2017 ANNUAL REPORT - A. O. Smith Corp.

1 2017 ANNUALREPORTA shland City, TNAustin, TXBanbury, EnglandBangalore, IndiaCharlotte, NCCookeville, TNDubai, United Arab EmiratesEl Paso, TXFergus, CanadaFlorence, KYFranklin, TNGroveport. OHHaltom City, TXGlobal LocationsMilwaukee, WI (world headquarters)Hanoi, VietnamHong Kong SAR Irvine, CA Istanbul, TurkeyJohnson City, TNJuarez, MexicoKnoxville, TNLebanon, TNMcBee, SCNanjing, ChinaRenton, WAStratford, CanadaVeldhoven, the NetherlandsRegistrar. Stock Transfer Agent, Dividend Reinvestment Agent(for both classes of stock)EQ Shareowners Services161 N. Concord Exchange StreetSouth St. Paul, MN MeetingThe 2018 ANNUAL meeting of shareholders will be held on Monday, April 9, 2018, at 5:00 (EDT) at the Hilton Garden Inn, 159 Gateway Boulevard, Mooresville, ProfileA.

2 O. Smith Corporation is a global leader applying innovative technology and energy-efficient solutions to products manufactured and marketed worldwide. The company is one of the world s leading manufacturers of residential and commercial water heating equipment and boilers, as well as a manufacturer of water treatment products for residential and light commercial O. Smith is headquartered in Milwaukee, WI, with approximately 16,100 employees at operations in the , Canada, China, India, Mexico, the Netherlands, Turkey, theUnited Kingdom and Vietnam. A. O. Smith Corporation is part of the S&P 500 Index; and the company has paid cash dividends on its common stock every year since Sales(Dollars in billions)$ billion201720132014201520162017$ $ $ $ $ Earningsper Share*(Dollars)$ per share201720132014201520162017*2013-2014 and 2017 earnings per share are non-GAAP.

3 $ $ $ $ $ the cover:A. O. Smith continues to invest in its global operations. One example is this automated welding cell used to fabricate CREST boiler heat exchangers at the Lebanon O. Smith CorpS&P 500 Index2012 2013 2014 2015 2016 2017A. O. Smith Corporation Five YearCumulative Total ReturnDecember 31, 2012 to December 31, O. Smith 500 IndexLetter to ShareholdersMarch 2018 By nearly every measure, 2017 was a year of accomplishment forA. O. Smith Corporation. Thanks to the efforts of our global team of dedicated employees, we achieved record sales and a double-digit increase in adjusted earnings and adjusted earnings per share.

4 We successfully completed the acquisition of Hague Quality Water, helping to expand our water treatment product line in North America and enhance our global water treatment capabilities. And, we transitioned the A. O. Smith water heater brand into 1,700 Lowe s home improvement stores throughout the Consolidated revenues increased nearly 12 percent to $3 billion, with each of our global product categories contributing to the increase. In North America, sales were driven by higher volumes of water heaters and boilers as well as an incremental sales increase of $40 million of water treatment products from a full year of Aquasana and four months of Hague.

5 The Rest of World segment benefited from a 16 percent sales increase in China, led principally by higher volumes of water treatment and air purification products. China s sales surpassed $1 billion for the first time last is truly a remarkable growth story since 2002, sales in China have grown at a compound ANNUAL rate of more than 26 net earnings of $378 million or $ per share were an impressive 16 percent higher than the prior year. Increased volumes of water heaters and boilers in the and the increased sales in China, along with pricing actions in both regions, partially offset the higher commodity costs we experienced last year.

6 The transition of the A. O. Smith brand at Lowe s was a historic event the first time the A. O. Smith brand has been marketed in the retail channel. To support this transition, we introduced a new product line, the A. O. Smith Signature Series, designed exclusively for the retail channel. The team also created attractive new product packaging, eye-catching product displays, and launched a new website, , to support the introduction. In the wholesale channel, we continued to introduce new residential and commercial solutions, most notably, a new line of residential products, the A. O. Smith ProLine series of commercial grade water heaters, which was well received by the September, we acquired Hague Quality Water of Groveport, Ohio, a leading manufacturer of premium water soften-ing products.

7 The Hague acquisition helps to round out our water treatment product line in North America; and, with export sales to the European Union, Russia, and China making up approximately one-third of their revenue, Hague adds to our global capabilities as well. Their point-of-entry products are a good fit with Aquasana s offering of drinking water solutions for at home and on the also brings us a new channel, the water quality dealer network, and has extensive experience in the retail channel as well. For the past two years, Hague has been supplying A. O. Smith branded water softeners to China, and these products have been popular with Chinese continue to invest in our global operations.

8 We expect the new water treatment plant in Nanjing will be complete and in production during the second quarter. This new, larger facility features sophisticated equipment, world-class processes and will be the most advanced water treatment plant in the world. Also under construction is a new Corporate Technology Center adjacent to our World Headquarters in Milwaukee. This 42,700-square-foot research facility will provide us well-equipped laboratories and test areas specifically designed for water technology. We expect this new facility will open in the third quarter of O. Smith has the resources available to continue investingin its business and to take advantage of strategic opportunities that would add value.

9 Cash provided by operations last yearwas approximately $326 million, our cash balances at year-end were $820 million, and our net cash position was approximately$410 million. Total debt at year end was $410 million, resultingin a 20 percent ratio of total debt to total has been the case the last several years, we continued to reward our shareholders in 2017, repurchasing approximately million shares of common stock for a total of $139 million. In January, we announced a 29 percent increase in the company s quarterly dividend, to $.18 per share, the 13th consecutive year of dividend increases. Another important achievement was A. O.

10 Smith being included in the S&P 500 stock index, one of the most prestigious groupings of companies in the world. The outlook for this year is largely positive. We project residential water heater industry volumes will increase due to new construction and the expansion of replacement demand. Thanks to continued strong demand, we project boiler revenues will grow by approximately 10 percent. Our operations in India continue toshow improvement, and we anticipate our China revenues will grow 13 percent in 2018. Steel pricing remains an issue, and we are closely monitoring this are two transitions we would like to highlight. In April, Gloster B.