A. O. Smith Reports Record Earnings Per Share (EPS) in the Second Quarter 2023

Second Quarter 2023 Highlights
(Comparisons are year-over-year ("YoY"), unless otherwise noted)

• Sales of $961 million, a decrease of 1%
• North America decreased 3%
• Rest of World increased 6%, an increase of 12% in local currency
• Net earnings of $157.0 million resulted in record EPS of $1.04, an increase of 28%
• Adjusted earnings of $152.5 million exclude non-cash after-tax income of $4.5 million related to the finalization of our pension settlement, resulting in record adjusted EPS of $1.01
• Strong operating cash flow and free cash flow of $260.2 million and $236.0 million respectively, driven by higher earnings and working capital management
• 2023 Outlook raised to:
• Sales flat, to up 2%, compared to 2022
• EPS of between $3.38 and $3.53 and adjusted EPS between $3.45 and $3.60

MILWAUKEE, July 27, 2023 /PRNewswire/ -- Global water technology company A. O. Smith Corporation ("the Company") (NYSE: AOS) today announced its second quarter 2023 results.

Key Financial Metrics
Second Quarter

(in millions, except per share amounts)

"A. O. Smith delivered record earnings performance in the second quarter driven by lower year-over-year steel costs and continued strength in demand for our North America commercial and residential water heater products. We saw improvement in consumer demand in China in the quarter, especially for our water treatment products even as the Chinese economy remained challenged," noted Kevin J. Wheeler, chairman and chief executive officer. "I am pleased with the outstanding execution of the global team to serve our customers and deliver record results."

Second quarter adjusted earnings of $152.5 million and adjusted EPS of $1.01 exclude non-cash pre-tax income of $6.0 million related to the company's finalization of its pension settlement which occurred in December 2022. Of the $6.0 million of pension settlement income, $5.0 million was recorded in the North America segment and $1.0 million was recorded in corporate expenses.

Segment-level Performance

North America

Second Quarter 2023

Second quarter sales of $722.3 million decreased 3% compared to second quarter sales in the prior year. Higher water heater volumes were offset by lower boiler volumes and pricing.

Segment earnings were $199.1 million, an increase of 25% compared to segment earnings in the second quarter of last year. Segment operating margin was 27.6% in the second quarter of 2023, an increase of 610 basis points compared to the prior year. Adjusted segment earnings of $194.1 million and adjusted segment margin of 26.9% exclude $5.0 million of pre-tax pension settlement income. Adjusted segment earnings of $162.5 million and adjusted segment margin of 21.8% in the second quarter of 2022 exclude pre-tax, non-operating pension expenses of $2.6 million. The higher segment earnings and segment operating margin in the second quarter of 2023 were primarily due to lower material costs and higher volumes of commercial and residential water heaters, partially offset by lower boiler volumes.

Rest of World

Second Quarter 2023

Rest of World sales of $244.2 million increased 6% year-over-year, including an unfavorable currency translation impact of approximately $14 million. In local currency, segment sales increased by approximately 12% year-over-year. The increase in sales was primarily driven by stronger consumer demand in China, particularly for our residential and commercial water treatment products, as well as favorable product mix. Sales in India increased 15% in local currency.

Segment earnings were $28.3 million in the second quarter of 2023, an increase of 56% compared to the same period last year. Segment operating margin was 11.6% in the second quarter of 2023 compared with 7.9% in the second quarter of 2022. The higher segment earnings and segment margin were primarily driven by higher volumes and favorable mix in China.

Balance Sheet, Liquidity and Capital Allocation

As of June 30, 2023, cash and marketable securities balances totaled $409.7 million and debt totaled $206.0 million, resulting in a leverage ratio of 9.8% as measured by total debt-to-total capitalization.

Cash provided by operations was $260.2 million and free cash flow was $236.0 million in the first half of 2023, which increased year-over-year driven by higher earnings and a more favorable working capital contribution primarily related to lower inventory levels and incentive payments.

As part of its commitment to return capital to shareholders, the Company repurchased 1,075,000 shares at a cost of $69.6 million through June 30, 2023. As of June 30, 2023, authority remained to repurchase approximately 6.8 million additional shares. The Company expects to spend $300 million repurchasing shares in 2023.

On July 10, 2023, the Company's board of directors approved a $0.30 per share dividend for shareholders of record on July 31, payable on August 15. For the full release, click here.

Outlook

2023 Outlook
(in millions, except per share amounts)

"We are very pleased with our team's execution in the first half of the year, in particular, our margin performance. We will face higher steel costs in North America in the back half of 2023; therefore, we will see some margin pressure. However, our strong results in the second quarter, resilience in North America water heater demand and our current view of our price cost relationship give us confidence to raise our full year outlook," stated Wheeler. "Our revised outlook for the full year 2023 projects our sales to be flat, to up 2%, compared to last year. We raised our expected full year adjusted EPS to be between $3.45 and $3.60, a 12% year-over-year increase at the mid-point."

The Company's guidance excludes the potential impacts from future acquisitions.

A. O. Smith will host a webcasted conference call at 10 a.m. (Eastern Daylight Time) today. The call can be heard live on the Company's website click here. An audio replay of the call will be available on the Company's website after the live event. To access the archived audio replay, go to the "Investors" page and select the Second Quarter 2023 Earnings Call link.

To provide improved transparency into the operating results of its business, the Company is providing the following non-GAAP measures: total segment earnings, free cash flow, adjusted earnings, adjusted segment earnings and adjusted corporate expenses. Free cash flow is defined as cash provided by operations less capital expenditures. Adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expenses exclude the impact of impairment charges, pension settlement income and expenses, as well as legal judgment income, expenses associated with terminated acquisition costs and non-operating pension expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the financial information included in this news release.

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," "continue," "guidance," "outlook" or words of similar meaning. All 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: further softening in U.S. residential water heater demand; negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company's ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs; negative impacts to demand for the Company's products, particularly commercial products, as a result of the severity and duration of the lingering effects of the COVID-19 pandemic; further weakening in U.S. residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; inconsistent recovery of the Chinese economy or decline in the growth rate of consumer spending or housing sales in China; negative impact to the Company's business in China as a result of future COVID-19-related disruptions there; negative impact to the Company's businesses from international tariffs, trade disputes and geopolitical differences, including the conflict in Ukraine; potential further weakening in the high-efficiency gas boiler segment in the U.S.; substantial defaults in payment by, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer; foreign currency fluctuations; the Company's inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the Company's businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency; and adverse developments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this news 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. 

About A. O. Smith

A. O. Smith Corporation, with headquarters in Milwaukee, Wis., is a global leader applying innovative technology and energy-efficient solutions to products manufactured and marketed worldwide. Listed on the New York Stock Exchange (NYSE: AOS), the Company is one of the world's leading manufacturers of residential and commercial water heating equipment and boilers, as well as water treatment products. For more information, visit www.aosmith.com.

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SOURCE A. O. Smith Corporation