A.O. Smith has water on the brain. Controlled by the founding Smith family, the company makes water heating equipment for residential and commercial users. Its products include home gas and electric water heaters and large-scale commercial water heating systems. Its Lochinvar subsidiary specializes in high efficiency water heaters, boilers, pool heaters, and storage tanks. A.O. Smith sells its products in North America and China through a network of more than 1,000 wholesale distributors, as well as retailers such as Lowe's and Sears. A.O. Smith has operations in the U.S., Canada, Mexico, China, India, the UK, and the Netherlands.
The company operates through two reporting segments: North America (roughly 70% of revenue) and Rest of World (roughly 30%).
Both segments make and market residential gas, gas tankless, and electric water heaters, as well as commercial water heating equipment.
The North America segment is responsible for manufacturing and selling specialty commercial water heating equipment, condensing and non-condensing boilers, and water system tanks.
The Rest of World segment, which consists of China, India, and Europe, also makes and markets water treatment products, primarily in Asia.
A.O. Smith is a global company, with manufacturing operations in the US, Canada, Mexico, China, India, and the Netherlands. It boasts sales and distribution offices in more than 60 countries. More than 60% of its revenue is generated in the US, while China contributes nearly 30%. Canada generates another 5% of sales. Other large markets include Europe and India.
Sales and Marketing
A.O. Smith sells its products in North America and China through a network of wholesale distributors, including more than 1,200 independent wholesale plumbing distributors with 4,400-plus locations that serve both residential and commercial customers. It also sells its residential water heaters through retailers, such as Lowe's and Sears.
A.O. Smith's client base is fairly concentrated, as its top five customers made up roughly 35% of its total sales in 2014. The company spent $94 million on advertising in 2014, up from $78 million in 2013 and $69.2 million in 2012.
A.O. Smith has enjoyed rising revenue and profits for the past few years thanks to new home building in the US and the continued market acceptance of its high-efficiency condensing boilers.
A.O. Smith's revenue in 2014 grew by 9% to a record $2.36 billion, mostly thanks to higher sales volume of its water heaters and boilers in the US, plus 18% sales growth of water heaters and water treatment products in China. Sales in Canada, however, declined due to unfavorable currency exchange, while sales in India fell due to weakness in the housing market and a termination of a co-branding relationship with its largest distributor in the region.
Higher revenue and lower restructuring costs in 2014 drove the company's net income up by 23% to $207.8 million. Operations provided $263.9 million, or 6% less cash than in 2013, mostly as the company spent more toward marketable securities and building its inventory.
Foreign markets have become increasingly important for A.O. Smith. While the US still represents 62% of sales (down from 64% in 2012), the company has been seeking growth in the emerging markets. A.O. Smith has boosted its presence in its fast-growing China market, with the opening of its second water heater manufacturing plant in Nanjing to add 50% more capacity to its China water heater operations. With sales in China jumping by 18% in 2014 and double-digits in prior years, the company hopes China will continue to provide growth over the long term.
It's been investing in other emerging markets as well. In 2014, the company began marketing its reverse osmosis water purification products in Vietnam, including under-the-sink water purifiers, counter top water dispensers, and tankless RO products that produce large volumes of purified water. In 2013, it acquired Turkish water treatment company MiM to expand its reach into the Eastern European and Black Sea water treatment markets.
A.O. Smith has also been innovating with new product lines, with high-efficiency and sustainability in mind to target frugal and environmentally-conscious consumers. In 2014, it introduced both its Master-Fit Ultra-Low NOx commercial gas water heater for the California market, along with its high-efficiency commercial gas water heater Cyclone Mxi product with an efficiency-boosting adjustable burn rate feature that will save energy and lower customer operating costs.
Mergers and Acquisitions
In 2013, A.O. Smith purchased privately-held Turkish water treatment company MiM Isitma Sogutma Havalandirma ve Aritma Sistemleri San. Tic. A.S. (MiM) for $4 million, expanding the company's product offerings and expanding its reach to Eastern Europe and the Black Sea region water treatment markets.
The company sold its electric motors segment, Electric Products Company, to Regal Beloit in 2011. The deal included $760 million in cash in addition to $140.6 million in stock in Regal Beloit. A. O. Smith used proceeds from the sale to continue to grow in emerging markets. Working to expand its US business, A.O. Smith in 2011 bought Tennessee-based boiler manufacturer Lochinvar for some $418 million. The addition of Lochinvar gave A.O. Smith entry into the growing residential and commercial condensing boiler markets.
The Smith Family Voting Trust controls about 87% of the company.