UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

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

For the quarterly period ended September 30, ~~2017.~~

2019.

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

For the transition period from
to

Commission File Number

1-475

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)


~~Delaware~~	~~39-0619790~~
Delaware		39-0619790
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11270 West Park Place, Milwaukee, Wisconsin		53224-9508
(Address of principal executive office)		(Zip Code)

(414)

359-4000

(Registrant’s telephone number, including area code)

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


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock (par value $1.00 per share)	AOS	New York Stock Exchange

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

☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation

S-T (§

(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

☒

Yes

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer	☒	Accelerated Filer	☐

~~Non-accelerated filer~~	~~☐ (Do not check if a smaller reporting company)~~
Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Act.)

☐

Yes

☒

Class A Common Stock Outstanding as of October 31, ~~2017 — 26,113,827~~2019 - 26,052,953 shares

Common Stock Outstanding as of October 31, ~~2017 — 145,815,700~~2019 - 137,059,015 shares

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions, except for per share data)

(unaudited)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017 2016
Net sales
   $ 749.9 $ 683.9 $ 2,228.1 $ 1,987.8
Cost of products sold
   443.2 400.6 1,313.2 1,158.1


Gross profit
   306.7 283.3 914.9 829.7
Selling, general and administrative expenses
   175.8 164.7 535.2 484.1
Interest expense
   2.5 2.1 7.2 5.7
Other income
   (3.2 ) (1.9 ) (7.5 ) (6.2 )


Earnings before provision for income taxes
   131.6 118.4 380.0 346.1
Provision for income taxes
   37.9 35.2 106.2 102.3


Net Earnings
   $ 93.7 $ 83.2 $ 273.8 $ 243.8


Net Earnings Per Share of Common Stock
   $ 0.54 $ 0.48 $ 1.58 $ 1.39


Diluted Net Earnings Per Share of Common Stock
   $ 0.54 $ 0.47 $ 1.57 $ 1.38


Dividends Per Share of Common Stock
   $ 0.14 $ 0.12 $ 0.42 $ 0.36


~~A.O.~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Net sales
$
728.2
$
754.1
$
2,241.8
$
2,375.4

Cost of products sold

444.0

448.1

1,356.1

1,406.9

Gross profit

284.2

306.0

885.7

968.5

Selling, general and administrative expenses

172.3

177.6

535.7

567.7

Restructuring and impairment expenses

—

—

—

6.7

Interest expense

3.1

2.0

8.5

6.6

Other income

(4.0
)
(5.1
)
(15.1
)
(15.5
)

Earnings before provision for income taxes

112.8

131.5

356.6

403.0

Provision for income taxes

25.5

26.9

77.9

85.1

Net Earnings
$
87.3
$
104.6
$
278.7
$
317.9

Net Earnings Per Share of Common Stock
$
0.53
$
0.61
$
1.68
$
1.86

Diluted Net Earnings Per Share of Common Stock
$
0.53
$
0.61
$
1.66
$
1.84

Dividends Per Share of Common Stock
$
0.22
$
0.18
$
0.66
$
0.54

A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(dollars in millions)
(unaudited)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2017 2016 2017 2016
Net earnings
   $ 93.7 $ 83.2 $ 273.8 $ 243.8
Other comprehensive earnings (loss)

Foreign currency translation adjustments
   17.3 (3.5 ) 38.2 (12.0 )
Unrealized net losses on cash flow derivative instruments, less related income tax benefit of $1.0 and $0.7 in 2017, $0.2 and $1.1 in 2016
   (1.6 ) (0.2 ) (1.0 ) (1.7 )
Adjustment to pension liability, less related income tax provision of $(1.7) and $(2.3) in 2017 and $(1.6) and $(1.5) in 2016
   2.6 2.4 3.6 2.3


Comprehensive Earnings
   $ 112.0 $ 81.9 $ 314.6 $ 232.4


Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Net earnings
$
87.3
$
104.6
$
278.7
$
317.9

Other comprehensive (loss) earnings

Foreign currency translation adjustments

(21.9
)
(20.7
)
(16.1
)
(33.3
)
Unrealized net (losses) gains on cash flow derivative instruments, less related income tax benefit (provision) of $0.1 and ($0.1) in 2019, ($0.6) and ($0.9) in 2018

(0.3
)
1.3

0.3

2.1

Adjustment to pension liability, less related income tax benefit (provision) of $0.3 and ($1.6) in 2019 and ($1.7) and ($3.9) in 2018

(1.0
)
5.6

5.0

12.5

Comprehensive Earnings
$
64.1
$
90.8
$
267.9
$
299.2

S
ee accompanying notes to unaudited condensed consolidated financial statements.
3

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in millions)

(unaudited)
September 30,
2019

December 31,
2018

Assets

Current Assets

Cash and cash equivalents
$
219.4
$
259.7

Marketable securities

294.4

385.3

Receivables

614.1

647.3

Inventories

310.0

304.7

Other current assets

66.5

41.5

Total Current Assets

1,504.4

1,638.5

Property, plant and equipment

1,137.5

1,096.8

Less accumulated depreciation

(593.9
)
(556.8
)

Net property, plant and equipment

543.6

540.0

Goodwill

547.4

513.0

Other intangibles

339.5

293.1

Operating lease assets

48.3

—

Other assets

84.7

86.9

Total Assets
$
3,067.9
$
3,071.5

Liabilities

Current Liabilities

Trade payables
$
483.1
$
543.8

Accrued payroll and benefits

61.8

79.4

Accrued liabilities

135.9

120.4

Product warranties

42.8

41.7

Debt due within one year

6.8

—

Total Current Liabilities

730.4

785.3

Long-term debt

312.4

221.4

Pension liabilities

36.5

49.4

Long-term operating lease liabilities

39.6

—

Other liabilities

292.8

298.4

Total Liabilities

1,411.7

1,354.5

Stockholders’ Equity

Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,183,365 and 26,190,163

130.9

131.0

Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,524,227 and 164,517,431

164.5

164.5

Capital in excess of par value

507.3

496.7

Retained earnings

2,271.5

2,102.8

Accumulated other comprehensive loss

(361.6
)
(350.8
)
Treasury stock at cost

(1,056.4
)
(827.2
)

Total Stockholders’ Equity

1,656.2

1,717.0

Total Liabilities and Stockholders’ Equity
$
3,067.9
$
3,071.5

See accompanying notes to unaudited condensed consolidated financial statements
4

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED ~~BALANCE SHEETS~~
STATEMENTS OF CASH FLOWS

(dollars in millions)

   (unaudited)
September 30,
2017 December 31, 2016
Assets

Current Assets

Cash and cash equivalents
   $ 321.9 $ 330.4
Marketable securities
   446.0 424.2
Receivables
   587.1 518.7
Inventories
   292.1 251.1
Other current assets
   51.0 37.6


Total Current Assets
   1,698.1 1,562.0
Property, plant and equipment
   1,017.4 932.5
Less accumulated depreciation
   (515.7 ) (470.6 )


Net property, plant and equipment
   501.7 461.9
Goodwill
   516.3 491.5
Other intangibles
   312.3 308.3
Other assets
   76.2 67.3


Total Assets
   $ 3,104.6 $ 2,891.0


Liabilities

Current Liabilities

Trade payables
   $ 500.1 $ 528.6
Accrued payroll and benefits
   80.2 84.3
Accrued liabilities
   99.7 101.0
Product warranties
   44.2 44.5
Debt due within one year
   7.5 7.2


Total Current Liabilities
   731.7 765.6
Long-term debt
   442.2 316.4
Pension liabilities
   66.0 109.0
Other liabilities
   198.8 184.7


Total Liabilities
   1,438.7 1,375.7
Stockholders’ Equity

Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,246,059 and 26,313,351
   131.2 131.6
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,461,533 and 164,394,241
   164.5 164.4
Capital in excess of par value
   485.7 477.6
Retained earnings
   1,794.0 1,593.0
Accumulated other comprehensive loss
   (322.4 ) (363.2 )
Treasury stock at cost
   (587.1 ) (488.1 )


Total Stockholders’ Equity
   1,665.9 1,515.3


Total Liabilities and Stockholders’ Equity
   $ 3,104.6 $ 2,891.0

(unaudited)

Nine Months Ended
September 30,

2019

2018

Operating Activities

Net earnings
$
278.7
$
317.9

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

Depreciation and amortization

58.1

53.2

Stock based compensation expense

12.3

9.7

Net changes in operating assets and liabilities:

Current assets and liabilities

(43.8
)
(70.9
)
Noncurrent assets and liabilities

(25.3
)
(20.7
)

Cash Provided by Operating Activities

280.0

289.2

Investing Activities

Capital expenditures

(50.3
)
(58.5
)
Acquisition

(107.0
)
—

Investments in marketable securities

(237.3
)
(345.4
)
Net proceeds from sale of marketable securities

318.8

418.3

Cash (Used in) Provided by Investing Activities

(75.8
)
14.4

Financing Activities

Long-term debt incurred (repaid)

97.9

(217.1
)
Common stock repurchases

(230.0
)
(106.0
)
Payment of contingent consideration

(1.0
)
(2.3
)
Net (payments) proceeds from stock option activity

(1.4
)
0.7

Dividends paid

(110.0
)
(92.5
)

Cash Used In Financing Activities

(244.5
)
(417.2
)

Net decrease in cash and cash equivalents

(40.3
)
(113.6
)
Cash and cash equivalents - beginning of period

259.7

346.6

Cash and Cash Equivalents - End of Period
$
219.4
$
233.0

See accompanying notes to unaudited condensed consolidated financial statements
5

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~
STOCKHOLDERS’ EQUITY

(dollars in millions)

(unaudited)

   Nine Months Ended
September 30,
   2017 2016
Operating Activities

Net earnings
   $ 273.8 $ 243.8
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:

Depreciation and amortization
   51.9 48.7
Stock based compensation expense
   8.5 8.1
Net changes in operating assets and liabilities:

Current assets and liabilities
   (154.5 ) (23.5 )
Noncurrent assets and liabilities
   (29.5 ) (13.5 )


Cash Provided by Operating Activities
   150.2 263.6
Investing Activities

Capital expenditures
   (66.4 ) (58.7 )
Acquisitions
   (43.1 ) (90.5 )
Investments in marketable securities
   (407.3 ) (415.5 )
Net proceeds from sale of marketable securities
   405.3 318.2


Cash Used in Investing Activities
   (111.5 ) (246.5 )
Financing Activities

Long-term debt incurred
   125.8 86.5
Common stock repurchases
   (103.3 ) (100.2 )
Net proceeds from stock option activity
   3.1 5.5
Dividends paid
   (72.8 ) (63.2 )


Cash Used In Financing Activities
   (47.2 ) (71.4 )


Net decrease in cash and cash equivalents
   (8.5 ) (54.3 )
Cash and cash equivalents—beginning of period
   330.4 323.6


Cash and Cash Equivalents—End of Period
   $ 321.9 $ 269.3

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Class A Common Stock

Balance at the beginning of period
$
130.9
$
131.0
$
131.0
$
131.2

Conversion of Class A Common Stock

—

—

(0.1
)
(0.2
)

Balance at end of period
$
130.9
$
131.0
$
130.9
$
131.0

Common Stock

Balance at the beginning of period
$
164.5
$
164.5
$
164.5
$
164.5

Conversion of Class A Common Stock

—

—

—

—

Balance at end of period
$
164.5
$
164.5
$
164.5
$
164.5

Capital in Excess of Par Value

Balance at the beginning of period
$
506.7
$
494.2
$
496.7
$
486.5

Conversion of Class A Common Stock

—

—

0.1

0.2

Issuance of share units

—

(0.2
)
(6.2
)
(6.0
)
Vesting of share units

—

—

(2.0
)
(2.3
)
Stock based compensation expense

1.1

1.3

11.6

9.0

Exercises of stock options

(0.5
)
0.3

0.1

1.5

Stock incentives

—

0.2

7.0

6.9

Balance at end of period
$
507.3
$
495.8
$
507.3
$
495.8

Retained Earnings

Balance at the beginning of period
$
2,220.2
$
1,940.1
$
2,102.8
$
1,788.7

Net earnings

87.3

104.6

278.7

317.9

Cash dividends on stock

(36.0
)
(30.7
)
(110.0
)
(92.6
)

Balance at end of period
$
2,271.5
$
2,014.0
$
2,271.5
$
2,014.0

Accumulated Other Comprehensive Loss (see Note 17)
$
(361.6
) $
(318.2
) $
(361.6
) $
(318.2
)
Treasury Stock

Balance at the beginning of period
$
(958.8
) $
(695.1
) $
(827.2
) $
(626.5
)
Exercise of stock options

(0.2
)
0.5

(1.5
)
(0.9
)
Stock incentives and directors’ compensation

—

—

0.2

0.1

Shares repurchased

(97.4
)
(36.3
)
(230.0
)
(106.0
)
Vesting of share units

—

—

2.1

2.4

Balance at end of period
$
(1,056.4
) $
(730.9
) $
(1,056.4
) $
(730.9
)

Total Stockholders’ Equity
$
1,656.2
$
1,756.2
$
1,656.2
$
1,756.2

See accompanying notes ~~to unaudited condensed consolidated financial statements~~
which are an integral part of these statements.
6

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2017~~
2019

(unaudited)

1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, ~~2017~~2019 are not necessarily indicative of the results expected for the full year. It is suggested ~~that~~ the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the ~~Company’s~~
A. O. Smith Corporation’s (the Company)
Annual Report on Form
10-K
for the year ended December 31, ~~2016~~2018 filed with the SEC on February ~~17, 2017.~~
15, 2019.

Recent Accounting Pronouncements

In ~~August~~January 2017, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) ~~815,~~~~Derivatives~~350,
Intangibles – Goodwill and ~~Hedging~~Other
(issued under Accounting Standards Update (ASU) 2017-12, “Targeted Improvements to Accounting for Hedging Activities”). Under this amendment, more hedging strategies will be eligible for hedge accounting treatment. ASU 2017-12 also amends the presentation and disclosure requirements regarding derivatives and hedging and changes how companies assess effectiveness. The amendment requires adoption on January 1, 2019 and permits early adoption in any interim or annual period. The Company does not expect that the adoption of ASU 2017-12 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
~~In May 2017, the FASB amended ASC 718,~~~~Compensation – Stock Compensation~~(issued under ASU 2017-09, “Scope of Modification Accounting”). This amendment clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as a modification. Under this amendment, modification accounting must be used if three conditions are met: the fair value changes, the vesting conditions change, or the classification of the award changes due to the changes in terms or conditions. The amendment requires adoption on January 1, 2018 and permits early adoption. The Company does not expect that the adoption of ASU 2017-09 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
~~In March 2017, the FASB amended ASC 715,~~~~Compensation – Retirement Benefits~~(issued under ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”). This amendment changes the way net periodic benefit cost associated with employer-sponsored defined benefit plans is presented in the statement of earnings. Under the amendment, the service cost component of net periodic benefit cost is included in the same lines in the statement of earnings as other employee compensation costs and the other components of net periodic benefit cost must be presented separately outside of income from operations. The amendment requires adoption on January 1, 2018. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
1. ~~Basis of Presentation (continued)~~
~~In January 2017, the FASB amended ASC 350,~~~~Intangibles – Goodwill and Other~~ ~~(issued under ASU~~
2017-04, ~~“Simplifying~~
“Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value.
Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires adoption on January 1, 2020. The Company does not expect that the adoption of ASU
2017-04
will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In ~~October~~June 2016, the FASB ~~amended~~issued ASC ~~740,~~~~Income Taxes~~ ~~(issued~~326,
Financial Instruments – Credit Losses
(issued under ASU ~~2016-16). This amendment requires that~~
2016-13)
which modifies the ~~income tax consequences~~measurement of ~~an intra-entity transfer of an asset other than inventory be recognized when the transfer occurs. The amendment~~ expected credit losses on certain financial instruments. ASU
2016-13
requires adoption on January 1, ~~2018. This amendment is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings.~~2020. The Company does not expect that the adoption of ASU ~~2016-16~~
2016-13
will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
~~In August 2016, the FASB amended ASC 230,~~~~Statement of Cash Flows~~ (issued under ASU 2016-15, “Clarification of Certain Cash Receipts and Cash Payments”). This amendment clarifies reporting for contingent consideration payments made after a business combination depending on how soon after the acquisition the payments are made. The amendment requires adoption on January 1, 2018 and permits early adoption. The Company does not expect the adoption of ASU 2016-15 will 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~~
(issued under ASU
2016-02).
This amendment requires the recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements ~~currently~~ classified as operating leases. ~~This amendment requires adoption on~~The Company applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019, ~~and permits early adoption.~~as the date of the initial application. The Company ~~is in~~elected the ~~process~~package of ~~determining whether~~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 ~~will~~
did not have a material impact on ~~its~~the Company’s consolidated balance sheets, statements of earnings or statements of cash flows.
~~In May 2014, the FASB issued ASC 606-10,~~~~Revenue from Contracts with Customers~~ ~~(issued under ASU 2014-09). ASC 2014-09 will replace~~ Refer to Note 4, Leases, for additional information.

Table of Contents
2. Revenue Recognition
Substantially all ~~existing revenue recognition guidance when effective. In July 2015, the FASB approved a one-year deferral~~ of the ~~effective date~~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 transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.
Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $43.7 million and $47.0 million at September 30, 2019 and December 31, 2018, respectively. The Company assesses collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. The Company’s allowance for doubtful accounts was $6.2 million and $6.4 million at September 30, 2019 and December 31, 2018, respectively
.
Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required ~~adoption on January 1, 2018.~~ 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.
Disaggregation of Net Sales
The Company is ~~completing~~comprised of 2 reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The Rest of World segment also manufactures and markets
in-home
air purification products in China.
As each segment manufactures and markets products in its ~~review~~respective region of the world, the Company has determined that geography is the primary factor in reporting its ~~customer contracts~~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 ~~its analysis~~these product lines may be impacted differently by certain economic factors. Within the Rest of World segment, particularly in China and India, the Company’s major customers purchase across the Company’s product lines, utilizing the same distribution channel regardless of product type. In addition, the impact of economic factors is unlikely to be differentiated by product line in the ~~disclosure requirements~~Rest of ~~ASU 2014-09.~~World segment.
8

2. Revenue Recognition (continued)

The North America segment major product lines are defined as the following:

Water heaters

The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes and small businesses. The Company ~~does not anticipate that~~sells residential and commercial water heater products and related parts through its ~~pattern of revenue recognition will change as a result~~wholesale distribution channel, which includes more than 1,300 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the ~~adoption~~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 our 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 wholesale and retail distribution channels, similar to water heater products and related parts. The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through internet sales channels. A portion of the ~~new guidance.~~ Company’s sales of water treatment products in the North America segment is comprised of replacement filters.

The ~~Company expects to utilize~~following table disaggregates the ~~full retrospective method~~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 ~~adoption~~World segment sales are disaggregated by China and ~~does not expect the adoption~~all other Rest of ~~ASC 2014-09 to have a material impact on its consolidated balance sheets, statements~~World.

Table of ~~earnings or statements of cash flows.~~
Contents
2. Revenue Recognition (continued)

(dollars in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

North America

Water heaters and related parts
$
415.9
$
405.2
$
1,310.5
$
1,318.1

Boilers and related parts

60.2

58.6

150.8

143.0

Water treatment products
(1)

38.5

23.1

99.1

61.7

Total North America

514.6

486.9

1,560.4

1,522.8

Rest of World

China
$
189.6
$
246.2
$
626.8
$
806.4

All other Rest of World

30.7

27.9

74.7

69.6

Total Rest of World

220.3

274.1

701.5

876.0

Inter-segment sales

(6.7
)
(6.9
)
(20.1
)
(23.4
)

Total Net Sales
$
728.2
$
754.1
$
2,241.8
$
2,375.4

2.
(1)
Includes the results of Water-Right, Inc. from April 8, 2019, the date of acquisition
3. Acquisitions
On ~~September 5, 2017,~~April 8, 2019, the Company acquired 100 percent of the shares of ~~Hague Quality Water International (Hague)~~Water-Right, Inc. and its affiliated entities (Water-Right), ~~an Ohio-based~~a Wisconsin-based water ~~softener~~treatment company. With the addition of ~~Hague,~~Water-Right, the Company grew its North America water treatment platform. ~~Hague~~Water-Right is included in the Company’s North America segment for reporting purposes.
The Company paid an aggregate cash purchase price of ~~$43.1~~$107.0 million, net ~~of $4.1 million~~ of cash acquired. In addition, the Company established a ~~$1.5~~$4.0 million ~~holdback liability~~escrow to satisfy any potential obligations of the former owners of ~~Hague,~~Water-Right, should they arise, otherwise the amount will be paid to the former owners of Hague on September 5, 2018. 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 $0.1 million. As of the acquisition date and September 30, 2017, the Company estimated the fair value of the holdback liability and additional contingent consideration at $1.5 million and $2.0 million, respectively, and has recorded liabilities for those amounts.
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 ~~Hague~~Water-Right for purposes of allocating the purchase price. The Company is in the process of finalizing the fair value estimates; therefore, the allocation of the purchase price is subject to refinement. The preliminary ~~$12.8~~$57.6 million of acquired identifiable intangible assets was comprised of ~~$1.1~~the following: $38.3 million of ~~trade names that are~~customer relationships being amortized over 20 years, $18.2 million of trademarks not subject to amortization, and ~~$11.7~~$1.1 million of ~~customer lists~~
non-compete
agreements being amortized over 187.5 years.

September 5, 2017 (dollars in millions)

Current assets, net of cash acquired
   $ 7.8
Property, plant and equipment
   6.9
Intangible assets
   12.8
Goodwill
   21.3


Total assets acquired
   48.8
Current liabilities
   (4.7 )
Long-term liabilities
   (1.0 )


Total liabilities assumed
   (5.7 )


Net assets acquired
   $ 43.1


10

3. Acquisitions (continued)

April 8, 2019 (dollars in millions)

Current assets, net of cash acquired
$
9.7

Property, plant and equipment

8.6

Intangible assets

57.6

Goodwill

33.7

Total assets acquired

109.6

Current liabilities

(2.6
)

Total liabilities assumed

(2.6
)

Net assets acquired
$
107.0

The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have been included in the Company’s consolidated financial statements from ~~September 5, 2017,~~April 8, 2019, the date of acquisition. Revenues and
pre-tax
earnings associated with ~~Hague~~Water-Right included in the consolidated statement of earnings
for the nine months ended September 30, 2019
totaled ~~$2.2~~$29.9 million and ~~$0.6~~$5.0 million, respectively, which included ~~$0.7~~$5.4 million of operating earnings less ~~$0.1~~$0.4 million of acquisition-related costs incurred by the Company resulting from the acquisition.
2.4. ~~Acquisitions (continued)~~Leases
~~On August 8, 2016,~~
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 ~~acquired 100 percent~~the right to control the use of a physical asset for a stated term. The Company pays the ~~shares~~lessor for that right, with a series of ~~Aquasana, Inc. (Aquasana),~~payments defined in the contract and a ~~Texas-based water treatment company. With~~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 ~~addition~~Company’s incremental borrowing rate. The incremental borrowing rate is the rate of ~~Aquasana,~~interest that the Company ~~entered the North America water treatment market. Aquasana is included in the Company’s North America segment for reporting purposes.~~
~~The Company paid~~would
incur if it were
to borrow, on a collateralized basis, an aggregate cash purchase price of $85.1 million, net of $1.9 million of cash acquired. In addition, the Company incurred acquisition-related costs of approximately $1.2 million and recorded a holdback liability to satisfy any potential obligations of the former owners of Aquasana to pay any adjustmentsamount equal to the ~~purchase price. As of the acquisition date, the fair~~ value of the ~~holdback~~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.
1
1

5.	Restructuring and Impairment Expenses

In the first quarter of 2018, the Company announced a move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. At that time, the Company recognized $6.7 million of restructuring and impairment expenses, comprised of $4.0 million of 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 ~~million. The Company paid the holdback liability in full~~million tax benefit related to the ~~former owners~~charges. The consolidation of ~~Aquasana~~operations from the Renton facility to other U.S. facilities was completed in ~~the third quarter of 2017.~~
2018.

The following table ~~summarizes the allocation~~presents an analysis of the ~~fair value~~Company’s restructuring reserve as of ~~the assets acquired~~ and ~~liabilities assumed at~~for the date of acquisition of Aquasana. The $30.0 million of acquired intangible assets was comprised of $21.5 million of trade names that are not subject to amortization, $8.3 million of customer lists being amortized over ten years and $0.2 million of patents being amortized over five years.

August 8, 2016 (dollars in millions)

Current assets, net of cash acquired
   $ 7.3
Property, plant and equipment
   2.7
Intangible assets
   30.0
Goodwill
   60.4


Total assets acquired
   100.4
Current liabilities
   (7.1 )
Long-term liabilities
   (8.2 )


Total liabilities assumed
   (15.3 )


Net assets acquired
   $ 85.1


The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have been included in the Company’s consolidated financial statements from August 8, 2016, the date of acquisition.
ni
n
e
months ended September 30, 2019:

(dollars in millions)

Severance
Costs

Lease Exit
Costs

Total

Balance at January 1, 2019
$
0.2
$
1.3
$
1.5

Cash payments

—

(0.1
)
(0.1
)

Balance at March 31, 2019

0.2

1.2

1.4

Cash payments

—

(0.1
)
(0.1
)

Balance at June 30, 2019
$
0.2
$
1.1
$
1.3

Cash payments

(0.2
)
—

(0.2
)

Balance at September 30, 2019
$
—
$
1.1
$
1.1

3.6. Inventories
The following table presents the components of the Company’s inventory balances:

(dollars in millions)

   September 30,
2017    December 31,
2016
Finished products
   $ 138.4    $ 114.1
Work in process
   17.9    13.0
Raw materials
   154.5    142.4




Inventories, at FIFO cost
   310.8    269.5
LIFO reserve
   (18.7 )    (18.4 )




Net inventory
   $ 292.1    $ 251.1




(dollars in millions)

September 30, 2019

December 31, 2018

Finished products
$
140.2
$
137.6

Work in process

24.6

23.3

Raw materials

175.7

174.4

Inventories, at FIFO cost

340.5

335.3

LIFO reserve

(30.5
)
(30.6
)

Net inventory
$
310.0
$
304.7

1
3

Table of Contents
4.7. Product Warranties
The Company offers warranties on the ~~sales~~sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims. The following table presents the Company’s warranty liability activity.

(dollars in millions)
   Three Months Ended
September 30,
   2017    2016
Balance at July 1,
   $ 140.8    $ 141.5
Expense
   8.1    10.4
Claims settled
   (8.4 )    (8.9 )




Balance at September 30,
   $ 140.5    $ 143.0




(dollars in millions)
   Nine Months Ended
September 30,
   2017    2016
Balance at January 1,
   $ 140.9    $ 139.4
Expense
   28.6    34.7
Claims settled
   (29.0 )    (31.1 )




Balance at September 30,
   $ 140.5    $ 143.0




Three

Months

Ended
September 30,

(dollars in millions)

2019

2018

Balance at July 1,
$
134.0
$
141.6

Expense

11.0

8.7

Claims settled

(11.6
)
(9.8
)

Balance at September 30,
$
133.4
$
140.5

Nine

Months

Ended
September 30,

(dollars in millions)

2019

2018

Balance at January 1,
$
139.4
$
141.2

Expense

31.8

31.4

Claims settled

(37.8
)
(32.1
)

Balance at September 30,
$
133.4
$
140.5

5.8. Long-Term Debt
The Company has a $500 million multi-year multi-currency revolving credit agreement with a group of ~~nine~~
9
banks, which expires on
December 15, ~~2021.~~2021
. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied.
Borrowings under 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 Company’s commercial paper and credit line borrowings are classified as long-term debt at September 30, ~~2017.~~2019. At its option, the Company either maintains cash balances or pays fees for bank credit and services.
On November 28, 2016, the Company issued an aggregate of $45 million in term notes in two tranches to two insurance companies. Principal payments commence in 2023 and 2028 and the notes mature in 2029 and 2034, respectively. The notes have interest rates of 2.87 percent and 3.10 percent, respectively. The proceeds received from the issuance of the notes were used to pay down borrowings under the Company’s revolving credit facility.
6.9. Earnings per Share of Common Stock
The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the ~~computation~~computation of basic and diluted weighted-average shares used in the earnings per share calculations:

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Denominator for basic earnings per share – weighted average shares
   172,446,529    174,409,789    172,936,255    175,019,605
Effect of dilutive stock options and share units
   1,909,214    2,138,589    1,948,557    2,097,444








Denominator for diluted earnings per share
   174,355,743    176,548,378    174,884,812    177,117,049








Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Denominator for basic earnings per share - weighted average shares

164,298,458

170,507,922

166,296,444

171,030,747

Effect of dilutive stock options and share units

1,244,787

1,576,694

1,265,777

1,687,050

Denominator for diluted earnings per share

165,543,245

172,084,616

167,562,221

172,717,797

1
4

10.	Stock Based Compensation

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the ~~“Plan”)~~Plan) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at September 30, ~~2017~~2019 was ~~2,881,300.~~1,873,064. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in the three months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$1.3~~$1.5 million and ~~$1.2~~$1.8 million, respectively. Total stock based compensation expense recognized in the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$8.5~~$12.3 million and ~~$8.1~~$9.7 million, respectively.

Stock Options

The stock options granted in the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 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 ~~2017~~2019 and ~~2016~~2018 expire
ten years
after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period; however, included in stock option expense for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was 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 in the three months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$0.6~~$0.7 million and ~~$0.5~~$0.8 million, respectively. Stock based compensation expense attributable to stock options in the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$4.0~~$5.9 million and ~~$3.9~~$4.6 million, respectively.
7. ~~Stock Based Compensation (continued)~~

Changes in ~~option shares,~~options, all of which relate to the Company’s Common Stock, were as follows for the nine months ended September 30, ~~2017:~~

   Weighted-Avg.
Per Share
Exercise Price    Number of
Options    Average
Remaining
Contractual
Life    Aggregate
Intrinsic Value
(dollars in millions)
Outstanding at January 1, 2017
   $ 21.69    2,664,333
Granted
   50.16    358,150
Exercised
   18.84    (486,021 )
Terminated
   36.13    (3,640 )



Outstanding at September 30, 2017
   26.24    2,532,822    7 years    $ 82.7




Exercisable at September 30, 2017
   19.34    1,653,841    6 years    $ 65.4




2019:

Weighted-
Avg.

Per
Share
Exercise
Price

Number of
Options

Average
Remaining
Contractual
Life

Aggregate
Intrinsic
Value
(dollars in
millions)

Outstanding at January 1, 2019
$
33.05

2,432,689

Granted

49.49

557,045

Exercised

15.97

(177,306
)
Forfeited

54.29

(8,704
)
Outstanding at September 30, 2019

37.33

2,803,724

7
years
$
36.0

Exercisable at September 30, 2019

29.89

1,894,160

6
years
$
36.0

The weighted-average fair value per option at the date of grant during the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 using the Black-Scholes option-pricing model was ~~$13.04~~$10.83 and ~~$8.03,~~$14.80, respectively. Assumptions were as follows:

   Nine Months Ended September 30,
   2017 2016
Expected life (years)
   5.7 5.8
Risk-free interest rate
   2.4 % 1.7 %
Dividend yield
   1.0 % 1.3 %
Expected volatility
   26.5 % 27.7 %

Nine Months Ended

September 30,

2019

2018

Expected life (years)

5.5

5.7

Risk-free interest rate

2.7
%
2.9
%
Dividend yield

1.6
%
1.0
%
Expected volatility

22.8
%
22.1
%
1
5

Table of Contents
10. Stock Based Compensation (continued)
The expected lives of options for purposes of these models are based on historical exercise behavior. The risk-free interest rates for purposes of these models are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models are based on the historical volatility of the Common Stock.
Stock Appreciations Rights (SARs)
~~Certain~~
In 2015, certain
non-U.S.-based
employees ~~have been~~were granted SARs. Each SAR award ~~grants~~ grant
ed
the employee the right to receive cash equal to the excess of the share price of the Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted ~~have~~ha
d
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
NaN
SARs were granted in ~~2017~~2019 or ~~2016.~~2018. As of September 30, ~~2017,~~2019, there were ~~23,660~~14,880 SARs outstanding and ~~15,774 were~~ exercisable. In the nine months ended September 30, ~~2017, 427~~2019, 1,290 SARs were ~~exercised and 853 SARs were terminated.~~exercised. Stock based compensation expense attributable to SARs was minimal in the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~
7. ~~Stock Based Compensation (continued)~~
2018.
Restricted Stock and Share Units
Participants may also be awarded shares of restricted stock or share units under the Plan.
Share units vest three years after the date of grant.
The Company granted ~~107,755~~139,892 and ~~160,428~~106,581 share units under the plan in the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The share units were valued at ~~$5.4~~$6.9 million and ~~$5.2~~$6.6 million at the date of issuance in ~~2017~~2019 and ~~2016,~~2018, respectively, based on the price of the Company’s Common Stock at the date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was expense associated with accelerated vesting of share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of ~~$0.7~~$0.8 million and ~~$0.7~~$1.0 million was recognized in the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. Stock based compensation expense attributable to share units of ~~$4.5~~$6.4 million and ~~$4.2~~$5.1 million was recognized in the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively. Certain
non-U.S.-based
employees receive the cash value of ~~vested shares~~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 plan is as follows for the ~~three~~nine months ended September 30, ~~2017:~~

   Number of
Units    Weighted-Average
Grant Date Value
Issued and unvested at January 1, 2017
   544,055    $ 27.35
Granted
   107,755    50.16
Vested
   (213,863 )    23.25
Forfeited
   (3,465 )    33.58



Issued and unvested at September 30, 2017
   434,482    34.23



2019:

Number of Units

Weighted-Average
Grant Date Value

Issued and unvested at January 1, 2019

379,601
$
42.93

Granted

139,892

49.52

Vested

(147,642
)
31.35

Forfeited

(4,509
)
55.57

Issued and unvested at September 30, 2019

367,342

50.05

1
6

11.

Pensions

The following table presents the components of the Company’s net pension income.

(dollars in millions)

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Service cost
   $ 0.5    $ 0.4    $ 1.4    $ 1.3
Interest cost
   7.6    7.7    22.5    23.0
Expected return on plan assets
   (14.8 )    (13.9 )    (43.5 )    (41.5 )
Amortization of unrecognized loss
   4.6    4.4    13.4    13.2
Amortization of prior service cost
   (0.1 )    (0.3 )    (0.3 )    (0.8 )








Defined benefit plan income
   $ (2.2 )    $ (1.7 )    $ (6.5 )    $ (4.8 )

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Service cost
$
0.4
$
0.5
$
1.3
$
1.5

Interest cost

8.0

7.2

23.7

21.7

Expected return on plan assets

(14.3
)
(14.5
)
(43.1
)
(43.6
)
Amortization of unrecognized loss

4.4

4.9

12.4

14.2

Amortization of prior service cost

(0.2
)
(0.2
)
(0.4
)
(0.4
)

Defined benefit plan income
$
(1.7
) $
(2.1
) $
(6.1
) $
(6.6
)

The service cost component of net periodic benefit cost is presented within cost of products sold and selling, general and administrative expenses within the condensed consolidated statements of earnings while the other components of pension income are reflected in other income. The Company was not required to and did not make a contribution to its U.S. pension plan in 2018. The Company is not required to make a contribution in ~~2017 but made a voluntary $30 million contribution in the three months ended September 30, 2017. The Company also made a voluntary $30 million contribution to its U.S. pension plan in 2016.~~
2019.
9.12. Segment Results
The Company is comprised of ~~two~~2 reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas ~~gas tankless,~~and electric water heaters, ~~non-condensing~~ boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The ~~North America segment also manufactures and globally markets condensing boilers and water system tanks. The~~ Rest of World segment also manufactures and markets
in-home
air purification products in China.
The following table presents the Company’s segment results:

(dollars in millions)

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2017    2016    2017    2016
Net sales

North America
   $ 486.0    $ 450.8    $ 1,444.0    $ 1,307.5
Rest of World
   270.1    240.3    802.4    697.6
Inter-segment sales
   (6.2 )    (7.2 )    (18.3 )    (17.3 )








   $ 749.9    $ 683.9    $ 2,228.1    $ 1,987.8








Segment earnings

North America
   $ 110.3    $ 100.5    $ 323.7    $ 296.5
Rest of World
   33.8    31.1    98.8    90.9
Inter-segment earnings elimination
   (0.1 )    —      (0.3 )    —








   144.0    131.6    422.2    387.4
Corporate expense
   9.9    11.1    35.0    35.6
Interest expense
   2.5    2.1    7.2    5.7








Earnings before income taxes
   131.6    118.4    380.0    346.1
Provision for income taxes
   37.9    35.2    106.2    102.3








Net earnings
   $ 93.7    $ 83.2    $ 273.8    $ 243.8








(dollars in millions)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Net sales

North America
$
514.6
$
486.9
$
1,560.4
$
1,522.8

Rest of World

220.3

274.1

701.5

876.0

Inter-segment

(6.7
)
(6.9
)
(20.1
)
(23.4
)
$
728.2
$
754.1
$
2,241.8
$
2,375.4

Segment earnings

North America
(1)
$
121.6
$
105.6
$
360.5
$
336.5

Rest of World

4.1

39.1

38.8

109.8

Inter-segment

—

—

(0.1
)
—

125.7

144.7

399.2

446.3

Corporate expense

(9.8
)
(11.2
)
(34.1
)
(36.7
)
Interest expense

(3.1
)
(2.0
)
(8.5
)
(6.6
)
Earnings before income taxes

112.8

131.5

356.6

403.0

Provision for income taxes

25.5

26.9

77.9

85.1

Net earnings
$
87.3
$
104.6
$
278.7
$
317.9

(1)
includes restructuring and impairment expenses of:
$
—
$
—
$
—
$
6.7

1
7

Table of Contents
~~10.~~13. Fair Value Measurements
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.
~~10.~~ ~~Fair Value Measurements (continued)~~
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.
The following table presents assets measured at fair value on a recurring basis.

(dollars in millions)

Fair Value Measurement Using
   September 30, 2017    December 31, 2016
Quoted prices in active markets for identical assets (Level 1)
   $ 444.4    $ 424.5

(dollars in millions)

Fair Value Measurement Using

September 30, 2019

December 31, 2018

Quoted prices in active markets for identical assets (Level 1)
$
294.4
$
385.3

Significant other observable inputs (Level 2)

8.4

7.5

Items measured at fair value were comprised of the Company’s marketable securities (Level 1) and derivative instruments (Level 2). There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis during the nine months ended September 30, ~~2017.~~
2019.
~~11.~~14. Derivative Instruments
~~ASC 815,~~ ~~Derivatives and Hedging~~, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.
The Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive loss, net of tax, and is reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The amount by which the cumulative change in the value of the hedge more than offsets the cumulative change in the value of the hedged item (i.e., the ineffective portion) is recorded in earnings, net of tax, in the period the ineffectiveness occurs.
The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.
Cash Flow Hedges
With the exception of its net investment hedges, the Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), gains or losses on the derivative instrument are reported as a component of other comprehensive loss, net of tax, and are reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.
Foreign Currency Forward Contracts
The Company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of business. ~~Currencies~~Principal currencies for which the Company utilizes foreign currency forward contracts include the British pound, Canadian dollar, Euro and Mexican peso.
1
8

14.	Derivative Instruments (continued)

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.~~

(dollars in millions)

   September 30,
   2017    2016
   Buy    Sell    Buy    Sell
British pound
   $ —      $ 1.5    $ —      $ 0.2
Canadian dollar
   —      67.4    —      77.2
Euro
   27.9    0.5    6.7    0.5
Mexican peso
   19.3    —      13.8    —








Total
   $ 47.2    $ 69.4    $ 20.5    $ 77.9








~~Commodity Futures Contracts~~
~~In addition to entering~~contracts that are designated as cash flow hedges.

(dollars in millions)

September 30, 2019

December 31, 2018

Buy

Sell

Buy

Sell

British pound
$
—
$
0.3
$
—
$
1.0

Canadian dollar

—

39.4

—

—

Euro

44.7

—

32.0

—

Mexican peso

23.0

—

27.8

—

Total
$
67.7
$
39.7
$
59.8
$
1.0

Net Investment Hedges
The Company enters into ~~supply arrangements in the normal course of business, the Company also entered into futures~~certain foreign currency forward contracts to ~~fix~~hedge the ~~cost~~exposure to a portion of ~~certain raw material purchases, principally copper and steel, with~~ the ~~objective~~Company’s net investments in certain
non-U.S
.
s
ubsidiaries against the effect of ~~minimizing changes in cost due to market price fluctuations. The Company’s hedging strategy for achieving this objective is to purchase commodities futures contracts~~exchange rate fluctuations on the ~~open market~~translation of foreign currency balances to the ~~London Metals Exchange (LME) or over~~U.S. dollar. For the ~~counter contracts based on the LME for copper. Steel futures contracts~~derivative instruments that are ~~purchased on the New York Metals Exchange (NYMEX).~~
~~With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.~~
~~The after-tax~~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 ~~effective portion~~Company’s net investments in its
non-U.S.
subsidiaries. These hedges are determined to be effective. The Company recognized $
2.7
million and $
1.8
million of
after-tax
gains associated with hedges of a net investment in
non-U.S.
subsidiaries in currency translation adjustment in other comprehensive income in the
three and
nine months ended September 30, 2019
, respectively
. The Company recognized $
4.1
million and $
7.4
million of
after-tax
gains associated with hedges of a net investment in
non-U.S.
subsidiaries in currency translation adjustment in other comprehensive income in the three and nine months ended September 30, 2018, respectively. The contractual amount of the ~~copper and steel hedge~~Company’s foreign currency forward contracts that are designated as net investment hedges is $
100.0
million as of September 30, ~~2017 were recorded in accumulated other comprehensive loss and will be reclassified into cost~~2019.
1
9

Table of products sold in the period in which the underlying transaction is recorded in earnings. The after-tax gains and losses on the effective portion of the contracts will be reclassified within one year. Contractual amounts of the Company’s commodities futures contracts were immaterial as of September 30, 2017.
Contents
14. Derivative Instruments (continued)
The following tables present the impact of derivative contracts on the Company’s financial statements.
~~11.~~ ~~Derivative Instruments (continued)~~
Fair value of derivatives designated as hedging instruments under ASC 815:

(dollars in millions)

   Balance Sheet Location    September 30,
2017    December 31,
2016
Foreign currency contracts
   Other current assets    $ 0.6    $ 1.9
   Accrued liabilities    (2.0 )    (2.0 )
Commodities contracts
   Other current assets    0.1    0.8
   Accrued liabilities    —      (0.3 )




Total derivatives designated as hedging instruments
   $ (1.3 )    $ 0.4




(dollars in millions)

Balance

Sheet

Location

September 30,
2019

December 31,
2018

Foreign currency contracts

Other

current

assets
$
10.3
$
3.9

Other

non-current

assets

—

5.1

Accrued liabilities

(1.9
)
(0.6
)
Commodities contracts

Accrued liabilities

—

(0.9
)

Total derivatives designated as hedging instruments
$
8.4
$
7.5

The effect of ~~derivatives designated as hedging instruments~~cash flow hedges on the condensed consolidated statement of ~~earnings is as follows:~~
earnings:
Three Months Ended September 30 (dollars in millions):

Derivatives in
ASC 815 cash
flow hedging relationships
   Amount of gain
(loss)
recognized in
OCI on
derivative
(effective
portion) Location of
gain (loss)
reclassified
from
accumulated
OCI into
earnings
(effective
portion)    Amount of gain
(loss) reclassified
from accumulated
OCI into earnings
(effective portion) Location of
gain (loss)
recognized in
earnings on
derivative
(ineffective
portion)    Amount of
gain (loss)
recognized in
earnings on a
derivative
(ineffective
portion)
   2017 2016    2017 2016    2017    2016
Foreign currency contracts
   $ (2.5 ) $ 0.8
Cost of
products sold
   $ (0.3 ) $ (0.3 ) N/A    $ —      $ —
Commodities contracts
   —   (1.1 )
Cost of
products sold
   0.3 0.7
Cost of
products sold
   —      —








   $ (2.5 ) $ (0.3 )    $ —   $ 0.4    $ —      $ —








Derivatives in ASC 815 cash flow hedging relationships

Amount of gain (loss)
recognized in other
comprehensive

loss
on derivative

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

earnings

Amount of gain (loss)
reclassified from
accumulated other
comprehensive

loss
into earnings

2019

2018

2019

2018

Foreign currency contracts
$
(1.1
) $
1.9

Cost of products sold
$
(0.1
) $
—

Commodities contracts

—

—

Cost of products sold

(0.6
)
—

$
(1.1
) $
1.9
$
(0.7
) $
—

Nine Months Ended September 30 (dollars in millions):

Derivatives in ASC
815 cash flow
hedging relationships
   Amount of
gain (loss)
recognized in
OCI on
derivative
(effective
portion) Location of
gain (loss)
reclassified
from
accumulated
OCI into
earnings
(effective
portion)    Amount of gain
(loss) reclassified
from accumulated
OCI into earnings
(effective portion) Location of
gain (loss)
recognized in
earnings on
derivative
(ineffective
portion)    Amount of
gain (loss)
recognized in
earnings on a
derivative
(ineffective
portion)
   2017 2016    2017    2016    2017    2016
Foreign currency contracts
   $ (1.0 ) $ (4.1 )
Cost of
products sold
   $ 0.3    $ (1.1 ) N/A    $ —      $ —
Commodities contracts
   0.1 0.7
Cost of
products sold
   0.4    0.7
Cost of
products sold
   —      —










   $ (0.9 ) $ (3.4 )    $ 0.7    $ (0.4 )    $ —      $ —










Derivatives in ASC 815 cash flow hedging relationships

Amount of gain (loss)
recognized in other
comprehensive

loss
on derivative

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

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

2019

2018

2019

2018

Foreign currency contracts
$
(0.6
) $
3.3

Cost of products sold
$
(0.1
) $
0.1

Commodities contracts

(0.5
)
—

Cost of products sold

(1.4
)
0.3

$
(1.1
) $
3.3
$
(1.5
) $
0.4

20

15.	Income Taxes

The Company’s effective income tax rates for the three and nine months ended September 30, ~~2017~~2019 were ~~28.8~~22.6 percent and ~~27.9~~21.8 percent, respectively. The Company estimates that its annual effective income tax rate for the full year ~~2017~~2019 will be approximately ~~28 percent, assuming no material changes to existing tax codes. The full year effective income tax rate in 2016 was 29.4~~22.0 percent. The ~~lower~~ effective income tax rates infor the three and nine months ended September 30, ~~2017~~2018 were 20.5 percent and 21.1 percent, respectively. The change in the effective income tax rate
s
for the three and nine months ended September 30, 2019 compared to ~~prior year periods were~~the effective income tax rate
s
for the three and nine months ended September 30, 2018 was primarily due to ~~lower state income taxes.~~
change in the geographic
earnings mix.

As of September 30, ~~2017,~~2019, the Company had ~~$4.2~~$7.8 million of unrecognized tax benefits of which ~~$0.6~~$0.8 million would affect its effective income tax rate if recognized. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company’s U.S. federal income tax returns for ~~2015-2016~~2016-2019 are subject to audit. The Company is subject to state and local income tax audits for tax years ~~2001-2016.~~2002-2019. The Company is subject to
non-U.S.
income tax examinations for years ~~2008-2016.~~
2013-2019.

~~13.~~16.

Commitments and Contingencies

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 $17.1 and $25.1 million as of September 30, 2019 and December 31, 2018, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $56.3 million and $75.8 million as of September 30, 2019 and December 31, 2018, respectively. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of September 30, 2019 and December 31, 2018.

2
1

Table of Contents
17. Changes in Accumulated Other Comprehensive Loss by Component
Changes to accumulated other comprehensive loss by component are as follows:

(dollars in millions)
   Three Months Ended September 30,
   2017 2016
Cumulative foreign currency translation

Balance at beginning of period
   $ (58.3 ) $ (47.9 )
Other comprehensive gain (loss) before reclassifications
   17.3 (3.5 )


Balance at end of period
   (41.0 ) (51.4 )


Unrealized net gain (loss) on cash flow derivatives

Balance at beginning of period
   0.8 (0.3 )
Other comprehensive loss before reclassifications
   (1.6 ) —
Realized gains on derivatives reclassified to cost of products sold (net of tax provision of $0.2 in 2016, respectively)
   —   (0.2 )


Balance at end of period
   (0.8 ) (0.5 )


Pension liability

Balance at beginning of period
   (283.2 ) (275.3 )
Other comprehensive loss before reclassifications
   (0.1 ) (0.1 )
Amounts reclassified from accumulated other comprehensive loss:⁽¹⁾
   2.7 2.5


Balance at end of period
   (280.6 ) (272.9 )


Accumulated other comprehensive loss, end of period
   $ (322.4 ) $ (324.8 )


⁽¹⁾Amortization of pension items:

Actuarial losses
   $ 4.6 ⁽²⁾ $ 4.4 ⁽²⁾
Prior year service cost
   (0.1 )⁽²⁾ (0.3 )⁽²⁾


   4.5 4.1
Income tax benefit
   (1.8 ) (1.6 )


Reclassification net of income tax benefit
   $ 2.7 $ 2.5


⁽²⁾    These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 8—Pensions for additional details

(dollars in millions)

Three

Months

Ended
September 30,

2019

2018

Cumulative foreign currency translation

Balance at beginning of period
$
(59.1
) $
(39.1
)
Other comprehensive (loss) income before reclassifications

(21.9
)
(20.7
)

Balance at end of period

(81.0
)
(59.8
)

Unrealized net gain on cash flow derivatives

Balance at beginning of period

(0.1
)
(0.1
)
Other comprehensive (loss) gain before reclassifications

(0.8
)
1.3

Realized losses (gains) on derivatives reclassified to cost of products sold (net of income tax (benefit) provision of ($0.2) and $ - in 2019 and 2018, respectively)

0.5

—

Balance at end of period

(0.4
)
1.2

Pension liability

Balance at beginning of period

(279.2
)
(265.2
)
Other comprehensive (loss) gain before reclassifications

(4.1
)
2.0

Amounts reclassified from accumulated other comprehensive loss:
(1)

3.1

3.6

Balance at end of period

(280.2
)
(259.6
)

Accumulated other comprehensive loss, end of period
$
(361.6
) $
(318.2
)

(1)

Amortization of pension items:

Actuarial losses
$
4.4
(2) $
4.9
(2)
Prior year service cost

(0.2
)
(2)

(0.2
)
(2)

4.2

4.7

Income tax benefit

(1.1
)
(1.1
)

Reclassification net of income tax benefit
$
3.1
$
3.6

~~13.~~(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 11 - Pensions for additional details
2
2

Table of Contents
17. Changes in Accumulated Other Comprehensive Loss by Component (continued)
Changes to accumulated other comprehensive loss by component are as follows:

(dollars in millions)
   Nine Months Ended September 30,
   2017 2016
Cumulative foreign currency translation

Balance at beginning of period
   $ (79.2 ) $ (39.4 )
Other comprehensive gain (loss) before reclassifications
   38.2 (12.0 )


Balance at end of period
   (41.0 ) (51.4 )


Unrealized net gain on cash flow derivatives

Balance at beginning of period
   0.2 1.2
Other comprehensive loss before reclassifications
   (0.6 ) (1.9 )
Realized (gains) losses on derivatives reclassified to cost of products sold (net of tax provision (benefit) of $0.3 and $(0.2) in 2017 and 2016, respectively)
   (0.4 ) 0.2


Balance at end of period
   (0.8 ) (0.5 )


Pension liability

Balance at beginning of period
   (284.2 ) (275.2 )
Other comprehensive gain before reclassifications
   (4.3 ) (5.3 )
Amounts reclassified from accumulated other comprehensive loss:⁽¹⁾
   7.9 7.6


Balance at end of period
   (280.6 ) (272.9 )


Accumulated other comprehensive loss, end of period
   $ (322.4 ) $ (324.8 )


⁽¹⁾Amortization of pension items:

Actuarial losses
   $ 13.4 ⁽²⁾ $ 13.2 ⁽²⁾
Prior year service cost
   (0.3 )⁽²⁾ (0.8 )⁽²⁾


   13.1 12.4
Income tax benefit
   (5.2 ) (4.8 )


Reclassification net of income tax benefit
   $ 7.9 $ 7.6
⁽²⁾    These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 8—Pensions for additional details

(dollars in millions)

Nine

Months

Ended
September 30,

2019

2018

Cumulative foreign currency translation

Balance at beginning of period
$
(64.9
) $
(26.5
)
Other comprehensive income (loss) before reclassifications

(16.1
)
(33.3
)

Balance at end of period

(81.0
)
(59.8
)

Unrealized net gain on cash flow derivatives

Balance at beginning of period

(0.7
)
(0.9
)
Other comprehensive (loss) gain before reclassifications

(0.8
)
2.4

Realized losses (gains) on derivatives reclassified to cost of products sold
(net of income tax (benefit) provision of ($0.4) and $0.1 in 2019 and

2018,

respectively)

1.1

(0.3
)

Balance at end of period

(0.4
)
1.2

Pension liability

Balance at beginning of period

(285.2
)
(272.1
)
Other comprehensive (loss) gain before reclassifications

(4.1
)
2.0

Amounts reclassified from accumulated other comprehensive loss:
(1)

9.1

10.5

Balance at end of period

(280.2
)
(259.6
)

Accumulated other comprehensive loss, end of period
$
(361.6
) $
(318.2
)

(1)

Amortization of pension items:

Actuarial losses
$
12.4
(2) $
14.2
(2)
Prior year service cost
$
(0.4
)
(2)

(0.4
)
(2)

12.0

13.8

Income tax benefit

(2.9
)
(3.3
)

Reclassification net of income tax benefit
$
9.1
$
10.5

(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 11 - Pensions for additional details
2
3

PART I - FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our ~~Company~~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 ~~gas tankless,~~and electric water heaters, ~~non-condensing~~ boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective region of the world. Our ~~North America~~Rest of World segment also manufactures and ~~globally~~ markets ~~condensing boilers and water systems tanks. We also manufacture and market~~
in-home
air purifier products in China.

In our North America segment, we project our water heater sales ~~in the U.S.~~ will grow in ~~2017~~2019 compared to ~~2016~~2018 primarily due to ~~higher residential~~
mid-2018
pricing actions on water heaters related to steel and ~~commercial water heater volumes resulting from industry-wide new construction growth and expansion of replacement demand.~~other inflationary costs. We expect boiler sales ~~of Lochinvar-branded products to~~will grow ~~over eight~~five percent in ~~2017~~2019, driven by ~~double-digit boiler sales growth,~~the continuing U.S. industry transition to higher efficiency products and our introduction of new ~~product introductions and growth in sales of energy efficient~~ products. We ~~expanded~~continued to expand our North America water treatment platform by being named exclusive supplier of water treatment products to Lowe’s, with sales commencing in August 2018, and acquiring the ~~acquisition Hague Quality Water International (Hague) on September 5, 2017.~~Water-Right group of companies (Water-Right) in April 2019. We expect sales of North America water treatment products to ~~incrementally add over $40 million~~increase by approximately 60 percent in 2019, compared to 2018, primarily due to sales of Water-Right products from the date of acquisition, a full year ~~2017 sales.~~
of sales to Lowe’s and volume growth.

In our Rest of World segment, we expect ~~full year 2017~~China sales to decline in ~~China to grow compared to 2016~~2019 at a rate of ~~over 15~~approximately 23 percent in U.S. dollars and approximately 19 percent in local currency ~~terms driven~~due to inventory build in the sales channel that occurred in the first half of 2018 and an expectation that customers will scale back their purchases through the fourth quarter of 2019 due to continued elevated channel inventory levels. We believe Chinese consumer demand will continue to be weak and the Chinese currency will depreciate compared to the U.S. dollar by ~~expected continued overall water heater market growth, market share gains, improved product mix and water treatment product sales growth at a rate significantly higher than 15 percent.~~approximately five percent in 2019 compared with 2018. In addition, ~~our sales in India were approximately $18 million last year and~~ we expect our sales in India to grow ~~over 30~~approximately 15 percent in ~~2017.~~
2019 from approximately $34 million in 2018.

Combining all of these factors, we expect ~~total Company~~our consolidated sales ~~growth of between 11 percent and 12~~to decline approximately five percent in ~~2017 as compared to 2016.~~
U.S. dollar terms and approximately 3.5 percent in local currency terms in 2019.

RESULTS OF OPERATIONS

THIRD QUARTER AND FIRST NINE MONTHS OF ~~2017~~2019 COMPARED TO ~~2016~~
2018

Sales ~~for~~in the third quarter of ~~2017~~2019 were ~~$749.9~~$728 million or approximately ~~ten~~three percent ~~higher~~lower than sales of ~~$683.9~~$754 million in the third quarter of ~~2016.~~2018. Sales in the first nine months of ~~2017 increased to $2,228.1~~2019 were $2,242 million ~~from $1,987.8~~or approximately six percent lower than sales of $2,375 million in the same period last year. ~~Sales in China increased~~Our sales decline in the third quarter and first nine months of ~~2017,~~2019 compared to ~~prior~~the same periods in the previous year was primarily a result of lower sales in China due to ~~higher sales of~~weak consumer ~~products. Higher sales of water heaters~~demand and ~~boilers in the U.S. also contributed to higher~~elevated channel inventory levels. In addition, our sales in ~~both periods~~China were adversely impacted by currency translation of ~~2017, compared to prior periods. North America water treatment sales, comprised of Aquasana, acquired in August of 2016 and Hague, acquired on September 5, 2017 added $7.5~~approximately $6 million and ~~$30.8~~$35 million ~~of incremental sales to~~in the third quarter and first nine months of ~~2017, respectively. The~~2019, respectively, compared to the same periods last year, due to the depreciation of the Chinese currency ~~against~~compared to the U.S. ~~dollar negatively impacted~~dollar. The sales ~~by approximately $26 million~~decline in China more than offset the benefits of increased sales in North America, which were primarily a result of higher volumes of water heaters, boilers, and water treatment products in the third quarter of 2019 compared to the prior year period, and increased volumes of boilers and water treatment products in the first nine months of ~~2017,~~2019 compared to the same period in 2018. Water-Right, acquired on April 8, 2019, added approximately $16 million and $30 million to sales in the third quarter and first nine months of ~~2016.~~
2019, respectively.

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Gross profit margin in the third quarter of ~~2017~~2019 of ~~40.9~~39.0 percent was lower than the gross profit margin of ~~41.4~~40.6 percent in the third quarter of ~~2016.~~2018. Gross profit margin in the first nine months of ~~2017 decreased to 41.1~~2019 of 39.5 percent ~~from 41.7~~was lower than gross profit margin of 40.8 percent in the first nine months of ~~2016. Margins~~2018. The lower gross profit margin in ~~the third quarter and first nine months of 2017 were impacted by significantly higher steel costs that more than offset pricing actions taken earlier this year~~each period was primarily due to lower sales volumes in ~~North America and~~ China.
Selling, general and administrative (SG&A) expenses in the third quarter and first nine months of ~~2017 increased~~2019 decreased by ~~$11.1~~$5.3 million and ~~$51.1~~$32.0 million, respectively, as compared to the ~~same periods last year.~~prior year periods. The ~~increase~~decrease in SG&A expenses in ~~both periods in 2017~~the third quarter and first nine months of 2019 was primarily due to ~~higher~~lower advertising and selling expenses in China.
On March 21, 2018, we announced a plan to transfer water heater, boiler and ~~advertising~~storage tank production from our Renton, Washington plant to our other U.S. plants. The majority of the consolidation of operations occurred in the second quarter of 2018. As a result of the relocation of production, we incurred
pre-tax
restructuring and impairment expenses of $6.7 million in the first quarter of 2018, primarily related to ~~support increased volumes, brand~~employee severance and compensation-related costs, building lease exits costs and the ~~expansion~~impairment of ~~water treatment~~assets. These activities are reflected in “restructuring and ~~air purification retail outlets~~impairment expenses” in ~~China.~~
the accompanying financial statements.
We are providing
non-GAAP
measures (adjusted earnings, adjusted earnings per share, and adjusted segment earnings) that exclude restructuring and impairment expenses. Reconciliations to measures on a GAAP basis are provided later in this section. We believe that the measures of adjusted earnings, adjusted EPS and adjusted segment earnings provide useful information to investors about our performance and allow management and our investors to better compare our performance period over period.
Interest expense in the third quarter of ~~2017~~2019 was ~~$2.5~~$3.1 million compared to ~~$2.1~~$2.0 million in the same period last year. Interest expense in the first nine months of ~~2017~~2019 was ~~$7.2~~$8.5 million compared to ~~$5.7~~$6.6 million in the same period last year. The increase in interest expense in the third quarter and first nine months of ~~2017~~2019 was primarily due to higher ~~interest rates as well as higher overall~~ debt levels ~~primarily related~~ to ~~share repurchases and our acquisitions.~~
fund the acquisition of Water-Right.
Other income was ~~$3.2~~$4.0 million in the third quarter of ~~2017, up $1.3~~2019, compared to $5.1 million ~~from~~in the same period last year. Other income in the first nine months of ~~2017~~2019 was ~~$7.5~~$15.1 million ~~up from $6.2~~compared to $15.5 million in the ~~first nine months of 2016. The increase in other income in the third quarter and first nine months of 2017 was primarily due to increased interest income as compared to the~~ same ~~periods~~period last year.
Our pension costs and credits 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. We consider current market conditions including changes in interest rates in making these assumptions. Our assumption for the expected rate of return on plan assets is ~~7.5~~7.15 percent in ~~2017,~~2019, consistent with ~~2016.~~2018. The discount rate used to determine net periodic pension costs ~~decreased to 4.17~~increased from 3.65 percent in ~~2017 from 4.40~~2018 to 4.32 percent in ~~2016. We recognized pension~~2019. Pension income infor the third quarter and first nine months of ~~2017 of $6.5~~2019 was $1.7 million and $6.1 million, respectively, compared to ~~$4.8~~$2.1 million ~~of income~~and $6.6 million in the third quarter and first nine months of ~~2016. Our~~2018, respectively. 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 rates for the third quarter and first nine months of ~~2017~~2019 were ~~28.8~~22.6 percent and ~~27.9~~21.8 percent, respectively. Our effective income tax rates for the third quarter and first nine months of ~~2016~~2018 were ~~29.7~~20.5 percent and ~~29.6~~21.1 percent, respectively. ~~The lower~~Our effective income tax ~~rate~~rates in the third quarter and first nine months of ~~2017~~2019 were higher than the effective income tax rates in the same periods of 2018, primarily due to change in the geographic earnings mix. We estimate that our effective income tax rate for the full year 2019 will be approximately 22.0 percent.

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North America
Sales in the North America segment were $515 million in the third quarter of 2019 or $28 million higher than sales of $487 million in the third quarter of 2018. Sales for the first nine months of 2019 were $1,560 million or $37 million higher than sales of $1,523 million in the same period last year. The increase in sales in the third quarter 2019 compared to the same period last year was primarily due to higher volumes of water heaters, boilers, and water treatment products, which benefited from $16 million of Water-Right sales. The higher segment sales in the first nine months of 2019 were primarily due to
mid-2018
pricing actions and higher volumes of boilers and water treatment products, which were partially offset by lower volumes of residential water heaters. Water-Right, acquired in April 2019, added $30 million to sales in the first nine months of 2019.
North America segment earnings were $121.6 million in the third quarter of 2019 or approximately 15 percent higher than segment earnings of $105.6 million in the same period of 2018. Segment earnings in the first nine months of 2019 were $360.5 million or approximately seven percent higher than segment earnings of $336.5 million in the first nine months of 2018. Segment margin of 23.6 percent in the third quarter of 2019 was higher than our segment margin of 21.7 percent in the same period in 2018. Segment margin of 23.1 percent in the first nine months of 2019 was higher than 22.1 percent in the first nine months of last year. Adjusted segment earnings and adjusted segment margin in the first nine months of 2018 were $343.2 million and 22.5 percent, respectively. The higher segment earnings and segment margin in the third quarter of 2019 compared to 2018 were primarily a result of higher water heater and boiler volumes, lower steel costs, and improvement in the profitability of our water treatment products, which added incremental profits from the Water-Right acquisition. The higher segment earnings and segment margin in the first nine months of 2019 compared to 2018 were primarily due to the favorable impact from higher sales of boilers and water treatment products, which benefited from incremental profits from the Water-Right acquisition, and
mid-2018
pricing actions that were partially offset by the unfavorable impact from lower residential water heater volumes. We expect our full year segment margin to be between 23.5 and 23.75 percent in 2019.
Adjusted segment earnings and adjusted segment margin in 2018 exclude $6.7 million of
pre-tax
restructuring and impairment expenses associated with the transfer of production from Renton, Washington to our other U.S. plants.
Rest of World
Sales in the Rest of World segment were $220 million in the third quarter of 2019 or $54 million lower than sales of $274 million in the third quarter of 2018. Sales in the first nine months of 2019 were $702 million or $174 million lower than sales of $876 million in the first nine months of 2018. China sales declined approximately 23 percent in U.S. dollar terms and 20 percent in local currency in the third quarter of 2019 and declined approximately 22 percent in U.S. dollar terms and 18 percent in local currency in the first nine months of 2019 compared to the same periods last year. The decrease in China sales in the third quarter and first nine months of 2019 compared to the same periods last year was primarily due to lower state income taxes. We estimate that our annual effective income tax rate for the full year 2017 will be approximately 28.0 percent, compared to 29.4 percent for the full year 2016, assuming no material changes to existing tax codes.
~~North America~~
~~Sales in our North America segment were $486.0 million~~weak consumer demand and inventory build in the ~~third quarter of 2017 or $35.2 million higher than~~ sales of $450.8 million in the third quarter of 2016. Sales for the first nine months of 2017 were $1,444.0 million or $136.5 million higher than sales of $1,307.5 million in the same period last year. The increased sales in the third quarter and the first nine months of 2017 were primarily due to higher volumes of residential water heaters and boilers as well as pricing actions related to higher steel costs and inflationary pressure on other input costs. Additionally, saleschannel that occurred in the first ~~nine months~~half of ~~2017 benefitted from higher volumes~~2018. In addition, the weaker Chinese currency compared to the U.S. dollar, unfavorably impacted the translation of ~~commercial water heaters. Sales of Lochinvar-branded products grew 17 percent~~sales by approximately $6 million and ~~ten percent~~$35 million in the third quarter and first nine months of ~~2017, respectively,~~2019, respectively. The China sales declines were partially offset by higher sales in India, which grew approximately nine percent in both U.S. dollar and local currency terms in the third quarter of 2019 compared to the same ~~periods~~period last ~~year. North America water treatment sales added $7.5 million~~year and ~~$30.8 million of incremental sales to~~15 percent in U.S. dollar terms and 19 percent in local currency terms in the ~~third quarter and~~ first nine months of ~~2017, respectively.~~
~~North America~~2019 compared to the same period in 2018.

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Rest of World segment earnings were ~~$110.3~~$4.1 million in the third quarter of ~~2017 or~~2019, approximately ~~ten~~90 percent ~~higher~~lower than segment earnings of ~~$100.5~~$39.1 million in the ~~same period~~third quarter of ~~2016.~~2018. Segment earnings in the first nine months of ~~2016~~2019 were ~~$323.7~~$38.8 million, or approximately ~~nine~~65 percent ~~higher~~lower than segment earnings of ~~$296.5~~$109.8 million in the first nine months of ~~2016.~~2018. The ~~higher~~decreased segment earnings in both periods of 2019 were primarily due to lower sales in China and a higher mix of
mid-price
products, which have lower margins, that when combined, more than offset benefits to profits from lower SG&A expenses. Currency translation reduced segment earnings by approximately $3.0 million in the ~~third quarter and~~ first nine months of ~~2017 were primarily due~~2019 compared to ~~higher sales of water heaters and boilers as well as pricing actions that were partially offset by higher steel costs.~~the same period last year. Segment margin of ~~22.7~~1.9 percent in the third quarter of ~~2017~~2019 was ~~higher~~lower than ~~22.3~~our segment margin of 14.3 percent in the same period last year. Segment margin of ~~22.4~~5.5 percent in the first nine months of ~~2017~~2019 was lower than 22.7 percent in the same period in 2016. Segment margin in both periods of 2017 were negatively impacted by higher steel costs as well as the impact of Aquasana, which has lower operating margins than the segment average. We expect our ~~full year segment margin to be similar to 2016~~ segment margin of ~~22.1 percent, despite a 40 basis point headwind to segment margin from our North America water treatment business.~~
~~Rest of World~~
Sales in our Rest of World segment were $270.1 million in the third quarter of 2017 or $29.8 million higher than sales of $240.3 million in the third quarter of 2016. Sales in the first nine months of 2017 were $802.4 million or $104.8 million higher than sales of $697.6 million in the first nine months of 2016. China sales grew approximately 13 percent and 20 percent in local currency terms in the third quarter and first nine months of 2017, respectively, compared to same periods in the prior year, primarily due to higher sales of consumer products, particularly water treatment and air purification products. Sales in China in both periods of 2017 also benefitted from pricing actions announced earlier this year due to higher steel and other costs. China sales of A.O. Smith branded water treatment products grew 31 percent and China sales of air purification products doubled in the first nine months of 2017, compared to the same period last year.
Rest of World segment earnings were $33.8 million in the third quarter of 2017 or approximately nine percent higher than segment earnings of $31.1 million in the third quarter of 2016. Segment earnings in the first nine months of 2017 of $98.8 million were approximately nine percent higher than segment earnings of $90.9 million in the first nine months of 2016. China currency translation negatively impacted segment earnings by approximately $3.6 million in the first nine months of 2017. The higher segment earnings in the third quarter and first nine months of 2017 were primarily due to higher China sales, which included pricing actions, partially offset by higher steel prices and installation costs and increased SG&A expenses in China. SG&A expenses were higher in the third quarter and first nine months of 2017 primarily due to higher selling and advertising expenses in China to support brand building and the expansion of water treatment and air purification retail outlets in tier 2 and tier 3 cities. Additionally, the third quarter of 2017 was impacted by higher water treatment product development engineering costs. Segment margin of 12.5 ~~percent in the third quarter of 2017 was lower than the segment margin of 12.9 percent in the same period last year. Segment margin of 12.3~~ percent in the first nine months of ~~2017 was lower than the segment margin of 13.0 percent in the same period~~ last year. Segment margins in both the third quarter and first nine months of ~~2017~~2019 were lower than the same periods ~~in the prior~~last year primarily due to the factors mentioned above. We expect ~~our~~ full year ~~2017~~ segment margin to be ~~similar to 2016 segment margin of 13.4~~approximately 4.25 percent.
Outlook
We expect our ~~global~~consolidated sales to ~~grow between 11 and 12~~decline approximately five percent in ~~2017. With record earnings~~U.S. dollar terms and approximately 3.5 percent in ~~the first nine months of the~~local currency terms in 2019 due to prolonged headwinds in China, attributable to weak consumer demand, and elevated channel inventory levels. We expect full year ~~we increased the midpoint of our guidance for 2017.~~China sales to be down 23 percent year over year in U.S dollar terms and 19 percent in local currency terms. We believe we will achieve full-year earnings of between ~~$2.12~~$2.25 and ~~$2.14~~$2.28 per share, which excludes the potential impact from any future acquisitions.
Liquidity & Capital Resources
Working capital of ~~$966.4~~$774.0 million at September 30, ~~2017~~2019 was ~~$170.0~~$79.2 million ~~higher~~lower than at December 31, ~~2016~~2018. Lower cash balances, primarily ~~due to sales-related increases to accounts receivable balances, lower receipts~~as a result of approximately $149 million in cash in advance of sales from distribution customers in China and higher working capital resulting from the acquisition of Hague. Higher inventory levels related to residential water heater demand, boiler and air purifier sales seasonality, and water treatment safety stock in preparation for the move to a new plant in Chinarepatriation in the first ~~half~~nine months of ~~2018 also contributed~~this year which was utilized to ~~higher working capital.~~repay floating rate debt, were partially offset by lower accounts payable balances in China related to lower customer volume incentives and lower cash on deposit from customers in that region. As of September 30, ~~2017,~~2019, essentially all of the ~~$767.9~~$513.8 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries. ~~We would incur a cost to repatriate these funds to the U.S. and have accrued $37.8 million for the repatriation of a portion of these funds.~~
Cash provided by ~~operating activities~~operations in the ~~third quarter~~first nine months of ~~2017~~2019 was ~~$150.2~~$280.0 million compared with ~~$263.6~~$289.2 million ~~of cash~~ provided ~~by operating activities~~ during the same period last year. ~~Higher~~Lower earnings, which were ~~more than~~partially offset by ~~higher outlays for~~lower working ~~capital.~~capital investment compared with the same period in 2018, resulted in lower cash provided by operations. For the full year ~~2017,~~2019, we expect cash provided by operating activities towill be approximately ~~$325 million.~~
$400 million, compared with $448.9 million in 2018.
Capital expenditures totaled ~~$66.4~~$50.3 million in the first nine months of ~~2017,~~2019, compared with ~~$58.7~~$58.5 million in the year ago period. We project ~~2017~~2019 capital expenditures will be approximately ~~$100~~$80 million ~~including approximately $38 million related to capacity expansion to support the growth of water treatment~~ and ~~air purification products in China. We expect~~ full year depreciation and amortization will be approximately ~~$70~~$75 million.
~~In December 2016, we completed~~
We have a $500 million multi-currency credit facility with a group of nine banks, which expires in December 2021. The facility has an accordion provision, which allows us to increase it up to $700 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of September 30, ~~2017.~~
2019.

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The facility backs up commercial paper and credit line borrowings. As a result of the long-term nature of this facility, our commercial paper and credit line borrowings, as well as drawings under the facility, are classified as long-term debt. At September 30, ~~2017,~~2019, we had available borrowing capacity of ~~$177.8~~$300.7 million under this facility. We believe the combination of available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future.
In November 2016, we issued an aggregate of $45 million of fixed rate term notes in two tranches to two insurance companies. Principal payments commence in 2023 and 2028 and the notes mature in 2029 and 2034, respectively. The notes carry interest rates of 2.87 percent and 3.10 percent, respectively. We used proceeds from the issuance of the notes to pay down borrowings under our revolving credit facility.
Our total debt increased ~~$126.1~~$97.8 million from ~~$323.6~~$221.4 million at December 31, ~~2016~~2018 to ~~$449.7~~$319.2 million at September 30, ~~2017, as our cash flows generated in~~2019 to fund the ~~U.S. were more than offset by our share repurchase activity, dividend payments and the Hague acquisition.~~acquisition of Water-Right. Our leverage, as measured by the ratio of total debt to total capitalization, calculated excluding operating lease liabilities, was ~~21.3~~16.2 percent at ~~September 30, 2017,~~the end of the third quarter in 2019, compared with ~~17.6~~11.4 percent at ~~December 31, 2016.~~
the end of last year.
Our pension plan continues to meet all funding requirements under ERISA regulations. We are not required to make a contribution and we do not plan to make any voluntary contributions to the plan in ~~2017. However, primarily due to our anticipated continued strong cash flow generation~~2019.
In December 2018 and ~~escalating Pension Benefit Guaranty Corporation insurance premiums, we made a $30 million voluntary contribution to the plan~~ in ~~2017.~~
~~In 2016,~~June 2019, our Board of Directors approved adding ~~3,000,000~~5 million shares and 3 million shares, respectively, of common stock to an existing discretionary share repurchase authority. Under the share repurchase program, our common stock may be purchased through a combination of a Rule
10b5-1
automatic trading plan and discretionary purchases in accordance with applicable securities laws. The 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 the first nine months of ~~2017,~~2019, we repurchased ~~1,942,350~~4,921,538 shares of our stock at a total cost of ~~$103.3~~$230.0 million. ~~A total of approximately 3.0 million~~At September 30, 2019, we had 4,153,715 shares ~~remained~~remaining on the ~~existing~~board share repurchase ~~authority at September 30, 2017.~~authority. Depending on factors such as stock price, working capital requirements and alternative investment opportunities, we expect to spend approximately ~~$135~~$300 million on stock repurchases in 2019 through a combination of our Rule
10b5-1
automatic trading plan and opportunistic repurchases in ~~2017.~~
the open market.
On October ~~9, 2017,~~10, 2019, our Board of Directors ~~declared a~~increased the rate of our quarterly cash dividend ~~of $0.14~~to $0.24 per share on our Common Stock and Class A common ~~stock.~~stock, representing an increase of nine percent. The five-year compound annual growth rate of our quarterly dividend rate is more than 24 percent. The dividend is payable on ~~Nov~~November 15, ~~2017~~2019 to shareholders of record on October 31, ~~2017.~~
2019.
Non-GAAP
Financial Information
We provide
non-GAAP
measures (adjusted earnings, adjusted earnings per share (EPS) and adjusted segment earnings) that exclude restructuring and impairment expenses in 2018.
We believe that the measures of adjusted earnings, adjusted EPS and adjusted segment earnings provide useful information to investors about our performance and allow management and our investors to better compare our performance period over period.

A. O. SMITH CORPORATION

Adjusted Earnings and Adjusted EPS

(dollars in millions, except per share data)

(unaudited)

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Net Earnings (GAAP)
$
87.3
$
104.6
$
278.7
$
317.9

Restructuring and impairment expenses, before tax

—

—

—

6.7

Tax effect of restructuring and impairment expenses

—

—

—

(1.7
)

Adjusted Earnings
$
87.3
$
104.6
$
278.7
$
322.9

Diluted EPS (GAAP)
$
0.53
$
0.61
$
1.66
$
1.84

Restructuring and impairment expenses per diluted share

—

—

—

0.04

Tax effect of restructuring and impairment expenses per diluted share

—

—

—

(0.01
)

Adjusted EPS
$
0.53
$
0.61
$
1.66
$
1.87

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):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018
(2)

2019

2018

Segment Earnings (GAAP)

North America
$
121.6
$
105.6
$
360.5
$
336.5

Rest of World

4.1

39.1

38.8

109.8

Inter-segment earnings elimination

—

—

(0.1
)
—

Total Segment Earnings (GAAP)
$
125.7
$
144.7
$
399.2
$
446.3

Adjustments

North America
(1)
$
—
$
—
$
—
$
6.7

Rest of World

—

—

—

—

Inter-segment earnings elimination

—

—

—

—

Total Adjustments
$
—
$
—
$
—
$
6.7

Adjusted Segment Earnings

North America
$
121.6
$
105.6
$
360.5
$
343.2

Rest of World

4.1

39.1

38.8

109.8

Inter-segment earnings elimination

—

—

(0.1
)
—

Total Adjusted Segment Earnings
$
125.7
$
144.7
$
399.2
$
453.0

(1) The Company recognized $6.7 million of restructuring and impairment expenses in connection with the move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. For additional information, see Note 5 of the notes to the financial statements.
(2) On October 29, 2019, the Company filed a Form
8-K
with the Securities and Exchange Commission, with a news release attached as Exhibit 99.1, announcing its results for the quarter ended September 30, 2019 which included the table above. The Company later identified that balances presented in the table for the Three Months Ended September 30, 2018 incorrectly presented the results for Three Months Ended June 30, 2018. The presentation above has been adjusted to reflect the correct amounts and therefore does not agree to the news release.

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A. O. SMITH CORPORATION
Adjusted EPS and Adjusted 2019 Guidance
(unaudited)
The following is a reconciliation of diluted EPS to adjusted EPS
(non-GAAP):

2019
Guidance

2018

Diluted EPS (GAAP)
$
2.25 - 2.28
$
2.58

Restructuring and impairment expenses per diluted share, net of tax

—

0.03

Adjusted EPS
$
2.25
-
2.28
$
2.61

Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which 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 critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form
10-K
for the year ended December 31, ~~2016.~~2018. We believe that at September 30, ~~2017,~~2019, there has been no material change to this information.
Recent Accounting Pronouncements
Refer to
Recent Accounting Pronouncements
in Note 1 – Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information.
Forward Looking Statements
This filing contains statements that ~~we believe~~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” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further ~~slowdown in the growth rate~~weakening of the Chinese economy and/or a further decline in the growth rate of consumer spending or housing sales in China; negative impact to the company’s businesses from international tariffs and trade disputes; potential weakening in the high efficiency boiler segment in the U.S.; significant volatility in raw material prices; ~~our~~ inability of the company to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in ~~our~~the company’s replacement markets; foreign currency fluctuations; ~~our~~the company’s inability to successfully integrate or achieve ~~our~~its strategic objectives resulting from acquisitions; competitive pressures on ~~our~~the company’s businesses; the impact of potential
information technology or data security breaches; changes in ~~governmental~~government regulations or regulatory requirements; 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 ~~we are~~the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the ~~Company,~~company, or persons acting on ~~our~~its behalf, are qualified entirely by these cautionary statements.

Table of Contents
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As is more fully described in our Annual Report on Form
10-K
for the year ended December 31, ~~2016,~~2018, we are exposed to various types of market risks, including currency and certain commodity risks. Our quantitative and qualitative disclosures about market risk have not materially changed since that report was filed. We monitor our currency and commodity risks on a continuous basis and generally enter into forward and futures contracts to minimize these exposures. The majority of the contracts are for periods of less than one year. Our Company does not engage in speculation in our derivative strategies. It is important to note that gains and losses from our forward and futures contract activities are offset by changes in the underlying costs of the transactions being hedged.
ITEM 4 –- CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon this evaluation of these disclosure controls and procedures, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of September 30, ~~2017~~2019 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.
Changes in internal control over financial reporting
There have been no ~~significant~~ changes in our internal control over financial reporting during the quarter ended September 30, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
~~There have been no material changes~~
On May 28, 2019, a putative securities class action lawsuit was filed in the ~~legal~~U.S. District Court for the Eastern District of Wisconsin against the Company and ~~environmental matters discussed in Part 1, Item 3~~certain of its current or former officers. This action, now captioned as City of Birmingham Retirement and ~~Note 13~~Relief System v. A. O. Smith Corporation, et al., asserts securities fraud claims under Sections 10(b) and 20(a) of the ~~Notes to Consolidated Financial Statements~~Securities Exchange Act of 1934, and seeks damages and other relief based upon the allegations in ~~our Annual Report~~the complaint. A shareholder derivative lawsuit, captioned as Pierce v. Rajendra, et al. and based on ~~Form 10-K~~similar allegations as the putative class action, was filed on August 20, 2019, also in the U.S. District Court for the ~~year ended December 31, 2016.~~
Eastern District of Wisconsin.
ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In ~~2016,~~June 2019, our Board of Directors approved adding ~~3,000,000~~3 million shares of ~~Common Stock~~common stock to an existing discretionary share repurchase authority. Under the share repurchase program, the Common Stock may be purchased through a combination of a Rule
10b5-1
automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the 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 the third quarter of ~~2017,~~2019, we repurchased ~~663,500~~2,127,538 shares at an average price of ~~$55.93~~$45.75 per share and at a total cost of ~~$37.1~~$97.3 million. As of September 30, ~~2017,~~2019, there were ~~2,964,053~~4,153,715 shares remaining on the existing repurchase authorization.

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
July 1 – July 31, 2017
   200,000    $ 56.74    200,000    3,427,553
August 1 – August 31, 2017
   252,500    54.13    252,500    3,175,053
September 1 – September 30, 2017
   211,000    57.31    211,000    2,964,053
~~ITEM 5 - OTHER INFORMATION~~
~~None.~~

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

July 1 – July 31, 2019

1,166,600
$
45.16

1,166,600

5,114,653

August 1 – August 31, 2019

489,500

45.25

489,500

4,625,153

September 1 – September 30, 2019

471,438

47.73

471,438

4,153,715

ITEM 6 - EXHIBITS
Refer to the Exhibit Index on page 2933 of this report.

Table of Contents
INDEX TO EXHIBITS
~~Exhibit~~
~~Number~~

~~Description~~
~~31.1~~
Exhibit
Number
Description
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
~~31.2~~
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
~~32.1~~
32.1
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
~~32.2~~
32.2
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
~~101~~
101
The following materials from A. O. Smith Corporation’s Quarterly Report on Form
10-Q
for the quarter ended September 30, ~~2017~~2019 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, (ii) the Condensed Consolidated Statement of Comprehensive Earnings for the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, (iii) the Condensed Consolidated Balance Sheets as of September 30, ~~2017,~~2019, and December 31, ~~2016~~2018 (iv) the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (v) the Condensed Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (vi) the Notes to Condensed Consolidated Financial ~~Statements~~Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)


		~~Page~~
~~Part I.~~	~~FINANCIAL INFORMATION~~

		Page
Part I.	FINANCIAL INFORMATION

	Condensed Consolidated Statements of Earnings - Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		3


	Condensed Consolidated Statements of Comprehensive Earnings - Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		3

	Condensed Consolidated Balance Sheets - September 30, 2019 and December 31, 2018		4

	~~Condensed Consolidated Balance Sheets~~ ~~- September 30, 2017 and December 31, 2016~~		4

	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018		5

	Condensed Consolidated Statements of Stockholders’ Equity - Three and Nine Months Ended September 30, 2019 and 2018		6

	Notes to Condensed Consolidated Financial Statements - September 30, ~~2017~~2019		~~6-20~~ 7- 23

~~Item 2.~~
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		~~21-26~~ 24- 30

~~Item 3.~~
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		26 31

~~Item 4.~~	~~Controls and Procedures~~		27

~~Part II.~~	~~OTHER INFORMATION~~

~~Item 1.~~	~~Legal Proceedings~~		28
Item 4.	Controls and Procedures		31

~~Item 2.~~
Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings		32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28 32

~~Item 5.~~	~~Other Information~~		28

~~Item 6.~~	~~Exhibits~~		28
Item 6.

~~Index to~~ Exhibits			29 32

~~Signatures~~			30
Index to Exhibits			33

Signatures			34


(dollars in millions)
	September 30, 2019
Liabilities
Short term: Accrued liabilities	$	12.2
Long term: Operating lease liabilities		39.6

Total operating lease liabilities	$	51.8
Less: Rent incentives and deferrals		(3.5	)

Assets
Operating lease assets	$	48.3


Lease Term and Discount Rate	September 30, 2019
Weighted-average remaining lease term		10 years
Weighted-average discount rate		4.00	%


	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net sales	$	749.9		$	683.9		$	2,228.1		$	1,987.8
Cost of products sold		443.2			400.6			1,313.2			1,158.1

Gross profit		306.7			283.3			914.9			829.7
Selling, general and administrative expenses		175.8			164.7			535.2			484.1
Interest expense		2.5			2.1			7.2			5.7
Other income		(3.2	)		(1.9	)		(7.5	)		(6.2	)

Earnings before provision for income taxes		131.6			118.4			380.0			346.1
Provision for income taxes		37.9			35.2			106.2			102.3

Net Earnings	$	93.7		$	83.2		$	273.8		$	243.8

Net Earnings Per Share of Common Stock	$	0.54		$	0.48		$	1.58		$	1.39

Diluted Net Earnings Per Share of Common Stock	$	0.54		$	0.47		$	1.57		$	1.38

Dividends Per Share of Common Stock	$	0.14		$	0.12		$	0.42		$	0.36


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales	$	728.2		$	754.1		$	2,241.8		$	2,375.4
Cost of products sold		444.0			448.1			1,356.1			1,406.9

Gross profit		284.2			306.0			885.7			968.5
Selling, general and administrative expenses		172.3			177.6			535.7			567.7
Restructuring and impairment expenses		—			—			—			6.7
Interest expense		3.1			2.0			8.5			6.6
Other income		(4.0	)		(5.1	)		(15.1	)		(15.5	)

Earnings before provision for income taxes		112.8			131.5			356.6			403.0
Provision for income taxes		25.5			26.9			77.9			85.1

Net Earnings	$	87.3		$	104.6		$	278.7		$	317.9

Net Earnings Per Share of Common Stock	$	0.53		$	0.61		$	1.68		$	1.86

Diluted Net Earnings Per Share of Common Stock	$	0.53		$	0.61		$	1.66		$	1.84

Dividends Per Share of Common Stock	$	0.22		$	0.18		$	0.66		$	0.54


	(unaudited) September 30, 2019			December 31, 2018
Assets
Current Assets
Cash and cash equivalents	$	219.4		$	259.7
Marketable securities		294.4			385.3
Receivables		614.1			647.3
Inventories		310.0			304.7
Other current assets		66.5			41.5

Total Current Assets		1,504.4			1,638.5
Property, plant and equipment		1,137.5			1,096.8
Less accumulated depreciation		(593.9	)		(556.8	)

Net property, plant and equipment		543.6			540.0
Goodwill		547.4			513.0
Other intangibles		339.5			293.1
Operating lease assets		48.3			—
Other assets		84.7			86.9

Total Assets	$	3,067.9		$	3,071.5

Liabilities
Current Liabilities
Trade payables	$	483.1		$	543.8
Accrued payroll and benefits		61.8			79.4
Accrued liabilities		135.9			120.4
Product warranties		42.8			41.7
Debt due within one year		6.8			—

Total Current Liabilities		730.4			785.3
Long-term debt		312.4			221.4
Pension liabilities		36.5			49.4
Long-term operating lease liabilities		39.6			—
Other liabilities		292.8			298.4

Total Liabilities		1,411.7			1,354.5
Stockholders’ Equity
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,183,365 and 26,190,163		130.9			131.0
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,524,227 and 164,517,431		164.5			164.5
Capital in excess of par value		507.3			496.7
Retained earnings		2,271.5			2,102.8
Accumulated other comprehensive loss		(361.6	)		(350.8	)
Treasury stock at cost		(1,056.4	)		(827.2	)

Total Stockholders’ Equity		1,656.2			1,717.0

Total Liabilities and Stockholders’ Equity	$	3,067.9		$	3,071.5


	(unaudited) September 30, 2017			December 31, 2016
Assets
Current Assets
Cash and cash equivalents	$	321.9		$	330.4
Marketable securities		446.0			424.2
Receivables		587.1			518.7
Inventories		292.1			251.1
Other current assets		51.0			37.6

Total Current Assets		1,698.1			1,562.0
Property, plant and equipment		1,017.4			932.5
Less accumulated depreciation		(515.7	)		(470.6	)

Net property, plant and equipment		501.7			461.9
Goodwill		516.3			491.5
Other intangibles		312.3			308.3
Other assets		76.2			67.3

Total Assets	$	3,104.6		$	2,891.0

Liabilities
Current Liabilities
Trade payables	$	500.1		$	528.6
Accrued payroll and benefits		80.2			84.3
Accrued liabilities		99.7			101.0
Product warranties		44.2			44.5
Debt due within one year		7.5			7.2

Total Current Liabilities		731.7			765.6
Long-term debt		442.2			316.4
Pension liabilities		66.0			109.0
Other liabilities		198.8			184.7

Total Liabilities		1,438.7			1,375.7
Stockholders’ Equity
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,246,059 and 26,313,351		131.2			131.6
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,461,533 and 164,394,241		164.5			164.4
Capital in excess of par value		485.7			477.6
Retained earnings		1,794.0			1,593.0
Accumulated other comprehensive loss		(322.4	)		(363.2	)
Treasury stock at cost		(587.1	)		(488.1	)

Total Stockholders’ Equity		1,665.9			1,515.3

Total Liabilities and Stockholders’ Equity	$	3,104.6		$	2,891.0


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		21.3

Total assets acquired		48.8
Current liabilities		(4.7	)
Long-term liabilities		(1.0	)

Total liabilities assumed		(5.7	)

Net assets acquired	$	43.1


April 8, 2019 (dollars in millions)
Current assets, net of cash acquired	$	9.7
Property, plant and equipment		8.6
Intangible assets		57.6
Goodwill		33.7

Total assets acquired		109.6
Current liabilities		(2.6	)

Total liabilities assumed		(2.6	)

Net assets acquired	$	107.0


(dollars in millions)
		Three months ended		Nine months ended
Lease Expense	Classification	September 30, 2019		September 30, 2019
Operating lease expense (1)	Cost of products sold	$	0.7	$	2.0
	Selling, general and administrative expenses		4.3		13.3


August 8, 2016 (dollars in millions)
Current assets, net of cash acquired	$	7.3
Property, plant and equipment		2.7
Intangible assets		30.0
Goodwill		60.4

Total assets acquired		100.4
Current liabilities		(7.1	)
Long-term liabilities		(8.2	)

Total liabilities assumed		(15.3	)

Net assets acquired	$	85.1


(dollars in millions)
	Severance Costs			Lease Exit Costs			Total
Balance at January 1, 2019	$	0.2		$	1.3		$	1.5
Cash payments		—			(0.1	)		(0.1	)

Balance at March 31, 2019		0.2			1.2			1.4
Cash payments		—			(0.1	)		(0.1	)

Balance at June 30, 2019	$	0.2		$	1.1		$	1.3

Cash payments		(0.2	)		—			(0.2	)

Balance at September 30, 2019	$	—		$	1.1		$	1.1


(dollars in millions)
	September 30, 2017			December 31, 2016
Finished products	$	138.4		$	114.1
Work in process		17.9			13.0
Raw materials		154.5			142.4

Inventories, at FIFO cost		310.8			269.5
LIFO reserve		(18.7	)		(18.4	)

Net inventory	$	292.1		$	251.1


(dollars in millions)
	September 30, 2019			December 31, 2018
Finished products	$	140.2		$	137.6
Work in process		24.6			23.3
Raw materials		175.7			174.4

Inventories, at FIFO cost		340.5			335.3
LIFO reserve		(30.5	)		(30.6	)

Net inventory	$	310.0		$	304.7


	Three Months Ended September 30,
(dollars in millions)
	2019			2018
Balance at July 1,	$	134.0		$	141.6
Expense		11.0			8.7
Claims settled		(11.6	)		(9.8	)

Balance at September 30,	$	133.4		$	140.5


	Nine Months Ended September 30,
(dollars in millions)
	2019			2018
Balance at January 1,	$	139.4		$	141.2
Expense		31.8			31.4
Claims settled		(37.8	)		(32.1	)

Balance at September 30,	$	133.4		$	140.5


	Weighted-Avg. Per Share Exercise Price		Number of Options			Average Remaining Contractual Life		Aggregate Intrinsic Value (dollars in millions)
Outstanding at January 1, 2017	$	21.69		2,664,333
Granted		50.16		358,150
Exercised		18.84		(486,021	)
Terminated		36.13		(3,640	)

Outstanding at September 30, 2017		26.24		2,532,822			7 years	$	82.7

Exercisable at September 30, 2017		19.34		1,653,841			6 years	$	65.4


	Nine Months Ended September 30,
	2017			2016
Expected life (years)		5.7			5.8
Risk-free interest rate		2.4	%		1.7	%
Dividend yield		1.0	%		1.3	%
Expected volatility		26.5	%		27.7	%


	Nine Months Ended September 30,
	2019			2018
Expected life (years)		5.5			5.7
Risk-free interest rate		2.7	%		2.9	%
Dividend yield		1.6	%		1.0	%
Expected volatility		22.8	%		22.1	%


	Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2017		544,055		$	27.35
Granted		107,755			50.16
Vested		(213,863	)		23.25
Forfeited		(3,465	)		33.58

Issued and unvested at September 30, 2017		434,482			34.23


	Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2019		379,601		$	42.93
Granted		139,892			49.52
Vested		(147,642	)		31.35
Forfeited		(4,509	)		55.57

Issued and unvested at September 30, 2019		367,342			50.05


(dollars in millions)
Fair Value Measurement Using	September 30, 2017		December 31, 2016
Quoted prices in active markets for identical assets (Level 1)	$	444.4	$	424.5


(dollars in millions)
	September 30,
	2017				2016
	Buy		Sell		Buy		Sell
British pound	$	—	$	1.5	$	—	$	0.2
Canadian dollar		—		67.4		—		77.2
Euro		27.9		0.5		6.7		0.5
Mexican peso		19.3		—		13.8		—

Total	$	47.2	$	69.4	$	20.5	$	77.9


(dollars in millions)
	Balance Sheet Location	September 30, 2017			December 31, 2016
Foreign currency contracts	Other current assets	$	0.6		$	1.9
	Accrued liabilities		(2.0	)		(2.0	)
Commodities contracts	Other current assets		0.1			0.8
	Accrued liabilities		—			(0.3	)

Total derivatives designated as hedging instruments		$	(1.3	)	$	0.4


(dollars in millions)
	Balance Sheet Location		September 30, 2019			December 31, 2018
Foreign currency contracts		Other current assets	$	10.3		$	3.9
		Other non-current assets		—			5.1
		Accrued liabilities		(1.9	)		(0.6	)
Commodities contracts		Accrued liabilities		—			(0.9	)

Total derivatives designated as hedging instruments			$	8.4		$	7.5


Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)						Location of gain (loss) reclassified from accumulated OCI into earnings (effective portion)		Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)						Location of gain (loss) recognized in earnings on derivative (ineffective portion)		Amount of gain (loss) recognized in earnings on a derivative (ineffective portion)
	2017			2016					2017			2016					2017		2016
Foreign currency contracts	$	(2.5	)	$	0.8			Cost of products sold	$	(0.3	)	$	(0.3	)		N/A	$	—	$	—
Commodities contracts		—			(1.1	)		Cost of products sold		0.3			0.7			Cost of products sold		—		—

	$	(2.5	)	$	(0.3	)			$	—		$	0.4				$	—	$	—


Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive loss on derivative					Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings		Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings
	2019			2018				2019			2018
Foreign currency contracts	$	(1.1	)	$	1.9		Cost of products sold	$	(0.1	)	$	—
Commodities contracts		—			—		Cost of products sold		(0.6	)		—

	$	(1.1	)	$	1.9			$	(0.7	)	$	—


Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in OCI on derivative (effective portion)						Location of gain (loss) reclassified from accumulated OCI into earnings (effective portion)		Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)					Location of gain (loss) recognized in earnings on derivative (ineffective portion)		Amount of gain (loss) recognized in earnings on a derivative (ineffective portion)
	2017			2016					2017		2016					2017		2016
Foreign currency contracts	$	(1.0	)	$	(4.1	)		Cost of products sold	$	0.3	$	(1.1	)		N/A	$	—	$	—
Commodities contracts		0.1			0.7			Cost of products sold		0.4		0.7			Cost of products sold		—		—

	$	(0.9	)	$	(3.4	)			$	0.7	$	(0.4	)			$	—	$	—


(dollars in millions)
	Three Months Ended September 30,
	2017			2016
Cumulative foreign currency translation
Balance at beginning of period	$	(58.3	)	$	(47.9	)
Other comprehensive gain (loss) before reclassifications		17.3			(3.5	)

Balance at end of period		(41.0	)		(51.4	)

Unrealized net gain (loss) on cash flow derivatives
Balance at beginning of period		0.8			(0.3	)
Other comprehensive loss before reclassifications		(1.6	)		—
Realized gains on derivatives reclassified to cost of products sold (net of tax provision of $0.2 in 2016, respectively)		—			(0.2	)

Balance at end of period		(0.8	)		(0.5	)

Pension liability
Balance at beginning of period		(283.2	)		(275.3	)
Other comprehensive loss before reclassifications		(0.1	)		(0.1	)
Amounts reclassified from accumulated other comprehensive loss:⁽¹⁾		2.7			2.5

Balance at end of period		(280.6	)		(272.9	)

Accumulated other comprehensive loss, end of period	$	(322.4	)	$	(324.8	)

⁽¹⁾Amortization of pension items:
Actuarial losses	$	4.6	⁽²⁾	$	4.4	⁽²⁾
Prior year service cost		(0.1	)⁽²⁾		(0.3	)⁽²⁾

		4.5			4.1
Income tax benefit		(1.8	)		(1.6	)

Reclassification net of income tax benefit	$	2.7		$	2.5


⁽²⁾ These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 8—Pensions for additional details


	2019 Guidance		2018
Diluted EPS (GAAP)	$	2.25 - 2.28	$	2.58
Restructuring and impairment expenses per diluted share, net of tax		—		0.03

Adjusted EPS	$	2.25 - 2.28	$	2.61


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
July 1 – July 31, 2017		200,000	$	56.74		200,000		3,427,553
August 1 – August 31, 2017		252,500		54.13		252,500		3,175,053
September 1 – September 30, 2017		211,000		57.31		211,000		2,964,053


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
July 1 – July 31, 2019		1,166,600	$	45.16		1,166,600		5,114,653
August 1 – August 31, 2019		489,500		45.25		489,500		4,625,153
September 1 – September 30, 2019		471,438		47.73		471,438		4,153,715


~~Exhibit~~ ~~Number~~		~~Description~~

~~31.1~~
Exhibit Number			Description

	31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

~~31.2~~
	31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

~~32.1~~
	32.1		Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

~~32.2~~
	32.2		Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

~~101~~
	101		The following materials from A. O. Smith Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017~~2019 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, (ii) the Condensed Consolidated Statement of Comprehensive Earnings for the three and nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, (iii) the Condensed Consolidated Balance Sheets as of September 30, ~~2017,~~2019, and December 31, ~~2016~~2018 (iv) the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 (v) the Condensed Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (vi) the Notes to Condensed Consolidated Financial ~~Statements~~Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

	104		Cover Page Interactive Data File (embedded within the Inline XBRL document)


		A. O. SMITH CORPORATION

~~November 6, 2017~~
November 6, 2019		/s/ ~~Daniel L. Kempken~~ Helen E. Gurholt
	~~Daniel L. Kempken~~	Helen E. Gurholt
		Vice President and Controller

		/s/ ~~John J. Kita~~ Charles T. Lauber
	~~John J. Kita~~	Charles T. Lauber
		Executive Vice President and
	Chief Financial Officer