A. O. Smith Corporation (AOS - Free Report) kept its earnings streak alive in second-quarter 2018, pulling off an earnings beat of 6.5%. This is the company’s fourth consecutive quarter of better-than-expected results.
The company’s adjusted earnings in the quarter came in at 66 cents per share, beating the Zacks Consensus Estimate of 62 cents. Also, the bottom line increased 24.5% from the year-ago figure of 53 cents. The upside mainly came on the back of robust sales growth and 1.2% decline in shares outstanding. Also, lower effective tax rate (due to the implementation of the U.S. Tax Cut and Jobs Act) added 5 cents to the bottom line. However, higher steel prices and inflationary pressure on other costs dampened earnings growth to some extent.
Revenues Gain from Segmental Strength
A. O. Smith generated revenues of $833.3 million in the reported quarter, reflecting growth of 13% from the year-ago quarter. The improvement came on the back of a thriving water heater industry in the United States and sales growth in China.
Also, the top line surpassed the Zacks Consensus Estimate of $807.8 million by 3.2%.
A. O. Smith reports its revenues under the segments discussed below:
Revenues from North America segment (comprising U.S. and Canadian water heaters and boilers) in the second quarter increased 13.5% year over year to $534.2 million.
The improvement came on the back of higher volumes of commercial and residential water heaters and boilers sold in the quarter. Also, pricing actions taken to negate the impact of elevated steel costs proved conducive to the sales performance of this region. Water treatment products contributed about $7 million to revenues and boosted the segment’s growth.
Revenues from Rest of World segment (including China, India and Europe) totaled $308.1 million, increasing 12.9% year over year. It’s worth noting that sales in China increased 12% year over year.
The year-over-year growth stemmed from growth in sales of gas tankless water-heating and water-treatment products. Also, favorable pricing actions added to the top line. However, the positive aspects were hurt by lower sales of air purification products and weakness in e-commerce sales.
Adjusted Operating Margin Flat
In the reported quarter, A. O. Smith’s cost of products sold increased 13.4% year over year to $492.3 million. It represented 59.1% of the quarter’s revenues compared with 58.8% in the year-ago quarter. Gross margin decreased 30 basis points (bps) to 40.9%. Selling, general and administrative expenses grew 10.6% year over year to $197.2 million and constituted 23.7% of revenues compared with 24.2% in the year-ago quarter.
Adjusted operating earnings increased 12.7% year over year to $159.6 million, while operating margin remained flat at 19.2%. On a segmental basis, adjusted operating earnings of the North America segment grew 14.4% year over year on the back of higher sales volume and favorable pricing actions, partially offset by rise in prices of steel and other input costs.
Adjusted operating earnings for the Rest of World segment increased 6.8% on higher sales volumes, growth in Chinese sales and favorable pricing, partially offset by higher advertising costs, engineering expenses and issues related with the opening of a plant in China.
Balance Sheet and Cash Flow
Exiting the second quarter, A. O. Smith had cash and cash equivalents of $260 million, up 7.5% from $241.9 million recorded at the end of the last reported quarter. Long-term debt decreased 14% sequentially to $245.4 million.
In the first half of 2018, the company generated net cash of $173.2 million from its operating activities, reflecting growth of 136.6% from the year-ago period. Capital expenditures totaled $39.5 million compared with $36.3 million in the year-ago period.
During the first half of the year, the company bought back 1.1 million shares for $69.7 million and paid dividends amounting to $61.8 million.
At the end of the quarter, the company had approximately 1.3 million shares remaining under its repurchase authority. Additionally, the company’s board of directors authorized a 2.5 million share buyback program earlier this month.
Outlook
For 2018, A. O. Smith anticipates to gain from strengthening product demand in North America. Also, the company is progressing well with the launch of its water treatment products at all Lowe's home improvement stores in the United States. The company expects sales improvement, along with start-up and transition costs, from the new business in 2018.The new relationship is likely to accelerate growth of the company’s North American water treatment product line.
Also, sales in China (in local currency) are anticipated to improve 6% in the second half of the year compared with 4% growth recorded in the first half. Sales in China in the second half will be adversely impacted by rise in channel inventories. For the full year, revenues from China are projected to grow 8% year over year or 5% based on local currency.
The company raised earnings per share guidance for 2018. Adjusted earnings are now projected to be within $2.59-$2.63 range compared with the previous estimate of $2.55 and $2.61. The mid-point of the range reflects impressive year-over-year growth of 20%.
Additionally, the company expects to register revenue growth of 9.5-10% in 2018, down from the earlier projection of 10-10.75%. The unfavorable movement in Chinese currency will have an adverse $22 million impact of revenues.
A. O. Smith Corporation Price, Consensus and EPS Surprise
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A. O. Smith Corporation (AOS - Free Report) kept its earnings streak alive in second-quarter 2018, pulling off an earnings beat of 6.5%. This is the company’s fourth consecutive quarter of better-than-expected results.
The company’s adjusted earnings in the quarter came in at 66 cents per share, beating the Zacks Consensus Estimate of 62 cents. Also, the bottom line increased 24.5% from the year-ago figure of 53 cents. The upside mainly came on the back of robust sales growth and 1.2% decline in shares outstanding. Also, lower effective tax rate (due to the implementation of the U.S. Tax Cut and Jobs Act) added 5 cents to the bottom line. However, higher steel prices and inflationary pressure on other costs dampened earnings growth to some extent.
Revenues Gain from Segmental Strength
A. O. Smith generated revenues of $833.3 million in the reported quarter, reflecting growth of 13% from the year-ago quarter. The improvement came on the back of a thriving water heater industry in the United States and sales growth in China.
Also, the top line surpassed the Zacks Consensus Estimate of $807.8 million by 3.2%.
A. O. Smith reports its revenues under the segments discussed below:
Revenues from North America segment (comprising U.S. and Canadian water heaters and boilers) in the second quarter increased 13.5% year over year to $534.2 million.
The improvement came on the back of higher volumes of commercial and residential water heaters and boilers sold in the quarter. Also, pricing actions taken to negate the impact of elevated steel costs proved conducive to the sales performance of this region. Water treatment products contributed about $7 million to revenues and boosted the segment’s growth.
Revenues from Rest of World segment (including China, India and Europe) totaled $308.1 million, increasing 12.9% year over year. It’s worth noting that sales in China increased 12% year over year.
The year-over-year growth stemmed from growth in sales of gas tankless water-heating and water-treatment products. Also, favorable pricing actions added to the top line. However, the positive aspects were hurt by lower sales of air purification products and weakness in e-commerce sales.
Adjusted Operating Margin Flat
In the reported quarter, A. O. Smith’s cost of products sold increased 13.4% year over year to $492.3 million. It represented 59.1% of the quarter’s revenues compared with 58.8% in the year-ago quarter. Gross margin decreased 30 basis points (bps) to 40.9%. Selling, general and administrative expenses grew 10.6% year over year to $197.2 million and constituted 23.7% of revenues compared with 24.2% in the year-ago quarter.
Adjusted operating earnings increased 12.7% year over year to $159.6 million, while operating margin remained flat at 19.2%. On a segmental basis, adjusted operating earnings of the North America segment grew 14.4% year over year on the back of higher sales volume and favorable pricing actions, partially offset by rise in prices of steel and other input costs.
Adjusted operating earnings for the Rest of World segment increased 6.8% on higher sales volumes, growth in Chinese sales and favorable pricing, partially offset by higher advertising costs, engineering expenses and issues related with the opening of a plant in China.
Balance Sheet and Cash Flow
Exiting the second quarter, A. O. Smith had cash and cash equivalents of $260 million, up 7.5% from $241.9 million recorded at the end of the last reported quarter. Long-term debt decreased 14% sequentially to $245.4 million.
In the first half of 2018, the company generated net cash of $173.2 million from its operating activities, reflecting growth of 136.6% from the year-ago period. Capital expenditures totaled $39.5 million compared with $36.3 million in the year-ago period.
During the first half of the year, the company bought back 1.1 million shares for $69.7 million and paid dividends amounting to $61.8 million.
At the end of the quarter, the company had approximately 1.3 million shares remaining under its repurchase authority. Additionally, the company’s board of directors authorized a 2.5 million share buyback program earlier this month.
Outlook
For 2018, A. O. Smith anticipates to gain from strengthening product demand in North America. Also, the company is progressing well with the launch of its water treatment products at all Lowe's home improvement stores in the United States. The company expects sales improvement, along with start-up and transition costs, from the new business in 2018.The new relationship is likely to accelerate growth of the company’s North American water treatment product line.
Also, sales in China (in local currency) are anticipated to improve 6% in the second half of the year compared with 4% growth recorded in the first half. Sales in China in the second half will be adversely impacted by rise in channel inventories. For the full year, revenues from China are projected to grow 8% year over year or 5% based on local currency.
The company raised earnings per share guidance for 2018. Adjusted earnings are now projected to be within $2.59-$2.63 range compared with the previous estimate of $2.55 and $2.61. The mid-point of the range reflects impressive year-over-year growth of 20%.
Additionally, the company expects to register revenue growth of 9.5-10% in 2018, down from the earlier projection of 10-10.75%. The unfavorable movement in Chinese currency will have an adverse $22 million impact of revenues.
A. O. Smith Corporation Price, Consensus and EPS Surprise
Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>
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