A.O. Smith Corp. AOS continued with its impressive earnings streak in fourth-quarter 2015, with earnings per share of 90 cents surpassing the Zacks Consensus Estimate of 85 cents by a remarkable 5.9%. This was driven by strong revenue growth and better pricing, coupled with growing demand for the company’s products.
The results cheered investors as the company’s shares rose 2.9% in the trading session following the earnings release.
The earnings figure also compared favorably with the year-ago tally of 59 cents per share, up a whopping 52.5% year over year. Strong organic revenue growth, aided by growing demand of the company’s products, was the main earnings driver.
For the full year, the company reported record net earnings of $282.9 million, or $3.16 per share, up 36.1% from prior-year figures of $207.8 million, or $2.28 per share. The striking improvement in profits was led by solid growth in organic sales.
Inside the Headlines
Net sales for the quarter were up 2% year over year to $639.4 million but missed the Zacks Consensus Estimate of $674 million.The year-over-year increase was primarily driven by strong sales of Lochinvar-branded products and commercial water heaters in the U.S., higher prices in North America as well as consistently strong demand for water heating, water treatment products and new air purification products in China. However, currency translation continued to act as a headwind, negatively impacting sales.
Talking about the segments, A.O. Smith’s sales in North America segment (comprises U.S. and Canada) declined 3.9% year over year to $413.7 million owing to lower U.S. residential volumes, which more than offset growth in U.S. commercial water heater volumes.
Despite tepid top-line growth, segmental operating earnings rose 37.2% year over year to $92.2 million, driven by pricing actions, higher demand and lower steel costs.
For the full year, segment sales came in at a record $1.7 billion, which represented a 5% year-over-year increase of $1.62 billion. The remarkable top-line growth was driven by higher volumes of U.S. commercial water heaters and boilers, as well as favorable pricing actions in the U.S. and Canada. Segment operating earnings for the year also increased around 42% year over year to $339.9 million.
Quarterly sales for the Rest of the World segment (China, India & Europe) rose about 14% year over year to $231.8 million, led by a 15% increase in demand for water heating, water treatment and new air purification products in China.
Segment operating earnings also showed impressive growth, and were up 27% year over year to $28.5 million for the quarter, driven by strong top-line performance, lower steel and advertising costs, and smaller losses in India.
For 2015, segment sales surged 13% to $866.1 million compared with 2014 sales of $768.3 million, led by robust growth in China sales. Full-year operating earnings grew 6% year over year to $113 million.
Share Repurchases
During fourth-quarter 2015, A.O. Smith bought back around 329,000 common shares for $23.8 million, taking its full-year repurchases to about 1.9 million shares, which it purchased for an aggregate cost of $128.1 million. Toward the end of the quarter, the company increased the authorized shares available for repurchase by two million.
Thus, the company now has a remaining balance of roughly 2.59 million shares under its authorization program.
Liquidity & Cash Flows
A.O. Smith’s cash and cash equivalents at the end of the quarter were $323.6 million compared with $319.4 million at the end of 2014.
Long-term debt was $236.1 million as of Dec 31, 2015, higher than $210.1 million at the end of 2014.
Guidance
A.O. Smith revealed its 2016 earnings per share guidance, expecting earnings in a range of $3.40–$3.55 per share. The midpoint of the guidance range represents 10% bottom line growth from 2015 level.
The optimism is based on the strong growth momentum in 2015, fueled by thriving U.S. business and robust growth in China. In fact, in 2015, the company actually exceeded its anticipated sales growth rate in China of 15% in local currency terms, thanks to vigorous consumer spending and increased demand for its products.
A.O. Smith currently carries a Zacks Rank #3 (Hold). Better-ranked stocks include CUI Global, Inc. CUI, Encore Wire Corp. WIRE and Kaman Corporation KAMN, each sporting a Zacks Rank #2 (Buy).
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