A. O. Smith announces improved second quarter operating results before $.68 per share charge for flood-related costs

Milwaukee, Wis.-Water heater and electric motor manufacturer A. O. Smith Corporation (NYSE:AOS) today reported second quarter earnings of $16.6 million or $.54 per share, including a one-time pre-tax charge of $34.2 million or $.68 per share associated with flood damage at its Ashland City, Tenn., facility.

Earnings for the same quarter last year were $21.3 million or $.84 per share. Non-GAAP earnings for the second quarter 2009, excluding the impact of the SICO transaction, were $23.7 million or $.79 per share.

Second quarter sales of $572.5 million were nearly 15 percent higher than sales of $498.7 million for the same period last year.

"We are pleased with the outstanding performance achieved by both operating segments in the second quarter," Paul W. Jones, chairman and chief executive officer, said. "Electrical Products, in particular, recorded impressive sales and operating profit gains, with operating margins of 13.1 percent."

"At the same time, we have made remarkable progress recovering from the disastrous flood in Ashland City," Jones continued. "Our Water Products team performed selflessly during the difficult and complicated process to bring the facility back on line since May 3 and continues to work diligently to restore Ashland City while serving our customers. I also want to thank our customers for their patience and support during the last couple of months."

Water Products

Water Products Company's second quarter sales increased approximately 11 percent over last year to $374.9 million, bolstered by higher sales globally, particularly in China and Canada.

Operating profits in the second quarter were $7.8 million compared with $36.5 million recorded last year, as the contribution from higher overall global volumes was more than offset by $34.2 million in one-time expenses related to the flood in Ashland City. The flood-related expenses are after the recovery of approximately $32 million in property insurance.

Water Products Company's second quarter results included $9.3 million in sales from the company's new water purification business in China. The progress of the new business has been slower than anticipated due to a number of unforeseen challenges, and the company now expects its water purification business to break even in 2010. The company continues to expect strong long-term opportunities in the water purification industry in China and plans to introduce an A. O. Smith branded line of water purification products for the China retail segment during the third quarter.

On July 1, the company created a joint venture with Takagi Industrial Co. Ltd. of Fuji-city, Shizuoka, Japan, to market and manufacture tankless water heaters in North America. As part of the venture, A. O. Smith is taking over management of Takagi's North American sales and distribution organization.

"This venture represents an important opportunity for A. O. Smith to expand our offering of high efficiency water heating products and to participate in the growing North American tankless market," commented Jones.

Electrical Products

Second quarter sales at the Electrical Products Company increased approximately 22 percent over last year to $198.3 million. Motor sales were higher in all of the company's major market segments, most notably its North American residential heating and air conditioning market, as demand for customer replacement motors and hermetic motors for residential compressors was strong.

Operating profit improved substantially to $25.9 million compared with profits of $7.6 million in the second quarter of 2009. The improved profits were due to higher volumes, lower operating costs, ongoing process improvement activities, and higher sales of new products. Operating margin in the quarter was 13.1 percent compared with the 4.7 percent margin reported in the second quarter last year.

"The performance of our Electrical Products group through the second quarter is outstanding," Jones said. "We are seeing the positive results of the excellent execution of our roadmap to higher profitability, which has been our focus over the last few years and will continue. Plants were closed, products were rationalized, and manufacturing processes were streamlined both before and during the economic downturn. We are grateful to all our dedicated employees who contributed in so many ways to this achievement."

Sales of new products continued to accelerate in the second quarter, particularly high efficiency motors for the HVAC and pump industries. Also, the company's commercial hermetic motor facilities in Asia posted stronger sales than expected and higher sales than last year.

Outlook

"Our operating outlook remains strong, as does the demand for our products. As we look forward, we are cautious about the fragile nature of the global recovery, and we recognize the seasonality of our motor business," Jones said. "Our 2010 full-year earnings estimate, including the one-time charge for the flood, is a range of $3.05 to $3.25 per share."

A. O. Smith will broadcast a live conference call at 10:00 a.m. (Eastern Daylight Time) today. The call can be heard on the company's web site, www.aosmith.com. An audio replay of the call will be available on the company's web site after the live event.

Smith Investment transaction impact to reported results

The 2009 second quarter and six month results reflect the impact of the required GAAP accounting related to the company's previously announced transaction with Smith Investment Company (SICO), which closed April 22, 2009. The company believes that providing non-GAAP earnings information is beneficial to investors in understanding the historical operations of the company. A reconciliation of GAAP to non-GAAP earnings and earnings per share calculations is shown as part of the financial statements that accompany this release. Future quarterly financial statements will not be affected by the transaction; however, the company will provide non-GAAP financial information for historical comparison purposes. The following tables contain both the GAAP and the Non-GAAP information:

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," "guidance" 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; timing of any recoveries in housing or commercial construction; a slowdown in the Chinese economy; further adverse changes in customer liquidity and general economic and capital market conditions; the impact of acquisition accounting or non-GAAP financial measures on the company's financial statements; difficulties in integrating the China acquisition or the North American tankless water heater joint venture; difficulties in realizing future growth and profit expectations for the China acquisition or the North American tankless joint venture and potential negative impacts on the company that the flooding of its Ashland City, Tenn., water heater manufacturing plant may have. 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 2009 sales of $2.0 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.

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