UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, ~~2022.~~2023.


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

For the transition period from __________ to __________

Commission File Number 1-475

A. O. Smith Corporation

(Exact name of registrant as specified in its charter)

Delaware

(State of Incorporation)

11270 West Park Place, Milwaukee, Wisconsin

(Address of Principal Executive Office)

39-0619790

(I.R.S. Employer

Identification No.)

53224-9508

(Zip Code)

(414) 359-4000

(Registrant’s telephone number, including area code)

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

Title of Each Class

Trading
Symbol

Name of Each Exchange
on Which Registered

Common Stock (par value $1.00 per share)

AOS

New York Stock Exchange

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

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

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

Large accelerated filer

☒

Accelerated Filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Class A Common Stock Outstanding as of April ~~28, 2022~~26, 2023 - ~~25,971,005~~25,903,736 shares

Common Stock Outstanding as of April ~~28, 2022~~26, 2023 - ~~130,035,911~~124,537,812 shares

Index

A. O. Smith Corporation


		Page
Part I.	FINANCIAL INFORMATION

	Condensed Consolidated Statements of Earnings - Three Months Ended March ~~31, 2022~~ 3 1 , 202 3 and ~~2021~~20 2 2	3

	Condensed Consolidated Statements of Comprehensive Earnings - Three Months Ended March 31 ~~2022~~, 202 3 and ~~2021~~20 2 2	3

	Condensed Consolidated Balance Sheets - March 31 ~~2022~~, 202 3 and December 31, ~~2021~~20 2 2	4

	Condensed Consolidated Statements of Cash Flows - ~~Three~~T hree Months Ended March ~~31, 2022~~ 3 1 , 202 3 and ~~2021~~20 2 2	5

	Condensed Consolidated Statements of Stockholders’ Equity - Three Months Ended March ~~31, 2022~~ 3 1 , 202 3 and ~~2021~~20 2 2	6

	Notes to Condensed Consolidated Financial Statements - March ~~31, 2022~~ 3 1 , 202 3	7-17-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819-25-26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2526

Item 4.	Controls and Procedures	2526~~-26~~-27

Part II.	OTHER INFORMATION

Item 1.	Legal Proceedings	2627

~~Item 1A.~~	~~Risk Factors~~	26~~-27~~

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6.	Exhibits	27

Index to Exhibits		28

Signatures		29

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions, except for per share data)

(unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
		2022		2021				2023		2022
Net sales	Net sales	$	977.7	$	769.0		Net sales	$	966.4	$	977.7
Cost of products sold	Cost of products sold	636.1		480.4			Cost of products sold	592.3		636.1
Gross profit	Gross profit	341.6		288.6			Gross profit	374.1		341.6
Selling, general and administrative expenses	Selling, general and administrative expenses	179.8		166.5			Selling, general and administrative expenses	187.2		179.8

Impairment expense							Impairment expense	15.6		—
Interest expense	Interest expense	1.5		1.0			Interest expense	4.0		1.5
Other expense (income), net		3.7		(5.0)
Other (income) expense, net							Other (income) expense, net	(4.0)		3.7
Earnings before provision for income taxes	Earnings before provision for income taxes	156.6		126.1			Earnings before provision for income taxes	171.3		156.6
Provision for income taxes	Provision for income taxes	36.8		28.4			Provision for income taxes	44.4		36.8
Net Earnings	Net Earnings	$	119.8	$	97.7		Net Earnings	$	126.9	$	119.8
Net Earnings Per Share of Common Stock		$	0.76	$	0.60
Basic Net Earnings Per Share of Common Stock							Basic Net Earnings Per Share of Common Stock	$	0.84	$	0.76
Diluted Net Earnings Per Share of Common Stock	Diluted Net Earnings Per Share of Common Stock	$	0.76	$	0.60		Diluted Net Earnings Per Share of Common Stock	$	0.84	$	0.76
Dividends Per Share of Common Stock	Dividends Per Share of Common Stock	$	0.28	$	0.26		Dividends Per Share of Common Stock	$	0.30	$	0.28

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(dollars in millions)

(unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
		2022		2021				2023		2022
Net earnings	Net earnings	$	119.8	$	97.7		Net earnings	$	126.9	$	119.8
Other comprehensive earnings (loss)	Other comprehensive earnings (loss)						Other comprehensive earnings (loss)
Foreign currency translation adjustments	Foreign currency translation adjustments	0.6		(1.4)			Foreign currency translation adjustments	2.5		0.6
Unrealized losses on cash flow derivative instruments, less related income tax benefit of $0.2 in 2022, $0.7 and in 2021		(0.6)		(2.0)
Adjustment to pension liability, less related income tax provision of ($1.2) in 2022 and ($1.3) in 2021		3.8		3.8
Unrealized losses on cash flow derivative instruments, less related income tax benefit of $0.0 in 2023 and $0.2 in 2022							Unrealized losses on cash flow derivative instruments, less related income tax benefit of $0.0 in 2023 and $0.2 in 2022	(0.1)		(0.6)
Adjustment to pension liability, less related income tax provision of zero in 2023 and $(1.2) in 2022							Adjustment to pension liability, less related income tax provision of zero in 2023 and $(1.2) in 2022	—		3.8
Comprehensive Earnings	Comprehensive Earnings	$	123.6	$	98.1		Comprehensive Earnings	$	129.3	$	123.6

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in millions)


		(unaudited) March 31, 2022		December 31, 2021			(unaudited) March 31, 2023		December 31, 2022
Assets	Assets					Assets
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	405.8	$	443.3	Cash and cash equivalents	$	406.2	$	391.2
Marketable securities	Marketable securities	173.6		188.1		Marketable securities	89.8		90.6
Receivables	Receivables	608.3		634.4		Receivables	586.8		581.2
Inventories	Inventories	488.7		447.7		Inventories	503.7		516.4
Other current assets	Other current assets	45.0		39.1		Other current assets	57.3		54.3
Total Current Assets	Total Current Assets	1,721.4		1,752.6		Total Current Assets	1,643.8		1,633.7
Property, plant and equipment	Property, plant and equipment	1,354.1		1,343.2		Property, plant and equipment	1,375.9		1,364.8
Less accumulated depreciation	Less accumulated depreciation	(751.3)		(736.5)		Less accumulated depreciation	(790.4)		(774.1)
Net property, plant and equipment	Net property, plant and equipment	602.8		606.7		Net property, plant and equipment	585.5		590.7
Goodwill	Goodwill	628.8		627.8		Goodwill	619.9		619.7
Other intangibles	Other intangibles	360.4		364.8		Other intangibles	344.8		347.9
Operating lease assets	Operating lease assets	33.9		32.5		Operating lease assets	32.3		29.8
Other assets	Other assets	87.6		90.0		Other assets	110.0		110.5
Total Assets	Total Assets	$	3,434.9	$	3,474.4	Total Assets	$	3,336.3	$	3,332.3
Liabilities	Liabilities					Liabilities
Current Liabilities	Current Liabilities					Current Liabilities
Trade payables	Trade payables	$	658.7	$	745.9	Trade payables	$	550.4	$	625.8
Accrued payroll and benefits	Accrued payroll and benefits	61.4		113.4		Accrued payroll and benefits	59.9		75.7
Accrued liabilities	Accrued liabilities	207.0		181.8		Accrued liabilities	213.6		159.1
Product warranties	Product warranties	68.2		70.9		Product warranties	61.8		63.6
Debt due within one year	Debt due within one year	6.8		6.8		Debt due within one year	10.0		10.0
Total Current Liabilities	Total Current Liabilities	1,002.1		1,118.8		Total Current Liabilities	895.7		934.2
Long-term debt	Long-term debt	288.6		189.9		Long-term debt	330.8		334.5
Product warranties	Product warranties	114.7		113.5		Product warranties	119.4		118.9
Long-term operating lease liabilities	Long-term operating lease liabilities	24.6		22.3		Long-term operating lease liabilities	25.1		22.4
Other liabilities	Other liabilities	196.0		197.7		Other liabilities	175.1		174.6
Total Liabilities	Total Liabilities	1,626.0		1,642.2		Total Liabilities	1,546.1		1,584.6
Stockholders’ Equity	Stockholders’ Equity					Stockholders’ Equity
Class A Common Stock, $5 par value: authorized 27,000,000 shares; issued, 26,103,785 and 26,104,441		130.5		130.5
Common Stock, $1 par value: authorized 240,000,000 shares; issued 164,603,809 and 164,603,153		164.7		164.7
Class A Common Stock (shares issued, 26,034,116 and 26,035,656 as of March 31, 2023 and December 31, 2022, respectively)						Class A Common Stock (shares issued, 26,034,116 and 26,035,656 as of March 31, 2023 and December 31, 2022, respectively)	130.2		130.2
Common Stock (shares issued 164,673,478 and 164,671,938 as of March 31, 2023 and December 31, 2022, respectively)						Common Stock (shares issued 164,673,478 and 164,671,938 as of March 31, 2023 and December 31, 2022, respectively)	164.7		164.7
Capital in excess of par value	Capital in excess of par value	550.9		545.2		Capital in excess of par value	564.3		555.9
Retained earnings	Retained earnings	2,902.2		2,826.6		Retained earnings	2,966.5		2,885.0
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(327.6)		(331.4)		Accumulated other comprehensive loss	(80.0)		(82.4)
Treasury stock at cost	Treasury stock at cost	(1,611.8)		(1,503.4)		Treasury stock at cost	(1,955.5)		(1,905.7)
Total Stockholders’ Equity	Total Stockholders’ Equity	1,808.9		1,832.2		Total Stockholders’ Equity	1,790.2		1,747.7
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	3,434.9	$	3,474.4	Total Liabilities and Stockholders’ Equity	$	3,336.3	$	3,332.3

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

(unaudited)


		Three Months Ended March 31,					Three Months Ended March 31,
		2022		2021			2023		2022
Operating Activities	Operating Activities					Operating Activities
Net earnings	Net earnings	$	119.8	$	97.7	Net earnings	$	126.9	$	119.8
Adjustments to reconcile net earnings to cash provided by (used in) operating activities:	Adjustments to reconcile net earnings to cash provided by (used in) operating activities:					Adjustments to reconcile net earnings to cash provided by (used in) operating activities:
Depreciation and amortization	Depreciation and amortization	20.3		19.5		Depreciation and amortization	19.2		20.3
Stock based compensation expense	Stock based compensation expense	7.6		7.4		Stock based compensation expense	7.0		7.6
Non-cash impairment						Non-cash impairment	15.6		—
Net changes in operating assets and liabilities:	Net changes in operating assets and liabilities:					Net changes in operating assets and liabilities:
Current assets and liabilities	Current assets and liabilities	(137.8)		(13.2)		Current assets and liabilities	(50.6)		(137.8)
Noncurrent assets and liabilities	Noncurrent assets and liabilities	6.6		(7.0)		Noncurrent assets and liabilities	1.8		6.6
Cash Provided by Operating Activities	Cash Provided by Operating Activities	16.5		104.4		Cash Provided by Operating Activities	119.9		16.5
Investing Activities	Investing Activities					Investing Activities
Capital expenditures	Capital expenditures	(12.9)		(17.1)		Capital expenditures	(10.7)		(12.9)

Investments in marketable securities	Investments in marketable securities	(16.9)		(24.4)		Investments in marketable securities	(14.7)		(16.9)
Net proceeds from sale of marketable securities	Net proceeds from sale of marketable securities	31.9		54.0		Net proceeds from sale of marketable securities	15.6		31.9
Cash Provided by Investing Activities		2.1		12.5
Cash (Used in) Provided by Investing Activities						Cash (Used in) Provided by Investing Activities	(9.8)		2.1
Financing Activities	Financing Activities					Financing Activities
Long-term debt incurred (repaid)		98.7		(6.8)
Long-term debt (repaid) incurred						Long-term debt (repaid) incurred	(3.7)		98.7
Common stock repurchases	Common stock repurchases	(107.9)		(67.0)		Common stock repurchases	(53.1)		(107.9)

Net (payments) proceeds from stock option activity		(2.7)		4.5
Net proceeds (payments) from stock option activity						Net proceeds (payments) from stock option activity	4.7		(2.7)
Dividends paid	Dividends paid	(44.2)		(42.2)		Dividends paid	(45.4)		(44.2)
Cash Used in Financing Activities	Cash Used in Financing Activities	(56.1)		(111.5)		Cash Used in Financing Activities	(97.5)		(56.1)
Net (decrease) increase in cash and cash equivalents		(37.5)		5.4
Effect of exchange rate changes on cash and cash equivalents						Effect of exchange rate changes on cash and cash equivalents	2.4		—
Net increase (decrease) in cash and cash equivalents						Net increase (decrease) in cash and cash equivalents	15.0		(37.5)
Cash and cash equivalents - beginning of period	Cash and cash equivalents - beginning of period	443.3		573.1		Cash and cash equivalents - beginning of period	391.2		443.3
Cash and Cash Equivalents - End of Period	Cash and Cash Equivalents - End of Period	$	405.8	$	578.5	Cash and Cash Equivalents - End of Period	$	406.2	$	405.8

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

A. O. SMITH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in millions)

(unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
		2022		2021				2023		2022
Class A Common Stock	Class A Common Stock						Class A Common Stock
Balance at the beginning of period	Balance at the beginning of period	$	130.5	$	130.8		Balance at the beginning of period	$	130.2	$	130.5
Conversion of Class A Common Stock	Conversion of Class A Common Stock	—		(0.2)			Conversion of Class A Common Stock	—		—
Balance at end of period	Balance at end of period	$	130.5	$	130.6		Balance at end of period	$	130.2	$	130.5
Common Stock	Common Stock						Common Stock
Balance at the beginning of period	Balance at the beginning of period	$	164.7	$	164.6		Balance at the beginning of period	$	164.7	$	164.7
Conversion of Class A Common Stock	Conversion of Class A Common Stock	—		$	0.1		Conversion of Class A Common Stock	—		$	—
Balance at end of period	Balance at end of period	$	164.7	$	164.7		Balance at end of period	$	164.7	$	164.7
Capital in Excess of Par Value	Capital in Excess of Par Value						Capital in Excess of Par Value
Balance at the beginning of period	Balance at the beginning of period	$	545.2	$	520.4		Balance at the beginning of period	$	555.9	$	545.2
Conversion of Class A Common Stock		—		0.2
Issuance of share units	Issuance of share units	(5.8)		(5.3)			Issuance of share units	(10.1)		(5.8)
Vesting of share units	Vesting of share units	(2.4)		(1.7)			Vesting of share units	(3.1)		(2.4)
Stock based compensation expense	Stock based compensation expense	7.7		7.2			Stock based compensation expense	6.8		7.7
Exercises of stock options	Exercises of stock options	0.4		2.6			Exercises of stock options	4.7		0.4
Stock incentives		5.8		5.3
Issuance of share based compensation							Issuance of share based compensation	10.1		5.8
Balance at end of period	Balance at end of period	$	550.9	$	528.7		Balance at end of period	$	564.3	$	550.9
Retained Earnings	Retained Earnings						Retained Earnings
Balance at the beginning of period	Balance at the beginning of period	$	2,826.6	$	2,509.6		Balance at the beginning of period	$	2,885.0	$	2,826.6
Net earnings	Net earnings	119.8		97.7			Net earnings	126.9		119.8
Cash dividends on stock		(44.2)		(42.2)
Dividends on stock							Dividends on stock	(45.4)		(44.2)
Balance at end of period	Balance at end of period	$	2,902.2	$	2,565.1		Balance at end of period	$	2,966.5	$	2,902.2
Accumulated Other Comprehensive Loss (see Note 16)	Accumulated Other Comprehensive Loss (see Note 16)	$	(327.6)	$	(320.8)		Accumulated Other Comprehensive Loss (see Note 16)	$	(80.0)	$	(327.6)
Treasury Stock	Treasury Stock						Treasury Stock
Balance at the beginning of period	Balance at the beginning of period	$	(1,503.4)	$	(1,155.9)		Balance at the beginning of period	$	(1,905.7)	$	(1,503.4)
Exercise of stock options	Exercise of stock options	(2.9)		1.9			Exercise of stock options	0.2		(2.9)

Shares repurchased	Shares repurchased	(107.9)		(67.0)			Shares repurchased	(53.1)		(107.9)
Vesting of share units	Vesting of share units	2.4		1.7			Vesting of share units	3.1		2.4
Balance at end of period	Balance at end of period	$	(1,611.8)	$	(1,219.3)		Balance at end of period	$	(1,955.5)	$	(1,611.8)
Total Stockholders’ Equity	Total Stockholders’ Equity	$	1,808.9	$	1,849.0		Total Stockholders’ Equity	$	1,790.2	$	1,808.9

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

A. O. SMITH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, ~~2022~~2023

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, ~~2022~~2023 are not necessarily indicative of the results expected for the full year. It is suggested the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 filed with the SEC on February ~~11, 2022.~~14, 2023.

Recent Accounting ~~Pronouncement~~Pronouncements

~~In November 2021, the Financial Accounting Standards Board (FASB) amended ASC 832,~~ ~~Government Assistance~~ ~~(issued under Accounting Standards Update (ASU) 2021-10, "Disclosures by Business Entities about Government Assistance"). This amendment requires disclosures that~~No recent accounting pronouncements are expected to increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactionshave an impact on ~~an entity’s~~our condensed consolidated financial statements. The Company adopted the amendment on January 1, 2022, and the adoption of ASU 2021-10 is not expected to materially impact its annual disclosures, consolidated balance sheets, statements of earnings or statements of cash flows.

2. Revenue Recognition

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

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

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of ~~$118.2~~$70.3 million and ~~$155.2~~$85.7 million at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Customer deposit liabilities are short term in nature, ~~and deposits are~~ recognized into revenue within one year of receipt. The Company assesses the collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for ~~doubtful accounts,~~credit losses, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for ~~doubtful accounts~~credit losses was ~~$10.1~~$10.2 million at March 31, ~~2022~~2023 and $9.5 million at December 31, ~~2021.~~2022.

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

~~Table of Contents~~

~~2. Revenue Recognition (continued)~~

Disaggregation of Net Sales

The Company is comprised of 2two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, heat pump and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world.

Table of Contents

2. Revenue Recognition (continued)

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

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

Water heaters The Company’s water heaters are open water heating systems that heat potable water. Typical applications for water heaters include residences, restaurants, hotels, ~~and motels,~~ office buildings, laundries, car washes and small businesses. The Company sells residential and commercial water heater products and related parts through its wholesale distribution channel, which includes more than ~~1,100~~1,000 independent wholesale plumbing distributors. The Company also sells residential water heaters and related parts through retail and maintenance, repair and operations (MRO) channels. A significant portion of the Company’s water heater sales in the North America segment is derived from the replacement of existing products.

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

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

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


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,				(dollars in millions)	Three Months Ended March 31,
		2022		2021					2023		2022
North America	North America							North America
Water heaters and related parts	Water heaters and related parts	$	615.8	$	457.7			Water heaters and related parts	$	637.3	$	615.8
Boilers and related parts	Boilers and related parts	57.5		46.5				Boilers and related parts	58.4		57.5
Water treatment products	Water treatment products	56.8		48.7				Water treatment products	57.0		56.8
Total North America	Total North America	730.1		552.9				Total North America	752.7		730.1
Rest of World	Rest of World							Rest of World
China	China	$	228.3	$	199.2			China	$	190.2	$	228.3
All other Rest of World	All other Rest of World	27.7		23.1				All other Rest of World	28.9		27.7
Total Rest of World	Total Rest of World	256.0		222.3				Total Rest of World	219.1		256.0
Inter-segment sales	Inter-segment sales	(8.4)		(6.2)				Inter-segment sales	(5.4)		(8.4)
Total Net Sales	Total Net Sales	$	977.7	$	769.0			Total Net Sales	$	966.4	$	977.7

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3. ~~Acquisition~~Impairment Expense

~~On October 19, 2021,~~In the first quarter of 2023, the Company ~~acquired 100 percent of the shares and related assets of Giant Factories, Inc. (Giant)~~entered into negotiations to sell its business in Turkey (disposal group), a Canada-based manufacturer of residential and commercial water heaters. The addition of Giant increases the Company's North America market penetration, creating additional capacity and enhancing the Company's distribution capabilities. Giantwhich is included in the ~~North America~~Company's Rest of World segment. The Company ~~paid an aggregate cash purchase price of $198.6 million net of cash acquired. In addition,~~determined that the Company incurred acquisition costs of approximately $1.3 million. Under the purchase agreement for the Giant acquisition, an escrow of approximately $8 million was set aside from the purchase price to satisfy any potential obligations of the former owners of Giant, should they arise. The cash purchase price is preliminary and subject to customary adjustments. The purchase price allocation remains preliminary and subject to final valuation adjustments that will be completed within the one year period following the acquisition date.

~~The following table summarizes the preliminary allocation of~~ fair value of the ~~assets acquired and liabilities assumed at~~disposal group, less cost to sell, was lower than its carrying amount. As a result, in the ~~date~~first quarter of ~~acquisition. Of~~2023, the ~~$53.8~~Company recorded an impairment expense of $15.6 million of ~~acquired identifiable intangible assets, $43.9~~which $12.5 million ~~has been assigned to trademarks that are not subject to amortization~~was recorded in the Rest of World segment and ~~$9.2~~$3.1 million ~~has been assigned to customer relationships which are amortized over 22 years, and the remaining $0.7~~was recorded in Corporate Expense. The impairment was recorded as a net reduction of $4.5 million ~~has been assigned to non-compete agreements which are amortized over five years. The excess of the acquisition purchase price over the fair value assigned~~ to the assets ~~acquired~~ and liabilities ~~assumed was~~and $11.1 million for the anticipated liquidation of the cumulative foreign currency translation adjustment associated with the disposal group. The accrual for the impairment is recorded ~~as goodwill.~~


~~October 19, 2021 (dollars in millions)~~
~~Current assets, net of cash acquired~~	$	~~60.1~~
~~Property, plant and equipment~~	~~55.8~~
~~Intangible assets~~	~~53.8~~
~~Goodwill~~	~~77.6~~
~~Total assets acquired~~	~~247.3~~
~~Current~~in Accrued liabilities	~~(39.2)~~
~~Long Term liabilities~~	~~(9.5)~~
~~Net assets acquired~~	$	~~198.6~~

~~As required under ASC 805~~ ~~Business Combinations, Giant's results of operations have been included~~ in the ~~Company’s~~condensed consolidated ~~financial statements from October 19, 2021,~~balance sheet.

As of March 31, 2023, the ~~date~~disposal group did not meet the requirements to be classified as discontinued operations as the sale will not have a material effect on the Company's operations and does not represent a shift in the Company's strategy. Accordingly, the remaining carrying value of ~~acquisition.~~the disposal group as of March 31, 2023, was $0.6 million and classified as held for sale. The sale of the disposal group was completed in April 2023.

4. Leases

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

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

~~Table of Contents~~

~~4. Leases (continued)~~

Supplemental balance sheet information related to leases is as follows:


(dollars in millions)	(dollars in millions)	March 31, 2022		December 31, 2021		(dollars in millions)	March 31, 2023		December 31, 2022
Liabilities	Liabilities					Liabilities
Short term: Accrued liabilities	Short term: Accrued liabilities	$	10.8	$	11.7	Short term: Accrued liabilities	$	9.4	$	9.9
Long term: Operating lease liabilities	Long term: Operating lease liabilities	24.6		22.3		Long term: Operating lease liabilities	25.1		22.4
Total operating lease liabilities	Total operating lease liabilities	$	35.4	$	34.0	Total operating lease liabilities	$	34.5	$	32.3
Less: Rent incentives and deferrals	Less: Rent incentives and deferrals	(1.5)		(1.5)		Less: Rent incentives and deferrals	(2.2)		(2.5)
Assets	Assets					Assets
Operating lease assets	Operating lease assets	$	33.9	$	32.5	Operating lease assets	$	32.3	$	29.8


Lease Term and Discount Rate	March 31, ~~2022~~2023
Weighted-average remaining lease term	~~6.7~~7.4 years
Weighted-average discount rate	~~2.82%~~3.71	%

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4. Leases (continued)

The components of lease expense were as follows:


(dollars in millions)	(dollars in millions)		Three months ended March 31,				(dollars in millions)		Three months ended March 31,
Lease Expense	Lease Expense	Classification	2022(1)		2021(2)		Lease Expense	Classification	2023(1)		2022(2)
Operating lease expense	Operating lease expense	Cost of products sold	$	1.0	$	1.0	Operating lease expense	Cost of products sold	$	1.3	$	1.0
		Selling, general and administrative expenses	3.9		4.0			Selling, general and administrative expenses	4.1		3.9

(1)2023 includes short-term and variable lease expenses of $1.1 million and $1.2 million, respectively.

(2)2022 includes short-term and variable lease expenses of $0.5 million and $0.8 million, respectively.

~~(2)2021 includes short-term and variable lease expenses of $0.5 million and $0.6 million, respectively.~~

Maturities of lease liabilities were as follows:


(dollars in millions)	(dollars in millions)	March 31, 2022		(dollars in millions)	March 31, 2023
2022		$	9.2
2023	2023	7.8		2023	$	8.1
2024	2024	6.4		2024	8.2
2025	2025	4.4		2025	5.8
2026	2026	2.8		2026	4.0
After 2026		9.4
2027				2027	2.4
After 2027				After 2027	11.7
Total lease payments	Total lease payments	40.0		Total lease payments	40.2
Less: Imputed interest	Less: Imputed interest	(4.6)		Less: Imputed interest	(5.7)
Present value of operating lease liabilities	Present value of operating lease liabilities	$	35.4	Present value of operating lease liabilities	$	34.5

5. Inventories

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


(dollars in millions)	(dollars in millions)	March 31, 2022		December 31, 2021		(dollars in millions)	March 31, 2023		December 31, 2022
Finished products	Finished products	$	199.2	$	190.2	Finished products	$	175.5	$	174.4
Work in process	Work in process	51.4		42.0		Work in process	44.4		42.1
Raw materials	Raw materials	315.3		286.3		Raw materials	331.0		349.2
Inventories, at FIFO cost	Inventories, at FIFO cost	565.9		518.5		Inventories, at FIFO cost	550.9		565.7
LIFO reserve	LIFO reserve	(77.2)		(70.8)		LIFO reserve	(47.2)		(49.3)
		$	488.7	$	447.7
Inventories, at LIFO cost						Inventories, at LIFO cost	$	503.7	$	516.4

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6. Product Warranties

The Company offers warranties on the sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims. The increase in our reserve for product warranties as of the first quarter ended 2022 compared to the prior year period was primarily due to increased steel prices and the acquisition of Giant. Refer to Note 3, "Acquisition", for additional information regarding the acquisition of Giant.

~~The~~ following table presents the Company’s warranty liability activity:


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,				(dollars in millions)	Three Months Ended March 31,
		2022		2021			2023		2022
Balance at January 1,	Balance at January 1,	$	184.4	$	142.3	Balance at January 1,	$	182.5	$	184.4
Expense	Expense	13.9		12.6		Expense	18.4		13.9
Claims settled	Claims settled	(15.4)		(13.3)		Claims settled	(19.7)		(15.4)
Balance at March 31,	Balance at March 31,	$	182.9	$	141.6	Balance at March 31,	$	181.2	$	182.9

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7. Debt

In 2021, the Company renewed and amended its $500 million multi-year multi-currency revolving credit agreement with a new expiration date of April 1, 2026. The facility has an accordion provision that allows it to be increased up to $850 million if certain conditions (including lender approval) are satisfied. Borrowings under the Company's bank credit lines and commercial paper borrowings are supported by a $500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at March 31, ~~2022.~~2023. At its option, the Company either maintains cash balances or pays fees for bank credit and services. The facility requires the Company to maintain 2two financial covenants, a leverage ratio test and an interest coverage test. The Company was in compliance with the covenants as of March 31, ~~2022.~~2023.

8. Earnings per Share of Common Stock

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


		Three Months Ended March 31,		Three Months Ended March 31,
		2022	2021			2023	2022
Denominator for basic earnings per share - weighted average shares	Denominator for basic earnings per share - weighted average shares	157,018,566	161,526,733		Denominator for basic earnings per share - weighted average shares	150,897,302	157,018,566
Effect of dilutive stock options and share units	Effect of dilutive stock options and share units	1,299,133	1,258,590		Effect of dilutive stock options and share units	1,003,545	1,299,133
Denominator for diluted earnings per share	Denominator for diluted earnings per share	158,317,699	162,785,323		Denominator for diluted earnings per share	151,900,847	158,317,699

9. Stock Based Compensation

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the Incentive Plan) effective January 1, 2007. The Incentive Plan was most recently reapproved by stockholders on April 15, 2020. The Incentive Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of ~~options or~~ share units at March 31, ~~2022~~2023 was ~~7,117,740.~~2,491,654. Upon stock option exercise or share unit vesting, shares are issued from treasury stock. Total stock based compensation expense recognized in the three months ended March 31, 2023 and 2022 ~~and 2021~~ was ~~$7.6~~$7.0 million and ~~$7.4~~$7.6 million, respectively.

Stock Options

The Company decided to no longer grant stock options beginning with fiscal year 2023. Stock options previously granted ~~in the three months ended March 31, 2022 and 2021~~ have a three year pro rata vesting from the date of grant. Stock options ~~are~~were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted ~~in 2022 and 2021~~ expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period; however, included in the stock option expense for the three months ended March 31, 2022 ~~and 2021~~ was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Stock based compensation

~~Table of Contents~~

~~9. Stock Based Compensation (continued)~~

expense attributable to stock options in the three months ended March 31, 2023 and 2022 was $0.3 million and ~~2021 was~~ $3.9 million, ~~and $3.6 million,~~ respectively.

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, ~~2022:~~2023:

Weighted-
Avg. Per
Share
Exercise
Price Number of
Options Average
Remaining
Contractual
Life Aggregate
Intrinsic
Value
(dollars in
millions)
Outstanding at January 1, 2022 $ 47.73 2,252,498
Granted 74.23 318,520
Exercised 37.22 (19,532)
Forfeited 59.09 (8,269)
Outstanding at March 31, 2022 51.09 2,543,217 7 years $ 35.8
Exercisable at March 31, 2022 46.75 1,719,597 6 years $ 29.5


	Weighted- Avg. Per Share Exercise Price		Number of Options	Average Remaining Contractual Life	Aggregate Intrinsic Value (dollars in millions)
Outstanding at January 1, 2023	$	51.22	2,481,606

Exercised	45.47		(191,054)
Forfeited	61.09		(3,605)
Outstanding at March 31, 2023	51.69		2,286,947	6 years	$	41.5
Exercisable at March 31, 2023	48.72		1,952,622	6 years	$	40.4

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9. Stock Based Compensation (continued)

There were no stock options granted in 2023. The weighted-average fair value per option at the date of grant during the three months ended March 31, 2022 ~~and 2021~~ using the Black-Scholes option-pricing model was ~~$17.59 and $14.01, respectively.~~$17.59. Assumptions were as follows:

Three Months Ended March 31,
2022 2021
Expected life (years) 5.7 5.8
Risk-free interest rate 1.9 % 1.2 %
Dividend yield 1.5 % 1.6 %
Expected volatility 26.8 % 27.3 %


	Three Months Ended March 31,
	2022
Expected life (years)	5.7
Risk-free interest rate	1.9	%
Dividend yield	1.5	%
Expected volatility	26.8	%

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

~~Restricted Stock and~~ Share Units

Participants of the Incentive Plan may also be awarded ~~shares of restricted stock or~~ share ~~units under the Incentive Plan.~~units. Share units vest three years after the date of grant. The Company granted ~~88,894~~165,686 and ~~100,153~~88,894 share units under the Incentive Plan in the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

The share units were valued at ~~$6.6~~$11.1 million and ~~$6.1~~$6.6 million at the date of issuance in ~~2022~~2023 and ~~2021,~~2022, respectively, based on the price of the Company’s Common Stock at the date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 was expense associated with accelerated vesting of ~~restricted stock and~~ share unit awards for certain employees who ~~either~~ are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of ~~$3.7~~$6.6 million and ~~$3.8~~$3.7 million was recognized in the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

~~Table of Contents~~

~~9. Stock Based Compensation (continued)~~

A summary of share unit activity under the Incentive Plan is as follows for the three months ended March 31, ~~2022:~~2023:


		Number of Units	Weighted-Average Grant Date Value			Number of Units	Weighted-Average Grant Date Value
Issued and unvested at January 1, 2022		421,138	$	47.28
Issued and unvested at January 1, 2023					Issued and unvested at January 1, 2023	379,919	$	52.92
Granted	Granted	88,894	74.23		Granted	165,686	67.14
Vested	Vested	(124,191)	49.43		Vested	(156,173)	49.42
Forfeited	Forfeited	(6,137)	53.21		Forfeited	(2,449)	64.50
Issued and unvested at March 31, 2022		379,704	52.88
Issued and unvested at March 31, 2023					Issued and unvested at March 31, 2023	386,983	63.16

Performance Stock Units

Beginning in 2023, certain executives may also be awarded performance stock units under the Incentive Plan. Performance stock units vest over three years following the date of the grant. Performance stock units vest under a set of measurement criteria which are based upon achievement of certain Environmental, Social, and Governance targets. Potential payouts range from zero to 150% of the target awards and changes from target amounts are reflected as performance adjustments. The Company granted 24,580 performance stock units under the Incentive Plan in the three months ended March 31, 2023.

The performance stock units were valued at $1.7 million at the date of issuance in 2023, based on the price of the Company’s Common Stock at the date of grant. The weighted average grant date value for the units granted was $67.14. The performance stock units are recognized as compensation expense ratably over the three-year vesting period. Stock based compensation expense attributable to performance stock units of $0.1 million was recognized in the three months ended March 31, 2023. Certain non-U.S.-based executives receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

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10. Pensions

The following table presents the components of the Company’s net pension ~~income:~~expense:


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,				(dollars in millions)	Three Months Ended March 31,
		2022		2021					2023		2022
Service cost	Service cost	$	0.4	$	0.4			Service cost	$	0.3	$	0.4
Interest cost	Interest cost	3.6		3.6				Interest cost	0.3		3.6
Expected return on plan assets	Expected return on plan assets	(5.4)		(12.0)				Expected return on plan assets	(0.3)		(5.4)
Amortization of unrecognized loss	Amortization of unrecognized loss	5.1		5.2				Amortization of unrecognized loss	—		5.1
Amortization of prior service cost	Amortization of prior service cost	(0.1)		(0.1)				Amortization of prior service cost	—		(0.1)
Defined benefit plan expense (income)		$	3.6	$	(2.9)
Defined benefit plan expense								Defined benefit plan expense	$	0.3	$	3.6

The service cost component of net periodic benefit cost is presented within cost of products sold and selling, general and administrative expenses within the condensed consolidated statements of earnings while the other components of pension expense ~~(income)~~ are reflected in other ~~expense (income).~~expense. The Company was not required to and did not make a contribution to its U.S. pension plan in ~~2021.~~2022. The Company is not required to make a contribution in ~~2022.~~2023.

In 2021, the Company's Board of Directors approved the termination of the Company's largest defined benefit pension plan (the Plan) ~~representing~~with a termination date of December 31, 2021. The Plan represented over 95 percent of the Company's pension plan ~~liabilities with a termination date of December 31, 2021.~~liability. In April 2022, the Plan received a determination letter from the IRS that allowed the Company to proceed with the termination process for the Plan. In 2022, the Company expects to annuitize the remaining pension liability. The Plan settlement, which the Company expects to complete in the fourth quarter of 2022, ~~will accelerate~~ the ~~recognition~~Company settled Plan liabilities through lump-sum payments from existing plan assets to eligible participants who elected to receive them and through the purchase of ~~approximately $445 million~~annuities from Mass Mutual Life Insurance Company (MML). As of ~~non-cash, pre-tax~~March 1, 2023, MML assumed the future annuity payments for those eligible active and former employees and their beneficiaries. Remaining pension ~~expenses.~~

assets associated with the Plan at March 31, 2023 are $21.5 million. The Company intends to use the remaining assets to fund future non-elective contributions to the Company’s defined contribution plan. For additional information regarding the termination of the Plan and the Company’s defined contribution plan, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 14, 2023.

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11. Segment Results

The Company is comprised of 2two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The following table presents the Company’s segment results:


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,				(dollars in millions)	Three Months Ended March 31,
		2022		2021					2023		2022
Net sales	Net sales							Net sales
North America	North America	$	730.1	$	552.9			North America	$	752.7	$	730.1
Rest of World	Rest of World	256.0		222.3				Rest of World	219.1		256.0
Inter-segment	Inter-segment	(8.4)		(6.2)				Inter-segment	(5.4)		(8.4)
		$	977.7	$	769.0				$	966.4	$	977.7
Segment earnings	Segment earnings							Segment earnings
North America(1)	North America(1)	$	151.8	$	130.4			North America(1)	$	188.6	$	151.8
Rest of World(2)	Rest of World(2)	24.8		11.8				Rest of World(2)	5.3		24.8
Inter-segment		(0.1)		—
Inter-segment earnings elimination								Inter-segment earnings elimination	—		(0.1)
		176.5		142.2					193.9		176.5
Corporate expense~~(2)~~(3)	Corporate expense~~(2)~~(3)	(18.4)		(15.1)				Corporate expense~~(2)~~(3)	(18.6)		(18.4)
Interest expense	Interest expense	(1.5)		(1.0)				Interest expense	(4.0)		(1.5)
Earnings before income taxes	Earnings before income taxes	156.6		126.1				Earnings before income taxes	171.3		156.6
Provision for income taxes	Provision for income taxes	36.8		28.4				Provision for income taxes	44.4		36.8
Net earnings	Net earnings	$	119.8	$	97.7			Net earnings	$	126.9	$	119.8

(1)includes pension expense (income) of:		$	2.6	$	(2.6)
(2)includes pension expense (income) of:		$	0.3	$	(0.6)
Additional Information								Additional Information
(1) Adjustments: North America								(1) Adjustments: North America
includes pension expense of:								includes pension expense of:	$	—	$	2.6
(2) Adjustments: Rest of World								(2) Adjustments: Rest of World
includes impairment expense of:								includes impairment expense of:	$	12.5	$	—
(3) Adjustments: Corporate expense								(3) Adjustments: Corporate expense
includes impairment expense of:								includes impairment expense of:	$	3.1	$	—
includes pension expense of:								includes pension expense of:	$	—	$	0.3

12. Fair Value Measurements

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

~~The following table presents assets~~

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12. Fair Value Measurements (continued)

Assets (liabilities) measured at fair value on a recurring basis are as follows (dollars in millions):


Fair Value Measurement Using	Fair Value Measurement Using	March 31, 2022		December 31, 2021		Fair Value Measurement Using	Balance Sheet Location	March 31, 2023		December 31, 2022
Quoted prices in active markets for identical assets (Level 1)	Quoted prices in active markets for identical assets (Level 1)	$	173.6	$	188.1	Quoted prices in active markets for identical assets (Level 1)	Marketable Securities	$	89.8	$	90.6
Significant other observable inputs (Level 2)	Significant other observable inputs (Level 2)	(0.2)		(0.7)		Significant other observable inputs (Level 2)	Other current assets	7.0		6.5

Items measured at fair value were comprised of the Company’s marketable securities (Level 1) and derivative instruments (Level 2). There were no changes in the ~~Company’s~~Company's valuation techniques used to measure fair values on a recurring basis during the three months ended March 31, ~~2022.~~2023.

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13. Derivative Instruments

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

Cash Flow Hedges

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

Foreign Currency Forward Contracts

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

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

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


(dollars in millions)	(dollars in millions)	March 31, 2022				December 31, 2021				(dollars in millions)	March 31, 2023				December 31, 2022
		Buy		Sell		Buy		Sell			Buy		Sell		Buy		Sell

British pound										British pound	$	—	$	1.2	$	—	$	—
Canadian dollar	Canadian dollar	$	—	$	103.0	$	—	$	113.4	Canadian dollar	—		57.6		—		76.8
Euro	Euro	29.0		—		24.2		—		Euro	22.7		1.8		30.2		—
Mexican peso	Mexican peso	21.8		—		23.8		—		Mexican peso	15.5		—		15.7		—
Total	Total	$	50.8	$	103.0	$	48.0	$	113.4	Total	$	38.2	$	60.6	$	45.9	$	76.8

Net Investment Hedges

The Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges,

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13. Derivative Instruments (continued)

gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its non-U.S. subsidiaries. These hedges are determined to be effective. The Company recognized $0.5 million of after-tax gains associated with hedges of net investments in non-U.S. subsidiaries in currency translation adjustment in other comprehensive loss in the three months ended March 31, 2023. The Company recognized $0.3 million ~~and zero~~ of after-tax losses associated with hedges of a net investment in non-U.S. subsidiaries in currency translation adjustment in other comprehensive ~~income~~loss in the three months ended March 31, ~~2022 and 2021, respectively.~~2022. The contractual amount of the Company's foreign currency forward contracts that are designated as net investment hedges ~~is $50.0~~was $25.0 million as of March 31, ~~2022.~~

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~~13. Derivative Instruments (continued)~~

2023.

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

Fair value of derivatives designated as hedging instruments under ASC 815:


(dollars in millions)	(dollars in millions)	Balance Sheet Location	March 31, 2022		December 31, 2021		(dollars in millions)	Balance Sheet Location	March 31, 2023		December 31, 2022
Foreign currency contracts	Foreign currency contracts	Other current assets	$	1.3	$	1.7	Foreign currency contracts	Other current assets	$	7.0	$	6.4
		Accrued liabilities	(1.5)		(1.6)			Accrued liabilities	—		—
Total derivatives designated as hedging instruments	Total derivatives designated as hedging instruments		$	(0.2)	$	0.1	Total derivatives designated as hedging instruments		$	7.0	$	6.4

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

Three Months Ended March 31 (dollars in millions):


Derivatives in ASC 815 cash flow hedging relationships	Derivatives in ASC 815 cash flow hedging relationships	Amount of loss recognized in other comprehensive loss on derivatives				Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings	Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings				Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive loss on derivatives				Location of gain reclassified from accumulated other comprehensive loss into earnings	Amount of gain reclassified from accumulated other comprehensive loss into earnings
		2022		2021			2022		2021			2023		2022			2023		2022
Foreign currency contracts	Foreign currency contracts	$	(0.7)	$	(2.9)	Cost of products sold	$	0.1	$	(0.3)	Foreign currency contracts	$	1.7	$	(0.7)	Cost of products sold	$	1.9	$	0.1

Balance Sheet Hedges

Foreign Exchange Contracts

The Company periodically enters into foreign exchange contracts to mitigate the foreign currency volatility relative to certain intercompany loans. These foreign exchange contracts did not qualify for hedge accounting in accordance with ASC 815 and as such were marked to market through earnings. The fair value of the foreign exchange contracts was zero as of March 31, ~~2022.~~2023. The fair value of the foreign exchange contracts was ~~a liability~~an asset balance of ~~$0.8~~$0.1 million as of December 31, ~~2021~~2022 and recorded in ~~Accrued liabilities~~Other current assets within the consolidated balance sheet.

The following table summarizes the contractual amounts of the Company's foreign exchange contracts that are designated as balance sheet hedges:


(dollars in millions)	(dollars in millions)	March 31, 2022				December 31, 2021				(dollars in millions)	March 31, 2023				December 31, 2022
		Buy		Sell		Buy		Sell			Buy		Sell		Buy		Sell
Canadian dollar	Canadian dollar	$	—	$	123.4	$	—	$	125.6	Canadian dollar	$	—	$	76.4	$	—	$	81.5

The amounts recognized within the consolidated statements of earnings related to the Company's foreign exchange contracts are set forth below.

Three Months Ended March 31 (dollars in millions):


Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:	Location of loss within the consolidated statements of earnings	2022		2021		Derivatives not designated as hedging instruments:	Location of loss within the consolidated statements of earnings	2023		2022
Foreign exchange contracts	Foreign exchange contracts	Other expense (income) - net	$	1.3	$	—	Foreign exchange contracts	Other (income) expense - net	$	(0.1)	$	1.3

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14. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, ~~2022~~2023 was ~~23.5~~25.9 percent compared to ~~22.5~~23.5 percent for the three months ended March 31, ~~2021.~~2022. The Company estimates that its annual effective income tax rate for the full year ~~2022~~2023 will be ~~between~~ approximately ~~23.5 and 24~~24.0 percent. The change in the effective income tax rate for the three months ended March 31, ~~2022~~2023 compared to the effective income tax rate for the three months ended March 31, ~~2021~~2022 was primarily due to a change in geographical earnings ~~mix.~~mix as well as a $15.6 million impairment expense recorded with no associated tax benefit. Refer to Note 3 for additional information regarding the impairment expense.

As of March 31, ~~2022,~~2023, the Company had ~~$14.3~~$15.0 million of unrecognized tax benefits of which ~~$0.5~~$2.9 million would affect its effective income tax rate if recognized. The Company recognizes potential interest and penalties related to unrecognized tax

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~~14. Income Taxes (continued)~~

benefits as a component of income tax expense. The Company’s U.S. federal income tax returns ~~for 2017-2022~~and its U.S. state and local income tax returns are subject to ~~audit.~~audit for the years 2017-2023 and 2009-2023, respectively. The Company is subject to ~~state and local income~~examinations in foreign tax ~~audits~~jurisdictions for ~~tax~~the years ~~2008-2022. The Company is subject to non-U.S. income tax examinations for years 2015-2022.~~2017-2023.

15. Commitments and Contingencies

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

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

Before considering any reduction of distributor rebate accruals of ~~$3.0~~$1.2 million and ~~$3.9~~$1.1 million as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately ~~$6.8~~$2.3 million as of March 31, ~~2022~~2023 and ~~$7.2~~$2.4 million as of December 31, ~~2021.~~2022. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

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16. Changes in Accumulated Other Comprehensive Loss by Component

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


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,						(dollars in millions)	Three Months Ended March 31,
		2022			2021				2023		2022
Cumulative foreign currency translation	Cumulative foreign currency translation							Cumulative foreign currency translation
Balance at beginning of period	Balance at beginning of period	$	(44.7)		$	(48.1)		Balance at beginning of period	$	(84.1)	$	(44.7)
Other comprehensive income before reclassifications		0.6			(1.4)
Other comprehensive gain before reclassifications								Other comprehensive gain before reclassifications	2.5		0.6
Balance at end of period	Balance at end of period	(44.1)			(49.5)			Balance at end of period	(81.6)		(44.1)
Unrealized net gain (loss) on cash flow derivatives	Unrealized net gain (loss) on cash flow derivatives							Unrealized net gain (loss) on cash flow derivatives
Balance at beginning of period	Balance at beginning of period	0.6			0.6			Balance at beginning of period	4.9		0.6
Other comprehensive loss before reclassifications		(0.5)			(2.2)
Realized (gains) losses on derivatives reclassified to cost of products sold (net of income tax provision (benefit) of $— and ($0.1) in 2022 and 2021, respectively)		(0.1)			0.2
Other comprehensive gain (loss) before reclassifications								Other comprehensive gain (loss) before reclassifications	1.3		(0.5)
Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $0.5 and $— in 2023 and 2022, respectively)								Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $0.5 and $— in 2023 and 2022, respectively)	(1.4)		(0.1)
Balance at end of period	Balance at end of period	—			(1.4)			Balance at end of period	4.8		—
Pension liability	Pension liability							Pension liability
Balance at beginning of period	Balance at beginning of period	(287.3)			(273.7)			Balance at beginning of period	(3.2)		(287.3)

Amounts reclassified from accumulated other comprehensive loss:(1)	Amounts reclassified from accumulated other comprehensive loss:(1)	3.8			3.8			Amounts reclassified from accumulated other comprehensive loss:(1)	—		3.8
Balance at end of period	Balance at end of period	(283.5)			(269.9)			Balance at end of period	(3.2)		(283.5)
Accumulated other comprehensive loss, end of period	Accumulated other comprehensive loss, end of period	$	(327.6)		$	(320.8)		Accumulated other comprehensive loss, end of period	$	(80.0)	$	(327.6)

(1) Amortization of pension items:	(1) Amortization of pension items:							(1) Amortization of pension items:
Actuarial losses	Actuarial losses	$	5.1	(2)	$	5.2	(2)	Actuarial losses	$	—	$	5.1	(2)
Prior year service cost	Prior year service cost	(0.1)		(2)	(0.1)		(2)	Prior year service cost	—		(0.1)		(2)
		5.0			5.1				—		5.0
Income tax benefit	Income tax benefit	(1.2)			(1.3)			Income tax benefit	—		(1.2)
Reclassification net of income tax benefit	Reclassification net of income tax benefit	$	3.8		$	3.8		Reclassification net of income tax benefit	$	—	$	3.8

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

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

Overview

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

We seek to continue to grow our core residential and commercial water heating, boiler and water treatment businesses throughout the world. This includes focusing on acquisitions that are related to our core business.Consistent with this strategy, we acquired Giant Factories, Inc. (Giant), a Canada-based manufacturer of residential and commercial water heaters, on October 19, 2021, for $199 million, subject to customary adjustments, using a combination of debt and cash. The acquisition fits squarelysaw improvement in our ~~core capabilities, supplements our presence in Canada and enhances our capacity and distribution~~supply chain during 2022, particularly in the ~~region. Giant contributed $32.0 million~~second half of ~~sales~~the year and ~~approximately $0.02 in earnings per share (EPS) to our results in~~remained relatively stable through the first quarter of ~~2022.~~2023. We remain in close contact with our suppliers and logistics providers to resolve supply chain constraints as they arise.

We continue to seek acquisitions that enable geographic growth, expand our core business, and establish adjacencies. We will also continue to look for opportunities to add to our existing operations in high growth regions demonstrated by our previous introductions of water treatment products in India and range hoods and cooktops in China.

~~Our global supply chain management team continued~~In the first quarter of 2023, we committed to ~~navigate through supply chain and logistics challenges~~a plan to sell our business in Turkey. We recognized a non-cash impairment charge in the first quarter of ~~2022. We have seen supply constraints for certain components and raw materials used~~$15.6 million, primarily in anticipation of the liquidation of the cumulative foreign currency translation adjustment. While the more project based business model in Turkey did not fit well in our ~~operations, limited container~~strategy, we remain committed to our global water treatment business and trucking capacity, and port congestion and delays. In addition, while steel indices moderated as we moved into 2022, they have recently risen again, as commodity prices and availability remain volatile. We remainwill continue to invest in ~~close contact with our suppliers and logistics providers to troubleshoot, manage and resolve bottlenecks, as the environment remains unpredictable, particularly with the conflict in Ukraine.~~

~~Our business also continues to experience impacts from the novel coronavirus (COVID-19) pandemic.~~Omicron variant-related absenteeism negatively impacted North American production early in the first quarter. In addition, to slow the spread of COVID-19 in China, targeted lockdowns began in certain cities late in the first quarter.other regions.

In our North America segment, ~~after approximately eight percent growth~~we saw resilient demand in ~~2021, we expect~~the residential ~~industry~~ water heater industry in the first quarter. We continue to monitor proactive replacement and new home completions. We project 2023 industry residential unit volumes will be ~~down~~ approximately ~~two percent~~flat to 2022. Demand for commercial electric water heaters was strong in the first quarter of 2023 compared to the first quarter of 2022 ~~compared with 2021 as~~and our orders remain strong in April. Therefore, we ~~believe that industry demand will normalize to more historical growth rates. We believe~~expect that commercial water heater industry volumes will ~~be flat to slightly down in 2022~~increase mid-single digits compared to 2021 as we anticipate that new construction and replacement installations will level off. We expect sales in 2022 will benefit from our 2021 price increases, which had a cumulative effect on our water heater prices of approximately 50 percent.2022. We expect to see a ~~18 to 20 percent~~mid-single digit increase in our sales of boilers in ~~2022~~2023 compared to ~~2021~~2022, driven by ~~increased~~ pricing ~~in response to higher input cost~~ and ~~higher demand.~~demand for our high efficiency commercial boilers. We anticipate sales of our North America water treatment products will increase 13approximately five to 14seven percent in ~~2022,~~2023, compared to ~~2021,~~2022, primarily driven by ~~higher~~pricing and consumer ~~demand for our point of use and point of entry water treatment systems.~~demand.

In our Rest of World segment, ~~after strong growth~~our China business performed as we expected in ~~2021,~~the first quarter and we ~~expect 2022~~saw sequential month over month improvement in sales. We believe it will take time for consumer confidence to strengthen and for the economy to improve. We project our sales in China will grow three to ~~be flat~~five percent in 2023 in local currency compared ~~with 2021 as a result of economic headwinds from COVID-19-related lockdowns.~~to 2022. Our guidance assumes volume will improve sequentially throughout the year. We assume ~~China~~that currency ~~rates~~translation will ~~stay at levels similar to 2021.~~negatively impact sales by approximately two percent.

Combining all of these factors, we expect our 2023 consolidated sales to ~~increase between 14 and 16 percent in 2022. This~~be approximately flat to 2022 with a range of plus or minus two percent. Our guidance excludes the ~~potential~~ impacts from potential future acquisitions and assumes the COVID-19 related lockdowns in China subside during the second quarter of 2022, and that COVID-19 does not significantly impact our operations or our employees, customers or suppliers.

acquisitions.

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Results of Operations


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,						(dollars in millions)	Three Months Ended March 31,
		2022			2021				2023			2022
Net sales	Net sales	$	977.7		$	769.0		Net sales	$	966.4		$	977.7
Cost of products sold	Cost of products sold	636.1			480.4			Cost of products sold	592.3			636.1
Gross profit	Gross profit	341.6			288.6			Gross profit	374.1			341.6
Gross profit margin %	Gross profit margin %	34.9		%	37.5		%	Gross profit margin %	38.7		%	34.9		%
Selling, general and administrative expenses	Selling, general and administrative expenses	179.8			166.5			Selling, general and administrative expenses	187.2			179.8
Impairment expense								Impairment expense	15.6			—
Interest expense	Interest expense	1.5			1.0			Interest expense	4.0			1.5
Other expense (income) - net		3.7			(5.0)
Other (income) expense - net								Other (income) expense - net	(4.0)			3.7
Earnings before provision for income taxes	Earnings before provision for income taxes	156.6			126.1			Earnings before provision for income taxes	171.3			156.6
Provision for income taxes	Provision for income taxes	36.8			28.4			Provision for income taxes	44.4			36.8
Net Earnings	Net Earnings	$	119.8		$	97.7		Net Earnings	$	126.9		$	119.8

Our sales in the first quarter of ~~2022~~2023 were ~~$977.7~~$966.4 million, or ~~27.1~~1.2 percent ~~higher~~lower than ~~2021~~ first quarter 2022 sales of ~~$769.0~~$977.7 million. Compared to the prior year quarter, our change in sales ~~increase~~ was primarily driven by ~~inflation-related pricing actions~~higher water heater volumes in North America, ~~as well as higher~~partially offset by lower sales in China. ~~Our acquisition of Giant added $32.0 million of incremental sales in 2022.~~ In addition, our sales in ~~China~~our Rest of World segment were ~~favorably~~unfavorably impacted by approximately $5$17 million in the first quarter of ~~2022 compared to the first quarter of 2021,~~2023 due to the ~~appreciation~~deprecation of ~~the Chinese currency~~foreign currencies compared to the U.S. dollar.

Our gross profit margin in the first quarter of ~~2022~~2023 was ~~34.9~~38.7 percent and ~~declined~~increased compared to ~~37.5~~34.9 percent in the first quarter of ~~2021.~~2022. The ~~lower~~higher gross profit margin in the first quarter of ~~2022~~2023 was primarily due to ~~higher~~lower steel and other material ~~costs which outpaced our pricing actions.~~costs.

Selling, general, and administrative (SG&A) expenses were ~~$179.8~~$187.2 million in the first quarter of ~~2022~~2023 or ~~$13.3~~$7.4 million higher than the first quarter of ~~2021. The increase in SG&A~~2022. Higher selling expenses ~~was~~were primarily driven by higher selling expenses in North America ~~due~~on higher volumes, partially offset by lower selling expenses in China on lower sales.

Impairment expense in the first quarter of 2023 was $15.6 million which is related to ~~higher sales compared~~our commitment to sell our business in Turkey. Of the ~~prior year period.~~$15.6 million impairment, $12.5 million was recorded in the Rest of World segment and $3.1 million was recorded in Corporate Expense.

Interest expense in the first quarter of ~~2022~~2023 was ~~$1.5~~$4.0 million and higher compared to ~~$1.0~~$1.5 million in the first quarter of ~~2021~~2022 primarily due to higher debt ~~levels.~~levels and interest rates.

Other (income) expense-net was ($4.0) million in the first quarter of 2023 compared to expense ~~was~~of $3.7 million in the first quarter of ~~2022 compared to other income of ($5.0) million in the first quarter of 2021.~~2022. Pension expense in the first quarter of ~~2022~~2023 was ~~$3.6~~$0.3 million compared to ~~pension income of $2.9~~$3.6 million in the first quarter of ~~2021.~~

2022. In 2021, ~~our~~the Company's Board of Directors approved the termination of ~~our~~the Company's largest defined benefit pension plan (the Plan) ~~representing over 95 percent of our pension plan liabilities~~ with a termination date of December 31, 2021. In April 2022, we received a determination letter from the IRS that allowed us to proceed with the termination process for the Plan. In 2022, we expect to annuitize the remaining Plan pension liability. The Plan ~~settlement, which we expect to complete in~~represented over 95 percent of the Company's pension plan liability. In the fourth quarter of 2022, ~~will accelerate~~ the ~~recognition of approximately $445 million, or approximately $1.73 per share, of non-cash, pre-tax pension expenses. In addition, to protect the Plan’s funded status, the~~Company settled Plan ~~transferred a significant portion of its~~liabilities through lump-sum payments from existing plan assets to ~~lower risk investments~~eligible participants who elected to receive them and through the purchase of annuities.

Our effective income tax rate was 25.9 percent in ~~2021.~~the first quarter of 2023, compared with 23.5 percent in the first quarter of 2022. The ~~impact of this transition resulted~~change in ~~a lower expected~~the effective income tax rate ~~of return on pension investments and accordingly, higher pension expenses in 2022,~~for the three months ended March 31, 2023 compared to ~~previous years. The service cost component~~the effective income tax rate for the three months ended March 31, 2022 was primarily due to a change in geographical earnings mix as well as the $15.6 million impairment expense recorded with no associated tax benefit. We estimate that our annual effective income tax rate for the full year of ~~our pension income is reflected in cost of products sold and SG&A expenses. All other components of our pension expense (income) are reflected in other expense (income).~~2023 will be 24.0 percent.

We are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, total segment earnings, adjusted segment earnings, and adjusted corporate expense) that exclude the impact of ~~pension settlement expenses~~the 2023 impairment expense and 2022 non-operating pension ~~income and~~ expenses. Reconciliations from GAAP measures to non-GAAP measures are provided in the ~~financial information included in this filing.~~Non-GAAP Measures section below. We believe that the measures of adjusted earnings, adjusted EPS, adjusted segment earnings, and adjusted corporate expense provide useful information to investors about our performance and allow management and our investors to better understand our performance between periods without regard to items that we do not consider to be a component of our core operating performance.

Our pension costs and credits are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service. We consider current market

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conditions, including changes in interest rates, in making these assumptions. Our assumption for the expected rate of return on plan assets is 3.00 percent in 2022 compared to 6.25 percent in 2021. The discount rate used to determine net periodic pension costs increased to 2.72 percent in 2022 from 2.45 percent in 2021.

Our effective income tax rate was 23.5 percent in the first quarter of 2022, compared with 22.5 percent in the first quarter of 2021. Our higher effective income tax rate was primarily due to a change in geographic earnings mix. We estimate that our annual effective income tax rate for the full year of 2022 will be between 23.5 and 24 percent.

North America Segment


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,						(dollars in millions)	Three Months Ended March 31,
		2022			2021				2023			2022
Net Sales	Net Sales	$	730.1		$	552.9		Net Sales	$	752.7		$	730.1
Segment Earnings	Segment Earnings	151.8			130.4			Segment Earnings	188.6			151.8
Segment margin	Segment margin	20.8		%	23.6		%	Segment margin	25.1		%	20.8		%

Sales in our North America segment were $752.7 million in the first quarter of 2023 or $22.6 million higher than sales of $730.1 million in the first quarter ~~2022 or $177.2 million~~of 2022. Higher sales in the first quarter of 2023 were primarily driven by higher ~~than sales of $552.9~~residential and commercial water heater volumes, partially offset by lower pricing.

North America segment earnings were $188.6 million in the first quarter of ~~2021. The increased sales in the first quarter~~2023, an increase of ~~2022 were driven primarily by price increases, largely on water heaters, which were implemented in response~~approximately 24.2 percent compared to rising material and transportation costs. The first quarter of 2022 also benefited from higher volumes of boilers and water treatment products. Those increases were partially offset by lower commercial water heater volumes. In addition, our acquisition of Giant added $32.0 million of incremental sales in 2022.

~~North America~~ segment earnings ~~were~~of $151.8 million in the first quarter of ~~2022, an increase of 16 percent compared to segment earnings of $130.4 million in the first quarter of 2021.~~2022. Segment margins were ~~20.8~~25.1 percent and ~~23.6~~20.8 percent in the first quarter of 2023 and 2022, respectively. Higher segment earnings and ~~2021, respectively.~~ margins in the first quarter of 2023 compared to the first quarter of 2022 were primarily due to higher volumes of commercial and residential water heaters and lower steel costs. We estimate our 2023 North America segment margin will be approximately between 23 and 23.5 percent.

Adjusted segment earnings and adjusted segment margin in the first quarter of 2022 were $154.4 million and 21.1 percent, respectively. Adjusted segment earnings and adjusted segment margin in the first quarter of ~~2021 were $127.8~~2022 exclude $2.6 million ~~and 23.1 percent, respectively. Higher segment earnings~~of pension expense.

Rest of World Segment


(dollars in millions)	Three Months Ended March 31,
	2023			2022
Net Sales	$	219.1		$	256.0
Segment Earnings	5.3			24.8
Segment margin	2.4		%	9.7		%

Rest of World sales of $219.1 million in the first quarter of 2023 decreased 14 percent compared to the first quarter of 2022, ~~were primarily due~~including an unfavorable currency translation impact of $17 million. In local currency, segment sales decreased by approximately eight percent compared to ~~inflation-related price increases, partially offset by higher material and logistics costs. Segment margin was lower~~last year. The decrease in sales in the first quarter of ~~2022~~2023 was driven primarily by lower consumer demand in China due to COVID-19. Sales in India increased 28% in local currency in the ~~rise~~first quarter of 2023 on strong demand for our water heater and water treatment products compared to the prior year quarter.

Rest of World segment earnings were $5.3 million in ~~costs outpacing pricing actions~~the first quarter of 2023, compared to $24.8 million in the first quarter of 2022. Segment margins were 2.4 percent and 9.7 percent in the first quarter of 2023 and 2022, respectively. Lower segment earnings and segment margin in the first quarter of 2023, were primarily driven by the impairment expense of $12.5 million associated with our commitment to sell our business in Turkey and lower ~~commercial volumes. We estimate our 2022 North America segment margin will be between 22.5 and 23.0 percent, excluding pension expense.~~sales in China.

Adjusted segment earnings and adjusted segment margin in the first quarter of ~~2022 and 2021 exclude $2.6~~2023 were $17.8 million and ~~($2.6) million of pension expense (income),~~8.1 percent, respectively.

~~Rest of World Segment~~

(dollars in millions) Three Months Ended
March 31,
2022 2021
Net Sales $ 256.0 $ 222.3
Segment Earnings 24.8 11.8
Segment margin 9.7 % 5.3 %

~~Sales in our Rest of World~~ Adjusted segment ~~were $256.0 million~~earnings and adjusted segment margin in the first quarter of ~~2022 or $33.7~~2023 exclude the $12.5 million ~~higher than sales~~ of ~~$222.3 million in~~impairment expense. We estimate our 2023 Rest of World adjusted segment margin will be approximately 10 percent, excluding the ~~first quarter of 2021. Sales in China increased by 15 percent in U.S. dollar terms and 12 percent in local currency in the first quarter of 2022 compared to the first quarter of 2021. Higher~~impairment expense.

Outlook

We expect our consolidated sales in ~~China were primarily~~2023 to be flat to 2022 with a range of plus or minus two percent. Our sales projection is driven by ~~favorable mix~~expected flat industry residential unit volumes in North America, increased commercial water ~~heaters~~heater volumes, higher boiler and water treatment ~~products~~sales in North America, and higher sales for commercial water treatment products and replacement filters compared to the first quarter of 2021. Sales were also positively impacted by measures to distribute product into the market in advance of potential COVID-19 lockdowns in China, which have temporarily impacted transportation between impacted regions. In addition, our first quarter of 2022 sales in China were favorably impacted by approximately $5 million, due to the appreciation of the Chinese currency compared to the U.S. dollar.

Rest of World segment earnings were $24.8 million in the first quarter of 2022, an increase of $13.0 million compared to segment earnings of $11.8 million in the first quarter of 2021. Segment margin was 9.7 percent in the first quarter of 2022, higher than segment margin of 5.3 percent in the prior year period. Higher segment earnings and segment margin compared to the prior year period were primarily driven by favorable mix, higher volumes and lower advertising and selling expenses in China. We assume that currency translation will negatively impact sales by approximately two percent. As a result, we expect to achieve full-year ~~segment margin to be~~earnings of between ~~9.5~~$3.20 and ~~10 percent in 2022.~~$3.40 per share and adjusted earnings of between $3.30 and $3.50 per share. Our guidance excludes the impacts from potential future acquisitions.

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~~Outlook~~

We expect our consolidated sales in 2022 to increase between 14 to 16 percent compared to 2021. Our higher expected sales are driven by pricing actions implemented in 2021 in North America and expected increased boiler and water treatment volumes within that region. We expect to achieve full-year earnings of between $1.56 and $1.76 per share and adjusted EPS between $3.35 and $3.55 per share. Our 2022 guidance excludes the potential impacts from future acquisitions and assumes the COVID-19 related lockdowns in China subside during the second quarter of 2022, and that COVID-19 does not significantly impact our operations or our employees, customers or suppliers.

Liquidity & Capital Resources

Our working capital was ~~$719.3~~$748.1 million at March 31, ~~2022~~2023, and higher compared with ~~$633.8~~$699.5 million at December 31, ~~2021. A majority of the~~2022. The increase in working capital was primarily driven by lower accounts payable, ~~and payroll related~~payroll-related accruals and ~~higher~~ inventory balances than at December ~~2021,~~31, 2022, which ~~was~~were partially offset by ~~lower accounts receivables and~~higher accrued liabilities. In addition, cash ~~balances. We expect~~balances as of March 31, 2023 were positively impacted by $2.4 million due to ~~repatriate approximately $100 million~~the effects of changes in ~~2022 and use~~foreign currency during the ~~proceeds to pay down debt balances and repurchase our common stock.~~year.


(dollars in millions)	(dollars in millions)	Three Months Ended March 31,				(dollars in millions)	Three Months Ended March 31,
		2022		2021			2023		2022
Cash provided by operating activities	Cash provided by operating activities	$	16.5	$	104.4	Cash provided by operating activities	$	119.9	$	16.5
Cash provided by investing activities		2.1		12.5
Cash (used in) provided by investing activities						Cash (used in) provided by investing activities	(9.8)		2.1
Cash used in financing activities	Cash used in financing activities	(56.1)		(111.5)		Cash used in financing activities	(97.5)		(56.1)

Cash provided by operating activities in the first ~~quarter~~three months of ~~2022~~2023 was ~~$16.5~~$119.9 million compared with ~~$104.4~~$16.5 million in the ~~first quarter of 2021. Higher~~same period last year. Cash provided by higher earnings in the first ~~quarter~~three months of ~~2022~~2023 compared with the prior year was ~~more than offset~~also positively impacted by ~~higher~~lower incentive payments in ~~2022 due to record 2021 sales~~2023 and ~~earnings and working capital cash outlays for higher levels of safety stock on higher cost~~lower inventory ~~led to lower cash provided by operating activities.~~levels. Our free cash flow in the first ~~quarter~~three months of 2023 and 2022 was $109.2 million and ~~2021 was~~ $3.6 million, respectively. We expect cash provided by operating activities to be between $650 million and ~~$87.3~~$700 million ~~respectively.~~in 2023. We expect free cash flow to be between ~~$500~~$575 million ~~to $525~~and $625 million in ~~2022.~~2023. Free cash flow is a non-GAAP measure and is described in more detail in the Non-GAAP Measures section below.

~~Our capital~~Capital expenditures ~~were~~totaled $10.7 million in the first three months of 2023 compared with $12.9 million in the ~~first quarter of 2022 and $17.1 million in the first quarter of 2021.~~same period last year. We project ~~our 2022~~2023 capital expenditures will be between ~~$75~~$70 and ~~$80~~$75 million and ~~project~~full-year depreciation and amortization expense will be approximately ~~$80~~$70 million.

In 2021, we renewed and amended our $500 million revolving credit facility, which now expires on April 1, 2026. The renewed and amended facility, with a group of nine banks, has an accordion provision that allows it to be increased up to $850 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of March 31, ~~2022~~2023, and expect to be in compliance for the foreseeable future.

The facility backs up commercial paper and credit line borrowings. At March 31, ~~2022,~~2023, we had ~~$155.0~~$211.1 million outstanding under the facility and an available borrowing capacity of ~~$345.0~~$288.9 million. We believe the combination of available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future.

Our total debt ~~increased~~decreased by ~~$98.7~~$3.7 million ~~from $196.7 million at December 31, 2021 to $295.4 million at March 31, 2022. The increase~~ in ~~debt balances~~the first three months of 2023 which was primarily due to ~~repurchases~~the payment of ~~our common stock.~~debt. Our leverage, as measured by the ratio of total debt to total capitalization, ~~calculated excluding operating lease liabilities,~~ was ~~14.0~~16.0 percent at March 31, ~~2022,~~2023, compared with ~~9.7~~16.5 percent at December 31, ~~2021.~~

Our U.S. pension plan continues to meet all funding requirements under ERISA regulations. We were not required to make a contribution to our pension plan in 2021. We forecast that we will not be required to make a contribution to the plan in 2022, and we do not plan to make any voluntary contributions in 2022.

In the first quarter of ~~2022,~~2023, our Board of Directors approved adding ~~3,500,000~~7,500,000 shares of common stock to our existing discretionary share repurchase authority. Under our share repurchase program, we may purchase our common stock through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The stock repurchase authorization remains effective until terminated by our Board of Directors, which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. During the first ~~quarter~~three months of ~~2022,~~2023, we repurchased ~~1,486,500~~821,000 shares of our stock at a total cost of ~~$107.9~~$53.1 million. At March 31, ~~2022,~~2023, we had ~~5,539,857 million~~7,057,462 shares remaining on the share repurchase authority. Depending on factors such as stock price, working capital

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requirements, and alternative investment opportunities, we expect to spend approximately ~~$400~~$300 million on stock repurchases in ~~2022~~2023 through a combination of our Rule 10b5-1 automatic trading plan and open market repurchases.

On April ~~11, 2022,~~10, 2023, our Board of Directors declared a regular quarterly cash dividend of ~~$0.28~~$0.30 per share on our Common Stock and Class A common stock. The dividend is payable on May ~~16, 2022,~~15, 2023, to shareholders of record on April ~~29, 2022.~~28, 2023.

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Non-GAAP Financial Information

We provide non-GAAP measures of free cash flow, adjusted earnings, adjusted EPS, total segment earnings, adjusted segment earnings, and adjusted corporate expense. We define free cash flow as cash provided by operating activities less capital expenditures. Our adjusted earnings, adjusted EPS, adjusted segment earnings, and adjusted corporate expenses ~~excludes~~exclude the impact of ~~pension settlement expenses~~the 2023 impairment expense and 2022 non-operating pension ~~income and~~ expenses.

We believe that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements. We believe that the measure of adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expense provides useful information to investors about our performance and allows management and our investors to better understand our performance between periods without regard to items we do not consider to be a component of our core operating performance.

A. O. SMITH CORPORATION

Adjusted Earnings and Adjusted ~~EPS~~Earnings Per Share

(dollars in millions, except per share data)

(unaudited)

The following is a reconciliation of net earnings and diluted ~~EPS~~earnings per share to adjusted earnings (non-GAAP) and adjusted ~~EPS~~earnings per share (non-GAAP):

Three Months Ended
March 31,
2022 2021
Net Earnings (GAAP) $ 119.8 $ 97.7
Pension expense (income), before tax 2.9 (3.2)
Tax effect of pension expense (income) (0.7) 0.8
Adjusted Earnings (non-GAAP) $ 122.0 $ 95.3
Diluted EPS (GAAP) $ 0.76 $ 0.60
Pension expense (income) per diluted share, before tax 0.01 (0.01)
Tax effect of pension expense (income), per diluted share — —
Adjusted EPS (non-GAAP) $ 0.77 $ 0.59


	Three Months Ended March 31,
	2023		2022
Net Earnings (GAAP)	$	126.9	$	119.8
Impairment expense, before tax	15.6		—
Pension expense, before tax	—		2.9
Tax effect on above items	—		(0.7)
Adjusted Earnings (non-GAAP)	$	142.5	$	122.0

Diluted Earnings Per Share (GAAP)	$	0.84	$	0.76
Impairment expense per diluted share, before tax	0.10		—
Pension expense per diluted share, before tax	—		0.01
Tax effect on above items per diluted share	—		—
Adjusted Earnings Per Share (non-GAAP)	$	0.94	$	0.77

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A. O. SMITH CORPORATION

Adjusted Segment Earnings

(dollars in millions)

(unaudited)

The following is a reconciliation of reported earnings before provision for income taxes to total segment earnings to(non-GAAP) and adjusted segment earnings (non-GAAP):

Three Months Ended
March 31,
2022 2021
Segment Earnings (GAAP)
North America $ 151.8 $ 130.4
Rest of World 24.8 11.8
Inter-segment earnings elimination (0.1) —
Total Segment Earnings (GAAP) $ 176.5 $ 142.2
Adjustments:
North America pension expense (income) $ 2.6 $ (2.6)
Rest of World — —
Inter-segment earnings elimination — —
Total Adjustments $ 2.6 $ (2.6)
Adjusted Segment Earnings (non-GAAP)
North America $ 154.4 $ 127.8
Rest of World 24.8 11.8
Inter-segment earnings elimination (0.1) —
Total Adjusted Segment Earnings (non-GAAP) $ 179.1 $ 139.6

~~A. O. SMITH CORPORATION~~

~~Adjusted Corporate Expense~~

~~(dollars in millions)~~

~~(unaudited)~~

~~The following is a reconciliation of reported Corporate Expense to adjusted Corporate Expense (non-GAAP):~~

Three Months Ended
March 31,
2022 2021
Corporate Expense (GAAP) $ (18.4) $ (15.1)
Adjustments: Corporate pension expense (income) 0.3 (0.6)
Corporate Expense (non-GAAP) $ (18.1) $ (15.7)


	Three Months Ended March 31,
	2023		2022
Earnings Before Provision for Income Taxes (GAAP)	$	171.3	$	156.6
Add: Corporate expense(1)	18.6		18.4
Add: Interest expense	4.0		1.5
Total Segment Earnings (non-GAAP)	$	193.9	$	176.5

North America(2)	$	188.6	$	151.8
Rest of World(3)	5.3		24.8
Inter-segment earnings elimination	—		(0.1)
Total Segment Earnings (non-GAAP)	$	193.9	$	176.5

Additional Information
(1)Corporate expense	$	(18.6)	$	(18.4)
Impairment expense, before tax	3.1		—
Pension expense, before tax	—		0.3
Adjusted Corporate expense (non-GAAP)	$	(15.5)	$	(18.1)

(2)North America	$	188.6	$	151.8
Pension expense, before tax	—		2.6
Adjusted North America (non-GAAP)	$	188.6	$	154.4

(3)Rest of World	$	5.3	$	24.8
Impairment expense, before tax	12.5		—
Adjusted Rest of World (non-GAAP)	$	17.8	$	24.8

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A. O. SMITH CORPORATION

Free Cash Flow

(dollars in millions)

(unaudited)

The following is a reconciliation of reported cash flow from operating activities to free cash flow (non-GAAP):


		Three Months Ended, March 31,					Three Months Ended, March 31,
		2022		2021			2023		2022
Cash provided by operating activities (GAAP)	Cash provided by operating activities (GAAP)	$	16.5	$	104.4	Cash provided by operating activities (GAAP)	$	119.9	$	16.5
Less: Capital expenditures	Less: Capital expenditures	(12.9)		(17.1)		Less: Capital expenditures	(10.7)		(12.9)
Free cash flow (non-GAAP)	Free cash flow (non-GAAP)	$	3.6	$	87.3	Free cash flow (non-GAAP)	$	109.2	$	3.6

A. O. SMITH CORPORATION

~~2022~~2023 Adjusted EPS Guidance and ~~2021~~2022 Adjusted EPS

(unaudited)

The following is a reconciliation of diluted EPS to adjusted EPS (non-GAAP) (all items are net of tax):


		2022 Guidance		2021				2023 Guidance		2022
Diluted EPS (GAAP)	Diluted EPS (GAAP)	$ 1.56 - 1.76		$	3.02		Diluted EPS (GAAP)	$ 3.20 - 3.40		$	1.51
Estimated pension settlement charge		1.73	(1)	—
Pension expense (income)		0.06	(2)	(0.06)		(3)
Impairment expense							Impairment expense	0.10	(1)	—
Pension settlement charges							Pension settlement charges	—		1.60		(2)
Pension expense							Pension expense	—		0.06		(3)
Legal judgment income							Legal judgment income	—		(0.05)
Terminated acquisition-related expenses							Terminated acquisition-related expenses	—		0.02
Adjusted EPS (non-GAAP)	Adjusted EPS (non-GAAP)	$ 3.35 - 3.55		$	2.96		Adjusted EPS (non-GAAP)	$ 3.30 - 3.50		$	3.14

(1)Includes pre-tax ~~pension settlement charges~~impairment expense of ~~$378.3~~$12.5 million and ~~$66.7~~$3.1 million, within the ~~North America~~Rest of World segment and Corporate expenses, respectively.

(2)Includes pre-tax pension ~~expense~~settlement charges of ~~$10.5~~$346.8 million and ~~$1.3~~$70.5 million, within the North America segment and Corporate expenses, respectively.

(3)Includes pre-tax pension ~~income~~expense of ~~$10.5~~$9.7 million and ~~$2.6~~$2.0 million, within the North America segment and Corporate expenses, respectively.

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Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. We believe that at March 31, ~~2022,~~2023, there was no material change to this information.

Recent Accounting ~~Pronouncement~~Pronouncements

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

Forward Looking Statements

This filing contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance”, “outlook” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: further softening in U.S. residential water heater demand; negative impacts to the ~~Company's~~Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company’s ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs; negative impacts to demand for the Company’s products, particularly commercial products, ~~and to its operations and workforce~~ as a result of the severity and duration of the lingering effects of the COVID-19 pandemic; further weakening in U.S. residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; ~~an uneven~~inconsistent recovery of the Chinese economy or decline in the growth rate of consumer spending or housing sales in China; negative impact to the Company’s business in China as a result of future COVID-19 related disruptions there; negative impact to the Company's businesses from international tariffs, trade disputes and geopolitical differences, including the conflict in Ukraine; potential weakening in the high-efficiency boiler segment in the U.S.; substantial defaults in payment by, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer; ~~a weakening in U.S. residential or commercial construction or instability in the Company’s replacement markets;~~ foreign currency fluctuations; the Company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; competitive pressures on the Company’s businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency and adverse developments in general economic, political and business conditions in key regions of the world. Forward-looking statements included in this filing are made only as of the date of this filing, and the Company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the Company, or persons acting on its behalf, are qualified entirely by these cautionary statements.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As is more fully described in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, we are exposed to various types of market risks, including currency and certain commodity risks. Our quantitative and qualitative disclosures about market risk have not materially changed since that report was filed. We monitor our currency and commodity risks on a continuous basis and generally enter into forward and futures contracts to minimize these exposures. The majority of the contracts are for periods of less than one year. Our Company does not engage in speculation in our derivative strategies. It is important to note that gains and losses from our forward and futures contract activities are offset by changes in the underlying costs of the transactions being hedged.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon this evaluation of these disclosure controls and procedures, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of March 31, ~~2022~~2023 to ensure that information required to be

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disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the

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reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding disclosure.

Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There have been no material changes in the legal and environmental matters discussed in Part 1, Item 3 and Note 16 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

~~ITEM 1A RISK FACTORS~~

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except for the addition of the risk factor set forth below:

■~~The outbreak of hostilities in Ukraine may exacerbate certain risks we face~~

Russia’s invasion of Ukraine and the global response, including the imposition of sanctions by the European Union, the United States and other countries, could create or exacerbate risks facing our business. While we do not have a physical presence in Russia or Ukraine, we have evaluated our operations, vendor contracts and customer arrangements, and at present we do not expect the conflict to directly have a material and adverse effect on our financial condition or results of operations. However, further escalation of geopolitical tensions related to the military conflict, including increased trade barriers or restrictions on global trade, could result in, among other things, cyberattacks, supply disruptions, significant volatility in commodity prices and availability, supply of energy resources, lower consumer demand, changes to foreign exchange rates and financial and capital markets. These risks and others described more fully in our Annual Report could be exacerbated by this military conflict. The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time.

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

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

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

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

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

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

•Significant reductions in demand, particularly for our commercial products, or significant volatility in demand and a global economic recession that could reduce demand for our products, resulting from actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns. In addition, there is risk that the commercial sector, such as the restaurant and hospitality industries in which we have customers, will experience long-term shifts in consumer behavior which could negatively impact demand or capacity and may not return to pre-pandemic levels.

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

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

The extent to which the COVID-19 pandemic, or other outbreaks of disease or similar public health threats, materially and adversely impacts our business, results of operations and financial condition remains uncertain and will depend on future developments. Such developments may include the geographic spread and duration of the virus, periodic surges of the virus, the severity of the virus and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak. In the first quarter of 2022, a number of municipal governments in China imposed shutdowns to prevent further spread of COVID-19. These shutdowns may continue or recur during the foreseeable future, and could have a material negative impact on our business and operations there.

In addition, we cannot predict how quickly, and to what extent, normal economic and operating conditions can resume throughout the world, and the resumption of normal business operations may be delayed or constrained by lingering effects of the COVID-19 pandemic on our suppliers, third-party service providers, and/or customers.

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

In the first quarter of ~~2022,~~2023, our Board of Directors approved adding ~~3,500,000~~7,500,000 shares of common stock to the existing discretionary share repurchase authority. Under the share repurchase program, the Common Stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. In the first quarter of ~~2022,~~2023, we repurchased ~~1,486,500~~821,000 shares at an average price of ~~$72.58~~$64.63 per share and at a total cost of ~~$107.9~~$53.1 million. As of March 31, ~~2022,~~2023, there were ~~5,539,857~~7,057,462 shares remaining on the existing repurchase authorization.

ISSUER PURCHASES OF EQUITY SECURITIES
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 1 - January 31, 2022 268,500 $ 82.31 268,500 6,757,857
February 1 - February 28, 2022 677,000 72.66 677,000 6,080,857
March 1 - March 31, 2022 541,000 67.64 541,000 5,539,857


ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 1 - January 31, 2023	315,000	$	60.14	315,000	7,563,462
February 1 - February 28, 2023	230,000	67.29		230,000	7,333,462
March 1 - March 31, 2023	276,000	67.52		276,000	7,057,462

ITEM 6 - EXHIBITS

Refer to the Exhibit Index on page 28 of this report.

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INDEX TO EXHIBITS


Exhibit Number						Description

31.1						Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

31.2						Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

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

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

101						The following materials from A. O. Smith Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2022~~2023 are filed herewith, formatted in XBRL (Extensive Business Reporting Language): (i) the Condensed Consolidated Statement of Earnings for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, (ii) the Condensed Consolidated Statement of Comprehensive Earnings for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, (iii) the Condensed Consolidated Balance Sheets as of March 31, ~~2022,~~2023, and December 31, ~~2021~~2022 (iv) the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 (v) the Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 (vi) the Notes to Condensed Consolidated Financial Statements.

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SIGNATURES

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


			A. O. SMITH CORPORATION

~~May 2, 2022~~April 28, 2023			/s/ Benjamin A. Otchere
			Benjamin A. Otchere
			Vice President and Controller

			/s/ Charles T. Lauber
			Charles T. Lauber
			Executive Vice President and Chief Financial Officer


	Three Months Ended March 31,
	2022		2021
Expected life (years)	5.7		5.8
Risk-free interest rate	1.9	%	1.2	%
Dividend yield	1.5	%	1.6	%
Expected volatility	26.8	%	27.3	%