A. O. Smith(AOS) - 2023 Q1 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the three months ended March 31, 2023, and 2022, including Statements of Earnings, Comprehensive Earnings, Balance Sheets, Cash Flows, and Stockholders' Equity, with detailed notes on accounting policies and financial data Condensed Consolidated Statements of Earnings For the three months ended March 31, 2023, Net Sales slightly decreased to $966.4 million from $977.7 million year-over-year, while Net Earnings increased to $126.9 million, or $0.84 per diluted share, compared to $119.8 million, or $0.76 per diluted share, in the prior-year period, despite a $15.6 million impairment expense Consolidated Statements of Earnings (Q1 2023 vs Q1 2022) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net sales | $966.4 million | $977.7 million | | Gross profit | $374.1 million | $341.6 million | | Impairment expense | $15.6 million | $0.0 million | | Earnings before income taxes | $171.3 million | $156.6 million | | Net Earnings | $126.9 million | $119.8 million | | Diluted Net Earnings Per Share | $0.84 | $0.76 | Condensed Consolidated Balance Sheets As of March 31, 2023, total assets increased slightly to $3,336.3 million from $3,332.3 million at December 31, 2022, while total liabilities decreased to $1,546.1 million from $1,584.6 million, and total stockholders' equity rose to $1,790.2 million from $1,747.7 million Balance Sheet Summary | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,643.8 million | $1,633.7 million | | Total Assets | $3,336.3 million | $3,332.3 million | | Total Current Liabilities | $895.7 million | $934.2 million | | Total Liabilities | $1,546.1 million | $1,584.6 million | | Total Stockholders' Equity | $1,790.2 million | $1,747.7 million | Condensed Consolidated Statements of Cash Flows For the first three months of 2023, cash provided by operating activities significantly increased to $119.9 million from $16.5 million in the prior-year period, with cash used in investing activities at $9.8 million and financing activities at $97.5 million, resulting in a period-end cash balance of $406.2 million Cash Flow Summary (Q1 2023 vs Q1 2022) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Cash Provided by Operating Activities | $119.9 million | $16.5 million | | Cash (Used in) Provided by Investing Activities | $(9.8) million | $2.1 million | | Cash Used in Financing Activities | $(97.5) million | $(56.1) million | | Net increase (decrease) in cash | $15.0 million | $(37.5) million | | Cash and Cash Equivalents - End of Period | $406.2 million | $405.8 million | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures supporting the financial statements, including revenue disaggregation, a $15.6 million impairment expense from the Turkey business sale, segment performance, stock-based compensation, and pension plan termination details Disaggregation of Net Sales (Q1 2023 vs Q1 2022) | Segment / Product Line | Q1 2023 (millions) | Q1 2022 (millions) | | :--- | :--- | :--- | | 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 | | Total Net Sales | $966.4 | $977.7 | - In Q1 2023, the company recorded a $15.6 million impairment expense related to the planned sale of its business in Turkey, with $12.5 million allocated to the Rest of World segment and $3.1 million to Corporate Expense[31] - The company's largest defined benefit pension plan was terminated as of December 31, 2021, with liabilities settled in Q4 2022, significantly reducing pension-related expenses in Q1 2023[53] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial performance, noting a slight sales decrease but improved gross margins due to lower material costs, with North America showing strength while the Rest of World segment was impacted by lower demand in China and an impairment charge, maintaining strong liquidity and providing a full-year 2023 outlook of flat sales and adjusted EPS between $3.30 and $3.50 Overview and Outlook The company reports stable supply chains and resilient demand in North America residential water heaters, recorded a non-cash impairment of $15.6 million for the Turkey business sale, and expects full-year 2023 consolidated sales to be approximately flat with adjusted earnings between $3.30 and $3.50 per share - The company committed to selling its business in Turkey, resulting in a non-cash impairment charge of $15.6 million in Q1 2023[77] - Full-year 2023 consolidated sales are expected to be approximately flat to 2022 (range of +/- 2%)[77][82] - Full-year 2023 adjusted earnings are guided to be between $3.30 and $3.50 per share[82] Results of Operations Q1 2023 sales were $966.4 million, a 1.2% decrease from Q1 2022, driven by lower sales in China partially offset by higher water heater volumes in North America, while gross profit margin improved significantly to 38.7% due to lower material costs, and net earnings increased to $126.9 million despite a $15.6 million impairment charge - Gross profit margin increased to 38.7% in Q1 2023 from 34.9% in Q1 2022, primarily due to lower steel and other material costs[79] - SG&A expenses increased by $7.4 million year-over-year to $187.2 million, driven by higher selling expenses in North America on higher volumes[79] - The effective income tax rate rose to 25.9% from 23.5% in the prior year, mainly due to a change in geographical earnings mix and the non-tax-deductible impairment expense[79] Segment Performance The North America segment saw sales increase to $752.7 million and segment margin expand to 25.1%, driven by higher water heater volumes and lower material costs, while the Rest of World segment experienced a 14% sales decline to $219.1 million, impacted by lower demand in China and unfavorable currency translation, with segment earnings falling sharply to $5.3 million due to a $12.5 million impairment charge North America Segment Performance (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Sales | $752.7 million | $730.1 million | | Segment Earnings | $188.6 million | $151.8 million | | Segment Margin | 25.1% | 20.8% | Rest of World Segment Performance (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Sales | $219.1 million | $256.0 million | | Segment Earnings | $5.3 million | $24.8 million | | Segment Margin | 2.4% | 9.7% | - Rest of World adjusted segment earnings, excluding the $12.5 million impairment charge, were $17.8 million with an adjusted margin of 8.1% for Q1 2023[81] Liquidity & Capital Resources The company's liquidity position strengthened, with working capital increasing to $748.1 million, and cash from operations surged to $119.9 million for the quarter, a substantial increase from $16.5 million in the prior year, while the company repurchased $53.1 million of its stock and paid $45.4 million in dividends, maintaining a total debt to capitalization ratio of 16.0% - Cash provided by operating activities was $119.9 million in Q1 2023, compared to $16.5 million in Q1 2022, leading to free cash flow of $109.2 million[84] - During Q1 2023, the company repurchased 821,000 shares for $53.1 million, and expects to spend approximately $300 million on stock repurchases in 2023[85] - As of March 31, 2023, the company had an available borrowing capacity of $288.9 million under its revolving credit facility[85] Non-GAAP Financial Information This section provides reconciliations of GAAP to non-GAAP financial measures, showing Q1 2023 adjusted earnings of $142.5 million, or $0.94 per share, after excluding a $15.6 million pre-tax impairment expense, with free cash flow for the quarter at $109.2 million, and also presents adjusted segment earnings and its 2023 adjusted EPS guidance Reconciliation of Net Earnings to Adjusted Earnings (Q1 2023) | Metric | Amount (millions) | | :--- | :--- | | Net Earnings (GAAP) | $126.9 | | Impairment expense, before tax | $15.6 | | Adjusted Earnings (non-GAAP) | $142.5 | Reconciliation of Diluted EPS to Adjusted EPS (Q1 2023) | Metric | Amount | | :--- | :--- | | Diluted EPS (GAAP) | $0.84 | | Impairment expense per share | $0.10 | | Adjusted EPS (non-GAAP) | $0.94 | Reconciliation to Free Cash Flow (Q1 2023) | Metric | Amount (millions) | | :--- | :--- | | Cash provided by operating activities (GAAP) | $119.9 | | Less: Capital expenditures | $(10.7) | | Free cash flow (non-GAAP) | $109.2 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company states that its exposure to market risks, including currency and commodity risks, has not materially changed since its 2022 Annual Report on Form 10-K, and it continues to use derivative contracts, primarily with terms of less than one year, to manage these exposures without engaging in speculative trading - The company's quantitative and qualitative disclosures about market risk have not materially changed since the year-ended December 31, 2022 Form 10-K[102] - The company uses forward and futures contracts to minimize currency and commodity risk exposures, with the majority of contracts having a duration of less than one year[102] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2023, with no material changes in the company's internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of March 31, 2023[103] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[105] Part II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material changes in legal and environmental matters from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes in legal and environmental matters since the 2022 Form 10-K filing[106] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2023, the Board of Directors authorized an additional 7,500,000 shares for the company's discretionary share repurchase program, with 821,000 shares repurchased for a total cost of $53.1 million, leaving 7,057,462 shares available as of March 31, 2023 - The Board of Directors approved adding 7,500,000 shares to the existing share repurchase authority in Q1 2023[107] Issuer Purchases of Equity Securities (Q1 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2023 | 315,000 shares | $60.14 | | Feb 2023 | 230,000 shares | $67.29 | | Mar 2023 | 276,000 shares | $67.52 | | Total Q1 | 821,000 shares | $64.63 (average) | - As of March 31, 2023, 7,057,462 shares remained available for repurchase under the company's plans[108] Item 6. Exhibits This section references the Exhibit Index, which lists all exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data files - The report includes CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and financial statements formatted in XBRL (Exhibit 101)[110]