Charles T. Lauber
Executive Vice President and Chief Financial Officer at A. O. Smith
Thank you, Kevin. Good morning, everyone. I'm on Slide seven. Full-year sales in North America segment rose to $2.8 billion, an 11% increase compared with 2021. Pricing actions, largely on water heaters were partially offset by lower volumes of residential water heaters. Higher volumes of boilers and water treatment products also added to segment sales growth. Giant, acquired in October 2021 added incremental sales of $94 million.
North America segment adjusted earnings of $611 million increased 5% compared with 2021. The earnings benefit of inflation-related price increases and higher volumes of boilers and water treatment products was partially offset by higher material and freight costs and lower residential water heater volumes. Adjusted operating margin of 21.7%, a decline of 120 basis points year-over-year was driven by inflationary headwinds and volume-related production inefficiencies. We exited 2022 with our highest quarterly adjusted operating margins of the year at 23.3%.
Moving to Slide 8. Rest of the World segment sales of $966 million decreased 7% year-over-year and 2% in constant-currency basis. Currency translation unfavorably impacted segment sales by approximately $49 million, $36 million of which impacted China sales. Our sales decrease was primarily driven by lower sales in China as consumer demand was negatively impacted by COVID-19-related restrictions. India sales grew 28% in local currency in 2022 compared to 2021, as we continued to outperform the market.
Rest of the World segment earnings of $96 million increased 5% compared to segment earnings in 2021. In China, the impact from lower volumes was more than offset by lower selling, advertising and incentive expenses. Segment operating margin improved to 10%, an increase of 120 basis points compared to 2021, primarily as a result of improved management of discretionary spending in China. Please turn to Slide 9.
Turning to fourth quarter performance, we delivered sales of $936 million in the fourth quarter of 2022, down 6% year-over-year, driven by lower residential water heater volumes in North America and lower consumer demand in China that more than offset inflation-related pricing actions. Adjusted earnings in the fourth quarter were $0.86 per share compared with adjusted earnings of $0.85 per share in the fourth quarter of 2021. Please turn to Slide 10.
Fourth quarter sales in North America segment were $692 million, a 3% decrease compared to record sales in the fourth quarter of 2021. We saw quarter-over-quarter improvement of residential water heater demand. However, water heater volumes were still below the record industry levels in the fourth quarter of 2021. Our fourth quarter sales benefited from pricing actions and stronger boiler sales growth of 36% driven by backlog reduction.
North America segment adjusted earnings of $161 million decreased slightly compared with 2021. Their earnings benefit of inflation-related price increases, higher boiler volumes and lower steel costs was offset by lower residential water heater volumes. An improved price-cost relationship resulted in higher adjusted segment operating margin of 23.3%, compared with the 2021 adjusted segment margin of 23.0%.
Moving to Slide 11. Fourth quarter Rest of the World segment sales of $250 million decreased 13% year-over-year, primarily driven by the impact of unfavorable currency translation and lower consumer demand in China due to the COVID-19-related restrictions. Currency translation unfavorably impacted China sales by approximately $24 million. In local currency, China sales decreased approximately 7% year-over-year. India sales grew 16% in local currency in 2022, compared to 2021.
Rest of the World segment earnings of $32 million were slightly higher than Q4, 2021 segment earnings. In China, lower incentives and selling expenses offset lower volumes and currency translation headwinds resulting in segment operating margin of 12.7%, a significant improvement over the segment operating margin of 10.6% in the fourth quarter of 2021. Please turn to Slide 12.
We generated free cash flow of $321 million during 2022, lower than in 2021 as higher adjusted earnings were offset by lower customer deposits in China, higher 2021 incentive payments made in 2022 and working capital cash outlays, primarily related to higher inventories that more than offset the lower accounts receivable balances. Our cash balance totaled $482 million at the end of December and our net cash position was $137 million. Our leverage ratio was 16.5% as measured by total debt to total capital.
Now turning to Slide 13. In addition to returning capital to shareholders, we continue to see opportunities for organic growth, innovation and new product development across all of our product lines and geographies. We continue to target strategic acquisitions that meet our financial metrics of accretive to earnings in the first year and return on cost of capital in three years. The strength of our balance sheet allows us to pursue strategic acquisitions even in times of economic uncertainty.
Earlier this month, our Board approved our next quarterly dividend of $0.30 per share. We have increased our dividend for 30 consecutive years. We repurchased approximately 6.6 million shares of common stock in 2022 for a total of $404 million. The strength of our balance sheet also allows us to maintain our strong track record of delivering returns to shareholders. Over the past two years, we have returned $1 billion to shareholders through our dividend and share repurchases.
Please turn to Slide 14 and our 2023 earnings guidance and outlook. As previously discussed, we terminated our defined benefit pension plan at the end of 2021. The termination followed a strategy and measured glide path to de-risk our fully-funded exposure to pension liabilities. The plan, which was previously sunset [Phonetic] for benefits earned on December 31st, 2014, represented over 95% of the Company's pension plan liability.
The terminated plan's pension liability was annuitized in 2022. The pension settlement which we completed in the fourth quarter, accelerated the recognition of $417 million of non-cash, pre-tax pension expenses. Tax benefits associated with the pension settlement were $168 million and include amounts recorded at historical tax rates and results in an after-tax EPS impact of $1.60.
We are pleased to introduce our 2023 outlook with an expected EPS range of $3.15 per share and $3.45 per share. The midpoint of our EPS range represents an increase of 5% compared with the 2022 adjusted EPS. Our outlook is based on a number of key assumptions including, our guidance assumes that steel prices in 2023 on an annual basis will improve approximately 40% to 45% compared to 2022, including a sequential improvement of approximately 20% to 25% from the fourth quarter of 2022 to the first quarter of 2023.
We have seen a flattening of the steel index, and therefore, our outlook does not project a further meaningful sequential reduction in steel costs through 2023. Regarding other costs outside of steel, we have generally seen flattening in cost at elevated levels. While we do expect a shift in buying power to move from neutral towards a buyer's market as we progressed through the year, our outlook does not assume significant improvement in non-steel material costs in 2023.
We saw continued improvement in our supply chain in the second half of 2022. While challenges still persist, disruptions are limited. We remain in close contact with our suppliers and logistic providers to manage and resolve supply chain issues as they arise. We expect to generate strong free cash flow of between $550 million and $600 million. For the year, capex should be between $70 million and $75 million. Corporate and other expenses are expected to be approximately $55 million. Our effective tax rate is estimated to be approximately 24%. And, we expect to repurchase approximately $200 million of our shares of stock, resulting in outstanding diluted shares of 150 million at the end of 2023.
I'll now turn the call back over to Kevin, who will provide more color on our key markets and topline growth outlook and segment expectations for 2023, staying on Slide 14. Kevin?
