A. O. Smith Increases the Flow

A. O. Smith Corp. (AOS - Snapshot Report) posted third quarter results before the opening bell today. The company’s GAAP net income surged to $34.6 million from $5.8 million in the year-ago quarter, primarily due to lower raw material costs and aggressive cost reduction initiatives.

Excluding non-recurring items, earnings per share came in at 99 cents, surpassing the Zacks Consensus Estimate by 43%, or 20 cents.

A. O. Smith is a manufacturer of water heating equipment and electric motors, serving a diverse mix of residential, commercial and industrial end markets principally in the U.S.

The company recorded a 16.8% decline in sales to 501.5 million, compared to $602.7 million in the same period last year. The decline was mainly caused by sluggish housing market conditions and depressed commercial construction activity, partially offset by growth in water heater sales in China.

The company stated that sales from Water Products contracted 9.5% year over year to $336.7 million, while sales from Electrical Products slipped 28.5% to $165.9 million.

Operating margin in the Water Products segment expanded 270 basis points (bps) year over year to 11.5%, driven by higher margin China volumes, lower steel costs and management’s cost control efforts. Electrical Products division’s operating margin grew 910 bps to 13.7% due to cheaper raw materials, restructuring initiatives and a gain related to the sale of a Chinese facility.

During the quarter, the company entered into a deal to acquire a majority stake in the water treatment business of Hong Kong-based Tianlong Holding Co. Ltd. The acquisition will enable A. O. Smith to supply reverse osmosis water filtration products to residential and commercial markets in China as well as export markets across the world. The companies expect to complete the transaction during the fourth quarter.

Meanwhile, cash and equivalents at the end of the quarter was $69.2 million, compared to $27.6 million in the year-ago quarter. The company also stated that it reduced long-term debt by $115.4 million since the beginning of this year and its outstanding at the end of the quarter stood at $210.7 million.

Looking ahead, A. O. Smith boosted its full-year outlook based on the performance during the first 3 quarters of this year, but added that it was apprehensive about the recovery in residential and commercial construction markets and recent increase in raw material costs.

The company now expects adjusted earnings per share between $2.60 and $2.75, compared to the earlier prediction of $2.05 and $2.25 per share. The revised guidance is well above the Zacks Consensus Estimate of $2.35 per share, derived from 5 covering analysts, which moved up 2 cents over the past 2 months.