A little more than two weeks after a short-seller’s research report called its China business into question, Milwaukee-based A.O. Smith Corp. provided additional details on its supply chain partnership with Jiangsu Huiyuan Supply Chain Management Co. or UTP.
J. Capital Research issued a report May 16 questioning if A.O. Smith had propped up its sales in China through loans to distributors. At the time, A.O. Smith called the report “inaccurate, unfounded and misleading.”
In a security filing with the SEC on Monday, A.O. Smith indicated UTP provides order-entry, warehousing and logistics support for around 70% of the company’s sales in China.
The filing also said UTP does provide asset-backed financing for some distributors.
“To facilitate its financing support business, UTP has collateralized lending facilities in place with multiple Chinese banks under which (A.O. Smith) 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,” the filing said.
The J. Capital report had suggested A.O. Smith did not have access to around $539 million in cash it has in China because the money was used for distributor loans and the company could be on the hook if distributors default.
In its Monday filing, A.O. Smith said the amount of financing subject to inventory repurchase has not exceeded $2.5 million at any measurement date.
The company also said UTP is required to indemnify A.O. Smith for any losses related to inventory repurchases.
The gross repurchase amount for outstanding loans was $78 million as of March 31, the filing said.
In a separate announcement Monday, A.O. Smith said its board increased its share repurchase program from $200 million to $300 million.
“With our cash position, strong balance sheet and confidence in our global business, we are increasing our 2019 share repurchase program by 50 percent to $300 million,” said Kevin J. Wheeler, president and chief executive officer.
A.O. Smith’s stock price has also taken a hit since the J. Capital report was published, falling from more than $48 per share on May 15 to $40.50 on Friday. The price is up around 2.5% on Monday, as of early afternoon.
