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 and electric water heaters, boilers, tanks and water
treatment products. Both segments primarily manufacture and market in their
respective regions of the world. Our Rest of World segment also manufactures and
markets
in-home
air purification products in China.
In our North America segment, we project our sales in the U.S. will grow
approximately six percent in 2020 compared to 2019 due to higher water heater
and boiler volumes resulting from expected industry-wide new construction growth
and expansion of replacement demand. We continued to expand our North America
water treatment platform in 2019 by acquiring Water-Right, Inc. and its
affiliated entities (Water-Right) in April 2019. We expect sales of North
America water treatment products to increase by 20 to 25 percent in 2020,
compared to 2019, primarily due to volume growth and a full year of Water-Right
sales.
In our Rest of World segment, we expect 2020 China sales to grow by
approximately one percent in U.S. dollar terms and approximately 2.5 percent in
local currency compared with 2019, as we believe the Chinese economy will
continue to be weak. In addition, we expect our sales in India to grow between
15 and 20 percent in 2020 from approximately $39 million in 2019.
Combining all of these factors, we expect our consolidated sales to grow 4.5 to
5.5 percent in 2020. Our 2020 guidance introduced on January 28, 2020, excludes
the potential impact to our businesses from the coronavirus originating in
China. As of the date of this filing, while not yet quantifiable, we now expect
the coronavirus will have a material adverse impact on our operating results in
the first quarter of 2020 and we continue to assess the financial impact for the
remainder of 2020.
Our stated acquisition strategy includes a number of our water-related strategic
initiatives. We will seek to continue to grow our core residential and
commercial water heating, boiler and water treatment businesses throughout the
world. We will also continue to look for opportunities to add to our existing
operations in high growth regions demonstrated by our introduction of water
treatment products in India and Vietnam and air purification products as well as
range hoods and cooktops in China.
RESULTS OF OPERATIONS
Our sales in 2019 were $2,993 million, a decline of 6.1 percent compared to our
2018 sales of $3,188 million. The decrease in 2019 sales was primarily due to a
23 percent decline in China sales in U.S. dollar terms, which was largely a
result of weaker
end-market
demand in the region, year over year channel inventory shifts, and a higher mix
of sales of
mid-price
products versus premium price products than in the prior year. Excluding the
unfavorable impact from currency translation, China sales declined 19 percent in
2019. The sales reduction in China more than offset the benefits of higher sales
in North America, which were primarily a result of higher sales of water
treatment products, including incremental sales from our acquisition,
Water-Right, and water heater pricing actions related to steel and freight cost
increases. The increase in North America sales was partially offset by lower
residential water heater volumes. Our sales in 2018 were a company record
$3,188 million surpassing 2017 sales of $2,997 million by 6.4 percent. The
increase in sales in 2018 was primarily due to pricing actions related to higher
steel costs and higher sales of boilers and residential water heaters in the
U.S. as well as higher sales of water treatment products in China. Our global
water treatment sales grew to approximately $400 million in 2018. Total sales in
China grew four percent in 2018. Excluding the impact of the appreciation of the
Chinese currency against the U.S. dollar, our sales in China increased almost
two percent in 2018.
Our gross profit margin in 2019 of 39.5 percent declined compared to our gross
profit margin of 41.0 percent in 2018 primarily due to the lower sales volumes
in China and a higher mix of
mid-price
products, which have lower margins, in that region. Our gross profit margin in
2018 of 41.0 percent was essentially flat compared to our gross profit margin of
41.1 percent in 2017.
Selling, general and administrative (SG&A) expenses were $715.6 million in 2019
or $38.2 million lower than in 2018. The decrease in SG&A expenses in 2019 was
primarily due to lower advertising and selling expenses in China. SG&A expenses
were $31.0 million higher in 2018 than in 2017. The increase in SG&A expenses in
2018 to $753.8 million was primarily due to higher advertising expenses related
to brand building and higher product development engineering expenses in China.
On March 21, 2018, we announced a plan to transfer water heater, boiler and
storage tank production from our Renton, Washington plant to our other U.S.
plants. The majority of the consolidation of operations occurred in the second
quarter of 2018. As a result of the relocation of production, we incurred
pre-tax
restructuring and impairment expenses of $6.7 million in the first quarter of
2018, primarily related to employee severance and compensation-related costs,
building lease exit costs and the impairment of assets. These activities are
reflected in "restructuring and impairment expenses" in the accompanying
financial statements.
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We are providing
non-U.S.
Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings,
adjusted earnings per share, and adjusted segment earnings) that exclude
restructuring and impairment expenses. Reconciliations to measures on a GAAP
basis are provided later in this section. We believe that the measures of
adjusted earnings, adjusted EPS, and adjusted segment earnings 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 we do not consider to be a component of our core operating performance.
Interest expense was $11.0 million in 2019 compared to $8.4 million in 2018 and
$10.1 million in 2017. The increase in interest expense in 2019 was primarily
due to higher debt levels to fund the acquisition of Water-Right and share
repurchase activity. The decline in interest expense in 2018 compared to 2017
was a result of lower debt levels, primarily due to the repatriation of
approximately $312 million of cash from outside of the U.S, which was primarily
used to pay down floating rate debt, as well as to fund our share repurchase
activity and dividend payments. This decline was partially offset by higher
interest rates in 2018.
Other income was $18.0 million in 2019 compared to $21.2 million in 2018 and
$21.3 million in 2017. The decrease in other income in 2019 compared to 2018 was
primarily due to lower
non-service
cost related pension income and lower interest income.
Pension income in 2019 was $6.2 million compared to $8.7 million in 2018 and
$9.1 million in 2017. The service cost component of our pension income is
reflected in cost of products sold and SG&A expenses. All other components of
our pension income are reflected in other income.
Our effective income tax rate was 21.6 percent in 2019, compared with
20.4 percent in 2018 and 43.1 percent in 2017. Our effective income tax rates in
2019 and 2018 were lower than our adjusted effective income tax rate in 2017 due
to lower federal income taxes related to the U.S. Tax Cuts and Jobs Act of 2017
(U.S. Tax Reform). Our effective income tax rate in 2019 was higher than 2018
primarily due to a change in geographic earnings mix. The effective income tax
rate in 2017 was significantly higher due to
one-time
charges associated with U.S. Tax Reform of $81.8 million, primarily related to
the mandatory repatriation tax on undistributed foreign earnings that we are
required to pay over eight years. Excluding the impact of the U.S. Tax Reform
one-time
charges, our adjusted effective income tax rate was 27.4 percent in 2017. We
estimate our annual effective income tax rate for the full year 2020 will be
approximately 21.5 to 22.0 percent.
North America
Sales in our North America segment were $2,084 million in 2019 or $39 million
higher than sales of $2,045 million in 2018. The increase in segment sales was
primarily due to the incremental Water-Right sales of $44 million, water heater
pricing actions related to steel and freight cost increases, and higher sales of
water treatment products, which were partially offset by lower residential water
heater volumes. Sales in our North America segment were $2,045 million in 2018
or $140 million higher than sales of $1,905 million in 2017. The increase in
sales in 2018 compared to 2017 was primarily due to pricing actions related to
higher steel costs and higher volumes of boilers and residential water heaters
in the U.S. North America water treatment sales, including a full year of sales
from Hague, which we purchased in 2017, and the launch of products at Lowe's
commencing in August 2018, incrementally added approximately $29 million of
sales in 2018.
North America segment earnings were $488.9 million in 2019 compared to segment
earnings of $464.1 million and $428.6 million in 2018 and 2017, respectively.
Segment margins were 23.5 percent, 22.7 percent and 22.5 percent in 2019, 2018
and 2017, respectively. Adjusted segment earnings and segment margin in 2018,
which exclude restructuring and impairment expenses, were $470.8 million and
23.0 percent, respectively. The higher segment earnings and segment margin in
2019 compared to 2018 adjusted segment earnings and adjusted segment margin were
primarily a result of pricing actions, lower steel costs, and higher sales of
water treatment products, that included incremental volumes from our
acquisition, Water-Right. These increases were partially offset by the
unfavorable impact from lower residential water heater volumes. The higher
adjusted segment earnings and adjusted segment margin in 2018 compared to 2017
were primarily due to the favorable impact from higher sales of residential
water heaters and boilers and pricing actions in the U.S. that were partially
offset by higher steel costs and
one-time
expenses associated with the launch of water treatment products at Lowe's. We
estimate our 2020 North America segment margin will be between 23.25 and
24.25 percent.
Rest of World
Sales in our Rest of World segment in 2019 were $936 million or $238 million
lower than sales of $1,174 million in 2018. Lower sales in 2019 compared to 2018
was largely a result of decreased China sales which declined 23 percent in U.S.
dollar terms and 19 percent in local currency terms. The decline in China sales
was primarily due to weaker
end-market
demand, elevated channel inventory levels for the first three quarters of 2019
that returned to a more normal range of two to three months by the end of 2019,
and a higher mix of
mid-price
products versus premium priced products. In addition, the weaker Chinese
currency
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unfavorably impacted translated sales by approximately $39 million. Sales in
India grew approximately 13 percent in 2019 compared to 2018. Sales in China
grew four percent in 2018 compared to 2017 primarily due to higher sales of
water treatment products, including consumables, which were partially offset by
lower sales of electric water heaters and air purifiers. The appreciation of the
Chinese currency against the U.S. dollar contributed approximately $23 million
to segment sales in 2018. Excluding the benefit of the Chinese currency
appreciation, sales in China increased 1.9 percent in 2018. Water heater and
water treatment sales in India increased $8 million, over 30 percent, in 2018
compared to 2017.
Rest of World segment earnings were $40.2 million in 2019 compared to segment
earnings of $149.3 million in both 2018 and 2017. Segment margins were
4.3 percent in 2019 compared to 12.7 percent and 13.4 percent in 2018 and 2017,
respectively. The decline in 2019 segment earnings and margin compared to 2018
was primarily due to lower sales in China and a higher mix of
mid-price
products, which have lower margins, that when combined, more than offset
benefits to profits from lower SG&A expenses and material costs in that region.
Currency translation reduced segment earnings by approximately $3.0 million in
2019 compared to 2018. Segment earnings in 2018 were flat compared to 2017
primarily due to higher water treatment product sales and improved performance
in India that were offset by lower sales of electric water heaters and air
purifiers in China as well as higher SG&A expenses. Higher SG&A expenses in
China were primarily due to higher advertising expenses related to brand
building and higher product development engineering expenses. Segment margin
declined in 2018 compared to 2017 as a result of the factors above.  We expect
our 2020 Rest of World segment margin will be approximately five percent.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $733.9 million at December 31, 2019 compared with
$853.2 million and $973.1 million at December 31, 2018 and December 31, 2017,
respectively. Approximately $165 million in foreign cash, cash equivalents and
marketable securities was repatriated in 2019 and utilized to repay floating
rate debt, pay dividends and repurchase shares. The decline in cash, cash
equivalents and marketable securities and sales-related decreases in accounts
receivable partially offset by lower accounts payable balances explains the
majority of the decline in working capital in 2019. Approximately $312 million
in foreign cash was repatriated in 2018 and utilized to repay floating rate
debt, pay dividends and repurchase shares. The decline in cash, cash equivalents
and marketable securities balances more than offset sales-related increases in
accounts receivable and explains the majority of the decline in working capital
in 2018. As of December 31, 2019, essentially all of our $551.4 million of cash,
cash equivalents and marketable securities was held by our foreign subsidiaries.
We expect to repatriate approximately $150 million in the first half of 2020 and
use the proceeds to repay floating rate debt.
Cash provided by operating activities during 2019 was $456.2 million compared
with $448.9 million during 2018 and $326.4 million during 2017. The increase in
cash flows in 2019 compared with 2018 was primarily due to lower outlays for
working capital which offset lower earnings in 2019. The increase in cash flows
in 2018 compared to 2017 was primarily due to higher earnings and lower outlays
for working capital in 2018.
Our capital expenditures were $64.4 million in 2019, $85.2 million in 2018 and
$94.2 million in 2017. We broke ground in 2016 on the construction of a new
water treatment and air purification products manufacturing facility in Nanjing,
China, to support the expected growth of these products in China. The facility
became operational in May 2018. Included in 2018 capital expenditures were
approximately $13 million related to capacity expansion in China. Included in
2017 capital expenditures were approximately $24 million related to capacity
expansion in China. For 2020, we project approximately $80 million of capital
expenditures and approximately $85 million of depreciation and amortization
expense.
In December 2016, we completed a $500 million multi-currency five-year revolving
credit facility with a group of nine banks. The facility has an accordion
provision which allows it to be increased up to $700 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 December 31, 2019. The
facility backs up commercial paper and credit line borrowings, and it expires on
December 15, 2021. As a result of the long-term nature of this facility, the
commercial paper and credit line borrowings as well as drawings under the
facility are classified as long-term debt.
At December 31, 2019, we had available borrowing capacity of $336.0 million
under this facility. We believe that our combination of cash, available
borrowing capacity and operating cash flow will provide sufficient funds to
finance our existing operations for the foreseeable future.
Our total debt increased to $284.0 million at December 31, 2019 compared with
$221.4 million at December 31, 2018. We repatriated approximately $150 million
cash and paid down debt, which was more than offset by the purchase of
Water-Right and share repurchase activity exceeding cash generation in the U.S.
As a result, our leverage, as measured by the ratio of total debt to total
capitalization, was 14.6 percent at the end of 2019 compared with 11.4 percent
at the end of 2018.
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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
2019. We forecast that we will not be required to make a contribution to the
plan in 2020, and we do not plan to make any voluntary contributions in 2020.
For further information on our pension plans, see Note 13 of Notes to
Consolidated Financial Statements.
In 2019, we repurchased 6,113,038 shares at an average price of $47.06 per share
and a total cost of $287.7 million. Our Board of Directors increased the number
of shares we are authorized to repurchase by 3,000,000 shares at its June 2019
meeting. A total of 2,962,215 shares remained on the existing repurchase
authorization at December 31, 2019. Depending on factors such as stock price,
working capital requirements and alternative investment opportunities, such as
acquisitions, we expect to spend approximately $200 million on share repurchase
activity in 2020 using a combination of a
10b5-1
repurchase plan and opportunistic purchases.
We have paid dividends for 80 consecutive years with annual amounts increasing
each of the last 28 years. We paid dividends of $0.90 per share in 2019 compared
with $0.76 per share in 2018. We increased our dividend by nine percent in the
fourth quarter of 2019, and the five-year compound annual growth rate of our
dividend is approximately 25 percent.
Aggregate Contractual Obligations
A summary of our contractual obligations as of December 31, 2019, is as follows:

(dollars in millions)                                                   Payments due by period
                                                           Less Than       1 - 2      3 - 5       More than
Contractual Obligations                        Total        1 year         Years      Years        5 years
Long-term debt                                $ 284.0     $       6.8     $ 177.6     $ 20.1     $      79.5
Fixed rate interest                              26.0             3.7         6.8        5.7             9.8
Operating leases                                 64.9            14.0        19.5        8.6            22.8
Purchase obligations                            145.9           145.8         0.1         -               -
Pension and post-retirement obligations          49.3             9.8         2.2        2.0            35.3

Total                                         $ 570.1     $     180.1     $ 206.2     $ 36.4     $     147.4




As of December 31, 2019, our liability for uncertain income tax positions was
$9.7 million. Due to the high degree of uncertainty regarding timing of
potential future cash flows associated with these liabilities, we are unable to
make a reasonably reliable estimate of the amount and period in which these
liabilities might be paid.
We utilize blanket purchase orders to communicate expected annual requirements
to many of our suppliers. Requirements under blanket purchase orders generally
do not become committed until several weeks prior to our scheduled unit
production. The purchase obligation amount presented above represents the value
of commitments that we consider firm.
Recent Accounting Pronouncements
Refer to
Recent Accounting Pronouncements
in Note 1 of Notes to Consolidated Financial Statements.
Critical Accounting Policies
Our accounting policies are described in Note 1 of Notes to Consolidated
Financial Statements. Also as disclosed in Note 1, the preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. 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 most significant accounting estimates inherent in the preparation of our
financial statements include estimates associated with the evaluation of the
impairment of goodwill and indefinite-lived intangible assets, as well as
significant estimates used in the determination of liabilities related to
warranty activity, product liability and pensions. Various assumptions and other
factors underlie the determination of these significant estimates. The process
of determining significant estimates is fact-specific and takes into account
factors such as historical experience and trends, and in some cases, actuarial
techniques. We monitor these significant factors and adjustments are made as
facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the estimates described
above.
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Goodwill and Indefinite-lived Intangible Assets
In conformity with U.S. Generally Accepted Accounting Principles (GAAP),
goodwill and indefinite-lived intangible assets are tested for impairment
annually or more frequently if events or changes in circumstances indicate that
the assets might be impaired. We perform impairment reviews for our reporting
units using a fair-value method based on management's judgments and assumptions.
The fair value represents the estimated amount at which a reporting unit could
be bought or sold in a current transaction between willing parties on an
arms-length basis. The estimated fair value is then compared with the carrying
amount of the reporting unit, including recorded goodwill. We are subject to
financial statement risk to the extent that goodwill and indefinite-lived
intangible assets become impaired. Any impairment review is, by its nature,
highly judgmental as estimates of future sales, earnings and cash flows are
utilized to determine fair values. However, we believe that we conduct thorough
and competent annual valuations of goodwill and indefinite-lived intangible
assets and that there has been no impairment in goodwill or indefinite-lived
assets in 2019.
Product warranty
Our products carry warranties that generally range from one to ten years and are
based on terms that are generally accepted in the market. We provide for the
estimated cost of product warranty at the time of sale. The product warranty
provision is estimated based upon warranty loss experience using actual
historical failure rates and estimated costs of product replacement. The
variables used in the calculation of the provision are reviewed at least
annually. At times, warranty issues may arise which are beyond the scope of our
historical experience. We provide for any such warranty issues as they become
known and estimable. While our warranty costs have historically been within
calculated estimates, it is possible that future warranty costs could differ
significantly from those estimates. The allocation of the warranty liability
between current and long-term is based on the expected warranty liability to be
paid in the next year as determined by historical product failure rates. At
December 31, 2019 and 2018, our reserve for product warranties was
$134.3 million and $139.4 million, respectively.
Product liability
Due to the nature of our products, we are subject to product liability claims in
the normal course of business. We maintain insurance to reduce our risk. Most
insurance coverage includes self-insured retentions that vary by year. In 2019,
we maintained a self-insured retention of $7.5 million per occurrence with an
aggregate insurance limit of $125.0 million.
We establish product liability reserves for our self-insured retention portion
of any known outstanding matters based on the likelihood of loss and our ability
to reasonably estimate such loss. There is inherent uncertainty as to the
eventual resolution of unsettled matters due to the unpredictable nature of
litigation. We make estimates based on available information and our best
judgment after consultation with appropriate advisors and experts. We
periodically revise estimates based upon changes to facts or circumstances. We
also utilize an actuary to calculate reserves required for estimated incurred
but not reported claims as well as to estimate the effect of adverse development
of claims over time. At December 31, 2019 and 2018, our reserve for product
liability was $33.1 million and $39.3 million, respectively.
Pensions
We have significant pension benefit costs that 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. Consideration is given to current market conditions, including
changes in interest rates in making these assumptions. Our assumption for the
expected return on plan assets was 7.15 percent in 2019 and 2018. The discount
rate used to determine net periodic pension costs increased to 4.32 percent in
2019 from 3.65 percent in 2018. For 2020, our expected return on plan assets is
6.75 percent and our discount rate is 3.18 percent.
In developing our expected return on plan assets, we evaluate our pension plan's
current and target asset allocation, the expected long-term rates of return of
equity and bond indices and the actual historical returns of our pension plan.
Our plan's target allocation to equity managers is approximately 30 to
60 percent, with the remainder allocated primarily to bond managers, private
equity managers and real estate managers. Our actual asset allocation as of
December 31, 2019, was 42 percent to equity managers, 47 percent to bond
managers, 10 percent to real estate managers, and one percent to private equity
managers. We regularly review our actual asset allocation and periodically
rebalance our investments to our targeted allocation when considered
appropriate. Our pension plan's historical
ten-year
and
25-year
compounded annualized returns are 9.2 percent and 9.3 percent, respectively. We
believe that with our target allocation and the expected long-term returns of
equity and bond indices as well as our actual historical returns, our
6.75 percent expected return on plan assets for 2020 is reasonable.
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The discount rate assumptions used to determine future pension obligations at
December 31, 2019 and 2018 were based on the Aon AA Only Above Median yield
curve, which was designed by Aon to provide a means for plan sponsors to value
the liabilities of their postretirement benefit plans. The AA Only Above Median
yield curve represents a series of annual discount rates from bonds with AA
minimum average rating as rated by Moody's Investor Service, Standard & Poor's
and Fitch Ratings. We will continue to evaluate our actuarial assumptions at
least annually, and we will adjust the assumptions as necessary.
We recognized pension income of $6.2 million, $8.7 million, and $9.1 million in
2019, 2018, and 2017, respectively.
Costs associated with our replacement retirement plan in 2019 were approximately
$6 million, consistent with 2018. We made changes to our pension plan including
closing the plan to new entrants effective January 1, 2010, and the sunset of
our plan for the majority of our employees on December 31, 2014. Lowering the
expected return on plan assets by 25 basis points would decrease our net pension
income for 2019 by approximately $1.9 million. Lowering the discount rate by 25
basis points would increase our 2019 net pension income by approximately
$0.4 million.
In 2019, as part of our strategy to
de-risk
our defined benefit pension plan, the qualified defined benefit pension plan
purchased a group annuity contract whereby an unrelated insurance company
assumed a $31 million obligation to pay and administer future annuity payments
for certain retirees and beneficiaries.
Non-GAAP
Measures
We provide
non-GAAP
measures (adjusted earnings, adjusted earnings per share (EPS) and adjusted
segment earnings) that exclude restructuring and impairment expenses in 2018 and
the impact of a
one-time
charge associated with U.S. Tax Reform in 2017.
We believe that the measures of adjusted earnings, adjusted EPS, and adjusted
segment earnings 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 we do not consider to be a component of
our core operating performance.
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                            A. O. SMITH CORPORATION
                       Adjusted Earnings and Adjusted EPS
                  (dollars in millions, except per share data)
                                  (unaudited)
The following is a reconciliation of net earnings and diluted earnings per share
(EPS) to adjusted earnings
(non-GAAP)
and adjusted EPS
(non-GAAP):

                                                                Years ended December 31,
                                                            2019           2018          2017
Net Earnings (GAAP)                                       $   370.0       $ 444.2       $ 296.5
Restructuring and impairment expenses, before tax
(1)                                                              -            6.7            -
Tax effect of restructuring and impairment expenses              -           (1.7 )          -
U.S. Tax Reform income tax expense
(2)                                                               -             -          81.8

Adjusted Earnings                                         $   370.0       $ 449.2       $ 378.3

Diluted EPS (GAAP)                                        $    2.22       $  2.58       $  1.70
Restructuring and impairment expenses per diluted
share
(1)                                                       $      -        $

0.4 $ - Tax effect of restructuring and impairment expenses per diluted share

                                                -           (0.1 )          -
U.S. Tax Reform income tax expense
(2)                                                              -             -           0.47

Adjusted EPS                                              $    2.22       $  2.61       $  2.17







The following is a reconciliation of reported segment earnings to adjusted
segment earnings
(non-GAAP):

                                      Years ended December 31,
                                    2019         2018        2017
Segment Earnings (GAAP)
North America                     $   488.9     $ 464.1     $ 428.6
Rest of World                          40.2       149.3       149.3

Total Segment Earnings (GAAP)     $   529.1     $ 613.4     $ 577.9

Adjustments
North America
(1)                               $      -      $   6.7     $    -
Rest of World                            -           -            -

Total Adjustments                 $      -      $   6.7     $    -

Adjusted Segment Earnings
North America                     $   488.9     $ 470.8     $ 428.6
Rest of World                          40.2       149.3       149.3

Total Adjusted Segment Earnings $ 529.1 $ 620.1 $ 577.9

(1) We recognized $6.7 million of restructuring and impairment expenses in

connection with the move of manufacturing operations from our Renton,

Washington facility to other U.S. facilities. For additional information, see


    Note 5 of Notes to Consolidated Financial Statements.






(2) Excluding the impact of

one-time

U.S. Tax Reform charges, our 2017 adjusted effective income tax rate was

27.4 percent as compared to our effective income tax rate of 43.1 percent in


    2017. For additional information, see Note 15 of Notes to Consolidated
    Financial Statements.

Outlook


We expect higher boiler, water heater, and water treatment sales in North
America in 2020 and project segment sales to grow by approximately six percent
compared to 2019. Although China channel inventory levels have normalized to the
range of two to three months, we believe the Chinese economy will remain weak in
2020 and expect that 2020 sales in China will increase by one percent in U.S.
dollar terms and 2.5 percent in local currency terms. As a result, we expect our
consolidated sales to grow between 4.5 to 5.5 percent in 2020. We plan to
achieve full-year earnings of between $2.40 and $2.50 per share, which excludes
the potential impacts from future acquisitions. Our 2020 guidance above which
was introduced on January 28, 2020, excludes the potential impact on our
businesses from the coronavirus originating in China. As of the date of this
filing, while not yet quantifiable, we now expect the effects of the coronavirus
to have a material adverse impact on our operating results in the first quarter
of 2020 and we continue to assess the financial impact for the remainder of the
year.
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OTHER MATTERS
Environmental
Our operations are governed by a number of federal, foreign, state, local and
environmental laws concerning the generation and management of hazardous
materials, the discharge of pollutants into the environment and remediation of
sites owned by the company or third parties. We have expended financial and
managerial resources complying with such laws. Expenditures related to
environmental matters were not material in 2019 and we do not expect them to be
material in any single year. We have reserves associated with environmental
obligations at various facilities and we believe these reserves together with
available insurance coverage are sufficient to cover reasonably anticipated
remediation costs. Although we believe that our operations are substantially in
compliance with such laws and maintain procedures designed to maintain
compliance, there are no assurances that substantial additional costs for
compliance will not be incurred in the future. However, since the same laws
govern our competitors, we should not be placed at a competitive disadvantage.
Market Risk
We are exposed to various types of market risks, primarily currency. We monitor
our risks in such areas on a continuous basis and generally enter into forward
contracts to minimize such exposures for periods of less than one year. We do
not engage in speculation in our derivatives strategies. Further discussion
regarding derivative instruments is contained in Note 1 of Notes to Consolidated
Financial Statements.
We enter into foreign currency forward contracts to minimize the effect of
fluctuating foreign currencies. At December 31, 2019, we had net foreign
currency contracts outstanding with notional values of $205.6 million. Assuming
a hypothetical ten percent movement in the respective currencies, the potential
foreign exchange gain or loss associated with the change in exchange rates would
amount to $20.6 million. However, gains and losses from our forward contracts
will be offset by gains and losses in the underlying transactions being hedged.
Our earnings exposure related to movements in interest rates is primarily
derived from outstanding floating-rate debt instruments that are determined by
short-term money market rates. At December 31, 2019, we had $164.0 million in
outstanding floating-rate debt with a weighted-average interest rate of 2.5
percent at year end. A hypothetical ten percent annual increase or decrease in
the
year-end
average cost of our outstanding floating-rate debt would result in a change in
annual
pre-tax
interest expense of approximately $0.4 million.
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" 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: a
further weakening of the Chinese economy and/or a further decline in the growth
rate of consumer spending or housing sales in China; negative impact to the
company's businesses as a result of the coronavirus, originating in China;
negative impact to the company's businesses from international tariffs and trade
disputes; potential weakening in the high-efficiency boiler segment in the U.S.;
significant volatility in raw material prices; inability of the company to
implement or maintain pricing actions; potential 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; 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.

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