A.O. Smith Corporation 10-K (2022-02-11)

For the fiscal year ended December 31, 2021

 

 

BUSINESS

 

As used in this annual report on Form 10-K, references to the “Company,” “A. O. Smith,” “AOS,” “we,” “us,” and “our” refer to A. O. Smith and its consolidated subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under “Item 8. Financial Statements and Supplementary Data” in this annual report on Form 10-K.

 

in conjunction with somebody/something : (formal) together with somebody/something

 

consolidated financial statement : a report that gives information about the financial position of all the companies belonging to a business group, rather than giving information about each company separately

 

 

 

Our company is comprised of two reporting segments: North America and Rest of World. Our 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.

 

 

 

NORTH AMERICA

 

We serve residential and commercial end markets in North America with a broad range of products including

 

Water heaters. Our residential and commercial water heaters come in sizes ranging from 2.5 gallon (point-of-use) models to 2,500 gallon products with varying efficiency ranges. We offer electric, natural gas and liquid propane tank-type models as well as tankless (gas and electric), heat pump and solar tank units.

 

 

 

In 2021, we further expanded our market presence and product offerings with our acquisition of Giant Factories, Inc., (Giant) a Canada-based manufacturer of residential and commercial water heaters. Typical applications for our water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes, schools and small businesses.

 

 

 

Boilers. Our residential and commercial boilers range in size from 45,000 British Thermal Units (BTUs) to 6.0 million BTUs. Our boilers are primarily used in space heating applications for residences, hospitals, schools, hotels and other large commercial buildings.

 

 

 

Water treatment products. With the acquisition of Aquasana, Inc. (Aquasana) in 2016 we entered the water treatment market.

 

 

 

We expanded our product offerings with the acquisitions of Hague Quality Water International (Hague) in 2017, Water-Right, Inc. (Water-Right) in 2019 and Master Water Conditioning Corporation (Master Water) in 2021.

 

 

 

Our 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. We also offer a complete line of food and beverage filtration products. Typical applications for our water treatment products include residences, restaurants, hotels and offices.

 

 

 

Other. In our North America segment, we also manufacture expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, related products and parts.

 

 

 

A significant portion of our North America sales is derived from the replacement of existing products.

 

derive : to get or obtain something

 

 

 

We believe we are the largest manufacturer and marketer of water heaters in North America with a leading share in both the residential and commercial portions of the market.

 

 

 

In the commercial portions of the market for both water heating and space heating, we believe our comprehensive product lines and our high-efficiency products give us a competitive advantage.

 

 

 

Our wholesale distribution channel, where we sell our products primarily under the A. O. Smith and State brands, includes more than 1,100 independent wholesale plumbing distributors serving residential and commercial end markets.

 

 

 

We also sell our residential water heaters through the retail and maintenance, repair and operations (MRO) channels. In the retail channel, our customers include four of the six largest national hardware and home center chains, including a long-standing exclusive relationship with Lowe’s where we sell A. O. Smith branded products.

 

 

 

Our Lochinvar brand is one of the leading residential and commercial boiler brands in the U.S. Approximately 45 percent of Lochinvar branded sales consist of residential and commercial water heaters while the remaining 55 percent of Lochinvar branded sales consist primarily of boilers and related parts. 

 

 

 

Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms, the remainder of our Lochinvar branded products are distributed through wholesale channels.

 

comprise : to have somebody/something as parts or members / to be the parts or members that form something

 

remainder : the people, things or time that remain / (mathematics) the numbers left after one number has been subtracted from another, or one number has been divided into another 

 

 

 

We sell our A. O. Smith branded water treatment products through Lowe's, Amazon, and our wholesale distribution channels. Our Aquasana branded products are primarily sold directly to consumers through e-commerce as well as online retailers including Amazon and through other retail chains.

 

 

 

Our water softener branded products and problem well water solutions, which include Hague, Water-Right, and Master Water are sold through water quality dealers. Our water softener products are also sold through home center retail chains.

 

 

 

Our energy-efficient product offerings continue to be a sales driver for our business. Our condensing commercial water heaters and boilers continue to be an option for commercial customers looking for high-efficiency water and space heating

 

 

 

with a short payback period through energy savings. We offer residential heat pump, condensing tank-type and tankless water heaters in North America, as well as other higher efficiency water heating solutions to round out our energy-efficient product offerings. In addition, during 2021 we launched a commercial heat pump water heater to align with greenhouse gas emission reduction trends across the country.

 

round out something : to complete something

 

align : to arrange something in the correct position, or to be in the correct position, in relation to something else, especially in a straight line

 

 

 

We sell our products in highly competitive markets. We compete in each of our targeted market segments based on product design, reliability, quality of products and services, advanced technologies, energy efficiency, maintenance costs and price.

 

 

 

Our principal water heating and boiler competitors in North America include Rheem, Bradford White, Rinnai, Aerco and Navien. Numerous other manufacturing companies also compete. Our principal water treatment competitors in the U.S. are Culligan, Kinetico, Pentair, Franklin Electric and Ecowater as well as numerous regional assemblers.

 

 

 

REST OF WORLD

 

We have operated in China for more than 25 years. In that time, we have established A. O. Smith brand recognition in the residential and commercial markets. The Chinese water heater market is predominantly comprised of electric wall-hung, gas tankless, combi-boiler, heat pump and solar water heaters.

 

predominantly : mostly; mainly

 

 

 

We believe we are one of the leading suppliers of water heaters and reverse osmosis water treatment products to the residential market in China in dollar terms. We manufacture and market residential water treatment products, primarily incorporating reverse osmosis technology, and commercial water treatment products. We also design and market range hoods and cooktops in China.

 

osmosis : (biology or chemistry) the slow steady passing of a liquid through a membrane (= a thin layer of material) as a result of there being different amounts of dissolved substances on either side of the membrane / the process of gradually learning or being influenced by something, as a result of being in close contact with it 

 

 

 

We sell our products in approximately 13,000 points of sale in China, approximately 5,800 are retail outlets in tier one and tier two cities of which over 2,000 exclusively sell our products. We also sell our products through e-commerce channels.

 

 

 

In 2008, we established a sales office in India and began importing products specifically designed for India. We began manufacturing water heaters in India in 2010 and water treatment products in 2015.

 

 

 

Our primary competitors in China in the water heater market segment are Haier and Midea, which are Chinese companies, as well as Rinnai. Our principal competitors in the water treatment market are Angel, Midea, Truliva, and Xiaomi.

 

 

 

In India, we compete with Racold, Bajaj and Havells in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market. In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in Hong Kong, Turkey and Vietnam, all of which combined comprised less than 11 percent of total Rest of World sales in 2021.

 

 

 

(the rest omitted)