A. O. Smith Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $960.8 million | $965.9 million | $1,927.2 million | $1,943.6 million |
| Gross margin | 40.0% | 34.6% | 39.4% | 34.8% |
| Net earnings | $157.0 million | $126.2 million | $283.9 million | $246.0 million |
| Diluted EPS | $1.04 | $0.81 | $1.87 | $1.56 |
| Operating cash flow | Not separately reported | Not separately reported | $260.2 million | $54.4 million |
| Free cash flow (non-GAAP) | Not separately reported | Not separately reported | $236.0 million | $23.7 million |
Q2 sales declined 0.5%; first-half sales declined 0.8%. Higher material costs drove the substantial gross-margin improvement. Higher SG&A, interest expense and currency effects partly offset the benefit. Q2 other income included a $6.0 million pension settlement gain.
Segments: North America Q2 sales were $722.3 million, down from $744.1 million, while earnings rose to $199.1 million from $159.9 million and margin expanded to 27.6% from 21.5%. Rest of World Q2 sales rose to $244.2 million from $229.9 million and earnings to $28.3 million from $18.1 million. For the first half, Rest of World sales were $463.3 million versus $485.9 million and earnings were $33.6 million versus $42.9 million, including the Turkey impairment.
Financial position and capital allocation
- At June 30, cash and cash equivalents were $378.9 million and marketable securities were $30.8 million; total debt was $206.0 million, versus $344.5 million at December 31, 2022. First-half debt repayments were $139.3 million.
- Working capital was $700.6 million, broadly unchanged from $699.5 million at year-end. The company reported $75.6 million drawn under its $500 million revolving facility and $424.4 million of available capacity; it was in compliance with financial covenants.
- First-half investing cash flow was $33.8 million and financing cash outflow was $291.2 million. Capital expenditures were $24.2 million; dividends paid were $90.6 million; share repurchases were $69.6 million.
- Management expects approximately $300 million of 2023 share repurchases, subject to share price, working-capital needs and investment alternatives. The quarterly dividend was $0.30 per share.
Outlook, commentary and notable items
- 2023 consolidated sales guidance is flat to up 2% versus 2022. Full-year GAAP EPS guidance is $3.38–$3.53; adjusted EPS guidance is $3.45–$3.60. Guidance excludes potential acquisitions.
- Management expects 2023 operating cash flow of $625–$675 million and free cash flow of $550–$600 million; capital expenditures are forecast at $70–$75 million.
- Market outlook: North American residential water-heater industry volumes are projected flat to up 2%; commercial water-heater volumes are expected to rise in the mid-teens. North American boiler sales guidance was reduced to a high-single-digit decline. Water-treatment sales are expected to grow approximately 5–7%. China sales are projected to grow 3–5% in local currency, with currency translation expected to reduce sales by about 5%.
- The company sold its Turkey business on April 26, 2023. It recorded a $15.6 million first-quarter impairment, including $12.5 million in Rest of World and $3.1 million in Corporate Expense. Closing the sale resulted in release of $11.0 million of foreign-currency translation losses from accumulated other comprehensive loss.
- Management cited resilient North American residential water-heater demand, stronger China demand but a still-challenged economy, and improved supply-chain stability. Key risks include weaker demand or construction, inflation or recession, supply and commodity costs, pricing execution, China recovery and currency movements, geopolitical and trade issues, competition, cybersecurity, regulation and decarbonization trends.
- The company estimates a 24.0% full-year 2023 effective tax rate. Disclosure controls were deemed effective at June 30, 2023; no material change in internal control was reported.
Important facts for investors to verify
- Whether margin gains from lower material costs persist and offset higher employee, consulting, insurance and interest costs.
- Whether China demand and North American water-heater volumes meet guidance, and how currency translation affects reported sales.
- The assumptions behind reduced boiler-sales expectations and the projected recovery in Rest of World margins after excluding the Turkey impairment.
- Whether operating cash flow, free-cash-flow and EPS guidance are achieved; adjusted measures exclude specified impairment and pension items and are non-GAAP.
- The pace of planned buybacks and dividends relative to liquidity, debt repayment and investment needs; also monitor warranty accruals and the contingent China distributor-inventory repurchase exposure.