What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-07-30 compared with 2026-04-30 · 164 added, 75 removed, 111 unchanged (68% of the section changed)

7 unchanged sentences

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.

Leonard Valve contributed approximately $16 million and $32 million to sales in the second quarter and first half of 2026, respectively.

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

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

In the second quarter, the Company recognized a restructuring charge of $22.6 million, the majority of which is 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 our North America segment, water heater sales grew two percent in the second quarter of 2026.

Water heater sales were flat in the first half of 2026 as pricing benefits were offset by lower residential volumes.

We project that full year 2026 residential industry unit volumes will decrease low single digits, due to softness in new construction and a slower than expected start to the year.

We project that commercial water heater industry volumes will be similar to last year.

The Department of Energy recently announced an up-to-one-year enforcement delay of the October 2026 regulatory change related to energy efficiency requirements on commercial gas products.

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 that went into effect at the end of the second quarter.

Our boiler sales grew 21 percent and 12 percent in the second quarter and first half of 2026, respectively, due to carryover pricing benefits, a strong response to our annual seasonal pre-buy programs and pre-buy ahead of 2026 price increase.

We expect our boiler sales to grow between six and eight percent in 2026.

We anticipate sales of our North America water treatment products will grow between five and six percent primarily due to the benefits of pricing actions 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 28 percent in local currency in the second 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 project our third-party sales in China to decrease low double-digits 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.

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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.

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

Our guidance excludes the impacts from potential future acquisitions, any potential outcomes of the assessment of the China business and and the potential impact of recently announced changes in tariff policy.

Results of Operations

(dollars in millions) Three Months Ended

June 30, Six Months Ended

2026 2025 2026 2025

Net sales $ 1,004.3 $ 1,011.3 $ 1,949.9 $ 1,975.2

3 unchanged sentences

Selling, general and administrative expenses 197.7 191.3 401.6 383.9

Restructuring and impairment expenses 22.6 — 22.6 —

Interest expense 8.1 4.6 15.2 7.5

3 unchanged sentences

Net Earnings $ 124.9 $ 152.2 $ 242.9 $ 288.8

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.

Our sales in the second quarter of 2026 were $1,004.3 million and were slightly lower than the second quarter of 2025 sales of $1,011.3 million.

Sales in the first six months of 2026 were $1,949.9 million and lower than sales of $1,975.2 in the first six months of 2025.

Compared to the prior year quarter, our net sales decrease was primarily driven by lower sales in China due to continued weak consumer demand partially offset by the sales contribution from the acquisition of Leonard Valve, and the three percent organic growth in our North America business.

Our net sales decrease in the first six months of 2026 was primarily driven by lower sales in China partially offset by the sales contribution from the acquisition of Leonard Valve, and the one percent organic growth in our North America business.

Our gross profit margin in the second quarter of 2026 was 38.6 percent compared to 39.3 percent in the second quarter of 2025.

Gross profit margin in the first six months of 2026 was 38.6 compared to 39.1 percent in the first six months of 2025.

The decrease in gross profit margin for the second quarter and first six months of 2026 compared to the prior year periods was primarily due to lower sales volumes and higher material cost.

Selling, general, and administrative (SG&A) expenses in the second quarter of 2026 increased $6.4 million compared to the second quarter of 2025.

SG&A expenses increased $17.7 million in the first six months of 2026 compared to the prior year period.

The increases in SG&A expenses in the second quarter of 2026 compared to the prior year period were primarily due to the Leonard Valve acquisition including higher amortization expenses, and consulting costs.

The increases in first six months of 2026 compared to the prior year period were primarily due to higher employee costs, amortization expense and transaction costs related to the acquisition of Leonard Valve and consulting cost.

Restructuring and impairment expense in the three and six months ended June 30, 2026 was $22.6 million, and was associated with a restructuring plan designed to increase operational efficiency and accelerate growth through footprint optimization and brand rationalization.

The expense was related to our water treatment business and recorded in the North America segment.

Interest expense in the second quarter of 2026 was $8.1 million compared to $4.6 million in the same period last year.

Interest expense in the first six months of 2026 was $15.2 million compared to $7.5 million in the same period last year.

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

Other expense (income), net for the second quarter of 2026 was expense of $1.4 million compared to income of $0.4 million for the second quarter of 2025.

Other expense (income), net for the first six months of 2026 was expense of $1.4 million, compared to income of $1.6 million for the first six months of 2025.

The change in Other expense (income), net in the second quarter of 2026 was primarily due to higher foreign currency translation losses.

The change in Other expense (income), net in the first six months of 2026 was primarily due to higher foreign currency translation losses and lower interest income.

Our effective income tax rate for the three and six months ended June 30, 2026 was 20.9 percent and 22.3 percent, respectively.

The effective income tax rate for the three and six months ended June 30, 2025 was 24.5 percent.

The change in the effective income tax rate for the three and six months ended June 30, 2026 compared to the effective income tax rate for the three and six months ended June 30, 2025 was primarily due to a discrete tax benefit recognized during the period ended June 30, 2026 related to U.S.

cross border tax elections.

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

We are providing non-U.S.

Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted earnings per share (EPS), total segment earnings and adjusted segment earnings) that exclude the impact of restructuring and impairment expenses, as well as organic growth (decline) that excludes the impact of acquisitions and divestitures and foreign exchange from year-over-year comparisons.

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, organic growth (decline) and adjusted segment earnings 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

(dollars in millions) Three Months Ended

June 30, Six Months Ended

2026 2025 2026 2025

Net Sales $ 820.5 $ 779.0 $ 1,573.9 $ 1,527.7

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Segment margin 21.6 % 25.4 % 22.4 % 25.1 %

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.

Sales in our North America segment were $820.5 million in the second quarter of 2026, an increase of $41.5 million from $779.0 million in the second quarter of 2025.

Sales in the first six months of 2026 were $1,573.9 million, or $46.2 million higher than sales of $1,527.7 million in the same period last year.

Compared to the prior year quarter, our net sales increase was primarily driven by the benefits of 2025 pricing actions, incremental sales of approximately $16 million from the 2026 acquisition of Leonard Valve, and increased boiler volumes partially offset by lower residential water heater volumes.

Our net sales increase in the first six months compared to the prior year period was primarily driven by the benefits of 2025 pricing actions, incremental sales of approximately $32 million from the 2026 acquisition of Leonard Valve, and increased boiler volumes largely offset by lower residential water heater volumes.

North America segment earnings were $177.2 million in the second quarter of 2026, or $20.9 million lower than segment earnings of $198.1 million in the second quarter of 2025.

North America segment earnings were $352.6 million in the first six months of 2026, or $30.7 million lower than segment earnings of $383.3 million in the first six months of 2025.

Segment margins were 21.6 percent and 25.4 percent in the second quarter of 2026 and 2025, respectively.

Segment margins were 22.4 percent and 25.1 percent in the first six months of 2026 and 2025, respectively.

Adjusted segment earnings were $199.8 million in the second quarter of 2026 and $375.2 million for the first six months of 2026, with adjusted segment margins of 24.4% and 23.8%, respectively.

These adjusted results exclude the $22.6 million of pretax restructuring and impairment charges as outlined above.

Lower segment earnings and margins in the second quarter 2026 were driven by the restructuring and impairment charges.

Lower segment earnings and segment margin in the first six months of 2026 were primarily driven by the restructuring and impairment charges, increased material and input cost including steel and lower residential water heater volumes that more than offset the pricing benefits of our 2025 pricing actions and the earnings contribution from Leonard Valve.

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

Rest of World Segment

(dollars in millions) Three Months Ended

June 30, Six Months Ended

2026 2025 2026 2025

Net Sales $ 194.9 $ 240.1 $ 395.6 $ 466.8

1 unchanged sentence

Segment margin 5.2 % 10.5 % 5.7 % 9.6 %

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.

Sales in the Rest of World segment were $194.9 million in the second quarter of 2026, a decrease of $45.2 million from $240.1 million in the second quarter of 2025.

Sales in the first six months of 2026 were $395.6 million, or $71.2 million lower than sales of $466.8 million in the same period last year.

The decrease in sales in the second quarter of 2026 compared to the same period in 2025 was primarily due to lower sales in China that more than offset the favorable foreign currency translation impact of approximately $6 million resulting from the appreciation of foreign currencies compared to the U.S.

The decrease in sales in the first six months of 2026 compared to same period in 2025 was primarily due to lower sales in China that more than offset the favorable foreign currency translation impact of approximately $14 million resulting from the appreciation of foreign currencies compared to the U.S.

Rest of World segment earnings were $10.2 million in the second quarter of 2026, or $15.1 million lower compared to $25.3 million in the second quarter of 2025.

Segment earnings in the first six months of 2026 were $22.6 million, a decrease of $22.4 million compared to segment earnings of $45.0 million in the same period last year.

Segment margins were 5.2 percent and 10.5 percent in the second quarter of 2026 and 2025, respectively.

Segment margins were 5.7 percent and 9.6 percent in the first six months of 2026 and 2025, respectively.

The lower segment earnings and segment margin in the second quarter and first six months of 2026 compared to the prior periods were primarily driven by lower sales in China due to continued weak consumer demand, partially offset by 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.

We have narrowed our full year sales growth outlook from our prior guidance of an increase of between two and four percent to an increase of between two and three percent.

We have also narrowed our full-year diluted EPS to be between $3.60 and $3.75 from our prior guidance of between $3.60 and $3.90, and adjusted EPS to be between $3.70 and $3.85 from our prior guidance of between $3.70 and $4.00, reflecting persistent softness in the residential water heater industry volumes in North America.

Our guidance excludes the impacts of potential future acquisitions, any potential outcomes of the assessment of the China business, and the potential impact of recently announced changes in tariff policy.

Liquidity & Capital Resources

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.

Our working capital was $517.6 million at June 30, 2026, compared with $429.0 million at December 31, 2025.

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

As of June 30, 2026, cash balances were positively impacted by changes in foreign currency during the quarter of $1.2 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 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

In the first six months of 2026, we repatriated approximately $38 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances.

(dollars in millions) Six Months Ended

Cash provided by operating activities $ 253.8 $ 178.3

1 unchanged sentence

Cash provided by (used in) financing activities 223.6 (241.1)

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.

Cash provided by operations in the first six months of 2026 was $253.8 million, an increase of $75.5 million from $178.3 million in the first six months of 2025, primarily due to working capital management that more than offset lower earnings.

Our free cash flow in the first six months of 2026 and 2025 was $233.3 million and $139.9 million, respectively.

We expect cash provided by operating activities to be between $595 million and $645 million in 2026.

1 unchanged sentence

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

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.

Capital expenditures totaled $20.5 million in the first six months of 2026 compared with $38.4 million in the same period last year.

We project that 2026 capital expenditures will be approximately $60 to $70 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.

1 unchanged sentence

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 requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of June 30, 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.

At June 30, 2026, we had $40.0 million borrowings outstanding under the facility and an available borrowing capacity of $460.0 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.

2 unchanged sentences

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.

Our leverage, as measured by the ratio of total debt to total capitalization, was 25.7 percent at June 30, 2026, compared with 7.7 percent at December 31, 2025.

Our total debt increased by $482.5 million in the first six months 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.

1 unchanged sentence

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

During the first 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.

During the second quarter of 2026, we repurchased 1,885,727 shares at an average price of $58.93 per share and at a total cost of $111.1 million.

As of June 30, 2026, there were 3,202,304 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 $300 million on stock repurchases in 2026 through a combination of any Rule 10b5-1 automatic trading plan and open market repurchases.

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.

On July 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 August 17, 2026, to shareholders of record on July 31, 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.

Adjusted EPS excludes the impact of restructuring and impairment expenses.

We are providing non-U.S.

Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, total segment earnings and adjusted segment earnings) that exclude the impact of restructuring and impairment expenses.

Reconciliations from GAAP measures to non-GAAP measures are provided below.

We believe that the measure of adjusted earnings, adjusted EPS, and adjusted segment earnings 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.

Organic sales growth (decline) is a non-GAAP financial measure of sales growth (decline) excluding the effects of acquisitions and divestitures and foreign exchange from year-over-year comparisons.

We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth (decline) on a consistent basis.

Free cash flow is cash provided by operations less capital expenditures.

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

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

June 30, Six Months Ended

2026 2025 2026 2025

Net Earnings (GAAP) $ 124.9 $ 152.2 $ 242.9 $ 288.8

Restructuring and impairment expenses, before tax 22.6 — 22.6 —

Tax effect on above items (5.5) — (5.5) —

Adjusted Earnings (non-GAAP) $ 142.0 $ 152.2 $ 260.0 $ 288.8

Diluted Earnings Per Share (GAAP) (1)

$ 0.91 $ 1.07 $ 1.75 $ 2.01

Restructuring and impairment expenses, per diluted share, before tax 0.16 — 0.16 —

Tax effect on above items per diluted share (0.04) — (0.04) —

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

$ 1.03 $ 1.07 $ 1.87 $ 2.01

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

SMITH CORPORATION

Sales Growth (Decline)

The following table provides the components of net sales growth (decline):

Three Months Ended June 30, 2026

North America Rest of World Total

Sales Growth (Decline) 5 % (19) % (1) %

Acquisition Impact (1)

Foreign Exchange Impact — 3 % 1 %

Organic Sales Growth (Decline) (non-GAAP) 3 % (22) % (3) %

Six Months Ended June 30, 2026

North America Rest of World Total

Sales Growth (Decline) 3 % (15) % (1) %

Acquisition Impact (1)

Foreign Exchange Impact — 3 % 1 %

Organic Sales Growth (Decline) (non-GAAP) 1 % (18) % (4) %

(1) The acquisition effect includes the sales impact of the Leonard Valve acquisition in 2026.

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

June 30, Six Months Ended

2026 2025 2026 2025

Earnings Before Provision for Income Taxes (GAAP) $ 158.0 $ 201.6 $ 312.7 $ 382.7

Corporate expense 21.3 17.0 47.3 37.9

Interest expense 8.1 4.6 15.2 7.5

Total Segment Earnings (non-GAAP) $ 187.4 $ 223.2 $ 375.2 $ 428.1

North America (1)

$ 177.2 $ 198.1 $ 352.6 $ 383.3

Rest of World 10.2 25.3 22.6 45.0

Inter-segment earnings elimination — (0.2) — (0.2)

Total Segment Earnings (non-GAAP) $ 187.4 $ 223.2 $ 375.2 $ 428.1

Additional Information

(1) North America Segment Earnings

$ 177.2 $ 198.1 $ 352.6 $ 383.3

Restructuring and impairment expenses, before tax 22.6 — 22.6 —

Adjusted North America Segment Earnings (non-GAAP) $ 199.8 $ 198.1 $ 375.2 $ 383.3

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):

Three Months Ended

Six Months Ended

Cash provided by operating activities (GAAP) $ 253.8 $ 178.3

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

(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.

(1) Includes North America water treatment pre-tax restructuring and impairment expenses of approximately $20.0 million of which $22.6 million was recognized in the second quarter.

Anticipated proceeds from the sale of certain assets are expected to occur in late 2026.

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 March 31, 2026, there was no material change to this information.

We believe that at June 30, 2026, there was no material change to this information.

Recent Accounting Pronouncements

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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”, “confident” 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 release.

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;

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

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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.

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;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis