After a year of multiple guidance increases and repeatedly beating Wall Street's expectations at every turn, things are looking mighty good for A.O. Smith (NYSE:AOS) as we head into 2018. While its results were skewed by changes to U.S. tax law, it shouldn't' take away from what was a historically great year for the water heater manufacturer. Let's take a look at the company's most recent earnings report to see what's working well. 

By the numbers

Metric Q4 2017 Q3 2017 Q4 2016
Revenue $768 million $749 million $698 million
Operating income $140.8 million $131.6 million $116.4 million
Net income $22.7 million $93.7 million $82.7 million
Diluted EPS $0.13 $0.54 $0.47

Data source: A.O. Smith earnings release. EPS = earnings per share.

Don't let the one-time tax charge lead you to think it was a lousy quarter for A.O. Smith: This was another impressive report in a string of good reports in 2017. Higher revenue in both North America and China persists from higher volumes and higher prices. In fact, this year marked the first time A.O. Smith reached $1 billion in sales in China and $3 billion in total sales for the year. 

While its international business continues to rise at a steady clip, the more surprising result was the 9% increase in revenue in North America. North America is mostly considered a mature market for water heaters as just about every household has one. However, a robust housing market and investments in commercial-scale products helped increase sales at a higher-than-expected rate. Higher volumes and a price increase to reflect higher costs of steel drive much of these gains. 

The other encouraging sign was its growth in India. Sales in this newer market grew 40%. Like China, India could become another billion-dollar opportunity as the upper-middle and middle classes emerge in this rapidly growing economy. 

The one-time charge for the company's taxes came in at $81.8 million, or $0.47 per share, for the quarter. Absent this charge, its adjusted net income for fourth-quarter and fiscal year 2017 were $0.60 and $1.85 per share, respectively. That's a 16% boost compared to last year. In prior years, A.O. Smith's tax rate was 29.3%. With the changes to the tax code, management now expects its future tax rate will be between 22% and 22.5%.

On top of its $35 million in share repurchases for the fourth quarter, it announced a 29% increase to its quarterly dividend a few weeks ago. These two things will go a long way in enhancing shareholder value, and investors should keep in mind that management still has the board's blessing to repurchase another 2.4 million shares (about 1.6% of total share count). 

A tankless water heater up close

Image source: Getty Images.

What management had to say

In its press release, CEO Ajit Rajendra discussed some of the actions management took to grow the business and make it worthwhile for investors to stick around.

On Jan. 19, we announced a 29 percent increase in our quarterly dividend rate, which is the 13th consecutive year of dividend increases. With the acquisition of U.S. water softener company, Hague, we broadened our technologies that address the global water treatment market. With substantial cash and marketable securities balances and a significant amount of incremental borrowing capacity, we believe we have the resources available to take advantage of additional global opportunities that would add long-term value as well as return cash to shareholders.

Management did note that most of that cash and marketable securities -- $820 million -- are parked outside the U.S. With so many opportunities to grow the business in China and India, chances are that money will remain overseas to fund manufacturing capacity and other ways to grow the business in these markets. 

Also in the release, Rajendra shared the company's 2018 guidance  to give investors a peek at this year. 

We believe our growth drivers are intact and that our replacement demand remains substantial, which leads us to expect 2018 earnings to be between $2.50 and $2.58 per share. Our guidance includes the benefit related to our lower projected tax rate under U.S. Tax Reform.  The midpoint of our 2018 earnings guidance represents a 17 percent increase over 2017 adjusted earnings per share.

AOS Chart

AOS data by YCharts.

What a Fool believes

A.O. Smith keeps delivering on just about everything that an investor would want from a company in a typically slow-growth business. Its domestic sales continue to be a cash flow engine to support some shareholder-friendly moves, and its investments overseas are already generating decent profit margins to support growth. 

With an added boost of lower taxes coming in 2018, it's looking like this year will be another record one for A.O. Smith.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.