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Water technology company A. O. Smith Corp. announced record sales of $1.94 billion and earnings of $162.6 million, or $3.49 per share, from continuing operations for 2012.
In a release on January 24, the Company reported sales from continuing operations for 2012 grew 13 percent from $1.71 billion recorded in 2011. The Lochinvar business, acquired in August 2011, added $225.7 million to sales compared with $75.9 million in 2011, and sales of A. O. Smith branded products in China grew 20 percent to approximately $448 million for the year.
Earnings from continuing operations for 2012 of $162.6 million, or $3.49 per share, included an after-tax gain of $16.8 million, or $.36 per share, related to the sale of shares of Regal Beloit Corp. which were received from the 2011 divestiture of the electric motor business. Earnings also included an after-tax gain of $2.9 million, or $.06 per share, related to a settlement with a component supplier in Canada and an after-tax gain of $2.0 million, or $.04 per share, resulting from revisions to the company’s estimate of the Lochinvar earn-out. Earnings from continuing operations for 2011 of $111.2 million, or $2.39 per share, included an after-tax gain of $12.9 million, or $.28 per share, related to shares of RBC hedged with an equity collar, a legal settlement with a component supplier and an increase to a warranty reserve associated with the Canadian component supplier.
In the 2012 fourth quarter, the company earned $43.2 million or $.93 per share from continuing operations on sales of $524.3 million. 2012 earnings included an after-tax gain of $2.9 million, or $.06 per share, related to the settlement with the Canadian component supplier and an after-tax expense of $1.9 million, or $.04 per share, resulting from the final revision to the company’s estimate of the Lochinvar earn-out due to higher than previously estimated sales. Earnings from continuing operations for the same three-month period in 2011 were $31.5 million or $.68 per share on sales of $475.8 million.
“With a strong fourth quarter and solid performance for the full year, the A. O. Smith team did an excellent job again in 2012 driving the company to achieve record sales and net earnings,” Ajita G. Rajendra, president and chief executive officer, observed. “We are very pleased with Lochinvar’s performance, and our China business’ growth was more than two and one-half times that country’s GDP growth last year. Although our North American new construction business continued to be affected by the slow economic recovery, we were able to take advantage of our strength in the replacement portion of the water heater and boiler markets.”
Cash, Leverage, Share Buyback and Acquisitions
Long-term debt totaled $243.7 million at the end of December 2012, resulting in leverage of 17 percent as measured by the ratio of total debt to total capital. Cash and investments, located largely outside the United States, totaled $462.9 million at the end of the year. A $13.5 million earn-out was paid to the former owners of Lochinvar in December 2012.
During the fourth quarter, the company repurchased 208,101 shares of common stock at an average price of $59.04 per share, representing a total of $12.3 million. For the entire year, repurchases totaled 426,490 shares at an average price of $51.60 per share for a total of $22.0 million. A total of approximately 462,000 shares remained in the existing repurchase authority at the end of 2012.
“Our pipeline of possible acquisition candidates remains active,” Paul W. Jones, executive chairman, said. “We continue to pursue water heating and water related investments all over the world, but we will remain selective and only make acquisitions that we believe will increase shareholder value. With more than $400 million in cash and a meaningful amount of incremental borrowing capacity, we are confident we have the resources available to take advantage of global opportunities that add long-term value.”
Discontinued Operations
In the fourth quarter of 2012, the company recorded non-cash expense of $3.9 million on the gain on sale of its Electrical Products Company discontinued operations which occurred in the third quarter of 2011. The non-cash charge was comprised of a $6.4 million correction primarily due to its calculation of taxes due upon repatriation of undistributed earnings offset by a change in the estimate related to other reserves associated with discontinued operations of $2.5 million.
Outlook for 2013
“With our strong North American replacement water heater business, growing Lochinvar boiler platform, and expanding global presence particularly in China, A. O. Smith is well positioned entering 2013,” Rajendra observed. “Business conditions are continuing to improve modestly in the U. S., and we remain optimistic the growth exhibited by the housing market last year will carry over into this year as well.”
“With a talented, disciplined team focused on serving our customers, we look forward to what we believe will be another strong year based on our earnings guidance. For 2013, we expect A. O. Smith Corp. to achieve full-year GAAP earnings of between $3.00 and $3.20 per share and Adjusted Earnings of between $3.25 and $3.45 per share, neither of which includes the potential impact from future acquisitions. “
A. O. Smith Corp. is a manufacturer of residential and commercial water heating equipment and boilers.
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