A. O. Smith (AOS) 10-K risk factor changes: FY2016 vs FY2015

| [removed: _•_] [added: •] | | _The effects of [removed: the] [added: a] global economic downturn could have a material adverse effect on our business_ |

The global economy [removed: is still showing] [added: continues to show] signs of [removed: stress,] [added: stress] and could stall or reverse the course of any recovery.

If this were to occur it could adversely affect consumer confidence and spending patterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, or slower adoption of energy efficient water heaters and [removed: boilers] [added: boilers, or high quality water filter products] which could negatively impact our profitability and cash flows.

| [removed: _•_] [added: •] | | _A portion of our business could be affected by a slowdown in the transition of the Chinese economy to a consumer driven [removed: ecomony_] [added: economy_] |

Our sales growth in China has averaged approximately [removed: 19] [added: 18] percent per year [added: in local currency] over the past three [removed: years] [added: years,] and we anticipate sales growth of approximately 15 percent in local currency in [removed: 2016.][added: 2017.]

We [removed: continue to expand] [added: are expanding our manufacturing] capacity for water [removed: heating and water] treatment [added: and air purification] products in China to meet local demand.

If [added: there is] a slowdown in the transition to a more consumer driven economy or the rate [added: of] urbanization was to stall, it could adversely affect our financial condition, results of operations and cash flows.

| [removed: _•_] [added: •] | | _Sales growth of our Lochinvar-branded products could stall resulting in lower than expected revenues and earnings_ |

The compound annual growth rate of [removed: revenues] [added: sales] of our Lochinvar-branded products has been approximately [removed: ten] [added: eight] percent per year since our acquisition of [removed: Lochinvar,] [added: Lochinvar in 2011,] largely due to the transition in the boiler industry in the U.S. from lower efficiency, non-condensing boilers to higher efficiency, [added: higher priced,] condensing [removed: boilers] [added: boilers,] as well as new product introductions.

In 2003, approximately five percent of the boilers sold in the U.S. were condensing [removed: boilers] [added: boilers,] and by [removed: 2013,] [added: 2015,] the percentage had grown to approximately [removed: 40] [added: 43] percent.

[removed: If] [added: We expect] the transition to [added: condensing boilers to continue, but if the transition to] higher efficiency, [added: higher priced,] condensing boilers stalls as a result of lower energy costs, [removed: another] [added: a U.S.] recession occurs, or our competitors’ technologies surpass our technology, our growth rate could be lower than expected.

| [removed: _•_] [added: •] | | _A material loss, cancellation, reduction, or delay in purchases by one or more of our largest customers could harm our business_ |

Net sales to our five largest customers represented approximately [removed: 38] [added: 37] percent of our sales in [removed: 2015.][added: 2016.]

The loss of one or more of our largest customers, any material reduction or delay in sales to these customers, [added: or] our inability to successfully develop relationships with additional [removed: customers, or our inability to execute on pricing actions] [added: customers] could have a material adverse effect on our financial position, results of operations and cash flows.

| [removed: _•_] [added: •] | | _A portion of our business could be adversely affected by a decline in [added: North American] new residential and commercial construction or a decline in replacement related volume_ |

The recovery in residential and commercial construction activity in North America remains fragile and construction could decline again after showing [added: modest] improvements in [removed: 2015.][added: 2016.]

We believe that the majority of the [removed: market] [added: markets] we serve [removed: is] [added: are] for replacement of existing products and replacement related volume growth was strong in 2013 and 2014 before declining in [removed: 2015.][added: 2015 and 2016.]

| [removed: _•_] [added: •] | | _We increasingly sell our products and operate outside the U.S., [added: and to some extent, rely on imports and exports,] which may present additional risks to our business_ |

Approximately 40 percent of our net sales in [removed: 2015] [added: 2016] were attributable to products sold outside of the U.S., primarily in China and Canada and to a lesser extent in Europe and India.

Approximately [removed: 8,100] [added: 9,700] of our [removed: 13,400] [added: 15,500] employees as of December 31, [removed: 2015] [added: 2016] were located in China.

At December 31, [removed: 2015,] [added: 2016,] approximately [removed: $458] [added: $752] million of [removed: our] [added: cash,] cash [added: equivalents] and marketable securities [removed: balances] were [added: held by our foreign subsidiaries, $558 million of which was] located in China.

International operations generally are subject to various risks, [removed: including] [added: including:] political, religious, and economic [removed: instability,] [added: instability;] local labor market [removed: conditions,] [added: conditions;] the imposition of [removed: foreign] tariffs [removed: and] [added: or] other trade restrictions, [added: or changes to trade agreements;] the impact of foreign government regulations, [added: actions or policies;] the effects of income [removed: taxes,] [added: taxes;] governmental [removed: expropriation,] [added: expropriation;] the imposition or increases in withholding and other taxes on remittances and other payments by foreign [removed: subsidiaries,] [added: subsidiaries;] labor relations [removed: problems,] [added: problems;] the imposition of environmental or employment laws, or other restrictions [added: or actions] by foreign [removed: governments] [added: governments;] and differences in business practices.

Unfavorable changes in the political, regulatory, [added: or trade climate, diplomatic relations, or government policies, particularly in relation to countries where we have a presence, including Canada, China] and [removed: business climate] [added: Mexico] could have a material adverse effect on our financial condition, results of operations and cash flows or our ability to repatriate funds to the U.S. [removed: As of December 31, 2015, approximately $645 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.]

We would incur a cost to repatriate these funds to the U.S. and have recorded a liability of approximately [removed: $48] [added: $42] million associated with the repatriation of a portion of those funds.

| [removed: _•_] [added: •] | | _Because we participate in markets that are highly competitive, our revenues and earnings could decline as we respond to competition_ |

| [removed: _•_] [added: •] | | _Our international operations are subject to risks related to foreign currencies_ |

[added: The majority of our foreign currency transaction risk results from sales of our products in Canada which are manufactured in the U.S.] These risks may hurt our reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S. dollars.

| [removed: _•_] [added: •] | | _If we are unable to develop product innovations and improve our technology and expertise, we could lose customers or market share_ |

| [removed: _•_] [added: •] | | _Changes in regulations or standards could adversely affect our business_ |

| [removed: _•_] [added: •] | | _Our business may be adversely impacted by product defects_ |

| [removed: _•_] [added: •] | | _Our operations could be adversely impacted by material price volatility and supplier concentration_ |

| [removed: _•_] [added: •] | | _We are subject to regulation of our international operations that could adversely affect our business and results of operations_ |

Due to our global operations, we are subject to many laws governing international relations, including those that prohibit improper payments to government officials and restrict where we can do business, what information or products we can supply to certain countries and what information we can provide to a [removed: non-U.S.] [added: non–U.S.] government, including but not limited to the Foreign Corrupt Practices Act and the U.S. Export Administration Act.

| [removed: _•_] [added: •] | | _Our results of operations may be negatively impacted by product liability lawsuits and claims_ |

Our [removed: water heating and boiler] products expose us to potential product liability risks that are inherent in the design, manufacture, sale and use of our products.

| [removed: _•_] [added: •] | | _Retention of key personnel is important to our business_ |

Failure to retain key personnel, particularly on the leadership team, [removed: would] [added: could] have a material effect on our business and our ability to execute our business strategies in a timely and effective manner.

| [removed: _•_] [added: •] | | _An inability to adequately maintain our information systems and their security, as well as to protect data and other confidential information, could adversely affect our business and reputation_ |

In the ordinary course of business, we [added: utilize information systems for day-to-day operations, to] collect and store sensitive data and information, including our proprietary and regulated business information and [removed: that] [added: personally identifiable information] of our customers, [removed: suppliers] [added: suppliers, employees] and business partners, as well as personally identifiable information about our employees.

Our information systems, like those of other companies, are susceptible to outages due to [added: system failures, failures on the part of third-party information system providers,] natural disasters, power loss, telecommunications failures, viruses, [removed: break-ins and similar events,] or breaches of security.

We also have operations and business relationships outside the U.S. that comprise a portion of our manufacturing, supply, and distribution.

| • | | _Impact of potential U.S. tax reform_ |

As of December 31, 2016, approximately $752 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.

Additionally, depending on tax proposals currently contemplated in the U.S. we could incur one-time income tax expenses associated with repatriation and the remeasurement of deferred income taxes.

| • | | _Potential acquisitions could use a significant portion of our capital and we may not successfully integrate future acquisitions or operate them profitably or achieve strategic objectives_ |

While we will continue to evaluate potential acquisitions, we could use a significant portion of our available capital to fund future acquisitions.

We expect the transition to continue, which we believe would result in approximately ten percent sales growth in Lochinvar-branded products in 2016 and annually for the foreseeable future after 2016 in conjunction with new product introductions.

| _•_ | | _A failure in our implementation of a new enterprise resource planning system could disrupt our business_ |

We depend on information technology to record and process customers’ orders, manufacture and ship products in a timely manner, and maintain the financial accuracy of our business records.

We are in the midst of implementing a global enterprise resource planning system that is core to our efforts to redesign and deploy new processes and migrate to a common information system across our plants over a period of several years.

There is no certainty that this system will deliver the expected benefits.

Implementation may impact our ability to process transactions accurately and efficiently, which could increase costs and thereby impact profitability or otherwise impact our business.

In addition, the failure to either deliver the application on time, or anticipate the necessary readiness and training needs, could lead to business disruption and loss of customers and revenue and profit.

The majority of our foreign currency transaction risk is a result of our Canadian water heater operations.

| _•_ | | _Acquisitions have contributed to our financial results and we may not be able to identify or complete future acquisitions, which could adversely affect our future growth_ |

Acquisitions we have made have positively impacted our results of operations.

While we will continue to evaluate potential acquisitions and intend to use a significant portion of our available capital for future acquisitions, we may not be able to identify and successfully negotiate suitable acquisitions, obtain financing for future acquisitions on satisfactory terms, utilize cash flows from operations, obtain regulatory approval for certain acquisitions, or otherwise complete acquisitions in the future.

Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water [removed: heaters.][added: heaters, as well as water treatment products.]

Both segments primarily manufacture and market in their respective [removed: region] [added: regions] of the world.

[removed: Primarily for Asia, our] [added: Our] Rest of World segment also manufactures and markets [removed: water treatment products.][added: in-home air purification products in China.]

In [removed: 2015,] [added: 2016,] our North America segment sales were [removed: $1,703.0] [added: $1,743.2] million and our Rest of World segment sales were [removed: $866.1] [added: $965.6] million.

Sales of our products in China grew significantly in [removed: 2015,] [added: 2016,] increasing [removed: 13.7] [added: 12.5] percent over [removed: 2014.][added: 2015.]

Excluding the impact from the [removed: strengthening] [added: appreciation of the] U.S. [removed: dollar,] [added: dollar in 2015,] sales in China increased 16.1 percent in 2015.

We expect sales in [removed: 2016] [added: 2017] in China to grow at a rate of approximately 15 percent in local currency, as we believe overall water heater market growth, geographic expansion, market share gains, [added: and] growth in water treatment [removed: products] and air purification products [removed: and improved product mix] will contribute to our growth.

Price increases for residential and commercial water heaters and higher volumes of commercial water heaters and [removed: condensing commercial] boilers contributed to [removed: 2015] [added: 2016] sales increases in our North America segment.

[added: Partially offsetting these factors was a decline in residential water heater volumes in the U.S.] We expect [added: our] North America residential and commercial water heater industry unit to show modest growth in [removed: 2016.][added: 2017.]

Lochinvar-branded products contributed [removed: $296.0] [added: $300.6] million to our net sales in [removed: 2015,] [added: 2016,] and we expect [removed: ten] [added: over eight] percent sales growth of Lochinvar-branded products in [removed: 2016,] [added: 2017,] driven by the [added: continuing] U.S. industry transition to higher efficiency products and our introduction of new [removed: products; particularly condensing boilers.][added: products.]

We will also continue to look for opportunities to add to our existing operations in the high growth regions [removed: of China and India] demonstrated by our introduction of air purification products in China [added: and water treatment products] in [added: India and Vietnam in] 2015.

Consistent with our stated strategy to expand our core product offering, we acquired [removed: Lochinvar] [added: Aquasana, Inc. (Aquasana)] in [removed: 2011.][added: August 2016.]

Our sales in 2015 were [removed: a record $2,536.5 million surpassing] [added: higher than] 2014 sales of $2,356.0 million by 7.7 percent.

Excluding the impact from the [removed: strengthening] [added: appreciation of the] U.S. dollar against the [removed: Canadian and] Chinese [removed: currencies,] [added: currency that occurred in 2016,] our sales grew [removed: over nine] [added: approximately eight] percent in [removed: 2015.][added: 2016.]

The increase in sales [added: in 2015] was [removed: due] [added: attributable] to higher prices in North America, higher sales of Lochinvar-branded products and commercial water heaters in the [removed: U.S.,] [added: U.S.] as well as [removed: continued] [added: strong] demand for our water heating and water treatment products in China.

Sales in China grew [removed: 13.7] [added: 12.5] percent in [removed: 2015.][added: 2016.]

Excluding the impact from the [removed: stronger] [added: strengthening] U.S. dollar, [removed: China] sales [added: in China] increased [removed: 16.1] [added: 18.9] percent in [removed: 2015.][added: 2016.]

Sales of water heaters and water treatment products in China grew [removed: 18.4] [added: 13.7] percent [removed: to $694.0 million] in [removed: 2014] [added: 2015] compared to [removed: 2013.][added: 2014.]

Our gross profit margin in [removed: 2015] [added: 2016] increased to [removed: 39.8] [added: 41.7] percent from [removed: 36.5] [added: 39.8] percent in [removed: 2014.][added: 2015.]

The higher margin in [removed: 2015] [added: 2016] was due to price increases in the [removed: U.S.] [added: U.S., lower material costs in the first half of 2016] and [removed: Canada,] higher [removed: U.S.] sales of [removed: commercial] boilers and commercial water heaters [removed: which have] [added: in the U.S. Our gross profit margin in 2015 increased from 36.5 percent in 2014 primarily due to price increases in the U.S. and Canada,] higher [removed: margins,] [added: U.S. sales of commercial water heaters and boilers,] lower steel costs and a reduction in pension-related costs.

Selling, general and administrative (SG&A) expenses were [removed: $38.6] [added: $48.2] million higher in [removed: 2015] [added: 2016] than in [removed: 2014.][added: 2015.]

[removed: The increase in] SG&A expenses [added: were $38.6 million higher] in 2015 [removed: to $610.7 million was] [added: than in 2014] primarily due to higher selling and engineering costs [removed: in support of] [added: supporting] increased volumes in China as well as higher costs associated with the 2015 launch of air purification products in China which more than offset [added: lower pension costs in the U.S.]

Pension [removed: expense] [added: income] in [removed: 2015] [added: 2016] was [removed: $0.1] [added: $6.9] million compared to [removed: $28.6] [added: pension expense of $0.1] million in [removed: 2014] [added: 2015] and [removed: $27.9] [added: $28.6] million in [removed: 2013.][added: 2014.]

The significant decrease in pension expense in 2015 compared to [removed: prior years] [added: 2014] was due to the sunset of our pension plan for the majority of our employees on December 31, 2014.

Interest expense was [removed: $7.4] [added: $7.3] million in [removed: 2015] [added: 2016] compared to [added: $7.4 million in 2015 and] $5.7 million in 2014.

The higher interest expense in 2015 [added: compared to 2014] was primarily related to interest rates on term notes in the amount of $75 million issued in January 2015 that were higher than the interest rate on the revolving credit facility that it replaced as well as higher overall debt levels related to share repurchases.

Other income was [removed: $10.8] [added: $9.4] million in [removed: 2015] [added: 2016] compared to [removed: $5.2] [added: $10.8] million in [removed: 2014] [added: 2015] and [removed: $3.8] [added: $5.2] million in [removed: 2013.][added: 2014.]

The [removed: increases] [added: increase] in other income in 2015 [removed: and] [added: compared to] 2014 [removed: were] [added: was] primarily due to higher interest income [removed: compared to] [added: resulting from a higher level of marketable securities during] the [removed: preceding] year.

Our effective tax rate was [removed: 29.7] [added: 29.4] percent in [removed: 2015,] [added: 2016,] compared with [removed: 27.5] [added: 29.7] percent in [removed: 2014] [added: 2015] and [removed: 28.2] [added: 27.5] percent in [removed: 2013.][added: 2014.]

The higher effective tax rate in 2015 [added: compared to 2014] was primarily due to a change in geographic earnings [removed: mix as compared to the prior year.][added: mix.]

[removed: Our North America segment sales were $1,703.0 million] [added: Sales] in 2015 [removed: or] [added: were] $81.3 million higher than sales of $1,621.7 million in 2014.

The sales increase in 2015 resulted from [removed: higher prices] [added: a price increase for residential water heaters] in the U.S. [removed: and Canada] [added: due to a regulatory change in April 2015] and higher volumes of commercial water heaters and condensing commercial boilers in the U.S., partially offset by lower residential volumes in the U.S. and [removed: an unfavorable currency impact] [added: a decrease] in [removed: Canada.][added: the translated value of the Canadian dollar during 2015.]

North America operating earnings were [removed: $339.9] [added: $385.9] million in [removed: 2015] [added: 2016] compared to operating earnings of [removed: $238.7] [added: $339.9] million and [removed: $211.9] [added: $238.7] million in [removed: 2014] [added: 2015] and [removed: 2013,] [added: 2014,] respectively.

Operating margins were [removed: 20.0] [added: 22.1] percent, [removed: 14.7] [added: 20.0] percent and [removed: 13.9] [added: 14.7] percent in [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013,] [added: 2014,] respectively.

The significantly higher operating earnings and operating margin in 2015 [added: compared to 2014] were primarily due to higher prices in the U.S. and Canada, higher sales of Lochinvar-branded products and commercial water heaters in the U.S., lower steel costs and lower pension costs which more than offset lower residential water heater volumes in the U.S. [removed: Higher] [added: We expect North America] operating [removed: earnings in 2014 compared to 2013 were primarily due] [added: margin] to [removed: higher volumes] [added: be between 21.5 and 22.25 percent] in [added: 2017, despite] the [removed: U.S. which were partially offset by higher material costs and approximately $9 million] [added: headwind from lower Aquasana margins] of [removed: incremental ERP implementation costs.][added: almost 50 basis points.]

Sales in our Rest of World segment in [removed: 2015] [added: 2016] were [removed: $866.1] [added: $965.6] million or [removed: $97.8] [added: $99.5] million higher than sales of [removed: $768.3] [added: $866.1] million in [removed: 2014.][added: 2015.]

Sales in [removed: China increased approximately $95] [added: 2015 were $97.8] million [added: higher than sales of $768.3 million in 2014] due to higher demand for water heaters, approximately $35 million of incremental sales of water treatment products and approximately $9 million in sales of our newly launched in-home air purification products.

Rest of World operating earnings were [removed: $113.0] [added: $129.1] million in [removed: 2015] [added: 2016] compared to operating earnings of [removed: $106.7] [added: $113.0] million and [removed: $88.0] [added: $106.7] million in [removed: 2014] [added: 2015] and [removed: 2013,] [added: 2014,] respectively.

Segment operating margins were [removed: 13.0] [added: 13.4] percent in [removed: 2015 as] [added: 2016] compared to [removed: 13.9] [added: 13.0] percent and [removed: 13.2] [added: 13.9] percent in [removed: 2014] [added: 2015] and [removed: 2013,] [added: 2014,] respectively.

Higher operating earnings in 2015 were primarily due to higher sales in China and lower steel costs that were partially offset by lower sales of highly profitable commercial water heaters in China, increased SG&A expenses and approximately $1.5 million of higher losses in India [removed: as] compared to 2014.

Aquasana designs, assembles and markets premium performance water treatment products, including whole-house treatment systems, drinking water solutions for at home and on-the-go, and shower filters.

Aquasana sells products primarily directly to U.S. consumers through e-commerce, as well as through retail outlets and distributors.

With a three year compound annual revenue growth rate of 17 percent as of December 31, 2016, Aqausana fits squarely within our stated strategy to expand our core product offerings to new geographies that present growth opportunities.

Our sales in 2016 were a record $2,685.9 million surpassing 2015 sales of $2,536.5 million by 5.9 percent.

The increase in sales in 2016 was primarily due to higher sales in China of water heaters, residential air purification products, as well as 35 percent sales growth of A. O. Smith-branded water treatment products.

Sales in China grew 12.5 percent in 2016, and excluding the impact of the appreciation of the U.S. dollar, sales in China increased 18.9 percent in 2016.

Our sales in 2016 also benefitted from price increases in the U.S., higher volumes of U.S. boilers and commercial water heaters as well as $18.4 million of sales of Aquasana-branded water treatment products resulting from our acquisition of Aquasana in August 2016.

These items more than offset lower volumes of U.S. residential water heaters.

Sales of water heaters and water treatment products in China grew 16.1 percent in 2015 compared to 2014, excluding impact of the appreciation of the U.S. dollar in 2015.

The increase in SG&A expenses in 2016 to $658.9 million was primarily due to higher selling costs supporting our sales efforts in tier 2 and tier 3 cities in China as well as higher advertising costs to support brand building in China.

As of December 31, 2015, we changed to a more precise method to estimate the service cost and interest components of net periodic benefit cost for our pension and post-retirement plan.

The change is the primary reason for the $7.1 million decrease in service and interest costs in 2016 compared to 2015.

Our lower effective tax rate in 2016 compared to 2015 was primarily due to our adoption of a new accounting standard for share-based compensation that was partially offset by a change in geographic earnings mix.

Sales in our North America segment sales were $1,743.2 million in 2016 or $40.2 million higher than sales of $1,703.0 million in 2015.

The sales increase in 2016 resulted from a full year of U.S. price increases for residential water heaters related to a regulatory change in April 2015, and an August 2016 price increase in the U.S. related to higher steel prices and other cost inflation.

Sales in 2016 also benefitted from higher volumes of boilers and commercial water heaters in the U.S. as well as the addition of $18.4 million of sales of water treatment products resulting from our Aquasana acquisition.

Lower volumes of U.S. residential water heaters partially offset these benefits.

The higher operating earnings and operating margin in 2016 compared to 2015 were primarily due to pricing actions in the U.S., lower material costs in the first half of 2016 and higher boiler and commercial water heater volumes in the U.S. that were partially offset by lower U.S. residential water heater volumes.

Excluding the impact from the appreciation of the U.S. dollar in 2016, sales in China increased 18.9 percent in 2016 driven by higher demand for water heaters, water treatment products and residential air purification products.

A. O. Smith-branded water treatment sales in China totaled $148 million in 2016 compared to $110 million in 2015.

Sales of in-home air purification products were $26 million in 2016 compared to $9 million in 2015.

Higher operating earnings and operating margin in 2016 compared to 2015 were primarily due to higher sales in China that were partially offset by increased SG&A expenses in China.

Higher selling costs in China to support our sales efforts in tier 2 and tier 3 cities and higher advertising costs to support brand building were the primary drivers of higher SG&A expenses.

Operating earnings in 2016 were also negatively impacted by almost $8 million due to the appreciation of the U.S. dollar in 2016.

We expect 2017 operating margin to exceed 14 percent.

The increase in cash flows in 2016 was primarily due to higher earnings from operations and lower outlays for working capital.

We experienced a series of favorable cash flow impacts in China in the fourth quarter of 2016, including:

| | • | | A decline in accounts receivable balances from the prior year-end, despite higher fourth quarter sales in 2016. We received a series of unanticipated large customer payments late in the fourth quarter of 2016 and benefitted from improved terms with a few customers, all resulting in lower accounts receivable balances; |

| --- | --- | --- | --- |

| | • | | An increase in trade payable balances most notably due to higher inventory in advance of the spring festival occurring in China in the last week in January; and |

| --- | --- | --- | --- |

| | • | | Higher receipts of cash in advance of sales from distribution customers. |

| --- | --- | --- | --- |

We expect higher earnings in 2017 to be more than offset by larger outlays for working capital due to the higher than anticipated cash flows in the fourth quarter of 2016.

Over the two-year period from 2016 to 2017, we expect to generate operating cash of approximately $800 million, which compares with $616 million of operating cash flows during 2014 to 2015.

We broke ground in 2016 on the construction of a new water treatment and air purification products manufacturing facility in Nanjing, China, to support the expected growth of these products in China.

Included in 2016 capital expenditures were approximately $13 million related to capacity expansion in China as well as approximately $11 million related to our enterprise resource planning (ERP) system implementation.

We expect our spending on the manufacturing facility in Nanjing will be approximately $40 million in 2017.

In November 2016, we issued $45 million of fixed rate term notes in two tranches to two insurance companies.

Principal payments commence in 2023 and 2028 and the notes mature in 2029 and 2034, respectively.

We also market in-home air purification products in China.

Partially offsetting these factors was a decline in residential water heater volumes in the U.S. The 13 percent decline in the value of the Canadian dollar against the U.S. dollar during 2015 also negatively impacted sales.

Lochinvar, one of the leading manufacturers of residential and commercial boilers in the U.S., fit squarely within our stated strategic growth initiative to expand our core water heating business.

In 2013, approximately 40 percent of boilers sold in the U.S. were condensing boilers, compared with five percent in 2003.

Our Lochinvar brand is a leading brand of higher efficiency, condensing boilers.

We expect the transition in the U.S. to higher efficiency boilers will continue into the foreseeable future.

Our sales in 2014 were higher than 2013 sales of $2,153.8 million by 9.4 percent.

The increase in 2014 in sales was attributable to higher volumes of water heaters and boilers in the U.S. and higher sales of water heaters and water treatment products in China.

Our gross profit margin in 2014 increased slightly from 35.9 percent in 2013, primarily due to higher volumes of water heaters and boilers in the U.S., partially offset by higher material costs in the U.S., as well as higher volumes of water heaters and water treatment products in the China.

lower pension costs in the U.S. SG&A expenses were $47.6 million higher in 2014 than in 2013 primarily due to higher selling and advertising costs in support of increased volumes in North America and China and approximately $9 million of incremental enterprise resource planning system (ERP) implementation costs.

On March 28, 2013, our Board of Directors approved a plan to transfer residential water heater production from our Fergus, Ontario plant to our other North American facilities.

The majority of our production was consolidated in the second quarter of 2013.

As a result of the capacity rationalization, we incurred pre-tax restructuring and impairment expenses of $22.0 million in 2013 related to employee severance costs, impairments of assets and equipment relocation costs.

In addition, included in operating earnings in 2013 is a pre-tax gain of $11.0 million resulting from a settlement with a former supplier related to previous overcharges and warranty costs.

Interest expense in 2013 was also $5.7 million.

Sales in 2014 were $101.7 million higher than sales of $1,520.0 million in 2013.

The sales increase in 2014 was primarily due to higher volumes of water heaters and boilers in the U.S., which were partially offset by lower water heaters sales in Canada, primarily due to a decline in the value of the Canadian dollar of approximately seven percent versus the U.S. dollar.

Sales for our Rest of World segment in 2014 were $100.3 million higher than sales of $668.0 million in 2013 due to an 18.4 percent increase in sales in China, driven by increased demand for water heaters and water treatment products and a higher priced product mix that was partially offset by lower sales in India resulting from weakness in the housing market and the termination of a co-branding relationship with our largest distributor.

Higher selling and engineering costs in China as well as higher

Higher operating earnings and margins in 2014 as compared to 2013 were due to higher sales of water heaters and water treatment products in China as well as a higher priced product mix as a result of product introductions with higher value features which was partially offset by larger losses in India.

Losses in India were $7.5 million in 2014, including approximately $1 million of product development and advertising expenses in advance of our 2015 launch of water treatment products.

Higher earnings in 2014 were more than offset by higher outlays for working capital.

Included in 2013 capital expenditures was approximately $45 million in China and India for the construction of a second water heater manufacturing plant in Nanjing, China and to continue the expansion of our manufacturing plant near Bangalore, India.

Also included in 2013 capital expenditures was approximately $19 million related to the ERP implementation.

We expect capital spending in 2016 to include approximately $8 million related to our ERP implementation and approximately $40 million related to the initial phase of a new water treatment manufacturing facility in China as we will outgrow capacity in a leased facility in the next few years.

We were not required to make a contribution to our pension plan in 2015 and we did not make any voluntary contributions.

At December 31,

| Long-term debt | | $ | 249.0 | | | $ | 12.9 | | | $ | 161.1 | | | $ | 6.8 | | | $ | 68.2 | |

| Fixed rate interest | | | 25.6 | | | | 3.8 | | | | 6.0 | | | | 5.0 | | | | 10.8 | |

| Operating leases | | | 39.5 | | | | 19.7 | | | | 8.1 | | | | 4.5 | | | | 7.2 | |

| Purchase obligations | | | 98.0 | | | | 97.2 | | | | 0.8 | | | | — | | | | — | |

| Pension and post-retirement obligations | | | 72.1 | | | | 2.2 | | | | 8.7 | | | | 8.1 | | | | 53.1 | |

| Total | | $ | 484.2 | | | $ | 135.8 | | | $ | 184.7 | | | $ | 24.4 | | | $ | 139.3 | |

In November 2015, the Financial Accounting Standards Board (FASB) amended Accounting Standard Codification (ASC) 740, _Income Taxes_ (issued under Accounting Standards No. (ASN) 2015-17).

This amendment requires that deferred tax assets and liabilities be classified as noncurrent in the statement of financial position.

The amendment is effective for periods beginning January 1, 2016 and allows for either prospective adoption or retrospective adoption.

We expect the adoption of amended ASC 740 to impact the classification of deferred taxes on our consolidated balance sheet.

In April 2015, the FASB amended ASC 835-30, _Interest - Imputation of Interest_ (issued under ASN 2015-03).

This amendment to ASC 835-30 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

The recognition and measurement guidance for debt issuance costs is not affected by this amendment.

Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water [removed: heaters.][added: heaters, as well as water treatment products.]

Primarily for Asia, [removed: our Rest of World segment] [added: we] also [removed: manufactures] [added: manufacture] and [removed: markets] [added: market] water treatment [added: products and air purification] products.

We also [added: manufacture and] market in-home air purification products in China.

The following table summarizes our [removed: sales from continuing operations.][added: sales.]

| | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | |

| North America | | $ | [removed: 1,703.0] [added: 1,743.2] | | | $ | [removed: 1,621.7] [added: 1,703.0] | | | $ | [removed: 1,520.0] [added: 1,621.7] | | | $ | [removed: 1,430.8] [added: 1,520.0] | | | $ | [removed: 1,289.5] [added: 1,430.8] | |

| Rest of World | | | [removed: 866.1] [added: 965.6] | | | | [removed: 768.3] [added: 866.1] | | | | [removed: 668.0] [added: 768.3] | | | | [removed: 542.5] [added: 668.0] | | | | [removed: 455.6] [added: 542.5] | |

| Inter-segment | | | [removed: (32.6] [added: (22.9] | ) | | | [removed: (34.0] [added: (32.6] | ) | | | [removed: (34.2] [added: (34.0] | ) | | | [removed: (34.0] [added: (34.2] | ) | | | [removed: (34.6] [added: (34.0] | ) |

| Total Sales | | $ | [removed: 2,536.5] [added: 2,685.9] | | | $ | [removed: 2,356.0] [added: 2,536.5] | | | $ | [removed: 2,153.8] [added: 2,356.0] | | | $ | [removed: 1,939.3] [added: 2,153.8] | | | $ | [removed: 1,710.5] [added: 1,939.3] | |

Sales in our North America segment increased [removed: 5.0 percent] [added: 2.4 percent,] or [removed: $81.3 million] [added: $40.2 million,] in [removed: 2015] [added: 2016] compared with the prior year.

The sales increase in [removed: 2015] [added: 2016] was the result of price increases in the U.S. [removed: and Canada] for residential and commercial water heaters and higher volumes of commercial water heaters and [removed: condensing commercial] boilers in the U.S. Lower volumes of U.S. residential water heaters [removed: and lower water heater sales in Canada, primarily due to a decline in the value of the Canadian dollar of approximately thirteen percent versus the U.S. dollar,] partially offset these favorable factors.

[added: Our Lochinvar brand is one of the leading residential and commercial boiler brands in the U.S.] Approximately 40 percent of Lochinvar-branded sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-branded sales consist primarily of boilers and related parts.

Our residential and commercial water heaters come in sizes ranging from 2.5 gallon (point-of-use) models to [removed: 12,500] [added: 12,000] gallon products with varying efficiency ranges.

Our North American residential water heater sales in [removed: 2015 were] [added: 2016 totaled] approximately $1.1 billion or 62 percent of North America sales.

_Boilers._ Our residential and commercial boilers range in size from 40,000 British Thermal Units (BTUs) to [removed: 5.0] [added: 6.0] million BTUs.

Our commercial boilers are [removed: used] primarily [added: used] in space heating applications for hospitals, schools, hotels and other large commercial buildings.

_Other._ [removed: Our] [added: In our] North America [removed: segment] [added: segment, we] also [removed: manufactures] [added: assemble and market water treatment products, primarily for the U.S. We also manufacture] expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, [removed: and] related products and parts.

A significant portion of [removed: the sales in] our North America [removed: segment] [added: sales] is derived from the replacement of existing products.

We are the largest manufacturer and marketer of water heaters in North [removed: America, and we have] [added: America with] a leading share in both the residential and commercial markets.

In the commercial market, we believe our comprehensive product line including boilers [added: and our high-efficiency products give us a competitive advantage in this portion of the water heating industry.]

Our wholesale distribution channel includes more than 1,200 independent wholesale plumbing distributors [removed: with more than 4,400 selling locations] serving residential and commercial end markets.

We also sell our residential water heaters through the retail [removed: channel.][added: and maintenance, repair and operations (MRO) channels.]

In [removed: this] [added: the retail] channel, our customers include five of the seven largest national hardware and home center chains, including [added: a] long-standing exclusive [removed: relationships] [added: relationship] with [removed: both Lowe’s and Sears.][added: Lowe’s.]

Our [added: commercial] boiler distribution channel is primarily comprised of manufacturer representative firms.

Sales in our Rest of World segment increased [removed: 12.7] [added: 11.5] percent, or [removed: $97.8] [added: $99.5] million, in [removed: 2015] [added: 2016] compared with the prior year.

A [removed: 13.7] [added: 12.5] percent increase in sales in China to [removed: $789.2] [added: $887.9] million was the primary source of the increase.

Excluding the [removed: impact from] [added: appreciation of] the [removed: stronger] U.S. [removed: dollar, China] [added: dollar in 2016,] sales [added: in China] increased [removed: 16.1] [added: 18.9] percent in [removed: 2015.][added: 2016.]

We have operated in China for [added: more than] 20 years.

In that time, we have been aggressively expanding our presence while building A. O. Smith brand recognition in the [removed: Chinese] residential and commercial markets.

The Chinese water heater market is predominantly comprised of electric wall-hung, [removed: solar and] gas tankless [added: and solar] water heaters.

We sell water heaters in more than [removed: 8,000] [added: 9,000] retail outlets in China, of which over [removed: 2,000] [added: 2,500] exclusively sell our products.

Our water treatment products and air purification products are sold in over [removed: 5,500] [added: 6,500] and [removed: 1,200] [added: 2,500] retail outlets in China, respectively.

In 2008, we established a sales office in India and began importing products specifically designed for [removed: India from our China operations.][added: India.]

We began manufacturing water heaters in India in [removed: 2010.][added: 2010 and water treatment products in 2015.]

Our [added: total] sales in India were [removed: $15.9] [added: $18.2] million in [removed: 2015] [added: 2016] compared with [removed: $15.1] [added: $15.9] million in [removed: 2014.][added: 2015.]

Our primary competitor in China is Haier Appliances, a Chinese company, but we also compete with Midea in the electric water heater and water treatment markets and Rinnai and Noritz in the gas tankless [removed: and solar] water heater [removed: markets.][added: market.]

[removed: We] [added: In India, we] compete with Bajaj and MTS-Racold in the water heater market and Eureka [removed: Forbes and] [added: Forbes,] Kent [added: and Hindustan Unilever] in the water treatment market.

In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in [removed: Turkey,] [added: Turkey and Vietnam,] all of which combined comprised [removed: less than seven] [added: six] percent of total Rest of World sales in [removed: 2015.][added: 2016.]

Our total expenditures for research and development in [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013] [added: 2014] were [removed: $73.7] [added: $80.1] million, [removed: $67.9] [added: $73.7] million and [removed: $57.8] [added: $67.9] million, respectively.

We employed approximately [removed: 13,400] [added: 15,500] employees as of December 31, [removed: 2015,] [added: 2016,] primarily non-union.

Our acquisition of Aquasana, Inc. (Aquasana) a water treatment company, in August 2016, added approximately $18 million of sales in 2016 compared with 2015.

Our water treatment products are primarily sold directly to consumers through e-commerce.

Our Aquasana brand is one of the leading brands in the direct to consumer portion of the water treatment industry in the U.S.

Our principal water treatment competitors in the U.S. are Brita, Culligan and Ecowater.

Our e-commerce sales continue to grow in China reaching nearly $200 million in 2016.

Our principal competitors in the China air purification market are Phillips, Panasonic and Sharp.

On August 22, 2011, we sold our Electrical Products business (EPC) to Regal Beloit Corporation (RBC) for approximately $760 million in cash and approximately 2.83 million shares of RBC common stock valued at $140.6 million as of that date.

Due to the sale, EPC has been reflected as a discontinued operation in the accompanying financial information for all periods presented.

| | | | | | | | | | | | | | | | | | | | | |

Our Lochinvar brand, which we acquired in August 2011, incrementally added approximately $143 million of sales in 2012 compared to 2011.

and our high-efficiency products give us a competitive advantage in this portion of the water heating industry.

Our Lochinvar brand is one of the leading brands of residential and commercial boilers in the U.S.

Primarily for Asia, we also manufacture and market water treatment products.

We also market air purification products primarily for the residential market in China.

Our online sales continue to grow in China and in 2015 reached $140 million.

In India, we compete in the water heater and water treatment markets.

A more detailed discussion of certain of these matters appears in Note [removed: 14] [added: 13] of Notes to Consolidated Financial Statements.

| [removed: x] [added: ☒] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the fiscal year ended December 31, [removed: 2015][added: 2016]

| [removed: ¨] [added: ☐] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

| (State of Incorporation) | | (I.R.S. [removed: Employer Identification] [added: Employer Identification] No.) |

| Title of Each Class | | Shares of Stock Outstanding February [removed: 10, 2016] [added: 13, 2017] | | Name of Each Exchange on Which Registered |

| Class A Common Stock (par value $5.00 per share) | | [removed: 13,121,508] [added: 26,180,295] | | Not listed |

| Common Stock (par value $1.00 per share) | | [removed: 74,677,900] [added: 147,065,441] | | New York Stock Exchange |

[removed: x] [added: ☒] Yes [removed: ¨] [added: ☐] No

[removed: ¨] [added: ☐] Yes [removed: x] [added: ☒] No

[removed: x] [added: ☒] Yes [removed: ¨] [added: ☐] No.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [removed: x]

| Large accelerated filer | | [removed: x] [added: ☒] | | Accelerated filer | | [removed: ¨] [added: ☐] |

| Non-accelerated filer | | [removed: ¨] [added: ☐] (Do not check if a smaller reporting company) | | Smaller reporting company | | [removed: ¨] [added: ☐] |

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

The aggregate market value of voting stock held by non-affiliates of the registrant was [removed: $41,422,906] [added: $47,734,692] for Class A Common Stock and [removed: $5,322,129,940] [added: $6,369,599,814] for Common Stock as of June 30, [removed: 2015.][added: 2016.]

| [removed: |] 1. | Portions of the company’s definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to be incorporated by reference in Part III). |

Year Ended December 31, [removed: 2015][added: 2016]

| [removed: Part I] [added: [Part I](#tx280399_1)] | | | | | | |

| Item 1. | | [removed: [Business](#tx104769_1)] [added: [Business](#tx280399_2)] | | | 3 | |

| Item 1A. | | [Risk [removed: Factors](#tx104769_2)] [added: Factors](#tx280399_3)] | | | 6 | |

| Item 1B. | | [Unresolved Staff [removed: Comments](#tx104769_3)] [added: Comments](#tx280399_4)] | | | 11 | |

| Item 2. | | [removed: [Properties](#tx104769_4)] [added: [Properties](#tx280399_5)] | | | 11 | |

| Item 3. | | [Legal [removed: Proceedings](#tx104769_5)] [added: Proceedings](#tx280399_6)] | | | 11 | |

| Item 4. | | [Mine Safety [removed: Disclosures](#tx104769_6)] [added: Disclosures](#tx280399_7)] | | | 11 | |

| [removed: Part II] [added: [Part II](#tx280399_8)] | | | | | | |

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#tx104769_7)] [added: Securities](#tx280399_9)] | | | [removed: 15] [added: 14] | |

| Item 6. | | [Selected Financial [removed: Data](#tx104769_8)] [added: Data](#tx280399_10)] | | | [removed: 17] [added: 16] | |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#tx104769_9)] [added: Operations](#tx280399_11)] | | | [removed: 18] [added: 17] | |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#tx104769_10)] [added: Risk](#tx280399_12)] | | | [removed: 24] [added: 23] | |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#tx104769_11)] [added: Data](#tx280399_13)] | | | [removed: 25] [added: 24] | |

| Item 9. | | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#tx104769_12)] [added: Disclosure](#tx280399_14)] | | | [removed: 53] [added: 54] | |

| Item 9A. | | [Controls and [removed: Procedures](#tx104769_13)] [added: Procedures](#tx280399_15)] | | | [removed: 53] [added: 54] | |

| Item 9B. | | [Other [removed: Information](#tx104769_14)] [added: Information](#tx280399_16)] | | | [removed: 54] [added: 55] | |

| [removed: Part III] [added: [Part III](#tx280399_17)] | | | | | | |

| Item 10. | | [Directors, Executive Officers and Corporate [removed: Governance](#tx104769_15)] [added: Governance](#tx280399_18)] | | | [removed: 56] [added: 57] | |

| Item 11. | | [Executive [removed: Compensation](#tx104769_16)] [added: Compensation](#tx280399_19)] | | | [removed: 56] [added: 57] | |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#tx104769_17)] [added: Matters](#tx280399_20)] | | | [removed: 56] [added: 57] | |

| Item 13. | | [Certain Relationships and Related Transactions and Director [removed: Independence](#tx104769_18)] [added: Independence](#tx280399_21)] | | | [removed: 57] [added: 58] | |

| Item 14. | | [Principal Accounting Fees and [removed: Services](#tx104769_19)] [added: Services](#tx280399_22)] | | | [removed: 57] [added: 58] | |

| [removed: Part IV] [added: [Part IV](#tx280399_23)] | | | | | | |

10-K 1 d280399d10k.htm FORM 10-K

| | | | | |

☒ Yes ☐ No

| --- | --- |

10-K 1 d104769d10k.htm FORM 10-K

| --- | --- | --- |

Properties utilized by us at December 31, [removed: 2015] [added: 2016] were as follows:

In this segment we have [removed: 12] [added: 15] manufacturing plants located in [removed: five] [added: six] states and two non-U.S. countries, of which [removed: ten] [added: 11] are owned directly by us or our subsidiaries and [removed: two] [added: four] are leased from outside parties.

The terms of leases in effect at December 31, [removed: 2015] [added: 2016] expire between [removed: 2016] [added: 2017] and 2025.

The terms of leases in effect at December 31, [removed: 2015] [added: 2016] expire between [removed: 2016] [added: 2017] and 2020.

| [removed: Randall S. Bednar (63)] [added: Peter R. Martineau (62)] | | Senior Vice President – Chief Information Officer | | [removed: 2007] [added: 2016] to Present |

| Wilfridus M. Brouwer [removed: (57)] [added: (58)] | | Senior Vice President – Asia Corporate Development | | 2015 to Present |

| Paul R. Dana [removed: (53)] [added: (54)] | | Senior Vice President – Global Manufacturing | | 2016 to Present |

| Wei Ding [removed: (53)] [added: (54)] | | Senior Vice President | | 2013 to Present |

| | | President – A. O. Smith (China) Investment Co., Ltd.; General Manager – A. O. Smith (China) Water Heater Co., Ltd. and A. O. Smith [removed: (Shanghai)] [added: (Nanjing)] Water Treatment Products Co. Ltd. | | 2013 to Present |

| Robert J. Heideman [removed: (49)] [added: (50)] | | Senior Vice President – Chief Technology Officer | | 2013 to Present |

| John J. Kita [removed: (60)] [added: (61)] | | Executive Vice President and Chief Financial Officer | | 2011 to Present |

| Charles T. Lauber [removed: (53)] [added: (54)] | | Senior Vice President, Strategy and Corporate Development | | 2013 to Present |

| Mark A. Petrarca [removed: (52)] [added: (53)] | | Senior Vice President – Human Resources and Public Affairs | | 2006 to Present |

| Ajita G. Rajendra [removed: (64)] [added: (65)] | | Chairman, President and Chief Executive Officer | | 2014 to Present |

| James F. Stern [removed: (53)] [added: (54)] | | Executive Vice President, General Counsel and Secretary | | 2007 to Present |

| William L. Vallett Jr. [removed: (56)] [added: (57)] | | Senior Vice President | | 2013 to Present |

| Kevin J. Wheeler [removed: (56)] [added: (57)] | | Senior Vice President | | 2013 to Present |

| | | Vice President – Business Transformation | | 2013 to 2015 |

| | | Vice President – Customer Satisfaction | | 2010 to 2012 |

##### [Table of Contents](#toc)

| | | | | |

| --- | --- | --- | --- | --- |

| Name (Age) | | Positions Held | | Period Position Was Held |

| | | Senior Vice President – Information Technology | | 2006 |

| | | Vice President – Information Technology | | 2001 to 2006 |

On [removed: April 15, 2013,] [added: September 7, 2016,] our Board of Directors declared a two-for-one stock split of our Class A Common Stock and Common Stock [added: (including treasury shares)] in the form of a 100 percent stock dividend to stockholders of record on [removed: April 30, 2013] [added: September 21, 2016] and payable on [removed: May 15, 2013.][added: October 5, 2016.]

| [removed: 2014] [added: 2016] | | 1st Qtr. | | | | 2nd Qtr. | | | | 3rd Qtr. | | | | 4th Qtr. | | |

| (b) | Holders. As of January 31, [removed: 2016,] [added: 2017,] the approximate number of stockholders of record of Common Stock and Class A Common Stock were [removed: 680] [added: 640] and [removed: 200,] [added: 180,] respectively. |

| (c) | Dividends. Dividends declared on the common stock are shown in Note [removed: 16] [added: 15] of Notes to Consolidated Financial Statements appearing elsewhere herein. |

| (d) | Stock Repurchases. In [removed: 2013,] [added: 2015,] our Board of Directors [removed: approved adding 2,000,000 shares of Common Stock to an existing discretionary share repurchase authority. In 2014, our board of directors] authorized the purchase of an additional [removed: 3,500,000] [added: 4,000,000] shares of our Common Stock. In [removed: 2015,] [added: 2016,] our Board of Directors authorized the purchase of an additional [removed: 2,000,000] [added: 3,000,000] shares of our Common Stock. Under the share repurchase program, our Common Stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchase will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. In [removed: 2015,] [added: 2016,] we repurchased [removed: 1,908,237] [added: 3,273,109] shares at an average price of [removed: $67.14] [added: $41.30] per share and at a total cost of [removed: $128.1] [added: $135.2] million. As of December 31, [removed: 2015,] [added: 2016,] there were [removed: 2,589,756] [added: 4,906,403] shares remaining on the existing repurchase authorization. |

The following table sets forth the number of shares of common stock we repurchased during the fourth quarter of [removed: 2015:][added: 2016:]

[removed: |] ISSUER PURCHASES OF EQUITY SECURITIES [removed: | | | | | | | | | | | | | | | | |]

[removed: ][added: ]

| Company/Index | | [removed: 12/31/10 | | | |] 12/31/11 | | | | 12/31/12 | | | | 12/31/13 | | | | 12/31/14 | | | | 12/31/15 | | | [added: | 12/31/16 | | |]

| High | | $ | 38.71 | | | $ | 44.06 | | | $ | 49.70 | | | $ | 51.49 | |

| Low | | | 30.15 | | | | 37.61 | | | | 42.88 | | | | 43.66 | |

| High | | $ | 32.99 | | | $ | 37.20 | | | $ | 38.72 | | | $ | 40.58 | |

| Low | | | 26.75 | | | | 31.76 | | | | 25.05 | | | | 32.12 | |

| October 1 – October 31, 2016 | | | 236,150 | | | $ | 49.15 | | | | 236,150 | | | | 5,396,408 | |

| November 1 – November 30, 2016 | | | 249,008 | | | | 46.37 | | | | 249,008 | | | | 5,147,400 | |

| December 1 – December 31, 2016 | | | 240,997 | | | | 49.24 | | | | 240,997 | | | | 4,906,403 | |

From December 31, 2011 to December 31, 2016

| A. O. Smith Corporation | | | 100.0 | | | | 159.5 | | | | 275.8 | | | | 292.0 | | | | 401.0 | | | | 501.4 | |

| S&P Mid Cap 400 Index | | | 100.0 | | | | 117.9 | | | | 157.4 | | | | 172.8 | | | | 169.0 | | | | 204.1 | |

| Russell 1000 Index | | | 100.0 | | | | 116.4 | | | | 155.0 | | | | 175.4 | | | | 177.0 | | | | 198.4 | |

| High | | $ | 65.99 | | | $ | 74.40 | | | $ | 77.43 | | | $ | 81.15 | |

| Low | | | 53.49 | | | | 63.53 | | | | 50.09 | | | | 64.23 | |

| High | | $ | 53.98 | | | $ | 51.17 | | | $ | 50.91 | | | $ | 57.16 | |

| Low | | | 44.56 | | | | 44.14 | | | | 46.36 | | | | 44.60 | |

| October 1 – October 31, 2015 | | | 192,320 | | | $ | 69.10 | | | | 192,320 | | | | 726,446 | |

| November 1 – November 30, 2015 | | | 136,690 | | | | 76.98 | | | | 136,690 | | | | 589,756 | |

| December 1 – December 31, 2015 | | | — | | | | — | | | | — | | | | 2,589,756 | |

From December 31, 2010 to December 31, 2015

| | | | | | | | | | | | | | | | | | | | | | | | | |

| A. O. Smith Corporation | | | 100.0 | | | | 107.0 | | | | 170.7 | | | | 295.1 | | | | 312.5 | | | | 429.0 | |

| S&P Mid Cap 400 Index | | | 100.0 | | | | 97.8 | | | | 115.2 | | | | 153.8 | | | | 168.9 | | | | 165.2 | |

| Russell 1000 Index | | | 100.0 | | | | 116.1 | | | | 135.2 | | | | 179.9 | | | | 203.7 | | | | 205.5 | |

| | | [removed: 2015] [added: 2016(1)] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013(1)] [added: 2014] | | | | [removed: 2012] [added: 2013(2)] | | | | [removed: 2011(2)(3)] [added: 2012(3)] | | |

| Net sales [removed: – continuing operations] | | $ | [removed: 2,536.5] [added: 2,685.9] | | | $ | [removed: 2,356.0] [added: 2,536.5] | | | $ | [removed: 2,153.8] [added: 2,356.0] | | | $ | [removed: 1,939.3] [added: 2,153.8] | | | $ | [removed: 1,710.5] [added: 1,939.3] | |

| Continuing operations | | | [removed: 282.9] [added: 326.5] | | | | [removed: 207.8] [added: 282.9] | | | | [removed: 169.7] [added: 207.8] | | | | [removed: 162.6] [added: 169.7] | | | | [removed: 111.2] [added: 162.6] | |

| Discontinued operations | | | — | | | | — | | | | — | | | | [removed: (3.9] [added: —] | [removed: )] | | | [removed: 194.5] [added: (3.9] | [added: )] |

| Net earnings | | $ | [removed: 282.9] [added: 326.5] | | | $ | [removed: 207.8] [added: 282.9] | | | $ | [removed: 169.7] [added: 207.8] | | | $ | [removed: 158.7] [added: 169.7] | | | $ | [removed: 305.7] [added: 158.7] | |

| Basic earnings (loss) per share of common [removed: stock(1)] [added: stock(1,2)] | | | | | | | | | | | | | | | | | | | | |

| Discontinued operations | | | — | | | | — | | | | — | | | | [removed: (0.04] [added: —] | [removed: )] | | | [removed: 2.11] [added: (0.02] | [added: )] |

| Diluted earnings (loss) per share of common [removed: stock(1)] [added: stock(1,2)] | | | | | | | | | | | | | | | | | | | | |

| Discontinued operations | | | — | | | | — | | | | — | | | | [removed: (0.04] [added: —] | [removed: )] | | | [removed: 2.09] [added: (0.02] | [added: )] |

| Cash dividends per common [removed: share(1)] [added: share(1,2)] | | $ | [removed: 0.76] [added: 0.48] | | | $ | [removed: 0.60] [added: 0.38] | | | $ | [removed: 0.46] [added: 0.30] | | | $ | [removed: 0.36] [added: 0.23] | | | $ | [removed: 0.30] [added: 0.18] | |

| | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | |

| Long-term debt(4) | | | [removed: 236.1] [added: 316.4] | | | | [removed: 210.1] [added: 236.1] | | | | [removed: 177.7] [added: 210.1] | | | | [removed: 225.1] [added: 177.7] | | | | [removed: 443.0] [added: 225.1] | |

| Total stockholders’ equity | | | [removed: 1,442.3] [added: 1,515.3] | | | | [removed: 1,381.3] [added: 1,442.3] | | | | [removed: 1,328.7] [added: 1,381.3] | | | | [removed: 1,194.1] [added: 1,328.7] | | | | [removed: 1,085.8] [added: 1,194.1] | |

| [removed: (1)] [added: (2)] | In April 2013, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in cash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for all periods presented to reflect the stock dividend. |

| Continuing operations | | $ | 1.87 | | | $ | 1.59 | | | $ | 1.15 | | | $ | 0.92 | | | $ | 0.88 | |

| Net earnings | | $ | 1.87 | | | $ | 1.59 | | | $ | 1.15 | | | $ | 0.92 | | | $ | 0.86 | |

| Continuing operations | | $ | 1.85 | | | $ | 1.58 | | | $ | 1.14 | | | $ | 0.91 | | | $ | 0.87 | |

| Net earnings | | $ | 1.85 | | | $ | 1.58 | | | $ | 1.14 | | | $ | 0.91 | | | $ | 0.85 | |

| Total assets | | $ | 2,891.0 | | | $ | 2,629.2 | | | $ | 2,498.1 | | | $ | 2,351.5 | | | $ | 2,245.6 | |

| (1) | In September 2016, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in cash dividends. Basic and diluted earnings per share are calculated using the weighted average shares outstanding which were restated for all periods presented to reflect the stock dividend. |

| (3) | In August 2011, we sold our Electrical Products business (EPC). Due to the sale, EPC is reflected as a discontinued operation. |

| Continuing operations | | $ | 3.19 | | | $ | 2.30 | | | $ | 1.84 | | | $ | 1.76 | | | $ | 1.20 | |

| Net earnings | | $ | 3.19 | | | $ | 2.30 | | | $ | 1.84 | | | $ | 1.72 | | | $ | 3.31 | |

| Continuing operations | | $ | 3.16 | | | $ | 2.28 | | | $ | 1.83 | | | $ | 1.75 | | | $ | 1.19 | |

| Net earnings | | $ | 3.16 | | | $ | 2.28 | | | $ | 1.83 | | | $ | 1.71 | | | $ | 3.28 | |

| Total assets | | $ | 2,646.5 | | | $ | 2,515.3 | | | $ | 2,391.5 | | | $ | 2,278.8 | | | $ | 2,349.0 | |

| (2) | In August 2011, we sold EPC which is reflected as a discontinued operation for all periods presented. |

| (3) | In August 2011, we acquired Lochinvar. |

We have audited the accompanying consolidated balance sheets of A. O. Smith Corporation as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity and cash flows for each of the three years in the period ended December 31, [removed: 2015.][added: 2016.]

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of A. O. Smith Corporation at December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2015,] [added: 2016,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), A. O. Smith Corporation’s internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, [removed: 2016] [added: 2017] expressed an unqualified opinion thereon.

[removed: |] Ernst & Young LLP [removed: |]

| | | [added: 2016 | | | |] 2015 | | | | 2014 | | |

| Cash and cash equivalents | | $ | [removed: 323.6] [added: 330.4] | | | $ | [removed: 319.4] [added: 323.6] | |

| Marketable securities | | | [removed: 321.6] [added: 424.2] | | | | [removed: 222.5] [added: 321.6] | |

| Receivables | | | [removed: 501.4] [added: 518.7] | | | | [removed: 475.4] [added: 501.4] | |

| Inventories | | | [removed: 222.9] [added: 251.1] | | | | [removed: 208.3] [added: 222.9] | |

| Other current assets | | | [removed: 45.9] [added: 37.6] | | | | [removed: 52.9] [added: 33.8] | |

| Total Current Assets | | | [removed: 1,455.3] [added: 1,562.0] | | | | [removed: 1,319.0] [added: 1,403.3] | |

| Net property, plant and equipment | | | [removed: 442.7] [added: 461.9] | | | | [removed: 427.7] [added: 442.7] | |

| Goodwill | | | [removed: 420.9] [added: 491.5] | | | | [removed: 428.8] [added: 420.9] | |

| Other intangibles | | | [removed: 291.0] [added: 308.3] | | | | [removed: 308.5] [added: 291.0] | |

| Trade payables | | $ | [removed: 424.9] [added: 528.6] | | | $ | [removed: 393.8] [added: 424.9] | |

| Accrued payroll and benefits | | | [removed: 81.5] [added: 84.3] | | | | [removed: 70.3] [added: 81.5] | |

| Accrued liabilities | | | [removed: 90.2] [added: 101.0] | | | | [removed: 85.1] [added: 90.2] | |

| Product warranties | | | [removed: 43.7] [added: 44.5] | | | | [removed: 42.3] [added: 43.7] | |

| Long-term debt due within one year | | | [removed: 12.9] [added: 7.2] | | | | [removed: 13.7] [added: 12.9] | |

| Total Current Liabilities | | | [removed: 653.2] [added: 765.6] | | | | [removed: 605.2] [added: 653.2] | |

| Long-term debt | | | [removed: 236.1] [added: 316.4] | | | | [removed: 210.1] [added: 236.1] | |

| Product warranties | | | [removed: 95.6] [added: 96.4] | | | | [removed: 93.9] [added: 95.6] | |

| Pension liabilities | | | [removed: 134.2] [added: 109.0] | | | | [removed: 133.1] [added: 134.2] | |

| Capital in excess of par value | | | [removed: 617.4] [added: 477.6] | | | | [removed: 600.1] [added: 469.3] | |

| Retained earnings | | | [removed: 1,350.7] [added: 1,593.0] | | | | [removed: 1,135.5] [added: 1,350.7] | |

| Accumulated other comprehensive loss | | | [removed: (313.4] [added: (363.2] | ) | | | [removed: (272.0] [added: (313.4] | ) |

| Treasury stock at cost | | | [removed: (360.5] [added: (488.1] | ) | | | [removed: (230.5] [added: (360.5] | ) |

| Total Stockholders’ Equity | | [added: $] | [added: 1,515.3 | | | $ |] 1,442.3 | | | [added: $] | 1,381.3 | |

| Total Liabilities and Stockholders’ Equity | | $ | [removed: 2,646.5] [added: 2,891.0] | | | $ | [removed: 2,515.3] [added: 2,629.2] | |

| | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Net sales | | $ | [removed: 2,536.5] [added: 2,685.9] | | | $ | [removed: 2,356.0] [added: 2,536.5] | | | $ | [removed: 2,153.8] [added: 2,356.0] | |

| Cost of products sold | | | [removed: 1,526.7] [added: 1,566.6] | | | | [removed: 1,496.7] [added: 1,526.7] | | | | [removed: 1,380.0] [added: 1,496.7] | |

| Gross profit | | | [removed: 1,009.8] [added: 1,119.3] | | | | [removed: 859.3] [added: 1,009.8] | | | | [removed: 773.8] [added: 859.3] | |

| Selling, general and administrative expenses | | | [removed: 610.7] [added: 658.9] | | | | [removed: 572.1] [added: 610.7] | | | | [removed: 524.5] [added: 572.1] | |

| Interest expense | | | [removed: 7.4] [added: 7.3] | | | | [removed: 5.7] [added: 7.4] | | | | 5.7 | |

| Other income - net | | | [removed: (10.8] [added: (9.4] | ) | | | [removed: (5.2] [added: (10.8] | ) | | | [removed: (3.8] [added: (5.2] | ) |

| Earnings before provision for income taxes | | | [removed: 402.5] [added: 462.5] | | | | [removed: 286.7] [added: 402.5] | | | | [removed: 236.4] [added: 286.7] | |

| Provision for income taxes | | | [removed: 119.6] [added: 136.0] | | | | [removed: 78.9] [added: 119.6] | | | | [removed: 66.7] [added: 78.9] | |

| Net Earnings | | $ | [removed: 282.9] [added: 326.5] | | | $ | [removed: 207.8] [added: 282.9] | | | $ | [removed: 169.7] [added: 207.8] | |

| Net Earnings Per Share of Common Stock | | $ | [removed: 3.19] [added: 1.87] | | | $ | [removed: 2.30] [added: 1.59] | | | $ | [removed: 1.84] [added: 1.15] | |

February 17, 2017

| | | 2016 | | | | 2015 | | |

| Other assets | | | 67.3 | | | | 71.3 | |

| Total Assets | | $ | 2,891.0 | | | $ | 2,629.2 | |

| Other liabilities | | | 88.3 | | | | 67.8 | |

| Total Liabilities | | | 1,375.7 | | | | 1,186.9 | |

| Class A Common Stock (shares issued 26,313,351 and 26,373,396) | | | 131.6 | | | | 131.8 | |

| Common Stock (shares issued 164,394,241 and 164,334,196) | | | 164.4 | | | | 164.4 | |

| Acquisitions of businesses | | | (90.8 | ) | | | — | | | | — | |

| Net earnings | | | 326.5 | | | | 282.9 | | | | 207.8 | |

| Foreign currency translation adjustments | | | (39.8 | ) | | | (42.7 | ) | | | (16.6 | ) |

| Unrealized net (loss) gain on cash flow derivative instruments, less related income tax benefit (provision) of $0.6 in 2016, $(0.2) in 2015 and $0.1 in 2014 | | | (1.0 | ) | | | 0.3 | | | | (0.1 | ) |

| Change in pension liability less related income tax benefit (provision) of $5.7 in 2016, $(0.5) in 2015 and $(1.0) in 2014 | | | (9.0 | ) | | | 1.0 | | | | 3.8 | |

On August 22, 2011, the Company sold its Electrical Products business (EPC).

Due to the sale, EPC related items have been reflected as discontinued operations in the consolidated statement of cash flows for all periods presented.

| Years ended December 31 (dollars in millions) | | 2016 | | | | 2015 | | |

| Expense | | | 43.2 | | | | 50.3 | |

| Claims settled | | | (41.6 | ) | | | (47.2 | ) |

Refer to the Recent Accounting Pronouncements section later in this footnote for additional information on the adoption of this pronouncement.

As required under amended ASC 718, in the year ended December 31, 2016, the Company recognized $5.9 million of discrete income tax benefits on settled stock based compensation awards.

As required under previous guidance, in the year ended December 31, 2015, the Company recognized $10.4 million of excess tax deductions as cash flows provided by financing activities.

| Denominator for diluted earnings per share | | | 176,825,280 | | | | 179,009,180 | | | | 181,973,962 | |

This amendment requires that the income tax consequences of an intra-entity transfer of an asset other than inventory be recognized when the transfer occurs.

The amendment is effective for the Company beginning January 1, 2018.

This amendment is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings.

In August 2016, the FASB amended ASC 230, _Statement of Cash Flows_ (issued under ASU 2016-15, “Clarification of Certain Cash Receipts and Cash Payments”).

This amendment clarifies reporting for contingent consideration payments made after a business combination depending on how soon after the acquisition the payments are made.

The Company does not expect the adoption of ASU 2016-15 will have a material impact on its consolidated statement of cash flows.

In March 2016, the FASB amended ASC 718, _Compensation - Stock Compensation_ (issued under ASU 2016-09).

This amendment simplified several aspects of the accounting for share-based payment transactions.

The Company adopted this amendment effective January 1, 2016.

The amendment requires the benefits or deficiencies of tax deductions in excess of or less than the recognized compensation cost to be recorded as income tax benefits or expense in the Consolidated Statement of Earnings in the periods in which they occur.

The amendment also eliminated previous guidance that required unrecognized future excess income tax benefits to be considered used to repurchase shares in the calculation of diluted shares which resulted in lower diluted shares outstanding than the calculation under the amendment.

The Company applied this guidance prospectively.

As such, in the year ended December 31, 2016, the Company recognized $5.9 million of discrete income tax benefits associated with excess tax benefits on settled stock based compensation awards and the Company’s diluted shares outstanding for the year ended December 31, 2016 increased as compared to the way it was calculated under previous guidance.

The amendment also required that cash paid by an employer to a taxing authority when shares are directly withheld for employee income tax withholding purposes be classified as financing activities in the consolidated statement of cash flows.

As required, the Company applied this guidance retrospectively in the presentation of the consolidated statement of cash flows for the period beginning January 1, 2014 and, as a result, reclassified $7.3 million and $0.1 million of cash used by operating activities to cash used by financing activities for the years ended December 31, 2015 and 2014, respectively.

| 1. | Organization and Significant Accounting Policies (continued) |

In February 2016, the FASB amended ASC 842, _Leases_ (issued under ASU 2016-02).

This amendment requires the recognition of lease assets and lease liabilities on the balance sheet for most leasing arrangements currently classified as operating leases.

| |

| --- |

February 17, 2016

| | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Deferred income taxes | | | 39.9 | | | | 40.5 | |

| Other assets | | | 36.6 | | | | 31.3 | |

| Total Assets | | $ | 2,646.5 | | | $ | 2,515.3 | |

| Deferred income taxes | | | 21.3 | | | | 21.4 | |

| Post-retirement benefit obligation | | | 6.2 | | | | 9.6 | |

| Other liabilities | | | 57.6 | | | | 60.7 | |

| Total Liabilities | | | 1,204.2 | | | | 1,134.0 | |

| Class A Common Stock (shares issued 13,186,698 and 13,220,470) | | | 65.9 | | | | 66.1 | |

| Common Stock (shares issued 82,167,098 and 82,133,326) | | | 82.2 | | | | 82.1 | |

| Restructuring, impairment and settlement expenses – net | | | — | | | | — | | | | 11.0 | |

| Loss on disposal of assets | | | 0.6 | | | | 0.1 | | | | 0.2 | |

| Acquisition of business | | | — | | | | — | | | | (4.0 | ) |

Primarily for Asia, the Rest of World segment also manufactures and markets water treatment products.

| Expense | | | 62.8 | | | | 62.2 | |

| Claims settled | | | (59.7 | ) | | | (62.6 | ) |

ASC 718 also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow.

Excess tax deductions of $10.4 million, $2.4 million and $4.8 million were recognized as cash flows provided by financing activities in 2015, 2014 and 2013, respectively.

| Denominator for diluted earnings per share | | | 89,504,590 | | | | 90,986,981 | | | | 92,787,670 | |

The Company expects the adoption of amended ASC 740 to impact the classification of deferred taxes on the Company’s consolidated balance sheet.

This amendment to ASC 835-30 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.

The recognition and measurement guidance for debt issuance costs is not affected by this amendment.

2014-09).

Either full retrospective adoption or modified retrospective adoption is allowed under ASC 606-10.

| 2. | Acquisition |

On February 14, 2013, the Company acquired 100 percent of the shares of MiM Isitma Sogutma Havalandirma ve Aritma Sistemleri San.

Tic.

A.S. (MiM), a privately-held Turkish water treatment company.

The addition of MiM expanded the Company’s product offerings and gave the Company access to Eastern Europe and the Black Sea region water treatment markets.

MiM is included in the Rest of World segment.

The fair value of the purchase price resulted in an allocation to acquired intangible assets totaling $4.3 million of which $2.4 million was assigned to customer lists which are being amortized over ten years.

| 2. | Acquisition (continued) |

Revenues and pre-tax results associated with MiM included in results of operations for the year ended December 31, 2013 were not material to the Company’s net sales or pre-tax earnings.

| 3. | Restructuring, Impairment and Settlement Income |

On March 28, 2013, the Company announced the move of manufacturing operations from its Fergus, Ontario facility to other North American facilities.

In 2013, the Company recognized $22.0 million of pre-tax restructuring and impairment expenses, comprised of impairment charges related to long-lived assets totaling $9.2 million, severance costs of $7.5 million, equipment relocation costs of $2.9 million and inventory obsolescence costs totaling $2.4 million, as well as a corresponding $5.6 million income tax benefit related to the expenses related to this move.

Based on this evaluation, our management has concluded that, as of December 31, [removed: 2015,] [added: 2016,] our internal control over financial reporting was effective.

Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements and the effectiveness of internal controls over financial reporting as of December 31, [removed: 2015] [added: 2016] as stated in their report which is included herein.

In [removed: 2015,] [added: 2016,] we continued the implementation of a new global enterprise resource planning system.

We are testing internal controls over financial reporting for design effectiveness prior to the implementation of each phase, and we have monitoring controls in place over the implementation of these [removed: changes][added: changes.]

Except as described above, there have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act) during the year ended December 31, [removed: 2015] [added: 2016] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As allowed by Securities and Exchange Commission guidance, management excluded from its assessment Aquasana, Inc., which was acquired in 2016 and constituted 3.5 percent and 5.8 percent of total assets and net assets, respectively, as of December 31, 2016 and 0.8 percent and 0.2 percent of net sales and net earnings, respectively, for the year then ended.

We have audited A. O. Smith Corporation’s internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, A. O. Smith Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2015,] [added: 2016,] based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of A. O. Smith Corporation as of December 31, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, [removed: 2015,] [added: 2016,] and our report dated February 17, [removed: 2016] [added: 2017] expressed an unqualified opinion thereon.

[removed: |] Ernst & Young LLP [removed: |]

As indicated in the accompanying Management Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Aquasana, Inc., which is included in the 2016 consolidated financial statements of A. O. Smith Corporation and constituted 3.5 percent and 5.8 percent of total assets and net assets, respectively, as of December 31, 2016 and 0.8 percent and 0.2 percent of net sales and net earnings, respectively, for the year then ended.

Our audit of internal control over financial reporting of A. O. Smith Corporation also did not include an evaluation of the internal control over financial reporting of Aquasana, Inc.

February 17, 2017

| |

| --- |

February 17, 2016

The information included under the headings “Election of Directors” and “Board Committees” in our definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

As a best practice, this code has been executed by [removed: all other company officers and] key financial and accounting personnel as well.

The information included under the heading “Compliance with Section 16(a) of the Securities Exchange Act” in our definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

The information included under the headings “Executive Compensation,” “Director Compensation,” “Report of the Personnel and Compensation Committee” and “Compensation Committee Interlocks and Insider Participation” in the company’s definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

The information included under the headings “Principal Stockholders” and “Security Ownership of Directors and Management” in our definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

The following table provides information about our equity compensation plans as of December 31, [removed: 2015.][added: 2016.]

| (1) | Consists of [removed: 1,326,779] [added: 2,664,333] shares subject to stock options, [removed: 329,262] [added: 519,354] shares subject to employee share units and [removed: 161,918] [added: 285,521] shares subject to director share units. |

| Equity compensation plans approved by security holders | | | 3,469,208 | (1) | | $ | 21.69 | (2) | | | 3,275,459 | (3) |

| Total | | | 3,469,208 | | | $ | 21.69 | | | | 3,275,459 | |

| Equity compensation plans approved by security holders | | | 1,817,959 | (1) | | $ | 36.05 | (2) | | | 1,994,172 | (3) |

| Total | | | 1,817,959 | | | $ | 36.05 | | | | 1,994,172 | |

The information included under the headings “Director Independence and Financial Literacy”, “Compensation Committee Interlocks and Insider Participation” and “Procedure for Review of Related Party Transactions” in our definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

The information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year) required by this Item 14 is incorporated herein by reference.

[added: | |] (a) [added: |] The following documents are filed as part of this Annual Report on Form 10-K: [added: |]

| Consolidated Balance Sheets at December 31, [removed: 2015] [added: 2016] and [removed: 2014] [added: 2015] | | | [removed: 26] [added: 25] | |

| For each of the three years in the period ended December 31, [removed: 2015:] [added: 2016:] | | | | |

| \- Consolidated Statement of Earnings | | | [removed: 27] [added: 26] | |

| \- Consolidated Statement of Comprehensive Earnings | | | [removed: 27] [added: 26] | |

| \- Consolidated Statement of Cash Flows | | | [removed: 28] [added: 27] | |

| \- Consolidated Statement of Stockholders’ Equity | | | [removed: 29] [added: 28] | |

| Notes to Consolidated Financial Statements | | | [removed: 30] [added: 29] - [removed: 53] [added: 54] | |

| [removed: | |] Schedule II - Valuation and Qualifying Accounts | | | [removed: 62] [added: 63] | |

[removed: | | |] Schedules not included have been omitted because they are not applicable. [removed: | | | | |]

| | 3. | Exhibits - see the Index to Exhibits on pages 60 - [removed: 61] [added: 62] of this report. Each management contract or compensatory plan or arrangement required to be filed as an exhibit to this report on Form 10-K are listed as Exhibits 10(a) through 10(m) in the Index to Exhibits. |

| Date: February 17, [removed: 2016] [added: 2017] | | | | By: | | /s/ Ajita G. Rajendra |

| | | | | | | Executive Chairman of [added: the Board of Directors] |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February 17, [removed: 2016] [added: 2017] by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

| _Name and Title_ | | [added: | |] _Signature_ |

| AJITA G. RAJENDRA | | [added: | |] /s/ Ajita G. Rajendra |

| Chairman of the Board, President and Chief Executive Officer | | [added: | |] Ajita G. Rajendra |

| JOHN J. KITA | | [added: | |] /s/ John J. Kita |

| Executive Vice President and Chief Financial Officer | | [added: | |] John J. Kita |

| DANIEL L. KEMPKEN | | [added: | |] /s/ Daniel L. Kempken |

| Vice President and Controller | | [added: | |] Daniel L. Kempken |

| RONALD D. BROWN | | [added: | |] /s/ Ronald D. Brown |

| Director | | [added: | |] Ronald D. Brown |

| GLOSTER B. CURRENT, Jr. | | [added: | |] /s/ Gloster B. Current, Jr. |

| Director | | [added: | |] Gloster B. Current, Jr. |

| WILLIAM P. GREUBEL | | [added: | |] /s/ William P. Greubel |

| Director | | [added: | |] William P. Greubel |

| PAUL W. JONES | | [added: | |] /s/ Paul W. Jones |

| Director | | [added: | |] Paul W. Jones |

| BRUCE M. SMITH | | [added: | |] /s/ Bruce M. Smith |

| Director | | [added: | |] Bruce M. Smith |

| MARK D. SMITH | | [added: | |] /s/ Mark D. Smith |

| Director | | [added: | |] Mark D. Smith |

| IDELLE K. WOLF | | [added: | |] /s/ Idelle K. Wolf |

| Director | | [added: | |] Idelle K. Wolf |

| GENE C. WULF | | [added: | |] /s/ Gene C. Wulf |

| Director | | [added: | |] Gene C. Wulf |

| (3)(i) | | | | [removed: Amended and] Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April [removed: 15, 2013,] [added: 11, 2016,] incorporated by reference to the [removed: annual] [added: quarterly] report on Form [removed: 10-K] [added: 10-Q] for the [removed: fiscal year] [added: quarter] ended [removed: December] [added: March] 31, [removed: 2013.] [added: 2016.] |

| [removed: (3)(ii)] | | [added: (l)] | | [removed: By-laws of] A. O. Smith Corporation [removed: as amended April 11, 2006,] [added: Senior Leadership Severance Plan,] incorporated by [removed: reference to Exhibit 3] [added: Reference] to the quarterly report [removed: on] [added: for] Form 10-Q for the quarter ended June 30, [removed: 2006.] [added: 2009.] |

| (4) | | (a) | | [removed: Amended and] Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April [removed: 15, 2013,] [added: 11, 2016,] incorporated by reference to the [removed: annual] [added: quarterly] report on Form [removed: 10-K] [added: 10-Q] for the [removed: fiscal year] [added: quarter] ended [removed: December] [added: March] 31, [removed: 2013.] [added: 2016.] |

| ILHAM KADRI | | | | /s/ Ilham Kadri |

| Director | | | | Ilham Kadri |

| --- | --- | --- | --- | --- |

| (3)(ii) | | | | By-laws of A. O. Smith Corporation as amended October 13, 2015, incorporated by reference to the current report on Form 8-K dated October 16, 2015. |

| | | (c) | | Amendment No. 1 dated as of December 15, 2016, to the Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith Corporation, A. O Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financial institutions and agents party thereto. |

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| | | | | | | the Board of Directors |

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| MATHIAS F. SANDOVAL | | /s/ Mathias F. Sandoval |

| Director | | Mathias F. Sandoval |

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