SMITH A O CORP 10-K

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, heat pump and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective region of the world. We continue to seek acquisitions that enable geographic growth, expand our core business, and establish adjacencies. On November 1, 2024, we acquired Pureit from Unilever for approximately $125 million, subject to customary adjustments. Pureit, a leading water purification business in South Asia, offers a broad range of residential water purification solutions and has annual sales of approximately USD $60 million. The acquisition fits squarely in our core capabilities and doubles our market penetration in the South Asia region. In the first quarter of 2024, we acquired Impact Water Products, a privately-held water treatment company. The acquisition supports our geographic expansion and growth strategy by expanding the West Coast presence of our water treatment business. Also, we continue to look for opportunities to add to our existing product portfolio in high growth regions demonstrated by our previous introductions of kitchen products and connected product technologies 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 North America 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 2024, we recognized restructuring and impairment expenses of $17.6 million. In China, severance expenses of $11.3 million related to the right sizing of that business for current market conditions. The remaining $6.3 million related to the restructuring of our water treatment business in North America as a part of a profitability improvement strategy that prioritizes improving our cost structure and emphasizes our more profitable channels. In our North America segment, we saw soft residential and commercial water heater order demand in the second half of 2024 after a strong first half of the year. We believe that a pre-buy ahead of our March 1st price increase pulled forward some demand into the first half of the year. We also believe our second half order demand was negatively impacted by our improved lead times. Those factors along with caution around softening of end market demand may have driven some customers to reduce their inventory levels. 2024 residential industry unit volumes were flat compared to the prior year and we project 2025 industry residential unit volumes will be flat as well. Proactive replacement has been above historical levels for the last several years and we project that will continue in 2025. We believe that new home construction remains in a deficit and will be flat compared to 2024. We anticipate that commercial water heater industry volumes will be approximately flat in 2025 after minimal growth in 2024 driven by growth in commercial electric water heaters greater than 55 gallons which was offset by lower shipments of commercial gas water heaters. We expect our boilers sales to grow between three and five percent in 2025 compared to 2024 as we continue to benefit from the transition to higher efficiency boilers. We anticipate sales of our North America water treatment products will be between $235 million and $245 million, a year-over-year decrease of approximately five percent as we de-emphasize certain channels and focus on our more profitable channels. In our Rest of World segment, after sales growth of three percent in the first half of the year, our full-year 2024 third-party sales in China declined six percent due to a further weakening of consumer demand in the second half of the year. In 2025, we project our third-party sales in China to decrease between five to eight percent in local currency compared to 2024 as we expect consumer demand softness will persist in 2025. Combining all of these factors, we expect our 2025 consolidated sales to be approximately flat to up two percent compared to 2024. Our guidance excludes the impacts from potential future acquisitions. 19 Table of Contents RESULTS OF OPERATIONS In this section, we discuss the results of our operations for 2024 compared with 2023. We discuss our cash flows and current financial condition under “Liquidity and Capital Resources.” For a discussion related to 2023 compared with 2022, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2023, which was filed with the United States Securities and Exchange Commission (SEC) on February 13, 2024, and is available on the SEC's website at www.sec.gov. Years Ended December 31, (dollars in millions) 2024 2023 2022 Net sales $ 3,818.1 $ 3,852.8 $ 3,753.9 Cost of products sold 2,362.0 2,368.0 2,424.3 Gross profit 1,456.1 1,484.8 1,329.6 Gross profit margin % 38.1 % 38.5 % 35.4 % Selling, general and administrative expenses 739.3 727.4 670.9 Restructuring and impairment expenses 17.6 18.8 — Interest expense 6.7 12.0 9.4 Other (income) expense-net (8.5) (6.9) 425.6 Earnings before provision for income taxes 701.0 733.5 223.7 Provision for (benefit from) income taxes 167.4 176.9 (12.0) Net Earnings $ 533.6 $ 556.6 $ 235.7 Our sales in 2024 were $3,818.1 million, a decrease of $34.7 million compared to 2023 sales of $3,852.8 million. Our decrease in net sales was primarily driven by lower water heater volumes in North America, lower sales in China, and unfavorable currency translation of approximately $18 million due to the depreciation of foreign currencies compared to the U.S. dollar, which more than offset our higher boiler sales and pricing actions. Our 2024 and 2023 acquisitions of water treatment companies in North America added approximately $18 million of incremental net sales in 2024. Our 2024 gross profit margin of 38.1 percent decreased compared to 38.5 percent in 2023. The lower gross profit margin in 2024 compared to 2023 was primarily due to higher production costs and operational inefficiencies associated with volume volatility, which outpaced our pricing actions. Selling, general, and administrative (SG&A) expenses were $739.3 million in 2024, or $11.9 million higher than in 2023. The increase in SG&A expenses in 2024 compared to the prior year was primarily due to higher employee costs from increased wages and higher selling and advertising expenses to support our strategic initiatives. We recognized $17.6 million of restructuring and impairment expenses during the year ended December 31, 2024. Of these expenses, $6.3 million was related to our water treatment business in the North America segment and was a result of a profitability improvement strategy that prioritizes improving our cost structure and emphasizes our more profitable channels. In the Rest of World segment, restructuring included severance costs in China of $11.3 million and was related to the right sizing of that business for current market conditions. Restructuring and impairment expenses in 2023 were $18.8 million, of which $15.7 million was recorded in the Rest of World segment and $3.1 million was recorded in Corporate Expense and related primarily to the sale of our business in Turkey. Interest expense was $6.7 million in 2024, compared to $12.0 million in 2023. The decrease in interest expense in 2024 compared to last year was primarily due to lower average debt levels. Other (income) expense, net was $8.5 million of income in 2024 compared to income of $6.9 million in 2023. The increase in other income was driven by lower foreign currency translation losses compared to last year, partially offset by lower interest income from lower average cash balances. Our effective income tax rate in 2024 was lower compared to 2023. The change in the effective income tax rate in 2024 compared to the prior year was primarily due to the restructuring and impairment expense recorded in 2023 with no associated tax benefit. We estimate that our annual effective income tax rate for the full year of 2025 will be approximately 24 to 24.5 percent. 20 Table of Contents We are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted earnings per share (EPS), total segment earnings, adjusted segment earnings, and adjusted corporate expense) that exclude the impact of restructuring and impairment expenses and pension settlement income. 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, 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 or recurring in nature. North America Segment Years ended December 31 (dollars in millions) 2024 2023 Net Sales $ 2,950.1 $ 2,922.9 Segment Earnings 707.5 726.7 Segment Margin 24.0 % 24.9 % Sales in our North America segment were $2,950.1 million in 2024, or $27.2 million higher than sales of $2,922.9 million in 2023. Compared to the prior year, pricing actions, higher boiler sales, and approximately $18 million of incremental net sales from our 2024 and 2023 acquisitions of water treatment companies primarily drove our net sales increase and more than offset lower water heater volumes. North America segment earnings were $707.5 million in 2024, or $19.2 million lower than segment earnings of $726.7 million in 2023. Segment margins were 24.0 percent and 24.9 percent in 2024 and 2023, respectively. Lower segment earnings and margins in 2024 were primarily due to lower water heater volumes, higher production costs and higher SG&A expenses associated with strategic investments that outpaced our pricing actions and higher boiler volumes. Segment earnings and margin in 2024 also included restructuring and impairment expenses of $6.3 million related to our water treatment business and a result of a profitability improvement strategy that prioritizes improving our cost structure and emphasizes our more profitable channels. Adjusted segment earnings and adjusted segment margin in 2024 were $713.8 million and 24.2 percent, respectively, which excludes $6.3 million of pre-tax restructuring and impairment expenses. Adjusted segment earnings and adjusted segment margin in 2023 were $726.0 million and 24.8 percent, respectively, and exclude pension settlement income. We estimate our 2025 North America segment margin will be approximately 24.0 to 24.5 percent. Rest of World Segment Years ended December 31 (dollars in millions) 2024 2023 Net Sales $ 918.6 $ 956.9 Segment Earnings 64.5 83.4 Segment Margin 7.0 % 8.7 % Sales in our Rest of World segment were $918.6 million in 2024, or $38.3 million lower than sales of $956.9 million in 2023. Compared to the prior year, lower net sales in 2024 were primarily driven by decreased sales of our core water heating and water treatment products in China and included approximately $13 million of unfavorable currency translation. The decline in sales in 2024 was partially offset by higher volumes of kitchen products in China and included increased inter-segment sales of approximately $16 million related to our tankless water heaters manufactured in China and shipped to the U.S. market. Rest of World segment earnings were $64.5 million in 2024 and lower compared to $83.4 million in 2023. Segment margins were 7.0 percent and 8.7 percent in 2024 and 2023, respectively. Lower volumes of our core water heating and water treatment products and an unfavorable product mix and sales promotions in China primarily drove lower segment earnings and segment margin in 2024, partially offset by lower SG&A costs. Segment earnings and margin in 2024 and 2023 included restructuring and impairment expenses of $11.3 million and $15.7 million, respectively. Restructuring and impairment expenses in 2024 were severance costs in China related to the right sizing of that business for current market conditions, and 2023 expenses were primarily associated with the sale of our business in Turkey. 21 Table of Contents Adjusted segment earnings and adjusted segment margin in 2024 were $75.8 million and 8.3 percent, respectively. Adjusted segment earnings and adjusted segment margin in 2023 were $99.1 million and 10.4 percent, respectively. Adjusted segment earnings and adjusted segment margin in 2024 and 2023 exclude $11.3 million and $15.7 million of restructuring and impairment expenses, respectively. We estimate our 2025 Rest of World segment margin will be approximately eight to nine percent. LIQUIDITY AND CAPITAL RESOURCES Our working capital was $495.7 million at December 31, 2024, compared with $555.0 million at December 31, 2023. The decrease in working capital was primarily related to lower cash and receivable balances, partially offset by higher inventory balances, lower accounts payable and lower payroll-related accruals. As of December 31, 2024, cash balances were negatively impacted by $6.6 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 our existing credit facilities. We believe our available cash and existing credit facilities are sufficient to cover our cash needs for the foreseeable future. We use a global cash pooling arrangement, intercompany borrowing, and some local credit lines to meet funding needs and allocate capital resources among various entities. We have historically made and anticipate future cash repatriations from certain foreign subsidiaries. In 2024, we repatriated approximately $90 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances and fund acquisitions. Years ended December 31 (dollars in millions) 2024 2023 Cash provided by operating activities $ 581.8 $ 670.3 Cash used in investing activities (267.1) (24.1) Cash used in financing activities (408.4) (684.7) Cash provided by operations in 2024 was $581.8 million and lower than $670.3 million in 2023, primarily as a result of higher incentive payments associated with record sales and profits earned in 2023, higher inventory balances and lower earnings, which more than offset lower trade receivable balances. Our free cash flow in 2024 and 2023 was $473.8 million and $597.7 million, respectively. We expect cash provided by operating activities to be between $600 million and $650 million in 2025. We expect free cash flow to be between $500 million and $550 million in 2025. Free cash flow is a non-GAAP measure described in more detail in the Non-GAAP Measures section below. Capital expenditures totaled $108.0 million in 2024 compared with $72.6 million in 2023. Higher capital expenditures compared to the prior year were primarily due to our capacity expansion projects in Juarez, Mexico and McBee, South Carolina and our new engineering facility in Lebanon, Tennessee. We project that 2025 capital expenditures will be between $90 million and $100 million and full-year depreciation and amortization expense will be approximately $80 million. In 2024, we renewed and amended our $500 million revolving credit facility ("renewed facility") which now expires on August 23, 2029. The renewed facility is with a group of nine banks and has an accordion provision that allows it to be increased up to $1 billion if certain conditions (including lender approval) are satisfied. Borrowing rates under the renewed facility are determined by our leverage ratio. The renewed 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 December 31, 2024, and expect to be in compliance for the foreseeable future. The renewed facility backs up commercial paper and credit line borrowings. At December 31, 2024, we had $30.0 million of borrowings outstanding under the renewed facility and an available borrowing capacity of $470.0 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 $65.9 million in 2024 primarily due to borrowings associated with our share repurchase program and Pureit acquisition. Our leverage, as measured by the ratio of total debt to total capitalization, was 9.3 percent at December 31, 2024, compared with 6.5 percent at December 31, 2023. In 2024, our Board of Directors approved adding 2,000,000 shares of common stock to our existing discretionary share repurchase authority. Under our share repurchase program, we may purchase our common stock through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. 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 2024, we repurchased 3,755,337 shares of our stock at a total cost of $305.8 million. As of December 31, 2024, we had 1,746,125 shares remaining on the share repurchase authority. On January 26, 2025, the Board of Directors approved adding 5,000,000 shares of common stock to the existing discretionary share repurchase authority. Including the additional shares, we had 6,476,677 shares 22 Table of Contents available for repurchase as of the date of the Board of Directors' approval. We intend to repurchase approximately $400 million of our common stock in 2025 through a combination of 10b5-1 plans and open-market purchases. We paid dividends of $1.30 per share in 2024 compared with $1.22 per share in 2023. We increased our dividend by six percent in the fourth quarter of 2024, and the five-year compound annual growth rate of our dividend payment is approximately eight percent. We have paid dividends for 85 consecutive years with annual amounts increasing each of the last 33 years. Recent Accounting Pronouncements Refer to Recent Accounting Pronouncements in Note 1, “Organization and Significant Accounting Policies” of Notes to the Consolidated Financial Statements. Critical Accounting Policies Our accounting policies are described in Note 1, “Organization and Significant Accounting Policies” of Notes to the Consolidated Financial Statements. Also as disclosed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the evaluation of the impairment of goodwill and indefinite-lived intangible assets and significant estimates used in the determination of the liability related to product warranties. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience and trends, and in some cases, actuarial techniques. We monitor these significant factors and adjustments are made as facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above. Goodwill and Indefinite-lived Intangible Assets In conformity with GAAP, goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We perform impairment reviews for our reporting units using a fair-value method based on management’s judgments and assumptions. The fair value represents the estimated amount at which a reporting unit could be bought or sold in a current transaction between willing parties on an arms-length basis. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental as estimates of future sales, earnings and cash flows are utilized to determine fair values. However, we believe that we conduct a thorough and competent annual quantitative analysis of goodwill and indefinite-lived intangible assets. Based on the annual goodwill impairment test, we determined there was no impairment of our goodwill as of December 31, 2024. The fair value of each of our reporting units significantly exceeded its carrying value and a 20 percent decrease in the estimated fair value of our reporting units would not have resulted in a different conclusion. Based on the annual indefinite-lived assets impairment test, we determined there was no impairment of our indefinite-lived assets as of December 31, 2024. Product Warranty Our products carry warranties that generally range from one to 12 years and are based on terms that are generally accepted in the market. We provide for the estimated cost of product warranty at the time of sale. The product warranty provision is estimated based on warranty loss experience using actual historical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed at least annually. At times, warranty issues may arise which are beyond the scope of our historical experience. We provide for any such warranty issues as they become known and estimable. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costs could differ significantly from those estimates. The allocation of the warranty liability between current and long-term is based on the expected warranty liability to be paid in the next year as determined by historical product failure rates. At December 31, 2024 and 2023, our reserve for product warranties was $190.4 million and $188.1 million, respectively. 23 Table of Contents Non-GAAP Measures 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 restructuring and impairment expenses and pension settlement income. Reconciliations from GAAP measures to non-GAAP measures are provided 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 or recurring in nature. A. O. SMITH CORPORATION Adjusted Earnings and Adjusted Earnings Per Share (dollars in millions, except per share data) (unaudited) 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): Twelve Months Ended December 31, 2024 2023 Net Earnings (GAAP) $ 533.6 $ 556.6 Restructuring and impairment expenses, before tax 17.6 18.8 Pension settlement income, before tax — (0.9) Tax effect on above items (3.2) 0.3 Adjusted Earnings (non-GAAP) $ 548.0 $ 574.8 Diluted Earnings Per Share (GAAP) (1) $ 3.63 $ 3.69 Restructuring and impairment expenses, per diluted share, before tax 0.12 0.12 Pension settlement income per diluted share, before tax — — Tax effect on above items per diluted share (0.02) — Adjusted Earnings Per Share (non-GAAP) (1) $ 3.73 $ 3.81 (1) Earnings per share amounts are calculated discretely and, therefore, may not add up to the total due to rounding. 24 Table of Contents A. O. SMITH CORPORATION Adjusted Segment Earnings (dollars in millions) (unaudited) 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): Twelve Months Ended December 31, 2024 2023 Earnings Before Provision for Income Taxes (GAAP) $ 701.0 $ 733.5 Add: Corporate expense (1) 63.9 64.1 Add: Interest expense 6.7 12.0 Total Segment Earnings (non-GAAP) $ 771.6 $ 809.6 North America (2) $ 707.5 $ 726.7 Rest of World (3) 64.5 83.4 Inter-segment earnings elimination (0.4) (0.5) Total Segment Earnings (non-GAAP) $ 771.6 $ 809.6 Additional Information (1) Corporate expense $ (63.9) $ (64.1) Pension settlement income, before tax — (0.2) Impairment expense, before tax — 3.1 Adjusted Corporate expense (non-GAAP) $ (63.9) $ (61.2) (2) North America $ 707.5 $ 726.7 Restructuring and impairment expenses, before tax 6.3 — Pension settlement income, before tax — (0.7) Adjusted North America (non-GAAP) $ 713.8 $ 726.0 (3) Rest of World $ 64.5 $ 83.4 Restructuring and impairment expenses, before tax 11.3 15.7 Adjusted Rest of World (non-GAAP) $ 75.8 $ 99.1 25 Table of Contents A. O. SMITH CORPORATION Free Cash Flow (dollars in millions) (unaudited) The following is a reconciliation of reported cash flow from operating activities to free cash flow (non-GAAP): Twelve Months Ended December 31, 2024 2023 Cash provided by operating activities (GAAP) $ 581.8 $ 670.3 Less: Capital expenditures (108.0) (72.6) Free cash flow (non-GAAP) $ 473.8 $ 597.7 A. O. SMITH CORPORATION 2025 EPS Guidance and 2024 Adjusted EPS (unaudited) The following is a reconciliation of diluted EPS to adjusted EPS (non-GAAP) (all items are net of tax): 2025 Guidance 2024 Diluted EPS (GAAP) $ 3.60 - 3.90 $ 3.63 Restructuring and impairment expenses — 0.10 (1) Adjusted EPS (non-GAAP) $ 3.60 - 3.90 $ 3.73 (1) Includes pre-tax restructuring and impairment expenses of $11.3 million and $6.3 million, within the Rest of World segment and North America segment, respectively. Outlook As we begin 2025, we expect our consolidated sales to be approximately flat to up two percent compared to 2024. Our projection is driven by expected flat industry residential and commercial volumes. In our Rest of the World segment, after a challenging 2024, we expect consumer demand softness will persist in 2025 in China and a decline in third-party sales. We expect full-year earnings of between $3.60 and $3.90 per share. Our guidance excludes the impacts of potential future acquisitions. OTHER MATTERS Environmental Our operations are governed by a number of federal, foreign, state, local and environmental laws concerning the generation and management of hazardous materials, the discharge of pollutants into the environment and remediation of sites owned by the Company or third parties. We have expended financial and managerial resources complying with such laws. Expenditures related to environmental matters were not material in 2024 and we do not expect them to be material in any single year. We have reserves associated with environmental obligations at various facilities and we believe these reserves together with available insurance coverage are sufficient to cover reasonably anticipated remediation costs. Although we believe that our operations are substantially in compliance with such laws and maintain procedures designed to maintain compliance, there are no assurances that substantial additional costs for compliance will not be incurred in the future. However, since the same laws govern our competitors, we should not be placed at a competitive disadvantage. Risk Management We evaluate risk to our business in a number of ways, primarily through our Enterprise Risk Management (ERM) process, which we conduct enterprise-wise on a periodic basis, and seeks to identify and address significant and material risks. Our ERM process assesses, manages, and monitors risks consistent with the integrated risk framework in the Enterprise Risk Management-Integrated Framework (2017) issued by the Committee of Sponsoring Organizations of the Treadway 26 Table of Contents Commission (COSO). We believe that risk-taking is an inherent aspect of the pursuit of our strategy. Our goal is to manage risks prudently rather than avoid risks. We can mitigate risks and their impact on our company only to a limited extent. A team of senior executives prioritizes identified risks, including decarbonization, new technologies and cyber threats among others, and assigns an executive to address each major identified risk area and lead action plans to manage risks. Our Board of Directors provides oversight of the ERM process and reviews significant identified risks. The Audit Committee of the Board of Directors also reviews significant financial risk exposures and the steps management has taken to monitor and manage them. Our other Board committees also play a role in risk management, as set forth in their respective charters. Our goal is to proactively manage risks using a structured approach in conjunction with strategic planning, with the intent to preserve and enhance shareholder value. However, the risks set forth in Item 1A - Risk Factors and elsewhere in this Annual Report on Form 10-K and other risks and uncertainties could adversely affect us and cause our results to vary materially from recent results or from our anticipated future results. Market Risk We are exposed to various types of market risks, primarily currency. We monitor our risks in such areas on a continuous basis and generally enter into forward contracts to minimize such exposures. We do not engage in speculation in our derivatives strategies. Further discussion regarding derivative instruments is contained in Note 1, “Organization and Significant Accounting Policies” of Notes to Consolidated Financial Statements. We enter into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. At December 31, 2024, we had net foreign currency contracts outstanding with notional values of $70.1 million. Assuming a hypothetical ten percent movement in the respective currencies, the potential foreign exchange gain or loss associated with the change in exchange rates would amount to $7.0 million. However, gains and losses from our forward contracts will be offset by gains and losses in the underlying transactions being hedged. Forward-Looking Statements This filing contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance,” “outlook” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: further softening in U.S. residential and commercial 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, as a result of changes in commercial property usage that followed the COVID-19 pandemic; further weakening in North American residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; inconsistent recovery of the Chinese economy or a further decline in the growth rate of consumer spending or housing sales in China; the availability, timing or effects of China stimulus programs; negative impact to the Company’s businesses from international tariffs, trade disputes and geopolitical differences, including the conflicts in Ukraine and the Middle East; potential 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; foreign currency fluctuations; the Company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; failure to realize the expected benefits of acquisitions or expected synergies; failure to realize the expected benefits, timing and extent, of regulatory changes; competitive pressures on the Company’s businesses; including new technologies and new competitors; the impact of potential information technology or data security breaches; negative impact of changes in government regulations or regulatory requirements; 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. A more detailed description of these risks is contained under the heading "Risk Factors" in Item 1A above. 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. All subsequent written and oral forward-looking statements attributed to the Company, or persons acting on its behalf, are qualified entirely by these cautionary statements. Forward-looking and other statements in this Form 10-K regarding our environmental and other sustainability plans and goals are not an indication that these statements are necessarily material to investors or are required to be disclosed in our filings with the SEC. In addition, historical, current, and forward-looking social, environmental and sustainability-related statements 27 Table of Contents may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. Any such forward-looking statements made herein are based on information currently available to us as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See “Market Risk” above.