Milwaukee,
Wis.—Global water technology company A. O. Smith Corporation (NYSE:AOS) today
announced a 24 percent increase in net earnings on record second quarter sales.
Net earnings
for the quarter ended on June 30 were $114.5 million or $.66 per share compared
with second quarter 2017 net earnings of $92.4 million or $.53 per share. Second quarter sales of $833.3 million were
13 percent higher than sales of $738.2 million during the same period last
year.
“Our North
American business performed solidly in the second quarter with sales of
residential and commercial water heaters and boilers all increasing,” Chairman
and Chief Executive Officer Ajita G. Rajendra commented. “Our operations are doing an excellent job of
managing through a volatile materials pricing environment.”
“The team is
preparing for next month’s launch of A. O. Smith-branded water treatment
products at all Lowe’s U.S. locations,” Rajendra continued. “We are excited about the prospects for this
business. We believe we offer innovative
products and a simplified decision process to customers interested in the
quality and safety of their home’s water.”
North America segment
Second
quarter sales for the North America segment increased more than 13 percent to
$534.2 million compared with second quarter 2017 sales of $470.7 million. Increased volumes of boilers and water
heaters, and pricing actions in response to increased steel prices contributed
to the sales increase. Sales of water
treatment products in North America added an incremental $7 million to sales
compared with the same period last year.
Segment
earnings of $124.9 million were more than 14 percent higher than 2017 second
quarter earnings of $109.2 million. The
favorable impact to earnings from higher volumes of boilers and water heaters,
along with the pricing actions, were partially offset by higher steel and other
input costs. Segment margin of 23.4
percent was slightly higher than the 2017 second quarter segment margin.
Rest of World segment
Second
quarter sales for the Rest of World segment increased 13 percent to $308.1
million compared with sales of $272.8 million in the 2017 second quarter. Sales in China increased 12 percent in the
second quarter, including a currency translation benefit of approximately $19
million. China sales grew four percent
in local currency. Higher sales of gas
tankless water heaters and water treatment products, as well as pricing actions
effective in mid-2017, were partially offset by lower sales of air purification
products and e-commerce sales compared with the prior year.
Segment
earnings of $34.7 million were nearly seven percent higher than the $32.5
million earned during the second quarter of 2017. Higher sales in China, including improved
pricing, were offset by increased engineering and advertising costs. In addition, higher depreciation and utility
costs and inefficiencies associated with the new water treatment plant opening
in China negatively impacted earnings. Segment margin of 11.3 percent was lower
than second quarter 2017 margin of 11.9 percent due to these factors. Currency
translation added approximately $2 million to segment earnings compared with
rates in the second quarter of 2017.
As previously
projected, the company experienced four percent local currency sales growth in
China in the first half of 2018, which was negatively impacted by lower
e-commerce sales partially due to a pre-buy late in 2017 and lower air purifier
sales. In the second half of 2018, the
company expects local currency sales in China to grow at a slightly higher rate
than the first half, or approximately six percent compared with last year. Sales are expected to be negatively impacted
in the second half of the year by high channel inventory levels believed to be
the result of a significant decline in the China housing market. For the year, the company projects more than
eight percent growth in China and five percent growth in local currency. The company remains confident in the
underlying fundamentals of its China business, including its well-known premium
consumer brand and reputation for innovative, reliable products.
Share repurchase and other items
During the
first half of 2018, the company repurchased approximately 1.1 million shares of
stock at a cost of $69.7 million. At its
July meeting, the company’s Board of Directors approved the repurchase of an
additional 2.5 million shares of stock.
The new authority is in addition to the authority to repurchase
approximately 1.3 million shares that remained at the end of June.
Cash provided
by operations was $173.2 million in the first half of 2018 compared with $73.2
million during the same period in 2017.
Higher earnings and lower investment in working capital contributed to
the increased cash flow. At the end of
June, the company had cash and marketable securities balances totaling $658.4
million located offshore and debt totaling $248.1 million. The company’s
leverage at the end of the second quarter, as measured by the ratio of total
debt to total capital, was 12.5 percent.
During the first half of 2018, the company repatriated approximately
$240 million in cash from outside the U.S., which was used to pay down floating
rate debt and improve the flexibility of its balance sheet.
The company’s
effective income tax rate in the second quarter of 2018 was 21.6 percent, lower
than the 27.8 percent rate during the 2017 second 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).
The lower effective income tax rate benefitted second quarter 2018 earnings per
share by $0.05 compared with 2017 rates.
Outlook for 2018
“We believe
our North America business will remain strong, bolstered by continued demand in
all parts of the business,” Rajendra said.
“We now
forecast total company sales growth between 9.5 and 10 percent in 2018. The impact of a weaker Chinese currency
compared to our April forecast reduced our guidance for full year sales by $22
million.”
“We increased
our adjusted 2018 earnings guidance to a range of $2.59 and $2.63 per share.
The midpoint of our adjusted 2018 earnings guidance represents a 20 percent
increase over 2017 adjusted earnings per share, and we project our second half
earnings to be better than the first half,” 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 or
housing sales 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.