A. O. Smith Corporation AOS reported disappointing third-quarter 2018 results with both earnings and revenues missing estimates.

The company’s adjusted earnings in the reported quarter were 61 cents per share, missing the Zacks Consensus Estimate of 63 cents. However, the bottom line recorded an increase of 13% from the year-ago figure of 54 cents.

Inside the Headlines

The company’s sales in the reported quarter rose 0.6% year over year to $754.1 million. Top-line growth was partially offset by weaker-than-expected water heater sales in the United States and China.

A. O. Smith Corporation Price, Consensus and EPS Surprise

A. O. Smith Corporation Price, Consensus and EPS Surprise | A. O. Smith Corporation Quote

However, the figure missed the Zacks Consensus Estimate of $804.25 million.

A.O. Smith’s sales in the North America segment (comprising U.S. and Canadian water heaters and boilers) were relatively flat year over year at $486.9 million. The company’s pricing actions on water heaters and boilers were offset by decline in volumes of water heaters in the United States. Water treatment products contributed about $9 million to revenues and boosted the segment’s growth.

Segmental operating earnings fell 4.3% year over year to $105.6 million. The decline was primarily attributable to lower sales of water heaters and higher steel and freight expenses, partially offset by pricing actions. Consequently, adjusted operating margin declined 100 basis points (bps) to 21.7%.

Quarterly sales at the Rest of the World segment (including China, India and Europe) were up 1.5% year over year to $274.1 million. The improvement came on the back of increase in sales of water treatment and air purification products in China. However, a decline in electric water heater sales dampened growth to some extent.

Operating earnings at the segment climbed 16% year over year to $39.1 million in the quarter. The lower-than-expected costs related to incentive programs in China along with lower losses in India proved beneficial. Operating margin expanded 180 bps to 14.3%.

Share Repurchases

During the first nine months of the year, A.O. Smith repurchased around 1.7 million shares for $106 million. At the end of the third quarter, the company had approximately 3.2 million shares remaining under the existing discretionary repurchase authority.

Liquidity & Cash Flow

Exiting the quarter on Sep 30, 2018, A.O. Smith’s cash and cash equivalents totaled $233 million compared with $346.6 million as of Dec 31, 2017.

At the end of the reported quarter, long-term debt was $193.3 million compared with $402.9 million as of Dec 31, 2017.

Outlook

Concurrent with third-quarter results, the company lowered guidance for 2018. A.O. Smith expects adjusted earnings between $2.57 and $2.60, down from the previous range of $2.59-$2.63. In addition, the company expects to register revenue growth of about 7% in 2018.

Zacks Rank & Stocks to Consider

A.O. Smith currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space are Altra Industrial Motion Corp. AIMC, Cintas Corporation CTAS and DXP Enterprises, Inc. DXPE. While Altra Industrial Motion sports a Zacks Rank #1 (Strong Buy), Cintas and DXP Enterprises carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Altra Industrial Motion surpassed estimates thrice in the trailing four quarters with an average beat of 5.04%.

Cintas exceeded estimates in each of the trailing four quarters with an average beat of 7.22%.

DXP Enterprises surpassed estimates twice in the trailing four quarters with an average beat of 101.32%.

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