Milwaukee,
Wis.—Water technology company
A.
O. Smith Corporation (NYSE-AOS) today announced record third quarter net
earnings of $93.7 million or $0.54 per share. Earnings per
share grew 15 percent compared with third quarter 2016 earnings per share of
$0.47.
Sales in the quarter ended Sept. 30 increased nearly 10 percent
to $749.9 million compared with sales of $683.9 million during the same period
in 2016.
“We
saw double digit sales growth in the third quarter due to strong demand for our
Lochinvar branded boilers and mid-single digit growth in residential water heater
volumes in the U.S.,” noted Chairman and Chief Executive Officer Ajita G.
Rajendra. “Sales of our consumer products in China, particularly water
treatment and air purification, contributed to our growth, as well.”
“In
early September, we welcomed the Hague team to the A. O. Smith family, through
our acquisition of the U.S. water softener company. Hague fits squarely in our
acquisition strategy to expand our global water treatment platform. We look
forward to growing the business together and pursuing the global opportunities
that we believe Hague’s innovative and high quality products bring to A. O.
Smith,” Rajendra stated.
North
America segment
Third
quarter sales for the North America segment, which include U.S. and Canadian
water heaters, boilers and water treatment products, increased eight percent to
$486.0 million compared with third quarter 2016 sales of $450.8 million. The increase in sales was primarily due to
increased sales of boilers, higher volumes of residential water
heaters and pricing actions related to higher steel costs. Lochinvar branded products grew 17 percent in
the third quarter. U.S. water treatment
sales, comprised of recently acquired Hague branded products as well as a full
quarter of Aquasana branded products, incrementally added approximately $8
million to the company’s North America segment sales.
North
America segment earnings of $110.3 million were 10 percent higher than the
$100.5 million earned in the third quarter of the prior year. The favorable
impact to profits from higher sales of boilers and residential water heaters
and the pricing actions were partially offset by higher steel costs. These
factors drove third quarter 2017 segment margin higher to 22.7 percent compared
with last year’s segment margin of 22.3 percent.
Rest
of World segment
Sales
of this segment, which is primarily comprised of China, Europe and India,
increased approximately 12 percent in the third quarter of 2017 to $270.1
million compared with the year-ago quarter.
Higher demand for the company’s premium consumer products, as well as
pricing actions due to higher steel and other costs, drove China sales up
nearly 13 percent.
Segment earnings were
nine percent higher at $33.8 million compared with $31.1 million achieved in
the third quarter one year ago. The
positive impact to profits from higher China sales, including the pricing
actions, was partially offset by higher steel and installation costs and
increased selling, general and administrative (SG&A) expenses in
China. Costs associated with the expansion of retail outlets in tier 2
and 3 cities that sell the company’s water treatment and air purification
products and higher water treatment product development engineering costs were
the primary drivers of higher SG&A costs in China. Third quarter 2017
segment margin was 12.5 percent compared with 12.9 percent segment margin
during the same period last year due to these factors.
Share Repurchase and
Other Items
During
the first nine months of 2017, the company repurchased over 1.9 million shares
of common stock at a total cost of $103 million. Approximately 3.0 million shares remained on
the existing discretionary authority at the end of the third quarter.
Total
debt as of Sept. 30, 2017, was $449.7 million, resulting in leverage of 21.3
percent as measured by the ratio of total debt to total capital. Cash and investments, located outside the
U.S., totaled $767.9 million at Sept. 30, 2017.
Cash provided by operations during the first nine months of 2017 was
$150.2 million compared with $263.6 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 nine months of 2016.
Primarily
as a result of continued strong cash flow and escalating Pension Benefit
Guaranty Corporation (PBGC) premiums, the company made a $30.0 million
voluntary contribution to its pension plan during the third quarter of
2017.
The
company’s effective income tax rate in the third quarter of 2017 was 28.8
percent. The rate was lower than the
29.7 percent in the prior year quarter primarily due to lower state income taxes.
2017 Outlook
“We expect continued
solid demand for our products and project our global sales will grow between 11
and 12 percent this year,” Rajendra shared. “With record results in the first
nine months of the year, we upgraded the midpoint of our 2017 guidance range
and now expect full-year 2017 earnings per share to be between $2.12 and
$2.14. Our guidance excludes the impact
from future acquisitions,” continued 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.