Milwaukee,
Wis.—Water
technology company A. O. Smith
Corporation (NYSE-AOS) today announced record first quarter net earnings of
$87.7 million or $.50 per share on
record first quarter sales of $740.0 million.
First quarter 2016 net earnings were $73.5 million or $.41 per
share. This is the fifth consecutive
year the company has achieved record first quarter sales and earnings
performance.
Sales in the quarter
ended March 31 grew approximately 16 percent compared with sales of $636.9
million during the same period in 2016. Sales in China grew
20 percent during the first quarter 2017 or grew 27 percent when excluding the
impact from the stronger U.S. dollar.
“The strength of both the
U.S. water heater industry and our consumer product demand in China is
encouraging,” noted Chairman and Chief Executive Officer Ajita G. Rajendra.
“With double digit sales growth in both operating segments in the quarter,
A. O. Smith is starting the year on solid footing.”
North America segment
First quarter sales for the
North America segment increased to $487.3 million compared with first quarter
2016 sales of $423.9 million. The
increase in sales was primarily due to higher volumes of residential and
commercial water heaters in the U.S. and Canada as well as pricing actions in
August 2016 related to steel cost increases and inflationary pressure on other
costs. The Aquasana water treatment business, which was acquired in August
2016, added $10.3 million to the company’s North America segment sales.
Segment operating earnings
of $104.2 million were approximately 13 percent higher than the $91.9 million
earned in the year ago quarter. The
favorable impact from higher volumes of water heaters and higher prices was
partially offset by higher steel and other input costs. First quarter 2017 operating margin of 21.4
percent declined slightly when compared to the first quarter 2016 operating
margin of 21.7 percent. The operating margin
of the newly acquired Aquasana business is lower than the segment average and
explained the overall margin decline for the segment in the first quarter.
Rest of World segment
Sales of this segment, which
is primarily comprised of China, Europe and India, increased approximately 19
percent in the first quarter of 2017 to $259.5 million from $217.4 million in
the year ago quarter. Continued strong
customer demand for the company’s premium products and a pre-buy in advance of
a price increase related to steel and other cost inflation, drove China sales
27 percent higher as measured in local currency and over 20 percent higher as
measured in U.S. dollars. Water treatment sales in China grew over 50 percent
and air purification sales grew over 80 percent in local currency.
Operating earnings for this
segment were $32.5 million compared with $26.9 million earned in the 2016 first
quarter. The impact to profits from
higher China sales was partially offset by higher selling, general and
administrative (SG&A) expenses in China. Higher selling and advertising costs to
support growth in China were the primary drivers of higher segment SG&A
expenses. Currency
translation reduced China earnings by approximately $2 million compared with
the prior year. The price increase in
China had a minimal impact to earnings in the first quarter. Segment
operating margin in the first quarter of 12.5 percent was essentially the same
when compared to the 12.4 percent operating margin in 2016.
Share
Repurchase and Other Items
During the first quarter of
2017, the company repurchased 606,850 shares of common stock at a total cost of
$30.1 million. Approximately 4.3 million
shares remained on the existing discretionary repurchase authority at the end
of the quarter.
Total debt as of March 31,
2017, was $369.4 million, resulting in leverage of 19.1 percent as measured by
the ratio of total debt to total capital.
Cash and investments, located outside the U.S., totaled $722.3 million
at the end of the quarter.
The company’s effective
income tax rate in the first quarter of 2017 was 27.2 percent. The rate was lower than the 29.1 percent rate
in the prior year quarter primarily due to a larger benefit associated with
stock-based compensation and a change in geographic earnings mix. The lower
effective tax rate compared with the effective rate a year ago benefited 2017
results by $0.01 per share. The company
expects its full-year effective income tax rate will be between 28.75 and 29
percent.
2017
Outlook
“Our outlook for 2017 is positive, and we are optimistic
we will grow revenues between nine and 10 percent,” commented Rajendra. “Thanks to our strong sales and earnings
growth this quarter, we increased the midpoint of our full-year earnings per
share guidance by $0.03 per share.
Excluding the impact from potential acquisitions, we now anticipate our
2017 earnings to be between $2.03 and $2.09 per share.”
A. O. Smith will broadcast a
live conference call at 10:00 a.m. (Eastern Daylight Time) today. The call can be heard on the company’s web
site, www.aosmith.com. An
audio replay 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,” “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 slowdown in the growth rate of the Chinese
economy and/or a decline in the growth rate of consumer spending in China;
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 future 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.