MILWAUKEE, Jan. 22 /PRNewswire-FirstCall/ — A. O. Smith Corporation
(NYSE: AOS), one of the world’s leading manufacturers of energy-efficient
residential and commercial water heating equipment and electric motors, today
announced results for its fiscal fourth quarter and full year 2008.
The company reported full year sales of $2.3 billion, essentially flat
compared to 2007, and net earnings of $81.9 million or $2.70 per share,
approximately seven percent lower than the record $88.2 million or $2.85 per
share last year. Earnings included after-tax restructuring and other charges
of $5.6 million or $.19 per share in 2008. In 2007, earnings included
restructuring and other charges of $.33 per share and tax benefits of $.16 per
share.
Fourth quarter sales of $508.6 million were approximately 11 percent lower
than fourth quarter 2007 sales of $569.9 million. A. O. Smith earned $6.6
million in the fourth quarter or $.22 per share, compared with the $17.0
million or $.55 per share earned during the same period in 2007. Earnings
included after-tax restructuring and other charges of $2.1 million or $.07 per
share in the fourth quarter of 2008 compared with $.26 per share in the fourth
quarter of 2007. In addition, fourth quarter 2007 earnings also included tax
benefits of $.06 per share.
“2008 was a solid year for our business, in spite of the rapid
deterioration of the global economy in the fourth quarter,” Paul W. Jones,
chairman and chief executive officer, observed. “The volatility of steel and
copper prices throughout 2008, coupled with the continuing weakness in the
domestic residential housing market, made 2008 a very challenging year. If
you add to that the precipitous volume declines in the fourth quarter, 2008
changed from an unfavorable business climate into one of the worst in recent
memory.”
“Despite these incredible headwinds, I am proud of our employees’ ability
to navigate the challenges that we encountered in 2008. As a result of the
hard work of our experienced team, we ended the year with a strong balance
sheet and debt to capital ratio of 34 percent,” Jones continued. “We are in a
good financial position in spite of the recession. We continue to focus on
preserving cash and reducing our cost structure to maintain our solid
financial position.”
Water Products Company
Water Products sales of $1.45 billion in 2008 were approximately two
percent higher than 2007 sales of $1.42 billion. A 26 percent increase in
sales of water heaters in China and pricing that partially covered higher
material costs helped offset lower residential and commercial water heater
volumes.
Operating profit decreased approximately 10 percent to $134.7 million due
to lower residential volumes and higher raw material costs partially offset by
pricing actions. Operating margin decreased to 9.3 percent compared with 10.5
percent the prior year.
Fourth quarter sales were $346.2 million, approximately $33 million lower
than the fourth quarter of 2007. China sales increased 11 percent, but were
overshadowed by lower sales to the residential and commercial water heater
markets. Operating earnings of $29.5 million were significantly lower than
last year’s record fourth quarter earnings. Earnings were impacted by lower
residential and commercial volumes and higher raw material costs not fully
covered by price increases. As a result, operating margins declined to 8.5
percent in the fourth quarter of 2008 from 11.9 percent in the fourth quarter
of 2007.
In late December, Water Products received a land allotment near Bangalore,
India, and will begin construction in the second quarter 2009 of a new 76,000
square foot plant. The plant is centrally located in one of the company’s key
target markets in India with a growing consumer class interested in premium
water heating solutions. The company designed a residential product line
specifically for this market and is currently importing the products from its
plant in Nanjing, China. The company expects to begin water heater production
in India during the second quarter of 2010.
Electrical Products Company
Electrical Products 2008 sales of $858.1 million were approximately four
percent lower than 2007 sales of $894.0 million. Pricing actions related to
higher material costs were more than offset by lower motor volumes caused by
the decline in the housing market and customer inventory reductions at the end
of the year.
Operating earnings of $39.1 million were significantly higher than the
$23.1 million earned in 2007. Earnings included $8.7 million of restructuring
expense in 2008 compared with $22.8 million in restructuring expense the prior
year. Operating profit margin increased to 4.6 percent in 2008 from 2.6
percent in 2007 due to lower restructuring costs offset by lower volume.
Fourth quarter sales were $163.2 million, approximately 15 percent lower
than 2007 fourth quarter sales of $192.4 million. In response to the weakened
housing market and the uncertainty from the overall economic recession, OEM
customers significantly reduced production schedules during the quarter,
resulting in lower order volume. The Electrical Products Company lost $5.2
million in the fourth quarter which included $2.9 million in restructuring
expense. In the fourth quarter of 2007, Electrical Products recorded an $18
million loss which included $21.2 million of restructuring expense.
At the end of 2008, Electrical Products completed the announced closings
of the Mebane, N.C., and Scottsville, Ky., plants. The company expects to
realize incremental annual cost savings of $15 million in 2009 due to this
restructuring initiative, which also included the closure of it plant in
Budapest, Hungary, in early 2008. The company also expects to complete
construction of its new commercial hermetic motor plant in Yueyang, China,
during the first quarter of 2009.
Cash flow and Leverage
Cash flow from operating activities in 2008 of $106.6 million was
significantly lower than the $190.5 million achieved in 2007 primarily due to
a larger investment in working capital, particularly inventory, and cash
deposits associated with margin calls on derivative contracts. The debt to
capital ratio of 34 percent at the end of 2008 was the same as last year, but
higher than the company expected due entirely to charges to stockholder’s
equity associated with pension liabilities and derivative contracts.
Smith Investment Company transaction
On Dec. 9, the company announced it had signed a definitive merger
agreement with Smith Investment Company (Pink Sheets: SMIC) under which Smith
Investment would become a wholly owned subsidiary of the company. Expected
benefits of the merger include:
— The number of shares of A. O. Smith stock exchanged for the underlying
shares owned by Smith Investment will be at a discount resulting in a small
decrease in the total shares outstanding;
— The transaction will involve several corporate governance enhancements
including one additional board seat elected by common stock shareholders, a
“sunset” provision on Class A Common Stock shares based on a percentage of
ownership, and a requirement that Class A shares convert automatically to
Common Stock shares upon transfer to unaffiliated third parties; and
— The number of A. O. Smith shares that have the potential to trade in
the public market will increase materially.
“We are pleased with the milestone in our history that this merger
represents,” Jones commented. “We have worked hard to ensure this is a good
deal for our shareholders. It will improve our corporate governance, has the
potential to increase the public float, and will result in a small reduction
of total shares outstanding.”
The transaction is subject to regulatory review and votes by A. O. Smith
and Smith Investment shareholders. A. O. Smith expects to complete the
transaction by the end of the second quarter.
Outlook
“Given the deteriorating global economic environment that intensified
during the fourth quarter, we are taking a more cautious approach to our
expectations for 2009. At this time, we are forecasting significantly lower
volumes for both our residential and commercial businesses in both operating
companies,” Jones commented. “Also, we expect an increase of more than $6
million in pension expense. While we are being impacted by global
macroeconomic headwinds, we continue to expect sales growth in China.”
“In addition, there are a number of factors that we believe will
contribute to earnings this year, including improvement in water heater
pricing, continued growth-although at a slower rate-in China, and savings from
the restructuring initiative at Electrical Products Company. At the same
time, we continue to reduce cost throughout our operations. We announced a
company-wide workforce reduction program this month for our salaried
workforce.”
“Notwithstanding these earnings enhancers, the weak economy will challenge
us throughout the year,” Jones continued. “Consequently, we expect 2009
earnings will be in a range between $2.40 and $2.60 per share.
A. O. Smith will broadcast a live conference call at 10:00 a.m. (Eastern
Standard Time) today. The call can be heard on the company’s web site,
http://www.aosmith.com. An audio replay of the call will be available on the
company’s web site after the live event.
Forward-looking statements
This release contains statements that the company believes are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements generally can be
identified by the use of words such as “may,” “will,” “expect,” “intend,”
“estimate,” “anticipate,” “believe,” “forecast,” or words of similar meaning.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those anticipated as of
the date of this release. Factors that could cause such a variance include
the following: significant volatility in raw material prices; competitive
pressures on the company’s businesses; inability to implement pricing actions;
negative impact of future pension contributions on the company’s ability to
generate cash flow; instability in the company’s electric motor and water
products markets; further weakening in housing construction; further weakening
in commercial construction; a further slowdown in the Chinese economy;
expected restructuring savings realized; further adverse changes in customer
liquidity and general economic and capital market conditions; any failures to
realize the anticipated benefits of the proposed Smith Investment transaction;
the ability to obtain regulatory approvals for the Smith Investment
transaction; or the risk of an unfavorable judgment or ruling in any Smith
Investment transaction – related litigation.
Forward-looking statements included in this press release are made only as
of the date of this release, and the company is under no obligation to update
these statements to reflect subsequent events or circumstances. All
subsequent written and oral forward-looking statements attributed to the
company, or persons acting on its behalf, are qualified entirely by these
cautionary statements.
A. O. Smith Corporation, with 2008 sales of $2.3 billion, is a global
leader applying innovative technology and energy-efficient solutions to
products marketed worldwide. The company is one of the world’s leading
manufacturers of residential and commercial water heating equipment, offering
a comprehensive product line featuring the best-known brands in North America
and China. A. O. Smith is also one of the largest manufacturers of electric
motors for residential and commercial applications in North America.
Additional information and where you can find it
In connection with the proposed transaction between A. O. Smith
Corporation (“A. O. Smith”) and Smith Investment Company (“SICO”), the parties
intend to file a registration statement on Form S-4 with the SEC containing a
joint proxy statement/ prospectus. Such documents, however, are not currently
available. The joint proxy statement/prospectus will be mailed to
stockholders of A. O. Smith and SICO. INVESTORS ARE URGED TO READ THE JOINT
PROXY STATEMENT/ PROSPECTUS REGARDING THE PROPOSED TRANSACTION WHEN IT BECOMES
AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors will be
able to obtain a free copy of the joint proxy statement/prospectus filed by
A. O. Smith, without charge, at the SEC’s website (http://www.sec.gov) once
such documents are filed with the SEC. It will also be available on A. O.
Smith’s website (http://www.aosmith.com) by clicking on A. O. Smith
Corporation, Investor Relations and then SEC filings. Copies of the joint
proxy statement/prospectus can also be obtained, without charge, once they are
filed with the SEC, by directing a request to A. O. Smith Corporation,
Attention: Investor Relations, 11270 West Park Place, Milwaukee, Wis., 53224.
A. O. Smith, SICO and their respective directors, executive officers and
other employees may be deemed to be participants in the solicitation of
proxies from the stockholders of A. O. Smith and SICO in connection with the
proposed transaction. Information about the directors and executive officers
of A. O. Smith and SICO and their respective interests in the proposed
transaction will be available in the joint proxy statement/prospectus.
A. O. SMITH CORPORATION
(condensed consolidated financial statements -
dollars in millions, except per share data)
Statement of Earnings
(unaudited)
Three Months ended Year ended
December 31 December 31
2008 2007 2008 2007
Net sales $508.6 $569.9 $2,304.9 $2,312.1
Cost of products sold 409.0 434.2 1,807.4 1,798.7
Gross profit 99.6 135.7 497.5 513.4
Selling, general and administrative 82.8 99.6 357.4 363.0
Restructuring and other charges 3.0 21.6 9.2 24.7
Interest expense 4.2 6.2 19.2 26.7
Other expense / (income) 0.2 0.1 1.6 (0.9)
9.4 8.2 110.1 99.9
Tax provision / (credit) 2.8 (8.8) 27.9 11.7
Earnings before equity loss in joint
venture 6.6 17.0 82.2 88.2
Equity loss in joint venture -- -- (0.3) --
Net Earnings $6.6 $17.0 $81.9 $88.2
Diluted Earnings Per Share of Common
Stock $0.22 $0.55 $2.70 $2.85
Average Common Shares Outstanding
(000's omitted) 30,321 30,633 30,290 30,973
A. O. SMITH CORPORATION
Balance Sheet
(dollars in millions)
(unaudited)
December 31 December 31
2008 2007
ASSETS:
Cash and cash equivalents $29.4 $37.2
Receivables 363.5 415.1
Inventories 282.0 261.8
Deferred income taxes 63.2 34.0
Other current assets 43.2 19.5
Total Current Assets 781.3 767.6
Net property, plant and equipment 418.9 421.1
Goodwill and other intangibles 583.4 599.5
Deferred income taxes 49.8 --
Other assets 50.5 66.2
Total Assets $1,883.9 $1,854.4
LIABILITIES AND STOCKHOLDERS' EQUITY:
Trade payables $274.7 $305.6
Accrued payroll and benefits 43.8 48.4
Product warranties 40.2 35.9
Long-term debt due within one year 12.5 15.6
Derivative contracts liability 73.0 1.4
Other current liabilities 55.8 65.7
Total Current Liabilities 500.0 472.6
Long-term debt 322.3 379.6
Other liabilities 156.5 170.2
Pension liabilities 264.0 39.7
Deferred income taxes -- 34.5
Stockholders' equity 641.1 757.8
Total Liabilities and Stockholders' Equity $1,883.9 $1,854.4
A. O. SMITH CORPORATION
STATEMENT OF CASH FLOWS
(dollars in millions)
(unaudited)
Year ended
December 31
2008 2007
Operating Activities
Net Earnings $81.9 $88.2
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Depreciation & amortization 66.3 67.5
Net changes in operating assets and
liabilities, net of acquisitions:
Current assets and liabilities (34.4) 26.4
Noncurrent assets and liabilities (11.6) 3.7
Other 4.4 4.7
Cash Provided by Operating Activities 106.6 190.5
Investing Activities
Capital expenditures (66.1) (71.4)
Proceeds from sale of restricted marketable
securities 12.0 --
Cash Used in Investing Activities (54.1) (71.4)
Financing Activities
Long-term debt repaid (40.1) (61.0)
Purchases of treasury stock -- (36.6)
Net proceeds from stock option activity 2.1 11.4
Dividends paid (22.3) (21.5)
Cash Used in Financing Activities (60.3) (107.7)
Net increase / (decrease) in cash and cash
equivalents (7.8) 11.4
Cash and cash equivalents - beginning of
period 37.2 25.8
Cash and Cash Equivalents - End of Period $29.4 $37.2
A. O. SMITH CORPORATION
Business Segments
(dollars in millions)
(unaudited)
Three Months ended Year ended
December 31 December 31
2008 2007 2008 2007
Net sales
Water Products $346.2 $379.0 $1,451.3 $1,423.1
Electrical Products 163.2 192.4 858.1 894.0
Inter-Segment Sales (0.8) (1.5) (4.5) (5.0)
$508.6 $569.9 $2,304.9 $2,312.1
Operating earnings
Water Products (1) $29.5 $45.1 $134.7 $150.0
Electrical Products (2) (5.2) (18.0) 39.1 23.1
Inter-Segment earnings -- (0.1) (0.1) (0.2)
24.3 27.0 173.7 172.9
Corporate expenses (3) (10.7) (12.6) (44.7) (46.3)
Interest expense (4.2) (6.2) (19.2) (26.7)
Earnings before income taxes 9.4 8.2 109.8 99.9
Tax provision 2.8 (8.8) 27.9 11.7
Net Earnings $6.6 $17.0 $81.9 $88.2
(1) includes equity loss
in joint venture of: $-- $-- $(0.3) $--
(2) includes pretax restructuring
and other charges of: $2.9 $21.2 $8.7 $22.8
(3) includes pretax restructuring
and other charges of: $0.1 $0.4 $0.5 $1.9
