Milwaukee, Wis.—Global water technology
company A. O. Smith Corporation
(NYSE-AOS) today announced third quarter net earnings of $104.6 million or
$0.61 per share
on third quarter sales of $754.1 million. Net earnings per share grew 13
percent compared with third quarter 2017 net earnings per share of $0.54.
Sales in the quarter
ended Sept. 30 were one percent higher compared with sales of $749.9 million
during the same period in 2017.
“We experienced softer water
heater sales in the U.S. and China than expected,” said President and Chief
Executive Officer, Kevin Wheeler. “We
believe a decline in water heater industry volumes in the U.S. and weaker
housing growth in China drove the softness in the quarter.”
“A bright spot in China was
our sales of water treatment products, which grew significantly in the
quarter,” continued Wheeler. This
growth reaffirms our belief of the growing consumer desire for safe drinking
water in that country, as well as our capabilities to bring the best products
to the market. Likewise, in the U.S., we launched A. O. Smith-branded water
treatment products in more than 1,700 Lowe’s stores across the country. We
understand that water quality is a growing concern for families and our
comprehensive line of products gives shoppers a wide array of options to
effectively improve the overall quality and safety of their water.”
North America segment
Third quarter sales of $486.9
million for the North America segment, which include U.S. and Canadian water
heaters, boilers and water treatment products, were essentially flat compared
with third quarter 2017. Pricing actions in 2018 on water heaters and boilers related to higher
steel and freight costs were more than offset by the effects of lower volumes of water heaters in the U.S.
North America water treatment sales, comprised of Aquasana, Hague and
the launch of the A. O. Smith branded water treatment products at Lowe’s,
incrementally added approximately $9 million to the company’s North America
segment sales in the quarter compared with 2017.
North America segment
earnings of $105.6 million were four percent lower than the same quarter of the
prior year. The unfavorable impact to profits from lower sales of water heaters
and higher steel and freight costs was partially offset by pricing actions.
Spending associated with the launch of water treatment products at Lowe’s
amounted to approximately $2 million. As a result of these factors, North
America segment margin of 21.7 percent was lower than the 22.7 percent segment
margin in same quarter last year.
Rest of World segment
Sales of this segment, which
is primarily comprised of China, Europe and India, increased approximately one
percent in the third quarter of 2018 to $274.1 million compared with the
year-ago quarter. Higher sales of water
treatment and air purification products in China were partially offset by a
decline in electric water heater sales compared with the prior year. Currency
translation reduced sales by approximately $6 million compared with the third
quarter 2017.
Segment earnings were approximately 16 percent higher
at $39.1 million compared with the third quarter of 2017, primarily due to
lower expenses associated with employee incentive programs in China and smaller
losses in India. As a result, third quarter 2018 segment margin of 14.3
percent was significantly higher than the 12.5 percent segment margin achieved
in the same period in 2017.
Share repurchase and other items
During the first nine months
of 2018, the company repurchased approximately 1.7 million shares of common
stock at a total cost of $106.0 million. Approximately 3.2 million shares
remained on the existing discretionary authority at the end of the third
quarter.
Cash and investments, located
outside the U.S., totaled $617.8 million at Sept. 30, 2018. Cash provided by operations during the first
nine months of 2018 was $289.2 million compared with $150.2 million during the
same period last year. Higher earnings
and a smaller investment in working capital were the primary drivers of higher
cash flow compared with the same period last year. As a result of strong cash
flow and expectations that it will continue, the company increased its dividend
two times in 2018. Each of the increases
was over 20 percent.
Total debt as of Sept. 30,
2018, was $193.3 million, resulting in leverage of 9.9 percent as measured by
the ratio of total debt to total capital.
The company repatriated nearly $300 million of cash during the first
nine months of 2018 using the proceeds to repurchase shares and pay down
floating rate debt.
The company’s effective
income tax rate in the third quarter of 2018 was 20.5 percent. The rate was lower than the 28.8 percent in
the prior year quarter primarily due to lower federal income taxes related to
tax reform. The lower effective income
tax rate compared with the effective rate a year ago benefitted third quarter
2018 results by $0.06 per share. The
company expects its full-year effective income tax rate will be approximately
21 percent.
2018 outlook
“We do not expect sales of
water heaters in the U.S. will be as strong as we previously forecasted,”
Wheeler shared. “Based on our shipments
in September, we believe residential water heater industry volumes will be down
approximately 100,000 units in the second half of the year compared with last
year, but increase by 250,000 to 300,000 units for the total year. Based on year-to-date shipments and a
difficult fourth quarter comparison, we expect 2018 commercial water heater
industry volumes will decline by approximately five percent compared with last
year.”
“We believe our China sales
will continue to be negatively impacted by significantly slower housing growth
caused by deteriorating consumer confidence related to a weakening economy and
international trade issues. We expect sales in China in local currency to grow
approximately three percent this year.”
“As a result of these
factors, we now expect 2018 total company sales growth of approximately seven
percent compared with 2017, and we modestly reduced our 2018 adjusted EPS
guidance range and now expect full-year 2018 adjusted earnings per share to be
between $2.57 and $2.60 per share,” Wheeler shared.
“We remain confident with the long-term fundamental
drivers of our core global business growth: household formation, drinking water
safety, and energy-efficient technologies,” concluded Wheeler.
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 or our key markets and/or a further 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.