Milwaukee, Wis.—A. O. Smith Corporation (NYSE:AOS) today
announced net earnings of $98.8 million or $0.57 per share on record sales of
$788.0 million for the first quarter of 2018.
Sales were 6.5 percent higher than sales of $740.0 million reported in
the same quarter of 2017. Net earnings
in 2017 were $87.7 million, or $0.50 per share.
Adjusted net earnings of $103.8 million or $0.60 per share
were over 18 percent higher than the first quarter of 2017 and excluded $5.0
million or $.03 per share of after-tax restructuring and impairment charges
related to the closing of the company’s commercial water heater plant in
Renton, Wash., and transfer of production to plants in Tennessee and South
Carolina.
A. O. Smith is providing non-GAAP measures (adjusted net
earnings, adjusted earnings per share and adjusted segment earnings) for 2018
that exclude the restructuring and impairment charges related to the plant closing. Reconciliations to measures on a GAAP basis
are provided in the financial information included with this press release.
Earlier in the month, A. O. Smith announced it was named the
primary supplier of water treatment products to all Lowe’s home improvement
stores in the U.S. The transition to the
A. O. Smith brand at Lowe’s will take place beginning in August. The company
expects sales of approximately $15 million and a small loss due to start-up and
transition costs from the new business in 2018.
“The key fundamentals
of our business: organic growth, stable replacement demand, innovation and new
products with features and benefits that consumers want and can afford
continued to remain in place. We are pleased to deliver solid performance in
the face of higher costs, particularly higher steel prices,” Chairman and Chief
Executive Officer Ajita Rajendra noted. “We established a noteworthy start to
2018.”
“The new business at Lowe’s underscores our strong
relationship with this important customer and represents our ability to
accelerate growth of our North American water treatment product line,” Rajendra
continued.
North America segment
Sales of the North America segment were $501.7 million in
the first quarter, a three percent increase over the same period in 2017. Increased boiler volumes and increased sales
due to pricing actions for water heaters in mid-2017 in response to higher
steel costs were partially offset by lower water heater volumes in Canada. North America water treatment sales incrementally
added approximately $8 million to first quarter segment sales.
Segment earnings of $106.0 million were nearly two percent
higher than the $104.2 million earned in the first quarter of last year. The 2017 pricing actions and the impact to
earnings from higher boiler volumes were partially offset by higher steel and
other costs. Segment earnings included
$6.7 million of pre-tax charges associated with the Renton plant closing.
Adjusted segment margin improved to 22.5 percent compared with segment margin
of 21.4 percent for the first quarter of 2017 due to the factors identified
above.
As a result of significantly higher steel prices and
inflationary pressure on freight and other costs since the beginning of 2018,
the company announced a price increase of up to 12 percent on its U.S. water
heater products effective in early June.
The company expects the price increase to average approximately 10
percent.
Rest of World segment
First quarter sales for the Rest of World segment increased
13 percent over the 2017 first quarter to $293.8 million. In China, sales increased 13 percent
including approximately $21 million of benefit from currency translation due to
the appreciation of the China currency compared with the prior year. In local currency terms, sales grew four
percent and were negatively impacted by a pre-buy in the fourth quarter of
2017. Pricing actions in mid-2017,
primarily due to higher steel and installation costs, as well as higher demand
for gas tankless water heaters and water treatment products, contributed to
higher sales and were partially offset by a significant decline in air
purification product sales primarily due to improved air quality in China.
First quarter segment earnings of $36.1 million were
approximately 11 percent higher than the $32.5 million earned in last year’s
first quarter. Higher China sales,
including the price increase, were partially offset by higher steel costs,
selling and engineering expenses associated with new product development and
the negative impact to earnings from lower air purification product sales. Currency translation added approximately $3
million to segment earnings compared with rates in the first quarter of
2017. Segment margin was 12.3 percent in
the first quarter, a modest decrease from first quarter 2017 margin of 12.5
percent.
Share repurchase and
other items
During the first quarter, the company repurchased
approximately 520,000 shares of common stock for a total of $33 million. Approximately 1.9 million shares remained on
the company’s existing repurchase authority as of March 31.
The company’s leverage at the end of the first quarter, as
measured by the ratio of total debt to total capital, declined to 14.6 percent
from 20.0 percent at the end of 2017.
The reduction was partially due to the repatriation of over $210 million
of cash from outside the U.S., which was used to pay down floating rate
debt. Cash provided by operations during
the first quarter was $43.2 million; the company used $11.5 million in cash
during the first quarter of last year.
First quarter 2018 cash flow benefited from higher adjusted net earnings
and smaller increases in working capital compared with one year ago. At the end of March, the company had cash and
marketable securities balances totaling $679.7 million located offshore; its
net cash position was approximately $386.5 million.
The company’s effective income tax rate in the first quarter
of 2018 was 21.2 percent, lower than the 27.2 percent rate during the 2017
first quarter. The lower rate was due to
lower federal income taxes resulting from the U.S. Tax Cut and Jobs Act (U.S.
Tax Reform), which was partially offset by lower stock-based compensation tax
benefits. The lower effective income tax
rate benefitted first quarter 2018 earnings by $0.04 per share compared with
2017 rates.
Outlook for 2018
“After one quarter, our outlook for our global water heating
and water treatment products is positive,” Rajendra said. “We expect organic growth, supported by
stable water heater replacement demand, will result in sales growth for the
year between 10 and 10.75 percent. This
leads us to increase our adjusted 2018 earnings guidance to a range of $2.55 to
$2.61 per share. The midpoint of our adjusted 2018 earnings guidance represents
a 19 percent increase over 2017 adjusted earnings per share,” Rajendra
concluded.
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, and an audio
replay of the call will be available on the web site following 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 slowdown in the growth rate of the Chinese economy or
our key markets 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; negative impact to the
company’s businesses from international tariffs and trade disputes; the impact
of potential information technology or data security breaches; changes in
government regulations or regulatory requirements; the impact of U.S. Tax
Reform and projections for effective tax rates and one-time expenses under the
new law 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.