A. O. Smith achieves record
sales of $3 billion in 2017.
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.
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. ”
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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
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
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.
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.
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