☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2020.
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware 39-0619790
(§ Non-accelerated filer ☐
Securities registered pursuant to Section 12(b)
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Part I. | |||||||
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3 | |||||||
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7- 21 | |||||||
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Item 2. | 22-26 | ||||||
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Item 3. | 26 | ||||||
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Item 4. | 27 | ||||||
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Part II. | |||||||
Item 1. | 27 | ||||||
Item 1A. | 28 | ||||||
Item 2. | 29 | ||||||
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Item 6. | |||||||
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31 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net sales | $ | 748.2 | $ | 788.0 | ||||
Cost of products sold | 455.4 | 466.5 | ||||||
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Gross profit | 292.8 | 321.5 | ||||||
Selling, general and administrative expenses | 184.7 | 192.9 | ||||||
Restructuring and impairment expenses | — | 6.7 | ||||||
Interest expense | 2.0 | 2.3 | ||||||
Other income | (5.5 | ) | (5.8 | ) | ||||
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Earnings before provision for income taxes | 111.6 | 125.4 | ||||||
Provision for income taxes | 22.3 | 26.6 | ||||||
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Net Earnings | $ | 89.3 | $ | 98.8 | ||||
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Net Earnings Per Share of Common Stock | $ | 0.53 | $ | 0.58 | ||||
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Diluted Net Earnings Per Share of Common Stock | $ | 0.53 | $ | 0.57 | ||||
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Dividends Per Share of Common Stock | $ | 0.22 | $ | 0.18 | ||||
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A. O. SMITH CORPORATION |
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(dollars in millions) (unaudited) |
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Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net earnings | $ | 89.3 | $ | 98.8 | ||||
Other comprehensive (loss) earnings | ||||||||
Foreign currency translation adjustments | 15.9 | 18.4 | ||||||
Unrealized net (losses) gains on cash flow derivative instruments, less related income tax provision of $ - in 2019 and ($0.7) in 2018 | (0.1 | ) | 2.0 | |||||
Adjustment to pension liability, less related income tax provision of ($1.0) in 2019 and ($1.1) in 2018 | 2.9 | 3.4 | ||||||
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Comprehensive Earnings | $ | 108.0 | $ | 122.6 | ||||
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Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net sales | $ | 636.9 | $ | 748.2 | ||||
Cost of products sold | 397.4 | 455.4 | ||||||
Gross profit | 239.5 | 292.8 | ||||||
Selling, general and administrative expenses | 173.8 | 184.7 | ||||||
Interest expense | 2.2 | 2.0 | ||||||
Other income | (4.2 | ) | (5.5 | ) | ||||
Earnings before provision for income taxes | 67.7 | 111.6 | ||||||
Provision for income taxes | 16.0 | 22.3 | ||||||
Net Earnings | $ | 51.7 | $ | 89.3 | ||||
Net Earnings Per Share of Common Stock | $ | 0.32 | $ | 0.53 | ||||
Diluted Net Earnings Per Share of Common Stock | $ | 0.32 | $ | 0.53 | ||||
Dividends Per Share of Common Stock | $ | 0.24 | $ | 0.22 | ||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net earnings | $ | 51.7 | $ | 89.3 | ||||
Other comprehensive (loss) earnings | ||||||||
Foreign currency translation adjustments | (18.0 | ) | 15.9 | |||||
Unrealized net gains (losses) on cash flow derivative instruments, less related income tax provision of $(0.1) in 2020 and $ - in 2019 | 0.3 | (0.1 | ) | |||||
Adjustment to pension liability, less related income tax provision of $(1.2) in 2020 and $(1.0) in 2019 | 3.6 | 2.9 | ||||||
Comprehensive Earnings | $ | 37.6 | $ | 108.0 | ||||
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
(unaudited) March 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 337.8 | $ | 259.7 | ||||
Marketable securities | 295.5 | 385.3 | ||||||
Receivables | 658.8 | 647.3 | ||||||
Inventories | 319.7 | 304.7 | ||||||
Other current assets | 46.3 | 41.5 | ||||||
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Total Current Assets | 1,658.1 | 1,638.5 | ||||||
Property, plant and equipment | 1,121.6 | 1,096.8 | ||||||
Less accumulated depreciation | (571.7 | ) | (556.8 | ) | ||||
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Net property, plant and equipment | 549.9 | 540.0 | ||||||
Goodwill | 513.9 | 513.0 | ||||||
Other intangibles | 289.9 | 293.1 | ||||||
Operating lease assets | 49.7 | — | ||||||
Other assets | 82.0 | 86.9 | ||||||
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Total Assets | $ | 3,143.5 | $ | 3,071.5 | ||||
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Liabilities | ||||||||
Current Liabilities | ||||||||
Trade payables | $ | 492.4 | $ | 543.8 | ||||
Accrued payroll and benefits | 47.6 | 79.4 | ||||||
Accrued liabilities | 148.4 | 120.4 | ||||||
Product warranties | 42.0 | 41.7 | ||||||
Debt due within one year | 6.8 | — | ||||||
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Total Current Liabilities | 737.2 | 785.3 | ||||||
Long-term debt | 277.6 | 221.4 | ||||||
Pension liabilities | 43.3 | 49.4 | ||||||
Long-term operating lease liabilities | 41.1 | — | ||||||
Other liabilities | 295.1 | 298.4 | ||||||
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Total Liabilities | 1,394.3 | 1,354.5 | ||||||
Stockholders’ Equity | ||||||||
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,190,163 and 26,191,327 | 131.0 | 131.0 | ||||||
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,517,431 and 164,516,267 | 164.5 | 164.5 | ||||||
Capital in excess of par value | 503.5 | 496.7 | ||||||
Retained earnings | 2,155.0 | 2,102.8 | ||||||
Accumulated other comprehensive loss | (332.1 | ) | (350.8 | ) | ||||
Treasury stock at cost | (872.7 | ) | (827.2 | ) | ||||
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Total Stockholders’ Equity | 1,749.2 | 1,717.0 | ||||||
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Total Liabilities and Stockholders’ Equity | $ | 3,143.5 | $ | 3,071.5 | ||||
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(unaudited) March 31, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 416.1 | $ | 374.0 | ||||
Marketable securities | 135.6 | 177.4 | ||||||
Receivables | 524.0 | 589.5 | ||||||
Inventories | 312.3 | 303.0 | ||||||
Other current assets | 54.5 | 56.5 | ||||||
Total Current Assets | 1,442.5 | 1,500.4 | ||||||
Property, plant and equipment | 1,159.5 | 1,156.9 | ||||||
Less accumulated depreciation | (622.2 | ) | (611.5 | ) | ||||
Net property, plant and equipment | 537.3 | 545.4 | ||||||
Goodwill | 542.6 | 546.0 | ||||||
Other intangibles | 333.1 | 338.4 | ||||||
Operating lease assets | 44.9 | 46.9 | ||||||
Other assets | 82.6 | 80.9 | ||||||
Total Assets | $ | 2,983.0 | $ | 3,058.0 | ||||
Liabilities | ||||||||
Current Liabilities | ||||||||
Trade payables | $ | 442.0 | $ | 509.6 | ||||
Accrued payroll and benefits | 47.7 | 64.6 | ||||||
Accrued liabilities | 159.7 | 143.7 | ||||||
Product warranties | 42.9 | 41.8 | ||||||
Debt due within one year | 6.8 | 6.8 | ||||||
Total Current Liabilities | 699.1 | 766.5 | ||||||
Long-term debt | 335.6 | 277.2 | ||||||
Pension liabilities | 20.8 | 27.8 | ||||||
Long-term operating lease liabilities | 37.3 | 38.7 | ||||||
Other liabilities | 273.9 | 281.0 | ||||||
Total Liabilities | 1,366.7 | 1,391.2 | ||||||
Stockholders’ Equity | ||||||||
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,175,113 and 26,180,885 | 130.9 | 130.9 | ||||||
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,532,481 and 164,526,709 | 164.5 | 164.5 | ||||||
Capital in excess of par value | 516.1 | 509.0 | ||||||
Retained earnings | 2,336.1 | 2,323.4 | ||||||
Accumulated other comprehensive loss | (362.4 | ) | (348.3 | ) | ||||
Treasury stock at cost | (1,168.9 | ) | (1,112.7 | ) | ||||
Total Stockholders’ Equity | 1,616.3 | 1,666.8 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 2,983.0 | $ | 3,058.0 | ||||
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating Activities | ||||||||
Net earnings | $ | 89.3 | $ | 98.8 | ||||
Adjustments to reconcile net earnings to cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 20.2 | 17.9 | ||||||
Stock based compensation expense | 8.7 | 6.5 | ||||||
Net changes in operating assets and liabilities: | ||||||||
Current assets and liabilities | (86.3 | ) | (70.4 | ) | ||||
Noncurrent assets and liabilities | (10.3 | ) | (9.6 | ) | ||||
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Cash Provided by Operating Activities | 21.6 | 43.2 | ||||||
Investing Activities | ||||||||
Capital expenditures | (20.9 | ) | (17.3 | ) | ||||
Investments in marketable securities | (48.5 | ) | (84.7 | ) | ||||
Net proceeds from sale of marketable securities | 147.2 | 136.9 | ||||||
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Cash Provided by Investing Activities | 77.8 | 34.9 | ||||||
Financing Activities | ||||||||
Long-term debt incurred (repaid) | 63.0 | (117.3 | ) | |||||
Common stock repurchases | (45.6 | ) | (33.1 | ) | ||||
Net payments from stock option activity | (1.6 | ) | (1.4 | ) | ||||
Dividends paid | (37.1 | ) | (31.0 | ) | ||||
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Cash Used In Financing Activities | (21.3 | ) | (182.8 | ) | ||||
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Net increase (decrease) in cash and cash equivalents | 78.1 | (104.7 | ) | |||||
Cash and cash equivalents - beginning of period | 259.7 | 346.6 | ||||||
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Cash and Cash Equivalents - End of Period | $ | 337.8 | $ | 241.9 | ||||
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Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating Activities | ||||||||
Net earnings | $ | 51.7 | $ | 89.3 | ||||
Adjustments to reconcile net earnings to cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 20.1 | 20.2 | ||||||
Stock based compensation expense | 9.0 | 8.7 | ||||||
Net changes in operating assets and liabilities: | ||||||||
Current assets and liabilities | (15.1 | ) | (86.3 | ) | ||||
Noncurrent assets and liabilities | (11.6 | ) | (10.3 | ) | ||||
Cash Provided by Operating Activities | 54.1 | 21.6 | ||||||
Investing Activities | ||||||||
Capital expenditures | (12.8 | ) | (20.9 | ) | ||||
Investments in marketable securities | (38.8 | ) | (48.5 | ) | ||||
Net proceeds from sale of marketable securities | 78.0 | 147.2 | ||||||
Cash Provided by Investing Activities | 26.4 | 77.8 | ||||||
Financing Activities | ||||||||
Long-term debt incurred | 58.5 | 63.0 | ||||||
Common stock repurchases | (56.7 | ) | (45.6 | ) | ||||
Net payments from stock option activity | (1.2 | ) | (1.6 | ) | ||||
Dividends paid | (39.0 | ) | (37.1 | ) | ||||
Cash Used i n Financing Activities | (38.4 | ) | (21.3 | ) | ||||
Net increase in cash and cash equivalents | 42.1 | 78.1 | ||||||
Cash and cash equivalents - beginning of period | 374.0 | 259.7 | ||||||
Cash and Cash Equivalents - End of Period | $ | 416.1 | $ | 337.8 | ||||
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Class A Common Stock | ||||||||
Balance at the beginning of the year | $ | 131.0 | $ | 131.2 | ||||
Conversion of Class A Common Stock | — | (0.2 | ) | |||||
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Balance at end of period | $ | 131.0 | $ | 131.0 | ||||
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Common Stock | ||||||||
Balance at the beginning of the year | $ | 164.5 | $ | 164.5 | ||||
Conversion of Class A Common Stock | — | — | ||||||
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Balance at end of period | $ | 164.5 | $ | 164.5 | ||||
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Capital in Excess of Par Value | ||||||||
Balance at the beginning of the year | $ | 496.7 | $ | 486.5 | ||||
Conversion of Class A Common Stock | — | 0.2 | ||||||
Issuance of share units | (6.1 | ) | (5.4 | ) | ||||
Vesting of share units | (1.9 | ) | (2.3 | ) | ||||
Stock based compensation expense | 8.6 | 6.3 | ||||||
Exercises of stock options | 0.1 | 0.9 | ||||||
Stock incentives | 6.1 | 5.4 | ||||||
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Balance at end of period | $ | 503.5 | $ | 491.6 | ||||
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Retained Earnings | ||||||||
Balance at the beginning of the year | $ | 2,102.8 | $ | 1,788.7 | ||||
Net earnings | 89.3 | 98.8 | ||||||
Cash dividends on stock | (37.1 | ) | (31.0 | ) | ||||
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Balance at end of period | $ | 2,155.0 | $ | 1,856.5 | ||||
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Accumulated Other Comprehensive Loss (see Note 15) | $ | (332.1 | ) | $ | (275.7 | ) | ||
Treasury Stock | ||||||||
Balance at the beginning of the year | $ | (827.2 | ) | $ | (626.5 | ) | ||
Exercise of stock options | (1.9 | ) | (2.2 | ) | ||||
Shares repurchased | (45.6 | ) | (33.1 | ) | ||||
Vesting of share units | 2.0 | 2.3 | ||||||
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Balance at end of period | $ | (872.7 | ) | $ | (659.5 | ) | ||
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Total Stockholders’ Equity | $ | 1,749.2 | $ | 1,708.4 | ||||
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Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Class A Common Stock | ||||||||
Balance at the beginning of the year | $ | 130.9 | $ | 131.0 | ||||
Balance at end of period | $ | 130.9 | $ | 131.0 | ||||
Common Stock | ||||||||
Balance at the beginning of the year | $ | 164.5 | $ | 164.5 | ||||
Balance at end of period | $ | 164.5 | $ | 164.5 | ||||
Capital in Excess of Par Value | ||||||||
Balance at the beginning of the year | $ | 509.0 | $ | 496.7 | ||||
Issuance of share units | (6.5 | ) | (6.1 | ) | ||||
Vesting of share units | (1.6 | ) | (1.9 | ) | ||||
Stock based compensation expense | 8.8 | 8.6 | ||||||
Exercises of stock options | (0.1 | ) | 0.1 | |||||
Stock incentives | 6.5 | 6.1 | ||||||
Balance at end of period | $ | 516.1 | $ | 503.5 | ||||
Retained Earnings | ||||||||
Balance at the beginning of the year | $ | 2,323.4 | $ | 2,102.8 | ||||
Net earnings | 51.7 | 89.3 | ||||||
Cash dividends on stock | (39.0 | ) | (37.1 | ) | ||||
Balance at end of period | $ | 2,336.1 | $ | 2,155.0 | ||||
Accumulated Other Comprehensive Loss (see Note 15) | $ | (362.4 | ) | $ | (332.1 | ) | ||
Treasury Stock | ||||||||
Balance at the beginning of the year | $ | (1,112.7 | ) | $ | (827.2 | ) | ||
Exercise of stock options | (1.1 | ) | (1.9 | ) | ||||
Shares repurchased | (56.7 | ) | (45.6 | ) | ||||
Vesting of share units | 1.6 | 2.0 | ||||||
Balance at end of period | $ | (1,168.9 | ) | $ | (872.7 | ) | ||
Total Stockholders’ Equity | $ | 1,616.3 | $ | 1,749.2 | ||||
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
2020
1. | Basis of Presentation |
24, 2020.
In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (issued under ASU2016-13) which modifies the measurement
2. | Revenue Recognition |
2. | Revenue Recognition (continued) |
2. | Revenue Recognition ( continued ) |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
North America | ||||||||
Water heaters and related parts | $ | 455.7 | $ | 446.8 | ||||
Boilers and related parts | 42.6 | 36.9 | ||||||
Water treatment products | 23.5 | 18.0 | ||||||
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Total North America | 521.8 | 501.7 | ||||||
Rest of World | ||||||||
China | $ | 213.0 | $ | 275.8 | ||||
All other Rest of World | 19.1 | 18.0 | ||||||
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Total Rest of World | 232.1 | 293.8 | ||||||
Inter-segment sales | (5.7 | ) | (7.5 | ) | ||||
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Total Net Sales | $ | 748.2 | $ | 788.0 | ||||
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Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
North America | ||||||||
Water heaters and related parts | $ | 447.8 | $ | 455.7 | ||||
Boilers and related parts | 41.5 | 42.6 | ||||||
Water treatment products (1) | 43.6 | 23.5 | ||||||
Total North America | 532.9 | 521.8 | ||||||
Rest of World | ||||||||
China | $ | 91.0 | $ | 213.0 | ||||
All other Rest of World | 19.2 | 19.1 | ||||||
Total Rest of World | 110.2 | 232.1 | ||||||
Inter-segment sales | (6.2 | ) | (5.7 | ) | ||||
Total Net Sales | $ | 636.9 | $ | 748.2 | ||||
3. | Acquisitions |
April 8, 2019 (dollars in millions) | ||||
Current assets, net of cash acquired | $ | 9.7 | ||
Property, plant and equipment | 8.6 | |||
Intangible assets | 60.4 | |||
Goodwill | 31.0 | |||
Total assets acquired | 109.7 | |||
Current liabilities | (2.7 | ) | ||
Net assets acquired | $ | 107.0 | ||
3. |
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4. | Leases |
March 31, 2019 | ||||
Liabilities | ||||
Short term: Accrued liabilities | $ | 12.3 | ||
Long term: Operating lease liabilities | 41.1 | |||
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Total operating lease liabilities | $ | 53.4 | ||
Less: Rent incentives and deferrals | (3.7 | ) | ||
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Assets | ||||
Operating lease assets | $ | 49.7 | ||
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March 31, 2020 | December 31, 2019 | |||||||
Liabilities | ||||||||
Short term: Accrued liabilities | $ | 11.5 | $ | 12.0 | ||||
Long term: Operating lease liabilities | 37.3 | 38.7 | ||||||
Total operating lease liabilities | $ | 48.8 | $ | 50.7 | ||||
Less: Rent incentives and deferrals | (3.9 | ) | (3.8 | ) | ||||
Assets | ||||||||
Operating lease assets | $ | 44.9 | $ | 46.9 | ||||
4. | Leases (continued) |
Lease Term and Discount Rate | March 31, | |||
Weighted-average remaining lease term | 10 years | |||
Weighted-average discount rate | 3.95 % |
(dollars in millions)
Lease Expense | Classification | Three months ended March 31, 2019 | ||||
Operating lease expense(1) | Cost of products sold | $ | 0.7 | |||
Selling, general and administrative expenses | 4.9 |
(dollars in millions) | ||||||||||
Three months ended March 31, | ||||||||||
Lease Expense | Classification | 2020 (1) | 2019 (2) | |||||||
Operating lease expense | Cost of products sold | $ | 0.7 | $ | 0.7 | |||||
Selling, general and administrative expenses | 4.0 | 4.9 |
| 2020 includes short-term and variable lease expenses of $0.4 million and $0.4 million, respectively. |
(2) | 2019 includes short-term and variable lease expenses of $0.4 million and $0.8 million, |
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(dollars in millions)
March 31, 2019 | ||||
2019 | $ | 11.5 | ||
2020 | 11.6 | |||
2021 | 8.8 | |||
2022 | 7.5 | |||
2023 | 3.6 | |||
After 2023 | 23.3 | |||
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Total lease payments | 66.3 | |||
Less: imputed interest | (12.9 | ) | ||
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Present value of operating lease liabilities | $ | 53.4 | ||
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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 tax benefit related to the charges. The consolidation of the Renton facility to other U.S. facilities was completed in 2018.
The following table presents an analysis of the Company’s restructuring reserve as of and for three months ended March 31, 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 | ) | |||||||
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Balance at March 31, 2019 | $ | 0.2 | $ | 1.2 | $ | 1.4 | ||||||
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(dollars in millions) | ||||
March 31, 2020 | ||||
2020 | $ | 10.2 | ||
2021 | 10.7 | |||
2022 | 9.2 | |||
2023 | 4.9 | |||
2024 | 3.8 | |||
After 2024 | 22.7 | |||
Total lease payments | 61.5 | |||
Less: imputed interest | (12.7 | ) | ||
Present value of operating lease liabilities | $ | 48.8 | ||
5. | Inventories |
(dollars in millions)
March 31, 2019 | December 31, 2018 | |||||||
Finished products | $ | 150.0 | $ | 137.6 | ||||
Work in process | 23.1 | 23.3 | ||||||
Raw materials | 177.2 | 174.4 | ||||||
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Inventories, at FIFO cost | 350.3 | 335.3 | ||||||
LIFO reserve | (30.6 | ) | (30.6 | ) | ||||
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Net inventory | $ | 319.7 | $ | 304.7 | ||||
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(dollars in millions) | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Finished products | $ | 142.8 | $ | 136.8 | ||||
Work in process | 21.6 | 21.7 | ||||||
Raw materials | 171.7 | 168.3 | ||||||
Inventories, at FIFO cost | 336.1 | 326.8 | ||||||
LIFO reserve | (23.8 | ) | (23.8 | ) | ||||
Net inventory | $ | 312.3 | $ | 303.0 | ||||
6. | Product Warranties |
Three Months Ended March 31, | ||||||||
(dollars in millions) | 2019 | 2018 | ||||||
Balance at January 1 | $ | 139.4 | $ | 141.2 | ||||
Expense | 9.4 | 11.6 | ||||||
Claims settled | (12.6 | ) | (11.2 | ) | ||||
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Balance at March 31 | $ | 136.2 | $ | 141.6 | ||||
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(dollars in millions) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Balance at January 1 | $ | 134.3 | $ | 139.4 | ||||
Expense | 13.5 | 9.4 | ||||||
Claims settled | (12.5 | ) | (12.6 | ) | ||||
Balance at March 31 | $ | 135.3 | $ | 136.2 | ||||
7. | Long-Term Debt |
8. | Earnings per Share of Common Stock |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Denominator for basic earnings per share - weighted average shares | 167,803,794 | 171,532,008 | ||||||
Effect of dilutive stock options and share units | 1,292,348 | 1,818,656 | ||||||
|
|
|
| |||||
Denominator for diluted earnings per share | 169,096,142 | 173,350,664 | ||||||
|
|
|
|
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Denominator for basic earnings per share - weighted average shares | 161,871,788 | 167,803,794 | ||||||
Effect of dilutive stock options and share units | 1,025,817 | 1,292,348 | ||||||
Denominator for diluted earnings per share | 162,897,605 | 169,096,142 | ||||||
9. | Stock Based Compensation |
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 | 49.42 | 545,500 | ||||||||||||||
Exercised | 17.82 | (46,915 | ) | |||||||||||||
Forfeited | 54.72 | (4,381 | ) | |||||||||||||
|
| |||||||||||||||
Outstanding at March 31, 2019 | 36.31 | 2,926,893 | 7 years | $ | 52.9 | |||||||||||
|
|
|
| |||||||||||||
Exercisable at March 31, 2019 | 28.84 | 2,016,795 | 6 years | $ | 50.3 | |||||||||||
|
|
|
|
2020:
Weighted- Avg. Per Exercise | Number of | Average Remaining Contractual Life | Aggregate Intrinsic Value (dollars in millions) | |||||||||||||
Outstanding at January 1, 2020 | $ | 37.64 | 2,728,350 | |||||||||||||
Granted | 42.39 | 784,300 | ||||||||||||||
Exercised | 15.04 | (25,147 | ) | |||||||||||||
Forfeited | 48.95 | (56,261 | ) | |||||||||||||
Outstanding at March 31, 2020 | 38.71 | 3,431,242 | 7 years | $ | 19.1 | |||||||||||
Exercisable at March 31, 2020 | 34.25 | 2,162,932 | 5 years | $ | 19.1 | |||||||||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Expected life (years) | 5.6 | 5.7 | ||||||
Risk-free interest rate | 2.7 | % | 2.9 | % | ||||
Dividend yield | 1.6 | % | 1.0 | % | ||||
Expected volatility | 22.8 | % | 22.1 | % |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Expected life (years) | 5.7 | 5.6 | ||||||
Risk-free interest rate | 1.6 | % | 2.7 | % | ||||
Dividend yield | 2.1 | % | 1.6 | % | ||||
Expected volatility | 23.6 | % | 22.8 | % |
9. | Stock Based Compensation (continued) |
Stock Appreciations Rights (SARs)
Certainnon-U.S.-based employees were granted SARs. Each SAR award grants the employee the right to receive cash equal to the excess of the share price of the Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted have three year pro rata vesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant and expire ten years from the date of grant. The fair value and compensation expense related to SARs are measured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 2019 or 2018. As of March 31, 2019, there were 14,880 SARs outstanding and exercisable. In the three months ended March 31, 2019, 1,290 SARs were exercised. Stock based compensation expense attributable to SARs was minimal in the three months ended March 31, 2019 and 2018.
Number of Units | Weighted-Average Grant Date Value | |||||||
Issued and unvested at January 1, 2019 | 379,601 | $ | 42.93 | |||||
Granted | 136,647 | 49.42 | ||||||
Vested | (147,362 | ) | 31.33 | |||||
Forfeited | (2,100 | ) | 55.32 | |||||
|
| |||||||
Issued and unvested at March 31, 2019 | 366,786 | 49.97 | ||||||
|
|
Number of Units | Weighted-Average Grant Date Value | |||||||
Issued and unvested at January 1, 2020 | 366,102 | $ | 49.92 | |||||
Granted | 169,407 | 42.39 | ||||||
Vested | (100,735 | ) | 49.21 | |||||
Forfeited | (7,557 | ) | 53.96 | |||||
Issued and unvested at March 31, 2020 | 427,217 | 46.94 | ||||||
10. | Pensions |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Service cost | $ | 0.4 | $ | 0.5 | ||||
Interest cost | 7.9 | 7.2 | ||||||
Expected return on plan assets | (14.3 | ) | (14.5 | ) | ||||
Amortization of unrecognized loss | 4.0 | 4.7 | ||||||
Amortization of prior service cost | (0.1 | ) | (0.1 | ) | ||||
|
|
|
| |||||
Defined benefit plan income | $ | (2.1 | ) | $ | (2.2 | ) | ||
|
|
|
|
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Service cost | $ | 0.4 | $ | 0.4 | ||||
Interest cost | 5.7 | 7.9 | ||||||
Expected return on plan assets | (13.0 | ) | (14.3 | ) | ||||
Amortization of unrecognized loss | 4.9 | 4.0 | ||||||
Amortization of prior service cost | (0.1 | ) | (0.1 | ) | ||||
Defined benefit plan income | $ | (2.1 | ) | $ | (2.1 | ) | ||
11. | Segment Results |
(dollars in millions) | ||||||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net sales | ||||||||
North America | $ | 521.8 | $ | 501.7 | ||||
Rest of World | 232.1 | 293.8 | ||||||
Inter-segment | (5.7 | ) | (7.5 | ) | ||||
|
|
|
| |||||
$ | 748.2 | $ | 788.0 | |||||
|
|
|
| |||||
Segment earnings | ||||||||
North America(1) | $ | 116.0 | $ | 106.0 | ||||
Rest of World | 12.3 | 36.1 | ||||||
Inter-segment | — | (0.1 | ) | |||||
|
|
|
| |||||
128.3 | 142.0 | |||||||
Corporate expense | (14.7 | ) | (14.3 | ) | ||||
Interest expense | (2.0 | ) | (2.3 | ) | ||||
|
|
|
| |||||
Earnings before income taxes | 111.6 | 125.4 | ||||||
Provision for income taxes | 22.3 | 26.6 | ||||||
|
|
|
| |||||
Net earnings | $ | 89.3 | $ | 98.8 | ||||
|
|
|
| |||||
(1) includes restructuring and impairment expenses of: | $ | — | $ | 6.7 |
(dollars in millions) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net sales | ||||||||
North America | $ | 532.9 | $ | 521.8 | ||||
Rest of World | 110.2 | 232.1 | ||||||
Inter-segment | (6.2 | ) | (5.7 | ) | ||||
$ | 636.9 | $ | 748.2 | |||||
Segment earnings ( losses ) | ||||||||
North America | $ | 127.1 | $ | 116.0 | ||||
Rest of World | (42.2 | ) | 12.3 | |||||
84.9 | 128.3 | |||||||
Corporate expense | (15.0 | ) | (14.7 | ) | ||||
Interest expense | (2.2 | ) | (2.0 | ) | ||||
Earnings before income taxes | 67.7 | 111.6 | ||||||
Provision for income taxes | 16.0 | 22.3 | ||||||
Net earnings | $ | 51.7 | $ | 89.3 | ||||
12. | Fair Value Measurements |
(dollars in millions) | ||||||||
Fair Value Measurement Using | March 31, 2019 | December 31, 2018 | ||||||
Quoted prices in active markets for identical assets (Level 1) | $ | 295.5 | $ | 385.3 | ||||
Significant other observable inputs (Level 2) | 3.1 | 7.5 |
(dollars in millions) | ||||||||
Fair Value Measurement Using | March 31, 2020 | December 31, 2019 | ||||||
Quoted prices in active markets for identical assets (Level 1) | $ | 135.6 | $ | 177.4 | ||||
Significant other observable inputs (Level 2) | 1.0 | 6.9 |
13. | Derivative Instruments |
13. | Derivative Instruments (continued) |
(dollars in millions) | ||||||||||||||||
March 31, 2019 | December 31, 2018 | |||||||||||||||
Buy | Sell | Buy | Sell | |||||||||||||
British pound | $ | — | $ | 0.8 | $ | — | $ | 1.0 | ||||||||
Canadian dollar | — | 22.8 | — | — | ||||||||||||
Euro | 37.5 | — | 32.0 | — | ||||||||||||
Mexican peso | 23.5 | — | 27.8 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 61.0 | $ | 23.6 | $ | 59.8 | $ | 1.0 | ||||||||
|
|
|
|
|
|
|
|
March 31, 2020 | December 31, 2019 | |||||||||||||||
Buy | Sell | Buy | Sell | |||||||||||||
British pound | $ | — | $ | 0.9 | $ | — | $ | 1.3 | ||||||||
Canadian dollar | — | 59.8 | — | 49.7 | ||||||||||||
Euro | 27.1 | — | 36.0 | — | ||||||||||||
Mexican peso | 23.4 | — | 18.6 | — | ||||||||||||
Total | $ | 50.5 | $ | 60.7 | $ | 54.6 | $ | 51.0 | ||||||||
13. | Derivative Instruments (continued) |
Fair value of derivatives designated as hedging instruments under ASC 815:
(dollars in millions) | ||||||||||
Balance Sheet Location | March 31, 2019 | December 31, 2018 | ||||||||
Foreign currency contracts | Other current assets | $ | 4.8 | $ | 3.9 | |||||
Othernon-current assets | — | 5.1 | ||||||||
Accrued liabilities | (1.3 | ) | (0.6 | ) | ||||||
Commodities contracts | Accrued liabilities | (0.4 | ) | (0.9 | ) | |||||
|
|
|
| |||||||
Total derivatives designated as hedging instruments | $ | 3.1 | $ | 7.5 | ||||||
|
|
|
|
Fair value of derivatives designated as hedging instruments under ASC 815: | ||||||||||
(dollars in millions) | ||||||||||
Balance Sheet Location | March 31, 2020 | December 31, 2019 | ||||||||
Foreign currency contracts | Other current assets | $ | 4.8 | $ | 8.4 | |||||
Accrued liabilities | (3.6 | ) | (1.5 | ) | ||||||
Commodities contracts | Accrued liabilities | (0.2 | ) | — | ||||||
Total derivatives designated as hedging instruments | $ | 1.0 | $ | 6.9 | ||||||
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 | $ | 0.1 | $ | 2.8 | Cost of products sold | $ | — | $ | — | |||||||||||
Commodities contracts | (0.2 | ) | 0.1 | Cost of products sold | — | — | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
$ | (0.1 | ) | $ | 2.9 | $ | — | $ | — | ||||||||||||
|
|
|
|
|
|
|
|
Derivatives in ASC 815 cash flow hedging relationships | Amount of gain (loss) recognized in other comprehensive loss on derivatives | Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings | Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||
Foreign currency contracts | $ | 1.4 | $ | 0.1 | Cost of products sold | $ | 0.8 | $ | — | | ||||||||
Commodities contracts | (0.2 | ) | (0.2 | ) | Cost of products sold | — | — | |||||||||||
$ | 1.2 | $ | (0.1 | ) | $ | 0.8 | $ | — | ||||||||||
14. | Income Taxes |
geographic
15. | Changes in Accumulated Other Comprehensive Loss by Component |
(dollars in millions) | ||||||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cumulative foreign currency translation | ||||||||
Balance at beginning of period | $ | (64.9 | ) | $ | (26.5 | ) | ||
Other comprehensive income before reclassifications | 15.9 | 18.4 | ||||||
|
|
|
| |||||
Balance at end of period | (49.0 | ) | (8.1 | ) | ||||
|
|
|
| |||||
Unrealized net gain on cash flow derivatives | ||||||||
Balance at beginning of period | (0.7 | ) | (0.9 | ) | ||||
Other comprehensive (loss) income before reclassifications | (0.1 | ) | 2.0 | |||||
|
|
|
| |||||
Balance at end of period | (0.8 | ) | 1.1 | |||||
|
|
|
| |||||
Pension liability | ||||||||
Balance at beginning of period | (285.2 | ) | (272.1 | ) | ||||
Amounts reclassified from accumulated other comprehensive loss:(1) | 2.9 | 3.4 | ||||||
|
|
|
| |||||
Balance at end of period | (282.3 | ) | (268.7 | ) | ||||
|
|
|
| |||||
Accumulated other comprehensive loss, end of period | $ | (332.1 | ) | $ | (275.7 | ) | ||
|
|
|
| |||||
(1)Amortization of pension items: | ||||||||
Actuarial losses | $ | 4.0 | (2) | $ | 4.7 | (2) | ||
Prior year service cost | (0.1 | )(2) | (0.1 | )(2) | ||||
|
|
|
| |||||
3.9 | 4.6 | |||||||
Income tax benefit | (1.0 | ) | (1.2 | ) | ||||
|
|
|
| |||||
Reclassification net of income tax benefit | $ | 2.9 | $ | 3.4 | ||||
|
|
|
|
(dollars in millions) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cumulative foreign currency translation | ||||||||
Balance at beginning of period | $ | (66.2 | ) | $ | (64.9 | ) | ||
Other comprehensive ( income before reclassificationsloss ) | (18.0 | ) | 15.9 | |||||
Balance at end of period | (84.2 | ) | (49.0 | ) | ||||
Unrealized net gain (loss) on cash flow derivatives | ||||||||
Balance at beginning of period | 0.2 | (0.7 | ) | |||||
Other comprehensive loss before reclassifications | 0.9 | (0.1 | ) | |||||
Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $ 0.2 and$ - in 2020 and 2019, respectively) | (0.6 | ) | — | |||||
Balance at end of period | 0.5 | (0.8 | ) | |||||
Pension liability | ||||||||
Balance at beginning of period | (282.3 | ) | (285.2 | ) | ||||
Amounts reclassified from accumulated other comprehensive loss: (1) | 3.6 | 2.9 | ||||||
Balance at end of period | (278.7 | ) | (282.3 | ) | ||||
Accumulated other comprehensive loss, end of period | $ | (362.4 | ) | $ | (332.1 | ) | ||
(1) Amortization of pension items: | ||||||||
Actuarial losses | $ | 4.9 | (2) | $ | 4.0 | (2) | ||
Prior year service cost | (0.1 | ) (2) | (0.1 | ) (2) | ||||
4.8 | 3.9 | |||||||
Income tax benefit | (1.2 | ) | (1.0 | ) | ||||
Reclassification net of income tax benefit | $ | $ | ||||||
(2) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 - Pensions for additional details |
16. |
Commitments and Contingencies |
On April 8, 2019,
PART I - FINANCIAL INFORMATION
2019
including incremental sales of $16 million from our Water-Right, Inc. (Water-Right) acquisition, which we completed in April 2019.
lower sales volumes in China.
On March 21, 2018, we announced a plan to close our Renton, Washington plant and transfer water heater, boiler and storage tank production to our other U.S. plants. The majority of the consolidation of operations occurred in the second quarter of 2018 and the Renton plant was fully closed in the
third quarter of 2018. AsChina as a result of the relocation of production, we incurredpre-tax restructuring and impairment expenses of $6.7 million in the first quarter of 2018, primarily related to employee severance and compensation-related costs, building lease exits costs and the impairment of assets. These activities are reflected in “restructuring and impairment expenses” in the accompanying financial statements.
We are providingnon-GAAP measures (adjusted earnings, adjusted earnings per share (EPS), and adjusted segment earnings) that exclude restructuring and impairment expenses. Reconciliations to measures on a GAAP basis are provided later in this section.
reduced sales volumes.
interest rates.
The decrease in other income was primarily due to lower interest income.
geographic earnings mix.
North America segment earnings were $116.0 million in the first quarter of 20192020, which was higher than segment earnings of $106.0$116.0 million in the same period of 2018. Adjusted segment earnings were $112.7 million2019. Segment margin was 23.9 percent in the first quarter of 2018. Segment margin was2020 compared to 22.2 percent in the first quarter of 20192019. The improvement in segment
levels at the end of 2019.
Outlook
We expect our consolidated sales to grow between 2.5performance with reasonable precision, and 3.5 percent and between three and four percent in local currency terms in 2019. We expect both operating segments to improve significantly in the second half of 2019 and project significantly improved second half year over year performance, primarily in our North America segment as a result we suspended our 2020 full year outlook. As the depth and duration of weakness experiencedthe disruption and pace of recovery in the third quarter of 2018. We believeour end markets become clearer, we will achieve full-year earningslook to return to our practice of between $2.69 and $2.75 per share, which excludes the potential impact from future acquisitions.
providing a current year outlook.
in local currency in China. Through the first four months of 2020, we repatriated $125 million to the U.S.
reduce costs.
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 March 31, 2020. Our total
Our total debt increased $63.0 million from $221.4 million at December 31, 2018 to $284.4 million at March 31, 2019 to fund our share repurchase activity and dividend payments. Our leverage, as measured by the ratio of total debt to total capitalization, calculated excluding operating lease liabilities, was 14.0 percent at the end of the first quarter in 2019, compared with 11.4 percent at the end of last year.
2020.
March 18, 2020.
Non-GAAP Financial Information
We providenon-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 March 31, | ||||||||
2019 | 2018 | |||||||
Net Earnings (GAAP) | $ | 89.3 | $ | 98.8 | ||||
Restructuring and impairment expenses, before tax | — | 6.7 | ||||||
Tax effect of restructuring and impairment expenses | — | (1.7 | ) | |||||
|
|
|
| |||||
Adjusted Earnings | $ | 89.3 | $ | 103.8 | ||||
|
|
|
| |||||
Diluted EPS (GAAP) | $ | 0.53 | $ | 0.57 | ||||
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 | $ | 0.60 | ||||
|
|
|
|
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 March 31, | ||||||||
2019 | 2018 | |||||||
Segment Earnings (GAAP) | ||||||||
North America | $ | 116.0 | $ | 106.0 | ||||
Rest of World | 12.3 | 36.1 | ||||||
Inter-segment earnings elimination | — | (0.1 | ) | |||||
|
|
|
| |||||
Total Segment Earnings (GAAP) | $ | 128.3 | $ | 142.0 | ||||
|
|
|
| |||||
Adjustments | ||||||||
North America | $ | — | $ | 6.7 | ||||
Rest of World | — | — | ||||||
Inter-segment earnings elimination | — | — | ||||||
|
|
|
| |||||
Total Adjustments | $ | — | $ | 6.7 | ||||
|
|
|
| |||||
Adjusted Segment Earnings | ||||||||
North America | $ | 116.0 | $ | 112.7 | ||||
Rest of World | 12.3 | 36.1 | ||||||
Inter-segment earnings elimination | — | (0.1 | ) | |||||
|
|
|
| |||||
Total Adjusted Segment Earnings | $ | 128.3 | $ | 148.7 | ||||
|
|
|
|
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) | $ | 2.69 - 2.75 | $ | 2.58 | ||||
Restructuring and impairment expenses per diluted share, net of tax | — | 0.03 | ||||||
|
|
|
| |||||
Adjusted EPS | $ | 2.69 - 2.75 | $ | 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 | ||||||||||||
January 1 – January 31, 2019 | 248,500 | $ | 45.73 | 248,500 | 5,826,753 | |||||||||||
February 1 – February 28, 2019 | 334,300 | 51.20 | 334,300 | 5,492,453 | ||||||||||||
March 1 – March 31, 2019 | 329,000 | 51.92 | 329,000 | 5,163,453 |
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 | ||||||||||||
January 1 – January 31, 2020 | 400,800 | $ | 46.89 | 400,800 | 2,561,415 | |||||||||||
February 1 – February 29, 2020 | 62,000 | 42.07 | 62,000 | 2,499,415 | ||||||||||||
March 1 – March 31, 2020 | 885,591 | 39.82 | 885,591 | 1,613,824 |
|
| |||
Exhibit Number | Description | |||
31.1 | ||||
31.2 | ||||
32.1 | ||||
32.2 | ||||
101 | The following materials from A. O. Smith Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, | |||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
A. O. SMITH CORPORATION | ||||||
May | /s/Helen E. Gurholt | |||||
Helen E. Gurholt | ||||||
Vice President and Controller | ||||||
/s/Charles T. Lauber | ||||||
Charles T. Lauber | ||||||
Executive Vice President and | ||||||
Chief Financial Officer |
29