10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020.

or

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

For the transition period from                      to                     

Commission File Number 1-475

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)

Delaware	39-0619790
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11270 West Park Place, Milwaukee, Wisconsin	53224-9508
(Address of principal executive office)	(Zip Code)

(414) 359-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock (par value $1.00 per share)	AOS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated Filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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

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

Class A Common Stock Outstanding as of April 30, 2020 – 26,044,733 shares

Common Stock Outstanding as of April 30, 2020 – 135,095,634 shares

Index

A. O. Smith Corporation

		Page
Part I.	FINANCIAL INFORMATION
	Condensed Consolidated Statements of Earnings - Three Months Ended March 31, 2020 and 2019		3
	Condensed Consolidated Statements of Comprehensive Earnings - Three Months Ended March 31, 2020 and 2019		3
	Condensed Consolidated Balance Sheets - March 31, 2020 and December 31, 2019		4
	Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 and 2019		5
	Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March 31, 2020 and 2019		6
	Notes to Condensed Consolidated Financial Statements - March 31, 2020		7-21
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22-26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		26
Item 4.	Controls and Procedures		27
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings		27
Item 1A.	Risk Factors		28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 6.	Exhibits		29
Index to Exhibits			30
Signatures			31

2

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions, except for per share data)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Net sales	$	636.9		$	748.2
Cost of products sold		397.4			455.4
Gross profit		239.5			292.8
Selling, general and administrative expenses		173.8			184.7
Interest expense		2.2			2.0
Other income		(4.2	)		(5.5	)
Earnings before provision for income taxes		67.7			111.6
Provision for income taxes		16.0			22.3
Net Earnings	$	51.7		$	89.3
Net Earnings Per Share of Common Stock	$	0.32		$	0.53
Diluted Net Earnings Per Share of Common Stock	$	0.32		$	0.53
Dividends Per Share of Common Stock	$	0.24		$	0.22

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(dollars in millions)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Net earnings	$	51.7		$	89.3
Other comprehensive (loss) earnings
Foreign currency translation adjustments		(18.0	)		15.9
Unrealized net gains (losses) on cash flow derivative instruments, less related income tax provision of $(0.1) in 2020 and $ - in 2019		0.3			(0.1	)
Adjustment to pension liability, less related income tax provision of $(1.2) in 2020 and $(1.0) in 2019		3.6			2.9
Comprehensive Earnings	$	37.6		$	108.0

See accompanying notes to unaudited condensed consolidated financial statements.    

3

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in millions)

	(unaudited) March 31, 2020			December 31, 2019
Assets
Current Assets
Cash and cash equivalents	$	416.1		$	374.0
Marketable securities		135.6			177.4
Receivables		524.0			589.5
Inventories		312.3			303.0
Other current assets		54.5			56.5
Total Current Assets		1,442.5			1,500.4
Property, plant and equipment		1,159.5			1,156.9
Less accumulated depreciation		(622.2	)		(611.5	)
Net property, plant and equipment		537.3			545.4
Goodwill		542.6			546.0
Other intangibles		333.1			338.4
Operating lease assets		44.9			46.9
Other assets		82.6			80.9
Total Assets	$	2,983.0		$	3,058.0
Liabilities
Current Liabilities
Trade payables	$	442.0		$	509.6
Accrued payroll and benefits		47.7			64.6
Accrued liabilities		159.7			143.7
Product warranties		42.9			41.8
Debt due within one year		6.8			6.8
Total Current Liabilities		699.1			766.5
Long-term debt		335.6			277.2
Pension liabilities		20.8			27.8
Long-term operating lease liabilities		37.3			38.7
Other liabilities		273.9			281.0
Total Liabilities		1,366.7			1,391.2
Stockholders’ Equity
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued 26,175,113 and 26,180,885		130.9			130.9
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,532,481 and 164,526,709		164.5			164.5
Capital in excess of par value		516.1			509.0
Retained earnings		2,336.1			2,323.4
Accumulated other comprehensive loss		(362.4	)		(348.3	)
Treasury stock at cost		(1,168.9	)		(1,112.7	)
Total Stockholders’ Equity		1,616.3			1,666.8
Total Liabilities and Stockholders’ Equity	$	2,983.0		$	3,058.0

See accompanying notes to unaudited condensed consolidated financial statements

4

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Operating Activities
Net earnings	$	51.7		$	89.3
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation and amortization		20.1			20.2
Stock based compensation expense		9.0			8.7
Net changes in operating assets and liabilities:
Current assets and liabilities		(15.1	)		(86.3	)
Noncurrent assets and liabilities		(11.6	)		(10.3	)
Cash Provided by Operating Activities		54.1			21.6
Investing Activities
Capital expenditures		(12.8	)		(20.9	)
Investments in marketable securities		(38.8	)		(48.5	)
Net proceeds from sale of marketable securities		78.0			147.2
Cash Provided by Investing Activities		26.4			77.8
Financing Activities
Long-term debt incurred		58.5			63.0
Common stock repurchases		(56.7	)		(45.6	)
Net payments from stock option activity		(1.2	)		(1.6	)
Dividends paid		(39.0	)		(37.1	)
Cash Used in Financing Activities		(38.4	)		(21.3	)
Net increase in cash and cash equivalents		42.1			78.1
Cash and cash equivalents - beginning of period		374.0			259.7
Cash and Cash Equivalents - End of Period	$	416.1		$	337.8

See accompanying notes to unaudited condensed consolidated financial statements

5

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in millions)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Class A Common Stock
Balance at the beginning of the year	$	130.9		$	131.0
Balance at end of period	$	130.9		$	131.0
Common Stock
Balance at the beginning of the year	$	164.5		$	164.5
Balance at end of period	$	164.5		$	164.5
Capital in Excess of Par Value
Balance at the beginning of the year	$	509.0		$	496.7
Issuance of share units		(6.5	)		(6.1	)
Vesting of share units		(1.6	)		(1.9	)
Stock based compensation expense		8.8			8.6
Exercises of stock options		(0.1	)		0.1
Stock incentives		6.5			6.1
Balance at end of period	$	516.1		$	503.5
Retained Earnings
Balance at the beginning of the year	$	2,323.4		$	2,102.8
Net earnings		51.7			89.3
Cash dividends on stock		(39.0	)		(37.1	)
Balance at end of period	$	2,336.1		$	2,155.0
Accumulated Other Comprehensive Loss (see Note 15)	$	(362.4	)	$	(332.1	)
Treasury Stock
Balance at the beginning of the year	$	(1,112.7	)	$	(827.2	)
Exercise of stock options		(1.1	)		(1.9	)
Shares repurchased		(56.7	)		(45.6	)
Vesting of share units		1.6			2.0
Balance at end of period	$	(1,168.9	)	$	(872.7	)
Total Stockholders’ Equity	$	1,616.3		$	1,749.2

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

6

A. O. SMITH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year. It is suggested the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 24, 2020.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) 740, Income Taxes (issued under Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes”). This amendment removes certain exceptions to the general principles of ASC 740, and clarifies and amends existing guidance to improve consistent application. The amendment requires adoption on January 1, 2021, with early adoption permitted. The Company does not expect that the adoption of ASU 2019-12 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In January 2017, the FASB amended ASC 350, Intangibles – Goodwill and Other (issued under ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted the amendment on January 1, 2020 and the adoption of ASU 2017-04 did not have an impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (issued under ASU 2016-13) which modifies the measurement of expected credit losses on certain financial instruments. The Company adopted 2016-13 on January 1, 2020 and the adoption did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

7

2. Revenue Recognition

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

The nature, timing and amount of revenue for a respective performance obligation are consistent for each customer. The Company measures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $65.2 million and $49.6 million at March 31, 2020 and December 31, 2019, respectively. The Company assesses the collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for doubtful accounts, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for doubtful accounts, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for doubtful accounts was $7.5 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.

Disaggregation of Net Sales

The Company is comprised of 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 World segment also manufactures and markets in-home air purification products in China.

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

8

2. Revenue Recognition (continued)

The North America segment major product lines are defined as the following:

Water heaters The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes and small businesses. The Company sells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than 1,300 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the Company’s water heater sales in the North America segment is derived from the replacement of existing products.

Boilers The Company’s boilers are closed loop water heating systems used primarily for space heating or hydronic heating. The Company’s boilers are primarily used in applications in commercial settings for hospitals, schools, hotels and other large commercial buildings while residential boilers are used in homes, apartments and condominiums. The Company’s boiler distribution channel is comprised primarily of manufacturer representative firms, with the remainder of our boilers distributed through wholesale channels. The Company’s boiler sales in the North America segment are derived from a combination of replacement of existing products and new construction.

Water treatment products The Company’s water treatment products range from point-of-entry water softeners, solutions for problem well water, and whole-home water filtration products to on-the-go filtration bottles and point-of-use carbon and reverse osmosis products. Typical applications for the Company’s water treatment products include residences, restaurants, hotels and offices. The Company sells water treatment products through its wholesale and retail distribution channels, similar to water heater products and related parts. The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through internet sales channels. A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.

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

9

2. Revenue Recognition (continued)

(dollars in millions)

	Three Months Ended March 31,
	2020			2019
North America
Water heaters and related parts	$	447.8		$	455.7
Boilers and related parts		41.5			42.6
Water treatment products(1)		43.6			23.5
Total North America		532.9			521.8
Rest of World
China	$	91.0		$	213.0
All other Rest of World		19.2			19.1
Total Rest of World		110.2			232.1
Inter-segment sales		(6.2	)		(5.7	)
Total Net Sales	$	636.9		$	748.2

(1) Includes the results of Water-Right, Inc. and its affiliated entities (Water-Right) from April 8, 2019, the date of acquisition

3. Acquisitions

On April 8, 2019, the Company acquired 100 percent of the shares of Water-Right, a Wisconsin-based water treatment company. With the addition of Water-Right, the Company grew its North America water treatment platform. Water-Right is included in the Company’s North America segment for reporting purposes.

The Company paid an aggregate cash purchase price of $107.0 million, net of cash acquired. In addition, the Company established a $4.0 million escrow to satisfy any potential obligations of the former owners of Water-Right, should they arise.

The following table summarizes the allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition of Water-Right for purposes of allocating the purchase price. Significant assumptions used to estimate the fair value of intangible assets acquired include discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates, attrition rates and royalty rates. The $60.4 million of acquired identifiable intangible assets was comprised of the following: $40.2 million of customer relationships being amortized over 20 years, $19.0 million of trademarks not subject to amortization, and $1.2 million of non-compete agreements being amortized over 7.5 years.

April 8, 2019 (dollars in millions)
Current assets, net of cash acquired	$	9.7
Property, plant and equipment		8.6
Intangible assets		60.4
Goodwill		31.0
Total assets acquired		109.7
Current liabilities		(2.7	)
Net assets acquired	$	107.0

10

3. Acquisitions (continued)

As required under ASC 805 Business Combinations, Water-Right’s results of operations have been included in the Company’s consolidated financial statements from April 8, 2019, the date of acquisition.

4. Leases

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

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

Supplemental balance sheet information related to leases was as follows:

(dollars in millions)

	March 31, 2020			December 31, 2019
Liabilities
Short term: Accrued liabilities	$	11.5		$	12.0
Long term: Operating lease liabilities		37.3			38.7
Total operating lease liabilities	$	48.8		$	50.7
Less: Rent incentives and deferrals		(3.9	)		(3.8	)
Assets
Operating lease assets	$	44.9		$	46.9

11

4. Leases (continued)

Lease Term and Discount Rate	March 31, 2020
Weighted-average remaining lease term		10 years
Weighted-average discount rate		3.95%

The components of lease expense were as follows:

(dollars in millions)
		Three months ended March 31,
Lease Expense	Classification	2020(1)		2019(2)
Operating lease expense	Cost of products sold	$	0.7	$	0.7
	Selling, general and administrative expenses		4.0		4.9

(1) 2020 includes short-term and variable lease expenses of $0.4 million and $0.4 million, respectively.

(2) 2019 includes short-term and variable lease expenses of $0.4 million and $0.8 million, respectively.

Maturities of lease liabilities were as follows:

(dollars in millions)
	March 31, 2020
2020	$	10.2
2021		10.7
2022		9.2
2023		4.9
2024		3.8
After 2024		22.7
Total lease payments		61.5
Less: imputed interest		(12.7	)
Present value of operating lease liabilities	$	48.8

5. Inventories

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

(dollars in millions)
	March 31, 2020			December 31, 2019
Finished products	$	142.8		$	136.8
Work in process		21.6			21.7
Raw materials		171.7			168.3
Inventories, at FIFO cost		336.1			326.8
LIFO reserve		(23.8	)		(23.8	)
Net inventory	$	312.3		$	303.0

12

6. Product Warranties

The Company offers warranties on the sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims. The following table presents the Company’s warranty liability activity.

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Balance at January 1	$	134.3		$	139.4
Expense		13.5			9.4
Claims settled		(12.5	)		(12.6	)
Balance at March 31	$	135.3		$	136.2

7. Long-Term Debt

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

Borrowings under bank credit lines and commercial paper borrowings are supported by the $500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at March 31, 2020. At its option, the Company either maintains cash balances or pays fees for bank credit and services.

8. Earnings per Share of Common Stock

The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:

	Three Months Ended March 31,
	2020		2019
Denominator for basic earnings per share - weighted average shares		161,871,788		167,803,794
Effect of dilutive stock options and share units		1,025,817		1,292,348
Denominator for diluted earnings per share		162,897,605		169,096,142

13

9. Stock Based Compensation

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at March 31, 2020 was 951,461. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in the three months ended March 31, 2020 and 2019 was $9.0 million and $8.7 million, respectively.

Stock Options

The stock options granted in the three months ended March 31, 2020 and 2019 have three year pro rata vesting from the date of grant. Stock options are issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted in 2020 and 2019 expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period; however, included in stock option expense for the three months ended March 31, 2020 and 2019 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Stock based compensation expense attributable to stock options in the three months ended March 31, 2020 and 2019 was $4.5 million and $4.3 million, respectively.

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, 2020:

	Weighted-Avg. Per Share Exercise Price		Number of Options			Average Remaining Contractual Life		Aggregate Intrinsic Value (dollars in millions)
Outstanding at January 1, 2020	$	37.64		2,728,350
Granted		42.39		784,300
Exercised		15.04		(25,147	)
Forfeited		48.95		(56,261	)
Outstanding at March 31, 2020		38.71		3,431,242			7 years	$	19.1
Exercisable at March 31, 2020		34.25		2,162,932			5 years	$	19.1

The weighted-average fair value per option at the date of grant during the three months ended March 31, 2020 and 2019 using the Black-Scholes option-pricing model was $8.15 and $10.83, respectively. Assumptions were as follows:

	Three Months Ended March 31,
	2020			2019
Expected life (years)		5.7			5.6
Risk-free interest rate		1.6	%		2.7	%
Dividend yield		2.1	%		1.6	%
Expected volatility		23.6	%		22.8	%

14

9. Stock Based Compensation (continued)

The expected lives of options for purposes of these models are based on historical exercise behavior. The risk-free interest rates for purposes of these models are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models are based on the historical volatility of the Common Stock.

Restricted Stock and Share Units

Participants may also be awarded shares of restricted stock or share units under the Plan. Share units vest three years after the date of grant. The Company granted 169,407 and 136,647 share units under the plan in the three months ended March 31, 2020 and 2019, respectively. The share units were valued at $7.2 million and $6.8 million at the date of issuance in 2020 and 2019, respectively, based on the price of the Company’s Common Stock at the date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three months ended March 31, 2020 and 2019 was expense associated with accelerated vesting of share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of $4.5 million and $4.4 million was recognized in the three months ended March 31, 2020 and 2019, respectively. Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

A summary of share unit activity under the plan is as follows for the three months ended March 31, 2020:

	Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2020		366,102		$	49.92
Granted		169,407			42.39
Vested		(100,735	)		49.21
Forfeited		(7,557	)		53.96
Issued and unvested at March 31, 2020		427,217			46.94

15

10. Pensions

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

	Three Months Ended March 31,
	2020			2019
Service cost	$	0.4		$	0.4
Interest cost		5.7			7.9
Expected return on plan assets		(13.0	)		(14.3	)
Amortization of unrecognized loss		4.9			4.0
Amortization of prior service cost		(0.1	)		(0.1	)
Defined benefit plan income	$	(2.1	)	$	(2.1	)

The service cost component of net periodic benefit cost is presented within cost of products sold and selling, general and administrative expenses within the condensed consolidated statements of earnings while the other components of pension income are reflected in other income. The Company was not required to and did not make a contribution to its U.S. pension plan in 2019. The Company is not required to make a contribution in 2020.

11. Segment Results

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

The following table presents the Company’s segment results:

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Net sales
North America	$	532.9		$	521.8
Rest of World		110.2			232.1
Inter-segment		(6.2	)		(5.7	)
	$	636.9		$	748.2
Segment earnings (losses)
North America	$	127.1		$	116.0
Rest of World		(42.2	)		12.3
		84.9			128.3
Corporate expense		(15.0	)		(14.7	)
Interest expense		(2.2	)		(2.0	)
Earnings before income taxes		67.7			111.6
Provision for income taxes		16.0			22.3
Net earnings	$	51.7		$	89.3

16

12. Fair Value Measurements

ASC 820, Fair Value Measurements, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following table presents assets measured at fair value on a recurring basis.

(dollars in millions)
Fair Value Measurement Using	March 31, 2020		December 31, 2019
Quoted prices in active markets for identical assets (Level 1)	$	135.6	$	177.4
Significant other observable inputs (Level 2)		1.0		6.9

Items measured at fair value were comprised of the Company’s marketable securities (Level 1) and derivative instruments (Level 2). There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis during the three months ended March 31, 2020.

13. Derivative Instruments

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

Cash Flow Hedges

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

Foreign Currency Forward Contracts

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

17

13. Derivative Instruments (continued)

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the consolidated statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective. The majority of the amounts in accumulated other comprehensive loss for cash flow hedges are expected to be reclassified into earnings within one year. The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts that are designated as cash flow hedges.

(dollars in millions)

	March 31, 2020				December 31, 2019
	Buy		Sell		Buy		Sell
British pound	$	—	$	0.9	$	—	$	1.3
Canadian dollar		—		59.8		—		49.7
Euro		27.1		—		36.0		—
Mexican peso		23.4		—		18.6		—
Total	$	50.5	$	60.7	$	54.6	$	51.0

Commodity Futures Contracts

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

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

The after-tax gains and losses of the contracts as of March 31, 2020 were recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in the period in which the underlying transaction is recorded in earnings. The after-tax gains and losses on the contracts will be reclassified within one year.

Net Investment Hedges

The Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its non-U.S. subsidiaries. These hedges are determined to be effective. The Company recognized $0.8 million and $1.3 million of after-tax gains associated with hedges of a net investment in non-U.S. subsidiaries in currency translation adjustment in other comprehensive income in the three months ended March 31, 2020 and 2019, respectively. The contractual amount of the Company’s foreign currency forward contracts that are designated as net investment hedges is $50.0 million as of March 31, 2020.

18

13. Derivative Instruments (continued)

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

Fair value of derivatives designated as hedging instruments under ASC 815:
(dollars in millions)
	Balance Sheet Location	March 31, 2020			December 31, 2019
Foreign currency contracts	Other current assets	$	4.8		$	8.4
	Accrued liabilities		(3.6	)		(1.5	)
Commodities contracts	Accrued liabilities		(0.2	)		—
Total derivatives designated as hedging instruments		$	1.0		$	6.9

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

Three Months Ended March 31 (dollars in millions):

Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive loss on derivatives						Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings	Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings
	2020			2019				2020		2019
Foreign currency contracts	$	1.4		$	0.1		Cost of products sold	$	0.8	$	—
Commodities contracts		(0.2	)		(0.2	)	Cost of products sold		—		—
	$	1.2		$	(0.1	)		$	0.8	$	—

14. Income Taxes

The effective income tax rate for the three months ended March 31, 2020 was 23.6 percent compared to 20.0 percent for the three months ended March 31, 2019. The higher effective income tax rate for the three months ended March 31, 2020 compared to the effective income tax rate for the three months ended March 31, 2019 was primarily due to a change in geographic earnings mix.

As of March 31, 2020, the Company had $9.7 million of unrecognized tax benefits of which $0.8 million would affect its effective income tax rate if recognized. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company’s U.S. federal income tax returns for 2016-2020 are subject to audit. The Company is subject to state and local income tax audits for tax years 2002-2020. The Company is subject to non-U.S. income tax examinations for years 2014-2020.

19

15. Changes in Accumulated Other Comprehensive Loss by Component

Changes to accumulated other comprehensive loss by component are as follows:

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Cumulative foreign currency translation
Balance at beginning of period	$	(66.2	)	$	(64.9	)
Other comprehensive (loss) income before reclassifications		(18.0	)		15.9
Balance at end of period		(84.2	)		(49.0	)
Unrealized net gain (loss) on cash flow derivatives
Balance at beginning of period		0.2			(0.7	)
Other comprehensive loss before reclassifications		0.9			(0.1	)
Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $0.2 and $- in 2020 and 2019, respectively)		(0.6	)		—
Balance at end of period		0.5			(0.8	)
Pension liability
Balance at beginning of period		(282.3	)		(285.2	)
Amounts reclassified from accumulated other comprehensive loss:(1)		3.6			2.9
Balance at end of period		(278.7	)		(282.3	)
Accumulated other comprehensive loss, end of period	$	(362.4	)	$	(332.1	)
(1)  Amortization of pension items:
Actuarial losses	$	4.9	(2)	$	4.0	(2)
Prior year service cost		(0.1	)(2)		(0.1	)(2)
		4.8			3.9
Income tax benefit		(1.2	)		(1.0	)
Reclassification net of income tax benefit	$	3.6		$	2.9

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

20

16. Commitments and Contingencies

The Company maintains a commercial relationship with a supply-chain service provider (the Provider) in connection with the Company’s business in China. In this capacity, the Provider offers order-entry, warehousing and logistics support. The Provider also offers asset-backed financing to certain of the Company’s distributors in China to facilitate their working capital needs. To facilitate its financing support business, the Provider has collateralized lending facilities in place with multiple Chinese banks under which the Company has agreed to repurchase inventory if both requested by the banks and certain defined conditions are met, primarily related to the aging of the distributors’ notes.

The Provider is required to indemnify the Company for any losses the Company would incur in the event of an inventory repurchase under these arrangements. Potential losses under the repurchase arrangements represent the difference between the repurchase price and net proceeds from the resale of product plus costs incurred in the process, less related distributor rebates.

Before considering any reduction of distributor rebate accruals of $9.1 million and $14.1 million as of March 31, 2020 and December 31, 2019, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $17.0 million and $23.1 million as of March 31, 2020 and December 31, 2019, respectively. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of March 31, 2020 and December 31, 2019.

21

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

OVERVIEW

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

In January 2020, an outbreak of a novel coronavirus (COVID-19) surfaced in Wuhan, China. As a result of the outbreak, the Chinese government required businesses to close and restricted certain travel within the country. In cooperation with the government authorities, our operations in China closed for approximately four weeks. As of the date of this filing, our operations in China have resumed but at below normal levels. In March 2020, COVID-19 was declared a global pandemic and we saw pressure in our other end markets worldwide. Through the date of this filing, our global manufacturing operations of essential water heating and water treatment products continue with minimal operating disruption. We shifted water heater production from Mexico to the U.S. in the short-term to minimize disruption due to the temporary closure of our Juarez, Mexico plant. As a result of the COVID-19 pandemic and in support of continuing our manufacturing efforts, we have undertaken numerous and meaningful steps to protect our employees, suppliers, and customers. These important steps, which in certain cases reduce efficiency, include making plant accommodations and reconfigurations to maintain social distancing, mask availability to all employees, during deep cleanings of our facilities and encouraging employees to work remotely where possible, among others. As we receive guidance from governmental authorities, we adjust our safety measures to meet or exceed those guidelines. The majority of our customers in the U.S. are also deemed essential under Cybersecurity and Infrastructure Security Agency (CISA) guidance and are operating their businesses under varying state and local governmental guidance.

Our global supply chain management team continues to monitor and manage our ability to operate effectively in response to various and differing shelter-in-place orders by countries and states where we and our suppliers operate. To date, we have not seen any meaningful disruptions to our supply chain. Ongoing communications with our suppliers to identify and mitigate risk of potential disruptions and to manage inventory levels continue.

While we believe our balance sheet and capital position are strong, proactive management of discretionary spending and cost structure will continue. In addition, the members of our Board of Directors have voluntarily reduced the cash component of their board compensation by 25 percent and our chairman and chief executive officer (CEO) has voluntarily reduced his base salary by 25 percent. Our CEO’s staff, which includes our other named executive officers, have also volunteered a 15 percent reduction in base salary. We also continue to focus on right-sizing our cost structure in China through headcount reductions, store closures, cuts in advertising and other cost saving measures.

We estimate that 85 percent of our water heater and boiler units sold in the U.S. relate to replacement business. While we expect that our replacement business in both water heating and boilers will provide a buffer in any economic downturn resulting from COVID-19 in a similar manner to what we have seen historically, the impacts of the pandemic on consumer spending are difficult to predict.

We believe that the current environment does not allow for the forecast of performance with reasonable precision, and as a result we suspended our 2020 full year outlook. As the severity and duration of the disruption and pace of recovery in our end markets become clearer, we will look to return to our practice of providing a current year outlook.

22

RESULTS OF OPERATIONS

FIRST THREE MONTHS OF 2020 COMPARED TO 2019

Sales in the first quarter of 2020 were $637 million, approximately 15 percent lower than sales of $748 million in the first quarter of 2019. Our lower sales in the first quarter of 2020 compared to the same period last year were primarily due to a 57 percent decline in sales in China, which was primarily driven by COVID-19 pandemic–related weak consumer demand. The decreased demand in China more than offset higher water treatment volumes in North America, including incremental sales of $16 million from our Water-Right, Inc. (Water-Right) acquisition, which we completed in April 2019.

First quarter gross profit margin of 37.6 percent in 2020 declined from a gross profit margin of 39.1 percent in the first quarter of 2019. The lower gross profit margin was primarily due to lower sales volumes in China.

Selling, general, and administrative (SG&A) expenses in the first quarter of 2020 were $173.8 million or $10.9 million lower than SG&A expenses of $184.7 million in the first quarter of 2019. The decrease in SG&A expenses in 2020 was primarily due to lower selling, advertising, and engineering expenses in China as a result of reduced sales volumes.

Interest expense in the first quarter of 2020 was $2.2 million compared to $2.0 million in the same period last year. Higher debt levels in 2020 were partially offset by lower interest rates.

Other income was $4.2 million in the first quarter of 2020, down from $5.5 million in the same period last year. The decrease in other income was primarily due to lower interest income.

Our pension costs and credits are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service. We consider current market conditions, including changes in interest rates, in making these assumptions. Our assumption for the expected rate of return on plan assets is 6.75 percent in 2020 compared to 7.15 percent in 2019. The discount rate used to determine net periodic pension costs decreased to 3.18 percent in 2020 from 4.32 percent in 2019. Pension income for the first quarter of 2020 and 2019 was $2.1 million in each period. The service cost component of our pension income is reflected in cost of products sold and SG&A expenses. All other components of our pension income are reflected in other income.

Our effective income tax rate for the first quarter of 2020 was 23.6 percent compared to 20.0 percent in the same period last year. Our effective income tax rate in the first quarter of 2020 was higher than the effective income tax rate in the first quarter of 2019, primarily due to a change in geographic earnings mix.

North America

Sales in our North America segment were $533 million in the first quarter of 2020, $11 million higher than sales of $522 million in the first quarter of 2019. The higher sales in the first quarter of 2020 were primarily due to incremental sales of $16 million from Water-Right, as well as organic growth of approximately 17 percent in our North America water treatment products. Higher water heater volumes were partially offset by a water heater sales mix composed of more electric models which have a lower selling price and lower contractual formula pricing associated with a portion of water heater sales based on lower steel costs.

North America segment earnings were $127.1 million in the first quarter of 2020, which was higher than segment earnings of $116.0 million in the same period of 2019. Segment margin was 23.9 percent in the first quarter of 2020 compared to 22.2 percent in the first quarter of 2019. The improvement in segment

23

earnings and margin compared to the prior period was driven by lower steel costs, and improvement in the profitability of water treatment sales, including incremental profit from Water-Right. These favorable impacts were partially offset by the mix toward electric water heaters and lower contractual formula pricing.

Rest of World

Sales in the Rest of World segment were $110 million in the first quarter of 2020 or $122 million lower than sales of $232 million in the first quarter of 2019. Sales in China decreased 57 percent in U.S. dollar terms and 56 percent in local currency terms, primarily due to COVID-19 pandemic related weak consumer demand as the Chinese economy was essentially closed and mobility was restricted for the majority of the first quarter of 2020. China channel inventory levels declined slightly in the first quarter of 2020 from the levels at the end of 2019.

Rest of World segment losses were $42.2 million in the first quarter of 2020 compared to earnings of $12.3 million in the first quarter of 2019. The unfavorable impact from lower China sales and a higher mix of mid-price products, which have lower margins compared to higher priced products, was partially offset by the benefits from lower SG&A expenses in that region. As a result of these factors, the segment margin in the first quarter of 2020 was negative compared with 5.3 percent in the same quarter of 2019.

Outlook

We believe that the current environment does not allow for the forecast of performance with reasonable precision, and as a result we suspended our 2020 full year outlook. As the depth and duration of the disruption and pace of recovery in our end markets become clearer, we will look to return to our practice of providing a current year outlook.

Liquidity & Capital Resources

Working capital of $743.4 million at March 31, 2020 was $9.5 million higher than at December 31, 2019, as a result of lower accounts payable balances which were partially offset by lower accounts receivable balances, primarily in China. As of March 31, 2020, approximately $295 million of the $551.7 million of cash, cash equivalents and marketable securities was held in local currency in China. Through the first four months of 2020, we repatriated $125 million to the U.S.

Cash provided by operations in the first quarter of 2020 was $54.1 million compared with $21.6 million provided during the same period last year. Lower earnings which were more than offset by lower working capital investment in the current period resulted in higher cash flow from operations. We believe the current environment is not conducive to reasonably forecast our cash flow for the full year 2020. We continue to monitor developments on an on-going basis and have taken proactive measures to focus on cash, manage working capital and reduce costs.

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

We have a $500 million multi-currency credit facility with a group of nine banks, which expires in December 2021. The facility has an accordion provision, which allows us to increase it up to $700 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of March 31, 2020. Our total

24

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

The facility backs up commercial paper and credit line borrowings. As a result of the long-term nature of this facility, our commercial paper and credit line borrowings, as well as drawings under the facility, are classified as long-term debt. At March 31, 2020, we had available borrowing capacity of $270.8 million under this facility. As of April 30, 2020, we had liquidity of approximately $850 million consisting of cash, cash equivalents and marketable securities, and undrawn borrowing capacity on our credit facility. We believe the combination of cash, available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future.

Our pension plan continues to meet all funding requirements under ERISA regulations. We are not required to make a contribution and we do not plan to make any voluntary contributions to the plan in 2020.

In the second quarter of 2019, our Board of Directors approved adding three million shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, our common stock may be purchased through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The stock repurchase authorization remains effective until terminated by our Board of Directors, which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. During the first quarter of 2020, we repurchased 1,348,391 shares of our stock at a total cost of $56.7 million. At March 31, 2020, we had 1,613,824 million shares remaining on the board share repurchase authority. Due to the uncertainty surrounding the impact of the global COVID-19 pandemic, we suspended our share repurchases on March 18, 2020.

On April 14, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.24 per share on our Common Stock and Class A common stock. The five-year compound annual growth rate of our dividend is approximately 20 percent. The dividend is payable on May 15, 2020 to shareholders of record on April 30, 2020.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2019. We believe that at March 31, 2020, there has been no material change to this information.

25

Recent Accounting Pronouncements

Refer to Recent Accounting Pronouncements in Note 1 – Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information.

Forward Looking Statements

This filing contains statements that the company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: negative impacts to the company’s business, including demand for its products, operations and work-force dislocation and disruption, supply chain disruption and liquidity as a result of the severity and duration of the COVID-19 pandemic; a failure to recover or a further weakening of the Chinese economy and/ or a failure to recover or a further decline in the growth rate of consumer spending or housing sales in China; negative impact to the company’s businesses from international tariffs and trade disputes; potential weakening in the high efficiency boiler segment in the U.S.; significant volatility in raw material availability and prices; inability of the company to implement or maintain pricing actions; a failure to recover or further weakening in U.S. residential or commercial construction or instability in the company’s replacement markets; foreign currency fluctuations; the company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the company’s businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; and adverse developments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this filing are made only as of the date of this filing, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As is more fully described in our Annual Report on Form 10-K for the year ended December 31, 2019, we are exposed to various types of market risks, including currency and certain commodity risks. Our quantitative and qualitative disclosures about market risk have not materially changed since that report was filed. We monitor our currency and commodity risks on a continuous basis and generally enter into forward and futures contracts to minimize these exposures. The majority of the contracts are for periods of less than one year. Our Company does not engage in speculation in our derivative strategies. It is important to note that gains and losses from our forward and futures contract activities are offset by changes in the underlying costs of the transactions being hedged.

26

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon this evaluation of these disclosure controls and procedures, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of March 31, 2020 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On May 28, 2019, a putative securities class action lawsuit was filed in the U.S. District Court for the Eastern District of Wisconsin against the Company and certain of its current or former officers. Subsequently, on November 22, 2019, a consolidated amended complaint was filed by the lead plaintiff. This action, now captioned as City of Birmingham Retirement and Relief System v. A. O. Smith Corporation, et al., asserts securities fraud claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and seeks damages and other relief based upon the allegations in the complaint. On January 24, 2020, A. O. Smith and the other defendants moved to dismiss the consolidated amended complaint for failure to state a claim. Their motion is currently pending. A shareholder derivative lawsuit, captioned as Pierce v. A. O. Smith Corporation, et al. and based on similar allegations as the putative class action, was filed on August 20, 2019, also in the U.S. District Court for the Eastern District of Wisconsin. On November 6, 2019, the plaintiff in the derivative action moved to dismiss his lawsuit, and re-filed it in the U.S. District Court for the District of Delaware on November 12, 2019. The derivative action asserts claims under Sections 14(a) and 20(a) of the Exchange Act, as well as for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks damages and other relief based upon the allegations in the complaint. On February 12, 2020, the parties filed a stipulation seeking to stay the derivative lawsuit pending resolution of the City of Birmingham lawsuit. On February 13, 2020, a second shareholder derivative suit, captioned as Jarozewski v. A. O. Smith Corporation, et al., was filed in the U.S. District Court for the District of Delaware, asserting claims under Sections 10(b), 14(a) and 20(a) of the Exchange Act, as well as for breach of fiduciary duty, unjust enrichment, and insider trading, and seeks damages and other relief based upon the allegations in the complaint. On April 1, 2020, the U.S. District Court for the District of Delaware, upon a joint stipulation filed by the parties, consolidated both the Pierce and Jarozewski derivative lawsuits and stayed the consolidated actions pending resolution of the City of Birmingham lawsuit.

27

ITEM 1A RISK FACTORS 

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, except for the addition of the risk factor set forth below:

The global coronavirus (COVID-19) pandemic, or other global public health pandemics, could have a material adverse effect on our business, results of operations and financial condition

Our business, results of operations and financial condition may be adversely affected if a global public health pandemic, including the current COVID-19 pandemic, interferes with the ability of our employees, suppliers, and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business and operations. The COVID-19 pandemic has significantly impacted economic activity and markets around the world, and it could have a material negative impact on our business and operations in numerous ways, including but not limited to those outlined below:

• The risk that we, or our employees, suppliers or customers may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities.

• Restrictions on shipping products from certain jurisdictions where they are produced or into certain jurisdictions where customers are located.

• Inability to meet our customers’ needs and achieve cost targets due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability.

• Failure of third parties on which we rely, including our suppliers, distributors, contractors and commercial banks, to meet their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact our operations.

• Significant reductions in demand or significant volatility in demand and a global economic recession that could further reduce demand for our products, resulting from actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns.

• Manufacturing plant inefficiencies due to safety and preventative health measures that we have implemented in our plants to prevent the spread of COVID-19.

• Deterioration of worldwide credit and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures.

The extent to which the COVID-19 pandemic, or other outbreaks of disease or similar public health threats, materially and adversely impacts our business, results of operations and financial condition is highly uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, the severity of the disease and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects of the COVID-19 pandemic on our suppliers, third-party service providers, and/or customers.

28

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In the second quarter of 2019, our Board of Directors approved adding three million shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, the Common Stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. In the first quarter of 2020, we repurchased 1,348,391 shares at an average price of $42.02 per share and at a total cost of $56.7 million. As of March 31, 2020, there were 1,613,824 shares remaining on the existing repurchase authorization. Due to the uncertainty surrounding the impact of the global COVID-19 pandemic, we suspended our share repurchases on March 18, 2020.

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 1 – January 31, 2020		400,800	$	46.89		400,800		2,561,415
February 1 – February 29, 2020		62,000		42.07		62,000		2,499,415
March 1 – March 31, 2020		885,591		39.82		885,591		1,613,824

ITEM 6 - EXHIBITS

Refer to the Exhibit Index on page 30 of this report.

29

INDEX TO EXHIBITS

Exhibit Number		Description
	31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
	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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three months ended March 31, 2020 and 2019, (ii) the Condensed Consolidated Statement of Comprehensive Earnings for the three months ended March 31, 2020 and 2019, (iii) the Condensed Consolidated Balance Sheets as of March 31, 2020, and December 31, 2019 (iv) the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2020 and 2019 (v) the Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2020 and 2019 (vi) the Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
	104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

30

SIGNATURES

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

	A. O. SMITH CORPORATION
May 5, 2020	/s/Helen E. Gurholt
	Helen E. Gurholt
	Vice President and Controller
	/s/Charles T. Lauber
	Charles T. Lauber
	Executive Vice President and
	Chief Financial Officer

31

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Kevin J. Wheeler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of A. O. Smith Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 5, 2020

/s/ Kevin J. Wheeler

Kevin J. Wheeler

Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Charles T. Lauber, certify that;

1. I have reviewed this quarterly report on Form 10-Q of A. O. Smith Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 5, 2020

/s/ Charles T. Lauber

Charles T. Lauber

Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned certifies that to the best of my knowledge:

(1) the Quarterly Report on Form 10-Q of A. O. Smith Corporation for the quarter ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or Section 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 A. O. Smith Corporation.

May 5, 2020

/s/ Kevin J. Wheeler

Kevin J. Wheeler

Chairman and Chief Executive Officer

EX-32.2

Exhibit 32.2

Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, the undersigned certifies that to the best of my knowledge:

(1) the Quarterly Report on Form 10-Q of A. O. Smith Corporation for the quarter ended March 31, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or Section 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 A. O. Smith Corporation.

May 5, 2020

/s/ Charles T. Lauber

Charles T. Lauber

Executive Vice President and Chief Financial Officer

XML

Income Taxes - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Income Tax Contingency [Line Items]
Effective tax rates	23.60%	20.00%
Unrecognized tax benefits	$ 9.7
Unrecognized tax benefits that would affect the effective tax rate, if recognized	$ 0.8
State and local | Earliest Tax Year
Income Tax Contingency [Line Items]
Income tax examinations, years under examination	2002
State and local | Latest Tax Year
Income Tax Contingency [Line Items]
Income tax examinations, years under examination	2020
Non-U.S. | Earliest Tax Year
Income Tax Contingency [Line Items]
Income tax examinations, years under examination	2014
Non-U.S. | Latest Tax Year
Income Tax Contingency [Line Items]
Income tax examinations, years under examination	2020
U.S. federal | Earliest Tax Year
Income Tax Contingency [Line Items]
Income tax examinations, years under examination	2016
U.S. federal | Latest Tax Year
Income Tax Contingency [Line Items]
Income tax examinations, years under examination	2020

XML

Schedule of Computation of Basic and Diluted Weighted-Average Shares Used in Earnings per Share Calculations (Detail) - shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Earnings Per Share [Abstract]
Denominator for basic earnings per share - weighted average shares	161,871,788	167,803,794
Effect of dilutive stock options and share units	1,025,817	1,292,348
Denominator for diluted earnings per share	162,897,605	169,096,142

XML

Maturities of lease liabilities (Detail) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Leases [Abstract]
2020	$ 10.2
2021	10.7
2022	9.2
2023	4.9
2024	3.8
After 2024	22.7
Total lease payments	61.5
Less: imputed interest	(12.7)
Present value of operating lease liabilities	$ 48.8	$ 50.7

XML

Summary of Preliminary Allocation of Fair Value of Assets Acquired and Liabilities Assumed at Date of Acquisition (Detail) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019	Apr. 08, 2019
Business Acquisition [Line Items]
Goodwill	$ 542.6	$ 546.0
Water-Right, Inc
Business Acquisition [Line Items]
Current assets, net of cash acquired			$ 9.7
Property, plant and equipment			8.6
Intangible assets			60.4
Goodwill			31.0
Total assets acquired			109.7
Current liabilities			(2.7)
Net assets acquired			$ 107.0

XML

Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Measurements

12. Fair Value Measurements

ASC 820, Fair Value Measurements, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following table presents assets measured at fair value on a recurring basis.

(dollars in millions)
Fair Value Measurement Using	March 31, 2020		December 31, 2019
Quoted prices in active markets for identical assets (Level 1)	$	135.6	$	177.4
Significant other observable inputs (Level 2)		1.0		6.9

Items measured at fair value were comprised of the Company’s marketable securities (Level 1) and derivative instruments (Level 2). There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis during the three months ended March 31, 2020.

XML

Commitments and Contingencies

3 Months Ended

Mar. 31, 2020

Commitments and Contingencies

16. Commitments and Contingencies

The Company maintains a commercial relationship with a supply-chain service provider (the Provider) in connection with the Company’s business in China. In this capacity, the Provider offers order-entry, warehousing and logistics support. The Provider also offers asset-backed financing to certain of the Company’s distributors in China to facilitate their working capital needs. To facilitate its financing support business, the Provider has collateralized lending facilities in place with multiple Chinese banks under which the Company has agreed to repurchase inventory if both requested by the banks and certain defined conditions are met, primarily related to the aging of the distributors’ notes.

The Provider is required to indemnify the Company for any losses the Company would incur in the event of an inventory repurchase under these arrangements. Potential losses under the repurchase arrangements represent the difference between the repurchase price and net proceeds from the resale of product plus costs incurred in the process, less related distributor rebates.

Before considering any reduction of distributor rebate accruals of $9.1 million and $14.1 million as of March 31, 2020 and December 31, 2019, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $17.0 million and $23.1 million as of March 31, 2020 and December 31, 2019, respectively. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of March 31, 2020 and December 31, 2019.

XML

Leases (Tables)

3 Months Ended

Mar. 31, 2020

Leases [Abstract]

Schedule of Leases Supplemental Balance Sheet

Supplemental balance sheet information related to leases was as follows:

(dollars in millions)

	March 31, 2020			December 31, 2019
Liabilities
Short term: Accrued liabilities	$	11.5		$	12.0
Long term: Operating lease liabilities		37.3			38.7
Total operating lease liabilities	$	48.8		$	50.7
Less: Rent incentives and deferrals		(3.9	)		(3.8	)
Assets
Operating lease assets	$	44.9		$	46.9

Lease Term and Discount Rate	March 31, 2020
Weighted-average remaining lease term		10 years
Weighted-average discount rate		3.95%

Schedule of Components of Lease Expense

The components of lease expense were as follows:

(dollars in millions)
		Three months ended March 31,
Lease Expense	Classification	2020(1)		2019(2)
Operating lease expense	Cost of products sold	$	0.7	$	0.7
	Selling, general and administrative expenses		4.0		4.9

(1) 2020 includes short-term and variable lease expenses of $0.4 million and $0.4 million, respectively.

(2) 2019 includes short-term and variable lease expenses of $0.4 million and $0.8 million, respectively.

Schedule of Maturities of Lease Liabilities

Maturities of lease liabilities were as follows:

(dollars in millions)
	March 31, 2020
2020	$	10.2
2021		10.7
2022		9.2
2023		4.9
2024		3.8
After 2024		22.7
Total lease payments		61.5
Less: imputed interest		(12.7	)
Present value of operating lease liabilities	$	48.8

XML

Segment Sales Disaggregated by Major Product Line (Detail) - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2020	Mar. 31, 2019
Net sales		$ 636.9	$ 748.2
Inter-segment
Net sales		(6.2)	(5.7)
Operating Segments [Member] | North America
Net sales		532.9	521.8
Operating Segments [Member] | North America | Water Heaters And Related Parts [Member]
Net sales		447.8	455.7
Operating Segments [Member] | North America | Boilers And Related Parts [Member]
Net sales		41.5	42.6
Operating Segments [Member] | North America | Water Treatment Products [Member]
Net sales	[1]	43.6	23.5
Operating Segments [Member] | Rest of World [Member]
Net sales		110.2	232.1
Operating Segments [Member] | Rest of World [Member] | China
Net sales		91.0	213.0
Operating Segments [Member] | Rest of World [Member] | All Other Rest Of World [Member]
Net sales		$ 19.2	$ 19.1

[1] Includes the results of Water-Right, Inc. from April 8, 2019, the date of acquisition

XML

Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents assets measured at fair value on a recurring basis.

(dollars in millions)
Fair Value Measurement Using	March 31, 2020		December 31, 2019
Quoted prices in active markets for identical assets (Level 1)	$	135.6	$	177.4
Significant other observable inputs (Level 2)		1.0		6.9

XML

Earnings per Share of Common Stock (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Computation of Basic and Diluted Weighted Average Shares Used in EPS Calculations

The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:

	Three Months Ended March 31,
	2020		2019
Denominator for basic earnings per share - weighted average shares		161,871,788		167,803,794
Effect of dilutive stock options and share units		1,025,817		1,292,348
Denominator for diluted earnings per share		162,897,605		169,096,142

XML

Leases

3 Months Ended

Mar. 31, 2020

Leases [Abstract]

Leases

4. Leases

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

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

Supplemental balance sheet information related to leases was as follows:

(dollars in millions)

	March 31, 2020			December 31, 2019
Liabilities
Short term: Accrued liabilities	$	11.5		$	12.0
Long term: Operating lease liabilities		37.3			38.7
Total operating lease liabilities	$	48.8		$	50.7
Less: Rent incentives and deferrals		(3.9	)		(3.8	)
Assets
Operating lease assets	$	44.9		$	46.9

Lease Term and Discount Rate	March 31, 2020
Weighted-average remaining lease term		10 years
Weighted-average discount rate		3.95%

The components of lease expense were as follows:

(dollars in millions)
		Three months ended March 31,
Lease Expense	Classification	2020(1)		2019(2)
Operating lease expense	Cost of products sold	$	0.7	$	0.7
	Selling, general and administrative expenses		4.0		4.9

(1) 2020 includes short-term and variable lease expenses of $0.4 million and $0.4 million, respectively.

(2) 2019 includes short-term and variable lease expenses of $0.4 million and $0.8 million, respectively.

Maturities of lease liabilities were as follows:

(dollars in millions)
	March 31, 2020
2020	$	10.2
2021		10.7
2022		9.2
2023		4.9
2024		3.8
After 2024		22.7
Total lease payments		61.5
Less: imputed interest		(12.7	)
Present value of operating lease liabilities	$	48.8

XML

Earnings per Share of Common Stock

3 Months Ended

Mar. 31, 2020

Earnings Per Share [Abstract]

Earnings per Share of Common Stock

8. Earnings per Share of Common Stock

The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:

	Three Months Ended March 31,
	2020		2019
Denominator for basic earnings per share - weighted average shares		161,871,788		167,803,794
Effect of dilutive stock options and share units		1,025,817		1,292,348
Denominator for diluted earnings per share		162,897,605		169,096,142

XML

Stock Based Compensation - Additional Information (Detail) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total stock based compensation cost recognized	$ 9.0	$ 8.7
Stock option compensation expense recognized	$ 4.5	$ 4.3
Weighted-average fair value per option at the date of grant	$ 8.15	$ 10.83
Employee Stock Option
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period	3 years	3 years
Award expiration period	10 years	10 years
Restricted Stock And Share Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period	3 years	3 years
Number of Units - Granted	169,407	136,647
Value of share units at the date of issuance	$ 7.2	$ 6.8
Share based compensation expense attributable to share units	$ 4.5	$ 4.4
A.O. Smith Combined Compensation Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares available for granting of options, restricted stock or share units	951,461

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2020	Dec. 31, 2019
Common Stock, Par or Stated Value Per Share	$ 1	$ 1
Common Stock, Shares Authorized	240,000,000	240,000,000
Common Stock, shares issued	164,532,481	164,526,709
Common Class A
Common Stock, Par or Stated Value Per Share	$ 5	$ 5
Common Stock, Shares Authorized	27,000,000	27,000,000
Common Stock, shares issued	26,175,113	26,180,885

XML

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net sales	$ 636.9	$ 748.2
Cost of products sold	397.4	455.4
Gross profit	239.5	292.8
Selling, general and administrative expenses	173.8	184.7
Interest expense	2.2	2.0
Other income	(4.2)	(5.5)
Earnings before provision for income taxes	67.7	111.6
Provision for income taxes	16.0	22.3
Net Earnings	$ 51.7	$ 89.3
Net Earnings Per Share of Common Stock	$ 0.32	$ 0.53
Diluted Net Earnings Per Share of Common Stock	0.32	0.53
Dividends Per Share of Common Stock	$ 0.24	$ 0.22

XML

Components of Company's Net Pension Income (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Defined Benefit Plan [Abstract]
Service cost	$ 0.4	$ 0.4
Interest cost	5.7	7.9
Expected return on plan assets	(13.0)	(14.3)
Amortization of unrecognized loss	4.9	4.0
Amortization of prior service cost	(0.1)	(0.1)
Defined benefit plan income	$ (2.1)	$ (2.1)

XML

Schedule of Summary by Currency of Foreign Currency Forward Contracts (Detail) - Foreign currency forward contracts - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Buy
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Contractual amounts of foreign currency forward contracts	$ 50.5	$ 54.6
Buy | Euro
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Contractual amounts of foreign currency forward contracts	27.1	36.0
Buy | Mexican peso
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Contractual amounts of foreign currency forward contracts	23.4	18.6
Sell
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Contractual amounts of foreign currency forward contracts	60.7	51.0
Sell | British pound
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Contractual amounts of foreign currency forward contracts	0.9	1.3
Sell | Canadian dollar
Derivative Instruments and Hedging Activities Disclosures [Line Items]
Contractual amounts of foreign currency forward contracts	$ 59.8	$ 49.7

XML

Segment Results (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Segment Earnings

The following table presents the Company’s segment results:

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Net sales
North America	$	532.9		$	521.8
Rest of World		110.2			232.1
Inter-segment		(6.2	)		(5.7	)
	$	636.9		$	748.2
Segment earnings (losses)
North America	$	127.1		$	116.0
Rest of World		(42.2	)		12.3
		84.9			128.3
Corporate expense		(15.0	)		(14.7	)
Interest expense		(2.2	)		(2.0	)
Earnings before income taxes		67.7			111.6
Provision for income taxes		16.0			22.3
Net earnings	$	51.7		$	89.3

XML

Product Warranties (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Product Warranty Liability Activity

The following table presents the Company’s warranty liability activity.

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Balance at January 1	$	134.3		$	139.4
Expense		13.5			9.4
Claims settled		(12.5	)		(12.6	)
Balance at March 31	$	135.3		$	136.2

XML

Revenue Recognition - Additional Information (Detail) $ in Millions	3 Months Ended
	Mar. 31, 2020 USD ($) Distributor Segment	Dec. 31, 2019 USD ($)
Customer deposits liability	$ 65.2	$ 49.6
Allowance for doubtful accounts	$ 7.5	$ 6.7
Number of reporting segments | Segment	2
Water Heaters | North America
Number of wholesale distributors | Distributor	1,300

XML

Inventories

3 Months Ended

Mar. 31, 2020

Inventories

5. Inventories

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

(dollars in millions)
	March 31, 2020			December 31, 2019
Finished products	$	142.8		$	136.8
Work in process		21.6			21.7
Raw materials		171.7			168.3
Inventories, at FIFO cost		336.1			326.8
LIFO reserve		(23.8	)		(23.8	)
Net inventory	$	312.3		$	303.0

XML

Stock Based Compensation

3 Months Ended

Mar. 31, 2020

Stock Based Compensation

9. Stock Based Compensation

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the “Plan”) effective January 1, 2007. The Plan was reapproved by stockholders on April 16, 2012. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at March 31, 2020 was 951,461. Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in the three months ended March 31, 2020 and 2019 was $9.0 million and $8.7 million, respectively.

Stock Options

The stock options granted in the three months ended March 31, 2020 and 2019 have three year pro rata vesting from the date of grant. Stock options are issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted in 2020 and 2019 expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period; however, included in stock option expense for the three months ended March 31, 2020 and 2019 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Stock based compensation expense attributable to stock options in the three months ended March 31, 2020 and 2019 was $4.5 million and $4.3 million, respectively.

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, 2020:

	Weighted-Avg. Per Share Exercise Price		Number of Options			Average Remaining Contractual Life		Aggregate Intrinsic Value (dollars in millions)
Outstanding at January 1, 2020	$	37.64		2,728,350
Granted		42.39		784,300
Exercised		15.04		(25,147	)
Forfeited		48.95		(56,261	)
Outstanding at March 31, 2020		38.71		3,431,242			7 years	$	19.1
Exercisable at March 31, 2020		34.25		2,162,932			5 years	$	19.1

The weighted-average fair value per option at the date of grant during the three months ended March 31, 2020 and 2019 using the Black-Scholes option-pricing model was $8.15 and $10.83, respectively. Assumptions were as follows:

	Three Months Ended March 31,
	2020			2019
Expected life (years)		5.7			5.6
Risk-free interest rate		1.6	%		2.7	%
Dividend yield		2.1	%		1.6	%
Expected volatility		23.6	%		22.8	%

The expected lives of options for purposes of these models are based on historical exercise behavior. The risk-free interest rates for purposes of these models are based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected lives of the option. The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock. The expected volatility for purposes of these models are based on the historical volatility of the Common Stock.

Restricted Stock and Share Units

Participants may also be awarded shares of restricted stock or share units under the Plan. Share units vest three years after the date of grant. The Company granted 169,407 and 136,647 share units under the plan in the three months ended March 31, 2020 and 2019, respectively. The share units were valued at $7.2 million and $6.8 million at the date of issuance in 2020 and 2019, respectively, based on the price of the Company’s Common Stock at the date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three months ended March 31, 2020 and 2019 was expense associated with accelerated vesting of share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of $4.5 million and $4.4 million was recognized in the three months ended March 31, 2020 and 2019, respectively. Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

A summary of share unit activity under the plan is as follows for the three months ended March 31, 2020:

	Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2020		366,102		$	49.92
Granted		169,407			42.39
Vested		(100,735	)		49.21
Forfeited		(7,557	)		53.96
Issued and unvested at March 31, 2020		427,217			46.94

XML

Derivative Instruments - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Trading Activity, Gains and Losses, Net [Line Items]
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	$ (18.0)	$ 15.9
Net Investment Hedging [Member] | Non-US [Member]
Trading Activity, Gains and Losses, Net [Line Items]
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax	0.8	$ 1.3
Derivative, Notional Amount	$ 50.0
Commodity Futures Contracts
Trading Activity, Gains and Losses, Net [Line Items]
Reclassification period for effective portion of contract, in years	1 year

XML

Changes in Option Awards All of Which Related to Common Stock (Detail) $ / shares in Units, $ in Millions	3 Months Ended
	Mar. 31, 2020 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted-Avg. Per Share Exercise Price, beginning period | $ / shares	$ 37.64
Weighted-Avg. Per Share Exercise Price - Granted | $ / shares	42.39
Weighted-Avg. Per Share Exercise Price - Exercised | $ / shares	15.04
Weighted-Avg. Per Share Exercise Price - Forfeited | $ / shares	48.95
Weighted-Avg. Per Share Exercise Price, ending period | $ / shares	38.71
Weighted-Average Per Share Exercise Price, Exercisable | $ / shares	$ 34.25
Number of Options Outstanding, Beginning Balance | shares	2,728,350
Number of Options, Granted | shares	784,300
Number of Options, Exercised | shares	(25,147)
Number of Options, Forfeited | shares	(56,261)
Number of Options Outstanding, Ending Balance | shares	3,431,242
Number of Options, Exercisable at End of Period | shares	2,162,932
Average remaining contractual life for outstanding options, in years	7 years
Average Remaining Contractual Life, Exercisable at End of Period, Years	5 years
Aggregate Intrinsic Value, Outstanding at End of Period | $	$ 19.1
Aggregate Intrinsic Value, Exercisable at End of Period | $	$ 19.1

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Operating Activities
Net earnings	$ 51.7	$ 89.3
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation and amortization	20.1	20.2
Stock based compensation expense	9.0	8.7
Net changes in operating assets and liabilities:
Current assets and liabilities	(15.1)	(86.3)
Noncurrent assets and liabilities	(11.6)	(10.3)
Cash Provided by Operating Activities	54.1	21.6
Investing Activities
Capital expenditures	(12.8)	(20.9)
Investments in marketable securities	(38.8)	(48.5)
Net proceeds from sale of marketable securities	78.0	147.2
Cash Provided by Investing Activities	26.4	77.8
Financing Activities
Long-term debt incurred	58.5	63.0
Common stock repurchases	(56.7)	(45.6)
Net payments from stock option activity	(1.2)	(1.6)
Dividends paid	(39.0)	(37.1)
Cash Used In Financing Activities	(38.4)	(21.3)
Net increase in cash and cash equivalents	42.1	78.1
Cash and cash equivalents - beginning of period	374.0	259.7
Cash and Cash Equivalents - End of Period	$ 416.1	$ 337.8

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net earnings	$ 51.7	$ 89.3
Other comprehensive (loss) earnings
Foreign currency translation adjustments	(18.0)	15.9
Unrealized net gains (losses) on cash flow derivative instruments, less related income tax provision of $(0.1) in 2020 and $ - in 2019	0.3	(0.1)
Adjustment to pension liability, less related income tax provision of $(1.2) in 2020 and $(1.0) in 2019	3.6	2.9
Comprehensive Earnings	$ 37.6	$ 108.0

XML

Schedule of Segment Earnings (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Segment Reporting Information [Line Items]
Net sales	$ 636.9	$ 748.2
Segment earnings (losses)	84.9	128.3
Other income (expense)	4.2	5.5
Interest expense	(2.2)	(2.0)
Earnings before provision for income taxes	67.7	111.6
Provision for income taxes	16.0	22.3
Net Earnings	51.7	89.3
Inter-segment
Segment Reporting Information [Line Items]
Net sales	(6.2)	(5.7)
Corporate
Segment Reporting Information [Line Items]
Other income (expense)	(15.0)	(14.7)
North America | Operating Segments
Segment Reporting Information [Line Items]
Net sales	532.9	521.8
Segment earnings (losses)	127.1	116.0
Rest of World | Operating Segments
Segment Reporting Information [Line Items]
Net sales	110.2	232.1
Segment earnings (losses)	$ (42.2)	$ 12.3

XML

Changes in Accumulated Other Comprehensive Loss by Component (Detail) - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2020	Mar. 31, 2019
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance		$ 1,666.8
Balance		1,616.3	$ 1,749.2
Cumulative foreign currency translation
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance		(66.2)	(64.9)
Other comprehensive (loss) income before reclassifications		(18.0)	15.9
Balance		(84.2)	(49.0)
Unrealized net gain on cash flow derivatives
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance		0.2	(0.7)
Other comprehensive (loss) income before reclassifications		0.9	(0.1)
Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $0.2 and $- in 2020 and 2019, respectively)		(0.6)
Balance		0.5	(0.8)
Pension liability
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance		(282.3)	(285.2)
Amounts reclassified from accumulated other comprehensive loss	[1]	3.6	2.9
Balance		(278.7)	(282.3)
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance		$ (362.4)	$ (332.1)

[1] Amortization of pension items:

XML

Components of lease expense (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020		Mar. 31, 2019
Short term lease expense	$ 0.4		$ 0.4
Variable lease expenses	0.4		0.8
Cost of products sold [Member]
Operating lease expense	0.7	[1]	0.7	[2]
Selling, general and administrative expenses [Member]
Operating lease expense	$ 4.0	[1]	$ 4.9	[2]

[1] 2020 includes short-term and variable lease expenses of $0.4 million and $0.4 million, respectively.

[2] 2019 includes short-term and variable lease expenses of $0.4 million and $0.8 million, respectively.

XML

Acquisitions - Additional Information (Detail) - Water-Right, Inc - USD ($) $ in Millions		3 Months Ended
	Apr. 08, 2019	Mar. 31, 2020
Business Acquisition [Line Items]
Percentage of ownership interest acquired	100.00%
Aggregate cash purchase price, net of cash acquired	$ 107.0
Acquired intangible assets	60.4
Effective Date Of Acquisition		Apr. 08, 2019
Escrow Deposit [Member]
Business Acquisition [Line Items]
consideration to former owners		$ 4.0
Trademarks [Member]
Business Acquisition [Line Items]
Acquired intangible assets, not subject to amortization	19.0
Noncompete agreements
Business Acquisition [Line Items]
Acquired intangible assets, subject to amortization	$ 1.2
Acquired intangible assets, amortization period, in years	7 years 6 months
Customer relationships
Business Acquisition [Line Items]
Acquired intangible assets, subject to amortization	$ 40.2
Acquired intangible assets, amortization period, in years	20 years

XML

Long-Term Debt - Additional Information (Detail) $ in Millions	3 Months Ended
	Mar. 31, 2020 USD ($) Banks
Debt Disclosure [Abstract]
Multi-currency revolving credit agreement	$ 500
Number of banks involved in multi-year multi-currency revolving credit agreement | Banks	9
Revolving credit facility, expiration date	Dec. 15, 2021
Multi-currency revolving credit agreement, maximum amount	$ 700

XML

Inventories (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Inventories

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

(dollars in millions)
	March 31, 2020			December 31, 2019
Finished products	$	142.8		$	136.8
Work in process		21.6			21.7
Raw materials		171.7			168.3
Inventories, at FIFO cost		336.1			326.8
LIFO reserve		(23.8	)		(23.8	)
Net inventory	$	312.3		$	303.0

XML

Derivative Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments

13. Derivative Instruments

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

Cash Flow Hedges

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

Foreign Currency Forward Contracts

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

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the consolidated statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective. The majority of the amounts in accumulated other comprehensive loss for cash flow hedges are expected to be reclassified into earnings within one year. The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts that are designated as cash flow hedges.

(dollars in millions)

	March 31, 2020				December 31, 2019
	Buy		Sell		Buy		Sell
British pound	$	—	$	0.9	$	—	$	1.3
Canadian dollar		—		59.8		—		49.7
Euro		27.1		—		36.0		—
Mexican peso		23.4		—		18.6		—
Total	$	50.5	$	60.7	$	54.6	$	51.0

Commodity Futures Contracts

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

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

The after-tax gains and losses of the contracts as of March 31, 2020 were recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in the period in which the underlying transaction is recorded in earnings. The after-tax gains and losses on the contracts will be reclassified within one year.

Net Investment Hedges

The Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its non-U.S. subsidiaries. These hedges are determined to be effective. The Company recognized $0.8 million and $1.3 million of after-tax gains associated with hedges of a net investment in non-U.S. subsidiaries in currency translation adjustment in other comprehensive income in the three months ended March 31, 2020 and 2019, respectively. The contractual amount of the Company’s foreign currency forward contracts that are designated as net investment hedges is $50.0 million as of March 31, 2020.

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

Fair value of derivatives designated as hedging instruments under ASC 815:
(dollars in millions)
	Balance Sheet Location	March 31, 2020			December 31, 2019
Foreign currency contracts	Other current assets	$	4.8		$	8.4
	Accrued liabilities		(3.6	)		(1.5	)
Commodities contracts	Accrued liabilities		(0.2	)		—
Total derivatives designated as hedging instruments		$	1.0		$	6.9

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

Three Months Ended March 31 (dollars in millions):

Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive loss on derivatives						Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings	Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings
	2020			2019				2020		2019
Foreign currency contracts	$	1.4		$	0.1		Cost of products sold	$	0.8	$	—
Commodities contracts		(0.2	)		(0.2	)	Cost of products sold		—		—
	$	1.2		$	(0.1	)		$	0.8	$	—

XML

Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2020

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) 740, Income Taxes (issued under Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes”). This amendment removes certain exceptions to the general principles of ASC 740, and clarifies and amends existing guidance to improve consistent application. The amendment requires adoption on January 1, 2021, with early adoption permitted. The Company does not expect that the adoption of ASU 2019-12 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In January 2017, the FASB amended ASC 350, Intangibles – Goodwill and Other (issued under ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted the amendment on January 1, 2020 and the adoption of ASU 2017-04 did not have an impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (issued under ASU 2016-13) which modifies the measurement of expected credit losses on certain financial instruments. The Company adopted 2016-13 on January 1, 2020 and the adoption did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

XML

Acquisitions

3 Months Ended

Mar. 31, 2020

Acquisitions

3. Acquisitions

On April 8, 2019, the Company acquired 100 percent of the shares of Water-Right, a Wisconsin-based water treatment company. With the addition of Water-Right, the Company grew its North America water treatment platform. Water-Right is included in the Company’s North America segment for reporting purposes.

The Company paid an aggregate cash purchase price of $107.0 million, net of cash acquired. In addition, the Company established a $4.0 million escrow to satisfy any potential obligations of the former owners of Water-Right, should they arise.

The following table summarizes the allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition of Water-Right for purposes of allocating the purchase price. Significant assumptions used to estimate the fair value of intangible assets acquired include discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates, attrition rates and royalty rates. The $60.4 million of acquired identifiable intangible assets was comprised of the following: $40.2 million of customer relationships being amortized over 20 years, $19.0 million of trademarks not subject to amortization, and $1.2 million of non-compete agreements being amortized over 7.5 years.

April 8, 2019 (dollars in millions)
Current assets, net of cash acquired	$	9.7
Property, plant and equipment		8.6
Intangible assets		60.4
Goodwill		31.0
Total assets acquired		109.7
Current liabilities		(2.7	)
Net assets acquired	$	107.0

As required under ASC 805 Business Combinations, Water-Right’s results of operations have been included in the Company’s consolidated financial statements from April 8, 2019, the date of acquisition.

XML

Long-Term Debt

3 Months Ended

Mar. 31, 2020

Debt Disclosure [Abstract]

Long-Term Debt

7. Long-Term Debt

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

Borrowings under bank credit lines and commercial paper borrowings are supported by the $500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at March 31, 2020. At its option, the Company either maintains cash balances or pays fees for bank credit and services.

XML

Segment Results

3 Months Ended

Mar. 31, 2020

Segment Results

11. Segment Results

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

The following table presents the Company’s segment results:

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Net sales
North America	$	532.9		$	521.8
Rest of World		110.2			232.1
Inter-segment		(6.2	)		(5.7	)
	$	636.9		$	748.2
Segment earnings (losses)
North America	$	127.1		$	116.0
Rest of World		(42.2	)		12.3
		84.9			128.3
Corporate expense		(15.0	)		(14.7	)
Interest expense		(2.2	)		(2.0	)
Earnings before income taxes		67.7			111.6
Provision for income taxes		16.0			22.3
Net earnings	$	51.7		$	89.3

XML

Derivative Instruments (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Summary by Currency of Foreign Currency Forward Contracts

The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts that are designated as cash flow hedges.

(dollars in millions)

	March 31, 2020				December 31, 2019
	Buy		Sell		Buy		Sell
British pound	$	—	$	0.9	$	—	$	1.3
Canadian dollar		—		59.8		—		49.7
Euro		27.1		—		36.0		—
Mexican peso		23.4		—		18.6		—
Total	$	50.5	$	60.7	$	54.6	$	51.0

Schedule of Impact of Cash Flow Hedges on Company's Financial Statements

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

Fair value of derivatives designated as hedging instruments under ASC 815:
(dollars in millions)
	Balance Sheet Location	March 31, 2020			December 31, 2019
Foreign currency contracts	Other current assets	$	4.8		$	8.4
	Accrued liabilities		(3.6	)		(1.5	)
Commodities contracts	Accrued liabilities		(0.2	)		—
Total derivatives designated as hedging instruments		$	1.0		$	6.9

Schedule of Effect of Derivatives Instruments on Condensed Consolidated Statement of Earnings

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

Three Months Ended March 31 (dollars in millions):

Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive loss on derivatives						Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings	Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings
	2020			2019				2020		2019
Foreign currency contracts	$	1.4		$	0.1		Cost of products sold	$	0.8	$	—
Commodities contracts		(0.2	)		(0.2	)	Cost of products sold		—		—
	$	1.2		$	(0.1	)		$	0.8	$	—

XML

Stock Based Compensation (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Changes in Option Shares

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, 2020:

	Weighted-Avg. Per Share Exercise Price		Number of Options			Average Remaining Contractual Life		Aggregate Intrinsic Value (dollars in millions)
Outstanding at January 1, 2020	$	37.64		2,728,350
Granted		42.39		784,300
Exercised		15.04		(25,147	)
Forfeited		48.95		(56,261	)
Outstanding at March 31, 2020		38.71		3,431,242			7 years	$	19.1
Exercisable at March 31, 2020		34.25		2,162,932			5 years	$	19.1

Schedule of Weighted Average Fair Value per Option at Date of Grant

The weighted-average fair value per option at the date of grant during the three months ended March 31, 2020 and 2019 using the Black-Scholes option-pricing model was $8.15 and $10.83, respectively. Assumptions were as follows:

	Three Months Ended March 31,
	2020			2019
Expected life (years)		5.7			5.6
Risk-free interest rate		1.6	%		2.7	%
Dividend yield		2.1	%		1.6	%
Expected volatility		23.6	%		22.8	%

Schedule of Share Unit Activity Under Plan

A summary of share unit activity under the plan is as follows for the three months ended March 31, 2020:

	Number of Units			Weighted-Average Grant Date Value
Issued and unvested at January 1, 2020		366,102		$	49.92
Granted		169,407			42.39
Vested		(100,735	)		49.21
Forfeited		(7,557	)		53.96
Issued and unvested at March 31, 2020		427,217			46.94

XML

Basis of Presentation

3 Months Ended

Mar. 31, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full year. It is suggested the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 24, 2020.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) 740, Income Taxes (issued under Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes”). This amendment removes certain exceptions to the general principles of ASC 740, and clarifies and amends existing guidance to improve consistent application. The amendment requires adoption on January 1, 2021, with early adoption permitted. The Company does not expect that the adoption of ASU 2019-12 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In January 2017, the FASB amended ASC 350, Intangibles – Goodwill and Other (issued under ASU 2017-04, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted the amendment on January 1, 2020 and the adoption of ASU 2017-04 did not have an impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (issued under ASU 2016-13) which modifies the measurement of expected credit losses on certain financial instruments. The Company adopted 2016-13 on January 1, 2020 and the adoption did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

XML

Summary of Share Unit Activity Under Plan (Detail) - Restricted Stock And Share Units - $ / shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Units Issued and unvested, Beginning of Period	366,102
Number of Units - Granted	169,407	136,647
Number of Units - Vested	(100,735)
Number of Units - Forfeited/cancelled	(7,557)
Number of Units Issued and unvested, End of Period	427,217
Weighted-Average Grant Date Value, Beginning of Period	$ 49.92
Weighted-Average Grant Date Value - Granted	42.39
Weighted-Average Grant Date Value - Vested	49.21
Weighted-Average Grant Date Value - Forfeited/cancelled	53.96
Weighted-Average Grant Date Value, End of Period	$ 46.94

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Assets
Cash and cash equivalents	$ 416.1	$ 374.0
Marketable securities	135.6	177.4
Receivables	524.0	589.5
Inventories	312.3	303.0
Other current assets	54.5	56.5
Total Current Assets	1,442.5	1,500.4
Property, plant and equipment	1,159.5	1,156.9
Less accumulated depreciation	(622.2)	(611.5)
Net property, plant and equipment	537.3	545.4
Goodwill	542.6	546.0
Other intangibles	333.1	338.4
Operating lease assets	44.9	46.9
Other assets	82.6	80.9
Total Assets	2,983.0	3,058.0
Liabilities
Trade payables	442.0	509.6
Accrued payroll and benefits	47.7	64.6
Accrued liabilities	159.7	143.7
Product warranties	42.9	41.8
Debt due within one year	6.8	6.8
Total Current Liabilities	699.1	766.5
Long-term debt	335.6	277.2
Pension liabilities	20.8	27.8
Long-term operating lease liabilities	37.3	38.7
Other liabilities	273.9	281.0
Total Liabilities	1,366.7	1,391.2
Stockholders' Equity
Common Stock, value	164.5	164.5
Capital in excess of par value	516.1	509.0
Retained earnings	2,336.1	2,323.4
Accumulated other comprehensive loss	(362.4)	(348.3)
Treasury stock at cost	(1,168.9)	(1,112.7)
Total Stockholders' Equity	1,616.3	1,666.8
Total Liabilities and Stockholders' Equity	2,983.0	3,058.0
Common Class A
Stockholders' Equity
Common Stock, value	130.9	130.9
Total Stockholders' Equity	$ 130.9	$ 130.9

XML

Cover Page - shares	3 Months Ended
	Mar. 31, 2020	Apr. 30, 2020
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Entity Registrant Name	SMITH A O CORP
Entity Small Business	false
Entity Central Index Key	0000091142
Entity Emerging Growth Company	false
Entity Interactive Data Current	Yes
Entity Current Reporting Status	Yes
Entity Shell Company	false
Document Quarterly Report	true
Document Transition Report	false
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
Document Period End Date	Mar. 31, 2020
Entity File Number	1-475
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	39-0619790
Entity Address, Address Line One	11270 West Park Place
Entity Address, State or Province	WI
Entity Address, Postal Zip Code	53224-9508
Entity Address, City or Town	Milwaukee
Security Exchange Name	NYSE
Trading Symbol	AOS
Title of 12(b) Security	Common Stock
Entity Filer Category	Large Accelerated Filer
City Area Code	414
Local Phone Number	359-4000
Document Fiscal Year Focus	2020
Common Class A
Document Information [Line Items]
Entity Common Stock, Shares Outstanding		26,044,733
Common Stock
Document Information [Line Items]
Entity Common Stock, Shares Outstanding		135,095,634

XML

Assets and Liabilities Measured at Fair Value on Recurring Basis (Detail) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Quoted Prices In Active Markets For Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets measured at fair value on recurring basis	$ 135.6	$ 177.4
Significant other observable inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Liabilities measured at fair value on recurring basis	$ 1.0	$ 6.9

XML

Schedule of Inventories (Detail) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Inventories
Finished products	$ 142.8	$ 136.8
Work in process	21.6	21.7
Raw materials	171.7	168.3
Inventories, at FIFO cost	336.1	326.8
LIFO reserve	(23.8)	(23.8)
Net inventory	$ 312.3	$ 303.0

XML

Leases - Additional Information (Detail)	3 Months Ended
	Mar. 31, 2020
Operating lease termination option	options to terminate can be effective within one year
Minimum [Member]
Operating lease term of extension	1 year
Maximum [Member]
Operating lease term of extension	5 years

XML

Schedule of Effect of Derivatives Instruments on Consolidated Statement of Earnings (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Derivative [Line Items]
Amount of gain (loss) recognized in other comprehensive loss on derivative	$ 1.2	$ (0.1)
Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings	0.8
Foreign Currency Contracts
Derivative [Line Items]
Amount of gain (loss) recognized in other comprehensive loss on derivative	1.4	0.1
Foreign Currency Contracts | Cost Of Products Sold
Derivative [Line Items]
Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings	0.8
Commodities Contracts
Derivative [Line Items]
Amount of gain (loss) recognized in other comprehensive loss on derivative	$ (0.2)	$ (0.2)

XML

Commitment and Contingencies - Additional Information (Detail) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Commitments and Contingencies [Line Items]
Distributor Rebate Accruals	$ 9.1	$ 14.1
Repurchase Of Inventory [Member]
Commitments and Contingencies [Line Items]
Default In outstanding loans	$ 17.0	$ 23.1

XML

Changes in Accumulated Other Comprehensive Loss by Component

3 Months Ended

Mar. 31, 2020

Changes in Accumulated Other Comprehensive Loss by Component

15. Changes in Accumulated Other Comprehensive Loss by Component

Changes to accumulated other comprehensive loss by component are as follows:

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Cumulative foreign currency translation
Balance at beginning of period	$	(66.2	)	$	(64.9	)
Other comprehensive (loss) income before reclassifications		(18.0	)		15.9
Balance at end of period		(84.2	)		(49.0	)
Unrealized net gain (loss) on cash flow derivatives
Balance at beginning of period		0.2			(0.7	)
Other comprehensive loss before reclassifications		0.9			(0.1	)
Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $0.2 and $- in 2020 and 2019, respectively)		(0.6	)		—
Balance at end of period		0.5			(0.8	)
Pension liability
Balance at beginning of period		(282.3	)		(285.2	)
Amounts reclassified from accumulated other comprehensive loss:(1)		3.6			2.9
Balance at end of period		(278.7	)		(282.3	)
Accumulated other comprehensive loss, end of period	$	(362.4	)	$	(332.1	)
(1)  Amortization of pension items:
Actuarial losses	$	4.9	(2)	$	4.0	(2)
Prior year service cost		(0.1	)(2)		(0.1	)(2)
		4.8			3.9
Income tax benefit		(1.2	)		(1.0	)
Reclassification net of income tax benefit	$	3.6		$	2.9

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

20

XML

Acquisitions (Tables)

3 Months Ended

Mar. 31, 2020

Summary of Preliminary Allocation of Fair Value of Assets Acquired and Liabilities Assumed at Date of Acquisition

April 8, 2019 (dollars in millions)
Current assets, net of cash acquired	$	9.7
Property, plant and equipment		8.6
Intangible assets		60.4
Goodwill		31.0
Total assets acquired		109.7
Current liabilities		(2.7	)
Net assets acquired	$	107.0

XML

Company's Warranty Liability Activity (Detail) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Product Warranties Disclosures [Abstract]
Balance at beginning of year	$ 134.3	$ 139.4
Expense	13.5	9.4
Claims settled	(12.5)	(12.6)
Balance at end of year	$ 135.3	$ 136.2

XML

Leases supplemental balance sheet (Detail) - USD ($) $ in Millions	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Liabilities
Short term: Accrued liabilities	$ 11.5	$ 12.0
Long term: Operating lease liabilities	37.3	38.7
Total Operating Lease Liabilities	48.8	50.7
Less:Rent incentives and deferrals	(3.9)	(3.8)
Assets
Operating lease assets	$ 44.9	$ 46.9
Lease Term and Discount Rate
Weighted-average remaining lease term	10 years
Weighted-average discount rate	3.95%

XML

Impact of Derivative Contracts on Company's Financial Statements (Detail) - USD ($) $ in Millions	Mar. 31, 2020	Dec. 31, 2019
Derivatives, Fair Value [Line Items]
Fair value of derivative instruments, total	$ 1.0	$ 6.9
Designated as Hedging Instrument | Foreign Currency Contracts | Other Current Assets
Derivatives, Fair Value [Line Items]
Fair value of derivative instruments, assets	4.8	8.4
Designated as Hedging Instrument | Foreign Currency Contracts | Accrued Liabilities
Derivatives, Fair Value [Line Items]
Fair value of derivative instruments, liabilities	(3.6)	$ (1.5)
Designated as Hedging Instrument | Commodities Contracts | Accrued Liabilities
Derivatives, Fair Value [Line Items]
Fair value of derivative instruments, liabilities	$ (0.2)

XML

Changes in Accumulated Other Comprehensive Loss by Component (Parenthetical) (Detail) - USD ($) $ in Millions		3 Months Ended
		Mar. 31, 2020	Mar. 31, 2019
Unrealized net gain on cash flow derivatives
Accumulated Other Comprehensive Income (Loss) [Line Items]
Realized gains on derivatives reclassified to cost of products sold, tax provision		$ 0.2	$ 0.0
Pension liability
Accumulated Other Comprehensive Income (Loss) [Line Items]
Reclassification, before income tax benefit		4.8	3.9
Income tax benefit		(1.2)	(1.0)
Reclassification net of income tax benefit	[1]	3.6	2.9
Actuarial losses
Accumulated Other Comprehensive Income (Loss) [Line Items]
Reclassification, before income tax benefit	[2]	4.9	4.0
Prior year service cost
Accumulated Other Comprehensive Income (Loss) [Line Items]
Reclassification, before income tax benefit	[2]	$ (0.1)	$ (0.1)

[1] Amortization of pension items:

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

XML

Income Taxes

3 Months Ended

Mar. 31, 2020

Income Taxes

14. Income Taxes

The effective income tax rate for the three months ended March 31, 2020 was 23.6 percent compared to 20.0 percent for the three months ended March 31, 2019. The higher effective income tax rate for the three months ended March 31, 2020 compared to the effective income tax rate for the three months ended March 31, 2019 was primarily due to a change in geographic earnings mix.

As of March 31, 2020, the Company had $9.7 million of unrecognized tax benefits of which $0.8 million would affect its effective income tax rate if recognized. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company’s U.S. federal income tax returns for 2016-2020 are subject to audit. The Company is subject to state and local income tax audits for tax years 2002-2020. The Company is subject to non-U.S. income tax examinations for years 2014-2020.

XML

Revenue Recognition (Tables)

3 Months Ended

Mar. 31, 2020

Revenue Recognition [Abstract]

Segment Sales Disaggregated by Major Product Line

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

(dollars in millions)

	Three Months Ended March 31,
	2020			2019
North America
Water heaters and related parts	$	447.8		$	455.7
Boilers and related parts		41.5			42.6
Water treatment products(1)		43.6			23.5
Total North America		532.9			521.8
Rest of World
China	$	91.0		$	213.0
All other Rest of World		19.2			19.1
Total Rest of World		110.2			232.1
Inter-segment sales		(6.2	)		(5.7	)
Total Net Sales	$	636.9		$	748.2

(1) Includes the results of Water-Right, Inc. and its affiliated entities (Water-Right) from April 8, 2019, the date of acquisition

XML

Pensions

3 Months Ended

Mar. 31, 2020

Pensions

10. Pensions

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

	Three Months Ended March 31,
	2020			2019
Service cost	$	0.4		$	0.4
Interest cost		5.7			7.9
Expected return on plan assets		(13.0	)		(14.3	)
Amortization of unrecognized loss		4.9			4.0
Amortization of prior service cost		(0.1	)		(0.1	)
Defined benefit plan income	$	(2.1	)	$	(2.1	)

The service cost component of net periodic benefit cost is presented within cost of products sold and selling, general and administrative expenses within the condensed consolidated statements of earnings while the other components of pension income are reflected in other income. The Company was not required to and did not make a contribution to its U.S. pension plan in 2019. The Company is not required to make a contribution in 2020.

XML

Revenue Recognition

3 Months Ended

Mar. 31, 2020

Revenue Recognition Disclosure [Text Block]

2. Revenue Recognition

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

The nature, timing and amount of revenue for a respective performance obligation are consistent for each customer. The Company measures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $65.2 million and $49.6 million at March 31, 2020 and December 31, 2019, respectively. The Company assesses the collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for doubtful accounts, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for doubtful accounts, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for doubtful accounts was $7.5 million and $6.7 million at March 31, 2020 and December 31, 2019, respectively.

Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.

Disaggregation of Net Sales

The Company is comprised of 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 World segment also manufactures and markets in-home air purification products in China.

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

The North America segment major product lines are defined as the following:

Water heaters The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes and small businesses. The Company sells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than 1,300 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the Company’s water heater sales in the North America segment is derived from the replacement of existing products.

Boilers The Company’s boilers are closed loop water heating systems used primarily for space heating or hydronic heating. The Company’s boilers are primarily used in applications in commercial settings for hospitals, schools, hotels and other large commercial buildings while residential boilers are used in homes, apartments and condominiums. The Company’s boiler distribution channel is comprised primarily of manufacturer representative firms, with the remainder of our boilers distributed through wholesale channels. The Company’s boiler sales in the North America segment are derived from a combination of replacement of existing products and new construction.

Water treatment products The Company’s water treatment products range from point-of-entry water softeners, solutions for problem well water, and whole-home water filtration products to on-the-go filtration bottles and point-of-use carbon and reverse osmosis products. Typical applications for the Company’s water treatment products include residences, restaurants, hotels and offices. The Company sells water treatment products through its wholesale and retail distribution channels, similar to water heater products and related parts. The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through internet sales channels. A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.

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

(dollars in millions)

	Three Months Ended March 31,
	2020			2019
North America
Water heaters and related parts	$	447.8		$	455.7
Boilers and related parts		41.5			42.6
Water treatment products(1)		43.6			23.5
Total North America		532.9			521.8
Rest of World
China	$	91.0		$	213.0
All other Rest of World		19.2			19.1
Total Rest of World		110.2			232.1
Inter-segment sales		(6.2	)		(5.7	)
Total Net Sales	$	636.9		$	748.2

(1) Includes the results of Water-Right, Inc. and its affiliated entities (Water-Right) from April 8, 2019, the date of acquisition

XML

Product Warranties

3 Months Ended

Mar. 31, 2020

Product Warranties Disclosures [Abstract]

Product Warranties

6. Product Warranties

The Company offers warranties on the sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims. The following table presents the Company’s warranty liability activity.

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Balance at January 1	$	134.3		$	139.4
Expense		13.5			9.4
Claims settled		(12.5	)		(12.6	)
Balance at March 31	$	135.3		$	136.2

XML

Changes in Accumulated Other Comprehensive Loss by Component (Tables)

3 Months Ended

Mar. 31, 2020

Changes to Accumulated Other Comprehensive Loss by Component

Changes to accumulated other comprehensive loss by component are as follows:

(dollars in millions)
	Three Months Ended March 31,
	2020			2019
Cumulative foreign currency translation
Balance at beginning of period	$	(66.2	)	$	(64.9	)
Other comprehensive (loss) income before reclassifications		(18.0	)		15.9
Balance at end of period		(84.2	)		(49.0	)
Unrealized net gain (loss) on cash flow derivatives
Balance at beginning of period		0.2			(0.7	)
Other comprehensive loss before reclassifications		0.9			(0.1	)
Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $0.2 and $- in 2020 and 2019, respectively)		(0.6	)		—
Balance at end of period		0.5			(0.8	)
Pension liability
Balance at beginning of period		(282.3	)		(285.2	)
Amounts reclassified from accumulated other comprehensive loss:(1)		3.6			2.9
Balance at end of period		(278.7	)		(282.3	)
Accumulated other comprehensive loss, end of period	$	(362.4	)	$	(332.1	)
(1)  Amortization of pension items:
Actuarial losses	$	4.9	(2)	$	4.0	(2)
Prior year service cost		(0.1	)(2)		(0.1	)(2)
		4.8			3.9
Income tax benefit		(1.2	)		(1.0	)
Reclassification net of income tax benefit	$	3.6		$	2.9

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

XML

Pensions (Tables)

3 Months Ended

Mar. 31, 2020

Schedule of Components of Net Pension Income

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

	Three Months Ended March 31,
	2020			2019
Service cost	$	0.4		$	0.4
Interest cost		5.7			7.9
Expected return on plan assets		(13.0	)		(14.3	)
Amortization of unrecognized loss		4.9			4.0
Amortization of prior service cost		(0.1	)		(0.1	)
Defined benefit plan income	$	(2.1	)	$	(2.1	)

XML

Schedule of Weighted-Average Fair Value per Option at Date of Grant (Detail)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Stock Based Compensation [Abstract]
Expected life (years)	5 years 8 months 12 days	5 years 7 months 6 days
Risk-free interest rate	1.60%	2.70%
Dividend yield	2.10%	1.60%
Expected volatility	23.60%	22.80%

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (Parenthetical) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Unrealized net gains (losses) on cash flow derivative instruments, less related income tax provision	$ (0.1)	$ 0.0
Adjustment to pension liability, less related income tax provision	$ (1.2)	$ (1.0)

XML

Schedule of Segment Earnings - Additional Information (Detail)	3 Months Ended
	Mar. 31, 2020 Segment
Segment Reporting Information [Line Items]
Number of reporting segments	2

XML

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($) $ in Millions	Total	Common Class A	Common Stock	Capital in Excess of Par Value	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Stock
Balance at Dec. 31, 2018		$ 131.0	$ 164.5	$ 496.7	$ 2,102.8		$ (827.2)
Net earnings	$ 89.3				89.3
Issuance of share units				(6.1)
Cash dividends on stock					(37.1)
Vesting of share units				(1.9)			2.0
Stock based compensation expense				8.6
Exercises of stock options				0.1			(1.9)
Stock incentives and directors' compensation				6.1
Shares repurchased							(45.6)
Balance at Mar. 31, 2019	1,749.2	131.0	164.5	503.5	2,155.0	$ (332.1)	(872.7)
Balance at Dec. 31, 2019	1,666.8	130.9	164.5	509.0	2,323.4		(1,112.7)
Net earnings	51.7				51.7
Issuance of share units				(6.5)
Cash dividends on stock					(39.0)
Vesting of share units				(1.6)			1.6
Stock based compensation expense				8.8
Exercises of stock options				(0.1)			(1.1)
Stock incentives and directors' compensation				6.5
Shares repurchased							(56.7)
Balance at Mar. 31, 2020	$ 1,616.3	$ 130.9	$ 164.5	$ 516.1	$ 2,336.1	$ (362.4)	$ (1,168.9)