Table of Contents
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM
10-K

☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2019

OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
to

Commission File Number
1-475

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)

Delaware
 
39-0619790

(State of

Incorporation)

 

(I.R.S. Employer


Identification No.)

11270 West Park Place, Milwaukee, Wisconsin
 
53224-9508
(Address of Principal Executive Office)
 
(Zip Code)

(414)
359-4000

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

 

Shares of Stock Outstanding

February 12, 2018

January 31, 2020
 

Name of Each Exchange
on

 
Which

Registered

Class A Common Stock

(par value $5.00 per share)

 26,065,195
26,044,733
 
Not listed

Common Stock

(par value $1.00 per share)

 145,446,771
135,926,301
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
☒
  Yes    
☐
  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
☐
  Yes    
☒
  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
☒
  Yes    
☐
  No.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     
☒
  Yes    
☐
  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form
10-K.
☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer or a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.

Large accelerated filer
 
☒
 
Accelerated filer
 
☐
Non-accelerated filer ☐  (Do not check if a smaller reporting company) 
Non-accelerated filer
☐
Smaller reporting company
 
☐
  
Emerging growth company
 
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act.)    
☐
  Yes    
☒
  No

The aggregate market value of voting stock held by
non-affiliates
of the registrant was $54,942,874$42,999,781 for Class A Common Stock and $8,057,328,456$6,432,921,438 for Common Stock as of June 30, 2017.

2019.

DOCUMENTS INCORPORATED BY REFERENCE

1.Portions of the company’s definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to be incorporated by reference in Part III).

Table of Contents

Table of Contents
A. O. Smith Corporation

Index to Form
10-K

Year Ended December 31, 2017

2019
Page
Part I
    Page 

Item 1.
Business
1
Item 1A.
Risk Factors
4
Item 1B.
Unresolved Staff Comments
9
Item 2.
Properties
9
Item 3.
Legal Proceedings
9
Item 4.
Mine Safety Disclosures
9
Part I

II
  

Item 1.

Business

  3

Item 1A.

Risk Factors

  6 

Item 1B.

5.
 

Unresolved Staff Comments

11

Item 2.

Properties

11

Item 3.

Legal Proceedings

11

Item 4.

Mine Safety Disclosures

11

Part II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  15
13
 

Item 6.

Selected Financial Data

  17 

Item 7.

6.
 

Selected Financial Data
15
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

  18
16
 

Item 7A.

 

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk

  25
23
 

Item 8.

 

Item 8.
Financial Statements and Supplementary Data

  26
24
 

Item 9.

 

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  56
57
 

Item 9A.

Controls and Procedures

  56

Item 9B.

Other Information

  
Item 9A.
Controls and Procedures
57
 

Item 9B.
Other Information
57
Part III

  

Item 10.

 

Item 10.
Directors, Executive Officers and Corporate Governance

  60
59
 

Item 11.

Executive Compensation

  60 

Item 12.

11.
 

Executive Compensation
59
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  60
59
 

Item 13.

 

Item 13.
Certain Relationships and Related Transactions and Director Independence

  61
60
 

Item 14.

 

Item 14.
Principal Accounting Fees and Services

  61
60
 

Part IV

  

Item 15.

 

Item 15.
Exhibits, Financial Statement Schedules

  62
61
 

Table of Contents
PART 1

ITEM1- BUSINESS

ITEM 1
- BUSINESS
Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our North America segment also manufactures and markets water system tanks. Our Rest of World segment also manufactures and markets
in-home
air purification products in China.

With the acquisition of Aquasana, Inc. (Aquasana) in 2016 and Hague Quality Water International (Hague) in 2017, we entered the North American water treatment market. Sales of water treatment products in North America totaled $57 million in 2017 and $18 million in 2016.

The following table summarizes our sales. This summary and all other information presented in this section should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, which appear in Item 8 in this document.

   Years Ended December 31 (dollars in millions) 
   2017  2016  2015  2014  2013 

North America

  $1,904.8  $1,743.2  $1,703.0  $1,621.7  $1,520.0 

Rest of World

   1,116.3   965.6   866.1   768.3   668.0 

Inter-segment

   (24.4)   (22.9)   (32.6)   (34.0)   (34.2) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total Sales

  $2,996.7  $2,685.9  $2,536.5  $2,356.0  $2,153.8 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

NORTH AMERICA

Sales in our North America segment increased 9.3 percent, or $161.6 million, in 2017 compared with the prior year. The sales increase in 2017 was the result of higher volumes of water heaters and boilers, and price increases in the U.S. for residential and commercial water heaters related to steel cost increases. North America water treatment sales in 2017, comprised of recently acquired Hague as well as a full year of Aquasana, incrementally added approximately $40 million of sales compared with 2016.

We serve residential and commercial end markets in North America with a broad range of products including:

Water heaters
. Our residential and commercial water heaters come in sizes ranging from 2.5 gallon
(point-of-use)
models to 12,0004,000 gallon products with varying efficiency ranges. We offer electric, natural gas and liquid propane tank-type models as well as tankless (gas and electric), heat pump and solar tank units. Typical applications for our water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes and small businesses.

Boilers.
Our residential and commercial boilers range in size from 40,00045,000 British Thermal Units (BTUs) to 6.0 million BTUs. Our commercial boilers are primarily used in space heating applications for residences, hospitals, schools, hotels and other large commercial buildings.

Water treatment products.
With the acquisition of Aquasana, Inc. (Aquasana) in 2016 we entered the water treatment market. We expanded our product offerings with the acquisitions of Hague Quality Water International (Hague) in 2017 and Water-Right, Inc. (Water-Right) in 2019. Our water treatment products range from
point-of-entry
water softeners, solutions for problem well water, and whole-home water filtration products to
on-the-go
filtration bottles and
point-of-use
carbon and reverse osmosis products topoint-of-entry water softeners and whole-home water filtrations products. We also offer a complete line of food and beverage filtration products. Typical applications for our water treatment products include residences, restaurants, hotels and offices. A large portion of our sales of water treatment products is comprised of replacement filters.

Other.
In our North America segment, we also manufacture expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, related products and parts.

A significant portion of our North America sales is derived from the replacement of existing products.

We believe we are the largest manufacturer and marketer of water heaters in North America with a leading share in both the residential and commercial markets. In the commercial markets for both water heating and space heating, we believe our comprehensive product lines and our high-efficiency products give us a competitive advantage in these portions of the markets. Our wholesale

distribution channel, where we sell our products primarily under the A. O. Smith and State brands, includes more than 1,300 independent wholesale plumbing distributors serving residential and commercial end markets. We also sell our residential water heaters through the retail and maintenance, repair and operations (MRO) channels. In the retail channel, our customers include four of the six largest national hardware and home center chains, including a long-standing exclusive relationship with Lowe’s where we sell A. O. Smith branded products.

Our Lochinvar brand is one of the leading residential and commercial boiler brands in the U.S. Approximately 40 percent of Lochinvar-brandedLochinvar branded sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-branded sales consist primarily of boilers and related parts. Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms.

firms, the remainder of our Lochinvar branded products are distributed through wholesale channels.

We sell our Aquasana branded products primarily directly to consumers through
e-commerce
as well as
on-line
retailers including Amazon and through other retail chains. Our Haguewater softener branded products primarilyand problem well water softeners,solutions, which include Hague, WaterBoss, Water-Right, WaterCare, and Evolve, are sold through Hague water quality dealers anddealers. Our water softener products are also sold through home center retail chains.

Our energy efficientA. O. Smith branded water treatment products are sold through Lowe’s and our wholesale distribution channels.

Our energy-efficient product offerings continue to be a sales driver for our business. Our Cyclone product familycommercial water heaters and our condensing boilers continue to be an option for commercial customers looking for high efficiency water and space heating with a short payback period through energy savings. We offer residential heat pump, condensing tank-type and tankless water heaters in North America, as well as other higher efficiency water heating solutions to round out our energy efficientenergy-efficient product offerings.

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We sell our water heating products in highly competitive markets. We compete in each of our targeted market segments based on product design, reliability, quality of products and services, advanced technologies, energy efficiency, maintenance costs and price. Our principal water heating and boiler competitors in North America include Rheem, Bradford White, Rinnai, Aerco and Navien. Numerous other manufacturing companies also compete. Our principal water treatment competitors in the U.S. are Brita, Culligan, Kinetico, Pentair and Ecowater as well as numerous independent water quality dealers.

regional assemblers.

REST OF WORLD

Sales in our Rest of World segment increased 15.6 percent, or $150.7 million, in 2017 compared with the prior year. A 15.9 percent increase in sales in China to over $1 billion was the primary source of the increase. Excluding the appreciation of the U.S. dollar, sales in China increased 17.9 percent in 2017.

We have operated in China for more than 20 years. In that time, we have been aggressively expanding our presence while building A. O. Smith brand recognition in the residential and commercial markets. The Chinese water heater market is predominantly comprised of electric wall-hung, gas tankless, combi-boiler, heat pump and solar water heaters. We believe we are one of the leading suppliers of water heaters to the residential market in China in dollar terms, with a broad product offering including electric, gas tankless, heat pump and combi boilers as well as solar units.terms. We also manufacture and market water treatment products, primarily residential reverse osmosis products. We also manufacture and market air purification products primarilyas well as range hoods and cooktops in China.

We sell water heaters in more than 8,000approximately 9,000 retail outlets in China, of which over 2,9002,600 exclusively sell our products. Our water treatment products and air purification products are sold in over 7,4008,100 and 3,5003,300 retail outlets in China, respectively. Oure-commerce sales continued to grow in China, to approximately $250 million in 2017.

In 2008, we established a sales office in India and began importing products specifically designed for India. We began manufacturing water heaters in India in 2010 and water treatment products in 2015. Our total sales in India were $26.2 million in 2017 compared with $18.2 million in 2016.

Our primary competitors in China in the electric water heater market segment are Haier and Midea, which are Chinese companies. We compete with Rinnai and Noritz in the gas tankless water heater market segment. Our principal competitors in the water treatment market are Qinyuan, Angel, Midea and Midea. We also compete with numerous other Chinese private and state-owned water heater and water treatment companies in China.Xiaomi. Our principal competitors in the China air purification market are Phillips, Panasonic and Sharp. In India, we compete with Bajaj andMTS-Racold Havels in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market.

In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in Hong Kong, Turkey and Vietnam, all of which combined comprised less than sixeight percent of total Rest of World sales in 2017.

2019.

RAW MATERIALS

Raw materials for our manufacturing operations, primarily consisting of steel, are generally available in adequate quantities. A portion of our customers are contractually obligated to accept price changes based on fluctuations in steel prices. There has been volatility in steel costs over the last several years.

RESEARCH AND DEVELOPMENT

To improve our competitiveness by generating new products and processes, we conduct research and development at our newly constructed Corporate Technology Center in Milwaukee, Wisconsin, at our Global Engineering Center in Nanjing, China, and at our operating locations. Our total expenditures for research and development in 2019, 2018 and 2017 2016were $87.9 million, $94.0 million and 2015 were $86.4 million, $80.1 million and $73.7 million, respectively.

PATENTS AND TRADEMARKS

We own and use in our businesses various trademarks, trade names, patents, trade secrets and licenses. We do not believe that our business as a whole is materially dependent upon any such trademark, trade name, patent, trade secret or license. However, our trade name is important with respect to our products, particularly in China, India and the U.S.

EMPLOYEES

We employed approximately 16,10015,100 employees as of December 31, 2017,2019, primarily
non-union.

BACKLOG

Due to the short-cycle nature of our businesses, none of our operations sustain significant backlogs.

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ENVIRONMENTAL LAWS

Our operations are governed by a variety of federal, foreign, state and local laws intended to protect the environment. Compliance with environmental laws has not had and is not expected to have a material effect upon the capital expenditures, earnings, or competitive position of our company. See Item 3.

AVAILABLE INFORMATION

We maintain a website with the address www.aosmith.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form
10-K.
Other than an investor’s own internet access charges, we make available free of charge through our website our Annual Report on Form
10-K,
quarterly reports on Form
10-Q,
current reports on Form
8-K
and amendments to these reports as soon as reasonably practical after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission (SEC).

All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at www.sec.gov.

We are committed to sound corporate governance and have documented our corporate governance practices by adopting the A. O. Smith Corporate Governance Guidelines. The Corporate Governance Guidelines, Criteria for Selection of Directors, Financial Code of Ethics, the A. O. Smith Guiding Principles, as well as the charters for the Audit, Personnel and Compensation, Nominating and Governance and the Investment Policy Committees of the Board of Directors and other corporate governance materials, may be viewed on the company’s website. Any waiver of or amendments to the Financial Code of Conduct or the A. O. Smith Guiding Principles also would be posted on this website; to date there have been none. Copies of these documents will be sent to stockholders free of charge upon written request of the corporate secretary at the address shown on the cover page of this Annual Report on Form
10-K.

ITEM1A– RISK FACTORS

We are also committed to growing our business in a sustainable and socially responsible manner consistent with our Guiding Principles. This commitment has driven us to design, engineer, and manufacture highly innovative and efficient products in an environmentally responsible manner that help reduce energy consumption, conserve water, and improve drinking water quality and public health. Consistent with this commitment, we issued our first Corporate Responsibility & Sustainability (CRS) report in 2018 detailing our company’s historic and current CRS efforts. Our CRS report is available on our website. The report is not included as part of, or incorporated by reference into, this Annual Report on Form
10-K.
To further demonstrate our commitment, in 2019, our company appointed Patricia K. Ackerman, to the role of Senior Vice President, Investor Relations, Treasurer, and Corporate Responsibility and Sustainability with specific responsibility for our CRS efforts.
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ITEM 1A – RISK FACTORS
You should carefully consider the risk factors set forth below and all other information contained in this Annual Report on Form
10-K,
including the documents incorporated by reference, before making an investment decision regarding our common stock. If any of the events contemplated by the following risks actually occurs, then our business, financial condition, or results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline, and you may lose all or part of your investment. The risks and uncertainties below are not the only risks facing our company.

•The effects of a global economic downturn could have a material adverse effect on our business

The effects of a global economic downturn could have a material adverse effect on our business
Global economic growth remains uneven and could stall or reverse course. If this werewas to occur it could adversely affect consumer confidence and spending patterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, or slower adoption of energy efficientenergy-efficient water heaters and boilers, or high quality water treatment products, which could negatively impact our profitability and cash flows. In addition, a deterioration in current economic conditions due to many factors or fears including credit market conditions,public health crises, such as the current coronavirus concerns originating in China, could negatively impact our vendors and customers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, or increased material prices, which could negatively impact our ability to distribute, market and sell our products and our financial condition, results of operations and cash flows.

•We increasingly sell our products and operate outside the U.S., and to a lesser extent, rely on imports and exports, which may present additional risks to our business

A portion of our business could be affected by further weakening of the Chinese economy
Approximately 4328 percent of our net sales in 20172019 were attributable to China. Our sales in China decreased in 2019 compared to 2018 and 2017. We believe that decrease was due to weaker
end-market
demand as a result of a weakening Chinese economy, elevated channel inventory levels, and a higher mix of
mid-price
products versus premium price products. We derive a substantial portion of our sales in China from premium-tier products. Changes in consumer preferences, weakening consumer confidence and sentiment as well as economic uncertainty, including the unknown impact from the coronavirus, may prompt consumers there to postpone purchases, choose lower-priced products or different alternatives, or lengthen the cycle of replacement purchases. Further deterioration in the Chinese economy may adversely affect our financial condition, results of operations and cash flows.
Because we participate in markets that are highly competitive, our revenues and earnings could decline as we respond to competition
We sell all of our products in highly competitive and evolving markets. We compete in each of our targeted markets based on product design, reliability, quality of products and services, advanced technologies, product performance, maintenance costs and price. Some of our competitors may have greater financial, marketing, manufacturing, research and development and distribution resources than we have; others may invest little in technology or product development but compete on price and the rapid replication of features, benefits, and technologies, and some are increasingly expanding beyond their existing manufacturing or geographic footprints. In North America, the gas tankless portion of the water heating market has for many years increased as a percentage of the overall market. While we have many gas tankless products, our market share for gas tankless products is lower than our market share for the remainder of the water heating market. Further expansion of the gas tankless portion of the North America market, which we believe was approximately nine percent of the residential market segment in 2019, could have an impact on our operating results. We cannot assure that our products will continue to compete successfully with those of our competitors. There could be new market participants that change the dynamics of those markets and it is possible that we will not be able to retain our customer base or improve or maintain our profit margins on sales to our customers, all of which could materially and adversely affect our financial condition, results of operations and cash flows.
Our business could be adversely impacted by changes in consumer purchasing behavior, consumer preferences and technological changes
Consumer preferences for products and the methods in which they purchase products are constantly changing based on, among other factors, cost, convenience, environmental and social concerns and perceptions. Consumer purchasing behavior may shift the product mix in the markets we participate in or result in a shift to new distribution channels, including
e-commerce,
which continues to expand. For example, consumer preferences may shift toward more efficient gas products or electric powered products due to the increased attention on the impact of greenhouse gas emissions on the environment. In addition, technologies are ever changing. Our ability to timely develop and successfully market new products and to develop, acquire, and retain necessary intellectual property rights is essential to our continued success, but cannot reasonably be assured. It is possible that we will not be able to develop new technologies, products or distribution channels to align with consumer purchasing behavior and consumer preferences, which could materially and adversely affect our financial condition, results of operations and cash flows.
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The occurrence or threat of extraordinary events, including natural disasters, political disruptions, terrorist attacks, public health issues, and acts of war, could significantly disrupt production, or impact consumer spending
As a global company with a large international footprint, we are subject to increased risk of damage or disruption to us, our employees, facilities, suppliers, distributors, or customers. Extraordinary events, including natural disasters, political disruptions, terrorist attacks, public health issues, and acts of war may disrupt our business and operations, impact our supply chain and access to necessary raw materials or could adversely affect the economy generally, resulting in a loss of sales and customers. One of our manufacturing plants is located within a floodplain that has experienced past flooding events. We also have other manufacturing facilities located in hurricane and earthquake zones. Any of these disruptions or other extraordinary events outside of our control that impact our operations or the operations of our suppliers and key distributors could affect our business negatively, harming operating results. In addition, these types of events also could negatively impact consumer spending in the impacted regions or depending on the severity, globally, which could materially and adversely affect our financial condition, results of operations and cash flows. For example, a strain of coronavirus surfaced in Wuhan, China and has led to store closures and a decrease of consumer traffic in China. While not yet quantifiable, we expect the effects of the coronavirus to have a material adverse impact on our operating results for the first quarter of 2020 and we continue to assess the financial impact for the remainder of 2020.
We sell our products and operate outside the U.S., and to a lesser extent, rely on imports and exports, which may present additional risks to our business
Approximately 36 percent of our net sales in 2019 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesser extent in Europe and India. We also have operations and business relationships outside the U.S. that comprise a portion of our manufacturing, supply, and distribution. Approximately 10,0008,800 of our 16,10015,100 employees as of December 31, 20172019 were located in China. At December 31, 2017,2019, approximately $815$549 million of cash cash equivalents and marketable securities were held by our foreign subsidiaries, $587 millionsubstantially all of which waswere located in China. International operations generally are subject to various risks, including: political, religious, and economic instability; local labor market conditions; the imposition ofnew or increased tariffs or other trade restrictions, or changes to trade agreements; the impact of foreign government regulations, actions or policies; the effects of income taxes; governmental expropriation; the imposition or increases in withholding and other taxes on remittances and other payments by foreign subsidiaries; labor relations problems; the imposition of environmental or employment laws, or other restrictions or actions by foreign governments; and differences in business practices. Unfavorable changes in the political, regulatory, or trade climate, diplomatic relations, or government policies, particularly in relation to countries where we have a presence, including Canada, China, India and Mexico, could have a material adverse effect on our financial condition, results of operations and cash flows or our ability to repatriate funds to the U.S.

•A portion of our business could be affected by a slowdown in the transition of the Chinese economy to a consumer driven economy

Our sales growth

A material loss, cancellation, reduction, or delay in China has averaged approximately 17.5 percent per year in local currency over the past three years, and we anticipate sales growthpurchases by one or more of approximately 13 percent in local currency in 2018. We expanded our water heater capacity substantially over the last few years and we are in the process of expandinglargest customers could harm our manufacturing capacity for water treatment and air purification products in China to meet local demand. If there is a slowdown in the transition to a more consumer driven economy or the rate of urbanization was to stall, it could adversely affect our financial condition, results of operations and cash flows.

•A material loss, cancellation, reduction, or delay in purchases by one or more of our largest customers could harm our business

business

Net sales to our five largest customers represented approximately 3839 percent of our sales in 2017.2019. We expect that our customer concentration will continue for the foreseeable future. Our concentration of sales to a relatively small number of customers makes our relationshiprelationships with each of these customers important to our business. We cannot assure that we will be able to retain our largest customers. Some of our customers may shift their purchases to our competitors in the future. The loss of one or more of our largest customers, any material reduction or delay in sales to these customers, or our inability to successfully develop relationships with additional customers could have a material adverse effect on our financial position, results of operations and cash flows.

•Our international operations are subject to risks related to foreign currencies

A portion of our business could be adversely affected by a decline in North American new residential and commercial construction or a decline in replacement related volume
Residential and commercial construction activity in North America has shown modest growth which could decline in the future. We believe that the significant majority of the markets we serve are for replacement of existing products, and residential water heater replacement volume was strong in 2017 and 2018 before declining in 2019. Changes in the replacement volume and in the construction market in North America could negatively affect us.
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Our international operations are subject to risks related to foreign currencies
We have a significant operationspresence outside of the U.S., primarily in China and Canada and to a lesser extent Europe, Mexico, and India, and therefore, hold assets, including $587$443 million of cash and marketable securities denominated in China,Chinese renminbi, incur liabilities, earn revenues and pay expenses in a variety of currencies other than the U.S. dollar. The financial statements of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements. Furthermore, typically our products are priced in foreign countries in local currencies. As a result, we are subject to risks associated with operating in foreign countries including fluctuations in currency exchange rates and interest rates, or hyperinflation in some foreign countries. Furthermore, typically our products are priced incountries or global exchange rate instability or volatility that strengthens the U.S. dollar against foreign countries in local currencies. As a result, an increase in the value of the U.S. dollar relative to the local currencies of our foreign markets has had and would continue to have a negative effect on our profitability. In addition to currency translation risks, we incur a currency transaction risk whenever one of our subsidiaries enters into either a purchase or sale transaction using a currency different from the operating subsidiaries’ functional currency. The majority of our foreign currency transaction risk results from sales of our products in Canada which we manufacture in the U.S.U.S, and to a lesser extent from component purchases in Europe and payroll in Mexico. These risks may hurt our reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S. dollars.

•A portion of our business could be adversely affected by a decline in North American new residential and commercial construction or a decline in replacement related volume

Residential and commercial construction activity in North America has shown modest growth and activity could decline again in the future. We believe that the majority of the markets we serve are for replacement of existing products and replacement related volume growth was strong in 2017.

Changes in replacement volume and in the construction marketregulations or standards could negatively affect us.

•Because we participate in markets that are highly competitive, our revenues and earnings could decline as we respond to competition

We sell all of our products in highly competitive markets. We compete in each of our targeted markets based on product design, reliability, quality of products and services, advanced technologies, product performance, maintenance costs and price. Some of our competitors may have greater financial, marketing, manufacturing, research and development and distribution resources than we have, and some are increasingly expanding beyond their existing manufacturing or geographic footprints. Consumer purchasing behavior may shift to new distribution channels, includinge-commerce, which is a rapidly developing area. Development of a successfule-commerce strategy involves significant time, investment and resources. We cannot assure that our products and services will continue to compete successfully with those of our competitors or that we will be able to retain our customer base or improve or maintain our profit margins on sales to our customers, all of which could materially and adversely affect our financial condition, results of operations and cash flows.

•If we are unable to develop product innovations and improve our technology and expertise, we could lose customers or market share

Our success may depend on our ability to adapt to technological changes in the water heating, boiler, water treatment and air purifier industries. If we are unable to timely develop and introduce new products, or enhance existing products, in response to changing market conditions or customer requirements or demands, our competitiveness could be materially and adversely affected. Our ability to develop and successfully market new products and to develop, acquire, and retain necessary intellectual property rights is essential to our continued success, but cannot reasonably be assured.

•Changes in regulations or standards could adversely affect our business

business

Our products are subject to a wide variety of statutory, regulatory and industry standards and requirements related to, among other items, energy and water efficiency, environmental emissions, labeling and safety. While we believe our products are currently efficient, safe and environment-friendly, a significant change to regulatory requirements whether(whether federal, foreign, state or local,local) such as a transition to alternative energy sources as a replacement for gas combustion, or to industry standards, could substantially increase manufacturing costs, impact the size and timing of demand for our products, affect the types of products we are able to offer or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations and cash flow.

•Newly enacted U.S. government tax reform could have a negative impact on the results of future operations

On December 22, 2017, the Tax Cuts and Jobs Act (U.S. Tax Reform) was enacted effective January 1, 2018 and contained substantial changes to the Internal Revenue Code, some of which could have an adverse effect on our business. U.S. Tax Reform significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on undistributed foreign earnings of foreign subsidiaries. With the enactment of U.S. Tax Reform, our results of operations for the year ended December 31, 2017 included provisional charges for income tax expense of approximately $81.8 million resulting from the deemed repatriation tax on undistributed foreign earnings and there-measurement of our deferred tax assets and liabilities to reflect the recently enacted 21 percent U.S. federal corporate income tax rate. These provisional amounts are based on our initial analysis of U.S. Tax Reform. Given the significant complexity of U.S. Tax Reform, anticipated guidance from the Internal Revenue Service about implementing U.S. Tax Reform, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to U.S. Tax Reform, these provisional amounts

Our business may be adjusted in future periods during 2018, which could result in further impact to our results of operations, financial condition and cash flow.

•Our business may be adversely impacted by product defects

adversely impacted by product defects

Product defects can occur through our own product development, design and manufacturing processes or through our reliance on third parties for component design and manufacturing activities. We may incur various expenses related to product defects, including product warranty costs, product liability and recall or retrofit costs. While we maintain a reserve for product warranty costs based on certain estimates and our knowledge of current events and actions, our actual warranty costs may exceed our reserve, resulting in current period expenses and a need to increase our reserves for warranty charges. In addition, product defects and recalls may diminish the reputation of our brand. Further, our inability to cure a product defect could result in the failure of a product line or the temporary or permanent withdrawal from a product or market. Any of these events may have a material adverse impact on our financial condition, results of operations and cash flows.

•Our operations could be adversely impacted by material price volatility and supplier concentration

Our operations could be adversely impacted by material price volatility and supplier concentration
The market prices for certain raw materials we purchase, primarily steel, have been volatile. Significant increases in the cost of any of the key materials we purchase could increase our cost of doing business and ultimately could lead to lower operating earnings if we are not able to recover these cost increases through price increases to our customers. Historically, there has been a lag in our ability to recover increased material costs from customers, and that lag could negatively impact our profitability.    In addition, in some cases we are dependent on a limited number of suppliers for some of the raw materials and components we require in the manufacturemanufacturing of our products. A significant disruption or termination of the supply from one of these suppliers could delay sales or increase costs which could result in a material adverse effect on our financial condition, results of operations and cash flows.

•We are subject to U.S. and global laws and regulations covering our domestic and international operations that could adversely affect our business and results of operations

An inability to adequately maintain our information systems and their security, as well as to protect data and other confidential information, could adversely affect our business and reputation
In the ordinary course of business, we utilize information systems for
day-to-day
operations, to collect and store sensitive data and information, including our proprietary and regulated business information and personally identifiable information of our customers, suppliers and business partners, as well as personally identifiable information about our employees. Our information systems, like those of other companies, are susceptible to outages due to system failures, cybersecurity threats, failures on the part of third-party information system providers, natural disasters, power loss, telecommunications failures, viruses, fraud, theft,
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malicious insiders or breaches of security. We have a response plan in place in the event of a data breach and we continue to take steps to maintain and improve data security and address these risks and uncertainties by implementing and improving internal controls, security technologies, insurance programs, network and data center resiliency and recovery processes. However, any operations failure or breach of security from increasingly sophisticated cyber threats could lead to disruptions of our business activities, the loss or disclosure of both our and our customers’ financial, product and other confidential information and could result in regulatory actions and have a material adverse effect on our financial condition, results of operations and cash flows and our reputation.
We are subject to U.S. and global laws and regulations covering our domestic and international operations that could adversely affect our business and results of operations
Due to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and restrict where we can do business, what information or products we can supply to certain countries and what information we can provide to a
non-U.S.
government, including but not limited to the Foreign Corrupt Practices Act and the U.S. Export Administration Act. Violations of these laws may result in criminal penalties or sanctions that could have a material adverse effect on our financial condition, results of operations and cash flows.

•Our results of operations may be negatively impacted by product liability lawsuits and claims

Our results of operations may be negatively impacted by product liability lawsuits and claims
Our products expose us to potential product liability risks that are inherent in the design, manufacture, sale and use of our products. While we currently maintain what we believe to be suitable product liability insurance, we cannot be certain that we will be able to maintain this insurance on acceptable terms, that this insurance will provide adequate protection against potential liabilities or that our insurance providers will be able to ultimately pay all insured losses. In addition, we self-insure a portion of product liability claims. A series of successful claims against us could materially and adversely affect our reputation and our financial condition, results of operations and cash flows.

•Retention of key personnel is important to our business

Our success is dependent on developing and retaining highly qualified personnel
Attracting and retaining talented employees is important to the continued success and growth of our business. Failure to retain key personnel, particularly on the leadership team, could have a material effect on our business and our ability to execute our business strategies in a timely and effective manner.

•Sales growth of our boilers could stall resulting in lower than expected revenues and earnings

Sales growth of our boilers could stall resulting in lower than expected revenues and earnings
The compound annual growth rate of our boiler sales has been approximately teneight percent per year since our acquisition of Lochinvar in 2011, largely due to the transition in the boiler industry in the U.S. from lower efficiency,
non-condensing
boilers to higher efficiency, higher priced, condensing boilers, as well as new product introductions. We expect the transition to condensing boilers to continue, but if the transition to higher efficiency, higher priced, condensing boilers stalls as a result of lower energy costs, a U.S. recession occurs, or our competitors’ technologies surpass our technology, our growth rate could be lower than expected.

•An inability to adequately maintain our information systems and their security, as well as to protect data and other confidential information, could adversely affect our business and reputation

In the ordinary course of business, we utilize information systems forday-to-day operations, to collect and store sensitive data and information, including our proprietary and regulated business information and personally identifiable information of our customers, suppliers, employees and business partners, as well as personally identifiable information about our employees. Our information systems, like those of other companies, are susceptible to outages due to system failures, failures on the part of third-party information system providers, natural disasters, power loss, telecommunications failures, viruses, or breaches of security. We continue to take steps to maintain and improve data security and address these risks and uncertainties by implementing and improving internal controls, security technologies, insurance programs, network and data center resiliency and recovery processes. However, any operations failure or breach of security from increasingly sophisticated cyber threats could lead to disruptions of our business activities, the loss or disclosure of both our and our customers’ financial, product and other confidential information and could result in regulatory actionsexpected and have a material adverse effect on our financial condition, results of operations and cash flowsflows.

Potential acquisitions could use a significant portion of our capital and our reputation.

•Potential acquisitions could use a significant portion of our capital and we may not successfully integrate future acquisitions or operate them profitably or achieve strategic objectives

we may not successfully integrate future acquisitions or operate them profitably or achieve strategic objectives

We will continue to evaluate potential acquisitions, and we could use a significant portion of our available capital to fund future acquisitions. If we complete any future acquisitions, then we may not be able to successfully integrate the acquired businesses or operate them profitably or accomplish our strategic objectives for those acquisitions. If we complete any future acquisitions in new geographies, our unfamiliarity with local regulations and market customs may impact our ability to operate them profitably or achieve our strategic objectives for those acquisitions. Our level of indebtedness may increase in the future if we finance acquisitions with debt, which would cause us to incur additional interest expense and could increase our vulnerability to general adverse economic and industry conditions and limit our ability to service our debt or obtain additional financing. The impact of future acquisitions may have a material adverse effect on our financial condition, results of operations and cash flows.

•Our underfunded pension plans may require future pension contributions which could limit our flexibility in managing our company

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We have significant goodwill and indefinite-lived intangible assets and an impairment of our goodwill or indefinite-lived intangible assets could cause a decline in our net worth
Our total assets include significant goodwill and indefinite-lived intangible assets. Our goodwill results from our acquisitions, representing the excess of the purchase prices we paid over the fair value of the net tangible and intangible assets we acquired. We assess whether there have been impairments in the value of our goodwill or indefinite-lived intangible assets during the fourth quarter of each calendar year or sooner if triggering events warrant. If future operating performance at our businesses does not meet expectations, we may be required to reflect
non-cash
charges to operating results for goodwill or indefinite-lived intangible asset impairments. The recognition of an impairment of a significant portion of goodwill or indefinite-lived intangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material. A significant reduction in our stockholders’ equity due to an impairment of goodwill or indefinite-lived intangible assets may affect our ability to maintain the
debt-to-capital
ratio required under our existing debt arrangements. We have identified the valuation of goodwill and indefinite-lived intangible assets as a critical accounting policy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies—Goodwill and Indefinite-lived Intangible Assets” included in Item 7 of this Annual Report on Form
10-K.
Our pension plans may require future pension contributions which could limit our flexibility in managing our company
The projected benefit obligationsobligation liability of our defined benefit pension plans of $869 million exceeded the fair value of the plan assets of $832 million by approximately $48$37 million at December 31, 2017.2019. U.S. employees hired after January 1, 2010 have not participated in our defined benefit plan, and benefit accruals for the majority of current salaried and hourly employees ended on December 31, 2014. We are forecastingforecast that we will not be required to make a contribution to the plan in 2018,2020, and we do not plan to make any voluntary contributions. However, we cannot provide any assurance that contributions will not be required in the future. Among the key assumptions inherent in our actuarially calculated pension plan obligation and pension plan expense are the discount rate and the expected rate of return on plan assets. If interest rates and actual rates of return on invested plan assets were to decrease significantly, our pension plan obligations could increase materially. The size of future required pension contributions could result in us dedicating a significant portion of our cash flows from operations to making the contributions which could negatively impact our flexibility in managing theour company.

•We have significant goodwill and indefinite-lived intangible assets and an impairment of our goodwill or indefinite-lived intangible assets could cause a decline in our net worth

Our total assets include significant goodwill and indefinite-lived intangible assets. Our goodwill results from our acquisitions, representing the excess

Certain members of the purchase prices we paid over the fair value of the net tangible and intangible assets we acquired. We assess whether there have been impairments in the valuefounding family of our goodwill or indefinite-lived intangible assets duringcompany and trusts for their benefit have the fourth quarter of each calendar year or sooner if triggering events warrant. If future operating performance at our businesses does not meet expectations, we may be required to reflectnon-cash charges to operating results for goodwill or indefinite-lived intangible asset impairments. The recognition of an impairment of a significant portion of goodwill or indefinite-lived intangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material. A significant reduction in our stockholders’ equity due to an impairment of goodwill or indefinite-lived intangible assets may affect our ability to maintain thedebt-to-capital ratio required under our existing debt arrangements. We have identified the valuation of goodwill and indefinite-lived intangible assets as a critical accounting policy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies—Goodwill and Indefinite-lived Intangible Assets” included in Item 7 of this Annual Report on Form10-K.

•Certain members of the founding family of our company and trusts for their benefit have the ability to influence all matters requiring stockholder approval

influence all matters requiring stockholder approval

We have two classes of common equity: our Common Stock and our Class A Common Stock. The holders of Common Stock currently are entitled, as a class, to elect only
one-third
of our board of directors. The holders of Class A Common Stock are entitled, as a class, to elect the remaining directors. Certain members of the founding family of our company and trusts for their benefit (Smith Family) have entered into a voting trust agreement with respect to shares of our Class A Common Stock and shares of our Common Stock they own. As of December 31, 2017,2019, through the voting trust, these members of the Smith Family own approximately 62.363.7 percent of the total voting power of our outstanding shares of Class A Common Stock and Common Stock, taken together as a single class, and approximately 96.396.5 percent of the voting power of the outstanding shares of our Class A Common Stock, as a separate class. Due to the differences in the voting rights between shares of our Common Stock
(one-tenth
of one vote per share) and shares of our Class A Common Stock (one vote per share), the Smith Family voting trust is in a position to control to a large extent the outcome of matters requiring a stockholder vote, including the adoption of amendments to our certificate of incorporation or bylaws or approval of transactions involving a change of control. This ownership position may increase if other members of the Smith Family enter into the voting trust agreement, and the voting power relating to this ownership position may increase if shares of our Class A Common Stock held by stockholders who are not parties to the voting trust agreement are converted into shares of our Common Stock. The voting trust agreement provides that, in the event one of the parties to the voting trust agreement wants to withdraw from the trust or transfer any of its shares of our Class A Common Stock, such shares of our Class A Common Stock are automatically exchanged for shares of our Common Stock held by the trust to the extent available in the trust. In addition, the trust will have the right to purchase the shares of our Class A Common Stock and our Common Stock proposed to be withdrawn or transferred from the trust. As a result, the Smith Family members that are parties to the voting trust agreement have the ability to maintain their collective voting rights in our company even if certain members of the Smith Family decide to transfer their shares.

ITEM1B- UNRESOLVED STAFF COMMENTS

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ITEM 
1B - UNRESOLVED STAFF COMMENTS
None.

ITEM2- PROPERTIES

ITEM 
2 - PROPERTIES
Properties utilized by us at December 31, 20172019 were as follows:

North America

In this segment, we have 1517 manufacturing plants located in sevennine states and two
non-U.S.
countries, of which 1214 are owned directly by us or our subsidiaries and three are leased from outside parties. The terms of leases in effect at December 31, 20172019 expire between 20182020 and 2025.

Rest of World

In this segment, we have six manufacturing plants located in four
non-U.S.
countries, of which threefour are owned directly by us or our subsidiaries and threetwo are leased from outside parties. The terms of leases in effect at December 31, 20172019 expire between 20182020 and 2020.

2022.

Corporate and General

We consider our plants and other physical properties to be suitable, adequate, and of sufficient productive capacity to meet the requirements of our business. The manufacturing plants operate at varying levels of utilization depending on the type of operation and market conditions. The executive offices of the company, which are leased, are located in Milwaukee, Wisconsin.

ITEM3- LEGAL PROCEEDINGS

ITEM 
3 - LEGAL PROCEEDINGS
We are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of our business involving product liability, property damage, insurance coverage, exposure to asbestos and other substances, patents and environmental matters, including the disposal of hazardous waste. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss or recovery, we believe, based on past experience, adequate reserves and insurance availability, that these unresolved legal actions will not have a material effect on our financial position or results of operations. A more detailed discussion of certain of these matters appears in Note 1316 of Notes to Consolidated Financial Statements.

ITEM4- MINE SAFETY DISCLOSURES

On May 28, 2019, a putative securities class action lawsuit was filed in the U.S. District Court for the Eastern District of Wisconsin against the Company and certain of its current or former officers. Subsequently, on November 22, 2019, a consolidated amended complaint was filed by the lead plaintiff. This action, now captioned as City of Birmingham Retirement and Relief System v. A. O. Smith Corporation, et al., asserts securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and seeks damages and other relief based upon the allegations in the complaint. On January 24, 2020, A. O. Smith and the other defendants moved to dismiss the consolidated amended complaint for failure to state a claim. Their motion is currently pending. A shareholder derivative lawsuit, captioned as Pierce v. A. O. Smith Corporation, et al. and based on similar allegations as the putative class action, was filed on August 20, 2019, also in the U.S. District Court for the Eastern District of Wisconsin. On November 6, 2019, the plaintiff in the derivative action moved to dismiss his lawsuit, and
re-filed
it in the U.S. District Court for the District of Delaware on November 12, 2019. The derivative action asserts claims under Sections 14(a) and 20(a) of the Exchange Act, as well as for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks damages and other relief based upon the allegations in the complaint. On February 12, 2020, the parties filed a stipulation seeking to stay the derivative lawsuit pending resolution of the City of Birmingham lawsuit. On February 13, 2020, a second shareholder derivative suit, captioned as Jarozewski v. A. O. Smith Corporation, et al., was filed in the U.S. District Court for the District of Delaware, asserting claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as for breach of fiduciary duty, unjust enrichment, and insider trading, and seeks damages and other relief based upon the allegations in the complaint. On February 19, 2020, the U.S. District Court for the District of Delaware entered the stipulation staying the Pierce lawsuit. Consequently, the Company anticipates that the Jarozewski lawsuit will be stayed as well. 
ITEM
4 - MINE SAFETY DISCLOSURES
Not applicable.

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EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to General Instruction of G(3) of Form
10-K, the following is a list of the executive officers which is included as an unnumbered Item in Part I of this report in lieu of being included in our Proxy Statement for our 2017 Annual Meeting of Stockholders.

EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to General Instruction of G(3) of Form10-K,

the following is a list of our executive officers which is included as an unnumbered Item in Part I of this report in lieu of being included in our Proxy Statement for our 20182020 Annual Meeting of Stockholders.

Name (Age)

 

Positions Held

 

Name (Age)
Positions Held
Period Position Was Held

Wilfridus M. Brouwer
Patricia K. Ackerman (59)
 
Senior Vice President – InternationalInvestor Relations, Treasurer and Corporate Responsibility and Sustainability
 2017
2019 to Present
 Senior
Vice President – Asia Corporate DevelopmentInvestor Relations & Treasurer
 2015
2008 to 20172018
 Senior
Vice President and Treasurer
 2013
2006 to 20142008
 President – A. O. Smith Holdings (Barbados) SRL
Assistant Treasurer
 2013
1995 to Present2006
Paul R. Dana (57)
Senior Vice President – Global Operations
2019 to Present
 Senior Vice President – Asia2009 to 2012
President and General Manager – A. O. Smith (China) Investment Co., Ltd.2009 to 2012
Paul R. Dana (55)
Senior Vice President – Global Manufacturing
 
2016 to Present2018
 
Vice President – Global Manufacturing
 
2015
 
President – APCOM, a division of State Industries, LLC, a subsidiary of the Company
 
2011 to 2017
 
Vice President – Product Engineering
 
2006 to 2010
 
Plant Manager – Productos de Agua, S. de R.L. de C.V.
 
1998 to 2005
Wei Ding (55) 
Anindadeb V. DasGupta (54)
Senior Vice President
 2013
2018 to Present
 
President – A. O. Smith ChinaHoldings (Barbados) SRL
 2017
2018 to Present
 
Vice President, Global Head Strategic Marketing; Global Head
e-commerce;
Global GM Flex & Signage Business Lines – A. O. Smith (China) Investment Co., Ltd.; General Manager – A. O. Smith (China) Water Heater Co., Ltd.OSRAM GmbH, Munich and A. O. Smith (Nanjing) Water Treatment Products Co. Ltd.Hong Kong
 2013
2014 to 20172018
Wallace E. Goodwin (64)
Senior Vice President
2018 to Present
 
President and General Manager – A. O. Smith (China) Water Heater Co., Ltd.Lochinvar, LLC
 2013
2018 to Present
 
Senior Vice President and General Manager – A. O. Smith Water Products CompanyLochinvar, LLC
 
2011 to 20122017
 Vice
President – China – A. O. Smith Water Products CompanyAPCOM, a division of State Industries, LLC
 2006
1999 to 2011
 General Manager – A. O. Smith (China) Water Heater Co., Ltd. 1999 to 2012
Robert J. Heideman (51)(53)
 
Senior Vice President – Chief Technology Officer
 
2013 to Present
 
Senior Vice President – Engineering & Technology
 
2011 to 2012
 
Senior Vice President – Corporate Technology
 
2010 to 2011
 
Vice President – Corporate Technology
 
2007 to 2010
 
Director – Materials
 
2005 to 2007
 
Section Manager
 
2002 to 2005

Name (Age)

 

Positions Held

 

D. Samuel Karge (45)
Senior Vice President
2018 to Present
President – North America Water Treatment
2018 to Present
Vice President, Sales and Marketing – Zurn Industries
2016 to 2018
Vice President & Platform Leader – Pentair Residential Filtration
2012 to 2016

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Table of Contents
Name (Age)
Positions Held
Period Position Was Held

Daniel L. Kempken (47)
Senior Vice President – Strategy and Corporate Development
2019 to Present
John J. Kita (62)
Vice President and Controller
 
2011 to 2019
Charles T. Lauber (57)
Executive Vice President and Chief Financial Officer
 2011
2019 to Present
 Senior Vice President, Corporate Finance and Controller2006 to 2011
Vice President, Treasurer and Controller1996 to 2006
Treasurer and Controller1995 to 1996
Assistant Treasurer1988 to 1994
Charles T. Lauber (55)
Senior Vice President, Strategy and Corporate Development
 
2013 to Present2019
 
Senior Vice President – Chief Financial Officer – A. O. Smith Water Products Company
 
2006 to 2012
 
Vice President – Global Finance – A. O. Smith Electrical Products Company
 
2004 to 2006
 
Vice President and Controller – A. O. Smith Electrical Products Company
 
2001 to 2004
 
Director of Audit and Tax
 
1999 to 2001
Peter R. Martineau (63)(65)
 
Senior Vice President – Chief Information Officer
 
2016 to Present
 
Vice President – Business Transformation
 
2013 to 2015
 
Vice President – Customer Satisfaction
 
2010 to 2012
Mark A. Petrarca (54)(56)
 
Senior Vice President – Human Resources and Public Affairs
 
2006 to Present
 
Vice President – Human Resources and Public Affairs
 
2005 to 2006
 
Vice President – Human Resources –
A. O. Smith Water Products Company
 
1999 to 2004
Ajita G. Rajendra (68)
Executive Chairman
2018 to Present
Ajita G. Rajendra (66)
Chairman and Chief Executive Officer
 
2017 to Present2018
 
Chairman, President and Chief Executive Officer
 
2014 to 2017
 
President and Chief Executive Officer
 
2013 to 2014
 
President and Chief Operating Officer
 
2011 to 2012
 
Executive Vice President
 
2006 to 2011
 
President – A. O. Smith Water Products Company
 
2005 to 2011
 
Senior Vice President
 
2005 to 2007
James F. Stern (55)(57)
 
Executive Vice President, General Counsel and Secretary
 
2007 to Present
 
Partner – Foley & Lardner LLP
 
1997 to 2007
William L. Vallett Jr. (58) 
David R. Warren (56)
Senior Vice President
 2013
2017 to Present
 Chief Executive Officer
President and General Manager – Lochinvar, LLCNorth America Water Heater
 2012
2017 to Present
 Chief Executive Officer
Vice President – Lochinvar CorporationInternational
 1992
2008 to 2012

2017

Name (Age)

 

Positions Held

 

Period Position Was Held

David R. Warren (53)Senior Vice President2017 to Present
 President and General Manager North America Water Heating2017 to Present
Vice President – International2008 to 2017
Managing Director –
A.O. Smith Water Products Company B.V.
 
2004 to 2008
 
Director, Reliance Sales
 
2002 to 2004
 
Regional Sales Manager
 
1999 to 2002
 
District Sales Manager
 
1990 to 1996
 
Sales Coordinator
 
1989 to 1990

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Table of Contents
Name (Age)
Positions Held
Period Position Was Held
Kevin J. Wheeler (60)
President and Chief Executive Officer
2018 to Present
Kevin J. Wheeler (58)
President and Chief Operating Officer
 
2017 to Present2018
 
Senior Vice President
 
2013 to 2017
 
President and General Manager – North America, India and Europe Water Heating
 
2013 to 2017
 
Senior Vice President and General Manager – North America, India and Europe – A. O. Smith Water Products Company
 
2011 to 2012
 
Senior Vice President and General Manager – U.S. Retail – A. O. Smith Water Products Company
 
2007 to 2011
 
Vice President – International – A. O. Smith Water Products Company
 
2004 to 2007
 
Managing Director – A. O. Smith Water Products Company B.V.
 
1999 to 2004

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PART II

ITEM 5
-
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

On September 7, 2016, our Board of Directors declared atwo-for-one stock split of our Class A Common Stock and Common Stock (including treasury shares) in the form of a 100 percent stock dividend to stockholders of record on September 21, 2016 and payable on October 5, 2016. All references in this Item 5 to numbers of A. O. Smith Corporation shares or price per share have been adjusted to reflect the split.

(a)
Market Information.Information
. Our Common Stock is listed on the New York Stock Exchange under the symbol AOS. Our Class A Common Stock is not listed. EQ Shareowner Services, P.O. Box 64874, St. Paul, Minnesota, 55164-0874 serves as the registrar, stock transfer agent and the dividend reinvestment agent for our Common Stock and Class A Common Stock.

Quarterly Common Stock Price Range

2017

  1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 

High

  $52.56   $57.58   $59.72   $63.70 

Low

   46.44    49.48    53.23    58.21 

2016

  1st Qtr.   2nd Qtr.   3rd Qtr.   4th Qtr. 

High

  $38.71   $44.06   $49.70   $51.49 

Low

   30.15    37.61    42.88    43.66 

(b)Holders.
Holders
. As of January 31, 2018,2020, the approximate number of stockholders of record of Common Stock and Class A Common Stock were 616592 and 179,160, respectively. The actual number of stockholders is greater than this number of holders of record, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of stockholders of record also does not include stockholders whose shares may be held in trust by other entities.

(c)Dividends.
Dividends
. Dividends declared on the common stock are shown in Note 1518 of Notes to Consolidated Financial Statements appearing elsewhere herein.

(d)
Stock Repurchases.Repurchases
. In 2016,the second quarter of 2019, our Board of Directors authorized the purchase of an additional 3,000,000approved adding three million shares of our Common Stock.Stock to an existing discretionary share repurchase authority. Under the share repurchase program, we may purchase our Common Stock may be purchased through a combination of Rule
10b5-1
automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchasepurchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule
10b5-1
automatic trading plan that we may then have in effect. In 2017,2019, we repurchased 2,533,3506,113,038 shares at an average price of $54.90$47.06 per share and at a total cost of $139.1$287.7 million. As of December 31, 2017,2019, there were 2,373,0532,962,215 shares remaining on the existing repurchase authorization.

The following table sets forth the number of shares of common stock we repurchased during the fourth quarter of 2017:

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

  Total Number
of Shares
Purchased		   Average
Price Paid
per Share		   Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs		   Maximum Number
of Shares that may
yet be Purchased
Under the Plans or
Programs		 

October 1 – October 31, 2017

   206,000   $60.52    206,000    2,758,053 

November 1 – November 30, 2017

   204,000    59.64    204,000    2,554,053 

December 1 – December 31, 2017

   181,000    61.70    181,000    2,373,053 

2019:
                 
ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
 
Total Number
of Shares
Purchased
  
Average
Price Paid
per Share
  
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
  
Maximum Number
of Shares that may
yet be Purchased
Under the Plans or
Programs
 
October 1 – October 31, 2019
  
414,700
  $
48.17
   
414,700
   
3,739,015
 
November 1 – November 30, 2019
  
370,800
   
50.20
   
370,800
   
3,368,215
 
December 1 – December 31, 2019
  
406,000
   
47.02
   
406,000
   
2,962,215
 
(e)
Performance Graph.Graph
. The following information in this Item 5 of this Annual Report on Form
10-K
is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing.

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The graph below shows a five-year comparison of the cumulative shareholder return on our Common Stock with the cumulative total return of the Standard & Poor’s (S&P) 500 Index, S&P 500 Select Industrials Index, S&P Mid Cap 400 Index and the Russell 1000 Index, all four of which are published indices. The company added the S&P 500 Index and the S&P 500 Select Industrials Index as indices for comparison in this Annual Report on Form10-K because our common stock was added to the S&P 500 Index in July 2017 and removed from the S&P Midcap 400 Index at the same time. In future periods, the S&P Midcap 400 Index and the Russell 1000 Index will not be included in the comparison.

Comparison of Five-Year Cumulative Total Return

From December 31, 20122014 to December 31, 2017

2019

Assumes $100 Invested with Reinvestment of Dividends

   Base
Period		   Indexed Returns 

Company/Index

  12/31/12   12/31/13   12/31/14   12/31/15   12/31/16   12/31/17 

A. O. Smith Corporation

   100.0    172.9    183.1    251.4    314.2    410.9 

S&P 500 Index

   100.0    132.4    150.5    152.6    170.8    208.1 

S&P Mid Cap 400 Index

   100.0    133.5    146.6    143.4    173.1    201.2 

Russell 1000 Index

   100.0    133.1    150.7    152.1    170.4    207.0 

S&P 500 Select Industrial Index

   100.0    140.8    155.9    149.3    179.3    222.6 

                         
 
Base
Period
  
Indexed Returns
 
Company/Index
 
12/31/14
  
12/31/15
  
12/31/16
  
12/31/17
  
12/31/18
  
12/31/19
 
A. O. Smith Corporation
  
100.0
   
137.3
   
171.6
   
224.5
   
158.5
   
180.1
 
S&P 500 Index
  
100.0
   
101.4
   
113.5
   
138.3
   
132.2
   
173.8
 
S&P 500 Select Industrial Index
  
100.0
   
95.8
   
115.1
   
142.8
   
123.8
   
160.2
 
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ITEM 6 – SELECTED FINANCIAL DATA
                     
(dollars in millions, except per share amounts)
          
 
Years ended December 31,
 
 
2019
  
2018
  
2017
(1)
  
2016
(2)
  
2015
 
Net sales
 $
2,992.7
  $
3,187.9
  $
2,996.7
  $
2,685.9
  $
2,536.5
 
Net earnings
(1)
 $
370.0
  $
444.2
  $
296.5
  $
326.5
  $
282.9
 
Basic earnings per share of common stock
(1,2)
               
Net earnings
 $
2.24
  $
2.60
  $
1.72
  $
1.87
  $
1.59
 
Diluted earnings per share of common stock
(1,2)
               
Net earnings
 $
2.22
  $
2.58
  $
1.70
  $
1.85
  $
1.58
 
Cash dividends per common share
(2)
 $
0.90
  $
0.76
  $
0.56
  $
0.48
  $
0.38
 
                     
 
Years ended December 31,
 
 
2019
  
2018
  
2017
  
2016
  
2015
 
Total assets
 $
3,058.0
  $
3,071.5
  $
3,197.4
  $
2,891.0
  $
2,629.2
 
Long-term
debt
(3)
  
277.2
   
221.4
   
402.9
   
316.4
   
236.1
 
Total stockholders’ equity
  
1,666.8
   
1,717.0
   
1,644.9
   
1,511.4
   
1,442.3
 
ITEM6– SELECTED FINANCIAL DATA

(dollars in millions, except per share amounts)                    
   Years ended December 31 
   2017(1)   2016(2)   2015   2014   2013(3) 

Net sales

  $2,996.7   $2,685.9   $2,536.5   $2,356.0   $2,153.8 

Net earnings(1)

  $296.5   $326.5   $282.9   $207.8   $169.7 

Basic earnings per share of common stock(1,2,3)

          

Net earnings

  $1.72   $1.87   $1.59   $1.15   $0.92 

Diluted earnings per share of common stock(1,2,3)

          

Net earnings

  $1.70   $1.85   $1.58   $1.14   $0.91 

Cash dividends per common share(2,3)

  $0.56   $0.48   $0.38   $0.30   $0.23 
   December 31 
   2017   2016   2015   2014   2013 

Total assets

  $3,197.3   $2,891.0   $2,629.2   $2,498.1   $2,351.5 

Long-term debt(4)

   402.9    316.4    236.1    210.1    177.7 

Total stockholders’ equity

   1,648.8    1,515.3    1,442.3    1,381.3    1,328.7 

(1)Due to the enactment of the U.S. Tax Cuts & Jobs Act in December 2017, we recorded provisionala
one-time charges
charge of $81.8 million in 2017, our estimate of the costs primarily associated with the repatriation of undistributed foreign earnings. These charges reduced 2017 earnings per share by $0.47.
(2)In September 2016, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in cash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for all periods presented to reflect the stock dividend.
(3)In April 2013, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in cash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for all periods presented to reflect the stock dividend.
(4)Excludes the current portion of long-term debt.

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ITEM 7 - 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our North America segment also manufactures and markets water systems tanks. Our Rest of World segment also manufactures and markets
in-home
air purification products in China.

In our North America segment, we project our sales in the U.S. will grow approximately six percent in 20182020 compared to 20172019 due to higher residential water heater and boiler volumes resulting from expected industry-wide new construction growth and expansion of replacement demand. We expect the North America residential water heater industry to have three to 3.5 percent unit growth in 2018. Due to nearly 20 percent unit growth in 2017, partially driven by an anticipated 2018 regulatory change and resultingpre-buy, we expect the North America commercial water heater industry to have a three percent unit decline in 2018. Our sales of boilers grew 13 percent in 2017, and we expect ten percent sales growth in 2018, driven by the continuing U.S. industry transition to higher efficiency products and our introduction of new products. We continued to expand our North America water treatment platform with the acquisition of Hague on September 5, 2017.in 2019 by acquiring Water-Right, Inc. and its affiliated entities (Water-Right) in April 2019. We expect sales of North America water treatment products to increase by approximately 5020 to 25 percent in 2018,2020, compared to 2017,2019, primarily due to volume growth and a full year of HagueWater-Right sales.

In our Rest of World segment, we expect 2020 China sales to grow by approximately one percent in 2018 at a rate ofU.S. dollar terms and approximately 132.5 percent in local currency compared with 2019, as we believe overall water heater market growth, geographic expansion, market share gains, and growth in water treatment and air purification productsthe Chinese economy will contributecontinue to our growth.be weak. In addition, we expect our sales in India to grow over 40between 15 and 20 percent in 20182020 from approximately $26$39 million in 2017.

2019.

Combining all of these factors, we expect total companyour consolidated sales growth of between 8.5 percent to 9.5grow 4.5 to 5.5 percent in 2018.

2020. Our 2020 guidance introduced on January 28, 2020, excludes the potential impact to our businesses from the coronavirus originating in China. As of the date of this filing, while not yet quantifiable, we now expect the coronavirus will have a material adverse impact on our operating results in the first quarter of 2020 and we continue to assess the financial impact for the remainder of 2020.

Our stated acquisition strategy includes a number of our water-related strategic initiatives. We will lookseek to continue to grow our core residential and commercial water heating, boiler and water treatment businesses throughout the world. We will also continue to look for opportunities to add to our existing operations in high growth regions demonstrated by our introduction in 2015 of air purification products in China and water treatment products in India and Vietnam.

Vietnam and air purification products as well as range hoods and cooktops in China.

RESULTS OF OPERATIONS

Our sales in 20172019 were $2,993 million, a decline of 6.1 percent compared to our 2018 sales of $3,188 million. The decrease in 2019 sales was primarily due to a 23 percent decline in China sales in U.S. dollar terms, which was largely a result of weaker
end-market
demand in the region, year over year channel inventory shifts, and a higher mix of sales of
mid-price
products versus premium price products than in the prior year. Excluding the unfavorable impact from currency translation, China sales declined 19 percent in 2019. The sales reduction in China more than offset the benefits of higher sales in North America, which were primarily a result of higher sales of water treatment products, including incremental sales from our acquisition, Water-Right, and water heater pricing actions related to steel and freight cost increases. The increase in North America sales was partially offset by lower residential water heater volumes. Our sales in 2018 were a company record $3,188 million surpassing 2017 sales of $2,997 million surpassing 2016 sales of $2,686 million by 11.66.4 percent. The increase in sales in 20172018 was primarily due to pricing actions related to higher steel costs and higher sales of boilers and residential water heaters in Chinathe U.S. as well as higher sales of water heaters and boilerstreatment products in North America. SalesChina. Our global water treatment sales grew to approximately $400 million in 2018. Total sales in China grew 15.9four percent to over $1 billion in 2017, and excluding2018. Excluding the impact of the appreciation of the Chinese currency against the U.S. dollar, our sales in China increased 17.9almost two percent in 2017. Our sales in 2016 were higher than 2015 sales of $2,537 million by 5.9 percent. In 2016, excluding the impact from the appreciation of the U.S. dollar against the Chinese currency, our sales grew approximately eight percent. Sales in China grew 12.5 percent in 2016, and excluding the impact of the appreciation of the U.S. dollar, sales in China increased by 18.9 percent in 2016.

2018.

Our gross profit margin in 2017 decreased2019 of 39.5 percent declined compared to 41.3 percent from 41.7our gross profit margin of 41.0 percent in 2016. The slightly lower margin in 2017 was2018 primarily due to significantlythe lower sales volumes in China and a higher steel costsmix of
mid-price
products, which have lower margins, in that more than offset pricing actions taken in 2017 in North America and China.region. Our gross profit margin in 2016 increased from 39.82018 of 41.0 percent was essentially flat compared to our gross profit margin of 41.1 percent in 2015 primarily due to price increases in the U.S., lower material costs in the first half of 2016 and higher sales of boilers and commercial water heaters in the U.S. than in 2015.

2017.

Selling, general and administrative (SG&A) expenses were $59.3$715.6 million in 2019 or $38.2 million lower than in 2018. The decrease in SG&A expenses in 2019 was primarily due to lower advertising and selling expenses in China. SG&A expenses were $31.0 million higher in 20172018 than in 2016.2017. The increase in SG&A expenses in 20172018 to $718.2$753.8 million was primarily due to higher selling and advertising expenses related to support increased volumes and brand building and higher product development engineering expenses in China.
On March 21, 2018, we announced a plan to transfer water heater, boiler and storage tank production from our newer product categories. SG&ARenton, Washington plant to our other U.S. plants. The majority of the consolidation of operations occurred in the second quarter of 2018. As a result of the relocation of production, we incurred
pre-tax
restructuring and impairment expenses were $48.2of $6.7 million higher in 2016 thanthe first quarter of 2018, primarily related to employee severance and compensation-related costs, building lease exit costs and the impairment of assets. These activities are reflected in 2015“restructuring and impairment expenses” in the accompanying financial statements.
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Table of Contents
We are providing
non-U.S.
Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted earnings per share, and adjusted segment earnings) that exclude restructuring and impairment expenses. Reconciliations to measures on a GAAP basis are provided later in this section. We believe that the measures of adjusted earnings, adjusted EPS, and adjusted segment earnings provide useful information to investors about our performance and allow management and our investors to better understand our performance between periods without regard to items we do not consider to be a component of our core operating performance.
Interest expense was $11.0 million in 2019 compared to $8.4 million in 2018 and $10.1 million in 2017. The increase in interest expense in 2019 was primarily due to higher selling costs supporting our sales effortsdebt levels to fund the acquisition of Water-Right and share repurchase activity. The decline in tier 2 and tier 3 cities in China as well as higher advertising costs to support brand building in China.

Pension income in 2017 was $9.1 million compared to $6.9 million in 2016 and $0.1 million of pension expense in 2015. As of December 31, 2015, we changed to what we believe is a more precise method to estimate the service cost and interest components of net periodic benefit cost for our pension and post-retirement plans. The change was the reason for $7.7 million and $7.1 million of decreases in 2017 and 2016, respectively, compared to 2015, in service and interest costs.

Interest expense was $10.1 million in 2017 compared to $7.3 million in 2016 and $7.4 million in 2015. The higher interest expense in 20172018 compared to 20162017 was primarily related to higher interest rates as well as higher overalla result of lower debt levels, primarily due to increasedthe repatriation of approximately $312 million of cash from outside of the U.S, which was primarily used to pay down floating rate debt, as well as to fund our share repurchasesrepurchase activity and acquisitions completeddividend payments. This decline was partially offset by higher interest rates in 2016 and 2017.

2018.

Other income was $10.4$18.0 million in 20172019 compared to $9.4$21.2 million in 20162018 and $10.8$21.3 million in 2015. The increase in other income in 2017 compared to 2016 was primarily due to higher interest income.2017. The decrease in other income in 20162019 compared to 20152018 was primarily due to a decrease in interestlower
non-service
cost related pension income caused byand lower interest ratesincome.
Pension income in China2019 was $6.2 million compared to $8.7 million in 2016.

2018 and $9.1 million in 2017. The service cost component of our pension income is reflected in cost of products sold and SG&A expenses. All other components of our pension income are reflected in other income.

Our effective income tax rate was 21.6 percent in 2019, compared with 20.4 percent in 2018 and 43.1 percent in 2017, compared with 29.4 percent2017. Our effective income tax rates in 20162019 and 29.7 percent in 2015. The significant increase in2018 were lower than our adjusted effective income tax rate in 2017 compared to previous years was due to provisionalone-time charges associated withlower federal income taxes related to the U.S. Tax Cuts &and Jobs Act of 2017 (U.S. Tax Reform). Our effective income tax rate in 2019 was higher than 2018 primarily due to a change in geographic earnings mix. The effective income tax rate in 2017 was significantly higher due to
one-time
charges associated with U.S. Tax Reform of $81.8 million, primarily related to the mandatory repatriation tax on undistributed foreign earnings that we are required to pay over eight years. Excluding the impact of the U.S. Tax Reform provisional
one-time
charges, our adjusted effective income tax rate was 27.4 percent in 2017. Our adjusted effective income tax rate in 2017 was lower than our effective income tax rate in 2016 primarily due to lower U.S. state income taxes and higher deductions for share-based compensation. Our lower effective income tax rate in 2016 compared to 2015 was primarily due to our adoption of an accounting standard for share-based compensation partially offset by a change in geographic earnings mix. We estimate our annual effective income tax rate for the full year 20182020 will be approximately 21.5 to 22.0 to 22.5 percent, significantly lower than previous years due to U.S. Tax Reform.

percent.

North America

Sales in our North America segment were $1,905$2,084 million in 20172019 or $162$39 million higher than sales of $1,743$2,045 million in 2016.2018. The increase in segment sales was primarily due to the incremental Water-Right sales of $44 million, water heater pricing actions related to steel and freight cost increases, and higher sales of water treatment products, which were partially offset by lower residential water heater volumes. Sales in our North America segment were $2,045 million in 2018 or $140 million higher than sales of $1,905 million in 2017. The increase in sales in 20172018 compared to 20162017 was primarily due to pricing actions related to higher steel costs and higher volumes of boilers and residential water heaters and boilers, price increases in the U.S. for water heaters largely related to steel cost increases as well as our customer’spre-buy of commercial water heaters in advance of an anticipated 2018 regulatory change. North America water treatment sales, comprisedincluding a full year of sales from Hague, acquiredwhich we purchased in September 2017, and Aquasana, acquiredthe launch of products at Lowe’s commencing in August 2016,2018, incrementally added approximately $40$29 million of sales in 2017. Sales in 2016 were $40 million higher than sales of $1,703 million in 2015. The sales increase in 2016 resulted from a full year of U.S. price increases for residential water heaters related to a regulatory change in April 2015, and a 2016 price increase in the U.S. related to higher steel prices and other cost inflation. Sales in 2016 also benefitted from higher volumes of boilers and commercial water heaters in the U.S. as well as the addition of $18.4 million of sales of water treatment products resulting from our Aquasana acquisition. Lower volumes of U.S. residential water heaters in 2016 compared to 2015 offset these benefits.

2018.

North America segment earnings were $428.6$488.9 million in 20172019 compared to segment earnings of $385.9$464.1 million and $339.9$428.6 million in 20162018 and 2015,2017, respectively. Segment margins were 23.5 percent, 22.7 percent and 22.5 percent 22.1in 2019, 2018 and 2017, respectively. Adjusted segment earnings and segment margin in 2018, which exclude restructuring and impairment expenses, were $470.8 million and 23.0 percent, and 20.0 percent in 2017, 2016 and 2015, respectively. The higher segment earnings and segment margin in 20172019 compared to 20162018 adjusted segment earnings and adjusted segment margin were primarily a result of pricing actions, lower steel costs, and higher sales of water treatment products, that included incremental volumes from our acquisition, Water-Right. These increases were partially offset by the unfavorable impact from lower residential water heater volumes. The higher adjusted segment earnings and adjusted segment margin in 2018 compared to 2017 were primarily due to the favorable impact from higher sales of residential water heaterheaters and boiler volumesboilers and pricing actions whichin the U.S. that were partially offset by higher steel costs. Segment margin in 2017 also benefitted from lower SG&A costs and
one-time
expenses as a percentassociated with the launch of sales. The higher segment earnings and segment margin in 2016 compared to 2015 were primarily due to pricing actions in the U.S., lower material costs in the first half of 2016 and higher boiler and commercial water heater volumes in the U.S., which were partially offset by lower U.S. residential water heater volumes.treatment products at Lowe’s. We estimate our 20182020 North America segment margin will be between 2223.25 and 22.5 percent primarily due to anticipated growth in boiler and residential water heater volumes offset by higher steel costs.

24.25 percent.

Rest of World

Sales in our Rest of World segment in 20172019 were $1,116$936 million or $150$238 million higherlower than sales of $966$1,174 million in 2016.2018. Lower sales in 2019 compared to 2018 was largely a result of decreased China sales which declined 23 percent in U.S. dollar terms and 19 percent in local currency terms. The decline in China sales was primarily due to weaker
end-market
demand, elevated channel inventory levels for the first three quarters of 2019 that returned to a more normal range of two to three months by the end of 2019, and a higher mix of
mid-price
products versus premium priced products. In addition, the weaker Chinese currency
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unfavorably impacted translated sales by approximately $39 million. Sales in India grew approximately 13 percent in 2019 compared to 2018. Sales in China grew 15.9four percent in 2018 compared to over $1 billion in 2017 due to higher demand for our consumer products, led by water treatment and air purification products and pricing actions primarily due to higher steelsales of water treatment products, including consumables, which were partially offset by lower sales of electric water heaters and installation costs. Excluding the impact from theair purifiers. The appreciation of the Chinese currency against the U.S. dollar contributed approximately $23 million to segment sales in 2017,2018. Excluding the benefit of the Chinese currency appreciation, sales in China increased 17.9 percent.1.9 percent in 2018. Water heater and water treatment sales in India increased $8 million, over 4030 percent, in 20172018 compared to 2016. Sales in our Rest of World segment in 2016 were $100 million higher than sales of $866 million in 2015. Sales in China grew 12.5 percent in 2016. Excluding the impact from the appreciation of the U.S. dollar in 2016, sales in China increased 18.9 percent in 2016 driven by higher demand for water heaters, water treatment products and residential air purification products. Water treatment sales in China totaled $177 million in 2016 compared to $130 million in 2015. Sales of air purification products were $26 million in 2016 compared to $9 million in 2015.

2017.

Rest of World segment earnings were $149.3$40.2 million in 20172019 compared to segment earnings of $129.1 million and $113.0$149.3 million in 2016both 2018 and 2015, respectively.2017. Segment margins were 4.3 percent in 2019 compared to 12.7 percent and 13.4 percent in 2018 and 2017, respectively. The decline in 2019 segment earnings and margin compared to 13.4 percent2018 was primarily due to lower sales in China and 13.0 percenta higher mix of
mid-price
products, which have lower margins, that when combined, more than offset benefits to profits from lower SG&A expenses and material costs in 2016 and 2015, respectively. Higherthat region. Currency translation reduced segment earnings by approximately $3.0 million in 20172019 compared to 20162018. Segment earnings in 2018 were flat compared to 2017 primarily due to higher water treatment product sales and improved performance in India that were offset by lower sales of electric water heaters and air purifiers in China which included a price increase, partially offset byas well as higher steel costs, higher fees paid to installers and increased SG&A expenses. Higher SG&A expenses in China were primarily due to the expansion of water treatment and air purification product retail outlets in tier 2 and tier 3 cities, higher advertising expenses related to brand building in our newer product

categories and higher water treatment product development engineering costs. Higher segment earnings and segmentexpenses. Segment margin declined in 20162018 compared to 2015 were primarily due to higher sales in China partially offset by increased SG&A expenses in China. Higher selling costs in China to support our sales efforts in tier 2 and tier 3 cities and higher advertising costs to support brand building were the primary drivers of higher SG&A expenses in 2016. Operating earnings in 2016 were also negatively impacted by almost $8 million due to the appreciation2017 as a result of the U.S. dollar in 2016.factors above.    We expect 2018our 2020 Rest of World segment margin to expand 30 to 40 basis points compared to 2017.

will be approximately five percent.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital was $978.3$733.9 million at December 31, 20172019 compared with $796.4$853.2 million and $750.1$973.1 million at December 31, 20162018 and December 31, 2015,2017, respectively. Cash generationApproximately $165 million in Chinaforeign cash, cash equivalents and marketable securities was repatriated in 2019 and utilized to repay floating rate debt, pay dividends and repurchase shares. The decline in cash, cash equivalents and marketable securities and sales-related decreases in accounts receivable partially offset by lower accounts payable balances explains the majority of the decline in working capital in 2019. Approximately $312 million in foreign cash was repatriated in 2018 and utilized to repay floating rate debt, pay dividends and repurchase shares. The decline in cash, cash equivalents and marketable securities balances more than offset sales-related increases in accounts receivable and inventory levels explainexplains the majority of the increasedecline in 2017 and 2016.working capital in 2018. As of December 31, 2017,2019, essentially all of our $820.0$551.4 million of cash, cash equivalents and marketable securities werewas held by our foreign subsidiaries. In December 2017, we recorded provisionalone-time charges of $81.8 million primarily associated with the mandatory repatriation tax of undistributed foreign earnings under U.S. Tax Reform. In addition, we had an existing accrual of $38.6 million associated with withholding taxes due upon issuance of foreign dividends. We expect to repatriate approximately $200$150 million in the first half of 20182020 and use the proceeds to repay floating rate debt.

Cash provided by operating activities during 20172019 was $326.4$456.2 million compared with $446.6$448.9 million during 20162018 and $351.7$326.4 million during 2015. The decline in cash flows in 2017 compared to 2016 was primarily due to higher outlays for working capital than the below normal levels experienced in 2016, which more than offset the impact of higher earnings in 2017. The increase in cash flows in 20162019 compared to 2015with 2018 was primarily due to higher earnings from operations and lower outlays for working capital. We experienced favorablecapital which offset lower earnings in 2019. The increase in cash flow impacts in China late in the fourth quarter of 2016 primarily from a series of unanticipated large customer payments including customer deposits.

Over thetwo-year period from 2016 to 2017, we generated operating cash of approximately $773 million, which compares with $616 million of operating cash flows during 2014 to 2015. We anticipate cash provided by operating activities to be $475 to $500 million in 2018 compared to $326 million in 2017 was primarily due to higher projected earnings and lower outlays for working capital particularly inventory.

in 2018.

Our capital expenditures were $64.4 million in 2019, $85.2 million in 2018 and $94.2 million in 2017, $80.7 million in 2016 and $72.7 million in 2015.2017. We broke ground in 2016 on the construction of a new water treatment and air purification products manufacturing facility in Nanjing, China, to support the expected growth of these products in China. The facility became operational in May 2018. Included in 2018 capital expenditures were approximately $13 million related to capacity expansion in China. Included in 2017 capital expenditures were approximately $24 million related to capacity expansion in China. Included in 2016 capital expenditures were approximately $13 million related to capacity expansion in China as well as approximately $11 million related to the continuation of our enterprise resource planning (ERP) system implementation. Included in 2015 capital expenditures were approximately $16 million related to our ERP implementation and approximately $19 million related to capacity expansion in China and the U.S. to support growth. WeFor 2020, we project approximately $100$80 million of capital expenditures in 2018, which includesand approximately $30$85 million related to the completion of capacity expansion in China. We project depreciation and amortization expense of approximately $80 million in 2018.

In January 2015, we issued $75 million of fixed rate term notes to an insurance company. Principal payments commence in 2020 and the notes mature in 2030. The notes carry an interest rate of 3.52 percent. We used proceeds of the notes to pay down borrowings under our revolving credit facility.

In November 2016, we issued $45 million of fixed rate term notes in two tranches to two insurance companies. Principal payments commence in 2023 and 2028 and the notes mature in 2029 and 2034, respectively. The notes carry interest rates of 2.87 and 3.10, respectively. We used proceeds of the notes to pay down borrowings under our revolving credit facility.

expense.

In December 2016, we completed a $500 million multi-currency five yearfive-year revolving credit facility with a group of nine banks. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of December 31, 2017.2019. The facility backs up commercial paper and credit line borrowings, and it expires on December 15, 2021. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings as well as drawings under the facility are classified as long-term debt.

At December 31, 2017,2019, we had available borrowing capacity of $217.1$336.0 million under this facility. We believe that our combination of cash, available borrowing capacity and operating cash flow will provide sufficient funds to finance our existing operations for the foreseeable future.

Our total debt increased to $410.4$284.0 million at December 31, 20172019 compared with $323.6$221.4 million at December 31, 2016, as our2018. We repatriated approximately $150 million cash flows generated in the U.S wereand paid down debt, which was more than offset by ourthe purchase of Water-Right and share repurchase activity and our acquisition of Hague.exceeding cash generation in the U.S. As a result, our leverage, as measured by the ratio of total debt to total capitalization, was 19.914.6 percent at the end of 20172019 compared with 17.611.4 percent at the end of 2016.

2018.

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Our U.S. pension plan continues to meet all funding requirements under ERISA regulations. We were not required to make a contribution to our pension plan in 2017 but made a voluntary $30 million contribution due to escalating Pension Benefit Guaranty Corporation insurance premiums.2019. We forecast that we will not be required to make a contribution to the plan in 2018,2020, and we do not plan to make any voluntary contributions in 2018.2020. For further information on our pension plans, see Note 1013 of the Notes to Consolidated Financial Statements.

In 2017,2019, we repurchased 2,533,3506,113,038 shares at an average price of $54.90$47.06 per share and a total cost of $139.1$287.7 million. Our Board of Directors increased the number of shares we are authorized to repurchase by 3,000,000 shares at its June 2019 meeting. A total of 2,373,0532,962,215 shares remained on the existing repurchase authorization at December 31, 2017.2019. Depending on factors such as stock price, working capital requirements and alternative investment opportunities, such as acquisitions, we expect to spend approximately $135$200 million on share repurchase activity in 20182020 using a combination of a
10b5-1
repurchase plan. In addition, we may opportunistically repurchase our shares in the open market in 2018.

plan and opportunistic purchases.

We have paid dividends for 7880 consecutive years with paymentsannual amounts increasing each of the last 2628 years. We paid dividends of $0.56$0.90 per share in 20172019 compared with $0.48$0.76 per share in 2016. In January 2018, we2018. We increased our dividend by 29nine percent in the fourth quarter of 2019, and anticipate paying dividendsthe five-year compound annual growth rate of $0.72 per share in 2018.

our dividend is approximately 25 percent.

Aggregate Contractual Obligations

A summary of our contractual obligations as of December 31, 2017,2019, is as follows:

(dollars in millions)

      Payments due by period 

Contractual Obligations

  Total   Less Than
1 year		   1 - 2
Years		   3 - 5
Years		   More than
5 years		 

Long-term debt

  $410.4   $7.5   $6.8   $296.5   $99.6 

Fixed rate interest

   34.1    4.1    7.7    6.8    15.5 

Operating leases

   47.5    20.2    8.5    5.6    13.2 

Purchase obligations

   118.5    118.3    0.1    0.1    —   

Pension and post-retirement obligations

   57.2    0.8    17.0    2.0    37.4 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $667.7   $150.9   $40.1   $311.0   $165.7 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

                     
(dollars in millions)
 
Payments due by period
 
Contractual Obligations
 
Total
  
Less Than
1 year
  
1 - 2
Years
  
3 - 5
Years
  
More than
5 years
 
Long-term debt
 $
284.0
  $
6.8
  $
177.6
  $
20.1
  $
79.5
 
Fixed rate interest
  
26.0
   
3.7
   
6.8
   
5.7
   
9.8
 
Operating leases
  
64.9
   
14.0
   
19.5
   
8.6
   
22.8
 
Purchase obligations
  
145.9
   
145.8
   
0.1
   
—  
   
—  
 
Pension and post-retirement obligations
  
49.3
   
9.8
   
2.2
   
2.0
   
35.3
 
                     
Total
 $
570.1
  $
180.1
  $
206.2
  $
36.4
  $
147.4
 
                     
As of December 31, 2017,2019, our liability for uncertain income tax positions was $6.2$9.7 million. Due to the high degree of uncertainty regarding timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

We utilize blanket purchase orders to communicate expected annual requirements to many of our suppliers. Requirements under blanket purchase orders generally do not become committed until several weeks prior to our scheduled unit production. The purchase obligation amount presented above represents the value of commitments that we consider firm.

Recent Accounting Pronouncements

Refer to
Recent Accounting Pronouncements
in Note 1 of Notes to Consolidated Financial Statements.

Critical Accounting Policies

Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. Also as disclosed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the evaluation of the impairment of goodwill and indefinite-lived intangible assets, as well as significant estimates used in the determination of liabilities related to warranty activity, product liability and pensions. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience and trends, and in some cases, actuarial techniques. We monitor these significant factors and adjustments are made as facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

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Goodwill and Indefinite-lived Intangible Assets

In conformity with U.S. Generally Accepted Accounting Principles (GAAP), goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We perform impairment reviews for our reporting units using a fair-value method based on management’s judgments and assumptions. The fair value represents the estimated amount at which a reporting unit could be bought or sold in a current transaction between willing parties on anarm’s-length arms-length basis. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental as estimates of future sales, earnings and cash flows are utilized to determine fair values. However, we believe that we conduct thorough and competent annual valuations of goodwill and indefinite-lived intangible assets and that there has been no impairment in goodwill or indefinite-lived assets in 2017.

2019.

Product warranty

Our products carry warranties that generally range from one to ten years and are based on terms that are generally accepted in the market. We provide for the estimated cost of product warranty at the time of sale. The product warranty provision is estimated based upon warranty loss experience using actual historical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed at least annually. At times, warranty issues may arise which are beyond the scope of our historical experience. We provide for any such warranty issues as they become known and estimable. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costs could differ significantly from those estimates. The allocation of the warranty liability between current and long-term is based on the expected warranty liability to be paid in the next year as determined by historical product failure rates. At December 31, 20172019 and 2016,2018, our reserve for product warranties was $142.4$134.3 million and $140.9$139.4 million, respectively.

Product liability

Due to the nature of our products, we are subject to product liability claims in the normal course of business. We maintain insurance to reduce our risk. Most insurance coverage includes self-insured retentions that vary by year. In 2017,2019, we maintained a self-insured retention of $7.5 million per occurrence with an aggregate insurance limit of $125.0 million.

We establish product liability reserves for our self-insured retention portion of any known outstanding matters based on the likelihood of loss and our ability to reasonably estimate such loss. There is inherent uncertainty as to the eventual resolution of unsettled matters due to the unpredictable nature of litigation. We make estimates based on available information and our best judgment after consultation with appropriate advisors and experts. We periodically revise estimates based upon changes to facts or circumstances. We also utilize an actuary to calculate reserves required for estimated incurred but not reported claims as well as to estimate the effect of adverse development of claims over time. At December 31, 20172019 and 2016,2018, our reserve for product liability was $40.1$33.1 million and $38.6$39.3 million, respectively.

Pensions

We have significant pension benefit costs that are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service. Consideration is given to current market conditions, including changes in interest rates in making these assumptions. Our assumption for the expected return on plan assets was 7.507.15 percent in 20172019 and 2016.2018. The discount rate used to determine net periodic pension costs decreasedincreased to 4.154.32 percent in 20172019 from 4.403.65 percent in 2016.2018. For 2018,2020, our expected return on plan assets is 7.156.75 percent and our discount rate is 3.653.18 percent.

In developing our expected return on plan assets, we evaluate our pension plan’s current and target asset allocation, the expected long-term rates of return of equity and bond indices and the actual historical returns of our pension plan. Our plan’s target allocation to equity managers is approximately 4530 to 5560 percent, with the remainder allocated primarily to bond managers, private equity managers and real estate managers. Our actual asset allocation as of December 31, 2017,2019, was 4542 percent to equity managers, 4347 percent to bond managers, nine10 percent to real estate managers, twoand one percent to private equity managers and one percent to others.managers. We regularly review our actual asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. Our pension plan’s historical
ten-year
and
25-year
compounded annualized returns are 6.39.2 percent and 9.29.3 percent, respectively. We believe that with our target allocation and the expected long-term returns of equity and bond indices as well as our actual historical returns, our 7.156.75 percent expected return on plan assets for 20182020 is reasonable.

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The discount rate assumptions used to determine future pension obligations at December 31, 20172019 and 20162018 were based on the AonHewittAon AA Only Above Median yield curve, which was designed by AonHewittAon to provide a means for plan sponsors to value the liabilities of their postretirement benefit plans. The AA Only Above Median yield curve represents a series of annual discount rates from bonds with AA minimum average rating as rated by Moody’s Investor Service, Standard & Poor’s and Fitch Ratings. We will continue to evaluate our actuarial assumptions at least annually, and we will adjust the assumptions as necessary.

We recognized pension income of $6.2 million, $8.7 million, and $9.1 million in 2019, 2018, and 2017, compared to $6.9 million of pension income in 2016 and $0.1 million of pension expense in 2015. As of December 31, 2015, we changed the method we used to estimate the service and interest components of net periodic pension benefit cost for our pension plan and post-retirement benefit plan. Historically, we estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We elected to utilize an approach that discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This change was made to provide a more precise measurement of service and interest costs by improving the correlation between the projected benefit cash flows to the corresponding spot yield curve rates. The change was the reason for $7.7 million and $7.1 million decreases in 2017 and 2016, respectively, compared to 2015, in service and interest costs.

respectively.

Costs associated with our replacement retirement plan in 20172019 were approximately $6 million, consistent with 2016.2018. We made changes to our pension plan including closing the plan to new entrants effective January 1, 2010, and the sunset of our plan for the majority of our employees on December 31, 2014 which significantly decreased pension expense beginning in 2015.2014. Lowering the expected return on plan assets by 25 basis points would increasedecrease our net pension expenseincome for 20172019 by approximately $2.0$1.9 million. Lowering the discount rate by 25 basis points would decreaseincrease our 20172019 net pension expenseincome by approximately $0.3$0.4 million.

In 2019, as part of our strategy to
de-risk
our defined benefit pension plan, the qualified defined benefit pension plan purchased a group annuity contract whereby an unrelated insurance company assumed a $31 million obligation to pay and administer future annuity payments for certain retirees and beneficiaries.
Non-GAAP
Measures

We provide
non-GAAP
measures (adjusted earnings, and adjusted earnings per share)share (EPS) and adjusted segment earnings) that exclude restructuring and impairment expenses in 2018 and the impact of a
one-time expenses
charge associated with U.S. Tax Reform. Reform in 2017.
We believe that thesenon-GAAP measures better reflect our financial performance.

As such, we believe that the measures of adjusted earnings, adjusted EPS, and adjusted segment earnings per share provide useful information to investors about our performance and allow management and our investors withto better understand our performance between periods without regard to items we do not consider to be a useful measurecomponent of our results. We have prepared annual reconciliationscore operating performance.

21
Table of adjusted earnings and adjusted earnings per share for 2017.

Contents

A. O. SMITH CORPORATION

Adjusted Earnings and Adjusted EPS

(dollars in millions, except per share data)

(unaudited)

The following is a reconciliation of net earnings and diluted earnings per share (EPS) to adjusted earnings
(non-GAAP)
and adjusted EPS
(non-GAAP):

   Years ended December 31, 
   2017   2016 

Net Earnings (GAAP)

  $296.5   $326.5 

U.S. Tax Reform income tax expense

   81.8    —   
  

 

 

   

 

 

 

Adjusted Earnings

  $378.3   $326.5 
  

 

 

   

 

 

 

Diluted EPS (GAAP)

  $1.70   $1.85 

U.S. Tax Reform income tax expense per diluted share

   0.47    —   
  

 

 

   

 

 

 

Adjusted EPS

  $2.17   $1.85 
  

 

 

   

 

 

 

Excluding the impact

             
 
Years ended December 31,
 
 
2019
  
2018
  
2017
 
Net Earnings (GAAP)
 $
370.0
  $
444.2
  $
296.5
 
Restructuring and impairment expenses, before tax
(1)
  
—  
   
6.7
   
—  
 
Tax effect of restructuring and impairment expenses
  
—  
   
(1.7
)  
—  
 
U.S. Tax Reform income tax expense
(2)
  
—
   
—
   
81.8
 
             
Adjusted Earnings
 $
370.0
  $
449.2
  $
378.3
 
             
Diluted EPS (GAAP)
 $
2.22
  $
2.58
  $
1.70
 
Restructuring and impairment expenses per diluted share
(1)
 $
—  
  $
0.4
  $
—  
 
Tax effect of restructuring and impairment expenses per diluted share
  
—  
   
(0.1
)  
—  
 
U.S. Tax Reform income tax expense
(2)
  
—  
   
—  
   
0.47
 
             
Adjusted EPS
 $
2.22
  $
2.61
  $
2.17
 
             
The following is a reconciliation of reported segment earnings to adjusted segment earnings
(non-GAAP):
             
 
Years ended December 31,
 
 
2019
  
2018
  
2017
 
Segment Earnings (GAAP)
         
North America
 $
488.9
  $
464.1
  $
428.6
 
Rest of World
  
40.2
   
149.3
   
149.3
 
             
Total Segment Earnings (GAAP)
 $
529.1
  $
613.4
  $
577.9
 
             
Adjustments
         
North America
(1)
 $
—  
  $
6.7
  $
—  
 
Rest of World
  
—  
   
—  
   
—
 
             
Total Adjustments
 $
—  
  $
6.7
  $
—  
 
             
Adjusted Segment Earnings
         
North America
 $
488.9
  $
470.8
  $
428.6
 
Rest of World
  
40.2
   
149.3
   
149.3
 
             
Total Adjusted Segment Earnings
 $
529.1
  $
620.1
  $
577.9
 
             
(1)We recognized $6.7 million of restructuring and impairment expenses in connection with the move of manufacturing operations from our Renton, Washington facility to other U.S. facilities. For additional information, see Note 5 of Notes to Consolidated Financial Statements.
(2)Excluding the impact of
one-time
U.S. Tax Reform provisionalone-time charges, our 2017 adjusted effective income tax rate was 27.4 percent as compared to our effective income tax rate of 43.1 percent in 2017. For additional information, see Note 15 of Notes to Consolidated Financial Statements.
Outlook
We expect higher boiler, water heater, and water treatment sales in North America in 2020 and project segment sales to grow by approximately six percent compared to our effective income tax rate2019. Although China channel inventory levels have normalized to the range of 43.1two to three months, we believe the Chinese economy will remain weak in 2020 and expect that 2020 sales in China will increase by one percent in 2017.

Outlook

WeU.S. dollar terms and 2.5 percent in local currency terms. As a result, we expect our consolidated sales to grow 8.5between 4.5 to 9.55.5 percent in 2018. With our organic growth potential and our stable replacement markets, we expect2020. We plan to achieve full-year earnings of between $2.50$2.40 and $2.58$2.50 per share, which excludes the potential impactimpacts from future acquisitions. Our 2020 guidance includesabove which was introduced on January 28, 2020, excludes the estimated benefit relatedpotential impact on our businesses from the coronavirus originating in China. As of the date of this filing, while not yet quantifiable, we now expect the effects of the coronavirus to have a material adverse impact on our lower projected income tax rate under U.S. Tax Reform.

operating results in the first quarter of 2020 and we continue to assess the financial impact for the remainder of the year.

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OTHER MATTERS

Environmental

Our operations are governed by a number of federal, foreign, state, local and environmental laws concerning the generation and management of hazardous materials, the discharge of pollutants into the environment and remediation of sites owned by the company or third parties. We have expended financial and managerial resources complying with such laws. Expenditures related to environmental matters were not material in 20172019 and we do not expect them to be material in any single year. We have reserves and available insurance coverage associated with environmental obligations at various facilities and we believe these reserves together with available insurance coverage are sufficient to cover reasonably anticipated remediation costs. Although we believe that our operations are substantially in compliance with such laws and maintain procedures designed to maintain compliance, there are no assurances that substantial additional costs for compliance will not be incurred in the future. However, since the same laws govern our competitors, we should not be placed at a competitive disadvantage.

Market Risk

We are exposed to various types of market risks, primarily currency. We monitor our risks in such areas on a continuous basis and generally enter into forward contracts to minimize such exposures for periods of less than one year. We do not engage in speculation in our derivatives strategies. Further discussion regarding derivative instruments is contained in Note 1 of Notes to Consolidated Financial Statements.

We enter into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. At December 31, 2017,2019, we had net foreign currency contracts outstanding with notional values of $94.9$205.6 million. Assuming a hypothetical ten percent movement in the respective currencies, the potential foreign exchange gain or loss associated with the change in exchange rates would amount to $9.5$20.6 million. However, gains and losses from our forward contracts will be offset by gains and losses in the underlying transactions being hedged.

Our earnings exposure related to movements in interest rates is primarily derived from outstanding floating-rate debt instruments that are determined by short-term money market rates. At December 31, 2017,2019, we had $282.9$164.0 million in outstanding floating-rate debt with a weighted-average interest rate of 2.32.5 percent at year end. A hypothetical ten percent annual increase or decrease in the
year-end
average cost of our outstanding floating-rate debt would result in a change in annual
pre-tax
interest expense of approximately $0.6$0.4 million.

Forward-Looking Statements

This filing contains statements that the companyCompany believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further slowdown in the growth rateweakening of the Chinese economy and/or a further decline in the growth rate of consumer spending or housing sales in China; negative impact to the company’s businesses as a result of the coronavirus, originating in China; negative impact to the company’s businesses from international tariffs and trade disputes; potential slower rate of conversionweakening in the high efficiencyhigh-efficiency boiler segment in the U.S.; significant volatility in raw material prices; our inability of the company to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in ourthe company’s replacement markets; foreign currency fluctuations; ourthe company’s inability to successfully integrate or achieve ourits strategic objectives resulting from acquisitions; competitive pressures on ourthe company’s businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; the impact of U.S. Tax Reform for effective income tax rates andone-time expenses under the new law and adverse developments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this filing are made only as of the date of this release,filing, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements.

ITEM7A– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Risk” above.

ITEM8– FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

23
Table of Contents
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

A. O. Smith Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of A. O. Smith Corporation (the Company) as of December 31, 20172019 and 2016, and2018, the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “financial“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 20172019 and 2016,2018, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 201824, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Product Warranty Liability Valuation
Description of the Matter
At December 31, 2019, the Company’s product warranty liability was $134.3 million. As discussed in Note 1 of the consolidated financial statements, the Company records a liability for the expected cost of warranty-related claims at the time of sale. The product warranty liability is estimated based upon warranty loss experience using actual historical failure rates and estimated cost of product replacement. Products generally carry warranties from one to ten years. The Company performs separate warranty calculations based on the product type and the warranty term and aggregates them.
Auditing the product warranty liability was complex due to the judgmental nature of the warranty loss experience assumptions, including the estimated product failure rate and the estimated cost of product replacement. In particular, it is possible that future product failure rates may not be reflective of historical product failure rates, or that a product quality issue has not yet been identified as of the financial statement date. Additionally, the cost of product replacement could differ from estimates due to fluctuations in the replacement cost of the product.
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Table of Contents
How We Addressed the Matter in our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s product warranty liability calculation. For example, we tested controls over management’s review of the product warranty liability calculation, including the significant assumptions and the data inputs to the calculation.
To test the Company’s calculation of the product warranty liability, our audit procedures included, among others, evaluating the methodology used, and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We tested the validity and categorization of claims by product type and warranty period within the calculation and tested the completeness of the claims data against the Company’s claim log. We recalculated the historical failure rates using actual claims data. We compared the estimated cost of replacement included in the product warranty liability with the current costs to manufacture a comparable product. We also analyzed subsequent claims data to identify changes in failure trends and assessed the historical accuracy of the prior year liability. Further, we inquired of operational and quality control personnel regarding quality issues and trends.
Accounting for Acquisitions – Valuation of Water-Right, Inc. Intangible Assets
Description of the Matter
During 2019, the Company completed its acquisition of Water-Right, Inc. for consideration of $107.0 million, net of cash acquired, as discussed in Note 3 to the consolidated financial statements. The transaction was accounted for using the purchase method of accounting.
Auditing the Company’s accounting for its acquisition of Water-Right, Inc. was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of identified intangible assets of $60.4 million, which principally consisted of customer relationships and trademarks. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The significant assumptions used to estimate the value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (including revenue growth rates, attrition rates and royalty rates). These significant assumptions are forward looking and could be affected by future economic and market conditions.
How We Addressed the Matter in our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over its accounting for acquisitions. For example, we tested controls over the estimation process supporting the measurement of customer relationships and trademark intangible assets, including management’s review of the significant assumptions used in the valuation models.
To test the estimated fair value of the customer relationship and trademark intangible assets, our audit procedures included, among others, evaluating the Company’s valuation methodology, and testing the significant assumptions discussed above including the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. We compared the revenue growth rates to third-party industry projections for the water treatment and purification market and to the historical performance of the acquired business. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. For example, we evaluated the discount rates by comparing them to discount rate ranges that were independently developed using publicly available market data for comparable peers. We also compared the customer attrition rates to historical customer retention rates and the royalty rate to relevant comparable licensing agreements.
/s/ Ernst & Young LLP

We have served as A. O. Smith Corporation’s auditor since 1917.

Milwaukee, Wisconsin

February 16, 2018

24, 2020

25
Table of Contents
CONSOLIDATED BALANCE SHEETS

December 31 (dollars in millions)

       
   2017  2016 

Assets

   

Current Assets

   

Cash and cash equivalents

  $346.6  $330.4 

Marketable securities

   473.4   424.2 

Receivables

   598.4   518.7 

Inventories

   291.2   251.1 

Other current assets

   57.2   37.6 
  

 

 

  

 

 

 

Total Current Assets

   1,766.8   1,562.0 

Net property, plant and equipment

   528.9   461.9 

Goodwill

   516.7   491.5 

Other intangibles

   308.7   308.3 

Other assets

   76.2   67.3 
  

 

 

  

 

 

 

Total Assets

  $3,197.3  $2,891.0 
  

 

 

  

 

 

 

Liabilities

   

Current Liabilities

   

Trade payables

  $535.0  $528.6 

Accrued payroll and benefits

   90.8   84.3 

Accrued liabilities

   110.7   101.0 

Product warranties

   44.5   44.5 

Long-term debt due within one year

   7.5   7.2 
  

 

 

  

 

 

 

Total Current Liabilities

   788.5   765.6 

Long-term debt

   402.9   316.4 

Product warranties

   97.9   96.4 

Pension liabilities

   48.1   109.0 

Other liabilities

   211.1   88.3 
  

 

 

  

 

 

 

Total Liabilities

   1,548.5   1,375.7 

Commitments and contingencies

   —     —   

Stockholders’ Equity

   

Preferred Stock

   —     —   

Class A Common Stock (shares issued 26,239,559 and 26,313,351)

   131.2   131.6 

Common Stock (shares issued 164,468,033 and 164,394,241)

   164.5   164.4 

Capital in excess of par value

   486.5   477.6 

Retained earnings

   1,792.6   1,593.0 

Accumulated other comprehensive loss

   (299.5)   (363.2) 

Treasury stock at cost

   (626.5)   (488.1) 
  

 

 

  

 

 

 

Total Stockholders’ Equity

   1,648.8   1,515.3 
  

 

 

  

 

 

 

Total Liabilities and Stockholders’ Equity

  $3,197.3  $2,891.0 
  

 

 

  

 

 

 

See accompanying notes which are an integral part of these statements.

   

         
December 31 (dollars in millions)
    
 
2019
  
2018
 
Assets
      
Current Assets
      
Cash and cash equivalents
 $
374.0
  $
259.7
 
Marketable securities
  
177.4
   
385.3
 
Receivables
  
589.5
   
647.3
 
Inventories
  
303.0
   
304.7
 
Other current assets
  
56.5
   
41.5
 
         
Total Current Assets
  
1,500.4
   
1,638.5
 
Net property, plant and equipment
  
545.4
   
540.0
 
Goodwill
  
546.0
   
513.0
 
Other intangibles
  
338.4
   
293.1
 
Operating lease assets
  
46.9
   
—  
 
Other assets
  
80.9
   
86.9
 
         
Total Assets
 $
3,058.0
  $
3,071.5
 
         
Liabilities
      
Current Liabilities
      
Trade payables
 $
509.6
  $
543.8
 
Accrued payroll and benefits
  
64.6
   
79.4
 
Accrued liabilities
  
143.7
   
120.4
 
Product warranties
  
41.8
   
41.7
 
Long-term debt due within one year
  
6.8
   
—  
 
         
Total Current Liabilities
  
766.5
   
785.3
 
Long-term debt
  
277.2
   
221.4
 
Product warranties
  
92.4
   
97.7
 
Pension liabilities
  
27.8
   
49.4
 
Long-term operating lease liabilities
  
38.7
   
—  
 
Other liabilities
  
188.6
   
200.7
 
         
Total Liabilities
  
1,391.2
   
1,354.5
 
Commitments and contingencies
  
—  
   
—  
 
Stockholders’ Equity
      
Preferred Stock
  
—  
   
—  
 
Class A Common Stock (shares issued 26,180,885 and 26,191,327)
  
130.9
   
131.0
 
Common Stock (shares issued 164,526,709 and 164,516,267)
  
164.5
   
164.5
 
Capital in excess of par value
  
509.0
   
496.7
 
Retained earnings
  
2,323.4
   
2,102.8
 
Accumulated other comprehensive loss
  
(348.3
)  
(350.8
)
Treasury stock at cost
  
(1,112.7
)  
(827.2
)
         
Total Stockholders’ Equity
  
1,666.8
   
1,717.0
 
         
Total Liabilities and Stockholders’ Equity
 $
3,058.0
  $
3,071.5
 
         
See accompanying notes which are an integral part of these statements.
26
Table of Contents
CONSOLIDATED STATEMENT OF EARNINGS

Years ended December 31 (dollars in millions, except per share amounts)

 
   2017  2016  2015 

Net sales

  $2,996.7  $2,685.9  $2,536.5 

Cost of products sold

   1,758.0   1,566.6   1,526.7 
  

 

 

  

 

 

  

 

 

 

Gross profit

   1,238.7   1,119.3   1,009.8 

Selling, general and administrative expenses

   718.2   658.9   610.7 

Interest expense

   10.1   7.3   7.4 

Other income - net

   (10.4)   (9.4)   (10.8) 
  

 

 

  

 

 

  

 

 

 

Earnings before provision for income taxes

   520.8   462.5   402.5 

Provision for income taxes

   224.3   136.0   119.6 
  

 

 

  

 

 

  

 

 

 

Net Earnings

  $296.5  $326.5  $282.9 
  

 

 

  

 

 

  

 

 

 

Net Earnings Per Share of Common Stock

  $1.72  $1.87  $1.59 
  

 

 

  

 

 

  

 

 

 

Diluted Net Earnings Per Share of Common Stock

  $1.70  $1.85  $1.58 
  

 

 

  

 

 

  

 

 

 

             
Years ended December 31 (dollars in millions, except per share amounts)
      
 
2019
  
2018
  
2017
 
Net sales
 $
2,992.7
  $
3,187.9
  $
2,996.7
 
Cost of products sold
  
1,812.0
   
1,882.4
   
1,764.3
 
             
Gross profit
  
1,180.7
   
1,305.5
   
1,232.4
 
Selling, general and administrative expenses
  
715.6
   
753.8
   
722.8
 
Restructuring and impairment expenses
  
—  
   
6.7
   
—  
 
Interest expense
  
11.0
   
8.4
   
10.1
 
Other income - net
  
(18.0
)  
(21.2
)  
(21.3
)
             
Earnings before provision for income taxes
  
472.1
   
557.8
   
520.8
 
Provision for income taxes
  
102.1
   
113.6
   
224.3
 
             
Net Earnings
 $
370.0
  $
444.2
  $
296.5
 
             
Net Earnings Per Share of Common Stock
 $
2.24
  $
2.60
  $
1.72
 
             
Diluted Net Earnings Per Share of Common Stock
 $
2.22
  $
2.58
  $
1.70
 
             
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS

Years ended December 31 (dollars in millions)

 
   2017  2016  2015 

Net Earnings

  $296.5  $326.5  $282.9 

Other comprehensive earnings (loss)

    

Foreign currency translation adjustments

   52.7   (39.8)   (42.7) 

Unrealized net (loss) gain on cash flow derivative instruments, less related income tax benefit (provision) of $0.7 in 2017, $0.6 in 2016 and $(0.2) in 2015

   (1.1)   (1.0)   0.3 

Change in pension liability less related income tax (provision) benefit of $(7.5) in 2017, $5.7 in 2016 and $(0.5) in 2015

   12.1   (9.0)   1.0 
  

 

 

  

 

 

  

 

 

 

Comprehensive Earnings

  $360.2  $276.7  $241.5 
  

 

 

  

 

 

  

 

 

 

See accompanying notes which are an integral part of these statements.

 

             
Years ended December 31 (dollars in millions)
      
 
2019
  
2018
  
2017
 
Net Earnings
 $
370.0
  $
444.2
  $
296.5
 
Other comprehensive earnings (loss)
         
Foreign currency translation adjustments
  
(1.3
)  
(38.4
)  
52.7
 
Unrealized net gain (loss) on cash flow derivative instruments, less related income tax (provision) benefit of ($0.3) in 2019, ($0.1) in 2018 and $0.7 in 2017
  
0.9
   
0.2
   
(1.1
)
Change in pension liability less related income tax (provision) benefit of $(1.0) in 2019, $4.3 in 2018 and $(7.5) in 2017
  
2.9
   
(13.1
)  
12.1
 
             
Comprehensive Earnings
 $
372.5
  $
392.9
  $
360.2
 
             
See accompanying notes which are an integral part of these statements.
27
Table of Contents
CONSOLIDATED STATEMENT OF CASH FLOWS

Years ended December 31 (dollars in millions)

 
   2017  2016  2015 

Operating Activities

    

Net earnings

  $296.5  $326.5  $282.9 

Adjustments to reconcile earnings to cash provided by (used in) operating activities:

    

Depreciation and amortization

   70.1   65.1   63.0 

U.S. Tax Reform income tax expense

   81.8   —     —   

Pension (income) expense

   (9.1)   (6.9)   0.1 

Stock based compensation expense

   9.9   9.4   8.8 

Net changes in operating assets and liabilities, net of acquisitions:

    

Current assets and liabilities

   (127.8)   68.5   16.8 

Noncurrent assets and liabilities

   5.0   (16.0)   (19.9) 
  

 

 

  

 

 

  

 

 

 

Cash Provided by Operating Activities

   326.4   446.6   351.7 

Investing Activities

    

Acquisitions of businesses

   (43.1)   (90.8)   —   

Investments in marketable securities

   (583.5)   (563.8)   (428.8) 

Proceeds from sales of marketable securities

   562.7   435.1   315.4 

Capital expenditures

   (94.2)   (80.7)   (72.7) 
  

 

 

  

 

 

  

 

 

 

Cash Used in Investing Activities

   (158.1)   (300.2)   (186.1) 

Financing Activities

    

Long-term debt incurred

   86.5   74.1   28.1 

Common stock repurchases

   (139.1)   (135.2)   (128.1) 

Net (payments) proceeds from stock option activity

   (0.9)   5.7   6.4 

Acquisition related contingent payment

   (1.7)   —     —   

Dividends paid

   (96.9)   (84.2)   (67.8) 
  

 

 

  

 

 

  

 

 

 

Cash Used in Financing Activities

   (152.1)   (139.6)   (161.4) 
  

 

 

  

 

 

  

 

 

 

Net increase in cash and cash equivalents

   16.2   6.8   4.2 

Cash and cash equivalents-beginning of year

   330.4   323.6   319.4 
  

 

 

  

 

 

  

 

 

 

Cash and CashEquivalents-End of Year

  $346.6  $330.4  $323.6 
  

 

 

  

 

 

  

 

 

 

See accompanying notes which are an integral part of these statements.

 

             
Years ended December 31 (dollars in millions)
      
 
2019
  
2018
  
2017
 
Operating Activities
         
Net earnings
 $
370.0
  $
444.2
  $
296.5
 
Adjustments to reconcile earnings to cash provided by (used in) operating activities:
         
Depreciation and amortization
  
78.3
   
71.9
   
70.1
 
U.S. Tax Reform income tax expense
  
—  
   
—  
   
81.8
 
Stock based compensation expense
  
13.3
   
10.1
   
9.9
 
Net changes in operating assets and liabilities, net of acquisitions:
         
Current assets and liabilities
  
32.6
   
(40.0
)  
(127.8
)
Noncurrent assets and liabilities
  
(38.0
)  
(37.3
)  
(4.1
)
             
Cash Provided by Operating Activities
  
456.2
   
448.9
   
326.4
 
Investing Activities
         
Acquisitions of businesses
  
(107.0
)  
—  
   
(43.1
)
Investments in marketable securities
  
(272.7
)  
(523.4
)  
(583.5
)
Proceeds from sales of marketable securities
  
478.0
   
595.9
   
562.7
 
Capital expenditures
  
(64.4
)  
(85.2
)  
(94.2
)
             
Cash Provided by (Used in) Investing Activities
  
33.9
   
(12.7
)  
(158.1
)
Financing Activities
         
Long-term debt incurred (repaid)
  
62.6
   
(189.0
)  
86.5
 
Common stock repurchases
  
(287.7
)  
(202.6
)  
(139.1
)
Net (payments) proceeds from stock option activity
  
(0.5
)  
0.9
   
(0.9
)
Payment of contingent consideration
  
(1.0
)  
(2.3
)  
(1.7
)
Dividends paid
  
(149.2
)  
(130.1
)  
(96.9
)
             
Cash Used in Financing Activities
  
(375.8
)  
(523.1
)  
(152.1
)
             
Net increase (decrease) in cash and cash equivalents
  
114.3
   
(86.9
)  
16.2
 
Cash and cash equivalents-beginning of year
  
259.7
   
346.6
   
330.4
 
             
Cash and Cash
Equivalents-End
of Year
 $
374.0
  $
259.7
  $
346.6
 
             
See accompanying notes, which are an integral part of these statements.
28
Table of Contents
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Years ended December 31 (dollars in millions)

 
   2017  2016  2015 

Class A Common Stock

    

Balance at the beginning of the year

  $131.6  $131.8  $132.2 

Conversion of Class A Common Stock

   (0.4)   (0.2)   (0.4) 
  

 

 

  

 

 

  

 

 

 

Balance at the end of the year

  $131.2  $131.6  $131.8 
  

 

 

  

 

 

  

 

 

 

Common Stock

    

Balance at the beginning of the year

  $164.4  $164.4  $164.2 

Conversion of Class A Common Stock

   0.1   —     0.2 
  

 

 

  

 

 

  

 

 

 

Balance at the end of the year

  $164.5  $164.4  $164.4 
  

 

 

  

 

 

  

 

 

 

Capital in Excess of Par Value

    

Balance at the beginning of the year

  $477.6  $469.3  $451.9 

Conversion of Class A Common Stock

   0.3   0.2   0.2 

Issuance of share units

   (4.9)   (4.6)   (4.2) 

Vesting of share units

   (2.9)   (2.0)   (3.2) 

Stock based compensation expense

   9.2   8.8   8.1 

Exercises of stock options

   1.4   0.3   1.1 

Tax benefit from exercises of stock options and vesting of share units

   —     —     10.4 

Stock incentives

   5.8   5.6   5.0 
  

 

 

  

 

 

  

 

 

 

Balance at the end of the year

  $486.5  $477.6  $469.3 
  

 

 

  

 

 

  

 

 

 

Retained Earnings

    

Balance at the beginning of the year

  $1,593.0  $1,350.7  $1,135.5 

Net earnings

   296.5   326.5   282.9 

Cash dividends on stock

   (96.9)   (84.2)   (67.7) 
  

 

 

  

 

 

  

 

 

 

Balance at the end of the year

  $1,792.6  $1,593.0  $1,350.7 
  

 

 

  

 

 

  

 

 

 

Accumulated Other Comprehensive Loss

    

Balance at the beginning of the year

  $(363.2)  $(313.4)  $(272.0) 

Foreign currency translation adjustments

   52.7   (39.8)   (42.7) 

Unrealized net (loss) gain on cash flow derivative instruments, less related income tax benefit (provision) of $0.7 in 2017, $0.6 in 2016 and $(0.2) in 2015

   (1.1)   (1.0)   0.3 

Change in pension liability less related income tax (provision) benefit of $(7.5) in 2017, $5.7 in 2016 and $(0.5) in 2015

   12.1   (9.0)   1.0 
  

 

 

  

 

 

  

 

 

 

Balance at the end of the year

  $(299.5)  $(363.2)  $(313.4) 
  

 

 

  

 

 

  

 

 

 

Treasury Stock

    

Balance at the beginning of the year

  $(488.1)  $(360.5)  $(230.5) 

Exercise of stock options, net of 160,856, 54,019 and 418,754 shares surrendered as proceeds and to pay taxes in 2017, 2016 and 2015, respectively

   (2.4)   4.0   (5.2) 

Stock incentives and directors’ compensation

   0.2   0.2   0.1 

Shares repurchased

   (139.1)   (135.2)   (128.1) 

Vesting of share units

   2.9   3.4   3.2 
  

 

 

  

 

 

  

 

 

 

Balance at the end of the year

  $(626.5)  $(488.1)  $(360.5) 
  

 

 

  

 

 

  

 

 

 

Total Stockholders’ Equity

  $1,648.8  $1,515.3  $1,442.3 
  

 

 

  

 

 

  

 

 

 

See accompanying notes which are an integral part of these statements.

 

             
Years ended December 31 (dollars in millions)
      
 
2019
  
2018
  
2017
 
Class A Common Stock
         
Balance at the beginning of the year
 $
131.0
  $
131.2
  $
131.6
 
Conversion of Class A Common Stock
  
(0.1
)  
(0.2
)  
(0.4
)
             
Balance at the end of the year
 $
130.9
  $
131.0
  $
131.2
 
             
Common Stock
         
Balance at the beginning of the year
 $
164.5
  $
164.5
  $
164.4
 
Conversion of Class A Common Stock
  
—  
   
—  
   
0.1
 
             
Balance at the end of the year
 $
164.5
  $
164.5
  $
164.5
 
             
Capital in Excess of Par Value
         
Balance at the beginning of the year
 $
496.7
  $
486.5
  $
477.6
 
Conversion of Class A Common Stock
  
0.1
   
0.2
   
0.3
 
Issuance of share units
  
(6.2
)  
(6.0
)  
(4.9
)
Vesting of share units
  
(2.2
)  
(2.4
)  
(2.9
)
Stock based compensation expense
  
12.9
   
10.1
   
9.2
 
Exercises of stock options
  
0.7
   
1.4
   
1.4
 
Stock incentives
  
7.0
   
6.9
   
5.8
 
             
Balance at the end of the year
 $
509.0
  $
496.7
  $
486.5
 
             
Retained Earnings
         
Balance at the beginning of the year
 $
2,102.8
  $
1,788.7
  $
1,589.1
 
Net earnings
  
370.0
   
444.2
   
296.5
 
Cash dividends on stock
  
(149.4
)  
(130.1
)  
(96.9
)
             
Balance at the end of the year
 $
2,323.4
  $
2,102.8
  $
1,788.7
 
             
Accumulated Other Comprehensive Loss
         
Balance at the beginning of the year
 $
(350.8
) $
(299.5
) $
(363.2
)
Foreign currency translation adjustments
  
(1.3
)  
(38.4
)  
52.7
 
Unrealized net gain (loss) on cash flow derivative instruments, less related income tax (provision) benefit of ($0.3) in 2019, ($0.1) in 2018 and $0.7 in 2017
  
0.9
   
0.2
   
(1.1
)
Change in pension liability less related income tax benefit (provision) of $(1.0) in 2019, $4.3 in 2018 and $(7.5) in 2017
  
2.9
   
(13.1
)  
12.1
 
             
Balance at the end of the year
 $
(348.3
) $
(350.8
) $
(299.5
)
             
Treasury Stock
         
Balance at the beginning of the year
 $
(827.2
) $
(626.5
) $
(488.1
)
Exercise of stock options, net of 87,918, 54,180 and 160,856 shares surrendered as proceeds and to pay taxes in 2019, 2018 and 2017, respectively
  
(0.2
)  
(0.7
)  
(2.4
)
Stock incentives and directors’ compensation
  
0.2
   
0.1
   
0.2
 
Shares repurchased
  
(287.7
)  
(202.6
)  
(139.1
)
Vesting of share units
  
2.2
   
2.5
   
2.9
 
             
Balance at the end of the year
 $
(1,112.7
) $
(827.2
) $
(626.5
)
             
Total Stockholders’ Equity
 $
1,666.8
  $
1,717.0
  $
1,644.9
 
             
See accompanying notes which are an integral part of these statements.
29
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Organization and Significant Accounting Policies

1. Organization and Significant Accounting Policies
Organization.
A. O. Smith Corporation (A. O. Smith or the Company) is comprised of two2 reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The North AmericaRest of World segment also manufactures and markets water system tanks. The Rest of World segment also manufacturers and markets
in-home
air purification products in China.

Consolidation.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany transactions.

Use of estimates
.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and notes. Actual results could differ from those estimates.

Fair value of financial instruments.
The carrying amounts of cash, cash equivalents, marketable securities, receivables, floating rate debt and trade payables approximated fair value as of December 31, 20172019 and 2016,2018, due to the short maturities or frequent rate resets of these instruments. As of December 31, 2017 and 2016, the carryingThe fair value of term notes with insurance companies was approximately $127.5 
 $
122.1
million and 134.4 as of December 31, 2019 compared with the carrying
amount of  
$
120.0
million respectively, which approximated fair value in both years.
for the same date. The fair value of term notes with insurance companies was estimated based on current rates offered for debt with similar maturities.

approximately $120.0 million as of December 31, 2018 which approximated the carrying value.

Foreign currency translation.translation
.
For all subsidiaries outside the U.S., with the exception of its Barbados, Hong Kong and Mexican companies and its
non-operating
companies in the Netherlands, the Company uses the local currency as the functional currency. For those operations using a functional currency other than the U.S. dollar, assets and liabilities were translated into U.S. dollars at
year-end
exchange rates, and revenues and expenses were translated at weighted-average exchange rates. The resulting translation adjustments were recorded as a separate component of stockholders’ equity. The Barbados, Dutch, Hong Kong, Mexican and MexicanNetherlands companies use the U.S. dollar as the functional currency. Gains and losses from foreign currency transactions were included in net earnings and were not significant in 2017, 20162019, 2018, or 2015.

2017.

Cash and cash equivalents
.
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Marketable securities
.
The Company considers all highly liquid investments with maturities greater than 90 days when purchased to be marketable securities. At December 31, 2017,2019, the Company’s marketable securities consisted of bank time deposits with original maturities ranging from 180 days to 12 months and were primarily located at investment grade rated banks in China.

Inventory valuation.
Inventories are carried at lower of cost or market.and net realizable value. Cost is determined on the
last-in,
first-out
(LIFO) method for a majority of the Company’s domestic inventories, which comprised 5961 percent and 6164 percent of the Company’s total inventory at December 31, 20172019 and 2016,2018, respectively. Inventories of foreign subsidiaries, the remaining domestic inventories and supplies were determined using the
first-in,
first-out
(FIFO) method.

Property, plant and equipment.
Property, plant and equipment are stated at cost. Depreciation is computed primarily by the
straight-line
method. The estimated service lives used to compute depreciation are generally 25 to 50 years for buildings, three to 20 years for equipment and three to 15 years for software. Maintenance and repair costs are expensed as incurred.

1.Organization and Significant Accounting Policies (continued)

Goodwill and other intangibles.
Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis. Separable intangible assets, primarily comprised of customer relationships, that are not deemed to have an indefinite life are amortized on a straight-line basis over their estimated useful lives which range from threefive to 25 years.

30
Table of Contents
1. Organization and Significant Accounting Policies (continued)
Impairment of long-lived and amortizable intangible assets.
Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected
undiscounted
cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.

Product warranties.
The Company’s products carry warranties that generally range from one to ten years and are based on terms that are consistent with the market.
The Company records a liability for the expected cost of warranty-related claims at the time of sale.sale and is estimated based on the warranty period, product type and loss experience using actual historical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed by the Company at least annually. At times, warranty issues may arise which are beyond the scope of the Company’s historical experience. The Company provides for any such warranty issues as they become known and estimable. The allocation of the warranty liability between current and long-term is based on expected warranty claims to be paid in the next year as determined by historical product failure rates.

The following table presents the Company’s product warranty liability activity in 20172019 and 2016:

Years ended December 31 (dollars in millions)

  2017   2016 

Balance at beginning of year

  $140.9   $139.3 

Expense

   39.7    42.5 

Claims settled

   (38.2)    (40.9) 
  

 

 

   

 

 

 

Balance at end of year

  $142.4   $140.9 
  

 

 

   

 

 

 

2018:

         
Years ended December 31 (dollars in millions)
 
2019
  
2018
 
Balance at beginning of year
 $
139.4
  $
141.2
 
Expense
  
44.3
   
40.7
 
Claims settled
  
(49.4
)  
(42.5
)
         
Balance at end of year
 $
134.3
  $
139.4
 
         
Derivative instruments.
The Company utilizes certain derivative instruments to enhance its ability to manage currency as well as raw materials price risk. The Company does not enter into contracts for speculative purposes. The fair values of all derivatives are recorded in the consolidated balance sheets. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss (AOCI)(AOCL), depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 11,14, “Derivative Instruments” of the notes to consolidated financial statements for disclosure of the Company’s derivative instruments and hedging activities.

Fair Value Measurements.
Accounting Standards Codification (ASC)
(ASC) 820
Fair Value Measurements
, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Assets measured at fair value on a recurring basis are as follows (dollars in millions):

Fair Value Measurement Using

  December 31, 2017   December 31, 2016 

Quoted prices in active markets for identical assets (Level 1)

  $475.1   $424.5 

         
Fair Value Measurement Using
 
December 31, 2019
  
December 31, 2018
 
Quoted prices in active markets for identical assets (Level
 
1)
 $
177.4
  $
385.3
 
Significant other observable inputs (Level 2)
  
6.9
   
7.5
 
There were no changes in the valuation techniques used to measure fair values on a recurring basis.

1.Organization and Significant Accounting Policies (continued)

31
Table of Contents
1. Organization and Significant Accounting Policies (continued)
Revenue recognition. The Company recognizes revenue upon transfer of title, which occurs upon shipment
Substantially all of the product toCompany’s sales are from contracts with customers for the customer except for certain export sales where transferpurchase of title occurs when the product reaches the customer destination.

its products. Contracts and customer purchase orders are used to determine the existence of a sales arrangement.contract. Shipping documents are used to verify shipment. TheFor substantially all of its products, the Company assesses whethertransfers control of products to the selling price is fixed or determinable basedcustomer at the point in time when title and risk are passed to the customer, which generally occurs upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectability based on the creditworthinessshipment of the customer as determined by credit checks and analysis, as well asproduct. See Note

2
, “Revenue Recognition” for disclosure of the customer’s payment history. The allowance for doubtful accounts was $5.3 million and $6.3 million at December 31, 2017 and 2016, respectively.

Reserves for customer returns for defective product are based on historical experience with similar types of sales. Accruals for rebates and incentives are based on pricing agreements and are tied to sales volume. Changes in such accruals may be required if future returns differ from historical experience or if actual sales volume differs from estimated sales volume. Rebates and incentives are recognized as a reduction of sales.

Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold.

Company’s revenue recognition activities. 

Advertising.
The majority of advertising costs are charged to operations as incurred and amounted to $110.7 million, $132.1 million and $126.9 million $113.9 millionduring 2019, 2018 and $102.2 million during 2017, 2016 and 2015, respectively. Included in total advertising costs are expenses associated with store displays for water heater, water treatment and air purification products in China that are amortized over 12 to 2436 months which totaled $28.5 million, $38.7 million and $43.0 million $37.0 millionduring 2019, 2018 and $27.4 million during 2017, 2016 and 2015, respectively.

Research and development.
Research and development costs are charged to operations as incurred and amounted to $87.9 million, $94.0 million and $86.4 million $80.1 millionduring 2019, 2018 and $73.7 million during 2017, 2016 and 2015, respectively.

Environmental costs.
The Company accrues for costs associated with environmental obligations when such costs are probable and reasonably estimable. Costs of estimated future expenditures are not discounted to their present value. Recoveries of environmental costs from other parties are recorded as assets when their receipt is considered probable. The accruals are adjusted as facts and circumstances change.

Stock-based compensation.
Compensation cost is recognized using the straight-line method over the vesting period of the award and forfeitures are recognized as they occur. The Company adopted amended ASC 718Compensation – Stock Compensation as of January 1, 2016. Refer to the Recent Accounting Pronouncements section later in this footnote for additional information on the adoption of this pronouncement. As required underIn accordance with amended ASC 718, the Company recognized $11.6$2.3 million, $2.4 million, and $5.9$11.6 million of discrete income tax benefits on settled stock based compensation awards during 2019, 2018, and 2017 and 2016, respectively. As required under previous guidance, in the year ended December 31, 2015, the Company recognized $10.4 million of excess tax deductions as cash flows provided by financing activities.

Income taxes.
The provision for income taxes is computed using the asset and liability method, in accordance with ASC 740
Income Taxes
, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled and are classified as noncurrent in the consolidated balance sheet. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement.

1.Organization and Significant Accounting Policies (continued)

Earnings per share of common stock.
The Company is not required to use the
two-class
method of calculating earnings per share since its Class A Common Stock and Common Stock have equal dividend rights. The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:

   2017   2016   2015 

Denominator for basic earnings per share - weighted-average shares outstanding

   172,666,056    174,712,683    177,622,280 

Effect of dilutive stock options, restricted stock and share units

   1,939,133    2,112,597    1,386,900 
  

 

 

   

 

 

   

 

 

 

Denominator for diluted earnings per share

   174,605,189    176,825,280    179,009,180 
  

 

 

   

 

 

   

 

 

 

On April 11, 2016, the Company’s stockholders approved a proposal to increase the Company’s authorized shares

             
 
2019
  
2018
  
2017
 
Denominator for basic earnings per share - weighted-average shares outstanding
  
165,450,441
   
170,589,345
   
172,666,056
 
Effect of dilutive stock options, restricted stock and share units
  
1,260,456
   
1,604,695
   
1,939,133
 
             
Denominator for diluted earnings per share
  
166,710,897
   
172,194,040
   
174,605,189
 
             
32
Table of Common StockContents
1. Organization and on September 7, 2016, the Company’s Board of Directors declared atwo-for-one stock split of the Company’s Class A Common Stock and Common Stock (including treasury shares) in the form of a 100 percent stock dividend to stockholders of record on September 21, 2016 and payable on October 5, 2016. All references in the financial statements and footnotes to the number of shares outstanding, price per share, per share amounts and stock based compensation data have been recast to reflect the stock split for all periods presented.

Reclassifications.Certain amounts from prior years have been reclassified to conform with current year presentation.

Significant Accounting Policies (continued)

Recent Accounting Pronouncements

In August 2017,December 2019, the Financial Accounting Standards Board (FASB) amended ASC 815,Derivatives and Hedging (issuedAccounting Standards Codification (ASC) 740,
Income Taxes
(issued under Accounting Standards Update (ASU)2017-12, “Targeted Improvements to 2019-12, “Simplifying the Accounting for Hedging Activities”Income Taxes”). Under thisThis amendment more hedging strategies are eligible for hedge accounting treatment. ASU2017-12 alsoremoves certain exceptions to the general principles of ASC 740, and clarifies and amends the presentation and disclosure requirements regarding derivatives and hedging and changes how companies assess effectiveness.existing guidance to improve consistent application. The amendment requires adoption on January 1, 2019 and permits2021, with early adoption in any interim or annual period.permitted. The Company does not expect thatis currently evaluating the adoption ofimpact ASU2017-12 2019-12 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In May 2017, the FASB amended ASC 718,Compensation – Stock Compensation (issued under ASU2017-09, “Scope of Modification Accounting”). This amendment clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as a modification. Under this amendment, modification accounting must be used if three conditions are met: the fair value changes, the vesting conditions change, or the classification of the award changes due to the changes in terms or conditions. The amendment requires adoption on January 1, 2018. The Company does not expect that the adoption of ASU2017-09 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In March 2017, the FASB amended ASC 715,Compensation – Retirement Benefits (issued under ASU2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”). This amendment changes the way net periodic benefit cost associated with employer-sponsored defined benefit plans is presented in the statement of earnings. Under the amendment, the service cost component of net periodic benefit cost is included in the same lines in the statement of earnings as other employee compensation costs and the other components of net periodic benefit cost must be presented separately outside of income from operations. The amendment requires adoption on January 1, 2018. The Company does not expect the adoption of ASU2017-07 to have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

financial statements.

In January 2017, the FASB amended ASC 350,
Intangibles – Goodwill and Other (issued
(issued under ASU
2017-04, “Simplifying
“Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does not expect that the adoption of ASU
2017-04
will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

1.Organization and Significant Accounting Policies (continued)

In OctoberJune 2016, the FASB amendedissued ASC 740,Income Taxes (issued326,
 Financial Instruments – Credit Losses
(issued under ASU2016-16). This amendment
2016-13)
which modifies the measurement of expected credit losses on certain financial instruments. ASU
2016-13
requires that the income tax consequences of an intra-entity transfer of an asset other than inventory be recognized when the transfer occurs. The amendment is effective for the Company beginningadoption on January 1, 2018. This amendment is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings.2020. The Company does not expect the adoption of amended ASU2016-16
2016-13
will not have a material impact on the Company’sits consolidated balance sheets, statementstatements of earnings or statements of cash flows.

In August 2016, the FASB amended ASC 230,Statement of Cash Flows (issued under ASU2016-15, “Clarification of Certain Cash Receipts and Cash Payments”). This amendment clarified reporting for contingent consideration payments made after a business combination depending on how soon after the acquisition the payments are made. The Company adopted ASU2016-15 effective January 1, 2017.

In March 2016, the FASB amended ASC 718,Compensation—Stock Compensation (issued under ASU2016-09). This amendment simplified several aspects of the accounting for share-based payment transactions. The Company adopted this amendment effective January 1, 2016. The amendment requires the benefits or deficiencies of tax deductions in excess of or less than the recognized compensation cost to be recorded as income tax benefits or expense in the consolidated statement of earnings in the periods in which they occur. The amendment also     eliminated previous guidance that required unrecognized future excess income tax benefits to be considered used to repurchase shares in the calculation of diluted shares which resulted in lower diluted shares outstanding than the calculation under the amendment. The Company applied this guidance prospectively. As such, the Company recognized $11.6 million and $5.9 million of discrete income tax benefits associated with excess tax benefits on settled stock based compensation awards during 2017 and 2016, respectively. The Company’s diluted shares outstanding for the 2017 and 2016 increased as compared to the way it was calculated under previous guidance.

In February 2016, the FASB amended ASC 842,
Leases (issued
(issued under ASU
2016-02).
This amendment requires the recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements currently classified as operating leases. This amendment isThe Company applied the modified retrospective transition method and elected the transition option to use the effective for periods beginningdate of January 1, 2019.2019, as the date of the initial application. The Company is inelected the processpackage of completing its analysis of itspractical expedients as well as a separate practical expedient not to separate lease population and does
non-lease
components. The Company did not expectelect the hindsight practical expedient. The adoption of ASU
2016-02 to
did not have a material impact on itsthe Company’s consolidated balance sheets, statements of earnings andor statements of cash flows.

In May 2014, the FASB issued ASC606-10, Refer to Note 4, Leases, for additional information.

2. Revenue from Contracts with Customers (issued under ASU2014-09). ASU2014-09 will replaceRecognition
Substantially all existing revenue recognition guidance when effective. In July 2015, the FASB approved a one year deferral of the effective dateCompany’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders are used to periods beginning January 1, 2018.determine the existence of a sales contract. Shipping documents are used to verify shipment. For substantially all of its products, the Company transfers control of products to the customer at the point in time when title and risk are passed to the customer, which generally occurs upon shipment of the product. Each unit sold is considered an independent, unbundled performance obligation. The Company’s sales arrangements do not include other performance obligations that are material in the context of the contract. The nature, timing and amount of revenue for a respective performance obligation are consistent for each customer. The Company has completed its reviewmeasures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.
Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer contractsdeposits liability of $49.6 million and $47.0 million at December 31, 2019 and December 31, 2018, respectively. The Company assesses collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. The Company’s allowance for doubtful accounts was $6.7 million and $6.4 million at December 31, 2019 and December 31, 2018, respectively.
Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net 
sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.
33
Table of Contents
2. Revenue Recognition (continued)
Disaggregation of Net Sales
The Company is comprised of 2 reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The Rest of World segment also manufactures and markets
in-home
air purification products in China.
As each segment manufactures and markets products in its respective region of the world, the Company has determined that geography is the primary factor in reporting its sales. The Company further disaggregates its North America segment sales by major product line as each of North America’s major product lines is sold through distinct distribution channels and these product lines may be impacted differently by certain economic factors. Within the Rest of World segment, particularly in China and India, the Company’s major customers purchase across the Company’s product lines, utilizing the same distribution channel regardless of product type. In addition, the impact of economic factors is unlikely to be differentiated by product line in the disclosure requirementsRest of ASU2014-09.World segment.
The North America segment major product lines are defined as the following:
Water heaters
The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes and small businesses. The Company will adopt ASU2014-09 on January 1, 2018 usingsells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than 1,300 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the full retrospective method. Company’s water heater sales in the North America segment is derived from the replacement of existing products.
Boilers
The adoptionCompany’s boilers are closed loop water heating systems used primarily for space heating or hydronic heating. The Company’s boilers are primarily used in applications in commercial settings for hospitals, schools, hotels and other large commercial buildings while residential boilers are used in homes, apartments and condominiums. The Company’s boiler distribution channel is comprised primarily of ASU2014-09 will not havemanufacturer representative firms, with the remainder of our boilers distributed through wholesale channels. The Company’s boiler sales in the North America segment are derived from a material impact on our financial statements on anon-going basis.

combination of replacement of existing products and new construction.

Water treatment
products
The Company’s water treatment products range from
point-of-entry
water softeners, solutions for problem well water, and whole-home water filtration products to
on-the-go
filtration bottles and
point-of-use
carbon and reverse osmosis products. Typical applications for the Company’s water treatment products include residences, restaurants, hotels and offices. The Company sells water treatment products through its wholesale and retail distribution channels, similar to water heater products and related parts. The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through internet sales channels. A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.
The following table disaggregates the Company’s net sales by segment. As described above, the Company’s North America segment sales are further disaggregated by major product line. In addition, the Company’s Rest of World segment sales are disaggregated by China and all other Rest of World.
34
Table of Contents
2. Revenue Recognition (continued)
Years ending December 31 (dollars in millions)
 
2019
  
2018
  
2017
 
North America
         
Water heaters and related parts
 $
1,742.6
  $
1,757.0
  $
1,663.0
 
Boilers and related parts
  
199.5
   
200.4
   
183.3
 
Water treatment products
(1)
  
141.4
   
87.3
   
58.5
 
             
Total North America
  
2,083.5
   
2,044.7
   
1,904.8
 
Rest of World
         
China
 $
827.2
  $
1,070.4
  $
1,029.4
 
All other Rest of World
  
108.6
   
103.2
   
86.9
 
             
Total Rest of World
  
935.8
   
1,173.6
   
1,116.3
 
Inter-segment sales
  
(26.6
)  
(30.4
)  
(24.4
)
             
Total Net Sales
 $
2,992.7
  $
3,187.9
  $
2,996.7
 
             
2.(1)Acquisitions

OnIncludes the results of Water-Right and Hague Quality Water International (Hague) from the date of acquisition of April 8, 2019 and September 5, 2017, respectively.

3. Acquisitions
On April 8, 2019, the Company acquired 100 percent of the shares of Water-Right, Inc. and its affiliated entities (Water-Right), a Wisconsin-based water treatment company. With the addition of Water-Right, the Company grew its North America water treatment platform. Water-Right is included in the Company’s North America segment for reporting purposes.
The Company paid an aggregate cash purchase price of $107.0 million, net of cash acquired. In addition, the Company established a $4.0 million escrow to satisfy any potential obligations of the former owners of Water-Right, should they arise.
The following table summarizes the preliminary estimate of the fair value of the assets acquired and liabilities assumed at the date of acquisition of Water-Right for purposes of allocating the purchase price. The Company is in the process of finalizing the fair value estimates; therefore, the allocation of the purchase price is subject to refinement.
Significant assumptions used to estimate the fair value of intangible assets acquired include discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates, attrition rates and royalty rates.
The preliminary $60.4 million of acquired identifiable intangible assets was comprised of the following: $40.2 million of customer relationships being amortized over 20 years, $19.0 million of trademarks not subject to amortization, and $1.2 million of
non-compete
agreements being amortized over 7.5 years.
April 8, 2019 (dollars in millions)
  
Current assets, net of cash acquired
 $
9.7
 
Property, plant and equipment
  
8.6
 
Intangible assets
  
60.4
 
Goodwill
  
31.0
 
     
Total assets acquired
  
109.7
 
Current liabilities
  
(2.7
)
     
Net assets acquired
 $
 
 
 
107.0
 
     
As required under ASC 805
Business Combinations
, Water-Right’s
results of operations have been included in the Company’s consolidated financial statements from April 8, 2019, the date of acquisition. Revenues and
pre-tax
earnings associated with Water-Right included in the consolidated statement of earnings for the
year
ended
December 31, 2019 totaled $44.3 million and $7.1 million, respectively, which included $7.5 million of operating earnings less $0.4 million of acquisition-related costs incurred by the Company resulting from the acquisition.
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Table of Contents
3. Acquisitions (continued)
On September 5, 2017, the Company acquired
100
 percent of the shares of Hague, Quality Water International (Hague), an Ohio-based water softener company. With the addition of Hague, the Company grew its North America water treatment platform. Hague is included in the Company’s North America segment for reporting purposes.

The Company paid an aggregate cash purchase price of $43.1 million, net of $4.1 million of cash acquired. In addition, the Company established a $1.5 million holdback liability to satisfy any potential obligations of the former owners of Hague, should they arise, otherwise the amount will be paid to the former owners of Hague on September 5, 2018.arise. The Company also agreed to make a contingent payment of up to an additional $2.0 million based on the amount by which products manufactured by or branded Hague increase over the
two-year
period ending June 30, 2019. In addition, the Company incurred acquisition-related costs of approximately $0.2 million.
As of the acquisition date, and December 31, 2017, the Company estimated the fair value of the holdback liability and additional contingent consideration at $1.5 million and $2.0 million, respectively, and has recorded liabilities for those amounts.

respectively. During 2018, the Company finalized the amount of acquisition date working capital, which resulted in a $1.3 million payment to the former owners of Hague related to the aforementioned holdback. The Company also paid $2.0 million of contingent payments associated with the amount by which sales of products manufactured by Hague increase over the

two-year
period ending June 30, 2019.
The following table summarizes the allocation of fair value of the assets acquired and liabilities assumed at the date of acquisition of Hague for purposes of allocating the purchase price. The Company is in the process of finalizing
Significant assumptions used to estimate the fair value estimates; thereforeof intangible assets acquired include discount rates and certain assumptions that form the allocationbasis of the purchase price is subject to refinement. forecasted results, including revenue growth rates, attrition rates and royalty rates.
The $12.8 million of acquired intangible assets was comprised of $1.1 million of trade names that are not subject to amortization and $11.7 million of customer lists being amortized over 18 years.

September 5, 2017 (dollars in millions)
  
Current assets, net of cash acquired
 $
7.8
 
Property, plant and equipment
  
6.9
 
Intangible assets
  
12.8
 
Goodwill
  
22.2
 
     
Total assets acquired
  
49.7
 
Current liabilities
  
(5.6
)
Long-term liabilities
  
(1.0
)
     
Total liabilities assumed
  
(6.6
)
     
Net assets acquired
 $
43.1
 
     

4. Leases
The acquisition was accountedCompany’s lease portfolio consists of operating leases for buildings and equipment, such as forklifts and copiers, primarily in the United States and China. The Company defines a lease as a contract that gives the Company the right to control the use of a physical asset for a stated term. The Company pays the lessor for that right, with a series of payments defined in the contract and a corresponding right of use operating lease asset and liability are recorded. The Company has elected not to record leases with an initial term of 12 months or less on its condensed consolidated balance sheet. To determine balance sheet amounts, required legal payments are discounted using the purchase methodCompany’s incremental borrowing rate. The incremental borrowing rate is the rate of accounting,interest that the Company would incur if it were to borrow, on a collateralized basis, an amount equal to the value of the leased item over a similar term, in a similar economic environment. Variable lease components not based on an index or rate are excluded from the measurement of the lease asset and accordingly,liability and expensed as incurred for all asset classes.
Certain leases include one or more options to renew or terminate. Renewal terms can extend the resultslease term from one to five years and options to terminate can be effective within one year. The exercise of operations have been includedlease renewal or termination is at the Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability. The Company’s consolidated financial statements from September 5, 2017, the date of acquisition. Net sales andpre-tax earningslease agreements do not contain any material residual value guarantees or material restrictive covenants or material subleases. Cash flows associated with Hague includedleases are materially consistent with the expense recorded in the condensed consolidated statement of earnings totaled $8.6earnings.
36
Table of Contents
4. Leases (continued)
Supplemental balance sheet information related to leases is as follows:
     
(dollars in millions)
  
 
December 31, 2019
 
Liabilities
   
Short term: Accrued liabilities
 $
12.0
 
Long term: Operating lease liabilities
  
38.7
 
     
Total operating lease liabilities
 $
50.7
 
Less: Rent incentives and deferrals
  
(3.8
)
     
Assets
   
Operating lease assets
 $
46.9
 
     
Lease Term and Discount Rate
December 31, 2019
Weighted-average remaining lease term
10 years
Weighted-average discount rate
3.93%
The components of lease expense were as follows:
       
(dollars in millions)
   
Lease Expense
 
Classification
 
Twelve months ended
December 31, 2019
 
Operating lease expense
(1)
 
Cost of products sold
 $
3.0
 
 
Selling, general and administrative expenses
  
17.6
 
(1)Includes short-term lease expense of $2.0 million for the twelve months ended December 31, 2019. Includes variable lease cost of $2.1 million for the twelve months ended December 31, 2019.
Rent expense, including payments under operating leases, was $24.0 million and $2.0$23.9 million respectively, which included $2.2in 2018 and 2017 respectively.
Maturities of lease liabilities were as follows:
     
(dollars in millions)
  
 
December 31, 2019
 
2020
 $
14.0
 
2021
  
10.5
 
2022
  
9.0
 
2023
  
4.9
 
2024
  
3.7
 
After 2024
  
22.8
 
     
Total lease payments
  
64.9
 
Less: imputed interest
  
(14.2
)
     
Present value of operating lease liabilities
 $
50.7
 
     
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Table of Contents
5. Restructuring and Impairment Expenses
On March 21, 2018, the Company announced a move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. The Company recognized $6.7 million of operating earnings less $0.2restructuring and impairment expenses, comprised of $4.0 million of acquisition-relatedseverance and compensation related costs, incurred bylease exit costs of $2.1 million and impairment charges related to long-lived assets totaling $0.6 million, as well as a corresponding $1.7 million tax benefit related to the Company resulting fromcharges. As of December 31, 2019, the acquisition.

2.Acquisitions (continued)

On August 8, 2016, the Company acquired 100 percentconsolidation of the shares of Aquasana, Inc. (Aquasana), a Texas-based water treatment company. With the addition of Aquasana, the Company entered the North America water treatment market. Aquasana is included in the Company’s North America segment for reporting purposes.

The Company paid an aggregate cash purchase price of $85.1 million, net of $1.9 million of cash acquired. In addition, the Company incurred acquisition-related costs of approximately $1.2 million and recorded a holdback liabilityRenton facility to satisfy any potential obligations of the former owners of Aquasana to pay any adjustment to the purchase price. As of the acquisition date, the fair value of the holdback liabilityother U.S. facilities was $1.7 million. The Company paid the full holdback liability to the former owners of Aquasana in 2017.

complete.

The following table summarizes the allocation of fair valuepresents an analysis of the assets acquiredCompany’s restructuring reserve for the years ended December 31, 2019 and liabilities assumed at the date2018:
                 
(dollars in millions)
        
 
Severance
Costs
  
Lease Exit
Costs
  
Fixed Assets
Impairment
  
Total
 
Balance at January 1, 2018
 $
—  
  $
—  
  $
—
  $
—  
 
Restructuring expense recognized
  
4.0
   
2.1
   
0.6
   
6.7
 
Cash payments and disposals
  
(3.8
)  
(0.8
)  
(0.6
)  
(5.2
)
                 
Balance at December 31, 2018
  
0.2
   
1.3
   
—
   
1.5
 
Cash payments and disposals
  
(0.2
)  
(0.8
)  
—
   
(1.0
)
                 
Balance at December 31, 2019
 $
—
  $
0.5
  $
—
  $
0.5
 
                 
6. Statement of acquisition of Aquasana. The $30.0 million of acquired intangible assets was comprised of $21.5 million of trade names that are not subject to amortization, $8.3 million of customer lists being amortized over ten years and $0.2 million of patents being amortized over five years.

August 8, 2016 (dollars in millions)

    

Current assets, net of cash acquired

  $7.3 

Property, plant and equipment

   2.7 

Intangible assets

   30.0 

Goodwill

   60.4 
  

 

 

 

Total assets acquired

   100.4 

Current liabilities

   (7.1) 

Long-term liabilities

   (8.2) 
  

 

 

 

Total liabilities assumed

   (15.3) 
  

 

 

 

Net assets acquired

  $85.1 
  

 

 

 

The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have been included in the Company’s financial statements from August 8, 2016, the date of acquisition.

3.Statement of Cash Flows

Cash Flows

Supplemental cash flow information is as follows:

Years ended December 31 (dollars in millions)

  2017  2016  2015 

Net change in current assets and liabilities, net of acquisitions:

    

Receivables

  $(75.8)  $(15.1)  $(25.9) 

Inventories

   (37.5)   (23.4)   (14.7) 

Other current assets

   (9.0)   (3.2)   (4.6) 

Trade payables

   (5.1)   101.5   31.0 

Accrued liabilities, including payroll and benefits

   12.2   6.0   19.8 

Income taxes (refundable) payable

   (12.6)   2.7   11.2 
  

 

 

  

 

 

  

 

 

 
  $(127.8)  $68.5  $16.8 
  

 

 

  

 

 

  

 

 

 

4.Inventories

December 31 (dollars in millions)

  2017   2016 

Finished products

  $134.6   $114.1 

Work in process

   18.3    13.0 

Raw materials

   160.5    142.4 
  

 

 

   

 

 

 

Inventories, at FIFO cost

   313.4    269.5 

LIFO reserve

   (22.2)    (18.4) 
  

 

 

   

 

 

 
  $291.2   $251.1 
  

 

 

   

 

 

 

             
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
 
Net change in current assets and liabilities, net of acquisitions:
         
Receivables
 $
62.4
  $
(54.6
) $
(75.8
)
Inventories
  
6.3
   
(7.7
)  
(37.5
)
Other current assets
  
(4.8
)  
10.0
   
(9.0
)
Trade payables
  
(35.4
)  
8.8
   
(5.1
)
Accrued liabilities, including payroll and benefits
  
14.2
   
(3.5
)  
12.2
 
Income taxes
  
(10.1
)  
7.0
   
(12.6
)
             
 $
32.6
  $
(40.0
) $
(127.8
)
             
7. Inventories
         
December 31 (dollars in millions)
 
2019
  
2018
 
Finished products
 $
136.8
  $
137.6
 
Work in process
  
21.7
   
23.3
 
Raw materials
  
168.3
   
174.4
 
         
Inventories, at FIFO cost
  
326.8
   
335.3
 
LIFO reserve
  
(23.8
)  
(30.6
)
         
 $
303.0
  $
304.7
 
         
The Company recognized
after-tax
LIFO (income) expenseincome of
$
(
0.7
)
million, $(0.4) million and $(0.3) million $0.3 millionin 2019, 2018 and $1.1 million in 2017, 2016respectively.
38
Table of Contents
8. Property, Plant and 2015, respectively.

5.Property, Plant and Equipment

December 31 (dollars in millions)

  2017   2016 

Land

  $11.2   $11.0 

Buildings

   329.9    286.4 

Equipment

   608.4    533.7 

Software

   110.6    101.4 
  

 

 

   

 

 

 
   1,060.1    932.5 

Less accumulated depreciation and amortization

   531.2    470.6 
  

 

 

   

 

 

 
  $528.9   $461.9 
  

 

 

   

 

 

 

6.Goodwill and Other Intangible Assets

Equipment

         
December 31 (dollars in millions)
 
2019
  
2018
 
Land
 $
11.6
  $
11.2
 
Buildings
  
334.1
   
323.3
 
Equipment
  
686.9
   
643.8
 
Software
  
124.3
   
118.5
 
         
  
1,156.9
   
1,096.8
 
Less accumulated depreciation and amortization
  
611.5
   
556.8
 
         
 $
545.4
  $
540.0
 
         
9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill during the years ended December 31, 20172019 and 20162018 consisted of the following:

(dollars in millions)

  North America   Rest of World   Total 

Balance at December 31, 2015

  $361.0   $59.9   $420.9 

Acquisitions

   70.0    —      70.0 

Currency translation adjustment

   1.2    (0.6)    0.6 
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   432.2    59.3    491.5 

Acquisitions

   22.2    —      22.2 

Currency translation adjustment

   2.8    0.2    3.0 
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

  $457.2   $59.5   $516.7 
  

 

 

   

 

 

   

 

 

 

             
(dollars in millions)
 
North America
  
Rest of World
  
Total
 
Balance at December 31, 2017
 $
457.2
  $
59.5
  $
516.7
 
Currency translation adjustment
  
(3.3
)  
(0.4
)  
(3.7
)
             
Balance at December 31, 2018
  
453.9
   
59.1
   
513.0
 
Acquisition
  
31.0
   
—  
   
31.0
 
Currency translation adjustment
  
2.0
   
—  
   
2.0
 
             
Balance at December 31, 2019
 $
486.9
  $
59.1
  $
546.0
 
             
The carrying amount of other intangible assets consisted of the following:

   2017   2016 

December 31 (dollars in millions)

  Gross
Carrying
Amount		   Accumulated
Amortization		  Net   Gross
Carrying
Amount		   Accumulated
Amortization		  Net 

Amortizable intangible assets:

          

Patents

  $3.7   $(2.7)  $1.0   $3.7   $(2.2)  $1.5 

Customer lists

   235.8    (93.3)   142.5    224.0    (80.3)   143.7 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total amortizable intangible assets

   239.5    (96.0)   143.5    227.7    (82.5)   145.2 

Indefinite-lived intangible assets:

          

Trade names

   165.2    —     165.2    163.1    —     163.1 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Total intangible assets

  $404.7   $(96.0)  $308.7   $390.8   $(82.5)  $308.3 
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

6.Goodwill and Other Intangible Assets (continued)

                         
 
2019
  
2018
 
December 31 (dollars in millions)
 
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
  
Gross
Carrying
Amount
  
Accumulated
Amortization
  
Net
 
Amortizable intangible assets:
                  
Patents
 $
3.7
  $
(3.5
) $
0.2
  $
3.7
  $
(3.3
) $
0.4
 
Customer lists
  
278.0
   
(123.6
)  
154.4
   
236.8
   
(108.2
)  
128.6
 
                         
Total amortizable intangible assets
  
281.7
   
(127.1
)  
154.6
   
240.5
   
(111.5
)  
129.0
 
Indefinite-lived intangible assets:
                  
Trade names
  
183.8
   
—  
   
183.8
   
164.1
   
—  
   
164.1
 
                         
Total intangible assets
 $
465.5
  $
(127.1
) $
338.4
  $
404.6
  $
(111.5
) $
293.1
 
                         
Amortization expenses of other intangible assets of $13.7$15.8 million, $13.4$14.3 million, and $14.2$13.7 million were recorded in 2017, 20162019, 2018 and 2015,2017, respectively. In the future, excluding the impact of any future acquisitions, the Company expects amortization expense of approximately $14.5$15.7 million annually and the intangible assets will be amortized over a weighted averageweighted-average period of 1213 years.

The Company concluded that no0 goodwill impairment existed at the time of the annual impairment tests which were performed in the fourth quarters of 2017, 20162019, 2018 and 2015. No2017. NaN impairments of other intangible assets were recorded in 2017, 20162019, 2018 and 2015.

7.Debt and Lease Commitments

December 31 (dollars in millions)

  2017   2016 

Bank credit lines, averageyear-end interest rates of 2.5% for 2017 and 2.4% for 2016

  $15.9   $23.6 

Revolving credit agreement borrowings, averageyear-end interest rates of 2.5% for 2017 and 1.7% for 2016

   190.0    80.0 

Commercial paper, averageyear-end interest rates of 1.7% for 2017 and 1.1% for 2016

   77.0    85.6 

Term notes with insurance companies, expiring 2029-2034, averageyear-end interest rates of 3.4% for 2017 and 3.5% for 2016

   122.7    125.5 

Canadian term notes with insurance companies, expiring through 2018, averageyear-end interest rates of 5.3% for 2017 and 2016

   4.8    8.9 
  

 

 

   

 

 

 
   410.4    323.6 

Less long-term debt due within one year

   7.5    7.2 
  

 

 

   

 

 

 

Long-term debt

  $402.9   $316.4 
  

 

 

   

 

 

 

2017.

39
Table of Contents
10. Debt
         
December 31 (dollars in millions)
 
2019
  
2018
 
Bank credit lines, average
year-end
interest rates of 2.4% for 2019 and 3.4% for 2018
 $
4.7
  $
17.1
 
Revolving credit agreement borrowings, average
year-end
interest rates of 2.8% for 2019 and 3.5% for 2018
  
85.0
   
10.0
 
Commercial paper, average
year-end
interest rates of 2.2% for 2019 and 2.7% for 2018
  
74.3
   
74.3
 
Term notes with insurance companies, expiring 2029-2034, average
year-end
interest rates of 3.3% for 2019 and 3.3% for 2018
  
120.0
   
120.0
 
         
  
284.0
   
221.4
 
Less long-term debt due within one year
  
6.8
   
—  
 
         
Long-term debt
 $
277.2
  $
221.4
 
         
In December 2016, the Company completed a $500 million multi-year multi-currency revolving credit agreement with a group of nine9 banks, which expires on December 15, 2021. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied. Borrowings under the Company’s bank credit lines and commercial paper borrowings are supported by the revolving credit agreement. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings are classified as long-term debt at December 31, 20172019 and 2016.2018. At its option, the Company either maintains cash balances or pays fees for bank credit and services.

On November 28, 2016, the Company issued $45 million in term notes in two tranches to two insurance companies. Principal payments commence in 2023 and 2028 and the notes mature in 2029 and 2034. The notes have interest rates of 2.87 percent and 3.10 percent. Proceeds of the notes were used to pay down borrowings under the Company’s revolving credit facility.

On January 15, 2015, the Company issued $75 million in term notes to an insurance company. Principle payments commence in 2020 and the notes mature in 2030. The notes have an interest rate of 3.52 percent. Proceeds of the notes were used to pay down borrowings under the Company’s revolving credit facility.

Scheduled maturities of
long-term
debt within each of the five years subsequent to December 31, 20172019 are as follows:

Years ending December 31 (dollars in millions)

  Amount 

2018

  $7.5 

2019

   —   

2020

   6.8 

2021

   290.0 

2022

   6.8 

7.Debt and Lease Commitments (continued)

Future minimum payments undernon-cancelable operating leases relating mostly to office, manufacturing and warehouse facilities total $47.5 million and are due as follows:

Years ending December 31 (dollars in millions)

  Amount 

2018

  $20.2 

2019

   4.9 

2020

   3.6 

2021

   3.1 

2022

   2.5 

Thereafter

   13.2 

Rent expense, including payments under operating leases, was $29.4 million, $29.8 million and $28.8 million in 2017, 2016 and 2015, respectively.

Interest paid by the Company was $10.0 million, $7.2 million and $6.4 million in 2017, 2016 and 2015, respectively. The Company capitalized interest expense of $0.7 million, $0.2 million and $0.2 million in 2017, 2016 and 2015, respectively.

8.

     
Years ending December 31 (dollars in millions)
 
Amount
 
2020
 $
6.8
 
2021
  
170.8
 
2022
  
6.8
 
2023
  
10.0
 
2024
  
10.0
 
11. Stockholders’ Equity

The Company’s authorized capital consists of three3 million shares of Preferred Stock $1 par value, 27 million shares of Class A Common Stock $5 par value, and 240 million shares of Common Stock $1 par value. The Common Stock has equal dividend rights with Class A Common Stock and is entitled, as a class, to elect
one-third
of the Board of Directors and has 1/10th vote per share on all other matters. Class A Common Stock is convertible to Common Stock on a one for one basis.

There were 10,442 shares during 2019, 48,232 shares during 2018 and 73,792 shares during 2017, 60,045 shares during 2016 and 67,544 shares during 2015, of Class A Common Stock converted into Common Stock. Regular dividends paid on the A. O. Smith Corporation Class A Common Stock and Common Stock amounted to $0.56, $0.48$0.90, $0.76 and $0.38$0.56 per share in 2019, 2018 and 2017, 2016 and 2015, respectively.

The Company completed atwo-for-one stock split on October 5, 2016. Amounts have been adjusted to reflect the stock split.

In 2015, the Company’sJune 2019, our Board of Directors authorized the purchase of an additional 4,000,000approved adding 3 million shares of the Company’s Common Stock. In 2016, the Company’s Board of Directors authorized the purchase ofStock to an additional 3,000,000 shares of the Company’s Common Stock.existing discretionary share repurchase authority. Under the share repurchase program, the Company’sCompany may purchase the Common Stock may be purchased through a combination of a Rule
10b5-1
automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchasepurchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors, including alternative investment opportunities. The sharestock repurchase authorization remains effective until terminated by the Company’s Board of Directors which may occur at any time, subject to the parameters of any Rule
10b5-1
automatic trading plan that the Company may then have in effect. In 2017,2019, the Company purchased 2,533,350repurchased 6,113,038 shares at an average price of $47.06 per share and at a total cost of $139.1$287.7 million. As of December 31, 2017,2019, there were 2,373,0532,962,215 shares remaining on the existing repurchase authorization. In 2016,2018, the Company purchased 3,273,109repurchased 3,797,800 shares at a cost of $135.2$202.6 million. In 2015,2017, the Company purchased 3,816,474repurchased 2,533,350 shares at a cost of $128.1$139.1 million.

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Table of Contents
11. Stockholders’ Equity (continued)
At December 31, 2017,2019, a total of 130,380 and 18,914,08228,205,806 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock. At December 31, 2016,2018, a total of 130,380 and 17,135,62822,418,066 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock.

8.Stockholders’ Equity (continued)

Accumulated other comprehensive loss is as follows:

December 31 (dollars in millions)

  2017   2016 

Cumulative foreign currency translation adjustments

  $(26.5)   $(79.2) 

Unrealized net (loss) gain on cash flow derivative instruments less related income tax benefit (provision) of $0.6 in 2017 and $(0.1) in 2016

   (0.9)    0.2 

Pension liability less related income tax benefit of $175.9 in 2017 and $183.4 in 2016

   (272.1)    (284.2) 
  

 

 

   

 

 

 
  $(299.5)   $(363.2) 
  

 

 

   

 

 

 

Changes to accumulated other comprehensive loss by component are as follows:

   Years ended
December 31,		 
   2017  2016 

Cumulative foreign currency translation

   

Balance at beginning of period

  $(79.2)  $(39.4) 

Other comprehensive gain (loss) before reclassifications

   52.7   (39.8) 
  

 

 

  

 

 

 

Balance at end of period

   (26.5)   (79.2) 
  

 

 

  

 

 

 

Unrealized net gain on cash flow derivatives

   

Balance at beginning of period

   0.2   1.2 

Other comprehensive losses before reclassifications

   (0.5)   (0.9) 

Realized gains on derivatives reclassified to cost of products sold (net of tax provision of $0.4 and $0.1 in 2017 and 2016, respectively)(1)

   (0.6)   (0.1) 
  

 

 

  

 

 

 

Balance at end of period

   (0.9)   0.2 
  

 

 

  

 

 

 

Pension liability

   

Balance at beginning of period

   (284.2)   (275.2) 

Other comprehensive gain (loss) before reclassifications

   1.4   (18.8) 

Amounts reclassified from accumulated other comprehensive loss(1)

   10.7   9.8 
  

 

 

  

 

 

 

Balance at end of period

   (272.1)   (284.2) 
  

 

 

  

 

 

 

Total accumulated other comprehensive loss, end of period

  $(299.5)  $(363.2) 
  

 

 

  

 

 

 

(1)Amounts reclassified from accumulated other comprehensive loss:

   

Realized gains on derivatives reclassified to cost of products sold

   (1.0)   (0.2) 

Tax provision

   0.4   0.1 
  

 

 

  

 

 

 

Reclassification net of tax

  $(0.6)  $(0.1) 
  

 

 

  

 

 

 

Amortization of pension items:

   

Actuarial losses

  $17.9(2)  $17.5(2) 

Prior year service cost

   (0.4)(2)   (1.5)(2) 
  

 

 

  

 

 

 
   17.5   16.0 

Tax benefit

   (6.8)   (6.2) 
  

 

 

  

 

 

 

Reclassification net of tax

  $10.7  $9.8 
  

 

 

  

 

 

 

(2)  These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 10 - Pensions and Other Post-retirement Benefits for additional details

   

                                                                         
 
Years ended
December 31,
 
 
2019
 
 
 
 
 
 
 
201
8
 
Cumulative foreign currency translation
      
Balance at beginning of period
 $(64.9) $(26.5)
Other comprehensive gain (loss) before reclassifications
  (1.3)  (38.4)
         
Balance at end of period
  (66.2)  (64.9)
         
Unrealized net (loss) gain on cash flow derivatives
      
Balance at beginning of period
  (0.7)  (0.9)
Other comprehensive (loss) gain before reclassifications
  (0.3)  
0.6
 
Realized losses (gains) on derivatives reclassified to cost of products sold (net of tax (benefit) provision of ($0.5) and $0.2 in 2019 and 2018, respectively)
(1)
  
1.2
   (0.4)
         
Balance at end of period
  
0.2
   (0.7)
         
Pension liability
      
Balance at beginning of period
  (285.2)  (272.1)
Other comprehensive (loss) gain before reclassifications
  (9.5)  (27.0)
Amounts reclassified from accumulated other comprehensive loss
(1)
  
12.4
   
13.9
 
         
Balance at end of period
  (282.3)  (285.2)
         
Total accumulated other comprehensive loss, end of period
 $
(348.3)
  $
(350.8)
 
         
9.
(1)
Stock Based CompensationAmounts reclassified from accumulated other comprehensive loss:

Realized loss (gains) on derivatives reclassified to cost
of products sold
  
1.7
   
(0.6
)
Tax (benefit) provision
  
(0.5
)  
0.2
 
         
Reclassification net of tax
 
$
                
1.2
  
$
 
 
 
 
 
 
 
 
            
(0.4
)
         
Amortization of pension items:
      
Actuarial losses
 $
16.8
(2)
 
 $
19.0
(2)
 
Prior year service cost
  
(0.5
)
(2)
  
(0.5
)
(2)
         
  
16.3
   
18.5
 
Tax benefit
  
(3.9
)  
(4.6
)
         
Reclassification net of tax
 $
12.4
  $
13.9
 
         
(2)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 13 “Pensions and Other Post-retirement Benefits” for additional details.
41
Table of Contents
12. Stock Based Compensation
The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by shareholdersstockholders in 2002. The number of shares available for granting of options or share units at December 31, 2017,2019, was 2,885,001.1,855,560. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in 2019, 2018 and 2017 2016was $13.3 million, $10.1 million and 2015 was $9.9 million, $9.4 million and $8.8 million, respectively.

Stock options

Options

The stock options granted in 2017, 20162019, 2018 and 20152017 have three year pro rata vesting from the datesdate of grant. Stock options are issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted in 2017, 20162019, 2018 and 20152017 expire ten years after the date of grant. StockThe Company’s stock options are expensed ratably over the three year vesting period. Included in stock option compensation expense recognized infor 2019, 2018 and 2017 2016 and 2015 was $4.7$6.4 million, $4.5$4.4 million and $4.0$4.7 million, respectively. Included in the stock option expense recognized in 2017, 20162019, 2018 and 20152017 is expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period.

Changes in option shares,options, all of which arerelate to the Company’s Common Stock, were as follows:

   Weighted-Avg.
Per Share
Exercise Price		   Years Ended December 31  (dollars in millions)
Aggregate
Intrinsic Value		 
     2017  2016  2015  

Outstanding at beginning of year

  $21.69    2,664,333   2,653,558   3,154,006  

Granted

       

2017—$50.16 to $50.16 per share

     358,150    

2016—$31.49 to $46.93 per share

      553,370   

2015—$23.24 to $25.34 per share

       484,990  

Exercised

       

2017—$4.75 to $31.67 per share

     (752,603)    $12.7 

2016—$4.75 to $30.77 per share

      (531,933)    7.5 

2015—$4.10 to $17.46 per share

       (978,208)   10.2 

Forfeited

       

2017—$30.77 to $50.16 per share

     (6,754)    

2016—$23.24 to $46.93 per share

      (10,662)   

2015—$17.46 to $23.24 per share

       (7,230)  
    

 

 

  

 

 

  

 

 

  

Outstanding at end of year

       

(2017—$4.75 to $50.16 per share)

   27.73    2,263,126   2,664,333   2,653,558  
    

 

 

  

 

 

  

 

 

  

Exercisable at end of year

   20.48    1,387,259   1,602,651   1,544,186  
    

 

 

  

 

 

  

 

 

  

The aggregate intrinsic value for the outstanding and exercisable options as

                         
Years Ended December 31
 
2019
  
2018
  
2017
 
 
Number of
Options
  
Weighted
Avg. Per
Share
Exercise
Price
  
Number of
Options
  
Weighted
Avg. Per
Share
Exercise
Price
  
Number of
Options
  
Weighted
Avg. Per
Share
Exercise
Price
 
Number of shares under options:
                  
Outstanding at beginning of year
  
2,432,689
   
33.05
   
2,263,126
   
27.73
   
2,664,333
   
21.69
 
Granted
  
557,045
   
49.49
   
373,220
   
61.62
   
358,150
   
50.16
 
Exercised
(1)
  (249,840)  
18.55
   (176,302)  
22.93
   (752,603)  
16.93
 
Forfeited
  (11,544)  
54.02
   (27,355)  
47.95
   (6,754)  
37.46
 
                         
Outstanding at end of year
(2)
  
2,728,350
   
37.64
   
2,432,689
   
33.05
   
2,263,126
   
27.73
 
                         
Exercisable at end of year
(3)
  
1,820,743
   
30.07
   
1,665,184
   
24.52
   
1,387,259
   
20.48
 
                         
(1)The total intrinsic value of options exercised in 2019, 2018 and 2017 was $7.7 million, $6.8 million and $29.1 million, respectively.
(2)The weighted average remaining contractual life of options outstanding was 7 years at December 31, 2019, December 31, 2018, and December 31, 2017. The aggregate intrinsic value of options outstanding at December 31, 2019 was $34.2 million.
(3)The weighted average remaining contractual life of options exercisable was 6 years at December 31, 2019, December 31, 2018 and, December 31, 2017. The aggregate intrinsic value of options exercisable at December 31, 2019 was $34.2 million.
         
 
Number of Options
  
Weighted Avg. Per
Share Exercise Price
 
Nonvested options at beginning of year
  
767,505
   
51.55
 
Granted
  
557,045
   
49.49
 
Vested
  (408,648)  
45.87
 
Forfeited
  (8,295)  
53.88
 
         
Nonvested options at end of year
  
907,607
   
52.82
 
         
42
Table of December 31, 2017 is $75.9 million and $56.6 million, respectively. The average remaining contractual life for outstanding and exercisable options is seven years and six years, respectively.

9.Stock Based Compensation (continued)

The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and exercisable at December 31, 2017:

Range of

Exercise Prices

  Options
Outstanding at
December 31,
2017		   Weighted-
Average
Exercise
Price		   Options
Exercisable at
December 31,
2017		   Weighted-
Average
Exercise
Price		   Weighted-
Average
Remaining
Contractual
Life		 

$4.75 to $11.50

   414,134   $9.56    414,134   $9.56    4 years 

$17.46 to $25.34

   556,847    20.58    556,847    20.58    7 years 

$26.47 to $50.16

   1,292,145    36.63    416,278    31.20    8 years 
  

 

 

     

 

 

     
   2,263,126      1,387,259     
  

 

 

     

 

 

     

Contents

12. Stock Based Compensation (continued)
The weighted-average fair value per option at the date of grant during 2017, 20162019, 2018 and 2015,2017, using the Black-Scholes option-pricing model, was $13.04, $8.03$10.83, $14.80 and $8.59,$13.04, respectively. Assumptions were as follows:

   2017  2016  2015 

Expected life (years)

   5.7   5.8   5.9 

Risk-free interest rate

   2.4%   1.7%   2.0% 

Dividend yield

   1.0%   1.3%   1.0% 

Expected volatility

   26.5%   27.7%   29.3% 

 
2019
  
2018
  
2017
 
Expected life (years)
  
5.5
   
5.7
   
5.7
 
Risk-free interest rate
  
2.7
%  
2.9
%  
2.4
%
Dividend yield
  
1.6
%  
1.0
%  
1.0
%
Expected volatility
  
22.8
%  
22.1
%  
26.5
%
The expected lifelives of options for purposes of these models isare based on historical exercise behaviors.behavior. The risk free interest rates for purposes of these models are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models isare based on the historical volatility of the Common Stock.

Stock Appreciations Rights (SARs)

Certain

In 2015, certain
non-U.S.-based
employees were granted SARs. Each SAR award grantsgranted the employee the right to receive cash equal to the excess of the share price of the Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted have three yearhad three-year pro rata vesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant and expire ten years from the date of grant. The fair value and compensation expense forrelated to SARs are remeasuredmeasured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 20172019, 2018 or 2016.2017. As of December 31, 2019, there were 14,880 SARs outstanding and exercisable. In 2018, there were 16,170 SARs outstanding and exercisable. In 2017, there were 23,660 SARs outstanding and 15,774 were exercisable. In 2016, there were 24,940 SARs outstanding and 8,320 were exercisable. In 2015, the Company granted 26,230 SARs and no SARs were exercisable. Stock based compensation expense attributable to SARS was not materialminimal in 2017, 20162019, 2018 and 2015.

2017.

Restricted stockStock and share units

Share Units

Participants may also be awarded shares of restricted stock or share units under the Plan. Share units vest three years after the date of grant. The Company granted 107,853, 160,465140,102, 106,581 and 152,192107,853 share units under the plan in 2019, 2018 and 2017, 2016 and 2015, respectively.

The share units were valued at $5.4$6.9 million, $5.2$6.6 million and $4.7$5.4 million at the date of issuance in 2019, 2018 and 2017, 2016 and 2015, respectively, and will bebased on the price of the Company’s Common Stock at the date of grant. The shares units are recognized as compensation expense ratably over the three-year vesting period; however, included in share based compensation isunit expense was expense associated with the accelerated vesting of share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period. CompensationStock based compensation expense of $5.2$6.9 million, $4.9$5.7 million and $4.8$5.2 million was recognized in 2017, 20162019, 2018 and 2015,2017, respectively. Certain
non-U.S.-based
employees receive the cash value of vested sharesthe share price at the vesting date in lieu of shares.

9.Stock Based Compensation (continued)

Unvested cash-settled awards are remeasured at each reporting period.

A summary of share unit activity under the plan is as follows:

   Number of Units   Weighted-Average
Grant Date Value		 

Outstanding at January 1, 2017

   544,055   $27.35 

Granted

   107,853    50.17 

Vested

   (213,863)    23.25 

Forfeited/cancelled

   (4,755)    34.25 
  

 

 

   

Outstanding at December 31, 2017

   433,290    34.96 
  

 

 

   

Total compensation expense for share units not yet recognized is $2.2 million at December 31, 2017. The weighted average period over which the expense is expected to be recognized is 11 months.

10.Pension and Other Post-retirement Benefits

 
Number of Units
  
Weighted-Average
Grant Date Value
 
Issued and unvested at January 1, 2019
  
379,601
  $
42.93
 
Granted
  
140,102
   
49.44
 
Vested
  
(147,642
)  
31.35
 
Forfeited
  
(5,959
)  
55.48
 
         
Issued and unvested at December 31, 2019
  
366,102
   
49.92
 
         
43
Table of Contents
13. Pension and Other Post-retirement Benefits
The Company provides retirement benefits for all U.S. employees including benefits for employees of previously owned businesses which were earned up to the date of sale. The Company also has two foreign pension plans, neither of which is material to the Company’s financial position.

The Company has a defined contribution plan which matches 100 percent of the first one percent of contributions made by participating employees and matches 50 percent of the next five percent of employee contributions. The Company also has defined contribution plans for certain hourly employees which provide for matching Company contributions.

The Company also has a defined benefit plan for salaried employees and its
non-union
hourly workforce. In 2009, the Company announced U.S. employees hired after January 1, 2010, would not participate in the defined benefit plan, and benefit accruals for the majority of current salaried and hourly employees sunset on December 31, 2014. Beginning in 2015, anAn additional Company contribution is being made to the defined contribution plan in lieu of benefits earned in a defined benefit plan. The Company also has defined benefit and contribution plans for certain union hourly employees.

The Company has unfunded defined-benefit post-retirement plans covering certain hourly and salaried employees that provide medical and life insurance benefits from retirement to age 65. Certain hourly employees retiring after January 1, 1996, are subject to a maximum annual benefit and salaried employees hired after December 31, 1993, are not eligible for post-retirement medical benefits.

As

44
Table of December 31, 2015, the Company changed the method used to estimate the serviceContents
13. Pension and interest components of net periodic benefit cost for its pension plan and its post-retirement benefit plan. This change compared to the previous method resulted in a $7.7 million and $7.1 million decrease in the service and interest components for pension cost in 2017 and 2016, respectively compared to 2015. Historically, the Company estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company has elected to utilize an approach that discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This change was made to provide a more precise measurement of service and interest costs by improving the correlation between the projected benefit cash flows to the corresponding spot yield curve rates.

This change did not affect the measurement of the total benefit obligations but reduced the service and interest cost for the pension plan. The Company accounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly accounted for it prospectively beginning January 1, 2016.

10.Pension and Other Post-retirement Benefits (continued)

Other Post-retirement Benefits (continued)

Obligations and Funded Status

Pension and Post-RetirementPost-retirement Disclosure Information under ASC 715,
Compensation – Retirement Benefits (ASC
(ASC 715)

The following tables present the changes in benefit obligations, plan assets and funded status for domestic pension and post-retirement plans and the components of net periodic benefit costs.

   Pension Benefits  Post-retirement Benefits 

Years ended December 31 (dollars in millions)

  2017  2016  2017  2016 

Accumulated benefit obligation (ABO) at December 31

  $921.8  $894.3   N/A   N/A 

Change in projected benefit obligations (PBO)

     

PBO at beginning of year

  $(895.8)  $(892.9)  $(6.6)  $(6.6) 

Service cost

   (1.8)   (1.8)   (0.1)   (0.1) 

Interest cost

   (30.0)   (30.6)   (0.3)   (0.2) 

Participant contributions

   —     —     (0.1)   —   

Plan amendments

   —     (0.7)   —     —   

Actuarial loss including assumption changes

   (54.3)   (31.0)   (1.1)   (0.2) 

Benefits paid

   59.2   61.2   0.6   0.5 
  

 

 

  

 

 

  

 

 

  

 

 

 

PBO at end of year

  $(922.7)  $(895.8)  $(7.6)  $(6.6) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in fair value of plan assets

     

Plan assets at beginning of year

  $787.0  $759.0  $—    $—   

Actual return on plan assets

   116.5   57.0   —     —   

Contribution by the company

   30.5   32.2   0.4   0.5 

Participant contributions

   —     —     0.1   —   

Benefits paid

   (59.2)   (61.2)   (0.5)   (0.5) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Plan assets at end of year

  $874.8  $787.0  $—    $—   
  

 

 

  

 

 

  

 

 

  

 

 

 

Funded status

  $(47.9)  $(108.8)  $(7.6)  $(6.6) 

Amount recognized in the balance sheet

     

Current liabilities

  $(0.5)  $(0.5)  $(0.3)  $(0.4) 

Non-current liabilities

   (47.4)   (108.3)   (7.3)   (6.2) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net pension liability at end of year

  $(47.9)*  $(108.8)*  $(7.6)  $(6.6) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Amounts recognized in accumulated other

comprehensive loss before tax

     

Net actuarial loss (gain)

  $451.8  $473.5  $(0.8)  $(2.0) 

Prior service cost

   (0.5)   (0.9)   (2.6)   (2.9) 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total recognized in accumulated other comprehensive loss

  $451.3  $472.6  $(3.4)  $(4.9) 
  

 

 

  

 

 

  

 

 

  

 

 

 

 
Pension Benefits
  
Post-retirement
 Benefits
 
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2019
  
2018
 
Accumulated benefit obligation (ABO) at December 31
 $
868.7
  $
833.0
   
N/A
   
N/A
 
Change in projected benefit obligations (PBO)
            
PBO at beginning of year
 $
(833.8
) $
(922.7
) $
(7.0
) $
(7.6
)
Service cost
  
(1.6
)  
(2.0
)  
(0.1
)  
(0.2
)
Interest cost
  
(31.6
)  
(28.9
)  
(0.3
)  
(0.3
)
Participant contributions
  
—  
   
—  
   
(0.1
)  
(0.1
)
Actuarial (loss) gain including assumption changes
  
(98.6
)  
61.2
   
(1.2
)  
0.6
 
Benefits paid
  
96.3
   
58.6
   
0.7
   
0.6
 
                 
PBO at end of year
 $
(869.3
) $
(833.8
) $
(8.0
) $
(7.0
)
                 
Change in fair value of plan assets
            
Plan assets at beginning of year
 $
777.5
  $
874.8
  $
—  
  $
—  
 
Actual return on plan assets
  
143.4
   
(39.3
)  
—  
   
—  
 
Contribution by the Company
  
7.8
   
0.6
   
0.5
   
0.5
 
Participant contributions
  
—  
   
—  
   
0.1
   
0.1
 
Benefits paid
  
(96.3
)  
(58.6
)  
(0.6
)  
(0.6
)
                 
Plan assets at end of year
 $
832.4
  $
777.5
  $
—  
  $
—  
 
                 
Funded status
 $
(36.9
) $
(56.3
) $
(8.0
) $
(7.0
)
Amount recognized in the balance sheet
            
Current liabilities
 $
(9.3
) $
(7.1
) $
(0.5
) $
(0.5
)
Non-current
liabilities
  
(27.6
)  
(49.2
)  
(7.5
)  
(6.5
)
                 
Net pension liability at end of year
 $
(36.9
)* $
(56.3
)* $
(8.0
) $
(7.0
)
                 
Amounts recognized in accumulated other comprehensive loss before tax
            
Net actuarial loss (gain)
 $
463.1
  $
468.9
  $
(0.2
) $
(1.4
)
Prior service cost
  
0.5
   
—  
   
(1.8
)  
(2.2
)
                 
Total recognized in accumulated other comprehensive loss
 $
463.6
  $
468.9
  $
(2.0
) $
(3.6
)
                 
*In addition, the Company has a liability for a foreign pension plan of $0.2 million and $0.2 million at December 31, 20172019 and 2016, respectively.2018.

10.Pension and Other Post-retirement Benefits (continued)

   Pension Benefits  Post-retirement Benefits 

Years ended December 31 (dollars in millions)

  2017  2016  2015  2017  2016  2015 

Net periodic benefit cost

       

Service cost

  $1.8  $1.8  $1.9  $0.1  $0.1  $0.1 

Interest cost

   30.0   30.6   37.6   0.3   0.2   0.3 

Expected return on plan assets

   (58.4)   (55.9)   (57.5)   —     —     —   

Amortization of unrecognized:

       

Net actuarial loss (gain)

   17.9   17.7   19.1   (0.1)   (0.2)   (0.1) 

Prior service cost

   (0.4)   (1.1)   (1.0)   (0.4)   (0.4)   (0.4) 

Curtailment and otherone-time charges

   —     —     —     —     —     —   
  

 

 

 ��

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Defined-benefit plan (income) cost

   (9.1)   (6.9)   0.1  $(0.1)  $(0.3)  $(0.1) 
     

 

 

  

 

 

  

 

 

 

Various U.S. defined contribution plans cost

   12.0   11.6   10.8    
  

 

 

  

 

 

  

 

 

    
  $2.9  $4.7  $10.9    
  

 

 

  

 

 

  

 

 

    

Other changes in plan assets and projected benefit obligation recognized

in other comprehensive loss

       

Net actuarial (gain) loss

  $(3.8)  $29.9  $17.2  $1.1  $0.2  $—   

Amortization of net actuarial (loss) gain

   (17.9)   (17.7)   (19.1)   0.1   0.2   0.1 

Prior service cost

   —     0.6   2.5   —     —     (3.7) 

Amortization of prior service cost

   0.5   1.1   1.0   0.4   0.4   0.4 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recognized in other comprehensive loss

   (21.2)   13.9   1.6   1.6   0.8   (3.2) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recognized in net periodic (benefit) cost and other comprehensive loss

  $(30.3)  $7.0  $1.7  $1.5  $0.5  $(3.3) 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

45
Table of Contents
13. Pension and Other Post-retirement Benefits (continued)
                         
 
Pension Benefits
  
Post-retirement Benefits
 
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
  
2019
  
2018
  
2017
 
Net periodic benefit cost
                  
Service cost
 $
1.6
  $
2.0
  $
1.8
  $
0.1
  $
0.1
  $
0.1
 
Interest cost
  
31.6
   
28.9
   
30.0
   
0.3
   
0.3
   
0.3
 
Expected return on plan assets
  
(57.3
)  
(58.1
)  
(58.4
)  
—
   
—
   
—
 
Amortization of unrecognized:
                  
Net actuarial loss (gain)
  
16.8
   
19.0
   
17.9
   
—
   
—
   
(0.1
)
Prior service cost
  
(0.5
)  
(0.5
)  
(0.4
)  
(0.4
)  
(0.4
)  
(0.4
)
                         
Defined-benefit plan income
  
(7.8
)  
(8.7
)  
(9.1
) $
—
  $
—
  $
(0.1
)
                         
Curtailment and other
one-time
charges
  
1.6
   
—
   
—
          
Various U.S. defined contribution plans cost
  
13.3
   
12.2
   
12.0
          
                         
 $
7.1
  $
3.5
  $
2.9
          
                         
Other changes in plan assets and projected benefit obligation recognized in other
comprehensive
 
loss
                  
Net actuarial loss (gain)
 $
12.6
  $
36.1
  $
(3.8
) $
1.2
  $
(0.6
) $
1.1
 
Amortization of net actuarial (loss) gain
  
(18.4
)  
(19.0
)  
(17.9
)  
—
   
—
   
0.1
 
Amortization of prior service cost
  
0.5
   
0.5
   
0.5
   
0.4
   
0.4
   
0.4
 
                         
Total recognized in other comprehensive loss
  
(5.3
)  
17.6
   
(21.2
)  
1.6
   
(0.2
)  
1.6
 
                         
Total recognized in net periodic (benefit) cost and other comprehensive loss
 $
(11.5
) $
8.9
  $
(30.3
) $
1.6
  $
(0.2
) $
1.5
 
                         
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20182020 are $18.7$19.8 million and $(0.4)$(0.5) million, respectively. The estimated net actuarial loss and prior year service cost for the post-retirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 20182020 are $(0.1) $
-
million and $(0.4)$(0.3) million, respectively. As permitted under ASC 715, the amortization of any prior service cost was previously determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. Beginning in 2015 the amortization occurs over the average remaining life expectancy of participants expected to receive benefits under the plan as permitted under ASC 715.

The 20172019 and 20162018 after tax adjustments for additional minimum pension liability resulted in other comprehensive gain (loss) of $12.1$2.9 million and $(9.0)($13.1) million, respectively.

Actuarial assumptions used to determine benefit obligations at December 31 are as follows:

   Pension Benefits  Post-retirement Benefits 
   2017  2016  2017  2016 

Discount rate

   3.65%   4.15%   3.79%   4.33% 

Average salary increases

   n/a   4.00%   n/a   n/a 

                 
 
Pension Benefits
  
Post-retirement
 Benefits
 
 
2019
  
2018
  
2019
  
2018
 
Discount rate
  
3.18
%  
4.32
%  
3.40
%  
4.46
%
Actuarial assumptions used to determine net periodic benefit cost for the year ended December 31 are as follows:

   Pension Benefits  Post-retirement Benefits 

Years ended December 31

  2017  2016  2015  2017  2016  2015 

Discount rate

   4.15%   4.40%   4.05%   4.40%   4.55%   4.00% 

Expected long-term return on plan assets

   7.50%   7.50%   7.75%   n/a   n/a   n/a 

Rate of compensation increase

   4.00%   4.00%   4.00%   4.00%   4.00%   4.00% 

10.Pension and Other Post-retirement Benefits (continued)

                         
 
Pension Benefits
  
Post-retirement
 Benefits
 
Years ended December 31
 
2019
  
2018
  
2017
  
2019
  
2018
  
2017
 
Discount rate
  
4.32
%  
3.65
%  
4.15
%  
4.45
%  
3.79
%  
4.40
%
Expected long-term return on plan assets
  
7.15
%  
7.15
%  
7.50
%  
n/a
   
n/a
   
n/a
 
Rate of compensation increase
  
4.00
%  
4.00
%  
4.00
%  
4.00
%  
4.00
%  
4.00
%
Assumptions

In developing the expected long-term rate of return on plan assets assumption, the Company evaluated its pension plan’s target and actual asset allocation and expected long-term rates of return of equity and bond indices. The Company also considered its pension plan’s historical
ten-year
and
25-year
compounded annualized returns of 6.39.2 percent and 9.29.3 percent, respectively.

46
Table of Contents
13. Pension and Other Post-retirement Benefits (continued)
Assumed health care cost trend rates

Assumed health care cost trend rates as of December 31 are as follows:

   2017  2016 

Health care cost trend rate assumed for next year

   6.50%   6.50% 

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

   5.00%   5.00% 

Year that the rate reaches the ultimate trend rate

   2021   2021 

         
 
2019
  
2018
 
Health care cost trend rate assumed for next year
  
7.70
%  
6.00
%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
  
5.00
%  
5.00
%
Year that the rate reaches the ultimate trend rate
  
2029
   
2021
 
A
one-percentage-point
change in the assumed health care cost trend rates would not result in a material impact on the Company’s consolidated financial statements.

Plan Assets

The Company’s pension plan weighted asset allocations as of December 31 by asset category are as follows:

Asset Category

  2017  2016 

Equity securities

   45%   48% 

Debt securities

   43   37 

Real estate

   9   10 

Private equity

   2   4 

Other

   1   1 
  

 

 

  

 

 

 
   100%   100% 
  

 

 

  

 

 

 

10.Pension and Other Post-retirement Benefits (continued)

         
Asset Category
 
2019
  
2018
 
Equity securities
  
42
%  
40
%
Debt securities
  
47
   
48
 
Real estate
  
10
   
10
 
Private equity
  
1
   
2
 
         
  
100
%  
100
%
         
47
Table of Contents
13. Pension and Other Post-retirement Benefits (continued)
The following tables present the fair value measurement of the Company’s plan assets as of December 31, 20172019 and 20162018 (dollars in millions):

       December 31, 2017 

Asset Category

  Total   Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)		   Significant Other
Observable Inputs
(Level 2)		   Significant Non-
observable Inputs
(Level 3)		 

Short-term investments

  $15.8   $2.0   $13.8   $—   

Equity securities

        

Common stocks

   220.3    220.3    —      —   

Commingled equity funds

   121.5    —      121.5    —   

Fixed income securities

        

U.S. treasury securities

   46.0    46.0    —      —   

Other fixed income securities

   219.9    —      219.9    —   

Commingled fixed income funds

   99.8    —      99.8    —   

Other types of investments

        

Mutual funds

   51.8    —      51.8    —   

Real estate funds

   77.8    —      —      77.8 

Private equity

   20.9    —      —      20.9 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value of plan asset investments

  $873.8   $268.3   $506.8   $98.7 
    

 

 

   

 

 

   

 

 

 

Non-investment plan assets

   1.0       
  

 

 

       

Total plan assets

  $874.8       
  

 

 

       
       December 31, 2016 

Asset Category

  Total   Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)		   Significant Other
Observable Inputs
(Level 2)		   Significant Non-
observable Inputs
(Level 3)		 

Short-term investments

  $28.7   $1.1   $7.9   $19.7 

Equity securities

        

Common stocks

   254.0    254.0    —      —   

Commingled equity funds

   105.6    —      105.6    —   

Fixed income securities

        

U.S. treasury securities

   97.6    97.6    —      —   

Other fixed income securities

   102.6    —      102.6    —   

Commingled fixed income funds

   90.3    —      90.3    —   

Other types of investments

        

Mutual funds

   4.5    —      4.5    —   

Real estate funds

   74.3    —      —      74.3 

Private equity

   28.0    —      —      28.0 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value of plan asset investments

  $785.6   $352.7   $310.9   $122.0 
    

 

 

   

 

 

   

 

 

 

Non-investment plan assets

   1.4       
  

 

 

       

Total plan assets

  $787.0       
  

 

 

       

10.

                 
   
December 31, 2019
 
Asset Category
 
Total
  
Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)
  
Significant Other
Observable Inputs
(Level 2)
  
Significant
 Non-

observable Inputs
(Level 3)
 
Short-term investments
 $
14.6
  $
2.8
  $
11.8
  $
—  
 
Equity securities
            
Common stocks
  
127.0
   
127.0
   
—  
   
—  
 
Commingled equity funds
  
113.4
   
—  
   
113.4
   
—  
 
Fixed income securities
            
U.S. treasury securities
  
49.8
   
49.8
   
—  
   
—  
 
Other fixed income securities
  
225.1
   
—  
   
225.1
   
—  
 
Commingled fixed income funds
  
114.0
   
—  
   
114.0
   
—  
 
Options
  
(10.8
)  
—  
   
(10.8
)  
—  
 
Other types of investments
            
Mutual funds
  
104.9
   
—  
   
104.9
   
—  
 
Real estate funds
  
82.3
   
—  
   
—  
   
82.3
 
Private equity
  
8.6
   
—  
   
—  
   
8.6
 
                 
Total fair value of plan asset investments
 $
828.9
  $
179.6
  $
558.4
  $
90.9
 
                 
Non-investment
plan assets
  
3.4
          
                 
Total plan assets
 $
832.3
          
                 
                 
   
December 31, 2018
 
Asset Category
 
Total
  
Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)
  
Significant Other
Observable Inputs
(Level 2)
  
Significant
 Non-

observable Inputs
(Level 3)
 
Short-term investments
 $
14.4
  $
—  
  $
14.4
  $
—  
 
Equity securities
            
Common stocks
  
125.6
   
125.6
   
—  
   
—
 
Commingled equity funds
  
104.3
   
—  
   
104.3
   
—
 
Fixed income securities
            
U.S. treasury securities
  
86.0
   
86.0
   
—  
   — 
Other fixed income securities
  
185.8
   
—  
   
185.8
   
—
 
Commingled fixed income funds
  
92.0
   
—  
   
92.0
   
—
 
Other types of investments
            
Mutual funds
  
73.6
   
—  
   
73.6
   
—
 
Real estate funds
  
80.4
   
—  
   
—  
   
80.4
 
Private equity
  
13.2
   
—
   
—
   
13.2
 
                 
Total fair value of plan asset investments
 $
775.3
  $
211.6
  $
470.1
  $
93.6
 
                 
Non-investment
plan assets
  
2.2
          
                 
Total plan assets
 $
777.5
          
                 
48
Table of Contents
13. Pension and Other Post-retirement Benefits (continued)

The short-term investments included in the Company’s plan assets consist of cash and cash equivalents. The fair value of the remaining categories of the Company’s plan assets are valued as follows: equity securities are valued using the closing stock price on a national securities exchange, which reflects the last reported sales price on the last business day of the year; fixed income securities are valued using institutional bond quotes, which are based on various market and industry inputs; mutual funds and real estate funds are valued using the net asset value of the fund, which is based on the fair value of the underlying securities; and private equity investments are valued at the estimated fair value at the previous quarter end, which is based on the proportionate share of the underlying portfolio investments.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 20172019 and 20162018 (dollars in millions):

   Short term
investments		   Real
estate
funds		   Private
equity		   Total 

Balance at December 31, 2015

  $12.4   $70.9   $34.3   $117.6 

Actual return (loss) on plan assets:

        

Relating to assets still held at the reporting date

   —      3.4    (5.5)    (2.1) 

Relating to assets sold during the period

   —      —      9.3    9.3 

Purchases, sales and settlements

   7.3    —      (10.1)    (2.8) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   19.7    74.3    28.0    122.0 

Actual return (loss) on plan assets:

        

Relating to assets still held at the reporting date

   —      3.5    (5.6)    (2.1) 

Relating to assets sold during the period

   —      —      7.8    7.8 

Purchases, sales and settlements

   (19.7)    —      (9.3)    (29.0) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

  $—     $77.8   $20.9   $98.7 
  

 

 

   

 

 

   

 

 

   

 

 

 

             
 
Real estate
funds
  
Private
equity
  
Total
 
Balance at December 31, 2017
 $
77.8
  $
20.9
  $
98.7
 
Actual return (loss) on plan assets:
         
Relating to assets still held at the reporting date
  
2.6
   
(0.3
)  
2.3
 
Relating to assets sold during the period
  
—  
   
(0.8
)  
(0.8
)
Purchases, sales and settlements
  
—  
   
(6.6
)  
(6.6
)
             
Balance at December 31, 2018
  
80.4
   
13.2
   
93.6
 
Actual return (loss) on plan assets:
         
Relating to assets still held at the reporting date
  
1.9
   
—  
   
1.9
 
Relating to assets sold during the period
  
—  
   
(1.4
)  
(1.4
)
Purchases, sales and settlements
  
—  
   
(3.2
)  
(3.2
)
             
Balance at December 31, 2019
 $
82.3
  $
8.6
  $
90.9
 
             
The Company’s investment policies employ an approach whereby a diversified blend of equity and bond investments is used to maximize the long-term return of plan assets for a prudent level of risk. Equity investments are diversified across domestic and
non-domestic
stocks, as well as growth, value, and small to large capitalizations. Bond investments include corporate and government issues, with short-,
mid-
and long-term maturities, with a focus on investment grade when purchased. The Company’s target allocation to equity managers is between 4530 to 5560 percent with the remainder allocated primarily to bonds, real estate, private equity managers and cash. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies.

The Company’s actual asset allocations are in line with target allocations. The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.

There was no Company stock included in plan assets at December 31, 2017.

2019.

Cash Flows

The Company was not required to and did not make a contributionany contributions in 2017 but elected to make a $30 million voluntary contribution. 2019.
The Company is not required to make a contribution in 2018.

10.Pension and Other Post-retirement Benefits (continued)

2020.

49
Table of Contents
13. Pension and Other Post-retirement Benefits (continued)
Estimated Future Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

Years ending December 31 (dollars in millions)

  Pension Benefits   Post-retirement
Benefits		 

2018

  $60.5   $0.3 

2019

   66.6    0.4 

2020

   68.5    0.4 

2021

   59.3    0.4 

2022

   58.6    0.4 

2023 – 2027

   285.6    2.2 

11.Derivative instruments

ASC 815Derivatives and Hedging, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

The Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), gains or losses on the derivative instrument is reported as a component of other comprehensive loss, net of tax, and is reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.

Years ending December 31 (dollars in millions)
 
Pension Benefits
  
Post-retirement

Benefits
 
2020
 $
66.8
  $
0.5
 
2021
  
57.7
   
0.5
 
2022
  
57.1
   
0.5
 
2023
  
56.2
   
0.5
 
2024
  
55.4
   
0.5
 
2025 – 2029
  
270.9
   
2.3
 
14. Derivative Instruments
The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.

Cash Flow Hedges
With the exception of its net investment hedges, the Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), gains or losses on the derivative instrument are reported as a component of other comprehensive loss, net of tax, and are reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.
Foreign Currency Forward Contracts

The Company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of business. Principal currencies for which the Company utilizes foreign currency forward contracts include the British pound, Canadian dollar, Euro and Mexican peso.

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the consolidated statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective.

The majority of the amounts in accumulated other comprehensive loss for cash flow hedges willare expected to be reclassified into earnings no later than December 31, 2018.

11.Derivative instruments (continued)

within one year.

The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts:

December 31 (dollars in millions)

  2017   2016 
   Buy   Sell   Buy   Sell 

British pound

  $—     $1.2   $—     $1.2 

Canadian dollar

   —      48.1    —      56.9 

Euro

   29.3    —      25.4    1.8 

Mexican peso

   16.3    —      16.9    —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $45.6   $49.3   $42.3   $59.9 
  

 

 

   

 

 

   

 

 

   

 

 

 

contracts that are designated as cash flow hedges:

December 31 (dollars in millions)
 
2019
  
2018
 
 
Buy
  
Sell
  
Buy
  
Sell
 
British pound
 $
—  
  $
1.3
  $
—  
  $
1.0
 
Canadian dollar
  
—  
   
49.7
   
—  
   
—  
 
Euro
  
36.0
   
—  
   
32.0
   
—  
 
Mexican peso
  
18.6
   
—  
   
27.8
   
—  
 
                 
Total
 $
54.6
  $
51.0
  $
59.8
  $
1.0
 
                 
50
Table of Contents
14. Derivative Instruments (continued)
Commodity Futures Contracts

In addition to entering into supply arrangements in the normal course of business, the Company also enters into futures contracts to fix the cost of certain raw material purchases, principally steel, with the objective of minimizing changes in cost due to market price fluctuations. The hedging strategy for achieving this objective is to purchase steel futures contracts on the New York Metals Exchange (NYMEX) and copper futures contracts on the open market of the London Metals Exchange (LME) or over the counter contracts based on the LME.

With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.

Net Investment Hedges
Theafter-tax Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain
non-U.S.
subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its
non-U.S.
subsidiaries. These hedges are determined to be effective. The Company recognized $
 -
and $7.4 million of
after-tax
gains associated with hedges of a net investment in
non-U.S.
subsidiaries in currency translation adjustment in other comprehensive income in 2019 and 2018, respectively. The contractual amount of the Company’s foreign currency forward contracts that are designated as net investment hedges is $100.0 million as of December 31, 2017 were recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in2019.
The following tables present the periods in which the underlying transactions are recorded in earnings. Theafter-tax gains and losses of the contracts will be reclassified within one year. Contractual amounts of the Company’s commodities futures contracts were immaterial as of December 31, 2017.

The impact of derivative contracts on the Company’s financial statements is as follows:

statements.

Fair value of derivative instrumentsderivatives designated as hedging instruments under ASC 815:

      Fair Value 

December 31 (dollars in millions)

  

Balance Sheet Location

  2017   2016 
Foreign currency contracts  Other current assets  $0.2   $1.9 
  Accrued liabilities   (1.8)    (2.0) 
Commodities contracts  Other current assets   0.2    0.8 
  Accrued liabilities   —      (0.3) 
    

 

 

   

 

 

 

Total derivatives designated as hedging instruments

    $(1.4)   $0.4 
    

 

 

   

 

 

 

11.Derivative instruments (continued)

  
Fair Value
 
December 31 (dollars in millions)
 
Balance Sheet Location
 
2019
  
2018
 
Foreign currency contracts
 
Other current assets
 $
8.4
  $
3.9
 
 
Other
non-current
assets
  
—  
   
5.1
 
 
Accrued liabilities
  
(1.5
)  
(0.6
)
Commodities contracts
 
Accrued liabilities
  
—  
   
(0.9
)
           
Total derivatives designated as hedging instruments
  $
 
 
 
6.9
  $
 
 
 
7.5
 
           
The effect of derivative instrumentscash flow hedges on the condensed consolidated statement of earnings is as follows.

earnings:

Years ended December 31 (dollars in millions)

Derivatives in ASC 815 cash flow hedging relationships

  Amount of gain (loss)
recognized in other
comprehensive loss on
derivative		  

Location of gain (loss)
reclassified from
accumulated other
comprehensive loss into
earnings

  Amount of gain
(loss) reclassified
from accumulated
other comprehensive
loss into earnings		 
   2017  2016     2017   2016 

Foreign currency contracts

  $(1.1)  $(3.8)  Cost of products sold  $0.4   $(1.4) 

Commodities contracts

   0.5   2.4  Cost of products sold   0.6    1.6 
  

 

 

  

 

 

    

 

 

   

 

 

 
  $(0.6)  $(1.4)    $1.0   $0.2 
  

 

 

  

 

 

    

 

 

   

 

 

 

12.Income Taxes

Derivatives in ASC 815 cash flow
hedging relationships
 
Amount of gain (loss)
recognized in other
comprehensive loss on
derivative
s
  
Location of gain (loss)
reclassified from
accumulated other
comprehensive loss into
earnings
 
Amount of gain
(loss) reclassified
from accumulated
other comprehensive
loss into earnings
 
 
2019
  
2018
   
2019
  
2018
 
Foreign currency contracts
 $
0.2
  $
1.8
  
Cost of products sold
 
 
 
 
 		$
(0.2
) $
0.3
 
Commodities contracts
  
(0.5
)  
(1.1
) 
Cost of products sold
  
(1.5
)  
0.3
 
                   
 $
(0.3
) $
0.7
   $
(1.7
) $
0.6
 
                   
51
Table of Contents
15. Income Taxes
The components of the provision (benefit) for income taxes consisted of the following:

Years ended December 31 (dollars in millions)

  2017   2016   2015 

Current:

      

Federal

  $148.0   $71.6   $82.9 

State

   9.4    14.5    13.9 

International

   43.8    34.9    23.6 

Deferred:

      

Federal

   23.5    11.0    (4.2) 

State

   5.8    5.2    2.2 

International

   (6.2)    (1.2)    1.2 
  

 

 

   

 

 

   

 

 

 
  $224.3   $136.0   $119.6 
  

 

 

   

 

 

   

 

 

 

Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
 
Current:
         
Federal
 $
66.4
  $
60.1
  $
148.0
 
State
  
14.8
   
15.6
   
9.4
 
International
  
19.9
   
38.6
   
43.8
 
Deferred:
         
Federal
  
0.4
   
(1.7
)  
23.5
 
State
  
1.8
   
1.5
   
5.8
 
International
  
(1.2
)  
(0.5
)  
(6.2
)
             
 $
102.1
  $
113.6
  $
224.3
 
             
The provision for income taxes differs from the U.S. federal statutory rate due to the following items:

Years ended December 31

  2017  2016  2015 

Provision at U.S. federal statutory rate

   35.0%   35.0%   35.0% 

State taxes, net of federal benefit

   1.9   2.8   2.6 

International income tax rate differential - China

   (6.5)   (6.2)   (6.8) 

International income tax rate differential - other

   0.1   0.3   0.2 

U.S. manufacturing credit

   (1.4)   (1.5)   (1.3) 

Research tax credits

   (0.3)   (0.3)   (0.3) 

Excess tax benefit on stock compensation

   (2.2)   (1.1)   —   

Other

   0.8   0.4   0.3 
  

 

 

  

 

 

  

 

 

 
   27.4%   29.4%   29.7% 

U.S. Tax Cuts & Jobs Act (U.S. Tax Reform)

   15.7   —     —   
  

 

 

  

 

 

  

 

 

 
   43.1%   29.4%   29.7% 
  

 

 

  

 

 

  

 

 

 

Years ended December 31
 
2019
  
2018
  
2017
 
Provision at U.S. federal statutory rate
  
21.0
%  
21.0
%  
35.0
%
State taxes, net of federal benefit
  
2.8
   
2.4
   
1.9
 
International income tax rate differential—China
  
(1.3
)  
(2.3
)  
(6.5
)
International income tax rate differential—other
  
0.4
   
1.1
   
0.1
 
U.S. manufacturing credit
  
—  
   
—  
   
(1.4
)
Research tax credits
  
(0.4
)  
(0.5
)  
(0.3
)
Excess tax benefit on stock compensation
  
(0.5
)  
(0.4
)  
(2.2
)
Other
  
(0.4
)  
(0.9
)  
0.8
 
             
  
21.6
%  
20.4
%  
27.4
%
U.S. Tax Cuts & Jobs Act (U.S. Tax Reform)
  
—  
   
—  
   
15.7
 
             
  
21.6
%  
20.4
%  
43.1
%
U.S. Tax Reform was enacted on December 22, 2017 and significantly changed U.S. corporate income tax laws. Among other things, U.S. Tax Reform reduced the U.S. corporate income tax rate to 21 percent commencing on January 1, 2018, implemented a territorial tax system and levied a
one-time
mandatory tax on undistributed earnings of foreign subsidiaries of U.S. companies.

12.Income Taxes (continued)

As a result of U.S. Tax Reform, the Company recorded provisional income tax expense of $81.8 million in the fourth quarter of 2017. The provisional income tax expense resulting from U.S. Tax Reform iswas included in the provision for income taxes on the Company’s consolidated statement of earnings and consisted of two components: $83.5 million of income tax expense related to the
one-time
mandatory tax on undistributed foreign earnings and a $1.7 million income tax benefit resulting from the remeasurement of the Company’s U.S. deferred tax assets and liabilities based on the new lower U.S. corporate income tax rate. As permitted under the SEC Staff Accounting Bulletin 118, thesethe amounts may berecorded during 2017 were subject to revisions in 2018. Future revisions may include adjustments to
The Company completed its accounting for the measurement of accumulated foreign earnings included in theone-time mandatoryincome tax calculation. The ultimate impacteffects of U.S. Tax Reform may differ fromas of December 31, 2018 and determined that there was 0 material adjustment necessary to the provisional amounts it recorded duein 2017.
As allowed under ASU
2018-02
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, the Company has elected not to future changes in interpretationreclassify the income tax effects of the guidance issued.

U.S. Tax Reform from accumulated other comprehensive losses to retained earnings.

Components of earnings before income taxes were as follows:

Years ended December 31 (dollars in millions)

  2017   2016   2015 

U.S.

  $329.9   $300.9   $255.7 

International

   190.9    161.6    146.8 
  

 

 

   

 

 

   

 

 

 
  $520.8   $462.5   $402.5 
  

 

 

   

 

 

   

 

 

 

Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
 
U.S.
 $
400.3
  $
376.0
  $
329.9
 
International
  
71.8
   
181.8
   
190.9
 
             
 $
472.1
  $
557.8
  $
520.8
 
             
Total income taxes paid by the Company amounted to $116.6 million, $116.4 million, and $131.1 million $117.4 million,in 2019, 2018 and $97.5 million in 2017, 2016 and 2015, respectively.

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Table of Contents
15. Income Taxes (continued)
As of December 31, 2017,2019, the Company has $38.6$20.8 million accrued for its estimate of withholding taxes due upon repatriation of undistributed foreign earnings it considers to be not permanently reinvested. As of December 31, 2017, $815.22019, $548.6 million of cash and cash equivalents and marketable securities were held by its foreign subsidiaries.

The tax effects of temporary differences of assets and liabilities between income tax and financial reporting are as follows:

December 31 (dollars in millions)

              
   2017   2016 
   Assets  Liabilities   Assets  Liabilities 

Employee benefits

  $30.4  $—     $67.5  $—   

Product liability and warranties

   43.4   —      67.1   —   

Inventories

   —     2.0    —     3.4 

Accounts receivable

   16.5   —      14.9   —   

Property, plant and equipment

   —     31.1    —     34.3 

Intangibles

   —     54.3    —     77.4 

Environmental liabilities

   2.4   —      2.9   —   

Undistributed foreign earnings

   —     38.6    —     42.3 

Tax loss and credit carryovers

   19.8   —      18.2   —   

All other

   5.5   —      4.3   —   

Valuation allowance

   (15.0)   —      (13.1)   —   
  

 

 

  

 

 

   

 

 

  

 

 

 
  $103.0  $126.0   $161.8  $157.4 
  

 

 

  

 

 

   

 

 

  

 

 

 

Net asset

   $23.0   $4.4  
   

 

 

   

 

 

  

12.Income Taxes (continued)

December 31 (dollars in millions)
        
 
2019
  
2018
 
 
Assets
  
Liabilities
  
Assets
  
Liabilities
 
Employee benefits
 $
27.3
  $
—  
  $
32.5
  $
—  
 
Product liability and warranties
  
39.7
   
—  
   
42.5
   
—  
 
Inventories
  
—  
   
0.3
   
—  
   
0.6
 
Accounts receivable
  
16.3
   
—  
   
18.3
   
—  
 
Property, plant and equipment
  
—  
   
34.9
   
—  
   
36.3
 
Intangibles
  
—  
   
61.3
   
—  
   
57.3
 
Environmental liabilities
  
1.9
   
—  
   
2.1
   
—  
 
Undistributed foreign earnings
  
—  
   
20.8
   
—  
   
28.9
 
Tax loss and credit carryovers
  
15.2
   
—  
   
17.5
   
—  
 
All other
  
7.7
   
—  
   
4.0
   
—  
 
Valuation allowance
  
(11.9
)  
—  
   
(13.1
)  
—  
 
                 
 $
96.2
  $
117.3
  $
103.8
  $
123.1
 
                 
Net liability
    $
21.1
     $
19.3
 
                 
The Company believes it is more likely than not that it will realize its deferred tax assets through the reduction of future taxable income. The Company considered historical operating results in determining the probability of the realization of the deferred tax assets.

A reconciliation of the beginning and ending amounts of tax loss carryovers, credit carryovers and valuation allowances is as follows:

December 31 (dollars in millions)

                
   Net Operating Losses and Tax Credits   Valuation Allowances 
   2017   2016   2017   2016 

Beginning balance

  $18.2   $14.6   $13.1   $11.0 

Additions

   1.6    3.7    1.9    2.1 

Reductions

   —      (0.1)    —      —   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $19.8   $18.2   $15.0   $13.1 
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31 (dollars in millions)
        
 
Net Operating Losses and Tax Credits
  
Valuation Allowances
 
 
2019
  
2018
  
2019
  
2018
 
Beginning balance
 $
17.5
  $
19.8
  $
13.1
  $
15.0
 
Reductions
  
(2.3
)  
(2.3
)  
(1.2
)  
(1.9
)
                 
Ending balance
 $
15.2
  $
17.5
  $
11.9
  $
13.1
 
                 
The Company has foreign net operating loss carryovers that expire in 20182020 through 20252027 and state and local net operating loss carryovers that expire between 20182029 and 2034.

2030.

A reconciliation of the beginning and ending amount of unrecognized benefits is as follows:

(Dollars in millions)

  2017   2016 

Balance at January 1

  $4.2   $2.6 

Additions for tax positions of prior years

   2.0    1.6 
  

 

 

   

 

 

 

Balance at December 31

  $6.2   $4.2 
  

 

 

   

 

 

 

(Dollars in millions)
 
2019
  
2018
 
Balance at January 1
 $
8.3
  $
6.2
 
Additions for tax positions of prior years
  
1.4
   
2.1
 
         
Balance at December 31
 $
9.7
  $
8.3
 
         
The amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0.6$0.8 million. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2017,2019, there was an immaterial amount of interest and penalties accrued. The Company anticipates that there will not0t be a material decrease in the total amount of unrecognized tax benefits in 2018.2020. The Company’s U.S. federal income tax returns and its U.S. state and local income tax returns are subject to audit for the years 2015-20172016-2019 and 2001-2017,2002-2019, respectively. The Company is subject to
non-U.S.
income tax audits for the years 2009-2017.

13.Commitments and Contingencies

2013-2019.

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Table of Contents
16. Commitments and Contingencies
Environmental Contingencies
The Company is a potentially responsible party in judicial and administrative proceedings seeking to clean up sites which have been environmentally impacted. In each case, the Company has established reserves, insurance proceeds and/or a potential recovery from third parties. The Company believes any environmental claims will not have a material effect on its financial position or results of operations.

Product Liability and Other Matters
The Company is subject to various claims and pending lawsuits for product liability and other matters arising out of the conduct of the Company’s business. With respect to product liability claims, the Company has self-insured a portion of its product liability loss exposure for many years. The Company has established reserves and has insurance coverage, which it believes are adequate to cover incurred claims. For the years ended December 31, 20172019 and 2016,2018, the Company had $125 million of product liability insurance for individual losses in excess of $7.5 million. The Company periodically reevaluates its exposure on claims and lawsuits and makes adjustments to its reserves as appropriate. The Company believes, based on current knowledge, consultation with counsel, adequate reserves and insurance coverage that the outcome of such claims and lawsuits will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

14.Operations by Segment

Inventory Repurchase Arrangements
The Company maintains a commercial relationship with a supply-chain service provider (the Provider) in connection with the Company’s business in China. In this capacity, the Provider offers order-entry, warehousing and logistics support. The Provider also offers asset-backed financing to certain of the Company’s distributors in China to facilitate their working capital needs. To facilitate its financing support business, the Provider has collateralized lending facilities in place with multiple Chinese banks under which the Company has agreed to repurchase inventory if both requested by the banks and certain defined conditions are met, primarily related to the aging of the distributors’ notes.
The Provider is required to indemnify the Company for any losses the Company would incur in the event of an inventory repurchase under these arrangements. Potential losses under the repurchase arrangements represent the difference between the repurchase price and net proceeds from the resale of product plus costs incurred in the process, less related distributor rebates.
Before considering any reduction of distributor rebate accruals of $14.1 and $25.1 million as of December 31, 2019 and December 31, 2018, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $23.1 million and $75.8 million as of December 31, 2019 and December 31, 2018, respectively. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of December 31, 2019 and December 31, 2018.
17. Operations by Segment
The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The North America segment also manufactures and markets water system tanks. Our Rest of World segment also manufactures and markets
in-home
air purification products in China.

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Table of Contents
17. Operations by Segment (continued)
The accounting policies of the reportable segments are the same as those described in the “Summary of Significant Accounting Policies” outlined in Note 1. Segment earnings, defined by the Company as earnings before interest, taxes, general corporate and corporate research and development expenses, were used to measure the performance of the segments.

   Net Sales  Earnings 

Years ended December 31 (dollars in millions)

  2017  2016  2015  2017  2016  2015 

North America

  $1,904.8  $1,743.2  $1,703.0  $428.6  $385.9  $339.9 

Rest of World

   1,116.3   965.6   866.1   149.3   129.1   113.0 

Inter-segment

   (24.4)   (22.9)   (32.6)   —     —     —   
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total segments – sales, segment earnings

  $2,996.7  $2,685.9  $2,536.5  $577.9  $515.0  $452.9 
  

 

 

  

 

 

  

 

 

    

Corporate expenses

      (47.0)   (45.2)   (43.0) 

Interest expense

      (10.1)   (7.3)   (7.4) 
     

 

 

  

 

 

  

 

 

 

Earnings before income taxes

      520.8   462.5   402.5 

Provision for income taxes

      (224.3)   (136.0)   (119.6) 
     

 

 

  

 

 

  

 

 

 

Net earnings

     $296.5  $326.5  $282.9 
     

 

 

  

 

 

  

 

 

 

In 2017, the Company recorded provisionalone-time charges of $81.8 million associated with U.S. Tax Reform, primarily related to the repatriation of undistributed foreign earnings.

 
Net Sales
  
Earnings
 
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
  
2019
  
2018
  
2017
 
North America
(1)
 $
2,083.5
  $
2,044.7
  $
1,904.8
  $
488.9
  $
464.1
  $
428.6
 
Rest of World
  
935.8
   
1,173.6
   
1,116.3
   
40.2
   
149.3
   
149.3
 
Inter-segment
  
(26.6
)  
(30.4
)  
(24.4
)  
—  
   
—  
   
—  
 
                         
Total segments – sales, segment earnings
 $
2,992.7
  $
3,187.9
  $
2,996.7
  $
529.1
  $
613.4
  $
577.9
 
                         
Corporate expenses
           
(46.0
)  
(47.2
)  
(47.0
)
Interest expense
           
(11.0
)  
(8.4
)  
(10.1
)
                         
Earnings before income taxes
           
472.1
   
557.8
   
520.8
 
Provision for income taxes
(2)
           
(102.1
)  
(113.6
)  
(224.3
)
                         
Net earnings
          $
370.0
  $
444.2
  $
296.5
 
                         
(1)In 2018, the Company recognized $6.7 million of restructuring and impairment expenses in connection with the move of manufacturing operations from our Renton, Washington facility to other U.S. facilities. For additional information, see Note 5 “Restructuring and Impairment Expenses.”
(2)In 2017, the Company recorded a
one-time
charge of $81.8 million associated with U.S. Tax Reform, primarily related to the repatriation of undistributed foreign earnings. For additional information, see Note 15 “Income Taxes.”
In 2019, sales to the North America segment’s two largest customers were $361.4$421.1 million and $335.2$378.9 million
which represented 1214 percent and 11
13
 percent
of the Company’s net sales, respectively. In 2016,
2018
, sales to the North America segment’s two largest customers were $311.5$
425.3
 million and $280.8$
355.6
 million which represented 12
13
 percent and
11
 percent of the Company’s net sales, respectively. In 2015,
2017
, sales to the North America segment’s two largest customers were $301.7$
361.4
 million and $287.0$
335.2
 million which represented
12
 percent and
11
 percent of the Company’s net sales, respectively.

Assets, depreciation and capital expenditures by segment

   Total Assets
(December 31)		   Depreciation and
Amortization (Years Ended
December 31)		   Capital
Expenditures
(Years Ended
December 31)		 

(dollars in millions)

  2017   2016   2015   2017   2016   2015   2017   2016   2015 

North America

  $1,592.5   $1,515.9   $1,381.1   $45.1   $42.9   $41.9   $38.5   $45.9   $43.5 

Rest of World

   741.4    584.3    544.2    23.8    21.0    19.8    55.2    34.3    28.4 

Corporate

   863.4    790.8    703.9    1.2    1.2    1.3    0.5    0.5    0.8 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,197.3   $2,891.0   $2,629.2   $70.1   $65.1   $63.0   $94.2   $80.7   $72.7 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 
Total Assets
(December 31)
  
Depreciation and
Amortization (Years Ended
December 31)
  
Capital
Expenditures
(Years Ended
December 31)
 
(dollars in millions)
 
2019
  
2018
  
2017
  
2019
  
2018
  
2017
  
2019
  
2018
  
2017
 
North America
 $
1,742.8
  $
1,653.6
  $
1,592.6
  $
49.3
  $
45.5
  $
45.1
  $
47.6
  $
45.8
  $
38.5
 
Rest of World
  
709.1
   
721.6
   
741.4
   
27.9
   
25.2
   
23.8
   
15.9
   
32.3
   
55.2
 
Corporate
  
606.1
   
696.3
   
863.4
   
1.1
   
1.2
   
1.2
   
0.9
   
7.1
   
0.5
 
                                     
Total
 $
3,058.0
  $
3,071.5
  $
3,197.4
  $
78.3
  $
71.9
  $
70.1
  $
64.4
  $
85.2
  $
94.2
 
                                     
The majority of corporate assets consist of cash, cash equivalents, marketable securities and deferred income taxes.

14.Operations by Segment (continued)

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Table of Contents
17. Operations by Segment (continued)
Net sales and long-lived assets by geographic location

The following data by geographic area includes net sales based on product shipment destination and long-lived assets based on physical location. Long-lived assets include net property, plant and equipment, operating lease assets and other long-term assets.

   Long-lived Assets
(December 31)		  

Net Sales

(Years Ended December 31)

 

(dollars in millions)

  2017   2016   2015     2017   2016   2015 

United States

  $303.0   $292.4   $297.8  

United States

  $1,698.1   $1,570.7   $1,531.4 

China

   250.8    184.3    157.3  

China

   1,034.9    887.1    787.1 

Canada

   3.2    3.1    2.7  

Canada

   163.7    138.7    129.9 

Other Foreign

   47.1    48.4    55.2  

Other Foreign

   100.0    89.4    88.1 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

  $604.1   $528.2   $513.0  

Total

  $2,996.7   $2,685.9   $2,536.5 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

15.Quarterly Results of Operations (Unaudited)

(dollars in millions, except per share amounts)

 
   1st Quarter   2nd Quarter   3rd Quarter   4th Quarter 
   2017   2016   2017   2016   2017   2016   2017   2016 

Net sales

  $740.0   $636.9   $738.2   $667.0   $749.9   $683.9   $768.6   $698.1 

Gross profit

   302.3    262.7    305.9    283.7    306.7    283.3    323.8    289.6 

Net earnings

   87.7    73.5    92.4    87.1    93.7    83.2    22.7    82.7 

Basic earnings per share

   0.51    0.42    0.53    0.50    0.54    0.48    0.13    0.48 

Diluted earnings per share

   0.50    0.41    0.53    0.49    0.54    0.47    0.13    0.47 

Common dividends declared

   0.14    0.12    0.14    0.12    0.14    0.12    0.14    0.12 

                         
 
Long-lived Assets
(December 31)
   
Net Sales
(Years Ended December 31)
 
(dollars in millions)
 
2019
  
2018
  
2017
   
2019
  
2018
  
2017
 
United States
 $
360.2
  $
327.3
  $
303.0
  
United States
 $
1,868.7
 
 
 
 
 $
1,820.8
 
 
 
 
 $
1,698.1
 
China
  
266.7
   
252.6
   
250.8
  
China
  
825.4
   
1,071.2
   
1,034.9
 
Canada
  
4.2
   
3.1
   
3.2
  
Canada
  
168.5
   
175.0
   
163.7
 
Other Foreign
  
42.1
   
42.9
   
47.1
  
Other Foreign
  
130.1
   
120.9
   
100.0
 
                           
Total
 $
673.2
  $
625.9
  $
604.1
  
Total
 $
 
2,992.7
  $
3,187.9
  $
2,996.7
 
                           
18. Quarterly Results of Operations (Unaudited)
                                 
(dollars in millions, except per share amounts)
            
  
1st Quarter
  
2nd Quarter
  
3rd Quarter
  
4th Quarter
 
 
2019
  
2018
  
2019
  
2018
  
2019
  
2018
  
2019
  
2018
 
Net sales
 $
748.2
  $
788.0
  $
765.4
  $
833.3
  $
728.2
  $
754.1
  $
750.9
  $
812.5
 
Gross profit
  
292.8
   
321.5
   
308.7
   
341.0
   
284.2
   
306.0
   
295.0
   
337.0
 
Net earnings
  
89.3
   
98.8
   
102.1
   
114.5
   
87.3
   
104.6
   
91.3
   
126.3
 
Basic earnings per share
  
0.53
   
0.58
   
0.61
   
0.67
   
0.53
   
0.61
   
0.56
   
0.75
 
Diluted earnings per share
  
0.53
   
0.57
   
0.61
   
0.66
   
0.53
   
0.61
   
0.56
   
0.74
 
Common dividends declared
  
0.22
   
0.18
   
0.22
   
0.18
   
0.22
   
0.18
   
0.24
   
0.22
 
Net earnings per share are computed separately for each period, and therefore, the sum of such quarterly per share amounts may differ from the total for the year.

In the fourthfirst quarter of 2017,2018, the Company recorded provisionalone-time charges$6.7 million of $81.8 millionrestructuring and impairment expenses associated with a move of manufacturing operations from its Renton, Washington facility to other U.S. Tax Reform, primarily relatedfacilities. These charges reduced
after-tax
earnings by $5.0 million or $0.03 per share.
19. Subsequent Event
In January 2020, an outbreak of a novel coronavirus
(COVID-19)
surfaced in Wuhan, China. The outbreak caused the Chinese government to require businesses to close and to restrict certain travel within the country. In cooperation with the government authorities, the Company’s operations in China extended their Chinese New Year holiday shut down by approximately one to two weeks. As of the date of this filing, the Company has resumed operations, but at below normal levels. The majority of the stores where the Company’s products are sold have temporarily closed and most of the stores that remain open are operating with reduced hours and are experiencing significant declines in customer traffic. In addition, as a significant portion of the Company’s products in China require installation by a professional, actions taken to contain the spread of the virus have, in certain cases, limited access for installation. The duration and intensity of the impact of the coronavirus and resulting disruption to the repatriationCompany’s operations is uncertain. While our global supply chains are currently not affected, it is unknown whether or how they may be affected if such an epidemic persists for an extended period. While not yet quantifiable, the Company expects this situation will have a material adverse impact to its operating results in the first quarter of undistributed foreign earnings. These charges reduced earnings per share by $0.47.

2020 and continues to assess the financial impact for the remainder of the

 year.
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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in RulesRule
13a-15(e)
under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on such evaluations,the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act, and that information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

Management Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is(as defined in Exchange Act Rule
13a-15(f)).
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As allowed by Securities and Exchange Commission guidance, management excluded from its assessment Hague,Water-Right, which was acquired in 20172019 and constituted 1.63.6 percent and 2.96.3 percent of total assets and net assets, respectively, as of December 31, 20172019 and 0.31.5 percent and 0.51.4 percent of net sales and net earnings, respectively, for the year then ended. Based on this evaluation, our management has concluded that, as of December 31, 2017,2019, our internal control over financial reporting was effective.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements and the effectiveness of internal controls over financial reporting as of December 31, 20172019 as stated in their report which is included herein.

Changes in Internal Control Over Financial Reporting

There have not been any changeno changes in the company’s internal control over financial reporting (as such term is defined in Rules13a-15(f) and15d-15(f) under the Securities and Exchange Act) Act Rule
13a-15(f))
during the year ended December 31, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B - 9B—OTHER INFORMATION

None

None.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

A. O. Smith Corporation

Opinion on Internal Control over Financial Reporting

We have audited A. O. Smith Corporation’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, A. O. Smith Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.

As indicated in the accompanying Management Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Hague Quality Water International,Water-Right, Inc., which is included in the 20172019 consolidated financial statements of the Company and constituted 1.63.6 percent and 2.96.3 percent of total assets and net assets, respectively, as of December 31, 20172019 and .31.5 percent and ..51.4 percent of net sales and net earnings, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Hague Quality Water International.

Water-Right, Inc.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of A. O. Smith Corporation as of December 31, 20172019 and 2016,2018, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20172019, and the related notes and financial statement schedule listed in the index at Item 15(a) and our report dated February 16, 201824, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Milwaukee, Wisconsin

February 16, 2018

/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 24, 2020
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PART III

ITEM10- DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM
 10—DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included under the headings “Election of Directors” and “Board Committees” in our definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission (SEC) under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference. The information required regarding Executive Officers of the company is included in Part I of this Annual Report on Form
10-K
under the caption “Executive Officers of the Company.”

We have a separately designated Audit Committee on which Gene C. Wulf, Gloster B. Current, Jr., Dr. Ilham Kadri, Mark D. Smith and Idelle K. Wolf serve, with Mr. Wulf, as Chairperson. All members are independent under applicable SEC and New York Stock Exchange rules; the Board of Directors of the company has concluded that Ms. Wolf and Mr. Wulf are “audit committee financial experts” in accordance with SEC rules. Mr. Current will serve on the Audit Committee until his planned retirement just prior to the 2018 Annual Meeting of Stockholders.

We have adopted a Financial Code of Ethics applicable to our principal executive officer, principal financial officer and principal accounting officer. As a best practice, this code has been executed by key financial and accounting personnel as well. In addition, we have adopted a general code of business conduct for our directors, officers and all employees, which is known as the A. O. Smith Guiding Principles. The Financial Code of Ethics, the A. O. Smith Guiding Principles and other company corporate governance matters are available on our website at
www.aosmith.com
. We are not including the information contained on our website as a part of or incorporating it by reference into, this Form
10-K.
We intend to disclose on this website any amendments to, or waivers from, the Financial Code of Ethics or the A. O. Smith Guiding Principles that are required to be disclosed pursuant to SEC rules. There have been no waivers of the Financial Code of Ethics or the A. O. Smith Guiding Principles. Stockholders may obtain copies of any of these corporate governance documents free of charge by writing to the Corporate Secretary at the address on the cover page of this Form
10-K.

The information included under the heading “Compliance with Section 16(a) of the Securities Exchange Act” in our definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

ITEM 11 -
 11—EXECUTIVE COMPENSATION

The information included under the headings “Executive Compensation,” “Director Compensation,” “Report of the Personnel and Compensation Committee” and “Compensation Committee Interlocks and Insider Participation” in the company’s definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

ITEM 12 - 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS

The information included under the headings “Principal Stockholders” and “Security Ownership of Directors and Management” in our definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

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Table of Contents
Equity Compensation Plan Information

The following table provides information about our equity compensation plans as of December 31, 2017.

Plan Category

  Number of securities to
be issued upon the
exercise of outstanding
options, warrants and
rights		  Weighted-average exercise
price of outstanding options,
warrants and rights		  Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)		 

Equity compensation plans approved by security holders

   2,943,263(1)  $27.73(2)   2,885,001(3) 

Equity compensation plans not approved by security holders

   —     —     —   
  

 

 

  

 

 

  

 

 

 

Total

   2,943,263  $27.73   2,885,001 
  

 

 

  

 

 

  

 

 

 

2019.
             
Plan Category
 
Number of securities to
be issued upon the
exercise of outstanding
options, warrants and
rights
  
Weighted-average
 exercise
price of outstanding options,
warrants and rights
  
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)
 
Equity compensation plans approved by security holders
  
3,321,472
(1)  $
37.64
(2)   
1,855,560
(3) 
Equity compensation plans not approved by security holders
  
—  
   
—  
   
—  
 
             
Total
  
3,321,472
  $
37.64
   
1,855,560
 
             
(1)Consists of 2,263,1262,728,350 shares subject to stock options, 399,270313,763 shares subject to employee share units and 280,867279,359 shares subject to director share units.
(2)Represents the weighted average exercise price of outstanding options and does not take into account outstanding share units.
(3)Represents securities remaining available for issuance under the A. O. Smith Combined Incentive Compensation Plan. If any awards lapse, expire, terminate or are cancelled without issuance of shares, or shares are forfeited under any award, then such shares will become available for issuance under the A. O. Smith Combined Incentive Compensation Plan, hereby increasing the number of securities remaining available.

ITEM
 13 -– CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information included under the headings “Director Independence and Financial Literacy”, “Compensation Committee Interlocks and Insider Participation” and “Procedure for Review of Related Party Transactions” in our definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

ITEM
 14 -– PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the 20182020 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) required by this Item 14 is incorporated herein by reference.

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Table of Contents
PART IV

ITEM
 15
- EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM15- EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)The following documents are filed as part of this Annual Report on Form
10-K:

(a)      The following documents are filed as part of this Annual Report on Form 10-K:  
1.  Financial Statements of the Company  
      Form 10-K
Page Number		 
  The following consolidated financial statements of A. O. Smith Corporation are included in Item 8:  
  

Consolidated Balance Sheets at December 31, 2017 and 2016

   27 
  

For each of the three years in the period ended December 31, 2017:

  
  

- Consolidated Statement of Earnings

   28 
  

- Consolidated Statement of Comprehensive Earnings

   28 
  

- Consolidated Statement of Cash Flows

   29 
  

- Consolidated Statement of Stockholders’ Equity

   30 
  Notes to Consolidated Financial Statements   31 - 56 
2.  

Financial Statement Schedules

 

Schedule II - Valuation and Qualifying Accounts

   66 
  Schedules not included have been omitted because they are not applicable.  
3.  Exhibits - see the Index to Exhibits on pages 63 - 64 of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K are listed as Exhibits 10(a) through 10(m) in the Index to Exhibits. 
  Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act of 1934, as amended, we will, upon request and upon payment of a reasonable fee not to exceed the rate at which such copies are available from the SEC, furnish copies to our security holders of any exhibits listed in the Index to Exhibits. 

INDEX TO EXHIBITS

1.Financial Statements of the Company
Exhibit  

Number

 

Description

Form
 10-K

Page Number
The following consolidated financial statements of A. O. Smith Corporation are included in Item 8:
Consolidated Balance Sheets at December 31, 2019 and 2018
26
For each of the three years in the period ended December 31, 2019:
- Consolidated Statement of Earnings
27
- Consolidated Statement of Comprehensive Earnings
27
- Consolidated Statement of Cash Flows
28
- Consolidated Statement of Stockholders’ Equity
29
Notes to Consolidated Financial Statements
30 - 56
2.Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts
65
Schedules not included have been omitted because they are not applicable.
3.Exhibits - see the Index to Exhibits on pages 64—65 of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form
10-K
are listed as Exhibits 10(a) through 10(m) in the Index to Exhibits.
Pursuant to the requirements of Rule
14a-3(b)(10)
of the Securities Exchange Act of 1934, as amended, we will, upon request and upon payment of a reasonable fee not to exceed the rate at which such copies are available from the SEC, furnish copies to our security holders of any exhibits listed in the Index to Exhibits.
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Table of Contents
INDEX TO EXHIBITS
Exhibit
Number
Description
(3)(i)
  
Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference to Exhibit 3i(b) in the quarterly report on Form 10-Q for the quarter ended March 31, 2016.
(3)(ii)
  
By-laws of A. O. Smith Corporation as amended October 13, 2015, incorporated by reference to Exhibit 3.1 in the current report on Form 8-K dated October 16, 2015.
(4) (a) 
(4)
(a)
Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference to Exhibit 3i(b) in the quarterly report on Form 10-Q for the quarter ended March 31, 2016.
 
(b)
 
Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith Corporation, A. O. Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financial institutions and agents party thereto, incorporated by reference to Exhibit 4.1 in the current report on Form 8-K dated December 12, 2012.
 
(c)
 
Amendment No. 1 dated as of December 15, 2016, to the Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith Corporation, A. O Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financial institutions and agents party thereto, incorporated by reference to Exhibit 4(c) in the annual report on Form 10-K for the fiscal year ended December 31, 2016.
 
(d)
 
The corporation has instruments that define the rights of holders of long-term debt that are not being filed with this Registration Statement in reliance upon Item 601(b)(4)(iii) of Regulation
S-K.
The Registrant agrees to furnish to the SEC, upon request, copies of these instruments.
(10) Material Contracts
(10)
Material Contracts
 (a) 

A. O. Smith Combined Incentive Compensation Plan, incorporated by reference asto Exhibit A toof the Proxy Statement filed on March 5, 2012 for the 2012 Annual Meeting of Stockholders.

 
(b)
 
A. O. Smith Corporation Executive Life Insurance Plan, as amended January 1, 2009, incorporated by reference to Exhibit 10(b) of the annual report on Form 10-K for the fiscal year ended December 31, 2008.
 
(c)
 
A. O. Smith Nonqualified Deferred Compensation Plan, adopted December 1, 2008, incorporated by reference to Exhibit 10(c) of the annual report on Form 10-K for the fiscal year ended December 31, 2008.
 
(d)
 
A. O. Smith Corporation Executive Supplemental Pension Plan, as amended January 1, 2009, incorporated by reference to Exhibit 10(d) of the annual report on Form 10-K for the fiscal year ended December 31, 2008.
 
(e)
 
A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to theExhibit 4.5 of Form S-8 Registration Statement filed by the corporation on July 30, 2007 (Reg. No. 333-144950).
 
(f)
 
A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 10.1 of the quarterly report on Form 10-Q for the quarter ended March 31, 2012.
 
(g)
 
A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 10 of the quarterly report on Form 10-Q for the quarter ended March 31, 2016.
 
(h)
 
Offer Letter to Ajita G. Rajendra, dated September 20, 2004, incorporated by reference to Exhibit 10.M of the annual report on Form 10-K for the fiscal year ended December 31, 2007.
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Table of Contents
INDEX TO EXHIBITS (continued)
Exhibit
Number
Description
 
(i)
 
Amendment to Offer Letter to Ajita G. Rajendra dated December 10, 2015, incorporated by reference to Exhibit 10(i) of the annual report on Form 10-K for the fiscal year ended December 31, 2015.

INDEX TO EXHIBITS (continued)

Exhibit

Number

 

Description

 
(j)
 Summary of Directors’ Compensation incorporated by reference to the quarterly report on Form 10-Q for the quarter ended June 30, 2015.
(k)
A. O. Smith Corporation Senior Leadership Severance Plan, incorporated by Referencereference to Exhibit 10.1 of the quarterly report for Form 10-Q for the quarter ended June 30, 2009.
 (l)
(k)
 
Form of A. O. Smith Corporation Special Retention Award Agreement, incorporated by reference to Exhibit 10.1 of the quarterly report on Form 10-Q for the quarter ended March 31, 2011.
 (m)
(l)
 
Stockholder Agreement dated as of December 9, 2008, between A. O. Smith Corporation and each Smith Investment Company stockholder who becomes a signatory thereto, incorporated by reference to Exhibit 10.3 of the current report on Form 8-K dated December 9, 2008.
 (n)
(m)
 
Summary of Directors’ Compensation incorporated by reference to Exhibit 10.1 of the quarterly report on Form 10-Q for the quarter ended June 30, 2019.
(21)
  
Subsidiaries.
(23)
  
Consent of Independent Registered Public Accounting Firm.
(31.1)
  
Certification by the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated February 16, 2018.24, 2020.
(31.2)
  
Certification by the Executive Vice-President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated February 16, 2018.24, 2020.
(32.1)
  
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
(32.2)
  
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
(101)
  
The following materials from A. O. Smith Corporation’s Annual Report on Form
10-K
for the fiscal year ended December 31, 20172019 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 20172019 and 2016,2018, (ii) the Consolidated Statement of Earnings for the three years ended December 31, 2017,2019, (iii) the Consolidated Statement of Comprehensive Earnings for the three years ended December 31, 2017,2019, (iv) the Consolidated Statement of Cash Flows for the three years ended December 31, 2017,2019, (v) the Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 20172019 and (vi) the Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly authorized.

  
A. O. SMITH CORPORATION
Date: February 16, 201824, 2020
  
By:
 

/s/ Ajita G. Rajendra

   
Ajita G. Rajendra
   

Executive Chairman of

the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February 16, 201824, 2020 by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name and Title
 
Signature
AJITA G. RAJENDRA
 

/s/ Ajita G. Rajendra

Executive Chairman of the Board and Chief Executive Officerof Directors
 
Ajita G. Rajendra
KEVIN J. WHEELER
 

/s/ Kevin J. Wheeler

Director
 
Kevin J. Wheeler
President and Chief OperatingExecutive Officer
 
JOHN J. KITA 

/s/ John J. Kita

CHARLES T. LAUBER
/s/ Charles T. Lauber
Executive Vice President and Chief Financial Officer
 John J. Kita
Charles T. Lauber
DANIEL L. KEMPKEN 

/s/ Daniel L. Kempken

HELEN E. GURHOLT
/s/ Helen E. Gurholt
Vice President and Controller
 Daniel L. Kempken
Helen E. Gurholt
RONALD D. BROWN
 

/s/ Ronald D. Brown

Director
 
Ronald D. Brown
GLOSTER B. CURRENT, Jr. 

/s/ Gloster B. Current, Jr.

Director
WILLIAM P. GREUBEL
 Gloster B. Current, Jr.
WILLIAM P. GREUBEL

/s/ William P. Greubel

Director
 
William P. Greubel
PAUL W. JONES
 

/s/ Paul W. Jones

Director
 
Paul W. Jones
DR. ILHAM KADRI
 

/s/ Dr. Ilham Kadri

Director
 
Dr. Ilham Kadri
BRUCE M. SMITH
 

/s/ Bruce M. Smith

Director
 
Bruce M. Smith
MARK D. SMITH
 

/s/ Mark D. Smith

Director
 
Mark D. Smith
IDELLE K. WOLF
 

/s/ Idelle K. Wolf

Director
 
Idelle K. Wolf
GENE C. WULF
 

/s/ Gene C. Wulf

Director
 
Gene C. Wulf

64
Table of Contents
A. O. SMITH CORPORATION

SCHEDULE II
-
VALUATION AND QUALIFYING ACCOUNTS

(Dollars in millions)

Years ended December 31, 2017, 20162019, 2018 and 2015

Description  Balance at
Beginning
of Year		   Charged to
Costs and
Expenses		   Acquisition
of
Businesses		   Deductions  Balance at
End of
Year		 

2017:

         

Valuation allowance for trade and notes receivable

  $6.3   $—     $0.2   $(1.2)  $5.3 

Valuation allowance for deferred tax assets

   13.1    1.9    —      —     15.0 

2016:

         

Valuation allowance for trade and notes receivable

  $6.0   $1.1   $0.2   $(1.0)  $6.3 

Valuation allowance for deferred tax assets

   11.0    2.1    —      —     13.1 

2015:

         

Valuation allowance for trade and notes receivable

  $3.7   $2.6    —     $(0.3)  $6.0 

Valuation allowance for deferred tax assets

   9.8    1.4    —      (0.2)   11.0 

66

2017
                     
Description
 
Balance at
Beginning
of Year
  
Charged to
Costs and
Expenses
  
Acquisition
of
Businesses
  
Deductions
  
Balance at
End of
Year
 
2019:
               
Valuation allowance for trade and notes receivable
 $
6.4
  $
0.3
  $
—
  $
(0.1
) $
6.6
 
Valuation allowance for deferred tax assets
  
13.1
   
—
   
—
   
(1.2
)  
11.9
 
2018:
               
Valuation allowance for trade and notes receivable
 $
5.3
  $
1.5
  $
—
  $
(0.4
) $
6.4
 
Valuation allowance for deferred tax assets
  
15.0
   
—
   
—
   
(1.9
)  
13.1
 
2017:
               
Valuation allowance for trade and notes receivable
 $
6.3
  $
—
  $
0.2
  $
(1.2
) $
5.3
 
Valuation allowance for deferred tax assets
  
13.1
   
1.9
   
—
   
—
   
15.0
 
65