A. O. Smith (AOS) 10-K risk factor changes: FY2018 vs FY2017

| --- | --- |

You should carefully consider the risk factors set forth below and all other information contained in this Annual Report on Form 10-K, including the documents incorporated by reference, before making an investment decision regarding our common stock.

If any of the events contemplated by the following risks actually occurs, then our business, financial condition, or results of operations could be materially adversely affected.

As a result, the trading price of our common stock could decline, and you may lose all or part of your investment.

The risks and uncertainties below are not the only risks facing our company.

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

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

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

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 treatment products which could negatively impact our profitability and cash flows.

In addition, a deterioration in current economic conditions, including credit market conditions, could negatively impact our vendors and customers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, or increased material prices, which could negatively impact our ability to distribute, market and sell our products and our financial condition, results of operations and cash flows.

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

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

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

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

Approximately 10,000 of our 16,100 employees as of December 31, 2017 were located in China.

At December 31, 2017, approximately $815 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries, $587 million of which was located in China.

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

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, China, India and 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.

| | • | | _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 17.5 percent per year in local currency over the past three years, and we anticipate sales growth of approximately 13 percent in local currency in 2018.

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

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

| | • | | _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 38 percent of our sales in 2017.

We expect that our customer concentration will continue for the foreseeable future.

Our concentration of sales to a relatively small number of customers makes our relationship with each of these customers important to our business.

We cannot assure that we will be able to retain our largest customers.

Some of our customers may shift their purchases to our competitors in the future.

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

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

| | • | | _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, 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 financial statements of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements.

As a result, we are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates and interest rates, or hyperinflation in some foreign countries.

Furthermore, typically our products are priced in foreign countries in local currencies.

As a result, an increase in the value of the U.S. dollar relative to the local currencies of our foreign markets has had and would continue to have a negative effect on our profitability.

In addition to currency translation risks, we incur a currency transaction risk whenever one of our subsidiaries enters into either a purchase or sale transaction using a currency different from the operating subsidiaries’ functional currency.

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

In our North America segment, we project our sales in the U.S. will grow in [removed: 2018] [added: 2019] compared to [removed: 2017] [added: 2018] due to higher residential water heater and boiler volumes resulting from expected industry-wide new construction growth and expansion of replacement demand.

[removed: Due to nearly 20 percent unit growth in 2017, partially driven by an anticipated 2018 regulatory change and resulting pre-buy, we] [added: We] expect the North America commercial water heater industry to [removed: have a three] [added: be flat in 2019, after declining over five] percent [removed: unit decline] in [removed: 2018.][added: 2018 following growth of 11 percent in 2017, partially due to an anticipated regulatory change.]

Our sales of boilers grew [removed: 13] [added: nine] percent in [removed: 2017,] [added: 2018,] and we expect ten percent sales growth in [removed: 2018,] [added: 2019,] driven by the continuing U.S. industry transition to higher efficiency products and our introduction of new products.

We expect sales of North America water treatment products to increase by [removed: approximately 50] [added: 35 to 40] percent in [removed: 2018,] [added: 2019,] compared to [removed: 2017,] [added: 2018,] primarily due to volume growth and a full year of [removed: Hague sales.][added: sales to Lowe’s.]

In addition, we expect our sales in India to grow over [removed: 40] [added: 30] percent in [removed: 2018] [added: 2019] from approximately [removed: $26] [added: $34] million in [removed: 2017.][added: 2018.]

We will [removed: look] [added: seek] to continue to grow our core residential and commercial water heating, boiler and water treatment businesses throughout the world.

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

Our sales in [removed: 2017] [added: 2018] were a [removed: company] [added: Company] record [removed: $2,997] [added: $3,188] million surpassing [removed: 2016] [added: 2017] sales of [removed: $2,686] [added: $2,997] million by [removed: 11.6] [added: 6.4] percent.

[removed: The increase in] [added: Our] sales in 2017 [removed: was] [added: were higher than 2016 sales of $2,686 million by 11.6 percent,] primarily due to higher sales in China as well as higher sales of water heaters and boilers in North America.

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

[removed: In 2016, excluding] [added: Excluding] the impact [removed: from] [added: of] the appreciation of the U.S. dollar against the Chinese currency, our sales [removed: grew approximately eight percent.][added: in China increased almost two percent in 2018.]

[removed: Sales in China grew 12.5 percent in 2016, and excluding the impact of] [added: Excluding] the [removed: appreciation] [added: benefit] of the U.S. [removed: dollar,] [added: dollar appreciation,] sales in China increased [removed: by 18.9] [added: 1.9] percent in [removed: 2016.][added: 2018.]

Our gross profit margin in 2017 decreased [removed: to 41.3 percent] from [removed: 41.7] [added: 41.5] percent in 2016.

The slightly lower margin in 2017 [added: compared to 2016] was due to significantly higher steel costs that more than offset pricing actions taken in 2017 in North America and China.

Selling, general and administrative (SG&A) expenses were [removed: $59.3] [added: $31.0] million higher in [removed: 2017] [added: 2018] than in [removed: 2016.][added: 2017.]

[removed: The increase in] SG&A expenses [added: were $60.3 million higher] in 2017 [removed: to $718.2 million was] [added: than in 2016] primarily due to higher selling and advertising expenses to support increased volumes and brand building in our newer product categories.

Pension income in [removed: 2017] [added: 2018] was [removed: $9.1] [added: $8.7] million compared to [removed: $6.9] [added: $9.1] million in [removed: 2016] [added: 2017] and [removed: $0.1] [added: $6.9] million [removed: of pension expense] in [removed: 2015.][added: 2016.]

Interest expense was [removed: $10.1] [added: $8.4] million in [removed: 2017] [added: 2018] compared to [removed: $7.3] [added: $10.1] million in [removed: 2016] [added: 2017] and [removed: $7.4] [added: $7.3] million in [removed: 2015.][added: 2016.]

Other income was [removed: $10.4] [added: $21.2] million in [removed: 2017] [added: 2018] compared to [removed: $9.4] [added: $21.3] million in [removed: 2016] [added: 2017] and [removed: $10.8] [added: $18.1] million in [removed: 2015.][added: 2016.]

The increase in other income in 2017 compared to 2016 was primarily due to higher [added: non-service cost related pension income and higher] interest income.

Our effective income tax rate was [removed: 43.1] [added: 20.4] percent in [removed: 2017,] [added: 2018,] compared with [removed: 29.4] [added: 43.1] percent in [removed: 2016] [added: 2017] and [removed: 29.7] [added: 29.4] percent in [removed: 2015.][added: 2016.]

The significant increase in our effective income tax rate in 2017 compared to [removed: previous] [added: prior] years was due to [removed: provisional] one-time charges associated with [removed: the] U.S. Tax [removed: Cuts & Jobs Act (U.S. Tax Reform)] [added: 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 [removed: provisional] one-time charges, our adjusted effective income tax rate was 27.4 percent in 2017.

We estimate our annual effective income tax rate for the full year [removed: 2018] [added: 2019] will be approximately [removed: 22.0 to 22.5 percent, significantly lower than previous years due to U.S. Tax Reform.][added: 21.5 percent.]

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

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

North America segment earnings were [removed: $428.6] [added: $464.1] million in [removed: 2017] [added: 2018] compared to segment earnings of [removed: $385.9] [added: $428.6] million and [removed: $339.9] [added: $385.9] million in [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] respectively.

Segment margins were [removed: 22.5] [added: 22.7] percent, [removed: 22.1] [added: 22.5] percent and [removed: 20.0] [added: 22.1] percent in [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] respectively.

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

[removed: 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.

Sales in our Rest of World segment in [removed: 2016] [added: 2018] were [removed: $100] [added: $1,174] million [added: or $58 million] higher than sales of [removed: $866] [added: $1,116] million in [removed: 2015.][added: 2017.]

Sales in China grew [removed: 12.5] [added: four] percent in [removed: 2016.][added: 2018.]

Rest of World segment earnings were $149.3 million in [removed: 2017] [added: 2018] compared to segment earnings of [removed: $129.1] [added: $149.3] million and [removed: $113.0] [added: $129.1] million in [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] respectively.

Segment margins were [removed: 13.4] [added: 12.7] percent in [removed: 2017] [added: 2018] compared to 13.4 percent and [removed: 13.0] [added: 13.4] percent in [removed: 2016] [added: 2017] and [removed: 2015,] [added: 2016,] respectively.

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 [added: categories and higher water treatment product development engineering costs.]

Our working capital was [removed: $978.3] [added: $853.2] million at December 31, [removed: 2017] [added: 2018] compared with [removed: $796.4] [added: $973.1] million and [removed: $750.1] [added: $791.2] million at December 31, [removed: 2016] [added: 2017] and December 31, [removed: 2015,] [added: 2016,] respectively.

Cash generation in China and sales-related increases in accounts receivable, and inventory levels [removed: explain] [added: led to] the majority of the increase in [removed: 2017 and 2016.][added: working capital in 2017.]

As of December 31, [removed: 2017,] [added: 2018,] essentially all of our [removed: $820.0] [added: $645.0] million of cash, cash equivalents and marketable securities [removed: were] [added: was] held by our foreign subsidiaries.

We expect to repatriate approximately [removed: $200] [added: $150] million in the first half of [removed: 2018] [added: 2019] and use the proceeds to repay floating rate debt.

We continued to expand our North America water treatment platform in 2018 by being named exclusive supplier of water treatment products to Lowe’s, with sales commencing in August 2018.

In our Rest of World segment, we expect China sales to decline in 2019 at a rate of between seven and 10 percent in U.S. dollars and three to six percent in local currency, as we believe the Chinese economy will continue to be weak and the Chinese currency will depreciate compared to the U.S. dollar by approximately four percent in 2019 compared with 2018.

Combining all of these factors, we expect our consolidated sales to grow one to 2.5 percent and between 2.5 to four percent in local currency terms in 2019.

The increase in sales in 2018 was primarily due to pricing actions related to higher steel costs and higher sales of boilers and residential water heaters in the U.S. as well as higher sales of water treatment products in China.

Our global water treatment sales grew to approximately $400 million in 2018.

Our gross profit margin in 2018 of 41.0 percent was essentially flat compared to our gross profit margin of 41.1 percent in 2017.

The increase in SG&A expenses in 2018 to $753.8 million was primarily due to higher advertising expenses related to brand building and higher product development engineering expenses in China.

On March 21, 2018, we announced a plan to close our Renton, Washington plant and transfer water heater, boiler and storage tank production to our other U.S. plants.

The majority of the consolidation of operations occurred in the second quarter of 2018 and the Renton plant was fully closed in the third quarter of 2018.

As a result of the relocation of production, we incurred pre-tax restructuring and impairment expenses of $6.7 million in the first quarter of 2018, primarily related to employee severance and compensation-related costs, building lease exit costs and the impairment of assets.

These activities are reflected in “restructuring and impairment expenses” in the accompanying financial statements.

We are providing non-GAAP measures (adjusted earnings, adjusted earnings per share (EPS), and adjusted segment earnings) that exclude Renton related restructuring and impairment expenses and one-time expenses associated with the U.S. Tax Cuts & Jobs Act (U.S. Tax Reform).

Reconciliations to measures on a GAAP basis are provided later in this section.

Higher interest rates in 2018 were offset by lower debt levels, primarily due to the repatriation of approximately $312 million of cash from outside of the U.S., which was primarily used to pay down floating rate debt, as well as, to fund our share repurchase activity and dividend payments.

The service cost component of our pension income is reflected in cost of products sold and SG&A expenses.

All other components of our pension income are reflected in other income.

Our effective income tax rate in 2018 was lower than our adjusted effective income tax rate in 2017 due to lower federal income taxes related to U.S. Tax Reform.

Sales in our North America segment were $2,045 million in 2018 or $140 million higher than sales of $1,905 million in 2017.

The increase in sales in 2018 compared to 2017 was primarily due to pricing actions related to higher steel costs and higher volumes of boilers and residential water heaters in the U.S. North America water treatment sales, including a full year of sales from Hague and the launch of products at Lowe’s commencing in August 2018, incrementally added approximately $29 million of sales in 2018.

Adjusted segment earnings and segment margin in 2018, which exclude restructuring and impairment expenses, were $470.8 million and 23.0 percent, respectively.

The higher adjusted segment earnings and adjusted segment margin in 2018 compared to 2017 were primarily due to the favorable impact from higher sales of residential water heaters and boilers and pricing actions in the U.S. that were partially offset by higher steel costs and one-time expenses associated with the launch of water treatment products at Lowe’s.

We estimate our 2019 North America segment margin will be between 23 and 23.5 percent.

Sales in China grew four percent in 2018 primarily due to higher sales of water treatment products, including consumables, which were partially offset by lower sales of electric water heaters and air purifiers.

The appreciation of the U.S. dollar against the Chinese currency contributed approximately $23 million to segment sales in 2018.

Water heater and water treatment sales in India increased $8 million, over 30 percent, in 2018 compared to 2017.

Sales in China grew 15.9 percent to over $1 billion in 2017 due to higher demand for our

Segment earnings in 2018 were flat compared to 2017 primarily due to higher water treatment product sales and improved performance in India that were offset by lower sales of electric water heaters and air purifiers as well as higher SG&A expenses.

Higher SG&A expenses in China were primarily due to higher advertising expenses related to brand building and higher product development engineering expenses.

Segment margin declined in 2018 compared to 2017 as a result of the factors above.

We expect our 2019 Rest of World segment margin will be approximately 12 to 12.5 percent due to lower sales and profitability in China.

Approximately $312 million in foreign cash was repatriated in 2018 and utilized to repay floating rate debt, pay dividends and repurchase shares.

The decline in cash, cash equivalents and marketable securities balances more than offset sales-related increases in accounts receivable, and explains the majority of the decline in working capital in 2018.

The facility became operational in May 2018.

For 2019, we project approximately $85 million of capital expenditures and approximately $75 million of depreciation and amortization expense.

Our total debt declined to $221.4 million at December 31, 2018 compared with $410.4 million at December 31, 2017.

We repatriated approximately $312 million cash and paid down debt, which was partially offset by share repurchase activity exceeding cash generation in the U.S. As a result, our leverage, as measured by the ratio of total debt to total capitalization, was 11.4 percent at the end of 2018 compared with 19.9 percent at the end of 2017.

We were not required to make a contribution to our pension plan in 2018.

Our Board of Directors increased the number of shares we are authorized to repurchase by 2,500,000 shares and 5,000,000 shares at its July 2018 and December 2018 meetings, respectively.

We increased our dividend rate twice in 2018, and the five year compound annual growth rate of our dividend is approximately 30 percent.

| Long-term debt | | $ | 221.4 | | | $ | — | | | $ | 115.0 | | | $ | 16.9 | | | $ | 89.5 | |

Our North America segment also manufactures and markets water systems tanks.

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

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

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

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 2016 were higher than 2015 sales of $2,537 million by 5.9 percent.

Our gross profit margin in 2016 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. than in 2015.

SG&A expenses were $48.2 million higher in 2016 than in 2015 primarily due to higher selling costs supporting our sales efforts in tier 2 and tier 3 cities in China as well as higher advertising costs to support brand building in China.

As of December 31, 2015, we changed to 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 plans.

The change was the reason for $7.7 million and $7.1 million of decreases in 2017 and 2016, respectively, compared to 2015, in service and interest costs.

The decrease in other income in 2016 compared to 2015 was primarily due to a decrease in interest income caused by lower interest rates in China in 2016.

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

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

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

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

Lower volumes of U.S. residential water heaters in 2016 compared to 2015 offset these benefits.

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

The higher segment earnings and 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 U.S., which were partially offset by lower U.S. residential water heater volumes.

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.

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

Water treatment sales in China totaled $177 million in 2016 compared to $130 million in 2015.

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

categories and higher water treatment product development engineering costs.

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

Higher selling costs in China to support our sales efforts in tier 2 and tier 3 cities and higher advertising costs to support brand building were the primary drivers of higher SG&A expenses in 2016.

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

We expect 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 experienced favorable cash flow impacts in China late in the fourth quarter of 2016 primarily from a series of unanticipated large customer payments including customer deposits.

Over the two-year period from 2016 to 2017, we generated operating cash of approximately $773 million, which compares with $616 million of operating cash flows during 2014 to 2015.

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

Included in 2015 capital expenditures were approximately $16 million related to our ERP implementation and approximately $19 million related to capacity expansion in China and the U.S. to support growth.

We project depreciation and amortization expense of approximately $80 million in 2018.

In January 2015, we issued $75 million of fixed rate term notes to an insurance company.

Principal payments commence in 2020 and the notes mature in 2030.

The notes carry an interest rate of 3.52 percent.

We used proceeds of the notes to pay down borrowings under our revolving credit facility.

Our total debt increased to $410.4 million at December 31, 2017 compared with $323.6 million at December 31, 2016, as our cash flows generated in the U.S were more than offset by our share repurchase activity and our acquisition of Hague.

As a result, our leverage, as measured by the ratio of total debt to total capitalization, was 19.9 percent at the end of 2017 compared with 17.6 percent at the end of 2016.

| --- | --- |

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

[added: _Water treatment products._] 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.

Our residential and commercial water heaters come in sizes ranging from 2.5 gallon (point-of-use) models to [removed: 12,000] [added: 4,000] gallon products with varying efficiency ranges.

[removed: _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.

A [removed: large] portion of our sales of water treatment products is comprised of replacement filters.

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

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

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

Our commercial boiler distribution channel is primarily comprised of manufacturer representative [removed: firms.][added: firms, the remainder of our Lochinvar branded products are distributed through wholesale channels.]

Our [removed: Hague branded products, primarily] water [removed: softeners,] [added: softener products] are sold through [removed: Hague] water quality dealers and home center retail chains.

Our [removed: Cyclone product family] [added: commercial water heaters] and our condensing boilers continue to be an option for commercial customers looking for high efficiency water and space heating with a short payback period through energy savings.

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

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

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

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

We sell water heaters in more than [removed: 8,000] [added: 9,000] retail outlets in China, of which over [removed: 2,900] [added: 2,800] exclusively sell our products.

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

Our primary competitors in China in the electric water heater market segment are Haier and Midea, [added: which are] Chinese companies.

Our principal competitors in the water treatment market are Qinyuan, [removed: Angel] [added: Angel, Midea] and [removed: Midea.][added: Xiaomi.]

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

In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in Hong Kong, Turkey and Vietnam, all of which combined comprised less than six percent of total Rest of World sales in [removed: 2017.][added: 2018.]

To improve our competitiveness by generating new products and processes, we conduct research and development at our [added: newly constructed] Corporate Technology Center in Milwaukee, Wisconsin, at our Global Engineering Center in Nanjing, China, and at our operating locations.

Our total expenditures for research and development in [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] were [removed: $86.4] [added: $94.0] million, [removed: $80.1] [added: $86.4] million and [removed: $73.7] [added: $80.1] million, respectively.

We employed approximately [removed: 16,100] [added: 16,300] employees as of December 31, [removed: 2017,] [added: 2018,] primarily non-union.

Our A. O. Smith branded water treatment products are sold through Lowe’s.

We manufacture and market water treatment products, primarily residential reverse osmosis products.

All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at www.sec.gov.

We are also committed to growing our business in a sustainable and socially responsible manner consistent with our Guiding Principles.

This commitment has driven us to design, engineer, and manufacture highly innovative and efficient products in an environmentally responsible manner that help reduce energy consumption, conserve water, and improve drinking water quality and public health.

Consistent with this commitment, we issued our first Corporate Responsibility & Sustainability (CRS) report in 2018 detailing our company’s historic and current CRS efforts.

Our CRS report is available on our website, www.aosmith.com.

To further demonstrate our commitment, our company recently appointed Patricia K.

Ackerman, Senior Vice President, Investor Relations, Treasurer, and Corporate Responsibility and Sustainability with specific responsibility for our CRS efforts.

| ITEM 1A – | RISK FACTORS |

You should carefully consider the risk factors set forth below and all other information contained in this Annual Report on Form 10-K, including the documents incorporated by reference, before making an investment decision regarding our common stock.

If any of the events contemplated by the following risks actually occurs, then our business, financial condition, or results of operations could be materially adversely affected.

As a result, the trading price of our common stock could decline, and you may lose all or part of your investment.

The risks and uncertainties below are not the only risks facing our company.

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

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

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

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 treatment products, which could negatively impact our profitability and cash flows.

In addition, a deterioration in current economic conditions, including credit market conditions, could negatively impact our vendors and customers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, or increased material prices, which could negatively impact our ability to distribute, market and sell our products and our financial condition, results of operations and cash flows.

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

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

Approximately 43 percent of our net sales in 2018 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesser extent in Europe and India.

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

Approximately 10,000 of our 16,300 employees as of December 31, 2018 were located in China.

At December 31, 2018, approximately $644 million of cash was held by our foreign subsidiaries, substantially all of which was located in China.

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

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, China, India and 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.

| | • | | _A portion of our business could be affected by further weakening of the Chinese economy_ |

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

Approximately 34 percent of our net sales in 2018 were attributable to China.

Our sales growth in China decreased in 2018.

We believe that decrease was due to weakness in the housing market in China, weakening consumer sentiment in part associated with concerns about the trade tensions between China and the U.S. and a weakening Chinese economy.

We derive a substantial portion of our sales in China from premium-tier products and weakening consumer confidence and sentiment as well as economic uncertainty may prompt consumers there to choose lower-priced alternatives or lengthen the cycle of replacement purchases.

Further deterioration in the Chinese economy could adversely affect our financial condition, results of operations and cash flows.

| | • | | _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 39 percent of our sales in 2018.

We expect that our customer concentration will continue for the foreseeable future.

Our concentration of sales to a relatively small number of customers makes our relationship with each of these customers important to our business.

We cannot assure that we will be able to retain our largest customers.

Our North America segment also manufactures and markets water system tanks.

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

The following table summarizes our sales.

This summary and all other information presented in this section should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements, which appear in Item 8 in this document.

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

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

| | | Years Ended December 31 (dollars in millions) | | | | | | | | | | | | | | | | | | |

| | | 2017 | | | | 2016 | | | | 2015 | | | | 2014 | | | | 2013 | | |

| North America | | $ | 1,904.8 | | | $ | 1,743.2 | | | $ | 1,703.0 | | | $ | 1,621.7 | | | $ | 1,520.0 | |

| Rest of World | | | 1,116.3 | | | | 965.6 | | | | 866.1 | | | | 768.3 | | | | 668.0 | |

| Inter-segment | | | (24.4 | ) | | | (22.9 | ) | | | (32.6 | ) | | | (34.0 | ) | | | (34.2 | ) |

| Total Sales | | $ | 2,996.7 | | | $ | 2,685.9 | | | $ | 2,536.5 | | | $ | 2,356.0 | | | $ | 2,153.8 | |

Sales in our North America segment increased 9.3 percent, or $161.6 million, in 2017 compared with the prior year.

The sales increase in 2017 was the result of higher volumes of water heaters and boilers, and price increases in the U.S. for residential and commercial water heaters related to steel cost increases.

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

Our wholesale

Sales in our Rest of World segment increased 15.6 percent, or $150.7 million, in 2017 compared with the prior year.

A 15.9 percent increase in sales in China to over $1 billion was the primary source of the increase.

Excluding the appreciation of the U.S. dollar, sales in China increased 17.9 percent in 2017.

Our e-commerce sales continued to grow in China, to approximately $250 million in 2017.

Our total sales in India were $26.2 million in 2017 compared with $18.2 million in 2016.

We also compete with numerous other Chinese private and state-owned water heater and water treatment companies in China.

A more detailed discussion of certain of these matters appears in Note [removed: 13] [added: 15] of Notes to Consolidated Financial Statements.

| --- | --- |

For the fiscal year ended December 31, [removed: 2017][added: 2018]

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

[added: |] (414) 359-4000 [added: | | |]

[added: |] Registrant’s telephone number, including area code [added: | | |]

| Title of Each Class | | Shares of Stock Outstanding [removed: February 12, 2018] [added: January 31, 2019] | | Name of Each Exchange on Which Registered |

| Class A Common Stock (par value $5.00 per share) | | [removed: 26,065,195] [added: 26,059,903] | | Not listed |

| Common Stock (par value $1.00 per share) | | [removed: 145,446,771] [added: 141,852,744] | | New York Stock Exchange |

Indicate by check mark whether the registrant has submitted [removed: electronically and posted on its corporate Web site, if any,] every Interactive Data File required to be submitted [removed: and posted] pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit [removed: and post] such files).

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

The aggregate market value of voting stock held by non-affiliates of the registrant was [removed: $54,942,874] [added: $54,612,426] for Class A Common Stock and [removed: $8,057,328,456] [added: $8,368,308,653] for Common Stock as of June 30, [removed: 2017.][added: 2018.]

| [added: |] 1. | Portions of the company’s definitive Proxy Statement for the [removed: 2018] [added: 2019] 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: 2017][added: 2018]

| [removed: Part I] [added: [Part I](#tx678397_1)] | | | | | | |

| Item 1. | | [removed: [Business](#tx473899_1)] [added: [Business](#tx678397_2)] | | | 3 | |

| Item 1A. | | [Risk [removed: Factors](#tx473899_2)] [added: Factors](#tx678397_3)] | | | 6 | |

| Item 1B. | | [Unresolved Staff [removed: Comments](#tx473899_3)] [added: Comments](#tx678397_4)] | | | 11 | |

| Item 2. | | [removed: [Properties](#tx473899_4)] [added: [Properties](#tx678397_5)] | | | 11 | |

| Item 3. | | [Legal [removed: Proceedings](#tx473899_5)] [added: Proceedings](#tx678397_6)] | | | 11 | |

| Item 4. | | [Mine Safety [removed: Disclosures](#tx473899_6)] [added: Disclosures](#tx678397_7)] | | | 11 | |

| [removed: Part II] [added: [Part II](#tx678397_8)] | | | | | | |

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#tx473899_7)] [added: Securities](#tx678397_9)] | | | 15 | |

| Item 6. | | [Selected Financial [removed: Data](#tx473899_8)] [added: Data](#tx678397_10)] | | | 17 | |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#tx473899_9)] [added: Operations](#tx678397_11)] | | | 18 | |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#tx473899_10)] [added: Risk](#tx678397_12)] | | | 25 | |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#tx473899_11)] [added: Data](#tx678397_13)] | | | 26 | |

| Item 9. | | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#tx473899_12)] [added: Disclosure](#tx678397_14)] | | | [removed: 56] [added: 58] | |

| Item 9A. | | [Controls and [removed: Procedures](#tx473899_13)] [added: Procedures](#tx678397_15)] | | | [removed: 56] [added: 58] | |

| Item 9B. | | [Other [removed: Information](#tx473899_14)] [added: Information](#tx678397_16)] | | | [removed: 57] [added: 58] | |

| [removed: Part III] [added: [Part III](#tx678397_17)] | | | | | | |

| Item 10. | | [Directors, Executive Officers and Corporate [removed: Governance](#tx473899_15)] [added: Governance](#tx678397_18)] | | | 60 | |

| Item 11. | | [Executive [removed: Compensation](#tx473899_16)] [added: Compensation](#tx678397_19)] | | | 60 | |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#tx473899_17)] [added: Matters](#tx678397_20)] | | | 60 | |

| Item 13. | | [Certain Relationships and Related Transactions and Director [removed: Independence](#tx473899_18)] [added: Independence](#tx678397_21)] | | | 61 | |

| Item 14. | | [Principal Accounting Fees and [removed: Services](#tx473899_19)] [added: Services](#tx678397_22)] | | | 61 | |

| [removed: Part IV] [added: [Part IV](#tx678397_23)] | | | | | | |

| Item 15. | | [Exhibits, Financial Statement [removed: Schedules](#tx473899_20)] [added: Schedules](#tx678397_24)] | | | 62 | |

10-K 1 d678397d10k.htm FORM 10-K

| | | |

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

10-K 1 d473899d10k.htm FORM 10-K

| --- | --- |

| --- | --- |

Properties utilized by us at December 31, [removed: 2017] [added: 2018] were as follows:

In this segment, we have [removed: 15] [added: 14] manufacturing plants located in [removed: seven] [added: six] states and two non-U.S. countries, of which 12 are owned directly by us or our subsidiaries and [removed: three] [added: two] are leased from outside parties.

The terms of leases in effect at December 31, [removed: 2017] [added: 2018] expire between [removed: 2018] [added: 2019] and 2025.

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

The terms of leases in effect at December 31, [removed: 2017] [added: 2018] expire between [removed: 2018] [added: 2020] and [removed: 2020.][added: 2022.]

| --- | --- |

Pursuant to General Instruction of G(3) of Form 10-K, the following is a list of [removed: the] [added: 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 [removed: 2017] [added: 2019] Annual Meeting of Stockholders.

| [removed: Name] [added: Name] (Age) | | Positions Held | | Period Position Was Held |

| [removed: Wilfridus M. Brouwer (59)] [added: David R. Warren (55)] | | Senior Vice President [removed: – International] | | 2017 to Present |

| [added: Wei Ding (56)] | | Senior Vice President | | 2013 to [removed: 2014] [added: Present] |

| | | President – A. O. Smith Holdings (Barbados) SRL | | [removed: 2013] [added: 2018] to Present |

| Paul R. Dana [removed: (55)] [added: (56)] | | Senior Vice President – Global [removed: Manufacturing] [added: Operations] | | [removed: 2016] [added: 2019] to Present |

| [removed: Wei Ding (55)] [added: Robert J. Heideman (52)] | | Senior Vice President [added: – Chief Technology Officer] | | 2013 to Present |

| [removed: Robert J. Heideman (51)] [added: Peter R. Martineau (64)] | | Senior Vice President – Chief [removed: Technology] [added: Information] Officer | | [removed: 2013] [added: 2016] to Present |

| John J. Kita [removed: (62)] [added: (63)] | | Executive Vice President and Chief Financial Officer | | 2011 to Present |

| Charles T. Lauber [removed: (55)] [added: (56)] | | Senior Vice President, Strategy and Corporate Development | | 2013 to Present |

| Mark A. Petrarca [removed: (54)] [added: (55)] | | Senior Vice President – Human Resources and Public Affairs | | 2006 to Present |

| [removed: Ajita G. Rajendra (66)] | | Chairman and Chief Executive Officer | | 2017 to [removed: Present] [added: 2018] |

| James F. Stern [removed: (55)] [added: (56)] | | Executive Vice President, General Counsel and Secretary | | 2007 to Present |

| [removed: David R. Warren (53)] [added: Anindadeb V. DasGupta (52)] | | Senior Vice President | | [removed: 2017] [added: 2018] to Present |

| | | President and General Manager [added: –] North America Water [removed: Heating] [added: Heater] | | 2017 to Present |

| Kevin J. Wheeler [removed: (58)] [added: (59)] | | President and Chief [removed: Operating] [added: Executive] Officer | | [removed: 2017] [added: 2018] to Present |

| Patricia K. Ackerman (58) | | Senior Vice President – Investor Relations, Treasurer and Corporate Responsibility and Sustainability | | 2019 to Present |

| | | Vice President – Investor Relations & Treasurer | | 2008 to 2018 |

| | | Vice President and Treasurer | | 2006 to 2008 |

| | | Assistant Treasurer | | 1995 to 2006 |

| | | Senior Vice President – Global Manufacturing | | 2016 to 2018 |

| | | Vice President, Global Head Strategic Marketing; Global Head e-commerce; Global GM Flex & Signage Business Lines – OSRAM GmbH, Munich and Hong Kong | | 2014 to 2018 |

| Wallace E. Goodwin (63) | | Senior Vice President | | 2018 to Present |

| | | President and General Manager – Lochinvar, LLC | | 2018 to Present |

| | | Senior Vice President and General Manager – Lochinvar, LLC | | 2011 to 2017 |

| | | President – APCOM, a division of State Industries, LLC | | 1999 to 2011 |

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

| D. Samuel Karge (44) | | Senior Vice President | | 2018 to Present |

| | | President – North America Water Treatment | | 2018 to Present |

| | | Vice President, Sales and Marketing – Zurn Industries | | 2016 to 2018 |

| | | Vice President & Platform Leader – Pentair Residential Filtration | | 2012 to 2016 |

| Ajita G. Rajendra (67) | | Executive Chairman | | 2018 to Present |

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

| | | President and Chief Operating Officer | | 2017 to 2018 |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| --- | --- |

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.

| | | Senior Vice President – Asia Corporate Development | | 2015 to 2017 |

| | | Senior Vice President – Asia | | 2009 to 2012 |

| | | President and General Manager – A. O. Smith (China) Investment Co., Ltd. | | 2009 to 2012 |

| Peter R. Martineau (63) | | Senior Vice President – Chief Information Officer | | 2016 to Present |

| William L. Vallett Jr. (58) | | Senior Vice President | | 2013 to Present |

| | | Chief Executive Officer – Lochinvar, LLC | | 2012 to Present |

| | | Chief Executive Officer – Lochinvar Corporation | | 1992 to 2012 |

| (c) | Dividends. Dividends declared on the common stock are shown in Note [removed: 15] [added: 17] of Notes to Consolidated Financial Statements appearing elsewhere herein. |

| (d) | Stock Repurchases. In [removed: 2016,] [added: the second quarter of 2018,] our Board of Directors authorized [added: adding 2,500,000 shares of Common Stock an existing discretionary share repurchase authority. In] the [removed: purchase] [added: fourth quarter] of [added: 2018, our Board of Directors authorized adding] an additional [removed: 3,000,000] [added: 5,000,000] shares of [removed: our] Common [removed: Stock.] [added: Stock the existing discretionary share repurchase authority.] Under the share repurchase program, [removed: our] [added: we may purchase the] Common Stock [removed: 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 [removed: purchase] [added: purchases] will depend on a number of factors, including share price, trading volume and general market conditions, as well as [removed: 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: 2017,] [added: 2018,] we repurchased [removed: 2,533,350] [added: 3,797,800] shares at an average price of [removed: $54.90] [added: $53.34] per share and at a total cost of [removed: $139.1] [added: $202.6] million. As of December 31, [removed: 2017,] [added: 2018,] there were [removed: 2,373,053] [added: 6,075,253] 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: 2017:][added: 2018:]

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) 500 Index, S&P 500 Select Industrials Index, [removed: S&P Mid Cap 400 Index and the Russell 1000 Index, all four of] which are published indices.

[removed: ][added: ]

| Company/Index | | [removed: 12/31/12 | | | |] 12/31/13 | | | | 12/31/14 | | | | 12/31/15 | | | | 12/31/16 | | | | 12/31/17 | | | [added: | 12/31/18 | | |]

| (b) | Holders. As of January 31, 2019, the approximate number of stockholders of record of Common Stock and Class A Common Stock were 613 and 171, respectively. The actual number of stockholders is greater than this number of holders of record, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of stockholders of record also does not include stockholders whose shares may be held in trust by other entities. |

| October 1 – October 31, 2018 | | | 276,300 | | | $ | 48.75 | | | | 276,300 | | | | 7,881,253 | |

| November 1 – November 30, 2018 | | | 1,257,200 | | | | 46.53 | | | | 1,257,200 | | | | 6,624,053 | |

| December 1 – December 31, 2018 | | | 548,800 | | | | 45.09 | | | | 548,800 | | | | 6,075,253 | |

From December 31, 2013 to December 31, 2018

| A. O. Smith Corporation | | | 100.0 | | | | 105.9 | | | | 145.4 | | | | 181.8 | | | | 237.7 | | | | 167.9 | |

| S&P 500 Index | | | 100.0 | | | | 113.7 | | | | 115.3 | | | | 129.0 | | | | 157.2 | | | | 150.3 | |

| S&P 500 Select Industrial Index | | | 100.0 | | | | 110.7 | | | | 106.1 | | | | 127.4 | | | | 158.1 | | | | 137.1 | |

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

All references in this Item 5 to numbers of A. O. Smith Corporation shares or price per share have been adjusted to reflect the split.

Quarterly Common Stock Price Range

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

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

| 2017 | | 1st Qtr. | | | | 2nd Qtr. | | | | 3rd Qtr. | | | | 4th Qtr. | | |

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

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

| 2016 | | 1st Qtr. | | | | 2nd Qtr. | | | | 3rd Qtr. | | | | 4th Qtr. | | |

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

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

| (b) | Holders. As of January 31, 2018, the approximate number of stockholders of record of Common Stock and Class A Common Stock were 616 and 179, respectively. |

| 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 | |

| | | [removed: 2017(1)] [added: 2018] | | | | [removed: 2016(2)] [added: 2017(1)] | | | | [removed: 2015] [added: 2016(2)] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013(3)] [added: 2014] | | |

| Net sales | | $ | [removed: 2,996.7] [added: 3,187.9] | | | $ | [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] | |

| Net earnings(1) | | $ | [removed: 296.5] [added: 444.2] | | | $ | [removed: 326.5] [added: 296.5] | | | $ | [removed: 282.9] [added: 326.5] | | | $ | [removed: 207.8] [added: 282.9] | | | $ | [removed: 169.7] [added: 207.8] | |

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

| Net earnings | | $ | [removed: 1.72] [added: 2.60] | | | $ | [removed: 1.87] [added: 1.72] | | | $ | [removed: 1.59] [added: 1.87] | | | $ | [removed: 1.15] [added: 1.59] | | | $ | [removed: 0.92] [added: 1.15] | |

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

| Net earnings | | $ | [removed: 1.70] [added: 2.58] | | | $ | [removed: 1.85] [added: 1.70] | | | $ | [removed: 1.58] [added: 1.85] | | | $ | [removed: 1.14] [added: 1.58] | | | $ | [removed: 0.91] [added: 1.14] | |

| Cash dividends per common [removed: share(2,3)] [added: share(2)] | | $ | [removed: 0.56] [added: 0.76] | | | $ | [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: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Total assets | | $ | [removed: 3,197.3] [added: 3,071.5] | | | $ | [removed: 2,891.0] [added: 3,197.4] | | | $ | [removed: 2,629.2] [added: 2,891.0] | | | $ | [removed: 2,498.1] [added: 2,629.2] | | | $ | [removed: 2,351.5] [added: 2,498.1] | |

| Long-term [removed: debt(4)] [added: debt(3)] | | | [removed: 402.9] [added: 221.4] | | | | [removed: 316.4] [added: 402.9] | | | | [removed: 236.1] [added: 316.4] | | | | [removed: 210.1] [added: 236.1] | | | | [removed: 177.7] [added: 210.1] | |

| Total stockholders’ equity | | | [removed: 1,648.8] [added: 1,717.0] | | | | [removed: 1,515.3] [added: 1,644.9] | | | | [removed: 1,442.3] [added: 1,511.4] | | | | [removed: 1,381.3] [added: 1,442.3] | | | | [removed: 1,328.7] [added: 1,381.3] | |

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

| [removed: (4)] [added: (3)] | Excludes the current portion of long-term debt. |

| | | Years ended December 31, | | | | | | | | | | | | | | | | | | |

| --- | --- |

| | | December 31 | | | | | | | | | | | | | | | | | | |

| (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. |

We have audited the accompanying consolidated balance sheets of A. O. Smith Corporation (the Company) as of December 31, [removed: 2017 and 2016,] [added: 2018] and [added: 2017,] 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: 2017,] [added: 2018,] and the related notes and financial statement schedule listed in the index at Item 15(a) (collectively referred to as the [removed: “financial] [added: “consolidated financial] statements”).

In our opinion, the [added: consolidated] financial statements present fairly, in all material respects, the [removed: consolidated] financial position of the Company at December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the [removed: consolidated] results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in Internal [removed: Control - Integrated] [added: Control—Integrated] Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February [removed: 16, 2018] [added: 15, 2019] expressed an unqualified opinion thereon.

| | | [added: 2018 | | | |] 2017 | | | | 2016 | | |

| Cash and cash equivalents | | $ | [removed: 346.6] [added: 259.7] | | | $ | [removed: 330.4] [added: 346.6] | |

| Marketable securities | | | [removed: 473.4] [added: 385.3] | | | | [removed: 424.2] [added: 473.4] | |

| Other current assets | | | [removed: 57.2] [added: 41.5] | | | | [removed: 37.6] [added: 57.2] | |

| Total Current Assets | | | [removed: 1,766.8] [added: 1,638.5] | | | | [removed: 1,562.0] [added: 1,766.9] | |

| Net property, plant and equipment | | | [removed: 528.9] [added: 540.0] | | | | [removed: 461.9] [added: 528.9] | |

| Goodwill | | | [removed: 516.7] [added: 513.0] | | | | [removed: 491.5] [added: 516.7] | |

| Other intangibles | | | [removed: 308.7] [added: 293.1] | | | | [removed: 308.3] [added: 308.7] | |

| Other assets | | | [removed: 76.2] [added: 86.9] | | | | [removed: 67.3] [added: 76.2] | |

| Trade payables | | $ | [removed: 535.0] [added: 543.8] | | | $ | [removed: 528.6] [added: 535.0] | |

| Accrued payroll and benefits | | | [removed: 90.8] [added: 79.4] | | | | [removed: 84.3] [added: 90.8] | |

| [added: | | |] Accrued liabilities | | | [removed: 110.7] | [added: (0.9] | [added: )] | | [removed: 101.0] | [added: —] | [added: |]

| Product warranties | | | [removed: 44.5] [added: 41.7] | | | | 44.5 | |

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

| Total Current Liabilities | | | [removed: 788.5] [added: 785.3] | | | | [removed: 765.6] [added: 793.8] | |

| Long-term debt | | | [removed: 402.9] [added: 221.4] | | | | [removed: 316.4] [added: 402.9] | |

| Product warranties | | | [removed: 97.9] [added: 97.7] | | | | [removed: 96.4] [added: 97.9] | |

| Pension liabilities | | | [removed: 48.1] [added: 49.4] | | | | [removed: 109.0] [added: 48.1] | |

| Class A Common Stock (shares issued [removed: 26,239,559] [added: 26,191,327] and [removed: 26,313,351)] [added: 26,239,559)] | | | [removed: 131.2] [added: 131.0] | | | | [removed: 131.6] [added: 131.2] | |

| Common Stock (shares issued [removed: 164,468,033] [added: 164,516,267] and [removed: 164,394,241)] [added: 164,468,033)] | | | 164.5 | | | | [removed: 164.4] [added: 164.5] | |

| Capital in excess of par value | | | [removed: 486.5] [added: 496.7] | | | | [removed: 477.6] [added: 486.5] | |

| Accumulated other comprehensive loss | | | [removed: (299.5] [added: (350.8] | ) | | | [removed: (363.2] [added: (299.5] | ) |

| Treasury stock at cost | | | [removed: (626.5] [added: (827.2] | ) | | | [removed: (488.1] [added: (626.5] | ) |

| Total Stockholders’ Equity | | | [removed: 1,648.8] [added: 1,717.0] | | | | [removed: 1,515.3] [added: 1,644.9] | |

| Total Liabilities and Stockholders’ Equity | | $ | [removed: 3,197.3] [added: 3,071.5] | | | $ | [removed: 2,891.0] [added: 3,197.4] | |

[removed: |] See accompanying notes which are an integral part of these statements. [removed: | | | | | | | | |]

| | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Net sales | | $ | [removed: 2,996.7] [added: 3,187.9] | | | $ | [removed: 2,685.9] [added: 2,996.7] | | | $ | [removed: 2,536.5] [added: 2,685.9] | |

| Selling, general and administrative expenses | | | [removed: 718.2] [added: 753.8] | | | | [removed: 658.9] [added: 722.8] | | | | [removed: 610.7] [added: 662.5] | |

| Interest expense | | | [removed: 10.1] [added: 8.4] | | | | [removed: 7.3] [added: 10.1] | | | | [removed: 7.4] [added: 7.3] | |

| Earnings before provision for income taxes | | | [removed: 520.8] [added: 557.8] | | | | [removed: 462.5] [added: 520.8] | | | | [removed: 402.5] [added: 462.5] | |

| Provision for income taxes | | | [removed: 224.3] [added: 113.6] | | | | [removed: 136.0] [added: 224.3] | | | | [removed: 119.6] [added: 136.0] | |

| Net Earnings | | $ | [removed: 296.5] [added: 444.2] | | | $ | [removed: 326.5] [added: 296.5] | | | $ | [removed: 282.9] [added: 326.5] | |

| Net Earnings Per Share of Common Stock | | $ | [removed: 1.72] [added: 2.60] | | | $ | [removed: 1.87] [added: 1.72] | | | $ | [removed: 1.59] [added: 1.87] | |

| Diluted Net Earnings Per Share of Common Stock | | $ | [removed: 1.70] [added: 2.58] | | | $ | [removed: 1.85] [added: 1.70] | | | $ | [removed: 1.58] [added: 1.85] | |

[added: |] CONSOLIDATED STATEMENT OF COMPREHENSIVE EARNINGS [added: | | | | | | | | | | | | |]

| Net Earnings | | $ | [removed: 296.5] [added: 444.2] | | | $ | [removed: 326.5] [added: 296.5] | | | $ | [removed: 282.9] [added: 326.5] | |

February 15, 2019

| | | 2018 | | | | 2017 | | |

| Receivables | | | 647.3 | | | | 592.7 | |

| Inventories | | | 304.7 | | | | 297.0 | |

| Total Assets | | $ | 3,071.5 | | | $ | 3,197.4 | |

| Other liabilities | | | 200.7 | | | | 209.8 | |

| Total Liabilities | | | 1,354.5 | | | | 1,552.5 | |

| Retained earnings | | | 2,102.8 | | | | 1,788.7 | |

| Cost of products sold | | | 1,882.4 | | | | 1,764.3 | | | | 1,571.7 | |

| Gross profit | | | 1,305.5 | | | | 1,232.4 | | | | 1,114.2 | |

| Restructuring and impairment expenses | | | 6.7 | | | | — | | | | — | |

| Other income - net | | | (21.2 | ) | | | (21.3 | ) | | | (18.1 | ) |

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

| Foreign currency translation adjustments | | | (38.4 | ) | | | 52.7 | | | | (39.8 | ) |

| Change in pension liability less related income tax benefit (provision) of $4.3 in 2018, $(7.5) in 2017 and $5.7 in 2016 | | | (13.1 | ) | | | 12.1 | | | | (9.0 | ) |

| Total Stockholders’ Equity | | $ | 1,717.0 | | | $ | 1,644.9 | | | $ | 1,511.4 | |

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

1.

Foreign currency translation.

1.

| Years ended December 31 (dollars in millions) | | 2018 | | | | 2017 | | |

| Claims settled | | | (42.5 | ) | | | (39.4 | ) |

| Significant other observable inputs (Level 2) | | | 7.5 | | | | (1.4 | ) |

1.

Organization and Significant Accounting Policies (continued)

Revenue recognition. The Company adopted ASC 606-10 as of January 1, 2018.

Substantially all of the Company’s sales are from contracts with customers for the purchase of its products.

For substantially all of its products, the Company transfers control of products to the customer at the point in time when title and risk are passed to the customer, which generally occurs upon shipment of the product.

See Note 2, “Revenue Recognition” for disclosure of the Company’s revenue recognition activities.

1.

Organization and Significant Accounting Policies (continued)

The Company adopted the amendment on January 1, 2018 and the adoption of ASU 2017-09 did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.

As a result of this adoption, for the year ended December 31, 2017 the Company retrospectively reclassified $6.3 million and $4.6 million of non-service cost pension income from cost of products sold and selling, general and administrative expenses, respectively, to other income in the consolidated statement of earnings.

The for the year ended December 31, 2016, the Company retrospectively reclassified $5.1 million and $3.6 million of non-service cost pension income from cost of products sold and selling, general and administrative expenses, respectively, to other income in the consolidated statement of earnings.

The Company intends to apply the modified retrospective transition method and elect the transition option to use the effective date of January 1, 2019 as the date of initial application.

The Company also intends to elect the package of practical expedients and the practical expedient not to separate lease and non-lease components.

The Company does not intend to elect the hindsight practical expedient.

1.

Organization and Significant Accounting Policies (continued)

In 2018, the Company completed a comprehensive analysis of its lease population.

| --- | --- |

February 16, 2018

| Receivables | | | 598.4 | | | | 518.7 | |

| Inventories | | | 291.2 | | | | 251.1 | |

| Total Assets | | $ | 3,197.3 | | | $ | 2,891.0 | |

| Other liabilities | | | 211.1 | | | | 88.3 | |

| Total Liabilities | | | 1,548.5 | | | | 1,375.7 | |

| Retained earnings | | | 1,792.6 | | | | 1,593.0 | |

| Cost of products sold | | | 1,758.0 | | | | 1,566.6 | | | | 1,526.7 | |

| Gross profit | | | 1,238.7 | | | | 1,119.3 | | | | 1,009.8 | |

| Other income - net | | | (10.4 | ) | | | (9.4 | ) | | | (10.8 | ) |

| Pension (income) expense | | | (9.1 | ) | | | (6.9 | ) | | | 0.1 | |

| Tax benefit from exercises of stock options and vesting of share units | | | — | | | | — | | | | 10.4 | |

| Total Stockholders’ Equity | | $ | 1,648.8 | | | $ | 1,515.3 | | | $ | 1,442.3 | |

The North America segment also manufactures and markets water system tanks.

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

Revenue recognition. The Company recognizes revenue upon transfer of title, which occurs upon shipment of the product to the customer except for certain export sales where transfer of title occurs when the product reaches the customer destination.

Reserves for customer returns for defective product are based on historical experience with similar types of sales.

Rebates and incentives are recognized as a reduction of sales.

The Company adopted amended ASC 718 _Compensation – Stock Compensation_ as of January 1, 2016.

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

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

The amendment requires adoption on January 1, 2019 and permits early adoption in any interim or annual period.

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

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

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

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

The Company adopted ASU 2016-15 effective January 1, 2017.

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

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

The Company adopted this amendment effective January 1, 2016.

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

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

The Company applied this guidance prospectively.

As such, the Company recognized $11.6 million and $5.9 million of discrete income tax benefits associated with excess tax benefits on settled stock based compensation awards during 2017 and 2016, respectively.

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

In July 2015, the FASB approved a one year deferral of the effective date to periods beginning January 1, 2018.

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

The 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.

Based on this evaluation, our management has concluded that, as of December 31, [removed: 2017,] [added: 2018,] 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: 2017] [added: 2018] as stated in their report which is included herein.

There have not been any change in the company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act) during the year ended December 31, [removed: 2017] [added: 2018] that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

As allowed by Securities and Exchange Commission guidance, management excluded from its assessment Hague, which was acquired in 2017 and constituted 1.6 percent and 2.9 percent of total assets and net assets, respectively, as of December 31, 2017 and 0.3 percent and 0.5 percent of net sales and net earnings, respectively, for the year then ended.

REPORT OF INDEPENDENT REGISTERED [added: PUBLIC] ACCOUNTING FIRM

We have audited A. O. Smith Corporation’s internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, A. O. Smith Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of A. O. Smith Corporation as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the related consolidated statements of earnings, comprehensive earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, [removed: 2017] [added: 2018,] and [added: the related notes and financial statement schedule listed in the index at Item 15(a) and] our report dated February [removed: 16, 2018] [added: 15, 2019] expressed an unqualified opinion thereon.

February 15, 2019

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

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 Hague Quality Water International, which is included in the 2017 consolidated financial statements of the Company and constituted 1.6 percent and 2.9 percent of total assets and net assets, respectively, as of December 31, 2017 and .3 percent and .5 percent of net sales and net earnings, respectively, for the year then ended.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Hague Quality Water International.

February 16, 2018

The information included under the headings “Election of Directors” and “Board Committees” in our definitive Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders (to be filed with the Securities and Exchange Commission (SEC) under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

[removed: Current, Jr.,] [added: Wulf,] 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: 2018] [added: 2019] Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

| --- | --- |

Wulf, Gloster B.

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: 2018] [added: 2019] Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) 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: 2018] [added: 2019] Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

The following table provides information about our equity compensation plans as of December 31, [removed: 2017.][added: 2018.]

| (1) | Consists of [removed: 2,263,126] [added: 2,432,689] shares subject to stock options, [removed: 399,270] [added: 325,778] shares subject to employee share units and [removed: 280,867] [added: 284,598] shares subject to director share units. |

| Equity compensation plans approved by security holders | | | 3,043,065 | (1) | | $ | 33.05 | (2) | | | 2,490,644 | (3) |

| Total | | | 3,043,065 | | | $ | 33.05 | | | | 2,490,644 | |

| 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 | |

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: 2018] [added: 2019] Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) is incorporated herein by reference.

The information included under the heading “Report of the Audit Committee” in our definitive Proxy Statement for the [removed: 2018] [added: 2019] Annual Meeting of Stockholders (to be filed with the SEC under Regulation 14A within 120 days after the end of the registrant’s fiscal year) required by this Item 14 is incorporated herein by reference.

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

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

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

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

| | | [removed: Consolidated] [added: [Consolidated] Balance Sheets at December 31, [removed: 2017] [added: 2018] and [removed: 2016 |] [added: 2017](#tx678397_25)] | | 27 | [removed: |]

| | | [removed: For] [added: [For] each of the three years in the period ended December 31, [removed: 2017: | |] [added: 2018: - Consolidated Statement of Earnings](#tx678397_26)] | | [added: 28] |

| | | [removed: \-] [added: [\-] Consolidated Statement of [removed: Earnings |] [added: Comprehensive Earnings](#tx678397_27)] | | 28 | [removed: |]

| | | [removed: \-] [added: [\-] Consolidated Statement of Cash [removed: Flows |] [added: Flows](#tx678397_28)] | | 29 | [removed: |]

| | | [removed: \-] [added: [\-] Consolidated Statement of Stockholders’ [removed: Equity |] [added: Equity](#tx678397_29)] | | 30 | [removed: |]

| | | [removed: Notes] [added: [Notes] to Consolidated Financial [removed: Statements |] [added: Statements](#tx678397_30)] | | 31 - [removed: 56 |] [added: 57] |

| [removed: 2.] | | [removed: Financial Statement Schedules Schedule] [added: [Schedule] II - Valuation and Qualifying [removed: Accounts |] [added: Accounts](#tx678397_31)] | | 66 | [removed: |]

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

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

[removed: | | |] 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 SEC, furnish copies to our security holders of any exhibits listed in the Index to Exhibits. [removed: | | | | |]

| [added: Exhibit] Number | | Description | [removed: | |]

| (3)(i) | | [removed: | |] [Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference to [added: Exhibit 3i(b) in] the quarterly report on Form 10-Q for the quarter ended March 31, 2016.](http://www.sec.gov/Archives/edgar/data/91142/000119312516583538/d156476dex3ib.htm) |

| (3)(ii) | | [removed: | |] [By-laws of A. O. Smith Corporation as amended October 13, 2015, incorporated by reference to [added: Exhibit 3.1 in] the current report on Form 8-K dated October 16, 2015.](http://www.sec.gov/Archives/edgar/data/91142/000119312515345565/d27877dex31.htm) |

| (4) | | (a) [removed: | |] [Restated Certificate of Incorporation of A. O. Smith Corporation as amended through April 11, 2016, incorporated by reference to [added: Exhibit 3i(b) in] the quarterly report on Form 10-Q for the quarter ended March 31, 2016.](http://www.sec.gov/Archives/edgar/data/91142/000119312516583538/d156476dex3ib.htm) |

| | | (b) [removed: | |] [Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith Corporation, A. O. Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financial institutions and agents party thereto, incorporated by reference to [added: Exhibit 4.1 in] the current report on Form 8-K dated December 12, 2012.](http://www.sec.gov/Archives/edgar/data/91142/000119312512501762/d452855dex41.htm) |

| | | (c) [removed: | |] [Amendment No. 1 dated as of December 15, 2016, to the Amended and Restated Credit Agreement, dated as of December 12, 2012, among A. O. Smith Corporation, A. O Smith Enterprises Ltd., A. O. Smith International Holdings B.V., and the financial institutions and agents party thereto, incorporated by reference to [added: Exhibit 4(c) in] the annual report on Form 10-K for the fiscal year ended December 31, 2016.](http://www.sec.gov/Archives/edgar/data/91142/000119312517047795/d280399dex4c.htm) |

| | | (d) [removed: | |] The corporation has instruments that define the rights of holders of long-term debt that are not being filed with this Registration Statement in reliance upon Item 601(b)(4)(iii) of Regulation S-K. The Registrant agrees to furnish to the SEC, upon request, copies of these instruments. |

| (10) | | Material Contracts | [removed: | |]

| | | (a) [removed: | |] [A. O. Smith Combined Incentive Compensation Plan, incorporated by reference [removed: as] [added: to] Exhibit A [removed: to] [added: of] the Proxy Statement filed on March 5, 2012 for the 2012 Annual Meeting of Stockholders.](http://www.sec.gov/Archives/edgar/data/91142/000119312512095470/d282230ddef14a.htm#toc282230_39) |

| | | (b) [removed: | |] [A. O. Smith Corporation Executive Life Insurance Plan, as amended January 1, 2009, incorporated by reference to [added: Exhibit 10(b) of] the annual report on Form 10-K for the fiscal year ended December 31, 2008.](http://www.sec.gov/Archives/edgar/data/91142/000119312509037280/dex10b.htm) |

| | | (c) [removed: | |] [A. O. Smith Nonqualified Deferred Compensation Plan, adopted December 1, 2008, incorporated by reference to [added: Exhibit 10(c) of] the annual report on Form 10-K for the fiscal year ended December 31, 2008.](http://www.sec.gov/Archives/edgar/data/91142/000119312509037280/dex10c.htm) |

| | | (d) [removed: | |] [A. O. Smith Corporation Executive Supplemental Pension Plan, as amended January 1, 2009, incorporated by reference to [added: Exhibit 10(d) of] the annual report on Form 10-K for the fiscal year ended December 31, 2008.](http://www.sec.gov/Archives/edgar/data/91142/000119312509037280/dex10d.htm) |

| | | (e) [removed: | |] [A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to [removed: the] [added: Exhibit 4.5 of] Form S-8 Registration Statement filed by the corporation on July 30, 2007 (Reg. No. 333-144950).](http://www.sec.gov/Archives/edgar/data/91142/000119312507165182/dex45.htm) |

| | | (f) [removed: | |] [A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to [added: Exhibit 10.1 of] the quarterly report on Form 10-Q for the quarter ended March 31, 2012.](http://www.sec.gov/Archives/edgar/data/91142/000119312512214980/d338089dex101.htm) |

| | | (g) [removed: | |] [A. O. Smith Corporation Executive Incentive Compensation Award Agreement, incorporated by reference to [added: Exhibit 10 of] the quarterly report on Form 10-Q for the quarter ended March 31, 2016.](http://www.sec.gov/Archives/edgar/data/91142/000119312516583538/d156476dex10.htm) |

| | | (h) [removed: | |] [Offer Letter to Ajita G. Rajendra, dated September 20, 2004, incorporated by reference to [added: Exhibit 10.M of] the annual report on Form 10-K for the fiscal year ended December 31, 2007.](http://www.sec.gov/Archives/edgar/data/91142/000119312508034592/dex10m.htm) |

| | | (i) [removed: | |] [Amendment to Offer Letter to Ajita G. Rajendra dated December 10, 2015, incorporated by reference to [added: Exhibit 10(i) of] the annual report on Form 10-K for the fiscal year ended December 31, 2015.](http://www.sec.gov/Archives/edgar/data/91142/000119312516467088/d104769dex10i.htm) |

| Exhibit Number | | Description | [removed: | |]

| | | [removed: (j) | |] [added: (m)] [Summary of Directors’ Compensation incorporated by reference to [added: Exhibit 10.1 of] the quarterly report on Form 10-Q for the quarter ended June 30, [removed: 2015.](http://www.sec.gov/Archives/edgar/data/91142/000119312516674828/d191834dex101.htm)] [added: 2018.](http://www.sec.gov/Archives/edgar/data/91142/000119312518239198/d439992dex101.htm)] |

| | | [removed: (k) | |] [added: (j)] [A. O. Smith Corporation Senior Leadership Severance Plan, incorporated by [removed: Reference] [added: reference] to [added: Exhibit 10.1 of] the quarterly report for Form 10-Q for the quarter ended June 30, 2009.](http://www.sec.gov/Archives/edgar/data/91142/000119312509163445/dex101.htm) |

| | | [removed: (l) | |] [added: (k)] [Form of A. O. Smith Corporation Special Retention Award Agreement, incorporated by reference to [added: Exhibit 10.1 of] the quarterly report on Form 10-Q for the quarter ended March 31, 2011.](http://www.sec.gov/Archives/edgar/data/91142/000119312511133654/dex101.htm) |

| | | [removed: (m) | |] [added: (l)] [Stockholder Agreement dated as of December 9, 2008, between A. O. Smith Corporation and each Smith Investment Company stockholder who becomes a signatory thereto, incorporated by reference to [added: Exhibit 10.3 of] the current report on Form 8-K dated December 9, 2008.](http://www.sec.gov/Archives/edgar/data/91142/000119312508250700/dex103.htm) |

| [removed: | | (n)] [added: (21)] | | [removed: [Summary of Directors’ Compensation](https://www.sec.gov/Archives/edgar/data/91142/000119312518048314/d473899dex10n.htm)] [added: [Subsidiaries.](https://www.sec.gov/Archives/edgar/data/91142/000119312519042339/d678397dex21.htm)] |

| (23) | | [removed: | |] [Consent of Independent Registered Public Accounting [removed: Firm.](https://www.sec.gov/Archives/edgar/data/91142/000119312518048314/d473899dex23.htm)] [added: Firm.](https://www.sec.gov/Archives/edgar/data/91142/000119312519042339/d678397dex23.htm)] |

| (31.1) | | [removed: | |] [Certification by the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated February [removed: 16, 2018.](https://www.sec.gov/Archives/edgar/data/91142/000119312518048314/d473899dex311.htm)] [added: 15, 2019.](https://www.sec.gov/Archives/edgar/data/91142/000119312519042339/d678397dex311.htm)] |

| (31.2) | | [removed: | |] [Certification by the Executive Vice-President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated February [removed: 16, 2018.](https://www.sec.gov/Archives/edgar/data/91142/000119312518048314/d473899dex312.htm)] [added: 15, 2019.](https://www.sec.gov/Archives/edgar/data/91142/000119312519042339/d678397dex312.htm)] |

1.

Form 10-K

| 2. | | Financial Statement Schedules | | |

| --- | --- |

| | | |

| | | |

| | | |

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

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| | | |

| 2018: | | | | | | | | | | | | | | | | | | | | |

| | | | | | | |

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

| | | \- Consolidated Statement of Comprehensive Earnings | | | 28 | |

| | | | | |

| Exhibit | | | | |

| (21) | | | | [Subsidiaries.](https://www.sec.gov/Archives/edgar/data/91142/000119312518048314/d473899dex21.htm) |

| GLOSTER B. CURRENT, Jr. | | /s/ Gloster B. Current, Jr. |

| Director | | Gloster B. Current, Jr. |

| 2015: | | | | | | | | | | | | | | | | | | | | |