A. O. Smith Corporation (A. O. Smith) has reported net sales of $2.3 billion for the year 2008, compared with the net sales of $2.31 billion in the previous year-end. It has also reported net earnings of $81.9 million, or $2.7 per share for the year 2008, down 7%, compared to the net earnings of $88.2 million, or $2.85 per share in the previous year-end.

Earnings included after-tax restructuring and other charges of $5.6 million or $0.19 per share in 2008. In 2007, earnings included restructuring and other charges of $0.33 per share and tax benefits of $0.16 per share.

Fourth quarter sales of $508.6 million were about 11% lower than fourth quarter 2007 sales of $569.9 million. A. O. Smith earned $6.6 million in the fourth quarter or $.22 per share, compared with the $17.0 million or $.55 per share earned during the same period in 2007. Earnings included after-tax restructuring and other charges of $2.1 million or $.07 per share in the fourth quarter of 2008 compared with $.26 per share in the fourth quarter of 2007. In addition, fourth quarter 2007 earnings also included tax benefits of $.06 per share.

“2008 was a solid year for our business, in spite of the rapid deterioration of the global economy in the fourth quarter,” Paul W. Jones, chairman and chief executive officer, observed. “The volatility of steel and copper prices throughout 2008, coupled with the continuing weakness in the domestic residential housing market, made 2008 a very challenging year. If you add to that the precipitous volume declines in the fourth quarter, 2008 changed from an unfavorable business climate into one of the worst in recent memory.”

“Despite these incredible headwinds, I am proud of our employees’ ability to navigate the challenges that we encountered in 2008. As a result of the hard work of our experienced team, we ended the year with a strong balance sheet and debt to capital ratio of 34%,” Jones continued. “We are in a good financial position in spite of the recession. We continue to focus on preserving cash and reducing our cost structure to maintain our solid financial position.”

Water Products Company:

Water Products sales of $1.45 billion in 2008 were about two% higher than 2007 sales of $1.42 billion. A 26% increase in sales of water heaters in China and pricing that partially covered higher material costs helped offset lower residential and commercial water heater volumes.

Operating profit decreased about 10% to $134.7 million due to lower residential volumes and higher raw material costs partially offset by pricing actions. Operating margin decreased to 9.3% compared with 10.5% the prior year.

Fourth quarter sales were $346.2 million, about $33 million lower than the fourth quarter of 2007. China sales increased 11%, but were overshadowed by lower sales to the residential and commercial water heater markets. Operating earnings of $29.5 million were significantly lower than last year’s record fourth quarter earnings. Earnings were impacted by lower residential and commercial volumes and higher raw material costs not fully covered by price increases. As a result, operating margins declined to 8.5% in the fourth quarter of 2008 from 11.9% in the fourth quarter of 2007.

In late December 2008, Water Products received a land allotment near Bangalore, India, and will begin construction in the second quarter 2009 of a new 76,000 square foot plant. The plant is centrally located in one of the company’s key target markets in India with a growing consumer class interested in premium water heating solutions. The company designed a residential product line specifically for this market and is currently importing the products from its plant in Nanjing, China. The company expects to begin water heater production in India during the second quarter of 2010.

Electrical Products Company:

Electrical Products 2008 sales of $858.1 million were about 4% lower than 2007 sales of $894.0 million. Pricing actions related to higher material costs were more than offset by lower motor volumes caused by the decline in the housing market and customer inventory reductions at the end of the year.

Operating earnings of $39.1 million were significantly higher than the $23.1 million earned in 2007. Earnings included $8.7 million of restructuring expense in 2008 compared with $22.8 million in restructuring expense the prior year. Operating profit margin increased to 4.6% in 2008 from 2.6% in 2007 due to lower restructuring costs offset by lower volume.

Fourth quarter sales were $163.2 million, about 15% lower than 2007 fourth quarter sales of $192.4 million. In response to the weakened housing market and the uncertainty from the overall economic recession, OEM customers significantly reduced production schedules during the quarter, resulting in lower order volume. The Electrical Products Company lost $5.2 million in the fourth quarter which included $2.9 million in restructuring expense. In the fourth quarter of 2007, Electrical Products recorded an $18 million loss which included $21.2 million of restructuring expense.

At the end of 2008, Electrical Products completed the announced closings of the Mebane, N.C., and Scottsville, Ky., plants. The company expects to realize incremental annual cost savings of $15 million in 2009 due to this restructuring initiative, which also included the closure of it plant in Budapest, Hungary, in early 2008. The company also expects to complete construction of its new commercial hermetic motor plant in Yueyang, China, during the first quarter of 2009.

Cash flow and leverage:

Cash flow from operating activities in 2008 of $106.6 million was significantly lower than the $190.5 million achieved in 2007 primarily due to a larger investment in working capital, particularly inventory, and cash deposits associated with margin calls on derivative contracts. The debt to capital ratio of 34% at the end of 2008 was the same as last year, but higher than the company expected due entirely to charges to stockholder’s equity associated with pension liabilities and derivative contracts.

Smith Investment Company transaction:

On December 9, 2008, the company announced it had signed a definitive merger agreement with Smith Investment Company (PK: SMIC) under which Smith Investment would become a wholly owned subsidiary of the company. Expected benefits of the merger include:

The number of shares of A. O. Smith stock exchanged for the underlying shares owned by Smith Investment will be at a discount resulting in a small decrease in the total shares outstanding;

The transaction will involve several corporate governance enhancements including one additional board seat elected by common stock shareholders, a sunset provision on Class A Common Stock shares based on a%age of ownership, and a requirement that Class A shares convert automatically to Common Stock shares upon transfer to unaffiliated third parties; and

The number of A. O. Smith shares that have the potential to trade in the public market will increase materially.

“We are pleased with the milestone in our history that this merger represents,” Jones commented. “We have worked hard to ensure this is a good deal for our shareholders. It will improve our corporate governance, has the potential to increase the public float, and will result in a small reduction of total shares outstanding.”

The transaction is subject to regulatory review and votes by A. O. Smith and Smith Investment shareholders. A. O. Smith expects to complete the transaction by the end of the second quarter.