A.O. Smith Corporation

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A.O. Smith Corporation

11270 West Park Place
P.O. Box 245008
Milwaukee, Wisconsin 53224-9508
U.S.A.
Telephone: (414) 359-4000
Fax: (414) 359-4064
Web site: http://www.aosmith.com

Public Company
Incorporated: 1904 as A.O. Smith Company
Employees: 13,800
Sales: $1.21 billion (2000)
Stock Exchanges: New York
Ticker Symbol: AOS
NAIC: 333319 Other Commercial and Service Industry Machinery Manufacturing; 335228 Other Major Household Appliance Manufacturing; 335312 Motor and Generator Manufacturing; 333996 Fluid Power Pump and Motor Manufacturing

A.O. Smith Corporation is a manufacturer specializing in electric motors, water heaters, and boilers. The company’s Electrical Products unit accounts for more than two-thirds of revenues and makes motors for air conditioners, refrigerators, furnaces, garage door openers, and pumps used in home water systems, swimming pools, and hot tubs. The remaining sales are generated by the Water Products unit, which makes both residential and commercial water heaters, as well as large-volume copper-tube boilers. Over its long history, A.O. Smith has evolved from a small bicycle parts factory to a specialized manufacturer of motors and water heating products. For a long period the company was a much more diversified manufacturer, with such additional product lines as automotive structural components, fiberglass piping systems, livestock feed storage systems, and storage tanks. Most of these businesses were divested in the late 20th century.

Early Decades: From Baby Carriage Parts to Auto Frames

Although A.O. Smith was founded in 1904, the company traces its history back to the mid-19th century, when Charles Jeremiah (C. J.) Smith emigrated from England to the United States. The journeyman metal tradesman ventured all the way to Milwaukee, Wisconsin, and, after being self-employed for a decade, went to work for the Milwaukee Railroad Shop. As a highly skilled workman, he made a good living, but went back into business for himself in 1874, when he opened a machine shop and began manufacturing baby carriage parts. Two of Smith’s four sons, Charles S. and George H., joined the family firm in the mid-1880s.

As bicycles became popular in the last decade of the century, C.J. Smith and Sons branched out. By 1895, it was the largest manufacturer of steel bicycle parts in the United States. The patriarch called in his eldest son, Arthur O. (A. O.), an architectural engineer specializing in large buildings, to help build a five-story factory for the growing family business. After two years of close work with his father, A.O. decided to join the company permanently as treasurer. By then, C.J. Smith and Sons had declared itself the largest manufacturer of component bicycle parts in the world.

Increasing overcapacity in that industry and the advent of the automobile brought another change to C.J. Smith and Sons. In 1899 the family sold its business to the Federal Bicycle Corporation of America, a then-legal monopoly known as the “Bicycle Trust.” A.O. retained management of the Milwaukee (or “Smith Parts”) Branch of the Trust. Arthur Smith indulged his personal interest in the composition and manufacture of automobile frames with two years of “tinkering” that culminated in the sale of his first automotive frame to the Peerless Motor Car Co. in 1902. Word of his frame, which was lighter, stronger, more flexible, and cheaper than conventional ones, spread quickly: by the following year, Smith had contracts with six major automobile manufacturers.

A.O. Smith quit Federal in 1903, bought the Smith Parts Co. from his former employer, and incorporated it as A.O. Smith Company in 1904. The company’s sales totaled $375,733 and profits topped $100,000 that first year. Unfortunately, patriarch C.J. Smith also passed away in 1904.

In April 1906, Henry Ford contracted with A.O. Smith for frames. At the time, the company was producing only ten pressed steel frames a day. Ford needed 10,000 frames in four months, a tenfold increase in the prevailing production rate. Realizing that adding workers and space would only consume valuable time in training and construction, Smith looked for ways to increase efficiency through technological improvements. He and his team of engineers retooled existing presses to produce two corresponding halves of an auto frame simultaneously and arranged the presses to form a continuous assembly line. The delivery of 10,000 A.O. Smith frames that August helped Ford introduce his popularly priced Model N late in 1906 and attracted more automobile manufacturers to the supplier. Because A.O. Smith soon found itself turning away business, it built a new, larger headquarters on 135 acres on the outskirts of Milwaukee to accommodate demand. By the end of the decade, A.O. Smith was manufacturing 110,000 frames per year, over 60 percent of the auto industry’s requirements.

Three years later, when A.O. Smith died, his son Lloyd Raymond (Ray) was made president. Ray’s was not just a dynastic leadership, however. Both A.O. and L.R. Smith were later inducted into the Automotive Hall of Fame and the Wisconsin Business Hall of Fame. The 23-year-old former company secretary had previously proposed manufacturing improvements that multiplied A.O. Smith’s production rate seven times: by 1916, the company was manufacturing 800,000 frames per year—half the auto industry’s needs. Called “decisive, restless and a profound thinker” by corporate historians, Ray Smith also propelled the family company into new ventures. Smith bought a license to manufacture “The Motor Wheel,” a small gas engine that could be attached to a bicycle’s rear wheel to make a “motorbike.” The company sold 25,000 of the vehicles nationwide from 1914 to 1919, and even applied the technology to a small wooden “sports car” called the Smith Flyer.

L.R. Smith’s reluctance to pay for the marketing support necessary to maintain such products’ popularity, combined with the fact that the United States was thoroughly embroiled in World War I, brought diversification to a halt in 1919. A.O. Smith manufactured hollow-steel artillery vehicle poles and bomb casings for the war effort. By war’s end, the company was producing 6,500 bomb casings per day, thanks to a welding breakthrough that produced stronger bonds in less time.

1920s: The Mechanical Marvel

Throughout the war years, a team of Smith’s best engineers formulated a revolutionary plan to automate the company’s frame production process. Although expensive—construction consumed $6 million by 1920—the “Mechanical Marvel” they created produced 7,200 frames on two 180-man shifts per day. The machines performed 552 separate functions, including forming, trimming, and riveting. It took A.O. Smith 15 years to recoup its investment in the Mechanical Marvel (which was designated a National Historic Mechanical Engineering Landmark in 1979), but the plant ran practically without stop until 1958.

The Mechanical Marvel marked only the beginning of an enterprising decade, during which the company’s 500-person engineering department developed new applications for the welding process formulated during World War I. A welded coupling designed to link seamless steel casings for oil drilling rigs soon became a petroleum industry standard. High pressure tanks for gasoline refineries developed by A.O. Smith could withstand three times the pressure of customary tanks. Engineers also modified those tanks for use in the paper, chemical refining, and other industries by adding an anticorrosive, stainless steel liner to the tanks. During the 1920s, A.O. Smith also originated the large-diameter, high-pressure pipe that launched the natural gas transmission industry and made natural gas a viable alternative to coal and oil. The company captured every order for large diameter pipe in the country. As the authority in this industry, Smith had to send its own employees out to weld pipeline installations around the world.

A.O. Smith was thus well positioned when the stock market crash of October 1929 ushered in the Great Depression. It had a two-year backlog of pipe orders and a dominant position in its other markets. As auto sales fell from 4.4 million in 1929 to less than two million in 1931, however, the company was forced to cut employment by 10 percent at its main plant. In 1930, sales plummeted from $57 million to $9 million and the company suffered an operating loss of $5 million the following year. L.R. brought in an outsider, William C. Heath, to play “bad cop.” Heath cut executive salaries by 50 percent and reduced the operating staff by one-fourth, but even these measures did not bring the company into the black. In May 1932, 3,000 employees—almost half the total company’s payroll—were laid off. Corporate historians noted that “Demand for frames was so low, supervisors painted them by hand to save the expense of starting the automatic equipment.”

Company Perspectives:

At home or at work, you come in contact every day with products made by A.O. Smith Corporation. We are the company that provides the hot water for your morning shower, whether you’re at home…or in a 500-room hotel! We help keep your home or office warm or cool with electric motors that power fans, blowers, and air conditioning compressors. Open a garage door or security gate…turn on your kitchen fan…or relax in your hot tub…chances are, you’ll find an A.O. Smith product hard at work.

Mid-Century Diversification

A.O. Smith’s “savior” came from a highly unlikely source—the December 1933 repeal of Prohibition. The end of that “noble experiment” brought America’s brewing capital, Milwaukee, back to life, and A.O. Smith utilized its technical creativity to profit from the rebirth. The company quickly introduced a steel beer barrel with a special liner that protected the beer from metallic migration. The new keg’s quick acceptance enabled A.O. Smith to recall 450 laid-off workers. The company also developed an innovative process to fuse glass to the interior of 35,000 gallon tanks that resulted in the superior cleanliness demanded by the brewing industry.

Ray Smith left day-to-day management of the company to Heath after suffering a heart attack in 1934. Heath led the company to apply its glass-and-steel fusing process in A.O. Smith’s first mass consumer product, the water heater. Before the product’s introduction, most homeowners had to replace their all-steel water heaters often due to corrosion, or spend prohibitive amounts on stainless-steel ones. Although A.O. Smith developed its affordable, durable, glass-lined model in 1936 and was able to mass-produce it by 1939, world war interrupted the company’s plans a second time.

Smith began to expand through acquisitions before World War II, purchasing Smith Meter Co., a Los Angeles firm that produced petroleum line measuring devices in 1937. The company diversified into electric motors with the 1940 acquisition of Los Angeles-based Sawyer Electrical Manufacturing Company and Whirl-A-Way Motors in Dayton, Ohio. By the end of the 1950s, electric motors, especially hermetically sealed ones, were A.O. Smith’s best-selling product.

By the time the United States entered World War II in 1941, A.O. Smith had already submitted proposals for aerial bombs made of welded pipe, won the government contracts, and built a factory to produce them. The company’s engineers developed better, cheaper propeller blades and manufactured landing gear for B-17 “Flying Fortress” and B-29 “Super Fortress” fighter bombers. The company was such a vital wartime supplier that Adolf Hitler targeted it in an unexecuted invasion of the United States.

The investment of over $50 million in new plants and equipment before 1950 propelled A.O. Smith to unprecedented success in the booming postwar American economy. As new housing starts jumped to 4,000 per day and auto production soared to one million a month, the company was poised to prosper. Volume at the centrally located Kankakee water heater plant built in 1947 doubled twice before 1950, with the help of retail giant Sears, Roebuck & Co., which sold A.O. Smith water heaters under a private label. Monthly production approached 50,000 units by the mid-1950s. A.O. Smith had also entered the commercial water heater market in 1948 through the acquisition of Toledo, Ohio-based Burkay Company. In addition, A.O. Smith supplied all of Chevrolet’s automotive frames during the 1950s, when that make was the most popular in the United States. The contract helped establish A.O. Smith as the largest independent supplier of chassis frames to the auto industry in the postwar era. Petroleum pipeline sales also recovered quickly and Smith formed a joint venture with steelmaker ARMCO to create a pipe factory in Texas close to customers.

Diversification continued under Heath in the postwar era, with the development in 1949 of Harvestore glass-lined silos that were filled from the top, emptied from the bottom, and were dark-colored to prevent wintertime freezing of the feed stored inside. After a slow start, the silos were well accepted by U.S. farmers, and the company offered them overseas in Germany and the United Kingdom beginning in the 1960s. A.O. Smith started exploring the fiberglass industry in 1953 in cooperation with Dow, forming a glass fiber division in 1959 (forerunner of Smith Fiberglass Products). The company soon developed fiberglass pipe and fittings for special niche applications in oil fields, and later made fiberglass Corvette Sting Ray bodies.

Diversification was accompanied by rationalization. When A.O. Smith’s patent on the glass-lined water heater expired in 1955 and competition was opened, Smith eased out of the private-label segment, and scaled back efforts in the residential market to concentrate on the commercial segment with its leading Burkay brand. The company also phased out pressure containers such as beer and petroleum tanks in the late 1950s. A.O. Smith’s own success thwarted some of its business interests. The completion of the U.S. Transcontinental Pipeline System significantly reduced the demand for pipe, eventually forcing the company to sell its steel pipe business in Texas to its partner, ARMCO. Despite these withdrawals from certain markets, sales at A.O. Smith increased from $190 million in 1946 to $280 million by 1960.

Key Dates:

1874:: Charles Jeremiah Smith opens a machine shop in Milwaukee to make baby carriage parts.
1895:: C.J. Smith and Sons is the largest maker of steel bicycle parts in the United States.
1899:: Company is sold to Federal Bicycle Corporation and operates as the Smith Parts branch.
1902:: Arthur O. Smith, son of C.J., sells his first automotive frame.
1904:: A.O. Smith buys Smith Parts and incorporates it as A.O. Smith Company.
1910:: Company has grown to become the largest auto frame maker in North America.
1921:: Company’s frame production process is automated through the construction of the Mechanical Marvel.
1936:: A.O. Smith develops an affordable, durable, glass-lined water heater.
1940:: Company diversifies into electric motors through the purchase of Sawyer Electrical Manufacturing Company.
1949:: Harvestore glass-lined silos are introduced.
1959:: A.O. Smith establishes glass fiber division, which begins making fiberglass pipe and fittings.
1972:: Water heater division begins its first European operation in the Netherlands.
1986:: Small motor division of Westinghouse is acquired.
1997:: UPPCO, Incorporated, maker of electric motors, is acquired; automotive products business is sold to Tower Automotive Inc.
1998:: A.O. Smith acquires the domestic compressor motor business of General Electric Company.
1999:: The fractional horsepower motors business of MagneTek, Inc. is acquired.
2000:: Fiberglass pipe business is sold to Varco International Inc.
2001:: Company sells its storage tank unit to CST Industries, Inc. A.O. Smith now concentrates solely on electric motors and water heaters.

A.O. Smith’s automotive division endured several upheavals throughout the 1960s and 1970s that threatened its existence. The proliferation of car models in the 1960s challenged Smith’s adaptive ability and compelled it to retool from riveted frames to more adaptable welded frames. At the same time, 45 percent of U.S. auto production converted to unitized frame construction, effectively eliminating the need for a conventional frame. General Motors’ decision to stick with the tried-and-true isolated frame construction kept the automotive division afloat for the time being.

L.B. “Ted” Smith was elected chairman and chief executive officer and Urban Kuechle became president in 1967. The team sought out new businesses to replace the ones that had been eliminated. In 1969 alone, A.O. Smith acquired Layne & Bowler Pump company in Los Angeles, Bull Motors of the United Kingdom, and a majority interest in Armor Elevator, the sixth largest elevator manufacturer in the United States. The company also pushed its international growth, forming a Mexican affiliate to manufacture auto frames, Canadian and Dutch water heater subsidiaries, and a consumer products division in Japan. Successive earnings records in 1968 and 1969 seemed to affirm the acquisition spree; sales climbed as well, from $355 million in 1969 to $600 million in 1973.

Overcoming Numerous Difficulties in the 1970s and 1980s

Unfortunately, the ensuing decade ushered in a myriad of problems that impaired A.O. Smith. The government wage and price freeze mandated in 1971 squeezed profit margins, and the Arab oil embargo that started in 1973 forever harmed sales of full-size, gas-consuming cars, which constituted the majority of Smith’s remaining frame market. Labor unrest also plagued many Smith divisions. A ten-month strike at Armor Elevator, which had just completed two years of acquisitions, crippled that subsidiary in 1972. The following year saw strikes at plants in Pennsylvania and Kentucky and the first labor halt at the Milwaukee factory in its 100-year history.

In 1972 the water heater division began its first European operation, in Veldhoven, the Netherlands. L.B. Smith and President Jack Parker divested Armor Elevator, Bull Motors, and Meter Systems in 1975. After the strikes were settled and the government lifted the wage and price freeze, inflation set in. Still, A.O. Smith began to recover in the last half of the decade, winning a new contract with General Motors and expanding the Harvestore and Electrical Products divisions. Sales increased $100 million from 1976 to 1977 and profits were also on the rise.

However, General Motors’ 1980 announcement that it would convert all of its production to front-wheel drive, unitized body autos threatened the survival of the $270 million automotive segment of A.O. Smith’s $836 million business. Luckily, the massive automaker took more than eight years to phase out full-framed vehicles (A.O. Smith delivered its last Cadillac frame in 1990), and A.O. Smith used that time to transform its automotive division. Automotive, which had made truck frames since 1905, shifted its primary focus to the expanding market for trucks, vans, and sport utility vehicles, winning contracts with Ford, Chrysler, and General Motors in 1980 alone. By 1985, light truck frames were the corporation’s single largest product line. Smith also won a contract to produce components for the critically acclaimed and top-selling Ford Taurus in the early 1980s.

The company would meet other challenges under the leadership of Tom Dolan, who became president in 1982 and advanced to chairman and chief executive officer upon the retirement of L.B. Smith. Pressures from auto manufacturers, who were themselves influenced by intense foreign competition, spurred A.O. Smith to simultaneously reduce costs and increase quality. It was no simple task for the automotive division, which was then characterized by hostility between labor and management and 20 percent defect rates. Management embarked on a three-stage strategy to increase employee involvement through quality circles, labor-management task forces, and cooperative work teams. Although the plan initially met resistance from union leaders, six years of gradual change yielded impressive results: the productivity growth rate doubled in 1988 and defects were reduced to 3 percent. The work teams also enabled A.O. Smith to save money by drastically reducing the ratio of foremen to workers from l-to-10 in 1987 to l-to-34 in 1988.

During this period of cultural revolution, A.O. Smith was hit hard by recessions in 1980 and 1982. Hundreds of workers were laid off as auto sales fell to their lowest levels in 20 years. The company slashed capital spending and expenses, cut officer salaries by 10 percent, and let one-fourth of the corporate staff go. Even more layoffs were necessary later in the decade, as the company trimmed net employment from a high of 12,300 in 1986 to 9,400 in 1990.

The farming crisis that occurred at this same time reduced the Harvestore subsidiary’s sales from $140 million in 1979 to $21 million by 1984. The division shuttered two plants and consolidated all operations at the main DeKalb, Illinois, plant. A.O. Smith eventually shifted the subsidiary’s focus to municipal water storage tanks and sold Harvestore’s U.K. subsidiary. Although its revenues remained small, Harvestore did eventually return to profitability.

A.O. Smith’s problems compounded in the early 1980s, as competition in the water heater industry exposed internal problems. Inefficient plants cost the Water Products Division $10 million in 1981 alone. The subsidiary closed one factory and opened a more efficient one, and other cost-cutting measures helped it achieve profitability in 1983 after four successive years of losses. Continuing efforts helped the division become one of A.O. Smith’s most consistently profitable divisions, setting profit records in 1986, 1988, and 1990.

A.O. Smith’s electric motors division was one of the corporation’s few consistently bright spots in the 1980s. Despite fairly intense competition, the subsidiary was able to establish operations in Mexico and Texas and even acquire a primary competitor’s small motor business (that of Westinghouse, purchased in 1986). The unit set a profit record of $45 million in 1985. Smith’s fiberglass business had also recovered from the shocks of the previous decade to set four successive years of record profits beginning in 1987.

1990s and Beyond: Concentrating on Motors and Water Heaters

Despite an inconsistent earnings record in the 1980s—the company achieved only two successive profitable years during the decade—A. O. Smith had managed to pay cash dividends on its common stock every year since 1940. Having endured a grueling six years at the company’s helm and achieving several of his goals, Tom Dolan retired from the chief executive office in 1988. Robert J. O’Toole assumed that office, adding the chairmanship in 1991. He directed the company’s implementation of “just-in-time” delivery of automotive products through the construction of five regional assembly plants in close proximity to customers. Although the firm recorded a net loss in 1992, its return to profitability the following year coincided with a general economic recovery in the United States.

Sales rose steadily into the mid-1990s as the company was well-positioned to benefit from the explosive growth in sales of SUVs and light trucks in the 1990s. The company’s automotive operation also sought new business with Japanese automakers, opening a sales and engineering office in Yokohama in 1993 and landing a major contract with Nissan for the manufacture of components for the sides of pickup trucks. In December 1995 A.O. Smith doubled the revenues of its storage tank business and entered the bulk dry storage market through the acquisition of Parsons, Kansas-based Peabody TecTank Inc. That same year, the company launched three joint ventures in China, one of which would make A.O. Smith the first U.S. company to manufacture water heaters in that rapidly developing country. Overall company revenues increased from $915.8 million in 1991 to $1.54 billion in 1995.

Despite the sales gains and steady profitability enjoyed by A.O. Smith in the mid-1990s, the company’s automotive unit was under pressure to further ratchet up investments to maintain a competitive position. The difficulty was that every time an automaker began work on a new car or truck model, manufacturers of the frames had to spend $30 million to $50 million to retool their plants. A.O. Smith also did not have the financial resources to grow its automotive unit through acquisitions. After reviewing its strategic options, the company decided to make the dramatic move of selling off the automotive unit, which had the additional disadvantage of operating in a low-growth, cyclical industry. In April 1997 the unit was sold to Tower Automotive Inc. of Minneapolis for $710 million. The deal allowed A.O. Smith to virtually extinguish its long-term debt, buy back some of its stock, and concentrate on its key remaining units: electric motors, water heaters, industrial storage tanks, and fiberglass pipe. The company also still had its agricultural storage tank operation, Harvestore, but had decided, in the face of numerous lawsuits and class-action suits alleging that Harvestore had sold farmers defective silos, to sell the unit. A sale did not immediately materialize, however, and Harvestore was eventually merged back with the industrial storage tank unit.

Part of the proceeds from the automotive divestment were slated for acquisitions to build up the remaining units. Before the deal with Tower Automotive had even been completed, in fact, A.O. Smith had finished its first such acquisition, a $60.9 million deal for UPPCO, Incorporated, a manufacturer of subfractional horsepower electric motors based in Monticello, Indiana. Such motors were used in a variety of applications, including bathroom and range hood fans, microwave ovens, frost-free refrigerators, dishwashers, and humidifiers. In July 1998 A.O. Smith paid $125.6 million for the domestic compressor motor business of General Electric Company. Based in Scottsville, Kentucky, the GE unit had annual sales of about $130 million for its compressors that were used primarily in residential and commercial air conditioning units and in commercial refrigeration units. This acquisition made the electric motors unit the largest A.O. Smith unit in terms of revenues. Then in August 1999, A.O. Smith made its third motor acquisition in as many years when it bought the electric motors unit of Nashville-based MagneTek, Inc. for $244.6 million, the largest acquisition in company history. The MagneTek unit, which had 1998 revenues of about $367 million, produced fractional horsepower motors for pools, spas, and air conditioners. Through this series of acquisitions, A.O. Smith was able to increase its sales of electric motors from the $340 million level of 1996 to $884.2 million by 2000. Meantime, the company began manufacturing residential water heaters in Nanjing, China, in 1998, having bought out its joint venture partner. By 1999 it had achieved $13 million in sales of A.O. Smith brand water heaters in that country.

Rounding out the company’s whirlwind transformation were the divestments of the fiberglass pipe and storage tank businesses. In December 2000 A.O. Smith sold the fiberglass business to Varco International Inc., while the storage tank unit was sold to the newly formed CST Industries, Inc. in January 2001. Cash proceeds from the sales were about $63 million. These latest divestments were designed to allow the company to concentrate on its two main businesses—electric motors and water heaters—and to serve as a consolidator within those industries. The company seemed certain to grow these businesses through acquisitions as well as by expanding internationally. Under the continued leadership of O’Connor, A.O. Smith was beginning a new century as a radically different company from what it had been less than a decade earlier, and as a much stronger company as well.

Principal Subsidiaries

AOS Holding Company; A.O. Smith International Corporation; A.O. Smith Export, Ltd. (Barbados); A.O. Smith Electrical Products Canada Limited; A.O. Smith Enterprises Ltd. (Canada); A.O. Smith (China) Water Heater Co., Ltd.; A.O. Smith L’eau Chaude S.a.r.l. (France); A.O. Smith Warmwasser-Systemtechnik GmbH (Germany); A.O. Smith Electrical Products Limited Liability Company (Hungary); A.O. Smith Electric Motors (Ireland) Ltd.; A.O. Smith Holding (Ireland) Ltd.; IG-Mex, S.A. de C.V. (Mexico); Motores Electricos de Juarez, S.A. de C.V. (Mexico); Motores Electricos de Monterrey, S.A. de C.V. (Mexico); Productos de Agua, S.A. de C.V. (Mexico); Productos Electricos Aplicados, S.A. de C.V. (Mexico); A.O. Smith Electrical Products B.V. (Netherlands); A.O. Smith Water Products Company B.V. (Netherlands); A.O. Smith Electrical Products (S.E.A) Pte Ltd (Singapore); A.O. Smith Electrical Products Limited (U.K.).

Principal Operating Units

Electrical Products Company; Water Products Company.

Principal Competitors

American Water Heater Group Inc.; AMTROL Inc.; Baldor Electric Company; Bradford-White Corp.; Emerson; Fasco; General Electric Company; Hayward Industries; Jakel Inc.; Paloma Industries Limited; State Industries, Inc.