Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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, 20192022
OR
☐
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
to
Commission File Number
1-475
A. O. Smith Corporation
(Exact name of registrant as specified in its charter)
Delaware
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)
11270 West Park Place, Milwaukee, Wisconsin
(Address of Principal Executive Office)
39-0619790
(I.R.S. Employer Identification No.)
53224-9508
(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
Trading Symbol(s)
Shares of Stock Outstanding
January 31, 2020
2023
Name of Each Exchange
on
Which
Registered
Class A Common Stock

(par value $5.00 per share)
26,044,733
None
25,905,276
Not listed
Common Stock

(par value $1.00 per share)
135,926,301
AOS
124,974,017
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
☒
  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 every Interactive Data File required to be submitted 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 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
☐
☐
Emerging growth company
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth
Non-accelerated filer☐Smaller reporting 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.                              ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of 12b-2of the Act.)         
☐
  Yes    
☒
  No
The aggregate market value of voting stock held by
non-affiliates
of the registrant was $42,999,781$41,779,676 for Class A Common Stock and $6,432,921,438$6,733,262,366 for Common Stock as of June 30, 2019.2022.
DOCUMENTS INCORPORATED BY REFERENCE
1.
1.Portions of the company’s definitive Proxy Statement for the 20202023 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).
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Table of Contents
Table of Contents
A. O. Smith Corporation
Index to Form
10-K
Year Ended December 31, 2019
2022
Page
3
Part I
7
1
Item 1A.
Risk Factors
4
Item 1B.
Unresolved Staff Comments
912
Properties13
9
913
913
1316
1517
1618
2328
2428
57
57
57
Item 9C.
57
59
59
5960
60
60
61
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PART 1
ITEM 1
– BUSINESS
- BUSINESS
As used in this annual report on Form 10-K, references to the “Company,” “A. O. Smith,” “AOS,” “we,” “us,” and “our” refer to A. O. Smith and its consolidated subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under “Item 8 Financial Statements and Supplementary Data” in this annual report on Form 10-K. 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, heat pump, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our Rest of World segment also manufacturesis primarily comprised of China, Europe and markets
in-homeIndia.
air purification products in China.
NORTH AMERICA
We serveSales in our North America segment accounts for 74% of our total sales in 2022. This segment serves residential and commercial end markets in North America with a broad range of products including:
Water heaters
. Our residential and commercial water heaters, primarily come in sizes ranging from 40 to 80 gallon models, however, we also offer sizes as low as 2.5 gallon
(point-of-use)
models to 4,000 and as high as 2,500 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, schools and small businesses. In 2022, we continued our integration activities of Giant Factories, Inc., (Giant) a Canada-based manufacturer of residential and commercial water heaters, which we acquired in late 2021.
Boilers.
Our residential and commercial boilers range in size from 45,000 British Thermal Units (BTUs) to 6.0 million BTUs. Boilers are closed loop water heating systems used primarily for space heating or hydronic heating. Our boilers are primarily used in space heating applications in commercial settings for residences, hospitals, schools, hotels and other large commercial buildings.buildings while residential boilers are used in homes, apartments and condominiums.
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 2019.2019, Master Water Conditioning Corporation (Master Water) in 2021 and Atlantic Filter Corporation (Atlantic Filter) in 2022. 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. We also offer a completecomprehensive line of foodcommercial water treatment and beverage filtration products. Typical applications for our water treatment products include residences, restaurants, hotels and offices. A 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.portions of the market. In the commercial marketsportions of the market 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.advantage. Our wholesale distribution channel, where we sell our products primarily under the A. O. Smith and State brands, includes more than 1,3001,000 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 branded sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-brandedLochinvar branded sales consist primarily of boilers and related parts. Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms with the remainder of our Lochinvar branded products arebeing distributed through wholesale channels.
We sell our A. O. Smith branded water treatment products through Lowe's and Amazon. Our Aquasana branded products are primarily sold directly to consumers through
e-commerce
as well as
on-line
retailers including Amazon and through other retail chains. channels. Our water softener branded products and problem well water solutions, which include Hague, WaterBoss, Water-Right, WaterCare,Master Water, and Evolve,Atlantic Filter, are sold through water quality dealers. Our water softener products are also sold through home center retail chains. Our A. O. Smith branded water treatment products are sold through Lowe’s and our wholesale distribution channels.
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Our energy-efficient product offerings continue to be a sales driver for our business. Our condensing commercial water heaters and our condensing boilers continue to be an option for commercial customers looking for high efficiencyhigh-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-efficient product offerings. In addition, during 2021 we launched a commercial heat pump water heater to align with greenhouse gas emission reduction trends across the U.S.
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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, Franklin Electric and Ecowater as well as numerous regional assemblers.
REST OF WORLD
Sales in our Rest of World segment accounts for 26% of our total sales in 2022, a majority of which is in China. We have operated in China for more than 20nearly 30 years. In that time, we have been aggressively expanding our presence while buildingestablished A. O. Smith brand recognition in the residential and commercial markets. We manufacture and market residential water heater and water treatment products, primarily incorporating reverse osmosis technology, and commercial water treatment products. 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 suppliersmarket leaders of water heaters and reverse osmosis water treatment products to the residential market in China in dollar terms. We manufacturealso design and market water treatment products, primarily residential reverse osmosis products. We also manufacture and market air purification products as well as range hoods and cooktops in China.
We sell water heatersour products in approximately 9,000 retail outlets12,000 points of sale in China, of which over 2,600approximately 5,400 are retail outlets in tier one through tier three cities and approximately 2,000 exclusively sell our products. We also sell our products through e-commerce channels. Our primary competitors in China in the water heater market segment are Haier, Midea, and Rinnai. Our principal competitors in the water treatment productsmarket are Angel, Midea, Truliva, and air purification products are sold in over 8,100 and 3,300 retail outlets in China, respectively.Xiaomi.
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.
We continue to expand our product offerings and sales in this country, primarily through wholesale, e-commerce and retail channels. Our primary competitors in China in the electric water heater market segmentIndia 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 Xiaomi. Our principal competitors in the China air purification market are Phillips, Panasonic and Sharp. In India, we compete withRacold, Bajaj and HavelsHavells in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market.
In addition, weWe also sell water heaters in the European and Middle and Far Eastern markets and water treatment products in Hong Kong, Turkey and Vietnam, all of which combined comprised less than eight13 percent of total Rest of World sales in 2019.2022.
RAW MATERIALS
RawWe use a wide range of raw materials forin our manufacturing operations, primarily consisting of steel,operations. These raw materials are generally available in adequate quantities.quantities, however, the COVID-19 pandemic and disruptions in the commercial transportation network have stressed the availability of certain raw materials. While supply chain and logistics challenges lingered in 2022, we saw improvement, particularly in the second half of the year. Our primary raw material input is steel which has experienced volatility in costs over the last several years. A portion of our customers are contractually obligatedhave contractual pricing tied to accepta steel price changes based on fluctuations in steel prices. There has been volatility in steel costs over the last several years.index.
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, our Global Engineering Center in Nanjing, China, and our operating locations. Our total expenditures for research and development in 2019, 20182022, 2021 and 20172020 were $87.9$89.0 million, $94.0$94.2 million and $86.4$80.7 million, respectively.
PATENTS AND TRADEMARKS
We invest, own and use in our businesses various trademarks, trade names, patents, trade secrets and licenses. We monitor our intellectual property for infringement and in 2022 received a judgment of $11.5 million against a competitor related to one of our patents. Although we believe our trademarks, trade names, patents, trade secrets, and licenses to constitute a valuable asset in the aggregate, we do not believe thatregard our business as a whole isbeing materially dependent uponon any suchsingle trademark, trade name, patent, trade secret, license or license. However, ourany group of related such rights. Our trade name is important with respect to our products, particularly in China, India, and the U.S.North America.

EMPLOYEES4
HUMAN CAPITAL
We employed approximately 15,10012,000 employees as of December 31, 2019, primarily
non-union.
2022 with approximately 6,200 in North America and 5,800 in Rest of World. A small portion of our workforce in the U.S. is represented by a labor union, while outside the U.S., we have employees in certain countries that are represented by employee representative organizations, such as an employee association, union, or works council.
Our Guiding Principles and Values. The foundation of how we conduct business and interact with our employees is outlined in A. O. Smith Corporation’s Guiding Principles and our Statement of Values. These principles and values help to shape how we hire, train and treat our employees, emphasizing teamwork and promoting diversity in seeking our objectives. We believe that our Guiding Principles and Values shape the critical elements of our effort to attract, retain and develop talent.
Culture and Employee Engagement. We conduct a Global Employee Engagement Survey on a biannual basis. This third party managed survey measures employees’ level of engagement against external norms and provides us with actionable feedback that drives improvement priorities. Survey participation in 2022 was 97 percent, which we believe reflects our employees’ desire to share their perspectives and a commitment to continuous improvement. Survey results help shape action plans to further improve our culture and we will conduct the survey again in 2024.
Diversity and Inclusion. As reflected in our Guiding Principles, we strive to create a workplace where people from diverse backgrounds can thrive and achieve their fullest potential. A. O. Smith’s commitment to this objective starts at the top with its Board of Directors, which is 50% diverse. A. O. Smith monitors the gender and racial composition of its workforce in the U.S. at various levels within the organization, and also tracks pay equity on an ongoing basis.
Compensation and Benefits. We provide what we believe is a robust total compensation program designed to be market-competitive and internally equitable to attract, retain, motivate and reward a high-performance workforce. Regular internal and external analysis is performed to ensure this market alignment. In addition to salaries, these programs, which vary by country, can include annual performance-based bonuses, stock-based compensation awards, retirement plans with employee matching opportunities, health benefits, health savings and flexible spending accounts, paid time off, family leave, and tuition assistance, among others.
Training and Development. We provide all employees with a wide range of professional development experiences, both formal and informal, to help them achieve their full potential. All of of our salaried employees are given formal development plans. Some of the formal development programs that employees have access to include early-career leadership development programs, front-line leadership development programs, continuous improvement skill-building programs, core process technology councils and tuition reimbursement for degree programs or trade schools. In 2022, we partnered with a third party provider to deliver diversity and inclusive leadership training to enhance the capability of our workforce with a program that aligns with our Guiding Principles, Values, and overall leadership approach. In 2022, we provided this training to our senior leadership team globally and senior management in the U.S., and we intend to expand that training program in 2023. Globally, all office and professional employees also have formal performance reviews and development plans with a focus on learning by doing. We expect our managers to work closely with their employees to ensure performance feedback and to conduct development discussions on a regular basis.
Safety. The safety of our people is always at the forefront of what we do. We provide safety training in our production facilities, designed to empower our employees with the knowledge and tools they need to make safe choices and mitigate risks. In addition to traditional training, we use standardized signage and visual management throughout our facilities. Since 1954, we have awarded annually the Lloyd B. Smith President's Safety Award, which acknowledges an A. O. Smith facility that demonstrates the most improvement over one year in the area of workplace safety.
BACKLOG
Due to the short-cycle nature of our businesses, none of our operations do not normally sustain significant backlogs.

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ENVIRONMENTAL LAWS
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
Our operations, including the manufacture, packaging, labeling, storage, distribution, advertising and sale of our products, are governedsubject to various federal, state, local and foreign laws and regulations. In the U.S., many of our products are regulated by the Department of Energy, the Consumer Product Safety Commission, and the Federal Trade Commission. State and local governments, through laws, regulations, and building codes, also regulate our water heating and water treatment products. Whether at the federal, state, or local level, these laws are intended to improve energy efficiency and product safety, and protect public health and the environment. In recent years, a varietylimited number of states and local authorities have proposed or implemented bans on gas-fired products in new construction in an effort to address greenhouse gas emissions. Similar laws and regulations have been adopted by government authorities in other countries in which we manufacture, distribute, and sell our products. We offer a complete line of water and hydronic heating products, including electric-powered water heaters and boilers, and we believe that any reduction in fossil fuel-powered products would be counterbalanced by the demand for our non-fossil fuel powered products. We are confident that our continued emphasis on product design and innovation will keep us well positioned to deliver products demanded by customers, regardless of fuel source.
In addition, our operations are subject to federal, foreign, state and local laws intendedenvironmental laws. We are subject to protectregulations of the environment.U.S. Environmental Protection Agency and the Occupational Health and Safety Administration and their counterpart state agencies. Compliance with government regulations and 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’sCompany’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.
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 helphelps reduce energy consumption, conserve water and improve drinking water quality and public health. Consistent with this commitment, we issuedissue our first Corporate Responsibility & Sustainability (CRS)sustainability report in 2018biennially detailing our company’s historic and current CRS efforts. We issued our third report, the 2022 Environmental, Social and Governance ("ESG") Report in December 2022, documenting our ESG activities over the past two years. This report details the positive impact of our highly efficient products, highlights our company’s commitment to employees and the communities in which we operate, and reports on our progress toward our greenhouse gas emissions reduction goal of 10% by 2025. We have made significant progress toward our ESG emission reduction goal and prevented almost 500,000 metric tons of carbon emissions in 2021 through the sale of our high efficiency water heaters and boilers. Our CRSscorecard reflecting our progress is available on our website. We have also achieved WAVE water stewardship verification and achieved our fourth consecutive Energy Star Partner of the Year Award. Our ESG report is available on our website. The report iswebsite and 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
In the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have an impact on our business, financial condition, operating results and cash flows. The risks set forth below are not an exhaustive list of potential risks but reflect those that we believe to be material. 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 were to actually occurs,occur, 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
Economic and uncertainties below are not the only risks facing our company.Industry Risks
■The effects of a global and regional economic downturnconditions could have a material adverse effect on our business
GlobalA decline in economic growth remains unevenactivity, such as a recession or economic downturn, in the U.S. and could stall or reverse course. If this was to occur itother regions in the world in which we do business, 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-efficient water heaters and boilers, or high qualityhigh-quality water treatment products, which could negatively impact our profitability and cash flows. In addition, aSuch deterioration in current economic conditions due tocould arise from many factors or fears including public health crises, suchpolitical instability or risk of government default. In addition, an increase in price levels generally or in particular industries (such as the current coronavirus concerns originatinginflation in China,steel prices in 2021 and the recent inflation in other material and logistics costs), could result in a consumer shift away from the products we offer, which could adversely affect our revenues and, at the same time, increase our costs. A deterioration in economic conditions also 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.
■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
A portionAs a global company with a large international footprint, we are subject to increased risk of damage or disruption to us and our employees, facilities, suppliers, distributors, or customers. Extraordinary events, including natural disasters, resulting from but not limited to climate change, political disruptions, terrorist attacks, public health issues, such as the COVID-19 pandemic, and acts of war may disrupt our business and operations and 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. Any of these disruptions or other extraordinary events outside of our business could be affected by further weakening ofcontrol that impact our operations or the Chinese economy
Approximately 28 percentoperations of our net salessuppliers and key distributors could affect our business negatively, harming operating results.
The COVID-19 pandemic continues to cause disruption to the global economy. We continue to monitor the pandemic, and while periodic local increases and decreases in 2019 were attributable to China. Our sales in China decreased in 2019 compared to 2018 and 2017. We believe that decrease wasCOVID-19 cases are likely, generally the restrictions due to weaker
end-market
demand asand in response to the pandemic continue to relax in most locations. However, the COVID-19 pandemic and efforts to manage it, including those by governmental authorities, could have a resultmaterial adverse effect on our financial condition, results of a weakening Chinese economy, elevated channel inventory levels,operations and a higher mix ofcash flows.
mid-price
products versus premium price products. We derive a substantial portionNatural disasters and extreme weather conditions may disrupt the productivity of our salesfacilities.For example, two of our manufacturing plants are located within a floodplain that has experienced past flooding events. We also have other manufacturing facilities located in China from premium-tier products. Changeshurricane and earthquake zones. We maintain insurance coverage and have taken steps to mitigate these physical risks related to natural disasters and extreme weather conditions. Pricing for our insurance program has remained at the prevailing market rate with no significant change in consumer preferences, weakening consumer confidence and sentiment as well as economic uncertainty, including the unknown impactcurrent year’s premium rates from the coronavirus, may prompt consumersprior year. Also, to mitigate the risk of flooding, we recently completed an approximately 7,000-foot-long berm, flood gates, and pumping stations around our Ashland City, Tennessee facility, our largest manufacturing facility. Despite our mitigation efforts, there is still the potential for natural disasters and extreme weather conditions to postpone purchases, choose lower-priced products or different alternatives, or lengthendisrupt the cycleproductivity of replacement purchases. Further deteriorationour facilities.
Apart from the potential impact on our operations, these types of events also could negatively impact consumer spending in the Chinese economy mayimpacted regions or depending on the severity, globally, which could materially and adversely affect our financial condition, results of operations and cash flows.
7
■Our business could be adversely impacted by changes in consumer purchasing behavior, consumer preferences, technological changes, and market trends
Consumer preferences for products and the methods in which they purchase products are constantly changing based on, among other factors, cost, performance, convenience, environmental and social concerns and perceptions. Consumer purchasing behavior may shift the product mix in the markets in which we participate or result in a shift to other distribution channels, for example e-commerce. Consumer preferences and broader trends, such as decarbonization and electrification efforts in response to climate change, may result in increased demand for higher efficiency products and/or more electric powered products. In addition, technologies are ever changing. Our ability to respond to these trends, timely transition our product portfolio, develop new and innovative products, and acquire and protect the 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, or do so on a timely basis, to align with consumer purchasing behavior and consumer preferences, which could materially and adversely affect our financial condition, results of operations and cash flows.
■Our operations could be adversely impacted by material and component price volatility, as well as supplier concentration
The market prices for certain materials and components we purchase, primarily steel, have been volatile. We have also experienced inflation related increases in our transportation costs. Significant increases in the cost of any of the key materials and components we purchase would 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 some cases, we are dependent on a limited number of suppliers for some of the raw materials and components we require in the manufacturing 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.
■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 nine11 percent of the residential market segment in 2019,2022, 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■Because approximately 22 percent of our sales in 2022 were attributable to China, adverse economic conditions or changes in consumer purchasing behavior in China could impact our business
Our sales in China decreased five percent in local currency in 2022 compared to 2021. Our 2022 sales in China were impacted by lower consumer demand driven by COVID-19 related disruptions. Certain COVID-19 restrictions were lifted at the end of 2022 but could return. We derive a substantial portion of our sales in China from premium-tier products. Changes in consumer preferences and technological changes
Consumerpurchasing behaviors including preferences for e-commerce, weakening consumer confidence and sentiment as well as economic uncertainty, socio-political risks, increased competition from Chinese-based companies, and potential future COVID-19 related impacts, may prompt Chinese consumers to postpone purchases, choose lower-priced products andor different alternatives, or lengthen 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 mixcycle of replacement purchases. Further deterioration 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 preferencesChinese economy 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
Business, Operational, and Strategic Risks
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 3634 percent of our net sales in 20192022 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 8,8005,200 of our 15,10012,000 employees as of December 31, 20192022 were located in China. At December 31, 2019,2022, approximately $549$472 million of cash and marketable securities were held by our foreign subsidiaries, substantially all of which were located in China. International operations generally are subject to various risks, including: political, religious, and economic instability; local labor market conditions; new 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 changes or imposition of statutory restrictions which prohibit repatriation of cash; 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 material loss, cancellation, reduction, or delay in purchases by one or more of our largest customers could harm our business
Net salesSales to our five largest customers represented approximately 39 percent of our sales in 2019.2022. 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 relationships 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. Our customers may experience financial instability, affecting their ability to make or pay for future purchases. Further, a customer may be acquired by a customer of a competitor which could result in our loss of that customer. 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.
■A portion of our business could be adversely affected by a further decline in North American new residential andor commercial construction or a decline in replacement relatedreplacement-related volume
of water heaters and boilers, including a decline in demand for commercial spaces
Residential and commercialnew construction activity in North America has shown modestand industry-wide replacement-related volume of water heaters had growth which could declinein 2020 and 2021, and then declined in 2022. New residential housing starts in the future.U.S. are projected to decrease further in 2023 compared to 2022.Commercial construction activity in North America grew in 2022 and 2021 after declining in 2020. We believe that the significant majority of the markets we serve are for the replacement of existing products, and residential water heater replacement volume was strong in 20172022 and 2018 before declining2021. As a result of the COVID-19 pandemic, businesses and commercial spaces have experienced and may experience in 2019.the future, fluctuation in demand and in occupancy that may reduce demand for our products, and commercial sectors, such as the restaurant and hospitality industries in which we have customers, may experience long-term shifts in consumer behavior which could negatively impact demand or capacity and may not return to pre-pandemic levels. In addition, the acceptance of remote work arrangements could negatively impact demand for commercial construction. Changes in the replacement volume and in the construction market in North America could negatively affect us.
■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 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, malicious actors or breaches of security. Like many companies, we, and some third parties upon which we rely, have experienced cybersecurity incidents and attacks on information technology networks and systems, products and services in the past but, to date, none have resulted in a material breach or had a material adverse impact on our financial condition, results of operations, or cash flows. We may experience them in the future, potentially with increasing frequency from increasingly
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sophisticated cyber threats. In addition, as a result of the COVID-19 pandemic, remote work and remote access to our systems have increased, which may heighten these risks. A successful attack in the future could result in operations failure or breach of security that 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, litigation and have a material adverse effect on our financial condition, results of operations and cash flows and our reputation. We have a response plan in place in the event of a data breach and we have an active program 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.
■Our international operations are subject to risks related to foreign currencies
We have a significant presence outside of the U.S., primarily in China and Canada and to a lesser extent Europe, Mexico, and India, and therefore, hold assets, including $443$377 million of cash and marketable securities denominated in 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, hyperinflation in some foreign countries such as Turkey, where we currently have minor operations, or global exchange rate instability or volatility that strengthens the U.S. dollar against foreign currencies. As a result, anAn increase in the value of the U.S. dollar relative to the local currencies of our foreign markets, as experienced globally in the second half of 2022, has hadnegatively affected our sales, profitability, and would continue tocash and cash equivalents balances and could have a negative effect onsuch effects in the future. In 2022, the change in foreign currencies negatively impacted our profitability.sales and cash and cash equivalents by approximately $61 million and $21 million, respectively. 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, a portion of which we manufacture in the U.S, and to a lesser extent from component purchases in Europe and India and payroll in Mexico. These risks may hurtadversely impact our reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S. dollars.
Changes in regulations or standards could adversely affect our 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 federal, foreign, state or 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.
■Our business may be 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.
■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 acquired Giant, a Canada-based manufacturer of residential and commercial water heaters, on October 19, 2021, for $199 million subject to customary adjustments using a combination of cash and debt. We will continue to evaluate potential acquisitions, and we could use a significant portion of our available capital to fund future acquisitions. We may not be able to successfully integrate Giant or any future 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 relevant regulations and market conditions may impact our ability to operate them profitably or achieve our strategic objectives for those acquisitions. 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 increaseslevel of indebtedness may increase in the cost of any of the key materialsfuture if we purchasefinance acquisitions with debt, which would cause us to incur additional interest expense and could increase our cost of doing businessvulnerability to general adverse economic 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 inindustry conditions and limit our ability to recover increased material costs from customers, and that lag could negativelyservice our debt or obtain additional financing. The 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 manufacturing 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 infuture acquisitions may have a material adverse effect on our financial condition, results of operations and cash flows.

An inability to adequately maintain our information systems10
Legal, Regulatory, and their security,Governance Risks
■Changes in regulations or standards, such as well as to protect data and other confidential information,those associated with climate change, could adversely affect our business
Our products are subject to a wide variety of statutory, regulatory and reputation
In the ordinary courseindustry standards and requirements related to, among other items, energy and water efficiency, environmental emissions, labeling and safety. We believe our products are currently efficient, safe and environment-friendly. However, a limited number of business, we utilize information systems for
day-to-day
operations,federal, foreign, state and local governments are adopting laws, regulations and codes in response to collect and store sensitive data and information, including our proprietary and regulated business information and personally identifiable informationclimate change that require a transition to non-fossil fuel based sources of our customers, suppliers and business partners,energy production as well as personally identifiable information about our employees. Our information systems, like thosesignificantly reducing or eliminating the on-site combustion 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 placefossil fuels in the eventbuilding sector, such as limiting or prohibiting the delivery of natural gas in new construction. A significant change to regulatory requirements that promote a data breachtransition to alternative energy sources as a replacement for gas, or a significant shift in industry standards, could substantially increase manufacturing costs, capital expenditures, transportation costs and raw material costs, impact the size and timing of demand for our products, affect the types of products we continueare able 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,offer or put us at a competitive disadvantage, any operations failure or breach of security from increasingly sophisticated cyber threatswhich could lead to disruptions ofharm 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.
flow.
■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 Environmental, Social, and Governance (ESG) commitments could result in additional costs, and our inability to achieve them could have an adverse impact on our reputation and performance
We periodically communicate our strategies, commitments and targets related to ESG matters, including carbon emissions, diversity and inclusion, and human rights through the issuance of our ESG report. Although we intend to meet these strategies, commitments and targets and are committed to advancing sustainable innovations in our industry, we may be unable to achieve them due to impacts on resources, operational costs, and technological advancements. Failure to meet these sustainability requirements or targets could adversely impact our reputation as well as the demand for our products and adversely affect our business, financial condition and results of operations. In addition, standards and processes for measuring and reporting carbon emissions and other sustainability metrics may change over time, result in inconsistent data, or result in significant revisions to our strategies, commitments and targets, or our ability to achieve them. Any scrutiny of our carbon emissions or other sustainability disclosures or our failure to achieve related strategies, commitments and targets could negatively impact our reputation or performance.
■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.
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
The compound annual growth rate of our boiler sales has been approximately eight 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 and have a material adverse effect on our financial condition, results of operations and cash flows.
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 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, 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.
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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.
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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 obligation liability of our defined benefit pension plans of $869 million exceeded the fair value of the plan assets of $832 million by approximately $37 million at December 31, 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 forecast that we will not be required to make a contribution to the plan in 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 contributions which could negatively impact our flexibility in managing our company.
■Certain members of the founding family of our company and trusts for their benefit have the ability to 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 boardBoard of directors.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, 2019,2022, through the voting trust, these members of the Smith Family own approximately 63.765.6 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 96.596.8 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
(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.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
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ITEM 
1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 
2 -– PROPERTIES
Properties utilized by us at December 31, 20192022 were as follows:
North America
In this segment, we have 1720 manufacturing plants located in nineten states and two
non-U.S.
countries, of which 1417 are owned directly by us or our subsidiaries and three are leased from outside parties. The terms of leases in effect at December 31, 20192022, expire between 20202023 and 2025.
Rest of World
In this segment, we have six manufacturing plants located in four
non-U.S.
countries, of which four are owned directly by us or our subsidiaries and two are leased from outside parties. The terms of leases in effect at December 31, 20192022, expire between 2020 and 2022.in 2025.
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. TheOur manufacturing plants operate at varying levels of utilization depending on the type of operation and market conditions. The executive offices of the company,Company, which are leased, are located in Milwaukee, Wisconsin.
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 16, “Commitments and Contingencies” of Notes to the Consolidated Financial Statements.
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 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 20202023 Annual Meeting of Stockholders.
Name (Age)
Positions Held
Period Position Was Held
Patricia K. Ackerman (59)
Samuel M. Carver (54)
Senior Vice President – Investor Relations, Treasurer and Corporate Responsibility and Sustainability
2019 to Present
Vice President – Investor Relations & Treasurer
2008 to 2018
Vice President and Treasurer
2006 to 2008
Assistant Treasurer
1995 to 2006
Paul R. Dana (57)
Senior Vice President – Global Operations
20192021 to Present
Senior
Vice President – GlobalNorth America Manufacturing
20162011 to 2018
2021
Vice President – Global Manufacturing
2015
President – APCOM, a division of State Industries, LLC, a subsidiary of the Company
Various A.O. Smith Officer and Management Positions
20112006 to 2017
2011
Vice President – Product Engineering
2006 to 2010
Plant Manager – Productos de Agua, S. de R.L. de C.V.
1998 to 2005
Anindadeb V. DasGupta (54)
Senior Vice President
2018 to Present
President – A. O. Smith Holdings (Barbados) SRL
2018 to Present
Vice President, Global Head Strategic Marketing; Global Head
e-commerce;
Global GM Flex & Signage Business Lines – OSRAM GmbH, Munich and Hong Kong
2014 to 2018
Wallace E. Goodwin (64)
Senior Vice President
2018 to Present
President and General Manager – Lochinvar, LLC
2018 to Present
Senior Vice President and General Manager – Lochinvar, LLC
2011 to 2017
President – APCOM, a division of State Industries, LLC
1999 to 2011
Robert J. Heideman (53)
(56)
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
Various A.O. Smith Officer and Management Positions
20072002 to 2010
2011
Director – Materials
2005 to 2007
D. Samuel Karge (48)Senior Vice President2018 to Present
Section Manager
2002 to 2005
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 (water solutions manufacturer)
2016 to 2018
Vice President & Platform Leader – Pentair Residential Filtration
2012 to 2016
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Name (Age)
Positions Held
Period Position Was Held
Daniel L. Kempken (47)
(50)
Senior Vice President – Strategy and Corporate Development
2019 to Present
Vice President and Controller
2011 to 2019
Parag Kulkarni (55)
Senior Vice President, International; President - A. O. Smith India Water Products Private Limited2022 to Present
Managing Director - A. O. Smith India Water Products Private Limited2015 to 2022
Charles T. Lauber (57)(60)
Executive Vice President and Chief Financial Officer
2019 to Present
Senior Vice President, Strategy and Corporate Development
2013 to 2019
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 PresidentVarious A.O. Smith Officer and Controller – A. O. Smith Electrical Products Company
Management Positions
20011999 to 2004
2006
Director of Audit and Tax
1999 to 2001
Stephen D. O'Brien (54)Senior Vice President; President - Lochinvar, LLC2022 to Present
Peter R. Martineau (65)
Chief Operating Officer – Lochinvar, LLC2021 to 2022
Senior Vice President – Chief Information Officer- Mitsubishi Electric Trane US
20162015 to Present
2021
Mark A. Petrarca (59)Senior Vice President – Business Transformation- Human Resources and Public Affairs
20132006 to 2015
Present
Vice President – Customer Satisfaction
2010 to 2012
Mark A. Petrarca (56)
Senior Vice President – Human Resources and Public Affairs
20062005 to Present
2006
Vice President – Human Resources and Public Affairs
2005 to 2006
Various A.O. Smith Officer and Management Positions
1999 to 2005
Jack Qiu (50)Senior Vice President – Human Resources –
2020 to Present
President - A. O. Smith Water Products CompanyChina
1999 to 2004
Ajita G. Rajendra (68)
Executive Chairman
20182020 to Present
Chairman and Chief Executive Officer
2017 to 2018
Chairman,Vice President - A. O. Smith China
2012 to 2020
Various A.O. Smith Officer and Management Positions2003 to 2012
S. Melissa Scheppele (60)Senior Vice President - Chief Information Officer2020 to Present
Vice President and Chief ExecutiveInformation Officer - Triumph Group (aerospace and defense business)
20142016 to 2017
2020
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 (57)
(60)
Executive Vice President, General Counsel and Secretary
2007 to Present
Partner – Foley & Lardner LLP
1997 to 2007

14
Table of Contents



Name (Age)Positions HeldPeriod Position Was Held
David R. Warren (56)
(59)
Senior Vice President
2017 to Present
President and General Manager – North America Water HeaterHeating
2017 to Present
Vice President – International
2008 to 2017
Managing Director –
A.O. Smith Water Products Company B.V.
2004 to 2008
Director, Reliance Sales
Various A.O. Smith Officer and Management Positions
20021989 to 2004
2008
Regional Sales Manager
1999 to 2002
Kevin J. Wheeler (63)Chairman2020 to Present
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
President and Chief Operating Officer
2017 to 2018
Senior Vice President
2013 to 2017
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 PresidentVarious A.O. Smith Officer and General Manager – U.S. Retail – A. O. Smith Water Products Company
Management Positions
20071999 to 2011
2013
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
12
15
Table of Contents
PART II
ITEM 5
-
– MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)Market 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.
(a)
Market 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.
(b)
Holders
. As of January 31, 2020,(b)Holders. As of January 31, 2023, the approximate number of stockholders of record of Common Stock and Class A Common Stock were 592 and 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 declared on the common stock are shown in Note 18 of Notes to Consolidated Financial Statements appearing elsewhere herein.
(d)
Stock Repurchases
. In the second quarter of 2019, our Board of Directors approved adding three million shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, we may purchase our Common Stock 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 purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as 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 2019, we repurchased 6,113,038 shares at an average price of $47.06 per share and at a total cost of $287.7 million. As of December 31, 2019, there were 2,962,215 shares remaining on the existing repurchase authorization.
The following table sets forth the number of stockholders of record of Common Stock and Class A Common Stock were 526 and 144, 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 declared on the common stock are shown in Note 11, “Stockholders' Equity” of Notes to the Consolidated Financial Statements appearing elsewhere herein.
(d)Stock Repurchases. In 2022, the Board of Directors approved adding 3,500,000 shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, the 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 purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as 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 2022, we repurchased 6,647,895 shares at an average price of $60.70 per share and at a total cost of $403.5 million. As of December 31, 2022, there were 378,462 shares remaining on the existing repurchase authorization. On January 27, 2023, the Board of Directors approved adding 7,500,000 shares of common stock to the existing discretionary share repurchase authority. Including the additional shares, we repurchased duringhave approximately 7.6 million shares available for repurchase as of the fourth quarterdate of 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
 
the Board of Directors' approval. We intend to spend approximately $200 million to repurchase Common Stock in 2023 through a combination of 10b5-1 plans and open-market purchases.
(e)
Performance 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.
(e)Performance 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.
13
16
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, which are published indices.
Comparison of Five-Year Cumulative Total Return
From December 31, 20142017 to December 31, 20192022
Assumes $100 Invested with Reinvestment of Dividends
aos-20221231_g1.jpg
            
 
Base
Period
  
Indexed Returns
 Base
Period		Indexed Returns
Company/Index
 
12/31/14
  
12/31/15
  
12/31/16
  
12/31/17
  
12/31/18
  
12/31/19
 Company/Index12/31/1712/31/1812/31/1912/31/2012/31/2112/31/22
A. O. Smith Corporation
  
100.0
   
137.3
   
171.6
   
224.5
   
158.5
   
180.1
 A. O. Smith Corporation100.0 70.6 80.2 94.2 149.9 101.7 
S&P 500 Index
  
100.0
   
101.4
   
113.5
   
138.3
   
132.2
   
173.8
 S&P 500 Index100.0 95.6 125.7 148.9 191.6 156.9 
S&P 500 Select Industrial Index
  
100.0
   
95.8
   
115.1
   
142.8
   
123.8
   
160.2
 S&P 500 Select Industrial Index100.0 86.7 112.2 124.5 150.8 142.6 
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Table of Contents
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
 
(1)Due to the enactment of the U.S. Tax Cuts & Jobs Act in December 2017, we recorded a
one-time
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)Excludes the current portion of long-term debt.
Not applicable.
15
17
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, heat pump and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective regionsregion of the world. Our Rest of World segment also manufactures and markets
in-home
air purification products in China.
In our North America segment, we project ourOur sales in China in 2022 were impacted by lower consumer demand driven by COVID-19-related lockdowns.Certain COVID-19 restrictions were lifted in China at the U.S.end of 2022 and we believe that economic activity there will grow approximately six percentimprove in 2020 compared2023 as a result.
While supply chain and logistics challenges lingered in 2022, we saw improvement, particularly in the second half of the year. We remain in close contact with our suppliers and logistics providers to 2019 dueresolve supply chain constraints as they arise.
We continue to higher water heater and boiler volumes resulting from expected industry-wide new constructionseek acquisitions that enable geographic growth, and expansion of replacement demand. We continued to expand our North America water treatment platform in 2019 by acquiring Water-Right,core business, and establish adjacencies. Consistent with this strategy, we acquired Giant Factories, Inc. and its affiliated entities (Water-Right) in April 2019. We expect sales(Giant), a Canada-based manufacturer of North America water treatment products to increase by 20 to 25 percent in 2020, compared to 2019, primarily due to volume growth and a full year of Water-Right sales.
In our Rest of World segment, we expect 2020 China sales to grow by approximately one percent in U.S. dollar terms and approximately 2.5 percent in local currency compared with 2019, as we believe the Chinese economy will continue to be weak. In addition, we expect our sales in India to grow between 15 and 20 percent in 2020 from approximately $39 million in 2019.
Combining all of these factors, we expect our consolidated sales to grow 4.5 to 5.5 percent in 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 seek to continue to grow our core residential and commercial water heating, boilerheaters, on October 19, 2021, for $199 million, subject to customary adjustments, using a combination of debt and water treatment businesses throughoutcash. The acquisition fits squarely in our core capabilities, supplements our presence in Canada and enhances our capacity and distribution in the world.region. Giant contributed incremental sales of $94.3 million and $22.9 million in 2022 and 2021, respectively. Refer to Note 3, “Acquisitions” for additional information. We will also continue to look for opportunities to add to our existing operations in high growth regions demonstrated by our introductionprevious introductions of water treatment products in India and Vietnam and air purification products as well as range hoods and cooktops in China.
In our North America segment, after approximately eight percent growth each year in 2021 and 2020, we believe that the wholesale residential water heater industry is returning to a more historical growth rate following a channel inventory destocking that occurred primarily in the third quarter of 2022, which resulted in a decrease in industry demand of 12 percent compared to 2021. We believe the majority of our customers exited 2022 with near normal inventory levels. While we believe that new home construction is in a deficit, we project it will be a headwind in 2023 and therefore, we project 2023 industry residential unit volumes will decrease approximately two to five percent from 2022. We believe that commercial water heater industry volumes will be flat to slightly up in 2023 compared to 2022 as supply chain constraints continue to ease. We expect to see a 10 to 12 percent increase in our sales of boilers in 2023 compared to 2022 due to industry growth of approximately three to four percent and our expectation that the transition to higher-efficiency boilers will continue. We anticipate sales of our North America water treatment products will increase approximately five to seven percent in 2023, compared to 2022, primarily driven by pricing and consumer demand.
In our Rest of World segment, we see the recent change to certain COVID-19 restrictions in China as a positive step to an improved economic environment. We project our sales in China will grow three to five percent in 2023 in local currency compared to 2022. Our guidance assumes volume will improve sequentially through out the year. We assume that the currency translation impact on sales will be similar to the 2022 and negatively impact sales by approximately four percent.
Combining all of these factors, we expect our 2023 consolidated sales to be flat to 2022, with a range of plus or minus three percent. Our guidance excludes the impacts from potential future acquisitions and assumes the COVID-19-related impacts in China improve in the second half of the year and do not have a significant impact on our productivity or significantly impact the end markets that we serve.

18
RESULTS OF OPERATIONS
In this section, we discuss the results of our operations for 2022 compared with 2021. We discuss our cash flows and current financial condition under “Liquidity and Capital Resources.” For a discussion related to 2021 compared with 2020, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2021, which was filed with the United States Securities and Exchange Commission (SEC) on February 11, 2022, and is available on the SEC's website at www.sec.gov.
Years Ended December 31,
(dollars in millions)202220212020
Net sales$3,753.9 $3,538.9 $2,895.3 
Cost of products sold2,424.3 2,228.0 1,787.1 
Gross profit1,329.6 1,310.9 1,108.2 
Gross profit margin %35.4 %37.0 %38.3 %
Selling, general and administrative expenses670.9 701.4 660.3 
Severance and restructuring expenses— — 7.7 
Interest expense9.4 4.3 7.3 
Other expense (income)-net425.6 (20.4)(11.0)
Earnings before provision for income taxes223.7 625.6 443.9 
(Benefit from) provision for income taxes(12.0)138.5 99.0 
Net Earnings$235.7 $487.1 $344.9 
Our sales in 20192022 were $2,993$3,753.9 million, a decline ofor 6.1 percent compared to our 2018higher than 2021 sales of $3,188$3,538.9 million. The decrease in 2019 sales was primarily due to a 23 percent decline in ChinaHigher 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, which2022 were primarily a resultdriven by the impacts of higher sales of water treatment products, including incremental sales from our acquisition, Water-Right, and water heaterinflation-related pricing actions related to steel and freight cost increases. The increase in North America sales was partially offset by lower residential water heater volumes. Ourvolumes in North America and lower sales in 2018China. In addition, our sales were a company record $3,188negatively impacted by approximately $61 million surpassing 2017 sales of $2,997 million by 6.4 percent. The increase in sales in 2018 was primarilycompared to last year due to pricing actions related to higher steel costs and higher salesthe depreciation of boilers and residential water heaters in the U.S. as well as higher sales of water treatment products in China. Our global water treatment sales grew to approximately $400 million in 2018. Total sales in China grew four percent in 2018. Excluding the impact of the appreciation of the Chinese currencyforeign currencies against the U.S. dollar, ourdollar. Our acquisition of Giant added $94.3 million of incremental sales in China increased almost two percent in 2018.2022.
Our gross profit margin in 20192022 of 39.535.4 percent declined compared to our gross profit margin of 41.037.0 percent in 20182021. The lower gross margin in 2022 was primarily due to higher steel and other material costs and production inefficiencies, which outpaced the lower sales volumes in China and a higher miximpact of
mid-price
products, which have lower margins, in that region. Our gross profit margin in 2018 of 41.0 percent was essentially flat compared to our gross profit margin of 41.1 percent in 2017.pricing actions.
Selling, general, and administrative (SG&A) expenses were $715.6$670.9 million in 20192022, or $38.2$30.5 million lower than in 2018.2021. The decrease in SG&A expenses in 2019 was primarily due to the recognition of a gain from an $11.5 million judgment against a competitor related to its infringement of one of our patents, lower advertisingmanagement incentive expenses, and selling expenseslower engineering costs in China. SG&A expenses were $31.0
Interest expense was $9.4 million higher in 2018 than2022, compared to $4.3 million in 2017.2021. The increase in SG&A expensesinterest expense in 2018 to $753.8 million2022 was primarily due to higher advertising expenses related to brand buildingdebt levels and higher product development engineering expenses in China.
interest rates.
On March 21, 2018, we announcedIn 2021, our Board of Directors approved the termination of our defined benefit pension plan (the Plan) with a termination date of December 31, 2021. The Plan represented over 95 percent of our pension plan to transfer water heater, boiler and storage tank production from our Renton, Washington plant to our other U.S. plants. The majority of the consolidation of operations occurred inliability. In the second quarter of 2018. As2022, we received a resultdetermination letter from the Internal Revenue Service (IRS) that allowed us to proceed with the termination process. In the fourth quarter of 2022, the settled Plan liabilities resulted in $417.3 million of pretax pension settlement expense, of which, $346.8 million was recorded in the North America segment and $70.5 million in Corporate Expense, and included $167.7 million in related tax benefits. For additional information, refer to the Critical Accounting Policies section under “Pensions” below.
Other expense (income)-net in 2022 was $425.6 million in expense compared to income of $20.4 million in 2021. In 2022, Other expense (income)-net reflected the $417.3 million pension settlement expense related to the termination of the relocation of production, we incurred
pre-tax
restructuringPlan and impairment expenses of $6.7$13.9 million in pension expenses compared to $12.0 million of pension income in 2021. To protect the first quarterPlan's funded status, the Plan transferred a significant portion of 2018, primarily relatedits assets to employee severancelower-risk investments in 2021. The impact of this transition resulted in a lower expected rate of return on pension investments and, compensation-related costs, building lease exit costsaccordingly, higher pension expenses in 2022 compared to the previous year. The service cost component of our pension income is reflected in cost of products sold and the impairmentSG&A expenses. All other components of assets. These activitiesour pension expense (income) are reflected in “restructuring and impairment expenses” in the accompanying financial statements.
other expense (income)-net.
16
19
Our effective income tax rate in 2022 was lower than our effective income tax rate in 2021 primarily due to the tax effects of the pension settlement expense associated with the termination of the Plan, a non-recurring $4.2 million favorable tax impact recorded in the prior year periods related to amending a previously filed tax return and a change in geographic earnings mix. We estimate that our annual effective income tax rate for the full year of 2023 will be approximately 24 percent.
We are providing
non-U.S.
Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, adjusted segment earnings per share, and adjusted segment earnings)corporate expense) that exclude restructuringthe impact of the pension settlement expense as well as the income from the legal judgment, the expenses associated with a terminated acquisition and impairmentnon-operating pension income and expenses. Reconciliations from GAAP measures to non-GAAP measures on a GAAP basis are provided later in this section.the Non-GAAP Measures section below. We believe that the measures of adjusted earnings, adjusted EPS, and adjusted segment earnings and adjusted corporate expense 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 that we do not consider to be a component of our core operating performance.
Interest expense was $11.0 millionperformance or recurring 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 debt levels to fund the acquisition of Water-Right and share repurchase activity. The decline in interest expense in 2018 compared to 2017 was a result of lower debt levels, primarily due to the 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 repurchase activity and dividend payments. This decline was partially offset by higher interest rates in 2018.nature.
Other income was $18.0 million in 2019 compared to $21.2 million in 2018 and $21.3 million in 2017. The decrease in other income in 2019 compared to 2018 was primarily due to lower
non-service
cost related pension income and lower interest income.
Pension income in 2019 was $6.2 million compared to $8.7 million in 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. Our effective income tax rates in 2019 and 2018 were lower than our adjusted effective income tax rate in 2017 due to lower 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
one-time
charges, our adjusted effective income tax rate was 27.4 percent in 2017. We estimate our annual effective income tax rate for the full year 2020 will be approximately 21.5 to 22.0 percent.
North America
Segment
Years ended December 31 (dollars in millions)20222021
Net Sales$2,819.1 $2,529.5 
Segment Earnings266.0 590.8 
Segment Margin9.4 %23.4 %
Sales in our North America segment were $2,084$2,819.1 million in 20192022, or $39$289.6 million higher than sales of $2,045$2,529.5 million in 2018.2021. The increaseincreased sales in segment sales was primarily due2022 compared to the incremental Water-Right sales of $44 million,prior year were primarily driven by the price increases implemented in 2021, largely on water heater pricing actions relatedheaters, in response to steelrising material and freight cost increases,other input costs and higher sales of water treatment products, which were partiallymore than offset by lower residential water heater volumes. Sales involumes and unfavorable currency translation impact of approximately $12 million. In addition, our North America segment were $2,045acquisition of Giant added $94.3 million in 2018 or $140 million higher than sales of $1,905 million in 2017. The increase inincremental sales in 2018 compared to 2017 was primarily due to pricing actions related to higher steel costs and higher volumes of boilers and residential water heaters in the U.S. North America water treatment sales, including a full year of sales from Hague, which we purchased in 2017, and the launch of products at Lowe’s commencing in August 2018, incrementally added approximately $29 million of sales in 2018.
2022.
North America segment earnings were $488.9$266.0 million in 20192022, a decrease of 55 percent compared to segment earnings of $464.1 million and $428.6$590.8 million in 2018 and 2017, respectively.2021. Segment margins were 23.5 percent, 22.79.4 percent and 22.523.4 percent in 2019, 20182022 and 2017,2021, respectively. AdjustedLower segment earnings and segment margin in 2018, which exclude restructuring and impairment expenses, were $470.8 million and 23.0 percent, respectively. The higher segment earnings and segment margin in 2019 compared to 2018 adjusted segment earnings and adjusted segment margin2022 were primarily a resultdue to the Plan settlement expense 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$346.8 million, lower residential water heater volumes. Thevolumes, higher adjustedmaterial costs, and production inefficiencies, partially offset by price increases and the $11.5 million patent infringement judgment referenced above. Adjusted segment earnings and adjusted segment margin in 2018 compared to 20172022 were primarily due to the favorable impact from higher sales of residential water heaters$611.0 million and boilers21.7 percent, respectively. Adjusted segment earnings and pricing actionsadjusted segment margin in the U.S. that2021 were partially offset by higher steel costs$580.3 million and
one-time
expenses associated with the launch of water treatment products at Lowe’s. 22.9 percent, respectively. We estimate our 20202023 North America segment margin will be between 23.25approximately 23 percent.
Adjusted segment earnings and 24.25 percent.adjusted segment margin in 2022 exclude the pension settlement expense of $346.8 million, pension expense of $9.7 million and the recognition of the $11.5 million patent infringement judgment. Adjusted segment earnings and adjusted segment margin in 2021 exclude pension income of $10.5 million.
Rest of World
Segment
Sales in our
Years ended December 31 (dollars in millions)20222021
Net Sales$965.8 $1,036.5 
Segment Earnings96.3 91.4 
Segment Margin10.0 %8.8 %
Rest of World segment in 2019 were $936 million or $238 million lower than sales of $1,174$965.8 million in 2018. Lowerdecreased seven percent year-over-year, including an unfavorable currency translation impact of approximately $49 million, of which $36 million related to sales in 2019 comparedChina. In local currency, segment sales decreased by approximately two percent year-over-year. The decrease in sales in 2022 was primarily driven by lower consumer demand in China due to 2018 was largely a result of decreased China sales which declined 23 percentCOVID-19-related disruptions and lockdowns. Sales in U.S. dollar terms and 19India increased 28 percent in local currency terms. The decline in China sales was primarily2022 due to weaker
end-market
strong 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
17
Table of Contents
unfavorably impacted translated sales by approximately $39 million. Sales in India grew approximately 13 percent in 2019 compared to 2018. Sales in China grew four percent in 2018 compared to 2017 primarily due to higher sales ofour water treatment products, including consumables, which were partially offset by lower sales of electric water heaters and air purifiers. The appreciation of the Chinese currency against the U.S. dollar contributed approximately $23 million to segment sales in 2018. Excluding the benefit of the Chinese currency appreciation, sales in China increased 1.9 percent in 2018. Water heater and water treatment sales in India increased $8 million, over 30 percent, in 2018 compared to 2017.
products.
Rest of World segment earnings were $40.2$96.3 million in 20192022 compared to segment earnings of $149.3$91.4 million in both 2018 and 2017.2021. Segment margins were 4.310.0 percent and 8.8 percent in 2019 compared2022 and 2021, respectively. Compared to 12.7 percent and 13.4 percent in 2018 and 2017, respectively. The decline in 20192021, higher segment earnings and margin were primarily driven by lower engineering, advertising, and selling expenses in China. We expect the full-year segment margin to be approximately 10 percent in 2023.
20
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $699.5 million at December 31, 2022 compared with $633.8 million at December 31, 2021. A majority of the increase in working capital was driven by lower accounts payable and payroll-related accruals and higher inventory balances than at December 31, 2021, due to 2018higher levels of safety stock which were partially offset by lower accounts receivable, and cash balances. In addition, cash balances as of December 31, 2022 were negatively impacted by $20.8 million due to the effects of changes in foreign currency during the year. In 2022, we repatriated approximately $120 million of cash from our foreign subsidiaries to the U.S. We used the proceeds to pay down outstanding debt balances.
Years ended December 31 (dollars in millions)20222021
Cash provided by operating activities$391.4 $641.1 
Cash provided by (used in) investing activities8.1 (349.9)
Cash used in financing activities(430.8)(421.0)
Cash provided by operating activities in 2022 was $391.4 million compared with $641.1 million during 2021. The decrease in operating cash flows in 2022 was primarily due to lower salescustomer deposits in China, higher 2021-related incentive payments made in 2022 and aadditional working capital cash outlays primarily related to higher mix of
mid-price
products, which have lower margins,cost inventories that when combined, more than offset benefitslower accounts receivable balances. Our free cash flow in 2022 and 2021 was $321.1 million and $566.0 million, respectively. We expect free cash flow to profits from lower SG&A expenses and material costs in that region. Currency translation reduced segment earnings by approximately $3.0be between $550 million to $600 million in 2019 compared to 2018. Segment earnings2023. Free cash flow is a non-GAAP measure and is described 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 as well as higher SG&A expenses. Higher SG&A expenses in China were primarily due to higher advertising expenses related to brand building and higher product development engineering expenses. Segment margin declined in 2018 compared to 2017 as a result of the factors above.    We expect our 2020 Rest of World segment margin will be approximately five percent.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $733.9 million at December 31, 2019 compared with $853.2 million and $973.1 million at December 31, 2018 and December 31, 2017, respectively. Approximately $165 million in foreign 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 explains the majority of the decline in working capital in 2018. As of December 31, 2019, essentially all of our $551.4 million of cash, cash equivalents and marketable securities was held by our foreign subsidiaries. We expect to repatriate approximately $150 milliondetail in the first half of 2020 and use the proceeds to repay floating rate debt.Non-GAAP Measures section below.
Cash provided by operating activities during 2019 was $456.2 million compared with $448.9 million during 2018 and $326.4 million during 2017. The increase in cash flows in 2019 compared with 2018 was primarily due to lower outlays for working capital which offset lower earnings in 2019. The increase in cash flows in 2018 compared to 2017 was primarily due to higher earnings and lower outlays for working capital in 2018.
Our capital expenditures were $64.4$70.3 million in 2019, $85.22022 and $75.1 million in 2018 and $94.2 million in 2017.2021. 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 2018project our 2023 capital expenditures were approximately $13will be between $70 and $75 million related to capacity expansion in China. Included in 2017 capital expenditures were approximately $24 million related to capacity expansion in China. For 2020, we project approximately $80 million of capital expenditures and approximately $85 million ofexpect depreciation and amortization expense.will be approximately $70 million.
In December 2016,2021, we completed arenewed and amended our $500 million multi-currency five-year revolving credit facility, which now expires on April 1, 2026. The renewed and amended facility, with a group of nine banks. The facilitybanks, has an accordion provision whichthat allows it to be increased up to $700$850 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, 2019. 2022, and expect to be in compliance for the foreseeable future.
The facility backs up commercial paper and credit line borrowings, and it expires onborrowings. At December 15, 2021. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings as well as drawings31, 2022, we had $208 million outstanding under the facility are classified as long-term debt.
At December 31, 2019, we hadand an available borrowing capacity of $336.0 million under this facility.$292 million. We believe that ourthe combination of cash, available borrowing capacity and operating cash flowflows will provide sufficient funds to finance our existing operations for the foreseeable future.
Our total debt increased by $150.6 million in 2022 and was primarily due to $284.0 million at December 31, 2019 compared with $221.4 million at December 31, 2018. We repatriated approximately $150 million cash and paid down debt, which was more than offset by the purchaserepurchases of Water-Right and share repurchase activity exceeding cash generation in the U.S. As a result, our common stock. Our leverage, as measured by the ratio of total debt to total capitalization, was 14.616.5 percent at the end of 2019December 31, 2022, compared with 11.49.7 percent at the end of 2018.
December 31, 2021.
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Our remaining 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 2019.2022. We forecast that we will not be required to make a contribution to the plan in 2020,2023, and we do not plan to make any voluntary contributions in 2020.2023. For further information on our pension plans, see the Critical Accounting Policies below and Note 13, “Pension and Other Post-retirement Benefits” of Notes to the Consolidated Financial Statements.
In 2019,2022, our Board of Directors approved adding 3,500,000 shares of common stock to our existing discretionary share repurchase authority. Under our share repurchase program, we may purchase our common stock through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. 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. During 2022, we repurchased 6,113,0386,647,895 shares at an average price of $47.06 per share andour stock at a total cost of $287.7$403.5 million. OurAs of December 31, 2022, we had 378,462 shares remaining on the share repurchase authority. On January 27, 2023, the Board of Directors increasedapproved adding 7,500,000 shares of common stock to the number ofexisting discretionary share repurchase authority. Including the additional shares, we are authorizedhave approximately 7.6 million shares available for repurchase as of the date of the Board of Directors' approval. We intend to repurchase by 3,000,000 shares at its June 2019 meeting. A total of 2,962,215 shares remained on the existing repurchase authorization at December 31, 2019. Depending on factors such as stock price, working capital requirements and alternative investment opportunities, such as acquisitions, we expect to spend approximately $200 million on share repurchase activityof our common stock in 2020 using2023 through a combination of a
10b5-1
repurchase plan plans and opportunisticopen-market purchases.

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We paid dividends of $1.14 per share in 2022 compared with $1.06 per share in 2021. We increased our dividend by seven percent in the fourth quarter of 2022, and the five-year compound annual growth rate of our dividend payment is approximately 15 percent. We have paid dividends for 8083 consecutive years with annual amounts increasing each of the last 2831 years. We paid dividends of $0.90 per share in 2019 compared with $0.76 per share in 2018. We increased our dividend by nine percent in the fourth quarter of 2019, and the five-year compound annual growth rate of our dividend is approximately 25 percent.
Aggregate Contractual Obligations
A summary of our contractual obligations as of December 31, 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
 $
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, 2019, our liability for uncertain income tax positions was $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, “Organization and Significant Accounting Policies” of Notes to the Consolidated Financial Statements.
Critical Accounting Policies
Our accounting policies are described in Note 1, “Organization and Significant Accounting Policies” of Notes to the 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),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 an 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 a thorough and competent annual valuationsquantitative analysis of goodwill and indefinite-lived intangible assets and thatassets. Based on the annual goodwill impairment test, we determined there has beenwas no impairment of our goodwill as of December 31, 2022. The fair value of each of our reporting units significantly exceeded its carrying value and a 20% decrease in goodwill orthe estimated fair value of our reporting units would not have resulted in a different conclusion. Based on the annual indefinite-lived assets in 2019.impairment test, we determined there was no impairment of our indefinite-lived assets as of December 31, 2022.
Product warrantyWarranty
Our products carry warranties that generally range from one to ten12 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, 20192022 and 2018,2021, our reserve for product warranties was $134.3$182.5 million and $139.4$184.4 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 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, 2019 and 2018, our reserve for product liability was $33.1 million and $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.
22
Our assumption for the expected return on plan assets was 7.153.12 and 6.25 percent in 20192022 and 2018.2021, respectively. The discount rate used to determine net periodic pension costs increased to 4.322.80 percent in 20192022 from 3.652.47 percent in 2018.2021. For 2020,2023, our expected return on plan assets is 6.755.25 percent and our discount rate is 3.185.13 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 equitybonds managers is approximately 30between 60 to 6095 percent with the remainder allocated primarily to bond managers,equities, private equity managers and real estate managers.cash. Our actual asset allocation as of December 31, 2019,2022, was 42eight percent to equity managers, 4727 percent to bond managers, 10 percent to real estate managers, and onefive percent to private equity managers.managers, and the remainder allocated to cash. 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 9.27.1 percent and 9.36.9 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 6.755.25 percent expected return on plan assets for 20202023 is reasonable.
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The discount rate assumptions used to determine future pension obligations at December 31, 20192022 and 20182021 were based on the Aon AA Only Above Median yield curve, which was designed by Aon 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, respectively.
Costs associated with our replacement retirement plan in 2019 were approximately $6 million, consistent with 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. Lowering the expected return on plan assets by 25 basis points would decreaseincrease our net pension incomeexpense for 20192022 by approximately $1.9$1.8 million. Lowering the discount rate by 25 basis points would increasedecrease our 20192022 net pension incomeexpense by approximately $0.4$0.8 million.
In 2019, as part2021, our Board of our strategy to
de-risk
Directors approved the termination of our defined benefit pension plan the qualified defined benefit(the Plan) with a termination date of December 31, 2021. The Plan represented over 95 percent of our pension plan purchasedliability. In the second quarter of 2022, we received a group annuity contract wherebydetermination letter from the IRS that allowed us to proceed with the termination process. In the fourth quarter of 2022, we settled approximately $169 million of Plan liabilities through lump-sum payments from existing plan assets to eligible participants who elected to receive them and settled approximately $463 million of Plan liabilities by entering into an unrelated insurance company assumed a $31 million obligationagreement to paypurchase annuities from Mass Mutual Life Insurance Company (MML). The irrevocable agreement with MML covers approximately 7,000 active and administerformer employees and their beneficiaries, with MML assuming the future annuity payments for certain retirees and beneficiaries.these individuals commencing March 1, 2023. These settlements resulted in approximately $417.3 million of pretax expense in 2022, partially offset by approximately $167.7 million in related tax benefits.

23
Non-GAAP
Measures
We provide
non-GAAP
are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, adjusted segment earnings per share (EPS) and adjusted segment earnings)corporate expense) that exclude restructuring and impairment expenses in 2018 and the impact of a
one-time
chargepension settlement expense as well as legal judgment income, expenses associated with U.S. Tax Reform in 2017.a terminated acquisition and non-operating pension income and expenses. Reconciliations from GAAP measures to non-GAAP measures are provided below.
We believe that the measures of adjusted earnings, adjusted EPS, and adjusted segment earnings and adjusted corporate expense 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 that we do not consider to be a component of our core operating performance.performance or recurring in nature.
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A. O. SMITH CORPORATION
Adjusted Earnings and Adjusted EPSEarnings Per Share
(dollars in millions, except per share data)
(unaudited)
The following is a reconciliation of net earnings and diluted EPS to adjusted earnings (non-GAAP) and adjusted EPS (non-GAAP):
Twelve Months Ended
December 31,
 20222021
Net Earnings (GAAP)$235.7 $487.1 
Pension settlement expense, before tax417.3 — 
Pension expense (income), before tax11.7 (13.1)
Legal judgment income, before tax(11.5)— 
Terminated acquisition-related expenses, before tax4.3 — 
Tax effect on above items(168.8)3.3 
Adjusted Earnings (non-GAAP)$488.7 $477.3 
Diluted Earnings Per Share (GAAP)(1)
$1.51 $3.02 
Pension settlement expense per diluted share, before tax2.68 — 
Pension expense (income) per diluted share, before tax0.08 (0.08)
Legal judgment income per diluted share, before tax(0.07)— 
Terminated acquisition-related expenses per diluted share, before tax0.03 — 
Tax effect on above items per diluted share(1.09)0.02 
Adjusted Earnings Per Share (non-GAAP)(1)
$3.14 $2.96 
(1)Earnings per share (EPS)amounts are calculated discretely and, therefore, may not add up to adjusted earningsthe total due to rounding.
(non-GAAP)
and adjusted EPS
(non-GAAP):
24
             
 
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
 
             
A. O. SMITH CORPORATION
Adjusted Segment Earnings
(dollars in millions)
(unaudited)
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
 
             
Twelve Months Ended
December 31,
 20222021
Segment Earnings (GAAP)
North America$266.0 $590.8 
Rest of World96.3 91.4 
Inter-segment earnings elimination(0.3)(0.2)
Total Segment Earnings (GAAP)$362.0 $682.0 
Adjustments:
North America$345.0 $(10.5)
Rest of World— — 
Inter-segment earnings elimination— — 
Total Adjustments$345.0 $(10.5)
Adjusted Segment Earnings (non-GAAP)
North America$611.0 $580.3 
Rest of World96.3 91.4 
Inter-segment earnings elimination(0.3)(0.2)
Total Adjusted Segment Earnings (non-GAAP)$707.0 $671.5 
Additional Information
Adjustments: North America Segment
Pension settlement expense, before tax$346.8 $— 
Pension expense (income), before tax9.7 (10.5)
Legal judgment income, before tax(11.5)— 
Total Adjustments$345.0 $(10.5)
A. O. SMITH CORPORATION
Adjusted Corporate Expense
(dollars in millions)
(unaudited)
The following is a reconciliation of reported Corporate Expense to adjusted Corporate Expense (non-GAAP):
(1)We recognized $6.7 million of restructuring and impairment expenses in connection with the move of manufacturing operations from our Renton, Washington facility to other U.S. facilities. For additional information, see Note 5 of Notes to Consolidated Financial Statements.
Twelve Months Ended
December 31,
 20222021
Corporate Expense (GAAP)$(128.9)$(52.1)
Adjustments:
Pension settlement expense, before tax70.5 — 
Corporate pension expense (income)2.0 (2.6)
Terminated acquisition-related expenses4.3 — 
Corporate Expense (non-GAAP)$(52.1)$(54.7)

(2)Excluding the impact of
one-time
U.S. Tax Reform 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.

Outlook25
WeA. O. SMITH CORPORATION
Free Cash Flow
(dollars in millions)
(unaudited)

The following is a reconciliation of reported cash flow from operating activities to free cash flow (non-GAAP):

Twelve Months Ended,
December 31,
20222021
Cash provided by operating activities (GAAP)$391.4 $641.1 
Less: Capital expenditures(70.3)(75.1)
Free cash flow (non-GAAP)$321.1 $566.0 
A. O. SMITH CORPORATION
2023 EPS Guidance and 2022 Adjusted EPS
(unaudited)

The following is a reconciliation of diluted EPS to adjusted EPS (non-GAAP) (all items are net of tax):

2023 Guidance2022
Diluted EPS (GAAP)$ 3.15-3.45$1.51 
Pension settlement expense— 1.60 (1)
Pension expense— 0.06 (2)
Legal judgment income— (0.05)
Terminated acquisition-related expenses— 0.02 
Adjusted EPS (non-GAAP)$ 3.15-3.45$3.14 
(1) Includes pre-tax pension settlement expense of $346.8 million and $70.5 million, within the North America segment and Corporate expenses, respectively.
(2) Includes pre-tax pension expense of $9.7 million and $2.0 million, within the North America segment and Corporate expenses, respectively.
Outlook
As we begin 2023, we expect higherour consolidated sales to be flat to 2022 with a range of plus or minus three percent. Our sales projection is driven by expected lower industry residential unit volumes in North America and offset by anticipated increased boiler water heater, and water treatment sales in North America in 2020 and project segment sales to grow by approximately six percent compared to 2019. Although China channel inventory levels have normalized to the range of two to three months, we believe the Chinese economy will remain weak in 2020 and expect that 2020higher sales in China will increase by one percent in U.S. dollar terms and 2.5 percent in local currency terms. As a result, weChina. We expect our consolidated sales to grow between 4.5 to 5.5 percent in 2020. We plan to achieve full-year earnings of between $2.40$3.15 and $2.50$3.45 per share, whichshare. Our guidance excludes the potential impacts from potential future acquisitions. Our 2020 guidance above which was introduced on January 28, 2020, excludesacquisitions and assumes the potentialCOVID-19-related impacts in China improve in the second half of the year and do not have a significant impact on our businesses fromproductivity or significantly impact the coronavirus originating in China. As of the date of this filing, while not yet quantifiable,end markets that we now expect the effects of the coronavirus to 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 the year.
22
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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 companyCompany or third parties. We have expended financial and managerial resources complying with such laws. Expenditures related to environmental matters were not material in 20192022 and we do not expect them to be material in any single year. We have reserves 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.
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Risk Management
We evaluate risk to our business in a number of ways, primarily through our Enterprise Risk Management (ERM) process, which we conduct enterprise-wise on a periodic basis, and seeks to identify and address significant and material risks. Our ERM process assesses, manages, and monitors risks consistent with the integrated risk framework in the Enterprise Risk Management-Integrated Framework (2017) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We believe that risk-taking is an inherent aspect of the pursuit of our strategy. Our goal is to manage risks prudently rather than avoid risks. We can mitigate risks and their impact on our company only to a limited extent.
A team of senior executives prioritizes identified risks, including decarbonization, new technologies and cyber threats among others, and assigns an executive to address each major identified risk area and lead action plans to manage risks. Our Board of Directors provides oversight of the ERM process and reviews significant identified risks. The Audit Committee of the Board of Directors also reviews significant financial risk exposures and the steps management has taken to monitor and manage them. Our other Board committees also play a role in risk management, as set forth in their respective charters.
Our goal is to proactively manage risks using a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareholder value. However, the risks set forth in Item 1A - Risk Factors and elsewhere in this Annual Report on Form 10-K and other risks and uncertainties could adversely affect us and cause our results to vary materially from recent results or from our anticipated future results.
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.exposures. We do not engage in speculation in our derivatives strategies. Further discussion regarding derivative instruments is contained in Note 1, “Organization and Significant Accounting Policies” of Notes to Consolidated Financial Statements.
We enter into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. At December 31, 2019,2022, we had net foreign currency contracts outstanding with notional values of $205.6$122.7 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 $20.6$12.3 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, 2019, we had $164.0 million in outstanding floating-rate debt with a weighted-average interest rate of 2.5 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 $0.4 million.
Forward-Looking Statements
This filing contains statements that the Company 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”, “outlook” or words of similar meaning. Forward-looking statements address uncertain matters and include any statements that: are not historical, such as statements about our strategy, financial plans, outlook, objectives, plans, intentions or goals (including those related to our social, environmental and other sustainability goals); or address possible or future results of operations or financial performance, including statements relating to orders, revenues, operating margins and earnings per share growth. 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: further softening in U.S. residential water heater demand; negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company’s ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs; negative impacts to demand for the Company’s products, particularly commercial products, as a result of the severity and duration of the lingering effects of the COVID-19 pandemic; further weakening in U.S. residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; an uneven recovery 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 businessesCompany’s business in China as a result of the coronavirus, originating in China;future COVID-19 related disruptions there; negative impact to the company’sCompany's businesses from international tariffs, trade disputes and trade disputes;geopolitical differences, including the conflict in Ukraine; potential weakening in the high-efficiency boiler segment in the U.S.; significant volatilitysubstantial defaults in rawpayment by, material prices; inabilityreduction in purchases by or the loss, bankruptcy or insolvency of the company to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in the company’s replacement markets;a major customer; foreign currency fluctuations; the company’sCompany’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the company’sCompany’s businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency; 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 filing, and the companyCompany is
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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,Company, or persons acting on its behalf, are qualified entirely by these cautionary statements.
Forward-looking and other statements in this Form 10-K regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking social, environmental and sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. All forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Risk” above.
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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 42)
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, 20192022 and 2018,2021, 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, 2019,2022, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, 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, 2019,2022, 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 24, 202014, 2023 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 includeincluded 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.

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Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattersmatter 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 mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accountsaccount or disclosuresdisclosure to which they relate.it relates.
Product Warranty Liability Valuation
Description of the Matter

At December 31, 2019,2022, the Company’s product warranty liability was $134.3$182.5 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 tentwelve 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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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 and accuracy of the claims data against the Company’s claim log.data. 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.product and assessed the impact of projected changes in significant product costs. We also analyzed subsequentcurrent year 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 24, 2020
14, 2023
25
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CONSOLIDATED BALANCE SHEETS
December 31 (dollars in millions)
20222021
Assets
Current Assets
Cash and cash equivalents$391.2 $443.3 
Marketable securities90.6 188.1 
Receivables581.2 634.4 
Inventories516.4 447.7 
Other current assets54.3 39.1 
Total Current Assets1,633.7 1,752.6 
Net property, plant and equipment590.7 606.7 
Goodwill619.7 627.8 
Other intangibles347.9 364.8 
Operating lease assets29.8 32.5 
Other assets110.5 90.0 
Total Assets$3,332.3 $3,474.4 
Liabilities
Current Liabilities
Trade payables$625.8 $745.9 
Accrued payroll and benefits75.7 113.4 
Accrued liabilities159.1 181.8 
Product warranties63.6 70.9 
Long-term debt due within one year10.0 6.8 
Total Current Liabilities934.2 1,118.8 
Long-term debt334.5 189.9 
Product warranties118.9 113.5 
Pension liabilities9.9 15.9 
Long-term operating lease liabilities22.4 22.3 
Other liabilities164.7 181.8 
Total Liabilities1,584.6 1,642.2 
Commitments and contingencies— — 
Stockholders’ Equity
Preferred Stock— — 
Class A Common Stock (shares issued 26,035,656 and 26,104,441 as of December 31, 2022 and 2021, respectively)130.2 130.5 
Common Stock (shares issued 164,671,938 and 164,603,153 as of December 31, 2022 and 2021, respectively)164.7 164.7 
Capital in excess of par value555.9 545.2 
Retained earnings2,885.0 2,826.6 
Accumulated other comprehensive loss(82.4)(331.4)
Treasury stock at cost(1,905.7)(1,503.4)
Total Stockholders’ Equity1,747.7 1,832.2 
Total Liabilities and Stockholders’ Equity$3,332.3 $3,474.4 
         
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.
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CONSOLIDATED STATEMENT OF EARNINGS
      
Years ended December 31 (dollars in millions, except per share amounts)
      Years ended December 31 (dollars in millions, except per share amounts)
 
2019
  
2018
  
2017
 202220212020
Net sales
 $
2,992.7
  $
3,187.9
  $
2,996.7
 Net sales$3,753.9 $3,538.9 $2,895.3 
Cost of products sold
  
1,812.0
   
1,882.4
   
1,764.3
 Cost of products sold2,424.3 2,228.0 1,787.1 
         
Gross profit
  
1,180.7
   
1,305.5
   
1,232.4
 Gross profit1,329.6 1,310.9 1,108.2 
Selling, general and administrative expenses
  
715.6
   
753.8
   
722.8
 Selling, general and administrative expenses670.9 701.4 660.3 
Restructuring and impairment expenses
  
—  
   
6.7
   
—  
 
Severance and restructuring expensesSeverance and restructuring expenses— — 7.7 
Interest expense
  
11.0
   
8.4
   
10.1
 Interest expense9.4 4.3 7.3 
Other income - net
  
(18.0
)  
(21.2
)  
(21.3
)
         
Other expense (income), netOther expense (income), net425.6 (20.4)(11.0)
Earnings before provision for income taxes
  
472.1
   
557.8
   
520.8
 Earnings before provision for income taxes223.7 625.6 443.9 
Provision for income taxes
  
102.1
   
113.6
   
224.3
 
         
(Benefit from) provision for income taxes(Benefit from) provision for income taxes(12.0)138.5 99.0 
Net Earnings
 $
370.0
  $
444.2
  $
296.5
 Net Earnings$235.7 $487.1 $344.9 
         
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
 
         
Net Earnings Per Share of Common Stock (1)
Net Earnings Per Share of Common Stock (1)
$1.52 $3.05 $2.13 
Diluted Net Earnings Per Share of Common Stock (1)
Diluted Net Earnings Per Share of Common Stock (1)
$1.51 $3.02 $2.12 
(1)Earnings per share amounts are calculated discretely and, therefore, may not add up to the total due to rounding.
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
Years ended December 31 (dollars in millions)
202220212020
Net Earnings$235.7 $487.1 $344.9 
Other comprehensive earnings (loss)
Foreign currency translation adjustments(39.4)3.4 18.1 
Unrealized net gain on cash flow derivative instruments, less related income tax provision of $(1.4) in 2022, $— in 2021 and $(0.1) in 20204.3 — 0.4 
Change in pension liability less related income tax (provision) benefit of $(179.0) in 2022 $4.5 in 2021 and $(2.8) in 2020284.1 (13.6)8.6 
Comprehensive Earnings$484.7 $476.9 $372.0 
             
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.
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CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in millions)
202220212020
Operating Activities
Net earnings$235.7 $487.1 $344.9 
Adjustments to reconcile earnings to cash provided by (used in) operating activities:
Depreciation and amortization76.9 77.9 80.0 
Stock based compensation expense11.1 11.9 12.7 
Pension settlement expense417.3 — — 
Pension settlement non-cash taxes(167.7)— — 
Net changes in operating assets and liabilities, net of acquisitions:
Current assets and liabilities(194.1)90.8 130.4 
Noncurrent assets and liabilities12.2 (26.6)(5.9)
Cash Provided by Operating Activities391.4 641.1 562.1 
Investing Activities
Acquisitions of businesses(8.0)(207.6)— 
Investments in marketable securities(91.6)(185.4)(157.4)
Proceeds from sales of marketable securities178.0 118.2 226.0 
Capital expenditures(70.3)(75.1)(56.8)
Cash Provided by (Used in) Investing Activities8.1 (349.9)11.8 
Financing Activities
Long-term debt incurred (repaid)150.6 83.5 (170.8)
Common stock repurchases(403.5)(366.5)(56.7)
Net (payments) proceeds from stock option activity(0.7)32.1 11.4 
Dividends paid(177.2)(170.1)(158.7)
Cash Used in Financing Activities(430.8)(421.0)(374.8)
Effect of exchange rate changes on cash and cash equivalents(20.8)— — 
Net (decrease) increase in cash and cash equivalents(52.1)(129.8)199.1 
Cash and cash equivalents-beginning of year443.3 573.1 374.0 
Cash and Cash Equivalents-End of Year$391.2 $443.3 $573.1 
             
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.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Years ended December 31 (dollars in millions)
202220212020
Class A Common Stock
Balance at the beginning of the year$130.5 $130.8 $130.9 
Conversion of Class A Common Stock(0.3)(0.3)(0.1)
Balance at the end of the year$130.2 $130.5 $130.8 
Common Stock
Balance at the beginning of the year$164.7 $164.6 $164.5 
Conversion of Class A Common Stock— 0.1 0.1 
Balance at the end of the year$164.7 $164.7 $164.6 
Capital in Excess of Par Value
Balance at the beginning of the year$545.2 $520.4 $509.0 
Conversion of Class A Common Stock0.3 0.3 0.1 
Issuance of share units(6.0)(5.6)(6.7)
Vesting of share units(3.0)(2.2)(1.8)
Stock based compensation expense11.1 10.3 12.4 
Exercises of stock options1.3 15.4 0.1 
Stock incentives7.0 6.6 7.3 
Balance at the end of the year$555.9 $545.2 $520.4 
Retained Earnings
Balance at the beginning of the year$2,826.6 $2,509.6 $2,323.4 
Net earnings235.7 487.1 344.9 
Dividends on stock(177.3)(170.1)(158.7)
Balance at the end of the year$2,885.0 $2,826.6 $2,509.6 
Accumulated Other Comprehensive Loss
Balance at the beginning of the year$(331.4)$(321.2)$(348.3)
Foreign currency translation adjustments(39.4)3.4 18.1 
Unrealized net gain on cash flow derivative instruments, less related income tax provision of $(1.4) in 2022 $— in 2021 and $(0.1) in 20204.3 — 0.4 
Change in pension liability less related income tax (provision) benefit of $(179.0) in 2022, $4.5 in 2021 and $(2.8) in 2020284.1 (13.6)8.6 
Balance at the end of the year$(82.4)$(331.4)$(321.2)
Treasury Stock
Balance at the beginning of the year$(1,503.4)$(1,155.9)$(1,112.7)
Exercise of stock options, net of 47,309, 34,679 and 35,467 shares surrendered as proceeds and to pay taxes in 2022, 2021 and 2020, respectively(2.1)16.5 11.3 
Stock incentives and directors’ compensation0.3 0.3 0.4 
Shares repurchased(403.5)(366.5)(56.7)
Vesting of share units3.0 2.2 1.8 
Balance at the end of the year$(1,905.7)$(1,503.4)$(1,155.9)
Total Stockholders’ Equity$1,747.7 $1,832.2 $1,848.3 
             
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.
2933
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization.
A. O. Smith Corporation (A. O. Smith or the Company) is comprised of 2two 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.
Consolidation.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany transactions.
Use of estimates
.
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, 20192022 and 2018,2021, due to the short maturities or frequent rate resets of these instruments. The fair value of term notes with insurance companies included in Long-term debt within the consolidated balance sheets was approximately
 $
122.1
 $120.2 million as of December 31, 20192022 compared with the carrying
amount of
$
120.0
$136.5 million
for the same date. The fair value of term notes with insurance companies was approximately $120.0$128.4 million as of December 31, 2018 which approximated2021 compared with the carrying value.
amount of $145.9 million.
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, Hong Kong, Mexican and non-operating Netherlands 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 2019, 2018,2022, 2021, or 2017.2020.
Cash and cash equivalents
.
equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Marketable securities
.
securities. The Company considers all highly liquid investments with maturities greater than 90 days when purchased to be marketable securities. At December 31, 2019,2022, 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.China and Hong Kong.
Inventory valuation.
Inventories are carried at lower of cost andor 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 6136 percent and 6437 percent of the Company’s total inventory at December 31, 20192022 and 2018,2021, 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.
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 five to 25 years.
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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 involveinvolves significant judgment.
Product warranties.
The Company’s products carry warranties that generally range from one to tentwelve 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
34
Table of Contents
1. Organization and Significant Accounting Policies (continued)
at the time of 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 20192022 and 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
 
         
2021:
Years ended December 31 (dollars in millions)20222021
Balance at beginning of year$184.4 $142.3 
Expense64.2 81.2 
Claims settled(66.1)(51.3)
Acquired obligations— 12.2 
Balance at end of year$182.5 $184.4 
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 (AOCL), depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 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) 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 (liabilities) measured at fair value on a recurring basis are as follows (dollars in millions):
Fair Value Measurement UsingBalance Sheet LocationDecember 31, 2022December 31, 2021
Quoted prices in active markets for identical assets (Level 1)Marketable Securities$90.6 $188.1 
Significant other observable inputs (Level 2)Other current assets / Accrued liabilities6.5 (0.7)
         
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.
31
Table of Contents
1. Organization and Significant Accounting Policies (continued)
Revenue recognition.
Substantially all of the Company’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders are used to 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. See Note
2,
, “Revenue Recognition” for disclosure of the Company’s revenue recognition activities. 
Advertising.
The majority of advertising costs are charged to operations as incurred and amounted to $110.7totaled $100.4 million, $132.1$107.0 million and $126.9$97.0 million during 2019, 20182022, 2021 and 2017,2020, respectively. Included in total advertising costs are expenses associated with store displays for water heater, water treatment products, range hood and air purification productscook tops in China that are amortized over 12 to 3648 months which totaled $28.5$17.2 million, $38.7$25.2 million and $43.0$27.0 million during 2019, 20182022, 2021 and 2017,2020, respectively.
35
Table of Contents
1. Organization and Significant Accounting Policies (continued)
Research and development.
Research and development costs are charged to operations as incurred and amounted to $87.9$89.0 million, $94.0$94.2 million and $86.4$80.7 million during 2019, 20182022, 2021 and 2017,2020, 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. In accordance with amended ASC 718, the Company recognized $2.3$1.1 million, $2.4$5.6 million, and $11.6$4.2 million of discrete income tax benefits on settled stock based compensation awards during 2019, 2018,2022, 2021, and 20172020 respectively.
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.
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:
             
 
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
 
             
202220212020
Denominator for basic earnings per share - weighted-average shares outstanding154,786,327 159,906,834 161,530,589 
Effect of dilutive stock options, restricted stock and share units993,037 1,413,068 1,073,560 
Denominator for diluted earnings per share155,779,364 161,319,902 162,604,149 
32
Table of Contents
1. Organization and Significant Accounting Policies (continued)
Recent Accounting Pronouncements
Pronouncements.
In December 2019,November 2021, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) 740,
Income Taxes
(issuedASC 832, Government Assistance (issued under Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes”2021-10, “Disclosures by Business Entities about Government Assistance”). This amendment removes certain exceptionsrequires disclosures that are expected to increase the general principlestransparency of ASC 740,transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and clarifies and amends existing guidance to improve consistent application.(3) the effect of those transactions on an entity’s financial statements. The Company adopted the amendment requires adoption on January 1, 2021, with early adoption permitted. The Company is currently evaluating the impact ASU 2019-12 will have on its consolidated financial statements.
In January 2017, the FASB amended ASC 350,
Intangibles – Goodwill2022, and Other
(issued under ASU
2017-04,
“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 2021-10 did not impact on its annual disclosures, consolidated balance sheets, statements of earnings or statements of cash flows.
In June 2016, the FASB issued ASC 326,
 Financial Instruments – Credit Losses
(issued under ASU
2016-13)
which modifies the measurement of expected credit losses on certain financial instruments. ASU
2016-13
requires adoption on January 1, 2020. The adoption of ASU
2016-13
will not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
In February 2016, the FASB amended ASC 842,
Leases
(issued under ASU
2016-02).
This amendment requires the recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements classified as operating leases. The Company applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019, as the date of the initial application. The Company elected the package of practical expedients as well as a separate practical expedient not to separate lease and
non-lease
components. The Company did not elect the hindsight practical expedient. The adoption of ASU
2016-02
did not have a material impact on the Company’s consolidated balance sheets, statements of earnings or statements of cash flows. Refer to Note 4, Leases, for additional information.
2. Revenue Recognition
Substantially all of the Company’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders are used to 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 measures 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 the transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.
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Table of Contents
2. Revenue Recognition (continued)
Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $49.6$85.7 million and $47.0$155.2 million at December 31, 20192022 and December 31, 2018,2021, respectively. Customer deposit liabilities are short term in nature, recognized into revenue within one year of receipt. The Company assesses the 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. In determining the allowance for credit losses, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for doubtful accountscredit losses was $6.7 million and $6.4$9.5 million at both December 31, 20192022 and December 31, 2018, respectively.2021.
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 2two 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, heat pump 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 channelchannels regardless of product type. In addition, the impact of economic factors is unlikely to be differentiated by product line in the Rest of World segment.
The North America segmentsegment's 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 sells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than 1,3001,000 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 Company’s water heater sales in the North America segment is derived from the replacement of existing products.
Boilers
The Company’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 manufacturer representative firms, with the remainder of ourits boilers distributed through wholesale channels. The Company’s boiler sales in the North America segment are derived from a 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 wholesaleretail and retailwholesale 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 internete-commerce sales channels. A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.
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Table of Contents
2. Revenue Recognition (continued)
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.
Years ended December 31 (dollars in millions)202220212020
North America
Water heaters and related parts(1)
$2,325.1 $2,115.9 $1,753.9 
Boilers and related parts272.0 212.1 187.2 
Water treatment products222.0 201.5 177.2 
Total North America2,819.1 2,529.5 2,118.3 
Rest of World
China$839.1 $922.4 $701.0 
All other Rest of World126.7 114.1 99.3 
Total Rest of World965.8 1,036.5 800.3 
Inter-segment sales(31.0)(27.1)(23.3)
Total Net Sales$3,753.9 $3,538.9 $2,895.3 
(1)Includes the results of Giant Factories, Inc. (Giant) from October 19, 2021, the date of acquisition.
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
 
             
(1)Includes 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,October 19, 2021, the Company acquired 100 percent of the shares and related assets of Water-Right, Inc.Giant, a Canada-based manufacturer of residential and its affiliated entities (Water-Right), a Wisconsin-basedcommercial 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 segmentheaters for reporting purposes.
The Company paid an aggregate cash purchase price of $107.0$198.6 million, net of cash acquired. In addition,The Company paid $2.5 million of the purchase price in the second quarter of 2022 as a result of final working capital adjustments. The Company established a $4.0incurred acquisition costs of approximately $1.3 million in 2021.
Under the Giant purchase agreement, approximately $8 million of the purchase price was set aside as an escrow to satisfy any potential obligations of the former owners of Water-Right,Giant, 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 inexpects to pay out the processescrow during the second quarter of finalizing the fair value estimates; therefore, the2023. The allocation of the purchase price is subject to refinement.
Significant assumptions usedgoodwill decreased by $4.3 million in 2022 due to estimate the fair valuenet impact 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 subjecta measurement period adjustment, primarily related 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 incurredincome tax matters, partially offset by the Company resulting from the acquisition.
35
Table of Contents
3. Acquisitions (continued)
On September 5, 2017, the Company acquired
100
 percent of the shares of Hague, an Ohio-based water softener company. With thefinal working capital adjustment. The addition of Hague,Giant increased the Company grew itsCompany's North America water treatment platform. Haguemarket penetration, created additional capacity and enhanced the Company's distribution capabilities. Giant is included in the Company’s North America segment for reporting purposes.segment.
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. 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, the Company estimated the fair value of the holdback liability and additional contingent consideration at $1.5 million and $2.0 million, 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 allocatingacquisition. Of the purchase price.
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 $12.8$53.8 million of acquired identifiable intangible assets, $43.9 million was comprised of $1.1 million of trade namesassigned to trademarks that are not subject to amortization and $11.7$9.2 million was assigned to customer relationships which are amortized over 22 years, and the remaining $0.7 million was assigned to non-compete agreements which are amortized over five years. The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill.
The following table summarizes the estimated fair values of Giant's assets acquired and liabilities assumed at the date of acquisition:
October 19, 2021 (dollars in millions)
Current assets, net of cash acquired$60.1 
Property, plant and equipment55.8 
Intangible assets53.8 
Goodwill77.6 
Total assets acquired247.3 
Current liabilities(39.2)
Long Term liabilities(9.5)
Net assets acquired$198.6 
38
Table of Contents
3. Acquisitions (continued)
During the second quarter of 2022, the Company acquired a privately-held water treatment company. The Company paid an aggregate cash purchase price of $5.5 million, net of cash acquired. The addition of the company acquired expands the Company's water treatment platform and is included in the North America segment for reporting purposes.
During the third quarter of 2022, the Company incurred $4.3 million of customer lists being amortized over 18 years.expenses and related income tax benefit of $1.1 million associated with a terminated acquisition. These expenses were related to the due diligence of a prospective acquisition target and recorded within selling, general and administrative expenses in the consolidated statement of earnings.
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
 
     
As required under ASC 805 Business Combinations, results of operations have been included in the Company’s consolidated financial statements from the date of their acquisition.
4. Leases
The Company’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 Company’s incremental borrowing rate.rate as of the inception of the lease. The incremental borrowing rate is the rate of 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 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 lease term from one to five years and options to terminate can be effective within one year. The exercise of lease 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 lease agreements do not contain any material residual value guarantees or material restrictive covenants or material subleases. Cash flows associated with leases are materially consistent with the expense recorded in the condensed consolidated statement of earnings.

36
Table of Contents
4. Leases (continued)
Supplemental balance sheet information related to leases is as follows:
(dollars in millions)December 31, 2022December 31, 2021
Liabilities
Short term: Accrued liabilities$9.9 $11.7 
Long term: Operating lease liabilities22.4 22.3 
Total operating lease liabilities$32.3 $34.0 
Less: Rent incentives and deferrals(2.5)(1.5)
Assets
Operating lease assets$29.8 $32.5 
     
(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
2022
Weighted-average remaining lease term
106.4 years
Weighted-average discount rate
3.93%
3.21%
39
Table of Contents
4. Leases (continued)
The components of lease expense were as follows:
    
(dollars in millions)
   (dollars in millions)
Lease Expense(1)
 
Classification
 
Twelve months ended
December 31, 2019
 ClassificationYear ended December 31, 2022Year ended December 31, 2021
Operating lease expense
(1)
 
Cost of products sold
 $
3.0
 Cost of products sold$4.3 $3.6 
 
Selling, general and administrative expenses
  
17.6
 Selling, general and administrative expenses15.8 16.8 
(1)(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 $23.9variable lease expenses of $3.1 million in 2018for the year ended December 31, 2022 and 2017short-term lease expense of $2.5 million and variable lease expenses of $2.3 million for the year ended December 31, 2021, 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
 
     
(dollars in millions)December 31, 2022
2023$10.6 
20247.9 
20255.3 
20263.2 
20271.7 
After 20277.5 
Total lease payments36.2 
Less: Imputed interest(3.9)
Present value of operating lease liabilities$32.3 
37
5. Severance and Restructuring Expenses
Table of Contents
5. Restructuring and Impairment Expenses
On March 21, 2018,During the year ended December 31, 2020, to align its business to market conditions, the Company announced a move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. The Company recognized $6.7$7.7 million of pre-tax severance and restructuring and impairmentexpenses. These expenses were comprised of $4.0$6.8 million ofin severance and compensation related costs, lease 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$1.4 million tax benefit and were completed in 2020. $2.7 million of the expense was related to the charges. AsNorth America segment and $5.0 million was related to the Rest of December 31, 2019, the consolidation of the Renton facility to other U.S. facilities was complete.
The following table presents an analysis of the Company’s restructuring reserve for the years ended December 31, 2019 and 2018:
                 
(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
 
                 
World segment.
6. Statement of Cash Flows
Supplemental cash flow information is as follows:
      
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
 Years ended December 31 (dollars in millions)202220212020
Net change in current assets and liabilities, net of acquisitions:
         Net change in current assets and liabilities, net of acquisitions:
Receivables
 $
62.4
  $
(54.6
) $
(75.8
)Receivables$42.5 $(25.5)$4.5 
Inventories
  
6.3
   
(7.7
)  
(37.5
)Inventories(82.8)(109.5)2.9 
Other current assets
  
(4.8
)  
10.0
   
(9.0
)Other current assets(9.1)4.9 4.7 
Trade payables
  
(35.4
)  
8.8
   
(5.1
)Trade payables(89.4)142.9 85.6 
Accrued liabilities, including payroll and benefits
  
14.2
   
(3.5
)  
12.2
 Accrued liabilities, including payroll and benefits(46.5)56.3 29.3 
Income taxes
  
(10.1
)  
7.0
   
(12.6
)Income taxes(8.8)21.7 3.4 
            $(194.1)$90.8 $130.4 
 $
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 of
$
(
0.7
)
In addition cash interest paid during the years ended December 31, 2022, 2021 and 2020 were $9.3 million, $(0.4)$4.2 million, and $(0.3)$7.6 million, in 2019, 2018respectively. Total cash and 2017,cash equivalents and marketable securities at December 31, 2022 and 2021 was $481.8 million and $631.4 million, respectively, of which $472.1 million and $608.0 million were held by the Company’s foreign subsidiaries, at December 31, 2022 and 2021, respectively.
38
40
Table of Contents
7. Inventories
The following table presents the components of the Company’s inventory balances:
December 31 (dollars in millions)20222021
Finished products$174.4 $190.2 
Work in process42.1 42.0 
Raw materials349.2 286.3 
Inventories, at FIFO cost565.7 518.5 
LIFO reserve(49.3)(70.8)
Inventories, at LIFO cost$516.4 $447.7 
8. Property, Plant and Equipment
    
December 31 (dollars in millions)
 
2019
  
2018
 December 31 (dollars in millions)20222021
Land
 $
11.6
  $
11.2
 Land$28.5 $22.9 
Buildings
  
334.1
   
323.3
 Buildings373.2 377.0 
Equipment
  
686.9
   
643.8
 Equipment822.5 805.8 
Software
  
124.3
   
118.5
 Software140.6 137.5 
      1,364.8 1,343.2 
  
1,156.9
   
1,096.8
 
Less accumulated depreciation and amortization
  
611.5
   
556.8
 
      
 $
545.4
  $
540.0
 
      
Accumulated depreciation and amortizationAccumulated depreciation and amortization(774.1)(736.5)
Net property, plant, and equipmentNet property, plant, and equipment$590.7 $606.7 
9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill during the years ended December 31, 20192022 and 20182021 consisted of the following:
(dollars in millions)North AmericaRest of WorldTotal
Balance at December 31, 2020$487.7 $59.1 $546.8 
Currency translation adjustment(1.3)(0.2)(1.5)
Acquisitions82.5 — 82.5 
Balance at December 31, 2021568.9 58.9 627.8 
Currency translation adjustment(7.8)(0.3)(8.1)
Balance at December 31, 2022$561.1 $58.6 $619.7 
             
(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:
                         
 
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
 
                         
20222021
December 31 (dollars in millions)Gross
Carrying
Amount		Accumulated
Amortization		NetGross
Carrying
Amount		Accumulated
Amortization		Net
Amortizable intangible assets:
Patents$3.7 $(3.7)$— $3.7 $(3.7)$— 
Customer lists288.6 (164.0)124.6 288.3 (150.8)137.5 
Total amortizable intangible assets292.3 (167.7)124.6 292.0 (154.5)137.5 
Indefinite-lived intangible assets:
Trade names223.3 — 223.3 227.3 — 227.3 
Total intangible assets$515.6 $(167.7)$347.9 $519.3 $(154.5)$364.8 
41
Table of Contents
9. Goodwill and Other Intangible Assets (continued)
Amortization expenses of other intangible assets of $15.8$12.8 million, $14.3$12.3 million, and $13.7$14.5 million were recorded in 2019, 20182022, 2021 and 2017,2020, respectively. In the future, excluding the impact of any future acquisitions, the Company expects amortization expense of approximately $15.7$12.5 million annually and the intangible assets will be amortized over a weighted-average period of 1312 years.
The Company concluded that 0no goodwill impairment existed at the time of the annual impairment tests which were performed in the fourth quarters of 2019, 20182022, 2021 and 2017. NaN2020. No impairments of other intangible assets were recorded in 2019, 20182022, 2021 and 2017.
2020.
39
Table of Contents
10. Debt
December 31 (dollars in millions)20222021
Bank credit lines, average year-end interest rates of 5.0% for 2021$— $0.8 
Revolving credit agreement borrowings, average year-end interest rates of 5.3% for 2022 and 1.1% for 2021185.4 50.0 
Commercial paper, average year-end interest rate of 4.6% for 202222.6 — 
Term notes with insurance companies, expiring 2029-2034, average year-end interest rates of 3.1% for 2022 and 3.1% for 2021136.5 145.9 
344.5 196.7 
Long-term debt due within one year(10.0)(6.8)
Long-term debt$334.5 $189.9 
         
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 2016,2021, the Company completed arenewed and amended its $500 million multi-year multi-currency revolving credit agreement with a groupnew expiration date of 9 banks, which expires on December 15, 2021.April 1, 2026. The facility has an accordion provision which allows it to be increased up to $700$850 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 $500 million 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, 2019 and 2018. At its option, the Company either maintains cash balances or pays fees for bank credit and services.
The Company has fixed-rate interest expense obligations of $19.5 million on outstanding debt as of December 31, 2022. Scheduled maturities of
long-term
debt within each of the five years subsequent to December 31, 20192022 are as follows:
     
Years ending December 31 (dollars in millions)
 
Amount
 
2020
 $
6.8
 
2021
  
170.8
 
2022
  
6.8
 
2023
  
10.0
 
2024
  
10.0
 
Years ending December 31 (dollars in millions)Amount
2023$10.0 
202410.0 
202510.0 
2026236.5 
202728.5 
11. Stockholders’ Equity
The Company’s authorized capital consists of 3three 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 10,44268,785 shares during 2019, 48,2322022, 64,072 shares during 20182021 and 73,79212,372 shares during 2017,2020, 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 $0.90, $0.76$1.14, $1.06 and $0.56$0.98 per share in 2019, 20182022, 2021 and 2017,2020, respectively.
In June 2019, our2022, the Board of Directors approved adding 3 million3,500,000 shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, the CompanyCommon Stock may purchase the Common Stockbe 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 purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by the Company’sCompany's Board of Directors which may occur at any time, subject to the parameters of any Rule
10b5-1
automatic trading
42
Table of Contents
11. Stockholders’ Equity (continued)
plan that the Companywe may then have in effect. In 2019,2022, the Company repurchased 6,113,0386,647,895 shares at an average price of $47.06$60.70 per share and at a total cost of $287.7$403.5 million. As of December 31, 2019,2022, there were 2,962,215378,462 shares remaining on the existing repurchase authorization. In 2018,2021, the Company repurchased 3,797,8005,087,467 shares at a cost of $202.6$366.5 million. In 2017,2020, the Company repurchased 2,533,3501,348,391 shares at a cost of $139.1$56.7 million.
40
Table of Contents
11. Stockholders’ Equity (continued)
At December 31, 2019,2022, a total of 130,380 and 28,205,80639,398,135 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock. At December 31, 2018,2021, a total of 130,380 and 22,418,06632,924,647 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock.

Changes to accumulated other comprehensive loss by component are as follows:
(dollars in millions)Years ended December 31,
20222021
Cumulative foreign currency translation
Balance at beginning of period$(44.7)$(48.1)
Other comprehensive (loss) gain before reclassifications(39.4)3.4 
Balance at end of period(84.1)(44.7)
Unrealized net gain (loss) on cash flow derivatives
Balance at beginning of period0.6 0.6 
Other comprehensive gain (loss) before reclassifications7.4 (0.6)
Realized (gains) losses on derivatives reclassified to cost of products sold (net of tax provision (benefit) of $1.0 and $(0.2) in 2022 and 2021, respectively)(1)
(3.1)0.6 
Balance at end of period4.9 0.6 
Pension liability
Balance at beginning of period(287.3)(273.7)
Other comprehensive gain (loss) before reclassifications19.8 (28.6)
Amounts reclassified from accumulated other comprehensive loss(1)
264.3 15.0 
Balance at end of period(3.2)(287.3)
Total accumulated other comprehensive loss, end of period$(82.4)$(331.4)

(1)Amounts reclassified from accumulated other comprehensive loss:
Realized (gains) losses on derivatives reclassified to cost of products sold$(4.1)$0.8 
Tax provision (benefit)1.0 (0.2)
Reclassification net of tax$(3.1)$0.6 
Amortization of pension items:
Actuarial losses$437.2 (2)$20.3 (2)
Prior year service cost(0.4)(2)(0.4)(2)
436.8 19.9 
Tax benefit(172.5)(4.9)
Reclassification net of tax$264.3 $15.0 
(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.
                                                                         
 
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)
 
         
(1)
Amounts 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”)Incentive Plan) effective January 1, 2007. The Incentive Plan was most recently reapproved by stockholders on April 16, 2012.15, 2020. The Incentive Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at December 31, 2019,2022, was 1,855,560.
43
Table of Contents
12. Stock Based Compensation (continued)
2,613,804 which includes 2,400,000 additional shares that were authorized on April 15, 2020 at the Company's annual meeting of stockholders. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.
Total stock based compensation expense recognized in 2019, 20182022, 2021 and 20172020 was $13.3$11.1 million, $10.1$11.9 million and $9.9$12.7 million, respectively.
Stock Options
The stock options granted in 2019, 20182022, 2021 and 20172020 have three year pro rata vesting from the date 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 2019, 20182022, 2021 and 20172020 expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period. Included in stock option expense for 2019, 2018 and 2017 was $6.4 million, $4.4 million and $4.7 million, respectively. Includedperiod; however, included in the stock option expense recognized in 2019, 20182022, 2021 and 20172020 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. Stock based compensation expense attributable to stock options for 2022, 2021 and 2020 was $5.5 million, $5.1 million and $6.2 million, respectively.
Changes in options, all of which relate to the Company’s Common Stock, were as follows:
            
Years Ended December 31
 
2019
 
2018
 
2017
 Years Ended December 31202220212020
 
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
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:
                  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
 Outstanding at beginning of year2,252,498 $47.73 2,785,654 $43.01 2,728,350 $37.64 
Granted
  
557,045
   
49.49
   
373,220
   
61.62
   
358,150
   
50.16
 Granted322,460 74.11 368,780 60.85 798,970 42.50 
Exercised
(1)
  (249,840)  
18.55
   (176,302)  
22.93
   (752,603)  
16.93
 
Exercised(1)
(66,697)39.77 (889,345)38.35 (662,215)19.59 
Forfeited
  (11,544)  
54.02
   (27,355)  
47.95
   (6,754)  
37.46
 Forfeited(26,655)61.46 (12,591)49.18 (79,451)48.98 
                        
Outstanding at end of year
(2)
  
2,728,350
   
37.64
   
2,432,689
   
33.05
   
2,263,126
   
27.73
 
Outstanding at end of year(2)
2,481,606 51.22 2,252,498 47.73 2,785,654 43.01 
                        
Exercisable at end of year
(3)
  
1,820,743
   
30.07
   
1,665,184
   
24.52
   
1,387,259
   
20.48
 
Exercisable at end of year(3)
1,675,552 46.88 1,191,795 45.71 1,529,464 40.35 
                        
(1)The total intrinsic value of options exercised in 2022, 2021 and 2020 was $1.6 million, $31.0 million and $21.3 million, respectively.
(2)The weighted average remaining contractual life of options outstanding was 7 years at December 31, 2022, and 8 years at December 31, 2021 and December 31, 2020, respectively. The aggregate intrinsic value of options outstanding at December 31, 2022 was $22.6 million.
(3)The weighted average remaining contractual life of options exercisable was 6 years at December 31, 2022, 7 years at December 31, 2021, and 6 years at December 31, 2020, respectively. The aggregate intrinsic value of options exercisable at December 31, 2022 was $18.9 million.
Number of OptionsWeighted Avg. Per
Share Exercise Price
Nonvested options at beginning of year1,060,703 $49.99 
Granted322,460 74.11 
Vested(559,150)48.73 
Forfeited(17,959)61.83 
Nonvested options at end of year806,054 60.26 
(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
 
         

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12. Stock Based Compensation (continued)
The weighted-average fair value per option at the date of grant during 2019, 20182022, 2021 and 2017,2020, using the Black-Scholes option-pricing model, was $10.83, $14.80$17.57, $14.03 and $13.04,$8.17, respectively. Assumptions were as follows:
202220212020
Expected life (years)5.75.85.7
Risk-free interest rate1.9 %1.2 %1.5 %
Dividend yield1.5 %1.6 %2.1 %
Expected volatility26.8 %27.4 %23.7 %
 
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 lives of options for purposes of these models are based on historical exercise behavior. The risk freerisk-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 are based on the historical volatility of the Common Stock.
Stock Appreciations Rights (SARs)
In 2015, certain
non-U.S.-based
employees were granted SARs. Each SAR award granted 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 had 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 related to SARs are measured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 2019, 2018 or 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. Stock based compensation expense attributable to SARS was minimal in 2019, 2018 and 2017.
Restricted Stock and Share Units
Participants may also be awarded shares of restricted stock or share units under the Incentive Plan. Share units vest three years after the date of grant. The Company granted 140,102, 106,58194,731, 104,312 and 107,853174,420 share units under the planIncentive Plan in 2019, 20182022, 2021 and 2017,2020, respectively.
The share units were valued at $6.9$7.0 million, $6.6$6.4 million and $5.4$7.4 million at the date of issuance in 2019, 20182022, 2021 and 2017,2020, respectively, based on the price of the Company’s Common Stock at the date of grant. The sharesshare units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense was expense associated with the accelerated vesting of share unit awards for certain employees who are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of $6.9$5.6 million, $5.7$6.8 million and $5.2$6.5 million was recognized in 2019, 20182022, 2021 and 2017,2020, respectively. Certain
non-U.S.-based
employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.
A summary of share unit activity under the planIncentive Plan is as follows:
 
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
 
         
Number of UnitsWeighted-Average
Grant Date Value
Issued and unvested at January 1, 2021421,138 $47.28 
Granted94,731 73.40 
Vested(126,631)49.49 
Forfeited(9,319)56.28 
Issued and unvested at December 31, 2022379,919 52.92 
43
45
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. TheIn addition, the Company also has defined contribution plans for certain hourly employees which provide for matching Company contributions.
The Company also hashad 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. An additional Company contribution is 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.
44
TableIn 2021, the Company's Board of Contents
13. PensionDirectors approved the termination of the defined benefit pension plan (the Plan) with a termination date of December 31, 2021. The Plan represented over 95 percent of the Company's pension plan liability. In the second quarter of 2022, the Company received a determination letter from the Internal Revenue Service (IRS) that allowed the Company to proceed with the termination process. In the fourth quarter of 2022, the Company settled approximately $169 million of Plan liabilities through lump-sum payments from existing plan assets to eligible participants who elected to receive them and Other Post-retirement Benefits (continued)settled approximately $463 million of Plan liabilities by entering into an agreement to purchase annuities from Mass Mutual Life Insurance Company (MML). The irrevocable agreement with MML covers approximately 7,000 active and former employees and their beneficiaries, with MML assuming the future annuity payments for these individuals commencing March 1, 2023. These settlements resulted in $417.3 million of pretax expense in 2022, partially offset by approximately $167.7 million in related tax benefits.
Obligations and Funded Status
Pension and Post-retirement Disclosure Information under ASC 715,
Compensation – Retirement Benefits
(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)
 
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 $0.2 million at December 31, 2019 and 2018.
4546
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13. Pension and Other Post-retirement Benefits (continued)
Pension BenefitsPost-retirement Benefits
Years ended December 31 (dollars in millions)2022202120222021
Accumulated benefit obligation (ABO) at December 31$(27.7)$(841.2)N/AN/A
Change in projected benefit obligations (PBO)
PBO at beginning of year$(842.1)$(869.8)$(2.2)$(5.9)
Service cost(1.4)(1.6)— — 
Interest cost(14.5)(14.5)(0.1)(0.1)
Participant contributions— — (0.1)(0.1)
Plan amendments— — — — 
Actuarial gain (loss) including assumption changes147.6 (9.0)(0.2)0.6 
Benefits paid219.3 52.8 0.9 3.3 
Transfer to insurer462.8 — — — 
PBO at end of year$(28.3)$(842.1)$(1.7)$(2.2)
Change in fair value of plan assets
Plan assets at beginning of year$825.9 $858.8 $— $— 
Actual return on plan assets(99.1)18.9 — — 
Contribution by the Company0.5 1.0 0.8 3.2 
Participant contributions— — 0.1 0.1 
Benefits paid(219.3)(52.8)(0.9)(3.3)
Transfer to insurer(462.8)— — — 
Plan assets at end of year$45.2 $825.9 $— $— 
Funded status$16.9 $(16.2)$(1.7)$(2.2)
Amount recognized in the balance sheet
Noncurrent assets$27.1 $— $— $— 
Current liabilities(0.5)(0.5)(0.2)(0.2)
Non-current liabilities(9.7)(15.7)(1.5)(2.0)
Net pension asset (liability) at end of year$16.9 *$(16.2)*$(1.7)$(2.2)
Amounts recognized in accumulated other comprehensive loss before tax
Net actuarial loss$5.2 $469.7 $0.2 $�� 
Prior service cost2.1 1.4 (2.3)(2.8)
Total recognized in accumulated other comprehensive loss$7.3 $471.1 $(2.1)$(2.8)
                         
 
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
 
                         
*In addition, the Company has a liability for a foreign pension plan of $0.3 million and $0.2 million at December 31, 2022 and 2021, respectively.
The estimated net actuarial loss and prior service costin the current year for both the pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2020 are $19.8 million and $(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 2020 are $was primarily due to the change in the discount rate.
47
-
Table of Contents
million
13. Pension and $(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.Other Post-retirement Benefits (continued)
Pension BenefitsPost-retirement Benefits
Years ended December 31 (dollars in millions)202220212020202220212020
Net periodic cost (benefit)
Service cost$1.4 $1.6 $1.5 $— $— $— 
Interest cost14.5 14.5 23.0 0.1 0.1 0.1 
Expected return on plan assets(21.5)(48.0)(51.9)— — — 
Amortization of unrecognized:
Net actuarial loss19.9 20.3 20.2 — — — 
Prior service cost(0.4)(0.4)(0.4)(0.5)(0.5)(0.5)
Defined-benefit plan income13.9 (12.0)(7.6)(0.4)(0.4)$(0.4)
Settlements, curtailments and other one-time charges417.3 — 2.5 — — (0.5)
Various U.S. defined contribution plans cost15.3 14.6 14.4 — — — 
$446.5 $2.6 $9.3 $(0.4)$(0.4)$(0.9)
Other changes in plan assets and projected benefit obligation recognized in other comprehensive loss
Net actuarial (gain) loss$(27.0)$38.1 $11.7 $0.2 $(0.6)$0.8 
Amortization of net actuarial loss(19.9)(20.3)(22.8)— — — 
Settlement loss(417.3)— — — — — 
Prior service credit— — — — ��� (2.0)
Amortization of prior service cost0.4 0.4 0.4 0.5 0.5 0.5 
Total recognized in other comprehensive loss(463.8)18.2 (10.7)0.7 (0.1)(0.7)
Total recognized in net periodic (benefit) cost and other comprehensive loss$(32.6)$6.2 $(15.8)$0.3 $(0.5)$(1.6)
The 20192022 and 20182021 after tax adjustments for additional minimum pension liability resulted in other comprehensive gain (loss) of $2.9$284.1 million and ($13.1)$(13.6) million, respectively.
Actuarial assumptions used to determine benefit obligations at December 31 are as follows:
Pension BenefitsPost-retirement Benefits
2022202120222021
Discount rate5.13 %2.72 %5.02 %2.43 %
                 
 
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 BenefitsPost-retirement Benefits
Years ended December 31202220212020202220212020
Discount rate2.80 %2.47 %3.18 %2.44 %2.05 %2.95 %
Expected long-term return on plan assets3.12 %6.25 %6.75 %N/AN/AN/A
Rate of compensation increase4.00 %4.00 %4.00 %N/A4.00 %4.00 %
                         
 
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 9.2 percent and 9.3 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:
         
 
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
 
2022 (1)
2021
Health care cost trend rate assumed for next yearN/A7.00 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)N/A5.00 %
Year that the rate reaches the ultimate trend rateN/A2029
A
one-percentage-point
change in the assumed health(1) Health care cost trend rates would not result in a material impact on the Company’s consolidated financial statements.inflation assumptions are no longer needed as all remaining retiree medical benefits are fixed subsidies or reimbursements.
48
Table of Contents
13. Pension and Other Post-retirement Benefits (continued)
Plan Assets
The Company’s pension plan weighted asset allocations as of December 31 by asset category are as follows:
Asset Category20222021
Equity securities8 %1 %
Debt securities27 75 
Private equity5 1 
Cash60 23 
100 %100 %
         
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, 20192022 and 20182021 (dollars in millions):
        
   
December 31, 2019
 December 31, 2022
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)
 Asset CategoryTotalQuoted 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
  $
—  
 Short-term investments$26.9 $26.9 $— $— 
Equity securities
            Equity securities
Common stocks
  
127.0
   
127.0
   
—  
   
—  
 Common stocks3.7 3.7 — — 
Commingled equity funds
  
113.4
   
—  
   
113.4
   
—  
 
Fixed income securities
            Fixed income securities
U.S. treasury securities
  
49.8
   
49.8
   
—  
   
—  
 
U.S. Treasury securitiesU.S. Treasury securities8.6 8.6 — — 
Other fixed income securities
  
225.1
   
—  
   
225.1
   
—  
 Other fixed income securities2.7 — 2.7 — 
Commingled fixed income funds
  
114.0
   
—  
   
114.0
   
—  
 
Options
  
(10.8
)  
—  
   
(10.8
)  
—  
 
Other types of investments
            Other types of investments
Mutual funds
  
104.9
   
—  
   
104.9
   
—  
 Mutual funds0.8 — 0.8 — 
Real estate funds
  
82.3
   
—  
   
—  
   
82.3
 
Private equity
  
8.6
   
—  
   
—  
   
8.6
 Private equity2.2 — — 2.2 
            
Total fair value of plan asset investments
 $
828.9
  $
179.6
  $
558.4
  $
90.9
 Total fair value of plan asset investments$44.9 $39.2 $3.5 $2.2 
           
Non-investment
plan assets
  
3.4
          Non-investment plan assets0.3 
         
Total plan assets
 $
832.3
          Total plan assets$45.2 
         
                 
   
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
          
                 
December 31, 2021
Asset CategoryTotalQuoted Prices in
Active Markets for
Identical Contracts
(Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant Non-
observable Inputs
(Level 3)
Short-term investments$182.9 $182.9 $— $— 
Equity securities
Common stocks3.7 3.7 — — 
Fixed income securities
U.S. Treasury securities52.8 52.8 — — 
Other fixed income securities551.2 — 551.2 — 
Other types of investments
Mutual funds26.7 — 26.7 — 
Private equity5.1 — — 5.1 
Total fair value of plan asset investments$822.4 $239.4 $577.9 $5.1 
Non-investment plan assets3.5 
Total plan assets$825.9 
4849
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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; Options are valued using the closings market value on the last day of the year; 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, 20192022 and 20182021 (dollars in millions):
             
 
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
 
             
Real estate
funds		Private
equity		Total
Balance at December 31, 2020$79.8 $4.9 $84.7 
Actual (loss) return on plan assets:
Relating to assets still held at the reporting date— 3.8 3.8 
Relating to assets sold during the period8.3 (3.1)5.2 
Purchases, sales and settlements(88.1)(0.5)(88.6)
Balance at December 31, 2021— 5.1 5.1 
Actual return (loss) on plan assets:
Relating to assets still held at the reporting date— (2.8)(2.8)
Relating to assets sold during the period— (0.2)(0.2)
Purchases, sales and settlements— 0.1 0.1 
Balance at December 31, 2022$— $2.2 $2.2 
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-
short, mid, and long-term maturities, with a focus on investment gradeinvestment-grade when purchased. The Company’sIn preparation for the Plan settlement, which we completed in the fourth quarter of 2022, the target allocation to equitybonds managers is between 3060 to 6095 percent with the remainder allocated primarily to bonds, real estate,equities, 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, 2019.2022.
Cash Flows
The Company was not required to and did not make any contributions in 2019.
2022 to the Plan. The Company is not required to make a contribution in 2020.2023.

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Table of Contents
13. Pension and Other Post-retirement Benefits (continued)
Estimated Future Payments
TheAs of December 31, 2022, 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
 
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
 
Years ended December 31 (dollars in millions)Pension BenefitsPost-retirement
Benefits
2023$4.9 $0.2 
20240.7 0.2 
20250.8 0.2 
20260.9 0.2 
20275.1 0.2 
2028 – 20329.2 0.7 
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 areas 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 are expected to be reclassified into earnings within one year.
The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts that are designated as cash flow hedges:
December 31 (dollars in millions)
 
2019
  
2018
 December 31 (dollars in millions)20222021
 
Buy
  
Sell
  
Buy
  
Sell
 BuySellBuySell
British pound
 $
—  
  $
1.3
  $
—  
  $
1.0
 British pound$— $— $— $— 
Canadian dollar
  
—  
   
49.7
   
—  
   
—  
 Canadian dollar— 76.8 — 113.4 
Euro
  
36.0
   
—  
   
32.0
   
—  
 Euro30.2 — 24.2 — 
Mexican peso
  
18.6
   
—  
   
27.8
   
—  
 Mexican peso15.7 — 23.8 — 
                
Total
 $
54.6
  $
51.0
  $
59.8
  $
1.0
 Total$45.9 $76.8 $48.0 $113.4 
                

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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
The 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$1.4 million of
after tax gains and $(0.5) million of after-tax
gains losses associated with hedges of a net investment in
non-U.S.
subsidiaries in currency translation adjustment in other comprehensive income in 20192022 and 2018,2021, respectively. The contractual amount of the Company’s foreign currency forward contracts that are designated as net investment hedges is $100.0 millionzero as of December 31, 2019.2022.
The following tables present the impact of derivative contracts on the Company’s financial statements.
Fair value of derivatives designated as hedging instruments under ASC 815:
December 31 (dollars in millions)Balance Sheet Location20222021
Foreign currency contractsOther current assets$6.4 $1.7 
Accrued liabilities— (1.6)
Total derivatives designated as hedging instruments$6.4 $0.1 
  
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 cash flow hedges on the condensed consolidated statement of 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
derivatives		Location of gain (loss)
reclassified from
accumulated other
comprehensive loss into
earnings		Amount of gain (loss) reclassified
from accumulated
other comprehensive
loss into earnings
2022202120222021
Foreign currency contracts$9.8 $(0.8)Cost of products sold$4.1 $(0.8)
Balance Sheet Hedges
Foreign Exchange Contracts
The Company periodically enters into foreign exchange contracts to mitigate the foreign currency volatility relative to certain intercompany loans. These foreign exchange contracts did not qualify for hedge accounting in accordance with ASC 815, and as such were marked to market through earnings. The fair value of the foreign exchange contracts was an asset balance of $0.1 million as of December 31, 2022 and recorded in Other current assets within the consolidated balance sheet. The fair value of the foreign exchange contracts was a liability balance of $0.8 million as of December 31, 2021 and recorded in Accrued liabilities within the consolidated balance sheet
The following table summarizes the contractual amounts of the Company's foreign exchange contracts that are designated as balance sheet hedges:
December 31 (dollars in millions)20222021
BuySellBuySell
Canadian dollar$— $81.5 $— $125.6 
The amounts recognized within the consolidated statements of earnings related to the Company's foreign exchange contracts are set forth below.
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
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
 
                   
Derivatives not designated as hedging instruments:Location of gain within the consolidated statements of earnings202220212020
Foreign exchange contractsOther expense (income) - net$1.2 $(0.9)$— 
51
52
15. Income Taxes
The components of the (benefit from) provision (benefit) for income taxes consisted of the following:
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
 Years ended December 31 (dollars in millions)202220212020
Current:
         Current:
Federal
 $
66.4
  $
60.1
  $
148.0
 Federal$101.8 $92.2 $67.1 
State
  
14.8
   
15.6
   
9.4
 State26.6 22.4 17.4 
International
  
19.9
   
38.6
   
43.8
 International30.5 29.5 25.8 
Deferred:
         Deferred:
Federal
  
0.4
   
(1.7
)  
23.5
 Federal(136.9)(3.2)5.6 
State
  
1.8
   
1.5
   
5.8
 State(34.1)(0.6)2.3 
International
  
(1.2
)  
(0.5
)  
(6.2
)International0.1 (1.8)(19.2)
            $(12.0)$138.5 $99.0 
 $
102.1
  $
113.6
  $
224.3
 
            
The (benefit from) provision for income taxes differs from the U.S. federal statutory rate due to the following items:
Years ended December 31
 
2019
  
2018
  
2017
 Years ended December 31202220212020
Provision at U.S. federal statutory rate(1)
  
21.0
%  
21.0
%  
35.0
%21.0 %21.0 %21.0 %
State taxes, net of federal benefit(1)
  
2.8
   
2.4
   
1.9
 2.7 2.8 3.5 
U.S pension plan settlement expense(1)
U.S pension plan settlement expense(1)
(29.5)— — 
International income tax rate differential—China
  
(1.3
)  
(2.3
)  
(6.5
)International income tax rate differential—China(4.6)(1.6)(0.6)
International income tax rate differential—other
  
0.4
   
1.1
   
0.1
 International income tax rate differential—other3.5 0.7 0.2 
U.S. manufacturing credit
  
—  
   
—  
   
(1.4
)
Research tax credits
  
(0.4
)  
(0.5
)  
(0.3
)Research tax credits(1.0)(0.4)(0.5)
Excess tax benefit on stock compensation
  
(0.5
)  
(0.4
)  
(2.2
)Excess tax benefit on stock compensation(0.5)(0.9)(0.9)
Other
  
(0.4
)  
(0.9
)  
0.8
 Other3.0 0.5 (0.4)
            (5.4)%22.1 %22.3 %
  
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.
As a result of U.S. Tax Reform, the Company recorded income tax expense of $81.8 million(1) Included in the fourth quarter of 2017. The income tax expense resulting from U.S. Tax Reform was 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 lower U.S. corporate income tax rate. As permitted under the SEC Staff Accounting Bulletin 118, the amounts recorded during 2017 were subject to revisions in 2018. 
The Company completed its accounting for the income2022 is tax effects of the pension plan settlement expense associated with the termination of the Plan. Refer to Note 13, “Pension and Other Postretirement Benefits” for more information. A tax benefit of $101.9 million on the pretax expense were reflected in computed tax provision at U.S. Tax Reform asfederal statutory rate and state taxes, net of December 31, 2018 and determined that there was 0 material adjustment necessaryfederal tax benefit for 2022. In 2022, the tax benefit of $65.8 million or a 29.5% benefit related to the provisional amounts it recordedrelease of stranded tax effects in 2017.
As allowed under ASU
2018-02
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, the Company has elected not to reclassifyAOCL through the income tax effects ofstatement was reflected in U.S. Tax Reform from accumulated other comprehensive losses to retained earnings.
pension plan settlement expense.

Components of earnings before income taxes were as follows:
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
 Years ended December 31 (dollars in millions)202220212020
U.S.
 $
400.3
  $
376.0
  $
329.9
 U.S.$63.9 $479.0 $407.3 
International
  
71.8
   
181.8
   
190.9
 International159.8 146.6 36.6 
            $223.7 $625.6 $443.9 
 $
472.1
  $
557.8
  $
520.8
 
            
TotalOur 2022 provision for income taxes included $167.7 million of tax benefit related to the effective settlement of the Plan, $101.9 million of which was the related tax effect on the pretax expense of $417.3 million and $65.8 million of which was related to the release of stranded tax effects in AOCL through the Tax Cuts and Jobs Act. Refer to Note 13, “Pension and Other Postretirement Benefits,” for more information.
The Company paid byincome taxes of $175.4 million, $131.2 million, and $114.1 million in 2022, 2021 and 2020, respectively.
Undistributed earnings of the CompanyCompany’s foreign subsidiaries amounted to $116.6$647.7 million $116.4 million, and $131.1 million in 2019, 2018 and 2017, respectively.
52
Table of Contents
15. Income Taxes (continued)
As ofat December 31, 2019, the2022. The Company has $20.8had $5.3 million accrued for its estimate of withholding taxes due upon repatriation of undistributedapproximately $173.0 million of foreign earnings it considers to be not permanently reinvested. Asreinvested as of December 31, 2019, $548.62022. The Company considers $474.7 million of cashthe total undistributed earnings to be permanently reinvested as a result of various factors including imposition of statutory restrictions at certain jurisdictions that prohibit the repatriation of a portion of the earnings.
53
Table of Contents
15. Income Taxes (continued)

Accordingly, no provision for state, local and cash equivalentsforeign withholding income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to state and marketable securities were held bylocal taxes, and withholding taxes payable to the various foreign countries. The Company expects to be able to take a 100% dividend received deduction to offset any US federal income tax liability. Determination of the amount of unrecognized state and local deferred income tax liability and associated foreign withholding taxes is not practicable due to the complexities associated with its foreign subsidiaries.hypothetical calculation.
The tax effects of temporary differences of assets and liabilities between income tax and financial reporting are as follows:
December 31 (dollars in millions)20222021
AssetsLiabilitiesAssetsLiabilities
Employee benefits$13.9 $— $22.6 $— 
Product liability and warranties50.7 — 52.3 — 
Inventories1.4 — 7.6 — 
Accounts receivable14.6 — 18.3 — 
Property, plant and equipment— 51.5 — 46.6 
Intangibles— 66.2 — 85.2 
Environmental liabilities1.6 — 1.7 — 
Undistributed foreign earnings— 5.3 — 6.5 
Tax loss and credit carryovers10.1 — 8.9 — 
All other14.0 — 12.9 — 
Valuation allowance(8.3)— (7.1)— 
$98.0 $123.0 $117.2 $138.3 
Net liability$25.0 $21.1 
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 net 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:
Net Operating Losses and Tax CreditsValuation Allowances
December 31 (dollars in millions)2022202120222021
Beginning balance$8.9 $20.3 $7.1 $13.0 
(Decreases) / increases1.2 (11.4)1.2 (5.9)
Ending balance$10.1 $8.9 $8.3 $7.1 
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 20202023 through 20272028 and state and local net operating loss carryovers that expire between 2029 andin 2030.
A reconciliation of the beginning and ending amount of unrecognized benefits is as follows:
(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
 
         
(Dollars in millions)20222021
Balance at January 1$14.3 $9.0 
Additions / (decreases) for tax positions of prior years0.7 5.3 
Balance at December 31$15.0 $14.3 
The amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0.8$2.9 million. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2019,2022, there was an immaterial amount of interest and penalties accrued. The Company anticipates that there will 0tnot be a material decrease in the total amount of unrecognized tax benefits in 2020.2023. 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 2016-20192017-2022 and 2002-2019,
54
Table of Contents
15. Income Taxes (continued)

2009-2022, respectively. The Company is subject to
non-U.S.
income examinations in foreign tax auditsjurisdictions for the years 2013-2019.2016-2022. If the examinations at certain foreign tax jurisdictions are resolved unfavorably, there could be additional assessments imposed by the relevant authorities.
53
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, 20192022 and 2018,2021, the Company had $125 million of product liability insurance for individual losses in excess of $7.5 million. At December 31, 2022 and 2021, our reserve for product liability was $31.7 million and $35.4 million, respectively. 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.
Purchase Obligations
The Company utilizes blanket purchase orders to communicate expected annual requirements to many suppliers. Requirements under blanket purchase orders generally do not become committed until several weeks prior to the scheduled unit production. The purchase obligations the Company considers firm as of December 31, 2022, is $211.4 million, most of which will be ordered in 2023.
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$1.1 million and $25.1$3.9 million as of December 31, 20192022 and December 31, 2018,2021, 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$2.4 million and $75.8$7.2 million as of December 31, 20192022 and December 31, 2018,2021, respectively. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of December 31, 20192022 and December 31, 2018.2021.
Legal Judgment Income
On September 28, 2022, the Company received a cash judgment of $11.5 million from a competitor of our North America segment related to its infringement of one of the Company’s patents. The terms of the judgment resulted in pre-tax income of $11.5 million which is recorded as an offset to selling, general and administrative expenses and a related tax expense of $2.9 million.
55
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. Our Rest of World segment also manufactures and markets
in-home
air purification products in China.
54
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
 Net SalesEarnings
Years ended December 31 (dollars in millions)
 
2019
  
2018
  
2017
  
2019
  
2018
  
2017
 Years ended December 31 (dollars in millions)202220212020
2022 (1)
2021
2020 (2)
North America
(1)
 $
2,083.5
  $
2,044.7
  $
1,904.8
  $
488.9
  $
464.1
  $
428.6
 $2,819.1 $2,529.5 $2,118.3 $266.0 $590.8 $503.5 
Rest of World
  
935.8
   
1,173.6
   
1,116.3
   
40.2
   
149.3
   
149.3
 Rest of World965.8 1,036.5 800.3 96.3 91.4 — 
Inter-segment
  
(26.6
)  
(30.4
)  
(24.4
)  
—  
   
—  
   
—  
 Inter-segment(31.0)(27.1)(23.3)(0.3)(0.2)(0.3)
                  
Total segments – sales, segment earnings
 $
2,992.7
  $
3,187.9
  $
2,996.7
  $
529.1
  $
613.4
  $
577.9
 Total segments – sales, segment earnings$3,753.9 $3,538.9 $2,895.3 $362.0 $682.0 $503.2 
               
Corporate expenses
           
(46.0
)  
(47.2
)  
(47.0
)Corporate expenses(128.9)(52.1)(52.0)
Interest expense
           
(11.0
)  
(8.4
)  
(10.1
)Interest expense(9.4)(4.3)(7.3)
               
Earnings before income taxes
           
472.1
   
557.8
   
520.8
 Earnings before income taxes223.7 625.6 443.9 
Provision for income taxes
(2)
           
(102.1
)  
(113.6
)  
(224.3
)
               
(Benefit from) provision for income taxes(Benefit from) provision for income taxes(12.0)138.5 99.0 
Net earnings
          $
370.0
  $
444.2
  $
296.5
 Net earnings$235.7 $487.1 $344.9 
               
(1)The Company recognized a pre-tax pension settlement expense of $346.8 million in the North America segment and $70.5 million within Corporate expenses. The (benefit from) provision for income taxes includes a tax benefit of ($167.7 million) related to the pension settlement. For additional information, see Note 13, “Pension and Other Post-retirement Benefits.”
(2)The Company recognized pre-tax severance and restructuring expenses of $2.7 million within the North America segment and $5.0 million within the Rest of World segment. For additional information, see Note 5, “Severance and Restructuring Expenses.”
(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 2019,2022, sales to the Company's North America segment’s two largest customers were $421.1$596.4 million and $378.9$414.2 million
which represented 1416 percent and
13
11 percent
of the Company’s net sales, respectively. In
2018
, 2021, sales to the Company's North America segment’s two largest customers were $
425.3
$536.9 million and $
355.6
$401.5 million which represented
13
15 percent and
11
percent of the Company’s net sales, respectively. In
2017
, 2020, sales to the Company's North America segment’s two largest customers were $
361.4
$471.9 million and $
335.2
$349.9 million which represented
12
16 percent and
11
12 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)202220212020202220212020202220212020
North America$2,230.3 $2,181.9 $1,759.1 $55.7 $52.2 $51.5 $48.6 $48.0 $41.7 
Rest of World597.7 792.7 664.9 20.5 25.1 27.9 10.9 15.8 14.9 
Corporate504.3 499.8 736.7 0.7 0.6 0.6 10.8 11.3 0.2 
Total$3,332.3 $3,474.4 $3,160.7 $76.9 $77.9 $80.0 $70.3 $75.1 $56.8 
 
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.
55
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)
 
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 first quarter of 2018, the Company recorded $6.7 million of restructuring and impairment expenses associated with a move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. 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 Company’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 2020 and continues to assess the financial impact for the remainder of the
 year.
56
Table of Contents
17. Operations by Segment (continued)
Long-lived Assets (December 31)Net Sales (Years Ended December 31)
(dollars in millions)202220212020202220212020
United States$409.8 $366.2 $355.8 United States$2,430.0 $2,239.1 $1,904.9 
China225.2 259.9 268.3 China826.6 912.6 695.6 
Canada54.7 59.1 4.5 Canada341.6 247.2 175.0 
Other Foreign41.3 44.0 43.4 Other Foreign155.7 140.0 119.8 
Total$731.0 $729.2 $672.0 Total$3,753.9 $3,538.9 $2,895.3 
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 defined in Rule
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 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 defined in Exchange Act Rule
13a-15(f)).
The Company’s internal control over financial reporting is 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. 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 (2013) 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 Water-Right, which was acquired in 2019 and constituted 3.6 percent and 6.3 percent of total assets and net assets, respectively, as of December 31, 2019 and 1.5 percent and 1.4 percent of net sales and net earnings, respectively, for the year then ended.Commission. Based on this evaluation, our management has concluded that, as of December 31, 2019,2022, 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, 20192022 as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in the company’sCompany’s internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f))
during the year ended December 31, 20192022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B—9B – OTHER INFORMATION
None.
ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
57
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, 2019,2022, 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, 2019,2022, 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 Water-Right, Inc., which is included in the 2019 consolidated financial statements of the Company and constituted 3.6 percent and 6.3 percent of total assets and net assets, respectively, as of December 31, 2019 and 1.5 percent and 1.4 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 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, 20192022 and 2018,2021, 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, 2019,2022, and the related notes and financial statement schedule listed in the index at Item 15(a) and our report dated February 24, 202014, 2023 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 24, 2020
Milwaukee, Wisconsin
February 14, 2023
58
PART III
ITEM
 10— 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 2020 2023 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 companyCompany 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 Idelle K. Wolf, Earl E. Exum, Michael M. Larsen and Gene C. Wulf Dr. Ilham Kadri, Mark D. Smith and Idelle K. Wolf serve, with Mr. Wulf,Ms. Wolf, as Chairperson. All members are independent under applicable SEC and New York Stock Exchange rules; the Board of Directors of the companyCompany has concluded that Mr. Larsen, Ms. Wolf and Mr. Wulf are “audit committee financial experts” in accordance with SEC rules.
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 20202023 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’sCompany’s definitive Proxy Statement for the 20202023 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.
59
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 20202023 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, 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
 
             
2022.
Plan CategoryNumber 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 holders3,073,707 (1)$51.22 (2)2,613,804 (3)
Equity compensation plans not approved by security holders— — — 
Total3,073,707 51.22 2,613,804 
(1)Consists of 2,481,606 shares subject to stock options, 345,775 shares subject to employee share units and 272,212 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 canceled 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.
(1)Consists of 2,728,350 shares subject to stock options, 313,763 shares subject to employee share units and 279,359 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 20202023 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
Our principal accountant is Ernst & Young, LLP (PCAOB ID: 42). The information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the 20202023 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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PART IV
ITEM
15
- – 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
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, 20192022 and 20182021
2630
For each of the three years in the period ended December 31, 2019:
2022:
-‑ Consolidated Statement of Earnings
2731
-‑ Consolidated Statement of Comprehensive Earnings
2731
-‑ Consolidated Statement of Cash Flows
2832
-‑ Consolidated Statement of Stockholders’ Equity
2933
Notes to Consolidated Financial Statements
30 - 5634-57
2.Financial Statement Schedules
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.
3.Exhibits - see the Index to Exhibits on pages 62-63 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(o) 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)
(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)
(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)
(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)
(10)
Material Contracts
(a)(a)

A. O. Smith Combined Incentive Compensation Plan, incorporated by reference to Exhibit A of the Proxy Statement filed on March 5, 20126, 2020 for the 20122020 Annual Meeting of Stockholders.

(b)
(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)
(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)
(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)
(e)
A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 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, 2012.2012 (for grants between February 2012 and January 2016).
(f)
(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, 2016.2016 (for grants between February 2016 and January 2021).
(g)
(h)
Offer Letter to Ajita G. Rajendra, dated September 20, 2004,A.O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 10.M10(h) of the annual report on Form 10-K for the fiscal year ended December 31, 2007.2020 (for grants between February 2021 and January 2022).
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Table of Contents
INDEX TO EXHIBITS (continued)
Exhibit
Number
Description
(h)
(i)
Amendment to Offer Letter to Ajita G. Rajendra dated December 10, 2015,A.O. Smith Corporation Executive Incentive Compensation Award Agreement (International), incorporated by reference to Exhibit 10(i) of the annual report on Form 10-K for the fiscal year ended December 31, 2015.2020 (for grants between February 2021 and January 2022).
(i)
A.O. Smith Corporation Executive Incentive Compensation Award Agreement incorporated by reference to exhibit 10(i) of the annual report on Form 10-K for the fiscal year ended December 31, 2021 (for grants between February 2022 and January 2023).
(j)
A.O. Smith Corporation Executive Incentive Compensation Award Agreement incorporated by reference to exhibit 10(j) of the annual report on Form 10-K for the fiscal year ended December 31, 2021 (International) (for grants between February 2022 and January 2023).
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Table of Contents

(j)
Exhibit
Number
Description
(k)
A.O. SmithCorporation Executive Incentive Compensation Award Agreement (Acceptance Certificates and Terms and Conditions) (for grants after February 2023).
(l)
A. O. Smith Corporation Senior Leadership Severance Plan, incorporated by reference to Exhibit 10.1 of the quarterly report for Form 10-Q for the quarter ended June 30, 2009.
(m)
(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.
(n)
(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.
(o)
(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, 2019.2021.
(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 24, 2020.1
4, 2023.
(31.2)
Certification by the Executive Vice-President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated February 24, 2020.1
4, 2023.
(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, 20192022 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 20192022 and 2018,2021, (ii) the Consolidated Statement of Earnings for the three years ended December 31, 2019,2022, (iii) the Consolidated Statement of Comprehensive Earnings for the three years ended December 31, 2019,2022, (iv) the Consolidated Statement of Cash Flows for the three years ended December 31, 2019,2022, (v) the Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 20192022 and (vi) the Notes to Consolidated Financial Statements.
63
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 24, 2020
By:
/s/ Ajita G. Rajendra
Date: February 14, 2023By:
Ajita G. Rajendra
/s/ Kevin J. Wheeler
Kevin J. Wheeler
Chairman, President and Chief Executive Chairman of
the Board of Directors
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February 24, 202014, 2023 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 of Directors
Ajita G. Rajendra
KEVIN J. WHEELER
/s/ Kevin J. Wheeler
Director
Kevin J. Wheeler
Chairman, President and Chief Executive Officer
CHARLES T. LAUBER
/s/ Charles T. Lauber
Executive Vice President and Chief Financial Officer
Charles T. Lauber
HELEN E. GURHOLT
BENJAMIN A. OTCHERE
/s/ Helen E. Gurholt
Benjamin A. Otchere
Vice President and Controller
Helen E. Gurholt
Benjamin A. Otchere
RONALD D. BROWN
/s/ Ronald D. Brown
Director
Ronald D. Brown
WILLIAM P. GREUBEL
EARL E. EXUM
/s/ William P. Greubel
Earl E. Exum
Director
William P. Greubel
Earl E. Exum
PAUL W. JONES
VICTORIA M. HOLT
/s/ Paul W. Jones
Victoria M. Holt
Director
Paul W. Jones
Victoria M. Holt
DR. ILHAM KADRI
/s/ Dr. Ilham Kadri
Director
Dr. Ilham Kadri
BRUCEMICHAEL M. SMITH
LARSEN
/s/ BruceMichael M. Smith
Larsen
Director
BruceMichael M. Smith
Larsen
AJITA G. RAJENDRA
/s/ Ajita G. Rajendra
DirectorAjita G. Rajendra
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
A. O. SMITH CORPORATION
SCHEDULE II
-
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in millions)
Years ended December 31, 2019, 20182022, 2021 and 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
 
2020
DescriptionBalance at
Beginning
of Year		Charged to
Costs and
Expenses		Acquisition
of
Businesses		DeductionsBalance at
End of
Year
2022:
Valuation allowance for trade and notes receivable$9.5 $0.6 $— $(0.6)$9.5 
Valuation allowance for deferred tax assets7.1 1.2 — — 8.3 
2021:
Valuation allowance for trade and notes receivable$5.6 $4.2 $0.8 $(1.1)$9.5 
Valuation allowance for deferred tax assets13.0 — — (5.9)7.1 
2020:
Valuation allowance for trade and notes receivable$6.6 $0.8 $— $(1.8)$5.6 
Valuation allowance for deferred tax assets11.9 1.1 — — 13.0 
65