What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-04-26 compared with 2023-10-27 · 85 added, 161 removed, 136 unchanged (64% 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, which continued through the first nine months of 2023.

Our supply chain has been relatively stable.

However, we continue to monitor potential disruptions and increase our safety stock of key components when we believe it is warranted.

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.

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 kitchen appliances in China.

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 nine months of 2023.

We project 2023 industry residential unit volumes will grow approximately four percent compared to 2022.

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

Therefore, we expect that commercial water heater industry volumes in 2023 will increase mid-teens compared to 2022.

Our boiler sales decreased 11 percent in the first nine months of 2023.

We believe channel inventory levels of our residential and light commercial boiler products were elevated coming into 2023, but are now approaching near normal levels.

Our boiler sales in the second half of 2022 benefited from a backlog reduction driven by production and supply chain improvements.

Orders for our energy efficient, custom condensing boilers have remained steady.

Based on these factors, we are reducing our boiler sales outlook to a 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.

In our Rest of World segment, the economy remains challenged in China.

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.

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

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

In the first quarter of 2024, we acquired Impact Water Products, a California-based water treatment company.

The acquisition supports our growth strategy by expanding the West Coast presence of our water treatment business.

We also continue to look for opportunities to add to our existing product portfolio in high growth regions demonstrated by our previous introductions of kitchen products in China.

We also recently introduced our internally designed and manufactured gas tankless water heaters in North America.

In addition, we are expanding our commercial water heater capacity in preparation for the new efficiency rule for commercial water heaters that the Department of Energy (DOE) has adopted that will take effect in 2026.

In our North America segment, we saw strong water heater demand in the first quarter that benefited from increased orders ahead of our March 1st price increases.

We project 2024 industry residential unit volumes will be flat after approximately six percent growth in 2023.

Proactive replacement has been above historical levels for the last several years and we project that will continue in 2024.

We believe that new home construction remains in a deficit and will be flat compared to 2023.

We anticipate that commercial water heater industry volumes will grow low single digits in 2024 compared to 2023 as demand for commercial electric water heaters greater than 55 gallon continues a positive trend toward pre-2022 levels.

Sales of our boilers and water treatment products were negatively impacted by elevated channel inventories in 2023.

We believe that channel inventories returned to near normal levels at the beginning of 2024 for both product categories.

We expect to see an eight to ten percent increase in our sales of boilers in 2024 compared to 2023 as we continue to benefit from the transition to higher efficiency boilers.

We anticipate sales of our North America water treatment products will increase approximately eight to ten percent in 2024, compared to 2023, as we continue our geographic expansion.

In our Rest of World segment, we saw local currency third-party sales growth in China of six percent in the first quarter.

We project our third-party sales in China will be flat to up three percent in 2024 in local currency compared to 2023 driven by innovative new products and resilient demand for our core products.

Our guidance assumes an unfavorable currency translation impact on sales of approximately one percent in 2024.

Combining all of these factors, we expect our 2024 consolidated sales to increase between three and five percent compared to 2023.

Our guidance excludes the impacts from potential future acquisitions.

1 unchanged sentence

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Net sales $ 978.8 $ 966.4

5 unchanged sentences

Interest expense 1.0 4.0

Other expense (income), net 2.5 2.4 (10.5) 6.4

Other income, net (1.2) (4.0)

Earnings before provision for income taxes 192.7 171.3

1 unchanged sentence

Net Earnings $ 147.6 $ 126.9

Our sales in the third quarter of 2023 were $937.5 million, or 7.2 percent higher than the third quarter 2022 sales of $874.2 million.

Sales in the first nine months of 2023 were $2,864.7 million, or approximately 1.7 percent higher than $2,817.8 million in the same period last year.

Compared to the prior year quarter, higher volumes of residential water heaters were partially offset by lower boiler volumes in North America.

In addition, our sales in the third quarter of 2023 were unfavorably impacted by approximately $13 million due to the depreciation of foreign currencies compared to the U.S.

In the first nine months of 2023, higher volumes of residential and commercial water heaters more than offset unfavorable foreign currency impacts of approximately $53 million, unfavorable pricing, and lower boiler sales in our North America segment.

Our gross profit margin in the third quarter of 2023 was 38.0 percent and increased compared to 34.9 percent in the third quarter of 2022.

Gross profit margin in the first nine months of 2023 was 38.9 percent compared to the gross profit margin of 34.8 percent in the first nine months of 2022.

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

Selling, general, and administrative (SG&A) expenses in the third quarter of 2023 increased by $19.4 million compared to the third quarter of 2022.

SG&A expenses increased $40.4 million in the first nine months of 2023 compared to the prior year.

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

The prior year periods include the recognition of an $11.5 million favorable judgment against a competitor related to its infringement of one of our patents, which reduced SG&A expenses, and was partially offset by a $4.3 million expense associated with a terminated acquisition.

Impairment expense in the first nine months of 2023 was $15.6 million related to the sale of our business in Turkey.

Our sales in the first quarter of 2024 were $978.8 million, or 1.3 percent higher than the first quarter 2023 sales of $966.4 million.

Compared to the prior year quarter, the increased sales were primarily driven by a positive mix shift towards high efficiency commercial water heaters including heat pumps.

In addition, our sales in the first quarter of 2024 were unfavorably impacted by approximately $9 million due to the depreciation of foreign currencies compared to the U.S.

Our gross profit margin in the first quarter of 2024 was 39.3 percent and increased compared to 38.7 percent in the first quarter of 2023.

The higher gross profit margin in the first quarter of 2024 compared to the same period last year was primarily due to lower steel costs.

Selling, general, and administrative (SG&A) expenses in the first quarter of 2024 increased by $5.0 million compared to the first quarter of 2023.

The increase in SG&A expenses in the first quarter of 2024 compared to the prior year period was primarily due to higher research and development expenses and higher employee costs from increased wages and management incentives.

Impairment expense in the first quarter 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 third quarter of 2023.

Interest expense in the third quarter of 2023 was $2.4 million and flat to the same period last year.

Interest expense in the first nine months of 2023 was $10.9 million compared to $6.0 million in the same period the previous year.

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

Other expense (income), net was $2.5 million in the third quarter of 2023 and essentially flat compared to $2.4 million in the third quarter of 2022.

Other expense (income), net was ($10.5) million in the first nine months of 2023 compared to expense of $6.4 million in the same period last year.

The increase in Other expense (income), net was due to a reduction in pension expense of $10.0 million for the nine 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 nine months ended September 30, 2023 was 23.2 percent and 24.7 percent, respectively.

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

The change in the effective income tax rate for the three and nine months ended September 30, 2023

compared to the effective income tax rate for the three and nine months ended September 30, 2022 was primarily due to a change in geographical earnings mix.

In addition, results in the nine months ended September 30, 2023 include 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 approximately 24 percent.

There was no impairment expense recorded in the first quarter of 2024.

Interest expense in the first quarter of 2024 was $1.0 million compared to $4.0 million in the same period last year.

The decrease in interest expense in the first quarter of 2024 compared to the same period last year was primarily due to lower debt levels.

Other income, net was $1.2 million in the first quarter of 2024 compared to $4.0 million in the first quarter of 2023.

The decrease in Other income, net was primarily due to higher foreign currency translation losses and lower interest income compared to the same period last year.

The Company’s effective income tax rate for the three months ended March 31, 2024 was 23.4 percent.

The effective income tax rate for the three months ended March 31, 2023 was 25.9 percent.

The change in the effective income tax rate for the three months ended March 31, 2024 compared to the effective income tax rate for the three months ended March 31, 2023 was primarily due to the $15.6 million impairment expense recorded in the prior year period with no associated tax benefit.

We estimate that our annual effective income tax rate for the full year of 2024 will be approximately between 24 and 24.5 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 pension settlement income and 2022 non-operating pension expenses related to the terminated pension plan.

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

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(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Net Sales $ 766.3 $ 752.7

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Segment margin 25.9 % 25.1 %

Sales in our North America segment were $709.9 million in the third quarter of 2023, or $57.0 million higher than sales of $652.9 million in the third quarter of 2022.

Sales in the first nine months of 2023 were $2,184.9 million, or $57.8 million higher than sales of $2,127.1 million in the same period last year.

Higher sales in the third quarter of 2023 were primarily driven by higher residential water heater volumes, partially offset by lower boiler volumes.

Increased sales in the first nine months of 2023 compared to the prior year period were primarily driven by higher residential and commercial water heater volumes, partially offset by unfavorable pricing and lower volumes of boilers.

North America segment earnings were $170.0 million in the third quarter of 2023, an increase of approximately 19.9 percent compared to segment earnings of $141.8 million in the third quarter of 2022.

Segment earnings in the first nine months of 2023 were $557.7 million, an increase of 23.0 percent compared to segment earnings of $453.5 million in the first nine months of 2022.

Segment margins were 23.9 percent and 21.7 percent in the third quarter of 2023 and 2022, respectively.

Segment margins were 25.5 percent and 21.3 percent in the first nine months of 2023 and 2022, respectively.

Higher segment earnings and margins in the third quarter of 2023 compared to the prior year were primarily due to higher volumes of residential water heaters and lower material costs which more than offset lower boiler volumes.

Higher segment earnings and margins in the first nine months of 2023 compared to the prior year were primarily due to the factors mentioned above and higher volumes of commercial water heaters.

Additionally, in the first nine months of 2023, we realized pre-tax pension settlement income of $5.0 million.

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 2022 exclude $2.6 million of pension expense and the recognition of the $11.5 million patent infringement judgment.

Adjusted segment earnings and adjusted segment margin in the first nine months of 2023 were $552.7 million and 25.3 percent, respectively.

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

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 2022 exclude $7.8 million of pension expense and the recognition of the $11.5 million patent infringement judgment.

Sales in our North America segment were $766.3 million in the first quarter of 2024, or $13.6 million higher than sales of $752.7 million in the first quarter of 2023.

Higher sales in the first quarter of 2024 were primarily driven by higher volumes of commercial water heaters and a positive product mix shift towards high efficiency water heaters, including heat pumps.

North America segment earnings were $198.7 million in the first quarter of 2024, an increase of approximately 5.4 percent compared to segment earnings of $188.6 million in the first quarter of 2023.

Segment margins were 25.9 percent and 25.1 percent in the first quarter of 2024 and 2023, respectively.

Higher segment earnings and margins in the first quarter of 2024 compared to the prior year were primarily due to the benefits of the positive product mix shift toward high efficiency products, higher commercial water heater volumes, and lower steel costs that were partially offset by higher selling and advertising expenses.

We estimate our 2024 North America segment margin will be approximately 25 percent.

1 unchanged sentence

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Net Sales $ 226.9 $ 219.1

1 unchanged sentence

Segment margin 7.6 % 2.4 %

Sales in the Rest of World segment were $233.4 million in the third quarter of 2023, or $3.2 million higher than sales of $230.2 million in the third quarter of 2022.

Sales in the first nine months of 2023 were $696.7 million, or $19.4 million lower than sales of $716.1 million in the same period last year.

The increased sales in the third quarter of 2023 were primarily driven by higher volumes in China, particularly in our kitchen appliance products, partially offset by unfavorable foreign currency translation of approximately $11 million.

The decrease in sales in the first nine months of 2023 was primarily driven by approximately $42 million unfavorable impact of foreign currency translation, partially offset by favorable product mix.

Rest of World segment earnings were $23.2 million in the third quarter of 2023, compared to $21.8 million in the third quarter of 2022.

Segment earnings in the first nine months of 2023 were $56.8 million compared to $64.7 million in the first nine months of 2022.

Segment margins were 9.9 percent and 9.5 percent in the third quarter of 2023 and 2022, respectively.

Segment margins were 8.2 percent and 9.0 percent in the first nine months of 2023 and 2022, respectively.

Higher segment earnings and segment margin in the third quarter of 2023 were primarily driven by sales of new products, particularly in our kitchen appliance products, and favorable mix in China.

Lower segment earnings and segment margin in the first nine 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 nine months of 2023 were $69.3 million and 9.9 percent, respectively.

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

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

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

Our sales projection is driven by an expected increase of approximately four percent industry residential unit volumes, increased commercial water heater volumes, and higher water treatment sales, partially offset by lower boiler sales in North America.

As a result, we expect to achieve full-year earnings of between $3.63 and $3.73 per share and adjusted earnings of between $3.70 and $3.80 per share.

Sales in the Rest of World segment were $226.9 million in the first quarter of 2024, or $7.8 million higher than sales of $219.1 million in the first quarter of 2023.

The increased sales in the first quarter of 2024 compared to 2023 was primarily due to higher volumes of kitchen products in China and increased inter-segment sales of approximately $8 million related to our recently introduced tankless water heaters manufactured in China and shipped to the U.S.

market, partially offset by unfavorable foreign currency translation of approximately $9 million.

Rest of World segment earnings were $17.2 million in the first quarter of 2024, compared to $5.3 million in the first quarter of 2023.

Segment margins were 7.6 percent and 2.4 percent in the first quarter of 2024 and 2023, respectively.

Higher segment earnings and segment margin in the first quarter of 2024 were primarily driven by the absence of the nonrecurring impairment expense of $12.5 million associated with the sale of our business in Turkey recorded in the first quarter of 2023.

We estimate our 2024 Rest of World segment margin will be approximately ten percent.

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 impairment expense.

We expect our consolidated sales to increase in 2024 between three and five percent.

Our sales projection is driven by continued end-market demand in water heating and the rebound that we expect in boiler and water treatment volumes after 2023 corrections in end-market inventories.

In our Rest of the World segment, we expect overall growth in China driven by new products and resilient demand for core product offerings.

We expect to achieve full-year earnings of between $3.90 and $4.15 per share.

Our guidance excludes the impacts from potential future acquisitions.

Liquidity & Capital Resources

Our working capital was $608.9 million at September 30, 2023, compared with $699.5 million at December 31, 2022.

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

In addition, as of September 30, 2023, cash balances were negatively impacted by $17.7 million due to changes in foreign currency during the year.

Our working capital was $578.1 million at March 31, 2024, compared with $555.0 million at December 31, 2023.

The increase in working capital was primarily related to higher inventory balances, lower accounts payable and payroll-related accruals partially offset by lower cash balances.

As of March 31, 2024, cash balances were negatively impacted by $3.1 million due to changes in foreign currency during the year.

Cash and cash equivalents used to fund our operations are primarily generated through operating activities and provided by our existing credit facilities.

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We have historically made and anticipate future cash repatriations to the United States from certain foreign subsidiaries.

In the first nine months of 2023, we repatriated approximately $100 million of cash from our foreign subsidiaries through dividends and approximately $200 million through our global cash pooling arrangement.

We used the proceeds to pay down outstanding debt balances.

(dollars in millions) Nine Months Ended

September 30,

(dollars in millions) Three Months Ended

Cash provided by operating activities $ 106.6 $ 119.9

Cash (used in) provided by investing activities (30.8) 58.3

Cash used in investing activities (71.2) (9.8)

Cash used in financing activities (120.6) (97.5)

Cash provided by operating activities in the first nine months of 2023 was $439.0 million compared with $214.7 million in the same period last year.

Cash provided by operations in the first nine 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 nine months of 2023 and 2022 was $396.3 million and $163.8 million, respectively.

Cash provided by operations was $106.6 million in the first three months of 2024 compared to $119.9 million in the prior year period, which decreased primarily as a result of higher incentive payments associated with record sales and profits earned in 2023 and higher inventory levels that more than offset higher earnings and accounts payable balances.

Our free cash flow in the first quarter of 2024 and 2023 was $84.6 million and $109.2 million, respectively.

We expect cash provided by operating activities to be between $640 million and $690 million in 2024.

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

Capital expenditures totaled $42.7 million in the first nine months of 2023 compared with $50.9 million in the same period last year.

We project 2023 capital expenditures will be approximately $65 million and full-year depreciation and amortization expense will be approximately $70 million.

In 2021, we renewed and amended our $500 million revolving credit facility, which now expires on April 1, 2026.

The renewed and amended facility, with a group of nine banks, has an accordion provision that allows it to be increased up to $850 million if certain conditions (including lender approval) are satisfied.

Capital expenditures totaled $22.0 million in the first quarter of 2024 compared with $10.7 million in the same period last year.

We project 2024 capital expenditures will be between $105 million and $115 million and full-year depreciation and amortization expense will be approximately $80 million.

We have a $500 million revolving credit facility which expires on April 1, 2026.

The facility is with a group of nine banks and has an accordion provision that allows it to be increased up to $850 million if certain conditions (including lender approval) are satisfied.

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, 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 March 31, 2024, and expect to be in compliance for the foreseeable future.

The facility backs up commercial paper and credit line borrowings.

At September 30, 2023, we had no borrowings outstanding under the facility and an available borrowing capacity of $500.0 million.

At March 31, 2024, we had no borrowings outstanding under the facility and an available borrowing capacity of $500 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 $214.9 million in the first nine months of 2023 primarily due to payments.

Our leverage, as measured by the ratio of total debt to total capitalization, was 6.4 percent at September 30, 2023, compared with 16.5 percent at December 31, 2022.

Our total debt decreased by $7.6 million in the first quarter of 2024 primarily due to debt repayments.

Our leverage, as measured by the ratio of total debt to total capitalization, was 6.0 percent at March 31, 2024, compared with 6.5 percent at December 31, 2023.

In the first quarter of 2024, our Board of Directors approved adding 2,000,000 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 2023, we repurchased 2,388,000 shares of our stock at a total cost of $161.4 million.

At September 30, 2023, we had 5,490,462 shares remaining on the share repurchase authority.

During the first three months of 2024, we repurchased 906,000 shares of our stock at a total cost of $74.5 million.

At March 31, 2024, we had 4,595,462 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 2024 through a combination of any renewed Rule 10b5-1 automatic trading plan and open market repurchases.

On October 9, 2023, our Board of Directors declared a regular quarterly cash dividend of $0.32 per share on our Common Stock and Class A common stock.

The dividend is payable on November 15, 2023, to shareholders of record on October 31, 2023.

On April 9, 2024, our Board of Directors declared a regular quarterly cash dividend of $0.32 per share on our Common Stock and Class A common stock.

The dividend is payable on May 15, 2024, to shareholders of record on April 30, 2024.

Non-GAAP Financial Information

1 unchanged sentence

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 pension settlement income and 2022 non-operating pension expenses related to the terminated pension plan.

Our adjusted earnings, adjusted EPS, adjusted segment earnings, and adjusted corporate expenses exclude the impact of the 2023 impairment expense.

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

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Net Earnings (GAAP) $ 147.6 $ 126.9

Impairment expense, before tax — 15.6

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

Pension expense, before tax — 3.0 — 8.9

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

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

Tax effect on above items — —

1 unchanged sentence

Diluted Earnings Per Share (GAAP) $ 1.00 $ 0.84

$ 0.90 $ 0.71 $ 2.77 $ 2.27

Impairment expense per diluted share, before tax — 0.10

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

Pension expense per diluted share, before tax — 0.02 — 0.06

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

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

Tax effect on above items per diluted share — —

Adjusted Earnings Per Share (non-GAAP) $ 1.00 $ 0.94

$ 0.90 $ 0.69 $ 2.84 $ 2.28

(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

September 30, Nine Months Ended

September 30,

2023 2022 2023 2022

Earnings Before Provision for Income Taxes (GAAP) $ 192.7 $ 171.3

Corporate expense (1)

14.4 16.5 47.0 45.5

Interest expense 1.0 4.0

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North America $ 198.7 $ 188.6

$ 170.0 $ 141.8 $ 557.7 $ 453.5

Rest of World (2)

23.2 21.8 56.8 64.7

Inter-segment earnings elimination (0.3) —

3 unchanged sentences

$ (21.9) $ (18.6)

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

Impairment expense, before tax — 3.1

Pension expense, before tax — 0.4 — 1.1

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

Adjusted Corporate expense (non-GAAP) $ (21.9) $ (15.5)

(2) North America

$ 170.0 $ 141.8 $ 557.7 $ 453.5

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

Pension expense, before tax — 2.6 — 7.8

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

Adjusted North America (non-GAAP) $ 170.0 $ 132.9 $ 552.7 $ 449.8

(2) Rest of World

$ 23.2 $ 21.8 $ 56.8 $ 64.7

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):

Nine Months Ended

September 30,

Three Months Ended

Cash provided by operating activities (GAAP) $ 106.6 $ 119.9

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Diluted EPS (GAAP) $ 3.90 - 4.15 $ 3.69

Impairment expense 0.10 (1)

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

Pension expense — 0.06 (4)

Legal judgment income — (0.05)

Terminated acquisition-related expenses — 0.02

Restructuring and impairment expense — 0.12 (1)

Adjusted EPS (non-GAAP) $ 3.90 - 4.15 $ 3.81

(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 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.

(1) Includes pre-tax restructuring and impairment expenses of $15.7 million and $3.1 million, within the Rest of World segment and Corporate expenses, respectively.

Critical Accounting Policies

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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, 2023.

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

We believe that at March 31, 2024, there was no material change to this information.

Recent Accounting Pronouncements

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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, as a result of the severity and duration of the lingering effects of the COVID-19 pandemic;

negative impacts to demand for the Company’s products, particularly commercial products, as a result of changes in commercial property usage that followed the COVID-19 pandemic;

further weakening in U.S.

1 unchanged sentence

inability of the Company to implement or maintain pricing actions;

inconsistent recovery of the Chinese economy or further 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 conflicts in Ukraine and Middle East;

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

negative impact to the Company’s businesses from international tariffs, trade disputes and geopolitical differences, including the conflicts in Ukraine,the Middle East and attacks on commercial shipping vessels in the Red Sea;

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

3 unchanged sentences

competitive pressures on the Company’s businesses;

including new technologies and new competitors;

the impact of potential information technology or data security breaches;

4 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 2. Management’s Discussion and Analysis