What changed in this filing

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Item 1. Business

2023-02-14 compared with 2022-02-11 · 74 added, 48 removed, 87 unchanged (58% of the section changed)

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Smith and its consolidated subsidiaries.

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under “Item 8.

Financial Statements and Supplementary Data” in this annual report on Form 10-K.

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under “Item 8 Financial Statements and Supplementary Data” in this annual report on Form 10-K.

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, heat pump and electric water heaters, boilers, tanks and water treatment products.

Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, heat pump, tanks and water treatment products.

Both segments primarily manufacture and market in their respective regions of the world.

Our Rest of World segment is primarily comprised of China, Europe and India.

NORTH AMERICA

We serve residential and commercial end markets in North America with a broad range of products including:

Sales in our North America segment accounts for 74% of our total sales in 2022.

This segment serves residential and commercial end markets with a broad range of products including:

Water heaters .

Our residential and commercial water heaters come in sizes ranging from 2.5 gallon (point-of-use) models to 2,500 gallon products with varying efficiency ranges.

Our residential and commercial water heaters, primarily come in sizes ranging from 40 to 80 gallon models, however, we also offer sizes as low as 2.5 gallon (point-of-use) and as high as 2,500 gallon products with varying efficiency ranges.

We offer electric, natural gas and liquid propane tank-type models as well as tankless (gas and electric), heat pump and solar tank units.

In 2021, we further expanded our market presence and product offerings with our acquisition of Giant Factories, Inc., (Giant) a Canada-based manufacturer of residential and commercial water heaters.

Typical applications for our water heaters include residences, restaurants, hotels and motels, office buildings, laundries, car washes, schools and small businesses.

Typical applications for our water heaters include residences, restaurants, hotels, office buildings, laundries, car washes, schools and small businesses.

In 2022, we continued our integration activities of Giant Factories, Inc., (Giant) a Canada-based manufacturer of residential and commercial water heaters, which we acquired in late 2021.

Our residential and commercial boilers range in size from 45,000 British Thermal Units (BTUs) to 6.0 million BTUs.

Our boilers are primarily used in space heating applications for residences, hospitals, schools, hotels and other large commercial buildings.

Boilers are closed loop water heating systems used primarily for space heating or hydronic heating.

Our 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.

Water treatment products.

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We expanded our product offerings with the acquisitions of Hague Quality Water International (Hague) in 2017, Water-Right, Inc.

(Water-Right) in 2019 and Master Water Conditioning Corporation (Master Water) in 2021.

(Water-Right) in 2019, Master Water Conditioning Corporation (Master Water) in 2021 and Atlantic Filter Corporation (Atlantic Filter) in 2022.

Our 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.

We also offer a complete line of food and beverage filtration products.

We also offer a comprehensive line of commercial water treatment and filtration products.

Typical applications for our water treatment products include residences, restaurants, hotels and offices.

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Approximately 40 percent of Lochinvar branded sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar branded sales consist primarily of boilers and related parts.

Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms, the remainder of our Lochinvar branded products are distributed through wholesale channels.

Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms with the remainder of our Lochinvar branded products being distributed through wholesale channels.

We sell our A.

Smith branded water treatment products through Lowe's, Amazon, and our wholesale distribution channels.

Our Aquasana branded products are primarily sold directly to consumers through e-commerce as well as online retailers including Amazon and through other retail chains.

Our water softener branded products and problem well water solutions, which include Hague, Water-Right, and Master Water are sold through water quality dealers.

Smith branded water treatment products through Lowe's and Amazon.

Our Aquasana branded products are primarily sold directly to consumers through e-commerce channels.

Our water softener products and problem well water solutions, which include Hague, Water-Right, Master Water, and Atlantic Filter, are sold through water quality dealers.

Our water softener products are also sold through home center retail chains.

Our energy-efficient product offerings continue to be a sales driver for our business.

Our condensing commercial water heaters and boilers continue to be an option for commercial customers looking for high-efficiency water and space heating

with a short payback period through energy savings.

Our condensing commercial water heaters and boilers continue to be an option for commercial customers looking for high-efficiency water and space heating with a short payback period through energy savings.

We offer residential heat pump, condensing tank-type and tankless water heaters in North America, as well as other higher efficiency water heating solutions to round out our energy-efficient product offerings.

In addition, during 2021 we launched a commercial heat pump water heater to align with greenhouse gas emission reduction trends across the country.

In addition, during 2021 we launched a commercial heat pump water heater to align with greenhouse gas emission reduction trends across the U.S.

We sell our products in highly competitive markets.

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REST OF WORLD

We have operated in China for more than 25 years.

Sales in our Rest of World segment accounts for 26% of our total sales in 2022, a majority of which is in China.

We have operated in China for nearly 30 years.

In that time, we have established A.

Smith brand recognition in the residential and commercial markets.

We manufacture and market residential water heater and water treatment products, primarily incorporating reverse osmosis technology, and commercial water treatment products.

The Chinese water heater market is predominantly comprised of electric wall-hung, gas tankless, combi-boiler, heat pump and solar water heaters.

We believe we are one of the leading suppliers of water heaters and reverse osmosis water treatment products to the residential market in China in dollar terms.

We manufacture and market residential water treatment products, primarily incorporating reverse osmosis technology, and commercial water treatment products.

We believe we are one of the market leaders of water heaters and reverse osmosis water treatment products to the residential market in China in dollar terms.

We also design and market range hoods and cooktops in China.

We sell our products in approximately 13,000 points of sale in China, approximately 5,800 are retail outlets in tier one and tier two cities of which over 2,000 exclusively sell our products.

We sell our products in approximately 12,000 points of sale in China, of which approximately 5,400 are retail outlets in tier one through tier three cities and approximately 2,000 exclusively sell our products.

We also sell our products through e-commerce channels.

Our primary competitors in China in the water heater market segment are Haier, Midea, and Rinnai.

Our principal competitors in the water treatment market are Angel, Midea, Truliva, and Xiaomi.

In 2008, we established a sales office in India and began importing products specifically designed for India.

We began manufacturing water heaters in India in 2010 and water treatment products in 2015.

Our primary competitors in China in the water heater market segment are Haier and Midea, which are Chinese companies, as well as Rinnai.

Our principal competitors in the water treatment market are Angel, Midea, Truliva, and Xiaomi.

In India, we compete with Racold, Bajaj and Havells in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market.

In addition, we sell water heaters in the European and Middle Eastern markets and water treatment products in Hong Kong, Turkey and Vietnam, all of which combined comprised less than 11 percent of total Rest of World sales in 2021.

We continue to expand our product offerings and sales in this country, primarily through wholesale, e-commerce and retail channels.

Our primary competitors in India are Racold, Bajaj and Havells in the water heater market and Eureka Forbes, Kent and Hindustan Unilever in the water treatment market.

We also sell water heaters in the European and Middle and Far Eastern markets and water treatment products in Hong Kong, and Vietnam, all of which combined comprised less than 13 percent of total Rest of World sales in 2022.

RAW MATERIALS

Raw materials for our manufacturing operations, primarily consisting of steel, are generally available in adequate quantities, however, the global health pandemic and disruptions in the commercial transportation network have stressed the availability of certain raw materials.

There has been volatility in steel costs over the last several years, particularity in 2021 as the steel price index increased over 100 percent compared to the prior year.

A portion of our customers have contractual pricing tied to a steel index.

We use a wide range of raw materials in our manufacturing operations.

These raw materials are generally available in adequate quantities, however, the COVID-19 pandemic and disruptions in the commercial transportation network have stressed the availability of certain raw materials.

While supply chain and logistics challenges lingered in 2022, we saw improvement, particularly in the second half of the year.

Our primary raw material input is steel which has experienced volatility in costs over the last several years.

A portion of our customers have contractual pricing tied to a steel price index.

RESEARCH AND DEVELOPMENT

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PATENTS AND TRADEMARKS

We own and use in our businesses various trademarks, trade names, patents, trade secrets and licenses.

Although we believe our trademarks, trade names, patents, trade secrets, and licenses to constitute a valuable asset in the aggregate, we do not regard our business as being materially dependent on any single or group of related trademarks, trade names, patents, trade secrets, or licenses.

Our trade name is important with respect to our products, particularly in China, India, and the U.S.

We invest, own and use in our businesses various trademarks, trade names, patents, trade secrets and licenses.

We monitor our intellectual property for infringement and in 2022 received a judgment of $11.5 million against a competitor related to one of our patents.

Although we believe our trademarks, trade names, patents, trade secrets, and licenses to constitute a valuable asset in the aggregate, we do not regard our business as being materially dependent on any single trademark, trade name, patent, trade secret, license or any group of related such rights.

Our trade name is important with respect to our products, particularly in China, India, and North America.

HUMAN CAPITAL

We employed approximately 13,700 employees as of December 31, 2021, primarily non-union.

The foundation of how we conduct business and interact with our employees is outlined in the A.

Smith Corporation Guiding Principles, which were refreshed in 2021, and our Statement of Values.

We employed approximately 12,000 employees as of December 31, 2022 with approximately 6,200 in North America and 5,800 in Rest of World.

A small portion of our workforce in the U.S.

is represented by a labor union, while outside the U.S., we have employees in certain countries that are represented by employee representative organizations, such as an employee association, union, or works council.

Our Guiding Principles and Values .

The foundation of how we conduct business and interact with our employees is outlined in A.

Smith Corporation’s Guiding Principles and our Statement of Values.

These principles and values help to shape how we hire, train and treat our employees, emphasizing teamwork and promoting diversity in seeking our objectives.

We believe that the critical elements of our effort to attract, retain and develop talent are employee engagement, talent development, a focus on employee safety, and market competitive compensation.

We believe that our Guiding Principles and Values shape the critical elements of our effort to attract, retain and develop talent.

Culture and Employee Engagement.

We conduct a Global Employee Engagement Survey on a biannual basis.

This third party managed survey measures employees’ level of engagement against external norms and provides us with actionable feedback that drives improvement priorities.

Survey participation in 2020 was 96 percent, which we believe indicates our employees' willingness to share their perspectives and a commitment to continuous improvement.

We will conduct the survey again in 2022.

Survey participation in 2022 was 97 percent, which we believe reflects our employees’ desire to share their perspectives and a commitment to continuous improvement.

Survey results help shape action plans to further improve our culture and we will conduct the survey again in 2024.

Diversity and Inclusion.

As reflected in our Guiding Principles, we strive to create a workplace where people from diverse backgrounds can thrive and achieve their fullest potential.

Smith’s commitment to this objective starts at the top with its Board of Directors, which is 50% diverse.

Smith monitors the gender and racial composition of its workforce in the U.S.

at various levels within the organization, and also tracks pay equity on an ongoing basis.

Compensation and Benefits.

We provide what we believe is a robust total compensation program designed to be market-competitive and internally equitable to attract, retain, motivate and reward a high-performance workforce.

Regular internal and external analysis is performed to ensure this market alignment.

In addition to salaries, these programs, which vary by country, can include annual performance-based bonuses, stock-based compensation awards, retirement plans with employee matching opportunities, health benefits, health savings and flexible spending accounts, paid time off, family leave, and tuition assistance, among others.

Training and Development.

We provide all employees with a wide range of professional development experiences, both formal and informal, to help them achieve their full potential.

All of of our salaried employees are given formal development plans.

Some of the formal development programs that employees have access to include early-career leadership development programs, front-line leadership development programs, continuous improvement skill-building programs, core process technology councils and tuition reimbursement for degree programs or trade schools.

Globally, all office and professional employees have a formal performance review and development plans with a focus on learning by doing.

It is expected that managers work closely with their employees to ensure performance feedback and development discussions take place on a regular basis.

In 2022, we partnered with a third party provider to deliver diversity and inclusive leadership training to enhance the capability of our workforce with a program that aligns with our Guiding Principles, Values, and overall leadership approach.

In 2022, we provided this training to our senior leadership team globally and senior management in the U.S., and we intend to expand that training program in 2023.

Globally, all office and professional employees also have formal performance reviews and development plans with a focus on learning by doing.

We expect our managers to work closely with their employees to ensure performance feedback and to conduct development discussions on a regular basis.

The safety of our people is always at the forefront of what we do.

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Smith facility that demonstrates the most improvement over one year in the area of workplace safety.

We provide what we believe is a robust total compensation program designed to be market-competitive and internally equitable to attract, retain, motivate and reward a high-performance workforce.

Regular internal and external analysis is performed to ensure this market alignment.

Due to the short-cycle nature of our businesses, none of our operations sustain significant backlogs.

Due to the short-cycle nature of our businesses, our operations do not normally sustain significant backlogs.

GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS

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Whether at the federal, state, or local level, these laws are intended to improve energy efficiency and product safety, and protect public health and the environment.

In recent years, a limited number of states and local authorities have proposed or implemented bans on gas-fired products in new construction in an effort to address greenhouse gas emissions.

Similar laws and regulations have been adopted by government authorities in other countries in which we manufacture, distribute, and sell our products.

We offer a complete line of water and hydronic heating products, including electric-powered water heaters and boilers, and we believe that any reduction in fossil fuel-powered products would be counterbalanced by the demand for our non-fossil fuel powered products.

We are confident that our continued emphasis on product design and innovation will keep us well positioned to deliver products demanded by customers, regardless of fuel source.

In addition, our operations are subject to federal, state and local environmental laws.

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We are also committed to growing our business in a sustainable and socially responsible manner consistent with our Guiding Principles.

This commitment has driven us to design, engineer, and manufacture highly innovative and efficient products in an environmentally responsible manner that help reduce energy consumption, conserve water, and improve drinking water quality and public health.

Consistent with this commitment, we issued our 2020 Corporate Responsibility & Sustainability (CRS) report detailing our company’s historical and current CRS efforts.

Our CRS report is available on our website.

The report is not included as part of, or incorporated by reference into, this Annual Report on Form 10-K.

This commitment has driven us to design, engineer and manufacture highly innovative and efficient products in an environmentally responsible manner that helps reduce energy consumption, conserve water and improve drinking water quality and public health.

Consistent with this commitment, we issue our sustainability report biennially detailing our company’s historic and current efforts.

We issued our third report, the 2022 Environmental, Social and Governance ("ESG") Report in December 2022, documenting our ESG activities over the past two years.

This report details the positive impact of our highly efficient products, highlights our company’s commitment to employees and the communities in which we operate, and reports on our progress toward our greenhouse gas emissions reduction goal of 10% by 2025.

We have made significant progress toward our ESG emission reduction goal and prevented almost 500,000 metric tons of carbon emissions in 2021 through the sale of our high efficiency water heaters and boilers.

Our scorecard reflecting our progress is available on our website.

We have also achieved WAVE water stewardship verification and achieved our fourth consecutive Energy Star Partner of the Year Award.

Our ESG report is available on our website and not included as part of, or incorporated by reference into, this Annual Report on Form 10-K.

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-K

Item 1. Business