Wholesale Channel Adapting to
Changing Markets, Customers
Wholesale distribution is A. O. Smith’s largest water heater
market channel and has been since the company began selling
residential water heaters more than 70 years ago. Today, as
market channels blur due to online technologies and changing
consumer preferences, the wholesale channel continues to adapt
its business model to the changing competitive environment.
Despite the changes, wholesale distribution remains positioned
to thrive in the long term, due to a number of factors:
• As water heaters become more complex, they require
professional installation. Wholesale distribution is closely
aligned with plumbing contractors;
• Distributors remain the major driver in commercial water
heating due to innovative programs that make products
and support available 24/7;
• Wholesale distribution, with its extensive logistics
capabilities, is well-adapted to serve the new
construction market.
Wholesale distributors are responding to a new generation
of consumers who are more engaged in any purchase that
affects their homes. Whereas, in the past, many wholesalers
discouraged direct consumer contact, today they are opening
large, well-appointed showrooms and utilizing digital marketing
tools to attract customers, particularly millennials. The term
for this approach is “omni-channel,” which means creating the
same environment for a customer no matter how he or she
wants to shop.
Senior Leadership
Charles T. Lauber
Senior Vice President-
Strategy & Corporate
Development
Peter R. Martineau
Senior Vice President &
Chief Information Officer
Mark A. Petrarca
Senior Vice President- Human
Resources & Public Affairs
Ajita G. Rajendra
Chairman & Chief
Executive Officer
James F. Stern
Executive Vice President,
General Counsel & Secretary
William L. Vallett, Jr.
Senior Vice President,
Chief Executive Officer-
Lochinvar, LLC
Kevin J. Wheeler
Senior Vice President and
General Manager- North America,
India, Europe & Export
The upgraded product sizing APP is designed to help plumbing contractors guide
consumers through the water heater selection process. The new APP is the latest
in a series of online tools designed to help plumbing contractors offer more value
to their customers.
Engineering Technician Jamie Wilks checks the remote monitoring capability of
a Cyclone® series 300 high efficiency water heater under test in the commercial
product engineering center. The Cyclone 300, which was introduced in January,
offers remote monitoring through a smart phone APP to help customers keep
tabs on water heater performance.
Over the last several years, A. O. Smith has developed a number
of tools and services to support its valued partners in the
wholesale distribution channel, and that effort will continue in
2017. One of the most visible services is the contractor locator,
a lead-generation tool provided on our wholesale websites.
The locator uses proprietary geo-locating algorithms to help
consumers find a qualified plumber near their home who can
install or service their water heater.
As products become more diverse and more complex, consumers
are asking for assistance in selecting the right water heater for
their homes. To meet this need, A. O. Smith has developed an
exclusive product sizing tool, available online or as an APP for
plumbers to download. The new tool allows plumbers to take
a consulting approach in helping guide customers through the
water heater sizing and selection process. To further assist with
the selection process, A. O. Smith includes rating and reviews for
residential water heaters on its web properties.
Another important new tool is the Green Sky® consumer financing
program that plumbing contractors can offer to their customer.
The financing covers not just the water heater, but also
installation, and other plumbing services. Overcoming the up-
front cost of a water heater purchase has been a barrier to more
adoption of energy efficient technologies, and this financing tool
has enabled contractors to effectively offer these solutions to
their customers.
All of these programs are designed to drive business to the
company’s channel partners, particularly plumbing contractors.
This, combined with the constant introduction of new residential
and commercial products, will help the wholesale distribution
channel continue to enjoy success for years to come.
11270 West Park Place
P.O. Box 245008
Milwaukee, WI 53224-9508
414.359.4000
www.aosmith.com
2016 Annual Report
Corporate Profile
A. O. Smith Corporation is a global leader
applying innovative technology and energy-
efficient solutions to products manufactured
and marketed worldwide. The company is
one of the world’s leading manufacturers
of residential and commercial water
heating equipment and boilers, as well as a
manufacturer of water treatment products for
residential and light commercial applications.
A. O. Smith is headquartered in Milwaukee,
WI, with approximately 15,500 employees at
operations in the U. S., Canada, China, India,
Mexico, the Netherlands, Turkey, the
United Kingdom and Vietnam.
The company has paid cash dividends on its
common stock every year since 1940.
Net Sales-Continuing
(Dollars in billions)
$2.69 billion
2016
$1.94
$2.15
$2.36
$2.54
$2.69
2012
2013
2014
2015
2016
Earnings per
Share-Continuing*
(Dollars)
$1.85 per share
2016
$078
2012
$1.03
$1.22
$1.58
$1.85
2013
2014
2015
2016
*2012-2014 earnings per share are non-GAAP.
A. O. Smith Corporation Five Year
Cumulative Total Return
December 31, 2011 to December 31, 2016
500
450
400
350
300
250
200
150
100
50
0
501.4%
A. O. Smith 2016
204.1%
S&P Midcap 400 2016
198.4%
Russell 1000 2016
2011 2012 2013 2014 2015 2016
A. O. Smith Corp
S&P Midcap 400 Index
Russell 1000 Index
The Lebanon plant has more than doubled the size of its product engineering lab and
added new testing capabilities to support its ambitious new product development plans.
Global Locations
Milwaukee, WI (world headquarters)
Ashland City, TN
Austin, TX
Banbury, England
Bangalore, India
Charlotte, NC
Cookeville, TN
Dubai, United Arab
Emirates
El Paso, TX
Fergus, Canada
Florence, KY
Franklin, TN
Haltom City, TX
Hanoi, Vietnam
Hong Kong, China
Irvine, CA
Istanbul, Turkey
Johnson City, TN
Juarez, Mexico
Knoxville, TN
Lebanon, TN
McBee, SC
Nanjing, China
Renton, WA
Stratford, Canada
Veldhoven, the Netherlands
Registrar. Stock Transfer Agent,
Dividend Reinvestment Agent
(for both classes of stock)
Wells Fargo Bank, N.A.
Shareowner Servicessm
161 N. Concord Exchange Street
South St. Paul, MN 55075
800-468-9716
www.shareowneronline.com
Annual Meeting
The 2017 annual meeting of
shareholders will be held on Monday,
April 10, 2017, at 8:00 a.m. (CDT)
at APCOM, Inc., 125 Southeast
Parkway, Franklin, TN.
Wholesale Channel Adapting to
Changing Markets, Customers
Wholesale distribution is A. O. Smith’s largest water heater
market channel and has been since the company began selling
residential water heaters more than 70 years ago. Today, as
market channels blur due to online technologies and changing
consumer preferences, the wholesale channel continues to adapt
its business model to the changing competitive environment.
Despite the changes, wholesale distribution remains positioned
to thrive in the long term, due to a number of factors:
• As water heaters become more complex, they require
professional installation. Wholesale distribution is closely
aligned with plumbing contractors;
• Distributors remain the major driver in commercial water
heating due to innovative programs that make products
and support available 24/7;
• Wholesale distribution, with its extensive logistics
capabilities, is well-adapted to serve the new
construction market.
Wholesale distributors are responding to a new generation
of consumers who are more engaged in any purchase that
affects their homes. Whereas, in the past, many wholesalers
discouraged direct consumer contact, today they are opening
large, well-appointed showrooms and utilizing digital marketing
tools to attract customers, particularly millennials. The term
for this approach is “omni-channel,” which means creating the
same environment for a customer no matter how he or she
wants to shop.
Senior Leadership
Charles T. Lauber
Senior Vice President-
Strategy & Corporate
Development
Peter R. Martineau
Senior Vice President &
Chief Information Officer
Mark A. Petrarca
Senior Vice President- Human
Resources & Public Affairs
Ajita G. Rajendra
Chairman & Chief
Executive Officer
James F. Stern
Executive Vice President,
General Counsel & Secretary
William L. Vallett, Jr.
Senior Vice President,
Chief Executive Officer-
Lochinvar, LLC
Kevin J. Wheeler
Senior Vice President and
General Manager- North America,
India, Europe & Export
The upgraded product sizing APP is designed to help plumbing contractors guide
consumers through the water heater selection process. The new APP is the latest
in a series of online tools designed to help plumbing contractors offer more value
to their customers.
Engineering Technician Jamie Wilks checks the remote monitoring capability of
a Cyclone® series 300 high efficiency water heater under test in the commercial
product engineering center. The Cyclone 300, which was introduced in January,
offers remote monitoring through a smart phone APP to help customers keep
tabs on water heater performance.
Over the last several years, A. O. Smith has developed a number
of tools and services to support its valued partners in the
wholesale distribution channel, and that effort will continue in
2017. One of the most visible services is the contractor locator,
a lead-generation tool provided on our wholesale websites.
The locator uses proprietary geo-locating algorithms to help
consumers find a qualified plumber near their home who can
install or service their water heater.
As products become more diverse and more complex, consumers
are asking for assistance in selecting the right water heater for
their homes. To meet this need, A. O. Smith has developed an
exclusive product sizing tool, available online or as an APP for
plumbers to download. The new tool allows plumbers to take
a consulting approach in helping guide customers through the
water heater sizing and selection process. To further assist with
the selection process, A. O. Smith includes rating and reviews for
residential water heaters on its web properties.
Another important new tool is the Green Sky® consumer financing
program that plumbing contractors can offer to their customer.
The financing covers not just the water heater, but also
installation, and other plumbing services. Overcoming the up-
front cost of a water heater purchase has been a barrier to more
adoption of energy efficient technologies, and this financing tool
has enabled contractors to effectively offer these solutions to
their customers.
All of these programs are designed to drive business to the
company’s channel partners, particularly plumbing contractors.
This, combined with the constant introduction of new residential
and commercial products, will help the wholesale distribution
channel continue to enjoy success for years to come.
11270 West Park Place
P.O. Box 245008
Milwaukee, WI 53224-9508
414.359.4000
www.aosmith.com
2016 Annual Report
Corporate Profile
A. O. Smith Corporation is a global leader
applying innovative technology and energy-
efficient solutions to products manufactured
and marketed worldwide. The company is
one of the world’s leading manufacturers
of residential and commercial water
heating equipment and boilers, as well as a
manufacturer of water treatment products for
residential and light commercial applications.
A. O. Smith is headquartered in Milwaukee,
WI, with approximately 15,500 employees at
operations in the U. S., Canada, China, India,
Mexico, the Netherlands, Turkey, the
United Kingdom and Vietnam.
The company has paid cash dividends on its
common stock every year since 1940.
Net Sales-Continuing
(Dollars in billions)
$2.69 billion
2016
$1.94
$2.15
$2.36
$2.54
$2.69
2012
2013
2014
2015
2016
Earnings per
Share-Continuing*
(Dollars)
$1.85 per share
2016
$078
2012
$1.03
$1.22
$1.58
$1.85
2013
2014
2015
2016
*2012-2014 earnings per share are non-GAAP.
A. O. Smith Corporation Five Year
Cumulative Total Return
December 31, 2011 to December 31, 2016
500
450
400
350
300
250
200
150
100
50
0
501.4%
A. O. Smith 2016
204.1%
S&P Midcap 400 2016
198.4%
Russell 1000 2016
2011 2012 2013 2014 2015 2016
A. O. Smith Corp
S&P Midcap 400 Index
Russell 1000 Index
The Lebanon plant has more than doubled the size of its product engineering lab and
added new testing capabilities to support its ambitious new product development plans.
Global Locations
Milwaukee, WI (world headquarters)
Ashland City, TN
Austin, TX
Banbury, England
Bangalore, India
Charlotte, NC
Cookeville, TN
Dubai, United Arab
Emirates
El Paso, TX
Fergus, Canada
Florence, KY
Franklin, TN
Haltom City, TX
Hanoi, Vietnam
Hong Kong, China
Irvine, CA
Istanbul, Turkey
Johnson City, TN
Juarez, Mexico
Knoxville, TN
Lebanon, TN
McBee, SC
Nanjing, China
Renton, WA
Stratford, Canada
Veldhoven, the Netherlands
Registrar. Stock Transfer Agent,
Dividend Reinvestment Agent
(for both classes of stock)
Wells Fargo Bank, N.A.
Shareowner Servicessm
161 N. Concord Exchange Street
South St. Paul, MN 55075
800-468-9716
www.shareowneronline.com
Annual Meeting
The 2017 annual meeting of
shareholders will be held on Monday,
April 10, 2017, at 8:00 a.m. (CDT)
at APCOM, Inc., 125 Southeast
Parkway, Franklin, TN.
shareholders. We repurchased more than
three million shares of company stock at
an approximate cost of $135 million.
In January, we announced a 17 percent
increase in the company’s quarterly cash
dividend, the 12th consecutive year in
which we raised the dividend.
In August, the company entered the North
American water treatment market with
the acquisition of Aquasana, Inc., of
Austin, Texas. Aquasana manufactures
an extensive line of premium water
treatment products, ranging from point-
of-entry systems for the home and
on-the-go products such as portable
filter bottles. Aquasana markets its
products directly to consumers, with 80
percent of sales coming from its web
site and call center located just outside
Fort Worth. We believe this new business
presents us with numerous opportunities,
as consumers are becoming more aware
of water quality issues throughout the U.S. and are seeking
healthier alternatives for their families. We also anticipate
revenue synergies as we take Aquasana products to our existing
businesses in China and India and introduce our patented
reverse osmosis products to U.S. consumers.
Growth Strategy: Organic Growth
China:
Lochinvar
brands:
NA water
heaters &
other:
32% of sales growing 15%
4.8%
11% of sales growing 8%
.9%
57% of sales growing 4%
2.3%
Total annual sales growth
8.0%
The North American segment unit reported sales increased
to $1.74 billion, a 14 percent increase in operating profits to
$385.9 million and an impressive 200 basis point increase in
operating margin. Higher volumes of boilers and commercial
water heaters contributed to the sales increase, and the team
in Canada did an excellent job of growing the business in
spite of the challenges coming from the strong U.S. dollar.
Although sales of Lochinvar-branded products did not
increase at the pace we expected, we did add share in the
important high-efficiency condensing boiler market. With a
large installed base of older, inefficient cast iron boilers in
North America, we believe there is room for further growth
in this market segment. After a number of years focused
on meeting new government efficiency standards, we are
now turning our sights to new product development, and
2017 promises to be a busy year in both the commercial and
residential segments. Chief among these new products are:
• The Cyclone® series 300 with an integrated touchscreen
and remote monitoring capability;
• The Lochinvar Noble combi boiler that allows us to enter
a portion of the residential boiler market in which we
were not participating;
• The ProLine® series of commercial-grade residential
water heaters. These units feature a number of
commercial quality components developed by APCOM and,
in some cases, come with an eight-year warranty; and
• A full suite of electric tankless water heaters, a line of
products we have not offered in the past.
The Rest of World segment experienced a sales increase
of 11 percent to $965.6 million, operating earnings of
$129.1 million, a 14 percent increase, and operating
margins of 13.4 percent. Our operations in China continue
to outperform the Chinese economy, as we take advantage
of the well-known A. O. Smith brand in that market. Sales
of gas tankless water heaters increased more than 20
percent, while heat pump and other renewable water heater
technologies also grew at double-digit rates (all measured in
local currency). A sizable percentage of our sales are coming
from the e-commerce channel, with revenues of nearly $200
million last year. Water treatment products continue to grow
at a fast pace, as sales increased nearly 40 percent in the
local currency over the prior year. In addition, sales of our
air purification line of products nearly tripled over the prior
year as Chinese consumers became aware of the air pollution
problems in large parts of the country. To meet the demand
for water treatment and air purification products, we began
construction of a new 700,000 square foot plant in Nanjing
during the fourth quarter of 2016. The new plant, which also
will include new product engineering and quality labs, will
begin production early next year.
Looking ahead, we expect to achieve our eight percent
revenue growth model in 2017 as we benefit from an
incremental $40 million in Aquasana sales, improved
residential water heater sales in the U.S. and continued
commercial water heater and boiler sales increases. China’s
growth will continue to outpace that country’s economy as we
will benefit from household formation, market share gains
and higher average selling prices in the water heater market,
and the water treatment and air purification product lines
once again experience double-digit growth. This outlook is
tempered by the likelihood of higher material costs—most
notably steel—and the U.S. dollar’s impact on Chinese,
Canadian, and other foreign currencies.
Nonetheless, I have confidence in the A. O. Smith team and
its ability to meet these challenges—as they have in the
past—and succeed. Everyone throughout our organization is
focused on the Fundamentals for Success, the foundation for
everything we do as a company:
• Live our values which define who we are, how we do
business, and the relationship we have with our
customers, suppliers, and the communities in which we
do business;
• Relentlessly take care of the customer, obsessively
understand what our customers want and need in order
for them to succeed—and then deliver on those
needs;
• Invest in innovation in order to provide our customers
with market-leading products and solutions; and
• Invest in our people by giving them the training,
tools, and knowledge to take care of customers and
provide employees with the opportunity to grow to their
fullest potential.
Together, these four fundamentals contribute to A. O. Smith’s
profitable growth. They have served us extremely well for the
last 143 years, and I’m certain they will continue to serve us,
in 2017 and beyond.
Ajita G. Rajendra
Chairman and Chief Executive Officer
Letter to Shareholders
March 2017
A. O. Smith once again enjoyed record-setting results in 2016.
Sales increased six percent (eight percent in local currency) to
more than $2.69 billion, the seventh consecutive year of record
revenue performance. A number of factors contributed to the
sales record, most notably impressive 19 percent sales growth
(in local currency) for our China operations and continued
demand for our commercial water heater and high-efficiency
boiler products. Our global water treatment product sales
increased to $194 million thanks to growth of 35 percent
in China and the addition of Texas-based water treatment
company Aquasana, which we acquired in August.
Our earnings performance also set a record, increasing 17
percent to $1.85 per share. The higher commercial water
heater and boiler volumes and continued double-digit sales
growth in China, combined with improved pricing and lower
material costs during the first half of the year contributed to the
earnings improvement. Earnings were partially offset by lower
U.S. residential water heater sales and higher selling costs in
China to support expansion into the Tier 2 and Tier 3 cities as
well as higher advertising costs to support brand building and
the expansion of the air purification product line.
Cash flow from operating activities increased an impressive
27 percent to $447 million. As has been our practice the
last several years, the company returned cash to you, our
Board of Directors
Gloster B. Current Jr.
Retired Vice President, Corporate Affairs
& Assistant to the Chief Executive Officer,
Northwestern Mutual Life Insurance Company.
Elected to Board 20071
Paul W. Jones
Retired Executive Chairman and
former Chief Executive Officer.
Elected to Board 20042
Dr. Ilham Kadri
Senior Vice President, Sealed Air Corporation
and President, Diversey Care Division.
Elected to Board 2016
William P. Greubel
Retired Chief Executive Officer & Director,
Wabash National Corporation.
Elected to Board 20063,4
Gene C. Wulf
Retired Director and Executive Vice President,
Bemis Company, Inc.
Elected to Board 20031
Mark D. Smith
Business Manager, Strattec Security Corporation.
Elected to Board 20011
Idelle K. Wolf
Retired President, Barnes Distribution.
Elected to Board 20051
Ajita G. Rajendra
Chairman & Chief Executive Officer.
Elected to Board 20112
Ronald D. Brown
Chief Operating Officer, The Armor Group.
Elected to Board 20013,4
Bruce M. Smith
Retired Chairman of the Board of Managers &
former Chief Executive Officer, Smith Investment
Company LLC.
Elected to Board 19952,3,4
1 Audit Committee
2 Investment Policy Committee
3 Nominating and Governance Committee
4 Personnel and Compensation Committee
Senior Leadership
Patricia K. Ackerman
Vice President-
Investor Relations & Treasurer
Dr. Wilfridus M. Brouwer
Senior Vice President-
Asia Corporate Development
Paul R. Dana
Senior Vice President-
Global Manufacturing
Wei Ding
Senior Vice President,
President- A. O. Smith China
Wallace E. “Eddie”
Goodwin
President & Chief Operating
Officer- Lochinvar, LLC
Dr. Robert J. Heideman
Senior Vice President-
Chief Technology Officer
Daniel L. Kempken
Vice President & Controller
John J. Kita
Executive Vice President
& Chief Financial Officer
In August 2016 A. O. Smith acquired Aquasana, Inc. which designs, assembles and
markets premium performance water purification products, including whole-house
purification systems which are highlighted above.
Water Treatment Business Enters the
U.S. and Continues to Expand Globally
Water quality needs for U.S. consumers continue to evolve with an
aging and deteriorating water infrastructure and an increase in
consumer awareness of water quality problems, including unhealthy
drinking water throughout the country.
Responding to these trends, A. O. Smith entered into the North American
market in August 2016 with the acquisition of Texas-based Aquasana,
Inc. which designs, assembles and markets premium performance
water treatment products. Aquasana sells its whole-house treatment
systems, drinking water solutions for at home and on-the-go and
shower filters directly to U.S. consumers via www.aquasana.com, as
well as its Texas-based call center and direct to the consumer, and
through retail outlets and distributers.
Aquasana’s drinking water filters remove over 66 harmful contaminants
from water including chlorine, chloramines, pharmaceuticals,
herbicides, pesticides, industrial solvents, lead, asbestos, and mercury
and are engineered to preserve the healthy minerals in water, including
calcium, magnesium and potassium.
In 2016, the company continued to expand its water treatment line-up
around the world, with major advancements in China, India and Turkey
and the expansion into Vietnam as well.
• China: Nanjing Water Treatment (NWT) started construction on a
new 700,000 square foot plant, which is scheduled to begin
production in 2018. The new plant will manufacture residential
and commercial water treatment products, air purifiers and water
softeners. The company also launched a new line of Wifi intelligent
reverse osmosis (RO) water treatment products, which can be
paired through an APP on a smart-device to alert consumers to any
issues. The NWT team recently entered the commercial
water treatment market in 15 major markets in China.
• India: A. O. Smith entered four additional markets including:
Hyderabad, Pune, Kolkata, and Chennai. The company
introduced five new water treatment products in 2016 and
expanded beyond the RO category with the launch of a
unique UV water treatment that offers both ambient and
hot water. The two new under-the-counter products, provide
a digital display and alarm systems, unique in the industry
for under the counter products, and the two new RO models
allow for dispensing water at a touch of a button (i.e.
electronic faucets).
• Turkey: A. O. Smith expanded its presence in the residential and
light commercial channels in Istanbul and Ishmair through an
exclusive dealer network in those cities. Two new RO units,
the Lotus and the Daisy, were also introduced in 2016.
• Vietnam: Sales reached $3.5 million in 2016, as the Vietnam
team continues to focus its efforts on selling premium
RO water treatment products using the patented side-stream
membrane technology and continues to develop their sales
channels in that country.
The Flint, Michigan, water crisis and the continued lead
contamination issues throughout the U.S. have created greater
consumer awareness of water quality issues; however, more
education is needed to inform consumers about Chromium 6,
Teflon, and other drinking water contaminants. In addition to
marketing innovative, effective water treatment products,
A. O. Smith will continue to be a thought leader in this
important global industry.
In 2016 the company began construction on a new 700,000 square foot plant,
which will manufacture residential and commercial treatment products, air
purifiers and water softeners in Nanjing, China.
shareholders. We repurchased more than
three million shares of company stock at
an approximate cost of $135 million.
In January, we announced a 17 percent
increase in the company’s quarterly cash
dividend, the 12th consecutive year in
which we raised the dividend.
In August, the company entered the North
American water treatment market with
the acquisition of Aquasana, Inc., of
Austin, Texas. Aquasana manufactures
an extensive line of premium water
treatment products, ranging from point-
of-entry systems for the home and
on-the-go products such as portable
filter bottles. Aquasana markets its
products directly to consumers, with 80
percent of sales coming from its web
site and call center located just outside
Fort Worth. We believe this new business
presents us with numerous opportunities,
as consumers are becoming more aware
of water quality issues throughout the U.S. and are seeking
healthier alternatives for their families. We also anticipate
revenue synergies as we take Aquasana products to our existing
businesses in China and India and introduce our patented
reverse osmosis products to U.S. consumers.
Growth Strategy: Organic Growth
China:
Lochinvar
brands:
NA water
heaters &
other:
32% of sales growing 15%
4.8%
11% of sales growing 8%
.9%
57% of sales growing 4%
2.3%
Total annual sales growth
8.0%
The North American segment unit reported sales increased
to $1.74 billion, a 14 percent increase in operating profits to
$385.9 million and an impressive 200 basis point increase in
operating margin. Higher volumes of boilers and commercial
water heaters contributed to the sales increase, and the team
in Canada did an excellent job of growing the business in
spite of the challenges coming from the strong U.S. dollar.
Although sales of Lochinvar-branded products did not
increase at the pace we expected, we did add share in the
important high-efficiency condensing boiler market. With a
large installed base of older, inefficient cast iron boilers in
North America, we believe there is room for further growth
in this market segment. After a number of years focused
on meeting new government efficiency standards, we are
now turning our sights to new product development, and
2017 promises to be a busy year in both the commercial and
residential segments. Chief among these new products are:
• The Cyclone® series 300 with an integrated touchscreen
and remote monitoring capability;
• The Lochinvar Noble combi boiler that allows us to enter
a portion of the residential boiler market in which we
were not participating;
• The ProLine® series of commercial-grade residential
water heaters. These units feature a number of
commercial quality components developed by APCOM and,
in some cases, come with an eight-year warranty; and
• A full suite of electric tankless water heaters, a line of
products we have not offered in the past.
The Rest of World segment experienced a sales increase
of 11 percent to $965.6 million, operating earnings of
$129.1 million, a 14 percent increase, and operating
margins of 13.4 percent. Our operations in China continue
to outperform the Chinese economy, as we take advantage
of the well-known A. O. Smith brand in that market. Sales
of gas tankless water heaters increased more than 20
percent, while heat pump and other renewable water heater
technologies also grew at double-digit rates (all measured in
local currency). A sizable percentage of our sales are coming
from the e-commerce channel, with revenues of nearly $200
million last year. Water treatment products continue to grow
at a fast pace, as sales increased nearly 40 percent in the
local currency over the prior year. In addition, sales of our
air purification line of products nearly tripled over the prior
year as Chinese consumers became aware of the air pollution
problems in large parts of the country. To meet the demand
for water treatment and air purification products, we began
construction of a new 700,000 square foot plant in Nanjing
during the fourth quarter of 2016. The new plant, which also
will include new product engineering and quality labs, will
begin production early next year.
Looking ahead, we expect to achieve our eight percent
revenue growth model in 2017 as we benefit from an
incremental $40 million in Aquasana sales, improved
residential water heater sales in the U.S. and continued
commercial water heater and boiler sales increases. China’s
growth will continue to outpace that country’s economy as we
will benefit from household formation, market share gains
and higher average selling prices in the water heater market,
and the water treatment and air purification product lines
once again experience double-digit growth. This outlook is
tempered by the likelihood of higher material costs—most
notably steel—and the U.S. dollar’s impact on Chinese,
Canadian, and other foreign currencies.
Nonetheless, I have confidence in the A. O. Smith team and
its ability to meet these challenges—as they have in the
past—and succeed. Everyone throughout our organization is
focused on the Fundamentals for Success, the foundation for
everything we do as a company:
• Live our values which define who we are, how we do
business, and the relationship we have with our
customers, suppliers, and the communities in which we
do business;
• Relentlessly take care of the customer, obsessively
understand what our customers want and need in order
for them to succeed—and then deliver on those
needs;
• Invest in innovation in order to provide our customers
with market-leading products and solutions; and
• Invest in our people by giving them the training,
tools, and knowledge to take care of customers and
provide employees with the opportunity to grow to their
fullest potential.
Together, these four fundamentals contribute to A. O. Smith’s
profitable growth. They have served us extremely well for the
last 143 years, and I’m certain they will continue to serve us,
in 2017 and beyond.
Ajita G. Rajendra
Chairman and Chief Executive Officer
Letter to Shareholders
March 2017
A. O. Smith once again enjoyed record-setting results in 2016.
Sales increased six percent (eight percent in local currency) to
more than $2.69 billion, the seventh consecutive year of record
revenue performance. A number of factors contributed to the
sales record, most notably impressive 19 percent sales growth
(in local currency) for our China operations and continued
demand for our commercial water heater and high-efficiency
boiler products. Our global water treatment product sales
increased to $194 million thanks to growth of 35 percent
in China and the addition of Texas-based water treatment
company Aquasana, which we acquired in August.
Our earnings performance also set a record, increasing 17
percent to $1.85 per share. The higher commercial water
heater and boiler volumes and continued double-digit sales
growth in China, combined with improved pricing and lower
material costs during the first half of the year contributed to the
earnings improvement. Earnings were partially offset by lower
U.S. residential water heater sales and higher selling costs in
China to support expansion into the Tier 2 and Tier 3 cities as
well as higher advertising costs to support brand building and
the expansion of the air purification product line.
Cash flow from operating activities increased an impressive
27 percent to $447 million. As has been our practice the
last several years, the company returned cash to you, our
Board of Directors
Gloster B. Current Jr.
Retired Vice President, Corporate Affairs
& Assistant to the Chief Executive Officer,
Northwestern Mutual Life Insurance Company.
Elected to Board 20071
Paul W. Jones
Retired Executive Chairman and
former Chief Executive Officer.
Elected to Board 20042
Dr. Ilham Kadri
Senior Vice President, Sealed Air Corporation
and President, Diversey Care Division.
Elected to Board 2016
William P. Greubel
Retired Chief Executive Officer & Director,
Wabash National Corporation.
Elected to Board 20063,4
Gene C. Wulf
Retired Director and Executive Vice President,
Bemis Company, Inc.
Elected to Board 20031
Mark D. Smith
Business Manager, Strattec Security Corporation.
Elected to Board 20011
Idelle K. Wolf
Retired President, Barnes Distribution.
Elected to Board 20051
Ajita G. Rajendra
Chairman & Chief Executive Officer.
Elected to Board 20112
Ronald D. Brown
Chief Operating Officer, The Armor Group.
Elected to Board 20013,4
Bruce M. Smith
Retired Chairman of the Board of Managers &
former Chief Executive Officer, Smith Investment
Company LLC.
Elected to Board 19952,3,4
1 Audit Committee
2 Investment Policy Committee
3 Nominating and Governance Committee
4 Personnel and Compensation Committee
Senior Leadership
Patricia K. Ackerman
Vice President-
Investor Relations & Treasurer
Dr. Wilfridus M. Brouwer
Senior Vice President-
Asia Corporate Development
Paul R. Dana
Senior Vice President-
Global Manufacturing
Wei Ding
Senior Vice President,
President- A. O. Smith China
Wallace E. “Eddie”
Goodwin
President & Chief Operating
Officer- Lochinvar, LLC
Dr. Robert J. Heideman
Senior Vice President-
Chief Technology Officer
Daniel L. Kempken
Vice President & Controller
John J. Kita
Executive Vice President
& Chief Financial Officer
In August 2016 A. O. Smith acquired Aquasana, Inc. which designs, assembles and
markets premium performance water purification products, including whole-house
purification systems which are highlighted above.
Water Treatment Business Enters the
U.S. and Continues to Expand Globally
Water quality needs for U.S. consumers continue to evolve with an
aging and deteriorating water infrastructure and an increase in
consumer awareness of water quality problems, including unhealthy
drinking water throughout the country.
Responding to these trends, A. O. Smith entered into the North American
market in August 2016 with the acquisition of Texas-based Aquasana,
Inc. which designs, assembles and markets premium performance
water treatment products. Aquasana sells its whole-house treatment
systems, drinking water solutions for at home and on-the-go and
shower filters directly to U.S. consumers via www.aquasana.com, as
well as its Texas-based call center and direct to the consumer, and
through retail outlets and distributers.
Aquasana’s drinking water filters remove over 66 harmful contaminants
from water including chlorine, chloramines, pharmaceuticals,
herbicides, pesticides, industrial solvents, lead, asbestos, and mercury
and are engineered to preserve the healthy minerals in water, including
calcium, magnesium and potassium.
In 2016, the company continued to expand its water treatment line-up
around the world, with major advancements in China, India and Turkey
and the expansion into Vietnam as well.
• China: Nanjing Water Treatment (NWT) started construction on a
new 700,000 square foot plant, which is scheduled to begin
production in 2018. The new plant will manufacture residential
and commercial water treatment products, air purifiers and water
softeners. The company also launched a new line of Wifi intelligent
reverse osmosis (RO) water treatment products, which can be
paired through an APP on a smart-device to alert consumers to any
issues. The NWT team recently entered the commercial
water treatment market in 15 major markets in China.
• India: A. O. Smith entered four additional markets including:
Hyderabad, Pune, Kolkata, and Chennai. The company
introduced five new water treatment products in 2016 and
expanded beyond the RO category with the launch of a
unique UV water treatment that offers both ambient and
hot water. The two new under-the-counter products, provide
a digital display and alarm systems, unique in the industry
for under the counter products, and the two new RO models
allow for dispensing water at a touch of a button (i.e.
electronic faucets).
• Turkey: A. O. Smith expanded its presence in the residential and
light commercial channels in Istanbul and Ishmair through an
exclusive dealer network in those cities. Two new RO units,
the Lotus and the Daisy, were also introduced in 2016.
• Vietnam: Sales reached $3.5 million in 2016, as the Vietnam
team continues to focus its efforts on selling premium
RO water treatment products using the patented side-stream
membrane technology and continues to develop their sales
channels in that country.
The Flint, Michigan, water crisis and the continued lead
contamination issues throughout the U.S. have created greater
consumer awareness of water quality issues; however, more
education is needed to inform consumers about Chromium 6,
Teflon, and other drinking water contaminants. In addition to
marketing innovative, effective water treatment products,
A. O. Smith will continue to be a thought leader in this
important global industry.
In 2016 the company began construction on a new 700,000 square foot plant,
which will manufacture residential and commercial treatment products, air
purifiers and water softeners in Nanjing, China.
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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
(State of Incorporation)
11270 West Park Place, Milwaukee, Wisconsin
(Address of Principal Executive Office)
Securities registered pursuant to Section 12(b) of the Act:
(414) 359-4000
Registrant’s telephone number, including area code
39-0619790
(I.R.S. Employer Identification No.)
53224-9508
(Zip Code)
Title of Each Class
Class A Common Stock
(par value $5.00 per share)
Common Stock
(par value $1.00 per share)
Shares of Stock Outstanding
February 13, 2017 .
Name of Each Exchange on
Which Registered z
26,180,295
Not listed
147,065,441
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
Yes No
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
Yes No
The aggregate market value of voting stock held by non-affiliates of the registrant was $47,734,692 for Class A Common Stock and
$6,369,599,814 for Common Stock as of June 30, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the company’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders (to be filed with the Securities
and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing,
to be incorporated by reference in Part III).
1
Table of Contents
A. O. Smith Corporation
Index to Form 10-K
Year Ended December 31, 2016
Part I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
2
Page
3
6
11
11
11
11
14
16
17
23
24
53
53
54
56
56
56
57
57
58
PART 1
ITEM 1 - BUSINESS
Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is
primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential
and commercial gas, gas tankless and electric water heaters, as well as water treatment products. Both segments primarily
manufacture and market in their respective regions of the world. Our North America segment also manufactures and globally
markets specialty commercial water heating equipment, condensing and non-condensing boilers and water systems tanks. We
also manufacture and market in-home air purification products in China.
The following table summarizes our sales. This summary and all other information presented in this section should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, which appear in Item
8 in this document.
North America
Rest of World
Inter-segment
Total Sales
NORTH AMERICA
Years Ended December 31 (dollars in millions)
2016
$ 1,743.2
2015
$ 1,703.0
2014
$ 1,621.7
2013
$ 1,520.0
2012
$ 1,430.8
965.6
866.1
768.3
668.0
542.5
(22.9)
(32.6)
(34.0)
(34.2)
(34.0)
$ 2,685.9
$ 2,536.5
$ 2,356.0
$ 2,153.8
$ 1,939.3
Sales in our North America segment increased 2.4 percent, or $40.2 million, in 2016 compared with the prior year. The sales
increase in 2016 was the result of price increases in the U.S. for residential and commercial water heaters and higher volumes
of commercial water heaters and boilers in the U.S. Lower volumes of U.S. residential water heaters partially offset these
favorable factors. Our acquisition of Aquasana, Inc. (Aquasana) a water treatment company, in August 2016, added
approximately $18 million of sales in 2016 compared with 2015.
We serve residential and commercial end markets in North America with a broad range of products including:
Water heaters. Our residential and commercial water heaters come in sizes ranging from 2.5 gallon (point-of-use) models to
12,000 gallon products with varying efficiency ranges. We offer electric, natural gas, gas tankless and liquid propane models
as well as solar tank units. Our North American residential water heater sales in 2016 totaled approximately $1.1 billion or 62
percent of North America sales. Typical applications for our water heaters include residences, restaurants, hotels and motels,
office buildings, laundries, car washes and small businesses.
Boilers. Our residential and commercial boilers range in size from 40,000 British Thermal Units (BTUs) to 6.0 million BTUs.
Our commercial boilers are primarily used in space heating applications for hospitals, schools, hotels and other large
commercial buildings.
Other. In our North America segment, we also assemble and market water treatment products, primarily for the U.S. We also
manufacture expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, related products and
parts.
A significant portion of our North America sales is derived from the replacement of existing products.
We are the largest manufacturer and marketer of water heaters in North America with a leading share in both the residential
and commercial markets. In the commercial market, we believe our comprehensive product line including boilers and our
high-efficiency products give us a competitive advantage in this portion of the water heating industry. Our wholesale
distribution channel includes more than 1,200 independent wholesale plumbing distributors serving residential and commercial
end markets. We also sell our residential water heaters through the retail and maintenance, repair and operations (MRO)
channels. In the retail channel, our customers include five of the seven largest national hardware and home center chains,
including a long-standing exclusive relationship with Lowe’s. Our commercial boiler distribution channel is primarily
comprised of manufacturer representative firms. Our water treatment products are primarily sold directly to consumers
through e-commerce.
3
Our Lochinvar brand is one of the leading residential and commercial boiler brands in the U.S. Approximately 40 percent of
Lochinvar-branded sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-
branded sales consist primarily of boilers and related parts.
Our Aquasana brand is one of the leading brands in the direct to consumer portion of the water treatment industry in the U.S.
Our energy efficient product offerings continue to be a sales driver for our business. Our Cyclone product family and our
condensing boilers continue to be an option for commercial customers looking for high efficiency water and space heating with
a short payback period through energy savings. We offer residential heat pump, condensing tank-type and tankless water
heaters in North America, as well as other higher efficiency water heating solutions to round out our energy efficient product
offerings.
We sell our water heating products in highly competitive markets. We compete in each of our targeted market segments based
on product design, reliability, quality of products and services, advanced technologies, product performance, maintenance costs
and price. Our principal water heating and boiler competitors in North America include Rheem, Bradford White, Rinnai,
Aerco and Navien. Numerous other manufacturing companies also compete. Our principal water treatment competitors in the
U.S. are Brita, Culligan and Ecowater.
REST OF WORLD
Sales in our Rest of World segment increased 11.5 percent, or $99.5 million, in 2016 compared with the prior year. A 12.5
percent increase in sales in China to $887.9 million was the primary source of the increase. Excluding the appreciation of the
U.S. dollar in 2016, sales in China increased 18.9 percent in 2016.
We have operated in China for more than 20 years. In that time, we have been aggressively expanding our presence while
building A. O. Smith brand recognition in the residential and commercial markets. The Chinese water heater market is
predominantly comprised of electric wall-hung, gas tankless and solar water heaters. We believe we are one of the leading
suppliers of water heaters to the residential market in China, with a broad product offering including electric, gas, gas tankless,
heat pump and solar units as well as combi boilers. Primarily for Asia, we also manufacture and market water treatment
products and air purification products.
We sell water heaters in more than 9,000 retail outlets in China, of which over 2,500 exclusively sell our products. Our water
treatment products and air purification products are sold in over 6,500 and 2,500 retail outlets in China, respectively. Our e-
commerce sales continue to grow in China reaching nearly $200 million in 2016.
In 2008, we established a sales office in India and began importing products specifically designed for India. We began
manufacturing water heaters in India in 2010 and water treatment products in 2015. Our total sales in India were $18.2 million
in 2016 compared with $15.9 million in 2015.
Our primary competitor in China is Haier Appliances, a Chinese company, but we also compete with Midea in the electric
water heater and water treatment markets and Rinnai and Noritz in the gas tankless water heater market. Additionally, we
compete with numerous other Chinese private and state-owned water heater and water treatment companies in China. Our
principal competitors in the China air purification market are Phillips, Panasonic and Sharp. In India, we compete with Bajaj
and MTS-Racold in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market.
In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in Turkey and
Vietnam, all of which combined comprised six percent of total Rest of World sales in 2016.
RAW MATERIALS
Raw materials for our manufacturing operations, primarily consisting of steel, are generally available in adequate quantities. A
portion of our customers are contractually obligated to accept price changes based on fluctuations in steel prices. There has
been volatility in steel costs over the last several years.
4
RESEARCH AND DEVELOPMENT
To improve our competitiveness by generating new products and processes, we conduct research and development at our
Corporate Technology Center in Milwaukee, Wisconsin, at our Global Engineering Center in Nanjing, China, and at our operating
locations. Our total expenditures for research and development in 2016, 2015 and 2014 were $80.1 million, $73.7 million and
$67.9 million, respectively.
PATENTS AND TRADEMARKS
We own and use in our businesses various trademarks, trade names, patents, trade secrets and licenses. We do not believe that our
business as a whole is materially dependent upon any such trademark, trade name, patent, trade secret or license. However, our
trade name is important with respect to our products, particularly in China, India and the U.S.
EMPLOYEES
We employed approximately 15,500 employees as of December 31, 2016, primarily non-union.
BACKLOG
Due to the short-cycle nature of our businesses, none of our operations sustains significant backlogs.
ENVIRONMENTAL LAWS
Our operations are governed by a variety of federal, foreign, state and local laws intended to protect the environment.
Compliance with environmental laws has not had and is not expected to have a material effect upon the capital expenditures,
earnings, or competitive position of our company. See Item 3.
AVAILABLE INFORMATION
We maintain a website with the address www.aosmith.com. The information contained on our website is not included as a part
of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own internet access charges,
we make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports as soon as reasonably practical after we have electronically filed
such material with, or furnished such material to, the Securities and Exchange Commission (SEC).
We are committed to sound corporate governance and have documented our corporate governance practices by adopting the
A. O. Smith Corporate Governance Guidelines. The Corporate Governance Guidelines, Criteria for Selection of Directors,
Financial Code of Ethics, the A. O. Smith Guiding Principles, as well as the charters for the Audit, Personnel and
Compensation, Nominating and Governance and the Investment Policy Committees of the Board of Directors and other
corporate governance materials, may be viewed on the company’s website. Any waiver of or amendments to the Financial
Code of Conduct or the A. O. Smith Guiding Principles also would be posted on this website; to date there have been none.
Copies of these documents will be sent to stockholders free of charge upon written request of the corporate secretary at the
address shown on the cover page of this Annual Report on Form 10-K.
5
ITEM 1A – RISK FACTORS
You should carefully consider the risk factors set forth below and all other information contained in this Annual Report on
Form 10-K, including the documents incorporated by reference, before making an investment decision regarding our common
stock. If any of the events contemplated by the following risks actually occurs, then our business, financial condition, or
results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline,
and you may lose all or part of your investment. The risks and uncertainties below are not the only risks facing our company.
The effects of a global economic downturn could have a material adverse effect on our business
The global economy continues to show signs of stress and could stall or reverse the course of any recovery. If this were to
occur it could adversely affect consumer confidence and spending patterns which could result in decreased demand for the
products we sell, a delay in purchases, increased price competition, or slower adoption of energy efficient water heaters and
boilers, or high quality water filter products which could negatively impact our profitability and cash flows. In addition, a
deterioration in current economic conditions, including credit market conditions, could negatively impact our vendors and
customers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in
supply of materials, or increased material prices, which could negatively impact our ability to distribute, market and sell our
products and our financial condition, results of operations and cash flows.
We increasingly sell our products and operate outside the U.S., and to some extent, rely on imports and exports, which
may present additional risks to our business
Approximately 40 percent of our net sales in 2016 were attributable to products sold outside of the U.S., primarily in China and
Canada and to a lesser extent in Europe and India. We also have operations and business relationships outside the U.S. that
comprise a portion of our manufacturing, supply, and distribution. Approximately 9,700 of our 15,500 employees as of
December 31, 2016 were located in China. At December 31, 2016, approximately $752 million of cash, cash equivalents and
marketable securities were held by our foreign subsidiaries, $558 million of which was located in China. International
operations generally are subject to various risks, including: political, religious, and economic instability; local labor market
conditions; the imposition of tariffs or other trade restrictions, or changes to trade agreements; the impact of foreign
government regulations, actions or policies; the effects of income taxes; governmental expropriation; the imposition or
increases in withholding and other taxes on remittances and other payments by foreign subsidiaries; labor relations problems;
the imposition of environmental or employment laws, or other restrictions or actions by foreign governments; and differences
in business practices. Unfavorable changes in the political, regulatory, or trade climate, diplomatic relations, or government
policies, particularly in relation to countries where we have a presence, including Canada, China and Mexico could have a
material adverse effect on our financial condition, results of operations and cash flows or our ability to repatriate funds to the
U.S.
A portion of our business could be affected by a slowdown in the transition of the Chinese economy to a consumer driven
ecomony
Our sales growth in China has averaged approximately 18 percent per year in local currency over the past three years, and we
anticipate sales growth of approximately 15 percent in local currency in 2017. We are expanding our manufacturing capacity
for water treatment and air purification products in China to meet local demand. If there is a slowdown in the transition to a
more consumer driven economy or the rate of urbanization was to stall, it could adversely affect our financial condition, results
of operations and cash flows.
A material loss, cancellation, reduction, or delay in purchases by one or more of our largest customers could harm our
business
Net sales to our five largest customers represented approximately 37 percent of our sales in 2016. We expect that our customer
concentration will continue for the foreseeable future. Our concentration of sales to a relatively small number of customers
makes our relationship with each of these customers important to our business. We cannot assure that we will be able to retain
our largest customers. Some of our customers may shift their purchases to our competitors in the future. The loss of one or
more of our largest customers, any material reduction or delay in sales to these customers, or our inability to successfully
develop relationships with additional customers could have a material adverse effect on our financial position, results of
operations and cash flows.
6
A portion of our business could be adversely affected by a decline in North American new residential and commercial
construction or a decline in replacement related volume
The recovery in residential and commercial construction activity in North America remains fragile and construction could
decline again after showing modest improvements in 2016. We believe that the majority of the markets we serve are for
replacement of existing products and replacement related volume growth was strong in 2013 and 2014 before declining in 2015
and 2016. Changes in replacement volume and in the construction market could negatively affect us.
Because we participate in markets that are highly competitive, our revenues and earnings could decline as we respond to
competition
We sell all of our products in highly competitive markets. We compete in each of our targeted markets based on product
design, reliability, quality of products and services, advanced technologies, product performance, maintenance costs and price.
Some of our competitors may have greater financial, marketing, manufacturing, research and development and distribution
resources than we have, and some are increasingly expanding beyond their existing manufacturing or geographic footprints.
Consumer purchasing behavior may shift to distribution channels, including e-commerce, which is a rapidly developing area.
Development of a successful e-commerce strategy involves significant time, investment and resources. We cannot assure that
our products and services will continue to compete successfully with those of our competitors or that we will be able to retain
our customer base or improve or maintain our profit margins on sales to our customers, all of which could materially and
adversely affect our financial condition, results of operations and cash flows.
Our international operations are subject to risks related to foreign currencies
We have significant operations outside of the U.S., primarily in China and Canada and to a lesser extent Europe and India, and
therefore, hold assets, incur liabilities, earn revenues and pay expenses in a variety of currencies other than the U.S. dollar.
The financial statements of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements. As
a result, we are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates
and interest rates, or hyperinflation in some foreign countries. Furthermore, typically our products are priced in foreign
countries in local currencies. As a result, an increase in the value of the U.S. dollar relative to the local currencies of our
foreign markets has had and would continue to have a negative effect on our profitability. In addition to currency translation
risks, we incur a currency transaction risk whenever one of our subsidiaries enters into either a purchase or sale transaction
using a currency different from the operating subsidiaries’ functional currency. The majority of our foreign currency
transaction risk results from sales of our products in Canada which are manufactured in the U.S. These risks may hurt our
reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S.
dollars.
If we are unable to develop product innovations and improve our technology and expertise, we could lose customers or
market share
Our success may depend on our ability to adapt to technological changes in the water heating, boiler and water treatment
industries. If we are unable to timely develop and introduce new products, or enhance existing products, in response to
changing market conditions or customer requirements or demands, our competitiveness could be materially and adversely
affected. Our ability to develop and successfully market new products and to develop, acquire, and retain necessary intellectual
property rights is essential to our continued success, but cannot reasonably be assured.
Changes in regulations or standards could adversely affect our business
Our products are subject to a wide variety of statutory, regulatory and industry standards and requirements related to, among
other items, energy efficiency, environmental emissions, labeling and safety. While we believe our products are currently
efficient, safe and environment-friendly, a significant change to regulatory requirements, whether federal, foreign, state or
local, or to industry standards, could substantially increase manufacturing costs, impact the size and timing of demand for our
products, or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on
our financial condition, results of operations and cash flow.
7
Our business may be adversely impacted by product defects
Product defects can occur through our own product development, design and manufacturing processes or through our reliance
on third parties for component design and manufacturing activities. We may incur various expenses related to product defects,
including product warranty costs, product liability and recall or retrofit costs. While we maintain a reserve for product warranty
costs based on certain estimates and our knowledge of current events and actions, our actual warranty costs may exceed our
reserve, resulting in current period expenses and a need to increase our reserves for warranty charges. In addition, product
defects and recalls may diminish the reputation of our brand. Further, our inability to cure a product defect could result in the
failure of a product line or the temporary or permanent withdrawal from a product or market. Any of these events may have a
material adverse impact on our financial condition, results of operations and cash flows.
Our operations could be adversely impacted by material price volatility and supplier concentration
The market prices for certain raw materials we purchase, primarily steel, have been volatile. Significant increases in the cost of
any of the key materials we purchase could increase our cost of doing business and ultimately could lead to lower operating
earnings if we are not able to recover these cost increases through price increases to our customers. Historically, there has been
a lag in our ability to recover increased material costs from customers, and that lag could negatively impact our profitability.
In addition, in some cases we are dependent on a limited number of suppliers for some of the raw materials and components we
require in the manufacture of our products. A significant disruption or termination of the supply from one of these suppliers
could delay sales or increase costs which could result in a material adverse effect on our financial condition, results of
operations and cash flows.
We are subject to regulation of our international operations that could adversely affect our business and results of
operations
Due to our global operations, we are subject to many laws governing international relations, including those that prohibit
improper payments to government officials and restrict where we can do business, what information or products we can supply
to certain countries and what information we can provide to a non−U.S. government, including but not limited to the Foreign
Corrupt Practices Act and the U.S. Export Administration Act. Violations of these laws may result in criminal penalties or
sanctions that could have a material adverse effect on our financial condition, results of operations and cash flows.
Our results of operations may be negatively impacted by product liability lawsuits and claims
Our products expose us to potential product liability risks that are inherent in the design, manufacture, sale and use of our
products. While we currently maintain what we believe to be suitable product liability insurance, we cannot be certain that we
will be able to maintain this insurance on acceptable terms, that this insurance will provide adequate protection against
potential liabilities or that our insurance providers will be able to ultimately pay all insured losses. In addition, we self-insure a
portion of product liability claims. A series of successful claims against us could materially and adversely affect our reputation
and our financial condition, results of operations and cash flows.
Impact of potential U.S. tax reform
As of December 31, 2016, approximately $752 million of cash, cash equivalents and marketable securities were held by our
foreign subsidiaries. We would incur a cost to repatriate these funds to the U.S. and have recorded a liability of approximately
$42 million associated with the repatriation of a portion of those funds. Additionally, depending on tax proposals currently
contemplated in the U.S. we could incur one-time income tax expenses associated with repatriation and the remeasurement of
deferred income taxes.
Retention of key personnel is important to our business
Attracting and retaining talented employees is important to the continued success of our business. Failure to retain key
personnel, particularly on the leadership team, could have a material effect on our business and our ability to execute our
business strategies in a timely and effective manner.
8
Sales growth of our Lochinvar-branded products could stall resulting in lower than expected revenues and earnings
The compound annual growth rate of sales of our Lochinvar-branded products has been approximately eight percent per year
since our acquisition of Lochinvar in 2011, largely due to the transition in the boiler industry in the U.S. from lower efficiency,
non-condensing boilers to higher efficiency, higher priced, condensing boilers, as well as new product introductions. In 2003,
approximately five percent of the boilers sold in the U.S. were condensing boilers, and by 2015, the percentage had grown to
approximately 43 percent. Our Lochinvar brand is a leader in residential and commercial condensing boilers. We expect the
transition to condensing boilers to continue, but if the transition to higher efficiency, higher priced, condensing boilers stalls as
a result of lower energy costs, a U.S. recession occurs, or our competitors’ technologies surpass our technology, our growth
rate could be lower than expected.
An inability to adequately maintain our information systems and their security, as well as to protect data and other
confidential information, could adversely affect our business and reputation
In the ordinary course of business, we utilize information systems for day-to-day operations, to collect and store sensitive data
and information, including our proprietary and regulated business information and personally identifiable information of our
customers, suppliers, employees and business partners, as well as personally identifiable information about our employees.
Our information systems, like those of other companies, are susceptible to outages due to system failures, failures on the part of
third-party information system providers, natural disasters, power loss, telecommunications failures, viruses, or breaches of
security. We continue to take steps to maintain and improve data security and address these risks and uncertainties by
implementing and improving internal controls, security technologies, network and data center resiliency and recovery
processes. However, any operations failure or breach of security from increasingly sophisticated cyber threats could lead to
disruptions of our business activities, the loss or disclosure of both our and our customers’ financial, product and other
confidential information and could result in regulatory actions and have a material adverse effect on our financial condition,
results of operations and cash flows and our reputation.
Potential acquisitions could use a significant portion of our capital and we may not successfully integrate future
acquisitions or operate them profitably or achieve strategic objectives
While we will continue to evaluate potential acquisitions, we could use a significant portion of our available capital to fund
future acquisitions. If we complete any future acquisitions, then we may not be able to successfully integrate the acquired
businesses or operate them profitably or accomplish our strategic objectives for those acquisitions. If we complete any future
acquisitions in new geographies, our unfamiliarity with local regulations and market customs may impact our ability to operate
them profitably or achieve our strategic objectives for those acquisitions. Our level of indebtedness may increase in the future
if we finance acquisitions with debt, which would cause us to incur additional interest expense and could increase our
vulnerability to general adverse economic and industry conditions and limit our ability to service our debt or obtain additional
financing. The impact of future acquisitions may have a material adverse effect on our financial condition, results of
operations and cash flows.
Our underfunded pension plans require future pension contributions which could limit our flexibility in managing our
company
Due to the significant negative investment returns in 2008, flat returns in 2015 and falling interest rates in recent years, the
projected benefit obligations of our defined benefit pension plans exceeded the fair value of the plan assets by approximately
$109 million at December 31, 2016. U.S. employees hired after January 1, 2010 have not participated in our defined benefit
plan, and benefit accruals for the majority of current salaried and hourly employees ended on December 31, 2014. We are
forecasting that we will not be required to make a contribution to the plan in 2017, and we do not plan to make any voluntary
contributions. However, we cannot provide any assurance that contributions will not be required in the future. Among the key
assumptions inherent in our actuarially calculated pension plan obligation and pension plan expense are the discount rate and
the expected rate of return on plan assets. If interest rates and actual rates of return on invested plan assets were to decrease
significantly, our pension plan obligations could increase materially. The size of future required pension contributions could
result in us dedicating a substantial portion of our cash flows from operations to making the contributions which could
negatively impact our flexibility in managing the company.
9
We have significant goodwill and indefinite-lived intangible assets and an impairment of our goodwill or indefinite-lived
intangible assets could cause a decline in our net worth
Our total assets include significant goodwill and indefinite-lived intangible assets. Our goodwill results from our acquisitions,
representing the excess of the purchase prices we paid over the fair value of the net tangible and intangible assets we acquired.
We assess whether there have been impairments in the value of our goodwill or indefinite-lived intangible assets during the
fourth quarter of each calendar year or sooner if triggering events warrant. If future operating performance at our businesses
does not meet expectations, we may be required to reflect non-cash charges to operating results for goodwill or indefinite-lived
intangible asset impairments. The recognition of an impairment of a significant portion of goodwill or indefinite-lived
intangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material.
A significant reduction in our stockholders’ equity due to an impairment of goodwill or indefinite-lived intangible assets may
affect our ability to maintain the debt-to-capital ratio required under our existing debt arrangements. We have identified the
valuation of goodwill and indefinite-lived intangible assets as a critical accounting policy. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Critical Accounting Policies—Goodwill and Indefinite-lived
Intangible Assets” included in Item 7 of this Annual Report on Form 10-K.
Certain members of the founding family of our company and trusts for their benefit have the ability to influence all matters
requiring stockholder approval
We have two classes of common equity: our Common Stock and our Class A Common Stock. The holders of Common Stock
currently are entitled, as a class, to elect only one-third of our board of directors. The holders of Class A Common Stock are
entitled, as a class, to elect the remaining directors. Certain members of the founding family of our company and trusts for their
benefit (Smith Family) have entered into a voting trust agreement with respect to shares of our Class A Common Stock and
shares of our Common Stock they own. As of December 31, 2016, these members of the Smith Family own approximately
62.0 percent of the total voting power of our outstanding shares of Class A Common Stock and Common Stock, taken together
as a single class, and approximately 95.9 percent of the voting power of the outstanding shares of our Class A Common Stock,
as a separate class. Due to the differences in the voting rights between shares of our Common Stock and shares of our Class A
Common Stock, the Smith Family is in a position to control to a large extent the outcome of matters requiring a stockholder
vote, including the adoption of amendments to our certificate of incorporation or bylaws or approval of transactions involving a
change of control. This ownership position may increase if other members of the Smith Family enter into the voting trust
agreement, and the voting power relating to this ownership position may increase if shares of our Class A Common Stock held
by stockholders who are not parties to the voting trust agreement are converted into shares of our Common Stock. The voting
trust agreement provides that, in the event one of the parties to the voting trust agreement wants to withdraw from the trust or
transfer any of its shares of our Class A Common Stock, such shares of our Class A Common Stock are automatically
exchanged for shares of our Common Stock held by the trust to the extent available in the trust. In addition, the trust will have
the right to purchase the shares of our Class A Common Stock and our Common Stock proposed to be withdrawn or transferred
from the trust. As a result, the Smith Family members that are parties to the voting trust agreement have the ability to maintain
their collective voting rights in our company even if certain members of the Smith Family decide to transfer their shares.
10
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
Properties utilized by us at December 31, 2016 were as follows:
North America
In this segment we have 15 manufacturing plants located in six states and two non-U.S. countries, of which 11 are owned
directly by us or our subsidiaries and four are leased from outside parties. The terms of leases in effect at December 31, 2016
expire between 2017 and 2025.
Rest of World
In this segment we have six manufacturing plants located in four non-U.S. countries, of which three are owned directly by us or
our subsidiaries and three are leased from outside parties. Initial lease terms generally provide for minimum terms of one to six
years and have one or more renewal options. The terms of leases in effect at December 31, 2016 expire between 2017 and
2020.
Corporate and General
We consider our plants and other physical properties to be suitable, adequate, and of sufficient productive capacity to meet the
requirements of our business. The manufacturing plants operate at varying levels of utilization depending on the type of
operation and market conditions. The executive offices of the company, which are leased, are located in Milwaukee,
Wisconsin.
ITEM 3 - LEGAL PROCEEDINGS
We are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of our
business involving product liability, property damage, insurance coverage, exposure to asbestos and other substances, patents
and environmental matters, including the disposal of hazardous waste. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss or recovery, we believe, based on past experience,
adequate reserves and insurance availability, that these unresolved legal actions will not have a material effect on our financial
position or results of operations. A more detailed discussion of certain of these matters appears in Note 13 of Notes to
Consolidated Financial Statements.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
11
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of the executive officers which is included as an
unnumbered Item in Part I of this report in lieu of being included in our Proxy Statement for our 2016 Annual Meeting of
Stockholders.
Name (Age)
Positions Held
Period Position Was Held
Wilfridus M. Brouwer (58) Senior Vice President – Asia Corporate Development
Senior Vice President
President – A. O. Smith Holdings (Barbados) SRL
Senior Vice President – Asia
President and General Manager – A. O. Smith (China)
Investment Co., Ltd.
Paul R. Dana (54)
Senior Vice President – Global Manufacturing
Vice President – Global Manufacturing
President – APCOM, a division of State Industries, Inc.,
a subsidiary of the Company
Vice President – Product Engineering
Plant Manager – Productos de Agua, S. de R.L. de C.V.
Wei Ding (54)
Senior Vice President
President – A. O. Smith (China) Investment Co., Ltd.;
General Manager – A. O. Smith (China) Water Heater
Co., Ltd. and A. O. Smith (Nanjing) Water Treatment
Products Co. Ltd.
President and General Manager – A. O. Smith (China)
Water Heater Co., Ltd.
Senior Vice President – A. O. Smith Water Products
Company
Vice President – China – A. O. Smith Water Products
Company
General Manager – A. O. Smith (China) Water Heater
Co., Ltd.
Robert J. Heideman (50)
Senior Vice President – Chief Technology Officer
Senior Vice President – Engineering & Technology
Senior Vice President – Corporate Technology
Vice President – Corporate Technology
Director – Materials
Section Manager
2015 to Present
2013 to 2014
2013 to Present
2009 to 2012
2009 to 2012
2016 to Present
2015
2011 to Present
2006 to 2010
1998 to 2005
2013 to Present
2013 to Present
2013
2011 to 2012
2006 to 2011
1999 to 2012
2013 to Present
2011 to 2012
2010 to 2011
2007 to 2010
2005 to 2007
2002 to 2005
John J. Kita (61)
Executive Vice President and Chief Financial Officer
2011 to Present
Senior Vice President, Corporate Finance and Controller
Vice President, Treasurer and Controller
Treasurer and Controller
Assistant Treasurer
2006 to 2011
1996 to 2006
1995 to 1996
1988 to 1994
12
Name (Age)
Positions Held
Period Position Was Held
Charles T. Lauber (54)
Senior Vice President, Strategy and Corporate
Development
Senior Vice President – Chief Financial Officer – A. O.
Smith Water Products Company
Vice President – Global Finance – A. O. Smith
Electrical Products Company
Vice President and Controller – A. O. Smith Electrical
Products Company
Director of Audit and Tax
Peter R. Martineau (62)
Senior Vice President – Chief Information Officer
Mark A. Petrarca (53)
Vice President – Business Transformation
Vice President – Customer Satisfaction
Senior Vice President – Human Resources and Public
Affairs
Vice President – Human Resources and Public Affairs
Vice President – Human Resources –
A. O. Smith Water Products Company
Ajita G. Rajendra (65)
Chairman, President and Chief Executive Officer
President and Chief Executive Officer
President and Chief Operating Officer
Executive Vice President
President – A. O. Smith Water Products Company
Senior Vice President
James F. Stern (54)
Executive Vice President, General Counsel and
Secretary
William L. Vallett Jr. (57)
Senior Vice President
Partner – Foley & Lardner LLP
Chief Executive Officer – Lochinvar, LLC
Chief Executive Officer – Lochinvar Corporation
Kevin J. Wheeler (57)
Senior Vice President
President and General Manager – North America, India
and Europe Water Heating
Senior Vice President and General Manager – North
America, India and Europe – A. O. Smith Water
Products Company
Senior Vice President and General Manager – U.S.
Retail – A. O. Smith Water Products Company
Vice President – International – A. O. Smith Water
Products Company
Managing Director – A. O. Smith Water Products
Company B.V.
13
2013 to Present
2006 to 2012
2004 to 2006
2001 to 2004
1999 to 2001
2016 to Present
2013 to 2015
2010 to 2012
2006 to Present
2005 to 2006
1999 to 2004
2014 to Present
2013 to 2014
2011 to 2012
2006 to 2011
2005 to 2011
2005 to 2007
2007 to Present
1997 to 2007
2013 to Present
2012 to Present
1992 to 2012
2013 to Present
2013 to Present
2011 to 2012
2007 to 2011
2004 to 2007
1999 to 2004
PART II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
On September 7, 2016, our Board of Directors declared a two-for-one stock split of our Class A Common Stock and Common
Stock (including treasury shares) in the form of a 100 percent stock dividend to stockholders of record on September 21, 2016 and
payable on October 5, 2016. All references in this Item 5 to numbers of A. O. Smith Corporation shares or price per share have
been adjusted to reflect the split.
(a) Market Information. Our Common Stock is listed on the New York Stock Exchange under the symbol AOS. Our Class A
Common Stock is not listed. Wells Fargo Shareowner Services, N.A., P.O. Box 64854, St. Paul, Minnesota, 55164-0854
serves as the registrar, stock transfer agent and the dividend reinvestment agent for our Common Stock and Class A
Common Stock.
Quarterly Common Stock Price Range
2016
High
Low
2015
High
Low
1st Qtr.
$ 38.71
30.15
1st Qtr.
$ 32.99
26.75
2nd Qtr.
$ 44.06
37.61
2nd Qtr.
$ 37.20
31.76
3rd Qtr.
$ 49.70
42.88
3rd Qtr.
$ 38.72
25.05
4th Qtr.
$ 51.49
43.66
4th Qtr.
$ 40.58
32.12
(b) Holders. As of January 31, 2017, the approximate number of stockholders of record of Common Stock and Class A
Common Stock were 640 and 180, respectively.
(c) Dividends. Dividends declared on the common stock are shown in Note 15 of Notes to Consolidated Financial Statements
appearing elsewhere herein.
(d)
Stock Repurchases. In 2015, our Board of Directors authorized the purchase of an additional 4,000,000 shares of our
Common Stock. In 2016, our Board of Directors authorized the purchase of an additional 3,000,000 shares of our Common
Stock. Under the share repurchase program, our Common Stock may be purchased through a combination of Rule 10b5-1
automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares
purchased and the timing of the purchase will depend on a number of factors, including share price, trading volume and
general market conditions, as well as on working capital requirements, general business conditions and other factors,
including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by
our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan
that we may then have in effect. In 2016, we repurchased 3,273,109 shares at an average price of $41.30 per share and at a
total cost of $135.2 million. As of December 31, 2016, there were 4,906,403 shares remaining on the existing repurchase
authorization.
The following table sets forth the number of shares of common stock we repurchased during the fourth quarter of 2016:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
October 1 – October 31, 2016
November 1 – November 30, 2016
December 1 – December 31, 2016
Total Number
of Shares
Purchased
236,150
249,008
240,997
Average
Price Paid
per Share
$ 49.15
46.37
49.24
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
236,150
249,008
240,997
Maximum Number
of Shares that may
yet be Purchased
Under the Plans or
Programs
5,396,408
5,147,400
4,906,403
(e)
Performance Graph. The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be
“soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act
of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated
by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent
we specifically incorporate it by reference into such a filing.
14
The graph below shows a five-year comparison of the cumulative shareholder return on our Common Stock with the cumulative
total return of the Standard & Poor’s (S&P) Mid Cap 400 Index and the Russell 1000 Index, both of which are published indices.
Comparison of Five-Year Cumulative Total Return
From December 31, 2011 to December 31, 2016
Assumes $100 Invested with Reinvestment of Dividends
500
450
400
350
300
250
200
150
100
50
0
2011
2012
SMITH (A O) CORP
2013
2014
S&P MIDCAP 400 INDEX
2015
2016
RUSSELL 1000 INDEX
Company/Index
A. O. Smith Corporation
S&P Mid Cap 400 Index
Russell 1000 Index
Base
Period
Indexed Returns
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
100.0
100.0
100.0
159.5
117.9
116.4
275.8
157.4
155.0
292.0
172.8
175.4
401.0
169.0
177.0
501.4
204.1
198.4
15
ITEM 6 – SELECTED FINANCIAL DATA
(dollars in millions, except per share amounts)
Net sales
Earnings (loss)
Continuing operations
Discontinued operations
Net earnings
Basic earnings (loss) per share of common
stock(1,2)
2016(1)
$ 2,685.9
2015
$ 2,536.5
Years ended December 31
2014
$ 2,356.0
2013(2)
$ 2,153.8
2012(3)
$ 1,939.3
326.5
-
326.5
$
282.9
-
282.9
$
207.8
-
207.8
$
169.7
-
169.7
162.6
(3.9)
$ 158.7
$
Continuing operations
Discontinued operations
Net earnings
$
$
1.87
-
1.87
$
$
1.59
-
1.59
$
$
1.15
-
1.15
$
$
0.92
-
0.92
$
$
0.88
(0.02)
0.86
Diluted earnings (loss) per share of common
stock(1,2)
Continuing operations
Discontinued operations
Net earnings
$
$
1.85
-
1.85
$
$
1.58
-
1.58
$
$
1.14
-
1.14
$
$
0.91
-
0.91
$
$
0.87
(0.02)
0.85
Cash dividends per common share(1,2)
$
0.48
$
0.38
$
0.30
$
0.23
$
0.18
Total assets
Long-term debt(4)
Total stockholders’ equity
2016
2015
December 31
2014
2013
2012
$ 2,891.0
$ 2,629.2
$ 2,498.1
$ 2,351.5
$ 2,245.6
316.4
236.1
210.1
177.7
225.1
1,515.3
1,442.3
1,381.3
1,328.7
1,194.1
(1) In September 2016, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not
included in cash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which
were restated for all periods presented to reflect the stock dividend.
(2)
In April 2013, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included
in cash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated
for all periods presented to reflect the stock dividend.
In August 2011, we sold our Electrical Products business (EPC). Due to the sale, EPC is reflected as a discontinued operation.
(3)
Excludes the current portion of long-term debt.
(4)
16
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is
primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential
and commercial gas, gas tankless and electric water heaters, as well as water treatment products. Both segments primarily
manufacture and market in their respective regions of the world. Our North America segment also manufactures and globally
markets specialty commercial water heating equipment, condensing and non-condensing boilers and water systems tanks. Our
Rest of World segment also manufactures and markets in-home air purification products in China.
In 2016, our North America segment sales were $1,743.2 million and our Rest of World segment sales were $965.6 million.
Sales of our products in China grew significantly in 2016, increasing 12.5 percent over 2015. Excluding the impact from the
strengthening U.S. dollar, sales in China increased 18.9 percent in 2016. We expect sales in 2017 in China to grow at a rate of
approximately 15 percent in local currency, as we believe overall water heater market growth, geographic expansion, market
share gains, and growth in water treatment and air purification products will contribute to our growth. Price increases for
residential and commercial water heaters and higher volumes of commercial water heaters and boilers contributed to 2016 sales
increases in our North America segment. Partially offsetting these factors was a decline in residential water heater volumes in
the U.S. We expect our North America residential and commercial water heater industry unit to show modest growth in 2017.
Lochinvar-branded products contributed $300.6 million to our net sales in 2016, and we expect over eight percent sales growth
of Lochinvar-branded products in 2017, driven by the continuing U.S. industry transition to higher efficiency products and our
introduction of new products. Approximately 40 percent of Lochinvar-branded product sales consist of residential and
commercial water heaters while the remaining 60 percent of Lochinvar-branded product sales consist primarily of boilers and
related parts.
Our stated acquisition strategy includes a number of our water-related strategic initiatives. We will look to continue to grow
our core residential and commercial water heating, boiler and water treatment businesses throughout the world. We will also
continue to look for opportunities to add to our existing operations in the high growth regions demonstrated by our introduction
of air purification products in China and water treatment products in India and Vietnam in 2015.
Consistent with our stated strategy to expand our core product offering, we acquired Aquasana, Inc. (Aquasana) in August
2016. Aquasana designs, assembles and markets premium performance water treatment products, including whole-house
treatment systems, drinking water solutions for at home and on-the-go, and shower filters. Aquasana sells products primarily
directly to U.S. consumers through e-commerce, as well as through retail outlets and distributors. With a three year compound
annual revenue growth rate of 17 percent as of December 31, 2016, Aqausana fits squarely within our stated strategy to expand
our core product offerings to new geographies that present growth opportunities.
RESULTS OF OPERATIONS
Our sales in 2016 were a record $2,685.9 million surpassing 2015 sales of $2,536.5 million by 5.9 percent. Excluding the
impact from the appreciation of the U.S. dollar against the Chinese currency that occurred in 2016, our sales grew
approximately eight percent in 2016. The increase in sales in 2016 was primarily due to higher sales in China of water heaters,
residential air purification products, as well as 35 percent sales growth of A. O. Smith-branded water treatment products. Sales
in China grew 12.5 percent in 2016, and excluding the impact of the appreciation of the U.S. dollar, sales in China increased
18.9 percent in 2016. Our sales in 2016 also benefitted from price increases in the U.S., higher volumes of U.S. boilers and
commercial water heaters as well as $18.4 million of sales of Aquasana-branded water treatment products resulting from our
acquisition of Aquasana in August 2016. These items more than offset lower volumes of U.S. residential water heaters. Our
sales in 2015 were higher than 2014 sales of $2,356.0 million by 7.7 percent. The increase in sales in 2015 was attributable to
higher prices in North America, higher sales of Lochinvar-branded products and commercial water heaters in the U.S. as well
as strong demand for our water heating and water treatment products in China. Sales of water heaters and water treatment
products in China grew 13.7 percent in 2015 compared to 2014. Sales of water heaters and water treatment products in China
grew 16.1 percent in 2015 compared to 2014, excluding impact of the appreciation of the U.S. dollar in 2015.
Our gross profit margin in 2016 increased to 41.7 percent from 39.8 percent in 2015. The higher margin in 2016 was due to
price increases in the U.S., lower material costs in the first half of 2016 and higher sales of boilers and commercial water
heaters in the U.S. Our gross profit margin in 2015 increased from 36.5 percent in 2014 primarily due to price increases in the
U.S. and Canada, higher U.S. sales of commercial water heaters and boilers, lower steel costs and a reduction in pension-
related costs.
17
Selling, general and administrative (SG&A) expenses were $48.2 million higher in 2016 than in 2015. The increase in SG&A
expenses in 2016 to $658.9 million was primarily due to higher selling costs supporting our sales efforts in tier 2 and tier 3
cities in China as well as higher advertising costs to support brand building in China. SG&A expenses were $38.6 million
higher in 2015 than in 2014 primarily due to higher selling and engineering costs supporting increased volumes in China as
well as higher costs associated with the 2015 launch of air purification products in China which more than offset lower pension
costs in the U.S.
Pension income in 2016 was $6.9 million compared to pension expense of $0.1 million in 2015 and $28.6 million in 2014. As
of December 31, 2015, we changed to a more precise method to estimate the service cost and interest components of net
periodic benefit cost for our pension and post-retirement plan. The change is the primary reason for the $7.1 million decrease
in service and interest costs in 2016 compared to 2015. The significant decrease in pension expense in 2015 compared to 2014
was due to the sunset of our pension plan for the majority of our employees on December 31, 2014. In 2015, we began making
additional Company contributions to a defined contribution plan in lieu of benefits earned in our pension plan.
Interest expense was $7.3 million in 2016 compared to $7.4 million in 2015 and $5.7 million in 2014. The higher interest
expense in 2015 compared to 2014 was primarily related to interest rates on term notes in the amount of $75 million issued in
January 2015 that were higher than the interest rate on the revolving credit facility that it replaced as well as higher overall debt
levels related to share repurchases.
Other income was $9.4 million in 2016 compared to $10.8 million in 2015 and $5.2 million in 2014. The decrease in other
income in 2016 compared to 2015 was primarily due to a decrease in interest income caused by lower interest rates in China in
2016. The increase in other income in 2015 compared to 2014 was primarily due to higher interest income resulting from a
higher level of marketable securities during the year.
Our effective tax rate was 29.4 percent in 2016, compared with 29.7 percent in 2015 and 27.5 percent in 2014. Our lower
effective tax rate in 2016 compared to 2015 was primarily due to our adoption of a new accounting standard for share-based
compensation that was partially offset by a change in geographic earnings mix. The higher effective tax rate in 2015 compared
to 2014 was primarily due to a change in geographic earnings mix.
North America
Sales in our North America segment sales were $1,743.2 million in 2016 or $40.2 million higher than sales of $1,703.0 million
in 2015. The sales increase in 2016 resulted from a full year of U.S. price increases for residential water heaters related to a
regulatory change in April 2015, and an August 2016 price increase in the U.S. related to higher steel prices and other cost
inflation. Sales in 2016 also benefitted from higher volumes of boilers and commercial water heaters in the U.S. as well as the
addition of $18.4 million of sales of water treatment products resulting from our Aquasana acquisition. Lower volumes of U.S.
residential water heaters partially offset these benefits. Sales in 2015 were $81.3 million higher than sales of $1,621.7 million
in 2014. The sales increase in 2015 resulted from a price increase for residential water heaters in the U.S. due to a regulatory
change in April 2015 and higher volumes of commercial water heaters and condensing commercial boilers in the U.S., partially
offset by lower residential volumes in the U.S. and a decrease in the translated value of the Canadian dollar during 2015.
North America operating earnings were $385.9 million in 2016 compared to operating earnings of $339.9 million and $238.7
million in 2015 and 2014, respectively. Operating margins were 22.1 percent, 20.0 percent and 14.7 percent in 2016, 2015 and
2014, respectively. The higher operating earnings and operating margin in 2016 compared to 2015 were primarily due to
pricing actions in the U.S., lower material costs in the first half of 2016 and higher boiler and commercial water heater volumes
in the U.S. that were partially offset by lower U.S. residential water heater volumes. The significantly higher operating
earnings and operating margin in 2015 compared to 2014 were primarily due to higher prices in the U.S. and Canada, higher
sales of Lochinvar-branded products and commercial water heaters in the U.S., lower steel costs and lower pension costs which
more than offset lower residential water heater volumes in the U.S. We expect North America operating margin to be between
21.5 and 22.25 percent in 2017, despite the headwind from lower Aquasana margins of almost 50 basis points.
Rest of World
Sales in our Rest of World segment in 2016 were $965.6 million or $99.5 million higher than sales of $866.1 million in 2015.
Sales in China grew 12.5 percent in 2016. Excluding the impact from the appreciation of the U.S. dollar in 2016, sales in
China increased 18.9 percent in 2016 driven by higher demand for water heaters, water treatment products and residential air
purification products. A. O. Smith-branded water treatment sales in China totaled $148 million in 2016 compared to $110
million in 2015. Sales of in-home air purification products were $26 million in 2016 compared to $9 million in 2015. Sales in
2015 were $97.8 million higher than sales of $768.3 million in 2014 due to higher demand for water heaters, approximately
$35 million of incremental sales of water treatment products and approximately $9 million in sales of our newly launched in-
home air purification products. Sales in China grew 13.7 percent in 2015. Excluding the impact from the appreciation of the
U.S. dollar in 2015, sales in China increased 16.1 percent in 2015.
18
Rest of World operating earnings were $129.1 million in 2016 compared to operating earnings of $113.0 million and $106.7
million in 2015 and 2014, respectively. Segment operating margins were 13.4 percent in 2016 compared to 13.0 percent and
13.9 percent in 2015 and 2014, respectively. Higher operating earnings and operating margin in 2016 compared to 2015 were
primarily due to higher sales in China that were partially offset by increased SG&A expenses in China. Higher selling costs in
China to support our sales efforts in tier 2 and tier 3 cities and higher advertising costs to support brand building were the
primary drivers of higher SG&A expenses. Operating earnings in 2016 were also negatively impacted by almost $8 million
due to the appreciation of the U.S. dollar in 2016. Higher operating earnings in 2015 were primarily due to higher sales in
China and lower steel costs that were partially offset by lower sales of highly profitable commercial water heaters in China,
increased SG&A expenses and approximately $1.5 million of higher losses in India compared to 2014. Earnings in China were
reduced by approximately $2.5 million due to the appreciation of the U.S. dollar in 2015. Higher selling and engineering costs
in China as well as higher SG&A costs associated with the 2015 launch of air purification products were the primary drivers
for decreased operating margins in 2015 as compared to 2014. We expect 2017 operating margin to exceed 14 percent.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $796.4 million at December 31, 2016 compared with $750.1 million and $713.8 million at December
31, 2015 and December 31, 2014, respectively. Cash generated in China and sales-related increases in accounts receivable,
inventory and accounts payable levels explain the majority of the increase in 2016 and 2015. As of December 31, 2016,
essentially all of our $754.6 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.
We would incur a cost to repatriate these funds to the U.S. and have an accrual of $42.3 million for the repatriation of a portion
of these funds.
Cash provided by operating activities during 2016 was $446.6 million compared with $351.7 million during 2015 and $264.0
million during 2014. The increase in cash flows in 2016 was primarily due to higher earnings from operations and lower
outlays for working capital. We experienced a series of favorable cash flow impacts in China in the fourth quarter of 2016,
including:
• A decline in accounts receivable balances from the prior year-end, despite higher fourth quarter sales in 2016. We
received a series of unanticipated large customer payments late in the fourth quarter of 2016 and benefitted from
improved terms with a few customers, all resulting in lower accounts receivable balances;
• An increase in trade payable balances most notably due to higher inventory in advance of the spring festival occurring
in China in the last week in January; and
• Higher receipts of cash in advance of sales from distribution customers.
The improvement in cash flows in 2015 was primarily due to higher earnings from operations and lower outlays for working
capital driven primarily by increases in accounts payable balances in China. We expect cash provided by operating activities in
2017 to be approximately $350 million. We expect higher earnings in 2017 to be more than offset by larger outlays for
working capital due to the higher than anticipated cash flows in the fourth quarter of 2016. Over the two-year period from 2016
to 2017, we expect to generate operating cash of approximately $800 million, which compares with $616 million of operating
cash flows during 2014 to 2015.
Our capital expenditures were $80.7 million in 2016, $72.7 million in 2015 and $86.1 million in 2014. We broke ground in
2016 on the construction of a new water treatment and air purification products manufacturing facility in Nanjing, China, to
support the expected growth of these products in China. Included in 2016 capital expenditures were approximately $13 million
related to capacity expansion in China as well as approximately $11 million related to our enterprise resource planning (ERP)
system implementation. Included in 2015 capital expenditures were approximately $16 million related to our ERP
implementation and approximately $19 million related to capacity expansion in China and the U.S. to support growth. Included
in 2014 capital expenditures was approximately $31 million related to our ERP implementation. We project between $90 and
$100 million of capital expenditures in 2017 and depreciation and amortization expense of approximately $70 million. We
expect our spending on the manufacturing facility in Nanjing will be approximately $40 million in 2017.
In December 2016, we completed a $500 million multi-currency five year revolving credit facility with a group of nine banks.
The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including
lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us
to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the
covenants as of December 31, 2016. The facility backs up commercial paper and credit line borrowings, and it expires on
December 15, 2021. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings, as
well as drawings under the facility are classified as long-term debt.
19
In November 2016, we issued $45 million of fixed rate term notes in two tranches to two insurance companies. Principal
payments commence in 2023 and 2028 and the notes mature in 2029 and 2034, respectively. The notes carry interest rates of
2.87 and 3.10, respectively. We used proceeds of the notes to pay down borrowings under our revolving credit facility.
In January 2015, we issued $75 million of fixed rate term notes to an insurance company. Principal payments commence in
2020 and the notes mature in 2030. The notes carry an interest rate of 3.52 percent. We used proceeds of the notes to pay
down borrowings under our revolving credit facility.
At December 31, 2016, we had available borrowing capacity of $310.8 million under this facility. We believe that the
combination of cash, available borrowing capacity and operating cash flow will provide sufficient funds to finance our existing
operations for the foreseeable future.
Our total debt increased to $323.6 million at December 31, 2016 compared with $249.0 million at December 31, 2015, as our
cash flows generated in the U.S were more than offset by our share repurchase activity and our purchase of Aquasana. As a
result, our leverage, as measured by the ratio of total debt to total capitalization, was 17.6 percent at the end of 2016 compared
with 14.7 percent at the end of 2015.
Our U.S. pension plan continues to meet all funding requirements under ERISA regulations. We were not required to make a
contribution to our pension plan in 2016 but made a voluntary $30 million contribution due to escalating Pension Benefit
Guaranty Corporation insurance premiums. We forecast that we will not be required to make a contribution to the plan in 2017
and we do not plan to make any voluntary contributions in 2017. For further information on our pension plans, see Note 10 of
the Notes to Consolidated Financial Statements.
During 2016, our Board of Directors authorized the purchase of an additional 3,000,000 shares of our Common Stock. In 2016,
we repurchased 3,273,109 shares at an average price of $41.30 per share and a total cost of $135.2 million. A total of 4,906,403
shares remained on the existing repurchase authorization at December 31, 2016. Depending on factors such as stock price,
working capital requirements and alternative investment opportunities, such as acquisitions, we expect to spend approximately
$135 million on share repurchase activity in 2017 using a 10b5-1 repurchase plan. In addition, we may opportunistically
repurchase an additional $65 million of our shares in 2017.
We have paid dividends for 77 consecutive years with payments increasing each of the last 25 years. We paid dividends of
$0.48 per share in 2016 compared with $0.38 per share in 2015. In January 2017, we increased our dividend by 17 percent and
anticipate paying dividends of $0.56 per share in 2017.
Aggregate Contractual Obligations
A summary of our contractual obligations as of December 31, 2016, is as follows:
(dollars in millions)
Contractual Obligations
Long-term debt
Fixed rate interest
Operating leases
Purchase obligations
Pension and post-retirement
obligations
Total
Total
$ 323.6
38.6
37.4
150.8
66.0
$ 616.4
$
Less Than
1 year
7.2
4.6
19.5
141.4
0.9
$ 173.6
$
Payments due by period
3 - 5
1 - 2
Years
Years
$ 202.9
7.2
7.2
8.1
4.2
7.9
3.6
5.8
9.5
$ 38.5
8.6
$ 226.5
More than
5 years
$ 106.3
18.7
5.8
-
47.0
$ 177.8
As of December 31, 2016, our liability for uncertain income tax positions was $4.2 million. Due to the high degree of
uncertainty regarding timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably
reliable estimate of the amount and period in which these liabilities might be paid.
We utilize blanket purchase orders to communicate expected annual requirements to many of our suppliers. Requirements
under blanket purchase orders generally do not become committed until several weeks prior to our scheduled unit production.
The purchase obligation amount presented above represents the value of commitments that we consider firm.
Recent Accounting Pronouncements
Refer to Recent Accounting Pronouncements in Note 1 of Notes to Consolidated Financial Statements.
20
Critical Accounting Policies
Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. Also as disclosed in Note 1,
the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use
of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying
notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be
material to the financial statements.
The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated
with the evaluation of the impairment of goodwill and indefinite-lived intangible assets, as well as significant estimates used in
the determination of liabilities related to warranty activity, product liability and pensions. Various assumptions and other
factors underlie the determination of these significant estimates. The process of determining significant estimates is fact-
specific and takes into account factors such as historical experience and trends, and in some cases, actuarial techniques. We
monitor these significant factors and adjustments are made as facts and circumstances dictate. Historically, actual results have
not significantly deviated from those determined using the estimates described above.
Goodwill and Indefinite-lived Intangible Assets
In conformity with U.S. Generally Accepted Accounting Principles, goodwill and indefinite-lived intangible assets are tested
for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.
We perform impairment reviews for our reporting units using a fair-value method based on management’s judgments and
assumptions. The fair value represents the estimated amount at which a reporting unit could be bought or sold in a current
transaction between willing parties on an arm’s-length basis. The estimated fair value is then compared with the carrying
amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent that
goodwill and indefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental
as estimates of future sales, earnings and cash flows are utilized to determine fair values. However, we believe that we conduct
annual thorough and competent valuations of goodwill and indefinite-lived intangible assets and that there has been no
impairment in goodwill or indefinite-lived assets in 2016.
Product warranty
Our products carry warranties that generally range from one to ten years and are based on terms that are generally accepted in
the market. We provide for the estimated cost of product warranty at the time of sale. The product warranty provision is
estimated based upon warranty loss experience using actual historical failure rates and estimated costs of product replacement.
The variables used in the calculation of the provision are reviewed at least annually. At times, warranty issues may arise which
are beyond the scope of our historical experience. We provide for any such warranty issues as they become known and
estimable. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costs
could differ significantly from those estimates. The allocation of the warranty liability between current and long-term is based
on the expected warranty liability to be paid in the next year as determined by historical product failure rates. At December 31,
2016, our reserve for product warranties was $140.9 million.
Product liability
Due to the nature of our products, we are subject to product liability claims in the normal course of business. We maintain
insurance to reduce our risk. Most insurance coverage includes self-insured retentions that vary by year. In 2016, we
maintained a self-insured retention of $7.5 million per occurrence with an aggregate insurance limit of $125.0 million.
We establish product liability reserves for our self-insured retention portion of any known outstanding matters based on the
likelihood of loss and our ability to reasonably estimate such loss. There is inherent uncertainty as to the eventual resolution of
unsettled matters due to the unpredictable nature of litigation. We make estimates based on available information and our best
judgment after consultation with appropriate advisors and experts. We periodically revise estimates based upon changes to
facts or circumstances. We also utilize an actuary to calculate reserves required for estimated incurred but not reported claims
as well as to estimate the effect of adverse development of claims over time. At December 31, 2016, our reserve for product
liability was $38.6 million.
Pensions
We have significant pension benefit costs that are developed from actuarial valuations. The valuations reflect key assumptions
regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service.
Consideration is given to current market conditions, including changes in interest rates in making these assumptions. Our
21
assumption for the expected return on plan assets was 7.50 percent in 2016 compared to 7.75 percent in 2015. The discount
rate used to determine net periodic pension costs increased to 4.40 percent in 2016 from 4.05 percent in 2015. For 2017, our
expected return on plan assets is 7.50 percent and our discount rate is 4.15 percent.
In developing our expected return on plan assets, we evaluate our pension plan’s current and target asset allocation, the
expected long-term rates of return of equity and bond indices and the actual historical returns of our pension plan. Our plan’s
target allocation to equity managers is approximately 45 to 55 percent, with the remainder allocated primarily to bond
managers, private equity managers and real estate managers. Our actual asset allocation as of December 31, 2016, was 48
percent to equity managers, 37 percent to bond managers, ten percent to real estate managers, four percent to private equity
managers and one percent to others. We regularly review our actual asset allocation and periodically rebalance our investments
to our targeted allocation when considered appropriate. Our pension plan’s historical ten-year and 25-year compounded
annualized returns are 5.7 percent and 9.0 percent, respectively. We believe that with our target allocation and the expected
long-term returns of equity and bond indices as well as our actual historical returns, our 7.50 percent expected return on plan
assets for 2017 is reasonable.
The discount rate assumptions used to determine future pension obligations at December 31, 2016 and 2015 were based on the
AonHewitt AA Only Above Median yield curve, which was designed by AonHewitt to provide a means for plan sponsors to
value the liabilities of their postretirement benefit plans. The AA Only Above Median yield curve represents a series of annual
discount rates from bonds with AA minimum average rating as rated by Moody’s Investor Service, Standard &Poor’s and Fitch
Ratings. We will continue to evaluate our actuarial assumptions at least annually, and we will adjust the assumptions as
necessary.
As of December 31, 2015, we changed the method we used to estimate the service and interest components of net periodic
pension benefit cost for our pension plan and post-retirement benefit plan. The change was the primary reason for the $7.1
million decrease in the service and interest components of pension costs in 2016.
As a result, we recognized pension income of $6.9 million in 2016 compared to $0.1 million of pension expense in 2015.
Costs associated with our replacement retirement plan in 2016 were approximately $6 million, consistent with 2015. We made
changes to our pension plan including closing the plan to new entrants effective January 1, 2010, and the sunset of our plan for
the majority of our employees on December 31, 2014 which significantly decreased pension expense beginning in 2015.
Lowering the expected return on plan assets by 25 basis points would increase our net pension expense for 2017 by
approximately $1.9 million. Lowering the discount rate by 25 basis points would decrease our 2017 net pension expense by
approximately $0.3 million.
Outlook
We expect our sales in China will continue to grow at a rate of approximately 15 percent in local currency terms in 2017 led by
continued strong sales growth of water heaters, water treatment and air purification products. We project continued declines in
the Chinese currency compared to the U.S. dollar resulting in a five percent, or $40 million, headwind in 2017 sales, compared
with the average rate in 2016. We expect our sales in the U.S. to grow due to residential water heater industry growth, driven
by new construction and expansion of replacement demand, as well as continued growth in sales of our boilers and water
treatment products. We expect sales of Lochinvar-branded products to grow over eight percent. We expect sales of Aquasana-
branded water treatment products will add an incremental $40 million of sales in 2017. We expect steel prices to continue to
be volatile and to be significantly higher than our average cost in 2016. We expect our effective tax rate to be between 29.4
percent and 29.7 percent assuming the current U.S. tax system remains in place.
Combining all these factors, we expect sales growth of between eight and 9.5 percent in 2017 and sales growth of between 9.5
and 11 percent measured in local currency in 2017 and earnings to be in the range of $1.98 to $2.08 per share for 2017. This
does not include the potential impact of future acquisitions.
OTHER MATTERS
Environmental
Our operations are governed by a number of federal, foreign, state, local and environmental laws concerning the generation and
management of hazardous materials, the discharge of pollutants into the environment and remediation of sites owned by the
company or third parties. We have expended financial and managerial resources complying with such laws. Expenditures
related to environmental matters were not material in 2016 and we do not expect them to be material in any single year. We
have reserves associated with environmental obligations at various facilities and we believe these reserves are sufficient to
cover reasonably anticipated remediation costs. Although we believe that our operations are substantially in compliance with
such laws and maintain procedures designed to maintain compliance, there are no assurances that substantial additional costs
for compliance will not be incurred in the future. However, since the same laws govern our competitors, we should not be
placed at a competitive disadvantage.
22
Market Risk
We are exposed to various types of market risks, primarily currency. We monitor our risks in such areas on a continuous basis
and generally enter into forward contracts to minimize such exposures for periods of less than one year. We do not engage in
speculation in our derivatives strategies. Further discussion regarding derivative instruments is contained in Note 1 of Notes to
Consolidated Financial Statements.
We enter into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. At December 31,
2016, we had net foreign currency contracts outstanding of $102.2 million. Assuming a hypothetical ten percent movement in
the respective currencies, the potential foreign exchange gain or loss associated with the change in exchange rates would
amount to $10.2 million. However, gains and losses from our forward contracts will be offset by gains and losses in the
underlying transactions being hedged.
Our earnings exposure related to movements in interest rates is primarily derived from outstanding floating-rate debt
instruments that are determined by short-term money market rates. At December 31, 2016, we had $189.2 million in
outstanding floating-rate debt with a weighted-average interest rate of 1.5 percent at year end. A hypothetical ten percent
annual increase or decrease in the year-end average cost of our outstanding floating-rate debt would result in a change in
annual pre-tax interest expense of approximately $0.3 million.
Forward-Looking Statements
This filing contains statements that the company believes are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as
“may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “guidance” or words of similar meaning. All
forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those
anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these
expectations include, among other things, the following: a further slowdown in the growth rate of the Chinese economy and/or
a decline in the growth rate of consumer spending in China; potential weakening in the high efficiency boiler segment in the
U.S.; significant volatility in raw material prices; inability of the Company to implement or maintain pricing actions; potential
weakening in U.S. residential or commercial construction or instability in the Company’s replacement markets; uncertain costs,
savings and timeframes associated with the Company’s new enterprises resources planning system; foreign currency
fluctuations; the Company’s ability to execute its acquisition strategy; 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 release, 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 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Risk” above.
23
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
A. O. Smith Corporation
We have audited the accompanying consolidated balance sheets of A. O. Smith Corporation as of December 31, 2016 and
2015, and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed
in the index at Item 15(a). These financial statements and schedule are the responsibility of the company’s management. Our
responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of A. O. Smith Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
A. O. Smith Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 17, 2017 expressed an unqualified opinion thereon.
Milwaukee, Wisconsin
February 17, 2017
Ernst & Young LLP
24
CONSOLIDATED BALANCE SHEETS
December 31 (dollars in millions)
Assets
Current Assets
Cash and cash equivalents
Marketable securities
Receivables
Inventories
Other current assets
Total Current Assets
Net property, plant and equipment
Goodwill
Other intangibles
Other assets
Total Assets
Liabilities
Current Liabilities
Trade payables
Accrued payroll and benefits
Accrued liabilities
Product warranties
Long-term debt due within one year
Total Current Liabilities
Long-term debt
Product warranties
Pension liabilities
Other liabilities
Total Liabilities
2016
2015
$ 330.4
424.2
518.7
251.1
37.6
1,562.0
461.9
491.5
308.3
67.3
$ 2,891.0
$ 528.6
84.3
101.0
44.5
7.2
765.6
316.4
96.4
109.0
88.3
1,375.7
$ 323.6
321.6
501.4
222.9
33.8
1,403.3
442.7
420.9
291.0
71.3
$ 2,629.2
$ 424.9
81.5
90.2
43.7
12.9
653.2
236.1
95.6
134.2
67.8
1,186.9
Commitments and contingencies
-
-
Stockholders’ Equity
Preferred Stock
Class A Common Stock (shares issued 26,313,351 and 26,373,396)
Common Stock (shares issued 164,394,241 and 164,334,196)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Treasury stock at cost
Total Stockholders’ Equity
-
131.6
164.4
477.6
1,593.0
(363.2)
(488.1)
1,515.3
-
131.8
164.4
469.3
1,350.7
(313.4)
(360.5)
1,442.3
Total Liabilities and Stockholders’ Equity
$ 2,891.0
$ 2,629.2
See accompanying notes which are an integral part of these statements.
25
CONSOLIDATED STATEMENT OF EARNINGS
Years ended December 31 (dollars in millions, except per share amounts)
Continuing Operations
Net sales
Cost of products sold
Gross profit
Selling, general and administrative expenses
Interest expense
Other income - net
Earnings before provision for income taxes
Provision for income taxes
Net Earnings
2016
2015
2014
$ 2,685.9
1,566.6
1,119.3
658.9
7.3
(9.4)
462.5
136.0
$ 2,536.5
1,526.7
1,009.8
610.7
7.4
(10.8)
402.5
119.6
$ 2,356.0
1,496.7
859.3
572.1
5.7
(5.2)
286.7
78.9
$
326.5
$
282.9
$
207.8
Net Earnings Per Share of Common Stock
$
1.87
$
1.59
$
1.15
Diluted Net Earnings Per Share of Common Stock
$
1.85
$
1.58
$
1.14
CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS
Years ended December 31 (dollars in millions)
Net Earnings
Other comprehensive (loss) earnings
Foreign currency translation adjustments
Unrealized net (loss) gain on cash flow derivative
instruments, less related income tax benefit (provision) of
$0.6 in 2016, $(0.2) in 2015 and $0.1 in 2014
Change in pension liability less related income tax benefit
(provision) of $5.7 in 2016, $(0.5) in 2015 and $(1.0) in
2014
Comprehensive Earnings
2016
2015
2014
$
326.5
$
282.9
$
207.8
(39.8)
(42.7)
(16.6)
(1.0)
0.3
(0.1)
(9.0)
276.7
$
1.0
241.5
$
3.8
194.9
$
See accompanying notes which are an integral part of these statements.
26
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31 (dollars in millions)
Operating Activities
Net earnings
Adjustments to reconcile earnings from continuing operations to
cash provided by (used in) operating activities:
Depreciation and amortization
Pension (income) expense
Stock based compensation expense
Net changes in operating assets and liabilities, net of
acquisitions:
Current assets and liabilities
Noncurrent assets and liabilities
Cash Provided by Operating Activities – continuing operations
Cash Used in Operating Activities – discontinued operations
Cash Provided by Operating Activities
Investing Activities
Acquisitions of businesses
Investments in marketable securities
Proceeds from sales of marketable securities
Capital expenditures
2016
2015
2014
$ 326.5
$ 282.9
$ 207.8
65.1
(6.9)
9.4
68.8
(15.1)
447.8
(1.2)
446.6
(90.8)
(563.8)
435.1
(80.7)
63.0
0.1
8.8
16.8
(18.7)
352.9
(1.2)
351.7
-
(428.8)
315.4
(72.7)
59.8
28.6
10.8
(37.6)
(3.6)
265.8
(1.8)
264.0
-
(321.9)
202.0
(86.1)
Cash Used in Investing Activities
(300.2)
(186.1)
(206.0)
Financing Activities
Long-term term debt incurred (repaid)
Long-term debt incurred (repaid)
Common stock repurchases
Net proceeds from stock option activity
Dividends paid
31.8
42.3
(135.2)
5.7
(84.2)
61.7
(33.6)
(128.1)
6.4
(67.8)
(13.9)
48.1
(103.8)
4.7
(54.4)
Cash Used in Financing Activities
(139.6)
(161.4)
(119.3)
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents-beginning of year
6.8
323.6
4.2
319.4
(61.3)
380.7
Cash and Cash Equivalents-End of Year
$ 330.4
$ 323.6
$ 319.4
See accompanying notes which are an integral part of these statements.
27
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Years ended December 31 (dollars in millions)
Class A Common Stock
Balance at the beginning of the year
Conversion of Class A Common Stock
Balance at the end of the year
Common Stock
Balance at the beginning of the year
Conversion of Class A Common Stock
Balance at the end of the year
Capital in Excess of Par Value
Balance at the beginning of the year
Conversion of Class A Common Stock
Issuance of share units
Vesting of share units
Stock based compensation expense
Exercises of stock options
Tax benefit from exercises of stock options and vesting of share units
Stock incentives
Balance at the end of the year
Retained Earnings
Balance at the beginning of the year
Net earnings
Cash dividends on stock
Balance at the end of the year
Accumulated Other Comprehensive Loss
Balance at the beginning of the year
Foreign currency translation adjustments
Unrealized net (loss) gain on cash flow derivative instruments, less related
income tax benefit (provision) of $0.6 in 2016, $(0.2) in 2015 and $0.1
in 2014
Change in pension liability less related income tax benefit (provision) of
2016
2015
2014
$ 131.8
(0.2)
$ 131.6
$ 132.2
(0.4)
$ 131.8
$ 132.8
(0.6)
$ 132.2
$ 164.4
-
$ 164.4
$ 164.2
0.2
$ 164.4
$ 164.2
-
$ 164.2
$ 469.3
0.2
(4.6)
(2.0)
8.8
0.3
-
5.6
$ 477.6
$ 451.9
0.2
(4.2)
(3.2)
8.1
1.1
10.4
5.0
$ 469.3
$ 441.2
0.6
(5.1)
(3.1)
10.3
(0.3)
2.4
5.9
$ 451.9
$1,350.7
326.5
(84.2)
$1,593.0
$1,135.5
282.9
(67.7)
$1,350.7
$ 982.2
207.8
(54.5)
$1,135.5
$ (313.4)
(39.8)
$ (272.0)
(42.7)
$ (259.1)
(16.6)
(1.0)
0.3
(0.1)
$5.7 in 2016, $(0.5) in 2015 and $(1.0) in 2014
Balance at the end of the year
(9.0)
$ (363.2)
1.0
$ (313.4)
3.8
$ (272.0)
Treasury Stock
Balance at the beginning of the year
Exercise of stock options, net of 54,019, 418,754 and 11,692 shares
surrendered as proceeds and to pay taxes in 2016, 2015 and 2014,
respectively
Stock incentives and directors’ compensation
Shares repurchased
Vesting of share units
Balance at the end of the year
$ (360.5)
$ (230.5)
$ (132.6)
4.0
0.2
(135.2)
3.4
$ (488.1)
(5.2)
0.1
(128.1)
3.2
$ (360.5)
2.6
0.2
(103.8)
3.1
$ (230.5)
Total Stockholders’ Equity
$ 1,515.3
$ 1,442.3
$ 1,381.3
See accompanying notes which are an integral part of these statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A. O. Smith Corporation (A. O. Smith or the Company) is comprised of two reporting segments: North
America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments
manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water heaters, as well
as water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The
North America segment also manufactures and globally markets specialty commercial water heating equipment, condensing
and non-condensing boilers and water systems tanks. The Company also manufactures and markets in-home air purification
products in China.
Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries
after elimination of intercompany transactions.
Except when otherwise indicated, amounts reflected in the financial statements or the notes thereto relate to the Company’s
continuing operations.
On August 22, 2011, the Company sold its Electrical Products business (EPC). Due to the sale, EPC related items have been
reflected as discontinued operations in the consolidated statement of cash flows for all periods presented.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the
United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in the
accompanying financial statements and notes. Actual results could differ from those estimates.
Fair value of financial instruments. The carrying amounts of cash, cash equivalents, marketable securities, receivables,
floating rate debt and trade payables approximated fair value as of December 31, 2016 and 2015, due to the short maturities or
frequent rate resets of these instruments. The fair value of term notes with insurance companies was approximately $133.1
million as of December 31, 2016 compared with the carrying amount of $134.4 million for the same date. The fair value of
term notes with insurance companies was approximately $104.4 million as of December 31, 2015 compared with the carrying
amount of $102.0 million for the same date. The fair value is estimated based on current rates offered for debt with similar
maturities.
Foreign currency translation. For all subsidiaries outside the U.S., with the exception of its Mexican operation and its Dutch
non-operating companies, the Company uses the local currency as the functional currency. For those operations using a
functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at year-end exchange rates,
and revenues and expenses are translated at weighted-average exchange rates. The resulting translation adjustments are
recorded as a separate component of stockholders’ equity. The Mexican operation and the Dutch non-operating companies use
the U.S. dollar as the functional currency. Gains and losses from foreign currency transactions are included in net earnings and
were not significant in 2016, 2015 or 2014.
Cash and cash equivalents. The Company considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
Marketable securities. The Company considers all highly liquid investments with maturities greater than 90 days when
purchased to be marketable securities. At December 31, 2016, the Company’s marketable securities consisted of bank time
deposits with original maturities ranging from 180 days to 12 months and are primarily located at investment grade rated banks
in China.
Inventory valuation. Inventories are carried at lower of cost or market. Cost is determined on the last-in, first-out (LIFO)
method for a majority of the Company’s domestic inventories, which comprise 61 percent and 66 percent of the Company’s
total inventory at December 31, 2016 and 2015, respectively. Inventories of foreign subsidiaries, the remaining domestic
inventories and supplies are determined using the first-in, first-out (FIFO) method.
Property, plant and equipment. Property, plant and equipment are stated at cost. Depreciation is computed primarily by the
straight-line method. The estimated service lives used to compute depreciation are generally 25 to 50 years for buildings, three
to 20 years for equipment and three to 15 years for software. Maintenance and repair costs are expensed as incurred.
29
1. Organization and Significant Accounting Policies (continued)
Goodwill and other intangibles. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for
impairment on an annual basis. Separable intangible assets, primarily comprised of customer relationships, that are not deemed
to have an indefinite life are amortized on a straight-line basis over their estimated useful lives which range from three to 25
years.
Impairment of long-lived and amortizable intangible assets. Property, plant and equipment and intangible assets subject to
amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.
Such analyses necessarily involve significant judgment.
Product warranties. The Company’s products carry warranties that generally range from one to ten years and are based on
terms that are consistent with the market. The Company records a liability for the expected cost of warranty-related claims at
the time of sale. The allocation of the warranty liability between current and long-term is based on expected warranty claims to
be paid in the next year as determined by historical product failure rates.
The following table presents the Company’s product warranty liability activity in 2016 and 2015:
Years ended December 31 (dollars in millions)
Balance at beginning of year
Expense
Claims settled
Balance at end of year
2016
$ 139.3
43.2
(41.6)
$ 140.9
2015
$ 136.2
50.3
(47.2)
$ 139.3
Derivative instruments. The Company utilizes certain derivative instruments to enhance its ability to manage currency as well
as raw materials price risk. The Company does not enter into contracts for speculative purposes. The fair values of all
derivatives are recorded in the consolidated balance sheets. The change in a derivative’s fair value is recorded each period in
current earnings or accumulated other comprehensive loss (AOCI), depending on whether the derivative is designated as part
of a hedge transaction and if so, the type of hedge transaction. See Note 11, “Derivative Instruments” of the notes to
consolidated financial statements for disclosure of the Company’s derivative instruments and hedging activities.
Fair Value Measurements. Accounting Standards Codification (ASC) 820 Fair Value Measurements, among other things,
defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and
liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is
an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
(Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active
markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market
data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information
generated by market transactions involving identical or comparable assets or liabilities.
Assets measured at fair value on a recurring basis are as follows (dollars in millions):
Fair Value Measurement Using
Quoted prices in active markets for identical assets (Level 1)
Significant other observable inputs (Level 2)
Total assets measured at fair value
December 31, 2016
December 31, 2015
$ 424.5
-
$ 424.5
$ 323.9
(0.3)
$ 323.6
There were no changes in the valuation techniques used to measure fair values on a recurring basis.
30
1. Organization and Significant Accounting Policies (continued)
Revenue recognition. The Company recognizes revenue upon transfer of title, which occurs upon shipment of the product to
the customer except for certain export sales where transfer of title occurs when the product reaches the customer destination.
Contracts and customer purchase orders are used to determine the existence of a sales arrangement. Shipping documents are
used to verify shipment. The Company assesses whether the selling price is fixed or determinable based upon the payment
terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses
collectability based on the creditworthiness of the customer as determined by credit checks and analysis, as well as the
customer’s payment history. The allowance for doubtful accounts was $6.3 million and $6.0 million at December 31, 2016 and
2015, respectively.
Reserves for customer returns for defective product are based on historical experience with similar types of sales. Accruals for
rebates and incentives are based on pricing agreements and are tied to sales volume. Changes in such accruals may be required
if future returns differ from historical experience or if actual sales volume differs from estimated sales volume. Rebates and
incentives are recognized as a reduction of sales.
Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products
sold.
Advertising. The majority of advertising costs are charged to operations as incurred and amounted to $113.9 million, $102.2
million and $94.0 million during 2016, 2015 and 2014, respectively. Included in total advertising costs are expenses associated
with store displays for water heater and water treatment products in China that are amortized over 12 to 24 months which
totaled $37.0 million, $27.4 million and $22.6 million during 2016, 2015 and 2014, respectively.
Research and development. Research and development costs are charged to operations as incurred and amounted to $80.1
million, $73.7 million and $67.9 million during 2016, 2015 and 2014, respectively.
Environmental costs. The Company accrues for costs associated with environmental obligations when such costs are
probable and reasonably estimable. Costs of estimated future expenditures are not discounted to their present value.
Recoveries of environmental costs from other parties are recorded as assets when their receipt is considered probable. The
accruals are adjusted as facts and circumstances change.
Stock-based compensation. Compensation cost is recognized using the straight-line method over the vesting period of the
award and forfeitures are recognized as they occur. The Company adopted amended ASC 718 Compensation – Stock
Compensation as of January 1, 2016. Refer to the Recent Accounting Pronouncements section later in this footnote for
additional information on the adoption of this pronouncement. As required under amended ASC 718, in the year ended
December 31, 2016, the Company recognized $5.9 million of discrete income tax benefits on settled stock based compensation
awards. As required under previous guidance, in the year ended December 31, 2015, the Company recognized $10.4 million of
excess tax deductions as cash flows provided by financing activities.
Income taxes. The provision for income taxes is computed using the asset and liability method, in accordance with ASC 740
Income Taxes, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of
temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable
income in effect for the years in which those tax assets are expected to be realized or settled and are classified as noncurrent in
the consolidated balance sheet. The Company records a valuation allowance to reduce deferred tax assets to the amount that is
believed more likely than not to be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent
likelihood of being realized upon settlement.
31
1. Organization and Significant Accounting Policies (continued)
Earnings per share of common stock. The Company is not required to use the two-class method of calculating earnings per
share since its Class A Common Stock and Common Stock have equal dividend rights. The numerator for the calculation of
basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted
weighted-average shares used in the earnings per share calculations:
Denominator for basic earnings per share -
weighted-average shares outstanding
Effect of dilutive stock options, restricted stock and share units
Denominator for diluted earnings per share
2016
2015
2014
174,712,683
2,112,597
176,825,280
177,622,280
1,386,900
179,009,180
180,587,008
1,386,954
181,973,962
On April 11, 2016, the Company’s stockholders approved a proposal to increase the Company’s authorized shares of Common
Stock and on September 7, 2016, the Company’s Board of Directors declared a two-for-one stock split of the Company’s Class
A Common Stock and Common Stock (including treasury shares) in the form of a 100 percent stock dividend to stockholders
of record on September 21, 2016 and payable on October 5, 2016. All references in the financial statements and footnotes to
the number of shares outstanding, price per share, per share amounts and stock based compensation data have been recast to
reflect the stock split for all periods presented.
Reclassifications. Certain amounts from prior years have been reclassified to conform with current year presentation.
Recent Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board (FASB) amended ASC 740, Income Taxes (issued under
Accounting Standards Update (ASU) 2016-16). This amendment requires that the income tax consequences of an intra-entity
transfer of an asset other than inventory be recognized when the transfer occurs. The amendment is effective for the Company
beginning January 1, 2018. This amendment is required to be applied on a modified retrospective basis through a cumulative-
effect adjustment directly to retained earnings. The Company does not expect the adoption of amended ASC 740 will have a
material impact on the Company’s consolidated financial condition, results of operations or cash flows.
In August 2016, the FASB amended ASC 230, Statement of Cash Flows (issued under ASU 2016-15, “Clarification of Certain
Cash Receipts and Cash Payments”). This amendment clarifies reporting for contingent consideration payments made after a
business combination depending on how soon after the acquisition the payments are made. The amendment requires adoption
for periods beginning January 1, 2018 and permits early adoption. The Company does not expect the adoption of ASU 2016-
15 will have a material impact on its consolidated statement of cash flows.
In March 2016, the FASB amended ASC 718, Compensation - Stock Compensation (issued under ASU 2016-09). This
amendment simplified several aspects of the accounting for share-based payment transactions. The Company adopted this
amendment effective January 1, 2016. The amendment requires the benefits or deficiencies of tax deductions in excess of or
less than the recognized compensation cost to be recorded as income tax benefits or expense in the Consolidated Statement of
Earnings in the periods in which they occur. The amendment also eliminated previous guidance that required unrecognized
future excess income tax benefits to be considered used to repurchase shares in the calculation of diluted shares which resulted
in lower diluted shares outstanding than the calculation under the amendment. The Company applied this guidance
prospectively. As such, in the year ended December 31, 2016, the Company recognized $5.9 million of discrete income tax
benefits associated with excess tax benefits on settled stock based compensation awards and the Company’s diluted shares
outstanding for the year ended December 31, 2016 increased as compared to the way it was calculated under previous
guidance.
The amendment also required that cash paid by an employer to a taxing authority when shares are directly withheld for
employee income tax withholding purposes be classified as financing activities in the consolidated statement of cash flows. As
required, the Company applied this guidance retrospectively in the presentation of the consolidated statement of cash flows for
the period beginning January 1, 2014 and, as a result, reclassified $7.3 million and $0.1 million of cash used by operating
activities to cash used by financing activities for the years ended December 31, 2015 and 2014, respectively.
32
1. Organization and Significant Accounting Policies (continued)
In February 2016, the FASB amended ASC 842, Leases (issued under ASU 2016-02). This amendment requires the
recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements currently classified as
operating leases. This amendment is effective for periods beginning January 1, 2019 and early adoption is permitted. The
Company is in the process of determining whether the adoption of ASU 2016-02 will have a material impact on its
consolidated balance sheets, consolidated statement of earnings or consolidated statement of cash flows.
In November 2015, the FASB amended ASC 740, Income Taxes (issued under ASU 2015-17). This amendment required that
deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The amendment was effective for periods
beginning January 1, 2016 and allowed either prospective adoption or retrospective adoption. The Company adopted ASU
2015-17 retrospectively and, as a result, classified all deferred tax assets and liabilities as non-current on the Company’s
consolidated balance sheets for all periods presented. Current deferred taxes of $39.9 million as of December 31, 2015 were
reclassified to non-current deferred taxes on the Company’s consolidated balance sheet.
In July 2015, the FASB amended ASC 330, Inventory (issued under ASU 2015-11, “Simplifying the Measurement of
Inventory”). This amendment requires inventory that is recorded using the first-in, first-out method to be measured at the
lower of cost or net realizable value. ASU 2015-11 is effective prospectively for the Company beginning January 1, 2017. The
Company does not expect the adoption of ASU 2015-11 to have a significant impact on its consolidated balance sheets,
consolidated statement of earnings or consolidated statement of cash flows.
In May 2014, the FASB issued ASC 606-10, Revenue from Contracts with Customers (issued under ASU 2014-09). ASC 606-
10 will replace all existing revenue recognition guidance when effective. In July 2015, the FASB approved a one year deferral
of the effective date to periods beginning January 1, 2018. The Company expects to utilize the full retrospective method of
adoption beginning January 1, 2018 and does not expect the adoption of ASC 606-10 to have a material impact on its
consolidated balance sheets, consolidated statement of earnings or consolidated statement of cash flows.
2. Acquisitions
On August 8, 2016, the Company acquired 100 percent of the shares of Aquasana, Inc. (Aquasana), a Texas-based water
treatment company. With the addition of Aquasana, the Company entered the U.S. water treatment market. Aquasana is
included in the Company’s North America segment for reporting purposes.
The Company paid an aggregate cash purchase price of $85.1 million, net of $1.9 million of cash acquired. In addition, the
Company incurred acquisition-related costs of approximately $1.2 million and recorded contingent consideration of $1.9
million, the fair value of the contingent payment due to the former owners of Aquasana if certain performance targets are met.
The following table summarizes the preliminary allocation of fair value of the assets acquired and liabilities assumed at the
date of acquisition. The Company is awaiting final valuations to support the acquired intangible assets as well as finalizing the
accounting for acquired liabilities. The $30.0 million of acquired intangible assets was comprised of $21.5 million of trade
names that are not subject to amortization, $8.3 million of customer lists which will be amortized over ten years and $0.2
million of patents which will be amortized over five years.
August 8, 2016 (dollars in millions)
Current assets, net of cash acquired
Property, plant and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Long-term liabilities
Total liabilities assumed
Net assets acquired
$
7.3
2.7
30.0
60.4
100.4
(7.1)
(8.2)
(15.3)
85.1
$
33
2. Acquisitions (continued)
The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have
been included in the Company’s financial statements from August 8, 2016, the date of acquisition. Revenues and pre-tax
losses associated with Aquasana included in the consolidated statement of earnings totaled $18.4 million and $(0.1) million,
respectively, which included $1.1 million of operating earnings less $1.2 million of acquisition-related costs incurred by the
Company resulting from the acquisition.
On August 26, 2016, the Company acquired certain assets, primarily inventory, and assumed a lease of a small electric water
heater manufacturer serving the North America market. The Company paid $5.7 million for the assets. Under the purchase
agreement, the Company agreed to make additional contingent payments for the acquired assets if certain conditions are met
over the next ten years. As of December 31, 2016, the Company estimated the fair value of the contingent payments at $5.2
million and a liability for the contingent consideration was accrued.
3. Statement of Cash Flows
Supplemental cash flow information is as follows:
Years ended December 31 (dollars in millions)
Net change in current assets and liabilities, net of
acquisitions:
Receivables
Inventories
Other current assets
Trade payables
Accrued liabilities, including payroll and benefits
Income taxes payable
4.
Inventories
December 31 (dollars in millions)
Finished products
Work in process
Raw materials
Inventories, at FIFO cost
LIFO reserve
2016
2015
2014
$ (16.8)
(14.9)
(7.7)
6.9
2.6
(7.7)
$ (37.6)
$ (15.1)
(23.4)
(3.2)
101.5
6.3
2.7
$ 68.8
2016
$ 114.1
13.0
142.4
269.5
(18.4)
$ 251.1
$ (25.9)
(14.7)
(4.6)
31.0
19.8
11.2
$ 16.8
2015
$ 85.7
13.4
139.6
238.7
(15.8)
$ 222.9
The Company recognized after-tax LIFO expense (income) of $0.3 million, $1.1 million and $(0.1) million in 2016, 2015 and
2014, respectively.
5.
Property, Plant and Equipment
December 31 (dollars in millions)
Land
Buildings
Equipment
Software
Less accumulated depreciation and amortization
2016
$ 11.0
286.4
533.7
101.4
932.5
470.6
$ 461.9
2015
$ 10.8
237.9
530.9
87.2
866.8
424.1
$ 442.7
34
6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill during the years ended December 31, 2016 and 2015 consisted of the following:
(dollars in millions)
Balance at December 31, 2014
Currency translation adjustment
Balance at December 31, 2015
Acquisitions
Currency translation adjustment
Balance at December 31, 2016
North America
$ 368.5
(7.5)
361.0
70.0
1.2
$ 432.2
Rest of World
$ 60.3
(0.4)
59.9
-
(0.6)
$ 59.3
Total
$ 428.8
(7.9)
420.9
70.0
0.6
$ 491.5
The carrying amount of other intangible assets consisted of the following:
December 31 (dollars in millions)
Amortizable intangible assets:
Patents
Customer lists
Total amortizable intangible assets
Indefinite-lived intangible assets:
Trade names
Total intangible assets
2016
2015
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
$
3.7
224.0
227.7
$
(2.2)
(80.3)
(82.5)
$ 1.5
143.7
145.2
$
3.2
231.6
234.8
$
(1.9)
(83.1)
(85.0)
$ 1.3
148.5
149.8
163.1
$ 390.8
-
$ (82.5)
163.1
$ 308.3
141.2
$ 367.0
-
$ (85.0)
141.2
$ 291.0
Amortization expenses of other intangible assets of $13.4 million, $14.2 million, and $14.3 million were recorded in 2016,
2015 and 2014, respectively. In the future, excluding the impact of any future acquisitions, the Company expects amortization
expense of approximately $13.8 million annually and the intangible assets will be amortized over a weighted average period of
13 years.
The Company concluded that no goodwill impairment existed at the time of the annual impairment tests which were performed
in the fourth quarters of 2016, 2015 and 2014. No impairments of other intangible assets were recorded in 2016, 2015 and
2014.
7. Debt and Lease Commitments
December 31 (dollars in millions)
Bank credit lines, average year-end interest rates of 2.4% for 2016 and
1.3% for 2015
Revolving credit agreement borrowings, average year-end interest rates of
1.7% for 2016 and 1.5% for 2015
Commercial paper, average year-end interest rates of 1.1% for 2016 and
2015
Term notes with insurance companies, expiring through 2034, average
year-end interest rates of 3.5% for 2016 and 3.9% for 2015
Canadian term notes with insurance companies, expiring through 2018,
average year-end interest rates of 5.3% for 2016 and 2015
Less long-term debt due within one year
Long-term debt
2016
2015
$ 23.6
$ 10.2
80.0
80.0
85.6
56.8
125.5
89.0
8.9
323.6
7.2
$ 316.4
13.0
249.0
12.9
$ 236.1
35
7. Debt and Lease Commitments (continued)
In December 2016, the Company completed a $500 million multi-year multi-currency revolving credit agreement with a group
of nine banks, which expires on December 15, 2021. The facility has an accordion provision which allows it to be increased up
to $700 million if certain conditions (including lender approval) are satisfied. Borrowings under the Company’s bank credit
lines and commercial paper borrowings are supported by the revolving credit agreement. As a result of the long-term nature of
this facility, the commercial paper and credit line borrowings are classified as long-term debt at December 31, 2016 and 2015.
At its option, the Company either maintains cash balances or pays fees for bank credit and services.
On November 28, 2016, the Company issued $45 million in term notes in two tranches to two insurance companies. Principal
payments commence in 2023 and the notes mature in 2029 and 2034. The notes have interest rates of 2.87 percent and 3.10
percent. Proceeds of the notes were used to pay down borrowings under the Company’s revolving credit facility.
On January 15, 2015, the Company issued $75 million in term notes to an insurance company. Principle payments commence
in 2020 and the notes mature in 2030. The notes have an interest rate of 3.52 percent. Proceeds of the notes were used to pay
down borrowings under the Company’s revolving credit facility.
Scheduled maturities of long-term debt within each of the five years subsequent to December 31, 2016 are as follows:
Years ending December 31 (dollars in millions)
2017
2018
2019
2020
2021
Amount
7.2
$
7.2
-
6.8
196.1
Future minimum payments under non-cancelable operating leases relating mostly to office, manufacturing and warehouse
facilities total $37.4 million and are due as follows:
Years ending December 31 (dollars in millions)
2017
2018
2019
2020
2021
Thereafter
Amount
$ 19.5
4.5
3.4
2.3
1.9
5.8
Rent expense, including payments under operating leases, was $29.8 million, $28.8 million and $24.3 million in 2016, 2015 and
2014, respectively.
Interest paid by the Company was $7.2 million, $6.4 million and $5.8 million in 2016, 2015 and 2014, respectively. The
Company capitalized interest expense of $0.2 million, $0.2 million and $0.4 million in 2016, 2015 and 2014, respectively.
8. Stockholders’ Equity
The Company’s authorized capital consists of three million shares of Preferred Stock $1 par value, 27 million shares of Class A
Common Stock $5 par value, and 240 million shares of Common Stock $1 par value. The Common Stock has equal dividend
rights with Class A Common Stock and is entitled, as a class, to elect one-third of the Board of Directors and has 1/10th vote
per share on all other matters. Class A Common Stock is convertible to Common Stock on a one for one basis.
There were 60,045 shares during 2016, 67,544 shares during 2015 and 136,092 shares during 2014, of Class A Common Stock
converted into Common Stock. Regular dividends paid on the A. O. Smith Corporation Class A Common Stock and Common
Stock amounted to $0.48, $0.38 and $0.30 per share in 2016, 2015 and 2014, respectively.
The Company completed a two-for-one stock split on October 5, 2016. Amounts have been adjusted to reflect the stock split.
36
8. Stockholders’ Equity (continued)
In 2014, the Company’s Board of Directors authorized the purchase of an additional 7,000,000 shares of the Company’s
Common Stock. In 2015, the Company’s Board of Directors authorized the purchase of an additional 4,000,000 shares of the
Company’s Common Stock. In 2016, the Company’s Board of Directors authorized the purchase of an additional 3,000,000
shares of the Company’s Common Stock. Under the share repurchase program, the Company’s Common Stock may be
purchased through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with
applicable securities laws. The number of shares purchased and the timing of the purchase will depend on a number of factors,
including share price, trading volume and general market conditions, as well as on working capital requirements, general
business conditions and other factors, including alternative investment opportunities. The share repurchase authorization
remains effective until terminated by the Board of Directors which may occur at any time, subject to the parameters of any
Rule 10b5-1 automatic trading plan that the Company may then have in effect. In 2016, the Company purchased 3,273,109
shares at a total cost of $135.2 million. As of December 31, 2016, there were 4,906,403 shares remaining on the existing
repurchase authorization. In 2015, the Company purchased 3,816,474 shares at a cost of $128.1 million. In 2014, the Company
purchased 4,309,566 shares at a cost of $103.8 million.
At December 31, 2016, a total of 130,380 and 17,135,628 shares of Class A Common Stock and Common Stock, respectively,
were held as treasury stock. At December 31, 2015, a total of 130,380 and 14,680,346 shares of Class A Common Stock and
Common Stock, respectively, were held as treasury stock.
Accumulated other comprehensive loss is as follows:
December 31 (dollars in millions)
Cumulative foreign currency translation adjustments
Unrealized net gain on cash flow derivative instruments less related
income tax provision of $(0.1) in 2016 and $(0.8) in 2015
Pension liability less related income tax benefit of $183.4 in 2016 and
$177.7 in 2015
2016
$ (79.2)
0.2
(284.2)
$(363.2)
2015
$ (39.4)
1.2
(275.2)
$(313.4)
37
8. Stockholders’ Equity (continued)
Changes to accumulated other comprehensive loss by component are as follows:
Cumulative foreign currency translation
Balance at beginning of period
Other comprehensive loss before reclassifications
Balance at end of period
Unrealized net gain on cash flow derivatives
Balance at beginning of period
Other comprehensive earnings before reclassifications
Realized gains on derivatives reclassified to cost of products sold (net of tax
provision of $0.1 and $2.3 in 2016 and 2015, respectively)(1)
Balance at end of period
Pension liability
Balance at beginning of period
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss (1)
Balance at end of period
Total accumulated other comprehensive loss, end of period
(1) Amounts reclassified from accumulated other comprehensive loss:
Realized gains on derivatives reclassified to cost of products sold
Tax provision
Reclassification net of tax
Amortization of pension items:
Actuarial losses
Prior year service cost
Tax benefit
Reclassification net of tax
Year ended
December 31,
2016
2015
$ (39.4)
(39.8)
(79.2)
$
3.3
(42.7)
(39.4)
1.2
(0.9)
(0.1)
0.2
(275.2)
(18.8)
9.8
(284.2)
$ (363.2)
(0.2)
0.1
(0.1)
$
$ 17.5 (2)
(1.5)(2)
16.0
(6.2)
9.8
$
0.9
3.7
(3.4)
1.2
(276.2)
(9.6)
10.6
(275.2)
$ (313.4)
(5.7)
2.3
(3.4)
$
$ 19.0 (2)
(1.4)(2)
17.6
(7.0)
$ 10.6
(2)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost.
See Note 10 - Pensions and Other Post-retirement Benefits for additional details
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 shareholders in 2002. The number of shares available for
granting of options or share units at December 31, 2016, was 3,275,459. Upon stock option exercise or share unit vesting,
shares are issued from treasury stock.
Total stock based compensation expense recognized in 2016, 2015 and 2014 was $9.4 million, $8.8 million and $10.8 million,
respectively.
38
9. Stock Based Compensation (continued)
Stock options
The stock options granted in 2016, 2015 and 2014 have three year pro rata vesting from the dates of grant. Stock options are
issued at exercise prices equal to the fair value of Common Stock on the date of grant. For active employees, all options
granted in 2016, 2015 and 2014 expire ten years after date of grant. Stock option compensation recognized in 2016, 2015 and
2014 was $4.5 million, $4.0 million and $4.9 million, respectively. Included in the stock option expense recognized in 2016,
2015 and 2014 is expense associated with the accelerated vesting of stock option awards for certain employees who either are
retirement eligible or become retirement eligible during the vesting period.
Changes in option shares, all of which are Common Stock, were as follows:
Weighted-Avg.
Per Share
Exercise Price
Years Ended December 31
2015
2016
2014
(dollars in millions)
Aggregate
Intrinsic Value
Outstanding at beginning of year
$ 18.03
2,653,558
3,154,006
2,881,246
Granted
2016--$31.49 to $46.93 per share
2015--$23.24 to $25.34 per share
2014--$17.46 to $26.47 per share
Exercised
2016--$4.75 to $30.77 per share
2015--$4.10 to $17.46 per share
2014--$4.10 to $11.50 per share
Forfeited
2016--$23.24 to $46.93 per share
2015--$17.46 to $23.24 per share
2014--$11.50 to $17.46 per share
Outstanding at end of year
(2016--$4.75 to $46.93 per share)
553,370
484,990
(531,933)
(978,208)
597,500
(316,502)
$ 7.5
10.2
2.6
(10,662)
(7,230)
(8,238)
21.69
2,664,333
2,653,558
3,154,006
Exercisable at end of year
16.12
1,602,651
1,544,186
1,865,278
The aggregate intrinsic value for the outstanding and exercisable options as of December 31, 2016 is $68.5 million and $50.1
million, respectively. The average remaining contractual life for outstanding and exercisable options is seven years and six
years, respectively.
The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and
exercisable at December 31, 2016:
Range of
Exercise Prices
$4.75 to $11.50
$17.46 to $25.34
$26.47 to $46.93
Options
Outstanding at
December 31,
2016
683,434
954,074
1,026,825
2,664,333
Weighted-
Average
Exercise
Price
$ 8.31
20.76
31.36
Options
Exercisable at
December 31,
2016
683,434
759,014
160,203
1,602,651
Weighted-
Average
Exercise
Price
$ 8.31
20.12
30.52
Weighted-
Average
Remaining
Contractual
Life
4 years
7 years
9 years
39
9. Stock Based Compensation (continued)
The weighted-average fair value per option at the date of grant during 2016, 2015 and 2014, using the Black-Scholes option-
pricing model, was $8.03, $8.59 and $8.28, respectively. Assumptions were as follows:
Expected life (years)
Risk-free interest rate
Dividend yield
Expected volatility
2016
5.8
1.7%
1.3%
27.7%
2015
5.9
2.0%
1.0%
29.3%
2014
6.0
2.7%
1.1%
36.6%
The expected life of options for purposes of these models is based on historical exercise behaviors. 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 on
Common Stock. The expected volatility for purposes of these models is based on the historical volatility of the Common Stock.
Stock Appreciations Rights (SARs)
Certain non-U.S.-based employees are granted SARs. Each SAR award grants the employee the right to receive cash equal to
the excess of the share price of the Common Stock on the date that a participant exercises such right over the grant date price of
the stock. 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 Common Stock on the date of grant and expire ten years from the date of grant. Compensation expense for
SARs is remeasured at each reporting period based on the estimated fair value on the date of grant using the Black-Scholes
option-pricing model, using assumptions similar to stock option awards. SARs are subsequently remeasured at each interim
reporting period based on a revised Black-Scholes value. No SARs were granted in 2016. As of December 31, 2016, there
were 24,940 SARs outstanding and 8,320 were exercisable. In 2015, the Company granted 26,230 cash-settled SARs and no
SARs were exercisable. Stock based compensation expense attributable to SARS was minimal in 2016 and 2015.
Restricted stock and share units
Participants may also be awarded shares of restricted stock or share units under the Plan. The Company granted 160,465,
152,192 and 221,382 share units under the plan in 2016, 2015 and 2014, respectively.
The share units were valued at $5.2 million, $4.7 million and $5.1 million at the date of issuance in 2016, 2015 and 2014,
respectively, and will be recognized as compensation expense ratably over the three-year vesting period; however, included in
share based compensation is expense associated with the accelerated vesting of share unit awards for certain employees who
either are retirement eligible or become retirement eligible during the vesting period. Compensation expense of $4.9 million,
$4.8 million and $5.9 million was recognized in 2016, 2015 and 2014, respectively. Certain non-U.S.-based employees receive
the cash value of vested shares at the vesting date in lieu of shares.
A summary of share unit activity under the plan is as follows:
Outstanding at January 1, 2016
Granted
Vested
Forfeited/cancelled
Outstanding at December 31, 2016
Number of Units
Weighted-Average
Grant Date Value
658,326
160,465
(268,306)
(6,430)
544,055
$ 22.15
32.21
17.39
31.81
27.35
Total compensation expense for share units not yet recognized is $2.3 million at December 31, 2016. The weighted average
period over which the expense is expected to be recognized is 14 months.
40
10. Pension and Other Post-retirement Benefits
The Company provides retirement benefits for all U.S. employees including benefits for employees of previously owned
businesses which were earned up to the date of sale. The Company also has two foreign pension plans, neither of which is
material to the Company’s financial position.
The Company has a defined contribution plan which matches 100 percent of the first one percent of contributions made by
participating employees and matches 50 percent of the next five percent of employee contributions. The Company also has
defined contribution plans for certain hourly employees which provide for matching Company contributions.
The Company also has a defined benefit plan for salaried employees and its non-union hourly workforce. In 2009, the
Company announced U.S. employees hired after January 1, 2010, would not participate in the defined benefit plan, and benefit
accruals for the majority of current salaried and hourly employees sunset on December 31, 2014. Beginning in 2015, an
additional Company contribution is being made to the defined contribution plan in lieu of benefits earned in a defined benefit
plan. The Company also has defined benefit and contribution plans for certain union hourly employees.
The Company has unfunded defined-benefit post-retirement plans covering certain hourly and salaried employees that provide
medical and life insurance benefits from retirement to age 65. Certain hourly employees retiring after January 1, 1996, are
subject to a maximum annual benefit and salaried employees hired after December 31, 1993, are not eligible for post-
retirement medical benefits.
As of December 31, 2015, the Company changed the method used to estimate the service and interest components of net
periodic benefit cost for its pension plan and its post-retirement benefit plan. This change compared to the previous method
resulted in a $7.1 million decrease in the service and interest components for pension cost in 2016. Historically, the Company
estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield
curve used to measure the benefit obligation at the beginning of the period. The Company has elected to utilize an approach
that discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates
derived from the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This
change was made to provide a more precise measurement of service and interest costs by improving the correlation between
the projected benefit cash flows to the corresponding spot yield curve rates.
This change did not affect the measurement of the total benefit obligations but reduced the service and interest cost for the
pension plan. The Company accounted for this change as a change in accounting estimate that is inseparable from a change in
accounting principle and accordingly accounted for it prospectively beginning January 1, 2016.
41
10. Pension and Other Post-retirement Benefits (continued)
Obligations and Funded Status
Pension and Post-Retirement Disclosure Information under ASC 715
The following tables present the changes in benefit obligations, plan assets and funded status for domestic pension and post-
retirement plans and the components of net periodic benefit costs.
Years ended December 31 (dollars in millions)
Accumulated benefit obligation (ABO) at December 31
2016
$ 894.3
2015
$ 889.4
2016
N/A
2015
N/A
Pension Benefits
Post-retirement Benefits
Change in projected benefit obligations (PBO)
PBO at beginning of year
Service cost
Interest cost
Participant contributions
Plan amendments
Actuarial (loss) gain including assumption changes
Benefits paid
PBO at end of year
Change in fair value of plan assets
Plan assets at beginning of year
Actual return on plan assets
Contribution by the company
Participant contributions
Benefits paid
Plan assets at end of year
$ (892.9)
(1.8)
(30.6)
-
(0.7)
(31.0)
61.2
$ (895.8)
$ (956.7)
(1.9)
(37.6)
-
(2.5)
45.6
60.2
$ (892.9)
$ 759.0
57.0
32.2
-
(61.2)
$ 787.0
$ 823.9
(5.3)
0.5
-
(60.1)
$ 759.0
$
$
$
$
(6.6)
(0.1)
(0.2)
-
-
(0.2)
0.5
(6.6)
-
-
0.5
-
(0.5)
-
$ (10.4)
(0.1)
(0.3)
(0.2)
3.7
-
0.7
(6.6)
$
$
$
-
-
0.5
0.2
(0.7)
-
Funded status
$ (108.8)
$ (133.9)
$
(6.6)
$
(6.6)
Amount recognized in the balance sheet
Current liabilities
Non-current liabilities
Net pension liability at end of year
Amounts recognized in accumulated other
comprehensive loss before tax
Net actuarial loss (gain)
Prior service cost
Total recognized in accumulated other comprehensive loss
$
(0.5)
(108.3)
$ (108.8)*
$
(1.8)
(132.1)
$ (133.9)*
$
$
(0.4)
(6.2)
(6.6)
$
$
(0.4)
(6.2)
(6.6)
$ 473.5
(0.9)
$ 472.6
$ 461.3
(2.6)
$ 458.7
$
$
(2.0)
(2.9)
(4.9)
$
$
(2.4)
(3.3)
(5.7)
* In addition, the Company has a liability for a foreign pension plan of $0.2 million and $0.3 million at December 31, 2016
and 2015, respectively.
42
10. Pension and Other Post-retirement Benefits (continued)
A
Years ended December 31 (dollars in millions)
Net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized:
Net actuarial loss (gain)
Prior service cost
Curtailment and other one-time charges
Defined-benefit plan (income) cost
Various U.S. defined contribution plans cost
Other changes in plan assets and projected
benefit obligation recognized
in other comprehensive loss
Net actuarial loss
Amortization of net actuarial (loss) gain
Prior service cost
Amortization of prior service cost
Total recognized in other comprehensive loss
Total recognized in net periodic cost (benefit)
and other comprehensive loss
Pension Benefits
Post-retirement Benefits
2016
2015
2014
2016
2015
2014
$
1.8
30.6
(55.9)
$
1.9
37.6
(57.5)
$
7.9
44.7
(60.3)
$
0.1
0.2
-
$ 0.1
0.3
-
$ 0.1
0.5
-
17.7
(1.1)
-
(6.9)
11.6
4.7
$
19.1
(1.0)
-
0.1
10.8
$ 10.9
35.1
(1.0)
2.2
28.6
6.1
$ 34.7
$ 29.9
(17.7)
0.6
1.1
13.9
$ 17.2
(19.1)
2.5
1.0
1.6
$ 33.4
(37.3)
-
1.0
(2.9)
$
$
(0.1)
(0.4)
(0.2)
(0.4)
-
(0.4)
-
-
(0.3) $ (0.1) $ 0.2
-
0.2
0.2
-
0.4
0.8
$
$
-
0.1
(3.7)
0.4
(3.2)
-
0.3
-
-
0.3
$
7.0
$
1.7
$ 25.7
$
0.5
$ (3.3) $ 0.5
The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost during 2017 are $17.8 million and $(0.4) million, respectively. The estimated
net actuarial loss and prior year service cost for the post-retirement benefit plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost during 2017 are $0.1 million and $(0.4) million, respectively. As permitted
under ASC 715, the amortization of any prior service cost was previously determined using a straight-line amortization of the
cost over the average remaining service period of employees expected to receive benefits under the plan. Beginning in 2015
the amortization occurs over the average remaining life expectancy of participants expected to receive benefits under the plan
as permitted under ASC 715.
The 2016 and 2015 after tax adjustments for additional minimum pension liability resulted in other comprehensive (loss) gain
of $(9.0) million and $1.0 million, respectively.
Actuarial assumptions used to determine benefit obligations at December 31 are as follows:
Discount rate
Average salary increases
Pension Benefits
2016
4.15%
4.00%
2015
4.40%
4.00%
Post-retirement Benefits
2015
2016
4.55%
4.33%
4.00%
4.00%
Actuarial assumptions used to determine net periodic benefit cost for the year ended December 31 are as follows:
Years ended December 31
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension Benefits
2015
4.05%
7.75%
4.00%
2014
4.85%
7.75%
4.00%
2016
4.40%
7.50%
4.00%
43
Post-retirement Benefits
2015
4.00%
n/a
4.00%
2014
4.70%
n/a
4.00%
2016
4.55%
n/a
4.00%
10. Pension and Other Post-retirement Benefits (continued)
Assumptions
In developing the expected long-term rate of return on plan assets assumption, the Company evaluated its pension plan’s target
and actual asset allocation and expected long-term rates of return of equity and bond indices. The Company also considered its
pension plan’s historical ten-year and 25-year compounded annualized returns of 5.7 percent and 9.0 percent, respectively.
Assumed health care cost trend rates
Assumed health care cost trend rates as of December 31 are as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2016
6.50 %
5.00 %
2021
2015
6.75 %
5.00 %
2021
A one-percentage-point change in the assumed health care cost trend rates would not result in a material impact on the
Company’s consolidated financial statements.
Plan Assets
The Company’s pension plan weighted asset allocations as of December 31 by asset category are as follows:
Asset Category
Equity securities
Debt securities
Real estate
Private equity
Other
2016
48 %
37
10
4
1
100 %
2015
47 %
39
9
5
-
100 %
44
10. Pension and Other Post-retirement Benefits (continued)
The following tables present the fair value measurement of the Company’s plan assets as of December 31, 2016 and 2015
(dollars in millions):
Asset Category
Short-term investments
Equity securities
Common stocks
Commingled equity funds
Fixed income securities
U.S. treasury securities
Other fixed income securities
Commingled fixed income funds
Other types of investments
Mutual funds
Real estate funds
Private equity
Total
$ 28.7
254.0
105.6
97.6
102.6
90.3
4.5
74.3
28.0
December 31, 2016
Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Non-
observable Inputs
(Level 3)
$
1.1
$
7.9
$ 19.7
254.0
-
97.6
-
-
-
-
-
-
105.6
-
102.6
90.3
4.5
-
-
-
-
-
-
-
-
74.3
28.0
$ 122.0
Total fair value of plan asset investments
Non-investment plan assets
Total plan assets
$ 785.6
1.4
$ 787.0
$ 352.7
$ 310.9
Asset Category
Total
December 31, 2015
Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant Non-
observable Inputs
(Level 3)
Short-term investments
$ 13.8
$
1.4
$
-
$ 12.4
Equity securities
Common stocks
Commingled equity funds
Fixed income securities
U.S. treasury securities
Other fixed income securities
Commingled fixed income funds
Other types of investments
Real estate funds
Private equity
Total fair value of plan asset investments
Non-investment plan assets
Total plan assets
238.6
109.6
114.3
91.6
84.1
70.9
34.3
$ 757.2
1.8
$ 759.0
238.6
-
114.3
-
-
-
-
-
109.6
-
91.6
84.1
-
-
$ 354.3
$ 285.3
-
-
-
-
-
70.9
34.3
$ 117.6
45
10. Pension and Other Post-retirement Benefits (continued)
The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as
of December 31, 2016 and 2015 (dollars in millions):
Short term
investments
Real
estate
funds
Private
equity
Total
Balance at December 31, 2014
$ 20.7
$ 64.1
$ 34.8
$ 119.6
Actual return (loss) on plan assets:
Relating to assets still held at the reporting date
Relating to assets sold during the period
Purchases, sales and settlements
Balance at December 31, 2015
Actual return (loss) on plan assets:
Relating to assets still held at the reporting date
Relating to assets sold during the period
Purchases, sales and settlements
Balance at December 31, 2016
-
-
(8.3)
12.4
-
-
7.3
$ 19.7
6.8
-
-
70.9
3.4
-
-
$ 74.3
(0.1)
7.8
(8.2)
34.3
(5.5)
9.3
(10.1)
$ 28.0
6.7
7.8
(16.5)
117.6
(2.1)
9.3
(2.8)
$ 122.0
The Company’s investment policies employ an approach whereby a diversified blend of equity and bond investments is used to
maximize the long−term return of plan assets for a prudent level of risk. Equity investments are diversified across domestic and
non−domestic stocks, as well as growth, value, and small to large capitalizations. Bond investments include corporate and
government issues, with short−, mid− and long−term maturities, with a focus on investment grade when purchased. The
Company’s target allocation to equity managers is between 45 to 55 percent with the remainder allocated primarily to bonds,
real estate, private equity managers and cash. Investment and market risks are measured and monitored on an ongoing basis
through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The Company’s actual asset allocations are in line with target allocations. The Company regularly reviews its actual asset
allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.
There was no Company stock included in plan assets at December 31, 2016.
Cash Flows
The Company was not required to make a contribution in 2016 but elected to make a $30 million voluntary contribution. The
Company is not required to make a contribution in 2017.
Estimated Future Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Years ending December 31 (dollars in millions)
2017
2018
2019
2020
2021
2022 – 2026
Pension Benefits
$ 60.2
67.6
60.1
66.4
59.2
284.4
Post-retirement
Benefits
$ 0.4
0.4
0.4
0.4
0.4
2.1
46
11. Derivative instruments
ASC 815 Derivatives and Hedging, as amended, requires that all derivative instruments be recorded on the balance sheet at fair
value and establishes criteria for designation and effectiveness of the hedging relationships. The accounting for changes in the
fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship
and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging
instruments, the Company must designate the hedging instrument, based upon the exposure hedged, as a fair value hedge, cash
flow hedge, or a hedge of a net investment in a foreign operation.
The Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component
of other comprehensive loss, net of tax, and is reclassified into earnings in the same line item associated with the forecasted
transaction and in the same period or periods during which the hedged transaction affects earnings. The amount by which the
cumulative change in the value of the hedge more than offsets the cumulative change in the value of the hedged item (i.e., the
ineffective portion) is recorded in earnings, net of tax, in the period the ineffectiveness occurs.
The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw
materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and
do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative
purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the
counterparties to perform.
Foreign Currency Forward Contracts
The Company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional
currency of certain subsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the
volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of
business. Principal currencies for which the Company utilizes foreign currency forward contracts include the British pound,
Canadian dollar, Euro and Mexican peso.
Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying
transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other
comprehensive loss to the consolidated statement of earnings. The assessment of effectiveness for forward contracts is based
on changes in the forward rates. These hedges have been determined to be effective.
The amounts in accumulated other comprehensive loss for cash flow hedges will be reclassified into earnings no later than
December 31, 2018.
47
11. Derivative instruments (continued)
The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts:
December 31 (dollars in millions)
2016
2015
British pound
Canadian dollar
Euro
Mexican peso
Total
Commodity Futures Contracts
Buy
$
-
-
25.4
16.9
$ 42.3
Sell
$ 1.2
56.9
1.8
-
$ 59.9
Buy
$
-
-
21.3
12.7
$ 34.0
Sell
$ 0.9
43.2
1.7
-
$ 45.8
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 copper and steel, with the objective of minimizing
changes in cost due to market price fluctuations. The hedging strategy for achieving this objective is to purchase commodities
futures contracts on the open market of the London Metals Exchange (LME) or over the counter contracts based on the LME
for copper. Steel futures contracts are purchased on the New York Metals Exchange (NYMEX).
With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.
The after-tax gains and losses of the effective portion of the contracts as of December 31, 2016 were recorded in accumulated
other comprehensive loss and will be reclassified into cost of products sold in the periods in which the underlying transactions
are recorded in earnings. The after-tax gains and losses on the effective portion of the contracts will be reclassified within one
year. Contractual amounts of the Company’s commodities futures contracts were immaterial as of December 31, 2016.
The impact of derivative contracts on the Company’s financial statements is as follows:
Fair value of derivative instruments designated as hedging instruments under ASC 815:
December 31 (dollars in millions)
Foreign currency contracts
Commodities contracts
Total derivatives designated as hedging
instruments
Balance Sheet Location
Other current assets
Accrued liabilities
Other current assets
Accrued liabilities
Fair Value
2016
$
1.9
(2.0)
0.8
(0.3)
$
0.4
2015
$
3.6
(1.3)
-
(0.3)
$
2.0
48
11. Derivative instruments (continued)
The effect of derivative instruments on the consolidated statement of earnings is as follows.
Year ended December 31 (dollars in millions)
Amount of gain
(loss) recognized
in other
comprehensive
loss on derivative
(effective portion)
2016
2015
$
(3.8) $
6.9
2.4
$ (1.4) $
(0.7)
6.2
Location of gain
(loss) reclassified
from accumulated
other
comprehensive
loss into earnings
(effective portion)
Cost of products
sold
Cost of products
sold
Amount of gain
(loss) reclassified
from accumulated
other comprehensive
loss into earnings
(effective portion)
2015
2016
Location of gain
recognized in
earnings on
derivative
(ineffective
portion)
Amount of gain
recognized in
earnings on a
derivative
(ineffective
portion)
2016
2015
$ (1.4)
$ 6.2
1.6
$ 0.2
(0.5)
$ 5.7
N/A
Cost of products
sold
$
$
-
-
-
$
$
-
-
-
Derivatives in
ASC 815 cash
flow hedging
relationships
Foreign currency
contracts
Commodities
contracts
12. Income Taxes
The components of the provision (benefit) for income taxes consisted of the following:
Years ended December 31 (dollars in millions)
Current:
Federal
State
International
Deferred:
Federal
State
International
2016
$ 71.6
14.5
34.9
11.0
5.2
(1.2)
$ 136.0
2015
$ 82.9
13.9
23.6
(4.2)
2.2
1.2
$ 119.6
The provision for income taxes differs from the U.S. federal statutory rate due to the following items:
Years ended December 31
Provision at U.S. federal statutory rate
State taxes, net of federal benefit
International income tax rate differential - China
International income tax rate differential - other
U.S. manufacturing credit
Research tax credits
Excess tax benefit on stock compensation
Other
2016
35.0 %
2.8
(6.2)
0.3
(1.5)
(0.3)
(1.1)
0.4
29.4 %
2015
35.0 %
2.6
(6.8)
0.2
(1.3)
(0.3)
-
0.3
29.7 %
2014
$ 48.7
10.4
22.4
(5.2)
(0.2)
2.8
$ 78.9
2014
35.0 %
2.3
(8.2)
0.4
(2.1)
(0.4)
-
0.5
27.5 %
Components of earnings before income taxes were as follows:
Years ended December 31 (dollars in millions)
U.S.
International
2016
$ 300.9
161.6
$ 462.5
2015
$ 255.7
146.8
$ 402.5
2014
$ 150.6
136.1
$ 286.7
49
12. Income Taxes (continued)
Total income taxes paid by the Company amounted to $117.4 million, $97.5 million, and $88.9 million in 2016, 2015 and
2014, respectively.
As of December 31, 2016, the Company has $42.3 million accrued for its estimate of the tax costs due upon repatriation of
undistributed foreign earnings it considers to be not permanently reinvested. At December 31, 2016, the Company had
undistributed foreign earnings of $982.2 million, of which $828.2 million are considered permanently reinvested. No U.S.
income tax provision or foreign withholding tax provisions have been made on foreign earnings that remain permanently
reinvested. The Company considers permanently reinvested earnings outside the U.S. on the basis of estimates that future
domestic cash generation will be sufficient to meet future domestic cash needs and its specific plans for reinvestment of foreign
subsidiary earnings. In addition, no provision or benefit for U.S. income taxes has been made on foreign currency translation
gains or losses. As of December 31, 2016, $751.7 million of cash and cash equivalents and marketable securities were held by
our foreign subsidiaries.
The tax effects of temporary differences of assets and liabilities between income tax and financial reporting are as follows:
December 31 (dollars in millions)
Employee benefits
Product liability and warranties
Inventories
Accounts receivable
Property, plant and equipment
Intangibles
Environmental liabilities
Undistributed foreign earnings
Tax loss and credit carryovers
All other
Valuation allowance
Net asset
2016
2015
Assets
$ 67.5
67.1
-
14.9
-
-
2.9
-
18.2
4.3
(13.1)
$ 161.8
$
4.4
Liabilities
$
-
-
3.4
-
34.3
77.4
-
42.3
-
-
-
$ 157.4
Assets
$ 75.0
66.8
-
13.0
-
-
2.7
-
14.6
3.4
(11.0)
$ 164.5
$ 21.0
$
Liabilities
-
-
4.4
-
36.9
54.3
-
47.9
-
-
-
$ 143.5
In November 2015, the FASB amended ASC 740, Income Taxes (issued under ASU 2015-17). This amendment required that
deferred tax assets and liabilities be classified as non-current in the balance sheet. The Company adopted ASU 2015-17 on
January 1, 2017 retrospectively and, as a result, has classified all deferred tax assets and liabilities as non-current in the
Company’s consolidated balance sheets for all periods presented. Current deferred taxes of $39.9 million as of December 31,
2015 were reclassified to non-current deferred taxes in the Company’s consolidated balance sheet.
The Company believes it is more likely than not that it will realize its deferred tax assets through the reduction of future taxable
income. Significant factors the Company considered in determining the probability of the realization of the deferred tax assets
include historical operating results and expected future earnings.
A reconciliation of the beginning and ending amounts of tax loss carryovers, credit carryovers and valuation allowances is as
follows:
December 31 (dollars in millions)
Beginning balance
Additions
Reductions
Ending balance
Net Operating Losses and Tax Credits
2016
$ 14.6
3.7
(0.1)
$ 18.2
2015
$ 14.9
1.4
(1.7)
$ 14.6
50
Valuation Allowances
2015
$
9.8
1.4
(0.2)
$ 11.0
2016
$ 11.0
2.1
-
$ 13.1
12. Income Taxes (continued)
The Company has foreign net operating loss carryovers that expire in 2017 through 2024 and state and local net operating loss
carryovers that expire between 2017 and 2033.
A reconciliation of the beginning and ending amount of unrecognized benefits is as follows:
(Dollars in millions)
Balance at January 1
Additions for tax positions of prior years
Balance at December 31
2016
$ 2.6
1.6
$ 4.2
2015
$ 1.2
1.4
$ 2.6
The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.6 million. The Company
recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. At
December 31, 2016, there was an immaterial amount of interest and penalties accrued. It is anticipated there will be no
decrease in the total amount of unrecognized tax benefits in 2017. The Company’s U.S. federal income tax returns for 2014-
2016 are subject to audit. The Company is subject to state and local income tax audits for tax years 2001-2016. The Company
is subject to non-U.S. income tax examinations for years 2008-2016.
13. Commitments and Contingencies
The Company is a potentially responsible party in judicial and administrative proceedings seeking to clean up sites which have
been environmentally impacted. In each case the Company has established reserves, insurance proceeds and/or a potential
recovery from third parties. The Company believes any environmental claims will not have a material effect on its financial
position or results of operations.
The Company is subject to various claims and pending lawsuits for product liability and other matters arising out of the
conduct of the Company's business. With respect to product liability claims, the Company has self-insured a portion of its
product liability loss exposure for many years. The Company has established reserves and has insurance coverage, which it
believes are adequate to cover incurred claims. For the years ended December 31, 2016 and 2015, the Company had $125
million of product liability insurance for individual losses in excess of $7.5 million. The Company periodically reevaluates its
exposure on claims and lawsuits and makes adjustments to its reserves as appropriate. The Company believes, based on
current knowledge, consultation with counsel, adequate reserves and insurance coverage that the outcome of such claims and
lawsuits will not have a material adverse effect on the Company's financial position, results of operations or cash flows.
14. Operations by Segment
The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is
primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential
and commercial gas, gas tankless and electric water heaters as well as water treatment products. Both segments primarily
manufacture and market in their respective regions of the world. The North America segment also manufactures and globally
markets specialty commercial water heating equipment, condensing and non-condensing boilers and water system tanks. The
Company also manufactures and markets in-home air purification products in China.
51
14. Operations by Segment (continued)
The accounting policies of the reportable segments are the same as those described in the “Summary of Significant Accounting
Policies” outlined in Note 1. Operating earnings, defined by the Company as earnings before interest, taxes, general corporate
and corporate research and development expenses, were used to measure the performance of the segments.
2016
Net Sales
2015
$ 1,743.2 $ 1,703.0 $ 1,621.7
768.3
(34.0)
$ 2,685.9 $ 2,536.5 $ 2,356.0
965.6
(22.9)
866.1
(32.6)
2014
Years ended December 31 (dollars in millions)
North America
Rest of World
Inter-segment
Total segments – sales, operating earnings
Corporate expenses
Interest expense
Earnings before income taxes
Provision for income taxes
Earnings from continuing operations
2016
$ 385.9
129.1
-
$515.0
Earnings
2015
$ 339.9
113.0
-
$452.9
2014
$ 238.7
106.7
(0.1)
$ 345.3
(45.2)
(7.3)
(43.0)
(7.4)
(52.9)
(5.7)
462.5
(136.0)
402.5
(119.6)
286.7
(78.9)
$ 326.5
$ 282.9
$ 207.8
In 2016, sales to the North America segment’s two largest customers were $311.5 million and $280.8 million which represented
12 percent and 11 percent of the Company’s net sales, respectively. In 2015, sales to the North America segment’s two largest
customers were $301.7 million and $287.0 million which represented 12 percent and 11 percent of the Company’s net sales,
respectively. In 2014, sales to the North America segment’s two largest customers were $296.5 million and $237.2 million
which represented 13 percent and ten percent of the Company’s net sales, respectively.
Assets, depreciation and capital expenditures by segment
Total Assets
(December 31)
(dollars in millions)
North America
Rest of World
Corporate
Total
2016
2015
$ 1,515.9 $ 1,381.1
544.2
703.9
$ 2,891.0 $ 2,629.2
584.3
790.8
2014
$ 1,358.5
523.8
615.8
$ 2,498.1
Depreciation and
Amortization (Years Ended
December 31)
2015
$ 41.9
19.8
1.3
$ 63.0
2014
$ 37.8
20.0
2.0
$ 59.8
2016
$ 42.9
21.0
1.2
$ 65.1
Capital
Expenditures
(Years Ended
December 31)
2016
2014
2015
$ 45.9 $ 43.5 $ 59.4
26.5
0.2
$ 80.7 $ 72.7 $ 86.1
28.4
0.8
34.3
0.5
The majority of corporate assets consist of cash, cash equivalents, marketable securities and deferred income taxes.
Net sales and long-lived assets by geographic location
The following data by geographic area includes net sales based on product shipment destination and long-lived assets based on
physical location. Long-lived assets include net property, plant and equipment and other long-term assets.
(dollars in millions)
2016
2015
2014
Long-lived Assets
(December 31)
Net Sales
(Years Ended December 31)
2014
2015
2016
United States
China
Canada
Other Foreign
Total
$ 292.4
184.3
3.1
48.4
$ 528.2
$ 297.8
157.3
2.7
55.2
$ 513.0
$ 285.4
144.0
3.5
58.3
$ 491.2
United States
China
Canada
Other Foreign
Total
$ 1,570.7 $ 1,531.4 $ 1,447.9
691.8
787.1
887.1
128.8
129.9
138.7
87.5
88.1
89.4
$ 2,685.9 $ 2,536.5 $ 2,356.0
52
15. Quarterly Results of Operations (Unaudited)
(dollars in millions, except per share amounts)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Net sales
Gross profit
Net earnings
2016
2015
$ 636.9 $ 618.5
229.2
58.4
262.7
73.5
2016
$ 667.0
283.7
87.1
2015
$ 653.5
262.4
71.1
2016
2015
$ 683.9 $ 625.1
255.6
73.6
283.3
83.2
2016
2015
$ 698.1 $ 639.4
262.6
79.8
289.6
82.7
Basic earnings per share
Diluted earnings per share
0.42
0.41
0.33
0.32
0.50
0.49
0.40
0.40
0.48
0.47
0.42
0.41
0.48
0.47
0.45
0.45
Common dividends declared
0.12
0.095
0.12
0.095
0.12
0.095
0.12
0.095
Net earnings per share are computed separately for each period, and therefore, the sum of such quarterly per share amounts
may differ from the total for the year.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange
Act of 1934, as amended (“the Exchange Act”) as of the end of the period covered by this report. Based on such evaluations, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period our disclosure controls and
procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act, and that information is accumulated and
communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding
required disclosure.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our internal control over financial reporting based on the Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). As
allowed by Securities and Exchange Commission guidance, management excluded from its assessment Aquasana, Inc., which was
acquired in 2016 and constituted 3.5 percent and 5.8 percent of total assets and net assets, respectively, as of December 31, 2016
and 0.8 percent and 0.2 percent of net sales and net earnings, respectively, for the year then ended. Based on this evaluation, our
management has concluded that, as of December 31, 2016, our internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements and the
effectiveness of internal controls over financial reporting as of December 31, 2016 as stated in their report which is included
herein.
53
Changes in Internal Control Over Financial Reporting
In 2016, we continued the implementation of a new global enterprise resource planning system. This multi-year initiative is
being conducted in phases and includes modifications to the design and operation of controls over financial reporting. We are
testing internal controls over financial reporting for design effectiveness prior to the implementation of each phase, and we
have monitoring controls in place over the implementation of these changes.
Except as described above, there have been no changes in our internal control over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act) during the year ended December 31, 2016 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B - OTHER INFORMATION
None
54
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
A. O. Smith Corporation
We have audited A. O. Smith Corporation’s internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). A. O. Smith Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management Report on Internal Control Over Financial Reporting, management’s
assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal
controls of Aquasana, Inc., which is included in the 2016 consolidated financial statements of A. O. Smith Corporation and
constituted 3.5 percent and 5.8 percent of total assets and net assets, respectively, as of December 31, 2016 and 0.8 percent and
0.2 percent of net sales and net earnings, respectively, for the year then ended. Our audit of internal control over financial
reporting of A. O. Smith Corporation also did not include an evaluation of the internal control over financial reporting of
Aquasana, Inc.
In our opinion, A. O. Smith Corporation maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of A. O. Smith Corporation as of December 31, 2016 and 2015, and the related consolidated
statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2016, and our report dated February 17, 2017 expressed an unqualified opinion thereon.
Milwaukee, Wisconsin
February 17, 2017
Ernst & Young LLP
55
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included under the headings “Election of Directors” and “Board Committees” in our definitive Proxy Statement
for the 2017 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference. The information required
regarding Executive Officers of the company is included in Part I of this Annual Report on Form 10-K under the caption
“Executive Officers of the Company.”
We have a separately designated Audit Committee on which Gene C. Wulf, Gloster B. Current, Jr., Mark D. Smith and Idelle
K. Wolf serve, with Mr. Wulf, as Chairperson. All members are independent under applicable SEC and New York Stock
Exchange rules; the Board of Directors of the company has concluded that Ms. Wolf and Mr. Wulf are “audit committee
financial experts” in accordance with SEC rules.
We have adopted a Financial Code of Ethics applicable to our principal executive officer, principal financial officer and
principal accounting officer. As a best practice, this code has been executed by key financial and accounting personnel as well.
In addition, we have adopted a general code of business conduct for our directors, officers and all employees, which is known
as the A. O. Smith Guiding Principles. The Financial Code of Ethics, the A. O. Smith Guiding Principles and other company
corporate governance matters are available on our website at www.aosmith.com. We are not including the information
contained on our website as a part of or incorporating it by reference into, this Form 10-K. We intend to disclose on this
website any amendments to, or waivers from, the Financial Code of Ethics or the A. O. Smith Guiding Principles that are
required to be disclosed pursuant to SEC rules. There have been no waivers of the Financial Code of Ethics or the A. O. Smith
Guiding Principles. Stockholders may obtain copies of any of these corporate governance documents free of charge by writing
to the Corporate Secretary at the address on the cover page of this Form 10-K.
The information included under the heading “Compliance with Section 16(a) of the Securities Exchange Act” in our definitive
Proxy Statement for the 2017 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under
Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information included under the headings “Executive Compensation,” “Director Compensation,” “Report of the Personnel and
Compensation Committee” and “Compensation Committee Interlocks and Insider Participation” in the company’s definitive
Proxy Statement for the 2017 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under
Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information included under the headings “Principal Stockholders” and “Security Ownership of Directors and Management” in
our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders (to be filed with the Securities and Exchange
Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by
reference.
56
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of December 31, 2016.
Number of securities to
be issued upon the
exercise of outstanding
options, warrants and
rights
Weighted-average exercise
price of outstanding options,
warrants and rights
3,469,208 (1)
-
3,469,208
$21.69 (2)
-
$21.69
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)
3,275,459 (3)
-
3,275,459
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
(1) Consists of 2,664,333 shares subject to stock options, 519,354 shares subject to employee share units and 285,521 shares
subject to director share units.
(2) Represents the weighted average exercise price of outstanding options and does not take into account outstanding share
units.
(3) Represents securities remaining available for issuance under the A. O. Smith Combined Incentive Compensation Plan. If
any awards lapse, expire, terminate or are cancelled without issuance of shares, or shares are forfeited under any award,
then such shares will become available for issuance under the A. O. Smith Combined Incentive Compensation Plan,
hereby increasing the number of securities remaining available.
ITEM 13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information included under the headings “Director Independence and Financial Literacy”, “Compensation Committee
Interlocks and Insider Participation” and “Procedure for Review of Related Party Transactions” in our definitive Proxy Statement
for the 2017 Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the 2017
Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days
after the end of the registrant’s fiscal year) required by this Item 14 is incorporated herein by reference.
57
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1.
Financial Statements of the Company
Form 10-K
Page Number
The following consolidated financial statements of A. O. Smith
Corporation are included in Item 8:
Consolidated Balance Sheets at December 31, 2016 and 2015 ...............................................
25
For each of the three years in the period ended December 31, 2016:
- Consolidated Statement of Earnings ....................................................................................
- Consolidated Statement of Comprehensive Earnings .........................................................
- Consolidated Statement of Cash Flows ...............................................................................
- Consolidated Statement of Stockholders’ Equity ................................................................
26
26
27
28
Notes to Consolidated Financial Statements ............................................................................ 29 - 53
2.
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts ............................................................................
62
Schedules not included have been omitted because they are not applicable.
3. Exhibits - see the Index to Exhibits on pages 60 - 61 of this report. Each management contract or compensatory plan
or arrangement required to be filed as an exhibit to this report on Form 10-K are listed as Exhibits 10(a) through 10(m)
in the Index to Exhibits.
Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act of 1934, as amended, we will, upon
request and upon payment of a reasonable fee not to exceed the rate at which such copies are available from the
Securities and Exchange Commission, furnish copies to our security holders of any exhibits listed in the Index to
Exhibits.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on behalf of the undersigned, thereunto duly authorized.
Date: February 17, 2017
A. O. SMITH CORPORATION
By:
/s/ Ajita G. Rajendra
Ajita G. Rajendra
Executive Chairman of
the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February 17, 2017
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Title
Signature
AJITA G. RAJENDRA
Chairman of the Board, President and Chief Executive Officer
/s/ Ajita G. Rajendra
Ajita G. Rajendra
JOHN J. KITA
Executive Vice President and Chief Financial Officer
/s/ John J. Kita
John J. Kita
DANIEL L. KEMPKEN
Vice President and Controller
RONALD D. BROWN
Director
GLOSTER B. CURRENT, Jr.
Director
WILLIAM P. GREUBEL
Director
PAUL W. JONES
Director
ILHAM KADRI
Director
BRUCE M. SMITH
Director
MARK D. SMITH
Director
IDELLE K. WOLF
Director
GENE C. WULF
Director
/s/ Daniel L. Kempken
Daniel L. Kempken
/s/ Ronald D. Brown
Ronald D. Brown
/s/ Gloster B. Current, Jr.
Gloster B. Current, Jr.
/s/ William P. Greubel
William P. Greubel
/s/ Paul W. Jones
Paul W. Jones
/s/ Ilham Kadri
Ilham Kadri
/s/ Bruce M. Smith
Bruce M. Smith
/s/ Mark D. Smith
Mark D. Smith
/s/ Idelle K. Wolf
Idelle K. Wolf
/s/ Gene C. Wulf
Gene C. Wulf
59
INDEX TO EXHIBITS
Exhibit
Number
(3)(i)
(3)(ii)
(4)
Description
Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016,
incorporated by reference to the quarterly report on Form 10-Q for the quarter ended March 31, 2016.
By-laws of A. O. Smith Corporation as amended October 13, 2015, incorporated by reference to the current
report on Form 8-K dated October 16, 2015.
(a) Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016,
incorporated by reference to the quarterly report on Form 10-Q for the quarter ended March 31, 2016.
(b) Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith
Corporation, A. O Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financial
institutions and agents party thereto, incorporated by reference to the current report on Form 8-K dated
December 12, 2012.
(c) Amendment No. 1 dated as of December 15, 2016, to the Amended and Restated Credit Agreement, dated
as of December 12, 2012, among A. O. Smith Corporation, A. O Smith Enterprises Ltd., A. O. Smith
International Holdings B.V., and the financial institutions and agents party thereto.
(d) The corporation has instruments that define the rights of holders of long-term debt that are not being filed
with this Registration Statement in reliance upon Item 601(b)(4)(iii) of Regulation S-K. The Registrant
agrees to furnish to the Securities and Exchange Commission, upon request, copies of these instruments.
(10)
Material Contracts
(a) A. O. Smith Combined Incentive Compensation Plan, incorporated by reference as Exhibit A to the Proxy
Statement filed on March 5, 2012 for the 2012 Annual Meeting of Stockholders.
(b) A. O. Smith Corporation Executive Life Insurance Plan, as amended January 1, 2009, incorporated by
reference to the annual report on Form 10-K for the fiscal year ended December 31, 2008.
(c) A. O. Smith Nonqualified Deferred Compensation Plan, adopted December 1, 2008, incorporated by
reference to the annual report on Form 10-K for the fiscal year ended December 31, 2008.
(d) A. O. Smith Corporation Executive Supplemental Pension Plan, as amended January 1, 2009, incorporated
by reference to the annual report on Form 10-K for the fiscal year ended December 31, 2008.
(e) A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference
to the Form S-8 Registration Statement filed by the corporation on July 30, 2007 (Reg. No. 333-144950).
(f) A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference
to the quarterly report on Form 10-Q for the quarter ended March 31, 2012.
(g) A.O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference
to the quarterly report on Form 10-Q for the quarter ended March 31, 2016.
(h) Offer Letter to Paul W. Jones, dated December 9, 2003, incorporated by reference to the annual report on
Form 10-K for the fiscal year ended December 31, 2007.
(i) Offer Letter to Ajita G. Rajendra, dated September 20, 2004, incorporated by reference to the annual report
on Form 10-K for the fiscal year ended December 31, 2007.
(j) Amendment to Offer Letter to Ajita G. Rajendra dated December 10, 2015, incorporated by reference to
the annual report on Form 10-K for the fiscal year ended December 31, 2015.
60
INDEX TO EXHIBITS (continued)
Exhibit
Number
Description
(k) Summary of Directors’ Compensation incorporated by reference to the quarterly report on Form 10-Q for
the quarter ended June 30, 2015.
(l) A. O. Smith Corporation Senior Leadership Severance Plan, incorporated by Reference to the quarterly
report for Form 10-Q for the quarter ended June 30, 2009.
(m) Form of A. O. Smith Corporation Special Retention Award Agreement, incorporated by reference to the
quarterly report on Form 10-Q for the quarter ended March 31, 2011.
(n) Stockholder Agreement dated as of December 9, 2008, between A. O. Smith Corporation and each Smith
Investment Company stockholder who becomes a signatory thereto, incorporated by reference to the
current report on Form 8-K dated December 9, 2008.
(21)
(23)
(31.1)
(31.2)
Subsidiaries.
Consent of Independent Registered Public Accounting Firm.
Certification by the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated
February 17, 2017.
Certification by the Executive Vice-President and Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act, dated February 17, 2017.
(32.1)
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
(32.2)
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
(101)
The following materials from A. O. Smith Corporation’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2016 are filed herewith, formatted in XBRL (Extensive Business Reporting
Language): (i) the Consolidated Balance Sheets as of December 31, 2016 and 2015, (ii) the Consolidated
Statement of Earnings for the three years ended December 31, 2016, (iii) the Consolidated Statement of
Comprehensive Earnings for the three years ended December 31, 2016, (iv) the Consolidated Statement of
Cash Flows for the three years ended December 31, 2016, (v) the Consolidated Statement of Stockholders’
Equity for the three years ended December 31, 2016 and (vi) the Notes to Consolidated Financial
Statements.
61
A. O. SMITH CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in millions)
Years ended December 31, 2016, 2015 and 2014
Description
2016:
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Acquisition
of
Businesses
Deductions
Balance at
End of
Year
$ 1.1
$ 0.2
$ (1.0)
$ 6.3
-
-
-
-
-
-
13.1
$
(0.3)
$ 6.0
(0.2)
11.0
(0.5)
(0.8)
3.7
9.8
Valuation allowance for trade and
notes receivable
Valuation allowance for deferred
tax assets
$ 6.0
11.0
2.1
2015:
Valuation allowance for trade and
notes receivable
Valuation allowance for deferred
tax assets
2014:
Valuation allowance for trade and
notes receivable
Valuation allowance for deferred
tax assets
$ 3.7
$ 2.6
9.8
1.4
2.8
9.6
1.4
1.0
62
Exhibit 21
SUBSIDIARIES: The following lists all subsidiaries and affiliates of A. O. Smith Corporation.
Name of Subsidiary
AOS Holding Company
A. O. Smith International Corporation
A. O. Smith Water Treatment (USA), Inc.
Flame Guard Water Heaters, Inc.
SICO Acquisition, LLC
Takagi - A. O. Smith Tankless Water Heater Company LLC
American Water Heater Company
Lochinvar, LLC
State Industries, Inc.
Aquasana Global, Inc.
Aquasana, Inc.
A. O. Smith Holdings (Barbados) SRL
A. O. Smith Enterprises Ltd.
A. O. Smith (China) Investment Co., Ltd.
A. O. Smith (China) Water Heater Co., Ltd.
A. O. Smith (China) Water Products Co., Ltd.
A. O. Smith (Nanjing) Water Treatment Products Co., Ltd.
A. O. Smith L’eau chaude S.a.r.l.
A. O. Smith (Hong Kong) Limited
A. O. Smith India Water Products Private Limited
Products de Agua, S. de R.L. de C.V.
A.O. Smith Electrical Products B.V.
A.O. Smith Holdings II B.V.
A.O. Smith Holdings III B.V.
A.O. Smith International Holdings B.V.
A.O. Smith Products v.o.f.
A.O. Smith Water Products Company B.V.
AO Smith Su Teknolojileri Anonim Sirketi
A. O. Smith Water FZE
Lochinvar Limited
63
Jurisdiction in Which
Incorporated
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Nevada
Tennessee
Tennessee
Texas
Texas
Barbados
Canada
China
China
China
China
France
Hong Kong
India
Mexico
The Netherlands
The Netherlands
The Netherlands
The Netherlands
The Netherlands
The Netherlands
Turkey
United Arab Emirates
United Kingdom
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-92329, 333-92428, 333-
144950 and 333-170436) pertaining to the A. O. Smith Corporation Long-Term Executive Incentive Compensation Plan, the
A. O. Smith Combined Executive Incentive Compensation Plan and the A. O. Smith Combined Incentive Compensation Plan
and in the related prospectuses of our reports dated February 17, 2017, with respect to the consolidated financial statements and
reporting of
schedule of A. O. Smith Corporation, and
A. O. Smith Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2016.
internal control over
the effectiveness of
financial
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 17, 2017
64
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Ajita G. Rajendra, certify that:
1.
I have reviewed this annual report on Form 10-K of A. O. Smith Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 17, 2017
/s/ Ajita G. Rajendra
Ajita G. Rajendra
President and Chief Executive Officer
65
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, John J. Kita, certify that;
1.
I have reviewed this annual report on Form 10-K of A. O. Smith Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 17, 2017
/s/ John J. Kita
John J. Kita
Executive Vice President and Chief Financial Officer
66
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of A. O. Smith Corporation (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”). I, Ajita G.
Rajendra, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 17, 2017
/s/ Ajita G. Rajendra
Ajita G. Rajendra
President and Chief Executive Officer
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be
deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
67
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of A. O. Smith Corporation (the “Company”) on Form 10-K for the fiscal year ended
December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”). I, John J. Kita,
Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 17, 2017
/s/ John J. Kita
John J. Kita
Executive Vice President and Chief Financial Officer
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be
deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained
by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
68
shareholders. We repurchased more than
three million shares of company stock at
an approximate cost of $135 million.
In January, we announced a 17 percent
increase in the company’s quarterly cash
dividend, the 12th consecutive year in
which we raised the dividend.
In August, the company entered the North
American water treatment market with
the acquisition of Aquasana, Inc., of
Austin, Texas. Aquasana manufactures
an extensive line of premium water
treatment products, ranging from point-
of-entry systems for the home and
on-the-go products such as portable
filter bottles. Aquasana markets its
products directly to consumers, with 80
percent of sales coming from its web
site and call center located just outside
Fort Worth. We believe this new business
presents us with numerous opportunities,
as consumers are becoming more aware
of water quality issues throughout the U.S. and are seeking
healthier alternatives for their families. We also anticipate
revenue synergies as we take Aquasana products to our existing
businesses in China and India and introduce our patented
reverse osmosis products to U.S. consumers.
Growth Strategy: Organic Growth
China:
Lochinvar
brands:
NA water
heaters &
other:
32% of sales growing 15%
4.8%
11% of sales growing 8%
.9%
57% of sales growing 4%
2.3%
Total annual sales growth
8.0%
The North American segment unit reported sales increased
to $1.74 billion, a 14 percent increase in operating profits to
$385.9 million and an impressive 200 basis point increase in
operating margin. Higher volumes of boilers and commercial
water heaters contributed to the sales increase, and the team
in Canada did an excellent job of growing the business in
spite of the challenges coming from the strong U.S. dollar.
Although sales of Lochinvar-branded products did not
increase at the pace we expected, we did add share in the
important high-efficiency condensing boiler market. With a
large installed base of older, inefficient cast iron boilers in
North America, we believe there is room for further growth
in this market segment. After a number of years focused
on meeting new government efficiency standards, we are
now turning our sights to new product development, and
2017 promises to be a busy year in both the commercial and
residential segments. Chief among these new products are:
• The Cyclone® series 300 with an integrated touchscreen
and remote monitoring capability;
• The Lochinvar Noble combi boiler that allows us to enter
a portion of the residential boiler market in which we
were not participating;
• The ProLine® series of commercial-grade residential
water heaters. These units feature a number of
commercial quality components developed by APCOM and,
in some cases, come with an eight-year warranty; and
• A full suite of electric tankless water heaters, a line of
products we have not offered in the past.
The Rest of World segment experienced a sales increase
of 11 percent to $965.6 million, operating earnings of
$129.1 million, a 14 percent increase, and operating
margins of 13.4 percent. Our operations in China continue
to outperform the Chinese economy, as we take advantage
of the well-known A. O. Smith brand in that market. Sales
of gas tankless water heaters increased more than 20
percent, while heat pump and other renewable water heater
technologies also grew at double-digit rates (all measured in
local currency). A sizable percentage of our sales are coming
from the e-commerce channel, with revenues of nearly $200
million last year. Water treatment products continue to grow
at a fast pace, as sales increased nearly 40 percent in the
local currency over the prior year. In addition, sales of our
air purification line of products nearly tripled over the prior
year as Chinese consumers became aware of the air pollution
problems in large parts of the country. To meet the demand
for water treatment and air purification products, we began
construction of a new 700,000 square foot plant in Nanjing
during the fourth quarter of 2016. The new plant, which also
will include new product engineering and quality labs, will
begin production early next year.
Looking ahead, we expect to achieve our eight percent
revenue growth model in 2017 as we benefit from an
incremental $40 million in Aquasana sales, improved
residential water heater sales in the U.S. and continued
commercial water heater and boiler sales increases. China’s
growth will continue to outpace that country’s economy as we
will benefit from household formation, market share gains
and higher average selling prices in the water heater market,
and the water treatment and air purification product lines
once again experience double-digit growth. This outlook is
tempered by the likelihood of higher material costs—most
notably steel—and the U.S. dollar’s impact on Chinese,
Canadian, and other foreign currencies.
Nonetheless, I have confidence in the A. O. Smith team and
its ability to meet these challenges—as they have in the
past—and succeed. Everyone throughout our organization is
focused on the Fundamentals for Success, the foundation for
everything we do as a company:
• Live our values which define who we are, how we do
business, and the relationship we have with our
customers, suppliers, and the communities in which we
do business;
• Relentlessly take care of the customer, obsessively
understand what our customers want and need in order
for them to succeed—and then deliver on those
needs;
• Invest in innovation in order to provide our customers
with market-leading products and solutions; and
• Invest in our people by giving them the training,
tools, and knowledge to take care of customers and
provide employees with the opportunity to grow to their
fullest potential.
Together, these four fundamentals contribute to A. O. Smith’s
profitable growth. They have served us extremely well for the
last 143 years, and I’m certain they will continue to serve us,
in 2017 and beyond.
Ajita G. Rajendra
Chairman and Chief Executive Officer
Letter to Shareholders
March 2017
A. O. Smith once again enjoyed record-setting results in 2016.
Sales increased six percent (eight percent in local currency) to
more than $2.69 billion, the seventh consecutive year of record
revenue performance. A number of factors contributed to the
sales record, most notably impressive 19 percent sales growth
(in local currency) for our China operations and continued
demand for our commercial water heater and high-efficiency
boiler products. Our global water treatment product sales
increased to $194 million thanks to growth of 35 percent
in China and the addition of Texas-based water treatment
company Aquasana, which we acquired in August.
Our earnings performance also set a record, increasing 17
percent to $1.85 per share. The higher commercial water
heater and boiler volumes and continued double-digit sales
growth in China, combined with improved pricing and lower
material costs during the first half of the year contributed to the
earnings improvement. Earnings were partially offset by lower
U.S. residential water heater sales and higher selling costs in
China to support expansion into the Tier 2 and Tier 3 cities as
well as higher advertising costs to support brand building and
the expansion of the air purification product line.
Cash flow from operating activities increased an impressive
27 percent to $447 million. As has been our practice the
last several years, the company returned cash to you, our
Board of Directors
Gloster B. Current Jr.
Retired Vice President, Corporate Affairs
& Assistant to the Chief Executive Officer,
Northwestern Mutual Life Insurance Company.
Elected to Board 20071
Paul W. Jones
Retired Executive Chairman and
former Chief Executive Officer.
Elected to Board 20042
Dr. Ilham Kadri
Senior Vice President, Sealed Air Corporation
and President, Diversey Care Division.
Elected to Board 2016
William P. Greubel
Retired Chief Executive Officer & Director,
Wabash National Corporation.
Elected to Board 20063,4
Gene C. Wulf
Retired Director and Executive Vice President,
Bemis Company, Inc.
Elected to Board 20031
Mark D. Smith
Business Manager, Strattec Security Corporation.
Elected to Board 20011
Idelle K. Wolf
Retired President, Barnes Distribution.
Elected to Board 20051
Ajita G. Rajendra
Chairman & Chief Executive Officer.
Elected to Board 20112
Ronald D. Brown
Chief Operating Officer, The Armor Group.
Elected to Board 20013,4
Bruce M. Smith
Retired Chairman of the Board of Managers &
former Chief Executive Officer, Smith Investment
Company LLC.
Elected to Board 19952,3,4
1 Audit Committee
2 Investment Policy Committee
3 Nominating and Governance Committee
4 Personnel and Compensation Committee
Senior Leadership
Patricia K. Ackerman
Vice President-
Investor Relations & Treasurer
Dr. Wilfridus M. Brouwer
Senior Vice President-
Asia Corporate Development
Paul R. Dana
Senior Vice President-
Global Manufacturing
Wei Ding
Senior Vice President,
President- A. O. Smith China
Wallace E. “Eddie”
Goodwin
President & Chief Operating
Officer- Lochinvar, LLC
Dr. Robert J. Heideman
Senior Vice President-
Chief Technology Officer
Daniel L. Kempken
Vice President & Controller
John J. Kita
Executive Vice President
& Chief Financial Officer
In August 2016 A. O. Smith acquired Aquasana, Inc. which designs, assembles and
markets premium performance water purification products, including whole-house
purification systems which are highlighted above.
Water Treatment Business Enters the
U.S. and Continues to Expand Globally
Water quality needs for U.S. consumers continue to evolve with an
aging and deteriorating water infrastructure and an increase in
consumer awareness of water quality problems, including unhealthy
drinking water throughout the country.
Responding to these trends, A. O. Smith entered into the North American
market in August 2016 with the acquisition of Texas-based Aquasana,
Inc. which designs, assembles and markets premium performance
water treatment products. Aquasana sells its whole-house treatment
systems, drinking water solutions for at home and on-the-go and
shower filters directly to U.S. consumers via www.aquasana.com, as
well as its Texas-based call center and direct to the consumer, and
through retail outlets and distributers.
Aquasana’s drinking water filters remove over 66 harmful contaminants
from water including chlorine, chloramines, pharmaceuticals,
herbicides, pesticides, industrial solvents, lead, asbestos, and mercury
and are engineered to preserve the healthy minerals in water, including
calcium, magnesium and potassium.
In 2016, the company continued to expand its water treatment line-up
around the world, with major advancements in China, India and Turkey
and the expansion into Vietnam as well.
• China: Nanjing Water Treatment (NWT) started construction on a
new 700,000 square foot plant, which is scheduled to begin
production in 2018. The new plant will manufacture residential
and commercial water treatment products, air purifiers and water
softeners. The company also launched a new line of Wifi intelligent
reverse osmosis (RO) water treatment products, which can be
paired through an APP on a smart-device to alert consumers to any
issues. The NWT team recently entered the commercial
water treatment market in 15 major markets in China.
• India: A. O. Smith entered four additional markets including:
Hyderabad, Pune, Kolkata, and Chennai. The company
introduced five new water treatment products in 2016 and
expanded beyond the RO category with the launch of a
unique UV water treatment that offers both ambient and
hot water. The two new under-the-counter products, provide
a digital display and alarm systems, unique in the industry
for under the counter products, and the two new RO models
allow for dispensing water at a touch of a button (i.e.
electronic faucets).
• Turkey: A. O. Smith expanded its presence in the residential and
light commercial channels in Istanbul and Ishmair through an
exclusive dealer network in those cities. Two new RO units,
the Lotus and the Daisy, were also introduced in 2016.
• Vietnam: Sales reached $3.5 million in 2016, as the Vietnam
team continues to focus its efforts on selling premium
RO water treatment products using the patented side-stream
membrane technology and continues to develop their sales
channels in that country.
The Flint, Michigan, water crisis and the continued lead
contamination issues throughout the U.S. have created greater
consumer awareness of water quality issues; however, more
education is needed to inform consumers about Chromium 6,
Teflon, and other drinking water contaminants. In addition to
marketing innovative, effective water treatment products,
A. O. Smith will continue to be a thought leader in this
important global industry.
In 2016 the company began construction on a new 700,000 square foot plant,
which will manufacture residential and commercial treatment products, air
purifiers and water softeners in Nanjing, China.
shareholders. We repurchased more than
The North American segment unit reported sales increased
will include new product engineering and quality labs, will
three million shares of company stock at
to $1.74 billion, a 14 percent increase in operating profits to
begin production early next year.
an approximate cost of $135 million.
In January, we announced a 17 percent
$385.9 million and an impressive 200 basis point increase in
operating margin. Higher volumes of boilers and commercial
Looking ahead, we expect to achieve our eight percent
increase in the company’s quarterly cash
water heaters contributed to the sales increase, and the team
revenue growth model in 2017 as we benefit from an
dividend, the 12th consecutive year in
in Canada did an excellent job of growing the business in
incremental $40 million in Aquasana sales, improved
which we raised the dividend.
spite of the challenges coming from the strong U.S. dollar.
residential water heater sales in the U.S. and continued
Although sales of Lochinvar-branded products did not
commercial water heater and boiler sales increases. China’s
In August, the company entered the North
increase at the pace we expected, we did add share in the
growth will continue to outpace that country’s economy as we
American water treatment market with
the acquisition of Aquasana, Inc., of
Austin, Texas. Aquasana manufactures
an extensive line of premium water
important high-efficiency condensing boiler market. With a
will benefit from household formation, market share gains
large installed base of older, inefficient cast iron boilers in
and higher average selling prices in the water heater market,
North America, we believe there is room for further growth
and the water treatment and air purification product lines
in this market segment. After a number of years focused
once again experience double-digit growth. This outlook is
treatment products, ranging from point-
on meeting new government efficiency standards, we are
tempered by the likelihood of higher material costs—most
of-entry systems for the home and
on-the-go products such as portable
filter bottles. Aquasana markets its
products directly to consumers, with 80
percent of sales coming from its web
site and call center located just outside
Fort Worth. We believe this new business
presents us with numerous opportunities,
as consumers are becoming more aware
of water quality issues throughout the U.S. and are seeking
healthier alternatives for their families. We also anticipate
revenue synergies as we take Aquasana products to our existing
businesses in China and India and introduce our patented
reverse osmosis products to U.S. consumers.
now turning our sights to new product development, and
notably steel—and the U.S. dollar’s impact on Chinese,
2017 promises to be a busy year in both the commercial and
Canadian, and other foreign currencies.
residential segments. Chief among these new products are:
• The Cyclone® series 300 with an integrated touchscreen
and remote monitoring capability;
Nonetheless, I have confidence in the A. O. Smith team and
its ability to meet these challenges—as they have in the
past—and succeed. Everyone throughout our organization is
• The Lochinvar Noble combi boiler that allows us to enter
focused on the Fundamentals for Success, the foundation for
a portion of the residential boiler market in which we
everything we do as a company:
were not participating;
• The ProLine® series of commercial-grade residential
water heaters. These units feature a number of
• Live our values which define who we are, how we do
business, and the relationship we have with our
customers, suppliers, and the communities in which we
commercial quality components developed by APCOM and,
do business;
in some cases, come with an eight-year warranty; and
• A full suite of electric tankless water heaters, a line of
understand what our customers want and need in order
products we have not offered in the past.
for them to succeed—and then deliver on those
• Relentlessly take care of the customer, obsessively
Growth Strategy: Organic Growth
China:
32% of sales growing 15%
Lochinvar
brands:
NA water
heaters &
other:
4.8%
.9%
2.3%
8.0%
11% of sales growing 8%
57% of sales growing 4%
Total annual sales growth
The Rest of World segment experienced a sales increase
of 11 percent to $965.6 million, operating earnings of
$129.1 million, a 14 percent increase, and operating
margins of 13.4 percent. Our operations in China continue
to outperform the Chinese economy, as we take advantage
of the well-known A. O. Smith brand in that market. Sales
of gas tankless water heaters increased more than 20
percent, while heat pump and other renewable water heater
technologies also grew at double-digit rates (all measured in
local currency). A sizable percentage of our sales are coming
from the e-commerce channel, with revenues of nearly $200
at a fast pace, as sales increased nearly 40 percent in the
local currency over the prior year. In addition, sales of our
air purification line of products nearly tripled over the prior
year as Chinese consumers became aware of the air pollution
problems in large parts of the country. To meet the demand
for water treatment and air purification products, we began
million last year. Water treatment products continue to grow
in 2017 and beyond.
needs;
• Invest in innovation in order to provide our customers
with market-leading products and solutions; and
• Invest in our people by giving them the training,
tools, and knowledge to take care of customers and
provide employees with the opportunity to grow to their
fullest potential.
Together, these four fundamentals contribute to A. O. Smith’s
profitable growth. They have served us extremely well for the
last 143 years, and I’m certain they will continue to serve us,
construction of a new 700,000 square foot plant in Nanjing
Ajita G. Rajendra
during the fourth quarter of 2016. The new plant, which also
Chairman and Chief Executive Officer
Letter to Shareholders
March 2017
A. O. Smith once again enjoyed record-setting results in 2016.
Sales increased six percent (eight percent in local currency) to
more than $2.69 billion, the seventh consecutive year of record
revenue performance. A number of factors contributed to the
sales record, most notably impressive 19 percent sales growth
(in local currency) for our China operations and continued
demand for our commercial water heater and high-efficiency
boiler products. Our global water treatment product sales
increased to $194 million thanks to growth of 35 percent
in China and the addition of Texas-based water treatment
company Aquasana, which we acquired in August.
Our earnings performance also set a record, increasing 17
percent to $1.85 per share. The higher commercial water
heater and boiler volumes and continued double-digit sales
growth in China, combined with improved pricing and lower
material costs during the first half of the year contributed to the
earnings improvement. Earnings were partially offset by lower
U.S. residential water heater sales and higher selling costs in
China to support expansion into the Tier 2 and Tier 3 cities as
well as higher advertising costs to support brand building and
the expansion of the air purification product line.
Cash flow from operating activities increased an impressive
27 percent to $447 million. As has been our practice the
last several years, the company returned cash to you, our
Northwestern Mutual Life Insurance Company.
Business Manager, Strattec Security Corporation.
Retired President, Barnes Distribution.
Board of Directors
Gloster B. Current Jr.
Retired Vice President, Corporate Affairs
& Assistant to the Chief Executive Officer,
Elected to Board 20071
Paul W. Jones
Retired Executive Chairman and
former Chief Executive Officer.
Elected to Board 20042
Dr. Ilham Kadri
William P. Greubel
Wabash National Corporation.
Elected to Board 20063,4
Mark D. Smith
Elected to Board 20011
Ajita G. Rajendra
Chairman & Chief Executive Officer.
Elected to Board 20112
Bruce M. Smith
Retired Chairman of the Board of Managers &
Gene C. Wulf
Bemis Company, Inc.
Elected to Board 20031
Idelle K. Wolf
Elected to Board 20051
Ronald D. Brown
Chief Operating Officer, The Armor Group.
Elected to Board 20013,4
Senior Vice President, Sealed Air Corporation
former Chief Executive Officer, Smith Investment
and President, Diversey Care Division.
Elected to Board 2016
Company LLC.
Elected to Board 19952,3,4
1 Audit Committee
2 Investment Policy Committee
3 Nominating and Governance Committee
4 Personnel and Compensation Committee
Retired Chief Executive Officer & Director,
Retired Director and Executive Vice President,
Senior Leadership
Senior Leadership
Patricia K. Ackerman
Vice President-
Investor Relations & Treasurer
Dr. Wilfridus M. Brouwer
Senior Vice President-
Asia Corporate Development
Charles T. Lauber
Senior Vice President-
Strategy & Corporate
Development
Peter R. Martineau
Senior Vice President &
Chief Information Officer
In August 2016 A. O. Smith acquired Aquasana, Inc. which designs, assembles and
markets premium performance water purification products, including whole-house
purification systems which are highlighted above.
Paul R. Dana
Senior Vice President-
Global Manufacturing
Wei Ding
Senior Vice President,
President- A. O. Smith China
Wallace E. “Eddie”
Goodwin
President & Chief Operating
Officer- Lochinvar, LLC
Dr. Robert J. Heideman
Senior Vice President-
Chief Technology Officer
Daniel L. Kempken
Vice President & Controller
John J. Kita
Executive Vice President
& Chief Financial Officer
Water Treatment Business Enters the
U.S. and Continues to Expand Globally
Water quality needs for U.S. consumers continue to evolve with an
aging and deteriorating water infrastructure and an increase in
consumer awareness of water quality problems, including unhealthy
drinking water throughout the country.
Mark A. Petrarca
Senior Vice President- Human
Resources & Public Affairs
Ajita G. Rajendra
Chairman & Chief
Executive Officer
Responding to these trends, A. O. Smith entered into the North American
market in August 2016 with the acquisition of Texas-based Aquasana,
Inc. which designs, assembles and markets premium performance
water treatment products. Aquasana sells its whole-house treatment
systems, drinking water solutions for at home and on-the-go and
shower filters directly to U.S. consumers via www.aquasana.com, as
well as its Texas-based call center and direct to the consumer, and
through retail outlets and distributers.
James F. Stern
Executive Vice President,
General Counsel & Secretary
William L. Vallett, Jr.
Aquasana’s drinking water filters remove over 66 harmful contaminants
Senior Vice President,
from water including chlorine, chloramines, pharmaceuticals,
Chief Executive Officer-
herbicides, pesticides, industrial solvents, lead, asbestos, and mercury
Lochinvar, LLC
and are engineered to preserve the healthy minerals in water, including
calcium, magnesium and potassium.
In 2016, the company continued to expand its water treatment line-up
around the world, with major advancements in China, India and Turkey
and the expansion into Vietnam as well.
• China: Nanjing Water Treatment (NWT) started construction on a
new 700,000 square foot plant, which is scheduled to begin
production in 2018. The new plant will manufacture residential
and commercial water treatment products, air purifiers and water
softeners. The company also launched a new line of Wifi intelligent
reverse osmosis (RO) water treatment products, which can be
paired through an APP on a smart-device to alert consumers to any
Kevin J. Wheeler
Senior Vice President and
General Manager- North America,
India, Europe & Export
issues. The NWT team recently entered the commercial
Wholesale Channel Adapting to
water treatment market in 15 major markets in China.
Changing Markets, Customers
• India: A. O. Smith entered four additional markets including:
Hyderabad, Pune, Kolkata, and Chennai. The company
Wholesale distribution is A. O. Smith’s largest water heater
introduced five new water treatment products in 2016 and
market channel and has been since the company began selling
expanded beyond the RO category with the launch of a
residential water heaters more than 70 years ago. Today, as
unique UV water treatment that offers both ambient and
market channels blur due to online technologies and changing
hot water. The two new under-the-counter products, provide
consumer preferences, the wholesale channel continues to adapt
a digital display and alarm systems, unique in the industry
its business model to the changing competitive environment.
for under the counter products, and the two new RO models
Despite the changes, wholesale distribution remains positioned
allow for dispensing water at a touch of a button (i.e.
to thrive in the long term, due to a number of factors:
electronic faucets).
• As water heaters become more complex, they require
• Turkey: A. O. Smith expanded its presence in the residential and
professional installation. Wholesale distribution is closely
light commercial channels in Istanbul and Ishmair through an
aligned with plumbing contractors;
exclusive dealer network in those cities. Two new RO units,
the Lotus and the Daisy, were also introduced in 2016.
• Distributors remain the major driver in commercial water
heating due to innovative programs that make products
• Vietnam: Sales reached $3.5 million in 2016, as the Vietnam
and support available 24/7;
team continues to focus its efforts on selling premium
RO water treatment products using the patented side-stream
• Wholesale distribution, with its extensive logistics
membrane technology and continues to develop their sales
capabilities, is well-adapted to serve the new
channels in that country.
construction market.
The Flint, Michigan, water crisis and the continued lead
contamination issues throughout the U.S. have created greater
Wholesale distributors are responding to a new generation
consumer awareness of water quality issues; however, more
of consumers who are more engaged in any purchase that
education is needed to inform consumers about Chromium 6,
affects their homes. Whereas, in the past, many wholesalers
Teflon, and other drinking water contaminants. In addition to
discouraged direct consumer contact, today they are opening
marketing innovative, effective water treatment products,
large, well-appointed showrooms and utilizing digital marketing
A. O. Smith will continue to be a thought leader in this
tools to attract customers, particularly millennials. The term
for this approach is “omni-channel,” which means creating the
important global industry.
same environment for a customer no matter how he or she
wants to shop.
The upgraded product sizing APP is designed to help plumbing contractors guide
In 2016 the company began construction on a new 700,000 square foot plant,
consumers through the water heater selection process. The new APP is the latest
which will manufacture residential and commercial treatment products, air
in a series of online tools designed to help plumbing contractors offer more value
purifiers and water softeners in Nanjing, China.
to their customers.
Engineering Technician Jamie Wilks checks the remote monitoring capability of
a Cyclone® series 300 high efficiency water heater under test in the commercial
product engineering center. The Cyclone 300, which was introduced in January,
offers remote monitoring through a smart phone APP to help customers keep
tabs on water heater performance.
Over the last several years, A. O. Smith has developed a number
of tools and services to support its valued partners in the
wholesale distribution channel, and that effort will continue in
2017. One of the most visible services is the contractor locator,
a lead-generation tool provided on our wholesale websites.
The locator uses proprietary geo-locating algorithms to help
consumers find a qualified plumber near their home who can
install or service their water heater.
As products become more diverse and more complex, consumers
are asking for assistance in selecting the right water heater for
their homes. To meet this need, A. O. Smith has developed an
exclusive product sizing tool, available online or as an APP for
plumbers to download. The new tool allows plumbers to take
a consulting approach in helping guide customers through the
water heater sizing and selection process. To further assist with
the selection process, A. O. Smith includes rating and reviews for
residential water heaters on its web properties.
Another important new tool is the Green Sky® consumer financing
program that plumbing contractors can offer to their customer.
The financing covers not just the water heater, but also
installation, and other plumbing services. Overcoming the up-
front cost of a water heater purchase has been a barrier to more
adoption of energy efficient technologies, and this financing tool
has enabled contractors to effectively offer these solutions to
their customers.
All of these programs are designed to drive business to the
company’s channel partners, particularly plumbing contractors.
This, combined with the constant introduction of new residential
and commercial products, will help the wholesale distribution
channel continue to enjoy success for years to come.
11270 West Park Place
P.O. Box 245008
Milwaukee, WI 53224-9508
414.359.4000
www.aosmith.com
2016 Annual Report
A. O. Smith Corporation Five Year
Cumulative Total Return
December 31, 2011 to December 31, 2016
500
450
400
350
300
250
200
150
100
50
0
2011 2012 2013 2014 2015 2016
A. O. Smith Corp
S&P Midcap 400 Index
Russell 1000 Index
501.4%
A. O. Smith 2016
204.1%
S&P Midcap 400 2016
198.4%
Russell 1000 2016
Corporate Profile
A. O. Smith Corporation is a global leader
applying innovative technology and energy-
efficient solutions to products manufactured
and marketed worldwide. The company is
one of the world’s leading manufacturers
of residential and commercial water
heating equipment and boilers, as well as a
manufacturer of water treatment products for
residential and light commercial applications.
A. O. Smith is headquartered in Milwaukee,
WI, with approximately 15,500 employees at
operations in the U. S., Canada, China, India,
Mexico, the Netherlands, Turkey, the
United Kingdom and Vietnam.
The company has paid cash dividends on its
common stock every year since 1940.
Net Sales-Continuing
(Dollars in billions)
$2.69 billion
2016
$1.94
$2.15
$2.36
$2.54
$2.69
2012
2013
2014
2015
2016
Earnings per
Share-Continuing*
(Dollars)
$1.85 per share
2016
The Lebanon plant has more than doubled the size of its product engineering lab and
added new testing capabilities to support its ambitious new product development plans.
Global Locations
Milwaukee, WI (world headquarters)
Ashland City, TN
Austin, TX
Banbury, England
Bangalore, India
Charlotte, NC
Cookeville, TN
Dubai, United Arab
Emirates
El Paso, TX
Fergus, Canada
Florence, KY
Franklin, TN
Hanoi, Vietnam
Hong Kong, China
Irvine, CA
Istanbul, Turkey
Johnson City, TN
Juarez, Mexico
Knoxville, TN
Lebanon, TN
McBee, SC
Nanjing, China
Renton, WA
Stratford, Canada
Registrar. Stock Transfer Agent,
Dividend Reinvestment Agent
(for both classes of stock)
Wells Fargo Bank, N.A.
Shareowner Servicessm
161 N. Concord Exchange Street
South St. Paul, MN 55075
800-468-9716
www.shareowneronline.com
Annual Meeting
The 2017 annual meeting of
shareholders will be held on Monday,
April 10, 2017, at 8:00 a.m. (CDT)
at APCOM, Inc., 125 Southeast
$078
2012
$1.03
$1.22
$1.58
$1.85
2013
2014
2015
2016
*2012-2014 earnings per share are non-GAAP.
Haltom City, TX
Veldhoven, the Netherlands
Parkway, Franklin, TN.
Wholesale Channel Adapting to
Changing Markets, Customers
Wholesale distribution is A. O. Smith’s largest water heater
market channel and has been since the company began selling
residential water heaters more than 70 years ago. Today, as
market channels blur due to online technologies and changing
consumer preferences, the wholesale channel continues to adapt
its business model to the changing competitive environment.
Despite the changes, wholesale distribution remains positioned
to thrive in the long term, due to a number of factors:
• As water heaters become more complex, they require
professional installation. Wholesale distribution is closely
aligned with plumbing contractors;
• Distributors remain the major driver in commercial water
heating due to innovative programs that make products
and support available 24/7;
• Wholesale distribution, with its extensive logistics
capabilities, is well-adapted to serve the new
construction market.
Wholesale distributors are responding to a new generation
of consumers who are more engaged in any purchase that
affects their homes. Whereas, in the past, many wholesalers
discouraged direct consumer contact, today they are opening
large, well-appointed showrooms and utilizing digital marketing
tools to attract customers, particularly millennials. The term
for this approach is “omni-channel,” which means creating the
same environment for a customer no matter how he or she
wants to shop.
Senior Leadership
Charles T. Lauber
Senior Vice President-
Strategy & Corporate
Development
Peter R. Martineau
Senior Vice President &
Chief Information Officer
Mark A. Petrarca
Senior Vice President- Human
Resources & Public Affairs
Ajita G. Rajendra
Chairman & Chief
Executive Officer
James F. Stern
Executive Vice President,
General Counsel & Secretary
William L. Vallett, Jr.
Senior Vice President,
Chief Executive Officer-
Lochinvar, LLC
Kevin J. Wheeler
Senior Vice President and
General Manager- North America,
India, Europe & Export
The upgraded product sizing APP is designed to help plumbing contractors guide
consumers through the water heater selection process. The new APP is the latest
in a series of online tools designed to help plumbing contractors offer more value
to their customers.
Engineering Technician Jamie Wilks checks the remote monitoring capability of
a Cyclone® series 300 high efficiency water heater under test in the commercial
product engineering center. The Cyclone 300, which was introduced in January,
offers remote monitoring through a smart phone APP to help customers keep
tabs on water heater performance.
Over the last several years, A. O. Smith has developed a number
of tools and services to support its valued partners in the
wholesale distribution channel, and that effort will continue in
2017. One of the most visible services is the contractor locator,
a lead-generation tool provided on our wholesale websites.
The locator uses proprietary geo-locating algorithms to help
consumers find a qualified plumber near their home who can
install or service their water heater.
As products become more diverse and more complex, consumers
are asking for assistance in selecting the right water heater for
their homes. To meet this need, A. O. Smith has developed an
exclusive product sizing tool, available online or as an APP for
plumbers to download. The new tool allows plumbers to take
a consulting approach in helping guide customers through the
water heater sizing and selection process. To further assist with
the selection process, A. O. Smith includes rating and reviews for
residential water heaters on its web properties.
Another important new tool is the Green Sky® consumer financing
program that plumbing contractors can offer to their customer.
The financing covers not just the water heater, but also
installation, and other plumbing services. Overcoming the up-
front cost of a water heater purchase has been a barrier to more
adoption of energy efficient technologies, and this financing tool
has enabled contractors to effectively offer these solutions to
their customers.
All of these programs are designed to drive business to the
company’s channel partners, particularly plumbing contractors.
This, combined with the constant introduction of new residential
and commercial products, will help the wholesale distribution
channel continue to enjoy success for years to come.
11270 West Park Place
P.O. Box 245008
Milwaukee, WI 53224-9508
414.359.4000
www.aosmith.com
2016 Annual Report
Corporate Profile
A. O. Smith Corporation is a global leader
applying innovative technology and energy-
efficient solutions to products manufactured
and marketed worldwide. The company is
one of the world’s leading manufacturers
of residential and commercial water
heating equipment and boilers, as well as a
manufacturer of water treatment products for
residential and light commercial applications.
A. O. Smith is headquartered in Milwaukee,
WI, with approximately 15,500 employees at
operations in the U. S., Canada, China, India,
Mexico, the Netherlands, Turkey, the
United Kingdom and Vietnam.
The company has paid cash dividends on its
common stock every year since 1940.
Net Sales-Continuing
(Dollars in billions)
$2.69 billion
2016
$1.94
$2.15
$2.36
$2.54
$2.69
2012
2013
2014
2015
2016
Earnings per
Share-Continuing*
(Dollars)
$1.85 per share
2016
$078
2012
$1.03
$1.22
$1.58
$1.85
2013
2014
2015
2016
*2012-2014 earnings per share are non-GAAP.
A. O. Smith Corporation Five Year
Cumulative Total Return
December 31, 2011 to December 31, 2016
500
450
400
350
300
250
200
150
100
50
0
501.4%
A. O. Smith 2016
204.1%
S&P Midcap 400 2016
198.4%
Russell 1000 2016
2011 2012 2013 2014 2015 2016
A. O. Smith Corp
S&P Midcap 400 Index
Russell 1000 Index
The Lebanon plant has more than doubled the size of its product engineering lab and
added new testing capabilities to support its ambitious new product development plans.
Global Locations
Milwaukee, WI (world headquarters)
Ashland City, TN
Austin, TX
Banbury, England
Bangalore, India
Charlotte, NC
Cookeville, TN
Dubai, United Arab
Emirates
El Paso, TX
Fergus, Canada
Florence, KY
Franklin, TN
Haltom City, TX
Hanoi, Vietnam
Hong Kong, China
Irvine, CA
Istanbul, Turkey
Johnson City, TN
Juarez, Mexico
Knoxville, TN
Lebanon, TN
McBee, SC
Nanjing, China
Renton, WA
Stratford, Canada
Veldhoven, the Netherlands
Registrar. Stock Transfer Agent,
Dividend Reinvestment Agent
(for both classes of stock)
Wells Fargo Bank, N.A.
Shareowner Servicessm
161 N. Concord Exchange Street
South St. Paul, MN 55075
800-468-9716
www.shareowneronline.com
Annual Meeting
The 2017 annual meeting of
shareholders will be held on Monday,
April 10, 2017, at 8:00 a.m. (CDT)
at APCOM, Inc., 125 Southeast
Parkway, Franklin, TN.
shareholders. We repurchased more than
three million shares of company stock at
an approximate cost of $135 million.
In January, we announced a 17 percent
increase in the company’s quarterly cash
dividend, the 12th consecutive year in
which we raised the dividend.
In August, the company entered the North
American water treatment market with
the acquisition of Aquasana, Inc., of
Austin, Texas. Aquasana manufactures
an extensive line of premium water
treatment products, ranging from point-
of-entry systems for the home and
on-the-go products such as portable
filter bottles. Aquasana markets its
products directly to consumers, with 80
percent of sales coming from its web
site and call center located just outside
Fort Worth. We believe this new business
presents us with numerous opportunities,
as consumers are becoming more aware
of water quality issues throughout the U.S. and are seeking
healthier alternatives for their families. We also anticipate
revenue synergies as we take Aquasana products to our existing
businesses in China and India and introduce our patented
reverse osmosis products to U.S. consumers.
Growth Strategy: Organic Growth
China:
Lochinvar
brands:
NA water
heaters &
other:
32% of sales growing 15%
4.8%
11% of sales growing 8%
.9%
57% of sales growing 4%
2.3%
Total annual sales growth
8.0%
The North American segment unit reported sales increased
to $1.74 billion, a 14 percent increase in operating profits to
$385.9 million and an impressive 200 basis point increase in
operating margin. Higher volumes of boilers and commercial
water heaters contributed to the sales increase, and the team
in Canada did an excellent job of growing the business in
spite of the challenges coming from the strong U.S. dollar.
Although sales of Lochinvar-branded products did not
increase at the pace we expected, we did add share in the
important high-efficiency condensing boiler market. With a
large installed base of older, inefficient cast iron boilers in
North America, we believe there is room for further growth
in this market segment. After a number of years focused
on meeting new government efficiency standards, we are
now turning our sights to new product development, and
2017 promises to be a busy year in both the commercial and
residential segments. Chief among these new products are:
• The Cyclone® series 300 with an integrated touchscreen
and remote monitoring capability;
• The Lochinvar Noble combi boiler that allows us to enter
a portion of the residential boiler market in which we
were not participating;
• The ProLine® series of commercial-grade residential
water heaters. These units feature a number of
commercial quality components developed by APCOM and,
in some cases, come with an eight-year warranty; and
• A full suite of electric tankless water heaters, a line of
products we have not offered in the past.
The Rest of World segment experienced a sales increase
of 11 percent to $965.6 million, operating earnings of
$129.1 million, a 14 percent increase, and operating
margins of 13.4 percent. Our operations in China continue
to outperform the Chinese economy, as we take advantage
of the well-known A. O. Smith brand in that market. Sales
of gas tankless water heaters increased more than 20
percent, while heat pump and other renewable water heater
technologies also grew at double-digit rates (all measured in
local currency). A sizable percentage of our sales are coming
from the e-commerce channel, with revenues of nearly $200
million last year. Water treatment products continue to grow
at a fast pace, as sales increased nearly 40 percent in the
local currency over the prior year. In addition, sales of our
air purification line of products nearly tripled over the prior
year as Chinese consumers became aware of the air pollution
problems in large parts of the country. To meet the demand
for water treatment and air purification products, we began
construction of a new 700,000 square foot plant in Nanjing
during the fourth quarter of 2016. The new plant, which also
will include new product engineering and quality labs, will
begin production early next year.
Looking ahead, we expect to achieve our eight percent
revenue growth model in 2017 as we benefit from an
incremental $40 million in Aquasana sales, improved
residential water heater sales in the U.S. and continued
commercial water heater and boiler sales increases. China’s
growth will continue to outpace that country’s economy as we
will benefit from household formation, market share gains
and higher average selling prices in the water heater market,
and the water treatment and air purification product lines
once again experience double-digit growth. This outlook is
tempered by the likelihood of higher material costs—most
notably steel—and the U.S. dollar’s impact on Chinese,
Canadian, and other foreign currencies.
Nonetheless, I have confidence in the A. O. Smith team and
its ability to meet these challenges—as they have in the
past—and succeed. Everyone throughout our organization is
focused on the Fundamentals for Success, the foundation for
everything we do as a company:
• Live our values which define who we are, how we do
business, and the relationship we have with our
customers, suppliers, and the communities in which we
do business;
• Relentlessly take care of the customer, obsessively
understand what our customers want and need in order
for them to succeed—and then deliver on those
needs;
• Invest in innovation in order to provide our customers
with market-leading products and solutions; and
• Invest in our people by giving them the training,
tools, and knowledge to take care of customers and
provide employees with the opportunity to grow to their
fullest potential.
Together, these four fundamentals contribute to A. O. Smith’s
profitable growth. They have served us extremely well for the
last 143 years, and I’m certain they will continue to serve us,
in 2017 and beyond.
Ajita G. Rajendra
Chairman and Chief Executive Officer
Letter to Shareholders
March 2017
A. O. Smith once again enjoyed record-setting results in 2016.
Sales increased six percent (eight percent in local currency) to
more than $2.69 billion, the seventh consecutive year of record
revenue performance. A number of factors contributed to the
sales record, most notably impressive 19 percent sales growth
(in local currency) for our China operations and continued
demand for our commercial water heater and high-efficiency
boiler products. Our global water treatment product sales
increased to $194 million thanks to growth of 35 percent
in China and the addition of Texas-based water treatment
company Aquasana, which we acquired in August.
Our earnings performance also set a record, increasing 17
percent to $1.85 per share. The higher commercial water
heater and boiler volumes and continued double-digit sales
growth in China, combined with improved pricing and lower
material costs during the first half of the year contributed to the
earnings improvement. Earnings were partially offset by lower
U.S. residential water heater sales and higher selling costs in
China to support expansion into the Tier 2 and Tier 3 cities as
well as higher advertising costs to support brand building and
the expansion of the air purification product line.
Cash flow from operating activities increased an impressive
27 percent to $447 million. As has been our practice the
last several years, the company returned cash to you, our
Board of Directors
Gloster B. Current Jr.
Retired Vice President, Corporate Affairs
& Assistant to the Chief Executive Officer,
Northwestern Mutual Life Insurance Company.
Elected to Board 20071
Paul W. Jones
Retired Executive Chairman and
former Chief Executive Officer.
Elected to Board 20042
Dr. Ilham Kadri
Senior Vice President, Sealed Air Corporation
and President, Diversey Care Division.
Elected to Board 2016
William P. Greubel
Retired Chief Executive Officer & Director,
Wabash National Corporation.
Elected to Board 20063,4
Gene C. Wulf
Retired Director and Executive Vice President,
Bemis Company, Inc.
Elected to Board 20031
Mark D. Smith
Business Manager, Strattec Security Corporation.
Elected to Board 20011
Idelle K. Wolf
Retired President, Barnes Distribution.
Elected to Board 20051
Ajita G. Rajendra
Chairman & Chief Executive Officer.
Elected to Board 20112
Ronald D. Brown
Chief Operating Officer, The Armor Group.
Elected to Board 20013,4
Bruce M. Smith
Retired Chairman of the Board of Managers &
former Chief Executive Officer, Smith Investment
Company LLC.
Elected to Board 19952,3,4
1 Audit Committee
2 Investment Policy Committee
3 Nominating and Governance Committee
4 Personnel and Compensation Committee
Senior Leadership
Patricia K. Ackerman
Vice President-
Investor Relations & Treasurer
Dr. Wilfridus M. Brouwer
Senior Vice President-
Asia Corporate Development
Paul R. Dana
Senior Vice President-
Global Manufacturing
Wei Ding
Senior Vice President,
President- A. O. Smith China
Wallace E. “Eddie”
Goodwin
President & Chief Operating
Officer- Lochinvar, LLC
Dr. Robert J. Heideman
Senior Vice President-
Chief Technology Officer
Daniel L. Kempken
Vice President & Controller
John J. Kita
Executive Vice President
& Chief Financial Officer
In August 2016 A. O. Smith acquired Aquasana, Inc. which designs, assembles and
markets premium performance water purification products, including whole-house
purification systems which are highlighted above.
Water Treatment Business Enters the
U.S. and Continues to Expand Globally
Water quality needs for U.S. consumers continue to evolve with an
aging and deteriorating water infrastructure and an increase in
consumer awareness of water quality problems, including unhealthy
drinking water throughout the country.
Responding to these trends, A. O. Smith entered into the North American
market in August 2016 with the acquisition of Texas-based Aquasana,
Inc. which designs, assembles and markets premium performance
water treatment products. Aquasana sells its whole-house treatment
systems, drinking water solutions for at home and on-the-go and
shower filters directly to U.S. consumers via www.aquasana.com, as
well as its Texas-based call center and direct to the consumer, and
through retail outlets and distributers.
Aquasana’s drinking water filters remove over 66 harmful contaminants
from water including chlorine, chloramines, pharmaceuticals,
herbicides, pesticides, industrial solvents, lead, asbestos, and mercury
and are engineered to preserve the healthy minerals in water, including
calcium, magnesium and potassium.
In 2016, the company continued to expand its water treatment line-up
around the world, with major advancements in China, India and Turkey
and the expansion into Vietnam as well.
• China: Nanjing Water Treatment (NWT) started construction on a
new 700,000 square foot plant, which is scheduled to begin
production in 2018. The new plant will manufacture residential
and commercial water treatment products, air purifiers and water
softeners. The company also launched a new line of Wifi intelligent
reverse osmosis (RO) water treatment products, which can be
paired through an APP on a smart-device to alert consumers to any
issues. The NWT team recently entered the commercial
water treatment market in 15 major markets in China.
• India: A. O. Smith entered four additional markets including:
Hyderabad, Pune, Kolkata, and Chennai. The company
introduced five new water treatment products in 2016 and
expanded beyond the RO category with the launch of a
unique UV water treatment that offers both ambient and
hot water. The two new under-the-counter products, provide
a digital display and alarm systems, unique in the industry
for under the counter products, and the two new RO models
allow for dispensing water at a touch of a button (i.e.
electronic faucets).
• Turkey: A. O. Smith expanded its presence in the residential and
light commercial channels in Istanbul and Ishmair through an
exclusive dealer network in those cities. Two new RO units,
the Lotus and the Daisy, were also introduced in 2016.
• Vietnam: Sales reached $3.5 million in 2016, as the Vietnam
team continues to focus its efforts on selling premium
RO water treatment products using the patented side-stream
membrane technology and continues to develop their sales
channels in that country.
The Flint, Michigan, water crisis and the continued lead
contamination issues throughout the U.S. have created greater
consumer awareness of water quality issues; however, more
education is needed to inform consumers about Chromium 6,
Teflon, and other drinking water contaminants. In addition to
marketing innovative, effective water treatment products,
A. O. Smith will continue to be a thought leader in this
important global industry.
In 2016 the company began construction on a new 700,000 square foot plant,
which will manufacture residential and commercial treatment products, air
purifiers and water softeners in Nanjing, China.
Wholesale Channel Adapting to
Changing Markets, Customers
Wholesale distribution is A. O. Smith’s largest water heater
market channel and has been since the company began selling
residential water heaters more than 70 years ago. Today, as
market channels blur due to online technologies and changing
consumer preferences, the wholesale channel continues to adapt
its business model to the changing competitive environment.
Despite the changes, wholesale distribution remains positioned
to thrive in the long term, due to a number of factors:
• As water heaters become more complex, they require
professional installation. Wholesale distribution is closely
aligned with plumbing contractors;
• Distributors remain the major driver in commercial water
heating due to innovative programs that make products
and support available 24/7;
• Wholesale distribution, with its extensive logistics
capabilities, is well-adapted to serve the new
construction market.
Wholesale distributors are responding to a new generation
of consumers who are more engaged in any purchase that
affects their homes. Whereas, in the past, many wholesalers
discouraged direct consumer contact, today they are opening
large, well-appointed showrooms and utilizing digital marketing
tools to attract customers, particularly millennials. The term
for this approach is “omni-channel,” which means creating the
same environment for a customer no matter how he or she
wants to shop.
Senior Leadership
Charles T. Lauber
Senior Vice President-
Strategy & Corporate
Development
Peter R. Martineau
Senior Vice President &
Chief Information Officer
Mark A. Petrarca
Senior Vice President- Human
Resources & Public Affairs
Ajita G. Rajendra
Chairman & Chief
Executive Officer
James F. Stern
Executive Vice President,
General Counsel & Secretary
William L. Vallett, Jr.
Senior Vice President,
Chief Executive Officer-
Lochinvar, LLC
Kevin J. Wheeler
Senior Vice President and
General Manager- North America,
India, Europe & Export
The upgraded product sizing APP is designed to help plumbing contractors guide
consumers through the water heater selection process. The new APP is the latest
in a series of online tools designed to help plumbing contractors offer more value
to their customers.
Engineering Technician Jamie Wilks checks the remote monitoring capability of
a Cyclone® series 300 high efficiency water heater under test in the commercial
product engineering center. The Cyclone 300, which was introduced in January,
offers remote monitoring through a smart phone APP to help customers keep
tabs on water heater performance.
Over the last several years, A. O. Smith has developed a number
of tools and services to support its valued partners in the
wholesale distribution channel, and that effort will continue in
2017. One of the most visible services is the contractor locator,
a lead-generation tool provided on our wholesale websites.
The locator uses proprietary geo-locating algorithms to help
consumers find a qualified plumber near their home who can
install or service their water heater.
As products become more diverse and more complex, consumers
are asking for assistance in selecting the right water heater for
their homes. To meet this need, A. O. Smith has developed an
exclusive product sizing tool, available online or as an APP for
plumbers to download. The new tool allows plumbers to take
a consulting approach in helping guide customers through the
water heater sizing and selection process. To further assist with
the selection process, A. O. Smith includes rating and reviews for
residential water heaters on its web properties.
Another important new tool is the Green Sky® consumer financing
program that plumbing contractors can offer to their customer.
The financing covers not just the water heater, but also
installation, and other plumbing services. Overcoming the up-
front cost of a water heater purchase has been a barrier to more
adoption of energy efficient technologies, and this financing tool
has enabled contractors to effectively offer these solutions to
their customers.
All of these programs are designed to drive business to the
company’s channel partners, particularly plumbing contractors.
This, combined with the constant introduction of new residential
and commercial products, will help the wholesale distribution
channel continue to enjoy success for years to come.
11270 West Park Place
P.O. Box 245008
Milwaukee, WI 53224-9508
414.359.4000
www.aosmith.com
2016 Annual Report
Corporate Profile
A. O. Smith Corporation is a global leader
applying innovative technology and energy-
efficient solutions to products manufactured
and marketed worldwide. The company is
one of the world’s leading manufacturers
of residential and commercial water
heating equipment and boilers, as well as a
manufacturer of water treatment products for
residential and light commercial applications.
A. O. Smith is headquartered in Milwaukee,
WI, with approximately 15,500 employees at
operations in the U. S., Canada, China, India,
Mexico, the Netherlands, Turkey, the
United Kingdom and Vietnam.
The company has paid cash dividends on its
common stock every year since 1940.
Net Sales-Continuing
(Dollars in billions)
$2.69 billion
2016
$1.94
$2.15
$2.36
$2.54
$2.69
2012
2013
2014
2015
2016
Earnings per
Share-Continuing*
(Dollars)
$1.85 per share
2016
$078
2012
$1.03
$1.22
$1.58
$1.85
2013
2014
2015
2016
*2012-2014 earnings per share are non-GAAP.
A. O. Smith Corporation Five Year
Cumulative Total Return
December 31, 2011 to December 31, 2016
500
450
400
350
300
250
200
150
100
50
0
501.4%
A. O. Smith 2016
204.1%
S&P Midcap 400 2016
198.4%
Russell 1000 2016
2011 2012 2013 2014 2015 2016
A. O. Smith Corp
S&P Midcap 400 Index
Russell 1000 Index
The Lebanon plant has more than doubled the size of its product engineering lab and
added new testing capabilities to support its ambitious new product development plans.
Global Locations
Milwaukee, WI (world headquarters)
Ashland City, TN
Austin, TX
Banbury, England
Bangalore, India
Charlotte, NC
Cookeville, TN
Dubai, United Arab
Emirates
El Paso, TX
Fergus, Canada
Florence, KY
Franklin, TN
Haltom City, TX
Hanoi, Vietnam
Hong Kong, China
Irvine, CA
Istanbul, Turkey
Johnson City, TN
Juarez, Mexico
Knoxville, TN
Lebanon, TN
McBee, SC
Nanjing, China
Renton, WA
Stratford, Canada
Veldhoven, the Netherlands
Registrar. Stock Transfer Agent,
Dividend Reinvestment Agent
(for both classes of stock)
Wells Fargo Bank, N.A.
Shareowner Servicessm
161 N. Concord Exchange Street
South St. Paul, MN 55075
800-468-9716
www.shareowneronline.com
Annual Meeting
The 2017 annual meeting of
shareholders will be held on Monday,
April 10, 2017, at 8:00 a.m. (CDT)
at APCOM, Inc., 125 Southeast
Parkway, Franklin, TN.