Jul. 18--Stock for A.O. Smith Corp. rallied sharply Friday on a mixed quarterly financial report, making it the second regional water-technology company to release earnings ahead of Milwaukee's third annual summit on the economics of water.

Late Thursday, Badger Meter Inc., which makes the meters that measure the value of an increasingly scarce and valuable commodity, reported record earnings for the second quarter and first half.

The chief executives of A.O. Smith and Badger, Paul Jones and Richard Meeusen, co-chair the Water Council, a trade group that represents the water engineering industries of southeastern Wisconsin.

Their organization is sponsoring Water Summit III on Monday at Discovery World, featuring water executives from as far away as the Middle East. Gov. Jim Doyle is scheduled to "discuss the future of the water industry." Even in a global slump, economists argue that water industries have international growth potential as demand increases for technologies that clean, recycle and conserve water. More than 1 billion people -- nearly one-fifth of the world's population -- lack access to safe drinking water, according to the United Nations.

A.O. Smith, a manufacturer of water heaters, said net earnings more than doubled to $21.3 million in the April-June period from $9.5 million in the same period one year earlier. The company's shares rallied $3.46 on Friday, or 9.7%, to close at $39.

The jump in earnings, however, stemmed largely from internal accounting changes related to its April merger with Smith Investment Co., an entity that existed mainly to hold a controlling share of A.O. Smith stock. By restructuring its capital base, it also expanded the number of outstanding shares, causing per-share earnings in the quarter to decline to 84 cents from $1 in the same period one year earlier.

The company also got a $1.9 million boost from a positive tax adjustment from its water-heater factory in China. But it mainly cited its cost-containment program for the buoyancy of its earnings. Given those factors, it raised its per-share earnings forecast this year to between $2.15 and $2.35; A.O. Smith previously expected 2009 earnings to be between $1.80 to $2.10 a share.

Sales for the quarter fell 20% to $498.7 million. The company cited softer demand in North America to invest in residential equipment such as water heaters. In addition to water heaters, the company makes electric motors.

"Given the current economic environment, both of our operating units performed well in the second quarter due to aggressive cost management and a relatively strong replacement market," Jones said.

A.O. Smith Corp.

2d quarter % 6/30 2009 2008 change Sales $498.7 $622.1 -20 Net income 21.3 9.5 124 EPS (diluted) 0.84 1.00 -16 6 months Sales $980.4 $1,193.6 -18 Net income 20.7 15.9 30 EPS (diluted) 1.19 1.67 -28

Figures in millions except for earnings per share. Percentages are based on unrounded sales and income figures.

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