A.O. Smith Corporation

On May 16, 2019, J Capital Research published a report raising questions about A.O. Smith’s revenue from China as well as its access to $539 million—or about 84% of the Company’s total cash at year end 2018—sitting in China.

On this news, the Company’s share price fell sharply during intraday trading, thereby injuring investors.

The complaint filed in this class action alleges that throughout the Class Period, Defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects. Specifically, Defendants failed to disclose to investors: (1) that the Company had undisclosed business connections and entanglements with UTP through which it funneled up to 75% of its China product sales; (2) that the Company had used UTP to engage in channel stuffing by artificially inflating inventories purportedly sold through distributors that were not based on consumer demand, thereby approximately doubling the normal level of inventory at such distributors; (3) that the Company had used its UTP relationship to artificially inflate the sales figures it reported to investors by as much as 8% and to conceal worsening sales trends that the Company was experiencing in China; (4) that the Company’s sales growth had been primarily in lower margin products as its higher priced products were being undercut by competition in “second-tier” Chinese cities, causing the Company to experience significant market pressures; (5) that the Company had increased its cash reserves in China to over $530 million in furtherance of its channel stuffing and sales manipulation scheme, encumbering the Company’s ability to repatriate the cash for use it for capital expenditures; and (6) as a result, the Company’s public statements were materially false and misleading at all relevant times.