| Stock Based Compensation | Stock Based Compensation The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the Incentive Plan) effective January 1, 2007. The Incentive Plan was most recently reapproved by stockholders on April 15, 2020. The Incentive Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of share units at March 31, 2023 was 2,491,654. Upon stock option exercise or share unit vesting, shares are issued from treasury stock. Total stock based compensation expense recognized in the three months ended March 31, 2023 and 2022 was $7.0 million and $7.6 million, respectively. Stock Options The Company decided to no longer grant stock options beginning with fiscal year 2023. Stock options previously granted have a three year pro rata vesting from the date of grant. Stock options were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period; however, included in the stock option expense for the three months ended March 31, 2022 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Stock based compensation expense attributable to stock options in the three months ended March 31, 2023 and 2022 was $0.3 million and $3.9 million, respectively. Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, 2023: Weighted- Number of Average Aggregate Outstanding at January 1, 2023 $ 51.22 2,481,606 Exercised 45.47 (191,054) Forfeited 61.09 (3,605) Outstanding at March 31, 2023 51.69 2,286,947 6 years $ 41.5 Exercisable at March 31, 2023 48.72 1,952,622 6 years $ 40.4 There were no stock options granted in 2023. The weighted-average fair value per option at the date of grant during the three months ended March 31, 2022 using the Black-Scholes option-pricing model was $17.59. Assumptions were as follows: Three Months Ended 2022 Expected life (years) 5.7 Risk-free interest rate 1.9 % Dividend yield 1.5 % Expected volatility 26.8 % The expected lives of options for purposes of these models are based on historical exercise behavior. The risk-free interest rates for purposes of these models are based on the U.S. Treasury yield 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. Share Units Participants of the Incentive Plan may also be awarded share units. Share units vest three years after the date of grant. The Company granted 165,686 and 88,894 share units under the Incentive Plan in the three months ended March 31, 2023 and 2022, respectively. The share units were valued at $11.1 million and $6.6 million at the date of issuance in 2023 and 2022, respectively, based on the price of the Company’s Common Stock at the date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three months ended March 31, 2023 and 2022 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 attributable to share units of $6.6 million and $3.7 million was recognized in the three months ended March 31, 2023 and 2022, respectively. Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period. A summary of share unit activity under the Incentive Plan is as follows for the three months ended March 31, 2023: Number of Units Weighted-Average Issued and unvested at January 1, 2023 379,919 $ 52.92 Granted 165,686 67.14 Vested (156,173) 49.42 Forfeited (2,449) 64.50 Issued and unvested at March 31, 2023 386,983 63.16 Performance Stock Units Beginning in 2023, certain executives may also be awarded performance stock units under the Incentive Plan. Performance stock units vest over three years following the date of the grant. Performance stock units vest under a set of measurement criteria which are based upon achievement of certain Environmental, Social, and Governance targets. Potential payouts range from zero to 150% of the target awards and changes from target amounts are reflected as performance adjustments. The Company granted 24,580 performance stock units under the Incentive Plan in the three months ended March 31, 2023. The performance stock units were valued at $1.7 million at the date of issuance in 2023, based on the price of the Company’s Common Stock at the date of grant. The weighted average grant date value for the units granted was $67.14. The performance stock units are recognized as compensation expense ratably over the three-year vesting period. Stock based compensation expense attributable to performance stock units of $0.1 million was recognized in the three months ended March 31, 2023. Certain non-U.S.-based executives receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period. |
