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A. O. Smith Corp. Reports Operating Results (10-K)

February 27, 2012 | About:
10qk

10qk

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A. O. Smith Corp. (AOS) filed Annual Report for the period ended 2011-12-31.

Smith (ao) Corp has a market cap of $2.12 billion; its shares were traded at around $45.71 with a P/E ratio of 21.8 and P/S ratio of 1.2. The dividend yield of Smith (ao) Corp stocks is 1.4%. Smith (ao) Corp had an annual average earning growth of 5.8% over the past 10 years.

Highlight of Business Operations:

We are a leading manufacturer of water heaters and boilers, serving a diverse mix of residential and commercial end markets principally in the U.S. with a strong and growing international presence. During the fourth quarter of 2011, we reorganized our management reporting structure to reflect our current business activities. Historical information has been revised to reflect our new structure. Our company is comprised of two reporting segments: North America and Rest of World. Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless, oil and electric water heaters. Both segments primarily manufacture and market in their respective region of the world. The North America segment also manufactures and globally markets specialty commercial water heating equipment, condensing and non-condensing boilers and water systems tanks. The Rest of World segment also manufactures and markets water treatment products, primarily for Asia. On August 22, 2011, we sold EPC to RBC for approximately $760 million in cash and approximately 2.83 million shares of RBC common stock valued at $140.6 million as of that date. Due to the sale, EPC has been reflected as discontinued operations in the accompanying financial statements for all periods presented. In 2011, sales for our North America segment were $1,289.5 million, sales for our Rest of World segment were $455.6 million and discontinued operations EPC sales were $531.8 million.

Our working capital was $720.3 million at December 31, 2011 compared with $209.5 million and $121.7 million at December 31, 2010 and December 31, 2009 respectively. The majority of the $510.8 million increase in working capital in 2011 was due to the receipt of cash and RBC shares from the sale of EPC, which closed in the third quarter, less the cash used in the acquisition of Lochinvar, and, to a lesser extent, the working capital related to the purchase of Lochinvar. The $87.8 million increase in working capital in 2010 resulted from higher cash levels outside the U.S., sales related increases late in the year in accounts receivable and higher inventory levels to support higher sales, new businesses and new product launches, which were partially offset by higher accounts payable balances related to higher sales. As of December 31, 2011, $463.3 million of cash and cash equivalents were held by our foreign subsidiaries.

Net other income was $19.8 million in 2011 and compared to net other expense of $.5 million and $2.8 million in 2010 and 2009, respectively. We closed on the sale of EPC to RBC on August 22, 2011 and received approximately 2.83 million RBC common shares as part of the sale proceeds. The RBC share price appreciated in the first quarter of 2011 during which we entered into an equity collar contract for 50 percent of the shares to protect a portion of the appreciation. The put strike price of the equity collar is $63.29 and the call strike price of the collar is $77.32. The RBC share price on December 31, 2011 was $50.97. The collar did not qualify for hedge accounting and therefore is adjusted to fair value on a quarterly basis through earnings from continuing operations. The company is required to make cash or stock deposits on unrealized losses on the

Operating earnings for North America were $154.0 million in 2011 or $62.8 million higher than earnings of $91.2 million in 2010. Operating earnings in 2010 were adversely impacted by a pretax charge of $35.4 million for flood damage to our water heater manufacturing facility located in Ashland City, TN in May 2010. This facility was temporarily shut down and production of water heaters was transferred to our other water heater manufacturing facilities in the U.S., Canada and Mexico. The total direct cost for the flood damage was $67.3 million and included: repair of buildings and equipment, site cleanup and restoration and write-off of inventory and fixed assets. Insurance proceeds were $31.9 million resulting in a net charge for direct flood expenses of $35.4 million. Additional detail is provided in Note 14 of the Notes to Consolidated Financial Statements. Also, included in 2011 is an $11.2 million pre-tax gain for recovery of costs and damages associated with a legal settlement relating to an issue with a component part supplied by one of our vendors. This gain is reflected in the Restructuring, impairment and settlement (income) expense-net line in the accompanying financial statements. The $11.2 million gain was partially offset by $8.2 million of product warranty expense associated with a similar component issue in Canada and recorded as cost of products sold in 2011. The increased operating earnings in 2011 when compared to 2010 excluding the above items were due primarily to $13.0 million of operating profit contributed by our Lochinvar acquisition. Operating earnings were $91.2 million in 2010 or $24.6 million less than earnings of $115.8 million in 2009. The lower earnings in 2010 resulted from the $35.4 million pre-tax flood expense which more than offset the impact of higher volumes in Canada and commercial products.

Operating earnings for our Rest of World segment were $42.7 million in 2011 compared to 2010 earnings of $42.4 million as increased earnings for our A. O. Smith branded products in China were offset by losses at SWT of $10.6 million in 2011 compared to losses of $3.2 million in 2010. Rest of World operating earnings were $33.0 million in 2009. The increase in earnings in 2010 from 2009 of $9.4 million was due mostly to higher earnings for A. O. Smith branded products. The operating margins for our Rest of World segment were 9.4 percent, 11.5 percent and 12.9 percent in 2011, 2010 and 2009, respectively. The decline in margin in 2011 was primarily due to losses at SWT resulting from lower sales and costs associated with moving to a new manufacturing facility in 2011. The increase in margin in 2010 from 2009 was due mostly to increased volumes of A. O. Smith branded products in China.

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