What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-04-29 compared with 2024-10-23 · 84 added, 191 removed, 96 unchanged (74% of the section changed)

5 unchanged sentences

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

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.

On July 15, 2024, we signed an agreement to acquire Pureit from Unilever for $120 million, subject to customary adjustments.

We expect to close on the acquisition by the end of 2024.

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, primarily in India.

The acquisition fits squarely in the Company’s core capabilities and would double the Company’s market penetration in the South Asia region.

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.

Pureit contributed $12 million to sales in the first quarter of 2025 and is expected to have annual sales of approximately USD $50 million for the full year 2025.

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 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 in China.

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

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 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 soft residential and commercial water heater order demand in the third quarter 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 third quarter order demand was negatively impacted by our improved lead times.

Those factors along with caution around softening end market demand may have driven some customers to reduce their inventory levels in the quarter.

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 be approximately flat in 2024 compared to 2023 as growth in commercial electric water heaters greater than 55 gallons will be offset by lower shipments of commercial gas water heaters.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 and we saw a return to growth in the second quarter.

We expect our boilers sales to grow approximately eight percent 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, after local currency third-party sales growth in China of four percent in the first half of 2024, our third quarter China sales declined 17 percent year-over-year as consumer demand headwinds were more significant than we expected.

We project our third-party sales in China to decrease six to eight percent in 2024 in local currency compared to 2023 as we expect consumer demand softness will persist through the remainder of 2024.

Combining all of these factors, we expect our 2024 consolidated sales to be approximately flat to 2023.

Our guidance excludes the impacts from potential future acquisitions.

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 lower water heater volumes in the first quarter of 2025 against a difficult comparison in the same period last year.

We believe that a pre-buy ahead of our March 2024 price increase pulled forward some demand into the first quarter of 2024.

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.

We anticipate that commercial water heater industry volumes will also be approximately flat in 2025 after minimal growth in 2024.

In response to higher steel and other input costs, including tariffs, we announced price increases on most of our water heater and boiler products.

We expect our boiler 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, our first quarter 2025 third-party sales in China declined four percent due to continued weak consumer demand.

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.

Given the uncertainty of the tariff environment, our guidance does not include our announced pricing which we project will offset, along with other actions, the current announced tariffs through the date of this filing.

In addition to pricing, our other actions include footprint optimization, strategic sourcing actions and other cost containment initiatives.

Our guidance also excludes the impacts from potential future acquisitions.

Results of Operations

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

Net sales $ 963.9 $ 978.8

3 unchanged sentences

Selling, general and administrative expenses 192.6 192.2

Impairment expense — — — 15.6

Interest expense 2.9 1.0

Other expense (income), net 2.6 2.5 0.5 (10.5)

Other income, net (1.2) (1.2)

Earnings before provision for income taxes 181.1 192.7

1 unchanged sentence

Net Earnings $ 136.6 $ 147.6

Our sales in the third quarter of 2024 were $902.6 million, or 3.7 percent lower than the third quarter 2023 sales of $937.5 million.

Sales in the first nine months of 2024 were $2,905.7 million, or 1.4 percent higher than $2,864.7 million in the same period last year.

Compared to the prior year quarter, our net sales decrease was primarily driven by lower sales in China and lower residential and commercial water heater volumes in North America, which more than offset our higher boiler sales, pricing actions, and favorable currency translation of approximately $1 million due to the appreciation of foreign currencies compared to the U.S.

Our net sales increase in the first nine months of 2024 was primarily driven by pricing actions and higher water heater and boiler sales in North America, offset by unfavorable currency translation of approximately $16 million due to the depreciation of foreign currencies compared to the U.S.

Our 2024 and 2023 acquisitions of water treatment companies in North America added approximately $6 million and $14 million of incremental net sales in the third quarter and first nine months of 2024, respectively.

Our gross profit margin in the third quarter of 2024 was 37.4 percent, a decrease compared to 38.0 percent in the third quarter of 2023.

Gross profit margin in the first nine months of 2024 was 38.5 percent compared to the gross profit margin of 38.9 percent in the first nine months of 2023.

The lower gross profit margin in the third quarter was primarily due to lower volumes and the associated negative impact on our operational efficiencies compared to the third quarter of 2023.

The lower gross profit margin in the first nine months of 2024 compared to the same period last year was primarily due to higher production costs, which outpaced our pricing actions.

Selling, general, and administrative (SG&A) expenses in the third quarter of 2024 increased by $1.7 million compared to the third quarter of 2023.

SG&A expenses increased $14.9 million in the first nine months of 2024 compared to the prior year.

The increase in SG&A expenses in the third quarter and first nine months of 2024 compared to the prior year periods was primarily due to higher employee costs from increased wages and management incentives in addition to higher selling expenses to support our sales initiatives.

Impairment expense in the first nine 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 first nine months of 2024.

Interest expense in the third quarter of 2024 was $1.5 million compared to $2.4 million in the same period last year.

Interest expense in the first nine months of 2024 was $4.3 million compared to $10.9 million in the same period the previous year.

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

Other expense (income), net was $2.6 million in the third quarter of 2024 essentially flat to the third quarter of 2023.

Other expense (income), net was $0.5 million in the first nine months of 2024 compared to ($10.5) million in the same period last year.

The decrease in Other expense (income), net in the first nine months of 2024 was primarily due to the absence of non-recurring pension settlement income of $6.0 million realized in the second quarter of 2023, higher foreign currency translation losses and lower interest income.

Our effective income tax rate for the three and nine months ended September 30, 2024 was 23.3 percent and 23.7 percent, respectively.

The effective income tax rate for the three and nine months ended September 30, 2023 was 23.2 percent and 24.7 percent, respectively.

The change in the effective income tax rate for the three months ended September 30, 2024 compared to the prior year quarter was primarily due to a change in geographical earnings mix.

The change in the effective income tax rate for the nine months ended September 30, 2024 compared to the prior year period was primarily due to a change in geographical earnings mix and 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 24 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.

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.

Our sales in the first quarter of 2025 were $963.9 million, and lower than the first quarter of 2024 sales of $978.8 million.

Compared to the prior year quarter, our net sales decrease was primarily driven by lower residential and commercial water heater volumes in North America, lower sales in China, and an unfavorable currency translation of approximately $7 million due to the depreciation of foreign currencies compared to the U.S.

dollar, which more than offset our higher sales of boilers and incremental sales related to the 2024 acquisition of Pureit that added approximately $12 million in the first quarter.

Our gross profit margin in the first quarter of 2025 was 38.9 percent, down compared to 39.3 percent in the first quarter of 2024.

The decrease in gross profit margin was primarily due to lower sales volumes.

Selling, general, and administrative (SG&A) expenses in the first quarter of 2025 were essentially flat compared to the first quarter of 2024.

Interest expense in the first quarter of 2025 was $2.9 million compared to $1.0 million in the same period last year.

The increase in interest expense in the first quarter of 2025 was primarily due to higher debt levels.

Other income, net was $1.2 million in the first quarter of 2025 and flat to the first quarter of 2024.

Our effective income tax rate for the three months ended March 31, 2025 was 24.6 percent.

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

The change in the effective income tax rate for the three months ended March 31, 2025 compared to the prior year quarter was primarily due to a change in geographical earnings mix.

We estimate that our annual effective income tax rate for the full year of 2025 will be approximately 24 to 24.5 percent.

North America Segment

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

Net Sales $ 748.7 $ 766.3

1 unchanged sentence

Segment margin 24.7 % 25.9 %

Sales in our North America segment were $703.3 million in the third quarter of 2024, or $6.6 million lower than sales of $709.9 million in the third quarter of 2023.

Sales in the first nine months of 2024 were $2,260.3 million, or $75.4 million higher than sales of $2,184.9 million in the same period last year.

Compared to the prior year quarter, our net sales decrease was driven by lower residential and commercial water heater volumes, which more than offset our higher boiler sales and pricing actions.

Higher water heater and commercial boiler sales and pricing actions primarily drove our net sales increase in the first nine months of 2024.

Our 2024 and 2023 acquisitions of water treatment companies added approximately $6 million and $14 million of incremental net sales in the third quarter and first nine months of 2024, respectively.

North America segment earnings were $162.5 million in the third quarter of 2024, or $7.5 million lower than segment earnings of $170.0 million in the third quarter of 2023.

Segment earnings in the first nine months of 2024 were $559.6 million, an increase of $1.9 million compared to segment earnings of $557.7 million in the first nine months of 2023.

Segment margins were 23.1 percent and 23.9 percent in the third quarter of 2024 and 2023, respectively.

Segment margins were 24.8 percent and 25.5 percent in the first nine months of 2024 and 2023, respectively.

Lower segment earnings and margin in the third quarter of 2024 compared to the prior year were primarily due to lower volumes of residential and commercial water heaters and higher production costs, which were partially offset by higher commercial boiler volumes.

Slightly higher segment earnings in the first nine months of 2024 compared to the prior year period were primarily due to pricing actions, partially offset by higher selling expenses to support our sales growth initiatives.

Lower segment margin in the first nine months of 2024 compared to the prior year period was primarily due to higher production costs and higher selling expenses that outpaced our pricing actions.

We estimate our 2024 North America segment margin will be approximately 24.5 percent.

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.

Sales in our North America segment were $748.7 million in the first quarter of 2025, or $17.6 million lower than sales of $766.3 million in the first quarter of 2024.

Compared to the prior year quarter, our net sales decrease was driven by lower residential and commercial water heater volumes, which more than offset our higher boiler sales.

North America segment earnings were $185.2 million in the first quarter of 2025, or $13.5 million lower than segment earnings of $198.7 million in the first quarter of 2024.

Segment margins were 24.7 percent and 25.9 percent in the first quarter of 2025 and 2024, respectively.

Lower segment earnings and margin in the first quarter of 2025 compared to the prior year quarter were primarily due to lower water heater volumes, lower volume-related absorption, and continued strategic investments, which were partially offset by higher boiler volumes.

We estimate our 2025 North America segment margin will be approximately 24 to 24.5 percent.

Rest of World Segment

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

Net Sales $ 226.7 $ 226.9

1 unchanged sentence

Segment margin 8.7 % 7.6 %

Sales in the Rest of World segment were $210.3 million in the third quarter of 2024, or $23.1 million lower than sales of $233.4 million in the third quarter of 2023.

Sales in the first nine months of 2024 were $682.0 million, or $14.7 million lower than sales of $696.7 million in the same period last year.

Compared to the prior year quarter, the net sales decrease was primarily due to lower volumes of our core water heating and water treatment products, partially offset by favorable currency translation of approximately $2 million.

Lower net sales in the first nine months of 2024 were primarily driven by the decrease in sales of our core products mentioned above with an incremental approximately $14 million of unfavorable currency translation.

The decline in sales in the first nine months of 2024 were partially offset by higher volumes of kitchen products in China and included increased inter-segment sales of approximately $12 million related to our tankless water heaters manufactured in China and shipped to the U.S.

Rest of World segment earnings were $13.6 million in the third quarter of 2024 and lower compared to $23.2 million in the third quarter of 2023.

Segment earnings in the first nine months of 2024 were $56.7 million, essentially flat to the first nine months of 2023.

Segment margins were 6.5 percent and 9.9 percent in the third quarter of 2024 and 2023, respectively.

Segment margins were 8.3 percent and 8.2 percent in the first nine months of 2024 and 2023, respectively.

Lower volumes of our core water heating and water treatment products primarily drove lower segment earnings and segment margin in the third quarter of 2024.

Essentially flat segment earnings and segment margin in the first nine months of 2024 were primarily driven by lower volumes of our core water heating and water treatment products and an unfavorable product mix and sales promotions in China, offset 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 eight percent.

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 of impairment expense.

We expect our consolidated sales in 2024 to be flat to 2023.

Our sales projection is driven by expected flat industry residential and commercial unit water heater volumes in North America compared to the prior year.

We expect to see an eight 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 by approximately eight to ten percent in 2024, compared to 2023, as we continue our geographic expansion.

In our Rest of the World segment, we expect sales in China to decrease six to eight percent in local currency compared to 2023, driven by expected softness in consumer demand.

We expect to achieve full-year earnings of between $3.70 and $3.85 per share.

Our guidance excludes the impacts from potential future acquisitions.

Sales in the Rest of World segment were $226.7 million in the first quarter of 2025, essentially flat to sales of $226.9 million in the first quarter of 2024.

Compared to the prior year quarter, essentially flat sales were primarily due to lower volumes of our residential water treatment and gas water heater products in China and unfavorable currency translation of approximately $3 million that fully offset incremental sales related to our 2024 acquisition of Pureit that added approximately $12 million in net sales.

Rest of World segment earnings were $19.7 million in the first quarter of 2025, or $2.5 million higher compared to $17.2 million in the first quarter of 2024.

Segment margins were 8.7 percent and 7.6 percent in the first quarter of 2025 and 2024, respectively.

The higher segment earnings and segment margin in 2025 compared to last year were primarily driven by cost controlling measures and benefits from our Q4 2024 restructuring actions which more than offset lower volumes in China.

We estimate our 2025 Rest of World segment margin will be approximately eight to nine percent.

We expect our consolidated sales in 2025 to be approximately flat to up two percent compared to 2024.

Our projection is driven by expected flat industry residential and commercial volumes in North America.

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.

In addition to pricing, our other actions include footprint optimization, strategic sourcing actions and other cost containment initiatives.

Our guidance also excludes the impacts from potential future acquisitions.

Liquidity & Capital Resources

Our working capital was $568.3 million at September 30, 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 lower payroll-related accruals, partially offset by lower cash and receivable balances.

As of September 30, 2024, cash balances were negatively impacted by $1.7 million due to changes in foreign currency during the year.

Our working capital was $540.0 million at March 31, 2025, compared with $495.7 million at December 31, 2024.

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

As of March 31, 2025, cash balances were positively impacted by $0.6 million due to changes in foreign currency during the quarter.

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

2 unchanged sentences

We have historically made and anticipate future cash repatriations from certain foreign subsidiaries.

In the first nine months of 2024, we repatriated approximately $88 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances and fund an acquisition.

(dollars in millions) Nine Months Ended

September 30,

(dollars in millions) Three Months Ended

Cash provided by operating activities $ 38.7 $ 106.6

1 unchanged sentence

Cash used in financing activities (95.1) (120.6)

Cash provided by operations in the first nine months of 2024 was $359.9 million and lower than $439.0 million in the first nine months of 2023, primarily as a result of higher incentive payments associated with record sales and profits earned in 2023 and higher inventory balances, which more than offset lower trade receivable balances.

Our free cash flow in the third quarter of 2024 and 2023 was $282.5 million and $396.3 million, respectively.

We expect cash provided by operating activities to be approximately $525 million in 2024.

We expect free cash flow to be approximately $415 million in 2024.

Cash provided by operations in the first three months of 2025 was $38.7 million and lower than $106.6 million in the first three months of 2024, primarily due to lower accounts receivable collections which resulted from lower prior quarter sales as well as lower current quarter earnings.

Our free cash flow in the first quarter of 2025 and 2024 was $17.4 million and $84.6 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 $77.4 million in the first nine months of 2024 compared with $42.7 million in the same period last year.

Higher capital expenditures compared to the prior year period was primarily due to our capacity expansion projects.

Capital expenditures totaled $21.3 million in the first three months of 2025 compared with $22.0 million in the same period last year.

We project 2025 capital expenditures will be between $90 million and $100 million and full-year depreciation and amortization expense will be approximately $80 million.

During the third quarter of 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, which is an increase of $150 million from the amount prior to the renewal and amendment.

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 September 30, 2024, and expect to be in compliance for the foreseeable future.

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 March 31, 2025, and expect to be in compliance for the foreseeable future.

The renewed facility backs up commercial paper and credit line borrowings.

At September 30, 2024, we had no borrowings outstanding under the renewed facility and an available borrowing capacity of $500.0 million.

At March 31, 2025, we had $113.3 million of borrowings outstanding under the renewed facility and an available borrowing capacity of $386.7 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 $7.6 million in the first nine months of 2024 as we used available cash to pay down outstanding debt balances.

Our leverage, as measured by the ratio of total debt to total capitalization, was 5.9 percent at September 30, 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.

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.

Our total debt increased by $76.6 million in the first three months of 2025 as we used available cash to fund our stock repurchase program.

Our leverage, as measured by the ratio of total debt to total capitalization, was 12.7 percent at March 31, 2025, compared with 9.3 percent at December 31, 2024.

In the first quarter of 2025, our Board of Directors approved adding 5,000,000 shares of common stock to the existing discretionary share repurchase authority.

Under the share repurchase program, the common stock may be purchased through a combination of 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 the first nine months of 2024, we repurchased 2,850,500 shares of our stock at a total cost of $237.1 million.

At September 30, 2024, we had 2,650,962 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 7, 2024, our Board of Directors declared a regular quarterly cash dividend of $0.34 per share on our Common Stock and Class A common stock.

The dividend is payable on November 15, 2024, to shareholders of record on October 31, 2024.

In the first quarter of 2025, we repurchased 1,794,694 shares at an average price of $67.19 per share and at a total cost of $120.6 million.

As of March 31, 2025, there were 4,951,431 shares remaining on the existing repurchase authorization.

Depending on factors such as stock price, working capital requirements, and alternative investment opportunities, we expect to spend approximately $400 million on stock repurchases in 2025 through a combination of any Rule 10b5-1 automatic trading plan and open market repurchases.

On April 7, 2025, our Board of Directors declared a regular quarterly cash dividend of $0.34 per share on our Common Stock and Class A common stock.

The dividend is payable on May 15, 2025, to shareholders of record on April 30, 2025.

Non-GAAP Financial Information

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

We provide non-GAAP measures of free cash flow.

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.

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

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

SMITH CORPORATION

Adjusted Earnings and Adjusted Earnings Per Share

(dollars in millions, except per share data)

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

Net Earnings (GAAP) $ 120.1 $ 135.4 $ 423.9 $ 419.3

Impairment expense, before tax — — — 15.6

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

Tax effect on above items — — — 1.5

Adjusted Earnings (non-GAAP) $ 120.1 $ 135.4 $ 423.9 $ 430.4

Diluted Earnings Per Share (GAAP) (1)

$ 0.82 $ 0.90 $ 2.87 $ 2.77

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

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

Tax effect on above items per diluted share — — — 0.01

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

$ 0.82 $ 0.90 $ 2.87 $ 2.84

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

SMITH CORPORATION

Adjusted Segment Earnings

(dollars in millions)

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2024 2023 2024 2023

Earnings Before Provision for Income Taxes (GAAP) $ 156.6 $ 176.4 $ 555.9 $ 556.6

Corporate expense (1)

18.0 14.4 55.7 47.0

Interest expense 1.5 2.4 4.3 10.9

Total Segment Earnings (non-GAAP) $ 176.1 $ 193.2 $ 615.9 $ 614.5

North America (2)

$ 162.5 $ 170.0 $ 559.6 $ 557.7

Rest of World (3)

13.6 23.2 56.7 56.8

Inter-segment earnings elimination — — (0.4) —

Total Segment Earnings (non-GAAP) $ 176.1 $ 193.2 $ 615.9 $ 614.5

Additional Information

(1) Corporate expense

$ (18.0) $ (14.4) $ (55.7) $ (47.0)

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

Impairment expense, before tax — — — 3.1

Adjusted Corporate expense (non-GAAP) $ (18.0) $ (14.4) $ (55.7) $ (44.9)

(2) North America

$ 162.5 $ 170.0 $ 559.6 $ 557.7

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

Adjusted North America (non-GAAP) $ 162.5 $ 170.0 $ 559.6 $ 552.7

(3) Rest of World

$ 13.6 $ 23.2 $ 56.7 $ 56.8

Impairment expense, before tax — — — 12.5

Adjusted Rest of World (non-GAAP) $ 13.6 $ 23.2 $ 56.7 $ 69.3

SMITH CORPORATION

Free Cash Flow

1 unchanged sentence

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) $ 38.7 $ 106.6

8 unchanged sentences

Adjusted EPS (non-GAAP) $ 3.60-3.90 $ 3.73

(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.

(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.

Critical Accounting Policies

4 unchanged sentences

The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2024.

We believe that at September 30, 2024, there was no material change to this information.

We believe that at March 31, 2025, there was no material change to this information.

Recent Accounting Pronouncements

5 unchanged sentences

Important factors that could cause actual results to differ materially from these expectations include, among other things, the following:

negative impact to the Company’s businesses from international tariffs, including any new or increased tariffs that could also trigger retaliatory responses from other countries, as well as, trade disputes and geopolitical differences, including the conflicts in Ukraine and the Middle East;

further softening in U.S.

7 unchanged sentences

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, 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.;

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;

1 unchanged sentence

the Company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions;

the possibility that the parties will fail to obtain necessary regulatory approvals or to satisfy any of the other conditions to the proposed acquisition;

failure to realize the expected benefits of acquisitions or expected synergies;

9 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