What changed in this filing

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Item 1A. Risk Factors

2023-02-14 compared with 2022-02-11 · 74 added, 81 removed, 105 unchanged (60% of the section changed)

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Economic and Industry Risks

■ Our operations could be adversely impacted by material and component price volatility and availability, as well as supplier concentration

■ The effects of global and regional economic conditions could have a material adverse effect on our business

A decline in economic activity, such as a recession or economic downturn, in the U.S.

and other regions in the world in which we do business, could adversely affect consumer confidence and spending patterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, slower adoption of energy-efficient water heaters and boilers, or high-quality water treatment products, which could negatively impact our profitability and cash flows.

Such deterioration in economic conditions could arise from many factors or fears including public health crises, political instability or risk of government default.

In addition, an increase in price levels generally or in particular industries (such as the inflation in steel prices in 2021 and the recent inflation in other material and logistics costs), could result in a consumer shift away from the products we offer, which could adversely affect our revenues and, at the same time, increase our costs.

A deterioration in economic conditions also could negatively impact our vendors and customers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, or increased material prices, which could negatively impact our ability to distribute, market and sell our products and our financial condition, results of operations and cash flows.

■ The occurrence or threat of extraordinary events, including natural disasters, political disruptions, terrorist attacks, public health issues, and acts of war, could significantly disrupt production, or impact consumer spending

As a global company with a large international footprint, we are subject to increased risk of damage or disruption to us and our employees, facilities, suppliers, distributors, or customers.

Extraordinary events, including natural disasters, resulting from but not limited to climate change, political disruptions, terrorist attacks, public health issues, such as the COVID-19 pandemic, and acts of war may disrupt our business and operations and impact our supply chain and access to necessary raw materials or could adversely affect the economy generally, resulting in a loss of sales and customers.

Any of these disruptions or other extraordinary events outside of our control that impact our operations or the operations of our suppliers and key distributors could affect our business negatively, harming operating results.

The COVID-19 pandemic continues to cause disruption to the global economy.

We continue to monitor the pandemic, and while periodic local increases and decreases in COVID-19 cases are likely, generally the restrictions due to and in response to the pandemic continue to relax in most locations.

However, the COVID-19 pandemic and efforts to manage it, including those by governmental authorities, could have a material adverse effect on our financial condition, results of operations and cash flows.

Natural disasters and extreme weather conditions may disrupt the productivity of our facilities.

For example, two of our manufacturing plants are located within a floodplain that has experienced past flooding events.

We also have other manufacturing facilities located in hurricane and earthquake zones.

We maintain insurance coverage and have taken steps to mitigate these physical risks related to natural disasters and extreme weather conditions.

Pricing for our insurance program has remained at the prevailing market rate with no significant change in the current year’s premium rates from the prior year.

Also, to mitigate the risk of flooding, we recently completed an approximately 7,000-foot-long berm, flood gates, and pumping stations around our Ashland City, Tennessee facility, our largest manufacturing facility.

Despite our mitigation efforts, there is still the potential for natural disasters and extreme weather conditions to disrupt the productivity of our facilities.

Apart from the potential impact on our operations, these types of events also could negatively impact consumer spending in the impacted regions or depending on the severity, globally, which could materially and adversely affect our financial condition, results of operations and cash flows.

■ Our business could be adversely impacted by changes in consumer purchasing behavior, consumer preferences, technological changes, and market trends

Consumer preferences for products and the methods in which they purchase products are constantly changing based on, among other factors, cost, performance, convenience, environmental and social concerns and perceptions.

Consumer purchasing behavior may shift the product mix in the markets in which we participate or result in a shift to other distribution channels, for example e-commerce.

Consumer preferences and broader trends, such as decarbonization and electrification efforts in response to climate change, may result in increased demand for higher efficiency products and/or more electric powered products.

In addition, technologies are ever changing.

Our ability to respond to these trends, timely transition our product portfolio, develop new and innovative products, and acquire and protect the necessary intellectual property rights is essential to our continued success, but cannot reasonably be assured.

It is possible that we will not be able to develop new technologies, products or distribution channels, or do so on a timely basis, to align with consumer purchasing behavior and consumer preferences, which could materially and adversely affect our financial condition, results of operations and cash flows.

■ Our operations could be adversely impacted by material and component price volatility, as well as supplier concentration

The market prices for certain materials and components we purchase, primarily steel, have been volatile.

steel index prices alone increased over 100 percent in 2021.

We have also experienced inflation related increases in our transportation costs.

In addition, some components are subject to long lead times.

Disruptions to the commercial transportation network, including limited container and trucking capacity and port congestion, have increased supplier delivery times for materials and components to our facilities and, in some cases, our ability to timely ship to customers.

We engage in ongoing communications with our suppliers to identify and mitigate risk of potential disruptions and to manage our material and component inventory levels.

Significant increases in the cost of any of the key materials and components we purchase or delays in their delivery could increase our cost of doing business and ultimately could lead to lower operating earnings if we are not able to recover these cost increases through price increases to our customers.

As a response to cost inflation in materials and components, we announced price increases on water heaters in North America in 2021 that compound to approximately 50 percent.

Historically, there has been a lag in our ability to recover increased material costs from customers, and that lag, particularly for the price increases that we implemented in 2021, could negatively impact our profitability.

Significant increases in the cost of any of the key materials and components we purchase would increase our cost of doing business and ultimately could lead to lower operating earnings if we are not able to recover these cost increases through price increases to our customers.

Historically, there has been a lag in our ability to recover increased material costs from customers, and that lag, could negatively impact our profitability.

In some cases, we are dependent on a limited number of suppliers for some of the raw materials and components we require in the manufacturing of our products.

A significant disruption or termination of the supply from one of these suppliers could delay sales or increase costs which could result in a material adverse effect on our financial condition, results of operations and cash flows.

■ The global coronavirus (COVID-19) pandemic, or other global public health pandemics, could have a material adverse effect on our business, results of operations and financial condition

Our business, results of operations and financial condition may be adversely affected if a global public health pandemic, including the current COVID-19 pandemic, interferes with the ability of our employees, suppliers, and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business and operations.

The COVID-19 pandemic has significantly impacted economic activity and markets around the world, and it could have a material negative impact on our business and operations in numerous ways, including but not limited to those outlined below:

• The risk that we, or our employees, suppliers or customers may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities.

• Restrictions on shipping products from certain jurisdictions where they are produced or into certain jurisdictions where customers are located.

• Inability to meet our customers’ needs and achieve cost targets due to increased logistics costs, longer shipment times, and disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability.

• Failure of third parties on which we rely, including our suppliers, distributors, contractors and commercial banks, to meet their obligations to us, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, workforce disruptions, or mandated shutdowns by governmental authorities, may adversely impact our operations.

• Significant reductions in demand, particularly for our commercial products, or significant volatility in demand and a global economic recession that could reduce demand for our products, resulting from actions taken by governments, businesses, and/or the general public in an effort to limit exposure to and spreading of such infectious diseases, such as travel restrictions, quarantines, and business shutdowns or slowdowns.

In addition, there is risk that the

commercial sector, such as the restaurant and hospitality industries in which we have customers, will experience long-term shifts in consumer behavior which could negatively impact demand or capacity and may not return to pre-pandemic levels.

• Manufacturing plant inefficiencies due to safety and preventative health measures that we have implemented in our plants to prevent the spread of COVID-19.

• Deterioration of worldwide capital, credit, and financial markets that could limit our ability to obtain external financing to fund our operations and capital expenditures.

The extent to which the COVID-19 pandemic, or other outbreaks of disease or similar public health threats, materially and adversely impacts our business, results of operations and financial condition remains uncertain and will depend on future developments.

Such developments may include the geographic spread and duration of the virus, periodic surges of the virus, the severity of the virus and the actions that may be taken by various governmental authorities and other third parties in response to the outbreak.

In addition, we cannot predict how quickly, and to what extent, normal economic and operating conditions can resume, and the resumption of normal business operations may be delayed or constrained by lingering effects of the COVID-19 pandemic on our suppliers, third-party service providers, and/or customers.

■ The effects of a global and regional economic conditions could have a material adverse effect on our business

A decline in economic activity, such as recession or economic downturn, in the U.S.

and other regions in the world in which we do business, could adversely affect consumer confidence and spending patterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, or slower adoption of energy-efficient water heaters and boilers, or high-quality water treatment products, which could negatively impact our profitability and cash flows.

Such deterioration in economic conditions could arise from many factors or fears including public health crises or political instability.

In addition, an increase in price levels generally or in particular industries (such as the recent inflation in steel prices and logistics costs), could result in a consumer shift away from the products we offer, which could adversely affect our revenues and, at the same time, increase our costs.

■ Because approximately 26 percent of our net sales in 2021 were attributable to China, adverse economic conditions or changes in consumer behavior in China could impact our business

Our sales in China increased 24 percent in local currency in 2021 compared to 2020.

Our sales in China were significantly impacted by the COVID-19 pandemic in 2020.

We derive a substantial portion of our sales in China from premium-tier products.

Changes in consumer preferences and purchasing behaviors including preferences for e-commerce, weakening consumer confidence and sentiment as well as economic uncertainty, socio-political risks, increased competition from Chinese based companies, and the potential future impact of the COVID-19 pandemic, may prompt Chinese consumers to postpone purchases, choose lower-priced products or different alternatives, or lengthen the cycle of replacement purchases.

Further deterioration in the Chinese economy may adversely affect our financial condition, results of operations and cash flows.

■ Because we participate in markets that are highly competitive, our revenues and earnings could decline as we respond to competition

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There could be new market participants that change the dynamics of those markets and it is possible that we will not be able to retain our customer base or improve or maintain our profit margins on sales to our customers, all of which could materially and adversely affect our financial condition, results of operations and cash flows.

■ Our business could be adversely impacted by changes in consumer purchasing behavior, consumer preferences and technological changes

Consumer preferences for products and the methods in which they purchase products are constantly changing based on, among other factors, cost, convenience, environmental and social concerns and perceptions.

Consumer purchasing behavior may shift the product mix in the markets we participate in or result in a shift to other distribution channels, including e-commerce, which continues to expand.

For example, consumer preferences may shift toward more efficient gas products or electric powered products due to the increased attention on the impact of greenhouse gas emissions on the environment in response to utility incentive programs, or the emergence of state or federal incentives.

In addition, technologies are ever changing.

Our ability to timely develop and successfully market new products and to develop, acquire, retain and protect necessary intellectual property rights is essential to our continued success, but cannot reasonably be assured.

It is possible that we will not be able to develop new technologies, products or distribution channels to align with consumer purchasing behavior and consumer preferences, which could materially and adversely affect our financial condition, results of operations and cash flows.

As a global company with a large international footprint, we are subject to increased risk of damage or disruption to us and our employees, facilities, suppliers, distributors, or customers.

Extraordinary events, including natural disasters resulting from but not limited to climate change, political disruptions, terrorist attacks, public health issues, such as the current COVID-19 pandemic, and acts of war may disrupt our business and operations and impact our supply chain and access to necessary raw materials or could adversely affect the economy generally, resulting in a loss of sales and customers.

Two of our manufacturing plants are located within a floodplain that has experienced past flooding events.

We also have other manufacturing facilities located in hurricane and earthquake zones.

In addition, these types of events also could negatively impact consumer spending in the impacted regions or depending on the severity, globally, which could materially and adversely affect our financial condition, results of operations and cash flows.

■ Because approximately 22 percent of our sales in 2022 were attributable to China, adverse economic conditions or changes in consumer behavior in China could impact our business

Our sales in China decreased five percent in local currency in 2022 compared to 2021.

Our 2022 sales in China were impacted by lower consumer demand driven by COVID-19 related disruptions.

Certain COVID-19 restrictions were lifted at the end of 2022 but could return.

We derive a substantial portion of our sales in China from premium-tier products.

Changes in consumer preferences and purchasing behaviors including preferences for e-commerce, weakening consumer confidence and sentiment as well as economic uncertainty, socio-political risks, increased competition from Chinese-based companies, and potential future COVID-19 related impacts, may prompt Chinese consumers to postpone purchases, choose lower-priced products or different alternatives, or lengthen the cycle of replacement purchases.

Further deterioration in the Chinese economy may adversely affect our financial condition, results of operations and cash flows.

Business, Operational, and Strategic Risks

■ We sell our products and operate outside the U.S., and to a lesser extent, rely on imports and exports, which may present additional risks to our business

Approximately 36 percent of our net sales in 2021 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesser extent in Europe and India.

Approximately 34 percent of our sales in 2022 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesser extent in Europe and India.

We also have operations and business relationships outside the U.S.

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governmental expropriation;

the changes or imposition of statutory restrictions which prohibit repatriation of cash;

the imposition or increases in withholding and other taxes on remittances and other payments by foreign subsidiaries;

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■ A material loss, cancellation, reduction, or delay in purchases by one or more of our largest customers could harm our business

Net sales to our five largest customers represented approximately 41 percent of our sales in 2021.

Sales to our five largest customers represented approximately 39 percent of our sales in 2022.

We expect that our customer concentration will continue for the foreseeable future.

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Some of our customers may shift their purchases to our competitors in the future.

Our customers may experience financial instability, affecting their ability to pay or make future purchases.

Our customers may experience financial instability, affecting their ability to make or pay for future purchases.

Further, a customer may be acquired by a customer of a competitor which could result in our loss of that customer.

The loss of one or more of our largest customers, any material reduction or delay in sales to these customers, or our inability to successfully develop

relationships with additional customers could have a material adverse effect on our financial position, results of operations and cash flows.

■ A portion of our business could be adversely affected by a decline in North American new residential construction, a decline in commercial construction or a decline in replacement-related volume of water heaters and boilers

Residential new construction activity in North America and industry-wide replacement-related volume of water heaters have shown growth which could decline in the future.

Commercial construction activity in North America grew in 2021 after declining in 2020.

We believe that the significant majority of the markets we serve are for replacement of existing products, and residential water heater replacement volume was strong in 2021.

The loss of one or more of our largest customers, any material reduction or delay in sales to these customers, or our inability to successfully develop relationships with additional customers could have a material adverse effect on our financial position, results of operations and cash flows.

■ A portion of our business could be adversely affected by a further decline in North American new residential or commercial construction or a decline in replacement-related volume of water heaters and boilers, including a decline in demand for commercial spaces

Residential new construction activity in North America and industry-wide replacement-related volume of water heaters had growth in 2020 and 2021, and then declined in 2022.

New residential housing starts in the U.S.

are projected to decrease further in 2023 compared to 2022.

Commercial construction activity in North America grew in 2022 and 2021 after declining in 2020.

We believe that the significant majority of the markets we serve are for the replacement of existing products, and residential water heater replacement volume was strong in 2022 and 2021.

As a result of the COVID-19 pandemic, businesses and commercial spaces have experienced and may experience in the future, fluctuation in demand and in occupancy that may reduce demand for our products, and commercial sectors, such as the restaurant and hospitality industries in which we have customers, may experience long-term shifts in consumer behavior which could negatively impact demand or capacity and may not return to pre-pandemic levels.

In addition, the acceptance of remote work arrangements could negatively impact demand for commercial construction.

Changes in the replacement volume and in the construction market in North America could negatively affect us.

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Our information systems are susceptible to outages due to system failures, cybersecurity threats, failures on the part of third-party information system providers, natural disasters, power loss, telecommunications failures, viruses, fraud, theft, malicious actors or breaches of security.

Like many companies, we, and some third parties upon which we rely, have experienced cybersecurity attacks on information technology networks and systems, products and services in the past but, to date, none have resulted in any material adverse impact to our financial condition, results of operations, or cash flows.

We may experience them in the future, potentially with increasing frequency from increasingly sophisticated cyber threats that could result in operations failure or breach of security that could lead to disruptions of our business activities, the loss or disclosure of both our and our customers’ financial, product and other confidential information and could result in regulatory actions, litigation and have a material adverse effect on our financial condition, results of operations and cash flows and our reputation.

We have a response plan in place in the event of a data breach and we continue to take steps to maintain and improve data security and address these risks and uncertainties by implementing and improving internal controls, security technologies, insurance programs, network and data center resiliency and recovery processes.

Like many companies, we, and some third parties upon which we rely, have experienced cybersecurity incidents and attacks on information technology networks and systems, products and services in the past but, to date, none have resulted in a material breach or had a material adverse impact on our financial condition, results of operations, or cash flows.

We may experience them in the future, potentially with increasing frequency from increasingly

sophisticated cyber threats.

In addition, as a result of the COVID-19 pandemic, remote work and remote access to our systems have increased, which may heighten these risks.

A successful attack in the future could result in operations failure or breach of security that could lead to disruptions of our business activities, the loss or disclosure of both our and our customers’ financial, product and other confidential information and could result in regulatory actions, litigation and have a material adverse effect on our financial condition, results of operations and cash flows and our reputation.

We have a response plan in place in the event of a data breach and we have an active program to maintain and improve data security and address these risks and uncertainties by implementing and improving internal controls, security technologies, insurance programs, network and data center resiliency and recovery processes.

■ Our international operations are subject to risks related to foreign currencies

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Furthermore, typically our products are priced in foreign countries in local currencies.

As a result, we are subject to risks associated with operating in foreign countries including fluctuations in currency exchange rates and interest rates, hyperinflation in some foreign countries or global exchange rate instability or volatility that strengthens the U.S.

As a result, we are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates and interest rates, hyperinflation in some foreign countries such as Turkey, where we currently have minor operations, or global exchange rate instability or volatility that strengthens the U.S.

dollar against foreign currencies.

As a result, an increase in the value of the U.S.

dollar relative to the local currencies of our foreign markets has had and could have a negative effect on our profitability.

In addition to currency translation risks, we incur a currency transaction risk whenever one of our subsidiaries enters into either a purchase or sale transaction using a currency different from the operating subsidiaries’ functional currency.

The majority of our foreign currency transaction risk results from sales of our products in Canada, a portion of which we manufacture in the U.S, and to a lesser extent from component purchases in Europe and payroll in Mexico.

These risks may hurt our reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S.

An increase in the value of the U.S.

dollar relative to the local currencies of our foreign markets, as experienced globally in the second half of 2022, has negatively affected our sales, profitability, and cash and cash equivalents balances and could have such effects in the future.

In 2022, the change in foreign currencies negatively impacted our sales and cash and cash equivalents by approximately $61 million and $21 million, respectively.

In addition to currency translation risks, we incur a currency transaction risk whenever one of our subsidiaries enters into a purchase or sale transaction using a currency different from the operating subsidiaries’ functional currency.

These risks may adversely impact our reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S.

■ Our business may be adversely impacted by product defects

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Legal, Regulatory, and Governance Risks

■ Changes in regulations or standards could adversely affect our business

■ Changes in regulations or standards, such as those associated with climate change, could adversely affect our business

Our products are subject to a wide variety of statutory, regulatory and industry standards and requirements related to, among other items, energy and water efficiency, environmental emissions, labeling and safety.

While we believe our products are currently efficient, safe and environment-friendly, federal, foreign, state and local governments may adopt laws, regulations and codes that will require a transition to non-fossil fuel based sources of energy production as well as significantly reducing or eliminating the on-site combustion of fossil fuels in the building sector, such as limiting or prohibiting the delivery of natural gas in new construction.

A significant change to regulatory requirements that promote a transition to alternative energy sources as a replacement for gas, or a significant shift in industry standards, could substantially increase manufacturing costs, impact the size and timing of demand for our products, affect the types of products we are able to offer or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations and cash flow.

We believe our products are currently efficient, safe and environment-friendly.

However, a limited number of federal, foreign, state and local governments are adopting laws, regulations and codes in response to climate change that require a transition to non-fossil fuel based sources of energy production as well as significantly reducing or eliminating the on-site combustion of fossil fuels in the building sector, such as limiting or prohibiting the delivery of natural gas in new construction.

A significant change to regulatory requirements that promote a transition to alternative energy sources as a replacement for gas, or a significant shift in industry standards, could substantially increase manufacturing costs, capital expenditures, transportation costs and raw material costs, impact the size and timing of demand for our products, affect the types of products we are able to offer or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations and cash flow.

■ We are subject to U.S.

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Violations of these laws may result in criminal penalties or sanctions that could have a material adverse effect on our financial condition, results of operations and cash flows.

■ Our Environmental, Social, and Governance (ESG) commitments could result in additional costs, and our inability to achieve them could have an adverse impact on our reputation and performance

We periodically communicate our strategies, commitments and targets related to ESG matters, including carbon emissions, diversity and inclusion, and human rights through the issuance of our ESG report.

Although we intend to meet these strategies, commitments and targets and are committed to advancing sustainable innovations in our industry, we may be unable to achieve them due to impacts on resources, operational costs, and technological advancements.

Failure to meet these sustainability requirements or targets could adversely impact our reputation as well as the demand for our products and adversely affect our business, financial condition and results of operations.

In addition, standards and processes for measuring and reporting carbon emissions and other sustainability metrics may change over time, result in inconsistent data, or result in significant revisions to our strategies, commitments and targets, or our ability to achieve them.

Any scrutiny of our carbon emissions or other sustainability disclosures or our failure to achieve related strategies, commitments and targets could negatively impact our reputation or performance.

■ Our results of operations may be negatively impacted by product liability lawsuits and claims

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies—Goodwill and Indefinite-lived Intangible Assets” included in Item 7 of this Annual Report on Form 10-K.

■ Our pension plans may require future pension contributions which could limit our flexibility in managing our company

The projected benefit obligation liability of our defined benefit pension plans of $842 million exceeded the fair value of the plan assets of $826 million by approximately $16 million at December 31, 2021.

employees hired after January 1, 2010, have not participated in our defined benefit plan, and benefit accruals for the majority of current salaried and hourly employees ended on December 31, 2014.

In 2021 our Board of Directors approved the termination of the previously sunset pension plan, with a termination date of December 31, 2021.

We filed a determination letter with the IRS regarding the qualification of the plan termination.

In 2022, we plan to annuitize the plan's remaining pension liability.

We forecast that we will not be required to make a contribution to the plan in 2022, and we do not plan to make any voluntary contributions.

However, we cannot provide any assurance that contributions will not be required in the future.

Among the key assumptions inherent in our actuarially calculated pension plan obligation and pension plan expense are the discount rate and the expected rate of return on plan assets.

If interest rates and actual rates of return on invested plan assets were to decrease significantly, our pension plan obligations could increase materially.

The size of future required pension contributions could result in us dedicating a significant portion of our cash flows from operations to making contributions which could negatively impact our flexibility in managing our company.

■ Certain members of the founding family of our company and trusts for their benefit have the ability to influence all matters requiring stockholder approval

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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-K

Item 1A. Risk Factors