What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-28 compared with 2023-04-28 · 128 added, 77 removed, 156 unchanged (57% 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 saw improvement in our supply chain during 2022, particularly in the second half of the year and remained relatively stable through the first half of 2023.

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

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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.

In the first half of 2023, we sold our business in Turkey.

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

While Turkey's more project-based business model 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 half of 2023.

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 project 2023 industry residential unit volumes will be approximately flat to up two percent compared to 2022.

Demand for commercial electric water heaters was strong in the first half of 2023 compared to last year.

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

Our boiler sales decreased 6 percent in the first half of the 2023.

We believe channel inventory levels of our residential and light commercial boiler products were elevated coming into 2023 and a mild end to winter and a warm spring led to lower industry demand coming out of the heating season which slowed channel inventory reduction efforts.

Orders for our energy efficient, custom condensing boilers remain steady.

Based on these factors, we are reducing our boiler sales outlook to decrease of high single digits in 2023 compared to 2022.

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.

In our Rest of World segment, we saw improvement in consumer demand in China although the economy remains challenged.

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.

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

Combining all of these factors, we expect our 2023 consolidated sales to be approximately flat to up two percent compared to 2022.

Our guidance excludes the impacts from potential future acquisitions.

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(dollars in millions) Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net sales $ 960.8 $ 965.9 $ 1,927.2 $ 1,943.6

9 unchanged sentences

Net Earnings $ 157.0 $ 126.2 $ 283.9 $ 246.0

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.

Our sales in the second quarter of 2023 were $960.8 million, or 0.5 percent lower than the second quarter 2022 sales of $965.9 million.

Sales in the first six months of 2023 were $1,927.2 million, or approximately 0.8 percent lower than $1,943.6 million in the same period last year.

Compared to the prior year quarter, higher volumes in China and higher volumes of commercial and residential water heaters in North America, were more than offset by lower boiler sales and unfavorable pricing in North America.

In addition, our sales in the second quarter of 2023 were unfavorably impacted by approximately $18 million in the second quarter of 2023 due to the depreciation of foreign currencies compared to the U.S.

In the first six months of 2023 our sales were negatively impacted by approximately $40 million due to the depreciation of foreign currencies compared to the U.S.

dollar and unfavorable pricing, and lower boiler sales in our North America segment.

These unfavorable impacts in the first six months of 2023 more than offset higher volumes of residential and commercial water heaters.

Our gross profit margin in the second quarter of 2023 was 40.0 percent and increased compared to 34.6 percent in the second quarter of 2022.

Gross profit margin in the first six months of 2023 was 39.4 percent compared to the gross profit margin of 34.8 percent in the first six months of 2022.

The higher gross profit margin in the second quarter and first six months of 2023 compared to the same periods last year was primarily due to lower material costs.

Selling, general, and administrative (SG&A) expenses increased by $13.6 million compared to the second quarter of 2022.

SG&A expenses increased $21.0 million in the first six months of 2023 compared to the prior year.

The increase in SG&A expense for the second quarter and first six months of 2023 compared to the prior period was primarily due to higher employee costs, which includes management incentive expenses related to higher earnings compared to the same periods last year and compensation increases.

Both periods in 2023 included higher consulting and insurance costs compared to the prior year.

Impairment expense in the first six months of 2023 was $15.6 million related to the sale of 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 in Corporate Expense.

There was no impairment expense recorded in the second quarter of 2023.

Interest expense in the second quarter of 2023 was $4.5 million compared to $2.1 million in the same period last year.

Interest expense in the first six months of 2023 was $8.5 million compared to $3.6 million in the same period the previous year.

The increase in interest expense in the second quarter and first six months of 2023 compared to the same periods last year was primarily due to higher debt levels and interest rates.

Other (income) expense, net was ($9.0) million in the second quarter of 2023 compared to expense of $0.3 million in the second quarter of 2022.

Other (income) expense, net was ($13.0) million in the first six months of 2023 compared to expense of $4.0 million in the same period last year.

The increase in Other (income) expense, net was due to a reduction in pension expense of $3.3 million and $6.6 million for the three months and six months ended 2023 compared to the prior year periods and also from $6.0 million of pension settlement income realized in the second quarter of 2023.

See Note 10 - Pensions for additional information on the pension settlement.

Our effective income tax rate for the three and six months ended June 30, 2023 was 24.8 percent and 25.3 percent, respectively.

The effective income tax rate for the three and six months ended June 30, 2022 was 23.7 percent and 23.6 percent, respectively.

The change in the effective income tax rate for the three and six months ended June 30, 2023 compared to the effective income

tax rate for the three and six months ended June 30, 2022 was primarily due to a change in geographical earnings mix.

In addition, results in the six months ended June 30, 2023 includes a $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, 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.

We believe that the measures of adjusted earnings, adjusted EPS, total segment earnings, 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.

North America Segment

(dollars in millions) Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net Sales $ 722.3 $ 744.1 $ 1,475.0 $ 1,474.2

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Segment margin 27.6 % 21.5 % 26.3 % 21.1 %

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.

Sales in our North America segment were $722.3 million in the second quarter of 2023, or $21.8 million lower than sales of $744.1 million in the second quarter of 2022.

Sales in the first six months of 2023 were $1,475.0 million, essentially flat to sales of $1,474.2 million in the same period last year.

Lower sales in the second quarter of 2023 were primarily driven by lower boiler volumes and unfavorable pricing which offset higher water heater volumes.

Essentially flat sales in the first six months of 2023 compared to the prior year period were primarily driven by higher residential and commercial water heater volumes which were fully offset by unfavorable pricing and lower volumes of boilers.

North America segment earnings were $199.1 million in the second quarter of 2023, an increase of approximately 24.5 percent compared to segment earnings of $159.9 million in the second quarter of 2022.

Segment earnings in the first six months of 2023 were $387.7 million, an increase of 24.4 percent compared to segment earnings of $311.7 million in the first six months of 2022.

Segment margins were 27.6 percent and 21.5 percent in the second quarter of 2023 and 2022, respectively.

Segment margins were 26.3 percent and 21.1 percent in the first six months of 2023 and 2022, respectively.

Higher segment earnings and margins in the second quarter and first six months of 2023 compared to the prior year were primarily due to lower material costs and higher volumes of commercial and residential water heaters, partially offset by lower boiler volumes.

Additionally, we realized pre-tax pension settlement income of $5.0 million.

We estimate our 2023 North America segment margin will be approximately between 24 and 24.25 percent, excluding the pension settlement income.

Adjusted segment earnings and adjusted segment margin in the second quarter of 2023 were $194.1 million and 26.9 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the second quarter of 2023 exclude $5.0 million of pension settlement income.

Adjusted segment earnings and adjusted segment margin in the second quarter of 2022 were $162.5 million and 21.8 percent, respectively.

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

Adjusted segment earnings and adjusted segment margin in the first six months of 2023 were $382.7 million and 25.9 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first six months of 2023 exclude $5.0 million of pension settlement income.

Adjusted segment earnings and adjusted segment margin in the first six months of 2022 were $316.9 million and 21.5 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first six months of 2022 exclude $5.2 million of pension expense.

Rest of World Segment

(dollars in millions) Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net Sales $ 244.2 $ 229.9 $ 463.3 $ 485.9

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Segment margin 11.6 % 7.9 % 7.3 % 8.8 %

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.

Sales in the Rest of World segment were $244.2 million in the second quarter of 2023, or $14.3 million higher than sales of $229.9 million in the second quarter of 2022.

Sales in the first six months of 2023 were $463.3 million, or $22.6 million lower than sales of $485.9 million in the same period last year.

The increased sales in the second quarter of 2023 were primarily driven by stronger consumer demand in China, particularly for our residential and commercial water treatment products, and favorable product mix.

The second quarter of 2023 sales were negatively impacted by currency translation of approximately $14 million compared to last year due to the depreciation of foreign currencies compared to the U.S.

The decrease in sales in the first six months of 2023 was primarily driven by the approximately $31 million unfavorable impact of foreign exchange due to the depreciation of foreign currencies compared to the U.S.

Rest of World segment earnings were $28.3 million in the second quarter of 2023, compared to $18.1 million in the second quarter of 2022.

Segment earnings in the first six months of 2023 were $33.6 million, compared to $42.9 million in the first six months of 2022.

Segment margins were 11.6 percent and 7.9 percent in the second quarter of 2023 and 2022, respectively.

Segment margins were 7.3 percent and 8.8 percent in the first six months of 2023 and 2022, respectively.

Higher segment earnings and segment margin in the second quarter of 2023 were primarily driven by higher volumes and favorable mix in China.

Lower segment earnings and segment margin in the first six months of 2023, were primarily driven by the impairment expense of $12.5 million associated with the sale of our business in Turkey.

Adjusted segment earnings and adjusted segment margin in the first six months of 2023 were $46.1 million and 10.0 percent, respectively.

Adjusted segment earnings and adjusted segment margin in the first six months 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.

We expect our consolidated sales in 2023 to be flat to up two percent compared with 2022.

Our sales projection is driven by expected flat to up two percent industry residential unit volumes, increased commercial water heater volumes, and higher water treatment sales, partially offset by lower boiler sales in North America, and higher sales in China.

As a result, we expect to achieve full-year earnings of between $3.38 and $3.53 per share and adjusted earnings of between $3.45 and $3.60 per share.

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Liquidity & Capital Resources

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

Our working capital was $700.6 million at June 30, 2023, and essentially the same compared with $699.5 million at December 31, 2022.

Movements in working capital comprised of lower Cash, cash equivalents, and Marketable securities due to the paydown of our Long-term debt and Trade payables.

In addition, as of June 30, 2023, cash balances were negatively impacted by $15.1 million due to changes in foreign currency during the year.

In the first six months of 2023, we repatriated approximately $98 million of cash from our foreign subsidiaries.

We used the proceeds to pay down outstanding debt balances.

(dollars in millions) Six Months Ended

Cash provided by operating activities $ 260.2 $ 54.4

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

Cash provided by investing activities 33.8 40.9

Cash used in financing activities (291.2) (179.2)

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.

Cash provided by operating activities in the first six months of 2023 was $260.2 million compared with $54.4 million in the same period last year.

Cash provided by operations in the first six months of 2023 increased compared with the prior year due to increased earnings and a more favorable working capital contribution primarily related to lower inventory levels and incentive payments.

Our free cash flow in the first six months of 2023 and 2022 was $236.0 million and $23.7 million, respectively.

We expect cash provided by operating activities to be between $625 million and $675 million in 2023.

We expect free cash flow to be between $550 million and $600 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 $10.7 million in the first three months of 2023 compared with $12.9 million in the same period last year.

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

Capital expenditures totaled $24.2 million in the first six months of 2023 compared with $30.7 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.

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

The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of March 31, 2023, 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 June 30, 2023, and expect to be in compliance for the foreseeable future.

The facility backs up commercial paper and credit line borrowings.

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

At June 30, 2023, we had $75.6 million outstanding under the facility and an available borrowing capacity of $424.4 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 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.

Our total debt decreased by $138.5 million in the first six months of 2023 which was primarily due to payments.

Our leverage, as measured by the ratio of total debt to total capitalization, was 9.8 percent at June 30, 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.

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

During the first 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 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.

During the first six months of 2023, we repurchased 1,075,000 shares of our stock at a total cost of $69.6 million.

At June 30, 2023, we had 6,803,462 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 any renewed Rule 10b5-1 automatic trading plan and open market repurchases.

On July 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 August 15, 2023, to shareholders of record on July 31, 2023.

Non-GAAP Financial Information

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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 exclude the impact of the 2023 impairment expense and 2022 non-operating pension expenses.

Our adjusted earnings, adjusted EPS, adjusted segment earnings, and adjusted corporate expenses exclude the impact of the 2023 impairment expense and pension settlement income and 2022 non-operating pension expenses related to the terminated pension plan.

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

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Net Earnings (GAAP) $ 157.0 $ 126.2 $ 283.9 $ 246.0

Impairment expense, before tax — — 15.6 —

Pension settlement income, before tax (6.0) — (6.0) —

Pension expense, before tax — 3.0 — 5.9

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Diluted Earnings Per Share (GAAP) (1)

$ 1.04 $ 0.81 $ 1.87 $ 1.56

Impairment expense per diluted share, before tax — — 0.10 —

Pension settlement income per diluted share, before tax (0.04) — (0.04) —

Pension expense per diluted share, before tax — 0.02 — 0.04

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Adjusted Earnings Per Share (non-GAAP) (1)

$ 1.01 $ 0.82 $ 1.94 $ 1.59

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

SMITH CORPORATION

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Three Months Ended

June 30, Six Months Ended

2023 2022 2023 2022

Earnings Before Provision for Income Taxes (GAAP) $ 208.9 $ 165.3 $ 380.2 $ 321.9

Corporate expense (1)

14.0 10.6 32.6 29.0

Interest expense 4.5 2.1 8.5 3.6

3 unchanged sentences

Rest of World (3)

28.3 18.1 33.6 42.9

Inter-segment earnings elimination — — — (0.1)

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$ (14.0) $ (10.6) $ (32.6) $ (29.0)

Pension settlement income, before tax (1.0) — (1.0) —

Impairment expense, before tax — — 3.1 —

3 unchanged sentences

$ 199.1 $ 159.9 $ 387.7 $ 311.7

Pension settlement income, before tax (5.0) — (5.0) —

Pension expense, before tax — 2.6 — 5.2

1 unchanged sentence

(3) Rest of World

$ 28.3 $ 18.1 $ 33.6 $ 42.9

Impairment expense, before tax — — 12.5 —

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

Three Months Ended,

Six Months Ended

Cash provided by operating activities (GAAP) $ 260.2 $ 54.4

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Impairment expense 0.10 (1)

Pension settlement charges — 1.60 (2)

Pension settlement (income) expense (0.03) (2)

Pension expense — 0.06 (4)

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(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.

(2) Includes pre-tax pension settlement income of $5.0 million and $1.0 million, within the North America segment and Corporate expenses, respectively.

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

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

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

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

We believe that at June 30, 2023, there was no material change to this information.

Recent Accounting Pronouncements

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

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

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

substantial defaults in payment by, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis