Table of Contents
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 March 31, 2019.

2020.

or

☐

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

For the transition period from
to

Commission File Number
1-475

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)

Delaware 39-0619790

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    
☐
  No

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

Indicate by check mark 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 ☐ 
Non-accelerated
filer
☐
Smaller reporting company
 
☐
  
Emerging growth company
 
☐

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

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

Class A Common Stock Outstanding as of April 30, 2019 - 26,059,3352020 – 26,044,733 shares

Common Stock Outstanding as of April 30, 2019 - 141,137,1642020
–
135,095,634 shares

Securities registered pursuant to Section 12(b)

Table of the Act:

Title of Each Class

Trading

Symbol

Name of Each Exchange

on Which Registered

Class A Common Stock (par value $5.00 per share)N/ANot listed
Common Stock (par value $1.00 per share)AOSNew York Stock Exchange

Contents

Index

A. O. Smith Corporation

Page
Part I.
FINANCIAL INFORMATION
    Page

Part I.

 

FINANCIAL INFORMATION

 

Condensed Consolidated Statements of Earnings
- Three Months Ended March 31, 20192020 and 20182019

  
3
 

Condensed Consolidated Statements of Comprehensive Earnings
- Three Months Ended March 31, 20192020 and 20182019

  
3
 
Condensed Consolidated Balance Sheets
- March 31, 2020 and December 31, 2019
4
 

Condensed Consolidated Balance Sheets - March  31, 2019 and December 31, 2018

4

Condensed Consolidated Statements of Cash Flows
- Three Months Ended March 31, 20192020 and 20182019

  
5
 

Condensed Consolidated Statements of Stockholders’ Equity
- Three Months Ended March 31, 20192020 and 20182019

  
6
 

Notes to Condensed Consolidated Financial Statements
- March 31, 20192020

  7-19
7-
21
 

Item 2.

 

Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

  20-25
22-26
 

Item 3.

 

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

  
26
 

Item 4.

Controls and Procedures

  26

Part II.

OTHER INFORMATION

Item 1.

Legal Proceedings

  
Item 4.
Controls and Procedures
27
 

Item 2.

 

Part II.
OTHER INFORMATION
Item 1.
Legal Proceedings
27
Item 1A.
Risk Factors
28
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

  27
29
 

Item 6.

Exhibits

  27

Index to Exhibits

  28
Item 6.
 

SignaturesExhibits

  
29
Index to Exhibits
30
Signatures
31
 

2
Table of Contents
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
March 31,		 
   2019  2018 

Net sales

  $748.2  $788.0 

Cost of products sold

   455.4   466.5 
  

 

 

  

 

 

 

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) 
  

 

 

  

 

 

 

Earnings before provision for income taxes

   111.6   125.4 

Provision for income taxes

   22.3   26.6 
  

 

 

  

 

 

 

Net Earnings

  $89.3  $98.8 
  

 

 

  

 

 

 

Net Earnings Per Share of Common Stock

  $0.53  $0.58 
  

 

 

  

 

 

 

Diluted Net Earnings Per Share of Common Stock

  $0.53  $0.57 
  

 

 

  

 

 

 

Dividends Per Share of Common Stock

  $0.22  $0.18 
  

 

 

  

 

 

 

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

 

 

(dollars in millions)

(unaudited)

 

 

   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 
  

 

 

  

 

 

 

Comprehensive Earnings

  $108.0  $122.6 
  

 

 

  

 

 

 

         
 
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
 
         
A. O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(dollars in millions)
(unaudited)
         
 
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
 
         
See accompanying notes to unaudited condensed consolidated financial statements.

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

3
Table of Contents
A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in millions)

   (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 
  

 

 

  

 

 

 

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) 
  

 

 

  

 

 

 

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 
  

 

 

  

 

 

 

Total Assets

  $3,143.5  $3,071.5 
  

 

 

  

 

 

 

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   —   
  

 

 

  

 

 

 

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 
  

 

 

  

 

 

 

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) 
  

 

 

  

 

 

 

Total Stockholders’ Equity

   1,749.2   1,717.0 
  

 

 

  

 

 

 

Total Liabilities and Stockholders’ Equity

  $3,143.5  $3,071.5 
  

 

 

  

 

 

 

         
 
(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
 
         
See accompanying notes to unaudited condensed consolidated financial statements

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

4
Table of Contents
A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

(unaudited)

   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) 
  

 

 

  

 

 

 

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 
  

 

 

  

 

 

 

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) 
  

 

 

  

 

 

 

Cash Used In Financing Activities

   (21.3)   (182.8) 
  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

   78.1   (104.7) 

Cash and cash equivalents - beginning of period

   259.7   346.6 
  

 

 

  

 

 

 

Cash and Cash Equivalents - End of Period

  $337.8  $241.9 
  

 

 

  

 

 

 

         
 
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
 
         
See accompanying notes to unaudited condensed consolidated financial statements

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

5
Table of Contents
A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in millions)

(unaudited)

   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) 
  

 

 

  

 

 

 

Balance at end of period

  $131.0  $131.0 
  

 

 

  

 

 

 

Common Stock

   

Balance at the beginning of the year

  $164.5  $164.5 

Conversion of Class A Common Stock

   —     —   
  

 

 

  

 

 

 

Balance at end of period

  $164.5  $164.5 
  

 

 

  

 

 

 

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 
  

 

 

  

 

 

 

Balance at end of period

  $503.5  $491.6 
  

 

 

  

 

 

 

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) 
  

 

 

  

 

 

 

Balance at end of period

  $2,155.0  $1,856.5 
  

 

 

  

 

 

 

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 
  

 

 

  

 

 

 

Balance at end of period

  $(872.7)  $(659.5) 
  

 

 

  

 

 

 

Total Stockholders’ Equity

  $1,749.2  $1,708.4 
  

 

 

  

 

 

 

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

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

6
Table of Contents
A. O. SMITH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

2020

(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 months ended March 31, 20192020 are not necessarily indicative of the results expected for the full year. It is suggested 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 Annual Report on Form
10-K
for the year ended December 31, 20182019 filed with the SEC on February 15, 2019.

24, 2020.

Recent Accounting Pronouncements

In January 2017,December 2019, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) 350,Intangibles – Goodwill and Other (issued740,
Income Taxes
(issued under Accounting Standards Update (ASU)
2019-12,
“Simplifying the Accounting for Income Taxes”). This amendment removes certain exceptions to the general principles of ASC 740, and clarifies and amends existing guidance to improve consistent application. The amendment requires adoption on January 1, 2021, with early adoption permitted. The Company does not expect that the adoption of ASU
2019-12
will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
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 Company adopted the amendment requires adoption on January 1, 2020. The Company does not expect that2020 and the adoption of ASU
2017-04 will
did not have an impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
In June 2016, the FASB issued ASC 326,
 Financial Instruments – Credit Losses
(issued under ASU
2016-13)
which modifies the measurement of expected credit losses on certain financial instruments. The Company adopted
2016-13
on January 1, 2020 and the adoption did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (issued under ASU2016-13) which modifies the measurement

7
Table of expected credit losses on certain financial instruments. ASU2016-13 requires adoption on January 1, 2020. The Company does not expect that the adoption of ASU2016-13 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 under ASU2016-02). This amendment requires the recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements classified as operating leases. The Company applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019, as the date of the initial application. The Company elected the package of practical expedients as well as a separate practical expedient not to separate lease andnon-lease components. The Company did not elect the hindsight practical expedient. Adoption of ASC 842 did not have a material impact on the Company’s consolidated balance sheets, statements of earnings or statements of cash flows. Refer to Note 3, Leases, for additional information.

Contents

2.

Revenue Recognition

Substantially all of the Company’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders are used to determine the existence of a sales contract. Shipping documents are used to verify shipment. For substantially all of its products, the Company transfers control of products to the customer at the point in time when title and risk are passed to the customer, which generally occurs upon shipment of the product. Each unit sold is considered an independent, unbundled performance obligation. The Company’s sales arrangements do not include other performance obligations that are material in the context of the contract.

The nature, timing and amount of revenue for a respective performance obligation are
consistent
for each customer. The Company measures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of 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 $33.7$65.2 million and $47.0$49.6 million at March 31, 20192020 and December 31, 2018,2019, respectively. The Company assesses the collectability of customer receivables based on the creditworthiness of thea customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for doubtful accounts, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for doubtful accounts, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for doubtful accounts was $6.7$7.5 million and $6.4$6.7 million at March 31, 20192020 and December 31, 2018,2019, 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 isare based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.

Disaggregation of Net Sales

The Company is comprised of two2 reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The Rest of World segment also manufactures and markets
in-home
air purification products in China.

As each segment manufactures and markets products in its respective region of the world, the Company has determined that geography is the primary factor in reporting its sales. The Company further disaggregates its North America segment sales by major product line as each of North America’s major product lines is sold through distinct distribution channels and these product lines may be impacted differently by certain economic factors. Within the Rest of World segment, particularly in China and India, the Company’s major customers purchase across the Company’s product lines, utilizing the same distribution channel regardless of product type. In addition, the impact of economic factors is unlikely to be differentiated by product line in the Rest of World segment.

8
Table of Contents
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 sells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than 1,300 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the 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 distributors
dealers
as well as directly to consumers.consumers including through internet sales channels. A portion of the Company’s sales of water treatment products in the North America
segment
is comprised of replacement filters.

The following table disaggregates the Company’s net sales by segment. As described above, the Company’s North America segment sales are further disaggregated by major product line. In addition, the Company’s Rest of World segment sales are disaggregated by China and all other Rest of World.

9
Table of Contents
2.
Revenue Recognition (
continued
)
(dollars in millions)

   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 
  

 

 

   

 

 

 

Total North America

   521.8    501.7 

Rest of World

    

China

  $213.0   $275.8 

All other Rest of World

   19.1    18.0 
  

 

 

   

 

 

 

Total Rest of World

   232.1    293.8 

Inter-segment sales

   (5.7)    (7.5) 
  

 

 

   

 

 

 

Total Net Sales

  $748.2   $788.0 
  

 

 

   

 

 

 

 
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
 
         
(1)
Includes the results of Water-Right, Inc. and its affiliated entities (Water-Right) from April 8, 2019, the date of acquisition
3.Acquisitions
On April 8, 2019, the Company acquired 100 percent of the shares of Water-Right, a Wisconsin-based water treatment company. With the addition of Water-Right, the Company grew its North America water treatment platform. Water-Right is included in the Company’s North America segment for reporting purposes.
The Company paid an aggregate cash purchase price of $107.0 million, net of cash acquired. In addition, the Company established a $4.0 million escrow to satisfy any potential obligations of the former owners of Water-Right, should they arise.
The following table summarizes the allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition of Water-Right for purposes of allocating the purchase price. Significant assumptions used to estimate the fair value of intangible assets acquired include discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates, attrition rates and royalty rates. The $60.4 million of acquired identifiable intangible assets was comprised of the following: $40.2 million of customer relationships being amortized over 20 years, $19.0 million of trademarks not subject to amortization, and $1.2 million of
non-compete
agreements being amortized over 7.5 years.
April 8, 2019 (dollars in millions)
  
Current assets, net of cash acquired
 $
9.7
 
Property, plant and equipment
  
8.6
 
Intangible assets
  
60.4
 
Goodwill
  
31.0
 
     
Total assets acquired
  
109.7
 
     
Current liabilities
  
(2.7
)
     
Net assets acquired
 $
107.0
 
     
10
Table of Contents
3.

Leases

Acquisitions (continued)

As required under ASC 805 Business Combinations, Water-Right’s
results
of operations have been included in the Company’s consolidated financial statements from April 8, 2019, the date of acquisition.
4.Leases
The Company’s lease portfolio consists of operating leases for
buildings
and equipment, such as forklifts and copiers, primarily in the United States and China. The Company defines a lease as a contract that gives the Company the right to control the use of a physical asset for a stated term. The Company pays the lessor for that right, with a series of payments defined in the contract and a corresponding right of use operating lease asset and liability are recorded. The Company has elected not to record leases with an initial term of 12 months or less on its condensed consolidated balance sheet. To determine balance sheet amounts, required legal payments are discounted using the Company’s incremental borrowing rate.rate as of the inception of the lease. The incremental borrowing rate is the rate of interest that the Company would haveincur if it were to borrow, on a collateralized basis, an amount equal to the value of the leased item over a similar term, in a similar economic environment. Variable lease components not based on an index or rate are excluded from the measurement of the lease asset and liability and expensed as incurred for all asset classes.

Certain leases include one or more options to renew or terminate. Renewal terms can extend the lease term from one to five years and options to terminate can be effective within one year. The exercise of lease renewal or termination is at the Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants or material subleases. Cash flows associated with leases are materially consistent with the expense recorded in the condensed consolidated statement of earnings.

Supplemental balance sheet information related to leases was as follows:

(dollars in millions)

   March 31, 2019 

Liabilities

  

Short term: Accrued liabilities

  $12.3 

Long term: Operating lease liabilities

   41.1 
  

 

 

 

Total operating lease liabilities

  $53.4 

Less: Rent incentives and deferrals

   (3.7) 
  

 

 

 

Assets

  

Operating lease assets

  $49.7 
  

 

 

 

         
 
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
 
         
11
Table of Contents
4.Leases (continued)
Lease Term and Discount Rate
 
March 31, 20192020
 

Weighted-average remaining lease term

  9
10 years
 

Weighted-average discount rate

  4.05
3.95
%
% 

The components of lease expense were as follows:

(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
 
(1)

Includes(1)

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, respectively

respectively.

3.

Leases (continued)

Maturities of lease liabilities were as follows:

(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 
  

 

 

 

Total lease payments

   66.3 

Less: imputed interest

   (12.9) 
  

 

 

 

Present value of operating lease liabilities

  $53.4 
  

 

 

 

4.

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 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) 
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

  $0.2   $1.2   $1.4 
  

 

 

   

 

 

   

 

 

 

     
(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

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

(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 
  

 

 

   

 

 

 

Inventories, at FIFO cost

   350.3    335.3 

LIFO reserve

   (30.6)    (30.6) 
  

 

 

   

 

 

 

Net inventory

  $319.7   $304.7 
  

 

 

   

 

 

 

         
(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
 
         
12
Table of Contents
6.

Product Warranties

The Company offers warranties on the 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.

   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) 
  

 

 

   

 

 

 

Balance at March 31

  $136.2   $141.6 
  

 

 

   

 

 

 

         
(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

The Company has a $500 million multi-year multi-currency revolving credit agreement with a group of nine9 banks, which expires on December 15, 2021. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied.

Borrowings under 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 March 31, 2019.2020. At its option, the Company either maintains cash balances or pays fees for bank credit and services.

8.

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 of basic and diluted weighted-average shares used in the earnings per share calculations:

   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
 
         
13
Table of Contents
9.

Stock Based Compensation

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at March 31, 20192020 was 1,887,527.951,461. 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 March 31, 2020 and 2019 was $9.0 million and 2018 was $8.7 million, and $6.5 million, respectively.

Stock Options

The stock options granted in the three months ended March 31, 20192020 and 20182019 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 20192020 and 20182019 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 months ended March 31, 20192020 and 20182019 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 March 31, 2020 and 2019 was $4.5 million and 2018 was $4.3 million, and $3.2 million, respectively.

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, 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

   49.42    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
 
Share
Exercise
 
Price
  
Number
of
 
Options
  
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
 
                 
The weighted-average fair value per option at the date of grant during the three months ended March 31, 20192020 and 20182019 using the Black-Scholes option-pricing model was $10.83$8.15 and $14.86,$10.83, respectively. Assumptions were as follows:

   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
%
14
Table of Contents
9.

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)

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.

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 136,647169,407 and 96,841136,647 share units under the plan in the three months ended March 31, 20192020 and 2018,2019, respectively. The share units were valued at $6.8$7.2 million and $6.0$6.8 million at the date of issuance in 20192020 and 2018,2019, 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 months ended March 31, 20192020 and 20182019 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 $4.4$4.5 million and $3.3$4.4 million was recognized in the three months ended March 31, 20192020 and 2018,2019, respectively. Certain
non-U.S.-based
employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

A summary of share unit activity under the plan is as follows for the three months ended March 31, 2019:

   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 
  

 

 

   
2020:

         
 
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
 
         
15
Table of Contents
10.

Pensions

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

   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
)
         
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 2018.2019. The Company is not required to make a contribution in 2019.

2020.
11.

Segment Results

The Company is comprised of two2 reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The 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
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
 
         
16
Table of Contents
12.

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. 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

  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
 
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 three months ended March 31, 2019.

2020.
13.

Derivative Instruments

The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.

Cash Flow Hedges

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

Foreign Currency Forward Contracts

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

17
Table of Contents
13.

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.Theeffective.
The majority of the amounts in accumulated other comprehensive loss for cash flow hedges are expected to be reclassified into earnings within one year. The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts that are designated as cash flow hedges.

(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 
  

 

 

   

 

 

   

 

 

   

 

 

 

(dollars in millions)
 
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
 
                 
Commodity Futures Contracts

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

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

The
after-tax
gains and losses of the contracts as of March 31, 20192020 were recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in the period in which the underlying transaction is recorded in earnings. The
after-tax
gains and losses on the contracts will be reclassified within one year. Commodity hedges outstanding at March 31, 2019 and December 31, 2018 totaled approximately 15,000 tons of steel.

Net Investment Hedges

The Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain
non-U.S.
subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its
non-U.S.
subsidiaries. These hedges are determined to be effective. The Company recognized $0.8 million and $1.3 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 months ended March 31, 2019.2020 and 2019, respectively. The contractual amount of the Company’s foreign currency forward contracts that are designated as net investment hedges is $100.0$50.0 million as of March 31, 2019.

2020.

18
Table of Contents
13.

Derivative Instruments (continued)

The following tables present the impact of derivative contracts on the Company’s financial statements.

Fair value of derivatives designated as hedging instruments under ASC 815:

(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
 
           
The effect of cash flow hedges on the condensed consolidated statement of earnings:

Three Months Ended March 31 (dollars in millions):

Derivatives in ASC 815 cash

flow hedging relationships

  Amount of gain (loss)
recognized in other
comprehensive loss
on derivative		   Location of gain (loss)
reclassified from
accumulated other
comprehensive loss
into earnings		   Amount of gain
(loss) reclassified
from accumulated
other comprehensive
loss into earnings		 
   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

The effective income tax rate for the three months ended March 31, 20192020 was 20.023.6 percent compared to 21.220.0 percent for the three months ended March 31, 2018.2019. The Company estimates that its annual effective income tax rate for the full year 2019 will be approximately 21.5 percent. The lowerhigher effective income tax rate for the three months ended March 31, 20192020 compared to the effective income tax rate for the three months ended March 31, 20182019 was primarily due to
a change in estimate related to the application of certain provisions associated with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform).

geographic

earnings mix.
As of March 31, 2019,2020, the Company had $8.3$9.7 million of unrecognized tax benefits of which $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 2016-20192016-2020 are subject to audit. The Company is subject to state and local income tax audits for tax years 2002-2019.2002-2020. The Company is subject to
non-U.S.
income tax examinations for years 2013-2019.

2014-2020.

19
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15.

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
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
(
loss
)
income before reclassifications
  
(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
 $
 
 
 
 
3.6
  $
 
 
 
 
2.9
 
         
(2)

These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 - Pensions for additional details

20
Table of Contents
16.

Subsequent Event

Commitments and Contingencies

On April 8, 2019,

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 acquiredhas agreed to repurchase inventory if both requested by the Water-Right groupbanks and certain defined conditions are met, primarily related to the aging of companiesthe 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 $9.1
million
and $14.1 million as of March 31, 2020 and December 31, 2019, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which included Water-Right, Incorporated (Water-Right), a Wisconsin-based water treatment company,would be contingent on the default of all of the outstanding loans, was approximately $17.0 million and $23.1 million as of March 31, 2020 and December 31, 2019, respectively. The Company’s reserves for a cash purchase priceestimated losses under repurchase arrangements were immaterial as of $107.0 million. Water-Right is a water quality solutions provider with a complete lineMarch 31, 2020 and December 31, 2019.
21
Table of residential and commercial products and systems for a wide variety of applications, including solutions for problem well water.

Contents

PART I - FINANCIAL INFORMATION

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

OVERVIEW

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

In January 2020, an outbreak of a novel coronavirus
(COVID-19)
surfaced in Wuhan, China. As a result of the outbreak, the Chinese government required businesses to close and restricted certain travel within the country. In cooperation with the government authorities, our North America segment,operations in China closed for approximately four weeks. As of the date of this filing, our operations in China have resumed but at below normal levels. In March 2020,
COVID-19
was declared a global pandemic and we projectsaw pressure in our sales will growother end markets worldwide. Through the date of this filing, our global manufacturing operations of essential water heating and water treatment products continue with minimal operating disruption. We shifted water heater production from Mexico to the U.S. in 2019 comparedthe short-term to 2018minimize disruption due tomid-2018 pricing actions the temporary closure of our Juarez, Mexico plant. As a result of the
COVID-19
pandemic and in support of continuing our manufacturing efforts, we have undertaken numerous and meaningful steps to protect our employees, suppliers, and customers. These important steps, which in certain cases reduce efficiency, include making plant accommodations and reconfigurations to maintain social distancing, mask availability to all employees, during deep cleanings of our facilities and encouraging employees to work remotely where possible, among others. As we receive guidance from governmental authorities, we adjust our safety measures to meet or exceed those guidelines. The majority of our customers in the U.S. are also deemed essential under Cybersecurity and Infrastructure Security Agency (CISA) guidance and are operating their businesses under varying state and local governmental guidance.
Our global supply chain management team continues to monitor and manage our ability to operate effectively in response to various and differing
shelter-in-place
orders by countries and states where we and our suppliers operate. To date, we have not seen any meaningful disruptions to our supply chain. Ongoing communications with our suppliers to identify and mitigate risk of potential disruptions and to manage inventory levels continue.
While we believe our balance sheet and capital position are strong, proactive management of discretionary spending and cost structure will continue. In addition, the members of our Board of Directors have voluntarily reduced the cash component of their board compensation by 25 percent and our chairman and chief executive officer (CEO) has voluntarily reduced his base salary by 25 percent. Our CEO’s staff, which includes our other named executive officers, have also volunteered a 15 percent reduction in base salary. We also continue to focus on water heaters related to steel
right-sizing
our cost structure in China through headcount reductions, store closures, cuts in advertising and other inflationary costs, as well as, highercost saving measures.
We estimate that 85 percent of our water heater and boiler volumesunits sold in the U.S. relate to replacement business. While we expect that our replacement business in both water heating and boilers will provide a buffer in any economic downturn resulting from expected industry-wide new construction growth
COVID-19
in a similar manner to what we have seen historically, the impacts of the pandemic on consumer spending are difficult to predict.
We believe that the current environment does not allow for the forecast of performance with reasonable precision, and expansion of replacement demand. Our sales of boilers grew nine percent in 2018, andas a result we expect ten percent sales growth in 2019, driven by the continuing U.S. industry transition to higher efficiency products andsuspended our introduction of new products. We 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 Water-Right group of companies (Water-Right) in April 2019. We expect sales of North America water treatment products to increase by 75 to 80 percent in 2019, compared to 2018, primarily due to volume growth, a2020 full year outlook. As the severity and duration of salesthe disruption and pace of recovery in our end markets become clearer, we will look to Lowe’s and salesreturn to our practice of Water-Right products from the dateproviding a current year outlook.
22
Table of acquisition. The impact to earnings will be minimal in 2019.

In our Rest of World segment, we expect China sales to decline in 2019 at a rate of between seven and nine percent in U.S. dollars and six to eight percent in local currency due to inventory build in the sales channel that occurred primarily in the first quarter of 2018 and we believe the Chinese economy will continue to be weak and the Chinese currency will depreciate compared to the U.S. dollar by approximately one percent in 2019 compared with 2018. In addition, we expect our sales in India to grow over 30 percent in 2019 from approximately $34 million in 2018.

Combining all of these factors, we expect our consolidated sales to grow 2.5 to 3.5 percent and between three to four percent in local currency terms in 2019.

Contents

RESULTS OF OPERATIONS

FIRST THREE MONTHS OF 20192020 COMPARED TO 2018

2019

Sales in the first quarter of 20192020 were $748$637 million, approximately five15 percent lower than sales of $788$748 million in the first quarter of 2018.2019. Our lower sales in the first quarter of 20192020 compared to the first quarter of 2018same period last year were primarily relateddue to lowera 57 percent decline in sales in China, which was primarily due to inventory builddriven by
COVID-19
pandemic–related weak consumer demand. The decreased demand in the sales channel in the first quarter of 2018 that did not repeat in the first quarter of 2019, partiallyChina more than offset bymid-2018 pricing actionshigher water treatment volumes in North America, due to steel and freight cost increases.

including incremental sales of $16 million from our Water-Right, Inc. (Water-Right) acquisition, which we completed in April 2019.

First quarter gross profit margin of 37.6 percent in 2020 declined from a gross profit margin of 39.1 percent in 2019 declined from gross profit margin of 40.8 percent in the first quarter of 20182019. The lower gross profit margin was primarily due to higher steel and other input costs.

lower sales volumes in China.

Selling, general, and administrative (SG&A) expenses forin the first quarter of 20192020 were $184.7$173.8 million or $8.2$10.9 million lower than SG&A expenses of $192.9$184.7 million in the first quarter of 2018.2019. The decrease in SG&A expenses in 20192020 was primarily due to lower selling, advertising, and engineering expenses 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 expense in the first quarter of 20192020 was $2.0$2.2 million compared to $2.3$2.0 million in the same period last year. Higher interest ratesdebt levels in 20192020 were partially offset by lower debt levels.

interest rates.

Other income was $5.5$4.2 million in the first quarter of 2019,2020, down slightly from $5.8$5.5 million in the same period last year.

The decrease in other income was primarily due to lower interest income.

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 6.75 percent in 2020 compared to 7.15 percent in 2019, consistent with 2018.2019. The discount rate used to determine net periodic pension costs increased from 3.65decreased to 3.18 percent in 2018 to2020 from 4.32 percent in 2019. Pension income for the first quarter of 2020 and 2019 was $2.1 million compared to $2.2 million in the first quarter of 2018.each period. The service cost component of our pension income is reflected in cost of products sold and SG&A expenses. All other components of our pension income are reflected in other income.

Our effective income tax rate for the first quarter of 20192020 was 20.023.6 percent compared to 21.220.0 percent in the same period last year. Our effective income tax rate in the first quarter of 20192020 was lowerhigher than the effective income tax rate in the first quarter of 20182019, primarily due to a change in estimate related to the application of certain provisions associated with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform). We estimate that our effective income tax rate for the full year 2019 will be approximately 21.5 percent.

geographic earnings mix.

North America

Sales in our North America segment were $533 million in the first quarter of 2020, $11 million higher than sales of $522 million in the first quarter of 2019 or $20 million2019. The higher thansales in the first quarter of 2020 were primarily due to incremental sales of $502$16 million from Water-Right, as well as organic growth of approximately 17 percent in our North America water treatment products. Higher water heater volumes were partially offset by a water heater sales mix composed of more electric models which have a lower selling price and lower contractual formula pricing associated with a portion of water heater sales based on lower steel costs.
North America segment earnings were $127.1 million in the first quarter of 2018. The increased sales in the first quarter of 2019 were primarily due to higher volumes of boilers and water treatment products andmid-2018 pricing actions on water heaters related to steel and freight cost increases, which were partially offset by lower residential water heater volumes.

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

23
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earnings and margin compared to 21.1 percentthe prior period was driven by lower steel costs, and improvement in the first quarterprofitability of 2018. Adjusted segment margin was 22.5 percent in the first quarter of 2018. The higher segment earnings in 2019 were primarily due to thewater treatment sales, including incremental profit from Water-Right. These favorable impact from higher sales of boilers andmid-2018 pricing actions thatimpacts were partially offset by higher steel and other input costs as well as the unfavorable impact from lower residentialmix toward electric water heater volumes. Weakness in the North American water treatment business as a result of tariff-related cost increasesheaters and lower than expected volumes resulted in the slightly lower segment margin in the first quarter of 2019 compared to the adjusted segment margin in the same period last year. We expect our full year segment margin to be between 23 and 23.25 percent in 2019. Adjusted segment earnings and adjusted segment margin in 2018 exclude $6.7 million ofpre-tax restructuring and impairment expenses associated with the transfer of production from Renton, Washington to our other U.S. plants.

contractual formula pricing.

Rest of World

Sales in the Rest of World segment were $232$110 million in the first quarter of 20192020 or $62$122 million lower than sales of $294 million in the first quarter of 2018. Sales in China decreased 23 percent in U.S. dollar terms and 18 percent in local currency terms. The expected decrease in China sales in the first quarter of 2019 compared to the same period last year was related to inventory build in the sales channel that occurred primarily in the first quarter of 2018 that did not repeat in 2019. The weaker Chinese currency unfavorably impacted the translation of sales by approximately $13$232 million in the first quarter of 2019. Sales in India grew approximately 30China decreased 57 percent in constantU.S. dollar terms and 56 percent in local currency terms, primarily due to
COVID-19
pandemic related weak consumer demand as the Chinese economy was essentially closed and mobility was restricted for the majority of the first quarter of 2020. China channel inventory levels declined slightly in the first quarter of 2019 compared to2020 from the same period last year.

levels at the end of 2019.

Rest of World segment losses were $42.2 million in the first quarter of 2020 compared to earnings wereof $12.3 million in the first quarter of 20192019. The unfavorable impact from lower China sales and a higher mix of
mid-price
products, which have lower margins compared to $36.1 millionhigher priced products, was partially offset by the benefits from lower SG&A expenses in that region. As a result of these factors, the segment margin in the first quarter of 2018. The first quarter segment margin of2020 was negative compared with 5.3 percent in 2019 was lower than our segment margin of 12.3 percent in the same period last year. The impact of lower sales in China more than offset lower advertising expenses. First quarter 2019 headcount cost reduction programs were offset by severance costs. Our ten percent headcount reduction was largely completed at the end of March 2019. Currency translation reduced segment earnings by approximately $1 million in the first quarter of 2019 compared to2019.
Outlook
We believe that the first quartercurrent environment does not allow for the forecast of 2018. We expect full year segment margin to be 11.75 percent to 12 percent.

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.

Liquidity & Capital Resources

Working capital of $920.9$743.4 million at March 31, 20192020 was $67.7$9.5 million higher than at December 31, 2018, primarily due to2019, as a result of lower accounts payable balances.balances which were partially offset by lower accounts receivable balances, primarily in China. As of March 31, 2019, essentially all2020, approximately $295 million of the $633.3$551.7 million of cash, cash equivalents and marketable securities werewas held by our foreign subsidiaries.

in local currency in China. Through the first four months of 2020, we repatriated $125 million to the U.S.

Cash provided by operations in the first three monthsquarter of 20192020 was $21.6$54.1 million compared with $43.2$21.6 million provided during the same period last year. Lower earnings andwhich were more than offset by lower accounts payable balancesworking capital investment in the current period resulted in lowerhigher cash flow from operations. ForWe believe the current environment is not conducive to reasonably forecast our cash flow for the full year 2019, we expect2020. We continue to monitor developments on an
on-going
basis and have taken proactive measures to focus on cash, provided by operating activities will be between $500manage working capital and $525 million, higher than 2018 cash provided by operating activities of approximately $449 million.

reduce costs.

Capital expenditures totaled $20.9$12.8 million in the first three monthsquarter of 2019,2020, compared with $17.3$20.9 million in the year ago period. We continue to invest strategically in our business focusing on productivity, new products and technology. We project 2019our 2020 capital expenditures willto be between $60 and $70 million, lower than our approximately $85$80 million andaverage annual spending in the last three years. We expect full year depreciation and amortization will be approximately $75$85 million.

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 March 31, 2020. Our total

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debt increased $58.4 million from $284.0 million at December 31, 2019 to $342.4 million at March 31, 2020. Our leverage ratio as measured by the ratio of total debt to total capitalization, calculated excluding operating leases, was 17.5 percent at March 31, 2020, significantly below the 60 percent maximum dictated by its credit and various long-term note facilities. Our ratio of debt to total capitalization was 14.6 percent at December 31, 2019.

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 March 31, 2019,2020, we had available borrowing capacity of $335.5$270.8 million under this facility. As of April 30, 2020, we had liquidity of approximately $850 million consisting of cash, cash equivalents and marketable securities, and undrawn borrowing capacity on our credit facility. We believe the combination of cash, available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future.

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.

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 2019.

2020.

In December 2018,the second quarter of 2019, our Board of Directors approved adding 5three million shares of common stockCommon 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 three monthsquarter of 2019,2020, we repurchased 911,8001,348,391 shares of our stock at a total cost of $45.6$56.7 million. At March 31, 2019,2020, we had 5,163,4531,613,824 million shares remaining on the board share repurchase authority. DependingDue to the uncertainty surrounding the impact of the global
COVID-19
pandemic, we suspended our share repurchases on factors such as stock price, working capital requirements and alternative investment opportunities, we expect to spend approximately $200 million on stock repurchases in 2019 through a combination of our Rule10b5-1 automatic trading plan and opportunistic repurchase in the open market.

March 18, 2020.

On April 9, 2019,14, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.22$0.24 per share on our Common Stock and Class A common stock. The five-year compound annual growth rate of our dividend is approximately 3020 percent. The dividend is payable on May 15, 20192020 to shareholders of record on April 30, 2019.

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.

2020.

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 
  

 

 

   

 

 

 

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, 2018.2019. We believe that at March 31, 2019,2020, there has been no material change to this information.

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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 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: negative impacts to the company’s business, including demand for its products, operations and work-force dislocation and disruption, supply chain disruption and liquidity as a result of the severity and duration of the
COVID-19
pandemic; a failure to recover or a further weakening of the Chinese economy and/ or a failure to recover 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 availability and prices; inability of the company to implement or maintain pricing actions; potentiala failure to recover or further weakening in U.S. residential or commercial construction or instability in the company’s replacement markets; foreign currency fluctuations; the company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the company’s businesses; the impact of potential information technology or data security breaches; changes in 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 the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements.

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, 2018,2019, 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.

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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 March 31, 20192020 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 March 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On May 28, 2019, a putative securities class action lawsuit was filed in the U.S. District Court for the Eastern District of Wisconsin against the Company and certain of its current or former officers. Subsequently, on November 22, 2019, a consolidated amended complaint was filed by the lead plaintiff. This action, now captioned as City of Birmingham Retirement and Relief System v. A. O. Smith Corporation, et al., asserts securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and seeks damages and other relief based upon the allegations in the complaint. On January 24, 2020, A. O. Smith and the other defendants moved to dismiss the consolidated amended complaint for failure to state a claim. Their motion is currently pending. A shareholder derivative lawsuit, captioned as Pierce v. A. O. Smith Corporation, et al. and based on similar allegations as the putative class action, was filed on August 20, 2019, also in the U.S. District Court for the Eastern District of Wisconsin. On November 6, 2019, the plaintiff in the derivative action moved to dismiss his lawsuit, and
 re-filed
it in the U.S. District Court for the District of Delaware on November 12, 2019. The derivative action asserts claims under Sections 14(a) and 20(a) of the Exchange Act, as well as for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks damages and other relief based upon the allegations in the complaint. On February 12, 2020, the parties filed a stipulation seeking to stay the derivative lawsuit pending resolution of the City of Birmingham lawsuit. On February 13, 2020, a second shareholder derivative suit, captioned as Jarozewski v. A. O. Smith Corporation, et al., was filed in the U.S. District Court for the District of Delaware, asserting claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as for breach of fiduciary duty, unjust enrichment, and insider trading, and seeks damages and other relief based upon the allegations in the complaint. On April 1, 2020, the U.S. District Court for the District of Delaware, upon a joint stipulation filed by the parties, consolidated both the Pierce and Jarozewski derivative lawsuits and stayed the consolidated actions pending resolution of the City of Birmingham lawsuit.
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ITEM 1A RISK FACTORS 
There have been no material changes from the risk factors disclosed in the legal and environmental matters discussed in Part 1, Item 3 and Note 15 of the Notes to Consolidated Financial Statements in ourCompany’s Annual Report on Form
10-K
for the year ended December 31, 2018.

2019, except for the addition of the risk factor set forth below:
The global coronavirus
(COVID-19)
pandemic, or other global public health pandemics, could have a material adverse effect on our business, results of operations and financial condition
Our business, results of operations and financial condition may be adversely affected if a global public health pandemic, including the current
COVID-19
pandemic, interferes with the ability of our employees, suppliers, and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business and operations. The
COVID-19
pandemic has significantly impacted economic activity and markets around the world, and it could have a material negative impact on our business and operations in numerous ways, including but not limited to those outlined below:
The risk that we, or our employees, suppliers or customers may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities.
Restrictions on shipping products from certain jurisdictions where they are produced or into certain jurisdictions where customers are located.
Inability to meet our customers’ needs and achieve cost targets due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability.
Failure of third parties on which we rely, including our suppliers, distributors, contractors and commercial banks, to meet their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact our operations.
Significant reductions in demand or significant volatility in demand and a global economic recession that could further reduce demand for our products, resulting from actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns.
Manufacturing plant inefficiencies due to safety and preventative health measures that we have implemented in our plants to prevent the spread of
COVID-19.
Deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures.
The extent to which the
COVID-19
pandemic, or other outbreaks of disease or similar public health threats, materially and adversely impacts our business, results of operations and financial condition is highly uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects of the
COVID-19
pandemic on our suppliers, third-party service providers, and/or customers.
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ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In December 2018,the second quarter of 2019, our Board of Directors approved adding 5three million shares of common stockCommon Stock to an existing discretionary share repurchase authority. Under the share repurchase program, the Common Stock may be purchased through a combination of Rule
10b5-1
automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule
10b5-1
automatic trading plan that we may then have in effect. In the first quarter of 2019,2020, we repurchased 911,8001,348,391 shares at an average price of $49.97$42.02 per share and at a total cost of $45.6$56.7 million. As of March 31, 2019,2020, there were 5,163,4531,613,824 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		 

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 
 Due to the uncertainty surrounding the impact of the global
COVID-19
pandemic, we suspended our share repurchases on March 18, 2020.
                 
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
 

ITEM 6 - EXHIBITS

Refer to the Exhibit Index on page 2830 of this report.

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INDEX TO EXHIBITS

Exhibit

Number

 

Description

31.1 
Exhibit
Number
Description
31.1
Certification of the Chief Executive Officer pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934.
31.2 
31.2
Certification of the Chief Financial Officer pursuant to Rule13a-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 March 31, 20192020 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three months ended March 31, 20192020 and 2018,2019, (ii) the Condensed Consolidated Statement of Comprehensive Earnings for the three months ended March 31, 20192020 and 2018,2019, (iii) the Condensed Consolidated Balance Sheets as of March 31, 2019,2020, and December 31, 20182019 (iv) the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 20192020 and 20182019 (v) the Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 20192020 and 20182019 (vi) the Notes to Condensed Consolidated Financial StatementsStatements. 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)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has authorized this report to be signed on its behalf by the undersigned.

   
A. O. SMITH CORPORATION
May 9, 20195, 2020
   

/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

31