A. O. Smith Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports full-year results, not a standalone 2021 fourth quarter. A. O. Smith manufactures water heaters, boilers, tanks and water treatment products through its North America and Rest of World segments, with China the largest international market.
Financial performance
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net sales | $3,538.9 million | $2,895.3 million | Up 22.2% |
| Gross profit / margin | $1,310.9 million / 37.0% | $1,108.2 million / 38.3% | Margin down 1.3 percentage points |
| Net earnings | $487.1 million | $344.9 million | Up 41.2% |
| Diluted EPS | $3.02 | $2.12 | Up from prior year |
| Cash from operations | $641.1 million | $562.1 million | Up $79.0 million |
| Free cash flow, non-GAAP | $566.0 million | $505.3 million | Operating cash flow less capital expenditures |
| Total debt | $196.7 million | $113.2 million | Debt-to-capitalization ratio was 9.7%, versus 5.8% |
Sales growth reflected pricing actions, higher volumes in North America and China, and favorable currency translation in China. Steel and other material costs rose faster than pricing, reducing gross margin. The effective tax rate was 22.1%, compared with 22.3% in 2020.
At year-end, cash and cash equivalents were $443.3 million and marketable securities were $188.1 million. Working capital was $633.8 million, down from $731.7 million. The company had $450 million of available capacity under its $500 million revolving credit facility, which expires in 2026. Capital expenditures were $75.1 million.
Segments and material changes
- North America: Sales were $2,529.5 million, up from $2,118.3 million; segment earnings were $590.8 million, up from $503.5 million. Segment margin decreased to 23.4% from 23.8%, primarily as material and logistics costs outpaced pricing.
- Rest of World: Sales were $1,036.5 million, up from $800.3 million; segment earnings were $91.4 million versus breakeven in 2020, with an 8.8% margin. China sales rose 24% in local currency; reported sales also benefited by approximately $58 million from currency appreciation.
- Acquisitions: The company acquired Canadian water heater manufacturer Giant on October 19, 2021, for approximately $198.6 million net of cash acquired. Giant contributed $22.9 million in sales. The company also acquired two water treatment businesses for an aggregate $9.0 million.
- Capital returns: The company repurchased 5.1 million shares for $366.5 million and paid $170.1 million in dividends. Dividends were $1.06 per share, up from $0.98.
- Warranty liability: The reserve increased to $184.4 million from $142.3 million, attributed primarily to higher steel costs and the Giant acquisition.
Outlook, risks and unusual items
For 2022, management forecast consolidated sales growth of 16% to 18%, GAAP EPS of $1.56 to $1.76, and adjusted EPS of $3.35 to $3.55. Adjusted EPS excludes estimated pension settlement charges and non-operating pension items. The company expects free cash flow of $500 million to $525 million, North America segment margin of 22.25% to 22.75%, and Rest of World segment margin of approximately 10%. Guidance assumes the Omicron surge subsides in the first quarter without significant operational or market impact, and excludes future acquisitions.
The company approved termination of its principal defined benefit pension plan, with settlement expected in the fourth quarter of 2022. Management estimated a non-cash, pre-tax settlement expense of approximately $445 million, or $1.73 per share, to be recognized in 2022. The plan was underfunded by approximately $16 million at year-end 2021; management forecast no required contribution in 2022.
Key risks include steel and component inflation and availability, transportation constraints, COVID-19 disruption, competition, economic and construction conditions, and changes in energy-efficiency or emissions regulation. China represented approximately 26% of 2021 net sales; sales outside the U.S. were approximately 36%. The five largest customers accounted for approximately 41% of sales. The filing also identifies currency, cybersecurity, product liability, acquisition integration and pension risks.
The company reported ordinary-course litigation, including product liability and environmental matters, and stated it did not expect unresolved claims to have a material effect based on current information, reserves and insurance. The auditor issued unqualified opinions on the financial statements and internal controls; the internal-control assessment excluded Giant, a recently acquired business.
Important facts for investors to verify
- Whether pricing actions and cost recovery can restore margins after 2021 steel and logistics inflation.
- Whether 2022 sales, EPS and free-cash-flow guidance remains achievable under the stated pandemic and market assumptions.
- The final cost, timing and accounting treatment of the pension plan settlement, including the estimated $445 million non-cash charge.
- Integration and performance of Giant and the other acquired businesses, and the resulting effect on debt and returns.
- Exposure to China, major customers and foreign-currency movements, including the availability and repatriation of foreign-held cash.
- Developments in product warranty claims and whether the $184.4 million warranty reserve adequately reflects replacement costs and claim trends.