A. O. Smith (AOS) 10-K risk factor changes: FY2017 vs FY2016

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

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

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

Approximately [removed: 40] [added: 43] percent of our net sales in [removed: 2016] [added: 2017] were attributable to products sold outside of the U.S., primarily in China and [removed: Canada] [added: Canada,] and to a lesser extent in Europe and India.

Approximately [removed: 9,700] [added: 10,000] of our [removed: 15,500] [added: 16,100] employees as of December 31, [removed: 2016] [added: 2017] were located in China.

At December 31, [removed: 2016,] [added: 2017,] approximately [removed: $752] [added: $815] million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries, [removed: $558] [added: $587] million of which was located in China.

Unfavorable changes in the political, regulatory, or trade climate, diplomatic relations, or government policies, particularly in relation to countries where we have a presence, including Canada, [removed: China] [added: China, India] and [removed: Mexico] [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.

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

Our sales growth in China has averaged approximately [removed: 18] [added: 17.5] percent per year in local currency over the past three years, and we anticipate sales growth of approximately [removed: 15] [added: 13] percent in local currency in [removed: 2017.][added: 2018.]

We [added: expanded our water heater capacity substantially over the last few years and we] are [added: in the process of] expanding our manufacturing capacity for water treatment and air purification products in China to meet local demand.

| [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: 37] [added: 38] percent of our sales in [removed: 2016.][added: 2017.]

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

[removed: The recovery in residential] [added: Residential] and commercial construction activity in North America [removed: remains fragile] [added: has shown modest growth] and [removed: construction] [added: activity] could decline again [removed: after showing modest improvements] in [removed: 2016.][added: the future.]

We believe that the majority of the markets we serve are for replacement of existing products and replacement related volume growth was strong in [removed: 2013 and 2014 before declining in 2015 and 2016.][added: 2017.]

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

Consumer purchasing behavior may shift to [added: new] distribution channels, including e-commerce, which is a rapidly developing area.

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

We have significant operations outside of the U.S., primarily in China and Canada and to a lesser extent Europe and India, and therefore, hold assets, [added: including $587 million of cash in China,] incur liabilities, earn revenues and pay expenses in a variety of currencies other than the U.S. dollar.

The majority of our foreign currency transaction risk results from sales of our products in Canada which [removed: are manufactured] [added: we manufacture] 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.

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

Our success may depend on our ability to adapt to technological changes in the water heating, [removed: boiler and] [added: boiler,] water treatment [added: and air purifier] industries.

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

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

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

| [added: |] • | | _We are subject to [removed: regulation of] [added: U.S. and global laws and regulations covering] our [added: domestic and] 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.

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

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

Attracting and retaining talented employees is important to the continued success [added: and growth] of our business.

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

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

| [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_ |

We continue to take steps to maintain and improve data security and address these risks and uncertainties by implementing and improving internal controls, security technologies, [added: insurance programs,] network and data center resiliency and recovery processes.

| [added: |] • | | _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_ |

[removed: While we] [added: We] will continue to evaluate potential acquisitions, [added: and] we could use a significant portion of our available capital to fund future acquisitions.

| [added: |] • | | _Our underfunded pension plans [added: may] require future pension contributions which could limit our flexibility in managing our company_ |

[removed: Due to the significant negative investment returns in 2008, flat returns in 2015 and falling interest rates in recent years, the] [added: The] projected benefit obligations of our defined benefit pension plans exceeded the fair value of the plan assets by approximately [removed: $109] [added: $48] million at December 31, [removed: 2016.][added: 2017.]

We are forecasting that we will not be required to make a contribution to the plan in [removed: 2017,] [added: 2018,] and we do not plan to make any voluntary contributions.

The size of future required pension contributions could result in us dedicating a [removed: substantial] [added: significant] portion of our cash flows from operations to making the contributions which could negatively impact our flexibility in managing the company.

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Global economic growth remains uneven and could stall or reverse course.

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| | • | | _Newly enacted U.S. government tax reform could have a negative impact on the results of future operations_ |

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On December 22, 2017, the Tax Cuts and Jobs Act (U.S. Tax Reform) was enacted effective January 1, 2018 and contained substantial changes to the Internal Revenue Code, some of which could have an adverse effect on our business.

U.S. Tax Reform significantly revises the U.S. corporate income tax by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on undistributed foreign earnings of foreign subsidiaries.

With the enactment of U.S. Tax Reform, our results of operations for the year ended December 31, 2017 included provisional charges for income tax expense of approximately $81.8 million resulting from the deemed repatriation tax on undistributed foreign earnings and the re-measurement of our deferred tax assets and liabilities to reflect the recently enacted 21 percent U.S. federal corporate income tax rate.

These provisional amounts are based on our initial analysis of U.S. Tax Reform.

Given the significant complexity of U.S. Tax Reform, anticipated guidance from the Internal Revenue Service about implementing U.S. Tax Reform, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to U.S. Tax Reform, these provisional amounts may be adjusted in future periods during 2018, which could result in further impact to our results of operations, financial condition and cash flow.

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The global economy continues to show signs of stress and could stall or reverse the course of any recovery.

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

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

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

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

In 2003, approximately five percent of the boilers sold in the U.S. were condensing boilers, and by 2015, the percentage had grown to approximately 43 percent.

Our Lochinvar brand is a leader in residential and commercial condensing boilers.

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

Our North America segment also manufactures and [removed: globally] markets [removed: specialty commercial] water [removed: heating equipment, condensing and non-condensing boilers and water] systems tanks.

[removed: In 2016, our North America segment sales were $1,743.2 million and] [added: Sales in] our Rest of World segment [removed: sales] [added: in 2016] were [removed: $965.6 million.][added: $100 million higher than sales of $866 million in 2015.]

[removed: Excluding] [added: Sales in China grew 12.5 percent in 2016, and excluding] the impact [removed: from] [added: of] the [removed: strengthening] [added: appreciation of the] U.S. dollar, sales in China increased [added: by] 18.9 percent in 2016.

[removed: We] [added: In our Rest of World segment, we] expect [removed: sales in 2017 in] China [added: sales] to grow [added: in 2018] at a rate of approximately [removed: 15 percent in local currency,] [added: 13 percent,] as we believe overall water heater market growth, geographic expansion, market share gains, and growth in water treatment and air purification products will contribute to our growth.

[removed: Lochinvar-branded products contributed $300.6 million to our net] [added: Our] sales [added: of boilers grew 13 percent] in [removed: 2016,] [added: 2017,] and we expect [removed: over eight] [added: ten] percent sales growth [removed: of Lochinvar-branded products] in [removed: 2017,] [added: 2018,] driven by the continuing U.S. industry transition to higher efficiency products and our introduction of new products.

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

Our sales in 2016 were [removed: a record $2,685.9 million surpassing] [added: higher than] 2015 sales of [removed: $2,536.5] [added: $2,537] million by 5.9 percent.

[removed: Excluding] [added: In 2016, excluding] the impact from the appreciation of the U.S. dollar against the Chinese [removed: currency that occurred in 2016,] [added: currency,] our sales grew approximately eight [removed: percent in 2016.][added: percent.]

The increase in sales in [removed: 2016] [added: 2017] was primarily due to higher sales in China [removed: of water heaters, residential air purification products,] as well as [removed: 35 percent] [added: higher] sales [removed: growth] of [removed: A. O. Smith-branded] water [removed: treatment products.][added: heaters and boilers in North America.]

Sales in China grew [removed: 12.5] [added: 15.9] percent [added: to over $1 billion] in [removed: 2016,] [added: 2017,] and excluding the impact of the appreciation of the U.S. dollar, sales in China increased [removed: 18.9] [added: 17.9] percent in [removed: 2016.][added: 2017.]

[removed: These items more than offset lower] [added: Lower] volumes of U.S. residential water [removed: heaters.][added: heaters in 2016 compared to 2015 offset these benefits.]

Our gross profit margin in [removed: 2016 increased] [added: 2017 decreased] to [removed: 41.7] [added: 41.3] percent from [removed: 39.8] [added: 41.7] percent in [removed: 2015.][added: 2016.]

[removed: The higher] [added: Our gross profit] margin in 2016 [removed: was] [added: increased from 39.8 percent in 2015 primarily] due to price increases in the U.S., lower material costs in the first half of 2016 and higher sales of boilers and commercial water heaters in the U.S. [removed: Our gross profit margin in 2015 increased from 36.5 percent in 2014 primarily due to price increases in the U.S. and Canada, higher U.S. sales of commercial water heaters and boilers, lower steel costs and a reduction] [added: than] in [removed: pension-related costs.][added: 2015.]

Selling, general and administrative (SG&A) expenses were [removed: $48.2] [added: $59.3] million higher in [removed: 2016] [added: 2017] than in [removed: 2015.][added: 2016.]

[removed: The increase in] SG&A expenses [added: were $48.2 million higher] in 2016 [removed: to $658.9 million was] [added: than in 2015] 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.

Pension income in [removed: 2016] [added: 2017] was [removed: $6.9] [added: $9.1] million compared to [removed: pension expense of $0.1] [added: $6.9] million in [removed: 2015] [added: 2016] and [removed: $28.6] [added: $0.1] million [added: of pension expense] in [removed: 2014.][added: 2015.]

As of December 31, 2015, we changed to [added: what we believe is] a more precise method to estimate the service cost and interest components of net periodic benefit cost for our pension and post-retirement [removed: plan.][added: plans.]

The change [removed: is] [added: was] the [removed: primary] reason for [removed: the] [added: $7.7 million and] $7.1 million [removed: decrease] [added: of decreases] in [removed: service] [added: 2017] and [removed: interest costs in 2016] [added: 2016, respectively,] compared to [removed: 2015.][added: 2015, in service and interest costs.]

Interest expense was [removed: $7.3] [added: $10.1] million in [removed: 2016] [added: 2017] compared to [removed: $7.4] [added: $7.3] million in [removed: 2015] [added: 2016] and [removed: $5.7] [added: $7.4] million in [removed: 2014.][added: 2015.]

Other income was [removed: $9.4] [added: $10.4] million in [removed: 2016] [added: 2017] compared to [removed: $10.8] [added: $9.4] million in [removed: 2015] [added: 2016] and [removed: $5.2] [added: $10.8] million in [removed: 2014.][added: 2015.]

The increase in other income in [removed: 2015] [added: 2017] compared to [removed: 2014] [added: 2016] was primarily due to higher interest [removed: income resulting from a higher level of marketable securities during the year.][added: income.]

Our effective [added: income] tax rate was [removed: 29.4] [added: 43.1] percent in [removed: 2016,] [added: 2017,] compared with [removed: 29.7] [added: 29.4] percent in [removed: 2015] [added: 2016] and [removed: 27.5] [added: 29.7] percent in [removed: 2014.][added: 2015.]

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

Sales in our North America segment [removed: sales] were [removed: $1,743.2] [added: $1,905] million in [removed: 2016] [added: 2017] or [removed: $40.2] [added: $162] million higher than sales of [removed: $1,703.0] [added: $1,743] million in [removed: 2015.][added: 2016.]

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 [removed: an August] [added: a] 2016 price increase in the U.S. related to higher steel prices and other cost inflation.

North America [removed: operating] [added: segment] earnings were [removed: $385.9] [added: $428.6] million in [removed: 2016] [added: 2017] compared to [removed: operating] [added: segment] earnings of [removed: $339.9] [added: $385.9] million and [removed: $238.7] [added: $339.9] million in [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] respectively.

[removed: Operating] [added: Segment] margins were [removed: 22.1] [added: 22.5] percent, [removed: 20.0] [added: 22.1] percent and [removed: 14.7] [added: 20.0] percent in [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014,] [added: 2015,] respectively.

The higher [removed: operating] [added: segment] earnings and [removed: operating] [added: segment] 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 [removed: U.S. that] [added: U.S., which] were partially offset by lower U.S. residential water heater volumes.

Sales in our Rest of World segment in [removed: 2016] [added: 2017] were [removed: $965.6] [added: $1,116] million or [removed: $99.5] [added: $150] million higher than sales of [removed: $866.1] [added: $966] million in [removed: 2015.][added: 2016.]

[removed: A. O. Smith-branded water] [added: Water] treatment sales in China totaled [removed: $148] [added: $177] million in 2016 compared to [removed: $110] [added: $130] million in 2015.

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

Excluding the impact from the appreciation of the U.S. dollar in [removed: 2015,] [added: 2017,] sales in China increased [removed: 16.1 percent in 2015.][added: 17.9 percent.]

Rest of World [removed: operating] [added: segment] earnings were [removed: $129.1] [added: $149.3] million in [removed: 2016] [added: 2017] compared to [removed: operating] [added: segment] earnings of [removed: $113.0] [added: $129.1] million and [removed: $106.7] [added: $113.0] million in [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] respectively.

Segment [removed: operating] margins were 13.4 percent in [removed: 2016] [added: 2017] compared to [removed: 13.0] [added: 13.4] percent and [removed: 13.9] [added: 13.0] percent in [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] respectively.

Higher [removed: operating] [added: segment] earnings and [removed: operating] [added: segment] margin in 2016 compared to 2015 were primarily due to higher sales in China [removed: 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 [removed: expenses.][added: expenses in 2016.]

Our working capital was [removed: $796.4] [added: $978.3] million at December 31, [removed: 2016] [added: 2017] compared with [removed: $750.1] [added: $796.4] million and [removed: $713.8] [added: $750.1] million at December 31, [removed: 2015] [added: 2016] and December 31, [removed: 2014,] [added: 2015,] respectively.

Cash [removed: generated] [added: generation] in China and sales-related increases in accounts receivable, [removed: inventory] and [removed: accounts payable] [added: inventory] levels explain the majority of the increase in [removed: 2016] [added: 2017] and [removed: 2015.][added: 2016.]

As of December 31, [removed: 2016,] [added: 2017,] essentially all of our [removed: $754.6] [added: $820.0] million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries.

We expect the North America residential water heater industry to have three to 3.5 percent unit growth in 2018.

Due to nearly 20 percent unit growth in 2017, partially driven by an anticipated 2018 regulatory change and resulting pre-buy, we expect the North America commercial water heater industry to have a three percent unit decline in 2018.

We continued to expand our North America water treatment platform with the acquisition of Hague on September 5, 2017.

We expect sales of North America water treatment products to increase by approximately 50 percent in 2018, compared to 2017, primarily due to volume growth and a full year of Hague sales.

In addition, we expect our sales in India to grow over 40 percent in 2018 from approximately $26 million in 2017.

Combining all of these factors, we expect total company sales growth of between 8.5 percent to 9.5 percent in 2018.

Our sales in 2017 were a company record $2,997 million surpassing 2016 sales of $2,686 million by 11.6 percent.

The slightly lower margin in 2017 was due to significantly higher steel costs that more than offset pricing actions taken in 2017 in North America and China.

The increase in SG&A expenses in 2017 to $718.2 million was primarily due to higher selling and advertising expenses to support increased volumes and brand building in our newer product categories.

The higher interest expense in 2017 compared to 2016 was primarily related to higher interest rates as well as higher overall debt levels primarily due to increased share repurchases and acquisitions completed in 2016 and 2017.

The significant increase in our effective income tax rate in 2017 compared to previous years was due to provisional one-time charges associated with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform) of $81.8 million, primarily related to the mandatory repatriation tax on undistributed foreign earnings that we are required to pay over eight years.

Excluding the impact of the U.S. Tax Reform provisional one-time charges, our adjusted effective income tax rate was 27.4 percent in 2017.

Our adjusted effective income tax rate in 2017 was lower than our effective income tax rate in 2016 primarily due to lower U.S. state income taxes and higher deductions for share-based compensation.

We estimate our annual effective income tax rate for the full year 2018 will be approximately 22.0 to 22.5 percent, significantly lower than previous years due to U.S. Tax Reform.

The increase in sales in 2017 compared to 2016 was primarily due to higher volumes of water heaters and boilers, price increases in the U.S. for water heaters largely related to steel cost increases as well as our customer’s pre-buy of commercial water heaters in advance of an anticipated 2018 regulatory change.

North America water treatment sales, comprised of Hague, acquired in September 2017 and Aquasana, acquired in August 2016, incrementally added approximately $40 million of sales in 2017.

Sales in 2016 were $40 million higher than sales of $1,703 million in 2015.

The higher segment earnings and segment margin in 2017 compared to 2016 were primarily due to higher water heater and boiler volumes and pricing actions which were partially offset by higher steel costs.

Segment margin in 2017 also benefitted from lower SG&A expenses as a percent of sales.

We estimate our 2018 North America segment margin will be between 22 and 22.5 percent primarily due to anticipated growth in boiler and residential water heater volumes offset by higher steel costs.

Sales in China grew 15.9 percent to over $1 billion in 2017 due to higher demand for our consumer products, led by water treatment and air purification products and pricing actions primarily due to higher steel and installation costs.

Water heater and water treatment sales in India increased $8 million, over 40 percent, in 2017 compared to 2016.

Higher segment earnings in 2017 compared to 2016 were primarily due to higher sales in China, which included a price increase, partially offset by higher steel costs, higher fees paid to installers and increased SG&A expenses.

Higher SG&A expenses in China were primarily due to the expansion of water treatment and air purification product retail outlets in tier 2 and tier 3 cities, higher advertising expenses related to brand building in our newer product

categories and higher water treatment product development engineering costs.

We expect 2018 Rest of World segment margin to expand 30 to 40 basis points compared to 2017.

In December 2017, we recorded provisional one-time charges of $81.8 million primarily associated with the mandatory repatriation tax of undistributed foreign earnings under U.S. Tax Reform.

In addition, we had an existing accrual of $38.6 million associated with withholding taxes due upon issuance of foreign dividends.

We expect to repatriate approximately $200 million in the first half of 2018 and use the proceeds to repay floating rate debt.

We anticipate cash provided by operating activities to be $475 to $500 million in 2018, compared to $326 million in 2017, due to higher projected earnings and lower outlays for working capital, particularly inventory.

Included in 2017 capital expenditures were approximately $24 million related to capacity expansion in China.

We project approximately $100 million of capital expenditures in 2018, which includes approximately $30 million related to the completion of capacity expansion in China.

| Long-term debt | | $ | 410.4 | | | $ | 7.5 | | | $ | 6.8 | | | $ | 296.5 | | | $ | 99.6 | |

| Fixed rate interest | | | 34.1 | | | | 4.1 | | | | 7.7 | | | | 6.8 | | | | 15.5 | |

| Operating leases | | | 47.5 | | | | 20.2 | | | | 8.5 | | | | 5.6 | | | | 13.2 | |

| Purchase obligations | | | 118.5 | | | | 118.3 | | | | 0.1 | | | | 0.1 | | | | — | |

| Pension and post-retirement obligations | | | 57.2 | | | | 0.8 | | | | 17.0 | | | | 2.0 | | | | 37.4 | |

| Total | | $ | 667.7 | | | $ | 150.9 | | | $ | 40.1 | | | $ | 311.0 | | | $ | 165.7 | |

Historically, we estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period.

We elected to utilize an approach that discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.

Sales of our products in China grew significantly in 2016, increasing 12.5 percent over 2015.

Price increases for residential and commercial water heaters and higher volumes of commercial water heaters and boilers contributed to 2016 sales increases in our North America segment.

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

Approximately 40 percent of Lochinvar-branded product sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-branded product sales consist primarily of boilers and related parts.

Consistent with our stated strategy to expand our core product offering, we acquired Aquasana, Inc. (Aquasana) in August 2016.

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

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

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

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.

Our sales in 2015 were higher than 2014 sales of $2,356.0 million by 7.7 percent.

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

Sales of water heaters and water treatment products in China grew 13.7 percent in 2015 compared to 2014.

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

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

The significant decrease in pension expense in 2015 compared to 2014 was due to the sunset of our pension plan for the majority of our employees on December 31, 2014.

In 2015, we began making additional Company contributions to a defined contribution plan in lieu of benefits earned in our pension plan.

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

The higher effective tax rate in 2015 compared to 2014 was primarily due to a change in geographic earnings mix.

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

Sales in 2015 were $81.3 million higher than sales of $1,621.7 million in 2014.

The sales increase in 2015 resulted from a price increase for residential water heaters in the U.S. due to a regulatory change in April 2015 and higher volumes of commercial water heaters and condensing commercial boilers in the U.S., partially offset by lower residential volumes in the U.S. and a decrease in the translated value of the Canadian dollar during 2015.

The significantly higher operating earnings and operating margin in 2015 compared to 2014 were primarily due to higher prices in the U.S. and Canada, higher sales of Lochinvar-branded products and commercial water heaters in the U.S., lower steel costs and lower pension costs which more than offset lower residential water heater volumes in the U.S. We expect North America operating margin to be between 21.5 and 22.25 percent in 2017, despite the headwind from lower Aquasana margins of almost 50 basis points.

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

Sales in China grew 13.7 percent in 2015.

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

Earnings in China were reduced by approximately $2.5 million due to the appreciation of the U.S. dollar in 2015.

Higher selling and engineering costs in China as well as higher SG&A costs associated with the 2015 launch of air purification products were the primary drivers for decreased operating margins in 2015 as compared to 2014.

We expect 2017 operating margin to exceed 14 percent.

We would incur a cost to repatriate these funds to the U.S. and have an accrual of $42.3 million for the repatriation of a portion of these funds.

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

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

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

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

The improvement in cash flows in 2015 was primarily due to higher earnings from operations and lower outlays for working capital driven primarily by increases in accounts payable balances in China.

We expect cash provided by operating activities in 2017 to be approximately $350 million.

Included in 2014 capital expenditures was approximately $31 million related to our ERP implementation.

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

During 2016, our Board of Directors authorized the purchase of an additional 3,000,000 shares of our Common Stock.

| Long-term debt | | $ | 323.6 | | | $ | 7.2 | | | $ | 7.2 | | | $ | 202.9 | | | $ | 106.3 | |

| Fixed rate interest | | | 38.6 | | | | 4.6 | | | | 8.1 | | | | 7.2 | | | | 18.7 | |

| --- | --- |

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

Our North America segment also manufactures and [removed: globally] markets [removed: specialty commercial] water [removed: heating equipment, condensing and non-condensing boilers and water systems] [added: system] tanks.

We also manufacture and market [removed: in-home] [added: water treatment products and] air purification [removed: products] [added: products, primarily] in China.

| | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | |

| North America | | $ | [removed: 1,743.2] [added: 1,904.8] | | | $ | [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] | |

| Rest of World | | | [removed: 965.6] [added: 1,116.3] | | | | [removed: 866.1] [added: 965.6] | | | | [removed: 768.3] [added: 866.1] | | | | [removed: 668.0] [added: 768.3] | | | | [removed: 542.5] [added: 668.0] | |

| Inter-segment | | | [removed: (22.9] [added: (24.4] | ) | | | [removed: (32.6] [added: (22.9] | ) | | | [removed: (34.0] [added: (32.6] | ) | | | [removed: (34.2] [added: (34.0] | ) | | | [removed: (34.0] [added: (34.2] | ) |

| Total Sales | | $ | [removed: 2,685.9] [added: 2,996.7] | | | $ | [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] | |

Sales in our North America segment increased [removed: 2.4] [added: 9.3] percent, or [removed: $40.2] [added: $161.6] million, in [removed: 2016] [added: 2017] compared with the prior year.

The sales increase in [removed: 2016] [added: 2017] was the result of [removed: price increases in the U.S. for residential and commercial water heaters and] higher volumes of [removed: commercial] water heaters and [removed: boilers] [added: boilers, and price increases] in the U.S. [removed: Lower volumes of U.S.] [added: for] residential [added: and commercial] water heaters [removed: partially offset these favorable factors.][added: related to steel cost increases.]

We offer electric, natural [removed: gas,] gas [removed: tankless] and liquid propane [added: tank-type] models as well as [added: tankless (gas and electric), heat pump and] solar tank units.

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

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

[removed: Our wholesale] distribution [removed: channel] [added: channel, where we sell our products primarily under the A. O. Smith and State brands,] includes more than [removed: 1,200] [added: 1,300] independent wholesale plumbing distributors serving residential and commercial end markets.

In the retail channel, our customers include [removed: five] [added: four] of the [removed: seven] [added: six] largest national hardware and home center chains, including a long-standing exclusive relationship with [removed: Lowe’s.][added: Lowe’s where we sell A. O. Smith branded products.]

We compete in each of our targeted market segments based on product design, reliability, quality of products and services, advanced technologies, [removed: product performance,] [added: energy efficiency,] maintenance costs and price.

Our principal water treatment competitors in the U.S. are Brita, [removed: Culligan] [added: Culligan, Kinetico] and [removed: Ecowater.][added: Ecowater as well as numerous independent water quality dealers.]

Sales in our Rest of World segment increased [removed: 11.5] [added: 15.6] percent, or [removed: $99.5] [added: $150.7] million, in [removed: 2016] [added: 2017] compared with the prior year.

A [removed: 12.5] [added: 15.9] percent increase in sales in China to [removed: $887.9 million] [added: over $1 billion] was the primary source of the increase.

Excluding the appreciation of the U.S. [removed: dollar in 2016,] [added: dollar,] sales in China increased [removed: 18.9] [added: 17.9] percent in [removed: 2016.][added: 2017.]

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

We believe we are one of the leading suppliers of water heaters to the residential market in [removed: China,] [added: China in dollar terms,] with a broad product offering including electric, [removed: gas,] gas tankless, heat pump and [removed: solar units] [added: combi boilers] as well as [removed: combi boilers.][added: solar units.]

We sell water heaters in more than [removed: 9,000] [added: 8,000] retail outlets in China, of which over [removed: 2,500] [added: 2,900] exclusively sell our products.

Our water treatment products and air purification products are sold in over [removed: 6,500] [added: 7,400] and [removed: 2,500] [added: 3,500] retail outlets in China, respectively.

Our e-commerce sales [removed: continue] [added: continued] to grow in [removed: China reaching nearly $200] [added: China, to approximately $250] million in [removed: 2016.][added: 2017.]

Our total sales in India were [removed: $18.2] [added: $26.2] million in [removed: 2016] [added: 2017] compared with [removed: $15.9] [added: $18.2] million in [removed: 2015.][added: 2016.]

[removed: Additionally, we] [added: We also] compete with numerous other Chinese private and state-owned water heater and water treatment companies in China.

In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in [added: Hong Kong,] Turkey and Vietnam, all of which combined comprised [added: less than] six percent of total Rest of World sales in [removed: 2016.][added: 2017.]

Our total expenditures for research and development in [removed: 2016, 2015] [added: 2017, 2016] and [removed: 2014] [added: 2015] were [removed: $80.1] [added: $86.4] million, [removed: $73.7] [added: $80.1] million and [removed: $67.9] [added: $73.7] million, respectively.

We employed approximately [removed: 15,500] [added: 16,100] employees as of December 31, [removed: 2016,] [added: 2017,] primarily non-union.

Due to the short-cycle nature of our businesses, none of our operations [removed: sustains] [added: sustain] significant backlogs.

| --- | --- |

Our Rest of World segment also manufactures and markets in-home air purification products in China.

With the acquisition of Aquasana, Inc. (Aquasana) in 2016 and Hague Quality Water International (Hague) in 2017, we entered the North American water treatment market.

Sales of water treatment products in North America totaled $57 million in 2017 and $18 million in 2016.

North America water treatment sales in 2017, comprised of recently acquired Hague as well as a full year of Aquasana, incrementally added approximately $40 million of sales compared with 2016.

_Water treatment products._ Our water treatment products range from on-the-go filtration bottles and point-of-use carbon and reverse osmosis products to point-of-entry water softeners and whole-home water filtrations products.

We also offer a complete line of food and beverage filtration products.

Typical applications for our water treatment products include residences, restaurants, hotels and offices.

A large portion of our sales of water treatment products is comprised of replacement filters.

Our wholesale

We sell our Aquasana branded products primarily directly to consumers through e-commerce as well as on-line retailers including Amazon and through other retail chains.

Our Hague branded products, primarily water softeners, are sold through Hague water quality dealers and home center retail chains.

Our primary competitors in China in the electric water heater market segment are Haier and Midea, Chinese companies.

We compete with Rinnai and Noritz in the gas tankless water heater market segment.

Our principal competitors in the water treatment market are Qinyuan, Angel and Midea.

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 North American residential water heater sales in 2016 totaled approximately $1.1 billion or 62 percent of North America sales.

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.

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

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

| --- | --- |

For the fiscal year ended December 31, [removed: 2016][added: 2017]

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

| Title of Each Class | | Shares of Stock Outstanding February [removed: 13, 2017] [added: 12, 2018] | | Name of Each Exchange on Which Registered |

| Class A Common Stock (par value $5.00 per share) | | [removed: 26,180,295] [added: 26,065,195] | | Not listed |

| Common Stock (par value $1.00 per share) | | [removed: 147,065,441] [added: 145,446,771] | | New York Stock Exchange |

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting [added: company, or emerging growth] company.

See the definitions of “large accelerated filer,” “accelerated [removed: filer” and] [added: filer,”] “smaller reporting [added: company,” and “emerging growth] company” in Rule 12b-2 of the Exchange Act.

The aggregate market value of voting stock held by non-affiliates of the registrant was [removed: $47,734,692] [added: $54,942,874] for Class A Common Stock and [removed: $6,369,599,814] [added: $8,057,328,456] for Common Stock as of June 30, [removed: 2016.][added: 2017.]

| 1. | Portions of the company’s definitive Proxy Statement for the [removed: 2017] [added: 2018] 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: 2016][added: 2017]

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

| Item 1. | | [removed: [Business](#tx280399_2)] [added: [Business](#tx473899_1)] | | | 3 | |

| Item 1A. | | [Risk [removed: Factors](#tx280399_3)] [added: Factors](#tx473899_2)] | | | 6 | |

| Item 1B. | | [Unresolved Staff [removed: Comments](#tx280399_4)] [added: Comments](#tx473899_3)] | | | 11 | |

| Item 2. | | [removed: [Properties](#tx280399_5)] [added: [Properties](#tx473899_4)] | | | 11 | |

| Item 3. | | [Legal [removed: Proceedings](#tx280399_6)] [added: Proceedings](#tx473899_5)] | | | 11 | |

| Item 4. | | [Mine Safety [removed: Disclosures](#tx280399_7)] [added: Disclosures](#tx473899_6)] | | | 11 | |

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

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#tx280399_9)] [added: Securities](#tx473899_7)] | | | [removed: 14] [added: 15] | |

| Item 6. | | [Selected Financial [removed: Data](#tx280399_10)] [added: Data](#tx473899_8)] | | | [removed: 16] [added: 17] | |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#tx280399_11)] [added: Operations](#tx473899_9)] | | | [removed: 17] [added: 18] | |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#tx280399_12)] [added: Risk](#tx473899_10)] | | | [removed: 23] [added: 25] | |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#tx280399_13)] [added: Data](#tx473899_11)] | | | [removed: 24] [added: 26] | |

| Item 9. | | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#tx280399_14)] [added: Disclosure](#tx473899_12)] | | | [removed: 54] [added: 56] | |

| Item 9A. | | [Controls and [removed: Procedures](#tx280399_15)] [added: Procedures](#tx473899_13)] | | | [removed: 54] [added: 56] | |

| Item 9B. | | [Other [removed: Information](#tx280399_16)] [added: Information](#tx473899_14)] | | | [removed: 55] [added: 57] | |

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

| Item 10. | | [Directors, Executive Officers and Corporate [removed: Governance](#tx280399_18)] [added: Governance](#tx473899_15)] | | | [removed: 57] [added: 60] | |

| Item 11. | | [Executive [removed: Compensation](#tx280399_19)] [added: Compensation](#tx473899_16)] | | | [removed: 57] [added: 60] | |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#tx280399_20)] [added: Matters](#tx473899_17)] | | | [removed: 57] [added: 60] | |

| Item 13. | | [Certain Relationships and Related Transactions and Director [removed: Independence](#tx280399_21)] [added: Independence](#tx473899_18)] | | | [removed: 58] [added: 61] | |

| Item 14. | | [Principal Accounting Fees and [removed: Services](#tx280399_22)] [added: Services](#tx473899_19)] | | | [removed: 58] [added: 61] | |

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

| Item 15. | | [Exhibits, Financial Statement [removed: Schedules](#tx280399_24)] [added: Schedules](#tx473899_20)] | | | [removed: 59] [added: 62] | |

10-K 1 d473899d10k.htm FORM 10-K

| | | | | 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.

| | | | | | | |

10-K 1 d280399d10k.htm FORM 10-K

| --- | --- |

Properties utilized by us at December 31, [removed: 2016] [added: 2017] were as follows:

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

The terms of leases in effect at December 31, [removed: 2016] [added: 2017] expire between [removed: 2017] [added: 2018] and 2025.

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

The terms of leases in effect at December 31, [removed: 2016] [added: 2017] expire between [removed: 2017] [added: 2018] and 2020.

| --- | --- |

Initial lease terms generally provide for minimum terms of one to six years and have one or more renewal options.

Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of the executive officers which is included as an unnumbered Item in Part I of this report in lieu of being included in our Proxy Statement for our [removed: 2016] [added: 2017] Annual Meeting of Stockholders.

| [removed: Wilfridus M. Brouwer (58)] | | Senior Vice President – Asia Corporate Development | | 2015 to [removed: Present] [added: 2017] |

| Paul R. Dana [removed: (54)] [added: (55)] | | Senior Vice President – Global Manufacturing | | 2016 to Present |

| | | President – APCOM, a division of State Industries, [removed: Inc.,] [added: LLC,] a subsidiary of the Company | | 2011 to [removed: Present] [added: 2017] |

| Wei Ding [removed: (54)] [added: (55)] | | 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 (Nanjing) Water Treatment Products Co. Ltd. | | 2013 to [removed: Present] [added: 2017] |

| Robert J. Heideman [removed: (50)] [added: (51)] | | Senior Vice President – Chief Technology Officer | | 2013 to Present |

| John J. Kita [removed: (61)] [added: (62)] | | Executive Vice President and Chief Financial Officer | | 2011 to Present |

| Charles T. Lauber [removed: (54)] [added: (55)] | | Senior Vice President, Strategy and Corporate Development | | 2013 to Present |

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

| Mark A. Petrarca [removed: (53)] [added: (54)] | | Senior Vice President – Human Resources and Public Affairs | | 2006 to Present |

| Ajita G. Rajendra [removed: (65)] [added: (66)] | | [removed: Chairman, President] [added: Chairman] and Chief Executive Officer | | [removed: 2014] [added: 2017] to Present |

| James F. Stern [removed: (54)] [added: (55)] | | Executive Vice President, General Counsel and Secretary | | 2007 to Present |

| William L. Vallett Jr. [removed: (57)] [added: (58)] | | Senior Vice President | | 2013 to Present |

| [removed: Kevin J. Wheeler (57)] | | Senior Vice President | | 2013 to [removed: Present] [added: 2017] |

| | | President and General Manager – North America, India and Europe Water Heating | | 2013 to [removed: Present] [added: 2017] |

| --- | --- |

EXECUTIVE OFFICERS OF THE COMPANY

Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of our executive officers which is included as an unnumbered Item in Part I of this report in lieu of being included in our Proxy Statement for our 2018 Annual Meeting of Stockholders.

| Wilfridus M. Brouwer (59) | | Senior Vice President – International | | 2017 to Present |

| | | President – A. O. Smith China | | 2017 to Present |

| | | Chairman, President and Chief Executive Officer | | 2014 to 2017 |

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

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

| David R. Warren (53) | | Senior Vice President | | 2017 to Present |

| | | President and General Manager North America Water Heating | | 2017 to Present |

| | | | | |

| | | Vice President – International | | 2008 to 2017 |

| | | | | |

| | | Managing Director – A.O. Smith Water Products Company B.V. | | 2004 to 2008 |

| | | | | |

| | | Director, Reliance Sales | | 2002 to 2004 |

| | | | | |

| | | Regional Sales Manager | | 1999 to 2002 |

| | | | | |

| | | District Sales Manager | | 1990 to 1996 |

| | | | | |

| | | Sales Coordinator | | 1989 to 1990 |

| | | | | |

| Kevin J. Wheeler (58) | | President and Chief Operating Officer | | 2017 to Present |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

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

| (a) | Market Information. Our Common Stock is listed on the New York Stock Exchange under the symbol AOS. Our Class A Common Stock is not listed. [removed: Wells Fargo] [added: EQ] Shareowner Services, [removed: N.A.,] P.O. Box [removed: 64854,] [added: 64874,] St. Paul, Minnesota, [removed: 55164-0854] [added: 55164-0874] serves as the registrar, stock transfer agent and the dividend reinvestment agent for our Common Stock and Class A Common Stock. |

| [removed: 2015] [added: 2017] | | 1st Qtr. | | | | 2nd Qtr. | | | | 3rd Qtr. | | | | 4th Qtr. | | |

| (b) | Holders. As of January 31, [removed: 2017,] [added: 2018,] the approximate number of stockholders of record of Common Stock and Class A Common Stock were [removed: 640] [added: 616] and [removed: 180,] [added: 179,] respectively. |

| (d) | Stock Repurchases. In [removed: 2015, our Board of Directors authorized the purchase of an additional 4,000,000 shares of our Common Stock. In] 2016, our Board of Directors authorized the purchase of an additional 3,000,000 shares of our Common Stock. Under the share repurchase program, our Common Stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchase will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. In [removed: 2016,] [added: 2017,] we repurchased [removed: 3,273,109] [added: 2,533,350] shares at an average price of [removed: $41.30] [added: $54.90] per share and at a total cost of [removed: $135.2] [added: $139.1] million. As of December 31, [removed: 2016,] [added: 2017,] there were [removed: 4,906,403] [added: 2,373,053] shares remaining on the existing repurchase authorization. |

The following table sets forth the number of shares of common stock we repurchased during the fourth quarter of [removed: 2016:][added: 2017:]

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

The graph below shows a five-year comparison of the cumulative shareholder return on our Common Stock with the cumulative total return of the Standard & Poor’s (S&P) [added: 500 Index, S&P 500 Select Industrials Index, S&P] Mid Cap 400 Index and the Russell 1000 Index, [removed: both] [added: all four] of which are published indices.

[removed: ][added: ]

| Company/Index | | [removed: 12/31/11 | | | |] 12/31/12 | | | | 12/31/13 | | | | 12/31/14 | | | | 12/31/15 | | | | 12/31/16 | | | [added: | 12/31/17 | | |]

| High | | $ | 52.56 | | | $ | 57.58 | | | $ | 59.72 | | | $ | 63.70 | |

| Low | | | 46.44 | | | | 49.48 | | | | 53.23 | | | | 58.21 | |

| October 1 – October 31, 2017 | | | 206,000 | | | $ | 60.52 | | | | 206,000 | | | | 2,758,053 | |

| November 1 – November 30, 2017 | | | 204,000 | | | | 59.64 | | | | 204,000 | | | | 2,554,053 | |

| December 1 – December 31, 2017 | | | 181,000 | | | | 61.70 | | | | 181,000 | | | | 2,373,053 | |

The company added the S&P 500 Index and the S&P 500 Select Industrials Index as indices for comparison in this Annual Report on Form 10-K because our common stock was added to the S&P 500 Index in July 2017 and removed from the S&P Midcap 400 Index at the same time.

In future periods, the S&P Midcap 400 Index and the Russell 1000 Index will not be included in the comparison.

From December 31, 2012 to December 31, 2017

| A. O. Smith Corporation | | | 100.0 | | | | 172.9 | | | | 183.1 | | | | 251.4 | | | | 314.2 | | | | 410.9 | |

| S&P 500 Index | | | 100.0 | | | | 132.4 | | | | 150.5 | | | | 152.6 | | | | 170.8 | | | | 208.1 | |

| S&P Mid Cap 400 Index | | | 100.0 | | | | 133.5 | | | | 146.6 | | | | 143.4 | | | | 173.1 | | | | 201.2 | |

| Russell 1000 Index | | | 100.0 | | | | 133.1 | | | | 150.7 | | | | 152.1 | | | | 170.4 | | | | 207.0 | |

| S&P 500 Select Industrial Index | | | 100.0 | | | | 140.8 | | | | 155.9 | | | | 149.3 | | | | 179.3 | | | | 222.6 | |

| 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 | |

| | | [removed: 2016(1)] [added: 2017(1)] | | | | [removed: 2015] [added: 2016(2)] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013(2)] [added: 2014] | | | | [removed: 2012(3)] [added: 2013(3)] | | |

| Net sales | | $ | [removed: 2,685.9] [added: 2,996.7] | | | $ | [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: Continuing operations] [added: Net earnings(1)] | | [added: $] | [removed: 326.5] [added: 296.5] | | | [added: $] | [removed: 282.9] [added: 326.5] | | | [added: $] | [removed: 207.8] [added: 282.9] | | | [added: $] | [removed: 169.7] [added: 207.8] | | | [added: $] | [removed: 162.6] [added: 169.7] | |

| Basic earnings [removed: (loss)] per share of common [removed: stock(1,2)] [added: stock(1,2,3)] | | | | | | | | | | | | | | | | | | | | |

| [removed: Continuing operations] [added: Net earnings] | | $ | [removed: 1.87] [added: 1.72] | | | $ | [removed: 1.59] [added: 1.87] | | | $ | [removed: 1.15] [added: 1.59] | | | $ | [removed: 0.92] [added: 1.15] | | | $ | [removed: 0.88] [added: 0.92] | |

| Diluted earnings [removed: (loss)] per share of common [removed: stock(1,2)] [added: stock(1,2,3)] | | | | | | | | | | | | | | | | | | | | |

| [removed: Continuing operations] [added: Net earnings] | | $ | [removed: 1.85] [added: 1.70] | | | $ | [removed: 1.58] [added: 1.85] | | | $ | [removed: 1.14] [added: 1.58] | | | $ | [removed: 0.91] [added: 1.14] | | | $ | [removed: 0.87] [added: 0.91] | |

| Cash dividends per common [removed: share(1,2)] [added: share(2,3)] | | $ | [removed: 0.48] [added: 0.56] | | | $ | [removed: 0.38] [added: 0.48] | | | $ | [removed: 0.30] [added: 0.38] | | | $ | [removed: 0.23] [added: 0.30] | | | $ | [removed: 0.18] [added: 0.23] | |

| | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | |

| Total assets | | $ | [removed: 2,891.0] [added: 3,197.3] | | | $ | [removed: 2,629.2] [added: 2,891.0] | | | $ | [removed: 2,498.1] [added: 2,629.2] | | | $ | [removed: 2,351.5] [added: 2,498.1] | | | $ | [removed: 2,245.6] [added: 2,351.5] | |

| Long-term debt(4) | | | [removed: 316.4] [added: 402.9] | | | | [removed: 236.1] [added: 316.4] | | | | [removed: 210.1] [added: 236.1] | | | | [removed: 177.7] [added: 210.1] | | | | [removed: 225.1] [added: 177.7] | |

| Total stockholders’ equity | | | [removed: 1,515.3] [added: 1,648.8] | | | | [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)] [added: (2)] | In September 2016, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in 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. |

| [removed: (2)] [added: (3)] | In April 2013, we declared a 100 percent stock dividend to holders of Common Stock and Class A Common Stock which is not included in 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. |

| (1) | Due to the enactment of the U.S. Tax Cuts & Jobs Act in December 2017, we recorded provisional one-time charges of $81.8 million, our estimate of the costs primarily associated with the repatriation of undistributed foreign earnings. These charges reduced earnings per share by $0.47. |

| --- | --- |

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

| Earnings (loss) | | | | | | | | | | | | | | | | | | | | |

| Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | (3.9 | ) |

| Net earnings | | $ | 326.5 | | | $ | 282.9 | | | $ | 207.8 | | | $ | 169.7 | | | $ | 158.7 | |

| Discontinued operations | | | — | | | | — | | | | — | | | | — | | | | (0.02 | ) |

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

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

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

We have audited the accompanying consolidated balance sheets of A. O. Smith Corporation [added: (the Company)] as of December 31, [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] and the related consolidated statements of earnings, comprehensive earnings, stockholders’ [removed: equity] [added: equity,] and cash flows for each of the three years in the period ended December 31, [removed: 2016.][added: 2017, and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the “financial statements”).]

These financial statements [removed: and schedule] are the responsibility of the [removed: company’s] [added: Company’s] management.

Our responsibility is to express an opinion on [removed: these] [added: the Company’s] financial statements [removed: and schedule] based on our audits.

We conducted our audits in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material [removed: misstatement.][added: misstatement, whether due to error or fraud.]

[removed: An audit includes] [added: Such procedures include] examining, on a test basis, evidence [removed: supporting] [added: regarding] the amounts and disclosures in the financial statements.

[removed: An audit] [added: Our audits] also [removed: includes assessing] [added: included evaluating] the accounting principles used and significant estimates made by management, as well as evaluating the overall [added: presentation of the] financial [removed: statement presentation.][added: statements.]

In our opinion, the financial statements [removed: referred to above] present fairly, in all material respects, the consolidated financial position of [removed: A. O. Smith Corporation] [added: the Company] at December 31, [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2016,] [added: 2017,] 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 [removed: States), A. O. Smith Corporation’s] [added: States) (PCAOB), the Company’s] internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] 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 [removed: 17, 2017] [added: 16, 2018] expressed an unqualified opinion thereon.

[removed: Ernst] [added: /s/ Ernst] & Young [removed: LLP][added: LLP]

| | | [added: 2017 | | | |] 2016 | | | | 2015 | | |

| Cash and cash equivalents | | $ | [removed: 330.4] [added: 346.6] | | | $ | [removed: 323.6] [added: 330.4] | |

| Marketable securities | | | [removed: 424.2] [added: 473.4] | | | | [removed: 321.6] [added: 424.2] | |

| Receivables | | | [removed: 518.7] [added: 598.4] | | | | [removed: 501.4] [added: 518.7] | |

| Inventories | | | [removed: 251.1] [added: 291.2] | | | | [removed: 222.9] [added: 251.1] | |

| Other current assets | | | [removed: 37.6] [added: 57.2] | | | | [removed: 33.8] [added: 37.6] | |

| Total Current Assets | | | [removed: 1,562.0] [added: 1,766.8] | | | | [removed: 1,403.3] [added: 1,562.0] | |

| Net property, plant and equipment | | | [removed: 461.9] [added: 528.9] | | | | [removed: 442.7] [added: 461.9] | |

| Goodwill | | | [removed: 491.5] [added: 516.7] | | | | [removed: 420.9] [added: 491.5] | |

| Other intangibles | | | [removed: 308.3] [added: 308.7] | | | | [removed: 291.0] [added: 308.3] | |

| Other assets | | | [removed: 67.3] [added: 76.2] | | | | [removed: 71.3] [added: 67.3] | |

| Total Assets | | $ | [removed: 2,891.0] [added: 3,197.3] | | | $ | [removed: 2,629.2] [added: 2,891.0] | |

| Trade payables | | $ | [removed: 528.6] [added: 535.0] | | | $ | [removed: 424.9] [added: 528.6] | |

| Accrued payroll and benefits | | | [removed: 84.3] [added: 90.8] | | | | [removed: 81.5] [added: 84.3] | |

| Accrued liabilities | | | [removed: 101.0] [added: 110.7] | | | | [removed: 90.2] [added: 101.0] | |

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

| Long-term debt due within one year | | | [removed: 7.2] [added: 7.5] | | | | [removed: 12.9] [added: 7.2] | |

| Total Current Liabilities | | | [removed: 765.6] [added: 788.5] | | | | [removed: 653.2] [added: 765.6] | |

| Long-term debt | | | [removed: 316.4] [added: 402.9] | | | | [removed: 236.1] [added: 316.4] | |

| Product warranties | | | [removed: 96.4] [added: 97.9] | | | | [removed: 95.6] [added: 96.4] | |

| Pension liabilities | | | [removed: 109.0] [added: 48.1] | | | | [removed: 134.2] [added: 109.0] | |

| Other liabilities | | | [removed: 88.3] [added: 211.1] | | | | [removed: 67.8] [added: 88.3] | |

| Total Liabilities | | | [removed: 1,375.7] [added: 1,548.5] | | | | [removed: 1,186.9] [added: 1,375.7] | |

| Class A Common Stock (shares issued [removed: 26,313,351] [added: 26,239,559] and [removed: 26,373,396)] [added: 26,313,351)] | | | [removed: 131.6] [added: 131.2] | | | | [removed: 131.8] [added: 131.6] | |

| Common Stock (shares issued [removed: 164,394,241] [added: 164,468,033] and [removed: 164,334,196)] [added: 164,394,241)] | | | [removed: 164.4] [added: 164.5] | | | | 164.4 | |

| Capital in excess of par value | | | [removed: 477.6] [added: 486.5] | | | | [removed: 469.3] [added: 477.6] | |

| Retained earnings | | | [removed: 1,593.0] [added: 1,792.6] | | | | [removed: 1,350.7] [added: 1,593.0] | |

| Accumulated other comprehensive loss | | | [removed: (363.2] [added: (299.5] | ) | | | [removed: (313.4] [added: (363.2] | ) |

| Treasury stock at cost | | | [removed: (488.1] [added: (626.5] | ) | | | [removed: (360.5] [added: (488.1] | ) |

| Total Stockholders’ Equity | | [added: $] | [added: 1,648.8 | | | $ |] 1,515.3 | | | [added: $] | 1,442.3 | |

Opinion on the Financial Statements

Basis for Opinion

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We have served as A. O. Smith Corporation’s auditor since 1917.

February 16, 2018

| | | 2017 | | | | 2016 | | |

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

| U.S. Tax Reform income tax expense | | | 81.8 | | | | — | | | | — | |

| Long-term debt incurred | | | 86.5 | | | | 74.1 | | | | 28.1 | |

| Acquisition related contingent payment | | | (1.7 | ) | | | — | | | | — | |

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

| Net earnings | | | 296.5 | | | | 326.5 | | | | 282.9 | |

| Foreign currency translation adjustments | | | 52.7 | | | | (39.8 | ) | | | (42.7 | ) |

| Unrealized net (loss) gain on cash flow derivative instruments, less related income tax benefit (provision) of $0.7 in 2017, $0.6 in 2016 and $(0.2) in 2015 | | | (1.1 | ) | | | (1.0 | ) | | | 0.3 | |

| Change in pension liability less related income tax (provision) benefit of $(7.5) in 2017, $5.7 in 2016 and $(0.5) in 2015 | | | 12.1 | | | | (9.0 | ) | | | 1.0 | |

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

| Expense | | | 39.7 | | | | 42.5 | |

| Claims settled | | | (38.2 | ) | | | (40.9 | ) |

In August 2017, the Financial Accounting Standards Board (FASB) amended ASC 815, _Derivatives and Hedging_ (issued under Accounting Standards Update (ASU) 2017-12, “Targeted Improvements to Accounting for Hedging Activities”).

Under this amendment, more hedging strategies are eligible for hedge accounting treatment.

ASU 2017-12 also amends the presentation and disclosure requirements regarding derivatives and hedging and changes how companies assess effectiveness.

In May 2017, the FASB amended ASC 718, _Compensation – Stock Compensation_ (issued under ASU 2017-09, “Scope of Modification Accounting”).

This amendment clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as a modification.

Under this amendment, modification accounting must be used if three conditions are met: the fair value changes, the vesting conditions change, or the classification of the award changes due to the changes in terms or conditions.

The amendment requires adoption on January 1, 2018.

In March 2017, the FASB amended ASC 715, _Compensation – Retirement Benefits_ (issued under ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”).

This amendment changes the way net periodic benefit cost associated with employer-sponsored defined benefit plans is presented in the statement of earnings.

Under the amendment, the service cost component of net periodic benefit cost is included in the same lines in the statement of earnings as other employee compensation costs and the other components of net periodic benefit cost must be presented separately outside of income from operations.

The amendment requires adoption on January 1, 2018.

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 amendment requires adoption on January 1, 2020.

The Company’s diluted shares outstanding for the 2017 and 2016 increased as compared to the way it was calculated under previous guidance.

The Company is in the process of completing its analysis of its lease population and does not expect the adoption of ASU 2016-02 to have a material impact on its consolidated balance sheets, statements of earnings and statements of cash flows.

The Company has completed its review of its customer contracts and its analysis of the impact of the disclosure requirements of ASU 2014-09.

The Company will adopt ASU 2014-09 on January 1, 2018 using the full retrospective method.

The adoption of ASU 2014-09 will not have a material impact on our financial statements on an on-going basis.

On September 5, 2017, the Company acquired 100 percent of the shares of Hague Quality Water International (Hague), an Ohio-based water softener company.

Our audits also included the financial statement schedule listed in the index at Item 15(a).

Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

February 17, 2017

| | | | | | | | | |

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

| Continuing Operations | | | | | | | | | | | | |

| Cash Provided by Operating Activities – continuing operations | | | 447.8 | | | | 352.9 | | | | 265.8 | |

| Cash Used in Operating Activities – discontinued operations | | | (1.2 | ) | | | (1.2 | ) | | | (1.8 | ) |

| Long-term term debt incurred (repaid) | | | 31.8 | | | | 61.7 | | | | (13.9 | ) |

| Long-term debt incurred (repaid) | | | 42.3 | | | | (33.6 | ) | | | 48.1 | |

| --- | --- |

Except when otherwise indicated, amounts reflected in the financial statements or the notes thereto relate to the Company’s continuing operations.

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

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

The fair value of term notes with insurance companies was approximately $104.4 million as of December 31, 2015 compared with the carrying amount of $102.0 million for the same date.

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

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

| Significant other observable inputs (Level 2) | | | — | | | | (0.3 | ) |

| Total assets measured at fair value | | $ | 424.5 | | | $ | 323.6 | |

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.

In November 2015, the FASB amended ASC 740, _Income Taxes_ (issued under ASU 2015-17).

This amendment required that deferred tax assets and liabilities be classified as noncurrent on the balance sheet.

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

The Company adopted ASU 2015-17 retrospectively and, as a result, classified all deferred tax assets and liabilities as non-current on the Company’s consolidated balance sheets for all periods presented.

Current deferred taxes of $39.9 million as of December 31, 2015 were reclassified to non-current deferred taxes on the Company’s consolidated balance sheet.

In July 2015, the FASB amended ASC 330, _Inventory_ (issued under ASU 2015-11, “Simplifying the Measurement of Inventory”).

This amendment requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value.

The Company is awaiting final valuations to support the acquired intangible assets as well as finalizing the accounting for acquired accrued liabilities.

On August 26, 2016, the Company acquired certain assets, primarily inventory, and assumed a lease of a small electric water heater manufacturer serving the North America market.

The Company paid $5.7 million for the assets.

Under the purchase agreement, the Company agreed to make additional contingent payments for the acquired assets if certain conditions are met over the next ten years.

| | | $ | 68.8 | | | $ | 16.8 | | | $ | (37.6 | ) |

| | | $ | 251.1 | | | $ | 222.9 | |

| | | | 932.5 | | | | 866.8 | |

| | | $ | 461.9 | | | $ | 442.7 | |

| Balance at December 31, 2014 | | $ | 368.5 | | | $ | 60.3 | | | $ | 428.8 | |

| Currency translation adjustment | | | (7.5 | ) | | | (0.4 | ) | | | (7.9 | ) |

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

| | | | 323.6 | | | | 249.0 | |

As allowed by Securities and Exchange Commission guidance, management excluded from its assessment [removed: Aquasana, Inc.,] [added: Hague,] which was acquired in [removed: 2016] [added: 2017] and constituted [removed: 3.5] [added: 1.6] percent and [removed: 5.8] [added: 2.9] percent of total assets and net assets, respectively, as of December 31, [removed: 2016] [added: 2017] and [removed: 0.8] [added: 0.3] percent and [removed: 0.2] [added: 0.5] percent of net sales and net earnings, respectively, for the year then ended.

Based on this evaluation, our management has concluded that, as of December 31, [removed: 2016,] [added: 2017,] 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: 2016] [added: 2017] as stated in their report which is included herein.

[removed: Except as described above, there] [added: There] have [added: not] been [removed: no changes] [added: any change] in [removed: our] [added: the company’s] internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act) during the year ended December 31, [removed: 2016] [added: 2017] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In 2016, we continued the implementation of a new global enterprise resource planning system.

This multi-year initiative is being conducted in phases and includes modifications to the design and operation of controls over financial reporting.

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

[removed: Report of Independent Registered Public Accounting Firm][added: REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM]

We have audited A. O. Smith Corporation’s internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] 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).

[removed: A. O. Smith Corporation’s] [added: The Company’s] management is responsible for maintaining effective internal control over financial [removed: reporting,] [added: reporting] and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting.

We conducted our audit in accordance with the standards of the [removed: Public Company Accounting Oversight Board (United States).][added: PCAOB.]

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 [removed: Aquasana, Inc.,] [added: Hague Quality Water International,] which is included in the [removed: 2016] [added: 2017] consolidated financial statements of [removed: A. O. Smith Corporation] [added: the Company] and constituted [removed: 3.5] [added: 1.6] percent and [removed: 5.8] [added: 2.9] percent of total assets and net assets, respectively, as of December 31, [removed: 2016] [added: 2017] and [removed: 0.8] [added: .3] percent and [removed: 0.2] [added: .5] percent of net sales and net earnings, respectively, for the year then ended.

Our audit of internal control over financial reporting of [removed: A. O. Smith Corporation] [added: the Company] also did not include an evaluation of the internal control over financial reporting of [removed: Aquasana, Inc.][added: Hague Quality Water International.]

In our opinion, A. O. Smith Corporation [added: (the Company)] maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2016,] [added: 2017,] based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United [removed: States),] [added: States) (PCAOB),] the consolidated balance sheets of A. O. Smith Corporation as of December 31, [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, [removed: 2016,] [added: 2017] and our report dated February [removed: 17, 2017] [added: 16, 2018] expressed an unqualified opinion thereon.

[removed: Ernst] [added: /s/ Ernst] & Young [removed: LLP][added: LLP]

Opinion on Internal Control over Financial Reporting

Basis for Opinion

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting

February 16, 2018

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February 17, 2017

The information included under the headings “Election of Directors” and “Board Committees” in our definitive Proxy Statement for the [removed: 2017] [added: 2018] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission [added: (SEC)] under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

Current, Jr., [added: Dr. Ilham Kadri,] Mark D.

The information included under the heading “Compliance with Section 16(a) of the Securities Exchange Act” in our definitive Proxy Statement for the [removed: 2017] [added: 2018] Annual Meeting of Stockholders (to be filed with the [removed: Securities and Exchange Commission] [added: SEC] under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

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Mr. Current will serve on the Audit Committee until his planned retirement just prior to the 2018 Annual Meeting of Stockholders.

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: 2017] [added: 2018] Annual Meeting of Stockholders (to be filed with the [removed: Securities and Exchange Commission] [added: SEC] 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: 2017] [added: 2018] Annual Meeting of Stockholders (to be filed with the [removed: Securities and Exchange Commission] [added: SEC] 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: 2016.][added: 2017.]

| (1) | Consists of [removed: 2,664,333] [added: 2,263,126] shares subject to stock options, [removed: 519,354] [added: 399,270] shares subject to employee share units and [removed: 285,521] [added: 280,867] shares subject to director share units. |

| Equity compensation plans approved by security holders | | | 2,943,263 | (1) | | $ | 27.73 | (2) | | | 2,885,001 | (3) |

| Total | | | 2,943,263 | | | $ | 27.73 | | | | 2,885,001 | |

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

| 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 | |

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: 2017] [added: 2018] Annual Meeting of Stockholders (to be filed with the [removed: Securities and Exchange Commission] [added: SEC] 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: 2017] [added: 2018] Annual Meeting of Stockholders (to be filed with the [removed: Securities and Exchange Commission] [added: SEC] 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.

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

| [removed: |] 1. | [added: |] Financial Statements of the Company | [added: | | | |]

| | | [added: | |] Form 10-K Page Number | | |

| [added: | |] The following consolidated financial statements of A. O. Smith Corporation are included in Item 8: | | | | |

| [added: | |] Consolidated Balance Sheets at December 31, [removed: 2016] [added: 2017] and [removed: 2015] [added: 2016] | | | [removed: 25] [added: 27] | |

| [added: | |] For each of the three years in the period ended December 31, [removed: 2016:] [added: 2017:] | | | | |

| [added: | |] \- Consolidated Statement of Earnings | | | [removed: 26] [added: 28] | |

| [added: | |] \- Consolidated Statement of Comprehensive Earnings | | | [removed: 26] [added: 28] | |

| [added: | |] \- Consolidated Statement of Cash Flows | | | [removed: 27] [added: 29] | |

| [added: | |] \- Consolidated Statement of Stockholders’ Equity | | | [removed: 28] [added: 30] | |

| [added: | |] Notes to Consolidated Financial Statements | | | [removed: 29] [added: 31] - [removed: 54] [added: 56] | |

| [added: 2. | | Financial Statement Schedules] Schedule II - Valuation and Qualifying Accounts | | | [removed: 63] [added: 66] | |

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

| [removed: |] 3. | [added: |] Exhibits - see the Index to Exhibits on pages [removed: 60] [added: 63] - [removed: 62] [added: 64] 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. | [added: | | | |]

[added: | | |] Pursuant to the requirements of Rule 14a-3(b)(10) of the Securities Exchange Act of 1934, as amended, we will, upon request and upon payment of a reasonable fee not to exceed the rate at which such copies are available from the [removed: Securities and Exchange Commission,] [added: SEC,] furnish copies to our security holders of any exhibits listed in the Index to Exhibits. [added: | | | | |]

| Date: February [removed: 17, 2017] [added: 16, 2018] | | | | By: | | /s/ Ajita G. Rajendra |

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of February [removed: 17, 2017] [added: 16, 2018] by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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

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

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

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

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

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

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

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

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

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

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

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

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

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