Executive VP & CFO at A. O. Smith
Thank you, Kevin, and good morning, everyone. I'm on Slide 7. Full year sales in North America segment rose to $2.5 billion, a 19% increase compared with 2020. Pricing actions largely on water heaters, represented approximately 70% of the increase. Higher volumes of water heaters and boilers were driven by strong replacement and new construction demand and higher volumes of water treatment products added to segment sales growth.
Giant, acquired on October 19, 2021, added $23 million to North America sales. North America segment earnings of $591 million increased 17% compared with 2020. The earnings benefit of inflation-related price increases and higher volumes was somewhat offset by higher material and freight costs. Segment operating margin of 23.4% was a modest decline compared with the 2020 segment margin despite significant cost headwinds.
Moving on to Slide 8. Rest of the World segment sales of $1 billion increased 30% year-over-year with approximately 60% of that increase attributed to higher volumes. Our sales increase was positively impacted by lower channel inventory reductions in 2021 as compared to 2020. Channel inventory levels at the end 2021 were at the lowest level in 5 years. Currency translation of China sales favorably impacted sales by approximately $58 million. Growth in each of our major product categories in China contributed to local currency growth of 24% in 2021. New product introductions in the premium segment of the market, particularly our slim line electric wall hung water heaters and water treatment products that deliver hot and ambient filtered water contributed to sales gains.
India sales grew 31% in 2021 compared to 2020. We remain committed to India as a long-term growth opportunity given its attractive growth characteristics and changes in demographics. Rest of the World segment earnings of $91 million increased significantly over breakeven results in 2020, which were adversely impacted by the pandemic. In China, the benefits from higher volumes and favorable mix were partially offset by employee incentives and higher advertising as well as the absence of social insurance waivers that were received in 2020. Segment operating margin improved to 8.8% compared to 2020, primarily as a result of improved operating leverage from higher volumes.
Please turn to Slide 9. Turning to the quarter -- fourth quarter performance, we delivered record sales of $996 million in the fourth quarter of 2021, up 19% year-over-year, driven by inflation-related pricing actions primarily in North America. Earnings in the fourth quarter were $0.87 per share, which is an 18% increase compared with earnings of $0.74 per share in the fourth quarter of 2020.
Please turn to Slide 10. Fourth quarter sales in North America segment rose to $715 million, a 27% increase compared against the strong comp in the fourth quarter of 2020. Pricing actions largely on water heaters and sales from Giant represented almost all of the increase. While volumes were strong relative to historical fourth quarter volumes, our 2020 fourth quarter was exceptionally strong, creating a difficult comp. North America segment earnings of $167 million increased 21% compared with 2020. The earnings benefit of inflation-related price increases was somewhat offset by higher material and freight costs and lower volumes. Pricing actions trailed rapidly rising steel costs, which resulted in a lower segment operating margin of 23.3% compared with the 2020 segment margin of 24.6%.
Moving to Slide 11. Fourth quarter Rest of the World segment sales of $288 million increased 3% year-over-year, primarily driven by favorable mix in China as consumers purchased our new higher-priced products with more features and benefits, which was offset by lower China volumes compared to the fourth quarter of 2020 which benefited from pent-up demand in China's economy emerging from the pandemic. Currency translation of China sales favorably impacted sales by approximately $9 million. Rest of the World segment earnings of $31 million were in line with Q4 2020 segment earnings and China, favorable mix offset lower volumes. Segment operating margin was 10.6% compared to 11.2% in the fourth quarter of 2020, primarily due to lower volumes.
Please turn to Slide 12. We generated strong free cash flow of $566 million during 2021, higher than 2020 due to higher earnings that were partially offset by a larger investment in working capital to support demand levels. Free cash flow conversion was 116%. Our cash balances totaled $631 million at the end of December, and our net cash position was $435 million. Our leverage ratio was 9.7% as measured by total debt to total capital. Our strong free cash flow and solid balance sheet enables us to focus on capital allocation priorities and returning cash to shareholders.
Earlier this month, our Board approved our next quarterly dividend of $0.28 per share, which represents our 82nd consecutive year of dividend payments. We repurchased approximately 5.1 million shares of common stock in 2021 for a total of $367 million.
Let's now turn 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 with a focus on water heating and water treating assets that meet our financial metrics of accretive to earnings in the first year and return our cost of capital in 3 years.
Please turn to Slide 14 and our 2020 earnings guidance and outlook. Adjusted EPS is introduced as a result of our termination of our defined benefit pension plan. The termination follows a strategy and measured glide path to derisk our fully funded exposure to pension liabilities. The plan, which was previously Sunset for Benefits Earned on December 31, 2014, represents over 95% of the company's pension liability. The terminated plans pension liability is expected to be annuitized in 2022. The pension plan settlement, which we expect will occur during the fourth quarter, will accelerate the recognition of a projected $445 million of noncash pretax pension expenses or an EPS impact of $1.73.
In addition, in order to protect our pension plans funded status during 2021, we transitioned our pension plan assets to lower risk investments. The impact of this transition will result in a lower rate of return on pension investments and accordingly, higher pension expenses in 2020 compared to previous years. In order to provide transparency to the operating results of our business, in 2022, we will provide non-GAAP measures, adjusted net earnings, adjusted earnings per share and adjusted segment earnings that exclude the impact of noncash pension income and expenses.
Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of the presentation and also on our website. We are pleased to introduce our 2022 outlook with an expected EPS range of $1.56 and $1.76 per share and our adjusted EPS range of $3.35 and $3.55 per share. The midpoint of our adjusted EPS range represents an increase of 17% compared with 2021. Our outlook is based on a number of key assumptions, including that the Omicron COVID-19 variant, which is currently surging and impacting our production due to labor constraints. We currently have approximately 7% of our North America workforce out due to COVID-19 surge. Our outlook assumes that the variance subsides in the first quarter, and we returned to the productivity levels that we operated at during the majority of 2021. Steel indices began to stabilize at the end of 2021 and we started to see the full benefit of our 5 announced 2021 price increases, which had a cumulative effect on water heating prices of approximately 50%.
Our guidance assumes that steel prices in 2022 on an annual basis will approximate steel market pricing at the end of 2021. We continue to see increases in non-steel materials and transportation costs. Multiple 2021 price increases compounding to approximately 50% for water heaters as we exit 2021.
We assume that approximately 45% of the cumulative announced price increase was realized in 2021, and the remainder will be realized in 2022. Previously announced mid- to high single-digit inflation-related price increases in the remainder of our global portfolio. Continued strength in demand and backlog in North America for all of our water heating product categories, driven by growth in replacement demand and new construction spending. While supply chain challenges have moderated as we move into 2022, we remain in close contact with our suppliers and logistics providers to troubleshoot, manage and resolve bottlenecks as the environment remains unpredictable, particularly with the current surge and the Omicron variant of COVID-19.
The integration of Giant, which we acquired in the fourth quarter of 2021 is on track and customer employee feedback is positive. We project the acquisition to achieve annual synergies of approximately $5 million over a 2-year period. Giant added $0.01 to EPS in 2021 net of customary purchase accounting adjustments and onetime transaction expenses. We reaffirm from our third quarter call that the acquisition is projected to add between $0.06 and $0.08 to EPS in 2022.
As for other housekeeping assumptions, we expect to generate strong free cash flow of between $500 million and $525 million. For the year, CapEx is projected to be between $75 million and $80 million. Corporate and other expenses are expected to be approximately $55 million. Our effective tax rate is estimated to be between 23.5% to 24%. And we expect to repurchase approximately $400 million of shares of our stock, resulting in outstanding diluted shares of 157 million at the end of 2022. Based on these assumptions, the midpoint of our adjusted EPS range represents an increase of 17% compared to 2021.
I'll now turn the call back over to Kevin, who will provide a little bit more color on our key markets and top line growth assumption outlook and segment expectations for 2022, while staying on Slide 14. Kevin?