A. O. Smith Corporation — 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing, not a standalone fourth-quarter report. A. O. Smith manufactures water heaters, boilers and water-treatment products through its North America and Rest of World segments.
Financial performance
| Metric | 2023 | 2022 |
|---|---|---|
| Net sales | $3,852.8 million | $3,753.9 million |
| Gross profit / margin | $1,484.8 million / 38.5% | $1,329.6 million / 35.4% |
| Net earnings | $556.6 million | $235.7 million |
| Diluted EPS | $3.69 | $1.51 |
| Adjusted diluted EPS (non-GAAP) | $3.81 | $3.14 |
| Cash from operations | $670.3 million | $391.4 million |
| Free cash flow (non-GAAP) | $597.7 million | $321.1 million |
- Sales rose 2.6%, primarily from higher residential and commercial water-heater volumes; unfavorable currency translation reduced sales by approximately $56 million.
- Gross margin improved mainly because of lower material costs. SG&A increased by $56.5 million, largely due to employee compensation and higher incentive expenses.
- North America sales grew to $2,922.9 million; segment margin increased to 24.9% from 9.4%. Rest of World sales declined to $956.9 million, while segment margin fell to 8.7% from 10.0%.
- Cash and marketable securities totaled $363.4 million at year-end, versus $481.8 million a year earlier. Working capital was $555.0 million, down from $699.5 million.
- Total debt was approximately $127.3 million, down $217.2 million year over year; debt-to-capitalization was 6.5%, versus 16.5%. The $500 million revolving credit facility had no outstanding borrowings and was fully available; the company reported covenant compliance.
- Capital expenditures were $72.6 million. The company repurchased 4.377 million shares for $306.5 million and paid dividends of $1.22 per share.
Material changes and unusual items
- 2022 GAAP earnings included a $417.3 million pretax pension settlement expense related to termination of the defined-benefit plan. This makes the sharp increase in 2023 GAAP earnings less representative of underlying operating growth; adjusted EPS rose from $3.14 to $3.81.
- 2023 included $18.8 million of restructuring and impairment expenses, including charges associated with the sale of the Turkey business and an exit from a Far East business.
- In 2022, results included an $11.5 million patent judgment income and $4.3 million of expenses related to a terminated acquisition.
- The company acquired a North American water-treatment business in 2023 for $16.8 million, net of cash acquired.
Outlook, risks and contingencies
- For 2024, management expects sales growth of 3%–5% and diluted EPS of $3.90–$4.15. It forecasts operating cash flow of $640–$690 million, free cash flow of $525–$575 million, and capital expenditures of $105–$115 million. Guidance excludes potential acquisitions.
- Management expects North America residential water-heater industry volumes to be approximately flat in 2024; commercial water-heater volumes to grow low single digits; boiler sales to increase 8%–10%; and North America water-treatment sales to increase 10%–12%. China sales are projected to grow 3%–5% in local currency.
- Key exposures include economic and construction-market softness, steel and other input-cost volatility, competition, foreign-exchange movements, China market conditions, customer concentration, cybersecurity, product liability and evolving energy-efficiency and decarbonization regulation. Five largest customers accounted for approximately 42% of 2023 sales; China accounted for approximately 22%.
- Product-warranty liability was $188.1 million at year-end. The auditor identified valuation of this liability as a critical audit matter. The company reported ordinary-course legal and environmental matters and believes reserves and insurance are adequate; it does not expect them to materially affect results.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether 2024 sales and EPS guidance is achieved, including the assumed recovery in boilers and water treatment after channel-inventory adjustments.
- How much of the 2023 margin and earnings improvement reflects sustainable operating factors, particularly lower material costs, rather than comparison effects from the 2022 pension settlement.
- Exposure to China, currency translation and the concentration of sales among a small group of customers.
- Whether warranty claims, product-liability exposure, and regulatory changes require higher costs or capital investment.
- Planned 2024 share repurchases of approximately $300 million and their effect on cash, liquidity and per-share results.