What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-04-30 compared with 2025-10-28 · 104 added, 125 removed, 82 unchanged (74% of the section changed)

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North America and Rest of World.

Our Rest of World segment is primarily comprised of China, Europe and India.

Our Rest of World segment is primarily comprised of China, India, and Europe.

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.

Pureit contributed $45 million to sales in the first nine months of 2025 and is expected to have sales of approximately USD $55 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 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 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, water heater sales were essentially flat in the first nine months of 2025 compared to the same period last year as pricing benefits and higher commercial volumes we achieved in the third quarter were offset by lower residential volumes in the first half of the year.

We believe we underperformed the market in the first half of the year as we limited prebuy ahead of our May 2025 price increase however we believe we outperformed the market in the third quarter and we expect to continue to strengthen our share through the fourth quarter.

2024 residential industry unit volumes were flat compared to the prior year and we project 2025 industry residential unit volumes will be flat to slightly down as new construction completions leads to softness in the wholesale residential channel.

We anticipate that commercial water heater industry volumes will increase low single digits 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 in the first half of 2025.

In addition to pricing, we intend to mitigate the impact of tariffs through footprint optimization, strategic sourcing actions and other cost containment initiatives.

We expect our boiler sales to grow between four and six 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 less attractive channels and focus on our more profitable channels.

In our Rest of World segment, China sales declined nine percent in local currency in the first nine months of 2025 due to continued weak consumer demand and the cessation of the appliance government subsidy programs in the third quarter.

For the full year 2025, we project our third-party sales in China to decrease approximately 10 percent in local currency compared to 2024 as we expect economic challenges will persist in 2025.

In the third quarter, we initiated an assessment of strategic opportunities for our China business, including strategic partnerships and other alternatives.

Consistent with our stated strategic priorities, we continue to seek acquisitions that enable growth, expand our core business, and establish adjacencies.

In January 2026, we acquired LVC Holdco LLC (Leonard Valve) for $470 million, subject to customary adjustments, and was funded with cash borrowed under a new term loan with a group of eight banks.

In the first quarter, we recognized $6 million of acquisition-related transaction expenses.

Leonard Valve is a leading manufacturer of water temperature and flow solutions and we believe it represents a compelling strategic fit and a meaningful advancement into our presence in the water management market.

Leonard Valve is projected to contribute approximately $70 million in sales in 2026 in the North America segment.

Leonard Valve contributed approximately $16 million to sales in the first quarter of 2026.

Consistent with our Operational Excellence strategic priority, in April 2026 the Company announced a restructuring plan in its North America water treatment business designed to increase operational efficiency and improve profitability and growth through footprint optimization as well as brand rationalization.

In the second quarter, the Company estimates that it will recognize a restructuring charge of approximately $20 million, the majority of which will be due to non-cash impairment expenses.

Beginning in 2027, annual savings are projected to be approximately $6 million to $8 million.

In our North America segment, water heater sales decreased two percent in the first quarter of 2026 as pricing benefits were more than offset by lower residential volumes.

Our first quarter sales were impacted by softer water heater industry volumes and weather-related production and shipping constraints.

We project that full year 2026 residential industry unit volumes will be flat to slightly down, due to softness in new construction and a slower than expected start to the year.

Due to a recent announcement from the Department of Energy indicating a one-year enforcement delay of the October 2026 regulatory change, we have lowered our outlook for the commercial water heater industry volumes which we now project will be similar to last year.

In response to higher steel and other input costs, in April, we announced price increases of four to seven percent on most of our water heater and boiler products.

Our boiler sales grew two percent in the first quarter of 2026.

We expect our boiler sales to grow between six and eight percent in 2026 due to pricing benefits and continued demand for our commercial high efficiency condensing gas boilers.

We anticipate sales of our North America water treatment products will grow between five and six percent primarily due to tariff-related pricing benefits and as we continue to expand our dealer network, partially offset by softness in our consumer channels.

In our Rest of World segment, China third-party sales declined 17 percent in local currency in the first quarter of 2026 due to continued challenging market conditions including the cessation of the government appliance subsidy programs.

For the full year 2026, based on our caution around a recovery timeline of our China business, we have revised and lowered our projection for our third-party sales in China to a low double-digits decrease in local currency sales compared to 2025.

In 2025, we initiated an assessment of strategic opportunities for our China business, including strategic partnerships and other alternatives.

We believe the China market has substantial long-term prospects and are committed to realizing the potential upside inherent in our China business.

Combining all of these factors, we expect our 2025 consolidated sales to be flat to up one percent compared to 2024.

Our guidance excludes the impacts from potential future acquisitions and any potential outcomes of the assessment of the China business.

The assessment is ongoing.

Combining all of these factors, we expect our 2026 consolidated sales to grow between two and four percent compared to 2025.

Our guidance excludes the impacts from potential future acquisitions, any potential outcomes of the assessment of the China business and any changes to tariffs after the date of this filing.

Results of Operations

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2025 2024 2025 2024

Net sales $ 945.6 $ 963.9

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Net Earnings $ 118.0 $ 136.6

Our sales in the third quarter of 2025 were $942.5 million, and were higher than the third quarter of 2024 sales of $902.6 million.

Sales in the first nine months of 2025 were $2,917.7 million, and were higher than sales of $2,905.7 million in the same period last year.

Compared to the prior year quarter, our net sales increase was primarily driven by price increases in response to higher input costs, including tariffs, and higher commercial water heater and boiler volumes, partially offset by lower volumes in China and the incremental sales related to the 2024 acquisition of Pureit which added approximately $17 million in the third quarter of 2025.

Our net sales increase in the first nine months of 2025 was primarily driven by the price increases mentioned above, higher commercial water heater and boiler volumes, and incremental sales related to the 2024 acquisition of Pureit which added approximately $45 million in the first nine months of 2025.

This more than offset lower volumes in China, lower residential water heater volumes in North America and unfavorable currency translation of approximately $9 million due to the depreciation of foreign currencies compared to the U.S.

Our gross profit margin in the third quarter of 2025 was 38.7 percent, up compared to 37.4 percent in the third quarter of 2024.

Gross profit margin in the first nine months of 2025 was 39.0 percent, up compared to the gross profit margin of 38.5 percent in the first nine months of 2024.

The increases in gross profit margin in the third quarter and first nine months were primarily driven by the benefits of pricing actions implemented earlier this year to address increased input costs in North America.

Selling, general, and administrative (SG&A) expenses in the third quarter of 2025 increased $12.3 million compared to the third quarter of 2024.

SG&A expenses increased $15.5 million in the first nine months of 2025 compared to the prior year.

The increases in SG&A expenses in the third quarter and first nine months of 2025 compared to the prior year periods were primarily due to higher employee costs, partially offset by benefits of our 2024 China restructuring actions.

Interest expense in the third quarter of 2025 was $3.6 million compared to $1.5 million in the same period last year.

Interest expense in the first nine months of 2025 was $11.1 million compared to $4.3 million in the same period the previous year.

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

Other expense (income), net for the third quarter of 2025 was expense of $0.2 million, compared to expense of $2.6 million for the third quarter of 2024.

Other expense (income), net for the first nine months of 2025 was income of $1.4 million compared to expense of $0.5 million in the same period last year.

The change in Other expense (income), net in the third quarter of 2025 was primarily due to lower foreign currency translation losses and lower interest income.

The change in Other expense (income), net in the first nine months of 2025 was primarily due to lower foreign currency translation losses.

Our effective income tax rate for the three and nine months ended September 30, 2025 was 23.2 percent and 24.1 percent, respectively.

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

The change in the effective income tax rate for the three and nine months ended September 30, 2025 compared to the effective income tax rate for the three and nine months ended September 30, 2024 was primarily due to the geographical earnings mix.

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

Our sales in the first quarter of 2026 were $945.6 million and were lower than the first quarter of 2025 sales of $963.9 million.

Compared to the prior year quarter, our net sales decrease was primarily driven by lower sales volumes in residential water heaters in North America, which were impacted by weather-related production and shipping constraints, particularly as a direct result of storm damage at the Company’s Ashland City, Tennessee plant and lower sales volumes in China.

The first quarter of 2025 benefited from incremental volume from the pull forward of water heater and boiler sales ahead of tariff and other cost-related price increases.

Lower sales volumes were partially offset by the favorable impact of pricing actions in 2025 as mentioned above, incremental sales of approximately $16 million from the 2026 acquisition of Leonard Valve, and a favorable foreign currency translation impact of approximately $11 million resulting from the appreciation of foreign currencies compared to the U.S.

Our gross profit margin in the first quarter of 2026 was 38.7 percent, compared 38.9 percent in the first quarter of 2025.

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 2026 increased $11.3 million compared to the first quarter of 2025.

The increases in SG&A expenses in the first quarter of 2026 compared to the prior year period were primarily due to higher employee costs and transaction costs related to the acquisition of Leonard Valve.

Interest expense in the first quarter of 2026 was $7.1 million compared to $2.9 million in the same period last year.

The increase in interest expense in the first quarter 2026 was primarily due to higher debt levels as a result of the Leonard Valve acquisition.

Other expense (income), net for the first quarter of 2026 was zero, compared to income of $1.2 million for the first quarter of 2025.

The change in Other expense (income), net in the first quarter of 2026 was primarily due to lower interest income.

Our effective income tax rate for the three months ended March 31, 2026 was 23.7 percent.

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

The change in the effective income tax rate for the three months ended March 31, 2026 compared to the effective income tax rate for the three months ended March 31, 2025 was primarily due to the geographical earnings mix.

We estimate that our annual effective income tax rate for the full year of 2026 will be approximately between 24.0 and 24.5 percent.

North America Segment

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2025 2024 2025 2024

Net Sales $ 753.4 $ 748.7

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Segment margin 23.3 % 24.7 %

Sales in our North America segment were $742.8 million in the third quarter of 2025, an increase of $39.5 million from $703.3 million in the third quarter of 2024.

Sales in the first nine months of 2025 were $2,270.5 million, or $10.2 million higher than sales of $2,260.3 million in the same period last year.

Compared to the prior year quarter, our net sales increase was primarily driven by the benefits of pricing actions as well as higher commercial water heater and boiler volumes.

Our net sales increase in the first nine months of 2025 was driven by the pricing actions and higher commercial water heater and boiler volumes as mentioned above, that were partially offset by unfavorable currency translation of approximately $6 million and lower residential water heater volumes.

North America segment earnings were $179.7 million in the third quarter of 2025, or $17.2 million higher than segment earnings of $162.5 million in the third quarter of 2024.

Segment earnings in the first nine months of 2025 were $563.0 million, an increase of $3.4 million compared to segment earnings of $559.6 million in the first nine months of 2024.

Segment margins were 24.2 percent and 23.1 percent in the third quarter of 2025 and 2024, respectively.

Segment margins were 24.8 percent in the first nine months of both 2025 and 2024.

Higher segment earnings and segment margin in the third quarter of 2025 and higher segment earnings for the first nine months of 2025 compared to the prior year periods were primarily due to pricing actions and higher commercial water heater and boiler volumes that more than offset higher material and other input costs.

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

Sales in our North America segment were $753.4 million in the first quarter of 2026, an increase of $4.7 million from $748.7 million in the first quarter of 2025.

Compared to the prior year quarter, our net sales increase was primarily driven by the benefits of 2025 pricing actions and incremental sales of approximately $16 million from the 2026 acquisition of Leonard Valve largely offset by lower residential water heater volumes which were impacted by weather-related production and shipping constraints, particularly as a direct result of storm damage at the Company’s Ashland City, Tennessee plant.

The first quarter of 2025 benefited from incremental volume from the pull forward of water heater and boiler sales ahead of tariff and other cost-related price increases.

North America segment earnings were $175.4 million in the first quarter of 2026, or $9.8 million lower than segment earnings of $185.2 million in the first quarter of 2025.

Segment margins were 23.3 percent and 24.7 percent in the first quarter of 2026 and 2025, respectively.

Lower segment earnings and segment margin in the first quarter of 2026 were primarily due to lower residential water heater volumes that more than offset the earnings contribution from Leonard Valve.

We estimate our 2026 full year North America segment margin will be approximately 24 percent.

Rest of World Segment

(dollars in millions) Three Months Ended

September 30, Nine Months Ended

September 30,

2025 2024 2025 2024

Net Sales $ 200.7 $ 226.7

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Segment margin 6.2 % 8.7 %

Sales in the Rest of World segment were $207.9 million in the third quarter of 2025, compared to $210.3 million in the third quarter of 2024.

Sales in the first nine months of 2025 were $674.7 million, or $7.3 million lower than sales of $682.0 million in the same period last year.

The decreases in sales in the third quarter and first nine months of 2025 compared to same periods in 2024 were primarily due to lower volumes of our residential water treatment and water heater products in China that were partially offset by incremental sales related to our 2024 acquisition of Pureit, which added approximately $17 million and $45 million in net sales in the third quarter and first nine month of 2025 respectively.

Rest of World segment earnings were $15.4 million in the third quarter of 2025, or $1.8 million higher compared to $13.6 million in the third quarter of 2024.

Segment earnings in the first nine months of 2025 were $60.4 million, an increase of $3.7 million compared to segment earnings of $56.7 million in the first nine months of 2024.

Segment margins were 7.4 percent and 6.5 percent in the third quarter of 2025 and 2024, respectively.

Segment margins were 9.0 percent and 8.3 percent in the first nine months of 2025 and 2024, respectively.

The higher segment earnings and segment margin in the third quarter and first nine months of 2025 compared to the prior quarter and prior year were primarily driven by benefits of our 2024 restructuring actions and tight spending controls in China that more than offset the lower China volumes.

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

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

Our projection is driven by expected boiler sales growth of between four and six percent, low single digit growth in commercial industry volumes, offset by flat to slightly down residential industry volumes in North America in 2025 compared to 2024.

In our Rest of the World segment, after a challenging 2024, we expect consumer demand softness will persist in 2025 in China leading to a decline in third-party sales.

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

Our guidance excludes the impacts from potential future acquisitions and any potential outcomes of the assessment of the China business.

Sales in the Rest of World segment were $200.7 million in the first quarter of 2026, compared to $226.7 million in the first quarter of 2025.

The decrease in sales in the first quarter of 2026 compared to same period in 2025 was primarily due to lower sales volumes in China that more than offset the favorable foreign currency translation impact of approximately $8 million resulting from the appreciation of foreign currencies compared to the U.S.

Rest of World segment earnings were $12.4 million in the first quarter of 2026, or $7.3 million lower compared to $19.7 million in the first quarter of 2025.

Segment margins were 6.2 percent and 8.7 percent in the first quarter of 2026 and 2025, respectively.

The lower segment earnings and segment margin in the first quarter of 2026 compared to the prior year quarter were primarily driven by lower volumes in China partially offset by the tight spending controls in China.

We estimate our 2026 full year Rest of World segment margin will be approximately six to seven percent.

We have revised and lowered the high end of our full year sales growth outlook from an increase of between two and five percent to an increase of between two and four percent.

We expect market conditions in China to remain challenged through the year.

Our 2025 full year earnings per share (EPS) was $3.85 and we have updated and lowered our full-year diluted EPS to be between $3.60 and $3.90 and adjusted EPS to be between $3.70 and $4.00, a reduction from our previous guidance of a diluted EPS range of $3.85 to $4.15, reflecting our caution around a recovery timeline for our China business as well as increased uncertainty around regulatory changes scheduled to take effect later this year in North America.

Our guidance excludes the impacts of potential future acquisitions, any potential outcomes of the assessment of the China business, and any changes to tariffs after the date of this filing.

Liquidity & Capital Resources

Our working capital was $463.6 million at September 30, 2025, compared with $495.7 million at December 31, 2024.

The decrease in working capital was primarily related to lower inventory and cash balances.

As of September 30, 2025, cash balances were positively impacted by changes in foreign currency during the quarter of $2.7 million.

Our working capital was $490.3 million at March 31, 2026, compared with $429.0 million at December 31, 2025.

The increase in working capital was primarily related to higher accounts receivable and cash balances.

As of March 31, 2026, cash balances were positively impacted by changes in foreign currency during the quarter of $0.5 million.

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

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

In the first nine months of 2025, we repatriated approximately $93 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances.

(dollars in millions) Nine Months Ended

September 30,

In the first quarter of 2026, we repatriated approximately $10 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances.

(dollars in millions) Three Months Ended

Cash provided by operating activities $ 129.4 $ 38.7

Cash used in investing activities (480.5) (10.8)

Cash used in financing activities (486.6) (367.7)

Cash provided by operations in the first nine months of 2025 was $433.7 million and higher than $359.9 million in the first nine months of 2024, primarily due to lower inventory balances that were partially offset by other working capital outlays including lower customer deposits in China.

Our free cash flow in the first nine months of 2025 and 2024 was $380.5 million and $282.5 million, respectively.

We expect cash provided by operating activities to be approximately $600 million in 2025.

We expect free cash flow to be approximately $500 million in 2025.

Cash provided by (used in) financing activities 361.3 (95.1)

Cash provided by operations in the first quarter of 2026 was $129.4 million and higher than $38.7 million in the first quarter of 2025, primarily due to changes in net working capital items, most notably, an increase in accounts payable due to timing of payments to its suppliers, a lesser of an increase in accounts receivable as a result of the Company's ongoing collections efforts that more than offset lower earnings.

Our free cash flow in the first quarter of 2026 and 2025 was $118.9 million and $17.4 million, respectively.

We expect cash provided by operating activities to be between $605 million and $655 million in 2026.

We expect free cash flow to be between $525 million and $575 million in 2026.

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

Capital expenditures totaled $53.2 million in the first nine months of 2025 compared with $77.4 million in the same period last year.

We project that 2025 capital expenditures will be approximately $75 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 September 30, 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, 2025, we had $30.0 million of borrowings outstanding under the renewed facility and an available borrowing capacity of $470.0 million.

Capital expenditures totaled $10.5 million in the first quarter of 2026 compared with $21.3 million in the same period last year.

We project that 2026 capital expenditures will be between $70 million and $80 million and full-year depreciation and amortization expense will be approximately $100 million.

In 2024, we renewed and amended our $500 million revolving credit facility ("facility") which now expires on August 23, 2029.

The 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 facility are determined by our leverage ratio.

The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of March 31, 2026, and expect to be in compliance for the foreseeable future.

The facility backs up commercial paper and credit line borrowings.

At March 31, 2026, we had no borrowings outstanding under the facility and an available borrowing capacity of $500.0 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 decreased by $7.4 million in the first nine months of 2025 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 9.2 percent at September 30, 2025, compared with 9.3 percent at December 31, 2024.

In the first quarter of 2026, we completed the acquisition of Leonard Valve for $470 million.

The acquisition was funded under a new three-year, $470 million term loan with a group of eight banks.

The Company borrowed the full available amount and used the proceeds to finance the purchase.

Our leverage, as measured by the ratio of total debt to total capitalization, was 24.7 percent at March 31, 2026, compared with 7.7 percent at December 31, 2025.

Our total debt increased by $460.8 million in the first quarter of 2026.

In the first quarter of 2026, our Board of Directors approved adding 5,000,000 shares of common stock to the existing discretionary share repurchase authority.

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

During the first nine months of 2025, we repurchased 4,976,377 shares at an average price of $67.39 per share and at a total cost of $335.4 million.

As of September 30, 2025, there were 1,769,748 shares remaining on the existing repurchase authorization.

During the first quarter of 2026, we repurchased 715,493 shares at an average price of $71.65 per share and at a total cost of $51.3 million.

As of March 31, 2026, there were 5,088,031 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 $200 million on stock repurchases in 2026 through a combination of any Rule 10b5-1 automatic trading plan and open market repurchases.

On October 13, 2025, our Board of Directors declared a regular quarterly cash dividend of $0.36 per share on our Common Stock and Class A common stock.

The dividend is payable on November 17, 2025, to shareholders of record on October 31, 2025.

On April 13, 2026, our Board of Directors declared a regular quarterly cash dividend of $0.36 per share on our Common Stock and Class A common stock.

The dividend is payable on May 15, 2026, to shareholders of record on April 30, 2026.

Non-GAAP Financial Information

We provide non-GAAP measures of free cash flow and adjusted EPS.

We define free cash flow as cash provided by operating activities less capital expenditures, while adjusted EPS excludes the impact of restructuring and impairment expenses.

We believe that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements and the measure of adjusted EPS 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 that we do not consider to be a component of our core operating performance or recurring in nature.

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

Adjusted EPS excludes the impact of restructuring and impairment expenses.

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

We believe that the measure of adjusted EPS 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.

SMITH CORPORATION

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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) $ 129.4 $ 38.7

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SMITH CORPORATION

2025 EPS Guidance and 2024 Adjusted EPS

2026 Adjusted EPS Guidance and 2025 EPS

The following is a reconciliation of diluted EPS to adjusted EPS (non-GAAP) (all items are net of tax):

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Diluted EPS (GAAP) $ 3.60-3.90 $ 3.85

Restructuring and impairment expense — 0.10 (1)

Restructuring and impairment expenses 0.10 (1)

Adjusted EPS (non-GAAP) $ 3.70-4.00 $ 3.85

(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.

(1) Includes announced North America water treatment pre-tax restructuring and impairment expenses of approximately $20 million expected to be recognized in the second quarter.

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, 2025.

We believe that at September 30, 2025, there was no material change to this information.

We believe that at March 31, 2026, there was no material change to this information.

Recent Accounting Pronouncements

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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.

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 release.

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

further weakening in North American residential or commercial construction or instability in the Company’s replacement markets;

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

difficulties in predicting results of operations of an acquired business;

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;

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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;

further weakening in North American residential or commercial construction or instability in the Company's replacement markets;

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, including the recent volatility in fuel and other material prices;

inability of the Company to implement or maintain pricing actions;

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uncertain outcomes and costs and other potential impacts of the Company’s assessment relating to the Company’s China business;

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

the failure to realize the expected benefits of restructuring actions;

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

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

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;

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.

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 the Company's Annual Report on Form 10-K for the year ended December 31, 2025.

2 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