A. O. Smith Annual Report 2018

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 OF1934For the fiscal year ended December 31, 2018OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For 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 of Incorporation) (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 OutstandingJanuary 31, 2019 Name of Each Exchange onWhich RegisteredClass A Common Stock(par value $5.00 per share) 26,059,903 Not listedCommon Stock(par value $1.00 per share) 141,852,744 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 every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit suchfiles). ☒ 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, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, oremerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growthcompany” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with anynew or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) ☐ Yes ☒ NoThe aggregate market value of voting stock held by non-affiliates of the registrant was $54,612,426 for Class A Common Stock and $8,368,308,653 forCommon Stock as of June 30, 2018.DOCUMENTS INCORPORATED BY REFERENCE 1.Portions of the company’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders (to be filed with the Securities andExchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to beincorporated by reference in Part III). Table of ContentsTable of ContentsA. O. Smith CorporationIndex to Form 10-KYear Ended December 31, 2018 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 58 Item 9A. Controls and Procedures 58 Item 9B. Other Information 58 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 2Table of ContentsPART 1ITEM 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,Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers,tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our Rest of Worldsegment also manufactures and markets in-home air purification products in China.NORTH AMERICAWe 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 4,000 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 solartank units. Typical applications for our water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes andsmall businesses.Boilers. Our residential and commercial boilers range in size from 40,000 British Thermal Units (BTUs) to 6.0 million BTUs. Our commercial boilersare primarily used in space heating applications for hospitals, schools, hotels and other large commercial buildings.Water treatment products. With the acquisition of Aquasana, Inc. (Aquasana) in 2016 and Hague Quality Water International (Hague) in 2017, weentered the North American water treatment market. Our water treatment products range from on-the-go filtration bottles and point-of-use carbon andreverse osmosis products to point-of-entry water softeners and whole-home water filtrations products. We also offer a complete line of food andbeverage filtration products. Typical applications for our water treatment products include residences, restaurants, hotels and offices. A portion of oursales of water treatment products is comprised of replacement filters.Other. In our North America segment, we also manufacture expansion tanks, commercial solar water heating systems, swimming pool and spa heaters,related products and parts.A significant portion of our North America sales is derived from the replacement of existing products.We believe we are the largest manufacturer and marketer of water heaters in North America with a leading share in both the residential and commercialmarkets. In the commercial markets for both water heating and space heating, we believe our comprehensive product lines and our high-efficiencyproducts give us a competitive advantage in these portions of the markets. Our wholesale distribution channel, where we sell our products primarilyunder the A. O. Smith and State brands, includes more than 1,300 independent wholesale plumbing distributors serving residential and commercial endmarkets. We also sell our residential water heaters through the retail and maintenance, repair and operations (MRO) channels. In the retail channel, ourcustomers include four of the six largest national hardware and home center chains, including a long-standing exclusive relationship with Lowe’swhere 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 salesconsist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-branded sales consist primarily of boilers and relatedparts. Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms, the remainder of our Lochinvar brandedproducts are distributed through wholesale channels.We sell our Aquasana branded products primarily directly to consumers through e-commerce as well as on-line retailers including Amazon and throughother retail chains. Our water softener products are sold through water quality dealers and home center retail chains. Our A. O. Smith branded watertreatment products are sold through Lowe’s.Our energy efficient product offerings continue to be a sales driver for our business. Our commercial water heaters and our condensing boilers continueto be an option for commercial customers looking for high efficiency water and space heating with a short payback period through energy savings. Weoffer residential heat pump, condensing tank-type and tankless water heaters in North America, as well as other higher efficiency water heatingsolutions to round out our energy efficient product offerings. 3Table of ContentsWe 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 andboiler competitors in North America include Rheem, Bradford White, Rinnai, Aerco and Navien. Numerous other manufacturing companies alsocompete. Our principal water treatment competitors in the U.S. are Brita, Culligan, Kinetico, Pentair and Ecowater as well as numerous regionalassemblers.REST OF WORLDWe 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, heat pump and solar water heaters. We believe we are one of the leading suppliers of water heaters to the residential market in China indollar terms. We manufacture and market water treatment products, primarily residential reverse osmosis products. We also manufacture and market airpurification products in China.We sell water heaters in more than 9,000 retail outlets in China, of which over 2,800 exclusively sell our products. Our water treatment products and airpurification products are sold in over 7,500 and 3,500 retail outlets in China, respectively.In 2008, we established a sales office in India and began importing products specifically designed for India. We began manufacturing water heaters inIndia in 2010 and water treatment products in 2015.Our primary competitors in China in the electric water heater market segment are Haier and Midea, which are Chinese companies. We compete withRinnai and Noritz in the gas tankless water heater market segment. Our principal competitors in the water treatment market are Qinyuan, Angel, Mideaand Xiaomi. Our principal competitors in the China air purification market are Phillips, Panasonic and Sharp. In India, we compete with Bajaj andHavels in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market.In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in Hong Kong, Turkey and Vietnam, all ofwhich combined comprised less than six percent of total Rest of World sales in 2018. 4Table of ContentsRAW MATERIALSRaw materials for our manufacturing operations, primarily consisting of steel, are generally available in adequate quantities. A portion of our customersare contractually obligated to accept price changes based on fluctuations in steel prices. There has been volatility in steel costs over the last severalyears.RESEARCH AND DEVELOPMENTTo improve our competitiveness by generating new products and processes, we conduct research and development at our newly constructed CorporateTechnology Center in Milwaukee, Wisconsin, at our Global Engineering Center in Nanjing, China, and at our operating locations. Our totalexpenditures for research and development in 2018, 2017 and 2016 were $94.0 million, $86.4 million and $80.1 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 ourproducts, particularly in China, India and the U.S.EMPLOYEESWe employed approximately 16,300 employees as of December 31, 2018, 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 environmentallaws has not had and is not expected to have a material effect upon the capital expenditures, earnings, or competitive position of our company. SeeItem 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 byreference into, this Annual Report on Form 10-K. Other than an investor’s own internet access charges, we make available free of charge through ourwebsite our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon asreasonably practical after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission(SEC). All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at www.sec.gov.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 ofthe Board of Directors and other corporate governance materials, may be viewed on the company’s website. Any waiver of or amendments to theFinancial Code of Conduct or the A. O. Smith Guiding Principles also would be posted on this website; to date there have been none. Copies of thesedocuments will be sent to stockholders free of charge upon written request of the corporate secretary at the address shown on the cover page of thisAnnual Report on Form 10-K.We are also committed to growing our business in a sustainable and socially responsible manner consistent with our Guiding Principles. Thiscommitment has driven us to design, engineer, and manufacture highly innovative and efficient products in an environmentally responsible mannerthat help reduce energy consumption, conserve water, and improve drinking water quality and public health. Consistent with this commitment, weissued our first Corporate Responsibility & Sustainability (CRS) report in 2018 detailing our company’s historic and current CRS efforts. Our CRSreport is available on our website, www.aosmith.com. To further demonstrate our commitment, our company recently appointed Patricia K. Ackerman,Senior Vice President, Investor Relations, Treasurer, and Corporate Responsibility and Sustainability with specific responsibility for our CRS efforts. 5Table 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 thefollowing risks actually occurs, then our business, financial condition, or results of operations could be materially adversely affected. As a result, thetrading price of our common stock could decline, and you may lose all or part of your investment. The risks and uncertainties below are not the onlyrisks 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 andspending patterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, or sloweradoption of energy efficient water heaters and boilers, or high quality water treatment products, which could negatively impact our profitability andcash flows. In addition, a deterioration in current economic conditions, including credit market conditions, could negatively impact our vendors andcustomers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, orincreased material prices, which could negatively impact our ability to distribute, market and sell our products and our financial condition, results ofoperations 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 additionalrisks to our businessApproximately 43 percent of our net sales in 2018 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesserextent in Europe and India. We also have operations and business relationships outside the U.S. that comprise a portion of our manufacturing, supply,and distribution. Approximately 10,000 of our 16,300 employees as of December 31, 2018 were located in China. At December 31, 2018,approximately $644 million of cash was held by our foreign subsidiaries, substantially all of which was located in China. International operationsgenerally are subject to various risks, including: political, religious, and economic instability; local labor market conditions; new or increased tariffs orother trade restrictions, or changes to trade agreements; the impact of foreign government regulations, actions or policies; the effects of income taxes;governmental expropriation; the imposition or increases in withholding and other taxes on remittances and other payments by foreign subsidiaries;labor relations problems; the imposition of environmental or employment laws, or other restrictions or actions by foreign governments; and differencesin business practices. Unfavorable changes in the political, regulatory, or trade climate, diplomatic relations, or government policies, particularly inrelation 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 further weakening of the Chinese economyApproximately 34 percent of our net sales in 2018 were attributable to China. Our sales growth in China decreased in 2018. We believe that decreasewas due to weakness in the housing market in China, weakening consumer sentiment in part associated with concerns about the trade tensions betweenChina and the U.S. and a weakening Chinese economy. We derive a substantial portion of our sales in China from premium-tier products andweakening consumer confidence and sentiment as well as economic uncertainty may prompt consumers there to choose lower-priced alternatives orlengthen the cycle of replacement purchases. Further deterioration in the Chinese economy could adversely affect our financial condition, results ofoperations and 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 39 percent of our sales in 2018. We expect that our customer concentration willcontinue for the foreseeable future. Our concentration of sales to a relatively small number of customers makes our relationship with each of thesecustomers important to our business. We cannot assure that we will be able to retain our largest customers. Some of our customers may shift theirpurchases to our competitors in the future. The loss of one or more of our largest customers, any material reduction or delay in sales to these customers,or our inability to successfully develop relationships with additional customers could have a material adverse effect on our financial position, results ofoperations and cash flows. 6Table 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 $539 million of cash denominated in local currency in China, incur liabilities, earn revenues and pay expenses in a variety of currenciesother than the U.S. dollar. The financial statements of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements.As a result, we are subject to risks associated with operating in foreign countries including fluctuations in currency exchange rates and interest rates,hyperinflation in some foreign countries or global exchange rate instability or volatility that strengthens the U.S. dollar against foreign currencies.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 tothe local currencies of our foreign markets has had and would continue to have a negative effect on our profitability. In addition to currency translationrisks, we incur a currency transaction risk whenever one of our subsidiaries enters into either a purchase or sale transaction using a currency differentfrom the operating subsidiaries’ functional currency. The majority of our foreign currency transaction risk results from sales of our products in Canadawhich we manufacture in the U.S. These risks may hurt our reported sales and profits in the future or negatively impact revenues and earnings translatedfrom foreign currencies 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 declinein replacement related volumeResidential and commercial construction activity in North America has shown modest growth and activity could decline again in the future. Webelieve that the majority of the markets we serve are for replacement of existing products and replacement related volume growth was strong in 2018.Changes in replacement volume and in the construction market could negatively affect us. • Because we participate in markets that are highly competitive, our revenues and earnings could decline as we respond to competitionWe sell all of our products in highly competitive and evolving markets. We compete in each of our targeted markets based on product design,reliability, quality of products and services, advanced technologies, product performance, maintenance costs and price. Some of our competitors mayhave greater financial, marketing, manufacturing, research and development and distribution resources than we have, and some are increasinglyexpanding beyond their existing manufacturing or geographic footprints. Consumer purchasing behavior may shift the product mix in the market orresult in a shift to new distribution channels, including e-commerce, which is a rapidly developing area. Development of a successful e-commercestrategy involves significant time, investment and resources. In North America, the tankless portion of the water heating market has for many yearsincreased as a percentage of the overall market. While we have many tankless products, our market share for tankless products is lower than our marketshare for the remainder of the water heating market. Further acceleration of the tankless portion of the North America market, which we believe was lessthan eight percent of the market in 2018, could have an impact on our operating results. We cannot assure that our products will continue to competesuccessfully with those of our competitors, there could be new market participants that change the dynamics of those markets and it is possible that wewill not be able to retain our customer base or improve or maintain our profit margins on sales to our customers, all of which could materially andadversely 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 weare unable to timely develop and introduce new products, or enhance existing products, in response to changing market conditions or customerrequirements or demands, our competitiveness could be materially and adversely affected. Our ability to develop and successfully market new productsand 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 andwater efficiency, environmental emissions, labeling and safety. While we believe our products are currently efficient, safe and environment-friendly, asignificant change to regulatory requirements (whether federal, foreign, state or local) such as electrification as a replacement for gas combustion, or toindustry standards, could substantially increase 7Table of Contentsmanufacturing costs, impact the size and timing of demand for our products, affect the types of products we are able to offer, or put us at a competitivedisadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations 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 forcomponent design and manufacturing activities. We may incur various expenses related to product defects, including product warranty costs, productliability and recall or retrofit costs. While we maintain a reserve for product warranty costs based on certain estimates and our knowledge of currentevents and actions, our actual warranty costs may exceed our reserve, resulting in current period expenses and a need to increase our reserves forwarranty charges. In addition, product defects and recalls may diminish the reputation of our brand. Further, our inability to cure a product defect couldresult in the failure of a product line or the temporary or permanent withdrawal from a product or market. Any of these events may have a materialadverse 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 materialswe purchase could increase our cost of doing business and ultimately could lead to lower operating earnings if we are not able to recover these costincreases through price increases to our customers. Historically, there has been a lag in our ability to recover increased material costs from customers,and that lag could negatively impact our profitability. In addition, in some cases we are dependent on a limited number of suppliers for some of theraw materials and components we require in the manufacture of our products. A significant disruption or termination of the supply from one of thesesuppliers could delay sales or increase costs which could result in a material adverse effect on our financial condition, results of operations and cashflows. • An inability to adequately maintain our information systems and their security and cybersecurity, as well as to protect data and otherconfidential information, could adversely 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 our proprietary and regulated business information and personally identifiable information of our customers, suppliers and business partners,as well as personally identifiable information about our employees. Our information systems, like those of other companies, are susceptible to outagesdue to system failures, cybersecurity threats, failures on the part of third-party information system providers, natural disasters, power loss,telecommunications failures, viruses, fraud, theft, malicious insiders or breaches of security. We continue to take steps to maintain and improve datasecurity and address these risks and uncertainties by implementing and improving internal controls, security technologies, insurance programs,network and data center resiliency and recovery processes. However, any operations failure or breach of security from increasingly sophisticated cyberthreats could lead to disruptions of our business activities, the loss or disclosure of both our and our customers’ financial, product and otherconfidential information and could result in regulatory actions and have a material adverse effect on our financial condition, results of operations andcash flows and our reputation. • We are subject to U.S. and global laws and regulations covering our domestic and international operations that could adversely affect ourbusiness and results of operationsDue to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments togovernment officials and restrict where we can do business, what information or products we can supply to certain countries and what information wecan provide to a non-U.S. government, including but not limited to the Foreign Corrupt Practices Act and the U.S. Export Administration Act.Violations of these laws may result in criminal penalties or sanctions that could have a material adverse effect on our financial condition, results ofoperations 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 acceptableterms, that this insurance will provide adequate protection against potential liabilities or that our insurance providers will be able to ultimately pay allinsured losses. In addition, we self-insure a portion of product liability claims. A series of successful claims against us could materially and adverselyaffect our reputation and our financial condition, results of operations and cash flows. 8Table of Contents • Our success is dependent on developing and retaining highly qualified personnelAttracting and retaining talented employees is important to the continued success and growth of our business. Failure to retain key personnel,particularly on the leadership team, could have a material effect on our business and our ability to execute our business strategies in a timely andeffective 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, largelydue to the transition in the boiler industry in the U.S. from lower efficiency, non-condensing boilers to higher efficiency, higher priced, condensingboilers, as well as new product introductions. We expect the transition to condensing boilers to continue, but if the transition to higher efficiency,higher priced, condensing boilers stalls as a result of lower energy costs, a U.S. recession occurs, or our competitors’ technologies surpass ourtechnology, our growth rate could be lower than expected. • 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 wecomplete any future acquisitions, we may not be able to successfully integrate the acquired businesses or operate them profitably or accomplish ourstrategic objectives for those acquisitions. If we complete any future acquisitions in new geographies, our unfamiliarity with local regulations andmarket customs may impact our ability to operate them profitably or achieve our strategic objectives for those acquisitions. Our level of indebtednessmay increase in the future if we finance acquisitions with debt, which would cause us to incur additional interest expense and could increase ourvulnerability to general adverse economic and industry conditions and limit our ability to service our debt or obtain additional financing. The impactof future acquisitions may have a material adverse effect on our financial condition, results of operations and cash flows. • Our pension plans may require future pension contributions which could limit our flexibility in managing our companyThe projected benefit obligation liability of our defined benefit pension plans of $834 million exceeded the fair value of the plan assets of$778 million by approximately $56 million at December 31, 2018. U.S. employees hired after January 1, 2010 have not participated in our definedbenefit plan, and benefit accruals for the majority of current salaried and hourly employees ended on December 31, 2014. We are forecasting that wewill not be required to make a contribution to the plan in 2019, and we do not plan to make any voluntary contributions. However, we cannot provideany assurance that contributions will not be required in the future. Among the key assumptions inherent in our actuarially calculated pension planobligation and pension plan expense are the discount rate and the expected rate of return on plan assets. If interest rates and actual rates of return oninvested plan assets were to decrease significantly, our pension plan obligations could increase materially. The size of future required pensioncontributions could result in us dedicating a significant portion of our cash flows from operations to making the contributions which could negativelyimpact our flexibility in managing the company. • We have significant goodwill and indefinite-lived intangible assets and an impairment of our goodwill or indefinite-lived intangible assetscould cause a decline in our net worthOur total assets include significant goodwill and indefinite-lived intangible assets. Our goodwill results from our acquisitions, representing the excessof the purchase prices we paid over the fair value of the net tangible and intangible assets we acquired. We assess whether there have been impairmentsin the value of our goodwill or indefinite-lived intangible assets during the fourth quarter of each calendar year or sooner if triggering events warrant. Iffuture operating performance at our businesses does not meet expectations, we may be required to reflect non-cash charges to operating results forgoodwill or indefinite-lived intangible asset impairments. The recognition of an impairment of a significant portion of goodwill or indefinite-livedintangible assets would negatively affect our results of operations and total capitalization, the effect of which could be material. A significantreduction in our stockholders’ equity due to an impairment of goodwill or indefinite-lived intangible assets may affect our ability to maintain thedebt-to-capital ratio required under our existing debt arrangements. We have identified the valuation of goodwill and indefinite-lived intangible assetsas a critical accounting policy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical AccountingPolicies—Goodwill and Indefinite-lived Intangible Assets” included in Item 7 of this Annual Report on Form 10-K. 9Table of Contents • Certain members of the founding family of our company and trusts for their benefit have the ability to influence all matters requiringstockholder approvalWe have two classes of common equity: our Common Stock and our Class A Common Stock. The holders of Common Stock currently are entitled, as aclass, to elect only one-third of our board of directors. The holders of Class A Common Stock are entitled, as a class, to elect the remaining directors.Certain members of the founding family of our company and trusts for their benefit (Smith Family) have entered into a voting trust agreement withrespect to shares of our Class A Common Stock and shares of our Common Stock they own. As of December 31, 2018, through the voting trust, thesemembers of the Smith Family own approximately 62.9 percent of the total voting power of our outstanding shares of Class A Common Stock andCommon Stock, taken together as a single class, and approximately 96.5 percent of the voting power of the outstanding shares of our Class A CommonStock, as a separate class. Due to the differences in the voting rights between shares of our Common Stock (one-tenth of one vote per share) and sharesof our Class A Common Stock (one vote per share), the Smith Family voting trust is in a position to control to a large extent the outcome of mattersrequiring a stockholder vote, including the adoption of amendments to our certificate of incorporation or bylaws or approval of transactions involvinga change of control. This ownership position may increase if other members of the Smith Family enter into the voting trust agreement, and the votingpower relating to this ownership position may increase if shares of our Class A Common Stock held by stockholders who are not parties to the votingtrust agreement are converted into shares of our Common Stock. The voting trust agreement provides that, in the event one of the parties to the votingtrust agreement wants to withdraw from the trust or transfer any of its shares of our Class A Common Stock, such shares of our Class A Common Stockare automatically exchanged for shares of our Common Stock held by the trust to the extent available in the trust. In addition, the trust will have theright to purchase the shares of our Class A Common Stock and our Common Stock proposed to be withdrawn or transferred from the trust. As a result,the Smith Family members that are parties to the voting trust agreement have the ability to maintain their collective voting rights in our company evenif certain members of the Smith Family decide to transfer their shares. 10Table of ContentsITEM 1B - UNRESOLVED STAFF COMMENTSNone.ITEM 2 - PROPERTIESProperties utilized by us at December 31, 2018 were as follows:North AmericaIn this segment, we have 14 manufacturing plants located in six states and two non-U.S. countries, of which 12 are owned directly by us or oursubsidiaries and two are leased from outside parties. The terms of leases in effect at December 31, 2018 expire between 2019 and 2025.Rest of WorldIn this segment, we have six manufacturing plants located in four non-U.S. countries, of which four are owned directly by us or our subsidiaries and twoare leased from outside parties. The terms of leases in effect at December 31, 2018 expire between 2020 and 2022.Corporate and GeneralWe consider our plants and other physical properties to be suitable, adequate, and of sufficient productive capacity to meet the requirements of ourbusiness. The manufacturing plants operate at varying levels of utilization depending on the type of operation and market conditions. The executiveoffices of the company, 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 orrecovery, we believe, based on past experience, adequate reserves and insurance availability, that these unresolved legal actions will not have amaterial effect on our financial position or results of operations. A more detailed discussion of certain of these matters appears in Note 15 of Notes toConsolidated Financial Statements. ITEM 4 - MINE SAFETY DISCLOSURESNot applicable. 11Table of ContentsEXECUTIVE 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 Iof this report in lieu of being included in our Proxy Statement for our 2019 Annual Meeting of Stockholders. Name (Age) Positions Held Period Position Was HeldPatricia K. Ackerman (58) Senior Vice President – Investor Relations, Treasurer andCorporate Responsibility and Sustainability 2019 to Present Vice President – Investor Relations & Treasurer 2008 to 2018 Vice President and Treasurer 2006 to 2008 Assistant Treasurer 1995 to 2006Paul R. Dana (56) Senior Vice President – Global Operations 2019 to Present Senior Vice President – Global Manufacturing 2016 to 2018 Vice President – Global Manufacturing 2015 President – APCOM, a division of State Industries, LLC, asubsidiary 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 2005Anindadeb V. DasGupta (52) Senior Vice President 2018 to Present President – A. O. Smith Holdings (Barbados) SRL 2018 to Present Vice President, Global Head Strategic Marketing; Global Heade-commerce; Global GM Flex & Signage Business Lines –OSRAM GmbH, Munich and Hong Kong 2014 to 2018Wei Ding (56) Senior Vice President 2013 to Present President – A. O. Smith China 2017 to Present President – A. O. Smith (China) Investment Co., Ltd.; GeneralManager – 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) WaterHeater 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 2012Wallace E. Goodwin (63) Senior Vice President 2018 to Present President and General Manager – Lochinvar, LLC 2018 to Present Senior Vice President and General Manager – Lochinvar, LLC 2011 to 2017 President – APCOM, a division of State Industries, LLC 1999 to 2011 12Table of ContentsName (Age) Positions Held Period Position Was HeldRobert J. Heideman (52) 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 2005D. Samuel Karge (44) Senior Vice President 2018 to Present President – North America Water Treatment 2018 to Present Vice President, Sales and Marketing – Zurn Industries 2016 to 2018 Vice President & Platform Leader – Pentair Residential Filtration 2012 to 2016John J. Kita (63) 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 (56) Senior Vice President, Strategy and Corporate Development 2013 to Present Senior Vice President – Chief Financial Officer – A. O. SmithWater Products Company 2006 to 2012 Vice President – Global Finance – A. O. Smith Electrical ProductsCompany 2004 to 2006 Vice President and Controller – A. O. Smith Electrical ProductsCompany 2001 to 2004 Director of Audit and Tax 1999 to 2001Peter R. Martineau (64) 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 (55) 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 ProductsCompany 1999 to 2004Ajita G. Rajendra (67) Executive Chairman 2018 to Present Chairman and Chief Executive Officer 2017 to 2018 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 2007 13Table of ContentsName (Age) Positions Held Period Position Was HeldJames F. Stern (56) Executive Vice President, General Counsel and Secretary 2007 to Present Partner – Foley & Lardner LLP 1997 to 2007David R. Warren (55) Senior Vice President 2017 to Present President and General Manager – North America Water Heater 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 (59) President and Chief Executive Officer 2018 to Present President and Chief Operating Officer 2017 to 2018 Senior Vice President 2013 to 2017 President and General Manager – North America, India andEurope Water Heating 2013 to 2017 Senior Vice President and General Manager – North America,India and Europe – A. O. Smith Water Products Company 2011 to 2012 Senior Vice President and General Manager – U.S. Retail – A. O.Smith Water Products Company 2007 to 2011 Vice President – International – A. O. Smith Water ProductsCompany 2004 to 2007 Managing Director – A. O. Smith Water Products Company B.V. 1999 to 2004 14Table of ContentsPART IIITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES (a)Market Information. Our Common Stock is listed on the New York Stock Exchange under the symbol AOS. Our Class A Common Stock is notlisted. EQ Shareowner Services, P.O. Box 64874, St. Paul, Minnesota, 55164-0874 serves as the registrar, stock transfer agent and the dividendreinvestment agent for our Common Stock and Class A Common Stock. (b)Holders. As of January 31, 2019, the approximate number of stockholders of record of Common Stock and Class A Common Stock were 613 and171, respectively. The actual number of stockholders is greater than this number of holders of record, and includes stockholders who arebeneficial owners, but whose shares are held in street name by brokers and other nominees. This number of stockholders of record also does notinclude stockholders whose shares may be held in trust by other entities. (c)Dividends. Dividends declared on the common stock are shown in Note 17 of Notes to Consolidated Financial Statements appearing elsewhereherein. (d)Stock Repurchases. In the second quarter of 2018, our Board of Directors authorized adding 2,500,000 shares of Common Stock an existingdiscretionary share repurchase authority. In the fourth quarter of 2018, our Board of Directors authorized adding an additional 5,000,000 sharesof Common Stock the existing discretionary share repurchase authority. Under the share repurchase program, we may purchase the CommonStock through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws.The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume andgeneral market conditions, as well as working capital requirements, general business conditions and other factors, including alternativeinvestment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur atany time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. In 2018, we repurchased3,797,800 shares at an average price of $53.34 per share and at a total cost of $202.6 million. As of December 31, 2018, there were 6,075,253shares 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 2018: ISSUER PURCHASES OF EQUITY SECURITIES Period Total Numberof SharesPurchased AveragePrice Paidper Share Total Number ofShares Purchased asPart of PubliclyAnnounced Plansor Programs Maximum Numberof Shares that mayyet be PurchasedUnder the Plans orPrograms October 1 – October 31, 2018 276,300 $ 48.75 276,300 7,881,253 November 1 – November 30, 2018 1,257,200 46.53 1,257,200 6,624,053 December 1 – December 31, 2018 548,800 45.09 548,800 6,075,253 (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 tobe “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 theSecurities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or theSecurities Exchange Act of 1934, except to the extent we specifically incorporate it by reference into such a filing. 15Table of ContentsThe graph below shows a five-year comparison of the cumulative shareholder return on our Common Stock with the cumulative total return of theStandard & Poor’s (S&P) 500 Index, S&P 500 Select Industrials Index, which are published indices.Comparison of Five-Year Cumulative Total ReturnFrom December 31, 2013 to December 31, 2018Assumes $100 Invested with Reinvestment of Dividends Base Period Indexed Returns Company/Index 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 A. O. Smith Corporation 100.0 105.9 145.4 181.8 237.7 167.9 S&P 500 Index 100.0 113.7 115.3 129.0 157.2 150.3 S&P 500 Select Industrial Index 100.0 110.7 106.1 127.4 158.1 137.1 16Table of ContentsITEM 6 – SELECTED FINANCIAL DATA (dollars in millions, except per share amounts) Years ended December 31, 2018 2017(1) 2016(2) 2015 2014 Net sales $ 3,187.9 $ 2,996.7 $ 2,685.9 $ 2,536.5 $ 2,356.0 Net earnings(1) $444.2 $296.5 $326.5 $282.9 $207.8 Basic earnings per share of common stock(1,2) Net earnings $2.60 $1.72 $1.87 $1.59 $1.15 Diluted earnings per share of common stock(1,2) Net earnings $2.58 $1.70 $1.85 $1.58 $1.14 Cash dividends per common share(2) $0.76 $0.56 $0.48 $0.38 $0.30 Years ended December 31 2018 2017 2016 2015 2014 Total assets $3,071.5 $3,197.4 $2,891.0 $2,629.2 $2,498.1 Long-term debt(3) 221.4 402.9 316.4 236.1 210.1 Total stockholders’ equity 1,717.0 1,644.9 1,511.4 1,442.3 1,381.3 (1) Due to the enactment of the U.S. Tax Cuts & Jobs Act in December 2017, we recorded a one-time charge of $81.8 million in 2017, our estimate ofthe costs primarily associated with the repatriation of undistributed foreign earnings. These charges reduced 2017 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 incash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for allperiods presented to reflect the stock dividend.(3)Excludes the current portion of long-term debt. 17Table 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,Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers,tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our Rest of Worldsegment 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 2019 compared to 2018 due to higher residential water heater and boilervolumes resulting from expected industry-wide new construction growth and expansion of replacement demand. We expect the North Americacommercial water heater industry to be flat in 2019, after declining over five percent in 2018 following growth of 11 percent in 2017, partially due toan anticipated regulatory change. Our sales of boilers grew nine percent in 2018, and we expect ten percent sales growth in 2019, driven by thecontinuing U.S. industry transition to higher efficiency products and our introduction of new products. We continued to expand our North Americawater treatment platform in 2018 by being named exclusive supplier of water treatment products to Lowe’s, with sales commencing in August 2018.We expect sales of North America water treatment products to increase by 35 to 40 percent in 2019, compared to 2018, primarily due to volume growthand a full year of sales to Lowe’s.In our Rest of World segment, we expect China sales to decline in 2019 at a rate of between seven and 10 percent in U.S. dollars and three to sixpercent in local currency, as we believe the Chinese economy will continue to be weak and the Chinese currency will depreciate compared to the U.S.dollar by approximately four percent in 2019 compared with 2018. In addition, we expect our sales in India to grow over 30 percent in 2019 fromapproximately $34 million in 2018.Combining all of these factors, we expect our consolidated sales to grow one to 2.5 percent and between 2.5 to four percent in local currency terms in2019.Our stated acquisition strategy includes a number of our water-related strategic initiatives. We will seek 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 ourexisting operations in high growth regions demonstrated by our introduction of water treatment products in India and Vietnam and air purificationproducts in China in 2015.RESULTS OF OPERATIONSOur sales in 2018 were a Company record $3,188 million surpassing 2017 sales of $2,997 million by 6.4 percent. The increase in sales in 2018 wasprimarily due to pricing actions related to higher steel costs and higher sales of boilers and residential water heaters in the U.S. as well as higher sales ofwater treatment products in China. Our global water treatment sales grew to approximately $400 million in 2018. Sales in China grew four percent in2018. Excluding the impact of the appreciation of the U.S. dollar against the Chinese currency, our sales in China increased almost two percent in2018. Our sales in 2017 were higher than 2016 sales of $2,686 million by 11.6 percent, primarily due to higher sales in China as well as higher sales ofwater heaters and boilers in North America. Our sales in China grew 15.9 percent in 2017 to over $1 billion, and excluding the impact of theappreciation of the U.S dollar against the Chinese currency, sales in China grew 17.9 percent in 2017 compared to 2016.Our gross profit margin in 2018 of 41.0 percent was essentially flat compared to our gross profit margin of 41.1 percent in 2017. Our gross profit marginin 2017 decreased from 41.5 percent in 2016. The slightly lower margin in 2017 compared to 2016 was due to significantly higher steel costs that morethan offset pricing actions taken in 2017 in North America and China. Selling, general and administrative (SG&A) expenses were $31.0 million higher in 2018 than in 2017. The increase in SG&A expenses in 2018 to$753.8 million was primarily due to higher advertising expenses related to brand building and higher product development engineering expenses inChina. SG&A expenses were $60.3 million higher in 2017 than in 2016 primarily due to higher selling and advertising expenses to support increasedvolumes and brand building in our newer product categories.On March 21, 2018, we announced a plan to close our Renton, Washington plant and transfer water heater, boiler and storage tank production to ourother U.S. plants. The majority of the consolidation of operations occurred in the second quarter of 2018 and the Renton plant was fully closed in thethird quarter of 2018. As a result of the relocation of production, we incurred pre-tax restructuring and impairment expenses of $6.7 million in the firstquarter of 2018, primarily related to employee severance and compensation-related costs, building lease exit costs and the impairment of assets. Theseactivities are reflected in “restructuring and impairment expenses” in the accompanying financial statements. 18Table of ContentsWe are providing non-GAAP measures (adjusted earnings, adjusted earnings per share (EPS), and adjusted segment earnings) that exclude Rentonrelated restructuring and impairment expenses and one-time expenses associated with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform). Reconciliationsto measures on a GAAP basis are provided later in this section.Interest expense was $8.4 million in 2018 compared to $10.1 million in 2017 and $7.3 million in 2016. Higher interest rates in 2018 were offset bylower debt levels, primarily due to the repatriation of approximately $312 million of cash from outside of the U.S., which was primarily used to paydown floating rate debt, as well as, to fund our share repurchase activity and dividend payments. 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 $21.2 million in 2018 compared to $21.3 million in 2017 and $18.1 million in 2016. The increase in other income in 2017compared to 2016 was primarily due to higher non-service cost related pension income and higher interest income.Pension income in 2018 was $8.7 million compared to $9.1 million in 2017 and $6.9 million in 2016. The service cost component of our pensionincome is reflected in cost of products sold and SG&A expenses. All other components of our pension income are reflected in other income.Our effective income tax rate was 20.4 percent in 2018, compared with 43.1 percent in 2017 and 29.4 percent in 2016. The significant increase in oureffective income tax rate in 2017 compared to prior years was due to one-time charges associated with U.S. Tax Reform of $81.8 million, primarilyrelated to the mandatory repatriation tax on undistributed foreign earnings that we are required to pay over eight years. Excluding the impact of theU.S. Tax Reform one-time charges, our adjusted effective income tax rate was 27.4 percent in 2017. Our effective income tax rate in 2018 was lowerthan our adjusted effective income tax rate in 2017 due to lower federal income taxes related to U.S. Tax Reform. Our adjusted effective income tax ratein 2017 was lower than our effective income tax rate in 2016 primarily due to lower U.S. state income taxes and higher deductions for share-basedcompensation. We estimate our annual effective income tax rate for the full year 2019 will be approximately 21.5 percent.North AmericaSales in our North America segment were $2,045 million in 2018 or $140 million higher than sales of $1,905 million in 2017. The increase in sales in2018 compared to 2017 was primarily due to pricing actions related to higher steel costs and higher volumes of boilers and residential water heaters inthe U.S. North America water treatment sales, including a full year of sales from Hague and the launch of products at Lowe’s commencing in August2018, incrementally added approximately $29 million of sales in 2018. Sales in 2017 were $162 million higher than sales of $1,743 million in 2016.The increase in sales in 2017 compared to 2016 was primarily due to higher volumes of water heaters and boilers, price increases in the U.S. for waterheaters largely related to steel cost increases as well as our customers’ pre-buy of commercial water heaters in advance of an anticipated 2018regulatory change. North America water treatment sales, comprised of Hague, acquired in September 2017 and Aquasana, acquired in August 2016,incrementally added approximately $40 million of sales in 2017.North America segment earnings were $464.1 million in 2018 compared to segment earnings of $428.6 million and $385.9 million in 2017 and 2016,respectively. Segment margins were 22.7 percent, 22.5 percent and 22.1 percent in 2018, 2017 and 2016, respectively. Adjusted segment earnings andsegment margin in 2018, which exclude restructuring and impairment expenses, were $470.8 million and 23.0 percent, respectively. The higheradjusted segment earnings and adjusted segment margin in 2018 compared to 2017 were primarily due to the favorable impact from higher sales ofresidential water heaters and boilers and pricing actions in the U.S. that were partially offset by higher steel costs and one-time expenses associatedwith the launch of water treatment products at Lowe’s. The higher segment earnings and segment margin in 2017 compared to 2016 were primarily dueto higher water heater and boiler volumes and pricing actions which were partially offset by higher steel costs. We estimate our 2019 North Americasegment margin will be between 23 and 23.5 percent.Rest of WorldSales in our Rest of World segment in 2018 were $1,174 million or $58 million higher than sales of $1,116 million in 2017. Sales in China grew fourpercent in 2018 primarily due to higher sales of water treatment products, including consumables, which were partially offset by lower sales of electricwater heaters and air purifiers. The appreciation of the U.S. dollar against the Chinese currency contributed approximately $23 million to segment salesin 2018. Excluding the benefit of the U.S. dollar appreciation, sales in China increased 1.9 percent in 2018. Water heater and water treatment sales inIndia increased $8 million, over 30 percent, in 2018 compared to 2017. Sales in our Rest of World segment in 2017 were $150 million higher thansales of $966 million in 2016. Sales in China grew 15.9 percent to over $1 billion in 2017 due to higher demand for our 19Table of Contentsconsumer products, led by water treatment and air purification products and pricing actions primarily due 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. Water heater and water treatment sales inIndia increased $8 million, over 40 percent, in 2017 compared to 2016.Rest of World segment earnings were $149.3 million in 2018 compared to segment earnings of $149.3 million and $129.1 million in 2017 and 2016,respectively. Segment margins were 12.7 percent in 2018 compared to 13.4 percent and 13.4 percent in 2017 and 2016, respectively. Segment earningsin 2018 were flat compared to 2017 primarily due to higher water treatment product sales and improved performance in India that were offset by lowersales of electric water heaters and air purifiers as well as higher SG&A expenses. Higher SG&A expenses in China were primarily due to higheradvertising expenses related to brand building and higher product development engineering expenses. Segment margin declined in 2018 compared to2017 as a result of the factors above. Higher segment earnings in 2017 compared to 2016 were primarily due to higher sales in China, which included aprice increase, partially offset by higher steel costs, higher fees paid to installers and increased SG&A expenses. Higher SG&A expenses in China wereprimarily due to the expansion of water treatment and air purification product retail outlets in tier 2 and tier 3 cities, higher advertising expensesrelated to brand building in our newer product categories and higher water treatment product development engineering costs. We expect our 2019Rest of World segment margin will be approximately 12 to 12.5 percent due to lower sales and profitability in China.LIQUIDITY AND CAPITAL RESOURCESOur working capital was $853.2 million at December 31, 2018 compared with $973.1 million and $791.2 million at December 31, 2017 andDecember 31, 2016, respectively. Approximately $312 million in foreign cash was repatriated in 2018 and utilized to repay floating rate debt, paydividends and repurchase shares. The decline in cash, cash equivalents and marketable securities balances more than offset sales-related increases inaccounts receivable, and explains the majority of the decline in working capital in 2018. Cash generation in China and sales-related increases inaccounts receivable, and inventory levels led to the majority of the increase in working capital in 2017. As of December 31, 2018, essentially all of our$645.0 million of cash, cash equivalents and marketable securities was held by our foreign subsidiaries. We expect to repatriate approximately$150 million in the first half of 2019 and use the proceeds to repay floating rate debt.Cash provided by operating activities during 2018 was $448.9 million compared with $326.4 million during 2017 and $446.6 million during 2016.The increase in cash flows in 2018 compared to 2017 was primarily due to higher earnings and lower outlays for working capital in 2018. The declinein 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.Our capital expenditures were $85.2 million in 2018, $94.2 million in 2017 and $80.7 million in 2016. We broke ground in 2016 on the constructionof a new water treatment and air purification products manufacturing facility in Nanjing, China, to support the expected growth of these products inChina. The facility became operational in May 2018. Included in 2018 capital expenditures were approximately $13 million related to capacityexpansion in China. Included in 2017 capital expenditures were approximately $24 million related to capacity expansion in China. Included in 2016capital expenditures were approximately $13 million related to capacity expansion in China as well as approximately $11 million related to thecontinuation of our enterprise resource planning (ERP) system implementation. For 2019, we project approximately $85 million of capitalexpenditures and approximately $75 million of depreciation and amortization expense.In November 2016, we issued $45 million of fixed rate term notes in two tranches to two insurance companies. Principal payments commence in 2023and 2028 and the notes mature in 2029 and 2034, respectively. The notes carry interest rates of 2.87 and 3.10, respectively. We used proceeds of thenotes to pay down 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 anaccordion provision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied. Borrowing ratesunder the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interestcoverage test, and we were in compliance with the covenants as of December 31, 2018. The facility backs up commercial paper and credit lineborrowings, and it expires on December 15, 2021. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings aswell as drawings under the facility are classified as long-term debt. 20Table of ContentsAt December 31, 2018, we had available borrowing capacity of $398.6 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 declined to $221.4 million at December 31, 2018 compared with $410.4 million at December 31, 2017. We repatriated approximately$312 million cash and paid down debt, which was partially offset by share repurchase activity exceeding cash generation in the U.S. As a result, ourleverage, as measured by the ratio of total debt to total capitalization, was 11.4 percent at the end of 2018 compared with 19.9 percent at the end of2017.Our U.S. pension plan continues to meet all funding requirements under ERISA regulations. We were not required to make a contribution to ourpension plan in 2018. We forecast that we will not be required to make a contribution to the plan in 2019, and we do not plan to make any voluntarycontributions in 2019. For further information on our pension plans, see Note 12 of the Notes to Consolidated Financial Statements.In 2018, we repurchased 3,797,800 shares at an average price of $53.34 per share and a total cost of $202.6 million. Our Board of Directors increasedthe number of shares we are authorized to repurchase by 2,500,000 shares and 5,000,000 shares at its July 2018 and December 2018 meetings,respectively. A total of 6,075,253 shares remained on the existing repurchase authorization at December 31, 2018. Depending on factors such as stockprice, working capital requirements and alternative investment opportunities, such as acquisitions, we expect to spend approximately $200 million onshare repurchase activity in 2019 using a combination of a 10b5-1 repurchase plan and opportunistic purchases.We have paid dividends for 79 consecutive years with annual amounts increasing each of the last 27 years. We paid dividends of $0.76 per share in2018 compared with $0.56 per share in 2017. We increased our dividend rate twice in 2018, and the five year compound annual growth rate of ourdividend is approximately 30 percent.Aggregate Contractual ObligationsA summary of our contractual obligations as of December 31, 2018, 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 $ 221.4 $— $ 115.0 $ 16.9 $89.5 Fixed rate interest 30.0 4.0 7.2 6.3 12.5 Operating leases 69.1 14.8 20.0 11.0 23.3 Purchase obligations 144.0 143.6 0.4 — — Pension and post-retirement obligations 46.8 4.7 6.7 2.1 33.3 Total $511.3 $167.1 $149.3 $36.3 $158.6 As of December 31, 2018, our liability for uncertain income tax positions was $8.3 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 whichthese liabilities might be paid.We utilize blanket purchase orders to communicate expected annual requirements to many of our suppliers. Requirements under blanket purchaseorders generally do not become committed until several weeks prior to our scheduled unit production. The purchase obligation amount presentedabove represents the value of commitments that we consider firm.Recent Accounting PronouncementsRefer to Recent Accounting Pronouncements in Note 1 of Notes to Consolidated Financial Statements. 21Table 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 eventsthat affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined withabsolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from thoseestimates, and such differences may be material to the financial statements.The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the evaluation ofthe impairment of goodwill and indefinite-lived intangible assets, as well as significant estimates used in the determination of liabilities related towarranty activity, product liability and pensions. Various assumptions and other factors underlie the determination of these significant estimates. Theprocess of determining significant estimates is fact-specific and takes into account factors such as historical experience and trends, and in some cases,actuarial techniques. We monitor these significant factors and adjustments are made as facts and circumstances dictate. Historically, actual results havenot significantly 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 whicha reporting unit could be bought or sold in a current transaction between willing parties on an arm’s-length basis. The estimated fair value is thencompared with the carrying amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent thatgoodwill and indefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental as estimates of futuresales, earnings and cash flows are utilized to determine fair values. However, we believe that we conduct thorough and competent annual valuations ofgoodwill and indefinite-lived intangible assets and that there has been no impairment in goodwill or indefinite-lived assets in 2018.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 providefor the estimated cost of product warranty at the time of sale. The product warranty provision is estimated based upon warranty loss experience usingactual historical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed at leastannually. At times, warranty issues may arise which are beyond the scope of our historical experience. We provide for any such warranty issues as theybecome known and estimable. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costscould differ significantly from those estimates. The allocation of the warranty liability between current and long-term is based on the expectedwarranty liability to be paid in the next year as determined by historical product failure rates. At December 31, 2018 and 2017, our reserve for productwarranties was $139.3 million and $141.2 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.Most insurance coverage includes self-insured retentions that vary by year. In 2018, we maintained a self-insured retention of $7.5 million peroccurrence with an aggregate insurance limit of $125.0 million.We establish product liability reserves for our self-insured retention portion of any known outstanding matters based on the likelihood of loss and ourability to reasonably estimate such loss. There is inherent uncertainty as to the eventual resolution of unsettled matters due to the unpredictable natureof litigation. We make estimates based on available information and our best judgment after consultation with appropriate advisors and experts. Weperiodically revise estimates based upon changes to facts or circumstances. We also utilize an actuary to calculate reserves required for estimatedincurred but not reported claims as well as to estimate the effect of adverse development of claims over time. At December 31, 2018 and 2017, ourreserve for product liability was $39.3 million and $40.1 million, respectively. 22Table 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,including changes in interest rates in making these assumptions. Our assumption for the expected return on plan assets was 7.15 percent in 2018 and7.50 percent in 2017. The discount rate used to determine net periodic pension costs decreased to 3.65 percent in 2018 from 4.15 percent in 2017. For2019, our expected return on plan assets is 7.15 percent and our discount rate is 4.32 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 ofreturn of equity and bond indices and the actual historical returns of our pension plan. Our plan’s target allocation to equity managers is approximately30 to 60 percent, with the remainder allocated primarily to bond managers, private equity managers and real estate managers. Our actual assetallocation as of December 31, 2018, was 40 percent to equity managers, 48 percent to bond managers, 10 percent to real estate managers, and twopercent to private equity managers. We regularly review our actual asset allocation and periodically rebalance our investments to our targetedallocation when considered appropriate. Our pension plan’s historical ten-year and 25-year compounded annualized returns are 8.9 percent and8.5 percent, respectively. We believe that with our target allocation and the expected long-term returns of equity and bond indices as well as our actualhistorical returns, our 7.15 percent expected return on plan assets for 2019 is reasonable.The discount rate assumptions used to determine future pension obligations at December 31, 2018 and 2017 were based on the Aon AA Only AboveMedian yield curve, which was designed by Aon 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’sInvestor Service, Standard & Poor’s and Fitch Ratings. We will continue to evaluate our actuarial assumptions at least annually, and we will adjust theassumptions as necessary.We recognized pension income of $8.7 million, $9.1 million, and $6.9 million in 2018, 2017, and 2016, respectively.Costs associated with our replacement retirement plan in 2018 were approximately $6 million, consistent with 2017. We made changes to our pensionplan including closing the plan to new entrants effective January 1, 2010, and the sunset of our plan for the majority of our employees on December 31,2014. Lowering the expected return on plan assets by 25 basis points would decrease our net pension income for 2018 by approximately $2.0 million.Lowering the discount rate by 25 basis points would increase our 2018 net pension income by approximately $0.1 million.Non-GAAP MeasuresWe provide non-GAAP measures (adjusted earnings, adjusted earnings per share (EPS) and adjusted segment earnings) that exclude restructuring andimpairment expenses in 2018 and the impact of a one-time charge associated with U.S. Tax Reform in 2017.We believe that the measures of adjusted earnings, adjusted EPS and adjusted segment earnings provide useful information to investors about ourperformance and allow management and our investors to better compare our performance year over year. 23Table 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, 2018 2017 Net Earnings (GAAP) $ 444.2 $ 296.5 Restructuring and impairment expenses, before tax(1) 6.7 — Tax effect of restructuring and impairment expenses (1.7) — U.S. Tax Reform income tax expense(2) — 81.8 Adjusted Earnings $449.2 $378.3 Diluted EPS (GAAP) $2.58 $1.70 Restructuring and impairment expenses per diluted share(1) 0.4 $— Tax effect of restructuring and impairment expenses per diluted share (0.1) — U.S. Tax Reform income tax expense(2) — 0.47 Adjusted EPS $2.61 $2.17 The following is a reconciliation of reported segment earnings to adjusted segment earnings (non-GAAP): Years ended December 31, 2018 2017 Segment Earnings (GAAP) North America $ 464.1 $ 428.6 Rest of World 149.3 149.3 Total Segment Earnings (GAAP) $613.4 $577.9 Adjustments North America (1) $6.7 $— Rest of World — — Total Adjustments $6.7 $— Adjusted Segment Earnings North America $470.8 $428.6 Rest of World 149.3 149.3 Total Adjusted Segment Earnings $620.1 $577.9 (1) We recognized $6.7 million of restructuring and impairment expenses in connection with the move of manufacturing operations from ourRenton, Washington facility to other U.S. facilities. For additional information, see Note 4 of Notes to Consolidated Financial Statements.(2) Excluding the impact of one-time U.S. Tax Reform 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. For additional information, see Note 14 of Notes to Consolidated Financial Statements.OutlookWe expect continued strong boiler and residential water heater sales in North America in 2019. We project that sales in China will decline by seven toten percent in U.S. dollar terms and three to six percent in local currency in 2019. The decrease is due to our expectation of relatively flat consumerdemand in China and without the increase of the channel inventory build in China that we experienced primarily in the first quarter of 2018 which weestimate was at least five percent of 2018 China sales. As a result, we expect our consolidated sales to grow one to 2.5 percent and between 2.5 to fourpercent in local currency terms in 2019. We expect to achieve full-year earnings of between $2.67 and $2.77 per share, which excludes the potentialimpact from future acquisitions. 24Table of ContentsOTHER MATTERSEnvironmentalOur operations are governed by a number of federal, foreign, state, local and environmental laws concerning the generation and management ofhazardous materials, the discharge of pollutants into the environment and remediation of sites owned by the company or third parties. We haveexpended financial and managerial resources complying with such laws. Expenditures related to environmental matters were not material in 2018 andwe do not expect them to be material in any single year. We have reserves associated with environmental obligations at various facilities and webelieve these reserves together with available insurance coverage are sufficient to cover reasonably anticipated remediation costs. Although we believethat our operations are substantially in compliance with such laws and maintain procedures designed to maintain compliance, there are no assurancesthat substantial additional costs for compliance will not be incurred in the future. However, since the same laws govern our competitors, we should notbe 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 intoforward contracts to minimize such exposures for periods of less than one year. We do not engage in speculation in our derivatives strategies. Furtherdiscussion regarding derivative instruments is contained in Note 1 of Notes to Consolidated Financial Statements.We enter into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. At December 31, 2018, we had net foreigncurrency contracts outstanding with notional values of $210.9 million. Assuming a hypothetical ten percent movement in the respective currencies, thepotential foreign exchange gain or loss associated with the change in exchange rates would amount to $21.1 million. However, gains and losses fromour forward contracts will be offset by gains and losses in the underlying transactions being hedged.Our earnings exposure related to movements in interest rates is primarily derived from outstanding floating-rate debt instruments that are determinedby short-term money market rates. At December 31, 2018, we had $101.4 million in outstanding floating-rate debt with a weighted-average interest rateof 2.9 percent at year end. A hypothetical ten percent annual increase or decrease in the year-end average cost of our outstanding floating-rate debtwould result in a change in annual pre-tax interest expense of approximately $0.3 million.Forward-Looking StatementsThis filing contains statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of1995. 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 causeactual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materiallyfrom these expectations include, among other things, the following: a further weakening of the Chinese economy and/or a further decline in the growthrate of consumer spending or housing sales in China; negative impact to our businesses from international tariffs and trade disputes; potentialweakening in the high efficiency boiler segment in the U.S.; significant volatility in raw material prices; our inability to implement or maintain pricingactions; potential weakening in U.S. residential or commercial construction or instability in our replacement markets; foreign currency fluctuations;our inability to successfully integrate or achieve our strategic objectives resulting from acquisitions; competitive pressures on our businesses; theimpacts of potential information technology or data security breaches; changes in government regulations or regulatory requirements; and adversedevelopments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this filingare made only as of the date of this filing, and we are under no obligation to update these statements to reflect subsequent events or circumstances. Allsubsequent written and oral forward-looking statements attributed to the Company, or persons acting on our behalf, are qualified entirely by thesecautionary statements.ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSee “Market Risk” above. 25Table 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, 2018 and 2017, therelated consolidated statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for each of the three years in the periodended December 31, 2018, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial positionof the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2018, in conformity 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, 2018, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 15, 2019 expressed anunqualified opinion thereon.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respectto the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission 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 obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits includedperforming procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing proceduresthat respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluatingthe overall presentation of the financial statements. 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 15, 2019 26Table of ContentsCONSOLIDATED BALANCE SHEETS December 31 (dollars in millions) 2018 2017 Assets Current Assets Cash and cash equivalents $259.7 $346.6 Marketable securities 385.3 473.4 Receivables 647.3 592.7 Inventories 304.7 297.0 Other current assets 41.5 57.2 Total Current Assets 1,638.5 1,766.9 Net property, plant and equipment 540.0 528.9 Goodwill 513.0 516.7 Other intangibles 293.1 308.7 Other assets 86.9 76.2 Total Assets $3,071.5 $3,197.4 Liabilities Current Liabilities Trade payables $543.8 $535.0 Accrued payroll and benefits 79.4 90.8 Accrued liabilities 120.4 116.0 Product warranties 41.7 44.5 Long-term debt due within one year — 7.5 Total Current Liabilities 785.3 793.8 Long-term debt 221.4 402.9 Product warranties 97.7 97.9 Pension liabilities 49.4 48.1 Other liabilities 200.7 209.8 Total Liabilities 1,354.5 1,552.5 Commitments and contingencies — — Stockholders’ Equity Preferred Stock — — Class A Common Stock (shares issued 26,191,327 and 26,239,559) 131.0 131.2 Common Stock (shares issued 164,516,267 and 164,468,033) 164.5 164.5 Capital in excess of par value 496.7 486.5 Retained earnings 2,102.8 1,788.7 Accumulated other comprehensive loss (350.8) (299.5) Treasury stock at cost (827.2) (626.5) Total Stockholders’ Equity 1,717.0 1,644.9 Total Liabilities and Stockholders’ Equity $3,071.5 $3,197.4 See accompanying notes which are an integral part of these statements. 27Table of ContentsCONSOLIDATED STATEMENT OF EARNINGS Years ended December 31 (dollars in millions, except per share amounts) 2018 2017 2016 Net sales $ 3,187.9 $ 2,996.7 $ 2,685.9 Cost of products sold 1,882.4 1,764.3 1,571.7 Gross profit 1,305.5 1,232.4 1,114.2 Selling, general and administrative expenses 753.8 722.8 662.5 Restructuring and impairment expenses 6.7 — — Interest expense 8.4 10.1 7.3 Other income - net (21.2) (21.3) (18.1) Earnings before provision for income taxes 557.8 520.8 462.5 Provision for income taxes 113.6 224.3 136.0 Net Earnings $444.2 $296.5 $326.5 Net Earnings Per Share of Common Stock $2.60 $1.72 $1.87 Diluted Net Earnings Per Share of Common Stock $2.58 $1.70 $1.85 CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS Years ended December 31 (dollars in millions) 2018 2017 2016 Net Earnings $444.2 $296.5 $326.5 Other comprehensive earnings (loss) Foreign currency translation adjustments (38.4) 52.7 (39.8) Unrealized net gain (loss) on cash flow derivative instruments, less related income tax (provision) benefitof ($0.1) in 2018, $0.7 in 2017 and $0.6 in 2016 0.2 (1.1) (1.0) Change in pension liability less related income tax benefit (provision) of $4.3 in 2018, $(7.5) in 2017and $5.7 in 2016 (13.1) 12.1 (9.0) Comprehensive Earnings $392.9 $360.2 $276.7 See accompanying notes which are an integral part of these statements. 28Table of ContentsCONSOLIDATED STATEMENT OF CASH FLOWS Years ended December 31 (dollars in millions) 2018 2017 2016 Operating Activities Net earnings $444.2 $296.5 $326.5 Adjustments to reconcile earnings to cash provided by (used in) operating activities: Depreciation and amortization 71.9 70.1 65.1 U.S. Tax Reform income tax expense — 81.8 — Stock based compensation expense 10.1 9.9 9.4 Net changes in operating assets and liabilities, net of acquisitions: Current assets and liabilities (40.0) (127.8) 68.5 Noncurrent assets and liabilities (37.3) (4.1) (22.9) Cash Provided by Operating Activities 448.9 326.4 446.6 Investing Activities Acquisitions of businesses — (43.1) (90.8) Investments in marketable securities (523.4) (583.5) (563.8) Proceeds from sales of marketable securities 595.9 562.7 435.1 Capital expenditures (85.2) (94.2) (80.7) Cash Used in Investing Activities (12.7) (158.1) (300.2) Financing Activities Long-term debt (repaid) incurred (189.0) 86.5 74.1 Common stock repurchases (202.6) (139.1) (135.2) Net proceeds (payments) from stock option activity 0.9 (0.9) 5.7 Acquisition related contingent payments (2.3) (1.7) — Dividends paid (130.1) (96.9) (84.2) Cash Used in Financing Activities (523.1) (152.1) (139.6) Net (decrease) increase in cash and cash equivalents (86.9) 16.2 6.8 Cash and cash equivalents-beginning of year 346.6 330.4 323.6 Cash and Cash Equivalents-End of Year $259.7 $346.6 $330.4 See accompanying notes, which are an integral part of these statements. 29Table of ContentsCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY Years ended December 31 (dollars in millions) 2018 2017 2016 Class A Common Stock Balance at the beginning of the year $131.2 $131.6 $131.8 Conversion of Class A Common Stock (0.2) (0.4) (0.2) Balance at the end of the year $131.0 $131.2 $131.6 Common Stock Balance at the beginning of the year $164.5 $164.4 $164.4 Conversion of Class A Common Stock — 0.1 — Balance at the end of the year $164.5 $164.5 $164.4 Capital in Excess of Par Value Balance at the beginning of the year $486.5 $477.6 $469.3 Conversion of Class A Common Stock 0.2 0.3 0.2 Issuance of share units (6.0) (4.9) (4.6) Vesting of share units (2.4) (2.9) (2.0) Stock based compensation expense 10.1 9.2 8.8 Exercises of stock options 1.4 1.4 0.3 Stock incentives 6.9 5.8 5.6 Balance at the end of the year $496.7 $486.5 $477.6 Retained Earnings Balance at the beginning of the year $ 1,788.7 $ 1,589.1 $ 1,346.8 Net earnings 444.2 296.5 326.5 Cash dividends on stock (130.1) (96.9) (84.2) Balance at the end of the year $2,102.8 $1,788.7 $1,589.1 Accumulated Other Comprehensive Loss Balance at the beginning of the year $ (299.5) $ (363.2) $ (313.4) Foreign currency translation adjustments (38.4) 52.7 (39.8) Unrealized net gain (loss) on cash flow derivative instruments, less related income tax (provision) benefit of($0.1) in 2018, $0.7 in 2017 and $0.6 in 2016 0.2 (1.1) (1.0) Change in pension liability less related income tax benefit (provision) of $4.3 in 2018, $(7.5) in 2017 and$5.7 in 2016 (13.1) 12.1 (9.0) Balance at the end of the year $(350.8) $(299.5) $(363.2) Treasury Stock Balance at the beginning of the year $ (626.5) $ (488.1) $ (360.5) Exercise of stock options, net of 54,180, 160,856 and 54,019 shares surrendered as proceeds and to pay taxesin 2018, 2017 and 2016, respectively (0.7) (2.4) 4.0 Stock incentives and directors’ compensation 0.1 0.2 0.2 Shares repurchased (202.6) (139.1) (135.2) Vesting of share units 2.5 2.9 3.4 Balance at the end of the year $(827.2) $(626.5) $(488.1) Total Stockholders’ Equity $1,717.0 $1,644.9 $1,511.4 See accompanying notes which are an integral part of these statements. 30Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. 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. TheRest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residentialand commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in theirrespective regions of the world. The Rest of World segment also manufacturers and markets in-home air purification products in China.Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination ofintercompany transactions.Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S.)requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and notes. Actualresults could differ from those estimates.Fair value of financial instruments. The carrying amounts of cash, cash equivalents, marketable securities, receivables, floating rate debt and tradepayables approximated fair value as of December 31, 2018 and 2017, due to the short maturities or frequent rate resets of these instruments. As ofDecember 31, 2018 and 2017, the carrying value of term notes with insurance companies was approximately $120.0 million and $127.5 million,respectively, which approximated fair 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.The Barbados, Hong Kong, Mexican and Netherlands companies use the U.S. dollar as the functional currency. Gains and losses from foreign currencytransactions were included in net earnings and were not significant in 2018, 2017, or 2016.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, 2018, the Company’s marketable securities consisted of bank time deposits with original maturities ranging from 180 daysto 12 months and were primarily located at investment grade rated banks in China.Inventory valuation. Inventories are carried at lower of cost and net realizable value. Cost is determined on the last-in, first-out (LIFO) method for amajority of the Company’s domestic inventories, which comprised 64 percent and 59 percent of the Company’s total inventory at December 31, 2018and 2017, 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 yearsfor software. Maintenance and repair costs are expensed as incurred.Goodwill and other intangibles. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis.Separable intangible assets, primarily comprised of customer relationships, that are not deemed to have an indefinite life are amortized on a straight-line basis over their estimated useful lives which range from three to 25 years. 31Table of Contents1. Organization and Significant Accounting Policies (continued) Impairment of long-lived and amortizable intangible assets. Property, plant and equipment and intangible assets subject to amortization arereviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of theexpected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference betweenthe fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.Product warranties. The Company’s products carry warranties that generally range from one to ten years and are based on terms that are consistentwith the market. The Company records a liability for the expected cost of warranty-related claims at the time of sale. The allocation of the warrantyliability between current and long-term is based on expected warranty claims to be paid in the next year as determined by historical product failurerates.The following table presents the Company’s product warranty liability activity in 2018 and 2017: Years ended December 31 (dollars in millions) 2018 2017 Balance at beginning of year $ 141.2 $ 140.9 Expense 40.7 39.7 Claims settled (42.5) (39.4) Balance at end of year $139.4 $141.2 Derivative instruments. The Company utilizes certain derivative instruments to enhance its ability to manage currency as well as raw materials pricerisk. The Company does not enter into contracts for speculative purposes. The fair values of all derivatives are recorded in the consolidated balancesheets. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss (AOCL), dependingon whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 13, “Derivative Instruments” ofthe notes to consolidated financial statements for disclosure of the Company’s derivative instruments and hedging activities.Fair Value Measurements. Accounting Standards Codification (ASC) 820 Fair Value Measurements, among other things, defines fair value,establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value oneither a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell anasset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that shouldbe determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputssuch as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly;and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by 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, 2018 December 31, 2017 Quoted prices in active markets for identical assets(Level 1) $ 385.3 $ 473.4 Significant other observable inputs (Level 2) 7.5 (1.4) There were no changes in the valuation techniques used to measure fair values on a recurring basis. 32Table of Contents1. Organization and Significant Accounting Policies (continued) Revenue recognition. The Company adopted ASC 606-10 as of January 1, 2018. Substantially all of the Company’s sales are from contracts withcustomers for the purchase of its products. Contracts and customer purchase orders are used to determine the existence of a sales contract. Shippingdocuments are used to verify shipment. For substantially all of its products, the Company transfers control of products to the customer at the point intime when title and risk are passed to the customer, which generally occurs upon shipment of the product. See Note 2, “Revenue Recognition” fordisclosure of the Company’s revenue recognition activities.Advertising. The majority of advertising costs are charged to operations as incurred and amounted to $132.1 million, $126.9 million and$113.9 million during 2018, 2017 and 2016, respectively. Included in total advertising costs are expenses associated with store displays for waterheater, water treatment and air purification products in China that are amortized over 12 to 36 months which totaled $38.7 million, $43.0 million and$37.0 million during 2018, 2017 and 2016, respectively.Research and development. Research and development costs are charged to operations as incurred and amounted to $94.0 million, $86.4 million and$80.1 million during 2018, 2017 and 2016, respectively.Environmental costs. The Company accrues for costs associated with environmental obligations when such costs are probable and reasonablyestimable. Costs of estimated future expenditures are not discounted to their present value. Recoveries of environmental costs from other parties arerecorded as assets when their receipt is considered probable. The accruals are adjusted as facts and circumstances change.Stock-based compensation. Compensation cost is recognized using the straight-line method over the vesting period of the award and forfeitures arerecognized as they occur. In accordance with amended ASC 718, the Company recognized $2.4 million, $11.6 million, and $5.9 million of discreteincome tax benefits on settled stock based compensation awards during 2018, 2017, and 2016 respectively.Income taxes. The provision for income taxes is computed using the asset and liability method, in accordance with ASC 740 Income Taxes, underwhich deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financialreporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measuredusing the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settledand are classified as noncurrent in the consolidated balance sheet. The Company records a valuation allowance to reduce deferred tax assets to theamount that is believed more likely than not to be realized.The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained onexamination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from suchpositions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement.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 ACommon Stock and Common Stock have equal dividend rights. The numerator for the calculation of basic and diluted earnings per share is netearnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations: 2018 2017 2016 Denominator for basic earnings per share - weighted-average sharesoutstanding 170,589,345 172,666,056 174,712,683 Effect of dilutive stock options, restricted stock and share units 1,604,695 1,939,133 2,112,597 Denominator for diluted earnings per share 172,194,040 174,605,189 176,825,280 33Table of Contents1. Organization and Significant Accounting Policies (continued) On April 11, 2016, the Company’s stockholders approved a proposal to increase the Company’s authorized shares of Common Stock and onSeptember 7, 2016, the Company’s Board of Directors declared a two-for-one stock split of the Company’s Class A Common Stock and Common Stock(including treasury shares) in the form of a 100 percent stock dividend to stockholders of record on September 21, 2016 and payable on October 5,2016. All references in the financial statements and footnotes to the number of shares outstanding, price per share, per share amounts and stock basedcompensation data have been recast to reflect the stock split for all periods presented.Reclassifications. Certain amounts from prior years have been reclassified to conform with current year presentation.Recent Accounting PronouncementsIn August 2017, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (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 hedge accounting treatment. ASU 2017-12 also amends the presentation and disclosure requirements regardingderivatives and hedging and changes how companies assess effectiveness. The Company adopted the amendment on January 1, 2018 and the adoptionof ASU 2017-12 did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.In May 2017, the FASB amended ASC 718, Compensation – Stock Compensation (issued under ASU 2017-09, “Scope of Modification Accounting”).This amendment clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as a modification. Under thisamendment, modification accounting must be used if three conditions are met: the fair value changes, the vesting conditions change, or theclassification of the award changes due to the changes in terms or conditions. The Company adopted the amendment on January 1, 2018 and theadoption of ASU 2017-09 did not 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 NetPeriodic Pension Cost and Net Periodic Postretirement Benefit Cost”). This amendment changes the way net periodic benefit cost associated withemployer-sponsored defined benefit plans is presented in the statement of earnings. Under the amendment, the service cost component of net periodicbenefit cost is included in the same lines in the statement of earnings as other employee compensation costs and the other components of net periodicbenefit cost must be presented separately outside of income from operations. The Company adopted the amendment on January 1, 2018. As a result ofthis adoption, for the year ended December 31, 2017 the Company retrospectively reclassified $6.3 million and $4.6 million of non-service costpension income from cost of products sold and selling, general and administrative expenses, respectively, to other income in the consolidatedstatement of earnings. The for the year ended December 31, 2016, the Company retrospectively reclassified $5.1 million and $3.6 million ofnon-service cost pension income from cost of products sold and selling, general and administrative expenses, respectively, to other income in theconsolidated statement of earnings. The adoption did not have a material impact on the Company’s consolidated balance sheets, statements of earningsor 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 goodwillimpairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that thecarrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reportingunit. The amendment requires adoption on January 1, 2020. The Company does not expect that the adoption of ASU 2017-04 will have a materialimpact on its consolidated balance sheets, statements of earnings or statements of cash flows.In October 2016, the FASB amended ASC 740, Income Taxes (issued under ASU 2016-16). This amendment requires that the income tax consequencesof an intra-entity transfer of an asset other than inventory be recognized when the transfer occurs. The Company adopted this amendment on January 1,2018 and the adoption of amended ASU 2016-16 did not have a material impact on its consolidated balance sheets, statement of earnings or statementsof cash flows.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 periodsbeginning January 1, 2019. The Company intends to apply the modified retrospective transition method and elect the transition option to use theeffective date of January 1, 2019 as the date of initial application. The Company also intends to elect the package of practical expedients and thepractical expedient not to separate lease and non-lease components. The Company does not intend to elect the hindsight practical expedient. 34Table of Contents1. Organization and Significant Accounting Policies (continued) In 2018, the Company completed a comprehensive analysis of its lease population. The impact of adoption will result in the recognition of leaseliabilities and corresponding right-of-use assets of approximately $55 million each. The adoption of ASU 2016-02 will not have a material impact onits consolidated balance sheets, statements of earnings or statements of cash flows.In May 2014, the FASB issued ASC 606-10, Revenue from Contracts with Customers (issued under ASU 2014-09). ASU 2014-09 replaces allpreviously existing revenue recognition guidance. The Company adopted ASU 2014-09 on January 1, 2018 using the full retrospective method andtherefore applied the standard to all contracts commencing on or after January 1, 2016. The Company recognized a net after-tax reduction to openingretained earnings of $3.9 million as of January 1, 2016 in connection with the adoption of ASU 2014-09. The adoption of ASU 2014-09 did not have amaterial impact on the Company’s consolidated balance sheets, statements of earnings or statements of cash flows. See Note 2 “Revenue Recognition”for further discussion.2. Revenue RecognitionSubstantially all of the Company’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders areused to determine the existence of a sales contract. Shipping documents are used to verify shipment. For substantially all of its products, the Companytransfers control of products to the customer at the point in time when title and risk are passed to the customer, which generally occurs upon shipmentof the product. Each unit sold is considered an independent, unbundled performance obligation. The Company’s sales arrangements do not includeother performance obligations that are material in the context of the contract. The nature, timing and amount of revenue for a respective performanceobligation are consistent for each customer. The Company measures the sales transaction price based upon the payment terms associated with thetransaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement oftransaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.Additionally, certain customers in China pay prior to the shipment of products resulting in a customer deposits liability of $47.0 million and$56.0 million at December 31, 2018 and December 31, 2017, respectively. The Company assesses collectability based on the creditworthiness of thecustomer as determined by credit checks and analysis, as well as the customer’s payment history. The Company’s allowance for doubtful accounts was$6.4 million and $5.3 million at December 31, 2018 and December 31, 2017, respectively.Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable considerationrelated to customer rebates which are calculated using expected values and is based on program specific factors such as expected rebate percentagesbased on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates ofexpected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual salesvolume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers areincluded in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.Disaggregation of Net SalesThe Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China,Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers,tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The Rest of Worldsegment also manufactures and markets in-home air purification products in China.As each segment manufactures and markets products in its respective region of the world, the Company has determined that geography is the primaryfactor in reporting its sales. The Company further disaggregates its North America segment sales by major product line as each of North America’smajor product lines is sold through distinct distribution channels and these product lines may be impacted differently by certain economic factors.Within the Rest of World segment, particularly in China and India, the Company’s major customers purchase across the Company’s product lines,utilizing the same distribution channel regardless of product type. In addition, the impact of economic factors is unlikely to be differentiated byproduct line in the Rest of World segment. 35Table of Contents2. Revenue Recognition (continued) The North America segment major product lines are defined as the following:Water heaters The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters includeresidences, restaurants, hotels and motels, office buildings, laundries, car washes and small businesses. The Company sells residential and commercialwater heater products and related parts through its wholesale distribution channel, which includes more than 1,300 independent wholesale plumbingdistributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels.A significant portion of the Company’s water heater sales in the North America segment is derived from the replacement of existing products.Boilers The Company’s boilers are closed loop water heating systems used primarily for space heating or hydronic heating. The Company’s boilers areprimarily used in applications in commercial settings for hospitals, schools, hotels and other large commercial buildings while residential boilers areused in homes, apartments and condominiums. The Company’s boiler distribution channel is comprised primarily of manufacturer representative firms,with the remainder our boilers distributed through wholesale channels. The Company’s boiler sales in the North America segment are derived from acombination of replacement of existing products and new construction.Water treatment products The Company’s water treatment products range from point-of-entry water softeners and whole-home water filtration productsto on-the-go filtration bottles and point-of-use carbon and reverse osmosis products. Typical applications for the Company’s water treatment productsinclude residences, restaurants, hotels and offices. A portion of the Company’s sales of water treatment products in the North America segment iscomprised of replacement filters.The following table disaggregates the Company’s net sales by segment. As described above, the Company’s North America segment sales are furtherdisaggregated by major product line. In addition, the Company’s Rest of World segment sales are disaggregated by China and all other Rest of World. Years ending December 31 (dollars in millions) 2018 2017 2016 North America Water heaters and related parts $1,757.0 $1,663.0 $1,563.2 Boilers and related parts 200.4 183.3 161.6 Water treatment products(1) 87.3 58.5 18.4 Total North America 2,044.7 1,904.8 1,743.2 Rest of World China $1,070.4 $1,029.4 $887.5 All other Rest of World 103.2 86.9 78.1 Total Rest of World 1,173.6 1,116.3 965.6 Inter-segment sales (30.4) (24.4) (22.9) Total Net Sales $3,187.9 $2,996.7 $2,685.9 (1) Includes Hague Quality Water International (Hague) and Aquasana, Inc. (Aquasana) from the date of acquisition of September 5, 2017 andAugust 8, 2016, respectively. 36Table of Contents3. AcquisitionsOn September 5, 2017, the Company acquired 100 percent of the shares of Hague, an Ohio-based water softener company. With the addition of Hague,the Company grew its North America water treatment platform. Hague is included in the Company’s North America segment 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. The Company also agreed to makea contingent payment of up to an additional $2.0 million based on the amount by which products manufactured by or branded Hague increase over thetwo-year period ending June 30, 2019. In addition, the Company incurred acquisition-related costs of approximately $0.2 million.As of the acquisition date, the Company estimated the fair value of the holdback liability and additional contingent consideration at $1.5 million and$2.0 million, respectively. During 2018, the Company finalized the amount of acquisition date working capital, which resulted in a $1.3 millionpayment to the former owners of Hague related to the aforementioned holdback. The Company also paid $1.0 million of contingent paymentsassociated with the amount by which sales of products manufactured by Hague increase over the two-year period ending June 30, 2019. As ofDecember 31, 2018, the Company estimated the fair value of the remaining contingent consideration at $1.0 million.The following table summarizes the allocation of fair value of the assets acquired and liabilities assumed at the date of acquisition of Hague forpurposes of allocating the purchase price. The $12.8 million of acquired intangible assets was comprised of $1.1 million of trade names that are notsubject 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 Hague’s results of operations have been included in the Company’s consolidated financial statements from September 5, 2017, the date of acquisition.On August 8, 2016, the Company acquired 100 percent of the shares of Aquasana, a Texas-based water treatment company. With the addition ofAquasana, 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 incurredacquisition-related costs of approximately $1.2 million and recorded a holdback liability to satisfy any potential obligations of the former owners ofAquasana to pay any adjustment to the purchase price. As of the acquisition date, the fair value of the holdback liability was $1.7 million. TheCompany paid the full holdback 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 customerlists being amortized over ten years and $0.2 million of patents being amortized over five years. 37Table of Contents3. Acquisitions (continued) 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 Aquasana’s results of operations have been included in the Company’s financial statements from August 8, 2016, the date of acquisition.4. Restructuring and Impairment ExpensesOn March 21, 2018, the Company announced a move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. TheCompany recognized $6.7 million of restructuring and impairment expenses, comprised of $4.0 million of severance and compensation related costs,lease exit costs of $2.1 million and impairment charges related to long-lived assets totaling $0.6 million, as well as a corresponding $1.7 million taxbenefit related to the charges. As of December 31, 2018, the consolidation of the Renton facility to other U.S. facilities was complete. There were norestructuring and impairment expenses in 2017 or 2016.The following table presents an analysis of the Company’s restructuring reserve for the twelve months ended December 31, 2018: (dollars in millions) SeveranceCosts Lease ExitCosts Fixed AssetsImpairment Total Balance at January 1, 2018 $— $— $— $— Restructuring expense recognized 4.0 2.1 0.6 6.7 Cash payments and disposals (3.8) (0.8) (0.6) (5.2) Balance at December 31, 2018 $0.2 $1.3 $— $1.5 5. Statement of Cash FlowsSupplemental cash flow information is as follows: Years ended December 31 (dollars in millions) 2018 2017 2016 Net change in current assets and liabilities, net of acquisitions: Receivables $(54.6) $(75.8) $(15.1) Inventories (7.7) (37.5) (23.4) Other current assets 10.0 (9.0) (3.2) Trade payables 8.8 (5.1) 101.5 Accrued liabilities, including payroll and benefits (3.5) 12.2 6.0 Income taxes payable (refundable) 7.0 (12.6) 2.7 $(40.0) $(127.8) $68.5 38Table of Contents6. Inventories December 31 (dollars in millions) 2018 2017 Finished products $137.6 $140.4 Work in process 23.3 18.3 Raw materials 174.4 160.5 Inventories, at FIFO cost 335.3 319.2 LIFO reserve (30.6) (22.2) $304.7 $297.0 The Company recognized after-tax LIFO (income) expense of $(0.4) million, $(0.3) million and $0.3 million in 2018, 2017 and 2016, respectively.7. Property, Plant and Equipment December 31 (dollars in millions) 2018 2017 Land $11.2 $11.2 Buildings 323.3 329.9 Equipment 643.8 608.4 Software 118.5 110.6 1,096.8 1,060.1 Less accumulated depreciation and amortization 556.8 531.2 $540.0 $528.9 8. Goodwill and Other Intangible AssetsChanges in the carrying amount of goodwill during the years ended December 31, 2018 and 2017 consisted of the following: (dollars in millions) North America Rest of World Total 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 Currency translation adjustment (3.3) (0.4) (3.7) Balance at December 31, 2018 $453.9 $59.1 $513.0 The carrying amount of other intangible assets consisted of the following: 2018 2017 December 31 (dollars in millions) GrossCarryingAmount AccumulatedAmortization Net GrossCarryingAmount AccumulatedAmortization Net Amortizable intangible assets: Patents $3.7 $(3.3) $0.4 $3.7 $(2.7) $1.0 Customer lists 236.8 (108.2) 128.6 235.8 (93.3) 142.5 Total amortizable intangible assets 240.5 (111.5) 129.0 239.5 (96.0) 143.5 Indefinite-lived intangible assets: Trade names 164.1 — 164.1 165.2 — 165.2 Total intangible assets $404.6 $(111.5) $293.1 $404.7 $(96.0) $308.7 Amortization expenses of other intangible assets of $14.3 million, $13.7 million, and $13.4 million were recorded in 2018, 2017 and 2016,respectively. In the future, excluding the impact of any future acquisitions, the Company expects amortization expense of approximately $14.2 millionannually and the intangible assets will be amortized over a weighted average period of 12 years. 39Table of Contents8. Goodwill and Other Intangible Assets (continued) The Company concluded that no goodwill impairment existed at the time of the annual impairment tests which were performed in the fourth quarters of2018, 2017 and 2016. No impairments of other intangible assets were recorded in 2018, 2017 and 2016.9. Debt and Lease Commitments December 31 (dollars in millions) 2018 2017 Bank credit lines, average year-end interest rates of 3.4% for 2018 and 2.5% for 2017 $17.1 $15.9 Revolving credit agreement borrowings, average year-end interest rates of 3.5% for 2018and 2.5% for 2017 10.0 190.0 Commercial paper, average year-end interest rates of 2.7% for 2018 and 1.7% for 2017 74.3 77.0 Term notes with insurance companies, expiring 2029-2034, average year-end interest ratesof 3.3% for 2018 and 3.4% for 2017 120.0 122.7 Canadian term notes with insurance companies, expiring through 2018, average year-endinterest rates of 5.3% for 2017 — 4.8 221.4 410.4 Less long-term debt due within one year — 7.5 Long-term debt $221.4 $402.9 In December 2016, the Company completed a $500 million multi-year multi-currency revolving credit agreement with a group of nine banks, whichexpires on December 15, 2021. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions(including lender approval) are satisfied. Borrowings under the Company’s bank credit lines and commercial paper borrowings are supported by therevolving credit agreement. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings are classified as long-term debt at December 31, 2018 and 2017. 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 in2023 and 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 usedto pay down borrowings under the Company’s revolving credit facility.Scheduled maturities of long-term debt within each of the five years subsequent to December 31, 2018 are as follows: Years ending December 31 (dollars in millions) Amount 2019 $— 2020 6.8 2021 108.2 2022 6.8 2023 10.0 40Table of Contents9. Debt and Lease Commitments (continued) Future minimum payments under non-cancelable operating leases relating mostly to office, manufacturing and warehouse facilities total $69.1 millionand are due as follows: Years ending December 31 (dollars in millions) Amount 2019 $14.8 2020 11.4 2021 8.6 2022 7.5 2023 3.5 Thereafter 23.3 Rent expense, including payments under operating leases, was $24.0 million, $23.9 million and $22.4 million in 2018, 2017 and 2016, respectively.Cash interest paid by the Company was $8.6 million, $10.0 million and $7.2 million in 2018, 2017 and 2016, respectively. The Company capitalizedinterest expense of $0.4 million, $0.7 million and $0.2 million in 2018, 2017 and 2016, respectively.10. 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 parvalue, and 240 million shares of Common Stock $1 par value. The Common Stock has equal dividend rights with Class A Common Stock and isentitled, 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 convertibleto Common Stock on a one for one basis.There were 48,232 shares during 2018, 73,792 shares during 2017 and 60,045 shares during 2016, of Class A Common Stock converted into CommonStock. Regular dividends paid on the A. O. Smith Corporation Class A Common Stock and Common Stock amounted to $0.76, $0.56 and $0.48 pershare in 2018, 2017 and 2016, respectively.In July 2018, the Company’s Board of Directors approved adding 2.5 million shares of Common Stock to an existing discretionary share repurchaseauthority. In December 2018, the Company’s Board of Directors authorized adding an additional 5 million shares of Common Stock to thediscretionary share repurchase authority. Under the share repurchase program, the Company may purchase the Common Stock through a combinationof Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased andthe timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well asworking capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchaseauthorization remains effective until terminated by the Company’s Board of Directors which may occur at any time, subject to the parameters of anyRule 10b5-1 automatic trading plan that the Company may then have in effect. In 2018, the Company repurchased 3,797,800 shares at an average priceof $53.34 per share and at a total cost of $202.6 million. As of December 31, 2018, there were 6,075,253 shares remaining on the existing repurchaseauthorization. In 2017, the Company purchased 2,533,350 shares at a cost of $139.1 million. In 2016, the Company purchased 3,273,109 shares at acost of $135.2 million.At December 31, 2018, a total of 130,380 and 22,418,066 shares of Class A Common Stock and Common Stock, respectively, were held as treasurystock. 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 astreasury stock. 41Table of Contents10. Stockholders’ Equity (continued) Accumulated other comprehensive loss is as follows: December 31 (dollars in millions) 2018 2017 Cumulative foreign currency translation adjustments $(64.9) $(26.5) Unrealized net loss on cash flow derivative instruments less related income tax benefitprovision of $0.2 in 2018 and $0.6 in 2017 (0.7) (0.9) Pension liability less related income tax benefit of $180.1 in 2018 and $175.9 in 2017 (285.2) (272.1) $(350.8) $(299.5) Changes to accumulated other comprehensive loss by component are as follows: Years endedDecember 31, 2018 2017 Cumulative foreign currency translation Balance at beginning of period $(26.5) $(79.2) Other comprehensive gain (loss) before reclassifications (38.4) 52.7 Balance at end of period (64.9) (26.5) Unrealized net (loss) gain on cash flow derivatives Balance at beginning of period (0.9) 0.2 Other comprehensive gain (loss) before reclassifications 0.6 (0.5) Realized gains on derivatives reclassified to cost of products sold (net oftax provision of $0.2 and $0.4 in 2018 and 2017, respectively)(1) (0.4) (0.6) Balance at end of period (0.7) (0.9) Pension liability Balance at beginning of period (272.1) (284.2) Other comprehensive (loss) gain before reclassifications (27.0) 1.4 Amounts reclassified from accumulated other comprehensive loss (1) 13.9 10.7 Balance at end of period (285.2) (272.1) Total accumulated other comprehensive loss, end of period $(350.8) $(299.5) (1) Amounts reclassified from accumulated other comprehensive loss: Realized gains on derivatives reclassified to cost of products sold (0.6) (1.0) Tax provision 0.2 0.4 Reclassification net of tax $(0.4) $(0.6) Amortization of pension items: Actuarial losses $19.0 (2) $17.9 (2) Prior year service cost (0.5) (2) (0.4)(2) 18.5 17.5 Tax benefit (4.6) (6.8) Reclassification net of tax $13.9 $10.7 (2)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 12 “ Pensionsand Other Post-retirement Benefits” for additional details 42Table of Contents11. 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, 2018, was 2,490,644. Uponstock option exercise or share unit vesting, shares are issued from treasury stock.Total stock based compensation expense recognized in 2018, 2017 and 2016 was $10.1 million, $9.9 million and $9.4 million, respectively.Stock optionsThe stock options granted in 2018, 2017 and 2016 have three year pro rata vesting from the dates of grant. Stock options are issued at exercise pricesequal to the fair value of Common Stock on the date of grant. For active employees, all options granted in 2018, 2017 and 2016 expire ten years afterthe date of grant. Stock option compensation expense recognized in 2018, 2017 and 2016 was $4.4 million, $4.7 million and $4.5 million,respectively. Included in the stock option expense recognized in 2018, 2017 and 2016 is expense associated with the accelerated vesting of stockoption awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period.Changes in option shares, all of which are Common Stock, were as follows: Years Ended December 31 2018 2017 2016 Shares WeightedAvg.ExercisePrice Shares WeightedAvg.ExercisePrice Shares WeightedAvg.ExercisePrice Number of shares under options: Outstanding at beginning of year 2,263,126 27.73 2,664,333 21.69 2,653,558 18.03 Granted 373,220 61.62 358,150 50.16 553,370 32.25 Exercised (1) (176,302) 22.93 (752,603) 16.93 (531,933) 14.12 Forfeited (27,355) 47.95 (6,754) 37.46 (10,662) 37.23 Outstanding at end of year (2) 2,432,689 33.05 2,263,126 27.73 2,664,333 21.69 Exercisable at end of year (3) 1,665,184 24.52 1,387,259 20.48 1,602,651 16.12 (1)The total intrinsic value of options exercised in 2018, 2017 and 2016 was $6.8 million, $29.1 million and $13.5 million, respectively.(2)The weighted average remaining contractual life of options outstanding was 7 years at December 31, 2018, December 31, 2017, andDecember 31, 2016. The aggregate intrinsic value of options outstanding at December 31, 2018 was $33.0 million.(3)The weighted average remaining contractual life of options exercisable was 6 years at December 31, 2018, December 31, 2017 and, December 31,2016. The aggregate intrinsic value of options exercisable at December 31, 2018 was $31.1 million. Shares Weighted Avg.Exercise Price Nonvested options at beginning of year 875,867 39.21 Granted 373,220 61.62 Vested (454,653) 36.26 Forfeited (26,929) 47.96 Nonvested options at end of year 767,505 51.55 The weighted-average fair value per option at the date of grant during 2018, 2017 and 2016, using the Black-Scholes option-pricing model, was$14.80, $13.04 and $8.03, respectively. Assumptions were as follows: 43Table of Contents11. Stock Based Compensation (continued) 2018 2017 2016 Expected life (years) 5.7 5.7 5.8 Risk-free interest rate 2.9% 2.4% 1.7% Dividend yield 1.0% 1.0% 1.3% Expected volatility 22.1% 26.5% 27.7% The expected life of options for purposes of these models is based on historical exercise behaviors. The risk free interest rates for purposes of thesemodels are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividendyields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of theCommon Stock. The expected volatility for purposes of these models is based on the historical volatility of the Common Stock.Stock Appreciations Rights (SARs)Certain non-U.S.-based employees were granted SARs. Each SAR award grants the employee the right to receive cash equal to the excess of the shareprice of the Company’s Common Stock on the date that a participant exercises such right over the grant date value of the SAR. SARs granted havethree year pro rata vesting from the date of grant. SARs were issued at exercise prices equal to the fair value of the Company’s Common Stock on thedate of grant and expire ten years from the date of grant. The fair value and compensation expense for SARs are remeasured at each reporting periodusing the Black-Scholes option-pricing model, using assumptions similar to stock option awards. No SARs were granted in 2018, 2017 or 2016. As ofDecember 31, 2018, there were 16,170 SARs outstanding and exercisable. In 2017, there were 23,660 SARs outstanding and 15,774 were exercisable.In 2016, there were 24,940 SARs outstanding and 8,320 were exercisable. Stock based compensation expense attributable to SARS was not material in2018, 2017 and 2016.Restricted stock and share unitsParticipants may also be awarded shares of restricted stock or share units under the Plan. The Company granted 106,581, 107,853 and 160,465 shareunits under the plan in 2018, 2017 and 2016, respectively.The share units were valued at $6.6 million, $5.4 million and $5.2 million at the date of issuance in 2018, 2017 and 2016, respectively, and will berecognized as compensation expense ratably over the three-year vesting period; however, included in share based compensation is expense associatedwith the accelerated vesting of share unit awards for certain employees who either are retirement eligible or become retirement eligible during thevesting period. Compensation expense of $5.7 million, $5.2 million and $4.9 million was recognized in 2018, 2017 and 2016, respectively. Certainnon-U.S.-based employees receive the cash value of vested shares at the vesting date in lieu of shares.A summary of share unit activity under the plan is as follows: Number of Units Weighted-AverageGrant Date Value Outstanding at January 1, 2018 433,290 $34.96 Granted 106,581 61.70 Vested (145,105) 30.79 Forfeited (15,165) 43.44 Outstanding at December 31, 2018 379,601 42.93 44Table of Contents12. 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 earnedup to the date of sale. The Company also has two foreign pension plans, neither of which is material to the Company’s financial position.The Company has a defined contribution plan which matches 100 percent of the first one percent of contributions made by participating employeesand matches 50 percent of the next five percent of employee contributions. The Company also has defined contribution plans for certain hourlyemployees which provide for matching Company contributions.The Company also has a defined benefit plan for salaried employees and its non-union hourly workforce. In 2009, the Company announced U.S.employees hired after January 1, 2010, would not participate in the defined benefit plan, and benefit accruals for the majority of current salaried andhourly employees sunset on December 31, 2014. An additional Company contribution is 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 lifeinsurance benefits from retirement to age 65. Certain hourly employees retiring after January 1, 1996, are subject to a maximum annual benefit andsalaried employees hired after December 31, 1993, are not eligible for post-retirement medical benefits. 45Table of ContentsObligations 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) 2018 2017 2018 2017 Accumulated benefit obligation (ABO) at December 31 $833.0 $921.8 N/A N/A Change in projected benefit obligations (PBO) PBO at beginning of year $(922.7) $(895.8) $(7.6) $(6.6) Service cost (2.0) (1.8) (0.2) (0.1) Interest cost (28.9) (30.0) (0.3) (0.3) Participant contributions — — (0.1) (0.1) Plan amendments — — — — Actuarial gain (loss) including assumption changes 61.2 (54.3) 0.6 (1.1) Benefits paid 58.6 59.2 0.6 0.6 PBO at end of year $(833.8) $(922.7) $(7.0) $(7.6) Change in fair value of plan assets Plan assets at beginning of year $874.8 $787.0 $— $— Actual return on plan assets (39.3) 116.5 — — Contribution by the company 0.6 30.5 0.5 0.4 Participant contributions — — 0.1 0.1 Benefits paid (58.6) (59.2) (0.6) (0.5) Plan assets at end of year $777.5 $874.8 $— $— Funded status $(56.3) $(47.9) $(7.0) $(7.6) Amount recognized in the balance sheet Current liabilities $(7.1) $(0.5) $(0.5) $(0.3) Non-current liabilities (49.2) (47.4) (6.5) (7.3) Net pension liability at end of year $(56.3)* $(47.9)* $(7.0) $(7.6) Amounts recognized in accumulated other comprehensive loss before tax Net actuarial loss (gain) $468.9 $451.8 $(1.4) $(0.8) Prior service cost — (0.5) (2.2) (2.6) Total recognized in accumulated other comprehensive loss $468.9 $451.3 $(3.6) $(3.4) *In addition, the Company has a liability for a foreign pension plan of $0.2 million at December 31, 2018 and 2017. 46Table of Contents12. Pension and Other Post-retirement Benefits (continued) Pension Benefits Post-retirement Benefits Years ended December 31 (dollars in millions) 2018 2017 2016 2018 2017 2016 Net periodic benefit cost Service cost $2.0 $1.8 $1.8 $0.1 $0.1 $0.1 Interest cost 28.9 30.0 30.6 0.3 0.3 0.2 Expected return on plan assets (58.1) (58.4) (55.9) — — — Amortization of unrecognized: Net actuarial loss (gain) 19.0 17.9 17.7 — (0.1) (0.2) Prior service cost (0.5) (0.4) (1.1) (0.4) (0.4) (0.4) Defined-benefit plan income (8.7) (9.1) (6.9) $— $(0.1) $(0.3) Various U.S. defined contribution plans cost 12.2 12.0 11.6 $3.5 $2.9 $4.7 Other changes in plan assets and projected benefit obligation recognized in othercomprehensive loss Net actuarial loss (gain) $36.1 $(3.8) $29.9 $(0.6) $1.1 $0.2 Amortization of net actuarial (loss) gain (19.0) (17.9) (17.7) — 0.1 0.2 Prior service cost — — 0.6 — — — Amortization of prior service cost 0.5 0.5 1.1 0.4 0.4 0.4 Total recognized in other comprehensive loss 17.6 (21.2) 13.9 (0.2) 1.6 0.8 Total recognized in net periodic cost (benefit) and other comprehensive loss $8.9 $(30.3) $7.0 $(0.2) $1.5 $0.5 The estimated net actuarial loss and prior service cost for the pension plans that will be amortized from accumulated other comprehensive loss into netperiodic benefit cost during 2019 are $18.8 million and $(0.5) million, respectively. The estimated net actuarial loss and prior year service cost for thepost-retirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2019 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 astraight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan.The 2018 and 2017 after tax adjustments for additional minimum pension liability resulted in other comprehensive (loss) gain of ($13.1) million and$12.1 million, respectively.Actuarial assumptions used to determine benefit obligations at December 31 are as follows: Pension Benefits Post-retirement Benefits 2018 2017 2018 2017 Discount rate 4.32% 3.65% 4.46% 3.79% 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 2018 2017 2016 2018 2017 2016 Discount rate 3.65% 4.15% 4.40% 3.79% 4.40% 4.55% Expected long-term return on plan assets 7.15% 7.50% 7.50% n/a n/a n/a Rate of compensation increase 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 47Table of Contents12. 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 assetallocation and expected long-term rates of return of equity and bond indices. The Company also considered its pension plan’s historical ten-year and25-year compounded annualized returns of 8.9 percent and 8.5 percent, respectively.Assumed health care cost trend ratesAssumed health care cost trend rates as of December 31 are as follows: 2018 2017 Health care cost trend rate assumed for next year 6.00% 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 consolidatedfinancial statements.Plan AssetsThe Company’s pension plan weighted asset allocations as of December 31 by asset category are as follows: Asset Category 2018 2017 Equity securities 40% 45% Debt securities 48 43 Real estate 10 9 Private equity 2 2 Other — 1 100% 100% 48Table of Contents12. 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, 2018 and 2017 (dollars in millions): December 31, 2018 Asset Category Total Quoted Prices inActive Markets forIdentical Contracts(Level 1) Significant OtherObservableInputs (Level 2) Significant Non-observableInputs (Level 3) Short-term investments $14.4 $— $14.4 $— Equity securities Common stocks 125.6 125.6 — — Commingled equity funds 104.3 — 104.3 — Fixed income securities U.S. treasury securities 86.0 86.0 — — Other fixed income securities 185.8 — 185.8 — Commingled fixed income funds 92.0 — 92.0 — Other types of investments Mutual funds 73.6 — 73.6 — Real estate funds 80.4 — — 80.4 Private equity 13.2 — — 13.2 Total fair value of plan asset investments $775.3 $211.6 $470.1 $93.6 Non-investment plan assets 2.2 Total plan assets $777.5 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 49Table of Contents12. 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 ofthe Company’s plan assets are valued as follows: equity securities are valued using the closing stock price on a national securities exchange, whichreflects the last reported sales price on the last business day of the year; fixed income securities are valued using institutional bond quotes, which arebased on various market and industry inputs; mutual funds and real estate funds are valued using the net asset value of the fund, which is based on thefair value of the underlying securities; and private equity investments are valued at the estimated fair value at the previous quarter end, which is basedon the proportionate share 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, 2018and 2017 (dollars in millions): Short terminvestments Realestatefunds Privateequity Total 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 Actual return (loss) on plan assets: Relating to assets still held at the reporting date — 2.6 (0.3) 2.3 Relating to assets sold during the period — — (0.8) (0.8) Purchases, sales and settlements — — (6.6) (6.6) Balance at December 31, 2018 $— $80.4 $13.2 $93.6 The Company’s investment policies employ an approach whereby a diversified blend of equity and bond investments is used to maximize the long-term return of plan assets for a prudent level of risk. Equity investments are diversified across domestic and non-domestic stocks, as well as growth,value, and small to large capitalizations. Bond investments include corporate and government issues, with short-, mid- and long-term maturities, with afocus on investment grade when purchased. The Company’s target allocation to equity managers is between 30 to 60 percent with the remainderallocated primarily to bonds, real estate, private equity managers and cash. Investment and market risks are measured and monitored on an ongoingbasis through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies.The Company’s actual asset allocations are in line with target allocations. The Company regularly reviews its actual asset allocation and periodicallyrebalances its investments to the targeted allocation when considered appropriate.There was no Company stock included in plan assets at December 31, 2018.Cash FlowsThe Company was not required to and did not make any contributions in 2018. The Company is not required to make a contribution in 2019. 50Table of Contents12. 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 2019 $66.4 $0.5 2020 68.3 0.5 2021 59.0 0.5 2022 58.3 0.5 2023 57.8 0.5 2024 – 2028 285.1 2.3 13. Derivative instrumentsASC 815, Derivatives and Hedging, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishescriteria for designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument dependson whether it has been designated and qualifies as a part of a hedging relationship and, further, on the type of hedging relationship. For thosederivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon theexposure hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation.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 thoseexposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with nocredit loss anticipated for failure of the counterparties to perform.Cash Flow HedgesWith the exception of its net investment hedges, the Company designates that all of its hedging instruments are cash flow hedges. For derivativeinstruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that isattributable to a particular risk), gains or losses on the derivative instrument are reported as a component of other comprehensive loss, net of tax, andare reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedgedtransaction affects earnings.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 certainsubsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currencypurchases, sales and certain intercompany transactions in the normal course of business. Principal currencies for which the Company utilizes foreigncurrency forward contracts include the British pound, Canadian dollar, Euro and Mexican peso.Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded 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 beeffective. The majority of the amounts in accumulated other comprehensive loss for cash flow hedges are expected to be reclassified into earningswithin one year. 51Table of Contents13. 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) 2018 2017 Buy Sell Buy Sell British pound $— $1.0 $— $1.2 Canadian dollar — — — 48.1 Euro 32.0 — 29.3 — Mexican peso 27.8 — 16.3 — Total $59.8 $1.0 $45.6 $49.3 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 ofcertain raw material purchases, principally steel, with the objective of minimizing changes in cost due to market price fluctuations. The hedgingstrategy for achieving this objective is to purchase steel futures contracts on the New York Metals Exchange (NYMEX) and copper futures contracts onthe open market of the London Metals Exchange (LME) or over the counter contracts based on the LME.With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.The after-tax gains and losses of the contracts as of December 31, 2018 were recorded in accumulated other comprehensive loss and will be reclassifiedinto cost of products sold in the period in which the underlying transaction is recorded in earnings. The after-tax gains and losses on the contracts willbe reclassified within one year. Commodity hedges outstanding at December 31, 2018 total approximately 15,000 tons of steel.Net Investment HedgesThe Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certainnon-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For thederivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where theyoffset gains and losses recorded on the Company’s net investments in its non-U.S. subsidiaries. These hedges are determined to be effective. TheCompany recognized $7.4 million of after-tax gains associated with hedges of a net investment in non-U.S. subsidiaries in currency translationadjustment in other comprehensive loss in 2018. The contractual amount of the Company’s foreign currency forward contracts that are designated asnet investment hedges is $150.0 million as of December 31, 2018.The following tables present the impact of derivative contracts on the Company’s financial statements.Fair value of derivatives designated as hedging instruments under ASC 815: Fair Value December 31 (dollars in millions) Balance Sheet Location 2018 2017 Foreign currency contracts Other current assets $3.9 $0.2 Other non-current assets 5.1 — Accrued liabilities (0.6) (1.8) Commodities contracts Other current assets — 0.2 Accrued liabilities (0.9) — Total derivatives designated as hedging instruments $7.5 $(1.4) 52Table of Contents13. 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 losson derivative Location of gain (loss)reclassified fromaccumulated othercomprehensive loss intoearnings Amount of gain(loss) reclassifiedfrom accumulatedother comprehensiveloss into earnings 2018 2017 2018 2017 Foreign currency contracts $1.8 $ (1.1) Cost of products sold $ 0.3 $ 0.4 Commodities contracts (1.1) 0.5 Cost of products sold 0.3 0.6 $0.7 $(0.6) $0.6 $1.0 14. Income TaxesThe components of the provision (benefit) for income taxes consisted of the following: Years ended December 31 (dollars in millions) 2018 2017 2016 Current: Federal $ 60.1 $ 148.0 $ 71.6 State 15.6 9.4 14.5 International 38.6 43.8 34.9 Deferred: Federal (1.7) 23.5 11.0 State 1.5 5.8 5.2 International (0.5) (6.2) (1.2) $113.6 $224.3 $136.0 The provision for income taxes differs from the U.S. federal statutory rate due to the following items: Years ended December 31 2018 2017 2016 Provision at U.S. federal statutory rate 21.0% 35.0% 35.0% State taxes, net of federal benefit 2.4 1.9 2.8 International income tax rate differential - China (2.3) (6.5) (6.2) International income tax rate differential - other 1.1 0.1 0.3 U.S. manufacturing credit — (1.4) (1.5) Research tax credits (0.5) (0.3) (0.3) Excess tax benefit on stock compensation (0.4) (2.2) (1.1) Other (0.9) 0.8 0.4 20.4% 27.4% 29.4% U.S. Tax Cuts & Jobs Act (U.S. Tax Reform) — 15.7 — 20.4% 43.1% 29.4% 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 Reformreduced the U.S. corporate income tax rate to 21 percent commencing on January 1, 2018, implemented a territorial tax system and levied a one-timemandatory tax on undistributed earnings of foreign subsidiaries of U.S. companies. 53Table of Contents14. Income Taxes (continued) As a result of U.S. Tax Reform, the Company recorded income tax expense of $81.8 million in the fourth quarter of 2017. The income tax expenseresulting from U.S. Tax Reform was included in the provision for income taxes on the Company’s consolidated statement of earnings and consisted oftwo components: $83.5 million of income tax expense related to the one-time mandatory tax on undistributed foreign earnings and a $1.7 millionincome tax benefit resulting from the remeasurement of the Company’s U.S. deferred tax assets and liabilities based on the lower U.S. corporate incometax rate. As permitted under the SEC Staff Accounting Bulletin 118, the amounts recorded during 2017 were subject to revisions in 2018. TheCompany completed its accounting for the income tax effects of U.S. Tax Reform as of December 31, 2018 and determined that there was no materialadjustment necessary to the provisional amounts it recorded in 2017.Components of earnings before income taxes were as follows: Years ended December 31 (dollars in millions) 2018 2017 2016 U.S. $ 376.0 $ 329.9 $ 300.9 International 181.8 190.9 161.6 $557.8 $520.8 $462.5 Total income taxes paid by the Company amounted to $116.4 million, $131.1 million, and $117.4 million in 2018, 2017 and 2016, respectively.As of December 31, 2018, the Company has $28.9 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, 2018, $644.1 million of cash and cash equivalents and marketablesecurities were held 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) 2018 2017 Assets Liabilities Assets Liabilities Employee benefits $32.5 $— $30.4 $— Product liability and warranties 42.5 — 43.4 — Inventories — 0.6 — 2.0 Accounts receivable 18.3 — 16.5 — Property, plant and equipment — 36.3 — 31.1 Intangibles — 57.3 — 54.3 Environmental liabilities 2.1 — 2.4 — Undistributed foreign earnings — 28.9 — 38.6 Tax loss and credit carryovers 17.5 — 19.8 — All other 4.0 — 5.5 — Valuation allowance (13.1) — (15.0) — $103.8 $123.1 $103.0 $126.0 Net liability $19.3 $23.0 54Table of Contents14. 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 2018 2017 2018 2017 Beginning balance $ 19.8 $ 18.2 $ 15.0 $ 13.1 Additions — 1.6 — 1.9 Reductions (2.3) — (1.9) — Ending balance $17.5 $19.8 $13.1 $15.0 The Company has foreign net operating loss carryovers that expire in 2019 through 2026 and state and local net operating loss carryovers that expirebetween 2019 and 2035.A reconciliation of the beginning and ending amount of unrecognized benefits is as follows: (Dollars in millions) 2018 2017 Balance at January 1 $ 6.2 $ 4.2 Additions for tax positions of prior years 2.1 2.0 Balance at December 31 $8.3 $6.2 The amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0.8 million. The Company recognizespotential interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2018, there was animmaterial amount of interest and penalties accrued. The Company anticipates that there will not be a decrease in the total amount of unrecognized taxbenefits in 2019. The Company’s U.S. federal income tax returns and its U.S. state and local income tax returns are subject to audit for the years 2016-2018 and 2001-2018, respectively. The Company is subject to non-U.S. income tax audits for the years 2009-2018.15. 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 believesany environmental claims will not have a material effect on its financial position or results of operations.The Company is subject to various claims and pending lawsuits for product liability and other matters arising out of the conduct of the Company’sbusiness. With respect to product liability claims, the Company has self-insured a portion of its product liability loss exposure for many years. TheCompany has established reserves and has insurance coverage, which it believes are adequate to cover incurred claims. For the years endedDecember 31, 2018 and 2017, the Company had $125 million of product liability insurance for individual losses in excess of $7.5 million. TheCompany periodically reevaluates its exposure on claims and lawsuits and makes adjustments to its reserves as appropriate. The Company believes,based on current knowledge, consultation with counsel, adequate reserves and insurance coverage that the outcome of such claims and lawsuits willnot have a material adverse effect on the Company’s financial position, results of operations or cash flows. 55Table of Contents16. 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,Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers,tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our Rest of Worldsegment 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 inNote 1. Segment earnings, defined by the Company as earnings before interest, taxes, general corporate and corporate research and developmentexpenses, were used to measure the performance of the segments. Net Sales Earnings Years ended December 31 (dollars in millions) 2018 2017 2016 2018 2017 2016 North America(1) $ 2,044.7 $ 1,904.8 $ 1,743.2 $464.1 $428.6 $385.9 Rest of World 1,173.6 1,116.3 965.6 149.3 149.3 129.1 Inter-segment (30.4) (24.4) (22.9) — — — Total segments – sales, segment earnings $3,187.9 $2,996.7 $2,685.9 $613.4 $577.9 $515.0 Corporate expenses (47.2) (47.0) (45.2) Interest expense (8.4) (10.1) (7.3) Earnings before income taxes 557.8 520.8 462.5 Provision for income taxes(2) (113.6) (224.3) (136.0) Net earnings $444.2 $296.5 $326.5 (1) In 2018, the Company recognized $6.7 million of restructuring and impairment expenses in connection with the move of manufacturingoperations from our Renton, Washington facility to other U.S. facilities. For additional information, see Note 4 “Restructuring and ImpairmentExpenses.”(2) In 2017, the Company recorded a one-time charge of $81.8 million associated with U.S. Tax Reform, primarily related to the repatriation ofundistributed foreign earnings. For additional information, see Note 14 “Income Taxes.”In 2018, sales to the North America segment’s two largest customers were $425.3 million and $355.6 million which represented 13 percent and11 percent of the Company’s net sales, respectively. 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 of the Company’s net sales, respectively. In 2016, sales to the North America segment’stwo largest customers were $311.5 million and $280.8 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) 2018 2017 2016 2018 2017 2016 2018 2017 2016 North America $1,653.6 $1,592.6 $1,515.9 $45.5 $45.1 $42.9 $45.8 $38.5 $45.9 Rest of World 721.6 741.4 584.3 25.2 23.8 21.0 32.3 55.2 34.3 Corporate 696.3 863.4 790.8 1.2 1.2 1.2 7.1 0.5 0.5 Total $3,071.5 $3,197.4 $2,891.0 $71.9 $70.1 $65.1 $85.2 $94.2 $80.7 The majority of corporate assets consist of cash, cash equivalents, marketable securities and deferred income taxes. 56Table of Contents16. 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) 2018 2017 2016 2018 2017 2016 United States $ 327.3 $ 303.0 $ 292.4 United States $ 1,820.8 $ 1,698.1 $ 1,570.7 China 252.6 250.8 184.3 China 1,071.2 1,034.9 887.1 Canada 3.1 3.2 3.1 Canada 175.0 163.7 138.7 Other Foreign 42.9 47.1 48.4 Other Foreign 120.9 100.0 89.4 Total $625.9 $604.1 $528.2 Total $3,187.9 $2,996.7 $2,685.9 17. Quarterly Results of Operations (Unaudited) (dollars in millions, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2018 2017 2018 2017 2018 2017 2018 2017 Net sales $ 788.0 $ 740.0 $ 833.3 $ 738.2 $ 754.1 $ 749.9 $ 812.5 $ 768.6 Gross profit 321.5 300.9 341.0 304.2 306.0 305.0 337.0 322.3 Net earnings 98.8 87.7 114.5 92.4 104.6 93.7 126.3 22.7 Basic earnings per share 0.58 0.51 0.67 0.53 0.61 0.54 0.75 0.13 Diluted earnings per share 0.57 0.50 0.66 0.53 0.61 0.54 0.74 0.13 Common dividends declared 0.18 0.14 0.18 0.14 0.18 0.14 0.22 0.14 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 forthe year.In the first quarter of 2018, the Company recorded $6.7 million of restructuring and impairment expenses associated with a move of manufacturingoperations from its Renton, Washington facility to other U.S. facilities. These charges reduced after-tax earnings by $5.0 million or $0.03 per share. Inthe fourth quarter of 2017, the Company recorded a one-time charge 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. 57Table of ContentsITEM 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 disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) as ofthe end of the period covered by this report. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer have concluded that,as of the end of such period our disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis,information required to be disclosed by us in the reports that we file or submit under the Exchange Act, and that information is accumulated andcommunicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.Management Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rule 13a-15(f). Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated theeffectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, our management has concluded that, as ofDecember 31, 2018, 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 anyevaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements and the effectiveness ofinternal controls over financial reporting as of December 31, 2018 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 the Securities and Exchange Act) during the year ended December 31, 2018 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.ITEM 9B - OTHER INFORMATIONNone 58Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC 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, 2018, based on criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSOcriteria). In our opinion, A. O. Smith Corporation (the Company) maintained, in all material respects, effective internal control over financial reportingas of December 31, 2018, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theconsolidated balance sheets of A. O. Smith Corporation as of December 31, 2018 and 2017, 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, 2018, and the related notesand financial statement schedule listed in the index at Item 15(a) and our report dated February 15, 2019 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectivenessof internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations 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 obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testingand evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary 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 financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could havea material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPMilwaukee, WisconsinFebruary 15, 2019 59Table of ContentsPART IIIITEM 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 2019 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 Iof this Annual Report on Form 10-K under the caption “Executive Officers of the Company.”We have a separately designated Audit Committee on which Gene C. Wulf, Dr. Ilham Kadri, Mark D. Smith and Idelle K. Wolf serve, with Mr. Wulf, asChairperson. All members are independent under applicable SEC and New York Stock Exchange rules; the Board of Directors of the company hasconcluded that Ms. Wolf and Mr. Wulf are “audit committee financial experts” in accordance with SEC rules.We have adopted a Financial Code of Ethics applicable to our principal executive officer, principal financial officer and principal accounting officer.As a best practice, this code has been executed by key financial and accounting personnel as well. In addition, we have adopted a general code ofbusiness conduct for our directors, officers and all employees, which is known as the A. O. Smith Guiding Principles. The Financial Code of Ethics, theA. O. Smith Guiding Principles and other company corporate governance matters are available on our website at www.aosmith.com. We are notincluding the information contained on our website as a part of or incorporating it by reference into, this Form 10-K. We intend to disclose on thiswebsite any amendments to, or waivers from, the Financial Code of Ethics or the A. O. Smith Guiding Principles that are required to be disclosedpursuant to SEC rules. There have been no waivers of the Financial Code of Ethics or the A. O. Smith Guiding Principles. Stockholders may obtaincopies of any of these corporate governance documents free of charge by writing to the Corporate Secretary at the address on the cover page of thisForm 10-K.The information included under the heading “Compliance with Section 16(a) of the Securities Exchange Act” in our definitive Proxy Statement for the2019 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) isincorporated herein 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 2019 AnnualMeeting 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 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information included under the headings “Principal Stockholders” and “Security Ownership of Directors and Management” in our definitive ProxyStatement for the 2019 Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of theregistrant’s fiscal year) is incorporated herein by reference. 60Table of ContentsEquity Compensation Plan InformationThe following table provides information about our equity compensation plans as of December 31, 2018. Plan Category Number of securitiesto be 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 3,043,065 (1) $33.05 (2) 2,490,644 (3) Equity compensation plans not approved by securityholders — — — Total 3,043,065 $33.05 2,490,644 (1) Consists of 2,432,689 shares subject to stock options, 325,778 shares subject to employee share units and 284,598 shares subject to directorshare units.(2) Represents the weighted average exercise price of outstanding options and does not take into account outstanding share units.(3) Represents securities remaining available for issuance under the A. O. Smith Combined Incentive Compensation Plan. If any awards lapse, expire,terminate or are cancelled without issuance of shares, or shares are forfeited under any award, then such shares will become available for issuanceunder the 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 2019 Annual Meeting ofStockholders (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 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the 2019 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. 61Table of ContentsPART IVITEM 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 CompanyForm 10-K Page NumberThe following consolidated financial statements of A. O. Smith Corporation are included in Item 8: Consolidated Balance Sheets at December 31, 2018 and 2017 27 For each of the three years in the period ended December 31, 2018: - 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 - 572. 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 arrangement required tobe filed as an exhibit to this report on Form 10-K are listed as Exhibits 10(a) through 10(m) in the Index to Exhibits.Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act of 1934, as amended, we will, upon request and upon paymentof a reasonable fee not to exceed the rate at which such copies are available from the SEC, furnish copies to our security holders of any exhibitslisted in the Index to Exhibits. 62Table of ContentsINDEX TO EXHIBITS ExhibitNumber Description(3)(i) Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference toExhibit 3i(b) in the quarterly 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 Exhibit 3.1 in the current report onForm 8-K dated October 16, 2015.(4) (a) Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference toExhibit 3i(b) in the quarterly report on Form 10-Q for the quarter ended March 31, 2016. (b) Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith Corporation, A. O. Smith EnterprisesLtd., A. O. Smith International Holdings B.V., and the financial institutions and agents party thereto, incorporated by reference toExhibit 4.1 in the current report on Form 8-K dated December 12, 2012. (c) Amendment No. 1 dated as of December 15, 2016, to the Amended and Restated Credit Agreement, dated as of December 12, 2012,among A. O. Smith Corporation, A. O Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financialinstitutions and agents party thereto, incorporated by reference to Exhibit 4(c) in the annual report on Form 10-K for the fiscal yearended 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, copiesof these instruments.(10) Material Contracts (a) A. O. Smith Combined Incentive Compensation Plan, incorporated by reference to Exhibit A of the Proxy Statement filed onMarch 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 Exhibit 10(b) ofthe annual report on Form 10-K for the fiscal year ended December 31, 2008. (c) A. O. Smith Nonqualified Deferred Compensation Plan, adopted December 1, 2008, incorporated by reference to Exhibit 10(c) ofthe annual report on Form 10-K for the fiscal year ended December 31, 2008. (d) A. O. Smith Corporation Executive Supplemental Pension Plan, as amended January 1, 2009, incorporated by reference to Exhibit10(d) of the annual report on Form 10-K for the fiscal year ended December 31, 2008. (e) A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 4.5 of Form S-8 Registration Statement filed by the corporation on July 30, 2007 (Reg. No. 333-144950). (f) A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 10.1 of thequarterly report on Form 10-Q for the quarter ended March 31, 2012. (g) A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to Exhibit 10 of thequarterly report on Form 10-Q for the quarter ended March 31, 2016. (h) Offer Letter to Ajita G. Rajendra, dated September 20, 2004, incorporated by reference to Exhibit 10.M of the annual report onForm 10-K for the fiscal year ended December 31, 2007. 63Table of ContentsINDEX TO EXHIBITS (continued) ExhibitNumber Description (i) Amendment to Offer Letter to Ajita G. Rajendra dated December 10, 2015, incorporated by reference to Exhibit 10(i) of the annualreport on Form 10-K for the fiscal year ended December 31, 2015. (j) A. O. Smith Corporation Senior Leadership Severance Plan, incorporated by reference to Exhibit 10.1 of the quarterly report for Form10-Q for the quarter ended June 30, 2009. (k) Form of A. O. Smith Corporation Special Retention Award Agreement, incorporated by reference to Exhibit 10.1 of the quarterlyreport on Form 10-Q for the quarter ended March 31, 2011. (l) Stockholder Agreement dated as of December 9, 2008, between A. O. Smith Corporation and each Smith Investment Companystockholder who becomes a signatory thereto, incorporated by reference to Exhibit 10.3 of the current report on Form 8-K datedDecember 9, 2008. (m) Summary of Directors’ Compensation incorporated by reference to Exhibit 10.1 of the quarterly report on Form 10-Q for the quarterended June 30, 2018.(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 15, 2019.(31.2) Certification by the Executive Vice-President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, datedFebruary 15, 2019.(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, 2018 arefiled herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31,2018 and 2017, (ii) the Consolidated Statement of Earnings for the three years ended December 31, 2018, (iii) the ConsolidatedStatement of Comprehensive Earnings for the three years ended December 31, 2018, (iv) the Consolidated Statement of Cash Flowsfor the three years ended December 31, 2018, (v) the Consolidated Statement of Stockholders’ Equity for the three years endedDecember 31, 2018 and (vi) the Notes to Consolidated Financial Statements. 64Table 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 onbehalf of the undersigned, thereunto duly authorized. A. O. SMITH CORPORATIONDate: February 15, 2019 By: /s/ Ajita G. Rajendra Ajita G. Rajendra Executive Chairman of the Board of DirectorsPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February 15, 2019 by the followingpersons on behalf of the registrant and in the capacities and on the dates indicated. Name and Title SignatureAJITA G. RAJENDRA /s/ Ajita G. RajendraExecutive Chairman of the Board of Directors Ajita G. RajendraKEVIN J. WHEELER /s/ Kevin J. WheelerDirector Kevin J. WheelerPresident and Chief Executive 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. BrownWILLIAM 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 65Table of ContentsA. O. SMITH CORPORATIONSCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS(Dollars in millions)Years ended December 31, 2018, 2017 and 2016 Description Balance atBeginningof Year Charged toCosts andExpenses AcquisitionofBusinesses Deductions Balance atEnd ofYear 2018: Valuation allowance for trade and notes receivable $5.3 $1.5 $— $(0.4) $6.4 Valuation allowance for deferred tax assets 15.0 — — (1.9) 13.1 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 66Exhibit 21SUBSIDIARIES: The following lists all subsidiaries and affiliates of A. O. Smith Corporation. Name of Subsidiary Jurisdiction in Which IncorporatedAOS Holding Company DelawareA. O. Smith Water Treatment (North America),Inc. DelawareSICO Acquisition, LLC DelawareTakagi - A. O. Smith Tankless Water HeaterCompany 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) Environmental Products Co.,Ltd. ChinaA. 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 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 VietnamExhibit 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.Smith Combined Incentive Compensation Plan of our reports dated February 15, 2019, with respect to the consolidated financial statements andschedule of A. O. Smith Corporation, and the effectiveness of internal control over financial reporting of A. O. Smith Corporation, included in thisAnnual Report (Form 10-K) for the year ended December 31, 2018./s/ Ernst & Young LLPMilwaukee, WisconsinFebruary 15, 2019Exhibit 31.1CERTIFICATION OF CHIEF EXECUTIVE OFFICERI, Kevin J. Wheeler, 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) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors: a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 15, 2019 /s/ Kevin J. WheelerKevin J. WheelerPresident and Chief Executive OfficerExhibit 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) and15d-15(f)) for the registrant and have: a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared; b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors: a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: February 15, 2019/s/ John J. KitaJohn J. KitaExecutive Vice President and Chief Financial OfficerExhibit 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, 2018, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”). I, Kevin J. Wheeler, President and Chief Executive 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 15, 2019/s/ Kevin J. WheelerKevin J. WheelerPresident 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 Companyfor purposes of Section 18 of the Securities Exchange Act of 1934, as amended.A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the 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, 2018, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”). I, John J. Kita, Executive Vice President and Chief Financial Officer ofthe 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 15, 2019/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 Companyfor purposes of Section 18 of the Securities Exchange Act of 1934, as amended.A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company andfurnished to the Securities and Exchange Commission or its staff upon request.

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