A. O. Smith Corporation — 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010. The unaudited filing reports Water Products and Electrical Products. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Net sales | $572.5 | $498.7 | $1,095.9 | $980.4 |
| Gross profit | $158.3 | $122.4 | $302.9 | $223.9 |
| Gross margin | 27.7% | 24.5% | 27.6% | 22.8% |
| Net earnings attributable to A. O. Smith | $16.6 | $21.3 | $47.5 | $24.0 |
| Diluted EPS | $0.54 | $0.84 | $1.55 | $1.38 |
| Operating cash flow | Not presented separately | Not presented separately | $50.0 | $91.1 |
- Q2 sales rose 14.8%; first-half sales rose $115.5 million, or approximately 11.8%. Management attributed growth to water heater sales in China and Canada, stronger global motor demand, and customer inventory replenishment.
- Q2 earnings included a $34.2 million pretax flood-related charge. First-half earnings also included this charge. Excluding the disclosed effects of the 2009 SICO transaction, management reported 2009 adjusted diluted EPS of $0.79 for Q2 and $1.07 for H1, versus reported EPS of $0.84 and $1.38, respectively. The 2010 figures were unaffected by that transaction.
- Water Products sales were $374.9 million in Q2 and $741.7 million in H1; operating earnings were $7.8 million and $51.7 million, respectively. Flood costs weighed heavily on segment earnings.
- Electrical Products sales were $198.3 million in Q2 and $356.1 million in H1; operating earnings were $25.9 million and $40.2 million. Higher volume, lower costs, process improvements, and new products supported the improvement.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $94.0 million, total assets $1,967.2 million, and total liabilities $1,142.6 million. Working capital excluding short-term debt was $293.2 million, $44.5 million above year-end 2009.
- Total debt was $244.7 million, down from $253.2 million at December 31, 2009. The debt-to-total-capitalization ratio was 23%, compared with 24% at year-end. Debt included $124.4 million of short-term debt and $21.1 million of long-term debt due within one year.
- The company had $300.6 million of available capacity under its $425 million revolving credit facility. The facility expires in February 2011; management planned to put a replacement facility in place in Q3 or early Q4 2010 and reported covenant compliance throughout the quarter.
- H1 operating cash flow declined to $50.0 million from $91.1 million, reflecting greater working-capital investment, partly offset by higher earnings. Capital expenditures were $21.9 million in H1. Cash increased to $94.0 million from $76.3 million at year-end.
Changes, outlook and notable items
- Management forecast 2010 full-year EPS of $3.05 to $3.25, including the flood charge; operating cash flow of approximately $140 million to $150 million; capital expenditures of $90 million to $100 million; and depreciation and amortization of approximately $70 million.
- Management described the operating outlook as strong but cautioned about the fragile global recovery and seasonality in the motor business. It expected China water heater growth at two to three times China GDP growth, slightly positive North American residential water heater growth, and commercial water heater sales down less than 5%.
- Flooding at the Ashland City, Tennessee, plant temporarily disrupted production beginning May 3. The recorded $34.2 million expense was net of $32.0 million in insurance proceeds against $66.2 million of direct costs. Some production resumed in June; management expected a return to normal operations by year-end. Some orders were lost, but management said customers had been retained. Approximately $7 million in government assistance was expected in 2010.
- China water-purification growth was slower than expected; management projected break-even in 2010 and planned a branded retail product launch in Q3. A North American tankless-water-heater joint venture with Takagi was formed July 1, after quarter-end. Residential heater production for India began in Q2.
- The board increased the quarterly dividend from $0.195 to $0.21 per share on July 23, payable August 16 to shareholders of record July 30. The company made a $20 million pension contribution in Q2 and planned total 2010 contributions of $30 million, although it said no contribution was required.
- Key risks cited include raw-material price volatility, competition and pricing pressure, housing and commercial construction weakness, a slowdown in China, pension funding needs, and execution and growth risks involving the China acquisition, tankless joint venture, and flood recovery. A $12.1 million vendor-recovery receivable was recorded while litigation was pending; the company said collection was probable and potential additional recovery could be $9 million to $18 million.
Important facts for investors to verify
- Whether Ashland City production returned to normal by year-end and whether actual flood losses, insurance recoveries, and government assistance matched estimates.
- Performance against the full-year EPS, operating cash flow, and capital expenditure outlook, considering the working-capital investment and flood disruption.
- Completion and terms of the replacement revolving credit facility before the existing facility’s February 2011 expiration.
- Whether China water heater growth, water-purification break-even, and the Takagi joint venture deliver the growth and profitability management anticipated.
- The status and collectability of the vendor-recovery receivable and any additional amounts sought through litigation.