A. O. Smith Reports Record Sales and Earnings in 2023 and Introduces 2024 Guidance

2023 Highlights
(Comparisons are year-over-year ("YoY"), unless otherwise noted)

• Record sales of $3.9 billion, an increase of 3% primarily driven by higher water heater volumes
• Record net earnings of $556.6 million and record earnings per share (EPS) of $3.69 driven by higher volumes and improved operating margin in North America
• Adjusted earnings of $574.8 million resulted in adjusted EPS of $3.81, an increase of 21%
• Strong operating cash flow and free cash flow of $670 million and $598 million, respectively, and free cash flow conversion of 107%
• 2024 Outlook:
  • Sales increase of 3% to 5%
  • EPS of between $3.90 and $4.15

MILWAUKEE, Jan. 30, 2024 /PRNewswire/ -- Global water technology company A. O. Smith Corporation ("the Company") (NYSE: AOS) today announced its full year and fourth quarter 2023 results.

Key Financial Metrics 

Full Year
(in millions, except per share amounts)

Fourth Quarter
(in millions, except per share amounts)

"For a third consecutive year, A. O. Smith delivered record sales in 2023, led by resilient North America water heater demand. We achieved sales growth in China of 4% in local currency despite continued challenges in the Chinese economy," noted Kevin J. Wheeler, chairman and chief executive officer. "I am pleased with our global team's outstanding performance across all aspects of our business, as they continue to operate our facilities at a higher level of efficiency, take care of our customers, and launch new and exciting products that deliver value."

Segment-level Performance

North America

Full Year 2023

2023 sales of $2,922.9 million improved 4% over 2022, primarily driven by strong demand for water heater products, which was partially offset by lower boiler volumes and pricing.

Segment earnings were $726.7 million and segment margin was 24.9% in 2023 compared to segment earnings of $266.0 million and segment margin of 9.4% in 2022. The significant year-over-year increases in segment earnings and segment margin were primarily due to a 2022 pre-tax non-cash pension settlement expense of $346.8 million. 2023 adjusted segment earnings were $726.0 million and adjusted segment margin was 24.8%. 2022 adjusted segment earnings and adjusted segment margin were $611.0 million and 21.7%, respectively. The higher adjusted segment earnings and adjusted segment margin in 2023 compared to 2022 were primarily driven by higher water heater volumes and lower material costs that were partially offset by higher selling, general and administrative expenses.

Fourth Quarter 2023

Fourth quarter sales of $738.0 million increased 7% compared to fourth quarter sales in the prior year as higher water heater volumes were partially offset by lower boiler sales.

Segment earnings were $169.0 million and segment margin was 22.9% in 2023 compared to segment losses of $187.5 million and segment margin of -27.1% in 2022. The significant year-over-year increases in segment earnings and segment margin were primarily due to a 2022 pre-tax non-cash pension settlement expense of $346.8 million. Fourth quarter 2023 adjusted segment earnings were $173.3 million and adjusted segment margin was 23.5%, compared to adjusted segment earnings of $161.2 million and adjusted segment margin of 23.3% in 2022. The year-over-year increase in adjusted segment earnings and adjusted segment margin was primarily due to higher water heater volumes.

Rest of World

Full Year 2023

Rest of World sales of $956.9 million decreased 1% year-over-year, including an unfavorable currency translation impact of $44 million primarily related to sales in China. In local currency, segment sales increased by approximately 4% year-over-year. The increase in local currency sales in 2023 was primarily driven by higher volumes in China, particularly of water treatment products and recently introduced kitchen products. Sales in India increased 15% in local currency in 2023 due to strong demand for water heater and water treatment products.

Segment earnings were $83.4 million and segment margin was 8.7% in 2023 compared to segment earnings of $96.3 million and segment margin of 10.0% in the prior year. 2023 adjusted segment earnings and adjusted segment margin were $99.1 million and 10.4%, respectively. The higher adjusted segment earnings and adjusted segment margin in 2023 compared to 2022 were primarily driven by higher sales in China.

Fourth Quarter 2023

Rest of World sales of $260.2 million increased 4% year-over-year, including an unfavorable currency translation impact of approximately $3 million related to sales in China. The increase in sales in the fourth quarter of 2023 was primarily driven by sales of recently introduced products in China. Sales in India increased 11% in local currency.

Segment earnings were $26.6 million and segment margin was 10.2% in the fourth quarter of 2023, compared to segment earnings of $31.6 million and segment margin of 12.7% in the same period of 2022. Adjusted segment earnings and adjusted segment margin were $29.8 million and 11.5%, respectively, in the fourth quarter of 2023. The lower adjusted segment earnings and adjusted segment margin compared to the prior year were primarily due to promotions and advertising supporting the launch of new kitchen products in China.

Balance Sheet, Liquidity and Capital Allocation

As of December 31, 2023, cash and marketable securities balances totaled $363.4 million and debt totaled $127.3 million, resulting in a leverage ratio of 6.5% as measured by total debt-to-total capitalization.

Cash provided by operations was $670.3 million and free cash flow was $597.7 million in 2023, representing year-over-year increases of 71% and 86%, respectively, primarily driven by higher earnings and lower working capital.

As part of its commitment to return capital to shareholders, the Company repurchased 4.4 million shares at a cost of $306.5 million in 2023. As of December 31, 2023, authority remained to repurchase approximately 3.5 million additional shares. In January 2024, the Company's board of directors increased the number of shares authorized for repurchase by an additional 2 million shares. The Company expects to spend $300 million repurchasing shares in 2024.

On January 16, 2024, the Company's board of directors approved a $0.32 per share dividend for shareholders of record on January 31, payable on February 15, marking 84 consecutive years of dividend payments. For the full release, click here.

Outlook

2024 Outlook
(in millions except per share amounts)

"2023 was a very successful year with record financial results and our 2024 outlook projects growth in both sales and earnings. In North America, we enter 2024 with optimism for continued end-market demand in water heating and a rebound in boiler and water treatment volumes after 2023 corrections in end-market inventories. In our Rest of the World segment, we see overall growth with stability in China as the economy continues to work through its challenges as well as continued mid-teens growth in India. Our outlook for 2024 projects our sales to increase between 3% and 5% year-over-year. We expect our full-year EPS to be between $3.90 and $4.15, a 6% year-over-year increase at the mid-point," stated Wheeler.

"We believe our strong balance sheet and free cash flow continue to provide us the liquidity to focus on our capital allocation priorities of organic growth, acquisitions, dividends and share repurchases, which we believe will enable us to execute our strategy to invest and grow profitably."

The Company's guidance excludes the potential impacts from future acquisitions.

A. O. Smith will host a webcasted conference call at 10:00 a.m. (Eastern Daylight Time) today. The call can be heard live on the Company's website click here. An audio replay of the call will be available on the Company's website after the live event. To access the archived audio replay, go to the "Investors" page and select the Fourth Quarter 2023 Earnings Call link.

To provide improved transparency into the operating results of its business, the Company is providing non-GAAP measures. Free cash flow is defined as cash provided by operations less capital expenditures. Adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expenses exclude the impact of impairment charges, pension settlement income and expenses, as well as legal judgment income, expenses associated with terminated acquisition costs and non-operating pension expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the financial information included in this news release.

Forward-looking Statements

This release contains statements that the Company believes are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "forecast," "continue," "guidance," "outlook" or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this release. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: softening in U.S. residential water heater demand; negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company's ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs; negative impacts to demand for the Company's products, particularly commercial products, as a result of changes in commercial property usage that followed the COVID-19 pandemic; further weakening in U.S. residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; inconsistent recovery of the Chinese economy or a further decline in the growth rate of consumer spending or housing sales in China; negative impact to the Company's businesses from international tariffs, trade disputes and geopolitical differences, including the conflicts in Ukraine, the Middle East and attacks on commercial shipping vessels in the Red Sea; potential further weakening in the high-efficiency gas boiler segment in the U.S.; substantial defaults in payment by, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer; foreign currency fluctuations; the Company's inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the Company's businesses, including new technologies and new competitors; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency; and adverse developments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this news release are made only as of the date of this release, and the Company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the Company, or persons acting on its behalf, are qualified entirely by these cautionary statements. 

About A. O. Smith
Celebrating its 150^th year of business, A. O. Smith Corporation, with headquarters in Milwaukee, Wis., is a global leader applying innovative technology and energy-efficient solutions to products manufactured and marketed worldwide. Listed on the New York Stock Exchange (NYSE: AOS), the Company is one of the world's leading manufacturers of residential and commercial water heating equipment and boilers, as well as water treatment products. For more information, visit www.aosmith.com.

SOURCE A. O. Smith Corporation