aos-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q

______________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023.


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 1-475

________________________________

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)

________________________________

Delaware

(State of Incorporation)

11270 West Park Place, Milwaukee, Wisconsin

(Address of Principal Executive Office)

39-0619790

(I.R.S. Employer

Identification No.)

53224-9508

(Zip Code)

(414) 359-4000

(Registrant’s telephone number, including area code)

_________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading
Symbol

Name of Each Exchange
on Which Registered

Common Stock (par value $1.00 per share)

AOS

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated Filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) ☐ Yes ☒ No

Class A Common Stock Outstanding as of April 26, 2023 - 25,903,736 shares

Common Stock Outstanding as of April 26, 2023 - 124,537,812 shares

Index

A. O. Smith Corporation


		Page
Part I.	FINANCIAL INFORMATION

	Condensed Consolidated Statements of Earnings - Three Months Ended March 3 1 , 202 3 and 20 2 2	3

	Condensed Consolidated Statements of Comprehensive Earnings - Three Months Ended March 31 , 202 3 and 20 2 2	3

	Condensed Consolidated Balance Sheets - March 31 , 202 3 and December 31, 20 2 2	4

	Condensed Consolidated Statements of Cash Flows - T hree Months Ended March 3 1 , 202 3 and 20 2 2	5

	Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 3 1 , 202 3 and 20 2 2	6

	Notes to Condensed Consolidated Financial Statements - March 3 1 , 202 3	7-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19-26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26

Item 4.	Controls and Procedures	26-27

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6.	Exhibits	27

Index to Exhibits		28

Signatures		29

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions, except for per share data)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Net sales	$	966.4	$	977.7
Cost of products sold	592.3		636.1
Gross profit	374.1		341.6
Selling, general and administrative expenses	187.2		179.8
Impairment expense	15.6		—
Interest expense	4.0		1.5
Other (income) expense, net	(4.0)		3.7
Earnings before provision for income taxes	171.3		156.6
Provision for income taxes	44.4		36.8
Net Earnings	$	126.9	$	119.8
Basic Net Earnings Per Share of Common Stock	$	0.84	$	0.76
Diluted Net Earnings Per Share of Common Stock	$	0.84	$	0.76
Dividends Per Share of Common Stock	$	0.30	$	0.28

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(dollars in millions)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Net earnings	$	126.9	$	119.8
Other comprehensive earnings (loss)
Foreign currency translation adjustments	2.5		0.6
Unrealized losses on cash flow derivative instruments, less related income tax benefit of $0.0 in 2023 and $0.2 in 2022	(0.1)		(0.6)
Adjustment to pension liability, less related income tax provision of zero in 2023 and $(1.2) in 2022	—		3.8
Comprehensive Earnings	$	129.3	$	123.6

See accompanying notes to unaudited condensed consolidated financial statements.

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A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in millions)


	(unaudited) March 31, 2023		December 31, 2022
Assets
Current Assets
Cash and cash equivalents	$	406.2	$	391.2
Marketable securities	89.8		90.6
Receivables	586.8		581.2
Inventories	503.7		516.4
Other current assets	57.3		54.3
Total Current Assets	1,643.8		1,633.7
Property, plant and equipment	1,375.9		1,364.8
Less accumulated depreciation	(790.4)		(774.1)
Net property, plant and equipment	585.5		590.7
Goodwill	619.9		619.7
Other intangibles	344.8		347.9
Operating lease assets	32.3		29.8
Other assets	110.0		110.5
Total Assets	$	3,336.3	$	3,332.3
Liabilities
Current Liabilities
Trade payables	$	550.4	$	625.8
Accrued payroll and benefits	59.9		75.7
Accrued liabilities	213.6		159.1
Product warranties	61.8		63.6
Debt due within one year	10.0		10.0
Total Current Liabilities	895.7		934.2
Long-term debt	330.8		334.5
Product warranties	119.4		118.9
Long-term operating lease liabilities	25.1		22.4
Other liabilities	175.1		174.6
Total Liabilities	1,546.1		1,584.6
Stockholders’ Equity
Class A Common Stock (shares issued, 26,034,116 and 26,035,656 as of March 31, 2023 and December 31, 2022, respectively)	130.2		130.2
Common Stock (shares issued 164,673,478 and 164,671,938 as of March 31, 2023 and December 31, 2022, respectively)	164.7		164.7
Capital in excess of par value	564.3		555.9
Retained earnings	2,966.5		2,885.0
Accumulated other comprehensive loss	(80.0)		(82.4)
Treasury stock at cost	(1,955.5)		(1,905.7)
Total Stockholders’ Equity	1,790.2		1,747.7
Total Liabilities and Stockholders’ Equity	$	3,336.3	$	3,332.3

See accompanying notes to unaudited condensed consolidated financial statements.

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A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Operating Activities
Net earnings	$	126.9	$	119.8
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation and amortization	19.2		20.3
Stock based compensation expense	7.0		7.6
Non-cash impairment	15.6		—
Net changes in operating assets and liabilities:
Current assets and liabilities	(50.6)		(137.8)
Noncurrent assets and liabilities	1.8		6.6
Cash Provided by Operating Activities	119.9		16.5
Investing Activities
Capital expenditures	(10.7)		(12.9)

Investments in marketable securities	(14.7)		(16.9)
Net proceeds from sale of marketable securities	15.6		31.9
Cash (Used in) Provided by Investing Activities	(9.8)		2.1
Financing Activities
Long-term debt (repaid) incurred	(3.7)		98.7
Common stock repurchases	(53.1)		(107.9)

Net proceeds (payments) from stock option activity	4.7		(2.7)
Dividends paid	(45.4)		(44.2)
Cash Used in Financing Activities	(97.5)		(56.1)
Effect of exchange rate changes on cash and cash equivalents	2.4		—
Net increase (decrease) in cash and cash equivalents	15.0		(37.5)
Cash and cash equivalents - beginning of period	391.2		443.3
Cash and Cash Equivalents - End of Period	$	406.2	$	405.8

See accompanying notes to unaudited condensed consolidated financial statements.

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A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in millions)

(unaudited)


	Three Months Ended March 31,
	2023		2022
Class A Common Stock
Balance at the beginning of period	$	130.2	$	130.5
Conversion of Class A Common Stock	—		—
Balance at end of period	$	130.2	$	130.5
Common Stock
Balance at the beginning of period	$	164.7	$	164.7
Conversion of Class A Common Stock	—		$	—
Balance at end of period	$	164.7	$	164.7
Capital in Excess of Par Value
Balance at the beginning of period	$	555.9	$	545.2
Issuance of share units	(10.1)		(5.8)
Vesting of share units	(3.1)		(2.4)
Stock based compensation expense	6.8		7.7
Exercises of stock options	4.7		0.4
Issuance of share based compensation	10.1		5.8
Balance at end of period	$	564.3	$	550.9
Retained Earnings
Balance at the beginning of period	$	2,885.0	$	2,826.6
Net earnings	126.9		119.8
Dividends on stock	(45.4)		(44.2)
Balance at end of period	$	2,966.5	$	2,902.2
Accumulated Other Comprehensive Loss (see Note 16)	$	(80.0)	$	(327.6)
Treasury Stock
Balance at the beginning of period	$	(1,905.7)	$	(1,503.4)
Exercise of stock options	0.2		(2.9)
Shares repurchased	(53.1)		(107.9)
Vesting of share units	3.1		2.4
Balance at end of period	$	(1,955.5)	$	(1,611.8)
Total Stockholders’ Equity	$	1,790.2	$	1,808.9

See accompanying notes to unaudited condensed consolidated financial statements.

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A. O. SMITH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the full year. It is suggested the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 14, 2023.

Recent Accounting Pronouncements

No recent accounting pronouncements are expected to have an impact on our condensed consolidated financial statements.

2. Revenue Recognition

Substantially all of the Company’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders are used to determine the existence of a sales contract. Shipping documents are used to verify shipment. For substantially all of its products, the Company transfers control of products to the customer at the point in time when title and risk are passed to the customer, which generally occurs upon shipment of the product. Each unit sold is considered an independent, unbundled performance obligation. The Company’s sales arrangements do not include other performance obligations that are material in the context of the contract.

The nature, timing and amount of revenue for a respective performance obligation are consistent for each customer. The Company measures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of the transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $70.3 million and $85.7 million at March 31, 2023 and December 31, 2022, respectively. Customer deposit liabilities are short term in nature, recognized into revenue within one year of receipt. The Company assesses the collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for credit losses, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for credit losses was $10.2 million at March 31, 2023 and $9.5 million at December 31, 2022.

Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.

Disaggregation of Net Sales

The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, heat pump and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world.

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2. Revenue Recognition (continued)

As each segment manufactures and markets products in its respective region of the world, the Company has determined that geography is the primary factor in reporting its sales. The Company further disaggregates its North America segment sales by major product line as each of North America’s major product lines is sold through distinct distribution channels and these product lines may be impacted differently by certain economic factors. Within the Rest of World segment, particularly in China and India, the Company’s major customers purchase across the Company’s product lines, utilizing the same distribution channels regardless of product type. In addition, the impact of economic factors is unlikely to be differentiated by product line in the Rest of World segment.

The North America segment's major product lines are defined as the following:

Water heaters The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters include residences, restaurants, hotels, office buildings, laundries, car washes and small businesses. The Company sells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than 1,000 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the Company’s water heater sales in the North America segment is derived from the replacement of existing products.

Boilers The Company’s boilers are closed loop water heating systems used primarily for space heating or hydronic heating. The Company’s boilers are primarily used in applications in commercial settings for hospitals, schools, hotels and other large commercial buildings while residential boilers are used in homes, apartments and condominiums. The Company’s boiler distribution channel is comprised primarily of manufacturer representative firms, with the remainder of its boilers distributed through wholesale channels. The Company’s boiler sales in the North America segment are derived from a combination of replacement of existing products and new construction.

Water treatment products The Company’s water treatment products range from point-of-entry water softeners, solutions for problem well water, and whole-home water filtration products to on-the-go filtration bottles and point-of-use carbon and reverse osmosis products. Typical applications for the Company’s water treatment products include residences, restaurants, hotels and offices. The Company sells water treatment products through its retail and wholesale distribution channels, similar to water heater products and related parts. The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through e-commerce sales channels. A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.

The following table disaggregates the Company’s net sales by segment. As described above, the Company’s North America segment sales are further disaggregated by major product line. In addition, the Company’s Rest of World segment sales are disaggregated by China and all other Rest of World:


(dollars in millions)	Three Months Ended March 31,
	2023		2022
North America
Water heaters and related parts	$	637.3	$	615.8
Boilers and related parts	58.4		57.5
Water treatment products	57.0		56.8
Total North America	752.7		730.1
Rest of World
China	$	190.2	$	228.3
All other Rest of World	28.9		27.7
Total Rest of World	219.1		256.0
Inter-segment sales	(5.4)		(8.4)
Total Net Sales	$	966.4	$	977.7

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3. Impairment Expense

In the first quarter of 2023, the Company entered into negotiations to sell its business in Turkey (disposal group), which is included in the Company's Rest of World segment. The Company determined that the fair value of the disposal group, less cost to sell, was lower than its carrying amount. As a result, in the first quarter of 2023, the Company recorded an impairment expense of $15.6 million of which $12.5 million was recorded in the Rest of World segment and $3.1 million was recorded in Corporate Expense. The impairment was recorded as a net reduction of $4.5 million to the assets and liabilities and $11.1 million for the anticipated liquidation of the cumulative foreign currency translation adjustment associated with the disposal group. The accrual for the impairment is recorded in Accrued liabilities in the condensed consolidated balance sheet.

As of March 31, 2023, the disposal group did not meet the requirements to be classified as discontinued operations as the sale will not have a material effect on the Company's operations and does not represent a shift in the Company's strategy. Accordingly, the remaining carrying value of the disposal group as of March 31, 2023, was $0.6 million and classified as held for sale. The sale of the disposal group was completed in April 2023.

4. Leases

The Company’s lease portfolio consists of operating leases for buildings and equipment, such as forklifts and copiers, primarily in the United States and China. The Company defines a lease as a contract that gives the Company the right to control the use of a physical asset for a stated term. The Company pays the lessor for that right, with a series of payments defined in the contract and a corresponding right of use operating lease asset and liability are recorded. The Company has elected not to record leases with an initial term of 12 months or less on its condensed consolidated balance sheet. To determine balance sheet amounts, required legal payments are discounted using the Company’s incremental borrowing rate as of the inception of the lease. The incremental borrowing rate is the rate of interest that the Company would incur if it were to borrow, on a collateralized basis, an amount equal to the value of the leased item over a similar term, in a similar economic environment. Variable lease components not based on an index or rate are excluded from the measurement of the lease asset and liability and expensed as incurred for all asset classes.

Certain leases include one or more options to renew or terminate. Renewal terms can extend the lease term from one to five years and options to terminate can be effective within one year. The exercise of lease renewal or termination is at the Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability. The Company’s lease agreements do not contain any arrangements related to material residual value guarantees, restrictive covenants or material subleases. Cash flows associated with leases are materially consistent with the expense recorded in the condensed consolidated statement of earnings.

Supplemental balance sheet information related to leases is as follows:


(dollars in millions)	March 31, 2023		December 31, 2022
Liabilities
Short term: Accrued liabilities	$	9.4	$	9.9
Long term: Operating lease liabilities	25.1		22.4
Total operating lease liabilities	$	34.5	$	32.3
Less: Rent incentives and deferrals	(2.2)		(2.5)
Assets
Operating lease assets	$	32.3	$	29.8


Lease Term and Discount Rate	March 31, 2023
Weighted-average remaining lease term	7.4 years
Weighted-average discount rate	3.71	%

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4. Leases (continued)

The components of lease expense were as follows:


(dollars in millions)		Three months ended March 31,
Lease Expense	Classification	2023(1)		2022(2)
Operating lease expense	Cost of products sold	$	1.3	$	1.0
	Selling, general and administrative expenses	4.1		3.9

(1)2023 includes short-term and variable lease expenses of $1.1 million and $1.2 million, respectively.

(2)2022 includes short-term and variable lease expenses of $0.5 million and $0.8 million, respectively.

Maturities of lease liabilities were as follows:


(dollars in millions)	March 31, 2023
2023	$	8.1
2024	8.2
2025	5.8
2026	4.0
2027	2.4
After 2027	11.7
Total lease payments	40.2
Less: Imputed interest	(5.7)
Present value of operating lease liabilities	$	34.5

5. Inventories

The following table presents the components of the Company’s inventory balances:


(dollars in millions)	March 31, 2023		December 31, 2022
Finished products	$	175.5	$	174.4
Work in process	44.4		42.1
Raw materials	331.0		349.2
Inventories, at FIFO cost	550.9		565.7
LIFO reserve	(47.2)		(49.3)
Inventories, at LIFO cost	$	503.7	$	516.4

6. Product Warranties

The Company offers warranties on the sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims. The following table presents the Company’s warranty liability activity:


(dollars in millions)	Three Months Ended March 31,
	2023		2022
Balance at January 1,	$	182.5	$	184.4
Expense	18.4		13.9
Claims settled	(19.7)		(15.4)
Balance at March 31,	$	181.2	$	182.9

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7. Debt

In 2021, the Company renewed and amended its $500 million multi-year multi-currency revolving credit agreement with a new expiration date of April 1, 2026. The facility has an accordion provision that allows it to be increased up to $850 million if certain conditions (including lender approval) are satisfied. Borrowings under the Company's bank credit lines and commercial paper borrowings are supported by a $500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at March 31, 2023. At its option, the Company either maintains cash balances or pays fees for bank credit and services. The facility requires the Company to maintain two financial covenants, a leverage ratio test and an interest coverage test. The Company was in compliance with the covenants as of March 31, 2023.

8. Earnings per Share of Common Stock

The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:


	Three Months Ended March 31,
	2023	2022
Denominator for basic earnings per share - weighted average shares	150,897,302	157,018,566
Effect of dilutive stock options and share units	1,003,545	1,299,133
Denominator for diluted earnings per share	151,900,847

SEC Form 10-Q filed by A.O. Smith Corporation