2010 Annual Report - AO Smith

1. Organization and Significant Accounting Policies (continued)
At December 31, 2010 and 2009, the company had a $13.8 million and $8.0 million receivable, respectively, relating to certain
costs it expects to recover 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 $6.0 million to $17.0 million.
Environmental costs. The company accrues for losses associated with environmental obligations when such losses are
probable and reasonably estimable. Costs of estimated future expenditures are not discounted to their present value.
Recoveries of environmental costs from other parties are recorded as assets when their receipt is considered probable. The
accruals are adjusted as facts and circumstances change.
Stock-based compensation. The company follows ASC 718, Compensation - Stock Compensation (formerly SFAS 123(R)).
Compensation cost is recognized using the straight-line method over the vesting period of the award. ASC 718 also requires the
benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under prior literature. Excess tax deductions of $0.7 million, $2.9 million and $1.1 million
were recognized as a financing cash flow in 2010, 2009 and 2008, respectively.
Earnings per share of common stock. The company is not required to use the two-class method of calculating earnings per
share since its Class A Common Stock and Common Stock have equal dividend rights. The numerator for the calculation of
basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted
weighted-average shares used in the earnings per share calculations:
2010 2009 2008
Denominator for basic earnings per share -
weighted-average shares outstanding 45,743,246 34,289,257 14,225,238
Effect of dilutive stock options, restricted stock and share units 419,469 187,599 -
Denominator for diluted earnings per share 46,162,715 34,476,856 14,225,238
On October 11, 2010, the company's board of directors declared a three-for-two stock split of the company's Class A Common
Stock and Common Stock in the form of a fifty percent stock dividend to stock holders of record on October 29, 2010 and
payable on November 15, 2010. Shares held in treasury by the company were not impacted by the split. All references in the
financial statements to number of shares outstanding, price per share, per share amounts and stock based compensation data
have been retroactively restated to reflect the split for all periods presented.
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 earlier in Note 1 to the Notes to 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 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.
Restricted marketable securities. The company acquired GSW Inc. in 2006. GSW Inc. operated a captive insurance
company to provide product liability and general liability insurance to its subsidiary American Water Heater Co. (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 is $11.6 million and $17.2
million at December 31, 2010 and 2009, respectively. The $11.6 million and $17.2 million of restricted money market
instruments are included in other assets on the company's balance sheet at December 31, 2010 and 2009, respectively. The cost
of the money market instruments approximates fair value.
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.
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