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A. O. Smith reports higher sales and earnings from continuing operations
Milwaukee, Wis.-Water technology company A. O. Smith Corporation (NYSE:AOS) reported third quarter earnings from continuing operations of $37.0 million or $.79 per share on a 12.2 percent increase in revenue.
The company's 2012 third quarter performance included a full quarter of Lochinvar's results, which was acquired in late August last year, as well as a non-cash, pre-tax gain of $6.4 million or $.08 per share resulting from a change to the company's estimate of the Lochinvar earn-out, which is based on revenue targets.
Prior-year third quarter earnings from continuing operations of $26.9 million or $.58 per share included a net pre-tax gain of $16.4 million related to shares of Regal Beloit Corporation (NYSE:RBC) and an equity collar, as well as pre-tax professional fees and expenses totaling $4.4 million related to the purchase of Lochinvar. The net favorable impact to earnings from these items in last year's third quarter was $.19 per share.
Sales for the three-month period ended Sept. 30 were $462.2 million, more than $50 million higher than third quarter 2011 sales of $412.0 million, driven by incremental Lochinvar sales and strong organic growth in China.
"The factors that have been influencing our business throughout 2012 continued during the third quarter," Chairman and Chief Executive Officer Paul W. Jones commented. "Our A. O. Smith branded sales in China grew over 20 percent in the quarter driven by new distribution, market share gains and new products, despite the slowdown in that country's economy."
"The Lochinvar acquisition continues to meet the high end of our profit expectations," he observed. "Lochinvar's new line of CREST ® high-efficiency, higher BTU input condensing boilers, which was introduced last year, has received excellent market acceptance; and we plan to launch new, larger input models of this product later this year."
North America segment
Third quarter sales of the North America segment, which includes U. S. and Canadian water heaters and boilers, increased to $335.7 million compared with third quarter 2011 sales of $310.2 million. The company benefited from sales of $60.1 million of Lochinvar products, compared with last year's partial quarter contribution of $20.8 million. Additionally, higher commercial water heater volumes were more than offset by lower residential water heater and tankless volumes.
Operating earnings from the segment of $50.7 million included a gain of $6.4 million related to the adjustment to the company's estimate of the Lochinvar earn-out, compared with $30.9 million earned during the third quarter of 2011. Profits from the Lochinvar acquisition contributed $14.9 million to quarterly earnings compared with $3.0 million last year. In addition, the segment benefited from higher commercial volumes and material costs that were lower than their relatively high levels last year. These benefits more than offset the volume decline in residential water heaters. As a result, third quarter operating margin of 15.1 percent was higher than third quarter 2011 margin of 10.0 percent.
Under the terms of the Lochinvar purchase agreement, Lochinvar's shareholders could earn up to an additional $35 million if certain revenue objectives are achieved from Dec. 1, 2011, to Nov. 30, 2012. At the time of the closing, the company projected the earn-out to be $16.8 million due to an estimated 16 percent increase in sales. Based on the current estimate of a 12 percent increase in sales, the earn-out is projected to be $10.4 million resulting in a pre-tax gain of $6.4 million that has been recorded in the third quarter.
Rest of World segment
Third quarter sales of this segment, which includes China, India, and Europe, increased more than $23 million to $133.8 million compared with sales of $110.5 million in the third quarter of 2011. Sales of A. O. Smith branded products in China increased approximately 22 percent in the quarter due to continued distribution expansion into Tier 2 and Tier 3 cities, greater acceptance of gas tankless and water treatment systems, and continued market share gains.
Third quarter operating profit increased approximately 41 percent to $12.7 million compared with $9.0 million earned in the prior year's quarter. Increased sales of A. O. Smith branded products in China and reduced losses from the company's China water treatment business contributed to the improved third quarter earnings. Operating margin of 9.5 percent improved compared with the third quarter 2011 operating margin of 8.1 percent.
Leverage and Cash
Long-term debt totaled $279.6 million at the end of September 2012, resulting in leverage of 19.0 percent, measured by the ratio of total debt to total capital. Cash and investments, located largely outside the United States, totaled $482.2 million at the end of the 2012 third quarter.
Outlook for 2012
"A. O. Smith continues to make progress as it pursues its strategy to become a global water technology company," Jones said. "The integration of the Lochinvar acquisition is essentially complete, and our pipeline of possible acquisition candidates remains active. We continue to pursue water heater and water treatment investments all over the world, and we are committed to investments that increase shareholder value. With more than $400 million in cash and an additional $400 million in borrowing capacity, we believe we have more than enough resources to take advantage of the right opportunities when they come along."
"Our businesses continue to perform well in a challenging global economy," he said. "Our focus on customers, combined with disciplined cost management, is paying off throughout the organization. We expect this strong performance to carry through to the end of the year. Consequently, we are raising our earnings guidance for the full year to between $2.85 and $2.95 per share. This does not include the potential impact from any future acquisitions, the first quarter gain from the sale of the RBC shares, or adjustments to the estimate of the calculation of the Lochinvar earn-out."
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. 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: difficulties in achieving the disclosed global expansion opportunities related to the Lochinvar acquisition; weakening in the high efficiency boiler segment in the United States; 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; further weakening in U. S. residential or commercial construction; timing of any recoveries in U. S. residential or commercial construction; a further 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 the best-known brands in North America and China, as well as water purification products for residential and light commercial applications. A. O. Smith, headquartered in Milwaukee, Wis., employs approximately 10,500 people at operations in the U. S., Canada, Mexico, India, China, and the Netherlands.