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Smith AO Corp – ‘424B4’ on 5/8/02

On: Wednesday, 5/8/02 · Accession #: 950124-2-1604 · File #: 333-87798

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/08/02  Smith AO Corp                     424B4                  1:243K                                   Bowne - Bde

Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus - Pursuant to Rule 424(B)(4)               87    400K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Business Capitalization Cash and cash equivalents Continuing operations Description of Capital Stock Discontinued operations Earnings from continuing operations Experts Forward-Looking Statements Incorporation of Information by Reference Index to Historical Consolidated Financial Statements Legal Matters Management and Board of Directors Management's Discussion and Analysis of Results of Operations and Financial Condition Net sales Notes to Condensed Consolidated Financial Statements Notes to Consolidated Financial Statements Offering, The Price Ranges of Common Stock and Class A Common Stock and Dividend Policy Prospectus Summary Report of Ernst & Young LLP, Independent Auditors Risk Factors Selected Historical Consolidated Financial Data The Offering Underwriting Use of Proceeds Where You Can Find More Information
1	1st Page - Filing Submission
6	Forward-Looking Statements
7	Prospectus Summary
12	The Offering
15	Risk Factors
19	Use of Proceeds
20	Price Ranges of Common Stock and Class A Common Stock and Dividend Policy
21	Capitalization
22	Selected Historical Consolidated Financial Data
24	Business
33	Management's Discussion and Analysis of Results of Operations and Financial Condition
41	Discontinued operations
42	Management and Board of Directors
44	Description of Capital Stock
46	Underwriting
48	Where You Can Find More Information
"	Incorporation of Information by Reference
49	Legal Matters
"	Experts
50	Index to Historical Consolidated Financial Statements
51	Report of Ernst & Young LLP, Independent Auditors
53	Continuing operations
56	Notes to Consolidated Financial Statements
"	Cash and cash equivalents
76	Earnings from continuing operations
81	Notes to Condensed Consolidated Financial Statements
85	Net sales

424B4 1st Page of 87 TOC ↑Top Previous Next ↓Bottom Just 1st
Filed pursuant to Rule 424(b)(4)
Registration Nos. 333-86074 and 333-87798

--------------------------------------------------------------------------------

[AOSMITH LOGO]

4,153,100 SHARES OF COMMON STOCK

---------------------

We are offering 4,153,100 shares of our common stock. We have two classes
of common equity: our common stock being offered by this prospectus and our
class A common stock. The holders of our common stock are entitled to elect 25
percent of the members of our board of directors and to one-tenth of one vote on
all other matters.
Our common stock is listed on the New York Stock Exchange under the symbol
"AOS." The last reported sale price of our common stock on May 7, 2002 was
$30.40 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE
9.

[Download Table]

PER SHARE TOTAL
--------- ------------

Public offering price................................ $28.25 $117,325,075
Underwriting discounts and commissions............... 1.48 6,146,588
Proceeds to A. O. Smith Corporation.................. 26.77 111,178,487

We have granted the underwriters a 30-day option to purchase up to an
additional 622,965 shares to cover over-allotments.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

---------------------

ROBERT W. BAIRD & CO.
BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
MAY 7, 2002

424B4 2nd Page of 87 TOC 1st Previous Next ↓Bottom Just 2nd
OUTSIDE GATEFOLD:

"COMFORT, CONVENIENCE, SECURITY, AND FUN . . ."

"Every day, people come in contact with the quality products of A. O. Smith
Corporation.

Our electrical motors and water heaters help make your life a little more
comfortable, a little more convenient . . .
and even more fun . . .
where you live, work, and play."

[LEGEND Logo], [STATE WATER HEATERS logo], [UNIVERSAL ELECTRIC logo], [A. O.
SMITH PROMAX logo], [A. O. SMITH WATER PRODUCTS COMPANY logo], [A. O. SMITH
CENTURY logo], [CYCLONE XHE logo], [A. O. SMITH MASTER-FIT PLUS logo], [SEALED
SHOT logo], [A. O. SMITH ELECTRICAL PRODUCTS COMPANY logo], [APCOM logo],
[DURA-MAX logo], and [A. O. SMITH logo].

INSIDE GATEFOLD -- LEFT SIDE:

Top of page:
[A. O. Smith Logo] "COMFORT, CONVENIENCE, SECURITY, AND FUN . . .
A. O. Smith At a Glance
Quality products manufactured by A. O. Smith are
found at home, at work, or just about anywhere that
people live, work, or play."

[Page includes twelve separate descriptions and pictures of selected A. O. Smith
products. The descriptions and pictures are placed as follows around an
illustration of a single-family home that depicts the locations of each of the
twelve products in or around the home:

Product 1: "Precision hermetic motors for unitary air conditioning compressors";
[Picture of example product connected to a window air conditioner]

Product 2: "Cost-effective C-frame motors are used in residential ventilation
applications such as bathroom fans and range hood fans"; [Picture of example
product connected to a kitchen range hood]

Product 3: "Compact C-frame motors for appliances such as frost-free
refrigerators and humidifiers"; [Picture of example product connected to a
refrigerator]

Product 4: "Dependable fractional horsepower fan motors for attic fans and
whole-house fan applications"; [Picture of example product connected to an attic
fan]

Product 5: "Reversible garage door opener motors designed for frequent cycles in
all types of weather"; [Picture of example product connected to a garage door
opener]

Product 6: "Fractional horsepower electric motors are used on power sprayers and
small air compressors;" [Picture of example product connected to a portable air
compressor]

Product 7: "Manufacturers of swimming pool pumps use dependable A. O. Smith and
Century(R)two-compartment switched and switchless pump motors"; [Picture of
example product connected to a swimming pool pump]

E-1

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Product 8: "A. O. Smith makes single-speed and two-speed motors for whirlpools,
spas, and jetted tubs"; [Picture of example product connected to a whirlpool
tub]

Product 9: "DC motors are used for treadmills and other exercise equipment";
[Picture of example product connected to a treadmill]

Product 10: "A. O. Smith has the right product and the right efficiency
residential water heater for any size home. Water heaters may be vented
conventionally or, for today's energy-efficient houses, direct vented or power
vented"; [Picture of example product connected to a residential water heater]

Product 11: "Durable pump motors for continuous-duty applications such as sump
pumps"; [Picture of example product connected to a sump pump]

Product 12: "Dependable fractional horsepower fan and blower motors for
furnaces, air conditioners, and heat pumps"; [Picture of example product
connected to a furnace]]

INSIDE GATEFOLD - RIGHT SIDE:

[Page includes thirteen separate descriptions and pictures of selected A. O.
Smith products. The descriptions and pictures are placed as follows around an
illustration of a hotel that depicts the locations of each of the thirteen
products in or around the hotel:

Product 1: "A. O. Smith manufactures hermetic motors in sizes up to 400
horsepower for commercial air conditioning equipment and rooftop chillers";
[Picture of example product connected to an air conditioner]

Product 2: "Totally enclosed, drip-proof integral horsepower motors for
continuous-duty fan and blower applications, such as commercial air conditioning
equipment"; [Picture of example product connected to an air conditioner]

Product 3: "94 percent efficiency, zero-clearance to combustibles design, and
direct venting make the Cyclone XHE(R) water heater well-suited to many
commercial applications"; [Picture of example product connected to a commercial
water heater]

Product 4: "A. O. Smith supplies integral horsepower and fractional horsepower
electric motors for commercial washing machines and dryers"; [Picture of example
product connected to a commercial washing machine and a commercial dryer]

Product 5: "Submersible integral motors power hydraulic and inverter
traction-driven elevators. Reliable integral DC motors open elevator doors";
[Picture of example product connected to an elevator door]

Product 6: "Durable, reversible fractional horsepower motors for commercial gate
openers"; [Picture of example product connected to a commercial gate opener]

Product 7: "For applications that require large amounts of hot water or hot
water at multiple temperatures, including sanitizing water, A. O. Smith offers
custom-designed commercial water heaters and hot water storage tanks"; [Picture
of example product connected to a commercial hot water heater]

E-2

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Product 8: "High-efficiency copper-tube boilers are used for large-volume hot
water applications for hydronic heating"; [Picture of example product connected
to a hydronic heater]

Product 9: "For continuous-duty applications, such as sump or sewage pumps,
customers rely on durable A. O. Smith fractional horsepower pump motors";
[Picture of example product connected to a sump pump]

Product 10: "Single-speed and two-speed two-compartment pool motors"; [Picture
of example product connected to a pool motor]

Product 11: "Fractional horsepower electric motors are used for pool sweepers
and related leisure-time equipment"; [Picture of example product connected to a
pool sweeper]

Product 12: "Fractional horsepower ventilation motors for commercial convection
ovens and commercial rangehood fans"; [Picture of example product connected to a
commercial convection oven]

Product 13: "Specialty motors for carbonated dispenser pumps and vending
machines"; [Picture of example product connected to a vending machine]]

E-3

424B4 5th Page of 87 TOC 1st Previous Next ↓Bottom Just 5th
TABLE OF CONTENTS

[Download Table]

PAGE
----

Forward-Looking Statements........ i
Prospectus Summary................ 1
Risk Factors...................... 9
Use of Proceeds................... 13
Price Ranges of Common Stock and
Class A Common Stock and
Dividend Policy................. 14
Capitalization.................... 15
Selected Historical Consolidated
Financial Data.................. 16
Business.......................... 18
Management's Discussion and
Analysis of Results of
Operations and Financial
Condition....................... 27

[Download Table]

PAGE
----

Management and Board of
Directors....................... 36
Description of Capital Stock...... 38
Underwriting...................... 40
Where You Can Find More
Information..................... 42
Incorporation of Information by
Reference....................... 42
Legal Matters..................... 43
Experts........................... 43
Index to Historical Consolidated
Financial Statements............ F-1

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING
OFFERS TO BUY, SHARES OF OUR COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND
SALES ARE PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION IN THIS PROSPECTUS
AND THE DOCUMENTS INCORPORATED BY REFERENCE IS ACCURATE ONLY AS OF THE
RESPECTIVE DATES OF THOSE DOCUMENTS IN WHICH THE INFORMATION IS CONTAINED. OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND PROSPECTS MAY HAVE
CHANGED SINCE THOSE DATES.

The underwriters are offering the shares subject to various conditions and
may reject all or part of any order. Delivery of the shares of our common stock
will be made on or about May 10, 2002.

We have registered the following trademarks, which are used in this
prospectus: A. O. SMITH, BURKAY, CENTURY, CYCLONE XHE, DURA-MAX, LEGEND,
MASTER-FIT, PROMAX, and RELIANCE. We also own the following trademarks and trade
names, which are used in this prospectus: APCOM, SEALED SHOT, STATE, UNIVERSAL,
and UPPCO.

Unless the context requires otherwise, references in this prospectus to
"we," "us," "our," or "ours" refer collectively to A. O. Smith Corporation and
its subsidiaries. Unless otherwise stated, the information contained in this
prospectus assumes the underwriters do not exercise the over-allotment option.

424B4 6th Page of 87 TOC 1st Previous Next ↓Bottom Just 6th
FORWARD-LOOKING STATEMENTS

This prospectus, including the information we incorporate by reference into
this prospectus, contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical facts, including
statements regarding our future financial position, business strategy, budgets,
projected sales, costs and earnings, and plans and objectives for future
operations, are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking words such as "may," "will,"
"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 prospectus. Factors that could cause such a
variance are disclosed in the section "Risk Factors" and elsewhere in this
prospectus and include the following:

- instability in our electrical products and water systems markets

- our inability to timely and properly integrate our acquisition of State
Industries, Inc.

- our inability to implement cost-reduction programs

- adverse changes in general economic conditions

- competitive pressures on our businesses

The forward-looking statements included in this prospectus are made only as
of the date of this prospectus, and we undertake no obligation to update
publicly these statements to reflect subsequent events or circumstances. We urge
you to review carefully the section "Risk Factors" for a more complete
discussion of the risks of an investment in our common stock.

424B4 7th Page of 87 TOC 1st Previous Next ↓Bottom Just 7th
PROSPECTUS SUMMARY

This summary highlights information contained elsewhere or incorporated by
reference in this prospectus. Because this is a summary, it is not complete and
does not contain all of the information that may be important to you. For a more
complete understanding of us and this offering of our common stock, we encourage
you to read this prospectus in its entirety and the other documents to which we
have referred you.

A. O. SMITH CORPORATION

OVERVIEW

We are a leading manufacturer of electric motors and water heating
equipment, serving a diverse mix of residential, commercial, and industrial end
markets principally in the United States with a growing international presence.
Our company is organized in two segments: electrical products and water systems.
Our electrical products business manufactures and markets a comprehensive line
of hermetic motors, fractional horsepower alternating current (AC) and direct
current (DC) motors, and integral horsepower motors. Our water systems business
manufactures and markets a comprehensive line of residential gas and electric
water heaters, standard and specialty commercial water heating equipment,
high-efficiency copper-tube boilers, and water systems tanks. In 2001, on a pro
forma basis for our December 2001 acquisition of State Industries, Inc., we had
net sales of approximately $1.5 billion, with 55 percent attributable to our
electrical products business and 45 percent attributable to our water systems
business.

Our electric motors are used in a wide variety of targeted applications,
including heating, ventilating and air conditioning systems, commonly known as
HVAC systems; pools, spas and water well pumps; garage door openers; overhead
cranes; elevators; and industrial pumps. We primarily sell our electric motors
directly to original equipment manufacturers, or OEMs. We also market our motor
products through wholesale distributors who sell to smaller OEMs and aftermarket
customers. Our residential and commercial water heaters are used in a wide
variety of targeted applications, including homes, apartments, schools,
hospitals, hotels, laundries, restaurants, stadiums and other large users of hot
water. Our water systems wholesale distribution channel includes more than 2,600
wholesale plumbing distributors that serve residential, commercial, and
industrial markets. We also sell our residential water heaters through the
retail channel. In this channel, our customers include four of the six largest
national hardware and home center chains, including a long-standing private
label relationship with Sears, Roebuck and Co.

During the past five years, we have significantly repositioned our company.
We have changed from a diversified manufacturer with five businesses, the
largest of which was our legacy automotive structural components business that
represented more than 50 percent of our total sales, to a company focused on our
electrical products and water systems businesses, which we believe offer the
opportunity for higher growth and more profitability. We divested our automotive
structural components business in 1997, realizing pre-tax proceeds of $770
million. By January 2001, we completed our repositioning with the divestiture of
our storage and fluid handling businesses. During this period of time, we also
made the following key acquisitions in our core electrical products and water
systems businesses, which significantly broadened our product offerings and
customer base:

- In March 1997, we acquired UPPCO, Inc., a manufacturer of C-frame
sub-fractional horsepower AC motors, which had annual sales of approximately
$70 million
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- In July 1998, we acquired General Electric Company's domestic hermetic motor
business, which had annual sales of approximately $120 million

- In August 1999, we acquired MagneTek, Inc.'s electric motor business, which
had annual sales of approximately $380 million

- In December 2001, we nearly doubled the size of our water systems business
by acquiring State Industries, a manufacturer of residential and commercial
water heating systems, which had annual sales of approximately $320 million

OUR COMPETITIVE STRENGTHS

With the completion of our repositioning, we believe we possess the scale
and competitive strengths necessary to continue to succeed in our targeted
markets. Our principal competitive strengths are set forth below.

Market Leadership. We are one of the three largest manufacturers of
electric motors in North America, having manufactured approximately 36 million
electric motors in 2001. We believe we are among the leaders in North America in
manufacturing and selling hermetic and fractional horsepower motors, and we have
the leading position in the pool and spa motors niche. We are one of the two
largest manufacturers of water heaters in North America, having produced more
than 3 million units on a pro forma basis in 2001. We have a leading position in
the higher-margin commercial water heater segment. With our acquisition of State
Industries, we are now positioned to expand our presence in the residential
market through the home center retail channel.

Low-Cost Manufacturing Capabilities. We have been, and will continue to be,
proactive in shifting our manufacturing operations to lower-cost locations. We
were one of the first United States manufacturers of electric motors and water
heaters to capitalize on the low-cost manufacturing potential of Mexico, and we
currently produce approximately 75 percent of our electric motors and 20 percent
of our residential water heaters in our 17 Mexican manufacturing facilities. In
addition to being low cost, we believe these facilities are widely regarded
within our industries as high-quality manufacturing operations. Our recent
acquisition of a motor manufacturer in China provides us with another platform
to manufacture products at lower costs.

Comprehensive Product Offerings with Leading Brands. We believe we offer
the most comprehensive product lines in our targeted markets. These offerings
give us a competitive advantage by enabling us to offer a broad range of
products that fulfill most electric motor and water heating needs of our
customers. Many of our brand names, including A. O. Smith, Reliance, and State,
are widely recognized within our industries and, we believe, are known for their
high quality, reliability, and performance. Our comprehensive product offerings
and strong brand identities have created customer loyalty and help us to
maintain existing business, as well as capture additional sales, particularly as
many of our customers seek to consolidate their supplier bases.

Operational and Engineering Flexibility. Our ability to offer fast,
innovative, and practical solutions to our customers is one of the reasons we
have achieved a leading position in many of our targeted markets. Our
engineering centers are staffed with highly qualified, experienced engineers
focused on quickly responding to our customers' needs by enhancing existing
products and developing new products on a timely basis. In addition, our
engineers work with our sales and marketing organization to develop new products
that meet our
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customers' evolving application needs and cost requirements. During the last
three years, we have invested on average over $25 million annually in research
and development.

Strong Relationships with Our Customers. We have established long-standing,
strong relationships with leading OEM customers, distributors, and retailers.
For many of our customers, we supply all or substantially all of their
requirements for the products we offer, and several of our customer
relationships date back for more than 40 years. In our water systems business,
we believe we offer the most extensive aftermarket technical support program,
and most of our customers use our personnel to provide support directly to their
end users.

Recurring Replacement Market Sales. We sell electric motors and water
heaters to customers who often provide replacement products to end users. As a
result, a substantial portion of our sales are less susceptible to the
cyclicality inherent to many manufacturers because it is often essential to the
end user's business or home to make the replacement purchase. In 2001, we
believe approximately 50 percent of our electrical products segment's net sales
and 80 percent of our water systems segment's pro forma net sales resulted from
the replacement needs of end users.

Experienced Management Team. Our senior management team has significant
experience in manufacturing, marketing, and sales. In addition, this team is
experienced in the acquisition and integration of businesses, aggressive cost
management, global operations, and efficient manufacturing techniques, all of
which are critical to our long-term business strategy. We have a track record of
acquiring complementary businesses and product lines, integrating them into our
organization, and aggressively managing their cost structures.

OUR BUSINESS STRATEGY

We intend to use our competitive strengths to increase sales and
profitability through the initiatives outlined below.

Focus On Organic Growth. We believe our "customer first" philosophy,
customer relationships, and product development capabilities will enable us to
grow our net sales. Our specific organic growth initiatives include the
following:

- Increase Sales to Existing Customers. We are focused on securing additional
sales to existing customers. Our relationships with leading multi-national
manufacturers, distributors, and retailers, when combined with our expanded
product offerings, provide us with opportunities for growth. For example, in
2001, our net sales of electrical products to York International Corporation
were $172 million, an increase of approximately 83 percent from $94 million
in 1997. Similarly, in 2001, our pro forma net sales of water systems
products to our top five wholesale distributors were $154 million, an
increase of approximately 63 percent from $94 million in 1997 to these same
customers. We expect that our expanded product offerings will allow us to
continue to increase sales to existing customers.

- Introduce New Products. We will continue to introduce differentiated
products in our targeted markets. We work closely with our customers to
develop new products or enhancements to existing products that improve
performance and meet their needs. We pride ourselves on our ability to
understand our customers' needs, and design, test, and build a product that
matches those needs. For example, our electrical products business recently
introduced two new lines of hermetic motors for use in commercial air
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conditioners. The first is a redesigned motor that provides 20 percent more
horsepower with only an eight percent increase in motor size, while the
second is a new line of motors for use in commercial scroll compressors. In
addition, during the last five years, our water systems business added
several new products, including our Cyclone XHE commercial water heater,
Genesis Burkay copper-tube boiler, and Master-Fit line of commercial water
heaters.

- Expand Internationally. To complement our North American capabilities, we
have established a manufacturing presence in Europe and Asia, and we are
prepared to expand further to serve our OEM customers as they increase their
focus on international markets. We also intend to continue to identify and
directly serve niche markets outside of North America that we believe offer
significant growth opportunities. For example, we began manufacturing and
marketing water heaters in China in 1998 from our plant in Nanjing and have
grown this business to approximately $26 million in sales in 2001. In
addition, we have entered into a marketing agreement with Aquecedores
Cumulus S/A, the second-largest water heater manufacturer in Brazil, which
allows us to sell our high-efficiency commercial water heater products in
that country.

Continue to Lower Manufacturing Costs. We are committed to being a low-cost
supplier. We continuously seek ways to lower costs, enhance product quality,
increase manufacturing efficiencies, and increase product throughput. The major
cost-saving initiatives that we have in process are:

- Complete the MagneTek Motor Operations Integration. We have recently
achieved our target of approximately $35 million of annualized cost savings
in the areas of raw materials purchasing, facility and product line
rationalization, and selling, general and administrative cost reductions
since our acquisition of the MagneTek motor operations in 1999. We are in
the process of transferring additional portions of our component and motor
assembly operations to our lower-cost Mexican operations and plan to
complete these transitions by the first quarter of 2003, which we expect
will result in additional annual cost savings of approximately $2 million.

- Further Reduce Costs in Our Electrical Products Operations. In addition to
the cost savings resulting from our MagneTek integration, during the fourth
quarter of 2001, we initiated several cost-reduction programs in our
electrical products business, including transferring six additional product
manufacturing lines to our lower-cost Mexican operations, reducing the
electrical products salaried workforce by 10 percent, and realigning our
motor warehouse operations to improve distribution efficiencies. We believe
these actions will enable us to achieve cost savings of more than $16
million in 2002 and $20 to $25 million annually in subsequent years.

- Selectively Manufacture in China. Although our Mexican operations, with
their scale and production flexibility, will continue to be the best
solution for supplying many of our customers, we believe that manufacturing
in China offers an opportunity to complement our Mexican manufacturing for
selected products, such as smaller size, higher order volume electric
motors. With our December 2001 acquisition of Shenzhen Speeda Industrial
Co., Ltd., a manufacturer of sub-fractional horsepower electric motors, we
now have a platform to manufacture electric motors in China.

- Integrate State Industries and Realize Operating Synergies. Our acquisition
of State Industries provides us with access to new markets and an
opportunity to improve the operations and efficiency of our overall water
systems business. We are moving our water
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systems business headquarters to State Industries' headquarters in Ashland
City, Tennessee, to facilitate the integration of State Industries with our
existing water systems operations. Our integration plan will enable us to
take advantage of the best practices of the two organizations to improve
efficiencies, rationalize our product lines, and reduce costs in the
business. We have identified immediate cost-reduction opportunities,
including management reductions, raw materials purchasing savings, and
freight and logistics savings, and we believe that these actions will enable
us to realize cost savings of approximately $5 million in 2002, $10 to $12
million in 2003, and over $15 million annually in subsequent years.

Pursue Strategic Acquisitions. We have been a consolidator in our targeted
markets, and we believe we have assembled the scale necessary to continue to
succeed in these markets. We will pursue complementary strategic acquisitions
that allow us to leverage the marketing, engineering, and manufacturing
strengths of our businesses. Our current acquisition criteria generally require
that a potential candidate participates in a market segment growing faster than
10 percent per year and offers attractive profit margins.

CORPORATE INFORMATION

Our principal executive offices are located at 11270 West Park Place,
Milwaukee, Wisconsin 53224-9508, and our telephone number is (414) 359-4000. Our
website address is www.aosmith.com. However, the information contained on our
website is not part of this prospectus.
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THE OFFERING

Common stock offered by A. O.
Smith Corporation............. 4,153,100 shares

Common stock to be outstanding
after the offering............ 19,371,112 shares

Class A common stock
outstanding before and after
the offering.................. 8,638,989 shares

Common stock and class A
common stock outstanding after
the offering.................. 28,010,101 shares

Use of proceeds............... We expect to use the net proceeds of the
offering to reduce debt under our multi-year
credit facility

New York Stock Exchange symbol
of common stock............... AOS

Risk factors.................. See the section entitled "Risk Factors" on page
9 for a discussion of factors you should
consider carefully before deciding to buy our
common stock

The number of shares of common stock and class A common stock outstanding
after this offering is based on the actual number of shares outstanding as of
March 31, 2002, and excludes:

- 2,654,300 shares of common stock issuable upon exercise of options
outstanding as of March 31, 2002, at a weighted average exercise price of
$17.08 per share; and

- 1,664,950 shares of common stock available for future grants under our stock
option plans, including 1,500,000 shares available for future grants under
the stock option plan that our stockholders adopted on April 8, 2002.

The number of shares of common stock offered and to be outstanding assumes
that the underwriters have not exercised their over-allotment option. If the
underwriters exercise their over-allotment option in full, then we will issue
and sell an additional 622,965 shares of our common stock and will have
19,994,077 shares of our common stock outstanding after the offering.

Each share of our class A common stock is convertible into one share of our
common stock at any time at the holder's option. See "Description of Capital
Stock."
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table presents summary historical consolidated financial data
as of and for each of the five years ended December 31, 2001, which have been
derived from our audited consolidated financial statements, and as of and for
each of the three months ended March 31, 2001 and 2002, which have been derived
from our unaudited interim consolidated financial statements. You should read
this information together with "Selected Historical Consolidated Financial
Data," "Management's Discussion and Analysis of Results of Operations and
Financial Condition," and our consolidated financial statements and related
notes included elsewhere in this prospectus (except for the consolidated
financial statements as of and for the years ended December 31, 1997 and 1998,
which are not included in this prospectus).

[Enlarge/Download Table]

FOR THE THREE
MONTHS
FOR THE YEARS ENDED DECEMBER 31,(1) ENDED MARCH 31,
---------------------------------------------------- -------------------
1997(2) 1998(3) 1999(4) 2000 2001(5)(6) 2001(6) 2002
------- ------- -------- -------- ---------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF EARNINGS DATA(7):
Continuing Operations:
Net sales.................................. $703.1 $800.8 $1,070.3 $1,247.9 $1,151.2 $ 318.2 $ 371.9
Cost of products sold...................... 543.4 623.2 839.5 999.8 948.8 259.4 295.0
------ ------ -------- -------- -------- -------- --------
Gross profit............................... 159.7 177.6 230.8 248.1 202.4 58.8 76.9
Selling, general and administrative
expenses................................. 105.8 105.2 136.3 153.7 145.7 38.1 53.2
Interest expense........................... 6.6 5.9 12.8 22.1 16.4 4.8 4.2
Amortization of intangibles................ 0.9 2.5 5.2 6.9 7.0 1.7 0.1
Restructuring and other charges............ -- -- -- -- 9.4 -- --
Other (income) expense -- net.............. (6.7) (2.9) (0.6) 0.3 1.4 0.7 0.8
------ ------ -------- -------- -------- -------- --------
Earnings before income taxes............. 53.1 66.9 77.1 65.1 22.5 13.5 18.6
Provision for income taxes................. 18.4 23.2 26.8 23.4 8.0 5.0 6.5
------ ------ -------- -------- -------- -------- --------
Earnings before equity in loss of joint
ventures................................. 34.7 43.7 50.3 41.7 14.5 8.5 12.1
Equity in loss of joint ventures........... (2.6) (3.0) -- -- -- -- --
------ ------ -------- -------- -------- -------- --------
Earnings from continuing operations.......... 32.1 40.7 50.3 41.7 14.5 8.5 12.1
Discontinued Operations:
Operating earnings (loss).................. 20.7 3.8 (0.9) -- -- -- --
Gain (loss) on disposition................. 101.0 -- (7.0) (11.9) -- -- --
------ ------ -------- -------- -------- -------- --------
121.7 3.8 (7.9) (11.9) -- -- --
------ ------ -------- -------- -------- -------- --------
Net earnings................................. $153.8 $ 44.5 $ 42.4 $ 29.8 $ 14.5 $ 8.5 $ 12.1
====== ====== ======== ======== ======== ======== ========
Basic Earnings (Loss) per Share:
Continuing operations...................... $ 1.16 $ 1.73 $ 2.17 $ 1.78 $ 0.61 $ 0.36 $ 0.51
Discontinued operations.................... 4.41 0.16 (0.34) (0.51) -- -- --
------ ------ -------- -------- -------- -------- --------
Net earnings............................... $ 5.57 $ 1.89 $ 1.83 $ 1.27 $ 0.61 $ 0.36 $ 0.51
====== ====== ======== ======== ======== ======== ========
Diluted Earnings (Loss) per Share:
Continuing operations...................... $ 1.14 $ 1.68 $ 2.11 $ 1.76 $ 0.61 $ 0.36 $ 0.50
Discontinued operations.................... 4.32 0.16 (0.33) (0.50) -- -- --
------ ------ -------- -------- -------- -------- --------
Net earnings............................... $ 5.46 $ 1.84 $ 1.78 $ 1.26 $ 0.61 $ 0.36 $ 0.50
====== ====== ======== ======== ======== ======== ========
Average Shares Outstanding(8):
Basic...................................... 27.6 23.6 23.2 23.4 23.6 23.5 23.8
Diluted.................................... 28.2 24.2 23.8 23.7 23.9 23.8 24.3
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................... $145.9 $ 37.7 $ 14.8 $ 15.3 $ 20.8 $ 13.1 $ 21.9
Working capital.............................. 237.8 155.2 217.7 227.0 221.6 238.0 224.1
Total assets................................. 682.8 736.6 1,065.6 1,064.9 1,293.9 1,052.2 1,305.2
Long-term debt............................... 101.0 131.2 351.3 316.4 390.4 295.7 378.9
Total stockholders' equity................... 399.7 401.1 431.1 448.4 451.9 452.7 466.1
OTHER FINANCIAL DATA(9):
Capital expenditures......................... $ 37.4 $ 18.5 $ 32.8 $ 40.5 $ 35.3 $ 9.5 $ 7.1
Depreciation and amortization................ 21.6 26.5 37.3 45.1 47.1 11.4 12.3
EBITDA(10)................................... 72.4 95.6 125.8 131.6 85.7 29.6 35.0
Cash provided by (used in) operating
activities................................. 73.5 65.6 47.8 75.2 49.8 (13.3) 22.9

424B4 14th Page of 87 TOC 1st Previous Next ↓Bottom Just 14th
------------------
(1) We have accounted for our former fluid handling, liquid and dry storage,
and automotive structural components businesses as discontinued operations
in our consolidated financial statements. On April 18, 1997, we sold our
automotive structural components business, exclusive of our Mexican
automotive affiliate, and on October 1, 1997, we sold our 40 percent
interest in our Mexican affiliate. On December 8, 2000, we sold our fluid
handling business, and on January 10, 2001, we sold our storage business.
See Note 3 to the consolidated financial statements included elsewhere in
this prospectus.
(2) On March 31, 1997, we acquired UPPCO, Inc. for $60.9 million.
(3) On July 1, 1998, we acquired certain assets of General Electric Company's
domestic hermetic motor business for $125.6 million.
(4) On August 2, 1999, we acquired MagneTek, Inc.'s domestic electric motor
business for $244.6 million. See Note 2 to the consolidated financial
statements included elsewhere in this prospectus.
(5) On December 28, 2001, we acquired all of the outstanding stock of State
Industries, Inc. for an aggregate purchase price of $117.2 million, and in
December 2001, we acquired 100 percent of the capital stock of Shenzhen
Speeda Industrial Co., Ltd. for a total purchase price of $3.3 million.
See Note 2 to the consolidated financial statements included elsewhere in
this prospectus.
(6) The statement of earnings data for the year ended December 31, 2001 and
the three months ended March 31, 2001 do not include any results of
operations of State Industries, Inc.
(7) Includes the results of the acquired businesses from their respective
dates of acquisition.
(8) Adjusted for a three-for-two stock split in August 1998. Includes shares
of common stock and class A common stock.
(9) Data shown is for continuing operations only.
(10) EBITDA consists of earnings before income taxes plus depreciation and
amortization and interest expense, less interest income. We have presented
EBITDA information solely as a supplemental disclosure because we believe
it allows for a more complete analysis of the results of our operations and
enables investors to determine our ability to service or incur
indebtedness. EBITDA should not be construed as an alternative to earnings
from continuing operations, net earnings, or cash flows from operating
activities, as determined in accordance with accounting principles
generally accepted in the United States. In addition, not all companies
that report EBITDA information calculate EBITDA in the same manner as we
do, and accordingly, our calculation is not necessarily comparable to
similarly entitled measures of other companies and may not be an
appropriate measure for performance relative to other companies.
8

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RISK FACTORS

You should carefully consider the risk factors set forth below and all other
information contained in this prospectus, including the documents incorporated
by reference, before making an investment decision regarding our common stock.
If any of the events contemplated by the following risks actually occurs, then
our business, financial condition, or results of operations could be materially
adversely affected. As a result, the trading price of our common stock could
decline, and you may lose all or part of your investment. The risks and
uncertainties below are not the only risks facing our company.

BECAUSE WE PARTICIPATE IN MARKETS THAT ARE HIGHLY COMPETITIVE, OUR REVENUES
COULD DECLINE AS WE RESPOND TO COMPETITION.

We sell all of our products in highly competitive markets. We compete in
each of our targeted markets based on product design, quality of products and
services, product performance, maintenance costs, and price. We compete against
manufacturers located in the United States and throughout the world. We also
face potential competition from some OEMs to whom we sell our electrical
products and from our customers and the end users of our products, who
continually assess any costs that could be reduced by vertically integrating or
using other alternate sources for the products we manufacture. A few of our
competitors have greater financial, marketing, manufacturing, and distribution
resources than we have. We cannot assure you that our products and services will
continue to compete successfully with those of our competitors or that we will
be able to retain our customer base or improve or maintain our profit margins on
sales to our customers, all of which could materially and adversely affect our
financial condition, results of operations, and cash flows.

SOME OF OUR MARKETS ARE CYCLICAL, AND A DECLINE IN ANY OF THESE MARKETS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING PERFORMANCE.

Our electrical products business is cyclical and dependent on consumer
spending and is therefore impacted by the strength of the economy generally,
interest rates, and other factors. Economic factors adversely affecting OEM
production and consumer spending could adversely impact our business. During
recessionary periods, we have been adversely affected by reduced demand for our
products. OEM production experienced a downturn in 2000 and 2001, which
adversely affected demand for our electrical products. This downturn may
continue or become more severe.

WE DEPEND ON REVENUES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS,
CANCELLATION, REDUCTION, OR DELAY IN PURCHASES BY THESE CUSTOMERS COULD HARM OUR
BUSINESS.

Sales to York International, our largest customer, represented 11.7 percent
of pro forma 2001 net sales, and collectively net sales to our four largest
customers represented approximately 25 percent of pro forma 2001 net sales. Our
success will depend on our continued ability to develop and manage relationships
with significant customers. We expect that significant customer concentration
will continue for the foreseeable future. Our dependence on sales from a
relatively small number of customers makes our relationship with each of these
customers important to our business. We cannot assure you that we will be able
to retain our largest customers. Some of our customers may in the future shift
their purchases of products from us to our competitors or to other sources. The
loss of one or more of our largest customers, any reduction or delay in sales to
these customers, our inability to

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successfully develop relationships with additional customers, or future price
concessions that we may make could significantly harm our business.

WE INCREASINGLY MANUFACTURE OUR PRODUCTS OUTSIDE THE UNITED STATES, WHICH MAY
PRESENT ADDITIONAL RISKS TO OUR BUSINESS.

A significant portion of our 2001 net sales were attributable to products
manufactured outside of the United States, principally in Mexico, and expanding
international manufacturing capacity in Mexico and China is part of our strategy
to reduce costs. Approximately 7,000 of our 15,000 total employees and 17 of our
41 manufacturing facilities are located in Mexico. Approximately 800 employees
and two manufacturing facilities are located in China. International operations
generally are subject to various risks, including political, religious, and
economic instability, local labor market conditions, the imposition of foreign
tariffs and other trade restrictions, the impact of foreign government
regulations, and the effects of income and withholding tax, governmental
expropriation, and differences in business practices. We may incur increased
costs and experience delays or disruptions in product deliveries and payments in
connection with international manufacturing and sales that could cause loss of
revenue. Unfavorable changes in the political, regulatory, and business climate
could have a material adverse effect on our financial condition, results of
operations, and cash flows.

WE MANUFACTURE A SIGNIFICANT PORTION OF OUR PRODUCTS IN MEXICO, WHICH EXPOSES US
TO THE RISK OF INCREASED LABOR COSTS DUE TO BOTH WAGE INFLATION IN MEXICO AND
STABILITY OR INCREASES IN THE VALUE OF THE MEXICAN PESO RELATIVE TO THE U.S.
DOLLAR.

We currently manufacture approximately 75 percent of our electric motors and
20 percent of our residential water heaters in Mexico. The costs we incur
manufacturing these products are directly related to changes in labor costs in
Mexico and fluctuations in exchange rates of the Mexican peso relative to the
U.S. dollar because the labor costs we incur measured in U.S. dollars are based
on the cost of labor in Mexican pesos and the exchange rate of the Mexican peso
relative to the U.S. dollar. Historically, Mexico has had higher wage inflation
than the United States has had. That inflation does not adversely affect our
costs when there is a corresponding decrease in the value of the Mexican peso
relative to the U.S. dollar. However, during periods in which the value of the
Mexican peso increases or remains stable relative to the U.S. dollar, higher
wage inflation in Mexico results in an increase in our labor costs because we
are not able to offset any increases in labor costs in Mexico when the cost of
such labor in Mexican pesos is measured in U.S. dollars.

OUR OPERATIONS WILL SUFFER IF WE ARE UNABLE TO COMPLETE OUR INTERNAL COST
REDUCTION PROGRAMS.

We are implementing a cost reduction program in our electrical products
business, which includes a transfer of portions of our manufacturing and
assembly work from six of our existing United States fabrication and motor
assembly plants to our operations in Mexico; a 10 percent reduction in the
electrical products salaried workforce; and a consolidation of several warehouse
facilities. As of March 31, 2002, we had charged $1.5 million against the
reserve we established for this program. In implementing this program, we may
not be able to successfully consolidate management, operations, product lines,
distribution networks, and manufacturing facilities, and we could experience a
disruption in our inventory and product supply or in administrative services. In
addition, we may not be able to complete this program without unexpected costs
or delays, or the need for increased management time and

424B4 17th Page of 87 TOC 1st Previous Next ↓Bottom Just 17th
effort. If we do not successfully implement this program on a timely basis, we
will not achieve the planned operational efficiencies and cost savings, and
there could be an adverse impact on ongoing relationships with our customers,
all of which would impact our profitability.

FAILURE TO INTEGRATE STATE INDUSTRIES WOULD ADVERSELY AFFECT OUR OPERATIONS.

We completed our acquisition of State Industries on December 28, 2001.
Realization of the benefits of this acquisition requires the integration of
State Industries' sales and marketing, distribution, manufacturing, engineering,
and administrative organization. The successful integration of State Industries
will require substantial attention from our senior management, which will
decrease the time that they have to serve and attract customers and develop new
products and services. We cannot assure you that we will be able to integrate
successfully State Industries, that we will operate the acquired business
profitably, or that we will obtain the beneficial effect from this acquisition.
Our financial condition, results of operations, and cash flows could be
materially and adversely affected if we do not successfully integrate State
Industries.

A SUBSTANTIAL PORTION OF OUR RESULTS HAS COME THROUGH ACQUISITIONS, AND WE MAY
NOT BE ABLE TO IDENTIFY OR COMPLETE FUTURE ACQUISITIONS, WHICH COULD ADVERSELY
AFFECT OUR FUTURE GROWTH.

Acquisitions we have made since 1997 have had a significant impact on our
results of operations during that period. While we will continue to evaluate
potential acquisitions, we may not be able to identify and successfully
negotiate suitable acquisitions, obtain financing for future acquisitions on
satisfactory terms, obtain regulatory approval for certain acquisitions, or
otherwise complete acquisitions in the future. If we complete any future
acquisitions, then we may not be able to successfully integrate the acquired
businesses or operate them profitably or accomplish our strategic objectives for
those acquisitions. Our level of indebtedness may increase in the future if we
finance acquisitions with debt, which would cause us to incur additional
interest expense and could increase our vulnerability to general adverse
economic and industry conditions and limit our ability to service our debt or
obtain additional financing. We cannot assure you that future acquisitions will
not have a material adverse effect on our financial condition, results of
operations, and cash flows.

OUR SALES OF ELECTRICAL PRODUCTS INCORPORATED INTO HVAC SYSTEMS ARE AFFECTED BY
THE WEATHER, AND MILD OR COOLER WEATHER COULD HAVE AN ADVERSE EFFECT ON OUR
OPERATING PERFORMANCE.

Many of our electrical products are incorporated into HVAC systems that OEMs
sell to end users. The number of installations of new and replacement HVAC
systems or components is higher during the spring and summer seasons due to the
increased use of air conditioning during warmer months. Mild or cooler weather
conditions during the spring and summer seasons often result in end users
deferring the purchase of new or replacement HVAC systems or components. As a
result, prolonged periods of mild or cooler weather conditions in the spring or
summer seasons in broad geographical areas could have a negative impact on the
demand for our electrical products and, therefore, could have an adverse effect
on our operating performance. In addition, due to variations in weather
conditions from year to year, our operating performance in any single year may
not be indicative of our performance in any future year.

424B4 18th Page of 87 TOC 1st Previous Next ↓Bottom Just 18th
OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY IMPACTED BY PRODUCT LIABILITY
LAWSUITS.

Our residential water heater business exposes us to potential product
liability risks that are inherent in the design, manufacture, and sale of our
products in that business. While we currently maintain what we believe to be
suitable product liability insurance, we cannot assure you that we will be able
to maintain this insurance on acceptable terms or that this insurance will
provide adequate protection against potential liabilities. In addition, we
self-insure a portion of product liability claims. A series of successful claims
against us could materially and adversely affect our reputation and our
financial condition, results of operations, and cash flows.

WE HAVE A $33.4 MILLION ASSET RELATING TO DIP TUBE LITIGATION THAT WE MAY NOT BE
ABLE TO COLLECT.

We and other water heater manufacturers settled in 1999 a class action
lawsuit relating to water heaters that contained a dip tube (a water heater
component) manufactured, designed, supplied, or sold by Perfection Corporation
between August 1993 and October 1996. Following settlement of the class action
lawsuit, we joined together with the other water heater manufacturers in an
action against Perfection Corporation and other related parties and their
insurers seeking to recover the damages we sustained as a result of the class
action settlement and other damages. As of March 31, 2002, we recorded a
long-term receivable of $33.4 million related to repair claims, administrative
costs, legal fees, and related expenses arising out of the settlement of the
class action lawsuit. Although we expect that we will recover all or a
substantial portion of this amount from Perfection Corporation, other related
parties, their insurers, or our insurers, we cannot assure you that we will do
so.

ONE STOCKHOLDER HAS VOTING CONTROL OF THE COMPANY.

We have two classes of common equity: our common stock, which we are
offering by this prospectus; and our class A common stock. Currently and
immediately after the offering, the holders of common stock are entitled, as a
class, to elect only 25 percent of our board of directors. Currently and
immediately after the offering, the holders of class A common stock are
entitled, as a class, to elect the remaining directors. As of March 31, 2002,
pro forma for the issuance of our common stock in the offering, a single
stockholder, Smith Investment Company, effectively controlled 75 percent of our
board of directors and our operations because it beneficially owned
approximately 93 percent of our class A common stock. Due to the differences in
the voting rights between shares of our common stock and shares of our class A
common stock, Smith Investment Company is and immediately after the offering
will be in a position to control to a large extent the outcome of matters
requiring a stockholder vote, including the adoption of amendments to our
certificate of incorporation or bylaws or approval of transactions involving a
change of control. The differences in the voting rights between shares of our
common stock and our class A common stock could have the effect of delaying,
deterring, or preventing a change of control. As of March 31, 2002, pro forma
for the issuance of our common stock in the offering, Smith Investment Company
beneficially owned approximately 34 percent of the total number of outstanding
shares of our common stock and class A common stock.

424B4 19th Page of 87 TOC 1st Previous Next ↓Bottom Just 19th
USE OF PROCEEDS

We estimate that we will receive approximately $110.8 million of net
proceeds in this offering, after deducting the underwriting discount and
estimated offering expenses payable by us. We intend to use the net proceeds
from this offering to repay debt under our $250 million multi-year revolving
credit facility, which expires on August 2, 2004. The interest we pay under this
credit facility was 2.4 percent per annum as of March 31, 2002 and varies
monthly with the London Interbank Offered Rate and our debt to total
capitalization ratio. As of March 31, 2002, we had $120.0 million of total debt
outstanding under this credit facility, $118.0 million of which we incurred in
2001 in connection with our acquisitions of State Industries and Shenzhen
Speeda.

424B4 20th Page of 87 TOC 1st Previous Next ↓Bottom Just 20th
PRICE RANGES OF COMMON STOCK AND
CLASS A COMMON STOCK AND DIVIDEND POLICY

Our common stock is traded on the New York Stock Exchange under the symbol
"AOS," and our class A common stock is traded on the American Stock Exchange
under the symbol "SMCA." The following table sets forth the high and low sale
prices of our common stock and class A common stock as reported by the New York
Stock Exchange and the American Stock Exchange for the stated quarter.

[Enlarge/Download Table]

CLASS A
COMMON STOCK COMMON STOCK
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------

2000
First Quarter....................................... $23.13 $14.94 $22.00 $15.50
Second Quarter...................................... 22.81 17.81 22.44 17.88
Third Quarter....................................... 21.38 11.19 17.25 12.00
Fourth Quarter...................................... 17.25 12.50 16.88 12.75
2001
First Quarter....................................... $20.10 $15.88 $19.80 $15.88
Second Quarter...................................... 19.53 16.40 19.20 16.50
Third Quarter....................................... 18.50 15.25 18.30 16.00
Fourth Quarter...................................... 19.75 14.67 18.90 14.50
2002
First Quarter....................................... $28.50 $19.00 $27.60 $19.25
Second Quarter (through May 7, 2002)................ 31.89 25.30 31.40 26.00

On May 7, 2002, the last reported sale price for our common stock on the New
York Stock Exchange was $30.40, and the last reported sale price for our class A
common stock on the American Stock Exchange was $30.00.

We paid cash dividends of $.52 per share on our common stock and class A
common stock in 2001 and dividends of $.50 per share in 2000.

On April 9, 2002, our board of directors declared a quarterly cash dividend
of $.13 per share on our common stock and class A common stock payable on May
15, 2002, to shareholders of record on April 30, 2002. Holders of shares
purchased in this offering will not be entitled to receive this dividend on the
purchased shares.

We have paid cash dividends for 62 consecutive years. We currently intend to
declare and pay dividends on a regular basis at a minimum of the current rate.
However, the payment and amount of future dividends is at the discretion of our
board of directors and will depend upon future earnings, capital requirements,
our general financial condition, general business conditions, and other factors.
In addition, the terms of our credit agreement contain certain conditions and
provisions that restrict our ability to pay quarterly dividends. Under the most
restrictive of these provisions, retained earnings of $66.6 million were
available for the payment of dividends as of March 31, 2002.

Whenever we pay cash dividends on our class A common stock, each share of
common stock is entitled to receive a dividend at least equal to the dividend
per share on our class A common stock. We may pay cash dividends to holders of
common stock in excess of dividends paid, or without paying dividends, to
holders of class A common stock.

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CAPITALIZATION

The following table sets forth our consolidated capitalization as of March
31, 2002, on an actual basis and as adjusted to give effect to our sale of
4,153,100 shares of common stock, after deducting the underwriting discount and
estimated offering expenses and after applying the net proceeds in this offering
as we intend. You should read this table together with "Management's Discussion
and Analysis of Results of Operations and Financial Condition," "Description of
Capital Stock," and our consolidated financial statements and related notes
included elsewhere in this prospectus.

[Download Table]

AS OF
MARCH 31, 2002
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN MILLIONS)

Total debt(1)............................................... $ 392,139 $ 281,336
========= =========
Total stockholders' equity:
Preferred stock, 3,000,000 shares authorized; 0 shares
outstanding............................................ $ - $ -
Class A common stock, $5 par value; 14,000,000 shares
authorized; 8,671,584 shares issued and 8,638,989
shares outstanding(2).................................. 43,358 43,358
Common stock, $1 par value; 60,000,000 shares authorized;
23,877,778 shares issued and 15,218,012 shares
outstanding; 23,877,778 shares issued and 19,371,112
shares outstanding as adjusted......................... 23,878 23,878
Capital in excess of par value.............................. 55,697 72,390
Retained earnings........................................... 560,448 560,448
Accumulated other comprehensive loss........................ (2,815) (2,815)
Treasury stock, at cost, 32,595 shares of class A common
stock and 8,659,766 shares of common stock; 32,595 shares
of class A common stock and 4,506,666 shares of common
stock as adjusted......................................... (214,417) (120,307)
--------- ---------
Total stockholders' equity............................. 466,149 576,952
--------- ---------
Total capitalization................................. $ 858,288 $ 858,288
========= =========

------------------
(1) Total debt includes long-term debt and long-term debt due within one year.
(2) Each share of our class A common stock is convertible into one share of our
common stock at any time at the holder's option.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table presents selected historical consolidated financial data
as of and for each of the five years ended December 31, 2001, which have been
derived from our audited consolidated financial statements, and as of and for
each of the three months ended March 31, 2001 and 2002, which have been derived
from our unaudited interim consolidated financial statements. You should read
this information together with "Management's Discussion and Analysis of Results
of Operations and Financial Condition," and our consolidated financial
statements and the related notes included elsewhere in this prospectus (except
for the consolidated financial statements as of and for the years ended December
31, 1997 and 1998, which are not included in this prospectus).

[Enlarge/Download Table]

FOR THE
THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31,(1) ENDED MARCH 31,
---------------------------------------------------- -------------------
1997(2) 1998(3) 1999(4) 2000 2001(5)(6) 2001(6) 2002
------- ------- -------- -------- ---------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF EARNINGS DATA(7):
Continuing Operations:
Net sales.................................. $703.1 $800.8 $1,070.3 $1,247.9 $1,151.2 $ 318.2 $ 371.9
Cost of products sold...................... 543.4 623.2 839.5 999.8 948.8 259.4 295.0
------ ------ -------- -------- -------- -------- --------
Gross profit............................... 159.7 177.6 230.8 248.1 202.4 58.8 76.9
Selling, general and administrative
expenses................................. 105.8 105.2 136.3 153.7 145.7 38.1 53.2
Interest expense......................... 6.6 5.9 12.8 22.1 16.4 4.8 4.2
Amortization of intangibles................ 0.9 2.5 5.2 6.9 7.0 1.7 0.1
Restructuring and other charges............ - - - - 9.4 - -
Other (income) expense--net................ (6.7) (2.9) (0.6) 0.3 1.4 0.7 0.8
------ ------ -------- -------- -------- -------- --------
Earnings before income taxes........... 53.1 66.9 77.1 65.1 22.5 13.5 18.6
Provision for income taxes................. 18.4 23.2 26.8 23.4 8.0 5.0 6.5
------ ------ -------- -------- -------- -------- --------
Earnings before equity in loss of joint
ventures................................. 34.7 43.7 50.3 41.7 14.5 8.5 12.1
Equity in loss of joint ventures........... (2.6) (3.0) - - - - -
------ ------ -------- -------- -------- -------- --------
Earnings from continuing operations.......... 32.1 40.7 50.3 41.7 14.5 8.5 12.1
Discontinued Operations:
Operating earnings (loss).................. 20.7 3.8 (0.9) - - - -
Gain (loss) on disposition................. 101.0 - (7.0) (11.9) - - -
------ ------ -------- -------- -------- -------- --------
121.7 3.8 (7.9) (11.9) - - -
------ ------ -------- -------- -------- -------- --------
Net earnings............................... $153.8 $ 44.5 $ 42.4 $ 29.8 $ 14.5 $ 8.5 $ 12.1
====== ====== ======== ======== ======== ======== ========
Basic Earnings (Loss) per Share:
Continuing operations...................... $ 1.16 $ 1.73 $ 2.17 $ 1.78 $ 0.61 $ 0.36 $ 0.51
Discontinued operations.................... 4.41 0.16 (0.34) (0.51) - - -
------ ------ -------- -------- -------- -------- --------
Net earnings............................... $ 5.57 $ 1.89 $ 1.83 $ 1.27 $ 0.61 $ 0.36 $ 0.51
====== ====== ======== ======== ======== ======== ========
Diluted Earnings (Loss) per Share:
Continuing operations...................... $ 1.14 $ 1.68 $ 2.11 $ 1.76 $ 0.61 $ 0.36 $ 0.50
Discontinued operations.................... 4.32 0.16 (0.33) (0.50) - - -
------ ------ -------- -------- -------- -------- --------
Net earnings............................... $ 5.46 $ 1.84 $ 1.78 $ 1.26 $ 0.61 $ 0.36 $ 0.50
====== ====== ======== ======== ======== ======== ========
Average Shares Outstanding(8):
Basic...................................... 27.6 23.6 23.2 23.4 23.6 23.5 23.8
Diluted.................................... 28.2 24.2 23.8 23.7 23.9 23.8 24.3
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................... $145.9 $ 37.7 $ 14.8 $ 15.3 $ 20.8 $ 13.1 $ 21.9
Working capital.............................. 237.8 155.2 217.7 227.0 221.6 238.0 224.1
Total assets................................. 682.8 736.6 1,065.6 1,064.9 1,293.9 1,052.2 1,305.2
Long-term debt............................... 101.0 131.2 351.3 316.4 390.4 295.7 378.9
Total stockholders' equity................... 399.7 401.1 431.1 448.4 451.9 452.7 466.1
OTHER FINANCIAL DATA(9):
Capital expenditures......................... $ 37.4 $ 18.5 $ 32.8 $ 40.5 $ 35.3 $ 9.5 $ 7.1
Depreciation and amortization................ 21.6 26.5 37.3 45.1 47.1 11.4 12.3
EBITDA(10)................................... 72.4 95.6 125.8 131.6 85.7 29.6 35.0
Cash provided by (used in) operating
activities................................. 73.5 65.6 47.8 75.2 49.8 (13.3) 22.9

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------------------
(1) We have accounted for our former fluid handling, liquid and dry storage,
and automotive structural components businesses as discontinued operations
in our consolidated financial statements. On April 18, 1997, we sold our
automotive structural components business, exclusive of our Mexican
automotive affiliate, and on October 1, 1997, we sold our 40 percent
interest in our Mexican affiliate. On December 8, 2000, we sold our fluid
handling business, and on January 10, 2001, we sold our storage business.
See Note 3 to the consolidated financial statements included elsewhere in
this prospectus.
(2) On March 31, 1997, we acquired UPPCO, Inc. for $60.9 million.
(3) On July 1, 1998, we acquired certain assets of General Electric Company's
domestic hermetic motor business for $125.6 million.
(4) On August 2, 1999, we acquired MagneTek, Inc.'s domestic electric motor
business for $244.6 million. See Note 2 to the consolidated financial
statements included elsewhere in this prospectus.
(5) On December 28, 2001, we acquired all of the outstanding stock of State
Industries, Inc. for an aggregate purchase price of $117.2 million, and in
December 2001, we acquired 100 percent of the capital stock of Shenzhen
Speeda Industrial Co., Ltd. for a total purchase price of $3.3 million. See
Note 2 to the consolidated financial statements included elsewhere in this
prospectus.
(6) The statement of earnings data for the year ended December 31, 2001 and the
three months ended March 31, 2001 do not include any results of operations
of State Industries, Inc.
(7) Includes the results of the acquired businesses from their respective dates
of acquisition.
(8) Adjusted for a three-for-two stock split in August 1998. Includes shares of
common stock and class A common stock.
(9) Data shown is for continuing operations only.
(10) EBITDA consists of earnings before income taxes plus depreciation and
amortization and interest expense, less interest income. We have presented
EBITDA information solely as a supplemental disclosure because we believe
it allows for a more complete analysis of the results of our operations and
enables investors to determine our ability to service or incur
indebtedness. EBITDA should not be construed as an alternative to earnings
from continuing operations, net earnings, or cash flows from operating
activities, as determined in accordance with accounting principles
generally accepted in the United States. In addition, not all companies
that report EBITDA information calculate EBITDA in the same manner as we
do, and accordingly, our calculation is not necessarily comparable to
similarly entitled measures of other companies and may not be an
appropriate measure for performance relative to other companies.

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BUSINESS

OUR COMPANY

We are a leading manufacturer of electric motors and water heating
equipment, serving a diverse mix of residential, commercial, and industrial end
markets principally in the United States with a growing international presence.
Our company is organized in two segments: electrical products and water systems.
Our electrical products business manufactures and markets a comprehensive line
of hermetic motors, fractional horsepower AC and DC motors, and integral
horsepower motors. Our water systems business manufactures and markets a
comprehensive line of residential gas and electric water heaters, standard and
specialty commercial water heating equipment, high-efficiency copper-tube
boilers, and water systems tanks. In 2001, on a pro forma basis for our December
2001 acquisition of State Industries, we had net sales of approximately $1.5
billion, with 55 percent attributable to our electrical products business and 45
percent attributable to our water systems business.

Our electric motors are used in a wide variety of targeted applications,
including HVAC systems; pools, spas and water well pumps; garage door openers;
overhead cranes; elevators; and industrial pumps. We primarily sell our electric
motors directly to OEMs. We also market our motor products through wholesale
distributors who sell to smaller OEMs and aftermarket customers. Our residential
and commercial water heaters are used in a wide variety of targeted
applications, including homes, apartments, schools, hospitals, hotels,
laundries, restaurants, stadiums, and other large users of hot water. Our water
systems wholesale distribution channel includes more than 2,600 wholesale
plumbing distributors that serve residential, commercial, and industrial
markets. We also sell our residential water heaters through the retail channel.
In this channel, our customers include four of the six largest national hardware
and home center chains, including a long-standing private label relationship
with Sears.

During the past five years, we have significantly repositioned our company.
We have changed from a diversified manufacturer with five businesses, the
largest of which was our legacy automotive structural components business that
represented more than 50 percent of our total sales, to a company focused on our
electrical products and water systems businesses, which we believe offer the
opportunity for higher growth and more profitability. We divested our automotive
structural components business in 1997, realizing pre-tax proceeds of $770
million. By January 2001, we had completed our repositioning with the
divestiture of our storage and fluid handling businesses. During this period, we
also made key acquisitions, including:

[Enlarge/Download Table]

ANNUAL
YEAR REVENUES AT
BUSINESS ACQUIRED ACQUISITION PRODUCTS
-------- -------- --------------- --------
(IN MILLIONS)

ELECTRICAL PRODUCTS
UPPCO, Inc. ........................... 1997 $ 70 C-Frame sub-fractional horsepower
AC motors
General Electric Company's domestic
hermetic motors business............. 1998 $120 Hermetic motors for HVAC and
refrigeration
MagneTek, Inc.'s motor business........ 1999 $380 Fractional horsepower, integral AC
and DC motors
WATER SYSTEMS
State Industries, Inc.................. 2001 $320 Residential and commercial gas and
electric water heaters, tanks,
parts and accessories

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The following competitive strengths contribute to the success of our
business:

- We are among the leaders in North America in the electric motor and water
heating market segments that we target, and we have the scale to increase
our leadership positions

- We have established a presence in Mexico and China to capitalize on the
low-cost manufacturing potential of each region

- Our comprehensive product offerings and strong brand identities have created
customer loyalty and help us to maintain existing business, as well as
capture additional sales, particularly as many of our customers seek to
consolidate their supplier bases

- Our operational and engineering flexibility help us to provide fast,
innovative, and practical solutions for our customers

- Our businesses have established long-standing, strong relationships with
leading OEM customers, distributors, and retailers

- Our products are used in essential applications that often require
replacement purchases

- Our senior management team has significant experience in manufacturing,
marketing, and sales

We intend to use our competitive strengths to increase sales and
profitability through the initiatives outlined below:

- Increase sales to existing customers, introduce new products, and expand
operations internationally

- Continue to lower operating costs and realize significant cost savings by
completing our MagneTek integration, further reducing cost in our electrical
products operations, selectively manufacturing electric motors in China, and
completing our integration of State Industries

- Pursue complementary strategic acquisitions that position us in adjacent
markets and allow us to leverage the marketing, engineering, and
manufacturing strengths of our businesses

ELECTRICAL PRODUCTS

We are one of the three largest manufacturers of electric motors in North
America, having manufactured approximately 36 million electric motors in 2001.
We offer a comprehensive line of hermetic motors, fractional horsepower AC and
DC motors, and integral horsepower motors, ranging in size from sub-fractional
C-frame ventilation motors up to 500 horsepower hermetic and 800 horsepower
specialty integral motors. We believe our extensive product offering gives us an
advantage in our targeted markets, often allowing us to serve all of our
customer's electric motor needs. We have significantly broadened our electric
motor product line and customer base through a series of acquisitions, including
UPPCO, General Electric Company's domestic hermetic motor business, and
MagneTek's electric motor business. Our motors are used in a wide range of
targeted residential, commercial, and industrial applications, including:

HVAC. We are North America's leading supplier of hermetic motors that is
not affiliated with a compressor manufacturer. These precisely engineered motors
range in size from 5.5 inches to more than 15 inches in diameter (1 1/2 to 500
horsepower) and are used for residential and commercial air conditioning
compressors, chillers, and commercial refrigeration

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equipment. We also manufacture a wide range of fractional horsepower fan and
blower motors for use in furnaces, heat pumps, unitary and window air
conditioners, and whole-house fan systems.

Pumps. We are the leading supplier of fractional horsepower pump motors for
swimming pools, spas, and jetted tubs, serving virtually all of the largest
manufacturers in this niche. Our motors also can be found in residential water
equipment, such as sump pumps, sewage pumps, sprinkling or irrigation systems,
and water well pumps.

Other residential and commercial. We are a leading supplier of fractional
horsepower motors for residential and commercial garage door and gate openers,
small air compressors, residential and commercial ventilation (range hood fans
and kitchen and bathroom fans), and hundreds of other specialized uses.

Industrial. Our fractional horsepower and integral horsepower motors are
used in overhead cranes, conveyors, elevators, commercial air conditioning,
agricultural, power transmission, and industrial pump applications.

We estimate that total sales of electric motors in the United States were
approximately $9 billion in 2001, and we believe international demand for
electric motors is about twice the size of the domestic demand. We target
selected segments of these markets. HVAC-related applications accounted for
approximately 60 percent of our 2001 segment sales, with pump, or water-moving,
applications representing 20 percent of our 2001 segment sales, and the
remainder made up of other residential, commercial, and industrial applications.
We believe approximately 50 percent of our 2001 segment sales resulted from the
replacement needs of end users.

Approximately 85 percent of our 2001 segment sales were to OEMs in a diverse
mix of industries, with the remainder of sales directed to the aftermarket or
distribution channels. Our 10 largest motor customers represented 50 percent of
2001 segment sales. Sales to our largest customer, York International and its
wholly owned Bristol Compressors subsidiary, were $172 million in 2001 and
represented approximately 20 percent of segment sales. We believe that more than
25 percent of our total segment sales were attributable to products used outside
of the United States.

We have a direct sales force consisting of 94 salespeople as of February 28,
2002. One-half of our sales force serves OEMs and the other one-half serves
distributors. Our sales and marketing organization is focused on specific
segments of our motor markets to identify and act on trends in the industries we
serve. Our approach of focused marketing, supported by product engineering, has
allowed us to establish close working relationships with many of the leading
companies in the industries we serve. In many instances, we supply all or
substantially all of their requirements for the products we offer, and several
of our customer relationships date back for more than 40 years. We serve
segments of the electric motor aftermarket through a nationwide network of
wholesale electrical equipment distributors. We have traditionally concentrated
our distribution services efforts in the HVAC and pool and spa aftermarkets,
although the MagneTek acquisition expanded our distribution efforts into the
industrial motor markets.

With our extensive technical resources, we are able to work with individual
customers to design and build a motor that meets their specific needs. Our
design engineers use computer-aided design tools and sophisticated math models
to develop a motor that matches our customers' performance requirements,
mechanical specifications, safety standards, energy

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efficiency needs, and cost targets. We evaluate motor designs in well-equipped
performance labs, using accelerated life tests, electrical tests, and mechanical
measures to assure the design performs in often-harsh environments or under
difficult operating conditions. Specialized testing includes sound chambers,
wind tunnels, and combustion labs. We also test motors and customer systems in
certified labs that comply with Underwriters' Laboratories, Canadian Standards
Association, International Electro-Technical Commission, or European Committee
for Standardization requirements, a capability that often reduces the time
needed to obtain agency approval.

To remain a leader in this highly competitive industry, we are committed to
being a low-cost supplier of electrical products. We were one of the first motor
manufacturers to identify the cost-reduction potential of Mexican operations,
and today we manufacture a majority of our electric motors in our 16 Mexican
motor facilities. In 2001, we undertook an initiative to accelerate the
cost-reduction programs that were already underway in our motor operations to
enhance our competitive position. These initiatives include transferring six
additional product manufacturing lines to our lower-cost Mexican operations;
reducing salaried workforce by 10 percent; and realigning our warehouse
facilities into three hub operations that will improve customer service while
reducing cost. In December 2001, we acquired Shenzhen Speeda, a manufacturer of
sub-fractional horsepower electric motors in China. This acquisition gave us our
first Asian motor manufacturing presence, and we intend to use this capability
to serve a portion of the North American HVAC market segment.

Our principal competitors in the electric motor industry are Emerson
Electric Co. and General Electric Company. A number of other companies, such as
Fasco Motors (a subsidiary of Invensys Motor Systems), Baldor Electric,
Regal-Beloit Corporation, and Jakel Incorporated, compete with us in specific
segments of the electric motor market.

WATER SYSTEMS

We are one of the two largest manufacturers and marketers of water heaters
in North America, having manufactured more than 3 million units on a pro forma
basis in 2001. We have a leading share in the commercial water heating segment,
and we believe we are the only domestic manufacturer that offers standard and
specialty commercial water heater products. We believe that our comprehensive
commercial product line gives us a competitive advantage in this higher-margin
segment of the water heating industry. We also are one of the leaders in the
residential water heating segment with an extensive line of high-efficiency gas
and electric models. We significantly broadened our market scope and product
offering with the acquisition of State Industries. This acquisition allowed us
to enter the retail segment of the residential market, a channel that represents
approximately one-half of the total United States residential market. The
acquisition of State Industries also enhanced our position in the wholesale
distribution channel and gave us a position in several new distribution
channels, such as direct sales to large homebuilders and the manufactured
housing market.

We serve residential, commercial, and industrial end markets with a broad
range of products, including:

Residential gas and electric water heaters. Our residential water heaters
come in sizes ranging from two-gallon (point-of-use) models to 120-gallon
appliances with varying efficiency ranges. We offer traditional atmospheric
water heaters as well as direct-vented and power-vented models for today's
energy efficient homes.

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Standard commercial water heaters. Our gas, oil, and electric water heaters
come in capacities ranging from 50 to 100 gallons and are used by customers who
require a consistent, economical source of hot water. Typical applications
include restaurants, hotels and motels, laundries, car washes, and small
businesses.

Specialty commercial water heaters. Our products include powered burner
water heaters, large-volume gas and electric water heaters, and other water
heating equipment that is custom-designed for the user's application. Our units
are often combined with water storage tanks to provide the customer with a
complete hot water system. Typical applications include hospitals, schools,
prisons, large hotels, factories, or other commercial environments where the
customer requires large volumes or high-demand periods of hot water.

Copper-tube boilers. We manufacture four distinct copper-tube boiler brands
designed to meet the customer's specific volume, efficiency, and cost
requirements. Our high-efficiency boilers are used in potable hot water and
hydronic heating applications. Applications for our boilers include schools,
stadiums, prisons, and other institutions.

Pump tanks, expansion tanks, and related products. We supply expansion
tanks for domestic water systems, which are used to equalize the pressure in the
system, as well as tanks for reverse osmosis water purification and related
applications.

Parts. Through our wholly owned APCOM subsidiary and protective coatings
division, we manufacture and market a wide range of water heater components,
including burners, gas manifolds, heating elements, thermostats, inlet tubes,
and glass frit used in making porcelain enamel linings. APCOM and our protective
coatings division provide us with a captive supply of water heater components to
reduce the risk of a shortage in supply. Additionally, APCOM supplies water
heater components to other major North American water heater manufacturers.

We estimate that the total sales of water heaters in the United States were
approximately $2 billion in 2001, and we believe international demand for water
heaters is about twice the size of the domestic demand. We believe approximately
80 percent of our 2001 pro forma segment sales resulted from the replacement
needs of end users.

We distribute our residential water heaters through the traditional plumbing
wholesale and retail channels. Residential water heaters represented 63 percent
of total 2001 pro forma water systems sales, with approximately 71 percent of
our residential water heaters sold through the plumbing wholesale channel. With
the State Industries acquisition, we now have access to the retail channel and
sell water heaters to four of the six largest national hardware and home center
chains, including a long-standing private label relationship with Sears.
Approximately 29 percent of our pro forma residential water heater sales and 18
percent of our total 2001 pro forma segment sales were through retail channels.

We sell our commercial water systems products, including standard and
specialty water heaters, high-efficiency copper-tube boilers, and large-volume
hot water storage tanks, exclusively through wholesale distributors. Sales of
our commercial water systems products represented approximately 20 percent of
2001 pro forma segment sales.

We have identified markets outside of North America as growth opportunities
for our water systems business, and we have a manufacturing and engineering
presence in Europe and Asia to complement our domestic capabilities. We opened
our manufacturing plant in Nanjing, China, in 1998, and we have grown this
business to more than $26 million in sales in 2001. Our China operation offers a
line of instantaneous gas and electric water heaters and wall-mounted gas and
electric units for a number of Chinese residential applications. We also

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recently began marketing commercial water heaters in China. In addition, we have
entered into a marketing agreement with Aquecedores Cumulus S/A, the
second-largest water heater manufacturer in Brazil, which allows us to sell our
high-efficiency commercial water heater products in that country. Our plant in
Veldhoven, The Netherlands, serves residential and commercial customers in
Europe and the Middle East. Over the last several years, we have successfully
adapted many of our popular U.S. commercial water systems products, such as the
Cyclone XHE commercial water heater, to European standards. In 2001, our water
systems business sold our products in 59 countries.

Engineering and technical support are important in the water heating
industry, particularly in the commercial segment, due to the specialized needs
of customers and challenging application requirements. We believe our product
engineering capabilities have contributed to our leadership in this commercial
segment. Our principal product engineering center is in McBee, South Carolina,
with a focused boiler testing facility in El Paso, Texas. Our engineers use
sophisticated computer-aided design tools to develop new residential and
commercial water heater designs. We put our new products through a thorough
evaluation in our performance test labs, where we monitor combustion,
efficiency, standby recovery, and product safety. We test products to ensure
they comply with American Gas Association, Underwriters' Laboratories, and
Canadian Standards Association requirements, as well as to meet local and state
codes. We also field-test products at a number of facilities around the United
States. Evidence of the effectiveness of our product engineering efforts is the
number of successful new products we have introduced over the last several
years, including:

- Our Cyclone XHE commercial water heater, which has 94 percent thermal
efficiency, is one of the most efficient storage-type units on the market.
In addition to its high efficiency, the Cyclone can be either sealed-direct
vented or vented conventionally, offering customers installation flexibility
and substantial cost savings.

- Our Genesis Burkay copper-tube boiler offers customers high efficiency in a
compact, space-saving design. This boiler offers multiple venting options
and microprocessor-controlled diagnostics. We also recently introduced a
line of larger models directly targeted at hydronic heating applications.

- Our Master-Fit line of commercial water heaters is designed for a wide range
of new and replacement applications. The compact size of these products
makes them well suited for retrofit applications, and we have introduced
models specifically designed for restaurants as well as low-emission units.

An increasing number of government regulations will have a significant
impact on the United States water heating industry in the coming years, and we
believe we will benefit from our engineering expertise in this challenging
environment. Beginning next year, United States water heater manufacturers will
be required to comply with new flammable vapor resistance standards for
residential gas water heaters. These new regulations, developed by the
manufacturers in cooperation with the United States Consumer Product Safety
Commission, dictate that gas water heaters must be designed to protect against
accidental ignition of flammable vapors caused by spilled gasoline or other
liquids. Other regulations impacting our markets include restrictions on water
heater emissions of nitrogen oxides (to date mandated only in California and
Texas) and a United States government requirement to increase the efficiency of
residential gas and electric water heaters by January 2004. We believe we will
successfully comply with these new regulations on a timely basis.

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Our acquisition of State Industries provides an opportunity to improve the
operations and efficiency of our overall water systems business. We are moving
our water systems business headquarters to State Industries' headquarters in
Ashland City, Tennessee, to facilitate the integration of State Industries with
our existing water systems operations. Our integration plan will enable us to
take advantage of the best practices of the two organizations to improve
efficiency, consolidate our product lines, and reduce costs in the business. We
have identified immediate cost reduction opportunities, including management
reductions, raw materials purchasing savings, and freight and logistics savings,
and we believe that these actions will enable us to realize cost savings of
approximately $5 million in 2002, $10 to $12 million in 2003, and over $15
million annually in subsequent years.

Our principal domestic water heating competitors include Rheem Manufacturing
Company, Inc. and, to a lesser extent, American Water Heater Company and
Bradford-White Corporation. We also compete against a number of companies, such
as Lochinvar Corporation, Raypak, Inc., Teledyne Laars Jandy Products (a
subsidiary of Water Pik Technologies, Inc.), and many smaller, regional
competitors, in certain segments of the United States water heater market, as
well as numerous competitors in international markets.

MANUFACTURING AND OPERATIONS

We manufacture 99 percent of the products we sell. Our 41 manufacturing
plants are well-equipped, and many are located in areas with low-cost labor,
including 17 plants in Mexico and two in China. Most of our plants are focused
facilities, concentrating on one particular product line. We frequently upgrade
our manufacturing operations to enhance productivity, quality, and response
times and regularly invest in tooling, equipment, automated processes
technologies, and information systems. These capital improvements have allowed
us to reduce costs and improve efficiency and product flow, helping us better
serve the rapidly changing needs of our customers. All of our plants operate
under a continuous improvement philosophy that encourages employee involvement
and improves customer satisfaction. We rigorously test our products throughout
the manufacturing process and, in some cases, have developed proprietary testing
equipment and procedures.

Our manufacturing operations are highly integrated, and we fabricate a
significant number of the components that comprise our motors and water heaters.
This gives us flexibility in responding to market demand and enables us to
upgrade continually the quality and performance of our products. In addition, we
manufacture a wide range of water heater components, including all of the water
heater porcelain enamels we use. We believe we are the only domestic water
heater manufacturer that formulates and manufactures its own glass coatings. We
take advantage of the size and scale of our businesses when purchasing raw
materials such as steel, copper, and aluminum, and through our global network of
suppliers we are able to reduce our overall materials cost while maintaining a
consistent source of supply.

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FACILITIES

The following table provides information regarding our manufacturing and
other principal facilities.

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SQUARE
LOCATION FOOTAGE STATUS DESCRIPTION OF USE
-------- --------- ------ --------------------------------

ELECTRICAL PRODUCTS -- UNITED STATES
El Paso, Texas........................... 101,000 Leased Warehouse
Lavergne, Tennessee...................... 188,000 Leased Warehouse
McMinnville, Tennessee................... 265,000 Leased Manufacturing
Mebane, North Carolina................... 225,000 Owned Manufacturing
Monticello, Indiana...................... 132,000 Owned Manufacturing
Mt. Sterling, Kentucky................... 268,000 Leased Manufacturing
Owosso, Michigan......................... 200,000 Owned Manufacturing
Ripley, Tennessee........................ 103,000 Owned Manufacturing
Scottsville, Kentucky.................... 229,000 Owned Manufacturing
Tipp City, Ohio.......................... 93,000 Owned Manufacturing
Tipp City, Ohio.......................... 167,000 Owned Warehouse
Tipp City, Ohio.......................... 128,000 Owned Electrical Products Headquarters
Tipp City, Ohio.......................... 43,000 Leased Electrical Products Headquarters
Upper Sandusky, Ohio..................... 129,000 Owned Manufacturing
ELECTRICAL PRODUCTS -- INTERNATIONAL
Acuna, Mexico (2 facilities)............. 163,000 Leased Manufacturing
Bray, Ireland............................ 49,000 Leased Manufacturing
Budapest, Hungary........................ 180,000 Leased Manufacturing
Gainsborough, England.................... 44,000 Owned Manufacturing
Juarez, Mexico (8 facilities)............ 583,000 Leased Manufacturing
Juarez, Mexico (3 facilities)............ 313,000 Owned Manufacturing
Monterrey, Mexico (3 facilities)......... 175,000 Owned Manufacturing
Shenzhen, China.......................... 60,000 Owned Manufacturing

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SQUARE
LOCATION FOOTAGE STATUS DESCRIPTION OF USE
-------- --------- ------ --------------------------------

WATER SYSTEMS -- UNITED STATES
Alsip, Illinois.......................... 51,000 Leased Product/Customer Service
Ashland City, Tennessee(1)............... 1,288,000 Owned Manufacturing
Charlotte, North Carolina................ 96,000 Owned Manufacturing
Cookeville, Tennessee.................... 50,000 Owned Manufacturing
El Paso, Texas........................... 100,000 Leased Manufacturing
El Paso, Texas........................... 111,000 Leased Warehouse
El Paso, Texas........................... 26,000 Leased Data Center
Florence, Kentucky....................... 41,000 Owned Manufacturing
Franklin, Tennessee...................... 125,000 Owned Manufacturing
Irving, Texas(1)......................... 26,000 Leased Water Systems Headquarters
McBee, South Carolina.................... 742,000 Owned Manufacturing
Renton, Washington....................... 100,000 Leased Manufacturing
WATER SYSTEMS -- INTERNATIONAL
Juarez, Mexico........................... 264,000 Owned Manufacturing
Nanjing, China........................... 189,000 Owned Manufacturing
Stratford, Canada........................ 53,000 Owned Manufacturing
Stratford, Canada........................ 56,000 Leased Warehouse
Veldhoven, The Netherlands............... 105,000 Leased Manufacturing
CORPORATE OFFICES
Milwaukee, Wisconsin..................... 110,000 Leased World Headquarters

------------------

(1) We are in the process of moving our water systems business headquarters from
Irving, Texas to Ashland City, Tennessee.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion and analysis should be read together with "Selected
Historical Consolidated Financial Data" and our consolidated financial
statements and related notes included elsewhere in this prospectus.

OVERVIEW

We are a leading manufacturer of electric motors and water heating
equipment. Our company is organized in two segments: electrical products and
water systems. Our electrical products business manufactures and markets a
comprehensive line of hermetic motors, fractional horsepower AC and DC motors,
and integral horsepower motors. Our water systems business manufactures and
markets a comprehensive line of standard and specialty commercial water heating
equipment, residential gas and electric water heaters, high-efficiency
copper-tube boilers, and water systems tanks.

RESULTS OF OPERATIONS

FIRST QUARTER 2002 AND 2001

Sales in the first quarter of 2002 were $371.9 million, an increase of $53.7
million or 16.9 percent over sales of $318.2 million in the first quarter of
2001. Increased year-over-year first quarter sales for our water systems segment
of $83.7 million more than offset a decline in sales of $30.0 million for our
electrical products segment. The significant increase in first quarter sales of
our water systems segment was attributable to the $84.1 million of sales
associated with our acquisition of State Industries on December 28, 2001. The
decline in electrical products segment sales reflects continued softness in the
electric motor market.

Our gross profit margin was 20.7 percent in the first quarter of 2002
compared with the 18.5 percent margin achieved in the first quarter of 2001. The
increase was the result of cost reductions in our electrical products segment
and the addition of State Industries.

Selling, general and administrative expense for the first quarter of 2002
was $53.2 million or $15.1 million higher than the $38.1 million expense in the
first quarter of 2001. The increase in selling, general and administrative
expense was the result of the additional $14.0 million of expense associated
with State Industries and a $1.7 million charge associated with the
consolidation of water systems' management staff. This increase was partially
offset by reduced selling, general and administrative expense in our electrical
products segment resulting from the business improvement programs announced in
the fourth quarter of 2001.

Interest expense in the first quarter of 2002 declined to $4.2 million from
$4.8 million in the first quarter of 2001. While our debt levels were higher in
the first quarter of 2002 than the same quarter last year, a significant decline
in interest rates resulted in reduced interest expense.

We have significant pension benefit costs and credits we develop from
actuarial valuations. These valuations reflect key assumptions regarding, among
other things, discount rates, expected returns on plan assets, retirement ages
and years of service. We are required to consider current market conditions,
including changes in interest rates, in making these assumptions. Changes in
related pension costs or credits may occur in the future as a result of changes
affecting the assumptions. We recognized $4.5 million of pension credits in the
first quarter of 2002 including $0.6 million of pension expense associated with
the State Industries

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acquisition. In the first quarter of 2001, we recognized $4.5 million of pension
credits. These credits are reflected as offsets to cost of products sold and
selling, general and administrative expense.

Our effective tax rate declined from 37.0 percent in the first quarter of
2001 to 35.0 percent in the first quarter of 2002 due primarily to the
implementation of a more efficient tax structure for international operations.

Net earnings in the first quarter of 2002 were $12.1 million or $3.6 million
higher than net earnings of $8.5 million in the first quarter of 2001. On a per
share basis, net earnings in the first quarter of 2002 were $.50 compared to the
$.36 in the first quarter of 2001. The increase in earnings was primarily
attributable to increased earnings for our water systems segment (discussed
subsequently), the elimination of goodwill amortization of $1.6 million, and the
aforementioned $0.6 million decrease in interest expense.

FULL YEAR 2001, 2000 AND 1999

Sales from continuing operations in 2001 were $1.15 billion, a decline of
$96.8 million or 7.8 percent from sales of $1.25 billion in 2000. The decrease
in sales resulted from an 11.0 percent decline in the electrical products
segment, which more than offset a slight increase in sales for the water systems
business. Sales in 2000 increased $177.6 million compared with 1999, with
approximately $190 million of the increase resulting from an additional seven
months of sales from the August 1999 acquisition of the MagneTek motor business,
and approximately $12 million in sales from our Chinese water heater operation.
These increases were partially offset by lower sales in our base electric motor
business.

Our gross profit margin for 2001 was 17.6 percent, compared with 19.9
percent and 21.6 percent in 2000 and 1999, respectively. The decline in gross
margin from 2000 to 2001 occurred within the electrical products segment and was
due primarily to under-absorption of manufacturing costs associated with lower
volume, Mexican wage inflation throughout the year, and increased costs for
certain raw materials. The lower profit margin in 2000 compared with 1999 was
due to inclusion of a full year of sales for the MagneTek motor business
acquisition which carried lower margins than the base electric motor business,
and less favorable cost absorption associated with declining volumes in the
latter half of the year.

Selling, general and administrative expense in 2001 was $145.7 million, $8.0
million lower than the $153.7 million recorded in 2000. The decrease resulted
from volume-related reductions in selling expenses, cost reduction programs, and
lower accruals for incentive plans. Selling, general and administrative expense
in 2000 increased $17.4 million over 1999 due to the additional expense
associated with a full year of owning the MagneTek motor business. Relative to
net sales, selling, general and administrative expense has been stable over the
last three years.

We recognized pension credits of $20.2 million, $17.7 million and $15.8
million in 2001, 2000, and 1999, respectively, reflected as offsets to cost of
products sold and selling, general and administrative expense. See Note 11 of
notes to consolidated financial statements.

Interest expense was $16.4 million in 2001 compared with $22.1 million and
$12.8 million in 2000 and 1999, respectively. The decline from 2000 to 2001 was
the result of lower average debt levels and declining interest rates while the
increase from 1999 to 2000 was due primarily to acquisition-related financings.

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Amortization of intangibles was constant in 2001 and 2000, at approximately
$7.0 million. The increase from $5.2 million in 1999 to 2000 was associated with
the acquisition of the MagneTek motor business.

Other expense increased by $1.1 million from 2000 to 2001 due mostly to
losses incurred on forward foreign currency contracts. The change from other
income of $0.6 million in 1999 to other expense of $0.3 million in 2000 was due
to a decrease in interest income as marketable securities were liquidated to
fund the MagneTek motor business acquisition.

Our effective tax rate was 35.5 percent in 2001, 36.0 percent in 2000, and
34.8 percent in 1999. The rate decreased in 2001 as a result of increased
research and state tax credits, partially offset by the negative impact of the
losses in low-tax foreign jurisdictions. The rate increased in 2000 as a result
of fewer research tax credits as compared to 1999.

We recorded net earnings from continuing operations of $14.5 million or $.61
per share in 2001 compared with $41.7 million or $1.76 per share in 2000.
Excluding a $9.4 million pre-tax special charge related primarily to the
restructuring of our electric motor operations, we recorded earnings of $20.5
million, or $.86 per share.

OPERATIONS BY SEGMENT

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FOR THE THREE
MONTHS
FOR THE YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------------------- ----------------
1999 2000 2001 2001 2002
-------- -------- -------- ------ ------
(IN MILLIONS)

NET SALES:
Electrical products............................. $ 735.0 $ 902.4 $ 802.7 $226.2 $196.2
Water systems................................... 335.3 345.5 348.5 92.0 175.7
-------- -------- -------- ------ ------
$1,070.3 $1,247.9 $1,151.2 $318.2 $371.9
======== ======== ======== ====== ======
OPERATING EARNINGS:
Electrical products............................. $ 78.9 $ 75.5 $ 20.8 $ 14.0 $ 15.1
Water systems................................... 33.8 34.9 39.2 9.9 13.6
-------- -------- -------- ------ ------
112.7 110.4 60.0 23.9 28.7
General, corporate and research and development
expenses...................................... (22.8) (23.2) (21.1) (5.6) (5.9)
Interest expense................................ (12.8) (22.1) (16.4) (4.8) (4.2)
-------- -------- -------- ------ ------
Earnings from continuing operations before
income taxes.................................. $ 77.1 $ 65.1 $ 22.5 $ 13.5 $ 18.6
======== ======== ======== ====== ======

ELECTRICAL PRODUCTS

FIRST QUARTER 2002 AND 2001

First quarter sales for our electrical products segment were $196.2 million
or $30.0 million lower than sales of $226.2 million in the same period last
year, and reflect continued softness in the electric motor market. Our HVAC and
pump business declined approximately 15 percent during the quarter compared to
last year, with the remainder of the business down approximately 10 percent.
Though air conditioning inventory replenishment is progressing slower than we
had anticipated at the beginning of the year, we believe air conditioning

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inventories remain at historically low levels and offer sales upside as we
progress through the year.

Operating earnings for our electrical products segment in the first quarter
of 2002 were $15.1 million or $0.5 million less than the $15.6 million of
operating earnings in the first quarter of 2001, as adjusted to exclude $1.6
million of goodwill amortization. Notwithstanding this decrease in operating
earnings, operating margins improved from 6.9 percent to 7.7 percent. The
favorable trend in our year-over-year operating margin for electrical products
was the result of cost reduction activities, including those announced in the
fourth quarter of 2001.

FULL YEAR 2001, 2000 AND 1999

Sales in the electrical products segment in 2001 were $802.7 million, $99.7
million or 11 percent lower than 2000 sales of $902.4 million. Sales in 1999
were $735.0 million. Our HVAC-related business experienced the largest sales
decline of approximately $60 million or 11 percent in 2001. The lower demand for
motors in 2001 was due to a number of factors including general economic
conditions, reduced discretionary spending on the part of consumers, and
inventory adjustments by air conditioning manufacturers and retailers. The
increase in sales from 1999 to 2000 was due to the additional seven months of
ownership of the MagneTek motor business which contributed approximately $190
million in sales. Excluding the MagneTek acquisition, sales in the base motor
business declined five percent in 2000 due mostly to a reduction in demand from
HVAC customers.

Operating earnings for our electrical products segment in 2001 were $28.9
million before special charges or $46.6 million lower than 2000 earnings of
$75.5 million. Earnings in 1999 were $78.9 million. The significant decline in
earnings was due mostly to lower sales volume, higher costs for raw materials
and Mexican labor, and more competitive market conditions. The decline in
earnings from 1999 to 2000 was due primarily to a weaker air conditioning
market.

In the fourth quarter of 2001, we announced a cost reduction program to
address challenging motor market conditions. The program consists of three major
elements. The first element involves a reduction of approximately 10 percent of
the salaried workforce to be completed by the middle of 2002. The second element
targets improved contribution margins and involves the repositioning of
additional parts fabrication and assembly work to our lower-cost Mexican
operations and is expected to be completed by the end of the first quarter of
2003. A portion of the work currently performed at six domestic plants will be
transferred to our operations in Juarez, Acuna, and Monterrey, Mexico. The third
element involved realignment of distribution activities into three hub
warehouses, thereby reducing cost and improving customer service, and has been
completed. We recognized a pre-tax charge of $8.1 million in the fourth quarter
of 2001, of which $0.8 million was spent as of December 31, 2001. We expect the
program to generate pre-tax savings of more than $16 million in 2002 and $20 to
$25 million annually thereafter.

WATER SYSTEMS

FIRST QUARTER 2002 AND 2001

First quarter sales for our water systems segment were $175.7 million, or
$83.7 million higher than sales of $92.0 million in the same period last year.
The increase in sales was associated with our State Industries acquisition which
recorded sales of $84.1 million in the

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first quarter. Excluding the State Industries acquisition, sales in the water
systems segment were flat. Higher sales in the commercial and China business
offset a modest decline in residential and other products.

Operating earnings for our water systems segment in the first quarter of
2002 were $13.6 million, which included $3.8 million of earnings associated with
the State Industries acquisition. The net $9.8 million of earnings for our base
water heater business compared to first quarter 2001 profits of $9.9 million and
included a $1.7 million charge associated with the consolidation of water
systems' management staff.

FULL YEAR 2001, 2000 AND 1999

Sales for our water systems segment increased slightly from $345.5 million
in 2000 to $348.5 million in 2001 and represents the fourth consecutive year of
record sales. The increased sales resulted from higher sales of residential
products and growth in the Chinese operation, partially offset by lower sales in
other international markets. Sales of $345.5 million in 2000 were higher than
1999 sales of $335.3 million due to a significant increase in China where sales
almost doubled, contributing an additional $12 million.

Operating earnings for our water systems segment in 2001 were $40.5 million
before special charges, reflecting a 16.0 percent increase over 2000 earnings of
$34.9 million. The improved earnings performance in 2001 was the result of
higher volume, better performance in China, and improved plant efficiencies
throughout the organization. The earnings improvement from $33.8 million in 1999
to $34.9 million in 2000 resulted from improved performance in China.

On December 28, 2001, we acquired all of the outstanding stock of State
Industries, a manufacturer of residential and standard commercial water heaters.
The acquisition nearly doubled the size of our existing water heater business
while complementing the existing wholesale distribution channel and adding a
strong presence in the retail market. We also expect to achieve scale-related
synergies as a result of the acquisition. The aggregate purchase price was
$117.2 million and was comprised of $57.8 million for the outstanding stock,
assumption of $56.3 million in debt, and $3.1 million of acquisition costs.
Additionally, we recognized a special charge of $1.3 million in the fourth
quarter of 2001 for lease costs associated with moving the water systems segment
headquarters from Irving, Texas to Ashland City, Tennessee, State Industries'
headquarters. The move is intended to facilitate the integration of the two
businesses.

LIQUIDITY AND CAPITAL RESOURCES

FIRST QUARTER 2002 AND 2001

Our working capital for continuing operations was $227.0 million at March
31, 2002, $7.2 million higher than at December 31, 2001. A sales-related
increase in accounts receivable of $27.8 million was partially offset by
increases in accounts payable and a reduction in our other current assets
account as a result of receiving an expected $12.4 million tax refund in the
first quarter of 2002. Cash provided by our operations during the first quarter
of 2002 was $22.9 million compared with $13.3 million of cash used by our
operations during the same period in 2001. We had higher earnings and smaller
increases to working capital during the first quarter of 2002 compared with the
first quarter of 2001. We project operating cash flow of $75 to $80 million for
the full year.

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Our capital expenditures during the first quarter of 2002 totaled $7.1
million, which was less than the $9.5 million spent in the first quarter of 2001
due to lower spending by our electrical products segment. We are projecting 2002
capital expenditures of $45 million, an increase of approximately $10 million
over the prior year, due primarily to the acquisition of State Industries. We
expect the level of 2002 capital expenditures to be marginally lower than 2002
depreciation expense and that cash flow during 2002 will adequately cover
planned capital expenditures. We believe that our present facilities and planned
capital expenditures are sufficient to provide adequate capacity for our
operations in 2002.

Our long-term debt decreased by $11.5 million from $390.4 million at
December 31, 2001 to $378.9 million at March 31, 2002. Our leverage as measured
by the ratio of total debt to total capitalization was 45.7 percent, down
slightly from the end of 2001. Excluding potential acquisitions and assuming
current outstanding share levels, we expect 2002 cash flow to result in a
year-end leverage ratio of approximately 43 percent, closer to our long-term
target of 40 percent. We did not enter into any significant operating leases
during the first quarter of 2002. We expect to have adequate liquidity in 2002
as we have a minimal amount of long-term debt maturing, and we have adequate
credit facilities to support our short-term borrowing needs. At March 31, 2002,
we had available borrowing capacity of $92.2 million under our credit
facilities. We believe that the combination of available borrowing capacity and
operating cash flow will provide sufficient funds to finance our existing
operations for the foreseeable future.

In connection with our acquisition of State Industries in December of 2001,
we recorded additional purchase liabilities of approximately $3.9 million
associated with employee severance costs. As of March 31, 2002, we have charged
$0.6 million against this reserve. In addition, we recorded purchase liabilities
of $17.9 million in 1999 associated with our MagneTek motor acquisition, which
included employee severance and relocation, as well as certain facility costs.
The balance of the MagneTek purchase liabilities was $6.0 million at March 31,
2002. We expect these activities to be completed within the next year.

On April 9, 2002, our board of directors declared a regular quarterly
dividend of $.13 per share on our common stock and class A common stock, which
is payable on May 15, 2002 to stockholders of record on April 30, 2002.

FULL YEAR 2001, 2000 AND 1999

Our working capital for continuing operations at December 31, 2001 was
$219.8 million compared with $204.3 million and $207.3 million at December 31,
2000 and 1999, respectively. The increase in our working capital in 2001 was due
to the December 28, 2001 acquisition of State Industries. The modest decline in
our working capital in 2000 was due to lower accounts receivable resulting from
weaker HVAC markets.

Our capital expenditures were $35.3 million in 2001 versus $40.5 million in
2000 and $32.8 million in 1999. The decrease in capital spending in 2001 and
increase in 2000 occurred in our electrical products segment. We are projecting
2002 capital expenditures of approximately $45 million, an increase over 2001
primarily due to the acquisition of State Industries. The level of 2002 capital
expenditures is expected to be marginally lower than 2002 depreciation expense.
Our cash flow during 2002 is expected to adequately cover projected capital
expenditures.

On June 8, 2001, we issued $50 million in notes under loan facilities with
two insurance companies. The notes range in maturity from 2013 to 2016 and carry
an interest rate of

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7.3 percent. Due to our acquisition of State Industries, long-term debt
increased $74.0 million from $316.4 million at December 31, 2000, to $390.4
million at December 31, 2001. Our leverage as measured by the ratio of total
debt to total capitalization was 47.4 percent at December 31, 2001, compared
with 42.2 percent at the end of 2000. Excluding potential acquisitions, we
expect 2002 cash flow to result in a year-end leverage ratio of approximately 43
percent, closer to our long-term target of 40 percent.

We expect to have adequate liquidity in 2002 as we have a minimal amount of
long-term debt maturing during 2002. In addition, we have a $250 million
multi-year revolving credit facility with a group of 10 financial institutions
that expires on August 2, 2004, and an $83 million 364-day credit agreement with
a group of six banks that expires on July 26, 2002, which we expect to support
any short-term borrowing needs. At December 31, 2001, we had available borrowing
capacity of $79.5 million under our credit facilities. For information about our
contractual cash obligations for indebtedness, capital leases, operating leases,
and related obligations as of December 31, 2001, see Note 8 of notes to
consolidated financial statements.

In connection with the acquisition of State Industries in December 2001, we
recorded additional purchase liabilities of approximately $3.9 million
associated with employee severance costs. In addition, we recorded purchase
liabilities of $17.9 million in 1999 associated with the MagneTek motor business
acquisition, which included employee severance and relocation, as well as
certain facility costs. We expect that the balance of MagneTek purchase
liabilities of $6.5 million at December 31, 2001 will be fully utilized during
2002.

Included in other assets is a $32.8 million receivable due to the payments
of claims associated with the dip tube class action lawsuit. See Note 13 of
notes to consolidated financial statements. We expect a modest increase to the
receivable in 2002. The receivable is classified as a long-term asset because
court proceedings will not begin until late 2002 and may not conclude until 2003
or later.

We have paid dividends for 62 consecutive years. We paid total dividends of
$.52 per share in 2001 compared with $.50 per share in 2000.

CRITICAL ACCOUNTING POLICIES

Our accounting policies are more fully described in Note 1 of notes to
consolidated financial statements. As disclosed in Note 1 of notes to
consolidated financial statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions about future events that affect
the amounts reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.

The most significant accounting estimates inherent in the preparation of our
financial statements include estimates associated with the evaluation of the
recoverability of certain assets including goodwill and receivables resulting
from the payment of claims associated with the dip tube class action lawsuit
(see Note 13 of notes to consolidated financial statements) as well as those
estimates used in the determination of liabilities related to warranty activity,
litigation, product liability, environmental matters and pensions and other
post-retirement benefits. Various assumptions and other factors underlie the
determination of these significant estimates. The process of determining
significant estimates is fact specific and takes into account factors such as
historical experience, product mix, and in some cases, actuarial

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techniques. We constantly reevaluate these significant factors and make
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the estimates
described above.

OTHER MATTERS

ENVIRONMENTAL

Our operations are governed by a number of federal, state, and local
environmental laws concerning the generation and management of hazardous
materials, the discharge of pollutants into the environment, and remediation of
sites owned by us or third parties. We have expended financial and managerial
resources to comply with such laws. Expenditures related to environmental
matters were not material in 2001 and are not expected to be material in any
single year. Although we believe that our operations are substantially in
compliance with such laws, and we have procedures designed to maintain
compliance, we cannot provide any assurance that substantial additional costs
for compliance will not be incurred in the future.

MARKET RISK

We are exposed to various types of market risks, primarily currencies and
certain commodities. We monitor our risks in these areas on a continuous basis
and generally enter into forward and futures contracts to minimize these
exposures for periods of less than one year. We do not engage in speculation in
our derivative strategies. Further discussion regarding derivative instruments
is contained in Note 1 of notes to consolidated financial statements.

Our commodity risks include raw material price fluctuations. We use futures
contracts to fix the cost of our expected needs with the objective of reducing
price risk. Futures contracts are purchased over time periods and at volume
levels which approximate expected usage. At December 31, 2001, we had commodity
futures contracts amounting to $57 million of commodity purchases. A
hypothetical 10 percent change in the underlying commodity price of such
contracts would have a potential impact of $5.7 million. Any gains and losses
from our futures contract activities will be offset by gains and losses in the
underlying commodity purchase transactions being hedged.

In addition, we enter into foreign currency forward contracts to minimize
the effect of fluctuating foreign currencies. At December 31, 2001, we had net
foreign currency contracts outstanding of $81 million. Assuming a hypothetical
10 percent movement in the respective currencies, the potential foreign exchange
gain or loss associated with the change in rates would amount to $8.1 million.
Any gains and losses from our forward contract activities will be offset by
gains and losses in the underlying transactions being hedged.

Our earnings exposure related to movements in interest rates is primarily
derived from outstanding floating-rate debt instruments that are determined by
short-term money market rates. At December 31, 2001, we had $260 million in
outstanding floating-rate debt with a weighted-average interest rate of 2.3
percent at year-end. A hypothetical 10 percent annual increase or decrease in
the year-end average cost of our company's outstanding floating-rate debt would
result in a change in annual pre-tax interest expense of $0.6 million.

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RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under
the new standards, goodwill and indefinite lived intangible assets are no longer
amortized but instead are reviewed annually for impairment. Separable intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001.
Accordingly, the goodwill associated with the December 2001 acquisitions of
State Industries and Shenzhen Speeda will not be amortized. See Note 2 of notes
to consolidated financial statements. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, we have applied the new accounting
standards effective January 1, 2002. We have assessed the recoverability of our
goodwill and intangible assets and have concluded that there is no impairment in
value of these assets. All of the goodwill amortization of $6.6 million in 2001
will be eliminated as a charge to operations in 2002.

Additionally, the FASB has issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 143 will become effective for us on
January 1, 2003. Adoption of this statement is not expected to have a material
impact on our consolidated financial statements. SFAS No. 144, which we adopted
on January 1, 2002, has not had a material impact on our consolidated financial
statements since its adoption.

DISCONTINUED OPERATIONS

On January 21, 2000, we announced the decision to exit the storage and fluid
handling markets, consistent with our strategy to expand our presence in
electrical products and water systems. On December 8, 2000, we sold our fluid
handling business, Smith Fiberglass Products Company, to Varco International
Corporation. On January 10, 2001, we sold substantially all of the assets of the
storage tank business, Engineered Storage Products Company, to CST Industries.
The sale of these businesses resulted in net after-tax proceeds of $62 million.
After-tax losses associated with discontinued operations amounted to $11.9
million and $7.8 million in 2000 and 1999, respectively, and consisted mostly of
losses associated with the disposition of these businesses. The 2000 loss also
included an after-tax charge of $4 million related to revised estimates on
certain claims that arose out of the sale of the automotive structural
components business in April 1997. See Note 3 of notes to consolidated financial
statements.

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MANAGEMENT AND BOARD OF DIRECTORS

The following table sets forth information as of April 12, 2002, concerning
our directors and certain executive officers. All of our officers serve terms of
one year and until their successors are elected and qualified. Our board of
directors currently includes eight members, with two directors elected by
holders of common stock and six elected by holders of class A common stock and
all directors serving terms of one year and until their successors are elected
and qualified.

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NAME AGE POSITION BACKGROUND
---- --- ------------------------ --------------------------------------

Robert J. O'Toole.............. 61 Chairman, President, and Elected Chairman in 1992; Chief
Chief Executive Officer Executive Officer since 1989;
President since 1986; joined A. O.
Smith in 1963
Kenneth W. Krueger............. 45 Senior Vice President Elected Senior Vice President and
and Chief Financial Chief Financial Officer in August
Officer 2000; previously employed by Eaton
Financial Corporation as Group Vice
President, Finance and Business
Planning; Vice President, Finance at
Rockwell Automation, where he worked
from 1983 to 1999
Donald M. Heinrich............. 49 Senior Vice President Elected Senior Vice President in July
and President, A. O. 2001; President of A. O. Smith
Smith Electrical Electrical Products Company since July
Products Company 2001; joined A. O. Smith Electrical
Products Company in January 2000, as
Senior Vice President-Operations;
served as President of Smith
Fiberglass Products Company from
November 1997 through January 2000;
joined A. O. Smith in October 1992 as
Vice President-Business Development
Ronald E. Massa................ 52 Senior Vice President Named President of A. O. Smith Water
and President, A. O. Products Company in February 1999;
Smith Water Products elected Senior Vice President in June
Company 1997; served as President of A. O.
Smith Automotive Products Company from
June 1996 to April 1997; served as
President of A. O. Smith Water
Products Company from 1995 to June
1996; held other management positions
in the A. O. Smith Water Products
Company prior thereto; joined A. O.
Smith in 1976
Glen R. Bomberger.............. 64 Director Elected a Director in 1986; Executive
Vice President from 1986 through April
2001; Chief Financial Officer from
1986 to 2000; joined A. O. Smith in
1960; Director of Smith Investment
Company

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NAME AGE POSITION BACKGROUND
---- --- ------------------------ --------------------------------------

Ronald D. Brown................ 48 Director Elected a Director in 2001; named
Chairman, President and Chief
Executive Officer of Milacron Inc. in
June 2001; served as President and
Chief Operating Officer of Milacron
Inc. since September 1999; on Milacron
Inc.'s Board of Directors since
November 1999; served as Chief
Financial Officer of Milacron Inc.
from 1993 through 1999; joined
Milacron Inc. in 1980
William F. Buehler............. 62 Director Elected a Director in 1998; Vice
Chairman of the Board of Directors and
President-Industry Solutions
Operations of Xerox Corporation from
April 1999 through 2000; joined Xerox
Corporation in 1991 as Executive Vice
President and Chief Staff Officer;
prior to joining Xerox, spent 27 years
with AT&T Corporation; Director of
Quest Diagnostics
Kathleen J. Hempel............. 51 Director Elected a Director in 1998; Vice
Chairman and Chief Financial Officer
of Fort Howard Corporation from 1992
until its merger into Fort James
Corporation in 1997; joined Fort
Howard Corporation in 1973; Director
of Oshkosh Truck Corporation,
Whirlpool Corporation, Kennametal
Corporation, Actuant Corporation, and
Visteon Corporation
Dr. Agnar Pytte................ 69 Director Elected a Director in 1991; became
president of Case Western Reserve
University in July 1987 and retired in
June 1999; prior to July 1987, was the
Provost at Dartmouth College where he
held other academic positions since
1958; currently Adjunct Professor at
Dartmouth College; Director of The
Goodyear Tire & Rubber Company
Bruce M. Smith................. 53 Director Elected a Director in 1995; elected
Chairman and Chief Executive Officer
of Smith Investment Company in January
1999; elected President of Smith
Investment Company in 1993; Executive
Vice President of A. O. Smith Water
Products Company from 1991 through
June 1993; Managing Director of A. O.
Smith Electric Motors (Ireland) Ltd.
from 1988 to 1991; joined A. O. Smith
in 1978; Director of Smith Investment
Company
Mark D. Smith.................. 40 Director Elected a Director in 2001; served as
a Product Business Manager for
Strattec Security Corporation since
1997; Operations Manager of A. O.
Smith Automotive Products Company from
1994 to 1997

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DESCRIPTION OF CAPITAL STOCK

Our restated certificate of incorporation provides that we have authority to
issue 60,000,000 shares of common stock, 14,000,000 shares of class A common
stock, and 3,000,000 shares of preferred stock. As of March 31, 2002, we had
15,218,012 shares of common stock issued and outstanding, 8,638,989 shares of
class A common stock issued and outstanding and no shares of preferred stock
issued and outstanding. All of the outstanding shares are fully paid and
nonassessable, and the shares of common stock being sold by us will, upon
completion of this offering, be fully paid and nonassessable.

The following summary of some provisions of our common stock, class A common
stock, and preferred stock is not complete. You should refer to our restated
certificate of incorporation, which is incorporated by reference as an exhibit
to the registration statement of which this prospectus is a part, and applicable
law for more information.

COMMON STOCK AND CLASS A COMMON STOCK

Dividends. The holders of shares of our class A common stock and our common
stock are entitled to receive dividends, including dividends of our stock, as
and when declared by our board of directors, subject to any limitations
applicable by law and to the rights of the holders, if any, of our preferred
stock. Whenever we pay any dividends, other than dividends of our stock, on our
class A common stock, each share of common stock is entitled to receive a
dividend at least equal to the dividend paid per share on our class A common
stock. We may pay dividends, other than dividends of our stock, to holders of
common stock in excess of dividends paid, or without paying dividends, to
holders of class A common stock.

Voting Rights. Currently, and immediately following the offering, holders
of our common stock, voting as a separate class, have the right to elect or
remove 25 percent of our entire board of directors, rounded to the nearest whole
number of directors. Currently, and immediately following the offering, holders
of our class A common stock are entitled to elect the remaining directors,
subject to any rights granted to holders of any series of preferred stock.
Except as may be required by law and in connection with some significant
actions, such as mergers, consolidations, or amendments to our restated
certificate of incorporation that affect the rights of stockholders, holders of
our common stock and our class A common stock will vote together as a single
class, except that the holders of class A common stock will have one vote per
share and the holders of common stock will have one-tenth vote per share.

Conversion. Each share of our class A common stock is convertible into one
share of our common stock at any time at the holder's option.

Other Terms. None of our stockholders have preemptive or other rights to
subscribe for, purchase, or receive any additional securities. No class of
common stock is subject to redemption.

Transfer Agent. The transfer agent for our common stock is Wells Fargo Bank
Minnesota, N.A. Shareholder Services.

PREFERRED STOCK

Our restated certificate of incorporation authorizes our board of directors
to issue our preferred stock in series and to determine and fix the rights,
preferences, and limitations of any series and the relative variations between
series with respect to the rate and nature of dividends, the price and terms and
conditions on which shares may be redeemed, the amount

424B4 45th Page of 87 TOC 1st Previous Next ↓Bottom Just 45th
payable in the event of our voluntary or involuntary liquidation, the terms of
any sinking fund provisions or redemption or repurchase of shares, the terms and
conditions for conversion into any other class or series of our stock, and
voting rights.

The issuance of any series of our preferred stock may have an adverse effect
on the rights of holders of our common stock and could decrease the amount of
earnings and assets available for distribution to holders of our common stock.
In addition, any issuance of our preferred stock could have the effect of
delaying, deferring, or preventing a change in control of our company.

SUPERMAJORITY VOTING PROVISIONS

Under our restated certificate of incorporation, the following extraordinary
corporate actions require approval by a vote of two-thirds of the total number
of votes represented by the outstanding shares entitled to vote thereon:

- any plan of merger or consolidation other than a plan of merger or
consolidation with or into any of our subsidiaries of which we own at least
90 percent of the outstanding capital stock

- any sale, lease, exchange, or other disposition of all or substantially all
of our assets, if not made in the ordinary course of our business

- any amendment to our restated certificate of incorporation that changes the
supermajority voting requirements discussed above

These supermajority voting requirements could have the effect of delaying,
deferring, or preventing a change of control of our company.

424B4 46th Page of 87 TOC 1st Previous Next ↓Bottom Just 46th
UNDERWRITING

Under an underwriting agreement dated May 7, 2002, we have agreed to sell to
the underwriters named below the indicated numbers of shares of our common
stock:

[Download Table]

NUMBER
UNDERWRITER OF SHARES
----------- ---------

Robert W. Baird & Co. Incorporated.......................... 2,076,550
Banc of America Securities LLC.............................. 1,038,275
Bear, Stearns & Co. Inc..................................... 1,038,275
---------
Total.................................................. 4,153,100
=========

The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of our common stock in the offering if any are
purchased, other than those shares covered by the over-allotment option we
describe below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a
pro-rata basis up to 622,965 additional shares from us at the public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of our common stock.

The underwriters propose to offer the shares of our common stock initially
at the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of up to $.87 per share.
The underwriters and selling group members may allow a discount of $.10 per
share on sales to other broker/dealers. After the offering, the underwriters may
change the public offering price and concession and discount to broker/dealers.
As used in this section:

- Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the underwriters are the three firms
acting on behalf of the underwriters.

- Selling group members are securities broker/dealers to whom the underwriters
may sell shares of our common stock at the public offering price less the
selling concession above, but who do not have a contractual commitment to
purchase shares from us.

- Broker/dealers are firms registered under applicable securities laws to sell
securities to the public.

The following table summarizes the compensation and estimated expenses we
will pay. The compensation we will pay to the underwriters will consist solely
of the underwriting discount, which is equal to the public offering price per
share of common stock less the amount the underwriters pay to us per share of
common stock. The underwriters have not received and will not receive from us
any other item of compensation or expense in

424B4 47th Page of 87 TOC 1st Previous Next ↓Bottom Just 47th
connection with this offering considered by the National Association of
Securities Dealers, Inc. to be underwriting compensation under its rules of fair
practice.

[Enlarge/Download Table]

PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------

Underwriting discounts and
commissions paid by us... $1.48 $1.48 $6,146,588 $7,068,576
Expenses payable by us..... 0.09 0.08 375,000 375,000

We have agreed to pay all of the expenses in connection with this offering.
The principal components of the offering expenses payable by us will include the
fees and expenses of our accountants and attorneys, the fees of our registrar
and transfer agent, the cost of printing this prospectus, and filing fees paid
to the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc.

We and our directors and key officers have agreed not to offer, sell,
transfer, pledge, contract to sell, transfer or pledge, or file with the
Securities and Exchange Commission a registration statement under the Securities
Act of 1933, as amended, relating to any additional shares of our common stock
or securities convertible into or exchangeable or exercisable for any of shares
of our common stock without the prior written consent of Robert W. Baird & Co.
Incorporated for a period of 90 days after the date of this prospectus, except
that these restrictions will not apply to our ability to grant employee or
director stock options under the terms of stock option plans in effect on the
date of this prospectus or to issue our common stock upon any exercise of these
options. The restrictions will also not apply to transfers by our directors and
key officers by gift, will, or intestacy so long as the transferee agrees not to
make further transfers of the shares during the 90-day period.

We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, as amended, or to contribute to payments that the
underwriters may be required to make in that respect.

Some of the underwriters and their affiliates have provided, and may provide
in the future, advisory and investment banking services to us, for which they
have received and would receive customary compensation.

The underwriters may engage in over-allotment transactions, stabilizing
transactions, and syndicate covering transactions in accordance with Regulation
M under the Securities Exchange Act of 1934, as amended.

- Stabilizing transactions permit bids to purchase shares of our common stock
so long as the stabilizing bids do not exceed a specified maximum.

- Over-allotment involves sales by the underwriters of shares in excess of the
number of shares the underwriters are obligated to purchase, which creates a
syndicate short position.

- Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed to cover syndicate
short positions.

These stabilizing transactions and syndicate covering transactions may cause
the price of our common stock to be higher than the price that might otherwise
exist in the open market. These transactions may be effected on the New York
Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

424B4 48th Page of 87 TOC 1st Previous Next ↓Bottom Just 48th
WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements, and other
information with the Securities and Exchange Commission, or SEC. We have also
filed a registration statement on Form S-3, including exhibits, under the
Securities Act of 1933 with respect to the common stock offered by this
prospectus. This prospectus is a part of the registration statement, but does
not contain all of the information included in the registration statement or the
exhibits. You may read and copy the registration statement and any other
document that we file at the SEC's public reference rooms at 450 Fifth Street,
N.W., Washington D.C., and at regional SEC offices in New York, New York and
Chicago, Illinois. You can call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. You can also find
our public filings with the SEC on the Internet at a web site maintained by the
SEC located at http://www.sec.gov. Our common stock is listed on the New York
Stock Exchange and reports, proxy statements and other information concerning us
can be inspected at the New York Stock Exchange located at 11 Wall Street, New
York, New York 10005.

INCORPORATION OF INFORMATION BY REFERENCE

We are "incorporating by reference" specified documents that we file with
the SEC, which means:

- incorporated documents are considered part of this prospectus

- we are disclosing important information to you by referring you to those
documents; and

- information we file with the SEC will automatically update and supersede
information contained in this prospectus

We incorporate by reference the documents we list below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this prospectus and before the
end of the offering of our common stock:

- our Annual Report on Form 10-K for the year ended December 31, 2001

- our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002

- our Current Reports on Form 8-K dated December 28, 2001, as amended, and
April 12, 2002

- the description of our common stock contained in our Registration Statement
on Form 8-A, filed with the SEC on December 9, 1994, including any amendment
or report filed for the purpose of updating such description

You may request a copy of any of these filings, at no cost, by writing to
Craig Watson, Director Public Relations, A. O. Smith Corporation, P.O. Box
245008, Milwaukee, Wisconsin 53224-9508, or by calling Mr. Watson at (414)
359-4000.

424B4 49th Page of 87 TOC 1st Previous Next ↓Bottom Just 49th
LEGAL MATTERS

Some legal matters in connection with the sale of the shares of our common
stock offered by this prospectus will be passed upon for us by Foley & Lardner,
Milwaukee, Wisconsin. Some legal matters will be passed upon for the
underwriters by Michael Best & Friedrich LLP, Madison, Wisconsin. Jere D.
McGaffey, a partner in the law firm of Foley & Lardner, is a director of our
controlling stockholder, Smith Investment Company, and he is a co-trustee of
trusts in which he has no beneficial interest that own approximately 60% of the
capital stock of Smith Investment Company.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 2000 and 2001, and for each of the three
years in the period ended December 31, 2001, as set forth in their report
appearing in this prospectus and registration statement. Ernst & Young LLP also
audited the financial statement schedule incorporated by reference from our
Annual Report on Form 10-K for the year ended December 31, 2001. We have
included our financial statements in the prospectus and elsewhere in the
registration statement and incorporated our financial statement schedule in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.

Lattimore Black Morgan & Cain, PC, independent public accountants, have
audited the financial statements of State Industries as set forth in their
report incorporated by reference in this prospectus and registration statement
from our Current Report on Form 8-K dated December 28, 2001, as amended on March
12, 2002. We have incorporated by reference the financial statements of State
Industries in this prospectus and registration statement in reliance on
Lattimore Black Morgan & Cain, PC's report, given on their authority as experts
in accounting and auditing.

424B4 50th Page of 87 TOC 1st Previous Next ↓Bottom Just 50th
INDEX TO HISTORICAL CONSOLIDATED
FINANCIAL STATEMENTS

[Download Table]

PAGE
----

Consolidated Financial Statements
------------------------------------------------------------
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets for the Years Ended December 31,
2000 and 2001............................................. F-3
Consolidated Statements of Earnings for the Years Ended
December 31, 1999, 2000 and 2001.......................... F-4
Consolidated Statements of Comprehensive Earnings for the
Years Ended December 31, 1999, 2000 and 2001.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001.......................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 2000 and 2001.............. F-6
Notes to Consolidated Financial Statements.................. F-7

Condensed Consolidated Financial Statements (unaudited)
------------------------------------------------------------
Condensed Consolidated Balance Sheets as of December 31,
2001 and March 31, 2002................................... F-29
Condensed Consolidated Statements of Earnings for the Three
Months Ended March 31, 2001 and 2002...................... F-30
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2002................ F-31
Notes to Condensed Consolidated Financial Statements........ F-32

F-1

424B4 51st Page of 87 TOC 1st Previous Next ↓Bottom Just 51st
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
A. O. Smith Corporation

We have audited the accompanying consolidated balance sheets of A. O. Smith
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of earnings, comprehensive earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of A. O. Smith
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
January 16, 2002

F-2

424B4 52nd Page of 87 TOC 1st Previous Next ↓Bottom Just 52nd
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

[Enlarge/Download Table]

DECEMBER 31,
-----------------------
2000 2001
---------- ----------

ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 15,287 $ 20,759
Receivables................................................. 169,117 209,871
Inventories................................................. 169,630 194,706
Deferred income taxes....................................... 12,907 22,403
Other current assets........................................ 7,789 28,039
Net current assets--discontinued operations................. 22,651 1,796
---------- ----------
TOTAL CURRENT ASSETS........................................ 397,381 477,574
Net property, plant, and equipment.......................... 282,835 355,298
Net goodwill and other intangibles.......................... 244,821 301,924
Prepaid pension............................................. 81,958 103,272
Other assets................................................ 40,380 55,855
Net long-term assets--discontinued operations............... 17,493 --
---------- ----------
TOTAL ASSETS........................................... $1,064,868 $1,293,923
========== ==========
LIABILITIES
CURRENT LIABILITIES
Notes payable............................................... $ -- $ 3,280
Trade payables.............................................. 91,780 131,073
Accrued payroll and benefits................................ 27,388 29,525
Accrued liabilities......................................... 26,865 58,443
Product warranty............................................ 11,574 19,470
Income taxes................................................ 1,695 887
Long-term debt due within one year.......................... 11,129 13,272
---------- ----------
TOTAL CURRENT LIABILITIES................................... 170,431 255,950
Long-term debt.............................................. 316,372 390,385
Product warranty............................................ 17,631 50,162
Post-retirement benefit obligation.......................... 18,012 17,073
Deferred income taxes....................................... 67,814 62,154
Other liabilities........................................... 26,213 66,321
---------- ----------
TOTAL LIABILITIES...................................... 616,473 842,045
Commitments and contingencies (Notes 8 and 13)
STOCKHOLDERS' EQUITY
Preferred Stock............................................. -- --
Class A Common Stock (shares issued 8,722,720 and
8,686,484)................................................ 43,614 43,432
Common Stock (shares issued 23,826,642 and 23,862,878)...... 23,827 23,863
Capital in excess of par value.............................. 53,521 54,785
Retained earnings........................................... 549,237 551,420
Accumulated other comprehensive loss........................ (5,438) (6,858)
Treasury stock at cost...................................... (216,366) (214,764)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY............................. 448,395 451,878
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $1,064,868 $1,293,923
========== ==========

See accompanying notes which are an integral part of these statements.
F-3

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CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands, Except Per Share Amounts)

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
--------------------------------------
1999 2000 2001
---------- ---------- ----------

CONTINUING OPERATIONS
Net sales........................................... $1,070,339 $1,247,945 $1,151,156
Cost of products sold............................... 839,572 999,821 948,815
---------- ---------- ----------
Gross profit........................................ 230,767 248,124 202,341
Selling, general, and administrative expenses....... 136,304 153,695 145,742
Interest expense.................................... 12,821 22,102 16,418
Amortization of intangibles......................... 5,162 6,932 6,956
Restructuring and other charges..................... -- -- 9,368
Other (income) expense--net......................... (612) 307 1,371
---------- ---------- ----------
77,092 65,088 22,486
Provision for income taxes.......................... 26,822 23,432 7,984
---------- ---------- ----------
EARNINGS FROM CONTINUING OPERATIONS................... 50,270 41,656 14,502
DISCONTINUED OPERATIONS
Loss from discontinued operations less related
income tax benefit 1999--$5,017, and
2000--$7,772..................................... (7,848) (11,903) --
---------- ---------- ----------
NET EARNINGS.......................................... $ 42,422 $ 29,753 $ 14,502
========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations............................... $ 2.17 $ 1.78 $ 0.61
Discontinued Operations............................. (.34) (.51) --
---------- ---------- ----------
NET EARNINGS.......................................... $ 1.83 $ 1.27 $ 0.61
========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Continuing Operations............................... $ 2.11 $ 1.76 $ 0.61
Discontinued Operations............................. (.33) (.50) --
---------- ---------- ----------
NET EARNINGS.......................................... $ 1.78 $ 1.26 $ 0.61
========== ========== ==========

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Dollars in Thousands)

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
-----------------------------
1999 2000 2001
------- ------- -------

NET EARNINGS................................................ $42,422 $29,753 $14,502
Other comprehensive earnings (loss)
Foreign currency translation adjustments.................. (1,750) (2,200) (981)
Unrealized net loss on cash flow derivative instruments
less related income tax benefit of $287................ -- -- (439)
------- ------- -------
COMPREHENSIVE EARNINGS...................................... $40,672 $27,553 $13,082
======= ======= =======

See accompanying notes which are an integral part of these statements.
F-4

424B4 54th Page of 87 TOC 1st Previous Next ↓Bottom Just 54th
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
--------- -------- --------

CONTINUING
OPERATING ACTIVITIES
Earnings from continuing operations.................... $ 50,270 $ 41,656 $ 14,502
Adjustments to reconcile earnings from continuing
operations to cash provided by operating activities:
Depreciation......................................... 30,769 36,582 38,485
Amortization......................................... 6,546 8,477 8,591
Net change in current assets and liabilities......... (24,929) 3,563 11,175
Net change in noncurrent assets and liabilities...... (13,930) (15,343) (22,667)
Other................................................ (911) 241 (258)
--------- -------- --------

CASH PROVIDED BY OPERATING ACTIVITIES..................... 47,815 75,176 49,828

INVESTING ACTIVITIES
Acquisition of businesses.............................. (244,592) -- (117,988)
Capital expenditures................................... (32,807) (40,516) (35,318)
--------- -------- --------

CASH USED IN INVESTING ACTIVITIES......................... (277,399) (40,516) (153,306)

FINANCING ACTIVITIES
Long-term debt incurred................................ 229,677 -- 90,565
Long-term debt retired................................. (4,629) (33,379) (11,129)
Purchase of treasury stock............................. (2,773) -- --
Net proceeds from common stock and option activity..... 1,149 816 1,407
Dividends paid......................................... (11,172) (11,720) (12,319)
--------- -------- --------

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........... 212,252 (44,283) 68,524

CASH FLOW PROVIDED BY (USED IN) DISCONTINUED OPERATIONS..... (5,573) 10,149 40,426
--------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (22,905) 526 5,472
Cash and cash equivalents--beginning of year.............. 37,666 14,761 15,287
--------- -------- --------
CASH AND CASH EQUIVALENTS--END OF YEAR...................... $ 14,761 $ 15,287 $ 20,759
========= ======== ========

See accompanying notes which are an integral part of these statements.
F-5

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
---------------------------------
1999 2000 2001
--------- --------- ---------

CLASS A COMMON STOCK
Balance at beginning of year............................. $ 43,688 $ 43,615 $ 43,614
Conversion of Class A Common Stock....................... (73) (1) (182)
--------- --------- ---------
Balance at end of year................................... $ 43,615 $ 43,614 $ 43,432
--------- --------- ---------
COMMON STOCK
Balance at beginning of year............................. $ 23,812 $ 23,826 $ 23,827
Conversion of Class A Common Stock....................... 14 1 36
--------- --------- ---------
Balance at end of year................................... $ 23,826 $ 23,827 $ 23,863
--------- --------- ---------
CAPITAL IN EXCESS OF PAR VALUE
Balance at beginning of year............................. $ 51,121 $ 53,026 $ 53,521
Conversion of Class A Common Stock....................... 59 -- 146
Exercise of stock options................................ (182) (84) (116)
Tax benefit from exercise of stock options............... 1,797 404 1,114
Stock incentives and directors' compensation............. 231 175 120
--------- --------- ---------
Balance at end of year................................... $ 53,026 $ 53,521 $ 54,785
--------- --------- ---------
RETAINED EARNINGS
Balance at beginning of year............................. $ 499,954 $ 531,204 $ 549,237
Net earnings............................................. 42,422 29,753 14,502
Cash dividends on common stock........................... (11,172) (11,720) (12,319)
--------- --------- ---------
Balance at end of year................................... $ 531,204 $ 549,237 $ 551,420
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year............................. $ (1,488) $ (3,238) $ (5,438)
Foreign currency translation adjustments................. (1,750) (2,200) (981)
Unrealized net loss on cash flow derivative instruments
less related income tax benefit of $287............... -- -- (439)
--------- --------- ---------
Balance at end of year................................... $ (3,238) $ (5,438) $ (6,858)
--------- --------- ---------
TREASURY STOCK
Balance at beginning of year............................. $(215,994) $(217,349) $(216,366)
Purchase of treasury stock............................... (2,773) -- --
Exercise of stock options................................ 1,330 901 1,524
Stock incentives and directors' compensation............. 88 82 78
--------- --------- ---------
Balance at end of year................................... $(217,349) $(216,366) $(214,764)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY................................. $ 431,084 $ 448,395 $ 451,878
========= ========= =========

See accompanying notes which are an integral part of these statements.
F-6

424B4 56th Page of 87 TOC 1st Previous Next ↓Bottom Just 56th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization. A. O. Smith Corporation (the company) is a manufacturer
serving customers worldwide. The company's major product lines include
fractional and integral horsepower alternating current (AC), direct current (DC)
and hermetic electric motors, as well as residential and commercial water
heaters. The company's products are manufactured and marketed primarily in North
America. Electric motors are sold principally to original equipment
manufacturers and industrial distributors. Water heaters are sold principally to
plumbing wholesalers and retail outlets.

Consolidation. The consolidated financial statements include the accounts
of the company and its wholly owned subsidiaries after elimination of
intercompany transactions.

Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the accompanying financial statements and notes. Actual results could differ
from those estimates.

Fair values. The carrying amounts of cash and cash equivalents, receivables
and trade payables approximated fair value as of December 31, 2000 and 2001, due
to the short maturities of these instruments. The carrying amount of long-term
debt approximated fair value as of December 31, 2000 and 2001, based on current
rates offered to the company for debt with the same or similar maturities.

Foreign currency translation. For all subsidiaries outside the United
States, with the exception of Mexico, the company uses the local currency as the
functional currency. For those operations using a functional currency other than
the U.S. dollar, assets and liabilities are translated into U.S. dollars at
year-end exchange rates, and revenues and expenses are translated at
weighted-average exchange rates. The resulting translation adjustments are
recorded as a separate component of stockholders' equity. The Mexico operations
use the U.S. dollar as the functional currency as such operations are a direct
and integral component of the company's U.S. operations. Gains and losses from
foreign currency transactions are included in net earnings.

Cash and cash equivalents. The company considers all highly liquid
investments, generally with a maturity of three months or less when purchased,
to be cash equivalents.

Inventory valuation. Inventories are carried at lower of cost or market.
Cost is determined on the last-in, first-out (LIFO) method for substantially all
domestic inventories which comprise 90 percent and 93 percent of the company's
total inventory at December 31, 2000 and 2001, respectively. Inventories of
foreign subsidiaries and supplies are determined using the first-in, first-out
(FIFO) method.

Property, plant, and equipment. Property, plant, and equipment are stated
at cost. Depreciation is computed primarily by the straight-line method. The
estimated service lives used to compute depreciation are generally 25 to 50
years for buildings and 5 to 20 years for equipment. Maintenance and repair
costs are expensed as incurred.

F-7

424B4 57th Page of 87 TOC 1st Previous Next ↓Bottom Just 57th
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill and other intangibles. Goodwill is amortized over 40 years. The
amortization period for other intangibles is as follows: patents and licensed
technologies, 5 to 10 years; assembled workforce, 20 to 25 years; and customer
lists, 30 years.

[Download Table]

DECEMBER 31,
--------------------
2000 2001
-------- --------
(DOLLARS IN
THOUSANDS)

Goodwill, at cost........................................... $248,925 $309,094
Other intangibles, at cost.................................. 11,424 15,314
-------- --------
260,349 324,408
Less accumulated amortization............................... 15,528 22,484
-------- --------
$244,821 $301,924
======== ========

Impairment of long-lived and intangible assets. Property, plant, and
equipment, goodwill, and other intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is recognized for
the difference between the fair value and carrying value of the asset or group
of assets. Such analyses necessarily involve significant judgment.

Derivative instruments. Effective January 1, 2001, the company adopted
Statement of Financial Accounting Standards (SFAS) No. 133, as amended, which
requires that all derivative instruments be recorded on the balance sheet at
fair value and establishes criteria for designation and effectiveness of the
hedging relationships. Any fair value changes are recorded in net earnings or
other comprehensive earnings (loss). The cumulative effect of adopting SFAS No.
133 was not material to the company's consolidated financial statements as of
January 1, 2001.

The company utilizes certain derivative instruments to enhance its ability
to manage currency exposures and raw material price risks. Derivative
instruments are entered into for periods consistent with the related underlying
exposures and do not constitute positions independent of those exposures. The
company does not enter into contracts for speculative purposes. The contracts
are executed with major financial institutions with no credit loss anticipated
for failure of the counterparties to perform.

COMMODITY FUTURE CONTRACTS

In addition to entering into supply arrangements in the normal course of
business, the company also enters into futures contracts to fix the cost of
certain raw material purchases, principally copper, with the objective of
minimizing changes in cost due to market price fluctuations.

The commodity futures contracts are designated as cash flow hedges of a
forecasted transaction. Derivative commodity liabilities of $6.9 million are
recorded in accrued liabilities as of December 31, 2001, with the value of the
effective portion of the contracts of $6.9 million recorded in accumulated other
comprehensive earnings (loss) and reclassified into cost of products sold in the
period in which the underlying transaction is recorded in earnings. Ineffective
portions of the commodity hedges are recorded in earnings in the period

F-8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in which the ineffectiveness occurs. The impact of hedge ineffectiveness on
earnings was not material for the year ended December 31, 2001.

FOREIGN CURRENCY FORWARD CONTRACTS

The company is exposed to foreign currency exchange risk as a result of
transactions in currencies other than the functional currency of certain
subsidiaries. The company utilizes foreign currency forward purchase and sale
contracts to manage the volatility associated with foreign currency purchases,
sales and certain intercompany transactions in the normal course of business.
Contracts typically have maturities of a year or less. Principal currencies
include the Mexican peso, Hungarian forint, British pound, Euro, and U.S.
dollar.

Forward contracts are accounted for as cash flow hedges of a forecasted
transaction. Derivative currency assets of $6.6 million as of December 31, 2001,
are recorded in other current assets. Gains and losses on these instruments are
recorded in other comprehensive earnings (loss) until the underlying transaction
is recorded in earnings. When the hedged item is realized, gains or losses are
reclassified from accumulated other comprehensive earnings (loss) to the
statement of earnings. The assessment of effectiveness for forward contracts is
based on changes in the forward rates. These hedges have been determined to be
perfectly effective.

The majority of the amounts in accumulated other comprehensive earnings
(loss) for cash flow hedges are expected to be reclassified into earnings within
a year.

The following table summarizes, by currency, the contractual amounts of the
company's foreign currency forward contracts.

[Enlarge/Download Table]

DECEMBER 31,
--------------------------------------
2000 2001
----------------- -----------------
BUY SELL BUY SELL
------- ------ ------- ------
(DOLLARS IN THOUSANDS)

Euro...................................................... $12,400 $1,840 $ 3,900 $1,560
British pound............................................. 1,515 1,532 2,824 1,525
Hungarian forint.......................................... 3,135 -- 3,394 --
Mexican peso.............................................. 64,901 -- 74,279 --
------- ------ ------- ------
Total................................................... $81,951 $3,372 $84,397 $3,085
======= ====== ======= ======

The forward contracts in place at December 31, 2000 and 2001, amounted to
approximately 75 percent and 85 percent, respectively, of the company's
anticipated subsequent year exposure for those currencies hedged.

Revenue recognition. The company recognizes revenue upon transfer of title,
which generally occurs upon shipment of the product to the customer.

Compensated absences. In the second quarter of 2000 and the fourth quarter
of 2001, the company changed its vacation policy for certain employees so that
vacation pay is earned ratably throughout the year and must be used by year-end.
The accrual for compensated absences was reduced by $2.3 and $1.6 million in
2000 and 2001, respectively, to eliminate vacation pay no longer required to be
accrued under the current policy.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Research and development. Research and development costs are charged to
operations as incurred and amounted to $23.9, $24.5, and $27.6 million for
continuing operations during 1999, 2000, and 2001, respectively.

Product warranty. The company offers warranties on the sales of certain of
its products and records an accrual for estimated future claims. Such accruals
are based upon historical experience and management's estimate of the level of
future claims.

Environmental costs. The company accrues for losses associated with
environmental obligations when such losses are probable and reasonably
estimable. Costs of estimated future expenditures are not discounted to their
present value. Recoveries of environmental costs from other parties are recorded
as assets when their receipt is considered probable. The accruals are adjusted
as facts and circumstances change.

Earnings per share of common stock. The numerator for the calculation of
basic and diluted earnings per share is net earnings. The following table sets
forth the computation of basic and diluted weighted-average shares used in the
earnings per share calculations:

[Enlarge/Download Table]

1999 2000 2001
---------- ---------- ----------

Denominator for basic earnings per
share--weighted-average shares......................... 23,220,813 23,396,210 23,648,136
Effect of dilutive stock options......................... 566,540 294,932 266,646
---------- ---------- ----------
Denominator for diluted earnings per share............... 23,787,353 23,691,142 23,914,782
========== ========== ==========

Reclassifications. Certain prior year amounts have been reclassified to
conform to the 2001 presentation.

New accounting standards. In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and
Other Intangible Assets." Under the new standards, goodwill and indefinite-lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. Accordingly, the goodwill associated with the
December 2001 acquisitions (see Note 2) will not be amortized. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, the company will
apply the new accounting standards beginning January 1, 2002. The company is
currently assessing the financial impact SFAS No. 142 will have on the
Consolidated Financial Statements. The company anticipates that all of the
goodwill amortization of $6.6 million in 2001 will be eliminated as a charge to
operations in 2002.

2. ACQUISITIONS

On December 28, 2001, the company acquired all of the outstanding stock of
State Industries, Inc. (State). State is a manufacturer of a comprehensive line
of residential and standard commercial water heaters and will nearly double the
size of the company's existing water heater business, while complementing the
existing wholesale channel of distribution with a strong presence in the retail
market. Scale-related synergies also are expected to be achieved as a result of
the acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate purchase price was $117.2 million. This was comprised of $57.8
million for the outstanding stock, assumption of $56.3 million of debt, and $3.1
million of acquisition costs of which $1.8 million are unpaid at December 31,
2001. In connection with the State acquisition, additional purchase liabilities
of $3.9 million were recorded for employee severance.

The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The company is in
the process of obtaining third-party appraisal of property, plant, and equipment
and valuation of certain intangible assets and, therefore, the allocation of the
purchase price is subject to refinement. The non-deductible goodwill has been
recorded within the Water Systems segment. Of the $3.9 million of acquired
intangible assets, $3.0 million was assigned to trademarks that are not subject
to amortization. The weighted average amortization period of the remaining
acquired intangible assets is expected to be 8.6 years.

[Download Table]

DECEMBER 28, 2001
-----------------
(DOLLARS IN
THOUSANDS)

Current assets.............................................. $102,665
Property, plant and equipment............................... 74,409
Intangible assets........................................... 3,890
Goodwill.................................................... 60,123
Other assets................................................ 653
--------
Total assets acquired..................................... $241,740
========
Current liabilities......................................... 74,261
Long-term liabilities....................................... 52,094
--------
Total liabilities assumed................................. 126,355
--------
Net assets acquired....................................... $115,385
========

On a pro forma basis, the unaudited consolidated results from continuing
operations assuming the State acquisition occurred on January 1, 2000, is as
follows:

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
---------------------------
2000 2001
---------- ----------
(DOLLARS IN THOUSANDS)

Net sales................................................ $1,572,617 $1,467,261
Earnings from continuing operations...................... 33,572 17,604
Earnings per share:
Basic.................................................. 1.43 .74
Diluted................................................ 1.42 .74

The pro forma results have been prepared for informational purposes only and
include adjustments to depreciation expense of acquired plant and equipment,
amortization of intangible assets other than goodwill and trademarks, increased
interest expense on acquisition debt, and certain other adjustments, together
with related income tax effects of such adjustments. Anticipated efficiencies
from the consolidation of manufacturing and commercial

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

activities and anticipated lower material costs related to the consolidation of
purchasing have been excluded from the pro forma operating results. These pro
forma results do not purport to be indicative of the results of operations that
would have occurred had the purchases been made as of the beginning of the
periods presented or of the results of operations that may occur in the future.

In December 2001, the company acquired a 100 percent equity interest in
Shenzhen Speeda Industrial Co., Ltd. and will utilize the facility located in
China to manufacture electric motors. The total purchase price of $3.3 million,
including future payments of $.7 million, exceeded the fair value of the assets
acquired (principally plant and equipment) by $.8 million which was recorded as
non-deductible goodwill within the Electrical Products segment.

On August 2, 1999, the company acquired the assets of MagneTek Inc.'s
(MagneTek) domestic electric motor business and six wholly owned foreign
subsidiaries for $244.6 million. The acquisition was accounted for using the
purchase method of accounting, and the financial statements include MagneTek's
operating results since the date of acquisition. The purchase price was
allocated to the assets acquired and liabilities assumed based on their
respective fair values at the date of acquisition. The excess of the purchase
price over the fair value of net assets acquired of $104.3 million has been
recorded as goodwill. Other intangibles acquired, customer lists, patents, and
trademarks were assigned fair values aggregating $9.0 million and are being
amortized over periods of 5 to 30 years. In connection with the MagneTek
acquisition, additional purchase liabilities of $17.9 million were recorded
which included employee severance and relocation, as well as certain facility
exit costs. The remaining balance of such purchase liabilities at December 31,
2001, is $6.5 million.

3. DIVESTITURES AND DISCONTINUED OPERATIONS

On January 17, 2000 (the measurement date), the company, with the approval
of its Board of Directors, decided to divest the company's fiberglass piping and
liquid and dry storage businesses. The combined net sales of these operations
were $118.6 and $129.3 million in 1999 and 2000, respectively.

On December 8, 2000, the company sold the fiberglass piping business,
operated as Smith Fiberglass Products Company. On January 10, 2001, the company
sold its liquid and dry storage business, operated as Engineered Storage
Products Company. The net after-tax proceeds from the sale of these businesses
were $62 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the after-tax loss from discontinued operations included
in the consolidated statement of earnings are as follows:

[Download Table]

YEARS ENDED
DECEMBER 31,
------------------
1999 2000
------- --------
(DOLLARS IN
THOUSANDS)

Earnings (loss) from operations:
Smith Fiberglass Products Company......................... $(4,355) $ --
Engineered Storage Products Company....................... 3,465 3,139
Loss on disposition:
Smith Fiberglass Products Company......................... (6,958) (9,032)
Engineered Storage Products Company....................... -- (1,993)
Automotive Products Company............................... -- (4,017)
------- --------
Net after-tax loss from discontinued operations............. $(7,848) $(11,903)
======= ========

Certain expenses have been allocated to the operations of the discontinued
businesses, including interest expense, which was allocated based on the ratio
of net assets of the discontinued businesses to the total consolidated capital
of the company.

The $9.0 million additional loss recorded at the time of the disposition of
the fiberglass piping business in 2000 resulted from recognition of sales
proceeds substantially less than originally anticipated, as the acquisition
financing market, both generally and specific to the potential buyer,
deteriorated to the point where the original transaction was not feasible.
Subsequently, a sales contract containing a substantial reduction in sales
proceeds and other concessions made by the company relative to the assumption of
certain future costs was negotiated. An after-tax loss from operations (in an
amount greater than what was originally anticipated as of the measurement date)
of $.5 million is included in the $9.0 million loss on disposition in 2000.

As a result of difficult financing conditions prevalent late in 2000,
certain prospective buyers for the storage business withdrew from active
negotiations resulting in a single interested buyer. The company agreed to price
concessions to successfully complete its exit from this business, which resulted
in an unanticipated after-tax loss on disposition for this business of $2.0
million.

The $4.0 million after-tax loss on disposition in 2000 for the automotive
business consists of two items: $2.8 million ($4.0 million pre-tax) for workers'
compensation costs associated with increased claims having an occurrence date
prior to the 1997 sale of the automotive business for which the company retained
responsibility per the sales contract; and $1.2 million ($2.0 million pre-tax)
for final settlement of a purchase price dispute in the amount of $7.6 million
for which $5.6 million pre-tax reserve had been established at the time of sale.
The $2.8 million adjustment for workers' compensation costs was incremental to a
$12.3 million reserve for workers' compensation retained by the company at the
time of sale.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net assets of discontinued operations included in the
consolidated balance sheets are as follows:

[Download Table]

DECEMBER 31,
-----------------
2000 2001
------- -------
(DOLLARS IN
THOUSANDS)

Receivables................................................. $25,915 $ 264
Inventories................................................. 4,138 --
Other current assets........................................ 8,737 7,371
Trade payables.............................................. (3,090) --
Accrued payroll and benefits................................ (2,908) --
Other current liabilities................................... (10,141) (5,839)
------- -------
Net current assets.......................................... $22,651 $ 1,796
======= =======
Net property, plant, and equipment.......................... $18,266 $ --
Other assets................................................ 5,130 --
Long-term liabilities....................................... (5,903) (2,078)
------- -------
Net long-term assets (liabilities).......................... $17,493 $(2,078)
======= =======

The net long-term liability in 2001 is included in other liabilities in the
consolidated balance sheet.

4. BUSINESS IMPROVEMENT PROGRAMS

In the fourth quarter of 2001, the company recorded restructuring and other
charges of $9.4 million ($6.0 million after tax, or $.25 per share). The program
is expected to generate pre-tax savings of more than $16.0 million in 2002 and
$20.0 to $25.0 million annually thereafter. The charges include employee
separation costs of $7.7 million associated with product or component
manufacturing repositioning and the realignment of certain administrative
functions. The resulting reduction of workforce is approximately 150 salaried
and 775 hourly employees. In addition, the company recorded facility impairment
and lease charges of $1.7 million representing estimated costs of facilities to
be vacated. The company spent $.8 million through December 31, 2001, for
employee severance and separation costs. As a result of actions taken through
December 31, 2001, the workforce has been reduced by approximately 66 employees.
The company expects to be substantially completed with the realignment
activities prior to December 31, 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STATEMENT OF CASH FLOWS

Supplemental cash flow information is as follows:

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
----------------------------
1999 2000 2001
-------- ------- -------
(DOLLARS IN THOUSANDS)

Net change in current assets and liabilities:
Receivables........................................... $ (7,726) $10,278 $16,159
Inventories........................................... (20,158) (6,187) 6,983
Other current assets.................................. 393 (377) 163
Trade payables........................................ 6,654 10,559 7,265
Accrued liabilities, including payroll and benefits... (1,979) (3,091) (8,984)
Income taxes.......................................... (2,113) (7,619) (10,411)
-------- ------- -------
$(24,929) $ 3,563 $11,175
======== ======= =======

6. INVENTORIES

[Download Table]

DECEMBER 31,
--------------------
2000 2001
-------- --------
(DOLLARS IN
THOUSANDS)

Finished products........................................... $109,702 $120,231
Work in process............................................. 37,186 40,210
Raw materials............................................... 41,051 58,375
-------- --------
Inventories, at FIFO cost................................... 187,939 218,816
Allowance to state inventories at LIFO cost................. 18,309 24,110
-------- --------
$169,630 $194,706
======== ========

7. PROPERTY, PLANT, AND EQUIPMENT

[Download Table]

DECEMBER 31,
--------------------
2000 2001
-------- --------
(DOLLARS IN
THOUSANDS)

Land........................................................ $ 6,690 $ 9,408
Buildings................................................... 99,888 136,189
Equipment................................................... 435,440 491,906
-------- --------
542,018 637,503
Less accumulated depreciation............................... 259,183 282,205
-------- --------
$282,835 $355,298
======== ========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LONG-TERM DEBT AND LEASE COMMITMENTS

[Download Table]

DECEMBER 31,
--------------------
2000 2001
-------- --------
(DOLLARS IN
THOUSANDS)

Bank credit lines, average year-end interest rate of 6.6
percent for 2000 and 4.5 percent for 2001................. $ 37,770 $ 25,596
Commercial paper, average year-end interest rate of 7.1
percent for 2000 and 2.3 percent for 2001................. 124,945 104,404
Revolver borrowings, average year-end interest rate of 7.2
percent for 2000 and 2.3 percent for 2001................. 50,000 120,000
Term notes with insurance companies, expiring through 2018,
average year-end interest rate of 7.0 percent for 2000 and
7.1 percent for 2001...................................... 102,286 141,157
Other notes, expiring through 2012, average year-end
interest rate of 4.5 percent for 2000 and 3.2 percent for
2001...................................................... 12,500 12,500
-------- --------
327,501 403,657
Less amount due within one year............................. 11,129 13,272
-------- --------
$316,372 $390,385
======== ========

The company has a $250 million multi-year revolving credit agreement with a
group of 10 financial institutions, that expires on August 2, 2004. It also has
an $83 million 364-day credit agreement with a group of six banks, that expires
on July 26, 2002. At its option, the company maintains either cash balances or
pays fees for bank credit and services.

On June 8, 2001, the company issued $50 million in notes under loan
facilities with two insurance companies. The notes range in maturity from 2013
to 2016 and carry an interest rate of 7.3 percent.

The company's credit agreement and term notes contain certain conditions and
provisions which restrict the company's payment of dividends. Under the most
restrictive of these provisions, retained earnings of $58.5 million were
unrestricted as of December 31, 2001.

Borrowings under the bank credit lines and in the commercial paper market
that are supported by the multi-year revolving credit agreement have been
classified as long-term. It has been the company's practice to renew or replace
the revolving credit agreement so as to maintain the availability of debt on a
long-term basis and to provide 100 percent backup for its borrowings in the
commercial paper market.

Long-term debt, maturing within each of the five years subsequent to
December 31, 2001, is as follows: 2002--$13.3; 2003--$11.7; 2004--$8.6;
2005--$8.6; and 2006--$6.9 million.

Future minimum payments under noncancelable operating leases total $69.0
million and are due as follows: 2002--$15.0; 2003--$12.0; 2004--$10.7;
2005--$6.7; 2006--$5.7 and thereafter--$18.9 million. Rent expense, including
payments under operating leases, was $15.3, $18.3, and $19.0 million in 1999,
2000, and 2001, respectively.

Interest paid by the company for continuing and discontinued operations, was
$13.8, $24.6, and $16.9 million in 1999, 2000, and 2001, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. STOCKHOLDERS' EQUITY

The company's authorized capital consists of 3 million shares of Preferred
Stock $1 par value, 14 million shares of Class A Common Stock $5 par value, and
60 million shares of Common Stock $1 par value. The Common Stock has equal
dividend rights with Class A Common Stock and is entitled, as a class, to elect
25 percent of the board of directors and has 1/10th vote per share on all other
matters.

During 1999, 2000, and 2001, 14,655, 200, and 36,236 shares, respectively,
of Class A Common Stock were converted into Common Stock. Regular dividends paid
on the Class A Common and Common Stock amounted to $.48, $.50, and $.52 per
share in 1999, 2000, and 2001, respectively.

On December 9, 1997, the company's board of directors authorized the
repurchase of up to $50 million of Common Stock of which $21.5 million remains
available at December 31, 2001. At December 31, 2000, 32,595 and 8,967,312
shares of Class A Common Stock and Common Stock, respectively, were held as
treasury stock. At December 31, 2001, 32,595 and 8,730,594, shares of Class A
Common Stock and Common Stock, respectively, were held as treasury stock.

10. STOCK OPTIONS

The company has two Long-Term Executive Incentive Compensation Plans for
granting nonqualified and incentive stock options to key employees. The 1990
Plan has terminated except as to outstanding options. The 1999 Plan provides for
the issuance of 1.5 million stock options at fair value on the date of grant.
The options granted become exercisable one year from date of grant and, for
active employees, expire ten years after date of grant. The number of shares
available for granting of options at December 31, 2001, was 158,650.

Changes in option shares, all of which are Common Stock, were as follows:

[Enlarge/Download Table]

WEIGHTED-AVERAGE
PER SHARE YEARS ENDED DECEMBER 31,
EXERCISE -----------------------------------
PRICE - 2001 1999 2000 2001
---------------- --------- --------- ---------

Outstanding at beginning of year.......... $12.87 2,022,900 1,979,800 2,448,500
Granted
1999--$29.03 per share.................. 173,900
2000--$13.56 to $16.28 per share........ 632,000
2001--$15.14 per share.................. 15.14 510,700
Exercised
1999--$4.67 to $16.67 per share......... (217,000)
2000--$4.67 to $16.33 per share......... (141,600)
2001--$5.63 to $16.33 per share......... 6.24 (225,600)
Expired
2000--$18.00 to $27.25 per share........ -- (21,700) --
--------- --------- ---------
Outstanding at end of year
(2001--$8.67 to $29.83 per share)....... 17.01 1,979,800 2,448,500 2,733,600
========= ========= =========
Exercisable at end of year................ 17.44 1,805,900 1,816,500 2,222,900
========= ========= =========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes weighted-average information by range of
exercise prices for stock options outstanding and exercisable at December 31,
2001:

[Enlarge/Download Table]

WEIGHTED-
OPTIONS WEIGHTED- OPTIONS WEIGHTED- AVERAGE
OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE REMAINING
RANGE OF DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE CONTRACTUAL
EXERCISE PRICES 2001 PRICE 2001 PRICE LIFE
--------------- -------------- --------- -------------- --------- -----------

$8.67 to $13.56.............. 747,100 12.63 747,100 12.63 7 years
$15.14 to $18.33............. 1,636,650 16.62 1,125,950 17.29 6 years
$25.25 to $29.83............. 349,850 28.16 349,850 28.16 7 years
--------- ---------
2,733,600 2,222,900
========= =========

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does
not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The company has chosen to continue applying
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, because the number of shares is fixed and the exercise price
of the stock options equals the market price of the underlying stock on the date
of grant, no compensation expense has been recognized.

Had compensation cost been determined based upon the fair value at the grant
date for awards under the plans based on the provisions of SFAS No. 123, the
company's pro forma earnings and earnings per share from continuing operations
would have been as follows:

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
-----------------------------
1999 2000 2001
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)

Earnings:
As reported............................................ $50,270 $41,656 $14,502
Pro forma.............................................. 49,311 40,330 12,727
Earnings per share:
As reported:
Basic............................................... $ 2.17 $ 1.78 $ 0.61
Diluted............................................. 2.11 1.76 0.61
Pro forma:
Basic............................................... 2.12 1.72 0.54
Diluted............................................. 2.07 1.70 0.53

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted-average fair value per option at the date of grant during 1999,
2000, and 2001 using the Black-Scholes option-pricing model, was $9.58, $4.73,
and $5.30, respectively. Assumptions were as follows:

[Download Table]

1999 2000 2001
---- ---- ----

Expected life (years)....................................... 4.0 5.0 6.0
Risk-free interest rate..................................... 6.5% 5.0% 4.7%
Dividend yield.............................................. 2.1% 2.2% 2.3%
Expected volatility......................................... 38.6% 39.9% 37.9%

11. PENSION AND OTHER POST-RETIREMENT BENEFITS

The company provides retirement benefits for all United States employees.
Plan assets consist primarily of marketable equities and debt securities. The
company also has several foreign pension plans, none of which are material to
the company's financial position. Effective January 1, 2001, the company changed
its Executive Supplemental Pension Plan (ESPP) to an unfunded defined benefit
plan. The company also has several unfunded defined benefit post-retirement
plans covering certain hourly and salaried employees that provide medical and
life insurance benefits from retirement to age 65.

The company has a defined contribution profit sharing and retirement plan
covering the majority of its salaried nonunion employees which provides for
annual company contributions of 35 percent to 140 percent of qualifying
contributions made by participating employees. The amount of the company's
contribution in excess of 35 percent is dependent upon the company's
profitability. The company also has defined contribution plans for certain
hourly employees which provide for annual matching company contributions.

On December 28, 2001, the company acquired State Industries, Inc., including
its pension and defined contribution benefit plans.

The company does not provide post-retirement health care benefits beyond age
65. Certain hourly employees retiring after January 1, 1996, are subject to a
maximum annual benefit and salaried employees hired after December 31, 1993, are
not eligible for post-retirement medical benefits. As a result, a one percentage
point change in the health care cost trend rate would not have a significant
effect on the amounts reported. The post-retirement benefit obligation was
determined using an assumed healthcare cost trend rate of nine percent in 2001
trending down to six percent in 2004 and thereafter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables present the changes in benefit obligations, plan
assets, funded status, and major assumptions used to determine these amounts for
domestic pension and post-retirement plans and components of net periodic
benefit costs.

[Enlarge/Download Table]

POST-RETIREMENT
PENSION BENEFITS BENEFITS
--------------------- -------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2000 2001
--------- --------- -------- --------
(DOLLARS IN THOUSANDS)

CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year........... $(530,658) $(561,771) $(17,477) $(17,177)
ESPP benefit obligation at beginning of year...... -- (6,963) -- --
Service cost...................................... (6,631) (5,900) (271) (258)
Interest cost..................................... (40,926) (41,579) (1,267) (1,227)
Participant contributions......................... -- -- (264) (387)
Plan amendments................................... -- (542) -- --
Actuarial gains (losses) including assumption
changes......................................... (23,084) (15,759) 79 2
Acquisition....................................... -- (64,642) -- --
Benefits paid..................................... 39,528 46,669 2,023 2,592
--------- --------- -------- --------
Benefit obligation at end of year................. $(561,771) $(650,487) $(17,177) $(16,455)
========= ========= ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.... $ 755,487 $ 737,119 $ -- $ --
Actual return on plan assets...................... 21,160 (35,967) -- --
Contribution by the company....................... -- 946 1,759 2,205
Participant contributions......................... -- -- 264 387
Acquisition....................................... -- 48,899 -- --
Benefits paid..................................... (39,528) (46,669) (2,023) (2,592)
--------- --------- -------- --------
Fair value of plan assets at end of year.......... $ 737,119 $ 704,328 $ -- $ --
========= ========= ======== ========
FUNDED STATUS..................................... $ 175,348 $ 53,841 $(17,177) $(16,455)
Unrecognized net actuarial loss (gain)............ (97,503) 22,290 (1,845) (1,781)
Unrecognized net transition asset................. (499) -- -- --
Unrecognized prior service cost (credit).......... 4,612 7,780 (677) (525)
--------- --------- -------- --------
Net amount recognized............................. $ 81,958 $ 83,911 $(19,699) $(18,761)
========= ========= ======== ========
Amounts recognized in the statement of financial
position consist of:
Prepaid pension asset........................... $ 81,958 $ 103,272 $ -- $ --
Accrued benefit liability....................... -- (19,361) (1,687) (1,688)
Post-retirement benefit obligation.............. -- -- (18,012) (17,073)
--------- --------- -------- --------
Net amount recognized............................. $ 81,958 $ 83,911 $(19,699) $(18,761)
========= ========= ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate..................................... 7.50% 7.25% 7.50% 7.25%
Expected return on plan assets.................... 10.25% 10.00% n/a n/a
Rate of compensation increase..................... 4.00% 4.00% 4.00% 4.00%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

[Enlarge/Download Table]

PENSION BENEFITS POST-RETIREMENT BENEFITS
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
-------------------------------- --------------------------
1999 2000 2001 1999 2000 2001
-------- -------- -------- ------ ------ ------
(DOLLARS IN THOUSANDS)

COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost.................... $ 4,890 $ 6,631 $ 5,900 $ 338 $ 271 $ 258
Interest cost................... 36,314 40,926 41,579 1,195 1,267 1,227
Expected return on plan
assets........................ (56,598) (64,854) (68,067) -- -- --
Amortization of prior service
cost.......................... 502 559 937 (152) (152) (152)
Amortization of transition
asset......................... (939) (939) (499) -- -- --
Amortization of net actuarial
gain.......................... -- -- -- (59) (82) (66)
-------- -------- -------- ------ ------ ------
Defined benefit plan cost
(income)...................... $(15,831) $(17,677) $(20,150) $1,322 $1,304 $1,267
====== ====== ======
Various U.S. defined
contribution plans cost....... 5,087 3,559 2,418
-------- -------- --------
$(10,744) $(14,118) $(17,732)
======== ======== ========

The company did not have any pension plans with accumulated benefit
obligations in excess of plan assets at December 31, 2000. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
the pension plans with accumulated benefit obligations in excess of plan assets
were $71,561, $68,104 and $48,899, respectively, as of December 31, 2001.

Net periodic benefit 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.

12. INCOME TAXES

The components of the provision for income taxes for continuing operations
consisted of the following:

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
----------------------------
1999 2000 2001
------- ------- --------
(DOLLARS IN THOUSANDS)

Current:
Federal............................................... $11,810 $ 3,964 $(10,100)
State................................................. 2,399 428 (12)
International......................................... 1,339 3,581 2,426
Deferred................................................ 11,274 15,459 15,670
------- ------- --------
$26,822 $23,432 $ 7,984
======= ======= ========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes for continuing operations differs from the
U.S. federal statutory rate due to the following items:

[Download Table]

YEARS ENDED
DECEMBER 31,
----------------------
1999 2000 2001
----- ----- ----
(DOLLARS IN
THOUSANDS)

Provision at U.S. federal statutory rate.................... 35.0% 35.0% 35.0%
International income tax rate differential.................. (1.8) (1.1) 2.2
State income and franchise taxes............................ 3.6 3.0 (.8)
Research tax credits........................................ (1.8) (.1) (1.3)
Other....................................................... (.2) (.8) .4
---- ---- ----
34.8% 36.0% 35.5%
==== ==== ====

Components of earnings from continuing operations before income taxes were
as follows:

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
-----------------------------
1999 2000 2001
------- ------- -------
(DOLLARS IN THOUSANDS)

United States............................................ $76,201 $57,845 $18,939
International............................................ 891 7,243 3,547
------- ------- -------
$77,092 $65,088 $22,486
======= ======= =======

Total taxes paid (tax refunds received) by the company for continuing and
discontinued operations amounted to $11.6, $13.1, and $(2.7) million in 1999,
2000, and 2001, respectively.

No provision for U.S. income taxes or foreign taxes has been made on the
undistributed earnings of foreign subsidiaries as such earnings are considered
to be permanently invested. At December 31, 2001, the undistributed earnings
amounted to $38.5 million. Determination of the amount of unrecognized deferred
tax liability on the undistributed earnings is not practicable. In addition, no
provision or benefit for U.S. income taxes have been made on foreign currency
translation gains or losses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences of assets and liabilities between
income tax and financial reporting for continuing operations are as follows:

[Enlarge/Download Table]

DECEMBER 31, 2000 DECEMBER 31, 2001
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
(DOLLARS IN THOUSANDS)

Employee benefits............................ $19,261 $33,791 $25,605 $ 42,125
Inventory.................................... 1,134 -- -- 3,363
Receivables.................................. -- 4,697 -- 10,111
Product liability and warranty............... 11,814 -- 40,986 --
Depreciation differences..................... -- 27,781 -- 42,781
Amortization differences..................... -- 13,094 -- 17,941
Tax loss and credit carryovers............... -- -- 9,946 --
All other.................................... -- 7,753 33 --
------- ------- ------- --------
$32,209 $87,116 $76,570 $116,321
======= ======= ======= ========
Net liability................................ $54,907 $ 39,751
======= ========

These deferred tax assets and liabilities are classified in the balance
sheet as current or long-term based on the balance sheet classification of the
related assets and liabilities as follows:

[Download Table]

DECEMBER 31,
--------------------
2000 2001
-------- --------
(DOLLARS IN
THOUSANDS)

Current deferred income tax assets.......................... $ 12,907 $ 22,403
Long-term deferred income tax liabilities................... (67,814) (62,154)
-------- --------
Net liability............................................... $ 54,907 $ 39,751
======== ========

As a result of the acquisition of State Industries, Inc., the company has
$19 million of federal net operating loss carryovers that expire between 2018
and 2021, $7.8 million of federal capital loss carryovers that expire in 2006,
$2.0 million of contribution carryovers that expire between 2002 and 2006, and
$2.5 million of tax credits, the majority of which have an unlimited carryover
period. Due to a change in State Industries, Inc. ownership, the annual
limitation for utilization of the federal tax carryovers is the equivalent of
$2.7 million of deductions.

The company also has approximately $140 million of state and local net
operating loss carryovers. The majority of these carryovers expire between 2010
and 2021.

13. LITIGATION AND INSURANCE MATTERS

The company and the newly acquired State Industries, Inc. (State) are
involved in various unresolved legal actions, administrative proceedings, and
claims in the ordinary course of its business involving product liability,
property damage, insurance coverage, patents, and environmental matters,
including the disposal of hazardous waste. Although it is not possible to
predict with certainty the outcome of these unresolved legal actions or the
range of possible loss or recovery, the company believes these unresolved legal
actions will not have a

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

material effect on its financial position or results of operations. The
following paragraphs summarize noteworthy actions and proceedings.

On July 16, 1999, a class action lawsuit was filed in the United States
District Court, Western District of Missouri, by individuals on behalf of
themselves and all persons throughout the United States who have owned or
currently own a water heater manufactured by Rheem Manufacturing Company, A. O.
Smith Corporation, Bradford White Company, American Water Heater Company,
Lochinvar Corporation, and State Industries, Inc. (the "water heater
manufacturers") that contains a dip tube manufactured, designed, supplied, or
sold by Perfection Corporation between August 1993 and October 1996. A dip tube
is a plastic tube in a residential water heater that brings the cold water
supply to the bottom area of the tank to be heated.

The plaintiffs and defendants reached a settlement of the claims of this
litigation. On November 22, 1999, the United States District Court, Western
District of Missouri, entered an order giving preliminary approval to the
settlement. On May 1, 2000, the District Court, which oversees the dip tube
class action, gave final approval to the settlement. The final order approved
the remedial system provided for in the settlement agreement. The deadline for
filing claims under the class action settlement agreement was December 31, 2000.
The water heater manufacturers paid the settlement claims. All other legal
actions brought against the water heater manufacturers respecting dip tube
claims have been dismissed as a result of the settlement of the class action.

Separately, the water heater manufacturers filed a direct action lawsuit in
the Civil District Court for the Parish of Orleans, State of Louisiana, against
Perfection Corporation and American Meter Company, the parent company of
Perfection: Manner Plastics Materials, Inc., the developer of the polypropylene
formula which it sold to Perfection Corporation: and their insurers. This
lawsuit seeks (1) recovery of damages sustained by the water heater
manufacturers related to the costs of the class action settlement and the
handling of dip tube claims outside of and prior to the national class action
settlement, (2) damages for the liability of the water heater manufacturers
assumed by Perfection Corporation by contract, and (3) personal injuries
suffered by the water heater manufacturers as a result of the disparagement of
their businesses. Also relating to the water heater manufacturers' recovery
efforts, the insurers of Perfection Corporation have brought third-party claims
against the water heater manufacturers in a state court action in Cook County,
Illinois. Perfection Corporation has also sued the water heater manufacturers in
a separate action in Cook County, Illinois. The filing by Perfection Corporation
is an attempt to preempt the Louisiana lawsuit.

As of December 31, 2001, the company recorded a long-term receivable of
$32.8 million (as detailed below) related to dip tube repair claims,
administrative costs, legal fees and related expenses. It is the company's
expectation that all or a substantial portion of its costs will be

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recovered from Perfection, American Meter Company, Manner Plastics Materials,
Inc., and their insurers, as well as the company's insurers.

[Enlarge/Download Table]

1999 CUMULATIVE
AND PRIOR 2000 2001 DECEMBER 31, 2001
--------- ------- ------- -----------------
(DOLLARS IN THOUSANDS)

Repair claim payments....................... $2,537 $ 6,268 $13,378 $22,183
Administrative costs........................ 1,021 2,009 4,503 7,533
Legal fees.................................. 490 2,085 470 3,045
------ ------- ------- -------
Total funding............................... $4,048 $10,362 $18,351 $32,761
====== ======= ======= =======

State is a defendant in three lawsuits pending at December 31, 2001, in
state courts in Texas, California, and Alabama. The plaintiffs in each of these
lawsuits are claiming they purchased a water heater manufactured by State which
was defective, causing the plaintiffs to incur expenses for repair, replacement,
or property damages. State ceased manufacturing this type water heater in 1999.
The plaintiffs in each lawsuit are seeking class action status. The Texas
lawsuit was certified by the trial court as a class action in 1999.
Subsequently, State and the class representatives entered into a settlement
agreement which provided compensation for the class members. As a result of a
class member's objection to the settlement, the appellate court, in reviewing
the certification of the class and the objection to the settlement, overruled
the trial court and in 2001 ordered the decertification of the class action. The
Texas Supreme Court affirmed the appellate court decision. State filed a
separate lawsuit, which is pending in the federal District Court in Dallas,
Texas, against the class representatives seeking to have the court declare that
State has no obligation under the settlement agreement. State is vigorously
contesting all of the claims in the three lawsuits. The company believes that
were there to be an adverse outcome with these lawsuits, it would not be
material to the company's financial condition. The insurer of State is disputing
the insurability of these claims. State and its insurer are suing each other in
a lawsuit, which is pending in the federal District Court in Nashville,
Tennessee, respectively seeking a declaration concerning the coverage provided,
if any, by the insurance policies for these claims.

The company is currently involved as a potentially responsible party ("PRP")
in judicial and administrative proceedings initiated on behalf of various state
and federal regulatory agencies seeking to clean up 12 sites which have been
environmentally impacted (the "Sites") and to recover costs they have incurred
or will incur as to the Sites. State is not involved in any environmentally
impacted sites. The company previously reported that it was a defendant in two
separate lawsuits involving a former mine in Colorado that is being remediated
by the United States Environmental Protection Agency ("EPA"). The claims against
the company have been dismissed by the trial court in both of those actions.
While the State of Colorado retains the right to appeal the trial court's
decision in one of those actions, the company believes that the trial court's
well-reasoned decision would be upheld on any appeal brought by the State of
Colorado. Since the EPA has indicated that it does not intend to pursue any
claims against the company with respect to this site, the company should have no
further potential liability with respect to the site.

It is impossible at this time to estimate the total cost of remediation for
the Sites or the company's ultimate share of those costs, primarily because the
Sites are in various stages of the remediation process and issues remain open at
many Sites concerning the selection and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

implementation of the final remedy, the cost of that remedy, and the company's
liability at a Site relative to the liability and viability of the other PRPs.

The company has established reserves for the Sites in a manner that is
consistent with generally accepted accounting principles for costs associated
with such cleanups when those costs are capable of being reasonably estimated.
To the best of the company's knowledge, the reserves it has established and
insurance proceeds that are available to the company are sufficient to cover the
company's liability. The company further believes its insurers have the
financial ability to pay any such covered claims, and there are viable PRPs at
each of the Sites which have the financial ability to pay their respective
shares of liability at the sites.

With respect to non-environmental claims, the company has self-insured a
portion of its product liability loss exposure and other business risks for many
years. The company has established reserves which it believes are adequate to
cover incurred claims. For the year ended December 31, 2001, the company had
$125 million of third-party product liability insurance for individual losses in
excess of $1.5 million and for aggregate annual losses in excess of $10 million;
State had $100 million of third-party product liability insurance for individual
losses in excess of $3.0 million and for aggregate annual losses in excess of $8
million. The company reevaluates its exposure on claims periodically and makes
adjustments to its reserves as appropriate.

14. OPERATIONS BY SEGMENT

The company has two reportable segments: Electrical Products and Water
Systems. The Electrical Products segment manufactures fractional and integral
alternating current (AC) and direct current (DC) motors used in fans and blowers
in furnaces, air conditioners, and ventilating systems; industrial applications
such as material handling; as well as in other consumer products such as home
appliances and jet pump motors, swimming pools, hot tubs, and spas. In addition,
the Electrical Products segment manufactures hermetic motors which are sold
worldwide to manufacturers of compressors used in air conditioning and
refrigeration systems. The Water Systems segment manufactures residential gas
and electric water heaters as well as commercial water heating equipment used in
a wide range of applications including hotels, laundries, car washes, factories,
and large institutions. In addition, the Water Systems segment manufactures
copper tube boilers used in large-volume hot water and hydronic heating
applications.

The accounting policies of the reportable segments are the same as those
described in the "Summary of Significant Accounting Policies" outlined in Note
1. Intersegment sales have been excluded from segment revenues and are
immaterial. Earnings before interest and taxes (EBIT) is used to measure the
performance of the segments and allocate resources.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OPERATIONS BY SEGMENT

[Enlarge/Download Table]

EARNINGS FROM
CONTINUING
OPERATIONS
-------------------------- NET SALES
YEARS ENDED ---------------------------------
DECEMBER 31, YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------
1999 2000 2001 1999 2000 2001
------ ------ ------ -------- --------- --------
(DOLLARS IN MILLIONS)

Electrical Products.................... $ 78.9 $ 75.5 $ 20.8 $ 735.0 $ 902.4 $ 802.7
Water Systems.......................... 33.8 34.9 39.2 335.3 345.5 348.5
------ ------ ------ -------- -------- --------
Total Segments--EBIT................... 112.7 110.4 60.0 $1,070.3 $1,247.9 $1,151.2
======== ======== ========
General Corporate and Research and
Development Expenses................. (22.8) (23.2) (21.1)
Interest Expense....................... (12.8) (22.1) (16.4)
------ ------ ------
Earnings from Continuing Operations
before Income Taxes.................. 77.1 65.1 22.5
Provision for Income Taxes............. (26.8) (23.4) (8.0)
------ ------ ------
Earnings from Continuing Operations.... $ 50.3 $ 41.7 $ 14.5
====== ====== ======

Net sales of the Electrical Products segment includes sales to York
International Corporation of $191.3 million, $182.9 million, and $171.9 million
in 1999, 2000, and 2001, respectively.

TOTAL ASSETS, DEPRECIATION AND AMORTIZATION, AND CAPITAL EXPENDITURES BY SEGMENT

[Enlarge/Download Table]

DEPRECIATION AND CAPITAL
AMORTIZATION EXPENDITURES
TOTAL ASSETS --------------------- ---------------------
------------------------------ YEARS ENDED YEARS ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
------------------------------ --------------------- ---------------------
1999 2000 2001 1999 2000 2001 1999 2000 2001
-------- -------- -------- ----- ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)

Electrical Products..... $ 705.1 $ 700.6 $ 680.3 $27.3 $34.7 $37.0 $27.0 $35.6 $29.5
Water Systems........... 177.4 182.8 420.6 8.8 9.0 8.9 5.6 4.6 5.7
-------- -------- -------- ----- ----- ----- ----- ----- -----
Total Segments.......... 882.5 883.4 1,100.9 36.1 43.7 45.9 32.6 40.2 35.2
Corporate Assets........ 120.9 141.4 191.2 1.2 1.3 1.2 0.2 0.3 0.1
Discontinued
Operations............ 62.2 40.1 1.8 5.3 5.6 -- 5.1 1.5 --
-------- -------- -------- ----- ----- ----- ----- ----- -----
Total................... $1,065.6 $1,064.9 $1,293.9 $42.6 $50.6 $47.1 $37.9 $42.0 $35.3
======== ======== ======== ===== ===== ===== ===== ===== =====

Corporate assets consist primarily of cash and cash equivalents, deferred
income taxes, and prepaid pension.

NET SALES AND LONG-LIVED ASSETS BY GEOGRAPHIC LOCATION

The following data by geographic area includes net sales based on product
shipment destination and long-lived assets based on physical location.
Long-lived assets include net

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

property, plant, and equipment and other long-term assets and exclude prepaid
pension, intangible assets, and long-lived assets of discontinued operations.

[Enlarge/Download Table]

LONG-LIVED ASSETS NET SALES
------------------------ ------------------------------
1999 2000 2001 1999 2000 2001
------ ------ ------ -------- -------- --------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)

United States........ $192.1 $200.1 $283.4 United States...... $ 959.7 $1,108.9 $ 984.4
Mexico............... 91.7 98.7 102.0 Foreign............ 110.6 139.0 166.8
-------- -------- --------
Other Foreign........ 28.5 24.4 25.8 Total.............. $1,070.3 $1,247.9 $1,151.2
------ ------ ------ ======== ======== ========
Total................ $312.3 $323.2 $411.2
====== ====== ======

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

[Enlarge/Download Table]

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
--------------- --------------- --------------- ---------------
2000 2001 2000 2001 2000 2001 2000 2001
------ ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Net sales....................... $344.6 $318.2 $341.3 $308.3 $290.8 $269.1 $271.2 $255.6
Gross profit.................... 73.4 58.8 73.5 58.6 54.3 42.6 46.9 42.3
Earnings
Continuing.................... 14.2 8.5 17.6 10.7 7.3 0.4 2.5 (5.1)
Discontinued.................. 0.4 -- -- -- 1.5 -- (13.8) --
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings.................. 14.6 8.5 17.6 10.7 8.8 0.4 (11.3) (5.1)
====== ====== ====== ====== ====== ====== ====== ======
Basic earnings per share
Continuing.................... .61 .36 .75 .45 .31 .02 .11 (.21)
Discontinued.................. .02 -- -- -- .07 -- (.59) --
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings.................. .63 .36 .75 .45 .38 .02 (.48) (.21)
====== ====== ====== ====== ====== ====== ====== ======
Diluted earnings per share
Continuing.................... .60 .36 .74 .45 .31 .02 .11 (.21)
Discontinued.................. .02 -- -- -- .06 -- (.58) --
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings.................. .62 .36 .74 .45 .37 .02 (.47) (.21)
====== ====== ====== ====== ====== ====== ====== ======
Common dividends declared....... .12 .13 .12 .13 .13 .13 .13 .13
====== ====== ====== ====== ====== ====== ====== ======

Net earnings and dividends declared per share are computed separately for
each period and, therefore, the sum of such quarterly per share amounts may
differ from the total for the year.

See Note 8 for restrictions on the payment of dividends.

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CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

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(UNAUDITED)
DECEMBER 31, 2001 MARCH 31, 2002
----------------- --------------

ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 20,759 $ 21,851
Receivables............................................. 209,871 237,690
Inventories............................................. 194,706 192,578
Deferred income taxes................................... 22,403 18,878
Other current assets.................................... 28,039 16,456
Net current assets--discontinued operations............. 1,796 --
---------- ----------
TOTAL CURRENT ASSETS.................................... 477,574 487,453
Property, plant and equipment........................... 637,503 641,804
Less accumulated depreciation........................... 282,205 292,817
---------- ----------
Net property, plant and equipment....................... 355,298 348,987
Goodwill................................................ 295,073 295,723
Other intangible assets................................. 6,851 6,480
Other assets............................................ 159,127 166,579
---------- ----------
TOTAL ASSETS....................................... $1,293,923 $1,305,222
========== ==========
LIABILITIES
CURRENT LIABILITIES
Notes payable........................................... $ 3,280 $ --
Trade payables.......................................... 131,073 138,191
Accrued payroll and benefits............................ 29,525 31,464
Accrued liabilities..................................... 58,443 55,949
Product warranty........................................ 19,470 19,155
Income taxes............................................ 887 2,419
Long-term debt due within one year...................... 13,272 13,272
Net current liabilities--discontinued operations........ -- 2,902
---------- ----------
TOTAL CURRENT LIABILITIES............................... 255,950 263,352
Long-term debt.......................................... 390,385 378,867
Other liabilities....................................... 133,556 130,277
Deferred income taxes................................... 62,154 66,577
---------- ----------
TOTAL LIABILITIES.................................. 842,045 839,073

STOCKHOLDERS' EQUITY
Class A common stock, $5 par value: authorized
14,000,000 shares; issued 8,671,584................... 43,432 43,358
Common stock, $1 par value: authorized 60,000,000
shares; issued 23,877,778............................. 23,863 23,878
Capital in excess of par value.......................... 54,785 55,697
Retained earnings....................................... 551,420 560,448
Accumulated other comprehensive loss.................... (6,858) (2,815)
Treasury stock at cost.................................. (214,764) (214,417)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY......................... 451,878 466,149
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,293,923 $1,305,222
========== ==========

See accompanying notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts)

[Download Table]

THREE MONTHS
ENDED MARCH 31,
--------------------
2001 2002
-------- --------

Electrical Products......................................... $226,253 $196,234
Water Systems............................................... 91,982 175,693
-------- --------
Net sales................................................. 318,235 371,927
Cost of products sold....................................... 259,440 295,026
-------- --------
Gross profit.............................................. 58,795 76,901
Selling, general and administrative expenses................ 38,123 53,204
Interest expense............................................ 4,801 4,177
Amortization of intangibles................................. 1,733 81
Other expense--net.......................................... 599 789
-------- --------
13,539 18,650
Provision for income taxes.................................. 5,010 6,528
-------- --------
NET EARNINGS.............................................. $ 8,529 $ 12,122
======== ========
EARNINGS PER COMMON SHARE
Basic..................................................... $ 0.36 $ 0.51
======== ========
Diluted................................................... $ 0.36 $ 0.50
======== ========
DIVIDENDS PER COMMON SHARE.................................. $ 0.13 $ 0.13
======== ========

See accompanying notes to unaudited condensed consolidated financial statements.
F-30

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)

[Download Table]

THREE MONTHS
ENDED
MARCH 31,
-------------------
2001 2002
-------- --------

CONTINUING
OPERATING ACTIVITIES
Earnings from continuing operations.................. $ 8,529 $ 12,122
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation.................................... 9,291 11,941
Amortization.................................... 2,120 356
Net change in current assets and liabilities.... (27,610) 3,024
Net change in other noncurrent assets and
liabilities................................... (5,832) (5,516)
Other........................................... 218 927
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........... (13,284) 22,854
INVESTING ACTIVITIES
Capital expenditures................................. (9,520) (7,080)
Acquisition of business.............................. -- (2,050)
-------- --------
CASH USED IN INVESTING ACTIVITIES......................... (9,520) (9,130)
CASH FLOW BEFORE FINANCING ACTIVITIES..................... (22,804) 13,724
FINANCING ACTIVITIES
Long-term debt retired............................... (20,666) (14,798)
Net proceeds from common stock and option activity... 101 815
Dividends paid....................................... (3,061) (3,094)
-------- --------
CASH USED IN FINANCING ACTIVITIES......................... (23,626) (17,077)
CASH PROVIDED BY DISCONTINUED OPERATIONS.................... 44,201 4,445
-------- --------
Net increase (decrease) in cash and cash equivalents... (2,229) 1,092
Cash and cash equivalents-beginning of period.......... 15,287 20,759
-------- --------
CASH AND CASH EQUIVALENTS--END OF PERIOD.................... $ 13,058 $ 21,851
======== ========

See accompanying notes to unaudited condensed consolidated financial statements.
F-31

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2002 are
not necessarily indicative of the results expected for the full year. It is
suggested that the accompanying condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and the
notes thereto included in the company's latest Annual Report on Form 10-K.
Certain prior year amounts have been reclassified to conform to the 2002
presentation.

2. ACQUISITIONS

On December 28, 2001, A. O. Smith Corporation (the company) acquired all of
the outstanding stock of State Industries, Inc. (State) for an aggregate
purchase price of $117.5 million. This was comprised of $57.8 million for the
outstanding stock, assumption of $56.3 million of debt, and $3.4 million of
acquisition costs, of which $2.1 million were paid during the three-month period
ended March 31, 2002. The purchase price was allocated to the assets acquired
and liabilities assumed based upon current estimates of their respective fair
values at the date of acquisition. In connection with the State acquisition,
additional purchase liabilities of $3.9 million were recorded for employee
severance. As of March 31, 2002, total costs incurred and charged against this
liability to date totaled $0.6 million.

On August 2, 1999, the company acquired the assets of MagneTek, Inc.'s
(MagneTek) domestic electric motor business and six wholly owned foreign
subsidiaries for $244.6 million. In connection with the MagneTek acquisition,
the company recorded additional purchase liabilities of $17.9 million, which
included employee severance and relocation, as well as certain facility exit
costs. The remaining balance of such purchase liabilities at March 31, 2002 is
$6.0 million.

3. BUSINESS IMPROVEMENT PROGRAMS

In the fourth quarter of 2001, the company recorded restructuring and other
charges of $9.4 million. The charges included employee separation costs of $7.7
million associated with product or component manufacturing repositioning and the
realignment of certain administrative functions. The resulting reduction of
workforce is approximately 150 salaried and 775 hourly employees. In addition,
the company recorded facility impairment and lease charges of $1.7 million
representing estimated costs of facilities to be vacated. The company spent $1.5
million through March 31, 2002 for employee severance and separation costs. As a
result of actions taken through March 31, 2002, the workforce has been reduced
by approximately 94 employees. The company expects to be substantially completed
with the realignment activities prior to December 31, 2002.

F-32

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INVENTORIES (DOLLARS IN THOUSANDS)

[Download Table]

DECEMBER 31, 2001 MARCH 31, 2002
----------------- --------------

Finished products............................... $120,231 $125,155
Work in process................................. 40,210 37,228
Raw materials................................... 58,375 54,305
-------- --------
218,816 216,688
Allowance to state inventories at LIFO cost..... 24,110 24,110
-------- --------
$194,706 $192,578
======== ========

5. GOODWILL AND OTHER INTANGIBLE ASSETS

The company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under
SFAS No. 142, goodwill and certain other intangible assets are no longer
amortized but are reviewed for impairment. In connection with the adoption of
SFAS No. 142, the company has completed the first step of the transitional
goodwill impairment test, which requires the company to compare the fair value
of its reporting units to the carrying value of the net assets of the respective
reporting units as of January 1, 2002. Based on this analysis, the company has
concluded that no impairment existed at the time of adoption, and, accordingly,
the company has not recognized any transitional impairment loss.

Changes in the carrying amount of goodwill during the first quarter of 2002
consist of the following (Dollars in thousands).

[Enlarge/Download Table]

ELECTRICAL WATER
PRODUCTS SYSTEMS TOTAL
---------- --------- --------

Balance at December 31, 2001......................... $230,004 $65,069 $295,073
Adjustment to property, plant and equipment and other
assets............................................. (37) 328 291
Additional acquisition costs......................... -- 359 359
-------- ------- --------
Balance at March 31, 2002............................ $229,967 $65,756 $295,723
======== ======= ========

As required by SFAS No. 142, the results of operations for periods prior to
its adoption have not been restated. The following table reconciles reported net
earnings and earnings per share to pro forma net earnings and earnings per share
that would have resulted for the three-

F-33

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

month period ended March 31, 2001 if SFAS No. 142 had been adopted effective
January 1, 2001 (Dollars in thousands, except per share amounts):

[Download Table]

THREE MONTHS ENDED
MARCH 31, 2001
------------------

Net earnings as reported.................................... $8,529
Goodwill amortization--after tax............................ 995
Assembled workforce amortization--after tax................. 58
------
Net earnings--pro forma..................................... 9,582
======
Basic earnings per share:
As reported............................................... $ 0.36
======
Pro forma................................................. $ 0.41
======
Diluted earnings per share:
As reported............................................... $ 0.36
======
Pro forma................................................. $ 0.40
======

Other intangible assets at December 31, 2001 and March 31, 2002 consist of the
following (Dollars in thousands):

[Enlarge/Download Table]

DECEMBER 31, 2001
--------------------------------
AMORTIZATION CARRYING ACCUMULATED
PERIOD AMOUNT AMORTIZATION NET
--------------- -------- ------------ ------

Intangible assets subject to amortization:
Patents................................. 10 - 12 years $ 618 $(111) $ 507
Customer lists.......................... 30 years 2,600 (209) 2,391
Other................................... 5 - 15 years 1,296 (373) 923
------ ----- ------
4,514 (693) 3,821
Intangible assets not subject to
amortization:
Trademarks and other.................... 3,030 -- 3,030
------ ----- ------
Total intangible assets................. $7,544 $(693) $6,851
====== ===== ======

[Enlarge/Download Table]

MARCH 31, 2002
--------------------------------
AMORTIZATION CARRYING ACCUMULATED
PERIOD AMOUNT AMORTIZATION NET
--------------- -------- ------------ ------

Intangible assets subject to amortization:
Patents................................. 10 - 12 years $ 618 $(126) $ 492
Customer lists.......................... 30 years 2,600 (231) 2,369
Other................................... 5 - 15 years 996 (407) 589
------ ----- ------
4,214 (764) 3,450
Intangible assets not subject to
amortization:
Trademarks and other.................... 3,030 -- 3,030
------ ----- ------
Total intangible assets................. $7,244 $(764) $6,480
====== ===== ======

F-34

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Amortization expense is projected to be approximately $0.2 million for each
of the fiscal years ended December 31, 2002 through 2006.

6. LONG-TERM DEBT

The company's credit agreement and term notes contain certain conditions and
provisions which restrict the company's payment of dividends. Under the most
restrictive of these provisions, retained earnings of $66.6 million were
unrestricted as of March 31, 2002.

7. COMPREHENSIVE EARNINGS (DOLLARS IN THOUSANDS)

The company's comprehensive earnings were comprised of net earnings, foreign
currency translation adjustments, and realized and unrealized gains and losses
on cash flow derivative instruments. Also included in comprehensive earnings for
the three-month period ended March 31, 2001 was a cumulative loss on cash flow
hedges of approximately $0.6 million in connection with the adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended,
on January 1, 2001.

[Download Table]

THREE MONTHS
ENDED
MARCH 31,
-----------------
2001 2002
------ -------

Net Earnings................................................ $8,529 $12,122
Other comprehensive earnings (loss):
Foreign currency translation adjustments.................. (1,817) (276)
Unrealized net gain on cash flow derivative instruments
less related income tax: 2001--$209 and 2002--$2,767... 326 4,319
------ -------
Comprehensive Earnings...................................... $7,038 $16,165
====== =======

8. EARNINGS PER SHARE OF COMMON STOCK

The numerator for the calculation of basic and diluted earnings per share is
net earnings. The following table sets forth the computation of basic and
diluted weighted-average shares used in the earnings per share calculations:

[Enlarge/Download Table]

THREE MONTHS
ENDED
MARCH 31,
------------------------
2001 2002
---------- ----------

Denominator for basic earnings per share--weighted-average
shares.................................................... 23,511,254 23,772,140
Effect of dilutive stock options............................ 316,965 545,337
---------- ----------
Denominator for diluted earnings per share.................. 23,828,219 24,317,477
========== ==========

F-35

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. OPERATIONS BY SEGMENT (DOLLARS IN THOUSANDS)

[Download Table]

THREE MONTHS
ENDED
MARCH 31,
--------------------
2001 2002
-------- --------

Net sales
Electrical Products....................................... $226,253 $196,234
Water Systems............................................. 91,982 175,693
-------- --------
$318,235 $371,927
======== ========
Earnings before interest and taxes
Electrical Products....................................... $ 14,024 $ 15,162
Water Systems............................................. 9,851 13,578
-------- --------
23,875 28,740
Corporate expenses.......................................... (5,535) (5,913)
Interest expense............................................ (4,801) (4,177)
-------- --------
Earnings from continuing operations before income taxes..... 13,539 18,650
Provision for income taxes.................................. (5,010) (6,528)
-------- --------
Earnings from continuing operations......................... $ 8,529 $ 12,122
======== ========

Intersegment sales, which are immaterial, have been excluded from segment
revenues.

10. ACCOUNTING FOR DERIVATIVE INSTRUMENTS

The company utilizes certain derivative instruments to enhance its ability
to manage currency exposures and raw materials price risks. Derivative
instruments are entered into for periods consistent with the related underlying
exposures and do not constitute positions independent of those exposures. The
company does not enter into contracts for speculative purposes. The company has
hedged certain of its forecasted exposures. Greater than 98 percent of these
contracts expire by December 31, 2003. The contracts are executed with major
financial institutions with no credit loss anticipated for failure of the
counterparties to perform.

FOREIGN CURRENCY FORWARD CONTRACTS

The company is exposed to foreign currency exchange risk as a result of
transactions in currencies other than the functional currency of certain
subsidiaries. The company utilizes foreign currency forward purchase and sale
contracts to manage the volatility associated with foreign currency purchases
and certain intercompany transactions in the normal course of business.
Contracts typically have maturities of a year or less. Principal currencies
include the Mexican peso, Hungarian forint, British pound, Euro and U.S. dollar.

Forward contracts are accounted for as cash flow hedges of a forecasted
transaction. The fair value of these currency derivatives of $6.6 million and
$5.9 million have been recorded in other current assets as of December 31, 2001
and March 31, 2002, respectively. Gains and

F-36

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

losses on these instruments are recorded in other comprehensive income(loss)
until the underlying transaction is recorded in earnings. When the hedged item
is realized, gains or losses are reclassified from accumulated other
comprehensive income(loss) to the statement of earnings. The assessment of
effectiveness for forward contracts is based on changes in the forward rates.
These hedges have been determined to be perfectly effective.

COMMODITY FUTURE CONTRACTS

In addition to entering into supply arrangements in the normal course of
business, the company also enters into future contracts to fix the cost of
certain raw material purchases, principally copper, with the objective of
minimizing changes in inventory cost due to market price fluctuations.

The commodity future contracts are designated as cash flow hedges of a
forecasted transaction. Derivative commodity liabilities of $6.9 million and
$1.2 million are recorded in accrued liabilities as of December 31, 2001 and
March 31, 2002, respectively, with the value of the effective portion of the
contracts of $6.9 million and $0.8 million recorded in accumulated other
comprehensive income(loss) as of December 31, 2001 and March 31, 2002,
respectively, and reclassified into cost of products sold in the period in which
the underlying transaction is recorded in earnings. Ineffective portions of the
commodity hedges are recorded into earnings in the period in which the
ineffectiveness occurs. Hedge ineffectiveness and impact on earnings was not
material for the three-month periods ended March 31, 2001 and 2002,
respectively.

The majority of the amounts in accumulated other comprehensive income(loss)
for cash flow hedges are expected to be reclassified into earnings within a
year.

11. SUBSEQUENT EVENT

On April 12, 2002, the company filed a Registration Statement on Form S-3
(Reg. No. 333-86074) with the Securities and Exchange Commission to sell up to
4,025,000 shares of Common Stock.

F-37

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	8/2/04	19	65	10-Q
	12/31/03	85		11-K, 5
	1/1/03	41
	12/31/02	63	84	10-K, 11-K
	7/26/02	39	65
	5/15/02	20	38
	5/10/02	5
Filed on:	5/8/02			S-3MEF
	5/7/02	1	46
	4/30/02	20	38
	4/12/02	42	86	8-K, S-3
	4/9/02	20	38
	4/8/02	12		DEF 14A
	3/31/02	12	86	10-Q
	3/12/02	49		8-K/A
	2/28/02	26
	1/16/02	51
	1/1/02	41	82
	12/31/01	13	86	10-K405, 11-K
	12/28/01	14	81	8-K, 8-K/A
	7/1/01	41	59
	6/30/01	41	59	10-Q
	6/8/01	38	65
	3/31/01	13	86	10-Q
	1/10/01	14	61
	1/1/01	57	84
	12/31/00	38	73	10-K405, 11-K
	12/8/00	14	61
	5/1/00	73
	1/21/00	41
	1/17/00	61
	1/1/00	60
	12/31/99	38	50	10-K, 11-K
	11/22/99	73
	8/2/99	14	81	8-K, 8-K/A
	7/16/99	73
	12/31/98	13	22	10-K, 11-K
	7/1/98	14	23	8-K
	12/31/97	13	22	10-K405
	12/9/97	66
	10/1/97	14	23
	4/18/97	14	23	8-K, 8-K/A
	3/31/97	14	23	10-Q
	1/1/96	68
	12/9/94	48
	12/31/93	68		10-K
				List all Filings

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Filing Submission 0000950124-02-001604 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Smith AO Corp – ‘424B4’ on 5/8/02

On: Wednesday, 5/8/02 · Accession #: 950124-2-1604 · File #: 333-87798

Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(4)
Filing Table of Contents