SEC Filing | A. O. Smith Corporation

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-475

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)


Delaware		39-0619790
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


11270 West Park Place, Milwaukee, Wisconsin		53224-9508
(Address of principal executive office)		(Zip Code)

(414)359-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


		Large accelerated filer þ				Accelerated Filer ¨
		Non-accelerated filer ¨ (Do not check if a smaller reporting company)				Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) ¨ Yes þ No

Class A Common Stock Outstanding as of October 29, 2010 — 4,969,487 shares

Common Stock Outstanding as of October 29, 2010 — 25,571,579 shares

Index

A. O. Smith Corporation


		Page
Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Earnings - Three and nine months ended September 30, 2010 and 2009		3

	Condensed Consolidated Balance Sheets - September 30, 2010 and December 31, 2009		4

	Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2010 and 2009		5

	Notes to Condensed Consolidated Financial Statements - September 30, 2010		6-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19-26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		27

Item 4.	Controls and Procedures		27-28

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings		29

Item 2.	Unregistered Sales Of Equity Securities and Use Of Proceeds		29

Item 5.	Other Information		29

Item 6.	Exhibits		29

Signatures			30

Index to Exhibits			31

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Three and Nine Months ended September 30, 2010 and 2009

(dollars in millions, except for per share data)

(unaudited)


	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
Water Products	$	377.5		$	336.7		$	1,119.1		$	1,012.8
Electrical Products		183.3			165.9			539.4			472.0
Inter-segment sales		(1.4	)		(1.1	)		(3.2	)		(2.9	)

Net sales		559.4			501.5			1,655.3			1,481.9
Cost of products sold		410.3			363.0			1,203.3			1,119.5

Gross profit		149.1			138.5			452.0			362.4
Selling, general and administrative expenses		101.7			92.3			303.2			265.6
Direct flood related expense		-			-			34.2			-
Restructuring and other charges/(income)		(0.4	)		(3.0	)		0.1			(1.5	)
Interest expense		2.5			2.5			7.8			8.8
Other expense - net		1.0			0.6			1.7			2.1

		44.3			46.1			105.0			87.4
Provision for income taxes		12.3			11.4			25.5			20.2

Earnings before equity loss in joint venture		32.0			34.7			79.5			67.2
Equity loss in joint venture		-			(0.1	)		(0.1	)		(0.3	)

Net earnings		32.0			34.6			79.4			66.9
Less: Net earnings attributable to noncontrolling interest		-			-			0.1			(8.3	)

Net earnings attributable to A. O. Smith Corporation	$	32.0		$	34.6		$	79.5		$	58.6

Earnings per Common Share
Basic	$	1.05		$	1.15		$	2.61		$	2.70


Diluted	$	1.04		$	1.14		$	2.59		$	2.69

Dividends to A. O. Smith Shareholders	$	0.21		$	0.195		$	0.60		$	0.575

See accompanying notes to unaudited condensed consolidated financial statements

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2010 and December 31, 2009

(dollars in millions)


	(unaudited) September 30, 2010			December 31, 2009
Assets
Current Assets
Cash and cash equivalents	$	109.1		$	76.3
Receivables		422.4			373.6
Inventories		268.6			215.1
Deferred income taxes		27.3			26.6
Other current assets		49.0			48.4

Total Current Assets		876.4			740.0
Property, plant and equipment		993.7			994.6
Less accumulated depreciation		592.6			582.3

Net property, plant and equipment		401.1			412.3
Goodwill		569.3			567.8
Other intangibles		114.4			119.5
Deferred income taxes		11.7			22.2
Other assets		33.7			39.5

Total Assets	$	2,006.6		$	1,901.3

Liabilities
Current Liabilities
Short term debt	$	158.0		$	-
Trade payables		337.8			312.9
Accrued payroll and benefits		51.2			51.6
Accrued liabilities		77.0			67.0
Product warranties		40.7			38.7
Long-term debt due within one year		21.1			21.1

Total Current Liabilities		685.8			491.3
Long-term debt		97.5			232.1
Pension liabilities		210.1			232.8
Other liabilities		151.3			155.3

Total Liabilities		1,144.7			1,111.5
Stockholders’ Equity
Class A Common Stock, $5 par value: authorized 14,000,000 shares; issued 5,002,082 and 5,818,107		25.0			26.2
Common Stock, $1 par value: authorized 60,000,000 shares; issued 27,404,778 and 27,166,486		27.4			27.2
Capital in excess of par value		667.9			662.7
Retained earnings		426.4			365.4
Accumulated other comprehensive loss		(228.5	)		(230.9	)
Treasury stock at cost		(75.3	)		(79.9	)
Noncontrolling interest		19.0			19.1

Total Stockholders’ Equity		861.9			789.8

Total Liabilities and Stockholders’ Equity	$	2,006.6		$	1,901.3

See accompanying notes to unaudited condensed consolidated financial statements

PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

Nine Months ended September 30, 2010 and 2009

(dollars in millions)

(unaudited)


	Nine Months Ended September 30
	2010			2009
Operating Activities

Net earnings	$	79.4		$	66.9
Adjustments to reconcile net earnings to cash provided by operating activities:
Depreciation and amortization		49.0			50.7
Loss (gain) on disposal of assets		14.0			(3.3	)
Net changes in operating assets and liabilities, net of acquisitions:
Current assets and liabilities		(63.5	)		95.4
Noncurrent assets and liabilities		(10.0	)		(26.1	)
Other		(0.1	)		0.7

Cash Provided by Operating Activities		68.8			184.3

Investing Activities
Capital expenditures		(47.6	)		(37.9	)
Net cash distributed with spin-off of discontinued businesses		-			(7.1	)
Acquisition of business		(5.6	)		(0.4	)
Proceeds from sale of restricted marketable securities		4.6			8.9
Proceeds from sale of assets		4.2			9.6

Cash Used in Investing Activities		(44.4	)		(26.9	)

Financing Activities
Short term debt incurred - net		40.8			-
Long-term debt repaid		(18.6	)		(111.5	)
Proceeds from stock option activity		4.5			3.5
Dividends paid		(18.3	)		(15.5	)

Cash Provided by (Used in) Financing Activities		8.4			(123.5	)

Net increase in cash and cash equivalents		32.8			33.9
Cash and cash equivalents - beginning of period		76.3			35.3


Cash and Cash Equivalents - End of Period	$	109.1		$	69.2

See accompanying notes to unaudited condensed consolidated financial statements

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited)

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results expected for the full year. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the company’s latest Annual Report on Form 10-K filed with the SEC on February 26, 2010.

On April 22, 2009, A. O. Smith Corporation (the company) closed on a merger transaction with Smith Investment Company (SICO). The merger was approved by the company’s stockholders on April 14, 2009.

The transaction between the company and SICO has been accounted for as a reverse acquisition with SICO as the accounting acquirer and the company (which is the surviving entity for legal purposes) as the accounting acquiree. As this is a common control transaction under Accounting Standards Codification (“ASC”) 805 Business Combinations (formerly FAS 141(R)), the transaction is accounted for as an equity transaction under ASC 810-10 Consolidations (formerly FAS 160). The acquisition of a noncontrolling interest does not require purchase accounting.

Furthermore, because SICO is the continuing reporting entity for accounting purposes, the reports filed by the company as the surviving corporation in the transaction will parallel the financial reporting required under GAAP and SEC reporting rules as if SICO were the legal successor as of the date of the transaction. Accordingly, prior period financial information presented in the company’s financial statements reflects the historical activity of SICO.

On January 19, 2009, SICO distributed all of its assets and liabilities other than its ownership of A. O. Smith stock. These assets and liabilities related primarily to the multicolor printing business conducted through Berlin Industries and the commercial warehousing, trucking and packaging business conducted through Central States Distribution Service, Inc.

Certain prior year amounts have been reclassified to conform to 2010 presentation.

2.	Inventories (dollars in millions)


	September 30, 2010				December 31, 2009
Finished products		$	166.5			$	142.9
Work in process			44.8				41.3
Raw materials			125.8				99.4

			337.1				283.6
LIFO reserve			(68.5	)			(68.5	)

		$	268.6			$	215.1

3.	Restricted Marketable Securities

The company acquired GSW Inc. (GSW) on April 3, 2006. GSW operated a captive insurance company (Captive) to provide product liability and general liability insurance to its subsidiary American Water Heater Company (American). The company decided to cover American’s prospective liability exposures with its existing insurance programs and all product liability claims for events which occurred prior to July 1, 2006 will be financed by the Captive. The reinsurance company restricts the amount of capital which must be maintained by the Captive and this restricted amount was $11.1 million at September 30, 2010. The $11.1 million is invested in short-term securities and is included in other non-current assets on the company’s balance sheet on September 30, 2010. During the first nine months of 2010 and 2009 the captive liquidated $4.6 million and $8.9 million of short term securities and paid the company a dividend of $4.6 and $8.9 million. The company used the proceeds to pay down debt.

4.	Long-Term Debt

The company has a $425 million multi-currency revolving credit agreement with eight banks. The facility expires February 17, 2011 and has an accordion provision which allows it to be increased up to $500 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by the company’s leverage ratio. The company plans to have the replacement for the facility in place in the fourth quarter 2010. There are no problems anticipated with completing the new facility at this time.

Borrowings under the bank credit lines and commercial paper borrowings are supported by the $425 million revolving credit agreement. As the revolving credit agreement expires in less than one year, outstanding borrowings of bank lines, credit lines and commercial paper are classified as short term debt at September 30, 2010.

5.	Product Warranties (dollars in millions)

The company offers warranties on the sales of certain of its products and records an accrual for the estimated future claims. The following table presents the company’s warranty liability activity for the nine months ended September 30, 2010 and 2009, respectively.


	2010				2009
Balance at January 1		$	112.9			$	111.8
Expense			51.9				54.3
Claims settled			(48.2	)			(54.1	)

Balance at September 30		$	116.6			$	112.0

The company has recorded a current receivable of $13.1 million to recover certain costs from a vendor under an arrangement which existed prior to entering into litigation with the vendor in Tennessee State Court. The company believes collection of the receivable and any future amounts to be recovered related to this litigation is probable (possible future amounts could reach an additional $8 million to $17 million).

6.	Comprehensive Earnings (dollars in millions)

The company’s comprehensive earnings are comprised of net earnings, foreign currency translation adjustments, adjustments to minimum pension liability and post retirement obligations, and realized and unrealized gains and losses on cash flow derivative instruments.


	Three Months Ended September 30						Nine Months Ended September 30
	2010			2009			2010			2009
Net earnings		$	32.0		$	34.6	$	79.4			$	66.9
Other comprehensive earnings (loss): Foreign currency translation adjustments			5.8			2.5		2.8				2.8
Adjustment to additional minimum pension liability and post retirement obligation less related income tax provision (benefit) of: 2010 - $(0.1) 2009 - $1.1			-			-		(0.1	)			1.7
Unrealized net (loss) gains on cash flow derivative instruments less related income tax provision (benefit): 2010 - $2.4 and $(0.4) 2009 - $5.6 and $29.0			4.0			8.8		(0.5	)			45.4
Less comprehensive (earnings) loss attributable to noncontrolling interest			-			-		0.1				(20.6	)
Reclass of Accumulated Comprehensive Loss associated with noncontrolling interest			-			-		-				(179.7	)

Comprehensive earnings (loss)		$	41.8		$	45.9	$	81.7			$	(83.5	)

7.	Earnings per Share of Common Stock

The numerator for the calculation of basic and diluted earnings per share is net earnings attributable to A. O. Smith Corporation and excludes the noncontrolling interest. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:


	Three Months Ended September 30				Nine Months Ended September 30
	2010		2009		2010		2009
Denominator for basic earnings per share - weighted average shares		30,531,143		30,160,136		30,479,513		21,664,457

Effect of dilutive stock options, restricted stock and share units		304,960		239,503		250,230		93,829


Denominator for diluted earnings per share		30,836,103		30,399,639		30,729,743		21,758,286

7.	Earnings per Share of Common Stock (continued)

The weighted average shares presented above have been impacted by the accounting treatment of the company’s transaction with SICO which closed on April 22, 2009 and is discussed in more detail in Note 1 to the Notes to Condensed Consolidated Financial Statements. The primary accounting impact of the SICO transaction is in the calculation of earnings per share since the accounting rules require the use of SICO adjusted average shares outstanding rather than A. O. Smith Corporation average shares outstanding prior to the closing. The SICO adjusted average shares outstanding reflect the historical shares of SICO multiplied by their exchange ratio from the April 22, 2009 merger transaction. Subsequent to the closing, A. O. Smith Corporation average shares are used in the calculation.

8.	Stock Based Compensation

The company adopted the A. O. Smith Combined Incentive Compensation Plan (the “plan”) effective January 1, 2007. The plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by shareholders in 2002. The plan provides for the issuance of 1,250,000 stock options, restricted stock or share units. At the company’s annual meeting of stockholders on April 14, 2009, an amendment to the plan was approved to increase the authorized shares of Common Stock under the plan by 1,250,000. Additionally, any shares that would have been available for stock options, restricted stock or share units under the predecessor plan, if that plan was in effect, will be available for granting of share based awards under the plan. The number of shares available for granting of options, restricted stock or share units at September 30, 2010 was 1,433,051. Upon stock option exercise, restricted stock grant, or share unit vesting, shares are issued from treasury stock.

Total stock based compensation cost recognized in the three month periods ended September 30, 2010 and 2009 was $1.4 million and $1.6 million, respectively. Total stock based compensation cost recognized in the nine month periods ended September 30, 2010 and 2009 was $4.8 million and $4.3 million, respectively.

Stock Options

The stock options granted in the nine month periods ended September 30, 2010 and 2009, have three year pro-rata vesting from the date of grant. Stock options are issued at exercise prices equal to the fair value of Common Stock on the date of grant. For active employees, all options granted in 2010 and 2009 expire ten years after date of grant. Options are expensed ratably over the three year vesting period. Stock based compensation cost attributable to stock options in the three month periods ended September 30, 2010 and 2009 was $0.6 million and $0.8, respectively. Stock based compensation expense attributable to stock options in the nine month periods ended September 30, 2010 and 2009 was $1.9 million and $1.8 million, respectively. Included in the stock option expense for the nine month periods ended September 30, 2010 and 2009 is expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period.

8.	Stock Based Compensation (continued)

Changes in option shares, all of which are Common Stock, were as follows for the nine months ended September 30, 2010:


	Weighted-Avg. Per Share Exercise Price		Nine Months Ended September 30, 2010			Average Remaining Contractual Life	Aggregate Intrinsic Value (dollars in millions)

Outstanding at January 1, 2010		$ 28.36		1,087,167

Granted		41.90		158,000

Exercised		19.72		(146,068	)

Terminated		30.41		(2,566	)


Outstanding at September 30, 2010		33.25		1,096,533		8 years		$27.0


Exercisable at September 30, 2010		$ 32.58		630,523		7 years		$16.0

The weighted-average fair value per option at the date of grant during the nine months ended September 30, 2010 and 2009 using the Black-Scholes option-pricing model, was $15.29 and $8.18, respectively. Assumptions were as follows:


	Nine Months Ended September 30,
	2010			2009
Expected life (years)		6.4			6.4
Risk-free interest rate		3.6	%		2.8	%
Dividend yield		1.9	%		2.8	%
Expected volatility		38.7	%		35.0	%

The expected life is based on historical exercise behavior and the projected exercise of unexercised stock options. The risk free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant for the expected life of the option. The expected dividend yield is based on the expected annual dividends divided by the grant date market value of our common stock. The expected volatility is based on the historical volatility of our common stock.

Restricted Stock and Share Units

Participants may also be awarded shares of restricted stock or share units under the plan. The company granted 68,401 and 105,534 share units under the plan in the nine month periods ended September 30, 2010 and 2009, respectively. The share units were valued at $2.9 million and $3.0 million at the date of issuance in 2010 and 2009, respectively, based on the company’s stock price at the date of grant and will be recognized as compensation expense ratably over the three-year vesting period. Share based compensation expense attributable to share units of $0.8 million was recognized in the three month periods ended September 30, 2010 and 2009. Share based compensation attributable to share units of $2.9 million and $2.5 million was recognized in the nine month periods ended September 30, 2010 and 2009, respectively. Share based compensation expense recognized in the nine month periods ended September 30, 2010 and 2009 included expense associated with accelerated vesting of share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period.

8.	Stock Based Compensation (continued)

A summary of share unit activity under the plan is as follows:


	Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2010		317,516			$ 33.01

Granted		68,401			41.90

Vested		(67,600	)		36.52

Terminated		(1,800	)		37.62


Issued and unvested at September 30, 2010		316,517			$ 33.65

9.	Pensions (dollars in millions)

The following table presents the components of the company’s net pension expense.


	Three Months Ended September 30								Nine Months Ended September 30
	2010				2009				2010				2009
Service cost		$	2.1			$	2.1			$	6.4			$	6.3
Interest cost			11.6				12.2				35.0				37.3
Expected return on plan assets			(15.4	)			(15.2	)			(46.2	)			(45.6	)
Amortization of net unrecognized loss			4.5				2.6				13.4				8.0
Amortization of prior service cost			(0.2	)			-				(0.7	)			0.2

Defined benefit plan expense		$	2.6			$	1.7			$	7.9			$	6.2

In 2009, the company made contributions totaling $50.8 million and is not required to make a contribution in 2010. The company did make a contribution in June 2010 for $20 million and an additional contribution of $10 million in July 2010.

10.

Operations by Segment (dollars in millions)


	Three Months Ended September 30								Nine Months Ended September 30
	2010				2009				2010				2009
Net sales
Water Products		$	377.5			$	336.7			$	1,119.1			$	1,012.8
Electrical Products			183.3				165.9				539.4				472.0
Inter-segment sales			(1.4	)			(1.1	)			(3.2	)			(2.9	)

		$	559.4			$	501.5			$	1,655.3			$	1,481.9

Operating earnings
Water Products ^(1),(4)		$	37.6			$	38.7			$	89.3			$	104.3
Electrical Products ⁽²⁾			21.7				22.8				61.9				27.4
Inter-segment earnings			-				-				(0.1	)			(0.1	)

			59.3				61.5				151.1				131.6
Corporate expenses ⁽³⁾			(12.5	)			(13.0	)			(38.4	)			(35.7	)
Interest expense			(2.5	)			(2.5	)			(7.8	)			(8.8	)


Earnings before income taxes			44.3				46.0				104.9				87.1
Provision for income taxes			12.3				11.4				25.5				20.2

Earnings from continuing operations		$	32.0			$	34.6			$	79.4			$	66.9


⁽¹⁾ includes equity loss in joint venture of :		$	-			$	(0.1	)		$	(0.1	)		$	(0.3	)
⁽²⁾ includes pre-tax restructuring and other charges/(income) of:		$	(0.4	)		$	(3.0	)		$	0.1			$	(2.5	)
⁽³⁾ includes pre-tax restructuring and other charges of:		$	-			$	-			$	-			$	1.0
⁽⁴⁾includes flood related expense of:		$	-			$	-			$	34.2			$	-

11.

Restructuring and Other Charges

Electrical Products Restructuring and Other Costs

December 31, 2009 balances represent miscellaneous costs yet to be paid related to plant closings in Scottsville, KY and Mebane, NC, which were completed prior to December 31, 2009, and severance accruals for the Shenzhen, China plant closing.

In the first nine months of 2009, $3.0 million of net gain was recognized related to the sale of the Shenzhen motor manufacturing facility to the Chinese government, which exercised eminent domain relative to a road construction project. Additionally, $0.5 million of expense was recognized for equipment move costs related to the plant closings mentioned above. In the first nine months of 2010, the company incurred net restructuring expenses of $0.1 million consisting of $0.7 million of severance cost associated with the Shenzhen closure as partially offset by $0.6 million of income from unutilized reserves associated with prior plant closings. Production ceased in Shenzhen in the second quarter of 2010.

The following table presents an analysis of the company’s Electrical Products restructuring reserve as of and for the nine months ended September 30, 2010 (dollars in millions):

11.

Restructuring and Other Charges (continued)


	Severance Costs			Other			Total
Balance at December 31, 2009		$ 0.3			$ 0.5			$ 0.8
Expense recognized		0.8			0.1			0.9
Payments		(0.1	)		(0.1	)		(0.2	)

Balance at March 31, 2010		1.0			0.5			1.5
Income recognized		(0.1	)		(0.3	)		(0.4	)
Payments/adjustments		(0.8	)		0.5			(0.3	)

Balance at June 30, 2010		0.1			0.7			0.8
Income recognized		-			(0.4	)		(0.4	)
Payments		(0.1	)		(0.3	)		(0.4	)

Balance at September 30, 2010		$ -			$ -			$ -

Other Charges

In the first quarter of 2009, the company recognized in corporate expense a $1.0 million loss on the sale of a vacated facility from a previously owned business.

12.

Fair Value Measurements

The company adopted ASC 820 Fair Value Measurements and Disclosures (formerly SFAS 157) on January 1, 2008. ASC 820, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Assets measured at fair value on a recurring basis are as follows (dollars in millions):


Fair Value Measurement Using	September 30, 2010		December 31, 2009
Quoted Prices in Active Markets for Identical Assets (Level 1)		$ 8.3		$ 12.7
Significant Other Observable Inputs (Level 2)		8.9		5.2

Total Net Derivative Contracts		$ 17.2		$ 17.9

There were no changes in our valuation techniques used to measure fair values on a recurring basis as a result of adopting ASC 820.

13.

Derivative Instruments

ASC 815 Derivatives and Hedging (formerly SFAS No. 133), as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the company must designate the hedging instrument, based upon the exposure hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

The company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (OCI), net of tax, and is reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The amount by which the cumulative change in the value of the hedge more than offsets the cumulative change in the value of the hedged item (i.e., the ineffective portion) is recorded in earnings, net of tax, in the period the ineffectiveness occurs.

The company utilizes certain derivative instruments to enhance its ability to manage currency and interest rate exposures as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.

Commodity Futures Contracts

In addition to entering into supply arrangements in the normal course of business, the company also enters into futures contracts to fix the cost of certain raw material purchases, principally copper and aluminum, with the objective of minimizing changes in cost due to market price fluctuations. The hedging strategy for achieving this objective is to purchase commodities futures contracts on the open market of the London Metals Exchange (LME), Shanghai Futures Exchange (SHFE) or over the counter contracts based on the LME. With one of its brokers, the company is required to make cash deposits on unrealized losses on commodity derivative contracts that exceed $10.0 million.

The after-tax gain of the effective portion of the contracts of $5.0 million as of September 30, 2010 was recorded in accumulated other comprehensive loss, and will be reclassified into cost of products sold in the period in which the underlying transaction is recorded in earnings. The effective portion of the contracts will be reclassified within one year. Commodity hedges outstanding at September 30, 2010 are a total of approximately 12.0 million pounds of copper and aluminum.

13.

Derivative Instruments (continued)

Foreign Currency Forward Contracts

The company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. The company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of business. Principal currencies include the Mexican peso, Chinese renminbi, Canadian dollar and Euro.

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective.

The majority of the amounts in accumulated other comprehensive loss for cash flow hedges is expected to be reclassified into earnings within one year and all of the hedges will be reclassified into earnings no later than September 4, 2012.

The following table summarizes, by currency, the contractual amounts of the company’s foreign currency forward contracts.


September 30 (dollars in millions)	2010						2009
	Buy			Sell			Buy			Sell
Euro		$	1.6		$	2.6		$	1.6		$	0.5
Canadian dollar			-			35.8			-			17.1
Chinese renminbi			74.0			-			20.2			-
Indian rupee			-			-			2.4			-
Mexican peso			103.0			-			99.6			-

Total		$	178.6		$	38.4		$	123.8		$	17.6

Interest Rate Swap Agreement

The company is exposed to interest rate risk as a result of its floating rate borrowings under its revolving credit facility. The company uses interest rate swaps to manage this risk. As of September 30, 2010 the company had one interest rate swap outstanding in the amount of $25 million that expires in November 2010.

The interest rate swap is designated and accounted for as a cash flow hedge of floating rate debt. Gains and losses on this instrument are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the statement of earnings. The assessment of effectiveness for the interest rate swap is based on changes in floating rate interest rates. This swap has been determined to be perfectly effective.

The impact of cash flow hedges on the company’s financial statements is as follows (dollars in millions):

13.

Derivative Instruments (continued)

Fair value of derivative instruments:


		Fair Value
(dollars in millions)	Balance Sheet Location	September 30, 2010				December 31, 2009

Commodities contracts	Other current assets		$	8.3			$	12.7
Foreign currency contracts	Accrued liabilities			-				(0.6	)
	Other current assets			9.1				6.8
Interest rate swap contract	Accrued liabilities			(0.2	)			(1.0	)

Total			$	17.2			$	17.9

The effect of derivative instruments on the Statement of Earnings for the quarter ended September 30:


Derivatives in ASC 815 cash flow hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)							Location of gain/(loss) reclassified from Accumulated OCI into earnings (effective portion)		Amount of gain/(loss) reclassified from Accumulated OCI into earnings (effective portion)								Location of gain/(loss) recognized in earnings on derivative (ineffective portion)		Amount of gain/(loss) recognized in earnings on a derivative (ineffective portion)
	2010			2009						2010				2009						2010			2009
Commodities contracts		$	6.8		$	8.4			Cost of products sold		$	1.9			$	(4.7	)		Cost of products sold		$	0.2		$	0.2
Foreign currency contracts			3.5			(2.8	)		Cost of products sold			2.3				(4.4	)		N/A			-			-
Interest rate swap contract			-			(0.1	)		Interest expense			(0.3	)			(0.3	)		N/A			-			-

		$	10.3		$	5.5					$	3.9			$	(9.4	)				$	0.2		$	0.2

The effect of derivative instruments on the Statement of Earnings year to date September 30:


Derivatives in ASC 815 cash flow hedging relationships	Amount of gain/(loss) recognized in OCI on derivative (effective portion)							Location of gain/(loss) reclassified from Accumulated OCI into earnings (effective portion)		Amount of gain/(loss) reclassified from Accumulated OCI into earnings (effective portion)								Location of gain/(loss) recognized in earnings on derivative (ineffective portion)		Amount of gain/(loss) recognized in earnings on a derivative (ineffective portion)
	2010			2009						2010				2009				2010				2009
Commodities contracts		$	4.5		$	26.5			Cost of products sold		$	9.1			$	(30.7	)		Cost of products sold	$	0.2		$	1.1
Foreign currency contracts			9.3			3.9			Cost of products sold			6.5				(13.0	)		N/A		-			-
Interest rate swap contract			-			(0.3	)		Interest expense			(0.9	)			(0.8	)		N/A		-			-

		$	13.8		$	30.1					$	14.7			$	(44.5	)			$	0.2		$	1.1

14.

Income Taxes

The effective tax rates for the third quarter and first nine months of 2010 were 27.8 percent and 24.3 percent, respectively, and third quarter includes a $0.8 million benefit related to the adjustment of the book tax provision to taxes paid. The year-to-date effective tax rate includes a second quarter $13.3 million tax benefit on a $34.2 million charge for flood related expenses (see Note 15 of Notes to Consolidated Financial Statements) as well as the $0.8 million benefit in the third quarter mentioned above. The 2009 third quarter and first nine months effective tax rates were 24.7 percent and 23.1 percent, respectively. The third quarter included a $3 million non-taxable gain associated with the sale of a motor manufacturing plant in Shenzhen, China and a $1.5 million tax benefit for additional research tax credits and closure of a federal tax audit. The year-to-date effective tax rate includes the aforementioned third quarter benefits and a $1.9 million second quarter favorable adjustment in deferred taxes primarily related to a retroactive reduction in the tax rate of the China water heater operation for achieving high technology status.

As of September 30, 2010 and December 31, 2009 the company had $4.5 million of unrecognized tax benefits of which $3.9 million would affect the effective tax rate if recognized. The company recognizes interest and potential penalties related to unrecognized tax benefits as a component of income tax expense.

The company’s U.S. federal tax returns for 2007-2009 are subject to audit. The company is subject to state and local audits for the years 2004-2009. The company is also subject to non-U.S. income tax examinations for years 2002-2009.

15.

Ashland City, TN Facility Flood

Starting May 3, 2010, production at the company’s largest water heater manufacturing plant located in Ashland City, TN was temporarily shut down due to record flooding of the Cumberland River. Water heater production was shifted to other company plants located in the United States, Canada and Mexico. The company resumed production at the Ashland City, TN plant in June 2010 and has reached production levels which align with demand. The company does not expect to return to pre-flood efficiency levels until the end of 2010.

During the second quarter of 2010, the company recorded flood related expense of $34.2 million, net of insurance proceeds, consisting of the following:


Repair or write off of buildings and equipment	$	36.2
Net inventory loss		15.7
Site cleanup and restoration		14.3

		66.2
Less: insurance proceeds		32.0

Total flood related expense	$	34.2

Site cleanup and restoration began as soon as the flood waters subsided. The company engaged outside contractors to pump out water and clean and sanitize the facilities and the grounds of the manufacturing facility prior to access by company personnel. Employees normally engaged in the production of water heaters were utilized in the cleanup and repair of the facility and equipment, assessment and recovery of inventories and other aspects of the site restoration. Internal and external costs associated with site restoration and cleanup totaled $14.3 million.

The buildings and equipment of the Ashland City, TN plant sustained damages due to the severe flooding. As of September 30, 2010, restoration of certain manufacturing equipment and office space is still in process. The carrying value of fixed assets destroyed in the flood was written

15.

Ashland City, TN Facility Flood (continued)

off, totaling $13.7 million. An additional $22.5 million was expensed to repair and refurbish damaged equipment to pre-flood condition.

The net inventory loss, totaling $15.7 million, includes the cost of raw materials, work-in-process and finished good inventories that were not able to be used or sold due to flood damage.

Insurance proceeds

The company maintains property damage and business interruption insurance coverage applicable to its Ashland City, TN plant totaling $30 million. The company also has federal flood insurance policies and $2 million was recovered. As of September 30, 2010 the company has received insurance proceeds of $32 million.

Government Assistance

In addition, the company has sought assistance from the State of Tennessee as well as local governmental agencies as incentive to reinvest in the Ashland City Facility. Those incentives are expected to be in the form of grants, tax credits and the purchase of certain property. When completed, the benefits, collectively, are expected to be approximately $7 million in 2010, of which $1.4 million of income was recorded in cost of goods sold in the third quarter of 2010.

PART I - - FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

A. O. Smith Corporation is a leading manufacturer of water heating equipment and electric motors, serving a diverse mix of residential, commercial and industrial end markets principally in the United States with a growing international presence. Our company is comprised of two reporting segments: Water Products and Electrical Products. Our Water Products business manufactures and markets a comprehensive line of residential gas and electric water heaters, standard and specialty commercial water heating equipment, high efficiency copper tube boilers, water treatment products and water system tanks. Our Electrical Products business manufactures and markets a comprehensive line of hermetic motors, fractional horsepower alternating current (AC) and direct current (DC) motors. In 2009, we had net sales of approximately $2.0 billion, with 69 percent attributable to our Water Products business and 31 percent attributable to our Electrical Products business.

Our Water Products water heater operations in China grew significantly in the third quarter and first nine months of 2010. We expect this growth to continue at a rate of two to three times the growth in China GDP as geographic expansion, market share gains and new product introductions contribute to our growth. The North American residential and commercial markets for our Water Products segment remain weak due to the relatively low number of housing starts and lack of commercial construction activity, although residential and commercial replacement demand has significantly supported our sales so far this year. We expect our 2010 North American residential and commercial growth in sales to be essentially flat for the total year.

Water Products recognized a pretax charge of $34.2 million in the second quarter of 2010 for expenses related to damages to its water heater manufacturing facility located in Ashland City, TN caused by record flooding of the Cumberland River. 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. A substantial portion of our pre-flood production activities have resumed at the facility prior to the end of the third quarter, however, some manufacturing inefficiencies are still being experienced. It is anticipated that operations will return to normal efficiency levels by the end of 2010. Some sales orders were lost, however, all customers have been retained.

The progress of our new water treatment business in China, which we acquired in November of 2009, has been slower than anticipated due to a number of unforeseen challenges, and we now expect this business to be about break even in 2010. We continue to expect strong long term sales growth opportunities in the water purification industry in China. We introduced A. O. Smith branded water purification products into our China retail distribution network during the third quarter.

During the second quarter of 2010, we began production of residential water heaters for the Indian market at our new plant located just outside of Bangalore, India.

On July 1, we acquired the rights from Takagi Industrial Co., Ltd, of Fuji-city, Shizuoka, Japan, to market and manufacture tankless water heaters in North America. As part of the venture, we are taking over the management of Takagi’s North American sales and distribution organization. Last year, we estimate the industry sold approximately 400,000 tankless water heaters in North America and we expect the market to grow by 10 percent in each of the next few years.

Our Electrical Products segment experienced increased sales in the third quarter due to higher global demand for motors and restocking of depleted inventories by its North America customers. Most of the segment’s end markets experienced growth compared with last year. At this point in the year, primarily due to the seasonality of the HVAC and pump segments, it is expected that volumes will decline in the fourth quarter compared with the third quarter.

RESULTS OF OPERATIONS

THIRD QUARTER AND FIRST NINE MONTHS OF 2010 COMPARED TO 2009

Sales were $559.4 million in the third quarter of 2010 or 11.5 percent higher than sales of $501.5 million in last year’s third quarter. Sales for the first nine months of 2010 were $1.66 billion or 11.7 percent higher than sales of $1.48 billion in the same period last year. The increased sales for both the third quarter and first nine months of 2010 were favorably impacted by higher water heater sales in China, improved demand in our global electric motors markets and replenishment of motor inventories by North American customers. The third quarter increase in sales was also impacted by commodity related pricing actions in both segments of our business earlier in the year.

Net earnings for the third quarter of 2010 were $32.0 million or $1.04 per diluted share or $2.6 million lower than net earnings of $34.6 million or $1.14 per diluted share in the third quarter of 2009. The lower third quarter earnings in 2010 were due to higher material costs, a $3.0 million gain on the sale of our Shenzhen, China motor facility in 2009 and a $1.5 million tax benefit in 2009 for additional research tax credits and closure of a federal tax audit. Net earnings for the first nine months of 2010 were $79.5 million or $2.59 per diluted share and compared to reported net earnings of $58.6 million or $2.69 per diluted share in the same period of 2009. Our reported earnings per share under GAAP for the first nine months of 2009 have been impacted by required accounting related to the company’s transaction with Smith Investment Company (SICO), which closed on April 22, 2009 and is discussed in more detail in Note 1 of the Notes to Condensed Consolidated Financial Statements. For accounting purposes, the former controlling shareholder, SICO, is treated as the acquirer even though A. O. Smith Corporation (the company) is the surviving corporation from a legal standpoint. Earnings and earnings per share amounts reported by the company for the first nine months of 2009 include SICO earnings and shares outstanding as adjusted by the exchange ratio of the merger.

The primary impact of the SICO transaction is in the calculation of earnings per share because the accounting rules require the use of SICO adjusted shares prior to closing. The 2010 quarterly and year-to-date earnings and per share amounts as well as the 2009 third quarter earnings and per share amounts are unaffected by the SICO transaction. Eliminating the impact of the transaction as set forth in the table on the following page, non-GAAP net earnings were $67.0 million or $2.21 per diluted share for the first nine months of 2009 and compared to the previously mentioned net earnings of $79.5 million or $2.59 per diluted share in the first nine months of 2010.

We believe that presenting this non-GAAP financial information permits investors to compare the financial results of the business operations for the current period to the historical financial results for the company. Although 2010 financial information is not impacted by the transaction, we will continue to present non-GAAP earnings per share information during 2010 for purposes of comparing the financial results of the current period to the historical financial results of the company. Management also used the non-GAAP information in 2009 for all internal purposes of reporting results of operations including return on investment measures utilized in determining incentive-based compensation and employee profit sharing amounts. Following is a reconciliation of GAAP to non-GAAP earnings and earnings per share as discussed above.

A. O. SMITH CORPORATION

Reconciliation of Non-GAAP Data

In millions, except per share amounts


	Third Quarter Ended September 30				Nine Months Ended September 30
	2010		2009		2010		2009
Net Earnings, as reported	$	32.0	$	34.6	$	79.5	$	58.6
Add: Non-GAAP adjustments attributable to net earnings of non-controlling interest and SICO expenses	$	-	$	-	$	-	$	8.4

Adjusted Earnings	$	32.0	$	34.6	$	79.5	$	67.0

Average Common shares outstanding, as reported⁽¹⁾		30.8		30.4		30.7		21.8
Add: Non-GAAP adjustments to weighted average Common shares attributable to non-controlling interest		-		-		-		8.5

Adjusted average Common shares outstanding		30.8		30.4		30.7		30.3

Earnings per Share, as reported	$	1.04	$	1.14	$	2.59	$	2.69

Adjusted Earnings per Share	$	1.04	$	1.14	$	2.59	$	2.21

The non-GAAP presentation of adjusted earnings per share should not be construed as an alternative to the results reported in accordance with U.S. GAAP. It is provided solely to assist in the investor’s understanding of the impact of these items on the comparability of the company’s operations.

⁽¹⁾	Reported shares are calculated as the weighted average of SICO shares as adjusted for the exchange ratio of the merger transaction prior to the closing and A. O. Smith shares after the closing

Our gross profit margins are unaffected by the aforementioned SICO transaction and in the third quarter decreased from 27.6 percent in 2009 to 26.7 percent in 2010. The decline in margin occurred in our Water Products segment and was due to higher material costs and continuing inefficiencies caused by the flood in May. Our gross profit margin for the first nine months of 2010 increased to 27.3 percent from 24.5 percent in the same period of 2009. The higher margin in 2010 was due to increased volume at both operating segments and lower operating costs especially in our electric motors facilities where our margin improvement programs implemented over the past few years continue to provide cost savings. The gross profit margin in the first nine months of 2010 also benefited from lower material costs in the first half of the year.

Selling, general and administrative expenses (SG&A) in the third quarter and first nine months of 2010 were higher than the same periods in 2009 by $9.4 million and $37.6 million respectively. The increase in SG&A in both the third quarter and first nine months of 2010 was due to higher selling and advertising costs in support of increased volume in China and new product lines and additional SG&A associated with our water treatment acquisition.

The company recognized a pretax charge of $34.2 million in the second quarter for flood damage to our water heater manufacturing facility located in Ashland City, TN caused by extremely heavy

rainfall on May 1st and 2nd of 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. Site cleanup and restoration began as soon as the flood water subsided. The total direct cost for the flood damage is estimated to be $66.2 million and includes: repair of buildings and equipment, site cleanup and restoration and write off of inventory and fixed assets. Insurance proceeds are $32.0 million resulting in a net charge for direct flood related expenses of $34.2 million. Additional detail is provided in Note 15 of the Notes to Condensed Consolidated Financial Statements. A substantial portion of pre-flood production activities have resumed at the Ashland City facility as of the end of the third quarter, however, some manufacturing inefficiencies are still being encountered. It is anticipated that operations will return to normal by 2010 year end. Some individual sales orders were lost, however, all customers have been retained.

In the third quarter of 2010, we recognized $0.4 million of restructuring income from unutilized reserves associated with prior plant closings. In the third quarter of 2009, we had restructuring income of $3.0 million associated with the sale of our Shenzhen, China electric motor facility to the Chinese government, which exercised eminent domain relative to a road construction project. In the first nine months of 2009, restructuring income was $1.5 million as the gain on the Shenzhen facility was partially offset by a $1.0 million loss on sale of a vacated facility from a previously owned business and $0.5 million of moving costs associated with certain Electrical Products plant closures. In the first nine months of 2010, we incurred net restructuring expenses of $0.1 million consisting of $0.7 million of severance cost associated with the Shenzhen closure as partially offset by $0.6 million of income from unutilized reserves associated with prior plant closings.

Interest expense was $2.5 million in the third quarter of both 2010 and 2009. Interest expense for the first nine months of 2010 was $1.0 million less than the same period last year due to lower debt levels.

We have significant pension benefit costs and credits that are developed from actuarial valuations. The valuations reflect key assumptions regarding among other things, discount rates, expected return on assets, retirement ages, and years of service. Consideration is given to current market conditions, including changes in interest rates in making these assumptions. Our assumptions for the expected rate of return on plan assets is 8.75 percent in 2010, unchanged from 2009. The discount rate used to determine net periodic pension costs decreased from 6.6 percent in 2009 to 5.8 percent in 2010. Pension expense for the first nine months of 2010 was $7.9 million or $1.7 million higher than the first nine months of 2009. Total pension expense for 2010 is expected to be $10.5 million compared to $8.3 million in 2009. Our pension costs are reflected in cost of products sold and selling, general and administrative expense.

Our effective tax rates for the third quarter and first nine months of 2010 were 27.8 percent and 24.3 percent, respectively, and included a benefit of $0.8 million related to the adjustment of the book tax provision to taxes paid. The rate for the first nine months of 2010 also included a second quarter $13.3 million tax benefit on the $34.2 million charge for flood related expenses. The 2009 third quarter effective tax rate was 24.7 percent and included a $3.0 million non-taxable gain associated with the sale of a motor manufacturing plant in Shenzhen, China and a $1.5 million tax benefit for additional research tax credits and closure of a federal tax audit. The effective tax rate for the first nine months of 2009 was 23.1 percent and included the aforementioned third quarter benefits and a $1.9 million second quarter favorable adjustment in deferred taxes, primarily related to a retroactive reduction in the tax rate of the China water heater operation for achieving high technology status.

The net earnings attributable to noncontrolling interest in the first nine months of 2009 are comprised of the portion of A. O. Smith Corporation’s earnings not attributable to SICO shareholders through the closing of the transaction on April 22, 2009.

Water Products

Third quarter sales for our Water Products segment were $377.5 million or $40.8 million higher than 2009 third quarter sales of $336.7 million. Year-to-date sales in 2010 were $1.12 billion or $106.3 million higher than the same period in 2009. The sales increase in both the third quarter and first nine months of the year was due mostly to significantly higher sales in our water heater operation in China resulting from geographic expansion, market share gains and new product introductions. In addition, our recently acquired water treatment business contributed sales of $8.3 million and $24.3 million in the third quarter and first nine months of 2010, respectively.

Third quarter operating earnings for our Water Products segment were $37.6 million, or 2.8 percent lower than last year’s third quarter due to higher steel costs as well as increased costs due to continuing inefficiencies resulting from the May flood in Ashland City. A price increase, which became effective in the third quarter, partially offset the impact from higher steel costs during the third quarter. Year-to-date earnings in 2010 were $89.3 million or $15.0 million lower than earnings of $104.3 million in the same period of 2010. The decline in year-to-date earnings was due to the $34.2 million second quarter pretax charge for costs associated with the flood which more than offset the impact of increased sales of higher margin water heaters in China and higher volume of commercial water heaters in North America.

Electrical Products

Third quarter sales for our Electrical Products segment were $183.3 million or 10.5 percent higher than sales of $165.9 million in the third quarter of 2009 due to increases in most market segments and significant improvement in China hermetic motor sales. On a year-to-date basis, sales were $539.4 million in 2010 or $67.4 million higher than in the same period last year due to higher volume in all major market segments.

Operating earnings for our Electrical Products segment in the third quarter of 2010 were $21.7 million or $1.1 million lower than 2009 third quarter earnings of $22.8 million as earnings from higher volumes and pricing actions were partially offset by higher steel costs. Also, last year’s third quarter earnings benefited from a $3.0 million net gain associated with the sale of the Shenzhen, China facility and $2.2 million of LIFO income which resulted from reduced inventory levels. Operating earnings for the first nine months of 2010 were $61.9 million or $34.5 million higher than the same period last year. The improved year-to-date earnings in 2010 were due to higher volumes, lower operating costs, ongoing process improvement activities and increased sales of new products.

Outlook

The underlying strength in the replacement demand for our products continues to bolster our sales, and our recovery from the flood has been remarkable. However, the summer selling season is over, and our HVAC and swimming pool pump OEM customers normally reduce their order volumes in the fourth quarter to adjust their inventories. We expect this year will be no different. In addition, we are experiencing increases in raw material prices, particularly copper and steel, which is another reason to be cautious.

Nonetheless, as a result of the strength of our businesses through the third quarter tempered by an uncertain economic and political climate going forward, we are raising our 2010 full-year earnings

estimate to between $3.25 to $3.35 per share, which includes the $.68 per share charge associated with the second quarter flood. The full year earnings estimate is based on the number of outstanding shares prior to the impact of the 3-for-2 stock split announced on October 15, 2010 and effective November 15, 2010.

Liquidity & Capital Resources

Our working capital, excluding short-term debt, was $348.6 million at September 30, 2010, $99.9 million greater than at December 31, 2009. The higher working capital was due to higher cash balances in China and higher accounts receivable and inventory levels related to higher volumes at both businesses. Inventory levels at Water Products were also higher to satisfy customer demand during the recovery period following the flooding of our Ashland City, Tennessee facility in May. This investment in working capital was partially offset by higher accounts payable balances at both businesses supporting higher volumes.

Cash provided by operating activities during the first nine months of 2010 was $68.8 million compared with $184.3 million during the same period last year. A larger investment in working capital needed to support increases in sales during the first nine months of 2010 compared with the same period in 2009 was partially offset by higher earnings. In addition, cash provided by operating activities in 2009 was positively impacted by significant reductions in inventory levels as a result of the difficult economic environment. For the total year 2010, we expect cash provided by operating activities to be approximately $150 to $160 million.

Our capital expenditures totaled $47.6 million during the first nine months of 2010, compared with $37.9 million spent one year ago. We are projecting 2010 capital expenditures to be between $80 and $90 million with approximately $20 million spent in this year as a result of the Tennessee flooding. Full year depreciation and amortization is expected to be approximately $70 million.

In February 2006, we completed a $425 million multi-currency credit facility with eight banks which expires in February, 2011. The facility has an accordion provision which allows it to be increased up to $500 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants during the entire quarter ending September 30, 2010. We plan to have the replacement for this facility in place in the fourth quarter of 2010, and we do not anticipate any problems completing the new facility at this time.

The facility backs up commercial paper and credit line borrowings. As the credit facility expires in less than one year, our commercial paper and credit line borrowings, as well as drawings under the facility, are classified as short-term debt. At September 30, 2010, we had available borrowing capacity of $267 million under this facility. We believe the combination of available borrowing capacity and operating cash flow will provide sufficient funds to finance our existing operations for the foreseeable future.

Our total debt increased $23.4 million from $253.2 million at December 31, 2009 to $276.6 million at September 30, 2010. Our leverage, as measured by the ratio of total debt to total capitalization, was 24% at the end of the quarter, the same as at the end of last year.

Our pension plan continues to meet all funding requirements under ERISA regulations. We are not required to make a contribution in 2010; however, we contributed $30 million to the plan earlier this year.

GSW, Inc operated a captive insurance company to provide product liability and general liability insurance to its subsidiary, American Water Heater Company. We decided to cover American’s liability exposures with our existing insurance programs and operate the captive in runoff effective July 1, 2006. The reinsurance company restricts the amount of capital which must be maintained by the captive. At September 30, 2010, the restricted amount was $11.1 million and is included in other non-current assets. The restricted assets are invested in money market securities. The captive paid a dividend of $4.6 million to us in the second quarter of this year, and it was used to pay down debt.

On October 11, 2010, our board of directors declared a cash dividend of $.21 per share on our common stock and Class A common stock. In addition, our board declared a 3-for-2 stock split in the form of a fifty percent stock dividend on October 12, 2010. Holders of our common stock and our Class A common stock will receive one additional identical share of such class of stock for every two shares they own as of the record date and will receive cash in lieu of fractional shares based on the closing price of our common stock on the record date, adjusted for the stock dividend. It is expected that the stock dividend will increase the total number of shares of common stock and Class A common stock outstanding to approximately 45.8 million shares. Both the cash dividend and the stock dividend are payable on November 15, 2010 to shareholders of record on October 29, 2010. The cash dividend will be paid on the basis of the pre-split shares.

Critical Accounting Policies

The preparation of our consolidated financial statements is in conformity with accounting principles generally accepted in the United States which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2009. We believe that at September 30, 2010 there has been no material change to this information.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued an amendment to Accounting Codification Statement (“ASC”) Topic 820, “Fair Value Measurements and Disclosures”. The amendment to Topic 820 improves disclosures about fair value measurements by requiring disclosure of transfers in and out of levels 1 and 2 as well as additional disclosures related to level 3 inputs. We adopted the amendment to ASC 820 on January 1, 2010. Adoption of this amendment did not have a material impact on our consolidated financial condition, results of operations or cash flows.

In May 2009, the FASB issued ASC Sub-topic 855-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 165), “Subsequent Events.” Sub-topic 855-10 addresses the types and timing of events that should be reported in the financial statements for events that occur between the balance sheet date and the date the financial statements are issued or available to be issued. We reviewed events for possible inclusion in the financial statements through the date the financial statements were available to be issued.

In March 2008, the FASB issued ASC Sub-topic 815-10, “Derivatives and Hedging”. Sub-topic 815-10 (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB No. 133”), is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. ASC 815-10 applies to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”). It also applies to non-derivative hedging instruments and all hedged items designated and qualifying under SFAS 133 and is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This pronouncement encourages, but does not require, comparative disclosures for periods prior to its initial adoption. We adopted ASC 815-10 on January 1, 2009. Adoption of this statement did not have a material impact on our consolidated financial condition, results of operations or cash flows.

In December 2007, the FASB issued ASC Sub-topic 810-10-65, “Consolidations”, (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”). This pronouncement changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method changes the accounting for transactions with minority interest holders and is effective beginning in 2009. We adopted ASC 810-10-65 on January 1, 2009. Adoption of this statement has impacted our accounting for the SICO transaction as well as the acquisition of Tianlong Holding Co., Ltd. and has been incorporated in the accompanying financial statements.

In December 2007, the FASB issued ASC Sub-topic 805-10, “Business Combinations”, (formerly SFAS No. 141(R)). ASC 805-10 requires us to continue to follow prior guidance for certain aspects of business combinations, with additional guidance provided defining the acquirer, recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and measuring goodwill or a gain from a bargain purchase. In addition, certain transaction costs previously capitalized as part of the purchase price will be expensed as incurred. Also, under ASC 805-10 adjustments associated with changes in tax contingencies that occur after the one year measurement period are recorded as adjustments to income. This statement is effective for all business combinations for which the acquisition date is on or after the beginning of an entity’s first fiscal year that begins after December 15, 2008; however, the guidance in this standard regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to January 1, 2009. We have adopted ASC 805-10 on January 1, 2009 and incorporated the impact of this statement in the accounting for the SICO transaction and the acquisition of Tianlong Holding Co., Ltd.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As is more fully described in our annual report on Form 10-K for the year ended December 31, 2009, we are exposed to various types of market risks, including currency and certain commodity risks. Our quantitative and qualitative disclosures about market risk have not materially changed since that report was filed. We monitor our currency and commodity risks on a continuous basis and generally enter into forward and futures contracts to minimize these exposures. The majority of the contracts are for periods of less than one year. Our company does not engage in speculation in our derivative strategies. It is important to note that gains and losses from our forward and futures contract activities are offset by changes in the underlying costs of the transactions being hedged.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of September 30, 2010 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

Changes in internal control over financial reporting

There have been no significant changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Forward Looking Statements

This filing 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 venture; difficulties in realizing future growth and profit expectations for the China acquisition or the North American tankless 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 filing are made only as of the date of this filing, 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.

PART II - - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There have been no material changes in the legal and environmental matters discussed in Part 1, Item 3 and Note 14 of the Notes to Consolidated Financial Statements in the company’s Form 10-K Report for the year ended December 31, 2009, which is incorporated herein by reference.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On December 14, 2007, the company’s board of directors approved a stock repurchase program authorizing the purchase of up to one million shares of the company’s common stock. This stock repurchase authorization remains effective until terminated by the company’s board of directors. The following table sets forth the number of shares of common stock the company repurchased during the first nine months of 2010.

ISSUER PURCHASES OF EQUITY SECURITIES

Period

(a) Total
Number of
Shares
Purchased

(b) Average
Price Paid
per Share

(d) Maximum
Number of Shares
that may Yet be
Purchased Under the
Plans or Programs

January 1 – September 30, 2010

1,000,000

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS

Refer to the Exhibit Index on page 31 of this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned.


		A. O. SMITH CORPORATION

November 4, 2010		/s/John J. Kita
		John J. Kita
		Senior Vice President
		Corporate Finance & Controller

November 4, 2010		/s/Terry M. Murphy
		Terry M. Murphy
		Executive Vice President
		and Chief Financial Officer

INDEX TO EXHIBITS


Exhibit Number		Description

31.1		Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32		Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

101		The following materials from A. O. Smith Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2010 and 2009, (ii) the Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 and (iv) the Notes to Condensed Consolidated Financial Statements.

Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)

Exhibit 31.1

CERTIFICATION

I, Paul W. Jones, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of A. O. Smith Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 4, 2010

/s/ Paul W. Jones

Paul W. Jones

Chairman and Chief Executive Officer

Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)

Exhibit 31.2

CERTIFICATION

I, Terry M. Murphy, certify that;

1.	I have reviewed this quarterly report on Form 10-Q of A. O. Smith Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 4, 2010

/s/ Terry M. Murphy

Terry M. Murphy

Executive Vice President and Chief Financial Officer

Written Statement of the Chief Executive Officer and the Chief Financial Officer

Exhibit 32

Written Statement of the Chief Executive Officer and the

Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, each of the undersigned certifies that to the best of our knowledge:

(1)	the Quarterly Report Form 10-Q of A. O. Smith Corporation for the quarter ended September 30, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of A. O. Smith Corporation.

November 4, 2010

/s/ Paul W. Jones

Paul W. Jones

Chairman and Chief Executive Officer

/s/ Terry M. Murphy

Terry M. Murphy

Executive Vice President and Chief Financial Officer

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