| Item 7.01. | Regulation FD Disclosure |
Based on requests for additional information, A. O. Smith Corporation (the “Company”) provides the following information.
As previously reported, the Company maintains a long-standing commercial relationship, extending for over two decades, with supply-chain service provider Jiangsu Huiyuan Supply Chain Management Co., Ltd. (“UTP”) in connection with the Company’s business in China. In its capacity as supply-chain service provider to the Company, UTP provides order-entry, warehousing and logistics support in connection with approximately 70% of the Company’s sales in China. The Company understands that UTP provides similar services for multiple other multinational companies.
UTP also provides asset-backed financing to certain of the Company’s distributors in China to facilitate their working capital needs. To facilitate its financing support business, UTP has collateralized lending facilities in place with multiple Chinese banks under which the Company has agreed to repurchase inventory if both requested by the bank and certain defined conditions are met, primarily related to the aging of the distributors’ notes.
Since these contingent arrangements were first initiated in 2015, the Company has not been requested to repurchase any inventory under these arrangements, and the portion of this financing that is subject to the conditions that would allow the banks to request a repurchase of inventory has at no measurement date exceeded $2.5 million. Further, UTP is required to indemnify the Company for any losses the Company would incur in the event of an inventory repurchase under these arrangements. Potential losses under the repurchase arrangement represent the difference between repurchase price and net proceeds from the resale of product plus costs incurred in the process, less rebates.
Before considering the reduction from the resale of the related inventory and rebate accruals ranging from $18 to $25 million, gross repurchase amounts, which would be contingent on the default of all of the outstanding loans, would have been approximately $67 million, $76 million, and $78 million, as of December 31, 2017, and 2018, and March 31, 2019, respectively. The reserve for estimated losses under repurchase agreements was immaterial at all measurement dates.
The information in this Item 7.01 shall neither be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by the Company under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent as shall be expressly set forth by specific reference in such filing.
Forward-looking statements
This release contains statements that the company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance” or words of similar meaning. All 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. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further weakening of the Chinese economy and/or a further decline in the growth rate of consumer spending or housing sales in China; negative impact to the company’s businesses from international tariffs and trade disputes; potential weakening in the high efficiency boiler segment in the U.S.; significant volatility in raw material prices; inability of the company to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in the company’s replacement markets; foreign currency fluctuations; the company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the company’s businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; and adverse developments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this press release are made only as of the date of this release, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements.
