A.O. Smith Corporation yesterday proclaimed record sales of $3.00 billion and net earnings of $296.50 million, which included estimated charges of $81.80 million associated with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform).
Sales for 2k17 grew nearly 12.00% from $2.690 billion in 2K16. Sales in China grew 16.00% throughout 2k17 and grew 18.00% when the impact from the stronger U.S. dollar is excluded.
Net earnings of $296.50 million or $1.7 for each share were lower than 2K16 net earnings of $326.50 million or $1.850 for each share. The decrease in earnings was due to estimated one-time charges associated with U.S. Tax Reform, totaling $81.80 million or $0.470 for each share.
Adjusted net earnings of $378.30 million or $2.170 for each share, which excluded the one-time U.S. Tax Reform-related charges, inclined 16.00% compared with net earnings of $326.50 million, or $1.850 for each share, the previous year.
In the 4th-quarter, the company earned $22.70 million or $0.130 for each share on sales of $768.60 million. 4th-quarter 2k17 adjusted net earnings were $104.50 million or $0.60 for each share and excluded $81.80 million or $0.470 for each share of one-time charges associated with U.S. Tax Reform.
Net earnings for the similar three-month period in 2K16 were $82.70 million or $0.47 for each share on $698.10 million of sales.
“2k17 marked another record year for A. O. Smith,” Ajita G. Rajendra, chairman, and CEO, declared. “Our double-digit sales growth in 2k17 was driven by continued strong demand for our customer goods in China and positive end markets for our water heaters and boilers in North America. China sales exceeded the $1.00 billion milestones and were driven by 35.00% growth in water treatment sales and a near doubling of air purification sales. China on-line sales reached $250.00 million in 2k17.”
North America segment
Sales for the North America segment in 2k17 were $1.9 billion, a nine% incline over 2K16 sales of $1.740 billion. The incline in sales was primarily due to higher volumes of water heaters and boilers and pricing actions related to steel cost inclines.
Water treatment sales, comprised of Hague Quality Water acquired in September 2k17, as well as a complete year of Aquasana sales, incrementally added approximately $40.00 million to the company’s North America segment sales.
Segment earnings inclined 11.00% in 2k17 to $428.60 million compared with $385.90 million in 2K16. The earnings incline was driven primarily by the 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%age of sales, 2k17 segment margin of 22.50% improved from 2K16 segment margin of 22.10%.
4th-quarter 2k17 sales for the segment of $460.80 million were six% greater than the prior year’s 4th-quarter sales of $435.60 million. The incline in sales was primarily due to higher volumes of boilers and commercial water heaters and pricing actions related to steel cost inclines. Water treatment sales incrementally added approximately $9.00 million to North America 4th-quarter segment sales.
4th-quarter segment earnings of $104.90 million were 17.00% higher than segment earnings of $89.40 million in the 4th-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, 4th-quarter segment margin of 22.80% was higher than the 4th-quarter segment margin of 20.50% one year ago.
Rest of World segment
Sales of this segment inclined 16.00% in 2k17 to $1.120 billion compared with 2K16 sales of $965.60 million. China sales inclined 16.00% and grew 18.00% when the impact from the stronger U.S. dollar is excluded.
An incline in demand for the company’s customer goods in the region, led by water treatment and air purification goods, 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 inclined approximately $8.00 million or over 40.00% in 2k17 compared with 2K16.
Earnings for this segment inclined 16.00% in 2k17 to $149.30 million compared with $129.10 million earned the prior year. Higher sales in China, including the price incline, were partially offset by higher steel costs; higher fees paid to installers and inclined SG&A costs.
Expansion of water treatment and air purification product retail outlets in tier 2.0 and 3.0 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 13.40% in 2k17 was essentially similar as the prior year.
Segment sales for the 4th-quarter 2k17 of $313.80 million were 17.00% higher than the similar period in the previous year. Sales in China inclined 16.00% 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 goods in the region. Sales in India grew over 40.00% compared with the similar period in 2K16.
Segment earnings of $50.80 million were 33.00% higher in the 4th-quarter of 2k17 compared with the similar three-month period in 2K16, driven by the impact from higher India sales and China sales, including the price incline.
Higher steel costs and higher fees paid to installers partially offset the impact of higher China sales. Segment margin for the period was 16.20% compared with 14.20% in 2K16, primarily due to improved margin for the company’s water treatment goods sold in China, lower China selling and advertising costs as a% of sales and improved performance in India.
Share Repurchase and Other Items
Throughout the 4th-quarter of 2k17, the company repurchased approximately 591,000.00 shares of its common stock at a total cost of $35.80 million. For 2k17, repurchases totaled approximately 2.50 million shares at a cost of $139.10 million. At the end of 2k17, approximately 2.40 million shares remained on the company’s repurchase authority.
Total debt was $410.40 million as of Dec. 31, 2k17, resulting in leverage of 19.90% as measured by the ratio of total debt to total capital. Cash and marketable securities, primarily located outside the U.S., totaled $820.00 million, and the company’s net cash position was $409.60 million at the end of 2k17.
As previously forecasted, cash provided by operations of $326.40 million was lower than the $446.60 million provided in 2K16. Higher adjusted net earnings in 2k17 were more than offset by higher outlays for working capital primarily due to higher than anticipated positive cash flows received late in the 4th-quarter of 2K16.
The 2k17 effective income tax rate was 43.10%, higher than the 29.40% recorded the previous year due to the one-time charges associated with U.S. Tax Reform. The adjusted effective income tax rate associated with 2k17 net earnings, excluding the impact of U.S. Tax Reform, was 27.40%.
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 28.00% effective income rate originally projected for 2k17, benefitted 2k17 results by $.020 for each share.
The company’s 4th-quarter tax expense included $81.80 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 22.00 and 22.50%.
“A. O. Smith continues to invest in its business while rewarding its shareholders. On Jan. 19, we announced a 29.00% incline in our quarterly dividend rate, which is the 13th consecutive year of dividend inclines,” 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 extra global opportunities that would add long-term value as well as return cash to shareholders.”
Outlook for 2018
“2k17 was another successful year for A. O. Smith drove by strong sales growth and global performance,” Rajendra observed. “We were also honored to join the S&P 500.00 index in July 2k17, which was a significant milestone in our company’s rich history.”
“We believe our development drivers are intact and that our replacement demand remains substantial, which leads us to expect 2018 earnings to be between $2.50 and $2.580 for each 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 17.00% incline over 2k17 adjusted earnings for each share,” Rajendra concluded.