Milwaukee, Wis.—Water
technology company A. O. Smith Corporation (NYSE-AOS) today announced record
second quarter net earnings of $92.4 million or $.53 per share on second
quarter sales of $738.2 million. Net
earnings per share grew eight percent compared with second quarter 2016 net
earnings per share of $.49.
Sales in the quarter ended
June 30 grew almost 11 percent compared with sales of $667.0 million during the
same period in 2016. Sales increased over 12 percent when adjusted for the
impact from the stronger U.S. dollar against the Chinese currency.
“We continued to see solid
demand for our premium products in China with sales growth in local currency of
20 percent, led by water treatment and air purification,” commented Ajita G.
Rajendra, chairman and chief executive officer. “Sales of our commercial water
heaters and boilers in North America continued to be strong.”
North America segment
Second quarter sales for the
North America segment, which include U.S. and Canadian water heaters, boilers
and water treatment products, increased nearly nine percent to $470.7 million
compared with second quarter 2016 sales of $432.8 million. The increase in sales was primarily due to
higher volumes of commercial water heaters and boilers in the U.S. and pricing
actions in August 2016 related to higher steel costs and inflationary pressure
on other costs. Aquasana, acquired in
August 2016, added $13 million to the company’s North America segment sales.
North America segment
earnings of $109.2 million were approximately five percent higher than the
$104.2 million in the second quarter last year. The favorable impact to profits
from higher sales of commercial water heaters and boilers and the August 2016
pricing actions were partially offset by higher steel costs. Second quarter 2017 segment margin declined to
23.2 percent from 24.1 percent last year due to significantly higher steel
costs than the prior year quarter. The
margin on Aquasana products is lower than the segment average, which also
contributed to the margin decline.
Rest of World segment
Sales of this segment, which
is primarily comprised of China, Europe and India, increased approximately 14
percent in the second quarter of 2017 to $272.8 million from $239.8 million in
the year-ago quarter. Continued strong
customer demand for the company’s premium products, as well as a price increase
announced in the first quarter of 2017, drove China sales 20 percent higher in
local currency. A. O. Smith branded
water treatment sales grew 40 percent in local currency in the second quarter
of 2017, and air purification product sales quadrupled.
Segment earnings were $32.5
million compared with $33.0 million achieved in the 2016 second quarter. The impact to profits from higher China sales
was more than offset by higher steel costs, increased selling, general and
administrative (SG&A) expenses and a less profitable sales mix in
China. Advertising to support brand
building and expansion of water treatment and air purification retail outlets
in tier 2 and 3 cities were the primary drivers of higher SG&A
spending. Segment performance was
negatively impacted by approximately $2 million of China currency
translation. As a result of these
factors, second quarter 2017 segment margin of 11.9 percent was lower than the
13.8 percent segment margin during the same time last year. The company expects pricing actions and
reductions to advertising expenses will improve profitability in its Rest of
World segment in the second half of the year.
Share Repurchase and Other Items
During the first half of
2017, the company repurchased approximately 1.3 million shares of common stock
at a total cost of $66.2 million.
Approximately 3.6 million shares remained on the existing discretionary
authority at the end of the second quarter.
Total debt as of June 30,
2017, was $375.1 million, resulting in leverage of 18.9 percent as measured by
the ratio of total debt to total capital.
Cash and investments, located outside the U.S., totaled $740.9 million
at June 30, 2017. Cash provided by
operations during the first half of 2017 was $73.2 million compared with $155.1
million during the same period last year.
Higher earnings were more than offset by higher outlays for working
capital in the 2017 period, which resulted in lower cash flow compared with the
first half of 2016.
The company’s effective
income tax rate in the second quarter of 2017 was 27.8 percent. The rate was lower than the 29.8 percent in
the prior year quarter primarily due to lower state income taxes and a change
in the geographic earnings mix. The
lower effective tax rate compared with the effective rate a year ago benefitted
2017 results by $0.01 per share. The
company expects its full-year effective income tax rate will be approximately
28.5 percent.
2017 Outlook
“We expect continued solid
demand for our products and project our global sales will grow between 10 and
11 percent this year,” Rajendra shared. “With record results in the first half
of the year, we upgraded the midpoint of our 2017 guidance range and now expect
full-year 2017 earnings per share to be between $2.07 and $2.11. Our guidance excludes the impact from future
acquisitions,” concluded Rajendra.
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
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.