Milwaukee, Wis. — Global water technology company A.
O. Smith Corporation
(NYSE: AOS) today announced second quarter net earnings of $102.1 million or
$0.61 per share on second quarter sales of $765.4 million. Earnings per share
declined eight percent compared with second quarter 2018 earnings of $0.66 per
share. Sales in the quarter ended June 30 were eight percent lower compared
with sales of $833.3 million during the same period in 2018.
“The second quarter proved to be challenging, largely due to
difficult revenue growth comparisons and the overall macroeconomic environment
in China,” said Kevin Wheeler, president and chief executive officer. “Performance
in North America remained steady despite expected lower water heater volumes in
the second quarter.”
“We believe our stable North America replacement business,
the growth drivers in water treatment solutions and boilers across North
America and favorable long-term demographics in China and India, coupled with
our strong balance sheet, well position A. O. Smith to enhance shareholder
value. Despite the continued challenging consumer demand environment and
previously disclosed elevated channel inventory levels in China, we remain
confident in our long-term business model and our ongoing investment in
innovation in that region,” commented Wheeler.
North America segment
Second quarter sales for the North America segment were $524.0
million, a two percent decrease from $534.2 million recorded in the same period
in 2018. Lower residential water heater volumes during the quarter were due to
a second quarter 2018 pre-buy in advance of a price increase, and were
partially offset by the impact of mid-2018 pricing actions. In addition, the
recently acquired Water-Right business added approximately $14 million to sales
in the quarter.
Segment earnings of $122.9 million were down two percent from
2018 second quarter earnings of $124.9 million. The favorable impact from
mid-2018 pricing actions was more than offset by the unfavorable impact from
lower water heater volumes and higher steel and other costs. As a result,
second quarter 2019 segment margin of 23.5 percent was essentially the same as
last year.
Rest of World segment
Second quarter sales for the Rest of World segment declined 19
percent to $249.1 million compared with sales of $308.1 million in the 2018
second quarter. China sales declined 16 percent in local currency, primarily
related to previously disclosed channel inventory build which occurred in the first
half of 2018 and did not repeat in 2019. The weaker Chinese currency
unfavorably impacted sales by approximately $16 million. India sales grew approximately
30 percent in constant currency compared with the same period in 2018.
Segment earnings of $22.4 million declined 35 percent compared
with second quarter 2018 earnings of $34.7 million. The impact to profits from
lower China sales more than offset the benefits to profits from lower selling,
general and administrative expenses. Weaker China currency translation
negatively impacted earnings by approximately $2 million. As a result of these
factors, segment margin declined to 9.0 percent from 11.3 percent in the same
quarter in 2018.
Share repurchases and
other items
During the first half of 2019, the Company repurchased
approximately 2.8 million shares of common stock at a cost of $132.6 million.
Approximately 6.3 million shares remained on the Company’s existing repurchase
authority at the end of June.
Interest costs were higher in the second quarter than a year
ago due to the acquisition of Water-Right in early April. For the year, the Company
expects interest expense to be approximately $11 million.
Cash provided by operations was $143.7 million in the first
half of 2019 compared with $173.2 million in the same period of 2018. Lower
earnings and higher working capital investment resulted in lower cash flow from
operations.
At the end of June, the Company had cash balances totaling $577.8
million located primarily offshore. The Company’s leverage ratio, as measured
by total debt to capital, was 17.2 percent at the end of the second quarter.
2019 outlook
“We continue to see prolonged headwinds in the appliance market
in China. As a result of weakness in
consumer demand and recent communications with key customers in China
indicating that they will scale back their purchases in the third quarter due
to continued elevated channel inventory levels, our outlook for the back half
of the year includes a year-over-year decline in China sales,” noted Wheeler.
“We project full year China sales to be down between 16 and 17 percent
year-over-year in local currency terms and 19 and 20 percent after a three
percentage point currency headwind. As a result, we have revised our full
year guidance to $2.35 to $2.41 earnings per share.”
A. O. Smith will broadcast a live conference call at 10 a.m.
Eastern Daylight time today. The call can be heard on the company’s web site, www.aosmith.com. An audio reply of the call will be available on the company’s
web site after the live event.
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.
About A. O. Smith
A.
O. Smith Corporation, with headquarters in Milwaukee, Wis., is a global leader
applying innovative technology and energy-efficient solutions to products
manufactured and marketed worldwide. Listed on the New York Stock Exchange
(NYSE), the company is one of the world's leading manufacturers of residential
and commercial water heating equipment and boilers, as well as a manufacturer
of water treatment and air purification products. For more information, visit www.aosmith.com.
SOURCE
A. O. Smith Corporation
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