A. O. Smith¡¯s financial performance was much improved in 2005, with substantially higher earnings and record sales of $1.69 billion. Our operating units overcame higher material and energy costs and created positive momentum that we believe will carry over into the new year. Among the highlights:
- Water Systems significantly improved its performance, setting sales,
operating earnings, and cash flow records;
- Volume from Electrical Products¡¯ low-cost operations in China increased
35 percent as we continue to increase our ability to manufacture
our complete line of electric motors in that country;
- Water heater sales in China increased to $86 million, more than
45 percent higher than the prior year;
- In November, we completed the acquisition of Yueyang Zhongmin Special
Electrical Machinery Co., Ltd., further enhancing our ability to
supply the growing market for commercial hermetic motors in China;
- A. O. Smith¡¯s cash flow from operations more than doubled last year
to $187 million, the result of higher earnings and a $71.4 million
reduction in working capital.
Another accomplishment in 2005 was that each of our units made major improvements in their operating capabilities through the use of continuous improvement, lean manufacturing, Kaizan, and other initiatives. These actions will help make each of our businesses more agile and better able to respond to our customers¡¯ needs.
The goals of the senior leadership team and our employees are to profitably grow our businesses, deliver improved returns to our shareholders, and continually find ways to add value to the company. Over the last 18 months, the leadership team and our Board of Directors have been taking a fresh look at the company¡¯s strategy. The result of this work is the A. O. Smith Integrated Business Model, a comprehensive guide to how we, as a company, can achieve our vision of becoming the global leader in the markets we serve.
The strategy we will employ to achieve this vision is to accelerate the company¡¯s sales and profit growth. We will be diligent in seeking profitable growth from a number of sources:
- Gaining share in our existing markets by designing and developing
innovative new products and services and by offering our customers
a compelling value proposition;
- Entering new domestic markets. There are segments of the motor and
water heater markets we do not serve, and we believe we have the ability
to bring new products to these untapped markets;
- Growing globally. We will identify and penetrate new international
markets using the enormously successful experience of our China water
heater business as a template;
- Expanding through acquisitions and joint ventures. We will continue to seek companies that bring us new customers, allow us to enter new markets, or offer innovative new technologies.
Among the excellence programs that support our growth strategy is the new Performance Excellence Program which we introduced last fall. Performance Excellence is a proven program that serves as a catalyst to bridge the gap between strategy and tactics, so that we can consistently achieve our targets and establish new, higher levels of performance. Each of our operating units has embraced the discipline of Performance Excellence, and it promises to become a way of life at our company. You can expect to hear more about this program in the future.
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