
Global water
technology company A. O. Smith
Corporation (the “Company”) (NYSE: AOS) today announced 2020
sales of $2.9 billion and net earnings of $344.9 million or $2.12 per share.
Sales were
approximately three percent lower than sales of $3.0 billion reported in 2019,
driven primarily by pandemic-related sales declines in the first half of 2020
in China. Net earnings in 2019 were $370.0 million or $2.22 per share.
Adjusted earnings
of $351.2 million, or $2.16 per share, were approximately five percent lower
than 2019 net earnings and excluded $6.3 million, or $0.04 per share, of
after-tax severance and restructuring charges in 2020 related to aligning the
business to current market conditions.
Record sales of $834.5
million in the fourth quarter of 2020 increased approximately 11 percent compared
with sales of $750.9 million in the same period in 2019, primarily due to
higher residential water heater volumes in North America and higher sales in
China.
In the fourth
quarter of 2020, the Company achieved net earnings of $120.0 million, or $0.74
per share, which were approximately 31 percent higher than net earnings of $91.3
million, or $0.56 per share, in the fourth quarter of 2019.
The Company is
providing non-GAAP measures (adjusted earnings, adjusted earnings per share and
adjusted segment earnings) for 2020 that exclude severance and restructuring
charges related to its business alignment actions. Reconciliations to measures
on a GAAP basis are provided in the financial information included with this news
release.
“With the safety
and well-being of our employees as the highest priority, I’m extremely proud of
our entire team supporting our customers with essential water heating and water
treatment products to combat the pandemic in an indisputably challenging year. We
believe our strong balance sheet and the stability afforded by our replacement demand
in the U.S., which we estimate at approximately 85 percent of water heater and
boiler units sold, put us in a solid position to successfully navigate through
the impact of the pandemic,” said Kevin J. Wheeler, chairman and chief executive
officer. “Our North America water treatment sales organically grew 14 percent
in 2020, and we believe the U.S. residential industry shipped a record number
of tank and tankless water heaters in 2020, exceeding 10 million units. We saw
progressive improvement in consumer demand for our products in China throughout
2020 and achieved high single-digit operating margins in that region in the
second half of 2020.”
North America segment
Sales of the North America segment in 2020 of $2.1 billion increased
approximately two percent compared with 2019. Higher residential water heater volumes,
growth in water treatment, as well as a full year of Water-Right sales were
partially offset by lower U.S. commercial water heater volumes, lower boiler
sales and a water heater sales mix composed of more electric models which have
a lower selling price.
North America segment earnings of $503.5 million increased approximately
three percent compared with 2019. The increase in earnings was driven by the
favorable impact to earnings from higher residential water heater volumes, growth
in water treatment sales, a full year of Water-Right sales and lower material
costs. The negative impact to earnings from lower volumes of boilers and
commercial water heaters and the water heater mix skew to electric partially
offset these factors. The resulting segment margin of 23.8 percent was slightly
higher than in 2019.
Adjusted segment
earnings of $506.2 million excluded $2.7 million in pre-tax severance costs
resulting in adjusted segment margin of 23.9
percent.
Record fourth quarter North America segment sales of $560.9 million
increased approximately seven percent compared with the same period in 2019,
primarily driven by higher residential water heater volumes.
Record fourth
quarter North America segment earnings of $137.9 million increased
approximately seven percent from the same period in 2019. The increase in
earnings was primarily driven by the favorable impact to earnings from higher
residential water heater volumes in North America and lower steel costs. These
factors were partially offset by higher logistics costs. As a result, fourth
quarter segment margin of 24.6 percent was slightly higher than 24.5 percent in
2019.
Rest of World segment
Rest of World segment sales in 2020 of $800.3 million declined approximately
14 percent from 2019. Pandemic-related lockdowns and weak end-market demand,
primarily in China in the first half of the year, and a higher mix of
mid-priced products resulted in lower sales. Currency translation of China sales
favorably impacted sales by approximately $9 million. India sales were also
negatively impacted by the pandemic-related economic disruption and declined to
$31.0 million compared with $38.6 million in 2019.
Rest of World segment earnings at breakeven in 2020 declined
significantly compared with segment earnings of $40.2 million in 2019. In
China, the unfavorable impact to earnings from lower sales and a higher mix of
mid-priced products, which have lower margins than higher-priced products, more
than offset reductions in SG&A costs and temporary waivers for required social
insurance contributions. As a result of these factors, segment operating margin
was zero compared with 4.3 percent in 2019.
Adjusted segment
earnings of $5.0 million in 2020 excluded $5.0 million in pre-tax severance and
restructuring costs resulting in adjusted segment margin of 0.6
percent.
Fourth quarter Rest of World segment sales of $279.0 million improved approximately
19 percent compared with the fourth quarter of 2019. Currency translation of
China sales favorably impacted sales by approximately $14 million. Constant
currency China sales improved 15 percent driven by mid-single-digit growth in
end market demand led by water treatment, replacement water treatment filters
and gas tankless water heaters and a favorable mix between product categories
compared with the fourth quarter of 2019.
Fourth quarter Rest
of World segment earnings of $31.3 million improved significantly from $1.5
million in the same quarter in 2019. In China, the favorable impact to earnings
from higher volumes, reductions in SG&A costs and lower material costs
drove higher earnings. As a result of these factors, fourth quarter segment
margin improved to 11.2 percent compared with 0.6 percent in 2019.
Balance sheet, liquidity and share repurchases
As of December
31, 2020, the Company had cash and marketable securities balances totaling $689.6
million and undrawn borrowing capacity on its credit facility totaling $500.0
million. The Company’s total debt was $113.2 million at the end of December,
and its leverage ratio was 5.8 percent as measured by total debt to total
capitalization. During 2020, the Company repatriated approximately $190 million
in overseas cash to the U.S.
Cash provided by operations of $562.1 million during
2020 increased from $456.2 million in 2019, primarily as a result of lower investment
in working capital which was partially offset by lower earnings in 2020 compared
with the prior year.
On January 27, 2021, the Board of
Directors of the Company approved adding 7,000,000 shares of common stock to an
existing discretionary share repurchase authority. Including the additional
shares, the Company has approximately 8.6 million shares available for
repurchase. Today, the Company announced its intention to spend approximately $400
million to repurchase its common stock in 2021 through a combination of 10b5-1
plans and open market purchases.
Operations and supply chain
The Company
remained operational with no significant COVID-19-related disruptions within
its plants or supply chain in the recent quarter. Lead times were extended in
the second and third quarters due to self-quarantine absenteeism mandated by
the Company’s COVID-19 prevention measures. The Company noted stability in its
North America water heater manufacturing lead times in the fourth quarter as a
result of adding manufacturing shifts, hiring temporary workers and shifting
some production.
The Company
has undertaken numerous and meaningful steps to protect its employees,
suppliers and customers during the pandemic. These important steps, which in certain
cases reduce efficiency, include continuous communication and training to
employees on living and working safely during a pandemic, plant accommodations
and reconfigurations to maintain social distancing, providing masks for all
employees, implementation of sanitizing stations, employee temperature-taking and
regular, proactive deep cleaning and sanitization of all facilities, among
others.
Outlook
“We
are encouraged by the resiliency of our North America water heater replacement demand
and the progressively improving year-over-year growth in consumer demand for
our products in China. We continue to expect tailwinds behind our North America
water treatment product sales driven by drinking water health and safety concerns,” noted Wheeler. “However, much
uncertainty remains about the duration and long-term implications of the
pandemic, particularly its impact on the U.S. commercial construction market.
“Under the assumption that the conditions
of our business environment and those of our suppliers and customers are
similar throughout 2021 to what we have experienced in recent months and that
they do not deteriorate as a result of further restrictions or shutdowns, today
we announce our full-year 2021 earnings guidance in a range between $2.40 and $2.50
per share. The mid-point of the guidance range represents an increase of 13
percent compared with our 2020 adjusted earnings results.
“We continue to believe that we have
ample liquidity and flexibility to meet the needs of our business, return cash
to shareholders and take advantage of organic and acquisitive growth
opportunities. We remain focused on keeping our employees safe, while serving
our customers and continuing to deliver on our mission to provide hot and clean
water necessary to keep communities and households safe during the pandemic.”
A. O. Smith
will broadcast a live conference call at 10:00 a.m. Eastern Standard Time today.
The call can be heard on the Company’s website, www.aosmith.com. An audio replay of
the call will be available on the Company’s website 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: negative
impacts to the Company’s businesses, including demand for its products, particularly
commercial products, operations and workforce dislocation and disruption,
supply chain disruption and liquidity as a result of the severity and duration
of the COVID-19 pandemic; a failure to recover or a further weakening of the
Chinese economy and/or a failure to recover 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 further weakening
in the high-efficiency boiler segment in the U.S.; significant volatility in
raw material availability and prices; inability of the Company to implement or
maintain pricing actions; a failure to recover or further 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 news 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.
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