A. O. SmithAOS

A. O. Smith reported adjusted earnings of $1.03 per share, topping the $0.96 analysts expected. Total revenue hit $1 billion, led by a 5 percent rise in North America. This domestic strength was fueled by a 21 percent jump in boiler sales and the addition of Leonard Valve, a company that makes water temperature control systems. These gains helped cover for fewer residential water heaters being sold in the U.S. during the period.

The international business remains a struggle, with sales outside North America falling 19 percent. This was almost entirely due to weak consumer spending in China, a market that has historically been a major growth engine for the company. Despite this drag, management is confident enough in its cash position to raise its full-year share buyback target to $300 million, signaling that the resilient U.S. replacement market continues to provide a steady floor for the business.

See the full quarter, and how our tracked metrics did

Source: 8-K filing

Key highlights

• North America organic growth: Organic sales, which exclude the impact of buying other companies, grew 3% in North America as strong boiler sales and higher prices helped offset lower demand for residential water heaters.
• China sales plummeting: Sales in China fell 28% in local currency during the quarter because of a weak consumer market, which dragged the entire international division's profit margin down from 10.5% to 5.2%.
• Cash generation accelerating: Free cash flow, the cash left after paying for operations and equipment, rose 67% to $233.3 million for the first half of the year as the company improved how it manages its inventory and bills.
• Boiler business strength: Boiler sales grew 21% compared to a year ago, providing a necessary boost to the North American segment as homeowners bought fewer standard water heaters.
• Shareholder returns increased: Management raised its full year target for buying back its own stock to $300 million, a 50% increase from the prior $200 million goal, signaling confidence in its cash levels despite the downturn in China.
• Narrowed annual guidance: The company tightened its full year outlook and now expects adjusted profit to be between $3.70 and $3.85 per share, compared to the previous high end of $4.00, due to ongoing weakness in the residential heater market.

Our take: This was a soft quarter despite the headline beat. While the North American boiler business is performing well, the 28% drop in China and shrinking profit margins are serious weights on the company. The core business remains a steady cash generator, but these results show it is becoming harder to outrun the slowdown in global consumer demand.