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A. O. Smith reports higher earnings on 16 percent increase in sales; raises 2013 outlook
Milwaukee, Wis.-A. O. Smith Corporation (NYSE:AOS) today announced third quarter net earnings of $46.2 million or $0.50 per share compared with $37.0 million or $.40 per share last year.
Third quarter 2013 adjusted earnings of $50.4 million or $0.54 per share exclude after-tax costs of $1.0 million related to the transfer of residential water heater manufacturing from the Fergus, Ontario, plant and $3.2 million in non-operating pension costs. Third quarter 2012 adjusted earnings were $34.1 million or $.37 per share.
Included in third quarter 2013 net earnings and adjusted earnings were approximately $3.0 million of higher income tax benefits than previously estimated, primarily related to U. S. manufacturing, and research and development activities.
Sales of $536.2 million for the quarter ended September 30 represented a 16 percent increase over sales of $462.2 million in the third quarter of 2012.
A. O. Smith is providing non-GAAP measures (adjusted earnings, adjusted earnings per share, and adjusted segment operating earnings) that exclude certain items as well as non-operating pension costs consisting of interest cost, expected return on plan assets, amortization of actuarial gains (losses), and curtailments. Prior year results are provided on a comparable basis. Reconciliations to measures on a GAAP basis are provided in the financial information included with this press release.
"A. O. Smith continued to benefit from improvement in several key sectors of the economy in the U. S.," Ajita G. Rajendra, president and chief executive officer, observed. "A growing home construction market created demand for residential water heaters, and we saw evidence that replacement demand improved, as well."
"Our team in China continued to do an excellent job of growing the business and serving our customers in that important region of the world. Market growth for water heaters and increased consumer demand for A. O. Smith branded water treatment products are having a favorable impact. Overall, A. O. Smith branded product sales in China increased approximately 35 percent in the quarter."
North America segment
Third quarter sales for the North America segment increased approximately 10 percent to $370.1 million compared with third quarter 2012 sales of $335.7 million driven by higher sales of residential and commercial water heaters and commercial boilers.
Segment operating earnings were $51.5 million compared with the $50.7 million earned in the third quarter last year. Third quarter adjusted segment operating earnings of $56.7 million were 25 percent higher than adjusted segment operating earnings of $45.5 million in the same period last year. The current period excluded $3.9 million of pre-tax non-operating pension costs and a pre-tax restructuring and impairment charge of $1.3 million compared with the year-ago period which excluded $1.2 million of pre-tax non-operating pension costs and a pre-tax $6.4 million gain related to an estimate of an earn-out associated with an acquisition. Higher volumes were the primary driver of increased profits in the quarter. Third quarter adjusted operating margin of 15.3 percent was almost two percentage points higher than the 2012 third quarter adjusted operating margin of 13.6 percent.
Rest of World segment
Sales for this segment increased 31 percent to $175.2 million compared with third quarter 2012 sales of $133.8 million. Sales of A. O. Smith branded products in China increased more than $38 million to $147.6 million in the quarter. Greater demand for the company's premium water heating and water treatment products, a higher-priced product mix as a result of successful product introductions and higher customer inventories in advance of the autumn holiday in October drove the increase in sales.
Segment operating earnings of $26.9 million more than doubled compared with third quarter 2012 earnings of $12.7 million. The higher volumes and improved mix of A. O. Smith branded products in China contributed to the increase in operating earnings. Third quarter operating margin of 15.4 percent improved significantly compared with third quarter 2012 operating margin of 9.5 percent as a result of higher volumes, new products and lower selling and advertising costs as a percentage of sales in China.
Cash, Leverage and Share Buyback
Total debt as of September 30, 2013 was $227.8 million, resulting in leverage of 15 percent as measured by the ratio of total debt to total capital. Cash and investments, located largely outside the U. S., totaled $476.8 million at the end of the quarter.
As mentioned last quarter, free cash flow generation in 2013 is expected to exceed $100 million, and, as a result, the Board of Directors increased the company's authorization to repurchase shares, resulting in authority at that time to repurchase approximately 2.5 million shares. During the third quarter, approximately 1.24 million shares of common stock at an average price of $42.48 per share were repurchased under a 10b5-1 automatic trading plan, representing a total of approximately $53 million. The 10b5-1 plan remains in place.
The company believes its cash flow from operations, borrowing capacity and existing cash are adequate to support the repurchase program, as well as its active acquisition strategy.
Outlook for 2013
"Our A. O. Smith team continues to execute at a very high level, and their focus on customer satisfaction and cost management can be seen in our strong financial performance to date," Rajendra said. "With improved market conditions in our major markets, and good customer acceptance of our new, higher-value A. O. Smith branded products in China, we feel confident about our company's prospects for the remainder of this year."
"As a result of our continued strong performance in the third quarter, we are increasing our guidance for 2013. We believe A. O. Smith Corporation will achieve full-year GAAP earnings of between $1.78 and $1.82 per share with adjusted earnings of between $2.00 and $2.04 per share. These estimates do not include the potential impact from future acquisitions."
"We will continue to be disciplined in evaluating acquisition opportunities that fit our stated corporate strategy. Our team is continuing to actively pursue potential acquisition candidates that meet our financial criteria and add shareholder value," 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. 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," "aspirations" or words of similar meaning. These 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: uncertain costs, savings and timeframes associated with the plant rationalization in Canada; uncertain costs, savings and timeframes associated with the implementation of the new Enterprise Resource Planning system; potential weakening in the high efficiency boiler segment in the U. S.; the ability to execute our acquisition strategy; significant volatility in raw material prices; competitive pressures on the company's businesses; inability to implement pricing actions; instability in the company's replacement markets; strength or duration of any recoveries in U. S. residential or commercial construction; a slowdown in the Chinese economy; foreign currency fluctuations; and adverse general economic conditions and capital market deterioration. 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.
A. O. Smith Corporation is one of the world's leading manufacturers of residential and commercial water heating equipment and boilers, offering a comprehensive line featuring leading brands in North America and China. In addition, the company manufacturers water treatment products for residential and light commercial applications, primarily for Asia. A. O. Smith, headquartered in Milwaukee, Wis., employs approximately 10,900 people at operations in the U. S., Canada, Mexico, India, China, the Netherlands, the United Kingdom, and Turkey.