A. O. Smith
Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934For the transition period from to Commission File Number 1-475 A. O. Smith Corporation(Exact name of registrant as specified in its charter) Delaware 39-0619790(State ofIncorporation) (I.R.S. EmployerIdentification No.)11270 West Park Place, Milwaukee, Wisconsin 53224-9508(Address of Principal Executive Office) (Zip Code)(414) 359-4000Registrant’s telephone number, including area codeSecurities registered pursuant to Section 12(b) of the Act: Title of Each Class Shares of Stock OutstandingFebruary 12, 2018 Name of Each Exchange onWhich RegisteredClass A Common Stock(par value $5.00 per share) 26,065,195 Not listedCommon Stock(par value $1.00 per share) 145,446,771 New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ NoIndicate 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 1934during 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 filingrequirements for the past 90 days. ☒ 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 tobe 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 thatthe registrant was required to submit and post such files). ☒ Yes ☐ NoIndicate 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 orany 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, oremerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) ☐ Yes ☒ NoThe aggregate market value of voting stock held by non-affiliates of the registrant was $54,942,874 for Class A Common Stock and $8,057,328,456 forCommon Stock as of June 30, 2017.DOCUMENTS INCORPORATED BY REFERENCE 1.Portions of the company’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders (to be filed with the Securities and ExchangeCommission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to be incorporated by reference inPart III). Table of ContentsTable of ContentsA. O. Smith CorporationIndex to Form 10-KYear Ended December 31, 2017 Page Part I Item 1. Business 3 Item 1A. Risk Factors 6 Item 1B. Unresolved Staff Comments 11 Item 2. Properties 11 Item 3. Legal Proceedings 11 Item 4. Mine Safety Disclosures 11 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15 Item 6. Selected Financial Data 17 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 56 Item 9A. Controls and Procedures 56 Item 9B. Other Information 57 Part III Item 10. Directors, Executive Officers and Corporate Governance 60 Item 11. Executive Compensation 60 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 60 Item 13. Certain Relationships and Related Transactions and Director Independence 61 Item 14. Principal Accounting Fees and Services 61 Part IV Item 15. Exhibits, Financial Statement Schedules 62 2Table of ContentsPART 1 ITEM 1- BUSINESSOur company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europeand India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers and watertreatment products. Both segments primarily manufacture and market in their respective regions of the world. Our North America segment also manufacturesand markets water system tanks. Our Rest of World segment also manufactures and markets in-home air purification products in China.With the acquisition of Aquasana, Inc. (Aquasana) in 2016 and Hague Quality Water International (Hague) in 2017, we entered the North American watertreatment market. Sales of water treatment products in North America totaled $57 million in 2017 and $18 million in 2016.The following table summarizes our sales. This summary and all other information presented in this section should be read in conjunction with theConsolidated Financial Statements and Notes to Consolidated Financial Statements, which appear in Item 8 in this document. Years Ended December 31 (dollars in millions) 2017 2016 2015 2014 2013 North America $1,904.8 $1,743.2 $1,703.0 $1,621.7 $1,520.0 Rest of World 1,116.3 965.6 866.1 768.3 668.0 Inter-segment (24.4) (22.9) (32.6) (34.0) (34.2) Total Sales $2,996.7 $2,685.9 $2,536.5 $2,356.0 $2,153.8 NORTH AMERICASales in our North America segment increased 9.3 percent, or $161.6 million, in 2017 compared with the prior year. The sales increase in 2017 was the resultof higher volumes of water heaters and boilers, and price increases in the U.S. for residential and commercial water heaters related to steel cost increases.North America water treatment sales in 2017, comprised of recently acquired Hague as well as a full year of Aquasana, incrementally added approximately$40 million of sales compared with 2016.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 withvarying efficiency ranges. We offer electric, natural gas and liquid propane tank-type models as well as tankless (gas and electric), heat pump and solar tankunits. Typical applications for our water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes and smallbusinesses.Boilers. Our residential and commercial boilers range in size from 40,000 British Thermal Units (BTUs) to 6.0 million BTUs. Our commercial boilers areprimarily used in space heating applications for hospitals, schools, hotels and other large commercial buildings.Water treatment products. Our water treatment products range from on-the-go filtration bottles and point-of-use carbon and reverse osmosis products topoint-of-entry water softeners and whole-home water filtrations products. We also offer a complete line of food and beverage filtration products. Typicalapplications for our water treatment products include residences, restaurants, hotels and offices. A large portion of our sales of water treatment products iscomprised of replacement filters.Other. In our North America segment, we also manufacture expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, relatedproducts 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 thecommercial markets for both water heating and space heating, we believe our comprehensive product lines and our high-efficiency products give us acompetitive advantage in these portions of the markets. Our wholesale 3Table of Contentsdistribution channel, where we sell our products primarily under the A. O. Smith and State brands, includes more than 1,300 independent wholesale plumbingdistributors serving residential and commercial end markets. We also sell our residential water heaters through the retail and maintenance, repair andoperations (MRO) channels. In the retail channel, our customers include four of the six largest national hardware and home center chains, including a long-standing exclusive relationship with Lowe’s where we sell A. O. Smith branded products.Our Lochinvar brand is one of the leading residential and commercial boiler brands in the U.S. Approximately 40 percent of Lochinvar-branded sales consistof residential and commercial water heaters while the remaining 60 percent of Lochinvar-branded sales consist primarily of boilers and related parts. Ourcommercial boiler distribution channel is primarily comprised of manufacturer representative firms.We sell our Aquasana branded products primarily directly to consumers through e-commerce as well as on-line retailers including Amazon and through otherretail chains. Our Hague branded products, primarily water softeners, are sold through Hague water quality dealers and home center retail chains.Our energy efficient product offerings continue to be a sales driver for our business. Our Cyclone product family and our condensing boilers continue to bean option for commercial customers looking for high efficiency water and space heating with a short payback period through energy savings. We offerresidential heat pump, condensing tank-type and tankless water heaters in North America, as well as other higher efficiency water heating solutions to roundout 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, energy efficiency, maintenance costs and price. Our principal water heating and boiler competitorsin North America include Rheem, Bradford White, Rinnai, Aerco and Navien. Numerous other manufacturing companies also compete. Our principal watertreatment competitors in the U.S. are Brita, Culligan, Kinetico and Ecowater as well as numerous independent water quality dealers.REST OF WORLDSales in our Rest of World segment increased 15.6 percent, or $150.7 million, in 2017 compared with the prior year. A 15.9 percent increase in sales in Chinato over $1 billion was the primary source of the increase. Excluding the appreciation of the U.S. dollar, sales in China increased 17.9 percent in 2017.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 brandrecognition in the residential and commercial markets. The Chinese water heater market is predominantly comprised of electric wall-hung, gas tankless,combi-boiler and solar water heaters. We believe we are one of the leading suppliers of water heaters to the residential market in China in dollar terms, with abroad product offering including electric, gas tankless, heat pump and combi boilers as well as solar units. We also manufacture and market water treatmentproducts and air purification products, primarily in China.We sell water heaters in more than 8,000 retail outlets in China, of which over 2,900 exclusively sell our products. Our water treatment products and airpurification products are sold in over 7,400 and 3,500 retail outlets in China, respectively. Our e-commerce sales continued to grow in China, toapproximately $250 million in 2017.In 2008, we established a sales office in India and began importing products specifically designed for India. We began manufacturing water heaters in Indiain 2010 and water treatment products in 2015. Our total sales in India were $26.2 million in 2017 compared with $18.2 million in 2016.Our primary competitors in China in the electric water heater market segment are Haier and Midea, Chinese companies. We compete with Rinnai and Noritzin the gas tankless water heater market segment. Our principal competitors in the water treatment market are Qinyuan, Angel and Midea. We also competewith numerous other Chinese private and state-owned water heater and water treatment companies in China. Our principal competitors in the China airpurification market are Phillips, Panasonic and Sharp. In India, we compete with Bajaj and MTS-Racold in the water heater market and Eureka Forbes, Kentand 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 Hong Kong, Turkey and Vietnam, all of whichcombined comprised less than six percent of total Rest of World sales in 2017. 4Table of ContentsRAW MATERIALSRaw materials for our manufacturing operations, primarily consisting of steel, are generally available in adequate quantities. A portion of our customers arecontractually obligated to accept price changes based on fluctuations in steel prices. There has been volatility in steel costs over the last several years.RESEARCH AND DEVELOPMENTTo improve our competitiveness by generating new products and processes, we conduct research and development at our Corporate Technology Center inMilwaukee, Wisconsin, at our Global Engineering Center in Nanjing, China, and at our operating locations. Our total expenditures for research anddevelopment in 2017, 2016 and 2015 were $86.4 million, $80.1 million and $73.7 million, respectively.PATENTS AND TRADEMARKSWe 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 ismaterially 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.EMPLOYEESWe employed approximately 16,100 employees as of December 31, 2017, primarily non-union.BACKLOGDue to the short-cycle nature of our businesses, none of our operations sustain significant backlogs.ENVIRONMENTAL LAWSOur operations are governed by a variety of federal, foreign, state and local laws intended to protect the environment. Compliance with environmental lawshas 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 INFORMATIONWe 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 referenceinto, 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 ourAnnual 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 practicalafter 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 CorporateGovernance Guidelines. The Corporate Governance Guidelines, Criteria for Selection of Directors, Financial Code of Ethics, the A. O. Smith GuidingPrinciples, as well as the charters for the Audit, Personnel and Compensation, Nominating and Governance and the Investment Policy Committees of theBoard of Directors and other corporate governance materials, may be viewed on the company’s website. Any waiver of or amendments to the Financial Codeof 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 sentto 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Table of ContentsITEM 1A– RISK FACTORSYou should carefully consider the risk factors set forth below and all other information contained in this Annual Report on Form 10-K, including thedocuments incorporated by reference, before making an investment decision regarding our common stock. If any of the events contemplated by the followingrisks actually occurs, then our business, financial condition, or results of operations could be materially adversely affected. As a result, the trading price of ourcommon 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 businessGlobal economic growth remains uneven and could stall or reverse course. If this were to occur it could adversely affect consumer confidence and spendingpatterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, or slower adoption of energyefficient water heaters and boilers, or high quality water treatment products which could negatively impact our profitability and cash flows. In addition, adeterioration in current economic conditions, including credit market conditions, could negatively impact our vendors and customers, which could result inan increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, or increased material prices, which couldnegatively 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 a lesser extent, rely on imports and exports, which may present additional risksto our businessApproximately 43 percent of our net sales in 2017 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesser extentin Europe and India. We also have operations and business relationships outside the U.S. that comprise a portion of our manufacturing, supply, anddistribution. Approximately 10,000 of our 16,100 employees as of December 31, 2017 were located in China. At December 31, 2017, approximately$815 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries, $587 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; theimposition of tariffs or other trade restrictions, or changes to trade agreements; the impact of foreign government regulations, actions or policies; the effects ofincome taxes; governmental expropriation; the imposition or increases in withholding and other taxes on remittances and other payments by foreignsubsidiaries; labor relations problems; the imposition of environmental or employment laws, or other restrictions or actions by foreign governments; anddifferences in business practices. Unfavorable changes in the political, regulatory, or trade climate, diplomatic relations, or government policies, particularlyin relation to countries where we have a presence, including Canada, China, India and Mexico, could have a material adverse effect on our financialcondition, 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 economyOur sales growth in China has averaged approximately 17.5 percent per year in local currency over the past three years, and we anticipate sales growth ofapproximately 13 percent in local currency in 2018. We expanded our water heater capacity substantially over the last few years and we are in the process ofexpanding our manufacturing capacity for water treatment and air purification products in China to meet local demand. If there is a slowdown in thetransition to a more consumer driven economy or the rate of urbanization was to stall, it could adversely affect our financial condition, results of operationsand cash flows. • A material loss, cancellation, reduction, or delay in purchases by one or more of our largest customers could harm our businessNet sales to our five largest customers represented approximately 38 percent of our sales in 2017. We expect that our customer concentration will continue forthe foreseeable future. Our concentration of sales to a relatively small number of customers makes our relationship with each of these customers important toour 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 thefuture. 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 developrelationships with additional customers could have a material adverse effect on our financial position, results of operations and cash flows. 6Table of Contents • Our international operations are subject to risks related to foreign currenciesWe 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,including $587 million of cash in China, incur liabilities, earn revenues and pay expenses in a variety of currencies other than the U.S. dollar. The financialstatements of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements. As a result, we are subject to risks associatedwith 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 thelocal currencies of our foreign markets has had and would continue to have a negative effect on our profitability. In addition to currency translation risks, weincur a currency transaction risk whenever one of our subsidiaries enters into either a purchase or sale transaction using a currency different from theoperating subsidiaries’ functional currency. The majority of our foreign currency transaction risk results from sales of our products in Canada which wemanufacture in the U.S. These risks may hurt our reported sales and profits in the future or negatively impact revenues and earnings translated from foreigncurrencies into U.S. dollars. • A portion of our business could be adversely affected by a decline in North American new residential and commercial construction or a decline inreplacement related volumeResidential and commercial construction activity in North America has shown modest growth and activity could decline again in the future. We believe thatthe majority of the markets we serve are for replacement of existing products and replacement related volume growth was strong in 2017. Changes inreplacement 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 competitionWe sell all of our products in highly competitive markets. We compete in each of our targeted markets based on product design, reliability, quality ofproducts 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 existingmanufacturing or geographic footprints. Consumer purchasing behavior may shift to new distribution channels, including e-commerce, which is a rapidlydeveloping area. Development of a successful e-commerce strategy involves significant time, investment and resources. We cannot assure that our productsand 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 maintainour profit margins on sales to our customers, all of which could materially and adversely affect our financial condition, results of operations and cash flows. • If we are unable to develop product innovations and improve our technology and expertise, we could lose customers or market shareOur success may depend on our ability to adapt to technological changes in the water heating, boiler, water treatment and air purifier industries. If we areunable to timely develop and introduce new products, or enhance existing products, in response to changing market conditions or customer requirements ordemands, 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 businessOur 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 toregulatory requirements, whether federal, foreign, state or local, or to industry standards, could substantially increase manufacturing costs, impact the size andtiming 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 ourfinancial condition, results of operations and cash flow. 7Table of Contents • Newly enacted U.S. government tax reform could have a negative impact on the results of future operationsOn December 22, 2017, the Tax Cuts and Jobs Act (U.S. Tax Reform) was enacted effective January 1, 2018 and contained substantial changes to the InternalRevenue Code, some of which could have an adverse effect on our business. U.S. Tax Reform significantly revises the U.S. corporate income tax by, amongother things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on undistributed foreign earnings offoreign subsidiaries. With the enactment of U.S. Tax Reform, our results of operations for the year ended December 31, 2017 included provisional charges forincome tax expense of approximately $81.8 million resulting from the deemed repatriation tax on undistributed foreign earnings and the re-measurement ofour deferred tax assets and liabilities to reflect the recently enacted 21 percent U.S. federal corporate income tax rate. These provisional amounts are based onour initial analysis of U.S. Tax Reform. Given the significant complexity of U.S. Tax Reform, anticipated guidance from the Internal Revenue Service aboutimplementing U.S. Tax Reform, and the potential for additional guidance from the Securities and Exchange Commission or the Financial AccountingStandards Board related to U.S. Tax Reform, these provisional amounts may be adjusted in future periods during 2018, which could result in further impact toour results of operations, financial condition and cash flow. • Our business may be adversely impacted by product defectsProduct defects can occur through our own product development, design and manufacturing processes or through our reliance on third parties for componentdesign and manufacturing activities. We may incur various expenses related to product defects, including product warranty costs, product liability and recallor retrofit costs. While we maintain a reserve for product warranty costs based on certain estimates and our knowledge of current events and actions, ouractual 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 lineor 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 concentrationThe market prices for certain raw materials we purchase, primarily steel, have been volatile. Significant increases in the cost of any of the key materials wepurchase could increase our cost of doing business and ultimately could lead to lower operating earnings if we are not able to recover these cost increasesthrough price increases to our customers. Historically, there has been a lag in our ability to recover increased material costs from customers, and that lag couldnegatively impact our profitability. In addition, in some cases we are dependent on a limited number of suppliers for some of the raw materials andcomponents we require in the manufacture of our products. A significant disruption or termination of the supply from one of these suppliers could delay salesor increase costs which could result in a material adverse effect on our financial condition, results of operations and cash flows. • We are subject to U.S. and global laws and regulations covering our domestic and international operations that could adversely affect our businessand results of operationsDue to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to governmentofficials and restrict where we can do business, what information or products we can supply to certain countries and what information we can provide to anon-U.S. government, including but not limited to the Foreign Corrupt Practices Act and the U.S. Export Administration Act. Violations of these laws mayresult 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 claimsOur products expose us to potential product liability risks that are inherent in the design, manufacture, sale and use of our products. While we currentlymaintain 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 insuredlosses. In addition, we self-insure a portion of product liability claims. A series of successful claims against us could materially and adversely affect ourreputation and our financial condition, results of operations and cash flows. 8Table of Contents • Retention of key personnel is important to our businessAttracting and retaining talented employees is important to the continued success and growth of our business. Failure to retain key personnel, particularly onthe leadership team, could have a material effect on our business and our ability to execute our business strategies in a timely and effective manner. • Sales growth of our boilers could stall resulting in lower than expected revenues and earningsThe compound annual growth rate of our boiler sales has been approximately ten percent per year since our acquisition of Lochinvar in 2011, largely due tothe transition in the boiler industry in the U.S. from lower efficiency, non-condensing boilers to higher efficiency, higher priced, condensing boilers, as wellas new product introductions. We expect the transition to condensing boilers to continue, but if the transition to higher efficiency, higher priced, condensingboilers 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 lowerthan expected. • An inability to adequately maintain our information systems and their security, as well as to protect data and other confidential information, couldadversely affect our business and reputationIn the ordinary course of business, we utilize information systems for day-to-day operations, to collect and store sensitive data and information, including ourproprietary and regulated business information and personally identifiable information of our customers, suppliers, employees and business partners, as wellas personally identifiable information about our employees. Our information systems, like those of other companies, are susceptible to outages due to systemfailures, failures on the part of third-party information system providers, natural disasters, power loss, telecommunications failures, viruses, or breaches ofsecurity. We continue to take steps to maintain and improve data security and address these risks and uncertainties by implementing and improving internalcontrols, security technologies, insurance programs, network and data center resiliency and recovery processes. However, any operations failure or breach ofsecurity 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 themprofitably or achieve strategic objectivesWe will continue to evaluate potential acquisitions, and we could use a significant portion of our available capital to fund future acquisitions. If we completeany future acquisitions, then we may not be able to successfully integrate the acquired businesses or operate them profitably or accomplish our strategicobjectives for those acquisitions. If we complete any future acquisitions in new geographies, our unfamiliarity with local regulations and market customs mayimpact our ability to operate them profitably or achieve our strategic objectives for those acquisitions. Our level of indebtedness may increase in the future ifwe finance acquisitions with debt, which would cause us to incur additional interest expense and could increase our vulnerability to general adverseeconomic and industry conditions and limit our ability to service our debt or obtain additional financing. The impact of future acquisitions may have amaterial adverse effect on our financial condition, results of operations and cash flows. • Our underfunded pension plans may require future pension contributions which could limit our flexibility in managing our companyThe projected benefit obligations of our defined benefit pension plans exceeded the fair value of the plan assets by approximately $48 million atDecember 31, 2017. U.S. employees hired after January 1, 2010 have not participated in our defined benefit plan, and benefit accruals for the majority ofcurrent 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 in2018, and we do not plan to make any voluntary contributions. However, we cannot provide any assurance that contributions will not be required in thefuture. Among the key assumptions inherent in our actuarially calculated pension plan obligation and pension plan expense are the discount rate and theexpected rate of return on plan assets. If interest rates and actual rates of return on invested plan assets were to decrease significantly, our pension planobligations could increase materially. The size of future required pension contributions could result in us dedicating a significant portion of our cash flowsfrom operations to making the contributions which could negatively impact our flexibility in managing the company. 9Table of Contents • We have significant goodwill and indefinite-lived intangible assets and an impairment of our goodwill or indefinite-lived intangible assets couldcause a decline in our net worthOur total assets include significant goodwill and indefinite-lived intangible assets. Our goodwill results from our acquisitions, representing the excess of thepurchase 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 valueof our goodwill or indefinite-lived intangible assets during the fourth quarter of each calendar year or sooner if triggering events warrant. If future operatingperformance at our businesses does not meet expectations, we may be required to reflect non-cash charges to operating results for goodwill or indefinite-livedintangible asset impairments. The recognition of an impairment of a significant portion of goodwill or indefinite-lived intangible assets would negativelyaffect our results of operations and total capitalization, the effect of which could be material. A significant reduction in our stockholders’ equity due to animpairment of goodwill or indefinite-lived intangible assets may affect our ability to maintain the debt-to-capital ratio required under our existing debtarrangements. We have identified the valuation of goodwill and indefinite-lived intangible assets as a critical accounting policy. See “Management’sDiscussion 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 stockholderapprovalWe 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. Certainmembers 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 ofour Class A Common Stock and shares of our Common Stock they own. As of December 31, 2017, through the voting trust, these members of the SmithFamily own approximately 62.3 percent of the total voting power of our outstanding shares of Class A Common Stock and Common Stock, taken together asa single class, and approximately 96.3 percent of the voting power of the outstanding shares of our Class A Common Stock, as a separate class. Due to thedifferences in the voting rights between shares of our Common Stock (one-tenth of one vote per share) and shares of our Class A Common Stock (one vote pershare), the Smith Family voting trust is in a position to control to a large extent the outcome of matters requiring a stockholder vote, including the adoptionof amendments to our certificate of incorporation or bylaws or approval of transactions involving a change of control. This ownership position may increaseif 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 ofour Class A Common Stock held by stockholders who are not parties to the voting trust agreement are converted into shares of our Common Stock. Thevoting 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 sharesof 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 tothe 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 Stockproposed 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 tomaintain their collective voting rights in our company even if certain members of the Smith Family decide to transfer their shares. 10Table of ContentsITEM 1B- UNRESOLVED STAFF COMMENTSNone. ITEM 2- PROPERTIESProperties utilized by us at December 31, 2017 were as follows:North AmericaIn this segment, we have 15 manufacturing plants located in seven states and two non-U.S. countries, of which 12 are owned directly by us or our subsidiariesand three are leased from outside parties. The terms of leases in effect at December 31, 2017 expire between 2018 and 2025.Rest of WorldIn 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 areleased from outside parties. The terms of leases in effect at December 31, 2017 expire between 2018 and 2020.Corporate and GeneralWe 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 thecompany, which are leased, are located in Milwaukee, Wisconsin. ITEM 3- LEGAL PROCEEDINGSWe are involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of our business involving productliability, property damage, insurance coverage, exposure to asbestos and other substances, patents and environmental matters, including the disposal ofhazardous 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 ourfinancial position or results of operations. A more detailed discussion of certain of these matters appears in Note 13 of Notes to Consolidated FinancialStatements. ITEM 4- MINE SAFETY DISCLOSURESNot applicable. 11Table of ContentsEXECUTIVE OFFICERS OF THE COMPANYPursuant 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 thisreport in lieu of being included in our Proxy Statement for our 2017 Annual Meeting of Stockholders.EXECUTIVE OFFICERS OF THE COMPANYPursuant to General Instruction of G(3) of Form 10-K, the following is a list of our executive officers which is included as an unnumbered Item in Part I of thisreport in lieu of being included in our Proxy Statement for our 2018 Annual Meeting of Stockholders. Name (Age) Positions Held Period Position Was HeldWilfridus M. Brouwer (59) Senior Vice President – International 2017 to Present Senior Vice President – Asia Corporate Development 2015 to 2017 Senior Vice President 2013 to 2014 President – A. O. Smith Holdings (Barbados) SRL 2013 to Present Senior Vice President – Asia 2009 to 2012 President and General Manager – A. O. Smith (China) Investment Co., Ltd. 2009 to 2012Paul R. Dana (55) Senior Vice President – Global Manufacturing 2016 to Present Vice President – Global Manufacturing 2015 President – APCOM, a division of State Industries, LLC, a subsidiary of the Company 2011 to 2017 Vice President – Product Engineering 2006 to 2010 Plant Manager – Productos de Agua, S. de R.L. de C.V. 1998 to 2005Wei Ding (55) Senior Vice President 2013 to Present President – A. O. Smith China 2017 to Present 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. 2013 to 2017 President and General Manager – A. O. Smith (China) Water Heater Co., Ltd. 2013 Senior Vice President – A. O. Smith Water Products Company 2011 to 2012 Vice President – China – A. O. Smith Water Products Company 2006 to 2011 General Manager – A. O. Smith (China) Water Heater Co., Ltd. 1999 to 2012Robert J. Heideman (51) Senior Vice President – Chief Technology Officer 2013 to Present Senior Vice President – Engineering & Technology 2011 to 2012 Senior Vice President – Corporate Technology 2010 to 2011 Vice President – Corporate Technology 2007 to 2010 Director – Materials 2005 to 2007 Section Manager 2002 to 2005 12Table of ContentsName (Age) Positions Held Period Position Was HeldJohn J. Kita (62) Executive Vice President and Chief Financial Officer 2011 to Present Senior Vice President, Corporate Finance and Controller 2006 to 2011 Vice President, Treasurer and Controller 1996 to 2006 Treasurer and Controller 1995 to 1996 Assistant Treasurer 1988 to 1994Charles T. Lauber (55) Senior Vice President, Strategy and Corporate Development 2013 to Present Senior Vice President – Chief Financial Officer – A. O. Smith Water Products Company 2006 to 2012 Vice President – Global Finance – A. O. Smith Electrical Products Company 2004 to 2006 Vice President and Controller – A. O. Smith Electrical Products Company 2001 to 2004 Director of Audit and Tax 1999 to 2001Peter R. Martineau (63) Senior Vice President – Chief Information Officer 2016 to Present Vice President – Business Transformation 2013 to 2015 Vice President – Customer Satisfaction 2010 to 2012Mark A. Petrarca (54) Senior Vice President – Human Resources and Public Affairs 2006 to Present Vice President – Human Resources and Public Affairs 2005 to 2006 Vice President – Human Resources – A. O. Smith Water Products Company 1999 to 2004Ajita G. Rajendra (66) Chairman and Chief Executive Officer 2017 to Present Chairman, President and Chief Executive Officer 2014 to 2017 President and Chief Executive Officer 2013 to 2014 President and Chief Operating Officer 2011 to 2012 Executive Vice President 2006 to 2011 President – A. O. Smith Water Products Company 2005 to 2011 Senior Vice President 2005 to 2007James F. Stern (55) Executive Vice President, General Counsel and Secretary 2007 to Present Partner – Foley & Lardner LLP 1997 to 2007William L. Vallett Jr. (58) Senior Vice President 2013 to Present Chief Executive Officer – Lochinvar, LLC 2012 to Present Chief Executive Officer – Lochinvar Corporation 1992 to 2012 13Table of ContentsName (Age) Positions Held Period Position Was HeldDavid R. Warren (53) Senior Vice President 2017 to Present President and General Manager North America Water Heating 2017 to Present Vice President – International 2008 to 2017 Managing Director – A.O. Smith Water Products Company B.V. 2004 to 2008 Director, Reliance Sales 2002 to 2004 Regional Sales Manager 1999 to 2002 District Sales Manager 1990 to 1996 Sales Coordinator 1989 to 1990Kevin J. Wheeler (58) President and Chief Operating Officer 2017 to Present Senior Vice President 2013 to 2017 President and General Manager – North America, India and Europe Water Heating 2013 to 2017 Senior Vice President and General Manager – North America, India and Europe – A. O. SmithWater Products Company 2011 to 2012 Senior Vice President and General Manager – U.S. Retail – A. O. Smith Water ProductsCompany 2007 to 2011 Vice President – International – A. O. Smith Water Products Company 2004 to 2007 Managing Director – A. O. Smith Water Products Company B.V. 1999 to 2004 14Table of ContentsPART IIITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESOn September 7, 2016, our Board of Directors declared a two-for-one stock split of our Class A Common Stock and Common Stock (including treasuryshares) 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 thisItem 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.EQ Shareowner Services, P.O. Box 64874, St. Paul, Minnesota, 55164-0874 serves as the registrar, stock transfer agent and the dividend reinvestmentagent for our Common Stock and Class A Common Stock.Quarterly Common Stock Price Range 2017 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. High $52.56 $57.58 $59.72 $63.70 Low 46.44 49.48 53.23 58.21 2016 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. High $38.71 $44.06 $49.70 $51.49 Low 30.15 37.61 42.88 43.66 (b)Holders. As of January 31, 2018, the approximate number of stockholders of record of Common Stock and Class A Common Stock were 616 and 179,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 2016, our Board of Directors authorized the purchase of an additional 3,000,000 shares of our Common Stock. Under the sharerepurchase program, our Common Stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchasesin 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 otherfactors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directorswhich 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 2017, werepurchased 2,533,350 shares at an average price of $54.90 per share and at a total cost of $139.1 million. As of December 31, 2017, there were2,373,053 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 2017: ISSUER PURCHASES OF EQUITY SECURITIES Period Total Numberof SharesPurchased AveragePrice Paidper Share Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms Maximum Numberof Shares that mayyet be PurchasedUnder the Plans orPrograms October 1 – October 31, 2017 206,000 $60.52 206,000 2,758,053 November 1 – November 30, 2017 204,000 59.64 204,000 2,554,053 December 1 – December 31, 2017 181,000 61.70 181,000 2,373,053 (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 SecuritiesExchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the SecuritiesExchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing. 15Table of ContentsThe graph below shows a five-year comparison of the cumulative shareholder return on our Common Stock with the cumulative total return of the Standard &Poor’s (S&P) 500 Index, S&P 500 Select Industrials Index, S&P Mid Cap 400 Index and the Russell 1000 Index, all four of which are published indices. Thecompany added the S&P 500 Index and the S&P 500 Select Industrials Index as indices for comparison in this Annual Report on Form 10-K because ourcommon stock was added to the S&P 500 Index in July 2017 and removed from the S&P Midcap 400 Index at the same time. In future periods, the S&PMidcap 400 Index and the Russell 1000 Index will not be included in the comparison.Comparison of Five-Year Cumulative Total ReturnFrom December 31, 2012 to December 31, 2017Assumes $100 Invested with Reinvestment of Dividends BasePeriod Indexed Returns Company/Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 A. O. Smith Corporation 100.0 172.9 183.1 251.4 314.2 410.9 S&P 500 Index 100.0 132.4 150.5 152.6 170.8 208.1 S&P Mid Cap 400 Index 100.0 133.5 146.6 143.4 173.1 201.2 Russell 1000 Index 100.0 133.1 150.7 152.1 170.4 207.0 S&P 500 Select Industrial Index 100.0 140.8 155.9 149.3 179.3 222.6 16Table of ContentsITEM 6– SELECTED FINANCIAL DATA (dollars in millions, except per share amounts) Years ended December 31 2017(1) 2016(2) 2015 2014 2013(3) Net sales $2,996.7 $2,685.9 $2,536.5 $2,356.0 $2,153.8 Net earnings(1) $296.5 $326.5 $282.9 $207.8 $169.7 Basic earnings per share of common stock(1,2,3) Net earnings $1.72 $1.87 $1.59 $1.15 $0.92 Diluted earnings per share of common stock(1,2,3) Net earnings $1.70 $1.85 $1.58 $1.14 $0.91 Cash dividends per common share(2,3) $0.56 $0.48 $0.38 $0.30 $0.23 December 31 2017 2016 2015 2014 2013 Total assets $3,197.3 $2,891.0 $2,629.2 $2,498.1 $2,351.5 Long-term debt(4) 402.9 316.4 236.1 210.1 177.7 Total stockholders’ equity 1,648.8 1,515.3 1,442.3 1,381.3 1,328.7 (1) Due to the enactment of the U.S. Tax Cuts & Jobs Act in December 2017, we recorded provisional one-time charges of $81.8 million, our estimate ofthe costs primarily associated with the repatriation of undistributed foreign earnings. These charges reduced earnings per share by $0.47.(2)In September 2016, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in cashdividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for all periodspresented to reflect the stock dividend.(3)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 cashdividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for all periodspresented to reflect the stock dividend.(4)Excludes the current portion of long-term debt. 17Table of ContentsITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEWOur company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europeand India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers and watertreatment products. Both segments primarily manufacture and market in their respective regions of the world. Our North America segment also manufacturesand markets water systems tanks. Our Rest of World segment also manufactures and markets in-home air purification products in China.In our North America segment, we project our sales in the U.S. will grow in 2018 compared to 2017 due to higher residential water heater and boiler volumesresulting from expected industry-wide new construction growth and expansion of replacement demand. We expect the North America residential water heaterindustry to have three to 3.5 percent unit growth in 2018. Due to nearly 20 percent unit growth in 2017, partially driven by an anticipated 2018 regulatorychange and resulting pre-buy, we expect the North America commercial water heater industry to have a three percent unit decline in 2018. Our sales of boilersgrew 13 percent in 2017, and we expect ten percent sales growth in 2018, driven by the continuing U.S. industry transition to higher efficiency products andour introduction of new products. We continued to expand our North America water treatment platform with the acquisition of Hague on September 5, 2017.We expect sales of North America water treatment products to increase by approximately 50 percent in 2018, compared to 2017, primarily due to volumegrowth and a full year of Hague sales.In our Rest of World segment, we expect China sales to grow in 2018 at a rate of approximately 13 percent, 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. In addition, we expectour sales in India to grow over 40 percent in 2018 from approximately $26 million in 2017.Combining all of these factors, we expect total company sales growth of between 8.5 percent to 9.5 percent in 2018.Our stated acquisition strategy includes a number of our water-related strategic initiatives. We will look to continue to grow our core residential andcommercial water heating, boiler and water treatment businesses throughout the world. We will also continue to look for opportunities to add to our existingoperations in high growth regions demonstrated by our introduction in 2015 of air purification products in China and water treatment products in India andVietnam.RESULTS OF OPERATIONSOur sales in 2017 were a company record $2,997 million surpassing 2016 sales of $2,686 million by 11.6 percent. The increase in sales in 2017 was primarilydue to higher sales in China as well as higher sales of water heaters and boilers in North America. Sales in China grew 15.9 percent to over $1 billion in 2017,and excluding the impact of the appreciation of the U.S. dollar, sales in China increased 17.9 percent in 2017. Our sales in 2016 were higher than 2015 salesof $2,537 million by 5.9 percent. In 2016, excluding the impact from the appreciation of the U.S. dollar against the Chinese currency, our sales grewapproximately eight percent. Sales in China grew 12.5 percent in 2016, and excluding the impact of the appreciation of the U.S. dollar, sales in Chinaincreased by 18.9 percent in 2016.Our gross profit margin in 2017 decreased to 41.3 percent from 41.7 percent in 2016. The slightly lower margin in 2017 was due to significantly higher steelcosts that more than offset pricing actions taken in 2017 in North America and China. Our gross profit margin in 2016 increased from 39.8 percent in 2015primarily 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.than in 2015.Selling, general and administrative (SG&A) expenses were $59.3 million higher in 2017 than in 2016. The increase in SG&A expenses in 2017 to$718.2 million was primarily due to higher selling and advertising expenses to support increased volumes and brand building in our newer productcategories. SG&A expenses were $48.2 million higher in 2016 than in 2015 primarily due to higher selling costs supporting our sales efforts in tier 2 and tier3 cities in China as well as higher advertising costs to support brand building in China.Pension income in 2017 was $9.1 million compared to $6.9 million in 2016 and $0.1 million of pension expense in 2015. As of December 31, 2015, wechanged to what we believe is a more precise method to estimate the service cost and interest components of net periodic benefit cost for our pension andpost-retirement plans. The change was the reason for $7.7 million and $7.1 million of decreases in 2017 and 2016, respectively, compared to 2015, in serviceand interest costs. 18Table of ContentsInterest expense was $10.1 million in 2017 compared to $7.3 million in 2016 and $7.4 million in 2015. The higher interest expense in 2017 compared to2016 was primarily related to higher interest rates as well as higher overall debt levels primarily due to increased share repurchases and acquisitionscompleted in 2016 and 2017.Other income was $10.4 million in 2017 compared to $9.4 million in 2016 and $10.8 million in 2015. The increase in other income in 2017 compared to2016 was primarily due to higher interest income. The decrease in other income in 2016 compared to 2015 was primarily due to a decrease in interest incomecaused by lower interest rates in China in 2016.Our effective income tax rate was 43.1 percent in 2017, compared with 29.4 percent in 2016 and 29.7 percent in 2015. The significant increase in oureffective income tax rate in 2017 compared to previous years was due to provisional one-time charges associated with the U.S. Tax Cuts & Jobs Act (U.S. TaxReform) of $81.8 million, primarily related to the mandatory repatriation tax on undistributed foreign earnings that we are required to pay over eight years.Excluding the impact of the U.S. Tax Reform provisional one-time charges, our adjusted effective income tax rate was 27.4 percent in 2017. Our adjustedeffective income tax rate in 2017 was lower than our effective income tax rate in 2016 primarily due to lower U.S. state income taxes and higher deductionsfor share-based compensation. Our lower effective income tax rate in 2016 compared to 2015 was primarily due to our adoption of an accounting standard forshare-based compensation partially offset by a change in geographic earnings mix. We estimate our annual effective income tax rate for the full year 2018will be approximately 22.0 to 22.5 percent, significantly lower than previous years due to U.S. Tax Reform.North AmericaSales in our North America segment were $1,905 million in 2017 or $162 million higher than sales of $1,743 million in 2016. The increase in sales in 2017compared to 2016 was primarily due to higher volumes of water heaters and boilers, price increases in the U.S. for water heaters largely related to steel costincreases as well as our customer’s pre-buy of commercial water heaters in advance of an anticipated 2018 regulatory change. North America water treatmentsales, comprised of Hague, acquired in September 2017 and Aquasana, acquired in August 2016, incrementally added approximately $40 million of sales in2017. Sales in 2016 were $40 million higher than sales of $1,703 million in 2015. The sales increase in 2016 resulted from a full year of U.S. price increasesfor residential water heaters related to a regulatory change in April 2015, and a 2016 price increase in the U.S. related to higher steel prices and other costinflation. 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 ofsales of water treatment products resulting from our Aquasana acquisition. Lower volumes of U.S. residential water heaters in 2016 compared to 2015 offsetthese benefits.North America segment earnings were $428.6 million in 2017 compared to segment earnings of $385.9 million and $339.9 million in 2016 and 2015,respectively. Segment margins were 22.5 percent, 22.1 percent and 20.0 percent in 2017, 2016 and 2015, respectively. The higher segment earnings andsegment margin in 2017 compared to 2016 were primarily due to higher water heater and boiler volumes and pricing actions which were partially offset byhigher steel costs. Segment margin in 2017 also benefitted from lower SG&A expenses as a percent of sales. The higher segment earnings and segment marginin 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 commercialwater heater volumes in the U.S., which were partially offset by lower U.S. residential water heater volumes. We estimate our 2018 North America segmentmargin will be between 22 and 22.5 percent primarily due to anticipated growth in boiler and residential water heater volumes offset by higher steel costs.Rest of WorldSales in our Rest of World segment in 2017 were $1,116 million or $150 million higher than sales of $966 million in 2016. Sales in China grew 15.9 percentto over $1 billion in 2017 due to higher demand for our consumer products, led by water treatment and air purification products and pricing actions primarilydue to higher steel and installation costs. Excluding the impact from the appreciation of the U.S. dollar in 2017, sales in China increased 17.9 percent. Waterheater and water treatment sales in India increased $8 million, over 40 percent, in 2017 compared to 2016. Sales in our Rest of World segment in 2016 were$100 million higher than sales of $866 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 airpurification products. Water treatment sales in China totaled $177 million in 2016 compared to $130 million in 2015. Sales of air purification products were$26 million in 2016 compared to $9 million in 2015.Rest of World segment earnings were $149.3 million in 2017 compared to segment earnings of $129.1 million and $113.0 million in 2016 and 2015,respectively. Segment margins were 13.4 percent in 2017 compared to 13.4 percent and 13.0 percent in 2016 and 2015, respectively. Higher segmentearnings in 2017 compared to 2016 were primarily due to higher sales in China, which included a price increase, partially offset by higher steel costs, higherfees paid to installers and increased SG&A expenses. Higher SG&A expenses in China were primarily due to the expansion of water treatment and airpurification product retail outlets in tier 2 and tier 3 cities, higher advertising expenses related to brand building in our newer product 19Table of Contentscategories and higher water treatment product development engineering costs. Higher segment earnings and segment margin in 2016 compared to 2015 wereprimarily due to higher sales in China partially offset by increased SG&A expenses in China. Higher selling costs in China to support our sales efforts in tier 2and tier 3 cities and higher advertising costs to support brand building were the primary drivers of higher SG&A expenses in 2016. Operating earnings in2016 were also negatively impacted by almost $8 million due to the appreciation of the U.S. dollar in 2016. We expect 2018 Rest of World segment marginto expand 30 to 40 basis points compared to 2017.LIQUIDITY AND CAPITAL RESOURCESOur working capital was $978.3 million at December 31, 2017 compared with $796.4 million and $750.1 million at December 31, 2016 and December 31,2015, respectively. Cash generation in China and sales-related increases in accounts receivable, and inventory levels explain the majority of the increase in2017 and 2016. As of December 31, 2017, essentially all of our $820.0 million of cash, cash equivalents and marketable securities were held by our foreignsubsidiaries. In December 2017, we recorded provisional one-time charges of $81.8 million primarily associated with the mandatory repatriation tax ofundistributed foreign earnings under U.S. Tax Reform. In addition, we had an existing accrual of $38.6 million associated with withholding taxes due uponissuance of foreign dividends. We expect to repatriate approximately $200 million in the first half of 2018 and use the proceeds to repay floating rate debt.Cash provided by operating activities during 2017 was $326.4 million compared with $446.6 million during 2016 and $351.7 million during 2015. Thedecline in cash flows in 2017 compared to 2016 was primarily due to higher outlays for working capital than the below normal levels experienced in 2016,which more than offset the impact of higher earnings in 2017. The increase in cash flows in 2016 compared to 2015 was primarily due to higher earnings fromoperations and lower outlays for working capital. We experienced favorable cash flow impacts in China late in the fourth quarter of 2016 primarily from aseries of unanticipated large customer payments including customer deposits.Over the two-year period from 2016 to 2017, we generated operating cash of approximately $773 million, which compares with $616 million of operatingcash flows during 2014 to 2015. We anticipate cash provided by operating activities to be $475 to $500 million in 2018, compared to $326 million in 2017,due to higher projected earnings and lower outlays for working capital, particularly inventory.Our capital expenditures were $94.2 million in 2017, $80.7 million in 2016 and $72.7 million in 2015. We broke ground in 2016 on the construction of anew water treatment and air purification products manufacturing facility in Nanjing, China, to support the expected growth of these products in China.Included in 2017 capital expenditures were approximately $24 million related to capacity expansion in China. Included in 2016 capital expenditures wereapproximately $13 million related to capacity expansion in China as well as approximately $11 million related to the continuation of our enterprise resourceplanning (ERP) system implementation. Included in 2015 capital expenditures were approximately $16 million related to our ERP implementation andapproximately $19 million related to capacity expansion in China and the U.S. to support growth. We project approximately $100 million of capitalexpenditures in 2018, which includes approximately $30 million related to the completion of capacity expansion in China. We project depreciation andamortization expense of approximately $80 million in 2018.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 in2030. 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.In November 2016, we issued $45 million of fixed rate term notes in two tranches to two insurance companies. Principal payments commence in 2023 and2028 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 paydown borrowings under our revolving credit facility.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 accordionprovision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facilityare determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and wewere in compliance with the covenants as of December 31, 2017. The facility backs up commercial paper and credit line borrowings, and it expires onDecember 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 facilityare classified as long-term debt. 20Table of ContentsAt December 31, 2017, we had available borrowing capacity of $217.1 million under this facility. We believe that our combination of cash, availableborrowing capacity and operating cash flow will provide sufficient funds to finance our existing operations for the foreseeable future.Our total debt increased to $410.4 million at December 31, 2017 compared with $323.6 million at December 31, 2016, as our cash flows generated in the U.Swere more than offset by our share repurchase activity and our acquisition of Hague. As a result, our leverage, as measured by the ratio of total debt to totalcapitalization, was 19.9 percent at the end of 2017 compared with 17.6 percent at the end of 2016.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 planin 2017 but made a voluntary $30 million contribution due to escalating Pension Benefit Guaranty Corporation insurance premiums. We forecast that we willnot be required to make a contribution to the plan in 2018, and we do not plan to make any voluntary contributions in 2018. For further information on ourpension plans, see Note 10 of the Notes to Consolidated Financial Statements.In 2017, we repurchased 2,533,350 shares at an average price of $54.90 per share and a total cost of $139.1 million. A total of 2,373,053 shares remained onthe existing repurchase authorization at December 31, 2017. Depending on factors such as stock price, working capital requirements and alternativeinvestment opportunities, such as acquisitions, we expect to spend approximately $135 million on share repurchase activity in 2018 using a 10b5-1repurchase plan. In addition, we may opportunistically repurchase our shares in the open market in 2018.We have paid dividends for 78 consecutive years with payments increasing each of the last 26 years. We paid dividends of $0.56 per share in 2017 comparedwith $0.48 per share in 2016. In January 2018, we increased our dividend by 29 percent and anticipate paying dividends of $0.72 per share in 2018.Aggregate Contractual ObligationsA summary of our contractual obligations as of December 31, 2017, is as follows: (dollars in millions) Payments due by period Contractual Obligations Total Less Than1 year 1 - 2Years 3 - 5Years More than5 years Long-term debt $410.4 $7.5 $6.8 $296.5 $99.6 Fixed rate interest 34.1 4.1 7.7 6.8 15.5 Operating leases 47.5 20.2 8.5 5.6 13.2 Purchase obligations 118.5 118.3 0.1 0.1 — Pension and post-retirement obligations 57.2 0.8 17.0 2.0 37.4 Total $667.7 $150.9 $40.1 $311.0 $165.7 As of December 31, 2017, our liability for uncertain income tax positions was $6.2 million. Due to the high degree of uncertainty regarding timing ofpotential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which theseliabilities might be paid.We utilize blanket purchase orders to communicate expected annual requirements to many of our suppliers. Requirements under blanket purchase ordersgenerally do not become committed until several weeks prior to our scheduled unit production. The purchase obligation amount presented above representsthe value of commitments that we consider firm.Recent Accounting PronouncementsRefer to Recent Accounting Pronouncements in Note 1 of Notes to Consolidated Financial Statements. 21Table of ContentsCritical Accounting PoliciesOur accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. Also as disclosed in Note 1, the preparation of financialstatements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions about future events thataffect 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 differencesmay 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 theimpairment of goodwill and indefinite-lived intangible assets, as well as significant estimates used in the determination of liabilities related to warrantyactivity, product liability and pensions. Various assumptions and other factors underlie the determination of these significant estimates. The process ofdetermining significant estimates is fact-specific and takes into account factors such as historical experience and trends, and in some cases, actuarialtechniques. We monitor these significant factors and adjustments are made as facts and circumstances dictate. Historically, actual results have notsignificantly deviated from those determined using the estimates described above.Goodwill and Indefinite-lived Intangible AssetsIn conformity with U.S. Generally Accepted Accounting Principles (GAAP), goodwill and indefinite-lived intangible assets are tested for impairmentannually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We perform impairment reviews for ourreporting units using a fair-value method based on management’s judgments and assumptions. The fair value represents the estimated amount at which areporting 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 comparedwith the carrying amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent that goodwill andindefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental as estimates of future sales, earnings and cashflows are utilized to determine fair values. However, we believe that we conduct thorough and competent annual valuations of goodwill and indefinite-livedintangible assets and that there has been no impairment in goodwill or indefinite-lived assets in 2017.Product warrantyOur 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 theestimated cost of product warranty at the time of sale. The product warranty provision is estimated based upon warranty loss experience using actualhistorical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed at least annually. Attimes, warranty issues may arise which are beyond the scope of our historical experience. We provide for any such warranty issues as they become known andestimable. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costs could differ significantly fromthose 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 yearas determined by historical product failure rates. At December 31, 2017 and 2016, our reserve for product warranties was $142.4 million and $140.9 million,respectively.Product liabilityDue 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. Mostinsurance coverage includes self-insured retentions that vary by year. In 2017, we maintained a self-insured retention of $7.5 million per occurrence with anaggregate 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 abilityto 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 reviseestimates based upon changes to facts or circumstances. We also utilize an actuary to calculate reserves required for estimated incurred but not reportedclaims as well as to estimate the effect of adverse development of claims over time. At December 31, 2017 and 2016, our reserve for product liability was$40.1 million and $38.6 million, respectively. 22Table of ContentsPensionsWe have significant pension benefit costs that are developed from actuarial valuations. The valuations reflect key assumptions regarding, among otherthings, discount rates, expected return on plan assets, retirement ages, and years of service. Consideration is given to current market conditions, includingchanges in interest rates in making these assumptions. Our assumption for the expected return on plan assets was 7.50 percent in 2017 and 2016. Thediscount rate used to determine net periodic pension costs decreased to 4.15 percent in 2017 from 4.40 percent in 2016. For 2018, our expected return onplan assets is 7.15 percent and our discount rate is 3.65 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 ofequity and bond indices and the actual historical returns of our pension plan. Our plan’s target allocation to equity managers is approximately 45 to55 percent, with the remainder allocated primarily to bond managers, private equity managers and real estate managers. Our actual asset allocation as ofDecember 31, 2017, was 45 percent to equity managers, 43 percent to bond managers, nine percent to real estate managers, two percent to private equitymanagers and one percent to others. We regularly review our actual asset allocation and periodically rebalance our investments to our targeted allocationwhen considered appropriate. Our pension plan’s historical ten-year and 25-year compounded annualized returns are 6.3 percent and 9.2 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 7.15 percent expected return on plan assets for 2018 is reasonable.The discount rate assumptions used to determine future pension obligations at December 31, 2017 and 2016 were based on the AonHewitt AA Only AboveMedian yield curve, which was designed by AonHewitt to provide a means for plan sponsors to value the liabilities of their postretirement benefit plans. TheAA Only Above Median yield curve represents a series of annual discount rates from bonds with AA minimum average rating as rated by Moody’s InvestorService, Standard & Poor’s and Fitch Ratings. We will continue to evaluate our actuarial assumptions at least annually, and we will adjust the assumptions asnecessary.We recognized pension income of $9.1 million in 2017 compared to $6.9 million of pension income in 2016 and $0.1 million of pension expense in 2015.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 ourpension plan and post-retirement benefit plan. Historically, we estimated the service and interest cost components utilizing a single weighted-averagediscount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We elected to utilize an approach thatdiscounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used inthe determination of the benefit obligation to the relevant projected cash flows. This change was made to provide a more precise measurement of service andinterest costs by improving the correlation between the projected benefit cash flows to the corresponding spot yield curve rates. The change was the reasonfor $7.7 million and $7.1 million decreases in 2017 and 2016, respectively, compared to 2015, in service and interest costs.Costs associated with our replacement retirement plan in 2017 were approximately $6 million, consistent with 2016. We made changes to our pension planincluding 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, 2014which significantly decreased pension expense beginning in 2015. Lowering the expected return on plan assets by 25 basis points would increase our netpension expense for 2017 by approximately $2.0 million. Lowering the discount rate by 25 basis points would decrease our 2017 net pension expense byapproximately $0.3 million.Non-GAAP MeasuresWe provide non-GAAP measures (adjusted earnings and adjusted earnings per share) that exclude one-time expenses associated with U.S. Tax Reform. Webelieve that these non-GAAP measures better reflect our financial performance.As such, we believe that the measures of adjusted earnings and adjusted earnings per share provide management and investors with a useful measure of ourresults. We have prepared annual reconciliations of adjusted earnings and adjusted earnings per share for 2017. 23Table of ContentsA. O. SMITH CORPORATIONAdjusted Earnings and Adjusted EPS(dollars in millions, except per share data)(unaudited)The following is a reconciliation of net earnings and diluted earnings per share (EPS) to adjusted earnings (non-GAAP) and adjusted EPS (non-GAAP): Years ended December 31, 2017 2016 Net Earnings (GAAP) $296.5 $326.5 U.S. Tax Reform income tax expense 81.8 — Adjusted Earnings $378.3 $326.5 Diluted EPS (GAAP) $1.70 $1.85 U.S. Tax Reform income tax expense per diluted share 0.47 — Adjusted EPS $2.17 $1.85 Excluding the impact of U.S. Tax Reform provisional one-time charges, our 2017 adjusted effective income tax rate was 27.4 percent as compared to oureffective income tax rate of 43.1 percent in 2017.OutlookWe expect our consolidated sales to grow 8.5 to 9.5 percent in 2018. With our organic growth potential and our stable replacement markets, we expect toachieve full-year earnings of between $2.50 and $2.58 per share, which excludes the potential impact from future acquisitions. Our guidance includes theestimated benefit related to our lower projected income tax rate under U.S. Tax Reform.OTHER MATTERSEnvironmentalOur operations are governed by a number of federal, foreign, state, local and environmental laws concerning the generation and management of hazardousmaterials, the discharge of pollutants into the environment and remediation of sites owned by the company or third parties. We have expended financial andmanagerial resources complying with such laws. Expenditures related to environmental matters were not material in 2017 and we do not expect them to bematerial in any single year. We have reserves and available insurance coverage associated with environmental obligations at various facilities and we believethese reserves are sufficient to cover reasonably anticipated remediation costs. Although we believe that our operations are substantially in compliance withsuch laws and maintain procedures designed to maintain compliance, there are no assurances that substantial additional costs for compliance will not beincurred in the future. However, since the same laws govern our competitors, we should not be placed at a competitive disadvantage.Market RiskWe 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 forwardcontracts to minimize such exposures for periods of less than one year. We do not engage in speculation in our derivatives strategies. Further discussionregarding 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, 2017, we had net foreign currencycontracts outstanding with notional values of $94.9 million. Assuming a hypothetical ten percent movement in the respective currencies, the potentialforeign exchange gain or loss associated with the change in exchange rates would amount to $9.5 million. However, gains and losses from our forwardcontracts 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 byshort-term money market rates. At December 31, 2017, we had $282.9 million in outstanding floating-rate debt with a weighted-average interest rate of2.3 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 resultin a change in annual pre-tax interest expense of approximately $0.6 million. 24Table of ContentsForward-Looking StatementsThis filing contains statements that the company believes are “forward-looking statements” within the meaning of the Private Securities Litigation ReformAct 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 actualresults to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from theseexpectations 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 ofconsumer spending in China; potential slower rate of conversion in the high efficiency boiler segment in the U.S.; significant volatility in raw materialprices; our inability to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in ourreplacement markets; foreign currency fluctuations; our inability to successfully integrate or achieve our strategic objectives resulting from acquisitions;competitive pressures on our businesses; the impact of potential information technology or data security breaches; changes in government regulations orregulatory requirements; the impact of U.S. Tax Reform for effective income tax rates and one-time expenses under the new law and adverse developments ingeneral economic, political and business conditions in key regions of the world. Forward-looking statements included in this filing are made only as of thedate of this release, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent writtenand 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 RISKSee “Market Risk” above. 25Table of ContentsITEM 8– FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and StockholdersA. O. Smith CorporationOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of A. O. Smith Corporation (the Company) as of December 31, 2017 and 2016, and therelated consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2017, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “financialstatements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, inconformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2018 expressed an unqualifiedopinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as A. O. Smith Corporation’s auditor since 1917.Milwaukee, WisconsinFebruary 16, 2018 26Table of ContentsCONSOLIDATED BALANCE SHEETS December 31 (dollars in millions) 2017 2016 Assets Current Assets Cash and cash equivalents $346.6 $330.4 Marketable securities 473.4 424.2 Receivables 598.4 518.7 Inventories 291.2 251.1 Other current assets 57.2 37.6 Total Current Assets 1,766.8 1,562.0 Net property, plant and equipment 528.9 461.9 Goodwill 516.7 491.5 Other intangibles 308.7 308.3 Other assets 76.2 67.3 Total Assets $3,197.3 $2,891.0 Liabilities Current Liabilities Trade payables $535.0 $528.6 Accrued payroll and benefits 90.8 84.3 Accrued liabilities 110.7 101.0 Product warranties 44.5 44.5 Long-term debt due within one year 7.5 7.2 Total Current Liabilities 788.5 765.6 Long-term debt 402.9 316.4 Product warranties 97.9 96.4 Pension liabilities 48.1 109.0 Other liabilities 211.1 88.3 Total Liabilities 1,548.5 1,375.7 Commitments and contingencies — — Stockholders’ Equity Preferred Stock — — Class A Common Stock (shares issued 26,239,559 and 26,313,351) 131.2 131.6 Common Stock (shares issued 164,468,033 and 164,394,241) 164.5 164.4 Capital in excess of par value 486.5 477.6 Retained earnings 1,792.6 1,593.0 Accumulated other comprehensive loss (299.5) (363.2) Treasury stock at cost (626.5) (488.1) Total Stockholders’ Equity 1,648.8 1,515.3 Total Liabilities and Stockholders’ Equity $3,197.3 $2,891.0 See accompanying notes which are an integral part of these statements. 27Table of ContentsCONSOLIDATED STATEMENT OF EARNINGS Years ended December 31 (dollars in millions, except per share amounts) 2017 2016 2015 Net sales $2,996.7 $2,685.9 $2,536.5 Cost of products sold 1,758.0 1,566.6 1,526.7 Gross profit 1,238.7 1,119.3 1,009.8 Selling, general and administrative expenses 718.2 658.9 610.7 Interest expense 10.1 7.3 7.4 Other income - net (10.4) (9.4) (10.8) Earnings before provision for income taxes 520.8 462.5 402.5 Provision for income taxes 224.3 136.0 119.6 Net Earnings $296.5 $326.5 $282.9 Net Earnings Per Share of Common Stock $1.72 $1.87 $1.59 Diluted Net Earnings Per Share of Common Stock $1.70 $1.85 $1.58 CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS Years ended December 31 (dollars in millions) 2017 2016 2015 Net Earnings $296.5 $326.5 $282.9 Other comprehensive earnings (loss) Foreign currency translation adjustments 52.7 (39.8) (42.7) Unrealized net (loss) gain on cash flow derivative instruments, less related income tax benefit (provision) of $0.7 in2017, $0.6 in 2016 and $(0.2) in 2015 (1.1) (1.0) 0.3 Change in pension liability less related income tax (provision) benefit of $(7.5) in 2017, $5.7 in 2016 and $(0.5) in2015 12.1 (9.0) 1.0 Comprehensive Earnings $360.2 $276.7 $241.5 See accompanying notes which are an integral part of these statements. 28Table of ContentsCONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31 (dollars in millions) 2017 2016 2015 Operating Activities Net earnings $296.5 $326.5 $282.9 Adjustments to reconcile earnings to cash provided by (used in) operating activities: Depreciation and amortization 70.1 65.1 63.0 U.S. Tax Reform income tax expense 81.8 — — Pension (income) expense (9.1) (6.9) 0.1 Stock based compensation expense 9.9 9.4 8.8 Net changes in operating assets and liabilities, net of acquisitions: Current assets and liabilities (127.8) 68.5 16.8 Noncurrent assets and liabilities 5.0 (16.0) (19.9) Cash Provided by Operating Activities 326.4 446.6 351.7 Investing Activities Acquisitions of businesses (43.1) (90.8) — Investments in marketable securities (583.5) (563.8) (428.8) Proceeds from sales of marketable securities 562.7 435.1 315.4 Capital expenditures (94.2) (80.7) (72.7) Cash Used in Investing Activities (158.1) (300.2) (186.1) Financing Activities Long-term debt incurred 86.5 74.1 28.1 Common stock repurchases (139.1) (135.2) (128.1) Net (payments) proceeds from stock option activity (0.9) 5.7 6.4 Acquisition related contingent payment (1.7) — — Dividends paid (96.9) (84.2) (67.8) Cash Used in Financing Activities (152.1) (139.6) (161.4) Net increase in cash and cash equivalents 16.2 6.8 4.2 Cash and cash equivalents-beginning of year 330.4 323.6 319.4 Cash and Cash Equivalents-End of Year $346.6 $330.4 $323.6 See accompanying notes which are an integral part of these statements. 29Table of ContentsCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY Years ended December 31 (dollars in millions) 2017 2016 2015 Class A Common Stock Balance at the beginning of the year $131.6 $131.8 $132.2 Conversion of Class A Common Stock (0.4) (0.2) (0.4) Balance at the end of the year $131.2 $131.6 $131.8 Common Stock Balance at the beginning of the year $164.4 $164.4 $164.2 Conversion of Class A Common Stock 0.1 — 0.2 Balance at the end of the year $164.5 $164.4 $164.4 Capital in Excess of Par Value Balance at the beginning of the year $477.6 $469.3 $451.9 Conversion of Class A Common Stock 0.3 0.2 0.2 Issuance of share units (4.9) (4.6) (4.2) Vesting of share units (2.9) (2.0) (3.2) Stock based compensation expense 9.2 8.8 8.1 Exercises of stock options 1.4 0.3 1.1 Tax benefit from exercises of stock options and vesting of share units — — 10.4 Stock incentives 5.8 5.6 5.0 Balance at the end of the year $486.5 $477.6 $469.3 Retained Earnings Balance at the beginning of the year $1,593.0 $1,350.7 $1,135.5 Net earnings 296.5 326.5 282.9 Cash dividends on stock (96.9) (84.2) (67.7) Balance at the end of the year $1,792.6 $1,593.0 $1,350.7 Accumulated Other Comprehensive Loss Balance at the beginning of the year $(363.2) $(313.4) $(272.0) Foreign currency translation adjustments 52.7 (39.8) (42.7) Unrealized net (loss) gain on cash flow derivative instruments, less related income tax benefit (provision) of $0.7 in 2017,$0.6 in 2016 and $(0.2) in 2015 (1.1) (1.0) 0.3 Change in pension liability less related income tax (provision) benefit of $(7.5) in 2017, $5.7 in 2016 and $(0.5) in 2015 12.1 (9.0) 1.0 Balance at the end of the year $(299.5) $(363.2) $(313.4) Treasury Stock Balance at the beginning of the year $(488.1) $(360.5) $(230.5) Exercise of stock options, net of 160,856, 54,019 and 418,754 shares surrendered as proceeds and to pay taxes in 2017,2016 and 2015, respectively (2.4) 4.0 (5.2) Stock incentives and directors’ compensation 0.2 0.2 0.1 Shares repurchased (139.1) (135.2) (128.1) Vesting of share units 2.9 3.4 3.2 Balance at the end of the year $(626.5) $(488.1) $(360.5) Total Stockholders’ Equity $1,648.8 $1,515.3 $1,442.3 See accompanying notes which are an integral part of these statements. 30Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.Organization and Significant Accounting PoliciesOrganization. A. O. Smith Corporation (A. O. Smith or the Company) is comprised of two reporting segments: North America and Rest of World. The Rest ofWorld segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential andcommercial gas and electric water heaters, boilers and water treatment products. Both segments primarily manufacture and market in their respective regionsof the world. The North America segment also manufactures and markets water system tanks. The Rest of World segment also manufacturers and marketsin-home air purification products in China.Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination ofintercompany transactions.Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requiresmanagement to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and notes. Actual results coulddiffer from those estimates.Fair value of financial instruments. The carrying amounts of cash, cash equivalents, marketable securities, receivables, floating rate debt and trade payablesapproximated fair value as of December 31, 2017 and 2016, due to the short maturities or frequent rate resets of these instruments. As of December 31, 2017and 2016, the carrying value of term notes with insurance companies was approximately $127.5 million and 134.4 million, respectively, which approximatedfair value in both years. The fair value was 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 Barbados, Hong Kong and Mexican companies and itsnon-operating companies in the Netherlands, the Company uses the local currency as the functional currency. For those operations using a functionalcurrency other than the U.S. dollar, assets and liabilities were translated into U.S. dollars at year-end exchange rates, and revenues and expenses weretranslated at weighted-average exchange rates. The resulting translation adjustments were recorded as a separate component of stockholders’ equity. TheBarbados, Dutch, Hong Kong and Mexican companies use the U.S. dollar as the functional currency. Gains and losses from foreign currency transactions wereincluded in net earnings and were not significant in 2017, 2016 or 2015.Cash and cash equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cashequivalents.Marketable securities. The Company considers all highly liquid investments with maturities greater than 90 days when purchased to be marketablesecurities. At December 31, 2017, the Company’s marketable securities consisted of bank time deposits with original maturities ranging from 180 days to 12months and were 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 theCompany’s domestic inventories, which comprised 59 percent and 61 percent of the Company’s total inventory at December 31, 2017 and 2016,respectively. Inventories of foreign subsidiaries, the remaining domestic inventories and supplies were determined using the first-in, first-out (FIFO) method.Property, plant and equipment. Property, plant and equipment are stated at cost. Depreciation is computed primarily by the straight-line method. Theestimated 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 forsoftware. Maintenance and repair costs are expensed as incurred. 31Table of Contents1.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 basisover 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 forimpairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscountedcash 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 carryingvalue 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 themarket. The Company records a liability for the expected cost of warranty-related claims at the time of sale. The allocation of the warranty liability betweencurrent 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 2017 and 2016: Years ended December 31 (dollars in millions) 2017 2016 Balance at beginning of year $140.9 $139.3 Expense 39.7 42.5 Claims settled (38.2) (40.9) Balance at end of year $142.4 $140.9 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. Thechange in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss (AOCI), depending on whether thederivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 11, “Derivative Instruments” of the notes toconsolidated 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 aconsistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurringbasis 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 transfera liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based onassumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tierfair 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 whichthere 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 markettransactions 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 December 31, 2017 December 31, 2016 Quoted prices in active markets for identical assets (Level 1) $475.1 $424.5 There were no changes in the valuation techniques used to measure fair values on a recurring basis. 32Table of Contents1.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 certainexport 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. TheCompany assesses whether the selling price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales priceis subject to refund or adjustment. The Company assesses collectability based on the creditworthiness of the customer as determined by credit checks andanalysis, as well as the customer’s payment history. The allowance for doubtful accounts was $5.3 million and $6.3 million at December 31, 2017 and 2016,respectively.Reserves for customer returns for defective product are based on historical experience with similar types of sales. Accruals for rebates and incentives are basedon pricing agreements and are tied to sales volume. Changes in such accruals may be required if future returns differ from historical experience or if actualsales 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 $126.9 million, $113.9 million and $102.2 millionduring 2017, 2016 and 2015, respectively. Included in total advertising costs are expenses associated with store displays for water heater, water treatment andair purification products in China that are amortized over 12 to 24 months which totaled $43.0 million, $37.0 million and $27.4 million during 2017, 2016and 2015, respectively.Research and development. Research and development costs are charged to operations as incurred and amounted to $86.4 million, $80.1 million and$73.7 million during 2017, 2016 and 2015, 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 assetswhen 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 arerecognized as they occur. The Company adopted amended ASC 718 Compensation – Stock Compensation as of January 1, 2016. Refer to the RecentAccounting Pronouncements section later in this footnote for additional information on the adoption of this pronouncement. As required under amendedASC 718, the Company recognized $11.6 million and $5.9 million of discrete income tax benefits on settled stock based compensation awards during 2017and 2016, respectively. As required under previous guidance, in the year ended December 31, 2015, the Company recognized $10.4 million of excess taxdeductions 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 whichdeferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and taxbases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enactedtax 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 inthe consolidated balance sheet. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than notto 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 bythe taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are thenmeasured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement. 33Table of Contents1.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 CommonStock and Common Stock have equal dividend rights. The numerator for the calculation of basic and diluted earnings per share is net earnings. The followingtable sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations: 2017 2016 2015 Denominator for basic earnings per share - weighted-average sharesoutstanding 172,666,056 174,712,683 177,622,280 Effect of dilutive stock options, restricted stock and share units 1,939,133 2,112,597 1,386,900 Denominator for diluted earnings per share 174,605,189 176,825,280 179,009,180 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 treasuryshares) 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 thefinancial statements and footnotes to the number of shares outstanding, price per share, per share amounts and stock based compensation data have beenrecast 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 PronouncementsIn August 2017, the Financial Accounting Standards Board (FASB) amended ASC 815, Derivatives and Hedging (issued under Accounting Standards Update(ASU) 2017-12, “Targeted Improvements to Accounting for Hedging Activities”). Under this amendment, more hedging strategies are eligible for hedgeaccounting treatment. ASU 2017-12 also amends the presentation and disclosure requirements regarding derivatives and hedging and changes howcompanies assess effectiveness. The amendment requires adoption on January 1, 2019 and permits early adoption in any interim or annual period. TheCompany does not expect that the adoption of ASU 2017-12 will have a material impact on its consolidated balance sheets, statements of earnings orstatements of cash flows.In May 2017, the FASB amended ASC 718, Compensation – Stock Compensation (issued under ASU 2017-09, “Scope of Modification Accounting”). Thisamendment clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as a modification. Under this amendment,modification accounting must be used if three conditions are met: the fair value changes, the vesting conditions change, or the classification of the awardchanges due to the changes in terms or conditions. The amendment requires adoption on January 1, 2018. The Company does not expect that the adoption ofASU 2017-09 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.In March 2017, the FASB amended ASC 715, Compensation – Retirement Benefits (issued under ASU 2017-07, “Improving the Presentation of Net PeriodicPension Cost and Net Periodic Postretirement Benefit Cost”). This amendment changes the way net periodic benefit cost associated with employer-sponsoreddefined benefit plans is presented in the statement of earnings. Under the amendment, the service cost component of net periodic benefit cost is included inthe same lines in the statement of earnings as other employee compensation costs and the other components of net periodic benefit cost must be presentedseparately outside of income from operations. The amendment requires adoption on January 1, 2018. The Company does not expect the adoption of ASU2017-07 to have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.In January 2017, the FASB amended ASC 350, Intangibles – Goodwill and Other (issued under ASU 2017-04, “Simplifying the Test for GoodwillImpairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairmenttest by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amountexceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendmentrequires adoption on January 1, 2020. The Company does not expect that the adoption of ASU 2017-04 will have a material impact on its consolidatedbalance sheets, statements of earnings or statements of cash flows. 34Table of Contents1.Organization and Significant Accounting Policies (continued) In October 2016, the FASB amended ASC 740, Income Taxes (issued under ASU 2016-16). This amendment requires that the income tax consequences of anintra-entity transfer of an asset other than inventory be recognized when the transfer occurs. The amendment is effective for the Company beginningJanuary 1, 2018. This amendment is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retainedearnings. The Company does not expect the adoption of amended ASU 2016-16 will have a material impact on the Company’s consolidated balance sheets,statement of earnings or statements of cash flows.In August 2016, the FASB amended ASC 230, Statement of Cash Flows (issued under ASU 2016-15, “Clarification of Certain Cash Receipts and CashPayments”). This amendment clarified reporting for contingent consideration payments made after a business combination depending on how soon after theacquisition the payments are made. The Company adopted ASU 2016-15 effective January 1, 2017.In March 2016, the FASB amended ASC 718, Compensation—Stock Compensation (issued under ASU 2016-09). This amendment simplified several aspectsof the accounting for share-based payment transactions. The Company adopted this amendment effective January 1, 2016. The amendment requires thebenefits 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 theconsolidated statement of earnings in the periods in which they occur. The amendment also eliminated previous guidance that required unrecognizedfuture excess income tax benefits to be considered used to repurchase shares in the calculation of diluted shares which resulted in lower diluted sharesoutstanding than the calculation under the amendment. The Company applied this guidance prospectively. As such, the Company recognized $11.6 millionand $5.9 million of discrete income tax benefits associated with excess tax benefits on settled stock based compensation awards during 2017 and 2016,respectively. The Company’s diluted shares outstanding for the 2017 and 2016 increased as compared to the way it was calculated under previous guidance.In February 2016, the FASB amended ASC 842, Leases (issued under ASU 2016-02). This amendment requires the recognition of lease assets and leaseliabilities on the balance sheet for most leasing arrangements currently classified as operating leases. This amendment is effective for periods beginningJanuary 1, 2019. The Company is in the process of completing its analysis of its lease population and does not expect the adoption of ASU 2016-02 to have amaterial impact on its consolidated balance sheets, statements of earnings and statements of cash flows.In May 2014, the FASB issued ASC 606-10, Revenue from Contracts with Customers (issued under ASU 2014-09). ASU 2014-09 will replace all existingrevenue 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 has completed its review of its customer contracts and its analysis of the impact of the disclosure requirements of ASU 2014-09. The Companywill adopt ASU 2014-09 on January 1, 2018 using the full retrospective method. The adoption of ASU 2014-09 will not have a material impact on ourfinancial statements on an on-going basis. 35Table of Contents2.AcquisitionsOn September 5, 2017, the Company acquired 100 percent of the shares of Hague Quality Water International (Hague), an Ohio-based water softenercompany. With the addition of Hague, the Company grew its North America water treatment platform. Hague is included in the Company’s North Americasegment for reporting purposes.The Company paid an aggregate cash purchase price of $43.1 million, net of $4.1 million of cash acquired. In addition, the Company established a$1.5 million holdback liability to satisfy any potential obligations of the former owners of Hague, should they arise, otherwise the amount will be paid to theformer owners of Hague on September 5, 2018. The Company also agreed to make a contingent payment of up to an additional $2.0 million based on theamount by which products manufactured by or branded Hague increase over the two-year period ending June 30, 2019. In addition, the Company incurredacquisition-related costs of approximately $0.2 million. As of the acquisition date and December 31, 2017, the Company estimated the fair value of theholdback liability and additional contingent consideration at $1.5 million and $2.0 million, respectively, and has recorded liabilities for those amounts.The following table summarizes the allocation of fair value of the assets acquired and liabilities assumed at the date of acquisition of Hague for purposes ofallocating the purchase price. The Company is in the process of finalizing the fair value estimates; therefore the allocation of the purchase price is subject torefinement. The $12.8 million of acquired intangible assets was comprised of $1.1 million of trade names that are not subject to amortization and$11.7 million of customer lists being amortized over 18 years. September 5, 2017 (dollars in millions) Current assets, net of cash acquired $7.8 Property, plant and equipment 6.9 Intangible assets 12.8 Goodwill 22.2 Total assets acquired 49.7 Current liabilities (5.6) Long-term liabilities (1.0) Total liabilities assumed (6.6) Net assets acquired $43.1 The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have been included in the Company’sconsolidated financial statements from September 5, 2017, the date of acquisition. Net sales and pre-tax earnings associated with Hague included in theconsolidated statement of earnings totaled $8.6 million and $2.0 million, respectively, which included $2.2 million of operating earnings less $0.2 million ofacquisition-related costs incurred by the Company resulting from the acquisition. 36Table of Contents2.Acquisitions (continued) On August 8, 2016, the Company acquired 100 percent of the shares of Aquasana, Inc. (Aquasana), a Texas-based water treatment company. With theaddition of Aquasana, the Company entered the North America water treatment market. Aquasana is included in the Company’s North America segment forreporting 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 a holdback liability to satisfy any potential obligations of the former owners of Aquasana to payany adjustment to the purchase price. As of the acquisition date, the fair value of the holdback liability was $1.7 million. The Company paid the fullholdback liability to the former owners of Aquasana in 2017.The following table summarizes the allocation of fair value of the assets acquired and liabilities assumed at the date of acquisition of Aquasana. The$30.0 million of acquired intangible assets was comprised of $21.5 million of trade names that are not subject to amortization, $8.3 million of customer listsbeing amortized over ten years and $0.2 million of patents being amortized over five years. August 8, 2016 (dollars in millions) Current assets, net of cash acquired $7.3 Property, plant and equipment 2.7 Intangible assets 30.0 Goodwill 60.4 Total assets acquired 100.4 Current liabilities (7.1) Long-term liabilities (8.2) Total liabilities assumed (15.3) Net assets acquired $85.1 The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations have been included in the Company’sfinancial statements from August 8, 2016, the date of acquisition. 3.Statement of Cash FlowsSupplemental cash flow information is as follows: Years ended December 31 (dollars in millions) 2017 2016 2015 Net change in current assets and liabilities, net of acquisitions: Receivables $(75.8) $(15.1) $(25.9) Inventories (37.5) (23.4) (14.7) Other current assets (9.0) (3.2) (4.6) Trade payables (5.1) 101.5 31.0 Accrued liabilities, including payroll and benefits 12.2 6.0 19.8 Income taxes (refundable) payable (12.6) 2.7 11.2 $(127.8) $68.5 $16.8 37Table of Contents4.Inventories December 31 (dollars in millions) 2017 2016 Finished products $134.6 $114.1 Work in process 18.3 13.0 Raw materials 160.5 142.4 Inventories, at FIFO cost 313.4 269.5 LIFO reserve (22.2) (18.4) $291.2 $251.1 The Company recognized after-tax LIFO (income) expense of $(0.3) million, $0.3 million and $1.1 million in 2017, 2016 and 2015, respectively. 5.Property, Plant and Equipment December 31 (dollars in millions) 2017 2016 Land $11.2 $11.0 Buildings 329.9 286.4 Equipment 608.4 533.7 Software 110.6 101.4 1,060.1 932.5 Less accumulated depreciation and amortization 531.2 470.6 $528.9 $461.9 6.Goodwill and Other Intangible AssetsChanges in the carrying amount of goodwill during the years ended December 31, 2017 and 2016 consisted of the following: (dollars in millions) North America Rest of World Total Balance at December 31, 2015 $361.0 $59.9 $420.9 Acquisitions 70.0 — 70.0 Currency translation adjustment 1.2 (0.6) 0.6 Balance at December 31, 2016 432.2 59.3 491.5 Acquisitions 22.2 — 22.2 Currency translation adjustment 2.8 0.2 3.0 Balance at December 31, 2017 $457.2 $59.5 $516.7 The carrying amount of other intangible assets consisted of the following: 2017 2016 December 31 (dollars in millions) GrossCarryingAmount AccumulatedAmortization Net GrossCarryingAmount AccumulatedAmortization Net Amortizable intangible assets: Patents $3.7 $(2.7) $1.0 $3.7 $(2.2) $1.5 Customer lists 235.8 (93.3) 142.5 224.0 (80.3) 143.7 Total amortizable intangible assets 239.5 (96.0) 143.5 227.7 (82.5) 145.2 Indefinite-lived intangible assets: Trade names 165.2 — 165.2 163.1 — 163.1 Total intangible assets $404.7 $(96.0) $308.7 $390.8 $(82.5) $308.3 38Table of Contents6.Goodwill and Other Intangible Assets (continued) Amortization expenses of other intangible assets of $13.7 million, $13.4 million, and $14.2 million were recorded in 2017, 2016 and 2015, respectively. Inthe future, excluding the impact of any future acquisitions, the Company expects amortization expense of approximately $14.5 million annually and theintangible assets will be amortized over a weighted average period of 12 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 2017,2016 and 2015. No impairments of other intangible assets were recorded in 2017, 2016 and 2015. 7.Debt and Lease Commitments December 31 (dollars in millions) 2017 2016 Bank credit lines, average year-end interest rates of 2.5% for 2017 and 2.4% for 2016 $15.9 $23.6 Revolving credit agreement borrowings, average year-end interest rates of 2.5% for 2017 and 1.7% for 2016 190.0 80.0 Commercial paper, average year-end interest rates of 1.7% for 2017 and 1.1% for 2016 77.0 85.6 Term notes with insurance companies, expiring 2029-2034, average year-end interest rates of 3.4% for 2017 and 3.5% for 2016 122.7 125.5 Canadian term notes with insurance companies, expiring through 2018, average year-end interest rates of 5.3% for 2017 and 2016 4.8 8.9 410.4 323.6 Less long-term debt due within one year 7.5 7.2 Long-term debt $402.9 $316.4 In December 2016, the Company completed a $500 million multi-year multi-currency revolving credit agreement with a group of nine banks, which expireson December 15, 2021. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including lenderapproval) are satisfied. Borrowings under the Company’s bank credit lines and commercial paper borrowings are supported by the revolving creditagreement. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings are classified as long-term debt atDecember 31, 2017 and 2016. 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 2023and 2028 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 downborrowings 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 maturein 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 creditfacility.Scheduled maturities of long-term debt within each of the five years subsequent to December 31, 2017 are as follows: Years ending December 31 (dollars in millions) Amount 2018 $7.5 2019 — 2020 6.8 2021 290.0 2022 6.8 39Table of Contents7.Debt and Lease Commitments (continued) Future minimum payments under non-cancelable operating leases relating mostly to office, manufacturing and warehouse facilities total $47.5 million andare due as follows: Years ending December 31 (dollars in millions) Amount 2018 $20.2 2019 4.9 2020 3.6 2021 3.1 2022 2.5 Thereafter 13.2 Rent expense, including payments under operating leases, was $29.4 million, $29.8 million and $28.8 million in 2017, 2016 and 2015, respectively.Interest paid by the Company was $10.0 million, $7.2 million and $6.4 million in 2017, 2016 and 2015, respectively. The Company capitalized interestexpense of $0.7 million, $0.2 million and $0.2 million in 2017, 2016 and 2015, respectively.8. Stockholders’ EquityThe 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 aone for one basis.There were 73,792 shares during 2017, 60,045 shares during 2016 and 67,544 shares during 2015, 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 $0.56, $0.48 and $0.38 per share in 2017,2016 and 2015, respectively.The Company completed a two-for-one stock split on October 5, 2016. Amounts have been adjusted to reflect the stock split.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, theCompany’s Board of Directors authorized the purchase of an additional 3,000,000 shares of the Company’s Common Stock. Under the share repurchaseprogram, the Company’s Common Stock may be purchased through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases inaccordance with applicable securities laws. The number of shares purchased and the timing of the purchase will depend on a number of factors, includingshare 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 mayoccur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that the Company may then have in effect. In 2017, the Companypurchased 2,533,350 shares at a total cost of $139.1 million. As of December 31, 2017, there were 2,373,053 shares remaining on the existing repurchaseauthorization. In 2016, the Company purchased 3,273,109 shares at a cost of $135.2 million. In 2015, the Company purchased 3,816,474 shares at a cost of$128.1 million.At December 31, 2017, a total of 130,380 and 18,914,082 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock. AtDecember 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. 40Table of Contents8.Stockholders’ Equity (continued) Accumulated other comprehensive loss is as follows: December 31 (dollars in millions) 2017 2016 Cumulative foreign currency translation adjustments $(26.5) $(79.2) Unrealized net (loss) gain on cash flow derivative instruments less related income taxbenefit (provision) of $0.6 in 2017 and $(0.1) in 2016 (0.9) 0.2 Pension liability less related income tax benefit of $175.9 in 2017 and $183.4 in 2016 (272.1) (284.2) $(299.5) $(363.2) Changes to accumulated other comprehensive loss by component are as follows: Years endedDecember 31, 2017 2016 Cumulative foreign currency translation Balance at beginning of period $(79.2) $(39.4) Other comprehensive gain (loss) before reclassifications 52.7 (39.8) Balance at end of period (26.5) (79.2) Unrealized net gain on cash flow derivatives Balance at beginning of period 0.2 1.2 Other comprehensive losses before reclassifications (0.5) (0.9) Realized gains on derivatives reclassified to cost of products sold (net of tax provision of $0.4 and $0.1 in 2017 and2016, respectively)(1) (0.6) (0.1) Balance at end of period (0.9) 0.2 Pension liability Balance at beginning of period (284.2) (275.2) Other comprehensive gain (loss) before reclassifications 1.4 (18.8) Amounts reclassified from accumulated other comprehensive loss (1) 10.7 9.8 Balance at end of period (272.1) (284.2) Total accumulated other comprehensive loss, end of period $(299.5) $(363.2) (1)Amounts reclassified from accumulated other comprehensive loss: Realized gains on derivatives reclassified to cost of products sold (1.0) (0.2) Tax provision 0.4 0.1 Reclassification net of tax $(0.6) $(0.1) Amortization of pension items: Actuarial losses $17.9(2) $17.5(2) Prior year service cost (0.4)(2) (1.5)(2) 17.5 16.0 Tax benefit (6.8) (6.2) Reclassification net of tax $10.7 $9.8 (2)  These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 10 - Pensions andOther Post-retirement Benefits for additional details   41Table of Contents9.Stock Based CompensationThe Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved bystockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originallyapproved by shareholders in 2002. The number of shares available for granting of options or share units at December 31, 2017, was 2,885,001. Upon stockoption exercise or share unit vesting, shares are issued from treasury stock.Total stock based compensation expense recognized in 2017, 2016 and 2015 was $9.9 million, $9.4 million and $8.8 million, respectively.Stock optionsThe stock options granted in 2017, 2016 and 2015 have three year pro rata vesting from the dates of grant. Stock options are issued at exercise prices equal tothe fair value of Common Stock on the date of grant. For active employees, all options granted in 2017, 2016 and 2015 expire ten years after date of grant.Stock option compensation expense recognized in 2017, 2016 and 2015 was $4.7 million, $4.5 million and $4.0 million, respectively. Included in the stockoption expense recognized in 2017, 2016 and 2015 is expense associated with the accelerated vesting of stock option awards for certain employees whoeither 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 ShareExercise Price Years Ended December 31 (dollars in millions)AggregateIntrinsic Value 2017 2016 2015 Outstanding at beginning of year $21.69 2,664,333 2,653,558 3,154,006 Granted 2017—$50.16 to $50.16 per share 358,150 2016—$31.49 to $46.93 per share 553,370 2015—$23.24 to $25.34 per share 484,990 Exercised 2017—$4.75 to $31.67 per share (752,603) $12.7 2016—$4.75 to $30.77 per share (531,933) 7.5 2015—$4.10 to $17.46 per share (978,208) 10.2 Forfeited 2017—$30.77 to $50.16 per share (6,754) 2016—$23.24 to $46.93 per share (10,662) 2015—$17.46 to $23.24 per share (7,230) Outstanding at end of year (2017—$4.75 to $50.16 per share) 27.73 2,263,126 2,664,333 2,653,558 Exercisable at end of year 20.48 1,387,259 1,602,651 1,544,186 The aggregate intrinsic value for the outstanding and exercisable options as of December 31, 2017 is $75.9 million and $56.6 million, respectively. Theaverage remaining contractual life for outstanding and exercisable options is seven years and six years, respectively. 42Table of Contents9.Stock Based Compensation (continued) The following table summarizes weighted-average information by range of exercise prices for stock options outstanding and exercisable at December 31,2017: Range ofExercise Prices OptionsOutstanding atDecember 31,2017 Weighted-AverageExercisePrice OptionsExercisable atDecember 31,2017 Weighted-AverageExercisePrice Weighted-AverageRemainingContractualLife $4.75 to $11.50 414,134 $9.56 414,134 $9.56 4 years $17.46 to $25.34 556,847 20.58 556,847 20.58 7 years $26.47 to $50.16 1,292,145 36.63 416,278 31.20 8 years 2,263,126 1,387,259 The weighted-average fair value per option at the date of grant during 2017, 2016 and 2015, using the Black-Scholes option-pricing model, was $13.04,$8.03 and $8.59, respectively. Assumptions were as follows: 2017 2016 2015 Expected life (years) 5.7 5.8 5.9 Risk-free interest rate 2.4% 1.7% 2.0% Dividend yield 1.0% 1.3% 1.0% Expected volatility 26.5% 27.7% 29.3% 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 arebased 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 purposesof these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expectedvolatility 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 were granted SARs. Each SAR award grants the employee the right to receive cash equal to the excess of the share price ofthe Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted have three year pro ratavesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant and expire tenyears from the date of grant. The fair value and compensation expense for SARs are remeasured at each reporting period using the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 2017 or 2016. As of December 31, 2017, there were 23,660 SARsoutstanding and 15,774 were exercisable. In 2016, there were 24,940 SARs outstanding and 8,320 were exercisable. In 2015, the Company granted 26,230SARs and no SARs were exercisable. Stock based compensation expense attributable to SARS was not material in 2017, 2016 and 2015.Restricted stock and share unitsParticipants may also be awarded shares of restricted stock or share units under the Plan. The Company granted 107,853, 160,465 and 152,192 share unitsunder the plan in 2017, 2016 and 2015, respectively.The share units were valued at $5.4 million, $5.2 million and $4.7 million at the date of issuance in 2017, 2016 and 2015, respectively, and will berecognized as compensation expense ratably over the three-year vesting period; however, included in share based compensation is expense associated withthe 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 $5.2 million, $4.9 million and $4.8 million was recognized in 2017, 2016 and 2015, respectively. Certain non-U.S.-basedemployees receive the cash value of vested shares at the vesting date in lieu of shares. 43Table of Contents9.Stock Based Compensation (continued) A summary of share unit activity under the plan is as follows: Number of Units Weighted-AverageGrant Date Value Outstanding at January 1, 2017 544,055 $27.35 Granted 107,853 50.17 Vested (213,863) 23.25 Forfeited/cancelled (4,755) 34.25 Outstanding at December 31, 2017 433,290 34.96 Total compensation expense for share units not yet recognized is $2.2 million at December 31, 2017. The weighted average period over which the expense isexpected to be recognized is 11 months. 10.Pension and Other Post-retirement BenefitsThe Company provides retirement benefits for all U.S. employees including benefits for employees of previously owned businesses which were earned up tothe 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 andmatches 50 percent of the next five percent of employee contributions. The Company also has defined contribution plans for certain hourly employees whichprovide 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. employeeshired after January 1, 2010, would not participate in the defined benefit plan, and benefit accruals for the majority of current salaried and hourly employeessunset on December 31, 2014. Beginning in 2015, an additional Company contribution is being made to the defined contribution plan in lieu of benefitsearned 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 insurancebenefits from retirement to age 65. Certain hourly employees retiring after January 1, 1996, are subject to a maximum annual benefit and salaried employeeshired 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 pensionplan and its post-retirement benefit plan. This change compared to the previous method resulted in a $7.7 million and $7.1 million decrease in the serviceand interest components for pension cost in 2017 and 2016, respectively compared to 2015. Historically, the Company estimated the service and interest costcomponents utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of theperiod. The Company has elected to utilize an approach that discounts the individual expected cash flows underlying the service cost and interest cost usingthe applicable spot rates derived from the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This changewas made to provide a more precise measurement of service and interest costs by improving the correlation between the projected benefit cash flows to thecorresponding 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 Companyaccounted for this change as a change in accounting estimate that is inseparable from a change in accounting principle and accordingly accounted for itprospectively beginning January 1, 2016. 44Table of Contents10.Pension and Other Post-retirement Benefits (continued) Obligations and Funded StatusPension and Post-Retirement Disclosure Information under ASC 715, Compensation – Retirement Benefits (ASC 715)The following tables present the changes in benefit obligations, plan assets and funded status for domestic pension and post-retirement plans and thecomponents of net periodic benefit costs. Pension Benefits Post-retirement Benefits Years ended December 31 (dollars in millions) 2017 2016 2017 2016 Accumulated benefit obligation (ABO) at December 31 $921.8 $894.3 N/A N/A Change in projected benefit obligations (PBO) PBO at beginning of year $(895.8) $(892.9) $(6.6) $(6.6) Service cost (1.8) (1.8) (0.1) (0.1) Interest cost (30.0) (30.6) (0.3) (0.2) Participant contributions — — (0.1) — Plan amendments — (0.7) — — Actuarial loss including assumption changes (54.3) (31.0) (1.1) (0.2) Benefits paid 59.2 61.2 0.6 0.5 PBO at end of year $(922.7) $(895.8) $(7.6) $(6.6) Change in fair value of plan assets Plan assets at beginning of year $787.0 $759.0 $— $— Actual return on plan assets 116.5 57.0 — — Contribution by the company 30.5 32.2 0.4 0.5 Participant contributions — — 0.1 — Benefits paid (59.2) (61.2) (0.5) (0.5) Plan assets at end of year $874.8 $787.0 $— $— Funded status $(47.9) $(108.8) $(7.6) $(6.6) Amount recognized in the balance sheet Current liabilities $(0.5) $(0.5) $(0.3) $(0.4) Non-current liabilities (47.4) (108.3) (7.3) (6.2) Net pension liability at end of year $(47.9)* $(108.8)* $(7.6) $(6.6) Amounts recognized in accumulated othercomprehensive loss before tax Net actuarial loss (gain) $451.8 $473.5 $(0.8) $(2.0) Prior service cost (0.5) (0.9) (2.6) (2.9) Total recognized in accumulated other comprehensive loss $451.3 $472.6 $(3.4) $(4.9) *In addition, the Company has a liability for a foreign pension plan of $0.2 million and $0.2 million at December 31, 2017 and 2016, respectively. 45Table of Contents10.Pension and Other Post-retirement Benefits (continued) Pension Benefits Post-retirement Benefits Years ended December 31 (dollars in millions) 2017 2016 2015 2017 2016 2015 Net periodic benefit cost Service cost $1.8 $1.8 $1.9 $0.1 $0.1 $0.1 Interest cost 30.0 30.6 37.6 0.3 0.2 0.3 Expected return on plan assets (58.4) (55.9) (57.5) — — — Amortization of unrecognized: Net actuarial loss (gain) 17.9 17.7 19.1 (0.1) (0.2) (0.1) Prior service cost (0.4) (1.1) (1.0) (0.4) (0.4) (0.4) Curtailment and other one-time charges — — — — — — Defined-benefit plan (income) cost (9.1) (6.9) 0.1 $(0.1) $(0.3) $(0.1) Various U.S. defined contribution plans cost 12.0 11.6 10.8 $2.9 $4.7 $10.9 Other changes in plan assets and projected benefit obligation recognizedin other comprehensive loss Net actuarial (gain) loss $(3.8) $29.9 $17.2 $1.1 $0.2 $— Amortization of net actuarial (loss) gain (17.9) (17.7) (19.1) 0.1 0.2 0.1 Prior service cost — 0.6 2.5 — — (3.7) Amortization of prior service cost 0.5 1.1 1.0 0.4 0.4 0.4 Total recognized in other comprehensive loss (21.2) 13.9 1.6 1.6 0.8 (3.2) Total recognized in net periodic (benefit) cost and other comprehensive loss $(30.3) $7.0 $1.7 $1.5 $0.5 $(3.3) The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive loss into netperiodic benefit cost during 2018 are $18.7 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 2018 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-lineamortization of the cost over the average remaining service period of employees expected to receive benefits under the plan. Beginning in 2015 theamortization occurs over the average remaining life expectancy of participants expected to receive benefits under the plan as permitted under ASC 715.The 2017 and 2016 after tax adjustments for additional minimum pension liability resulted in other comprehensive gain (loss) of $12.1 million and $(9.0)million, respectively.Actuarial assumptions used to determine benefit obligations at December 31 are as follows: Pension Benefits Post-retirement Benefits 2017 2016 2017 2016 Discount rate 3.65% 4.15% 3.79% 4.33% Average salary increases n/a 4.00% n/a n/a Actuarial assumptions used to determine net periodic benefit cost for the year ended December 31 are as follows: Pension Benefits Post-retirement Benefits Years ended December 31 2017 2016 2015 2017 2016 2015 Discount rate 4.15% 4.40% 4.05% 4.40% 4.55% 4.00% Expected long-term return on plan assets 7.50% 7.50% 7.75% n/a n/a n/a Rate of compensation increase 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 46Table of Contents10.Pension and Other Post-retirement Benefits (continued) AssumptionsIn developing the expected long-term rate of return on plan assets assumption, the Company evaluated its pension plan’s target and actual asset allocationand expected long-term rates of return of equity and bond indices. The Company also considered its pension plan’s historical ten-year and 25-yearcompounded annualized returns of 6.3 percent and 9.2 percent, respectively.Assumed health care cost trend ratesAssumed health care cost trend rates as of December 31 are as follows: 2017 2016 Health care cost trend rate assumed for next year 6.50% 6.50% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00% Year that the rate reaches the ultimate trend rate 2021 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 financialstatements.Plan AssetsThe Company’s pension plan weighted asset allocations as of December 31 by asset category are as follows: Asset Category 2017 2016 Equity securities 45% 48% Debt securities 43 37 Real estate 9 10 Private equity 2 4 Other 1 1 100% 100% 47Table of Contents10.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, 2017 and 2016 (dollars in millions): December 31, 2017 Asset Category Total Quoted Prices inActive Markets forIdentical Contracts(Level 1) Significant OtherObservable Inputs(Level 2) Significant Non-observable Inputs(Level 3) Short-term investments $15.8 $2.0 $13.8 $— Equity securities Common stocks 220.3 220.3 — — Commingled equity funds 121.5 — 121.5 — Fixed income securities U.S. treasury securities 46.0 46.0 — — Other fixed income securities 219.9 — 219.9 — Commingled fixed income funds 99.8 — 99.8 — Other types of investments Mutual funds 51.8 — 51.8 — Real estate funds 77.8 — — 77.8 Private equity 20.9 — — 20.9 Total fair value of plan asset investments $873.8 $268.3 $506.8 $98.7 Non-investment plan assets 1.0 Total plan assets $874.8 December 31, 2016 Asset Category Total Quoted Prices inActive Markets forIdentical Contracts(Level 1) Significant OtherObservable Inputs(Level 2) Significant Non-observable Inputs(Level 3) Short-term investments $28.7 $1.1 $7.9 $19.7 Equity securities Common stocks 254.0 254.0 — — Commingled equity funds 105.6 — 105.6 — Fixed income securities U.S. treasury securities 97.6 97.6 — — Other fixed income securities 102.6 — 102.6 — Commingled fixed income funds 90.3 — 90.3 — Other types of investments Mutual funds 4.5 — 4.5 — Real estate funds 74.3 — — 74.3 Private equity 28.0 — — 28.0 Total fair value of plan asset investments $785.6 $352.7 $310.9 $122.0 Non-investment plan assets 1.4 Total plan assets $787.0 48Table of Contents 10. Pension and Other Post-retirement Benefits (continued)The short-term investments included in the Company’s plan assets consist of cash and cash equivalents. The fair value of the remaining categories of theCompany’s plan assets are valued as follows: equity securities are valued using the closing stock price on a national securities exchange, which reflects thelast reported sales price on the last business day of the year; fixed income securities are valued using institutional bond quotes, which are based on variousmarket and industry inputs; mutual funds and real estate funds are valued using the net asset value of the fund, which is based on the fair value of theunderlying securities; and private equity investments are valued at the estimated fair value at the previous quarter end, which is based on the proportionateshare of the underlying portfolio investments.The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2017 and2016 (dollars in millions): Short terminvestments Realestatefunds Privateequity Total Balance at December 31, 2015 $12.4 $70.9 $34.3 $117.6 Actual return (loss) on plan assets: Relating to assets still held at the reporting date — 3.4 (5.5) (2.1) Relating to assets sold during the period — — 9.3 9.3 Purchases, sales and settlements 7.3 — (10.1) (2.8) Balance at December 31, 2016 19.7 74.3 28.0 122.0 Actual return (loss) on plan assets: Relating to assets still held at the reporting date — 3.5 (5.6) (2.1) Relating to assets sold during the period — — 7.8 7.8 Purchases, sales and settlements (19.7) — (9.3) (29.0) Balance at December 31, 2017 $— $77.8 $20.9 $98.7 The Company’s investment policies employ an approach whereby a diversified blend of equity and bond investments is used to maximize the long-termreturn of plan assets for a prudent level of risk. Equity investments are diversified across domestic and non-domestic stocks, as well as growth, value, andsmall to large capitalizations. Bond investments include corporate and government issues, with short-, mid- and long-term maturities, with a focus oninvestment grade when purchased. The Company’s target allocation to equity managers is between 45 to 55 percent with the remainder allocated primarily tobonds, real estate, private equity managers and cash. Investment and market risks are measured and monitored on an ongoing basis through regularinvestment 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 periodicallyrebalances its investments to the targeted allocation when considered appropriate.There was no Company stock included in plan assets at December 31, 2017.Cash FlowsThe Company was not required to make a contribution in 2017 but elected to make a $30 million voluntary contribution. The Company is not required tomake a contribution in 2018. 49Table of Contents10.Pension and Other Post-retirement Benefits (continued) Estimated Future PaymentsThe following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Years ending December 31 (dollars in millions) Pension Benefits Post-retirementBenefits 2018 $60.5 $0.3 2019 66.6 0.4 2020 68.5 0.4 2021 59.3 0.4 2022 58.6 0.4 2023 – 2027 285.6 2.2 11.Derivative instrumentsASC 815 Derivatives and Hedging, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteriafor designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument depends on whether ithas been designated and qualifies as a part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments thatare designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure hedged, as a fair valuehedge, 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 flowhedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), gains or losses on the derivativeinstrument is reported as a component of other comprehensive loss, net of tax, and is reclassified into earnings in the same line item associated with theforecasted transaction and in the same period or periods during which the hedged transaction affects earnings.The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw materials price risk. Derivativeinstruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. TheCompany does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipatedfor failure of the counterparties to perform.Foreign Currency Forward ContractsThe 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 andcertain intercompany transactions in the normal course of business. Principal currencies for which the Company utilizes foreign currency forward contractsinclude 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 inearnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the consolidated statement ofearnings. 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. 50Table of Contents11.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) 2017 2016 Buy Sell Buy Sell British pound $— $1.2 $— $1.2 Canadian dollar — 48.1 — 56.9 Euro 29.3 — 25.4 1.8 Mexican peso 16.3 — 16.9 — Total $45.6 $49.3 $42.3 $59.9 Commodity Futures ContractsIn 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 rawmaterial purchases, principally steel, with the objective of minimizing changes in cost due to market price fluctuations. The hedging strategy for achievingthis objective is to purchase steel futures contracts on the New York Metals Exchange (NYMEX) and copper futures contracts on the open market of theLondon Metals Exchange (LME) or over the counter contracts based on the LME.With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.The after-tax gains and losses of the contracts as of December 31, 2017 were recorded in accumulated other comprehensive loss and will be reclassified intocost of products sold in the periods in which the underlying transactions are recorded in earnings. The after-tax gains and losses of the contracts will bereclassified within one year. Contractual amounts of the Company’s commodities futures contracts were immaterial as of December 31, 2017.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: Fair Value December 31 (dollars in millions) Balance Sheet Location 2017 2016 Foreign currency contracts Other current assets $0.2 $1.9 Accrued liabilities (1.8) (2.0) Commodities contracts Other current assets 0.2 0.8 Accrued liabilities — (0.3) Total derivatives designated as hedginginstruments $(1.4) $0.4 51Table of Contents11.Derivative instruments (continued) The effect of derivative instruments on the consolidated statement of earnings is as follows.Years ended December 31 (dollars in millions) Derivatives in ASC 815 cash flow hedging relationships Amount of gain (loss)recognized in othercomprehensive loss onderivative Location of gain (loss)reclassified fromaccumulated othercomprehensive loss intoearnings Amount of gain(loss) reclassifiedfrom accumulatedother comprehensiveloss into earnings 2017 2016 2017 2016 Foreign currency contracts $(1.1) $(3.8) Cost of products sold $0.4 $(1.4) Commodities contracts 0.5 2.4 Cost of products sold 0.6 1.6 $(0.6) $(1.4) $1.0 $0.2 12.Income TaxesThe components of the provision (benefit) for income taxes consisted of the following: Years ended December 31 (dollars in millions) 2017 2016 2015 Current: Federal $148.0 $71.6 $82.9 State 9.4 14.5 13.9 International 43.8 34.9 23.6 Deferred: Federal 23.5 11.0 (4.2) State 5.8 5.2 2.2 International (6.2) (1.2) 1.2 $224.3 $136.0 $119.6 The provision for income taxes differs from the U.S. federal statutory rate due to the following items: Years ended December 31 2017 2016 2015 Provision at U.S. federal statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 1.9 2.8 2.6 International income tax rate differential - China (6.5) (6.2) (6.8) International income tax rate differential - other 0.1 0.3 0.2 U.S. manufacturing credit (1.4) (1.5) (1.3) Research tax credits (0.3) (0.3) (0.3) Excess tax benefit on stock compensation (2.2) (1.1) — Other 0.8 0.4 0.3 27.4% 29.4% 29.7% U.S. Tax Cuts & Jobs Act (U.S. Tax Reform) 15.7 — — 43.1% 29.4% 29.7% U.S. Tax Reform was enacted on December 22, 2017 and significantly changed U.S. corporate income tax laws. Among other things, U.S. Tax Reform reducedthe U.S. corporate income tax rate to 21 percent commencing on January 1, 2018, implemented a territorial tax system and levied a one-time mandatory taxon undistributed earnings of foreign subsidiaries of U.S. companies. 52Table of Contents12.Income Taxes (continued) As a result of U.S. Tax Reform, the Company recorded provisional income tax expense of $81.8 million in the fourth quarter of 2017. The provisional incometax expense resulting from U.S. Tax Reform is included in the provision for income taxes on the Company’s consolidated statement of earnings and consistedof two components: $83.5 million of income tax expense related to the one-time mandatory tax on undistributed foreign earnings and a $1.7 million incometax benefit resulting from the remeasurement of the Company’s U.S. deferred tax assets and liabilities based on the new lower U.S. corporate income tax rate.As permitted under the SEC Staff Accounting Bulletin 118, these amounts may be subject to revisions in 2018. Future revisions may include adjustments tothe measurement of accumulated foreign earnings included in the one-time mandatory tax calculation. The ultimate impact of U.S. Tax Reform may differfrom the provisional amounts recorded due to future changes in interpretation of the guidance issued.Components of earnings before income taxes were as follows: Years ended December 31 (dollars in millions) 2017 2016 2015 U.S. $329.9 $300.9 $255.7 International 190.9 161.6 146.8 $520.8 $462.5 $402.5 Total income taxes paid by the Company amounted to $131.1 million, $117.4 million, and $97.5 million in 2017, 2016 and 2015, respectively.As of December 31, 2017, the Company has $38.6 million accrued for its estimate of withholding taxes due upon repatriation of undistributed foreignearnings it considers to be not permanently reinvested. As of December 31, 2017, $815.2 million of cash and cash equivalents and marketable securities wereheld by its 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) 2017 2016 Assets Liabilities Assets Liabilities Employee benefits $30.4 $— $67.5 $— Product liability and warranties 43.4 — 67.1 — Inventories — 2.0 — 3.4 Accounts receivable 16.5 — 14.9 — Property, plant and equipment — 31.1 — 34.3 Intangibles — 54.3 — 77.4 Environmental liabilities 2.4 — 2.9 — Undistributed foreign earnings — 38.6 — 42.3 Tax loss and credit carryovers 19.8 — 18.2 — All other 5.5 — 4.3 — Valuation allowance (15.0) — (13.1) — $103.0 $126.0 $161.8 $157.4 Net asset $23.0 $4.4 53Table of Contents12.Income Taxes (continued) The Company believes it is more likely than not that it will realize its deferred tax assets through the reduction of future taxable income. The Companyconsidered historical operating results in determining the probability of the realization of the deferred tax assets.A reconciliation of the beginning and ending amounts of tax loss carryovers, credit carryovers and valuation allowances is as follows: December 31 (dollars in millions) Net Operating Losses and Tax Credits Valuation Allowances 2017 2016 2017 2016 Beginning balance $18.2 $14.6 $13.1 $11.0 Additions 1.6 3.7 1.9 2.1 Reductions — (0.1) — — Ending balance $19.8 $18.2 $15.0 $13.1 The Company has foreign net operating loss carryovers that expire in 2018 through 2025 and state and local net operating loss carryovers that expirebetween 2018 and 2034.A reconciliation of the beginning and ending amount of unrecognized benefits is as follows: (Dollars in millions) 2017 2016 Balance at January 1 $4.2 $2.6 Additions for tax positions of prior years 2.0 1.6 Balance at December 31 $6.2 $4.2 The amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0.6 million. The Company recognizes potentialinterest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2017, there was an immaterial amount ofinterest and penalties accrued. The Company anticipates that there will not be a decrease in the total amount of unrecognized tax benefits in 2018. TheCompany’s U.S. federal income tax returns and its U.S. state and local income tax returns are subject to audit for the years 2015-2017 and 2001-2017,respectively. The Company is subject to non-U.S. income tax audits for the years 2009-2017. 13.Commitments and ContingenciesThe Company is a potentially responsible party in judicial and administrative proceedings seeking to clean up sites which have been environmentallyimpacted. In each case the Company has established reserves, insurance proceeds and/or a potential recovery from third parties. The Company believes anyenvironmental 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 hasestablished reserves and has insurance coverage, which it believes are adequate to cover incurred claims. For the years ended December 31, 2017 and 2016,the Company had $125 million of product liability insurance for individual losses in excess of $7.5 million. The Company periodically reevaluates itsexposure on claims and lawsuits and makes adjustments to its reserves as appropriate. The Company believes, based on current knowledge, consultation withcounsel, adequate reserves and insurance coverage that the outcome of such claims and lawsuits will not have a material adverse effect on the Company’sfinancial position, results of operations or cash flows. 54Table of Contents14.Operations by SegmentThe Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europeand India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers and watertreatment products. Both segments primarily manufacture and market in their respective regions of the world. The North America segment also manufacturesand markets water system tanks. Our Rest of World segment also manufactures and markets in-home air purification products in China.The accounting policies of the reportable segments are the same as those described in the “Summary of Significant Accounting Policies” outlined in Note 1.Segment earnings, defined by the Company as earnings before interest, taxes, general corporate and corporate research and development expenses, were usedto measure the performance of the segments. Net Sales Earnings Years ended December 31 (dollars in millions) 2017 2016 2015 2017 2016 2015 North America $1,904.8 $1,743.2 $1,703.0 $428.6 $385.9 $339.9 Rest of World 1,116.3 965.6 866.1 149.3 129.1 113.0 Inter-segment (24.4) (22.9) (32.6) — — — Total segments – sales, segment earnings $2,996.7 $2,685.9 $2,536.5 $577.9 $515.0 $452.9 Corporate expenses (47.0) (45.2) (43.0) Interest expense (10.1) (7.3) (7.4) Earnings before income taxes 520.8 462.5 402.5 Provision for income taxes (224.3) (136.0) (119.6) Net earnings $296.5 $326.5 $282.9 In 2017, the Company recorded provisional one-time charges of $81.8 million associated with U.S. Tax Reform, primarily related to the repatriation ofundistributed foreign earnings.In 2017, sales to the North America segment’s two largest customers were $361.4 million and $335.2 million which represented 12 percent and 11 percent ofthe Company’s net sales, respectively. In 2016, sales to the North America segment’s two largest customers were $311.5 million and $280.8 million whichrepresented 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.Assets, depreciation and capital expenditures by segment Total Assets(December 31) Depreciation andAmortization (Years EndedDecember 31) CapitalExpenditures(Years EndedDecember 31) (dollars in millions) 2017 2016 2015 2017 2016 2015 2017 2016 2015 North America $1,592.5 $1,515.9 $1,381.1 $45.1 $42.9 $41.9 $38.5 $45.9 $43.5 Rest of World 741.4 584.3 544.2 23.8 21.0 19.8 55.2 34.3 28.4 Corporate 863.4 790.8 703.9 1.2 1.2 1.3 0.5 0.5 0.8 Total $3,197.3 $2,891.0 $2,629.2 $70.1 $65.1 $63.0 $94.2 $80.7 $72.7 The majority of corporate assets consist of cash, cash equivalents, marketable securities and deferred income taxes. 55Table of Contents14.Operations by Segment (continued) Net sales and long-lived assets by geographic locationThe 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. Long-lived Assets(December 31) Net Sales(Years Ended December 31) (dollars in millions) 2017 2016 2015 2017 2016 2015 United States $303.0 $292.4 $297.8 United States $1,698.1 $1,570.7 $1,531.4 China 250.8 184.3 157.3 China 1,034.9 887.1 787.1 Canada 3.2 3.1 2.7 Canada 163.7 138.7 129.9 Other Foreign 47.1 48.4 55.2 Other Foreign 100.0 89.4 88.1 Total $604.1 $528.2 $513.0 Total $2,996.7 $2,685.9 $2,536.5 15.Quarterly Results of Operations (Unaudited) (dollars in millions, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2017 2016 2017 2016 2017 2016 2017 2016 Net sales $740.0 $636.9 $738.2 $667.0 $749.9 $683.9 $768.6 $698.1 Gross profit 302.3 262.7 305.9 283.7 306.7 283.3 323.8 289.6 Net earnings 87.7 73.5 92.4 87.1 93.7 83.2 22.7 82.7 Basic earnings per share 0.51 0.42 0.53 0.50 0.54 0.48 0.13 0.48 Diluted earnings per share 0.50 0.41 0.53 0.49 0.54 0.47 0.13 0.47 Common dividends declared 0.14 0.12 0.14 0.12 0.14 0.12 0.14 0.12 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 theyear.In the fourth quarter of 2017, the Company recorded provisional one-time charges of $81.8 million associated with U.S. Tax Reform, primarily related to therepatriation of undistributed foreign earnings. These charges reduced earnings per share by $0.47.ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A – CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controlsand 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 theperiod covered by this report. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of suchperiod our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to bedisclosed by us in the reports that we file or submit under the Exchange Act, and that information is accumulated and communicated to the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. 56Table of ContentsManagement Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRule 13a-15(f). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of ourinternal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (2013 framework). As allowed by Securities and Exchange Commission guidance, management excluded from its assessment Hague,which was acquired in 2017 and constituted 1.6 percent and 2.9 percent of total assets and net assets, respectively, as of December 31, 2017 and 0.3 percentand 0.5 percent of net sales and net earnings, respectively, for the year then ended. Based on this evaluation, our management has concluded that, as ofDecember 31, 2017, 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 ofeffectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith 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 internalcontrols over financial reporting as of December 31, 2017 as stated in their report which is included herein.Changes in Internal Control Over Financial ReportingThere have not been any change in the company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under theSecurities and Exchange Act) during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.ITEM 9B - OTHER INFORMATIONNone 57Table of ContentsREPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRMThe Board of Directors and StockholdersA. O. Smith CorporationOpinion on Internal Control over Financial ReportingWe have audited A. O. Smith Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).In our opinion, A. O. Smith Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2017, based on the COSO criteria.As indicated in the accompanying Management Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on theeffectiveness of internal control over financial reporting did not include the internal controls of Hague Quality Water International, which is included in the2017 consolidated financial statements of the Company and constituted 1.6 percent and 2.9 percent of total assets and net assets, respectively, as ofDecember 31, 2017 and .3 percent and .5 percent of net sales and net earnings, respectively, for the year then ended. Our audit of internal control overfinancial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Hague Quality Water International.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidatedbalance sheets of A. O. Smith Corporation as of December 31, 2017 and 2016, 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, 2017 and our report dated February 16, 2018 expressed anunqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibilityis to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with thePCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules andregulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance 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 andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 58Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ Ernst & Young LLPMilwaukee, WisconsinFebruary 16, 2018 59Table of ContentsPART III ITEM 10- DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information included under the headings “Election of Directors” and “Board Committees” in our definitive Proxy Statement for the 2018 AnnualMeeting of Stockholders (to be filed with the Securities and Exchange Commission (SEC) under Regulation 14A within 120 days after the end of theregistrant’s fiscal year) is incorporated herein by reference. The information required regarding Executive Officers of the company is included in Part I of thisAnnual 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., Dr. Ilham Kadri, 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 thecompany has concluded that Ms. Wolf and Mr. Wulf are “audit committee financial experts” in accordance with SEC rules. Mr. Current will serve on theAudit Committee until his planned retirement just prior to the 2018 Annual Meeting of Stockholders.We have adopted a Financial Code of Ethics applicable to our principal executive officer, principal financial officer and principal accounting officer. As abest practice, this code has been executed by key financial and accounting personnel as well. In addition, we have adopted a general code of businessconduct 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. SmithGuiding Principles and other company corporate governance matters are available on our website at www.aosmith.com. We are not including the informationcontained 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, orwaivers 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 nowaivers of the Financial Code of Ethics or the A. O. Smith Guiding Principles. Stockholders may obtain copies of any of these corporate governancedocuments 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 2018Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporatedherein by reference.ITEM 11 - EXECUTIVE COMPENSATIONThe information included under the headings “Executive Compensation,” “Director Compensation,” “Report of the Personnel and CompensationCommittee” and “Compensation Committee Interlocks and Insider Participation” in the company’s definitive Proxy Statement for the 2018 Annual Meetingof Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein byreference.ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information included under the headings “Principal Stockholders” and “Security Ownership of Directors and Management” in our definitive ProxyStatement for the 2018 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’sfiscal year) is incorporated herein by reference. 60Table of ContentsEquity Compensation Plan InformationThe following table provides information about our equity compensation plans as of December 31, 2017. Plan Category Number of securities tobe issued upon theexercise of outstandingoptions, warrants andrights Weighted-average exerciseprice of outstanding options,warrants and rights Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected inthe first column) Equity compensation plans approved by securityholders 2,943,263(1) $27.73(2) 2,885,001(3) Equity compensation plans not approved by securityholders — — — Total 2,943,263 $27.73 2,885,001 (1) Consists of 2,263,126 shares subject to stock options, 399,270 shares subject to employee share units and 280,867 shares subject to director shareunits.(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 underthe A. O. Smith Combined Incentive Compensation Plan, hereby increasing the number of securities remaining available.ITEM 13 - CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEThe information included under the headings “Director Independence and Financial Literacy”, “Compensation Committee Interlocks and InsiderParticipation” and “Procedure for Review of Related Party Transactions” in our definitive Proxy Statement for the 2018 Annual Meeting of Stockholders (tobe filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the 2018 Annual Meeting ofStockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) required by this Item 14 isincorporated herein by reference. 61Table of ContentsPART 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-KPage Number The following consolidated financial statements of A. O. Smith Corporation are included in Item 8: Consolidated Balance Sheets at December 31, 2017 and 2016 27 For each of the three years in the period ended December 31, 2017: - Consolidated Statement of Earnings 28 - Consolidated Statement of Comprehensive Earnings 28 - Consolidated Statement of Cash Flows 29 - Consolidated Statement of Stockholders’ Equity 30 Notes to Consolidated Financial Statements 31 - 56 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 66 Schedules not included have been omitted because they are not applicable. 3. Exhibits - see the Index to Exhibits on pages 63 - 64 of this report. Each management contract or compensatory plan or arrangementrequired 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 uponpayment of a reasonable fee not to exceed the rate at which such copies are available from the SEC, furnish copies to our securityholders of any exhibits listed in the Index to Exhibits. 62Table of ContentsINDEX TO EXHIBITS Exhibit Number Description(3)(i) Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference to thequarterly report on Form 10-Q for the quarter ended March 31, 2016.(3)(ii) By-laws of A. O. Smith Corporation as amended October 13, 2015, incorporated by reference to the current report on Form 8-K datedOctober 16, 2015.(4) (a) Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference to thequarterly 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 currentreport 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 andagents party thereto, incorporated by reference to the annual report on Form 10-K for the fiscal year ended December 31, 2016. (d) The corporation has instruments that define the rights of holders of long-term debt that are not being filed with this RegistrationStatement in reliance upon Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to furnish to the SEC, upon request, copies ofthese 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 onForm 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 onForm 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 annualreport 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 RegistrationStatement 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 Form10-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 Form10-Q for the quarter ended March 31, 2016. (h) Offer Letter to Ajita G. Rajendra, dated September 20, 2004, incorporated by reference to the annual report on Form 10-K for the fiscalyear ended December 31, 2007. (i) Amendment to Offer Letter to Ajita G. Rajendra dated December 10, 2015, incorporated by reference to the annual report on Form 10-Kfor the fiscal year ended December 31, 2015. 63Table of ContentsINDEX TO EXHIBITS (continued) ExhibitNumber Description (j) Summary of Directors’ Compensation incorporated by reference to the quarterly report on Form 10-Q for the quarter ended June 30, 2015. (k) A. O. Smith Corporation Senior Leadership Severance Plan, incorporated by Reference to the quarterly report for Form 10-Q for the quarterended June 30, 2009. (l) Form of A. O. Smith Corporation Special Retention Award Agreement, incorporated by reference to the quarterly report on Form 10-Q forthe quarter ended March 31, 2011. (m) Stockholder Agreement dated as of December 9, 2008, between A. O. Smith Corporation and each Smith Investment Company stockholderwho becomes a signatory thereto, incorporated by reference to the current report on Form 8-K dated December 9, 2008. (n) Summary of Directors’ Compensation(21) Subsidiaries.(23) Consent of Independent Registered Public Accounting Firm.(31.1) Certification by the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated February 16, 2018.(31.2) Certification by the Executive Vice-President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, datedFebruary 16, 2018.(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, 2017 are filedherewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2017 and2016, (ii) the Consolidated Statement of Earnings for the three years ended December 31, 2017, (iii) the Consolidated Statement ofComprehensive Earnings for the three years ended December 31, 2017, (iv) the Consolidated Statement of Cash Flows for the three yearsended December 31, 2017, (v) the Consolidated Statement of Stockholders’ Equity for the three years ended December 31, 2017 and (vi)the Notes to Consolidated Financial Statements. 64Table of ContentsSIGNATURESPursuant 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 ofthe undersigned, thereunto duly authorized. A. O. SMITH CORPORATIONDate: February 16, 2018 By: /s/ Ajita G. Rajendra Ajita G. Rajendra Executive Chairman ofthe Board of DirectorsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February 16, 2018 by the following persons onbehalf of the registrant and in the capacities and on the dates indicated. Name and Title SignatureAJITA G. RAJENDRA /s/ Ajita G. RajendraChairman of the Board and Chief Executive Officer Ajita G. RajendraKEVIN J. WHEELER /s/ Kevin J. WheelerDirector Kevin J. WheelerPresident and Chief Operating Officer JOHN J. KITA /s/ John J. KitaExecutive Vice President and Chief Financial Officer John J. KitaDANIEL L. KEMPKEN /s/ Daniel L. KempkenVice President and Controller Daniel L. KempkenRONALD D. BROWN /s/ Ronald D. BrownDirector Ronald D. BrownGLOSTER B. CURRENT, Jr. /s/ Gloster B. Current, Jr.Director Gloster B. Current, Jr.WILLIAM P. GREUBEL /s/ William P. GreubelDirector William P. GreubelPAUL W. JONES /s/ Paul W. JonesDirector Paul W. JonesDR. ILHAM KADRI /s/ Dr. Ilham KadriDirector Dr. Ilham KadriBRUCE M. SMITH /s/ Bruce M. SmithDirector Bruce M. SmithMARK D. SMITH /s/ Mark D. SmithDirector Mark D. SmithIDELLE K. WOLF /s/ Idelle K. WolfDirector Idelle K. WolfGENE C. WULF /s/ Gene C. WulfDirector Gene C. Wulf 65Table of ContentsA. O. SMITH CORPORATIONSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS(Dollars in millions)Years ended December 31, 2017, 2016 and 2015 Description Balance atBeginningof Year Charged toCosts andExpenses AcquisitionofBusinesses Deductions Balance atEnd ofYear 2017: Valuation allowance for trade and notes receivable $6.3 $— $0.2 $(1.2) $5.3 Valuation allowance for deferred tax assets 13.1 1.9 — — 15.0 2016: Valuation allowance for trade and notes receivable $6.0 $1.1 $0.2 $(1.0) $6.3 Valuation allowance for deferred tax assets 11.0 2.1 — — 13.1 2015: Valuation allowance for trade and notes receivable $3.7 $2.6 — $(0.3) $6.0 Valuation allowance for deferred tax assets 9.8 1.4 — (0.2) 11.0 66Exhibit 10(n)SUMMARY OF DIRECTORS’ COMPENSATIONEffective January 1, 2018, compensation paid to non-employee directors of A. O. Smith Corporation is as follows: Directors will receive a cash annualretainer of $65,000, paid in quarterly amounts of $16,250. The lead director retainer of $20,000 annually remains unchanged. Each Personnel andCompensation Committee and Investment Policy Committee member receives an annual retainer of $13,000, paid quarterly, and each member of theNominating and Governance Committee receives $10,500 annually, with the Chairperson of each of these Committees receiving an additional $7,000 annualretainer. Each Audit committee member receives an annual retainer of $22,000, paid quarterly with the Chairperson receiving an additional $5,000 annualretainer. The award of shares of Common Stock to each director remained unchanged. Each director receives Common Stock with a market value of $125,000on the date of the award. The retainers were calculated to be comparable to the directors’ total compensation under the previous system, while simplifyingrecord keeping and reporting.Exhibit 21SUBSIDIARIES: The following lists all subsidiaries and affiliates of A. O. Smith Corporation. Name of Subsidiary Jurisdiction in WhichIncorporatedAOS Holding Company DelawareA. O. Smith International Corporation DelawareA. O. Smith Water Treatment (North America), Inc. DelawareAquaboss LLC DelawareSICO Acquisition, LLC DelawareTakagi—A. O. Smith Tankless Water Heater Company LLC DelawareAmerican Water Heater Company NevadaHague Europe, LLC OhioWilliam R. Hague, Inc. OhioLochinvar, LLC TennesseeState Industries, LLC. TennesseeAquasana, Inc. TexasA. O. Smith Holdings (Barbados) SRL BarbadosA. O. Smith Enterprises Ltd. CanadaA. O. Smith (China) Investment Co., Ltd. ChinaA. O. Smith (China) Water Heater Co., Ltd. ChinaA. O. Smith (China) Water Products Co., Ltd. ChinaA. O. Smith (Nanjing) Water Treatment Products Co., Ltd. ChinaA. O. Smith L’eau chaude S.a.r.l. FranceWaterboss Europe, SRL FranceA. O. Smith (Hong Kong) Limited Hong Kong SARA. O. Smith India Water Products Private Limited IndiaProducts de Agua, S. de R.L. de C.V. MexicoA.O. Smith Holdings I B.V. The NetherlandsA.O. Smith Holdings II B.V. The NetherlandsA.O. Smith Holdings III B.V. The NetherlandsA.O. Smith International Holdings B.V. The NetherlandsA.O. Smith Products v.o.f. The NetherlandsA.O. Smith Water Products Company B.V. The NetherlandsAO Smith Su Teknolojileri Anonim Sirketi TurkeyA. O. Smith Water FZE United Arab EmiratesLochinvar Limited United KingdomA. O. Smith Vietnam Company Limited VietnamExhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-144950 and 333-170436) pertaining to the A. O. SmithCombined Incentive Compensation Plan of our reports dated February 16, 2018, with respect to the consolidated financial statements and schedule ofA. O. Smith Corporation, and the effectiveness of internal control over financial reporting of A. O. Smith Corporation, included in this Annual Report (Form10-K) for the year ended December 31, 2017./s/ Ernst & Young LLPMilwaukee, WisconsinFebruary 16, 2018Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’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 reasonablylikely 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 controlover financial reporting.Date: February 16, 2018/s/ Ajita G. RajendraAjita G. RajendraChairman and Chief Executive OfficerExhibit 31.2CERTIFICATION OF CHIEF FINANCIAL OFFICERI, 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 thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects thefinancial 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 inExchange 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, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’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 reasonablylikely 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 controlover financial reporting.Date: February 16, 2018/s/ John J. KitaJohn J. KitaExecutive Vice President and Chief Financial OfficerExhibit 32.1Certification Pursuant to 18 U.S.C. Section 1350,As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report of A. O. Smith Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2017, as filed withthe 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 16, 2018/s/ Ajita G. RajendraAjita G. RajendraChairman and Chief Executive OfficerThis certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company forpurposes 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 tothe Securities and Exchange Commission or its staff upon request.Exhibit 32.2Certification Pursuant to 18 U.S.C. Section 1350,As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002In connection with the Annual Report of A. O. Smith Corporation (the “Company”) on Form 10-K for the fiscal year ended December 31, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”). I, John J. Kita, Executive Vice President and Chief Financial Officer of theCompany, 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 16, 2018/s/ John J. KitaJohn J. KitaExecutive Vice President and Chief Financial OfficerThis certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company forpurposes 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 tothe Securities and Exchange Commission or its staff upon request.

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