NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Organization. A. O. Smith Corporation (A. O. Smith or the Company) is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world.
Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of intercompany transactions.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and notes. Actual results could differ from those estimates.
Fair value of financial instruments. The carrying amounts of cash, cash equivalents, marketable securities, receivables, floating rate debt and trade payables approximated fair value as of December 31, 2020 and 2019, due to the short maturities or frequent rate resets of these instruments. The fair value of term notes with insurance companies was approximately $123.3 million as of December 31, 2020 compared with the carrying amount of $113.2 million for the same date. The fair value of term notes with insurance companies was approximately $122.1 million as of December 31, 2019 compared with the carrying amount of $120.0 million.
Foreign currency translation. For all subsidiaries outside the U.S., with the exception of its Barbados, Hong Kong and Mexican companies and its non-operating companies in the Netherlands, the Company uses the local currency as the functional currency. For those operations using a functional currency other than the U.S. dollar, assets and liabilities were translated into U.S. dollars at year-end exchange rates, and revenues and expenses were translated at weighted-average exchange rates. The resulting translation adjustments were recorded as a separate component of stockholders’ equity. The Barbados, Hong Kong, Mexican and Netherlands companies use the U.S. dollar as the functional currency. Gains and losses from foreign currency transactions were included in net earnings and were not significant in 2020, 2019, or 2018.
Cash and cash equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Marketable securities. The Company considers all highly liquid investments with maturities greater than 90 days when purchased to be marketable securities. At December 31, 2020, the Company’s marketable securities consisted of bank time deposits with original maturities ranging from 180 days to 12 months and were primarily located at investment grade rated banks in China.
Inventory valuation. Inventories are carried at lower of cost and net realizable value. Cost is determined on the last-in, first-out (LIFO) method for a majority of the Company’s domestic inventories, which comprised 67 percent and 65 percent of the Company’s total inventory at December 31, 2020 and 2019, respectively. Inventories of foreign subsidiaries, the remaining domestic inventories and supplies were determined using the first-in, first-out (FIFO) method.
Property, plant and equipment. Property, plant and equipment are stated at cost. Depreciation is computed primarily by the straight-line method. The estimated service lives used to compute depreciation are generally 25 to 50 years for buildings, three to 20 years for equipment and three to 15 years for software. Maintenance and repair costs are expensed as incurred.
Goodwill and other intangibles. Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment on an annual basis. Separable intangible assets, primarily comprised of customer relationships, that are not deemed to have an indefinite life are amortized on a straight-line basis over their estimated useful lives which range from five to 25 years.
Impairment of long-lived and amortizable intangible assets. Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Such analyses necessarily involve significant judgment.
Product warranties. The Company’s products carry warranties that generally range from one to ten years and are based on terms that are consistent with the market. The Company records a liability for the expected cost of warranty-related claims at the time of sale and is estimated based on the warranty period, product type and loss experience using actual historical failure
1. Organization and Significant Accounting Policies (continued)
rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed by the Company at least annually. At times, warranty issues may arise which are beyond the scope of the Company’s historical experience. The Company provides for any such warranty issues as they become known and estimable. The allocation of the warranty liability between current and long-term is based on expected warranty claims to be paid in the next year as determined by historical product failure rates.
The following table presents the Company’s product warranty liability activity in 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
Balance at beginning of year
|
$
|
134.3
|
|
|
$
|
139.4
|
|
Expense
|
56.1
|
|
|
44.3
|
|
Claims settled
|
(48.1)
|
|
|
(49.4)
|
|
Balance at end of year
|
$
|
142.3
|
|
|
$
|
134.3
|
|
Derivative instruments. The Company utilizes certain derivative instruments to enhance its ability to manage currency as well as raw materials price risk. The Company does not enter into contracts for speculative purposes. The fair values of all derivatives are recorded in the consolidated balance sheets. The change in a derivative’s fair value is recorded each period in current earnings or accumulated other comprehensive loss (AOCL), depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. See Note 14, “Derivative Instruments” of the notes to consolidated financial statements for disclosure of the Company’s derivative instruments and hedging activities.
Fair Value Measurements. 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.
Assets measured at fair value on a recurring basis are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
December 31, 2020
|
|
December 31, 2019
|
Quoted prices in active markets for identical assets (Level 1)
|
$
|
116.5
|
|
|
$
|
177.4
|
|
Significant other observable inputs (Level 2)
|
(4.3)
|
|
|
6.9
|
|
There were no changes in the valuation techniques used to measure fair values on a recurring basis.
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. See Note 2, “Revenue Recognition” for disclosure of the Company’s revenue recognition activities.
Advertising. The majority of advertising costs are charged to operations as incurred and totaled $97.0 million, $110.7 million and $132.1 million during 2020, 2019 and 2018, respectively. Included in total advertising costs are expenses associated with store displays for water heater, water treatment and air purification products in China that are amortized over 12 to 36 months which totaled $27.0 million, $28.5 million and $38.7 million during 2020, 2019 and 2018, respectively.
Research and development. Research and development costs are charged to operations as incurred and amounted to $80.7 million, $87.9 million and $94.0 million during 2020, 2019 and 2018, respectively.
Environmental costs. The Company accrues for costs associated with environmental obligations when such costs are probable and reasonably estimable. Costs of estimated future expenditures are not discounted to their present value.
1. Organization and Significant Accounting Policies (continued)
Recoveries of environmental costs from other parties are recorded as assets when their receipt is considered probable. The accruals are adjusted as facts and circumstances change.
Stock-based compensation. Compensation cost is recognized using the straight-line method over the vesting period of the award and forfeitures are recognized as they occur. In accordance with amended ASC 718, the Company recognized $4.2 million, $2.3 million, and $2.4 million of discrete income tax benefits on settled stock based compensation awards during 2020, 2019, and 2018 respectively.
Income taxes. The provision for income taxes is computed using the asset and liability method, in accordance with ASC 740 Income Taxes, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled and are classified as noncurrent in the consolidated balance sheet. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement.
Earnings per share of common stock. The Company is not required to use the two-class method of calculating earnings per share since its Class A Common Stock and Common Stock have equal dividend rights. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Denominator for basic earnings per share - weighted-average shares outstanding
|
161,530,589
|
|
|
165,450,441
|
|
|
170,589,345
|
|
Effect of dilutive stock options, restricted stock and share units
|
1,073,560
|
|
|
1,260,456
|
|
|
1,604,695
|
|
Denominator for diluted earnings per share
|
162,604,149
|
|
|
166,710,897
|
|
|
172,194,040
|
|
Recent Accounting Pronouncements.
In December 2019, the Financial Accounting Standards Board (FASB) amended Accounting Standards Codification (ASC) 740, Income Taxes (issued under Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes”). This amendment removes certain exceptions to the general principles of ASC 740, and clarifies and amends existing guidance to improve consistent application. The amendment requires adoption on January 1, 2021. The Company does not expect that the adoption of ASU 2019-12 will have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
In January 2017, the FASB amended ASC 350, Intangibles – Goodwill and Other (issued under ASU 2017-4, “Simplifying the Test for Goodwill Impairment”). This amendment simplifies the test for goodwill impairment by only requiring an entity to perform an annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount that the carrying amount exceeds the reporting unit’s fair value. Any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted the amendment on January 1, 2020 and the adoption did not have an impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
In June 2016, the FASB issued ASC 326, Financial Instruments – Credit Losses (issued under ASU 2016-13) which modifies the measurement of expected credit losses on certain financial instruments. The Company adopted ASU 2016-13 on January 1, 2020 and the adoption did not have a material impact on its consolidated balance sheets, statements of earnings or statements of cash flows.
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
2. Revenue Recognition (continued)
performance obligations that are material in the context of the contract. The nature, timing and amount of revenue for a respective performance obligation are consistent for each customer. The Company measures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.
Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $90.0 million and $49.6 million at December 31, 2020 and December 31, 2019, respectively. Customer deposit liabilities are short-term in nature and 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, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for doubtful accounts, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for doubtful accounts was $5.6 million at December 31, 2020 and $6.7 million at December 31, 2019.
Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.
Disaggregation of Net Sales
The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world.
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 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 1,200 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
2. Revenue Recognition (continued)
to water heater products and related parts. The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through internet sales channels. A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.
The following table disaggregates the Company’s net sales by segment. As described above, the Company’s North America segment sales are further disaggregated by major product line. In addition, the Company’s Rest of World segment sales are disaggregated by China and all other Rest of World.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2018
|
North America
|
|
|
|
|
|
Water heaters and related parts
|
$
|
1,753.9
|
|
|
$
|
1,742.6
|
|
|
$
|
1,757.0
|
|
Boilers and related parts
|
187.2
|
|
|
199.5
|
|
|
200.4
|
|
Water treatment products(1)
|
177.2
|
|
|
141.4
|
|
|
87.3
|
|
Total North America
|
2,118.3
|
|
|
2,083.5
|
|
|
2,044.7
|
|
Rest of World
|
|
|
|
|
|
China
|
$
|
701.0
|
|
|
$
|
827.2
|
|
|
$
|
1,070.4
|
|
All other Rest of World
|
99.3
|
|
|
108.6
|
|
|
103.2
|
|
Total Rest of World
|
800.3
|
|
|
935.8
|
|
|
1,173.6
|
|
Inter-segment sales
|
(23.3)
|
|
|
(26.6)
|
|
|
(30.4)
|
|
Total Net Sales
|
$
|
2,895.3
|
|
|
$
|
2,992.7
|
|
|
$
|
3,187.9
|
|
(1)Includes the results of Water-Right, Inc. and its affiliated entities (Water-Right) from April 8, 2019, the date of acquisition.
3. Acquisition
On April 8, 2019, the Company acquired 100 percent of the shares of Water-Right, a Wisconsin-based water treatment company. With the addition of Water-Right, the Company grew its North America water treatment platform. Water-Right is included in the Company’s North America segment.
The Company paid an aggregate cash purchase price of $107.0 million, net of cash acquired. In addition, the Company established a $4.0 million escrow to satisfy any potential obligations of the former owners of Water-Right, should they arise. During 2020, the Company released $3.9 million of the escrow to the previous owners of Water-Right. The remaining balance of $0.1 million is scheduled to be disbursed in the second quarter of 2021.
The following table summarizes the allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition of Water-Right for purposes of allocating the purchase price. Significant assumptions used to estimate the fair value of intangible assets acquired include discount rates and certain assumptions that form the basis of the forecasted results, including revenue growth rates, attrition rates and royalty rates. The $60.4 million of acquired identifiable intangible assets was comprised of the following: $40.2 million of customer relationships being amortized over 20 years, $19.0 million of trademarks not subject to amortization, and $1.2 million of non-compete agreements being amortized over 7.5 years.
|
|
|
|
|
|
April 8, 2019 (dollars in millions)
|
|
Current assets, net of cash acquired
|
$
|
9.7
|
|
Property, plant and equipment
|
8.6
|
|
Intangible assets
|
60.4
|
|
Goodwill
|
31.0
|
|
Total assets acquired
|
109.7
|
|
Current liabilities
|
(2.7)
|
|
Net assets acquired
|
$
|
107.0
|
|
As required under ASC 805 Business Combinations, Water-Right’s results of operations have been included in the Company’s consolidated financial statements from April 8, 2019, the date of acquisition.
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 consolidated balance sheet. To determine balance sheet amounts, required legal payments are discounted using the Company’s incremental borrowing rate as of the inception of the lease. The incremental borrowing rate is the rate of interest that the Company would incur if it were to borrow, on a collateralized basis, an amount equal to the value of the leased item over a similar term, in a similar economic environment. Variable lease components not based on an index or rate are excluded from the measurement of the lease asset and liability and expensed as incurred for all asset classes.
Certain leases include one or more options to renew or terminate. Renewal terms can extend the lease term from one to five years and options to terminate can be effective within one year. The exercise of lease renewal or termination is at the Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants or material subleases. Cash flows associated with leases are materially consistent with the expense recorded in the condensed consolidated statement of earnings.
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
December 31, 2020
|
|
December 31, 2019
|
Liabilities
|
|
|
|
Short term: Accrued liabilities
|
$
|
11.1
|
|
|
$
|
12.0
|
|
Long term: Operating lease liabilities
|
34.4
|
|
|
38.7
|
|
Total operating lease liabilities
|
$
|
45.5
|
|
|
$
|
50.7
|
|
Less: Rent incentives and deferrals
|
(3.9)
|
|
|
(3.8)
|
|
Assets
|
|
|
|
Operating lease assets
|
$
|
41.6
|
|
|
$
|
46.9
|
|
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
|
December 31, 2020
|
Weighted-average remaining lease term
|
|
10 years
|
Weighted-average discount rate
|
|
3.49%
|
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
Lease Expense(1)
|
Classification
|
|
Year ended December 31, 2020
|
|
Year ended December 31, 2019
|
Operating lease expense
|
Cost of products sold
|
|
$
|
3.1
|
|
|
$
|
3.0
|
|
|
Selling, general and administrative expenses
|
|
16.0
|
|
|
17.6
|
|
(1)Includes short-term lease expense of $1.8 million for the year ended December 31, 2020. Includes variable lease cost of $1.6 million for the year ended December 31, 2020. Includes short-term lease expense of $2.0 million for the year ended December 31, 2019. Includes variable lease cost of $2.1 million for the year ended December 31, 2019.
Rent expense, including payments under operating leases was $24.0 million in 2018.
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
(dollars in millions)
|
December 31, 2020
|
2021
|
$
|
12.4
|
|
2022
|
10.2
|
|
2023
|
5.6
|
|
2024
|
4.6
|
|
2025
|
2.9
|
|
After 2025
|
21.0
|
|
Total lease payments
|
56.7
|
|
Less: imputed interest
|
(11.2)
|
|
Present value of operating lease liabilities
|
$
|
45.5
|
|
5. Severance, Restructuring and Impairment Expenses
To align its business to current market conditions, the Company recognized $7.7 million of pre-tax severance and restructuring expenses during the year ended December 31, 2020. These expenses were comprised of $6.8 million severance costs and $0.9 million of other restructuring expenses, as well as a corresponding $1.4 million tax benefit. Of the $7.7 million expense recognized during the year ended December 31, 2020, $2.7 million was related to the North America segment and $5.0 million was related to the Rest of World segment. The Company’s severance and restructuring actions were completed in 2020.
On March 21, 2018, the Company announced a move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. The Company recognized $6.7 million of restructuring and impairment expenses, comprised of $4.0 million of severance and compensation related costs, lease exit costs of $2.1 million and impairment charges related to long-lived assets totaling $0.6 million, as well as a corresponding $1.7 million tax benefit related to the charges. As of December 31, 2019, the consolidation of the Renton facility to other U.S. facilities was complete.
The following table presents an analysis of the Company’s restructuring reserve for the years ended December 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Severance
Costs
|
|
Restructuring Expenses
|
|
Fixed Assets
Impairment
|
|
Total
|
Balance at January 1, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
4.0
|
|
|
2.1
|
|
|
0.6
|
|
|
6.7
|
|
Cash payments and disposals
|
(3.8)
|
|
|
(0.8)
|
|
|
(0.6)
|
|
|
(5.2)
|
|
Balance at December 31, 2018
|
0.2
|
|
|
1.3
|
|
|
—
|
|
|
1.5
|
|
Cash payments and disposals
|
(0.2)
|
|
|
(0.8)
|
|
|
—
|
|
|
(1.0)
|
|
Balance at December 31, 2019
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Charges
|
6.8
|
|
|
0.9
|
|
|
—
|
|
|
7.7
|
|
Cash payments and disposals
|
(5.1)
|
|
|
(1.4)
|
|
|
—
|
|
|
(6.5)
|
|
Balance at December 31, 2020
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
6. Statement of Cash Flows
Supplemental cash flow information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2018
|
Net change in current assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Receivables
|
$
|
4.5
|
|
|
$
|
62.4
|
|
|
$
|
(54.6)
|
|
Inventories
|
2.9
|
|
|
6.3
|
|
|
(7.7)
|
|
Other current assets
|
4.7
|
|
|
(4.8)
|
|
|
10.0
|
|
Trade payables
|
85.6
|
|
|
(35.4)
|
|
|
8.8
|
|
Accrued liabilities, including payroll and benefits
|
29.3
|
|
|
14.2
|
|
|
(3.5)
|
|
Income taxes
|
3.4
|
|
|
(10.1)
|
|
|
7.0
|
|
|
$
|
130.4
|
|
|
$
|
32.6
|
|
|
$
|
(40.0)
|
|
7. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (dollars in millions)
|
2020
|
|
2019
|
Finished products
|
$
|
143.4
|
|
|
$
|
136.8
|
|
Work in process
|
21.8
|
|
|
21.7
|
|
Raw materials
|
159.2
|
|
|
168.3
|
|
Inventories, at FIFO cost
|
324.4
|
|
|
326.8
|
|
LIFO reserve
|
(24.3)
|
|
|
(23.8)
|
|
|
$
|
300.1
|
|
|
$
|
303.0
|
|
The Company recognized after-tax LIFO income of $(0.2) million, $(0.7) million and $(0.4) million in 2020, 2019 and 2018, respectively.
8. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (dollars in millions)
|
2020
|
|
2019
|
Land
|
$
|
11.6
|
|
|
$
|
11.6
|
|
Buildings
|
349.2
|
|
|
334.1
|
|
Equipment
|
729.7
|
|
|
686.9
|
|
Software
|
132.1
|
|
|
124.3
|
|
|
1,222.6
|
|
|
1,156.9
|
|
Accumulated depreciation and amortization
|
(681.3)
|
|
|
(611.5)
|
|
|
$
|
541.3
|
|
|
$
|
545.4
|
|
9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill during the years ended December 31, 2020 and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
North America
|
|
Rest of World
|
|
Total
|
Balance at December 31, 2018
|
$
|
453.9
|
|
|
$
|
59.1
|
|
|
$
|
513.0
|
|
Acquisition
|
31.0
|
|
|
—
|
|
|
31.0
|
|
Currency translation adjustment
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Balance at December 31, 2019
|
486.9
|
|
|
59.1
|
|
|
546.0
|
|
Currency translation adjustment
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Balance at December 31, 2020
|
$
|
487.7
|
|
|
$
|
59.1
|
|
|
$
|
546.8
|
|
9. Goodwill and Other Intangible Assets (continued)
The carrying amount of other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
December 31 (dollars in millions)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
$
|
3.7
|
|
|
$
|
(3.7)
|
|
|
$
|
—
|
|
|
$
|
3.7
|
|
|
$
|
(3.5)
|
|
|
$
|
0.2
|
|
Customer lists
|
278.0
|
|
|
(138.1)
|
|
|
139.9
|
|
|
278.0
|
|
|
(123.6)
|
|
|
154.4
|
|
Total amortizable intangible assets
|
281.7
|
|
|
(141.8)
|
|
|
139.9
|
|
|
281.7
|
|
|
(127.1)
|
|
|
154.6
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
184.0
|
|
|
—
|
|
|
184.0
|
|
|
183.8
|
|
|
—
|
|
|
183.8
|
|
Total intangible assets
|
$
|
465.7
|
|
|
$
|
(141.8)
|
|
|
$
|
323.9
|
|
|
$
|
465.5
|
|
|
$
|
(127.1)
|
|
|
$
|
338.4
|
|
Amortization expenses of other intangible assets of $14.5 million, $15.8 million, and $14.3 million were recorded in 2020, 2019 and 2018, respectively. In the future, excluding the impact of any future acquisitions, the Company expects amortization expense of approximately $12.2 million annually and the intangible assets will be amortized over a weighted-average period of 13 years.
The Company concluded that no goodwill impairment existed at the time of the annual impairment tests which were performed in the fourth quarters of 2020, 2019 and 2018. No impairments of other intangible assets were recorded in 2020, 2019 and 2018.
10. Debt
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (dollars in millions)
|
2020
|
|
2019
|
Bank credit lines, average year-end interest rates of —% for 2020 and 2.4% for 2019
|
$
|
—
|
|
|
$
|
4.7
|
|
Revolving credit agreement borrowings, average year-end interest rates of —% for 2020 and 2.8% for 2019
|
—
|
|
|
85.0
|
|
Commercial paper, average year-end interest rates of —% for 2020 and 2.2% for 2019
|
—
|
|
|
74.3
|
|
Term notes with insurance companies, expiring 2029-2034, average year-end interest rates of 3.3% for 2020 and 3.3% for 2019
|
113.2
|
|
|
120.0
|
|
|
113.2
|
|
|
284.0
|
|
Long-term debt due within one year
|
(6.8)
|
|
|
(6.8)
|
|
Long-term debt
|
$
|
106.4
|
|
|
$
|
277.2
|
|
In December 2016, the Company completed a $500 million multi-year multi-currency revolving credit agreement with a group of nine banks, which expires on December 15, 2021. The facility has an accordion provision which allows it to be increased up to $700 million if certain conditions (including lender approval) are satisfied. Borrowings under the Company’s bank credit lines and commercial paper borrowings are supported by the revolving credit agreement. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings are classified as long-term debt at December 31, 2019. As of December 31, 2020 there were no commercial paper or credit line borrowings. At its option, the Company either maintains cash balances or pays fees for bank credit and services. The company has fixed-rate interest expense obligations of $22.2 million on outstanding debt as of December 31, 2020. Scheduled maturities of long-term debt within each of the five years subsequent to December 31, 2020 are as follows:
|
|
|
|
|
|
Years ending December 31 (dollars in millions)
|
Amount
|
2021
|
$
|
6.8
|
|
2022
|
6.8
|
|
2023
|
10.0
|
|
2024
|
10.0
|
|
2025
|
10.0
|
|
11. Stockholders’ Equity
The Company’s authorized capital consists of three million shares of Preferred Stock $1 par value, 27 million shares of Class A Common Stock $5 par value, and 240 million shares of Common Stock $1 par value. The Common Stock has equal dividend rights with Class A Common Stock and is entitled, as a class, to elect one-third of the Board of Directors and has 1/10th vote per share on all other matters. Class A Common Stock is convertible to Common Stock on a one for one basis.
There were 12,372 shares during 2020, 10,442 shares during 2019 and 48,232 shares during 2018, of Class A Common Stock converted into Common Stock. Regular dividends paid on the A. O. Smith Corporation Class A Common Stock and Common Stock amounted to $0.98, $0.90 and $0.76 per share in 2020, 2019 and 2018, respectively.
In the second quarter of 2019, the Company's Board of Directors approved adding three million shares of Common Stock to an existing discretionary share repurchase authority. Under the share repurchase program, the Common Stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The number of shares purchased and the timing of the purchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as working capital requirements, general business conditions and other factors, including alternative investment opportunities. The stock repurchase authorization remains effective until terminated by the Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that the Company may then have in effect. Due to the uncertainty surrounding the impact of the global COVID-19 pandemic, the Company suspended its share repurchases on March 18, 2020. In 2020, the Company repurchased 1,348,391 shares at an average price of $42.02 per share and at a total cost of $56.7 million. As of December 31, 2020, there were 1,613,824 shares remaining on the existing repurchase authorization. In 2019, the Company repurchased 6,113,038 shares at a cost of $287.7 million. In 2018, the Company repurchased 3,797,800 shares at a cost of $202.6 million.
At December 31, 2020, a total of 130,380 and 28,807,455 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock. At December 31, 2019, a total of 130,380 and 28,205,806 shares of Class A Common Stock and Common Stock, respectively, were held as treasury stock.
11. Stockholders’ Equity (continued)
Changes to accumulated other comprehensive loss by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years ended December 31,
|
|
2020
|
|
|
2019
|
Cumulative foreign currency translation
|
|
|
|
|
Balance at beginning of period
|
$
|
(66.2)
|
|
|
|
$
|
(64.9)
|
|
Other comprehensive gain (loss) before reclassifications
|
18.1
|
|
|
|
(1.3)
|
|
Balance at end of period
|
(48.1)
|
|
|
|
(66.2)
|
|
Unrealized net gain (loss) on cash flow derivatives
|
|
|
|
|
Balance at beginning of period
|
0.2
|
|
|
|
(0.7)
|
|
Other comprehensive gain (loss) before reclassifications
|
1.7
|
|
|
|
(0.3)
|
|
Realized (gains) losses on derivatives reclassified to cost of products sold (net of tax provision (benefit) of $0.4 and $(0.5) in 2020 and 2019, respectively)(1)
|
(1.3)
|
|
|
|
1.2
|
|
Balance at end of period
|
0.6
|
|
|
|
0.2
|
|
Pension liability
|
|
|
|
|
Balance at beginning of period
|
(282.3)
|
|
|
|
(285.2)
|
|
Other comprehensive (loss) before reclassifications
|
(6.3)
|
|
|
|
(9.5)
|
|
Amounts reclassified from accumulated other comprehensive loss(1)
|
14.9
|
|
|
|
12.4
|
|
Balance at end of period
|
(273.7)
|
|
|
|
(282.3)
|
|
Total accumulated other comprehensive loss, end of period
|
$
|
(321.2)
|
|
|
|
$
|
(348.3)
|
|
(1)Amounts reclassified from accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gains) loss on derivatives reclassified to cost of products sold
|
$
|
(1.7)
|
|
|
|
$
|
1.7
|
|
|
Tax provision (benefit)
|
0.4
|
|
|
|
(0.5)
|
|
|
Reclassification net of tax
|
$
|
(1.3)
|
|
|
|
$
|
1.2
|
|
|
Amortization of pension items:
|
|
|
|
|
|
Actuarial losses
|
$
|
20.2
|
|
(2)
|
|
$
|
16.8
|
|
(2)
|
Prior year service cost
|
(0.4)
|
|
(2)
|
|
(0.5)
|
|
(2)
|
|
19.8
|
|
|
|
16.3
|
|
|
Tax benefit
|
(4.9)
|
|
|
|
(3.9)
|
|
|
Reclassification net of tax
|
$
|
14.9
|
|
|
|
$
|
12.4
|
|
|
(2)These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 13 “Pensions and Other Post-retirement Benefits” for additional details.
12. Stock Based Compensation
The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the Plan) effective January 1, 2007. The Plan was most recently reapproved by stockholders on April 15, 2020. The Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of options or share units at December 31, 2020, was 3,395,216 which includes 2,400,000 additional shares that were authorized on April 15, 2020 at the Company's annual meeting of stockholders. Upon stock option exercise or share unit vesting, shares are issued from treasury stock. Total stock based compensation expense recognized in 2020, 2019 and 2018 was $12.7 million, $13.3 million and $10.1 million, respectively.
Stock Options
The stock options granted in 2020, 2019 and 2018 have three year pro rata vesting from the date of grant. Stock options are issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted in 2020, 2019 and 2018 expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period. Included in stock option expense for 2020, 2019 and 2018 was $6.2 million, $6.4 million and $4.4 million, respectively. Included in the stock option expense recognized in 2020, 2019 and 2018
12. Stock Based Compensation (continued)
is 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.
Changes in options, all of which relate to the Company’s Common Stock, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
2020
|
|
2019
|
|
2018
|
|
Number of
Options
|
|
Weighted
Avg. Per
Share
Exercise
Price
|
|
Number of
Options
|
|
Weighted
Avg. Per
Share
Exercise
Price
|
|
Number of
Options
|
|
Weighted
Avg. Per
Share
Exercise
Price
|
Number of shares under options:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
2,728,350
|
|
|
$
|
37.64
|
|
|
2,432,689
|
|
|
$
|
33.05
|
|
|
2,263,126
|
|
|
$
|
27.73
|
|
Granted
|
798,970
|
|
|
42.50
|
|
|
557,045
|
|
|
49.49
|
|
|
373,220
|
|
|
61.62
|
|
Exercised(1)
|
(662,215)
|
|
|
19.59
|
|
|
(249,840)
|
|
|
18.55
|
|
|
(176,302)
|
|
|
22.93
|
|
Forfeited
|
(79,451)
|
|
|
48.98
|
|
|
(11,544)
|
|
|
54.02
|
|
|
(27,355)
|
|
|
47.95
|
|
Outstanding at end of year(2)
|
2,785,654
|
|
|
43.01
|
|
|
2,728,350
|
|
|
37.64
|
|
|
2,432,689
|
|
|
33.05
|
|
Exercisable at end of year(3)
|
1,529,464
|
|
|
40.35
|
|
|
1,820,743
|
|
|
30.07
|
|
|
1,665,184
|
|
|
24.52
|
|
(1)The total intrinsic value of options exercised in 2020, 2019 and 2018 was $21.3 million, $7.7 million and $6.8 million, respectively.
(2)The weighted average remaining contractual life of options outstanding was 8 years at December 31, 2020, and 7 years at December 31, 2019, and December 31, 2018, respectively. The aggregate intrinsic value of options outstanding at December 31, 2020 was $35.3 million.
(3)The weighted average remaining contractual life of options exercisable was 6 years at December 31, 2020, December 31, 2019 and December 31, 2018. The aggregate intrinsic value of options exercisable at December 31, 2020 was $23.7 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Avg. Per
Share Exercise Price
|
Nonvested options at beginning of year
|
907,607
|
|
|
$
|
52.82
|
|
Granted
|
798,970
|
|
|
42.50
|
|
Vested
|
(416,432)
|
|
|
53.20
|
|
Forfeited
|
(33,955)
|
|
|
49.06
|
|
Nonvested options at end of year
|
1,256,190
|
|
|
46.23
|
|
The weighted-average fair value per option at the date of grant during 2020, 2019 and 2018, using the Black-Scholes option-pricing model, was $8.17, $10.83 and $14.80, respectively. Assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected life (years)
|
5.7
|
|
5.5
|
|
5.7
|
Risk-free interest rate
|
1.5
|
%
|
|
2.7
|
%
|
|
2.9
|
%
|
Dividend yield
|
2.1
|
%
|
|
1.6
|
%
|
|
1.0
|
%
|
Expected volatility
|
23.7
|
%
|
|
22.8
|
%
|
|
22.1
|
%
|
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.
12. Stock Based Compensation (continued)
Restricted Stock and Share Units
Participants may also be awarded shares of restricted stock or share units under the Plan. Share units vest three years after the date of grant. The Company granted 174,420, 140,102 and 106,581 share units under the plan in 2020, 2019 and 2018, respectively.
The share units were valued at $7.4 million, $6.9 million and $6.6 million at the date of issuance in 2020, 2019 and 2018, 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 was expense associated with accelerated vesting of share unit awards for certain employees who are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense of $6.5 million, $6.9 million and $5.7 million was recognized in 2020, 2019 and 2018, respectively. Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.
A summary of share unit activity under the plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted-Average
Grant Date Value
|
Issued and unvested at January 1, 2020
|
366,102
|
|
|
$
|
49.92
|
|
Granted
|
174,420
|
|
|
42.64
|
|
Vested
|
(100,735)
|
|
|
49.21
|
|
Forfeited
|
(13,001)
|
|
|
51.25
|
|
Issued and unvested at December 31, 2020
|
426,786
|
|
|
46.99
|
|
13. Pension and Other Post-retirement Benefits
The Company provides retirement benefits for all U.S. employees including benefits for employees of previously owned businesses which were earned up to the date of sale. The Company also has two foreign pension plans, neither of which is material to the Company’s financial position.
The Company has a defined contribution plan which matches 100 percent of the first one percent of contributions made by participating employees and matches 50 percent of the next five percent of employee contributions. The Company also has defined contribution plans for certain hourly employees which provide for matching Company contributions.
The Company also has a defined benefit plan for salaried employees and its non-union hourly workforce. In 2009, the Company announced U.S. employees hired after January 1, 2010, would not participate in the defined benefit plan, and benefit accruals for the majority of current salaried and hourly employees sunset on December 31, 2014. An additional Company contribution is made to the defined contribution plan in lieu of benefits earned in a defined benefit plan. The Company also has defined benefit and contribution plans for certain union hourly employees.
The Company has unfunded defined-benefit post-retirement plans covering certain hourly and salaried employees that provide medical and life insurance benefits from retirement to age 65. Certain hourly employees retiring after January 1, 1996, are subject to a maximum annual benefit and salaried employees hired after December 31, 1993, are not eligible for post-retirement medical benefits.
13. Pension and Other Post-retirement Benefits (continued)
Obligations and Funded Status
Pension and Post-retirement Disclosure Information under ASC 715, Compensation – Retirement Benefits (ASC 715)
The following tables present the changes in benefit obligations, plan assets and funded status for domestic pension and post-retirement plans and the components of net periodic benefit costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Post-retirement Benefits
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Accumulated benefit obligation (ABO) at December 31
|
$
|
869.0
|
|
|
$
|
868.7
|
|
|
N/A
|
|
N/A
|
Change in projected benefit obligations (PBO)
|
|
|
|
|
|
|
|
PBO at beginning of year
|
$
|
(869.3)
|
|
|
$
|
(833.8)
|
|
|
$
|
(8.0)
|
|
|
$
|
(7.0)
|
|
Service cost
|
(1.5)
|
|
|
(1.6)
|
|
|
—
|
|
|
(0.1)
|
|
Interest cost
|
(23.0)
|
|
|
(31.6)
|
|
|
(0.1)
|
|
|
(0.3)
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
(0.1)
|
|
|
(0.1)
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
Actuarial loss including assumption changes
|
(63.8)
|
|
|
(98.6)
|
|
|
(0.8)
|
|
|
(1.2)
|
|
Benefits paid
|
87.8
|
|
|
96.3
|
|
|
1.1
|
|
|
0.7
|
|
PBO at end of year
|
$
|
(869.8)
|
|
|
$
|
(869.3)
|
|
|
$
|
(5.9)
|
|
|
$
|
(8.0)
|
|
Change in fair value of plan assets
|
|
|
|
|
|
|
|
Plan assets at beginning of year
|
$
|
832.4
|
|
|
$
|
777.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
104.1
|
|
|
143.4
|
|
|
—
|
|
|
—
|
|
Contribution by the Company
|
10.1
|
|
|
7.8
|
|
|
0.5
|
|
|
0.5
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Benefits paid
|
(87.8)
|
|
|
(96.3)
|
|
|
(0.6)
|
|
|
(0.6)
|
|
Plan assets at end of year
|
$
|
858.8
|
|
|
$
|
832.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status
|
$
|
(11.0)
|
|
|
$
|
(36.9)
|
|
|
$
|
(5.9)
|
|
|
$
|
(8.0)
|
|
Amount recognized in the balance sheet
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(0.6)
|
|
|
(9.3)
|
|
|
(0.5)
|
|
|
(0.5)
|
|
Non-current liabilities
|
(13.4)
|
|
|
(27.6)
|
|
|
(5.4)
|
|
|
(7.5)
|
|
Net pension liability at end of year
|
$
|
(11.0)
|
|
*
|
$
|
(36.9)
|
|
*
|
$
|
(5.9)
|
|
|
$
|
(8.0)
|
|
Amounts recognized in accumulated other comprehensive loss before tax
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
452.0
|
|
|
$
|
463.1
|
|
|
$
|
0.6
|
|
|
$
|
(0.2)
|
|
Prior service cost
|
1.0
|
|
|
0.5
|
|
|
(3.3)
|
|
|
(1.8)
|
|
Total recognized in accumulated other comprehensive loss
|
$
|
453.0
|
|
|
$
|
463.6
|
|
|
$
|
(2.7)
|
|
|
$
|
(2.0)
|
|
*In addition, the Company has a liability for a foreign pension plan of $0.2 million at December 31, 2020 and 2019.
The actuarial loss in the current year for both the pension and post-retirement benefit plans was primarily due to the change in the discount rate.
13. Pension and Other Post-retirement Benefits (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Post-retirement Benefits
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Net periodic (benefit) cost
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost
|
23.0
|
|
|
31.6
|
|
|
28.9
|
|
|
0.1
|
|
|
0.3
|
|
|
0.3
|
|
Expected return on plan assets
|
(51.9)
|
|
|
(57.3)
|
|
|
(58.1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
20.2
|
|
|
16.8
|
|
|
19.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service cost
|
(0.4)
|
|
|
(0.5)
|
|
|
(0.5)
|
|
|
(0.5)
|
|
|
(0.4)
|
|
|
(0.4)
|
|
Defined-benefit plan income
|
(7.6)
|
|
|
(7.8)
|
|
|
(8.7)
|
|
|
(0.4)
|
|
|
—
|
|
|
$
|
—
|
|
Curtailment and other one-time charges
|
2.5
|
|
|
1.6
|
|
|
—
|
|
|
(0.5)
|
|
|
—
|
|
|
—
|
|
Various U.S. defined contribution plans cost
|
14.4
|
|
|
13.3
|
|
|
12.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
9.3
|
|
|
$
|
7.1
|
|
|
$
|
3.5
|
|
|
$
|
(0.9)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other changes in plan assets and projected benefit obligation recognized in other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
11.7
|
|
|
$
|
12.6
|
|
|
$
|
36.1
|
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
|
$
|
(0.6)
|
|
Amortization of net actuarial loss
|
(22.8)
|
|
|
(18.4)
|
|
|
(19.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.0)
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
0.4
|
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
|
0.4
|
|
|
0.4
|
|
Total recognized in other comprehensive loss
|
(10.7)
|
|
|
(5.3)
|
|
|
17.6
|
|
|
(0.7)
|
|
|
1.6
|
|
|
(0.2)
|
|
Total recognized in net periodic (benefit) cost and other comprehensive loss
|
$
|
(15.8)
|
|
|
$
|
(11.5)
|
|
|
$
|
8.9
|
|
|
$
|
(1.6)
|
|
|
$
|
1.6
|
|
|
$
|
(0.2)
|
|
The 2020 and 2019 after tax adjustments for additional minimum pension liability resulted in other comprehensive gain of $8.6 million and $2.9 million, respectively.
Actuarial assumptions used to determine benefit obligations at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Post-retirement Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Discount rate
|
2.44
|
%
|
|
3.18
|
%
|
|
2.04
|
%
|
|
3.40
|
%
|
Actuarial assumptions used to determine net periodic benefit cost for the year ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Post-retirement Benefits
|
Years ended December 31
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
3.18
|
%
|
|
4.32
|
%
|
|
3.65
|
%
|
|
2.95
|
%
|
|
4.45
|
%
|
|
3.79
|
%
|
Expected long-term return on plan assets
|
6.75
|
%
|
|
7.15
|
%
|
|
7.15
|
%
|
|
n/a
|
|
n/a
|
|
n/a
|
Rate of compensation increase
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
13. Pension and Other Post-retirement Benefits (continued)
Assumed health care cost trend rates
Assumed health care cost trend rates as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Health care cost trend rate assumed for next year
|
7.40
|
%
|
|
7.70
|
%
|
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
|
5.00
|
%
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
2029
|
|
2029
|
Plan Assets
The Company’s pension plan weighted asset allocations as of December 31 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
2020
|
|
2019
|
Equity securities
|
44
|
%
|
|
42
|
%
|
Debt securities
|
46
|
|
|
47
|
|
Real estate
|
9
|
|
|
10
|
|
Private equity
|
1
|
|
|
1
|
|
|
100
|
%
|
|
100
|
%
|
The following tables present the fair value measurement of the Company’s plan assets as of December 31, 2020 and 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Asset Category
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Non-
observable Inputs
(Level 3)
|
Short-term investments
|
$
|
13.7
|
|
|
$
|
—
|
|
|
$
|
13.7
|
|
|
$
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
Common stocks
|
136.5
|
|
|
136.5
|
|
|
—
|
|
|
—
|
|
Commingled equity funds
|
132.0
|
|
|
—
|
|
|
132.0
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
44.3
|
|
|
44.3
|
|
|
—
|
|
|
—
|
|
Other fixed income securities
|
229.1
|
|
|
—
|
|
|
229.1
|
|
|
—
|
|
Commingled fixed income funds
|
119.5
|
|
|
—
|
|
|
119.5
|
|
|
—
|
|
Options
|
(8.1)
|
|
|
—
|
|
|
(8.1)
|
|
|
—
|
|
Other types of investments
|
|
|
|
|
|
|
|
Mutual funds
|
105.6
|
|
|
—
|
|
|
105.6
|
|
|
—
|
|
Real estate funds
|
79.8
|
|
|
—
|
|
|
—
|
|
|
79.8
|
|
Private equity
|
4.9
|
|
|
—
|
|
|
—
|
|
|
4.9
|
|
Total fair value of plan asset investments
|
$
|
857.3
|
|
|
$
|
180.8
|
|
|
$
|
591.8
|
|
|
$
|
84.7
|
|
Non-investment plan assets
|
1.5
|
|
|
|
|
|
|
|
Total plan assets
|
$
|
858.8
|
|
|
|
|
|
|
|
13. Pension and Other Post-retirement Benefits (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Asset Category
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Contracts
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Non-
observable Inputs
(Level 3)
|
Short-term investments
|
$
|
14.6
|
|
|
$
|
2.8
|
|
|
$
|
11.8
|
|
|
$
|
—
|
|
Equity securities
|
|
|
|
|
|
|
|
Common stocks
|
127.0
|
|
|
127.0
|
|
|
—
|
|
|
—
|
|
Commingled equity funds
|
113.4
|
|
|
—
|
|
|
113.4
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
49.8
|
|
|
49.8
|
|
|
—
|
|
|
—
|
|
Other fixed income securities
|
225.1
|
|
|
—
|
|
|
225.1
|
|
|
—
|
|
Commingled fixed income funds
|
114.0
|
|
|
—
|
|
|
114.0
|
|
|
—
|
|
Options
|
(10.8)
|
|
|
|
|
(10.8)
|
|
|
|
Other types of investments
|
|
|
|
|
|
|
|
Mutual funds
|
104.9
|
|
|
—
|
|
|
104.9
|
|
|
—
|
|
Real estate funds
|
82.3
|
|
|
—
|
|
|
—
|
|
|
82.3
|
|
Private equity
|
8.6
|
|
|
—
|
|
|
—
|
|
|
8.6
|
|
Total fair value of plan asset investments
|
$
|
828.9
|
|
|
$
|
179.6
|
|
|
$
|
558.4
|
|
|
$
|
90.9
|
|
Non-investment plan assets
|
3.4
|
|
|
|
|
|
|
|
Total plan assets
|
$
|
832.3
|
|
|
|
|
|
|
|
The short-term investments included in the Company’s plan assets consist of cash and cash equivalents. The fair value of the remaining categories of the Company’s plan assets are valued as follows: equity securities are valued using the closing stock price on a national securities exchange, which reflects the last reported sales price on the last business day of the year; fixed income securities are valued using institutional bond quotes, which are based on various market and industry inputs; mutual funds and real estate funds are valued using the net asset value of the fund, which is based on the fair value of the underlying securities; Options are valued using the closings market value on the last day of the year; and private equity investments are valued at the estimated fair value at the previous quarter end, which is based on the proportionate share of the underlying portfolio investments.
The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2020 and 2019 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
funds
|
|
Private
equity
|
|
Total
|
Balance at December 31, 2018
|
$
|
80.4
|
|
|
$
|
13.2
|
|
|
$
|
93.6
|
|
Actual return (loss) on plan assets:
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
1.9
|
|
|
—
|
|
|
1.9
|
|
Relating to assets sold during the period
|
—
|
|
(1.4)
|
|
|
(1.4)
|
|
Purchases, sales and settlements
|
—
|
|
(3.2)
|
|
|
(3.2)
|
|
Balance at December 31, 2019
|
82.3
|
|
|
8.6
|
|
|
90.9
|
|
Actual (loss) return on plan assets:
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
(2.5)
|
|
|
(2.2)
|
|
|
(4.7)
|
|
Relating to assets sold during the period
|
—
|
|
|
(0.1)
|
|
|
(0.1)
|
|
Purchases, sales and settlements
|
—
|
|
|
(1.4)
|
|
|
(1.4)
|
|
Balance at December 31, 2020
|
$
|
79.8
|
|
|
$
|
4.9
|
|
|
$
|
84.7
|
|
13. Pension and Other Post-retirement Benefits (continued)
The Company’s investment policies employ an approach whereby a diversified blend of equity and bond investments is used to maximize the long-term return of plan assets for a prudent level of risk. Equity investments are diversified across domestic and non-domestic stocks, as well as growth, value, and small to large capitalizations. Bond investments include corporate and government issues, with short-, mid- and long-term maturities, with a focus on investment grade when purchased. The Company’s target allocation to equity managers is between 30 to 60 percent with the remainder allocated primarily to bonds, real estate, private equity managers and cash. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The Company’s actual asset allocations are in line with target allocations. The Company regularly reviews its actual asset allocation and periodically rebalances its investments to the targeted allocation when considered appropriate.
There was no Company stock included in plan assets at December 31, 2020.
Cash Flows
The Company was not required to and did not make any contributions in 2020. The Company is not required to make a contribution in 2021.
Estimated Future Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 (dollars in millions)
|
Pension Benefits
|
|
Post-retirement
Benefits
|
2021
|
$
|
56.7
|
|
|
$
|
0.5
|
|
2022
|
56.6
|
|
|
0.5
|
|
2023
|
55.8
|
|
|
0.5
|
|
2024
|
54.8
|
|
|
0.5
|
|
2025
|
54.0
|
|
|
0.5
|
|
2026 – 2030
|
264.0
|
|
|
2.0
|
|
14. 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.
14. Derivative Instruments (continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (dollars in millions)
|
2020
|
|
2019
|
|
Buy
|
|
Sell
|
|
Buy
|
|
Sell
|
British pound
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
1.3
|
|
Canadian dollar
|
—
|
|
|
79.7
|
|
|
—
|
|
|
49.7
|
|
Euro
|
32.7
|
|
|
—
|
|
|
36.0
|
|
|
—
|
|
Mexican peso
|
16.5
|
|
|
—
|
|
|
18.6
|
|
|
—
|
|
Total
|
$
|
49.2
|
|
|
$
|
80.7
|
|
|
$
|
54.6
|
|
|
$
|
51.0
|
|
Commodity Futures Contracts
In addition to entering into supply arrangements in the normal course of business, the Company also enters into futures contracts to fix the cost of certain raw material purchases, principally steel, with the objective of minimizing changes in cost due to market price fluctuations. The hedging strategy for achieving this objective is to purchase steel futures contracts on the New York Metals Exchange (NYMEX) and copper futures contracts on the open market of the London Metals Exchange (LME) or over the counter contracts based on the LME. With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts. There were no outstanding commodity futures contracts as of December 31, 2020 and 2019.
Net Investment Hedges
The Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its non-U.S. subsidiaries. These hedges are determined to be effective. The Company recognized $(3.1) million and $— million of after-tax losses associated with hedges of a net investment in non-U.S. subsidiaries in currency translation adjustment in other comprehensive income in 2020 and 2019, respectively. The contractual amount of the Company’s foreign currency forward contracts that are designated as net investment hedges is $100.0 million as of December 31, 2020.
The following tables present the impact of derivative contracts on the Company’s financial statements.
Fair value of derivatives designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
December 31 (dollars in millions)
|
Balance Sheet Location
|
|
2020
|
|
2019
|
Foreign currency contracts
|
Other current assets
|
|
$
|
2.7
|
|
|
$
|
8.4
|
|
|
Accrued liabilities
|
|
(7.0)
|
|
|
(1.5)
|
|
Total derivatives designated as hedging instruments
|
|
|
$
|
(4.3)
|
|
|
$
|
6.9
|
|
14. Derivative Instruments (continued)
The effect of cash flow hedges on the condensed consolidated statement of earnings:
Years ended December 31 (dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 cash flow
hedging relationships
|
Amount of gain (loss)
recognized in other
comprehensive loss on
derivatives
|
|
Location of gain (loss)
reclassified from
accumulated other
comprehensive loss into
earnings
|
|
Amount of gain
(loss) reclassified
from accumulated
other comprehensive
loss into earnings
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
Foreign currency contracts
|
$
|
2.3
|
|
|
$
|
0.2
|
|
|
Cost of products sold
|
|
$
|
1.9
|
|
|
$
|
(0.2)
|
|
Commodities contracts
|
—
|
|
|
(0.5)
|
|
|
Cost of products sold
|
|
(0.2)
|
|
|
(1.5)
|
|
|
$
|
2.3
|
|
|
$
|
(0.3)
|
|
|
|
|
$
|
1.7
|
|
|
$
|
(1.7)
|
|
15. Income Taxes
The components of the provision (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
67.1
|
|
|
$
|
66.4
|
|
|
$
|
60.1
|
|
State
|
17.4
|
|
|
14.8
|
|
|
15.6
|
|
International
|
25.8
|
|
|
19.9
|
|
|
38.6
|
|
Deferred:
|
|
|
|
|
|
Federal
|
5.6
|
|
|
0.4
|
|
|
(1.7)
|
|
State
|
2.3
|
|
|
1.8
|
|
|
1.5
|
|
International
|
(19.2)
|
|
|
(1.2)
|
|
|
(0.5)
|
|
|
$
|
99.0
|
|
|
$
|
102.1
|
|
|
$
|
113.6
|
|
The provision for income taxes differs from the U.S. federal statutory rate due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31
|
2020
|
|
2019
|
|
2018
|
Provision at U.S. federal statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State taxes, net of federal benefit
|
3.5
|
|
|
2.8
|
|
|
2.4
|
|
International income tax rate differential—China
|
(0.6)
|
|
|
(1.3)
|
|
|
(2.3)
|
|
International income tax rate differential—other
|
0.2
|
|
|
0.4
|
|
|
1.1
|
|
Research tax credits
|
(0.5)
|
|
|
(0.4)
|
|
|
(0.5)
|
|
Excess tax benefit on stock compensation
|
(0.9)
|
|
|
(0.5)
|
|
|
(0.4)
|
|
Other
|
(0.4)
|
|
|
(0.4)
|
|
|
(0.9)
|
|
|
22.3
|
%
|
|
21.6
|
%
|
|
20.4
|
%
|
U.S. Tax Reform was enacted on December 22, 2017 and significantly changed U.S. corporate income tax laws. Among other things, U.S. Tax Reform reduced the U.S. corporate income tax rate to 21 percent commencing on January 1, 2018, implemented a territorial tax system and levied a one-time mandatory tax on undistributed earnings of foreign subsidiaries of U.S. companies.
The Company completed its accounting for the income tax effects of U.S. Tax Reform as of December 31, 2018 and determined that there was no material adjustment necessary to the provisional amounts it recorded in 2017. As allowed under ASU 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, the Company has elected not to reclassify the income tax effects of U.S. Tax Reform from accumulated other comprehensive losses to retained earnings.
15. Income Taxes (continued)
Components of earnings before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2018
|
U.S.
|
$
|
407.3
|
|
|
$
|
400.3
|
|
|
$
|
376.0
|
|
International
|
36.6
|
|
|
71.8
|
|
|
181.8
|
|
|
$
|
443.9
|
|
|
$
|
472.1
|
|
|
$
|
557.8
|
|
Total income taxes paid by the Company amounted to $114.1 million, $116.6 million, and $116.4 million in 2020, 2019 and 2018, respectively.
As of December 31, 2020, the Company has $9.8 million accrued for its estimate of withholding taxes due upon repatriation of undistributed foreign earnings it considers to be not permanently reinvested. As of December 31, 2020, $524.2 million of cash and cash equivalents and marketable securities were held by its foreign subsidiaries.
The tax effects of temporary differences of assets and liabilities between income tax and financial reporting are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (dollars in millions)
|
2020
|
|
2019
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Employee benefits
|
$
|
21.6
|
|
|
$
|
—
|
|
|
$
|
27.3
|
|
|
$
|
—
|
|
Product liability and warranties
|
42.5
|
|
|
—
|
|
|
39.7
|
|
|
—
|
|
Inventories
|
1.5
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Accounts receivable
|
16.3
|
|
|
—
|
|
|
16.3
|
|
|
—
|
|
Property, plant and equipment
|
—
|
|
|
36.3
|
|
|
—
|
|
|
34.9
|
|
Intangibles
|
—
|
|
|
66.2
|
|
|
—
|
|
|
61.3
|
|
Environmental liabilities
|
1.9
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
Undistributed foreign earnings
|
—
|
|
|
9.8
|
|
|
—
|
|
|
20.8
|
|
Tax loss and credit carryovers
|
20.3
|
|
|
—
|
|
|
15.2
|
|
|
—
|
|
All other
|
9.9
|
|
|
—
|
|
|
7.7
|
|
|
—
|
|
Valuation allowance
|
(13.0)
|
|
|
—
|
|
|
(11.9)
|
|
|
—
|
|
|
$
|
101.0
|
|
|
$
|
112.3
|
|
|
$
|
96.2
|
|
|
$
|
117.3
|
|
Net liability
|
|
|
$
|
11.3
|
|
|
|
|
$
|
21.1
|
|
The Company believes it is more likely than not that it will realize its net deferred tax assets through the reduction of future taxable income. The Company considered historical operating results in determining the probability of the realization of the deferred tax assets.
A reconciliation of the beginning and ending amounts of tax loss carryovers, credit carryovers and valuation allowances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Losses and Tax Credits
|
|
Valuation Allowances
|
December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
15.2
|
|
|
$
|
17.5
|
|
|
$
|
11.9
|
|
|
$
|
13.1
|
|
Increases / (Reductions)
|
5.1
|
|
|
(2.3)
|
|
|
1.1
|
|
|
(1.2)
|
|
Ending balance
|
$
|
20.3
|
|
|
$
|
15.2
|
|
|
$
|
13.0
|
|
|
$
|
11.9
|
|
The Company has foreign net operating loss carryovers that expire in 2021 through 2028 and state and local net operating loss carryovers that expire between 2029 and 2030.
15. Income Taxes (continued)
A reconciliation of the beginning and ending amount of unrecognized benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2020
|
|
2019
|
Balance at January 1
|
$
|
9.7
|
|
|
$
|
8.3
|
|
Additions / (Reductions) for tax positions of prior years
|
(0.7)
|
|
|
1.4
|
|
Balance at December 31
|
$
|
9.0
|
|
|
$
|
9.7
|
|
The amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $0.5 million. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2020, there was an immaterial amount of interest and penalties accrued. The Company anticipates that there will not be a material decrease in the total amount of unrecognized tax benefits in 2021. The Company’s U.S. federal income tax returns and its U.S. state and local income tax returns are subject to audit for the years 2017-2020 and 2003-2020, respectively. The Company is subject to non-U.S. income tax audits for the years 2014-2020.
16. Commitments and Contingencies
Environmental Contingencies
The Company is a potentially responsible party in judicial and administrative proceedings seeking to clean up sites which have been environmentally impacted. In each case, the Company has established reserves, insurance proceeds and/or a potential recovery from third parties. The Company believes any environmental claims will not have a material effect on its financial position or results of operations.
Product Liability
The Company is subject to various claims and pending lawsuits for product liability and other matters arising out of the conduct of the Company’s business. With respect to product liability claims, the Company has self-insured a portion of its product liability loss exposure for many years. The Company has established reserves and has insurance coverage, which it believes are adequate to cover incurred claims. For the years ended December 31, 2020 and 2019, the Company had $125 million of product liability insurance for individual losses in excess of $7.5 million. The Company periodically reevaluates its exposure on claims and lawsuits and makes adjustments to its reserves as appropriate. The Company believes, based on current knowledge, consultation with counsel, adequate reserves and insurance coverage that the outcome of such claims and lawsuits will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Purchase Obligations
The Company utilizes blanket purchase orders to communicate expected annual requirements to many suppliers. Requirements under blanket purchase orders generally do not become committed until several weeks prior to the scheduled unit production. The purchase obligations the Company considers firm as of December 31, 2020 is $157.2 million, most of which will be ordered in 2021.
Inventory Repurchase Arrangements
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 $5.4 and $14.1 million as of December 31, 2020 and December 31, 2019, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $6.5 million and $23.1 million as of December 31, 2020 and December 31, 2019, respectively. The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of December 31, 2020 and December 31, 2019.
17. Operations by Segment
The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world.
The accounting policies of the reportable segments are the same as those described in the “Summary of Significant Accounting Policies” outlined in Note 1. Segment earnings, defined by the Company as earnings before interest, taxes, general corporate and corporate research and development expenses, were used to measure the performance of the segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Earnings
|
Years ended December 31 (dollars in millions)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
North America(1) (2)
|
$
|
2,118.3
|
|
|
$
|
2,083.5
|
|
|
$
|
2,044.7
|
|
|
$
|
503.5
|
|
|
$
|
488.9
|
|
|
$
|
464.1
|
|
Rest of World(3)
|
800.3
|
|
|
935.8
|
|
|
1,173.6
|
|
|
—
|
|
|
40.2
|
|
|
149.3
|
|
Inter-segment
|
(23.3)
|
|
|
(26.6)
|
|
|
(30.4)
|
|
|
(0.3)
|
|
|
—
|
|
|
—
|
|
Total segments – sales, segment earnings
|
$
|
2,895.3
|
|
|
$
|
2,992.7
|
|
|
$
|
3,187.9
|
|
|
$
|
503.2
|
|
|
$
|
529.1
|
|
|
$
|
613.4
|
|
Corporate expenses
|
|
|
|
|
|
|
(52.0)
|
|
|
(46.0)
|
|
|
(47.2)
|
|
Interest expense
|
|
|
|
|
|
|
(7.3)
|
|
|
(11.0)
|
|
|
(8.4)
|
|
Earnings before income taxes
|
|
|
|
|
|
|
443.9
|
|
|
472.1
|
|
|
557.8
|
|
Provision for income taxes
|
|
|
|
|
|
|
(99.0)
|
|
|
(102.1)
|
|
|
(113.6)
|
|
Net earnings
|
|
|
|
|
|
|
$
|
344.9
|
|
|
$
|
370.0
|
|
|
$
|
444.2
|
|
(1)In 2020, the Company recognized $2.7 of severance and restructuring expenses in connection with the Company's alignment of the business to current market conditions. For additional information, see Note 5 “Severance, Restructuring and Impairment Expenses.”
(2)In 2018, the Company recognized $6.7 of restructuring and impairment expenses in connection with the move of manufacturing operations from its Renton, Washington facility to other U.S. facilities. For additional information, see Note 5 “Severance, Restructuring and Impairment Expenses.”
(3)In 2020, the Company recognized $5.0 of severance and restructuring expenses in connection with its alignment of its business to current market conditions. For additional information, see Note 5 “Severance, Restructuring and Impairment Expenses.”
In 2020, sales to the North America segment’s two largest customers were $471.9 million and $349.9 million which represented 16 percent and 12 percent of the Company’s net sales, respectively. In 2019, sales to the North America segment’s two largest customers were $421.1 million and $378.9 million which represented 14 percent and 13 percent of the Company’s net sales, respectively. In 2018, sales to the North America segment’s two largest customers were $425.3 million and $355.6 million which represented 13 percent and 11 percent of the Company’s net sales, respectively.
Assets, depreciation and capital expenditures by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets (December 31)
|
|
Depreciation and Amortization (Years Ended December 31)
|
|
Capital Expenditures (Years Ended December 31)
|
(dollars in millions)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
North America
|
$
|
1,759.1
|
|
|
$
|
1,742.8
|
|
|
$
|
1,653.6
|
|
|
$
|
51.5
|
|
|
$
|
49.3
|
|
|
$
|
45.5
|
|
|
$
|
41.7
|
|
|
$
|
47.6
|
|
|
$
|
45.8
|
|
Rest of World
|
664.9
|
|
|
709.1
|
|
|
721.6
|
|
|
27.9
|
|
|
27.9
|
|
|
25.2
|
|
|
14.9
|
|
|
15.9
|
|
|
32.3
|
|
Corporate
|
736.7
|
|
|
606.1
|
|
|
696.3
|
|
|
0.6
|
|
|
1.1
|
|
|
1.2
|
|
|
0.2
|
|
|
0.9
|
|
|
7.1
|
|
Total
|
$
|
3,160.7
|
|
|
$
|
3,058.0
|
|
|
$
|
3,071.5
|
|
|
$
|
80.0
|
|
|
$
|
78.3
|
|
|
$
|
71.9
|
|
|
$
|
56.8
|
|
|
$
|
64.4
|
|
|
$
|
85.2
|
|
The majority of corporate assets consist of cash, cash equivalents, marketable securities and deferred income taxes.
17. Operations by Segment (continued)
Net sales and long-lived assets by geographic location
The following data by geographic area includes net sales based on product shipment destination and long-lived assets based on physical location. Long-lived assets include net property, plant and equipment, operating lease assets and other long-term assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived Assets (December 31)
|
|
|
Net Sales (Years Ended December 31)
|
(dollars in millions)
|
2020
|
|
2019
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
355.8
|
|
|
$
|
360.2
|
|
|
$
|
327.3
|
|
|
United States
|
$
|
1,904.9
|
|
|
$
|
1,868.7
|
|
|
$
|
1,820.8
|
|
China
|
268.3
|
|
|
266.7
|
|
|
252.6
|
|
|
China
|
695.6
|
|
|
825.4
|
|
|
1,071.2
|
|
Canada
|
4.5
|
|
|
4.2
|
|
|
3.1
|
|
|
Canada
|
175.0
|
|
|
168.5
|
|
|
175.0
|
|
Other Foreign
|
43.4
|
|
|
42.1
|
|
|
42.9
|
|
|
Other Foreign
|
119.8
|
|
|
130.1
|
|
|
120.9
|
|
Total
|
$
|
672.0
|
|
|
$
|
673.2
|
|
|
$
|
625.9
|
|
|
Total
|
$
|
2,895.3
|
|
|
$
|
2,992.7
|
|
|
$
|
3,187.9
|
|
18. Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net sales
|
$
|
636.9
|
|
|
$
|
748.2
|
|
|
$
|
663.9
|
|
|
$
|
765.4
|
|
|
$
|
760.0
|
|
|
$
|
728.2
|
|
|
$
|
834.5
|
|
|
$
|
750.9
|
|
Gross profit
|
239.5
|
|
|
292.8
|
|
|
247.5
|
|
|
308.7
|
|
|
297.1
|
|
|
284.2
|
|
|
324.1
|
|
|
295.0
|
|
Net earnings
|
51.7
|
|
|
89.3
|
|
|
67.8
|
|
|
102.1
|
|
|
105.4
|
|
|
87.3
|
|
|
120.0
|
|
|
91.3
|
|
Basic earnings per share
|
0.32
|
|
|
0.53
|
|
|
0.42
|
|
|
0.61
|
|
|
0.65
|
|
|
0.53
|
|
|
0.74
|
|
|
0.56
|
|
Diluted earnings per share
|
0.32
|
|
|
0.53
|
|
|
0.42
|
|
|
0.61
|
|
|
0.65
|
|
|
0.53
|
|
|
0.74
|
|
|
0.56
|
|
Common dividends declared
|
0.24
|
|
|
0.22
|
|
|
0.24
|
|
|
0.22
|
|
|
0.24
|
|
|
0.22
|
|
|
0.26
|
|
|
0.24
|
|
Net earnings per share are computed separately for each period, and therefore, the sum of such quarterly per share amounts may differ from the total for the year. In 2020, the Company recorded $7.7 million of severance and restructuring expenses associated with the alignment of its business to current market conditions. These charges reduced after-tax earnings by $6.3 million or $0.04 per share.