What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-10-29 compared with 2021-07-30 · 101 added, 94 removed, 117 unchanged (63% of the section changed)

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As a result of the outbreak, the Chinese government required businesses to close and restricted certain travel within the country.

In cooperation with the government authorities, our operations in China closed for approximately four weeks before resuming production before the end of the first quarter.

In March 2020, COVID-19 was declared a global pandemic and we experienced impacts to our business and other markets worldwide.

As a result of the COVID-19 pandemic and in support of continuing our manufacturing efforts, we have undertaken numerous and meaningful steps to protect our employees, suppliers, and customers.

As we receive guidance from governmental authorities, we adjust our safety measures to meet or exceed those guidelines.

Our global supply chain management team continued to navigate through supply chain and logistics challenges in the second quarter of 2021.

We have seen supply constraints for certain components and raw materials used in our operations, as well as limited container and trucking capacity, and port closures.

We expect those challenges to continue through the rest of the year and we remain in close communication with our suppliers to identify and manage inventory levels.

In our North America segment, we expect residential water heater industry volumes will increase approximately three percent in 2021 compared with 2020, driven by continued resilient replacement demand and growth in new home construction.

We continue to experience inflation across our supply chain, particularly steel and logistics costs.

In response to continued material and logistics cost increases, we have implemented price increases, including our announced fourth price increase on water heaters in late June, which is effective on August 1, 2021, at an increase of between ten and 12 percent based on the type of water heater.

We believe that commercial water heater industry volumes will increase approximately two percent in 2021 as pandemic-impacted businesses re-open and new construction and replacement installations increase.

We expect our boiler sales to grow by low double digits in 2021 compared to 2020 due to pandemic-related pent-up demand as well as our new product introductions.

We expect sales of our North America water treatment products to increase by 13 to 14 percent in 2021, compared to 2020, primarily driven by consumer demand for our point of use and point of entry water treatment systems.

In our Rest of World segment, we expect China sales in 2021 to increase 20 to 22 percent in local currency terms compared with 2020 due to higher volumes and increased consumer demand for our higher priced products across our all of our product categories.

As we continue to receive guidance from governmental authorities, we adjust our safety measures to meet or exceed those guidelines.

Our global supply chain management team continued to navigate through supply chain and logistics challenges.

We have seen supply constraints for certain components and raw materials used in our operations, as well as limited container and trucking capacity, and port congestion and delays.

We expect those challenges to continue for the foreseeable future and we remain in close communication with our suppliers.

In our North America segment, we expect residential water heater industry volumes will increase approximately six percent in 2021 compared with 2020, driven by continued growth in replacement demand and new home construction.

We believe that commercial water heater industry volumes will increase approximately ten percent in 2021 as pandemic-impacted businesses continue to re-open and new construction and replacement installations increase.

We continue to experience significant inflation across our supply chain, particularly steel and logistics costs.

In response to continued material and logistics cost increases, we have implemented price increases, including our announced fifth price increase in 2021 on water heaters in September, effective on November 15, 2021.

When fully realized at the end of 2021, the five announced inflation-related price increases on water heaters compound to approximately 50 percent.

We expect our boiler sales to grow by approximately 13 percent in 2021 compared to 2020 due to pandemic-related pent-up demand as well as our new product introductions.

We expect sales of our North America water treatment products to increase by approximately 12 percent in 2021, compared to 2020, primarily driven by consumer demand for our point of use and point of entry water treatment systems.

Our sales in China were negatively impacted by COVID-19 pandemic related shutdowns in 2020.

We assume China currency rates will stay at current levels and add approximately $54 million and $4 million to sales and earnings in 2021, respectively.

Combining all of these factors, we expect our consolidated sales to increase by between 17 and 18 percent in 2021.

Our guidance excludes the potential impacts from future acquisitions.

RESULTS OF OPERATIONS

SECOND QUARTER AND FIRST SIX MONTHS OF 2021 COMPARED TO 2020

Sales in the second quarter of 2021 were $860 million, or approximately 30 percent higher than sales of $664 million in the second quarter of 2020.

Sales in the first six months of 2021 were $1,629 million or approximately 25 percent higher than $1,301 million in the same period last year.

THIRD QUARTER AND FIRST NINE MONTHS OF 2021 COMPARED TO 2020

Sales in the third quarter of 2021 were $915 million, or approximately 20 percent higher than sales of $760 million in the third quarter of 2020.

Sales in the first nine months of 2021 were $2,543 million or approximately 23 percent higher than sales of $2,061 million in the same period last year.

Both periods in 2020 were negatively impacted by the COVID-19 pandemic.

Our sales increase in the second quarter and first six months of 2021 compared to the same periods of the previous year was primarily driven by higher water heater, boiler, and water treatment sales in North America and higher sales in China.

Our sales in China also benefited from currency translation of approximately $20 million and $34 million in the second quarter and first six months of 2021, respectively, due to the Chinese currency's appreciation against the U.S.

Gross profit margin in the second quarter of 2021 was 37.4 percent compared to gross profit margin of 37.3 percent in the prior-year period.

Gross profit margin in the first six months of 2021 was 37.5 percent compared to the gross profit margin of 37.4 percent in the first six months of 2020.

Selling, general, and administrative (SG&A) expenses in the second quarter and first six months of 2021 increased by $17.2 million and $9.9 million, respectively, compared to the prior-year periods.

The increase in SG&A expenses in the second quarter and first six months of 2021 was primarily due to higher engineering, selling, and advertising expenses and higher management incentive expenses related to increased sales versus the prior-year periods.

Higher SG&A expenses in both the

second quarter and first six months of 2021 were partially offset by the lower spending in China associated with headcount reductions, store closures and other cost-saving measures implemented during 2020.

During the second quarter of 2020, to align our business to market conditions, we recognized $6.1 million of pre-tax severance and restructuring expenses, primarily comprised of $5.2 million of severance costs and $0.9 million of other restructuring expenses.

Our sales increases in the third quarter and first nine months of 2021 compared to the same periods of the previous year were primarily driven by inflation-related pricing actions and higher water heater, boiler, and water treatment volumes in North America as well as higher sales in China.

Our sales in China also benefited from currency translation of approximately $14 million and $49 million in the third quarter and first nine months of 2021, respectively, due to the appreciation of the Chinese currency against the U.S.

Gross profit margin in the third quarter of 2021 was 37.2 percent compared to gross profit margin of 39.1 percent in the same period last year.

Gross profit margin in the first nine months of 2021 was 37.4 percent compared to the gross profit margin of 38.0 percent in the first nine months of 2020.

The lower gross margin in both periods of 2021 compared to 2020 was primarily due to higher steel and other material costs which outpaced our pricing actions.

Selling, general, and administrative (SG&A) expenses in the third quarter and first nine months of 2021 increased by $18.2 million and $28.1 million, respectively, compared to the prior-year periods.

The increase in SG&A expenses in the third quarter and first nine months of 2021 was primarily due to higher advertising, engineering and selling expenses and higher

management incentive expenses related to higher earnings compared to the same periods last year.

Higher SG&A expenses in both the third quarter and first nine months of 2021 were partially offset by lower spending in China associated with headcount reductions, store closures and other cost-saving measures previously implemented during 2020.

During the third quarter and first nine months of 2020, aligning our business to market conditions, we recognized $1.6 million and $7.7 million, respectively, of pre-tax severance and restructuring expenses.

These expenses were primarily comprised of $1.6 million of severance expenses in the third quarter of 2020 and $6.8 million of severance costs and $0.9 million of other restructuring expenses in the first nine months of 2020.

These activities are reflected in “severance and restructuring expenses” in the accompanying financial statements.

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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 compare our performance period over period.

Interest expense in the second quarter of 2021 was $0.9 million compared to $2.5 million in the same period last year.

Interest expense in the first half of 2021 was $1.9 million compared to $4.7 million in the same period the previous year.

The decrease in interest expense in the second quarter and first six months of 2021 compared to the same periods last year was primarily due to lower debt levels.

Other income was $3.9 million in the second quarter of 2021 and was essentially equal to $4.0 million in the same period last year.

Other income in the first six months of 2021 was $8.9 million compared to $8.2 million in the first half of 2020.

The increase in other income in the first half of 2021 compared to the same period last year was primarily due to higher pension income and higher currency translation gains, partially offset by lower interest income.

Interest expense in the third quarter of 2021 was $1.0 million compared to $1.6 million in the same period last year.

Interest expense in the first nine months of 2021 was $2.9 million compared to $6.3 million in the same period the previous year.

The decrease in interest expense in the third quarter and first nine months of 2021 compared to the same periods last year was primarily due to lower debt levels.

Other income was $4.7 million in the third quarter of 2021, higher than $2.8 million in the same period last year.

Other income in the first nine months of 2021 was $13.6 million compared to $11.0 million in the first nine months of 2020.

The increase in other income in the third quarter and first nine months of 2021 compared to the same periods last year was primarily due to higher pension income.

The third quarter of 2021 also benefited from higher interest income.

Our pension costs and credits are developed from actuarial valuations.

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The discount rate used to determine net periodic pension costs decreased to 2.45 percent in 2021 from 3.18 percent in 2020.

Pension income for the second quarter and first half of 2021 was $2.9 million and $5.8 million, respectively, compared to $2.0 million and $4.1 million in the second quarter and first half of 2020, respectively.

Pension income for the third quarter and first nine months of 2021 was $2.9 million and $8.7 million, respectively, compared to $1.8 million and $5.9 million in the third quarter and first nine months of 2020, respectively.

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 rates for the second quarter and first six months of 2021 were 21.9 percent and 22.2 percent, respectively.

Our effective income tax rates for the second quarter and first six months of 2020 were 22.1 percent and 22.8 percent, respectively.

Our effective income tax rate in the second quarter of 2021 was essentially the same as the prior year period.

Our effective income tax rate in the first half of 2021 was lower than the effective income tax rate in the same period of 2020 primarily due to a change in geographic earnings mix.

Our effective income tax rates for the third quarter and first nine months of 2021 were 20.9 percent and 21.7 percent, respectively.

Our effective income tax rates for the third quarter and first nine months of 2020 were 23.2 percent and 23.0 percent, respectively.

Our effective income tax rates in the third quarter and first nine months of 2021 were lower than the effective income tax rates in the same periods of 2020 primarily due to a change in geographic earnings mix as well as a favorable tax impact of 4.2 million related to amending a previously filed tax return.

We estimate that our annual effective income tax rate for the full year 2021 will be approximately 22.0 percent.

North America

Sales in the North America segment were $604 million in the second quarter of 2021, or $123 million higher than sales of $481 million in the second quarter of 2020.

Sales in the first six months of 2021 were $1,157 million or $144 million higher than sales of $1,013 million in the same period last year.

The increase in sales in the second quarter of 2021 compared to the prior-year period was primarily due to higher water heater, boiler, and water treatment volumes and the benefit of recent price increases implemented to offset higher material and transportation costs.

The higher segment sales in the first six months of 2021 were primarily due to the factors above, partially offset by lower U.S.

commercial water heater volumes.

North America segment earnings were $141.7 million in the second quarter of 2021, or approximately 34 percent higher than segment earnings of $105.4 million in the same period of 2020.

Segment earnings in the first six months of 2021 were $272.1 million, or approximately 17 percent higher than segment earnings of $232.5 in the first six months of 2020.

Segment margin of 23.5 percent in the second quarter of 2021 was higher than 21.9 percent in the same period last year.

Segment margin of 23.5 percent in the first six months of 2021 was higher than 22.9 percent in the same period last year.

Adjusted segment earnings and adjusted segment margin in the second quarter of 2020 were $107.6 million and 22.4 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first half of 2020 were $234.7 million and 23.2 percent, respectively.

Higher segment earnings and segment margin in the second quarter and first six months of 2021 compared to the prior-year periods were primarily driven by higher volumes and inflation-related price increases implemented to offset higher costs, partially offset by higher material and freight costs.

Segment earnings and margin in the prior-year periods were also adversely impacted by certain costs related to the pandemic, including temporarily moving production from Mexico to the U.S., paying employees during temporary plant shutdowns, proactively deep cleaning facilities, paying benefits during employee furloughs and other costs, which were approximately $5.5 million.

We expect the full-year segment margin to be between 22.75 and 23.0 percent in 2021.

Adjusted segment earnings and adjusted segment margin in 2020 exclude $2.2 million of pre-tax severance and restructuring expenses associated with an initiative to align our business to market conditions.

Sales in the North America segment were $658 million in the third quarter of 2021, or $114 million higher than sales of $544 million in the third quarter of 2020.

Sales in the first nine months of 2021 were $1,815 million or $258 million higher than sales of $1,557 million in the same period last year.

The increases in sales in the third quarter and first nine months 2021 compared to the prior-year periods were primarily due to the impact of pricing actions, largely on water heaters, implemented to offset higher steel, other material and logistics costs, as well as higher water heater, boiler, and water treatment volumes.

North America segment earnings were $151.8 million in the third quarter of 2021, or approximately 14 percent higher than segment earnings of $133.1 million in the same period of 2020.

Segment earnings in the first nine months of 2021 were $423.9 million, or approximately 16 percent higher than segment earnings of $365.6 million in the first nine months of 2020.

Segment margin of 23.1 percent in the third quarter of 2021 was lower than segment margin of 24.5 percent in the same period last year.

Segment margin of 23.4 percent in the first nine months of 2021 was slightly lower than segment margin of 23.5 percent in the same period last year.

Adjusted segment earnings and adjusted segment margin in the third quarter of 2020 were $133.6 million and 24.6 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first nine months of 2020 were $368.3 million and 23.6 percent, respectively.

Higher segment earnings in the third quarter and first nine months of 2021 compared to the prior-year periods were primarily driven by inflation-related price increases implemented to offset higher costs as well as higher volumes, partially offset by higher material and freight costs.

Segment earnings and margin in the prior-year periods were also adversely impacted by certain costs related to the pandemic.

These costs included temporarily moving production from Mexico to the U.S., paying employees during temporary plant shutdowns, proactively deep cleaning facilities,

paying benefits during employee furloughs, and other costs, which were approximately $1.1 million and $6.6 million for the three and nine months ended 2020, respectively.

We expect 2021 full-year segment margin to be between 22.75 and 23.0 percent.

Adjusted segment earnings and adjusted segment margin in the third quarter and first nine months of 2020 exclude $0.5 million and $2.7 million, respectively, of pre-tax severance and restructuring expenses associated with an initiative to align our business to market conditions.

Rest of World

Sales in the Rest of World segment were $263 million in the second quarter of 2021 or $73 million higher than sales of $190 million in the second quarter of 2020.

Sales in the first six months of 2021 were $486 million or $186 million higher than sales of $300 million in the first six months of 2020.

Sales in the Rest of World segment were $263 million in the third quarter of 2021, $42 million higher than sales of $221 million in the third quarter of 2020.

Sales in the first nine months of 2021 were $749 million, $228 million higher than sales of $521 million in the first nine months of 2020.

Sales in China increased approximately 19 percent in U.S.

dollar terms and 26 percent in local currency in the second quarter of 2021 and increased approximately 66 percent in U.S.

dollar terms and 53 percent in local currency in the first six months of 2021 compared to the same periods last year.

The increase in Rest of World sales in the second quarter and first half of 2021 was primarily due to sales growth in each of our major product lines in China compared to the same periods last year.

In addition, our sales in China benefited from currency translation of approximately $20 million and $34 million in the second quarter and first half of 2021, respectively, compared to the same periods last year, due to the appreciation of the Chinese currency compared to the U.S.

Rest of World segment earnings were $22.3 million in the second quarter of 2021, compared to losses of $5.8 million in the second quarter of 2020.

Segment earnings in the first six months of 2021 were $34.1 million, compared to losses of $48.0 million in the first half of 2020.

Segment margin was 8.5 percent and 7.0 percent in the second quarter and first half of 2021, compared to negative margins in both prior year periods.

Adjusted segment losses in the second quarter and first half of 2020 were $1.9 million and $44.1 million, respectively.

Higher segment earnings and segment margin in the second quarter and first six months of 2021 compared to the prior-year periods, which were negatively impacted by shutdowns and reduced consumer spending resulting from the pandemic, were primarily driven by higher volumes and lower selling and administrative costs in China compared to the same periods last year.

Higher second quarter 2021 earnings and margin were partially offset by the absence of social insurance waivers, which we received in China in the prior-year period.

dollar terms and 12 percent in local currency in the third quarter of 2021 and increased approximately 46 percent in U.S.

dollar terms and 36 percent in local currency in the first nine months of 2021 compared to the same periods last year.

The increase in Rest of World sales in the third quarter and first nine months of 2021 was primarily due to sales growth in each of our major product lines in China compared to the same periods last year.

In addition, sales in China benefited from currency translation of approximately $14 million and $49 million in the third quarter and first nine months of 2021, respectively, compared to the same periods last year, due to the appreciation of the Chinese currency compared to the U.S.

Rest of World segment earnings were $26.8 million in the third quarter of 2021, compared to earnings of $16.7 million in the third quarter of 2020.

Segment earnings in the first nine months of 2021 were $60.9 million, compared to losses of $31.3 million in the first nine months of 2020.

Segment margin was 10.2 percent and 8.1 percent in the third quarter and first nine months of 2021, compared to 7.5 percent in the third quarter of 2020 and negative margin in the first nine months of 2020.

Adjusted segment earnings in the third quarter of 2020 were $17.8 million and adjusted segment losses were $26.3 million in the first nine months of 2020.

Higher segment earnings and segment margin in the third quarter and first nine months of 2021 compared to the prior-year periods were primarily driven by higher volumes that were partially offset by higher employee incentive costs and brand building-related advertising costs in China compared to the same periods last year.

In both periods in 2021, higher segment earnings and margins were partially offset by the absence of social insurance waivers, which we received in China in the prior-year periods.

We expect full-year segment margin to be approximately eight percent in 2021.

Adjusted segment earnings in 2020 exclude $3.9 million of pre-tax severance and restructuring expenses associated with an initiative to align our business to market conditions.

We expect our consolidated sales to grow between 17 and 18 percent in 2021 on strong China, North America water heater, water treatment and boiler sales, enhanced by pricing actions.

Adjusted segment earnings in the third quarter and first nine months of 2020 exclude $1.1 million and $5.0 million, respectively, of pre-tax severance and restructuring expenses associated with an initiative to align our business to market conditions.

Excluding the impact of our recent acquisition of Giant Factories, Inc.

(Giant), we expect our consolidated sales to grow between 20 and 21 percent in 2021 on inflation-related pricing actions and strong China, North America water heater, water treatment and boiler volumes.

Our sales growth projection includes approximately $54 million of benefit from China currency translation.

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Liquidity & Capital Resources

Working capital of $678.7 million at June 30, 2021, was $53 million lower than at December 31, 2020.

The change in working capital was driven by sales-related increases to accounts receivable balances and higher inventories and was more than offset by lower cash balances primarily due to repurchases of our common stock.

As of June 30, 2021, approximately $439 million of our $582 million of cash, cash equivalents, and marketable securities was held by our foreign subsidiaries.

In addition, during the second quarter of 2021, we repatriated approximately $160 million of cash from our foreign subsidiaries.

We intend to use these proceeds to repurchase shares of our common stock.

Cash provided by operations in the first six months of 2021 was $196.0 million compared with $179.3 million during the same period last year.

The impact of higher earnings were partially offset by increased investments in working capital compared with the same period in 2020, resulting in increased cash flow from operations in the first six months of 2021.

For the full year 2021, we expect cash provided by operating activities will be between $500 and $525 million, lower than 2020 cash provided by operating activities of $562 million primarily due to higher investments in working capital, partially offset by higher earnings compared to the prior year.

Capital expenditures totaled $30.7 million in the first six months of 2021, compared with $24.8 million in the year-ago period.

Working capital of $756 million as of September 30, 2021, was $24 million higher than at December 31, 2020.

The change in working capital was driven by sales-related increases to accounts receivable balances and higher inventories that were partially offset by higher accounts payable balances.

As of September 30, 2021, approximately $520 million of our $685 million of cash, cash equivalents, and marketable securities was held by our foreign subsidiaries.

In the first nine months of 2021, we repatriated approximately $160 million of cash from our foreign subsidiaries.

We used the proceeds to repurchase shares of our common stock.

Cash provided by operations in the first nine months of 2021 was $376.8 million compared with $330.4 million during the same period last year.

The impact of higher earnings was partially offset by higher investments in working capital compared with the same period in 2020.

For the full year 2021, we expect cash provided by operating activities will be between $550 and $575 million, similar to 2020 cash provided by operating activities of $562 million primarily due to higher earnings in 2021 being offset by higher investments in working capital compared to last year.

Capital expenditures totaled $45.3 million in the first nine months of 2021, compared with $36.7 million in the year-ago period.

We project 2021 capital expenditures will be between $70 and $75 million, and full-year depreciation and amortization expense will be approximately $80 million.

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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 June 30, 2021.

We did not have borrowings on this facility as of June 30, 2021.

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 September 30, 2021.

We did not have borrowings on this facility as of September 30, 2021.

The facility backs up commercial paper and credit line borrowings.

At June 30, 2021, we had an available borrowing capacity of $500 million under this facility.

At September 30, 2021, we had an available borrowing capacity of $500 million under this facility.

We believe the combination of available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future.

Our total debt decreased by $6.8 million from $113.2 million at December 31, 2020 to $106.4 million at June 30, 2021.

Our leverage, as measured by the ratio of total debt to total capitalization, calculated excluding operating lease liabilities, was 5.5 percent at June 30, 2021, compared with 5.8 percent at December 31, 2020.

Our total debt decreased by $6.8 million from $113.2 million at December 31, 2020 to $106.4 million at September 30, 2021.

Our leverage, as measured by the ratio of total debt to total capitalization, calculated excluding operating lease liabilities, was 5.3 percent at September 30, 2021, compared with 5.8 percent at December 31, 2020.

Our pension plan continues to meet all funding requirements under ERISA regulations.

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The stock repurchase authorization remains effective until terminated by our Board of Directors, which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect.

During the first six months of 2021, we repurchased 2,978,657 shares of our stock at a total cost of $198.1 million.

At June 30, 2021, we had 5,635,167 million shares remaining on the share repurchase authority.

During the first nine months of 2021, we repurchased 3,177,467 shares of our stock at a total cost of $212.0 million.

As of September 30, 2021, we had 5,436,357 shares remaining on the share repurchase authority.

After a black out period on share repurchase activity in the third quarter related to the Giant acquisition, we plan to resume our repurchase program in early November.

Depending on factors such as stock price, working capital requirements and alternative investment opportunities, we expect to spend approximately $400 million on stock repurchases in 2021 through a combination of our Rule 10b5-1 automatic trading plan and opportunistic repurchases in the open market.

On July 12, 2021, our Board of Directors declared a regular quarterly cash dividend of $0.26 per share on our Common Stock and Class A common stock.

The dividend is payable on August 16, 2021, to shareholders of record on July 30, 2021.

On October 11, 2021, our Board of Directors increased the rate of our quarterly cash dividend of $0.28 per share on our Common Stock and Class A common stock.

The dividend is payable on November 15, 2021, to shareholders of record on October 29, 2021.

On October 19, 2021, we acquired Giant, a Canada-based manufacturer of residential and commercial water heaters for approximately $192 million using a combination of debt and cash.

Giant manufactures water heaters at two facilities in Montreal, Canada and sells water heating products under the Giant brand across Canada.

Giant had trailing twelve-month annual sales of approximately $105 million.

Non-GAAP Financial Information

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2021 2020 2021 2020

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Total Adjusted Segment Earnings $ 178.5 $ 151.4 $ 484.7 $ 341.7

(1) In the second quarter of 2020, the Company recognized $2.2 million of severance and restructuring expenses.

(1) In the third quarter and first nine months of 2020, the Company recognized $0.5 million and $2.7 million of severance and restructuring expenses, respectively.

For additional information, see Note 3 of the notes to the financial statements.

(2) In the second quarter of 2020, the Company recognized $3.9 million of severance and restructuring expenses.

(2) In the third quarter and first nine months of 2020, the Company recognized $1.1 million and $5.0 million of severance and restructuring expenses, respectively.

For additional information, see Note 3 of the notes to the financial statements.

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The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020.

We believe that at June 30, 2021, there has been no material change to this information.

We believe that at September 30, 2021, there has been no material change to this information.

Recent Accounting Pronouncement

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Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:

negative impacts to the Company’s businesses, including demand for its products, particularly commercial products, operations and workforce dislocation and disruption, supply chain disruption and liquidity as a result of the severity and duration of the COVID-19 pandemic;

lengthening or deepening of supply chain bottlenecks;

the Company's ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs;

negative impacts to the Company’s businesses, including demand for its products, particularly commercial products, operations and workforce dislocation and disruption as a result of the severity and duration of the COVID-19 pandemic;

inability of the Company to implement or maintain pricing actions;

an uneven recovery of the Chinese economy or decline in the growth rate of consumer spending or housing sales in China;

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potential weakening in the high-efficiency boiler segment in the U.S.;

significant volatility in material availability and prices;

inability of the Company to implement or maintain pricing actions;

a failure to recover or further weakening in U.S.

substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer, including from the result of COVID-19;

a weakening in U.S.

residential or commercial construction or instability in the Company’s replacement markets;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis