AOS 10-K & 10-Q changes, risk factors and insider trading

A decline in economic activity, such as a recession or economic downturn, in the U.S., China, and other regions in the world in which we do business, could further adversely affect consumer confidence and spending patterns which could result in decreased demand for the products we sell, a delay in purchases, increased price competition, or slower adoption of energy-efficient water heaters and boilers, or high-quality water treatment products, which could negatively impact our profitability and cash flows. Such deterioration in economic conditions could arise from many factors or fears including public health crises, further deterioration in the property market, political instability or risk of government default. In addition, an increase in price levels generally or in particular industries, could result in a consumer shift away from the products we offer, including trading downelecting to purchase lower priced models, which could adversely affect our revenues and, at the same time, increase our costs. A deterioration in economic conditions also could negatively impact our vendors and customers, which could result in an increase in bad debt expense, customer and vendor bankruptcies, interruption or delay in supply of materials, or increased material prices, which could negatively impact our ability to distribute, market and sell our products and our financial condition, results of operations and cash flows.

Import tariffs, taxes, customs duties and other trading regulations imposed by the U.S. government on foreign countries, or by foreign countries on the U.S., could significantly increase the prices we pay for raw materials that are critical to our ability to manufacture our products. And,In addition, we may be unable to find a domestic supplier to provide the necessary raw materials on an economical basis in the amounts we require. Also, the current U.S. administration has expressedimposed anew desiretariffs toand imposeraised substantialthe possibility of imposing additional new or increased tariffs. Any widespread imposition of additional new or increased tariffs could increase the cost of and reduce the demand for our products and any cost increases will either require us to increase prices, foreclose our sales into impacted markets or negatively impact our profit margins. Any new or increased tariffs could also trigger retaliatory responses from other countries which may decrease the competitiveness of our products in foreign markets. New or increased tariffs could also negatively affect U.S. national or regional economies, which could negatively affect the demand for our products. Unfavorable changes to import tariffs, taxes, customs duties and other trading regulations could have a material adverse effect on our financial condition, results of operations and cash flows.

Natural disasters and extreme weather conditions may disrupt the productivity of our facilities. For example, two of our manufacturing plants are located within a floodplain that has experienced past flooding events. We also have other manufacturing facilities located in hurricane and earthquake zones. We maintain insurance coverage and have taken steps to mitigate these physical risks related to natural disasters and extreme weather conditions. Although we have taken steps to mitigate the risk of flooding, there is still the potential for natural disasters and extreme weather conditions to disrupt the productivity of our facilities.

Our third-party sales in China decreased sixtwelve percent in local currency in 20242025 compared to 2023.2024. We derive a substantial portion of our sales in China from premium-tier products. Changes in consumer preferences and purchasing behaviors including preferences for e-commerce and manufacturer emphasis on brand ecosystems and connectivity, weakening consumer confidence and sentiment, as well as economic uncertainty, sociopolitical and demographic risks, availability of government incentives, and increased competition from Chinese-based companies may prompt Chinese consumers to postpone purchases, choose lower-priced products or different alternatives, or lengthen the cycle of replacement purchases. Further deterioration in the Chinese economy may adversely affect our financial condition, results of operations and cash flows.

Approximately 3231 percent of our sales in 20242025 were attributable to products sold outside of the U.S., primarily in China and Canada, and to a lesser extent in EuropeIndia and India.Europe. We also have operations and business relationships outside the U.S. that comprise a portion of our manufacturing, supply, and distribution. Approximately 5,0004,200 of our 12,70011,500 employees as of December 31, 20242025 were located in China. At December 31, 2024,2025, approximately $206$140 million of cash and marketable securities were held by our foreign subsidiaries, substantially all of which were located in China. International operations generally are subject to various risks, including: political, religious, and economic instability; local labor market conditions; new or increased tariffs or other trade restrictions, or changes to trade agreements; the impact of foreign government regulations, actions or policies; the effects of income taxes; governmental expropriation; the changes or imposition of statutory restrictions which prohibit repatriation of cash; the imposition or increases in withholding and other taxes on remittances and other payments by foreign subsidiaries; labor relations problems; the imposition of environmental or employment laws, or other restrictions or actions by foreign governments; and differences in business practices.

■A portion of our business could be adversely affected by a further decline in North American new residential or commercial construction or a decline in replacement-related volume of water heaters and boilers, including a decline in demand for commercial spaces

Residential new construction activity in North America declined in 2025 and industry-wide replacement-related volume of water heaters werewas flat incompared 2024to after growth in 2023.2024. New residential housing starts in the U.S. are projected to be approximately flat and housing completions are expected to decrease in 2026 compared to 2025. Commercial construction activity in North America grew in 2024, although at a slower rate than 2023.2025. We believe that the significant majority of the markets we serve are for the replacement of existing products, and residential water heater replacement volume has been strong. In recent years, businesses and commercial spaces have experienced and may experience in the future, fluctuation in demand and in occupancy that may reduce demand for our products, and commercial sectors, such as the restaurant and hospitality industries in which we have customers, may experience long-term shifts in consumer behavior which could negatively impact demand or capacity and may not return to pre-pandemic levels.capacity. In addition, the acceptance of remote work arrangements could negatively impact demand for commercial construction. Changes in the replacement volume and in the construction market in North America could negatively affect us.

In the ordinary course of business, we utilize information systems for day-to-day operations, to collect and store sensitive data and information, including our proprietary and regulated business information and personally identifiable information of our customers, suppliers and business partners, as well as personally identifiable information about our employees. Our information systems are susceptible to outages due to system failures, cybersecurity threats, failures on the part of third-party information system providers, natural disasters, power loss, telecommunications failures, viruses, fraud, theft, malicious actors or breaches of security. Like many companies, we, and some third parties upon which we rely, have experienced cybersecurity incidents and attacks on information technology networks and systems, products and services in the past but, to date, none have resulted in a material breach or had a material adverse impact on our financial condition, results of operations, or cash flows. We may experience such incidents and attacks in the future, potentially with increasing frequency from increasingly sophisticated cyber threats. In addition, remote work and remote access to our systems have increased in recent years, which may heighten these risks. Use of artificial intelligence software may also create risks from unintentional disclosure of proprietary, confidential, personal or otherwise sensitive information. Although we have a response plan in place in the event of a data breach and we have an active program to maintain and improve data security and address these risks and uncertainties by implementing and improving internal controls, security technologies, insurance programs, network and data center resiliency and recovery processes, a successful attack in the future could result in operations failure or breach of security that could lead to disruptions of our business activities and the loss or disclosure of both our and our customers’ financial, product and other confidential information and could result in regulatory actions, significant expense and litigation and have a material adverse effect on our financial condition, results of operations and cash flows and our reputation.

We have a significant presence outside of the U.S., primarily in China and Canada and to a lesser extent India, Europe, Mexico, and India,Mexico, and therefore, hold assets, including $119$83 million of cash and marketable securities denominated in Chinese renminbi, incur liabilities, earn revenues and pay expenses in a variety of currencies other than the U.S. dollar. The financial statements of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements. Furthermore, typically our products are priced in foreign countries in local currencies. As a result, we are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates and interest rates, or global exchange rate instability or volatility that strengthens the U.S. dollar against foreign currencies. An increase in the value of the U.S. dollar relative to the local currencies of our foreign markets, particularly in China, has negatively affected our sales, profitability, and cash and cash equivalents balances and could have such effects in the future. In 2024, the change in foreign currencies negatively impacted our sales and cash and cash equivalents by approximately $18 million and $7 million, respectively. In addition to currency translation risks, we incur a currency transaction risk whenever one of our subsidiaries enters into a purchase or sale transaction using a currency different from the operating subsidiaries’ functional currency. The majority of our foreign currency transaction risk results from sales of our products in Canada, a portion of which we manufacture in the U.S., and to a lesser extent from component purchases in EuropeIndia and IndiaEurope and payroll in Mexico. These risks may adversely impact our reported sales and profits in the future or negatively impact revenues and earnings translated from foreign currencies into U.S. dollars.

WeConsistent with our stated strategic priorities, we will continue to evaluate potential acquisitions, and we could use a significant portion of our available capital to fund future acquisitions. We may not be able to successfully integrate future acquired businesses or operate them profitably or accomplish our strategic objectives for those acquisitions. If we complete any future acquisitions in new geographies, our unfamiliarity with relevant regulations and market conditions may impact our ability to operate them profitably or achieve our strategic objectives for those acquisitions. Our level of indebtedness may increase in the future if we finance acquisitions with debt, which would cause us to incur additional interest expense and could increase our vulnerability to general adverse economic and industry conditions and limit our ability to service our debt or obtain additional financing. The impact of future acquisitions may have a material adverse effect on our financial condition, results of operations and cash flows.

Our products are subject to a wide variety of statutory, regulatory, codes and industry standards and requirements related to, among other items, energy and water efficiency, environmental emissions, labeling and safety. For example, the U.S. Department of Energy (DOE) has adopted a new efficiency rule for commercial water heaters that will take effect in 2026October and2026. The DOE has also adopted a new efficiency rule for our residential water heaters that will take effect in 2029.2029, which seeks to rapidly increase market adoption of heat pump water heating technology. In addition, newevolving national drinking water standards regulating per- and poly-fluoroalkyl substances (PFAS), as well as lead,mandatory lead pipe replacements by public water utilities, could affect the demand for our water filtration products. There are also a number of foreign, federal, foreign, state and local governments adopting laws, regulations and codes in response to climate change that will require a mandatory transition to non-fossil fuel based sources of energyspace productionand aswater wellheating as significantly reducing or eliminating the on-site combustion of fossil fuelsequipment in the building sector. We believe our products are currently efficient, safe and environment-friendly. However, aany further significant changechanges to regulatory or code requirements that promotesrequire a transition to alternative energy sources as a replacement for gas, or a significant shiftshifts in industry standards, couldmay substantially increase manufacturing costs, capital expenditures, transportation costs and raw material costs, alter distribution channels, attract new competitors, impact the size and timing of demand for our products, affect the types of products we are able to offer or put us at a competitive disadvantage, any of which could harm our business and have a material adverse effect on our financial condition, results of operations and cash flow.

We periodically communicate our strategies, commitments and targets related to sustainability matters, including carbon emissions, water usage, waste avoidance, and human rights, through the issuance of our sustainability report. Although we intend to meet these strategies, commitments and targetstargets, and we are committed to advancing sustainable innovations in our industry, we may be unable to achieve them due to availability of resources, significant increases in operational costs, and technological changes. Failure to meet these sustainability requirements or targets could adversely impact our reputation as well as the demand for our products and adversely affect our business, financial condition and results of operations. In addition, standards and processes for measuring and reporting carbon emissions, water usage, waste avoidance, and other sustainability metrics may change over time, result in inconsistent data, or result in significant revisions to our strategies, commitments and targets, or our ability to achieve them. Any scrutiny of our carbon emissions or other sustainability disclosures or our failure to achieve related strategies, commitments and targets could negatively impact our reputation or performance.

Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, EuropeIndia, and India.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.

Also, weWe 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 October 2026.

Combining all of these factors, we expect our 20252026 consolidated sales to begrow approximately flat to upbetween two and five percent compared to 2024.2025. Our guidance excludes the impacts from potential future acquisitions.acquisitions, any potential outcomes of the assessment of the China business and changes to tariffs.

Our 20242025 gross profit margin of 38.138.8 percent decreasedincreased compared to 38.538.1 percent in 2023.2024. The lowerhigher gross profit margin in 20242025 compared to 20232024 was primarily duedriven by the benefits of pricing actions implemented early in 2025 to higheraddress productionincreased input costs in North America and operationalhigher inefficienciesmix associatedof withcommercial volumewater volatility,heaters whichand outpaced our pricing actions.boilers.

Selling, general, and administrative (SG&A) expenses were $739.3$759.4 million in 2024,2025, or $11.9$20.1 million higher than in 2023.2024. The increase in SG&A expenses in 20242025 compared to the prior year was primarily due to higher employee costscosts, frompartially increasedoffset wagesby andbenefits higher selling and advertising expenses to supportof our strategic2024 initiatives.China restructuring actions.

We recognized $17.6 million of restructuring and impairment expenses during the year ended December 31, 2024. Of these expenses, $6.3 million was related to our water treatment business in the North America segment and was a result of a profitability improvement strategy that prioritizes improving our cost structure and emphasizes our more profitable channels. In the Rest of World segment, restructuring included severance costs in China of $11.3 million and was related to the right sizing of that business for current market conditions. Restructuring and impairment expenses in 2023 were $18.8 million, of which $15.7 million was recorded in the Rest of World segment and $3.1 million was recorded in Corporate Expense and related primarily to the sale of our business in Turkey.

Interest expense was $13.5 million in 2025, compared to $6.7 million in 2024, compared to $12.0 million in 2023.2024. The decreaseincrease in interest expense in 20242025 compared to lastthe prior year was primarily due to lowerhigher average debt levels.levels throughout 2025.

Other (income) expense,- net for 2025 was $8.5 millionincome of income$0.6 in 2024million, compared to income of $6.9$8.5 million in 2023.2024. The increasedecrease in other income - net was driven by lower foreign currency translation losses compared to lastthe year,prior partiallyyear offset byand lower interest income from lower average cash balances.

Our effective income tax rate in 2025 and 2024 was lower23.6 comparedpercent toand 2023.23.9 percent, respectively. The change in the effective income tax rate in 20242025 compared to the prior year was primarily due to the restructuring and impairment expense recordedreductions in 2023US withcross-border no associated tax benefit.tax. We estimate that our annual effective income tax rate for the full year of 20252026 will be approximately 24 to 24.5 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, and adjusted corporate expenseearnings) that exclude the impact of restructuring and impairment expenses and pension settlement income.expenses. 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 adjustedfree corporatecash expenseflow 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 earnings were $707.5$727.9 million in 2024,2025, or $19.2$20.4 million lowerhigher than segment earnings of $726.7$707.5 million in 2023.2024. Segment margins were 24.024.4 percent and 24.924.0 percent in 20242025 and 2023,2024, respectively. LowerHigher segment earnings and marginssegment margin in 2025 compared to 2024 were primarily duedriven toby lowerpricing benefits, higher boiler and commercial water heater volumes,volumes higherthat productionmore coststhan offset lower residential water heater volumes and higher SG&Ainput expensescosts, associatedincluding with strategic investments that outpaced our pricing actions and higher boiler volumes.tariffs. Segment earnings and margin in 2024 also included restructuring and impairment expenses of $6.3 million related to our water treatment business and a result of a profitability improvement strategy that prioritizes improving our cost structure and emphasizes our more profitable channels.

Adjusted segment earnings and adjusted segment margin in 2024 were $713.8 million and 24.2 percent, respectively, which excludes $6.3 million of pre-tax restructuring and impairment expenses. Adjusted segment earnings and adjusted segment margin in 2023 were $726.0 million and 24.8 percent, respectively, and exclude pension settlement income. We estimate our 20252026 North America segment margin will be approximately 24.0 to 24.5 percent.

Sales in our Rest of World segment were $918.6$880.4 million in 2024,2025, or $38.3$38.2 million lower than sales of $956.9$918.6 million in 2023.2024. Compared to the prior year, lowerOur net sales decrease in 2024 werewas primarilydue drivento bylower decreased salesvolumes of our coreresidential water heatingtreatment and water treatmentheater products in China andthat included approximately $13 million of unfavorable currency translation. The decline in sales in 2024 waswere partially offset by higher volumes of kitchen products in China and included increased inter-segmentincremental sales of approximately $16$53 million related to our tankless2024 wateracquisition heatersof manufactured in China and shipped to the U.S. market.Pureit.

Rest of World segment earnings were $76.4 million in 2025 and higher compared to $64.5 million in 2024 and lower compared to $83.4 million in 2023.2024. Segment margins were 7.08.7 percent and 8.77.0 percent in 20242025 and 2023,2024, respectively. LowerThe volumes of our core water heating and water treatment products and an unfavorable product mix and sales promotions in China primarily drove lowerhigher segment earnings and segment margin in 2024,2025 partiallycompared to 2024 were primarily driven by the benefits of restructuring actions taken at the end of 2024 and other cost saving measures that more than offset by lower SG&Asales costs.in China. Segment earnings and margin in 2024 and 2023 included restructuring and impairment expenses of $11.3 million and $15.7 million, respectively.million. Restructuring and impairment expenses in 2024 were severance costs in China related to the right sizing of that business for current market conditions, and 2023 expenses were primarily associated with the sale of our business in Turkey.conditions.

Adjusted segment earnings and adjusted segment margin in 2024 were $75.8 million and 8.3 percent, respectively. Adjusted segment earnings and adjusted segment margin in 2023 were $99.1 million and 10.4 percent, respectively. Adjusted segment earnings and adjusted segment margin in 2024 and 2023 exclude $11.3 million and $15.7 million of restructuring and impairment expenses, respectively.expenses. We estimate our 20252026 Rest of World segment margin will be approximately eight to nine percent.

Our working capital was $429.0 million at December 31, 2025, compared with $495.7 million at December 31, 2024, compared with $555.0 million at December 31, 2023.2024. The decrease in working capital was primarily related to lower inventory, cash balances, and receivableincreased balances,short partiallyterm offsetdebt by higher inventory balances, lower accounts payable and lower payroll-related accruals.maturities. As of December 31, 2024,2025, cash balances were negativelypositively impacted by $6.6 million due to changes in foreign currency during the year.year of $4.2 million. Cash and cash equivalents used to fund our operations are primarily generated through operating activities and our existing credit facilities. We believe our available cash and existing credit facilities are sufficient to cover our cash needs for the foreseeable future. We use a global cash pooling arrangement, intercompany borrowing, and some local credit lines to meet funding needs and allocate capital resources among various entities. We have historically made and anticipate future cash repatriations from certain foreign subsidiaries. In 2024,2025, we repatriated approximately $90$109 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances and fund acquisitions.balances.

Cash provided by operations in 20242025 was $616.8 million and higher than $581.8 million and lower than $670.3 million in 2023,2024, primarily as a result of higher incentive payments associated with record salesearnings and profitsa earnedone-time intax 2023,adjustment higherrelated inventoryto balancesa andtax lowerlaw earnings,change whichthat morebenefited than offset lower trade receivable balances.2025. Our free cash flow in 20242025 and 20232024 was $473.8$546.0 million and $597.7$473.8 million, respectively. We expect cash provided by operating activities to be between $600$605 million and $650$655 million in 2025.2026. We expect free cash flow to be between $500$525 million and $550$575 million in 2025.2026. Free cash flow is a non-GAAP measure described in more detail in the Non-GAAP Measures section below.

Capital expenditures totaled $70.8 million in 2025 compared with $108.0 million in 20242024. compared with $72.6 million in 2023. HigherLower capital expenditures compared to the prior year were primarily due to our capacity expansion projects in Juarez, Mexico and McBee, South Carolina and our new engineering facility in Lebanon, Tennessee.Tennessee in 2024. We project that 20252026 capital expenditures will be between $90$70 million and $100$80 million and full-year depreciation and amortization expense will be approximately $80$100 million.

In 2024, we renewed and amended our $500 million revolving credit facility ("renewed facility") which now expires on August 23, 2029. The renewed facility is with a group of nine banks and has an accordion provision that allows it to be increased up to $1 billion if certain conditions (including lender approval) are satisfied. Borrowing rates under the renewed facility are determined by our leverage ratio. The renewed facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of December 31, 2024,2025, and expect to be in compliance for the foreseeable future. The renewed facility backs up commercial paper and credit line borrowings. At December 31, 2024,2025, we had $30.0 million ofno borrowings outstanding under the renewed facility and an available borrowing capacity of $470.0$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 increaseddecreased by $65.9$38.2 million in 20242025 primarilyas duewe used available cash to borrowingspay associateddown withoutstanding ourdebt share repurchase program and Pureit acquisition.balances. Our leverage, as measured by the ratio of total debt to total capitalization, was 7.7 percent at December 31, 2025, compared with 9.3 percent at December 31, 2024, compared with 6.5 percent at December 31, 2023.2024.

We paid dividends of $1.38 per share in 2025 compared with $1.30 per share in 2024 compared with $1.22 per share in 2023.2024. We increased our dividend by six percent in the fourth quarter of 2024,2025, and the five-year compound annual growth rate of our dividend payment is approximately eightseven percent. We have paid dividends for 8586 consecutive years with annual amounts increasing each of the last 3334 years.

In conformity with GAAP, goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We perform impairment reviews for our reporting units using a fair-value method based on management’s judgments and assumptions. The fair value represents the estimated amount at which a reporting unit could be bought or sold in a current transaction between willing parties on an arms-length basis. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental as estimates of future sales, earnings and cash flows are utilized to determine fair values. However, we believe that we conduct a thorough and competent annual quantitative analysis of goodwill and indefinite-lived intangible assets. Based on the annual goodwill impairment test, we determined there was no impairment of our goodwill as of December 31, 2024.2025. The fair value of each of our reporting units significantly exceeded its carrying value and a 20 percent decrease in the estimated fair value of our reporting units would not have resulted in a different conclusion.value. Based on the annual indefinite-lived assets impairment test, we determined there was no impairment of our indefinite-lived assets as of December 31, 2024.2025.

We are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, total segment earnings, and adjusted segment earnings, and adjusted corporate expenseearnings) that exclude the impact of restructuring and impairment expenses and pension settlement income.expenses. Reconciliations from GAAP measures to non-GAAP measures are provided below.

We believe that the measures of adjusted earnings, adjusted EPS, adjusted segment earnings and adjustedfree corporatecash expenseflow 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.

Adjusted Earnings and Adjusted Earnings Per Share (dollars in millions, except per share data) (unaudited) The following is a reconciliation of net earnings and diluted earnings per share to adjusted earnings (non-GAAP) and adjusted earnings per share (non-GAAP):

Adjusted Segment Earnings (dollars in millionsunaudited)

Free Cash Flow (dollars in millionsunaudited)

We evaluate risk to our business in a number of ways, primarily through our Enterprise Risk Management (ERM) process, which we conduct enterprise-wiseenterprise-wide on a periodic basis, and seeks to identify and address significant and material risks. Our ERM process assesses, manages, and monitors risks consistent with the integrated risk framework in the Enterprise Risk Management-Integrated Framework (2017) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We believe that risk-taking is an inherent aspect of the pursuit of our strategy. Our goal is to manage risks prudently rather than avoid risks. We can mitigate risks and their impact on our company only to a limited extent.

This filing contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance,” “outlook” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: further 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; further softening in U.S. residential and commercial water heater demand; negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company’s ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs; negative impacts to demand for the Company’s products, particularly commercial products, as a result of changes in commercial property usage that followed the COVID-19 pandemic; further weakening in North American residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; inconsistent recovery of the Chinese economy or a further decline in the growth rate of consumer spending or housing sales in China; the availability, timing or effects of China stimulus programs; negativeuncertain impactoutcomes and costs and other potential impacts of the Company’s assessment relating to the Company’s businessesChina from international tariffs, trade disputes and geopolitical differences, including the conflicts in Ukraine and the Middle Eastbusiness; potential weakening in the high-efficiency gas boiler segment in the U.S.; substantial defaults in payment by, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer; foreign currency fluctuations; the Company’s inability to successfully integrate or achieve its strategic objectives resulting from acquisitions; failure to realize the expected benefits of acquisitions or expected synergies; failure to realize the expected benefits, timing and extent,extent of regulatory changes; competitive pressures on the Company’s businesses;businesses, including new technologies and new competitors; the impact of potential information technology or data security breaches; negative impact of changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency; and adverse developments in general economic, political and business conditions in key regions of the world. A more detailed description of these risks is contained under the heading "Risk Factors" in Item 1A above. Forward-looking statements included in this filing are made only as of the date of this filing, and the Company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the Company, or persons acting on its behalf, are qualified entirely by these cautionary statements.

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 and $32 million to sales in the firstsecond quarter and first half of 2026.2026, respectively. In the first quarter, we recognized $6 million of acquisition-related transaction expenses.

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 andaccelerate growth through footprint optimization as well as brand rationalization. In the second quarter, the Company estimates that it will recognizerecognized a restructuring charge of approximately $20$22.6 million, the majority of which will beis 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 decreasedgrew two percent in the second quarter of 2026. Water heater sales were flat in the first quarterhalf 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 bedecrease flatlow tosingle slightly down,digits, due to softness in new construction and a slower than expected start to the year. DueWe project that commercial water heater industry volumes will be similar to alast recentyear. announcement from theThe Department of Energy indicatingrecently aannounced one-yearan up-to-one-year enforcement delay of the October 2026 regulatory change,change werelated haveto loweredenergy ourefficiency outlookrequirements for theon commercial watergas heater industry volumes which we now project will be similar to last year.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.products that went into effect at the end of the second quarter. Our boiler sales grew two21 percent and 12 percent in the firstsecond quarter and first half of 2026.2026, 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 due to pricing benefits and continued demand for our commercial high efficiency condensing gas boilers.2026. We anticipate sales of our North America water treatment products will grow between five and six percent primarily due to tariff-relatedthe benefits of pricing benefitsactions 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 1728 percent in local currency in the firstsecond 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 forproject our third-party sales in China to adecrease 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. The assessment is ongoing.

Combining all of these factors, we expect our 2026 consolidated sales to grow between two and fourthree percent compared to 2025. Our guidance excludes the impacts from potential future acquisitions, any potential outcomes of the assessment of the China business and anyand the potential impact of recently announced changes toin tariffstariff after the date of this filing.policy.

Our gross profit margin in the firstsecond quarter of 2026 was 38.738.6 percent,percent compared 38.9to 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 quartersix 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.volumes and higher material cost.

Selling, general, and administrative (SG&A) expenses in the firstsecond quarter of 2026 increased $11.3$6.4 million compared to the firstsecond 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 quartersix months of 2026 compared to the prior year period were primarily due to higher employee costscosts, amortization expense and transaction costs related to the acquisition of Leonard Valve.Valve and consulting cost.

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 quartersix months of 2026 was $7.1$15.2 million compared to $2.9$7.5 million in the same period last year. The increase in interest expense in the second quarter and first quartersix 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 quartersix months of 2026 was zero,expense of $1.4 million, compared to income of $1.2$1.6 million for the first quartersix months of 2025. The change in Other expense (income), net in the firstsecond 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 MarchJune 31,30, 2026 was 23.720.9 percent.percent and 22.3 percent, respectively. The effective income tax rate for the three and six months ended MarchJune 31,30, 2025 was 24.624.5 percent. The change in the effective income tax rate for the three and six months ended MarchJune 31,30, 2026 compared to the effective income tax rate for the three and six months ended MarchJune 31,30, 2025 was primarily due to a discrete tax benefit recognized during the geographicalperiod earningsended mix.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 between 24.0 and 24.5 percent.

North America segment earnings were $175.4$177.2 million in the firstsecond quarter of 2026, or $9.8$20.9 million lower than segment earnings of $185.2$198.1 million in the second quarter of 2025. North America segment earnings were $352.6 million in the first quartersix 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 23.321.6 percent and 24.725.4 percent in the firstsecond 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 quartersix months of 2026 were primarily duedriven toby 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.

Sales in the Rest of World segment were $200.7$194.9 million in the firstsecond quarter of 2026, compareda todecrease $226.7of $45.2 million from $240.1 million in the firstsecond 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. dollar. The decrease in sales in the first quartersix months 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$14 million resulting from the appreciation of foreign currencies compared to the U.S. dollar.

Rest of World segment earnings were $12.4$10.2 million in the firstsecond quarter of 2026, or $7.3$15.1 million lower compared to $19.7$25.3 million in the firstsecond 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 6.25.2 percent and 8.710.5 percent in the second quarter of 2026 and 2025, respectively. Segment margins were 5.7 percent and 9.6 percent in the first quartersix months of 2026 and 2025, respectively. The lower segment earnings and segment margin in the second quarter and first quartersix months of 2026 compared to the prior year quarterperiods were primarily driven by lower volumessales in China due to continued weak consumer demand, 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 ofnarrowed our full year sales growth outlook from our prior guidance of an increase of between two and fivefour percent to an increase of between two and fourthree 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 updatedalso and lowerednarrowed our full-year diluted EPS to be between $3.60 and $3.90$3.75 from our prior guidance of between $3.60 and $3.90, and adjusted EPS to be between $3.70 and $4.00, a reduction$3.85 from our previousprior guidance of abetween diluted$3.70 EPSand range of $3.85 to $4.15,$4.00, reflecting ourpersistent cautionsoftness aroundin athe recoveryresidential timelinewater forheater ourindustry China business as well as increased uncertainty around regulatory changes scheduled to take effect later this yearvolumes in North America. Our guidance excludes the impacts of potential future acquisitions, any potential outcomes of the assessment of the China business, and anythe potential impact of recently announced changes toin tariffstariff after the date of this filing.policy.

Our working capital was $490.3$517.6 million at MarchJune 31,30, 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 MarchJune 31,30, 2026, cash balances were positively impacted by changes in foreign currency during the quarter of $0.5$1.2 million. Cash and cash equivalents used to fund our operations are primarily generated through operating activities and our existing credit facilities. We believe our available cash and existing credit facilities are sufficient to cover our cash needs for the foreseeable future. We use a global cash pooling arrangement, intercompany borrowing, and some local credit lines to meet funding needs and allocate capital resources among various entities. We have historically made and anticipate future cash repatriations from certain foreign subsidiaries. In the first quartersix months of 2026, we repatriated approximately $10$38 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances.

Cash provided by operations in the first quartersix months of 2026 was $129.4$253.8 million, an increase of $75.5 million andfrom higher than $38.7$178.3 million in the first quartersix months 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 effortsmanagement that more than offset lower earnings. Our free cash flow in the first quartersix months of 2026 and 2025 was $118.9$233.3 million and $17.4$139.9 million, respectively. We expect cash provided by operating activities to be between $605$595 million and $655$645 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 $10.5$20.5 million in the first quartersix months of 2026 compared with $21.3$38.4 million in the same period last year. We project that 2026 capital expenditures will be betweenapproximately $60 to $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 MarchJune 31,30, 2026, and expect to be in compliance for the foreseeable future. The facility backs up commercial paper and credit line borrowings. At MarchJune 31,30, 2026, we had no$40.0 million borrowings outstanding under the facility and an available borrowing capacity of $500.0$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.

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 24.725.7 percent at MarchJune 31,30, 2026, compared with 7.7 percent at December 31, 2025. Our total debt increased by $460.8$482.5 million in the first quartersix 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. Under the share repurchase program, 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 firstsecond quarter of 2026, we repurchased 715,4931,885,727 shares at an average price of $71.65$58.93 per share and at a total cost of $51.3$111.1 million. As of MarchJune 31,30, 2026, there were 5,088,0313,202,304 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 $200$300 million on stock repurchases in 2026 through a combination of any Rule 10b5-1 automatic trading plan and open market repurchases.

On AprilJuly 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 MayAugust 15,17, 2026, to shareholders of record on AprilJuly 30,31, 2026.

We believeare providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, total segment earnings and adjusted segment earnings) that freeexclude cashthe flowimpact providesof usefulrestructuring additionaland informationimpairment concerningexpenses. cashReconciliations flowfrom availableGAAP measures to meetnon-GAAP futuremeasures debtare serviceprovided obligations and working capital requirements.below. We believe that the measure of adjusted EPSearnings, 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.

(1)Includes announced North America water treatment pre-tax restructuring and impairment expenses of approximately $20$20.0 million expectedof towhich be$22.6 million was recognized in the second quarter. Anticipated proceeds from the sale of certain assets are expected to occur in late 2026.

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The 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 MarchJune 31,30, 2026, there was no material change to this information.

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”, “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.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; 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; further softening in U.S. residential and commercial water heater demand; negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company’s ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs, including the recent volatility in fuel and other material prices; inability of the Company to implement or maintain pricing actions; inconsistent recovery of the Chinese economy or a further decline in the growth rate of consumer spending or housing sales in China; the availability, timing or effects of China stimulus programs; uncertain outcomes and costs and other potential impacts of the Company’s assessment relating to the Company’s China business; 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; failure to realize the expected benefits, timing and extent of regulatory changes; competitive pressures on the Company’s businesses, including new technologies and new competitors; the impact of potential information technology or data security breaches; negative impact of changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency; and adverse developments in general economic, political and business conditions in key regions of the world. A more detailed description of these risks is contained under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2025. Forward-looking statements included in this filing are made only as of the date of this filing, and the Company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the Company, or persons acting on its behalf, are qualified entirely by these cautionary statements.