What changed in this filing

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Item 1. Financial Statements

2023-04-28 compared with 2022-10-28 · 138 added, 242 removed, 404 unchanged (48% of the section changed)

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net sales $ 966.4 $ 977.7

2 unchanged sentences

Selling, general and administrative expenses 187.2 179.8

Impairment expense 15.6 —

Interest expense 4.0 1.5

Other expense (income), net 2.4 ( 4.7 ) 6.4 ( 13.6 )

Other (income) expense, net ( 4.0 ) 3.7

Earnings before provision for income taxes 171.3 156.6

1 unchanged sentence

Net Earnings $ 126.9 $ 119.8

Net Earnings Per Share of Common Stock (1)

$ 0.71 $ 0.83 $ 2.29 $ 2.17

Basic Net Earnings Per Share of Common Stock $ 0.84 $ 0.76

Diluted Net Earnings Per Share of Common Stock $ 0.84 $ 0.76

$ 0.71 $ 0.82 $ 2.27 $ 2.15

Dividends Per Share of Common Stock $ 0.30 $ 0.28

(1) Earnings per share amounts are calculated discretely and, therefore, may not add up to the total due to rounding.

SMITH CORPORATION

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net earnings $ 126.9 $ 119.8

Other comprehensive (loss) earnings

Other comprehensive earnings (loss)

Foreign currency translation adjustments 2.5 0.6

Unrealized gains (losses) on cash flow derivative instruments, less related income tax (provision) benefit of $( 1.1 ) and $( 1.6 ) in 2022, $( 0.1 ) and $ 0.2 in 2021

3.5 0.4 5.0 ( 0.7 )

Adjustment to pension liability, less related income tax provision of $( 1.3 ) and $( 3.8 ) in 2022, $( 1.2 ) and $( 3.8 ) in 2021

Unrealized losses on cash flow derivative instruments, less related income tax benefit of $ 0.0 in 2023 and $ 0.2 in 2022

( 0.1 ) ( 0.6 )

Adjustment to pension liability, less related income tax provision of zero in 2023 and $( 1.2 ) in 2022

Comprehensive Earnings $ 129.3 $ 123.6

3 unchanged sentences

(dollars in millions)

September 30,

Current Assets

26 unchanged sentences

Stockholders’ Equity

Class A Common Stock, $ 5 par value:

authorized 27,000,000 shares;

issued, 26,050,642 and 26,104,441

Common Stock, $ 1 par value:

authorized 240,000,000 shares;

issued 164,656,952 and 164,603,153

Class A Common Stock (shares issued, 26,034,116 and 26,035,656 as of March 31, 2023 and December 31, 2022, respectively)

Common Stock (shares issued 164,673,478 and 164,671,938 as of March 31, 2023 and December 31, 2022, respectively)

Capital in excess of par value 564.3 555.9

8 unchanged sentences

(dollars in millions)

Nine Months Ended

September 30,

Three Months Ended

Operating Activities

3 unchanged sentences

Stock based compensation expense 7.0 7.6

Non-cash impairment 15.6 —

Net changes in operating assets and liabilities:

4 unchanged sentences

Capital expenditures ( 10.7 ) ( 12.9 )

Acquisitions of businesses ( 8.0 ) ( 9.0 )

Investments in marketable securities ( 14.7 ) ( 16.9 )

Net proceeds from sale of marketable securities 15.6 31.9

Cash Provided by (Used in) Investing Activities 58.3 ( 135.3 )

Cash (Used in) Provided by Investing Activities ( 9.8 ) 2.1

Financing Activities

Long-term debt incurred (repaid) 94.6 ( 6.8 )

Long-term debt (repaid) incurred ( 3.7 ) 98.7

Common stock repurchases ( 53.1 ) ( 107.9 )

Net (payments) proceeds from stock option activity ( 1.6 ) 15.7

Net proceeds (payments) from stock option activity 4.7 ( 2.7 )

Dividends paid ( 45.4 ) ( 44.2 )

1 unchanged sentence

Effect of exchange rate changes on cash and cash equivalents 2.4 —

Net decrease in cash and cash equivalents ( 84.5 ) ( 87.0 )

Net increase (decrease) in cash and cash equivalents 15.0 ( 37.5 )

Cash and cash equivalents - beginning of period 391.2 443.3

5 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Class A Common Stock

7 unchanged sentences

Balance at the beginning of period $ 555.9 $ 545.2

Conversion of Class A Common Stock 0.2 — 0.2 0.2

Issuance of share units ( 10.1 ) ( 5.8 )

2 unchanged sentences

Exercises of stock options 4.7 0.4

Stock incentives — 0.3 7.0 6.6

Issuance of share based compensation 10.1 5.8

Balance at end of period $ 564.3 $ 550.9

8 unchanged sentences

Exercise of stock options 0.2 ( 2.9 )

Stock incentives and directors’ compensation — 0.1 0.3 0.3

Shares repurchased ( 53.1 ) ( 107.9 )

5 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

March 31, 2023

Basis of Presentation

2 unchanged sentences

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results expected for the full year.

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the full year.

It is suggested the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 14, 2023.

Recent Accounting Pronouncement

In November 2021, the Financial Accounting Standards Board (FASB) amended ASC 832, Government Assistance (issued under Accounting Standards Update (ASU) 2021-10, "Disclosures by Business Entities about Government Assistance").

This amendment requires disclosures that are expected to increase the transparency of transactions with a government accounted for by applying a grant or contribution accounting model by analogy, including (1) the types of transactions, (2) the accounting for those transactions, and (3) the effect of those transactions on an entity’s financial statements.

The Company adopted the amendment on January 1, 2022, and the adoption of ASU 2021-10 is not expected to materially impact its annual disclosures, consolidated balance sheets, statements of earnings or statements of cash flows.

Recent Accounting Pronouncements

No recent accounting pronouncements are expected to have an impact on our condensed consolidated financial statements.

Revenue Recognition

9 unchanged sentences

The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $ 103.8 million and $ 155.2 million at September 30, 2022 and December 31, 2021, respectively.

Customer deposit liabilities are short term in nature, recognized into revenue within one year of receipt, and recorded in Trade payables within the condensed consolidated balance sheets.

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $ 70.3 million and $ 85.7 million at March 31, 2023 and December 31, 2022, respectively.

Customer deposit liabilities are short term in nature, recognized into revenue within one year of receipt.

The Company assesses the collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history.

1 unchanged sentence

In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables.

The Company’s allowance for credit losses was $ 10.1 million at September 30, 2022 and $ 9.5 million at December 31, 2021.

The Company’s allowance for credit losses was $ 10.2 million at March 31, 2023 and $ 9.5 million at December 31, 2022.

Rebates and incentives are based on pricing agreements and are tied to sales volume.

3 unchanged sentences

Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.

Revenue Recognition (continued)

Disaggregation of Net Sales

4 unchanged sentences

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

Revenue Recognition (continued)

As each segment manufactures and markets products in its respective region of the world, the Company has determined that geography is the primary factor in reporting its sales.

15 unchanged sentences

The Company sells water treatment products through its retail and wholesale distribution channels, similar to water heater products and related parts.

The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through internet sales channels.

The Company’s water treatment products are also sold through independent water quality dealers as well as directly to consumers including through e-commerce sales channels.

A portion of the Company’s sales of water treatment products in the North America segment is comprised of replacement filters.

3 unchanged sentences

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

North America

1 unchanged sentence

Boilers and related parts 58.4 57.5

Water treatment products and related parts 51.8 49.6 168.4 148.3

Water treatment products 57.0 56.8

Total North America 752.7 730.1

5 unchanged sentences

Total Net Sales $ 966.4 $ 977.7

On October 19, 2021, the Company acquired 100 percent of the shares and related assets of Giant Factories, Inc.

(Giant), a Canada-based manufacturer of residential and commercial water heaters for $ 198.6 million, net of cash acquired.

The Company paid $ 2.5 million of the purchase price in the second quarter of 2022 as a result of final working capital adjustments.

The Company incurred acquisition costs of approximately $ 1.3 million in 2021.

Under the Giant purchase agreement, approximately $ 8 million of the purchase price was set aside as an escrow to satisfy any potential obligations of the former owners of Giant, should they arise.

The allocation of the purchase price to goodwill decreased by $ 2.3 million in the second quarter of 2022 due to the net impact of a measurement period adjustment, primarily related to income tax matters, partially offset by the final working capital adjustment.

The purchase price allocation remains preliminary and subject to final valuation adjustments that will be completed within the one year period following the acquisition date.

The addition of Giant increased the Company's North America market penetration, created additional capacity and enhanced the Company's distribution capabilities.

Giant is included in the North America segment.

The following table summarizes the preliminary allocation of fair value of the assets acquired and liabilities assumed at the date of acquisition.

Of the $ 53.8 million of acquired identifiable intangible assets, $ 43.9 million was assigned to trademarks that are not subject to amortization and $ 9.2 million was assigned to customer relationships which are amortized over 22 years, and the remaining $ 0.7 million was assigned to non-compete agreements which are amortized over five years .

The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill.

The following table summarizes the estimated fair values of Giant's assets acquired and liabilities assumed at the date of acquisition:

October 19, 2021 (dollars in millions)

Current assets, net of cash acquired $ 60.1

Property, plant and equipment 55.8

Intangible assets 53.8

Goodwill 77.6

Total assets acquired 247.3

Current liabilities ( 39.2 )

Long Term liabilities ( 9.5 )

Net assets acquired $ 198.6

During the second quarter of 2022, the Company acquired a privately-held water treatment company.

The Company paid an aggregate cash purchase price of $ 5.5 million, net of cash acquired.

The addition of the company acquired expands the Company's water treatment platform and is included in the North America segment for reporting purposes.

As required under ASC 805 Business Combinations , results of operations have been included in the Company’s consolidated financial statements from the date of their acquisition.

During the third quarter of 2022, the Company incurred $ 4.3 million of expenses and related income tax benefit of $ 1.1 million associated with a terminated acquisition.

These expenses were related to the due diligence of a prospective acquisition target and recorded within selling, general and administrative expenses in the condensed consolidated statement of operations.

Impairment Expense

In the first quarter of 2023, the Company entered into negotiations to sell its business in Turkey (disposal group), which is included in the Company's Rest of World segment.

The Company determined that the fair value of the disposal group, less cost to sell, was lower than its carrying amount.

As a result, in the first quarter of 2023, the Company recorded an impairment expense of $ 15.6 million of which $ 12.5 million was recorded in the Rest of World segment and $ 3.1 million was recorded in Corporate Expense.

The impairment was recorded as a net reduction of $ 4.5 million to the assets and liabilities and $ 11.1 million for the anticipated liquidation of the cumulative foreign currency translation adjustment associated with the disposal group.

The accrual for the impairment is recorded in Accrued liabilities in the condensed consolidated balance sheet.

As of March 31, 2023, the disposal group did not meet the requirements to be classified as discontinued operations as the sale will not have a material effect on the Company's operations and does not represent a shift in the Company's strategy.

Accordingly, the remaining carrying value of the disposal group as of March 31, 2023, was $ 0.6 million and classified as held for sale.

The sale of the disposal group was completed in April 2023.

The Company’s lease portfolio consists of operating leases for buildings and equipment, such as forklifts and copiers, primarily in the United States and China.

7 unchanged sentences

Renewal terms can extend the lease term from one to five years and options to terminate can be effective within one year .

The exercise of lease renewal or termination is at the

Leases (continued)

Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants or material subleases.

The exercise of lease renewal or termination is at the Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability.

The Company’s lease agreements do not contain any arrangements related to material residual value guarantees, restrictive covenants or material subleases.

Cash flows associated with leases are materially consistent with the expense recorded in the condensed consolidated statement of earnings.

Supplemental balance sheet information related to leases is as follows:

(dollars in millions) September 30,

(dollars in millions) March 31,

2023 December 31, 2022

4 unchanged sentences

Operating lease assets $ 32.3 $ 29.8

Lease Term and Discount Rate September 30, 2022

Lease Term and Discount Rate March 31, 2023

Weighted-average remaining lease term 7.4 years

Weighted-average discount rate 3.71 %

Leases (continued)

The components of lease expense were as follows:

(dollars in millions) Three months ended

September 30,

Lease Expense Classification 2023 (1)

3 unchanged sentences

(2) 2022 includes short-term and variable lease expenses of $ 0.5 million and $ 0.8 million, respectively.

(dollars in millions) Nine Months Ended

September 30,

Lease Expense Classification 2022 (1)

Operating lease expense Cost of products sold $ 2.7 $ 2.9

Selling, general and administrative expenses 12.4 12.3

(1) 2022 includes short-term and variable lease expenses of $ 1.6 million and $ 2.5 million, respectively.

(2) 2021 includes short-term and variable lease expenses of $ 1.6 million and $ 1.8 million, respectively.

Leases (continued)

Maturities of lease liabilities were as follows:

(dollars in millions) September 30,

(dollars in millions) March 31,

After 2027 11.7

3 unchanged sentences

The following table presents the components of the Company’s inventory balances:

(dollars in millions) September 30,

(dollars in millions) March 31,

2023 December 31, 2022

7 unchanged sentences

The Company offers warranties on the sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims.

The increase in the reserve for product warranties as of September 30, 2022 compared to September 30, 2021 was primarily due to increased steel prices and the acquisition of Giant.

Refer to Note 3, "Acquisitions", for additional information regarding the acquisition of Giant.

The following table presents the Company’s warranty liability activity:

(dollars in millions) Three Months Ended

September 30,

Balance at July 1, $ 180.0 $ 144.9

Expense 14.0 18.5

Claims settled ( 16.8 ) ( 11.9 )

Balance at September 30, $ 177.2 $ 151.5

(dollars in millions) Nine Months Ended

September 30,

Balance at January 1, $ 182.5 $ 184.4

1 unchanged sentence

Claims settled ( 19.7 ) ( 15.4 )

Balance at September 30, $ 177.2 $ 151.5

Balance at March 31, $ 181.2 $ 182.9

In 2021, the Company renewed and amended its $ 500 million multi-year multi-currency revolving credit agreement with a new expiration date of April 1, 2026.

The facility has an accordion provision that allows it to be increased up to $ 850 million if certain conditions (including lender approval) are satisfied.

Borrowings under bank credit lines and commercial paper borrowings are supported by a $ 500 million revolving credit agreement.

As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at September 30, 2022.

Borrowings under the Company's bank credit lines and commercial paper borrowings are supported by a $ 500 million revolving credit agreement.

As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at March 31, 2023.

At its option, the Company either maintains cash balances or pays fees for bank credit and services.

The facility requires the Company to maintain two financial covenants, a leverage ratio test and an interest coverage test.

The Company was in compliance with the covenants as of September 30, 2022.

The Company was in compliance with the covenants as of March 31, 2023.

Earnings per Share of Common Stock

2 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Denominator for basic earnings per share - weighted average shares 150,897,302 157,018,566

7 unchanged sentences

Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002.

The number of shares available for granting of options or share units at September 30, 2022 was 7,134,900 .

The number of shares available for granting of share units at March 31, 2023 was 2,491,654 .

Upon stock option exercise or share unit vesting, shares are issued from treasury stock.

Total stock based compensation expense recognized in the three months ended September 30, 2022 and 2021 was $ 1.4 million and $ 1.4 million, respectively.

Total stock based compensation expense recognized in the nine months ended September 30, 2022 and 2021 was $ 10.4 million and $ 10.3 million, respectively.

Total stock based compensation expense recognized in the three months ended March 31, 2023 and 2022 was $ 7.0 million and $ 7.6 million, respectively.

Stock Options

The stock options granted in the nine months ended September 30, 2022 and 2021 have three year pro rata vesting from the date of grant.

Stock options are issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant.

For active employees, all options granted in 2022 and 2021 expire ten years after the date of grant.

The Company decided to no longer grant stock options beginning with fiscal year 2023.

Stock options previously granted have a three year pro rata vesting from the date of grant.

Stock options were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant.

For active employees, all options granted expire ten years after the date of grant.

The Company’s stock options are expensed ratably over the three year vesting period;

however, included in the stock option expense for the nine months ended September 30, 2022 and 2021 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period.

Stock based compensation expense attributable to stock options in the three months ended September 30, 2022 and 2021 was $ 0.5 million and $ 0.5 million, respectively.

Stock based compensation expense attributable to stock options in the nine months ended September 30, 2022 and 2021 was $ 5.0 million and $ 4.6 million, respectively.

Stock Based Compensation (continued)

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the nine months ended September 30, 2022:

however, included in the stock option expense for the three months ended March 31, 2022 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period.

Stock based compensation expense attributable to stock options in the three months ended March 31, 2023 and 2022 was $ 0.3 million and $ 3.9 million, respectively.

Changes in options, all of which relate to the Company’s Common Stock, were as follows for the three months ended March 31, 2023:

Price Number of

2 unchanged sentences

Outstanding at January 1, 2023 $ 51.22 2,481,606

Granted 74.11 322,460

Exercised 45.47 ( 191,054 )

Forfeited 61.09 ( 3,605 )

Outstanding at September 30, 2022 51.19 2,511,824 7 years $ 9.9

Exercisable at September 30, 2022 46.89 1,703,369 6 years $ 8.4

The weighted-average fair value per option at the date of grant during the nine months ended September 30, 2022 and 2021 using the Black-Scholes option-pricing model was $ 17.57 and $ 14.03 , respectively.

Outstanding at March 31, 2023 51.69 2,286,947 6 years $ 41.5

Exercisable at March 31, 2023 48.72 1,952,622 6 years $ 40.4

Stock Based Compensation (continued)

There were no stock options granted in 2023.

The weighted-average fair value per option at the date of grant during the three months ended March 31, 2022 using the Black-Scholes option-pricing model was $ 17.59 .

Assumptions were as follows:

Nine Months Ended

September 30,

Three Months Ended

Expected life (years) 5.7

4 unchanged sentences

The risk-free interest rates for purposes of these models are based on the U.S.

Treasury yield curve in effect on the date of grant for the respective expected lives of the option.

Treasury yield in effect on the date of grant for the respective expected lives of the option.

The expected dividend yields for purposes of these models are based on the dividends paid in the preceding four quarters divided by the grant date market value of the Common Stock.

The expected volatility for purposes of these models are based on the historical volatility of the Common Stock.

Restricted Stock and Share Units

Participants may also be awarded shares of restricted stock or share units under the Incentive Plan.

Participants of the Incentive Plan may also be awarded share units.

Share units vest three years after the date of grant.

The Company granted 94,604 and 104,223 share units under the Incentive Plan in the nine months ended September 30, 2022 and 2021, respectively.

The Company granted 165,686 and 88,894 share units under the Incentive Plan in the three months ended March 31, 2023 and 2022, respectively.

The share units were valued at $ 11.1 million and $ 6.6 million at the date of issuance in 2023 and 2022, respectively, based on the price of the Company’s Common Stock at the date of grant.

The share units are recognized as compensation expense ratably over the three-year vesting period;

however, included in share unit expense in the three and nine months ended September 30, 2022 and 2021 was expense associated with accelerated vesting of restricted stock and share unit awards for certain employees who either are retirement eligible or will become retirement eligible during the vesting period.

Stock based compensation expense attributable to share units of $ 1.0 million and $ 0.9 million was recognized in the three months ended September 30, 2022 and 2021, respectively.

Stock based compensation expense attributable to share units of $ 5.5 million and $ 5.7 million was recognized in the nine months ended September 30, 2022 and 2021, respectively.

however, included in share unit expense in the three months ended March 31, 2023 and 2022 was expense associated with accelerated vesting of share unit awards for certain employees who are retirement eligible or will become retirement eligible during the vesting period.

Stock based compensation expense attributable to share units of $ 6.6 million and $ 3.7 million was recognized in the three months ended March 31, 2023 and 2022, respectively.

Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares.

Unvested cash-settled awards are remeasured at each reporting period.

Stock Based Compensation (continued)

A summary of share unit activity under the Incentive Plan is as follows for the nine months ended September 30, 2022:

A summary of share unit activity under the Incentive Plan is as follows for the three months ended March 31, 2023:

Number of Units Weighted-Average

4 unchanged sentences

Forfeited ( 2,449 ) 64.50

Issued and unvested at September 30, 2022 380,672 52.92

The following table presents the components of the Company’s net pension expense (income):

Issued and unvested at March 31, 2023 386,983 63.16

Performance Stock Units

Beginning in 2023, certain executives may also be awarded performance stock units under the Incentive Plan.

Performance stock units vest over three years following the date of the grant.

Performance stock units vest under a set of measurement criteria which are based upon achievement of certain Environmental, Social, and Governance targets.

Potential payouts range from zero to 150 % of the target awards and changes from target amounts are reflected as performance adjustments.

The Company granted 24,580 performance stock units under the Incentive Plan in the three months ended March 31, 2023.

The performance stock units were valued at $ 1.7 million at the date of issuance in 2023, based on the price of the Company’s Common Stock at the date of grant.

The weighted average grant date value for the units granted was $ 67.14 .

The performance stock units are recognized as compensation expense ratably over the three-year vesting period.

Stock based compensation expense attributable to performance stock units of $ 0.1 million was recognized in the three months ended March 31, 2023.

Certain non-U.S.-based executives receive the cash value of the share price at the vesting date in lieu of shares.

Unvested cash-settled awards are remeasured at each reporting period.

The following table presents the components of the Company’s net pension expense:

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Service cost $ 0.3 $ 0.4

3 unchanged sentences

Amortization of prior service cost — ( 0.1 )

Defined benefit plan expense (income) $ 3.6 $ ( 2.9 ) $ 10.9 $ ( 8.7 )

The service cost component of net periodic benefit cost is presented within cost of products sold and selling, general and administrative expenses within the condensed consolidated statements of earnings while the other components of pension expense (income) are reflected in other expense (income).

Defined benefit plan expense $ 0.3 $ 3.6

The Company was not required to and did no t make a contribution to its U.S.

1 unchanged sentence

The Company is no t required to make a contribution in 2023.

In 2021, the Company's Board of Directors approved the termination of the Company's largest defined benefit pension plan (the Plan) representing over 95 percent of the Company's pension plan liabilities with a termination date of December 31, 2021.

In April 2022, the Plan received a determination letter from the IRS that allowed the Company to proceed with the termination process for the Plan.

In 2022, the Company expects to annuitize the remaining pension liability.

The Plan settlement, which the Company expects to complete in the fourth quarter of 2022, will accelerate the recognition of approximately $ 445 million of non-cash, pre-tax pension expenses.

In 2021, the Company's Board of Directors approved the termination of the Company's largest defined benefit pension plan (the Plan) with a termination date of December 31, 2021.

The Plan represented over 95 percent of the Company's pension plan liability.

In the fourth quarter of 2022, the Company settled Plan liabilities through lump-sum payments from existing plan assets to eligible participants who elected to receive them and through the purchase of annuities from Mass Mutual Life Insurance Company (MML).

As of March 1, 2023, MML assumed the future annuity payments for those eligible active and former employees and their beneficiaries.

Remaining pension assets associated with the Plan at March 31, 2023 are $ 21.5 million.

The Company intends to use the remaining assets to fund future non-elective contributions to the Company’s defined contribution plan.

For additional information regarding the termination of the Plan and the Company’s defined contribution plan, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 14, 2023.

Segment Results

6 unchanged sentences

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

North America $ 752.7 $ 730.1

6 unchanged sentences

Rest of World (2)

Inter-segment — ( 0.1 ) ( 0.1 ) ( 0.1 )

163.6 178.5 518.1 484.7

Inter-segment earnings elimination — ( 0.1 )

Corporate expense (3)

4 unchanged sentences

Net earnings $ 126.9 $ 119.8

(1) includes pension expense (income) of:

$ 2.6 $ ( 2.6 ) $ 7.8 $ ( 7.8 )

(2) includes legal judgment income of:

( 11.5 ) — ( 11.5 ) —

(3) includes terminated acquisition-related expenses of:

(4) includes pension expense (income) of:

0.4 ( 0.6 ) 1.1 ( 1.7 )

Additional Information

(1) Adjustments:

North America

includes pension expense of:

(2) Adjustments:

Rest of World

includes impairment expense of:

(3) Adjustments:

Corporate expense

includes impairment expense of:

includes pension expense of:

Fair Value Measurements

ASC 820, Fair Value Measurements , among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis.

Accounting Standards Codification (ASC) 820, Fair Value Measurements , among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring basis or nonrecurring basis.

ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

5 unchanged sentences

Assets and liabilities measured at fair value are based on the market approach which are prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following table presents assets (liabilities) measured at fair value on a recurring basis (dollars in millions):

Fair Value Measurement Using September 30,

Fair Value Measurements (continued)

Assets (liabilities) measured at fair value on a recurring basis are as follows (dollars in millions):

Fair Value Measurement Using Balance Sheet Location March 31,

2023 December 31, 2022

Quoted prices in active markets for identical assets (Level 1) $ 58.3 $ 188.1

Significant other observable inputs (Level 2) 7.9 ( 0.7 )

Quoted prices in active markets for identical assets (Level 1) Marketable Securities $ 89.8 $ 90.6

Significant other observable inputs (Level 2) Other current assets 7.0 6.5

Items measured at fair value were comprised of the Company’s marketable securities (Level 1) and derivative instruments (Level 2).

There were no changes in the Company’s valuation techniques used to measure fair values on a recurring basis during the nine months ended September 30, 2022.

There were no changes in the Company's valuation techniques used to measure fair values on a recurring basis during the three months ended March 31, 2023.

Derivative Instruments

16 unchanged sentences

The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts that are designated as cash flow hedges:

(dollars in millions) September 30, 2022 December 31, 2021

(dollars in millions) March 31, 2023 December 31, 2022

Buy Sell Buy Sell

British pound $ — $ 1.2 $ — $ —

Canadian dollar — 57.6 — 76.8

5 unchanged sentences

subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S.

For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its non-U.S.

For the derivative instruments that are designated and qualify as net investment hedges,

Derivative Instruments (continued)

gains and losses are reported in other comprehensive loss where they offset gains and losses recorded on the Company’s net investments in its non-U.S.

subsidiaries.

These hedges are determined to be effective.

The Company recognized zero and $ 1.4 million of after-tax gains associated with hedges of net investments in non-U.S.

subsidiaries in currency translation adjustment in other comprehensive loss in the three and nine months ended September 30, 2022, respectively.

The Company recognized zero and $( 0.1 ) million of after-tax losses associated with hedges of a net investment in non-U.S.

subsidiaries in currency translation adjustment in other comprehensive loss in both the three and nine months ended September 30, 2021, respectively.

The contractual amount of the Company's foreign currency forward contracts that are designated as net investment hedges is zero as of September 30, 2022.

Derivative Instruments (continued)

The Company recognized $ 0.5 million of after-tax gains associated with hedges of net investments in non-U.S.

subsidiaries in currency translation adjustment in other comprehensive loss in the three months ended March 31, 2023.

The Company recognized $ 0.3 million of after-tax losses associated with hedges of a net investment in non-U.S.

subsidiaries in currency translation adjustment in other comprehensive loss in the three months ended March 31, 2022.

The contractual amount of the Company's foreign currency forward contracts that are designated as net investment hedges was $ 25.0 million as of March 31, 2023.

The following tables present the impact of derivative contracts on the Company’s financial statements.

Fair value of derivatives designated as hedging instruments under ASC 815:

(dollars in millions) Balance Sheet Location September 30,

(dollars in millions) Balance Sheet Location March 31,

2023 December 31,

3 unchanged sentences

The effect of cash flow hedges on the condensed consolidated statement of earnings:

Three Months Ended September 30 (dollars in millions):

Derivatives in ASC 815 cash flow hedging relationships Amount of gain recognized in other

Three Months Ended March 31 (dollars in millions):

Derivatives in ASC 815 cash flow hedging relationships Amount of gain (loss) recognized in other

comprehensive

10 unchanged sentences

Foreign currency contracts $ 1.7 $ ( 0.7 ) Cost of products sold $ 1.9 $ 0.1

Nine Months Ended September 30 (dollars in millions):

Derivatives in ASC 815 cash flow hedging relationships Amount of gain (loss) recognized in other

comprehensive

loss on derivatives Location of gain (loss)

reclassified from

accumulated other

comprehensive loss

into earnings Amount of gain (loss)

reclassified from

accumulated other

comprehensive

loss into earnings

2022 2021 2022 2021

Foreign currency contracts $ 8.5 $ ( 1.9 ) Cost of products sold $ 1.8 $ ( 0.9 )

Balance Sheet Hedges

2 unchanged sentences

These foreign exchange contracts did not qualify for hedge accounting in accordance with ASC 815 and as such were marked to market through earnings.

The fair value of the foreign exchange contracts was an asset of $ 0.4 million as of September 30, 2022.

The fair value of the foreign exchange contracts was a liability of $ 0.8 million as of December 31, 2021 and recorded in Accrued liabilities within the consolidated balance sheet.

The fair value of the foreign exchange contracts was zero as of March 31, 2023.

The fair value of the foreign exchange contracts was an asset balance of $ 0.1 million as of December 31, 2022 and recorded in Other current assets within the consolidated balance sheet.

The following table summarizes the contractual amounts of the Company's foreign exchange contracts that are designated as balance sheet hedges:

(dollars in millions) September 30, 2022 December 31, 2021

(dollars in millions) March 31, 2023 December 31, 2022

Buy Sell Buy Sell

Canadian dollar $ — $ 76.4 $ — $ 81.5

Derivative Instruments (continued)

The amounts recognized within the consolidated statements of earnings related to the Company's foreign exchange contracts are set forth below.

Three Months Ended September 30 (dollars in millions):

Derivatives not designated as hedging instruments:

Location of loss within the consolidated statements of earnings

Foreign exchange contracts Other expense (income) - net $ 0.4 $ —

Nine Months Ended September 30 (dollars in millions):

Three Months Ended March 31 (dollars in millions):

Derivatives not designated as hedging instruments:

Location of loss within the consolidated statements of earnings

Foreign exchange contracts Other expense (income) - net $ 1.5 $ —

The Company’s effective income tax rate for the three and nine months ended September 30, 2022 was 24.1 percent and 23.7 percent, respectively.

The Company estimates that its annual effective income tax rate for the full year 2022 will be between approximately 23.5 and 24.0 percent.

The effective income tax rate for the three and nine months ended September 30, 2021 was 20.9 percent and 21.7 percent, respectively.

The change in the effective income tax rate for the three and nine months ended September 30, 2022 compared to the effective income tax rate for the three and nine months ended September 30, 2021 was primarily due to a non-recurring favorable tax impact recorded in 2021 of $ 4.2 million related to amending a previously filed tax return and a change in geographical earnings mix.

As of September 30, 2022, the Company had $ 14.3 million of unrecognized tax benefits of which $ 0.5 million would affect its effective income tax rate if recognized.

Foreign exchange contracts Other (income) expense - net $ ( 0.1 ) $ 1.3

The Company’s effective income tax rate for the three months ended March 31, 2023 was 25.9 percent compared to 23.5 percent for the three months ended March 31, 2022.

The Company estimates that its annual effective income tax rate for the full year 2023 will be approximately 24.0 percent.

The change in the effective income tax rate for the three months ended March 31, 2023 compared to the effective income tax rate for the three months ended March 31, 2022 was primarily due to a change in geographical earnings mix as well as a $ 15.6 million impairment expense recorded with no associated tax benefit.

Refer to Note 3 for additional information regarding the impairment expense.

As of March 31, 2023, the Company had $ 15.0 million of unrecognized tax benefits of which $ 2.9 million would affect its effective income tax rate if recognized.

The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Company’s U.S.

federal income tax returns for 2017-2022 are subject to audit.

The Company is subject to state and local income tax audits for tax years 2008-2022.

The Company is subject to non-U.S.

income tax examinations for years 2015-2022.

federal income tax returns and its U.S.

state and local income tax returns are subject to audit for the years 2017-2023 and 2009-2023, respectively.

The Company is subject to examinations in foreign tax jurisdictions for the years 2017-2023.

Commitments and Contingencies

5 unchanged sentences

Potential losses under the repurchase arrangements represent the difference between the repurchase price and net proceeds from the resale of product plus costs incurred in the process, less related distributor rebates.

Before considering any reduction of distributor rebate accruals of $ 1.4 million and $ 3.9 million as of September 30, 2022 and December 31, 2021, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $ 2.4 million as of September 30, 2022 and $ 7.2 million as of December 31, 2021.

The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of September 30, 2022 and December 31, 2021.

On September 28, 2022, the Company received a cash judgment of $ 11.5 million from a competitor of our North America segment related to its infringement of one of the Company’s patents.

The terms of the judgment resulted in pre-tax income of $ 11.5 million that is recorded as an offset to selling, general and administrative expenses and a related tax expense of $ 2.9 million.

Before considering any reduction of distributor rebate accruals of $ 1.2 million and $ 1.1 million as of March 31, 2023 and December 31, 2022, respectively, and from the resale of the related inventory, the gross amount the Company would be obligated to repurchase, which would be contingent on the default of all of the outstanding loans, was approximately $ 2.3 million as of March 31, 2023 and $ 2.4 million as of December 31, 2022.

The Company’s reserves for estimated losses under repurchase arrangements were immaterial as of March 31, 2023 and December 31, 2022.

Changes in Accumulated Other Comprehensive Loss by Component

1 unchanged sentence

(dollars in millions) Three Months Ended

September 30,

Cumulative foreign currency translation

Balance at beginning of period $ ( 84.1 ) $ ( 44.7 )

Other comprehensive loss before reclassifications ( 28.9 ) ( 2.4 )

Balance at end of period ( 97.6 ) ( 47.0 )

Unrealized net gain (loss) on cash flow derivatives

Balance at beginning of period 2.1 ( 0.5 )

Other comprehensive gain before reclassifications 2.5 0.6

Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $ 0.2 and $ 0.1 in 2022 and 2021, respectively)

( 0.8 ) ( 0.1 )

Balance at end of period ( 81.6 ) ( 44.1 )

Pension liability

Balance at beginning of period ( 279.8 ) ( 266.1 )

Amounts reclassified from accumulated other comprehensive loss:

Balance at end of period ( 276.1 ) ( 262.2 )

Accumulated other comprehensive loss, end of period $ ( 368.1 ) $ ( 309.3 )

(1) Amortization of pension items:

Actuarial losses $ 5.1 (2)

Prior year service cost ( 0.1 ) (2)

Income tax benefit ( 1.3 ) ( 1.2 )

Reclassification net of income tax benefit $ 3.7 $ 3.9

(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.

See Note 10 - Pensions for additional details.

Changes in Accumulated Other Comprehensive Loss by Component (continued)

Changes to accumulated other comprehensive loss by component are as follows:

(dollars in millions) Nine Months Ended

September 30,

Cumulative foreign currency translation

Balance at beginning of period $ ( 44.7 ) $ ( 48.1 )

Other comprehensive (loss) income before reclassifications ( 52.9 ) 1.1

Balance at end of period ( 97.6 ) ( 47.0 )

Unrealized net gain (loss) on cash flow derivatives

1 unchanged sentence

Other comprehensive gain (loss) before reclassifications 1.3 ( 0.5 )

Realized (gains) losses on derivatives reclassified to cost of products sold (net of income tax provision (benefit) of $ 0.4 and $( 0.2 ) in 2022 and 2021, respectively)

Realized gains on derivatives reclassified to cost of products sold (net of income tax provision of $ 0.5 and $ — in 2023 and 2022, respectively)

( 1.4 ) ( 0.1 )

Balance at end of period 4.8 —

12 unchanged sentences

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 1. Financial Statements