Milwaukee, Wis.— A.
O. Smith Corporation
(NYSE-AOS) today announced record sales of $3.0 billion and net earnings of
$296.5 million, which included estimated charges of $81.8 million associated
with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform).
Sales for 2017 grew
nearly 12 percent from $2.69 billion in 2016. Sales in China grew 16 percent
during 2017 and grew 18 percent when the impact from the stronger U.S. dollar
is excluded.
Net earnings of
$296.5 million or $1.70 per share were lower than 2016 net earnings of $326.5
million or $1.85 per share. The decrease
in earnings was due to estimated one-time charges associated with U.S. Tax
Reform, totaling $81.8 million or $.47 per share. Adjusted net earnings of $378.3 million or
$2.17 per share, which excluded the one-time U.S. Tax Reform-related charges,
increased 16 percent compared with net earnings of $326.5 million, or $1.85 per
share, the previous year.
In the fourth
quarter, the company earned $22.7 million or $.13 per share on sales of $768.6
million. Fourth quarter 2017 adjusted net
earnings were $104.5 million or $.60 per share and excluded $81.8 million or
$.47 per share of one-time charges associated with U.S. Tax Reform. Net earnings for the same three-month period
in 2016 were $82.7 million or $.47 per share on $698.1 million of sales.
A. O. Smith is providing non-GAAP measures
(adjusted net earnings, adjusted earnings per share and adjusted effective
income tax rates) for 2017 and the fourth quarter of 2017 that exclude the
company’s estimate of its total tax charges in those periods related to U.S.
Tax Reform. Reconciliations to measures
on a GAAP basis are provided in the financial information included with this
press release.
“2017 marked another record year for A. O.
Smith,” Ajita G. Rajendra, chairman and chief executive officer,
announced. “Our double-digit sales
growth in 2017 was driven by continued strong demand for our consumer products
in China and positive end markets for our water heaters and boilers in North
America. China sales exceeded the $1
billion milestone and were driven by 35 percent growth in water treatment sales
and a near doubling of air purification sales.
China on-line sales reached $250 million in 2017.”
North
America segment
Sales for the North America segment in 2017
were $1.90 billion, a nine percent increase over 2016 sales of $1.74 billion.
The increase in sales was primarily due to higher volumes of water heaters and
boilers and pricing actions related to steel cost increases. Water treatment
sales, comprised of Hague Quality Water acquired in September 2017, as well as
a full year of Aquasana sales, incrementally added approximately $40 million to
the company’s North America segment sales.
Segment earnings increased 11 percent in 2017
to $428.6 million compared with $385.9 million in 2016. The earnings increase
was driven primarily by higher water heater and boiler volumes and pricing
actions, which were partially offset by higher steel costs. As a result of lower selling, general and
administrative (SG&A) expenses as a percentage of sales, 2017 segment
margin of 22.5 percent improved from 2016 segment margin of 22.1 percent.
Fourth quarter 2017 sales for the segment of
$460.8 million were six percent greater than the prior year’s fourth quarter
sales of $435.6 million. The increase in sales was primarily due to higher
volumes of boilers and commercial water heaters and pricing actions related to
steel cost increases. Water treatment sales incrementally added approximately
$9 million to North America fourth quarter segment sales.
Fourth quarter segment earnings of $104.9
million were 17 percent higher than segment earnings of $89.4 million in the
fourth quarter of the prior year. The
favorable impacts from higher sales of boilers and commercial water heaters,
pricing actions in the U.S. and lower enterprise resource planning (ERP) costs
were partially offset by higher steel costs.
As a result of these factors, fourth quarter segment margin of 22.8
percent was higher than the fourth quarter segment margin of 20.5 percent one
year ago.
Rest of
World segment
Sales of this segment increased 16 percent in
2017 to $1.12 billion compared with 2016 sales of $965.6 million. China sales
increased 16 percent and grew 18 percent when the impact from the stronger U.S.
dollar is excluded. An increase in
demand for the company’s consumer products in the region, led by water
treatment and air purification products, and pricing actions primarily due to
higher steel costs and higher fees paid to installers contributed to the strong
sales growth in China. Water heater and water treatment sales in India
increased approximately $8 million or over 40 percent in 2017 compared with
2016.
Earnings for this segment increased 16
percent in 2017 to $149.3 million compared with $129.1 million earned the prior
year. Higher sales in China, including the price increase, were partially
offset by higher steel costs, higher fees paid to installers and increased
SG&A costs. Expansion of water treatment and air purification product
retail outlets in tier 2 and 3 cities, higher advertising related to brand
building in the company’s newer product categories and higher water treatment
product development engineering costs were the primary drivers of higher SG&A
in China. Segment margin of 13.4 percent
in 2017 was essentially the same as the prior year.
Segment sales for the fourth quarter 2017 of
$313.8 million were 17 percent higher than the same period in the previous
year. Sales in China increased 16 percent in the quarter, driven by pricing
actions primarily due to higher steel costs, higher fees paid to installers and
higher demand for the company’s consumer products in the region. Sales in India grew over 40 percent compared
with the same period in 2016.
Segment earnings of $50.8 million were 33
percent higher in the fourth quarter of 2017 compared with the same three-month
period in 2016, driven by the impact from higher India sales and China sales,
including the price increase. Higher steel costs and higher fees paid to
installers partially offset the impact of higher China sales. Segment margin
for the period was 16.2 percent compared with 14.2 percent in 2016, primarily
due to improved margin for the company’s water treatment products sold in China,
lower China selling and advertising costs as a percent of sales and improved
performance in India.
Share
Repurchase and Other Items
During the fourth quarter of 2017, the
company repurchased approximately 591,000 shares of its common stock at a total
cost of $35.8 million. For 2017,
repurchases totaled approximately 2.5 million shares at a cost of $139.1
million. At the end of 2017,
approximately 2.4 million shares remained on the company’s repurchase
authority.
Total debt was $410.4 million as of Dec. 31,
2017, resulting in leverage of 19.9 percent as measured by the ratio of total
debt to total capital. Cash and marketable securities, primarily located
outside the U.S., totaled $820.0 million, and the company’s net cash position
was $409.6 million at the end of 2017.
As previously forecasted, cash provided by operations of $326.4 million
was lower than the $446.6 million provided in 2016. Higher adjusted net
earnings in 2017 were more than offset by higher outlays for working capital
primarily due to higher than anticipated positive cash flows received late in
the fourth quarter of 2016.
The 2017 effective income tax rate was 43.1
percent, higher than the 29.4 percent recorded the previous year due to the
one-time charges associated with U.S. Tax Reform. The adjusted effective income tax rate
associated with 2017 net earnings, excluding the impact of U.S. Tax Reform, was
27.4 percent. The adjusted effective
income tax rate was lower than the rate realized the previous year primarily
due to lower U.S. state income taxes and higher deductions for stock-based
compensation. The lower adjusted
effective income tax rate, compared with the 28 percent effective income rate
originally projected for 2017, benefitted 2017 results by $.02 per share.
The company’s fourth quarter tax expense
included $81.8 million, primarily related to the mandatory repatriation tax on
undistributed earnings under U.S. Tax Reform, which will be paid over eight
years. The company projects its 2018
effective income tax rate to be between 22 and 22.5 percent.
“A. O. Smith continues to invest in its
business while rewarding its shareholders.
On Jan. 19, we announced a 29 percent increase in our quarterly dividend
rate, which is the 13th consecutive year of dividend increases,” Rajendra
continued. “With the acquisition of U.S. water softener company, Hague, we
broadened our technologies that address the global water treatment market. With
substantial cash and marketable securities balances and a significant amount of
incremental borrowing capacity, we believe we have the resources available to
take advantage of additional global opportunities that would add long-term
value as well as return cash to shareholders.”
Outlook
for 2018
“2017 was another successful year for A. O.
Smith driven by strong sales growth and global performance,” Rajendra observed.
“We were also honored to join the S&P 500 index in July 2017, which was a
significant milestone in our company’s rich history.”
“We
believe our growth drivers are intact and that our replacement demand remains
substantial, which leads us to expect 2018 earnings to be between $2.50 and
$2.58 per share. Our guidance includes the benefit related to our lower
projected tax rate under U.S. Tax Reform.
The midpoint of our 2018 earnings guidance represents a 17 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 Standard 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; 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.