What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-10-28 · 125 added, 200 removed, 108 unchanged (75% of the section changed)

5 unchanged sentences

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

We saw improvement in our supply chain during 2022, particularly in the second half of the year and remained relatively stable through the first quarter of 2023.

We remain in close contact with our suppliers and logistics providers to resolve supply chain constraints as they arise.

We continue to seek acquisitions that enable geographic growth, expand our core business, and establish adjacencies.

Consistent with this strategy, we acquired Giant Factories, Inc.

(Giant), a Canada-based manufacturer of residential and commercial water heaters, in October 2021 using a combination of debt and cash.

The acquisition fits squarely in our core capabilities, supplements our presence in Canada and enhances our capacity and distribution in the region.

Giant contributed $25.3 million and $88.1 million of net sales in the third quarter and first nine months of 2022, respectively.

Refer to Note 3, "Acquisitions" for additional information.

We also continue to look for opportunities to add to our existing operations demonstrated by our previous introductions of water treatment products in India and range hoods and cooktops in China.

Our global supply chain management team continued to navigate through supply chain and logistics challenges in the first nine months of 2022.

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

While we continued to see improvement in our supply chain as we closed out the third quarter, challenges still persist.

In addition, while steel markets moderated in the first nine months of 2022, commodity prices and availability remain volatile.

We remain in close contact with our suppliers and logistics providers to troubleshoot, manage and resolve bottlenecks, as the environment remains unpredictable.

In our North America segment, after approximately eight percent growth in 2021, we expect residential industry water heater volumes will be down approximately 12 to 13 percent in 2022 compared with 2021 as we believe that industry demand will normalize to more historical growth rates.

We saw greater than anticipated softness in residential water heater order rates in the third quarter of 2022 as we believe our customers right-sized their inventories in response to our lead times returning to pre-pandemic levels after being elevated due to COVID-19-related supply chain constraints.

While we expect quarter-over- quarter improvement in the fourth quarter, we expect North America residential water heater volume softness will persist through the remainder of the 2022.

We believe that commercial water heater industry unit volumes will decline approximately 15 percent in 2022 compared to 2021 primarily due to weakness in the commercial electric water heaters greater than 55 gallons product category.

We expect commercial gas water heater unit volumes to be flat to slightly down.

We expect net sales in 2022 will benefit from our 2021 price increases, which had a cumulative effect on our water heater prices of approximately 50 percent.

We expect to see an approximately 25 percent increase in our net sales of boilers in 2022 compared to 2021 driven by increased pricing in response to higher input costs coupled with higher demand.

We anticipate net sales of our North America water treatment products, inclusive of acquisitions, will increase approximately 10 percent in 2022, compared to 2021, primarily driven by higher consumer demand for our point of use and point of entry water treatment systems.

In our Rest of World segment, after strong growth in 2021, we expect 2022 net sales in China will be flat to slightly down in local currency compared with 2021.

Our business in China continues to be negatively impacted by the COVID-19 pandemic.

To slow the spread of COVID-19 in China, targeted shutdowns began in certain cities late in the first quarter of 2022 and persisted through the first nine months of the year.

The situation remains unpredictable.

Combining all of these factors, we expect our consolidated net sales to increase between five and seven percent in 2022, which includes our acquisition of Giant adding approximately $100 million in incremental net sales.

This guidance excludes the potential impacts from future acquisitions and assumes the COVID-19 related shutdowns in China remain at current levels throughout the rest of the year and do not significantly impact our operations or our employees, customers or suppliers.

We will also continue to look for opportunities to add to our existing operations in high growth regions demonstrated by our previous introductions of water treatment products in India and range hoods and cooktops in China.

In the first quarter of 2023, we committed to a plan to sell our business in Turkey.

We recognized a non-cash impairment charge in the first quarter of $15.6 million, primarily in anticipation of the liquidation of the cumulative foreign currency translation adjustment.

While the more project based business model in Turkey did not fit well in our strategy, we remain committed to our global water treatment business and will continue to invest in other regions.

In our North America segment, we saw resilient demand in the residential water heater industry in the first quarter.

We continue to monitor proactive replacement and new home completions.

We project 2023 industry residential unit volumes will be approximately flat to 2022.

Demand for commercial electric water heaters was strong in the first quarter of 2023 compared to the first quarter of 2022 and our orders remain strong in April.

Therefore, we expect that commercial water heater industry volumes will increase mid-single digits compared to 2022.

We expect to see a mid-single digit increase in our sales of boilers in 2023 compared to 2022, driven by pricing and demand for our high efficiency commercial boilers.

We anticipate sales of our North America water treatment products will increase approximately five to seven percent in 2023, compared to 2022, primarily driven by pricing and consumer demand.

In our Rest of World segment, our China business performed as we expected in the first quarter and we saw sequential month over month improvement in sales.

We believe it will take time for consumer confidence to strengthen and for the economy to improve.

We project our sales in China will grow three to five percent in 2023 in local currency compared to 2022.

Our guidance assumes volume will improve sequentially throughout the year.

We assume that currency translation will negatively impact sales by approximately two percent.

Combining all of these factors, we expect our 2023 consolidated sales to be approximately flat to 2022 with a range of plus or minus two percent.

Our guidance excludes the impacts from potential future acquisitions.

Results of Operations

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net sales $ 966.4 $ 977.7

3 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

Our net sales in the third quarter of 2022 were $874.2 million, or 4.4 percent lower than 2021 third quarter net sales of $914.6 million.

Net sales in the first nine months of 2022 were $2,817.8 million, or approximately 11 percent higher than $2,543.4 million in the same period last year.

Compared to the prior year quarter, our net sales decrease was primarily driven by lower residential water heater volumes in North America, which more than offset inflation-related pricing actions implemented in 2021.

Our net sales increase in the first nine months of 2022 was primarily driven by inflation-related pricing actions and partially offset by lower residential water heater volumes in North America and lower net sales in China.

In addition, our net sales in China were negatively impacted by approximately $12 million in the third quarter and first nine months of 2022 due to the depreciation of the Chinese currency against the U.S.

Our acquisition of Giant added $25.3 million and $88.1 million of incremental net sales in the third quarter and first nine months of 2022, respectively.

Our gross profit margin in the third quarter of 2022 was 34.9 percent compared to gross profit margin of 37.2 percent in the prior-year period.

Gross profit margin in the first nine months of 2022 was 34.8 percent compared to the gross profit margin of 37.4 percent in the first nine months of 2021.

The lower gross profit margins in the third quarter and first nine months of 2022 compared to the same periods last year were primarily due to higher steel and other material costs and production inefficiencies, which outpaced our pricing actions.

Selling, general, and administrative (SG&A) expenses in the third quarter of 2022 decreased by $22.1 million compared to the third quarter of 2021.

SG&A expenses decreased by $15.2 million in the first nine months of 2022 compared to the prior year period.

The decrease in SG&A expenses in the third quarter of 2022 was primarily due to the recognition of an $11.5 million judgment against a competitor related to its infringement of one of our patents, partially offset by $4.3 million of expenses associated with a terminated acquisition and lower selling expenses.

The decrease in SG&A expenses in the first nine months of 2022 was primarily due to the judgment discussed above, lower management incentive expenses, and lower engineering costs in China, partially offset by increased selling expenses on higher net sales and the terminated acquisition expenses discussed above.

Interest expense in the third quarter of 2022 was $2.4 million compared to $1.0 million in the same period last year.

Interest expense in the first nine months of 2022 was $6.0 million compared to $2.9 million in the same period the previous year.

The increase in interest expense in the third quarter and first nine months of 2022 compared to the same periods last year was primarily due to higher debt levels.

Other expense was $2.4 million in the third quarter of 2022 compared to other income of $(4.7) million in the third quarter of 2021.

Other expense was $6.4 million in the first nine months of 2022 compared to other income of ($13.6) million in the first nine months of 2021.

Pension expense in the third quarter of 2022 was $3.6 million compared to pension income of ($2.9) million in the third quarter of 2021.

Pension expense in the first nine months of 2022 was $10.9 million compared to pension income of ($8.7) million in the first nine months of 2021.

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

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

In 2022, we expect to annuitize the remaining Plan pension liability.

The Plan settlement, which we expect to complete in the fourth quarter of 2022, will accelerate the recognition of approximately $445 million of non-cash, pre-tax pension expenses, or approximately $1.73

per share after tax.

In addition, to protect the Plan’s funded status, the Plan transferred a significant portion of its assets to lower risk investments in 2021.

The impact of this transition resulted in a lower expected rate of return on pension investments and accordingly, higher pension expenses in 2022 compared to previous years.

The service cost component of our pension income is reflected in cost of products sold and SG&A expenses.

All other components of our pension expense (income) are reflected in other expense (income).

Our pension costs and credits are developed from actuarial valuations.

The valuations reflect key assumptions regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service.

We consider current market conditions, including changes in interest rates, in making these assumptions.

Our assumption for the expected rate of return on plan assets is 3.00 percent in 2022 compared to 6.25 percent in 2021.

The discount rate used to determine net periodic pension costs increased to 2.72 percent in 2022 from 2.45 percent in 2021.

Our effective income tax rates for the third quarter and first nine months of 2022 were 24.1 percent and 23.7 percent, respectively.

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

Our effective income tax rates in the third quarter and first nine months of 2022 were higher than our effective income tax rates in the same periods of 2021 primarily due to a non-recurring $4.2 million favorable tax impact recorded in the prior year periods related to amending a previously filed tax return and a change in geographic earnings mix.

We estimate our annual effective income tax rate for the full year of 2022 will be between 23.5 and 24.0 percent.

Our sales in the first quarter of 2023 were $966.4 million, or 1.2 percent lower than first quarter 2022 sales of $977.7 million.

Compared to the prior year quarter, our change in sales was primarily driven by higher water heater volumes in North America, partially offset by lower sales in China.

In addition, our sales in our Rest of World segment were unfavorably impacted by approximately $17 million in the first quarter of 2023 due to the deprecation of foreign currencies compared to the U.S.

Our gross profit margin in the first quarter of 2023 was 38.7 percent and increased compared to 34.9 percent in the first quarter of 2022.

The higher gross profit margin in the first quarter of 2023 was primarily due to lower steel and other material costs.

Selling, general, and administrative (SG&A) expenses were $187.2 million in the first quarter of 2023 or $7.4 million higher than the first quarter of 2022.

Higher selling expenses were primarily driven by higher selling expenses in North America on higher volumes, partially offset by lower selling expenses in China on lower sales.

Impairment expense in the first quarter of 2023 was $15.6 million which is related to our commitment to sell our business in Turkey.

Of the $15.6 million impairment, $12.5 million was recorded in the Rest of World segment and $3.1 million was recorded in Corporate Expense.

Interest expense in the first quarter of 2023 was $4.0 million and higher compared to $1.5 million in the first quarter of 2022 primarily due to higher debt levels and interest rates.

Other (income) expense-net was ($4.0) million in the first quarter of 2023 compared to expense of $3.7 million in the first quarter of 2022.

Pension expense in the first quarter of 2023 was $0.3 million compared to $3.6 million in the first quarter of 2022.

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.

Our effective income tax rate was 25.9 percent in the first quarter of 2023, compared with 23.5 percent in the first quarter of 2022.

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 the $15.6 million impairment expense recorded with no associated tax benefit.

We estimate that our annual effective income tax rate for the full year of 2023 will be 24.0 percent.

We are providing non-U.S.

Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expense) that exclude the impact of pension settlement expenses as well as legal judgment income, expenses associated with a terminated acquisition and non-operating pension income and expenses.

Reconciliations from GAAP measures to non-GAAP measures are provided below.

Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, total segment earnings, adjusted segment earnings, and adjusted corporate expense) that exclude the impact of the 2023 impairment expense and 2022 non-operating pension expenses.

Reconciliations from GAAP measures to non-GAAP measures are provided in the Non-GAAP Measures section below.

We believe that the measures of adjusted earnings, adjusted EPS, adjusted segment earnings, and adjusted corporate expense provide useful information to investors about our performance and allow management and our investors to better understand our performance between periods without regard to items that we do not consider to be a component of our core operating performance.

1 unchanged sentence

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net Sales $ 752.7 $ 730.1

1 unchanged sentence

Segment margin 25.1 % 20.8 %

Net sales in our North America segment were $652.9 million in the third quarter of 2022 or $5.3 million lower than net sales of $658.2 million in the third quarter of 2021.

Net sales in the first nine months of 2022 were $2,127.1 million or $312.4 million higher than net sales of $1,814.7 million in the same period last year.

Lower net sales in the third quarter of 2022 were primarily driven by lower residential water heater volumes which more than offset price increases implemented in 2021, largely on water heaters, which were in response to rising material and other input costs.

The increased net sales in the first nine months of 2022 compared to the prior year period were primarily driven by the price increases discussed above which were partially offset by lower residential water heater volumes.

In addition, our acquisition of Giant added $25.3 million and $88.1 million of incremental net sales in the third quarter and first nine months of 2022, respectively.

North America segment earnings were $141.8 million in the third quarter of 2022, a decrease of approximately seven percent compared to segment earnings of $151.8 million in the third quarter of 2021.

Segment earnings during the first nine months of 2022 were $453.5 million, an increase of approximately seven percent compared to segment earnings of $423.9 million during the first nine months of 2021.

Segment margins were 21.7 percent and 23.1 percent in the third quarter of 2022 and 2021, respectively.

Segment margins were 21.3 percent and 23.4 percent during the first nine months of 2022 and 2021, respectively.

Lower segment earnings in the third quarter of 2022 compared to the third quarter of 2021 were primarily due to lower residential water heater volumes, higher material costs, and production inefficiencies, partially offset by price increases implemented in 2021 as discussed above and the $11.5 million patent infringement judgment referenced above.

Higher segment earnings in the first nine months of 2022 compared to the prior year period were primarily due to the price increases and the judgment referenced above, partially offset by higher material and logistics costs.

Segment margin was lower in the third quarter and the first nine months of 2022 primarily due to an overall increase in costs, including production inefficiencies, outpacing pricing actions.

Adjusted segment earnings and adjusted segment margin in the third quarter of 2022 were $132.9 million and 20.4 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the third quarter of 2021 were $149.2 million and 22.7

percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first nine months of 2022 were $449.8 million and 21.1 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first nine months of 2021 were $416.1 million and 22.9 percent, respectively.

We estimate our 2022 North America adjusted segment margin will be approximately 21.5 percent, excluding legal judgment income and pension expense.

Adjusted segment earnings and adjusted segment margin in the third quarter of 2022 and 2021 exclude $2.6 million and ($2.6) million of pension expense (income), respectively, and the recognition of the $11.5 million patent infringement judgment.

Adjusted segment earnings and adjusted segment margin in the first nine months of 2022 and 2021 exclude $7.8 million and ($7.8) million of pension expense (income), respectively, and the recognition of the $11.5 million patent infringement judgment.

Sales in our North America segment were $752.7 million in the first quarter of 2023 or $22.6 million higher than sales of $730.1 million in the first quarter of 2022.

Higher sales in the first quarter of 2023 were primarily driven by higher residential and commercial water heater volumes, partially offset by lower pricing.

North America segment earnings were $188.6 million in the first quarter of 2023, an increase of approximately 24.2 percent compared to segment earnings of $151.8 million in the first quarter of 2022.

Segment margins were 25.1 percent and 20.8 percent in the first quarter of 2023 and 2022, respectively.

Higher segment earnings and margins in the first quarter of 2023 compared to the first quarter of 2022 were primarily due to higher volumes of commercial and residential water heaters and lower steel costs.

We estimate our 2023 North America segment margin will be approximately between 23 and 23.5 percent.

Adjusted segment earnings and adjusted segment margin in the first quarter of 2022 were $154.4 million and 21.1 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first quarter of 2022 exclude $2.6 million of pension expense.

Rest of World Segment

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net Sales $ 219.1 $ 256.0

1 unchanged sentence

Segment margin 2.4 % 9.7 %

Net sales in the Rest of World segment were $230.2 million in the third quarter of 2022, or $32.9 million lower than net sales of $263.1 million in the third quarter of 2021.

Net sales during the first nine months of 2022 were $716.1 million, or $32.5 million lower than net sales of $748.6 million during the first nine months ended of 2021.

Net sales in China decreased approximately 15 percent in U.S.

dollar terms and 10 percent in local currency in the third quarter of 2022 and approximately six percent in U.S.

dollar terms and five percent in local currency in the first nine months of 2022 compared to the same period last year.

Lower net sales in China in the third quarter and first nine months of 2022 were primarily driven by lower consumer demand due to COVID-19 related shutdowns.

In addition, our net sales in this segment were negatively impacted by approximately $16 million and $22 million in the third quarter and first nine months, respectively of 2022 compared to the same periods last year, due to the depreciation of foreign currencies compared to the U.S.

Net sales in India increased approximately 16 percent in the third quarter of 2022 on strong demand for our water heater and water treatment products compared to the prior year quarter.

Rest of World segment earnings were $21.8 million in the third quarter of 2022, compared to $26.8 million in the third quarter of 2021.

Segment earnings during the first nine months of 2022 were $64.7 million, compared to $60.9 million during the nine months of 2021.

Segment margins were 9.5 percent and 10.2 percent in the third quarter of 2022 and 2021, respectively.

Segment margins were 9.0 percent and 8.1 percent during the first nine months of 2022 and 2021, respectively.

Lower segment earnings in the third quarter of 2022, were driven by lower volumes in China, partially offset by lower selling and advertising expenses.

The decline in segment operating margin in the third quarter of 2022 was primarily due the impact of negative currency, partially offset by the increase in China operating margins.

Higher segment earnings and margin in the first nine months of 2022 compared to the prior year period were primarily driven by favorable mix and lower engineering, advertising and selling expenses in China.

We expect the full-year segment margin to be approximately 10 percent in 2022.

We expect our consolidated net sales to increase between five and seven percent in 2022, which includes our acquisition of Giant adding approximately $100 million in incremental net sales.

Our expected higher net sales are driven by pricing actions implemented in 2021 in North America, partially offset by lower volumes of residential water heaters in North America.

We expect to achieve full-year earnings of between $1.29 and $1.39 per share and adjusted earnings of between $3.05 and $3.15 per share.

Our 2022 guidance excludes the potential impacts from future acquisitions and assumes the COVID-19 related shutdowns in China remain at current levels throughout the rest of the year and do not significantly impact our operations or our employees, customers or suppliers.

Rest of World sales of $219.1 million in the first quarter of 2023 decreased 14 percent compared to the first quarter of 2022, including an unfavorable currency translation impact of $17 million.

In local currency, segment sales decreased by approximately eight percent compared to last year.

The decrease in sales in the first quarter of 2023 was driven primarily by lower consumer demand in China due to COVID-19.

Sales in India increased 28% in local currency in the first quarter of 2023 on strong demand for our water heater and water treatment products compared to the prior year quarter.

Rest of World segment earnings were $5.3 million in the first quarter of 2023, compared to $24.8 million in the first quarter of 2022.

Segment margins were 2.4 percent and 9.7 percent in the first quarter of 2023 and 2022, respectively.

Lower segment earnings and segment margin in the first quarter of 2023, were primarily driven by the impairment expense of $12.5 million associated with our commitment to sell our business in Turkey and lower sales in China.

Adjusted segment earnings and adjusted segment margin in the first quarter of 2023 were $17.8 million and 8.1 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first quarter of 2023 exclude the $12.5 million of impairment expense.

We estimate our 2023 Rest of World adjusted segment margin will be approximately 10 percent, excluding the impairment expense.

We expect our consolidated sales in 2023 to be flat to 2022 with a range of plus or minus two percent.

Our sales projection is driven by expected flat industry residential unit volumes in North America, increased commercial water heater volumes, higher boiler and water treatment sales in North America, and higher sales in China.

We assume that currency translation will negatively impact sales by approximately two percent.

As a result, we expect to achieve full-year earnings of between $3.20 and $3.40 per share and adjusted earnings of between $3.30 and $3.50 per share.

Our guidance excludes the impacts from potential future acquisitions.

Liquidity & Capital Resources

Our working capital was $668.7 million at September 30, 2022, and higher compared with $633.8 million at December 31, 2021.

A majority of the increase in working capital was driven by lower accounts payable and payroll-related accruals and higher inventory balances than at December 31, 2021, due to higher levels of safety stock on higher cost inventory which were partially offset by lower accounts receivable, and cash balances.

In addition, cash balances as of September 30, 2022 were negatively impacted by $37.4 million due to the effects of changes in foreign currency during the year.

In the first nine months of 2022, we repatriated approximately $120 million of cash from our foreign subsidiaries.

We used the proceeds to pay down outstanding debt balances.

(dollars in millions) Nine Months Ended

September 30,

Our working capital was $748.1 million at March 31, 2023, and higher compared with $699.5 million at December 31, 2022.

The increase in working capital was primarily driven by lower accounts payable, payroll-related accruals and inventory balances than at December 31, 2022, which were partially offset by higher accrued liabilities.

In addition, cash balances as of March 31, 2023 were positively impacted by $2.4 million due to the effects of changes in foreign currency during the year.

(dollars in millions) Three Months Ended

Cash provided by operating activities $ 119.9 $ 16.5

Cash provided by (used in) investing activities 58.3 (135.3)

Cash (used in) provided by investing activities (9.8) 2.1

Cash used in financing activities (97.5) (56.1)

Cash provided by operating activities in the first nine months of 2022 was $214.7 million compared with $376.8 million in the same period last year.

Cash provided by higher earnings in the first nine months of 2022 compared with the prior year was more than offset by lower customer deposits in China, higher incentive payments in 2022 due to record 2021 net sales and earnings, and additional working capital cash outlays for higher levels of safety stock on higher cost inventory.

Our free cash flow in the first nine months of 2022 and 2021 was $163.8 million and $331.5 million, respectively.

We expect free cash flow to be between $400 million to $425 million in 2022.

Cash provided by operating activities in the first three months of 2023 was $119.9 million compared with $16.5 million in the same period last year.

Cash provided by higher earnings in the first three months of 2023 compared with the prior year was also positively impacted by lower incentive payments in 2023 and lower inventory levels.

Our free cash flow in the first three months of 2023 and 2022 was $109.2 million and $3.6 million, respectively.

We expect cash provided by operating activities to be between $650 million and $700 million in 2023.

We expect free cash flow to be between $575 million and $625 million in 2023.

Free cash flow is a non-GAAP measure and is described in more detail in the Non-GAAP Measures section below.

Capital expenditures totaled $50.9 million in the first nine months of 2022, compared with $45.3 million in the same period last year.

Capital expenditures totaled $10.7 million in the first three months of 2023 compared with $12.9 million in the same period last year.

We project 2023 capital expenditures will be between $70 and $75 million and full-year depreciation and amortization expense will be approximately $70 million.

2 unchanged sentences

Borrowing rates under the facility are determined by our leverage ratio.

The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of September 30, 2022, and expect to be in compliance for the foreseeable future.

The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of March 31, 2023, and expect to be in compliance for the foreseeable future.

The facility backs up commercial paper and credit line borrowings.

At September 30, 2022, we had $152.1 million outstanding under the facility and an available borrowing capacity of $347.9 million.

At March 31, 2023, we had $211.1 million outstanding under the facility and an available borrowing capacity of $288.9 million.

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

Our total debt increased by $94.6 million in the first nine months of 2022 and was primarily due to repurchases of our common stock.

Our leverage, as measured by the ratio of total debt to total capitalization, was 14.1 percent at September 30, 2022, compared with 9.7 percent at December 31, 2021.

pension plans continues to meet all funding requirements under ERISA regulations.

We were not required to make a contribution to our pension plan in 2021.

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 in 2022.

Our total debt decreased by $3.7 million in the first three months of 2023 which was primarily due to the payment of debt.

Our leverage, as measured by the ratio of total debt to total capitalization, was 16.0 percent at March 31, 2023, compared with 16.5 percent at December 31, 2022.

In the first quarter of 2023, our Board of Directors approved adding 7,500,000 shares of common stock to our existing discretionary share repurchase authority.

1 unchanged sentence

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

During the first nine months of 2022, we repurchased 4,472,500 shares of our stock at a total cost of $282.0 million.

At September 30, 2022, we had 2,553,857 shares remaining on the share repurchase authority.

During the first three months of 2023, we repurchased 821,000 shares of our stock at a total cost of $53.1 million.

At March 31, 2023, we had 7,057,462 shares remaining on the share repurchase authority.

Depending on factors such as stock price, working capital requirements, and alternative investment opportunities, we expect to spend approximately $300 million on stock repurchases in 2023 through a combination of our Rule 10b5-1 automatic trading plan and open market repurchases.

On October 12, 2022, our Board of Directors declared a regular quarterly cash dividend of $0.30 per share on our Common Stock and Class A common stock, which represents an increase over the amount per share of our most recent dividend.

The dividend is payable on November 15, 2022, to shareholders of record on October 31, 2022.

On April 10, 2023, our Board of Directors declared a regular quarterly cash dividend of $0.30 per share on our Common Stock and Class A common stock.

The dividend is payable on May 15, 2023, to shareholders of record on April 28, 2023.

Non-GAAP Financial Information

We provide non-GAAP measures of free cash flow, adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expense.

We provide non-GAAP measures of free cash flow, adjusted earnings, adjusted EPS, total segment earnings, adjusted segment earnings, and adjusted corporate expense.

We define free cash flow as cash provided by operating activities less capital expenditures.

Our adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expenses excludes the impact of pension settlement expenses, non-operating pension income and expenses, legal judgment income, and expenses associated with terminated acquisition costs.

Our adjusted earnings, adjusted EPS, adjusted segment earnings, and adjusted corporate expenses exclude the impact of the 2023 impairment expense and 2022 non-operating pension expenses.

We believe that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements.

1 unchanged sentence

SMITH CORPORATION

Adjusted Earnings and Adjusted EPS

Adjusted Earnings and Adjusted Earnings Per Share

(dollars in millions, except per share data)

The following is a reconciliation of net earnings and diluted EPS to adjusted earnings (non-GAAP) and adjusted EPS (non-GAAP):

The following is a reconciliation of net earnings and diluted earnings per share to adjusted earnings (non-GAAP) and adjusted earnings per share (non-GAAP):

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

Net Earnings (GAAP) $ 126.9 $ 119.8

Legal judgment income, before tax (11.5) — (11.5) —

Pension expense (income), before tax 3.0 (3.2) 8.9 (9.5)

Terminated acquisition-related expenses, before tax 4.3 — 4.3 —

Impairment expense, before tax 15.6 —

Pension expense, before tax — 2.9

Tax effect on above items — (0.7)

Adjusted Earnings (non-GAAP) $ 142.5 $ 122.0

Diluted EPS (GAAP) (1)

$ 0.71 $ 0.82 $ 2.27 $ 2.15

Legal judgment income per diluted share, before tax (0.07) — (0.07) —

Pension expense (income) per diluted share, before tax 0.02 (0.02) 0.06 (0.06)

Terminated acquisition-related expenses per diluted share, before tax 0.03 — 0.03 —

Diluted Earnings Per Share (GAAP) $ 0.84 $ 0.76

Impairment expense per diluted share, before tax 0.10 —

Pension expense per diluted share, before tax — 0.01

Tax effect on above items per diluted share — —

Adjusted EPS (non-GAAP) (1)

$ 0.69 $ 0.81 $ 2.28 $ 2.11

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

Adjusted Earnings Per Share (non-GAAP) $ 0.94 $ 0.77

SMITH CORPORATION

1 unchanged sentence

(dollars in millions)

The following is a reconciliation of reported segment earnings to adjusted segment earnings (non-GAAP):

The following is a reconciliation of reported earnings before provision for income taxes to total segment earnings (non-GAAP) and adjusted segment earnings (non-GAAP):

Three Months Ended

September 30, Nine Months Ended,

September 30,

2022 2021 2022 2021

Segment Earnings (GAAP)

North America $ 141.8 $ 151.8 $ 453.5 $ 423.9

Rest of World 21.8 26.8 64.7 60.9

Inter-segment earnings elimination — (0.1) (0.1) (0.1)

Total Segment Earnings (GAAP) $ 163.6 $ 178.5 $ 518.1 $ 484.7

North America $ (8.9) $ (2.6) $ (3.7) $ (7.8)

Rest of World — — — —

Inter-segment earnings elimination — — — —

Total Adjustments $ (8.9) $ (2.6) $ (3.7) $ (7.8)

Adjusted Segment Earnings (non-GAAP)

Earnings Before Provision for Income Taxes (GAAP) $ 171.3 $ 156.6

Corporate expense (1)

Interest expense 4.0 1.5

Total Segment Earnings (non-GAAP) $ 193.9 $ 176.5

North America (2)

$ 188.6 $ 151.8

Rest of World (3)

Inter-segment earnings elimination — (0.1)

Total Adjusted Segment Earnings (non-GAAP) $ 154.7 $ 175.9 $ 514.4 $ 476.9

Total Segment Earnings (non-GAAP) $ 193.9 $ 176.5

Additional Information

North America Segment

Pension expense (income), before tax $ 2.6 $ (2.6) $ 7.8 $ (7.8)

Legal judgment income, before tax (11.5) — (11.5) —

Total Adjustments $ (8.9) $ (2.6) $ (3.7) $ (7.8)

SMITH CORPORATION

Adjusted Corporate Expense

(dollars in millions)

The following is a reconciliation of reported Corporate Expense to adjusted Corporate Expense (non-GAAP):

Three Months Ended

September 30, Nine Months Ended,

September 30,

(1) Corporate expense

$ (18.6) $ (18.4)

Corporate Expense (GAAP) $ (16.5) $ (11.1) $ (45.5) $ (38.0)

Corporate pension expense (income) 0.4 (0.6) 1.1 (1.7)

Terminated acquisition-related expenses 4.3 — 4.3 —

Corporate Expense (non-GAAP) $ (11.8) $ (11.7) $ (40.1) $ (39.7)

Impairment expense, before tax 3.1 —

Pension expense, before tax — 0.3

Adjusted Corporate expense (non-GAAP) $ (15.5) $ (18.1)

(2) North America

$ 188.6 $ 151.8

Pension expense, before tax — 2.6

Adjusted North America (non-GAAP) $ 188.6 $ 154.4

(3) Rest of World

Impairment expense, before tax 12.5 —

Adjusted Rest of World (non-GAAP) $ 17.8 $ 24.8

SMITH CORPORATION

2 unchanged sentences

The following is a reconciliation of reported cash flow from operating activities to free cash flow (non-GAAP):

Nine Months Ended,

September 30,

Three Months Ended,

Cash provided by operating activities (GAAP) $ 119.9 $ 16.5

6 unchanged sentences

Diluted EPS (GAAP) $ 3.20 - 3.40 $ 1.51

Estimated pension settlement charge 1.73 (1)

Pension expense (income) 0.06 (2)

Impairment expense 0.10 (1)

Pension settlement charges — 1.60 (2)

Pension expense — 0.06 (3)

Legal judgment income — (0.05)

1 unchanged sentence

Adjusted EPS (non-GAAP) $ 3.30 - 3.50 $ 3.14

(1) Includes pre-tax impairment expense of $12.5 million and $3.1 million, within the Rest of World segment and Corporate expenses, respectively.

(2) Includes pre-tax pension settlement charges of $346.8 million and $70.5 million, within the North America segment and Corporate expenses, respectively.

(3) Includes pre-tax pension expense of $9.7 million and $2.0 million, within the North America segment and Corporate expenses, respectively.

(3) Includes pre-tax pension income of $10.5 million and $2.6 million, within the North America segment and Corporate expenses, respectively.

Critical Accounting Policies

4 unchanged sentences

The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2022.

We believe that at September 30, 2022, there was no material change to this information.

Recent Accounting Pronouncement

Refer to Recent Accounting Pronouncement in Note 1 – Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information.

We believe that at March 31, 2023, there was no material change to this information.

Recent Accounting Pronouncements

Refer to Recent Accounting Pronouncements in Note 1 – Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information.

Forward Looking Statements

4 unchanged sentences

further softening in U.S.

residential water heater demand resulting primarily from channel inventory destocking;

residential water heater demand;

negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates;

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

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

negative impacts to demand for the Company’s products, particularly commercial products, as a result of the severity and duration of the lingering effects of the COVID-19 pandemic;

further weakening in U.S.

1 unchanged sentence

inability of the Company to implement or maintain pricing actions;

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

negative impact to the Company’s business in China as a result of future COVID-19 related shutdowns there;

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

negative impact to the Company’s business in China as a result of future COVID-19 related disruptions there;

negative impact to the Company's businesses from international tariffs, trade disputes and geopolitical differences, including the conflict in Ukraine;

6 unchanged sentences

changes in government regulations or regulatory requirements;

and adverse developments in general economic, political and business conditions in key regions of the world.

the inability to respond to secular trends toward decarbonization and energy efficiency and adverse developments in general economic, political and business conditions in key regions of the world.

Forward-looking statements included in this filing are made only as of the date of this filing, and the Company is under no obligation to update these statements to reflect subsequent events or circumstances.

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis