A. O. SMITH CORPORATION Overview
Our company is comprised of two reporting segments:North America and Rest of World. Our Rest of World segment is primarily comprised ofChina ,Europe andIndia . Both segments manufacture and market comprehensive lines of residential and commercial gas, heat pump and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective region of the world. We continue to seek acquisitions that enable geographic growth, expand our core business, and establish adjacencies. Consistent with this strategy, we acquiredGiant Factories, Inc. (Giant), aCanada -based manufacturer of residential and commercial water heaters, inOctober 2021 using a combination of debt and cash. The acquisition fits squarely in our core capabilities, supplements our presence inCanada and enhances our capacity and distribution in the region. Giant contributed$25.3 million and$88.1 million of net sales in the third quarter and first nine months of 2022, respectively. Refer to Note 3, "Acquisitions" for additional information. We also continue to look for opportunities to add to our existing operations demonstrated by our previous introductions of water treatment products inIndia and range hoods and cooktops inChina . Our global supply chain management team continued to navigate through supply chain and logistics challenges in the first nine months of 2022. We have seen supply constraints for certain components and raw materials used in our operations, limited container and trucking capacity, and port congestion and delays. While we continued to see improvement in our supply chain as we closed out the third quarter, challenges still persist. In addition, while steel markets moderated in the first nine months of 2022, commodity prices and availability remain volatile. We remain in close contact with our suppliers and logistics providers to troubleshoot, manage and resolve bottlenecks, as the environment remains unpredictable. In ourNorth America segment, after approximately eight percent growth in 2021, we expect residential industry water heater volumes will be down approximately 12 to 13 percent in 2022 compared with 2021 as we believe that industry demand will normalize to more historical growth rates. We saw greater than anticipated softness in residential water heater order rates in the third quarter of 2022 as we believe our customers right-sized their inventories in response to our lead times returning to pre-pandemic levels after being elevated due to COVID-19-related supply chain constraints. While we expect quarter-over- quarter improvement in the fourth quarter, we expectNorth America residential water heater volume softness will persist through the remainder of the 2022. We believe that commercial water heater industry unit volumes will decline approximately 15 percent in 2022 compared to 2021 primarily due to weakness in the commercial electric water heaters greater than 55 gallons product category. We expect commercial gas water heater unit volumes to be flat to slightly down. We expect net sales in 2022 will benefit from our 2021 price increases, which had a cumulative effect on our water heater prices of approximately 50 percent. We expect to see an approximately 25 percent increase in our net sales of boilers in 2022 compared to 2021 driven by increased pricing in response to higher input costs coupled with higher demand. We anticipate net sales of ourNorth America water treatment products, inclusive of acquisitions, will increase approximately 10 percent in 2022, compared to 2021, primarily driven by higher consumer demand for our point of use and point of entry water treatment systems. In our Rest of World segment, after strong growth in 2021, we expect 2022 net sales inChina will be flat to slightly down in local currency compared with 2021. Our business inChina continues to be negatively impacted by the COVID-19 pandemic. To slow the spread of COVID-19 inChina , targeted shutdowns began in certain cities late in the first quarter of 2022 and persisted through the first nine months of the year. The situation remains unpredictable. Combining all of these factors, we expect our consolidated net sales to increase between five and seven percent in 2022, which includes our acquisition of Giant adding approximately$100 million in incremental net sales. This guidance excludes the potential impacts from future acquisitions and assumes the COVID-19 related shutdowns inChina remain at current levels throughout the rest of the year and do not significantly impact our operations or our employees, customers or suppliers. 21 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended Nine Months Ended (dollars in millions) September 30, September 30, 2022 2021 2022 2021 Net sales$ 874.2 $ 914.6 $ 2,817.8 $ 2,543.4 Cost of products sold 569.2 574.3 1,836.8 1,593.1 Gross profit 305.0 340.3 981.0 950.3 Gross profit margin % 34.9 % 37.2 % 34.8 % 37.4 % Selling, general and administrative expenses 155.5 177.6 502.0 517.2 Interest expense 2.4 1.0 6.0 2.9 Other expense (income) - net 2.4 (4.7) 6.4 (13.6) Earnings before provision for income taxes 144.7 166.4 466.6 443.8 Provision for income taxes 34.9 34.8 110.8 96.3 Net Earnings$ 109.8 $ 131.6 $ 355.8 $ 347.5 Our net sales in the third quarter of 2022 were$874.2 million , or 4.4 percent lower than 2021 third quarter net sales of$914.6 million . Net sales in the first nine months of 2022 were$2,817.8 million , or approximately 11 percent higher than$2,543.4 million in the same period last year. Compared to the prior year quarter, our net sales decrease was primarily driven by lower residential water heater volumes inNorth America , which more than offset inflation-related pricing actions implemented in 2021. Our net sales increase in the first nine months of 2022 was primarily driven by inflation-related pricing actions and partially offset by lower residential water heater volumes inNorth America and lower net sales inChina . In addition, our net sales inChina were negatively impacted by approximately$12 million in the third quarter and first nine months of 2022 due to the depreciation of the Chinese currency against theU.S. dollar. Our acquisition of Giant added$25.3 million and$88.1 million of incremental net sales in the third quarter and first nine months of 2022, respectively. Our gross profit margin in the third quarter of 2022 was 34.9 percent compared to gross profit margin of 37.2 percent in the prior-year period. Gross profit margin in the first nine months of 2022 was 34.8 percent compared to the gross profit margin of 37.4 percent in the first nine months of 2021. The lower gross profit margins in the third quarter and first nine months of 2022 compared to the same periods last year were primarily due to higher steel and other material costs and production inefficiencies, which outpaced our pricing actions. Selling, general, and administrative (SG&A) expenses in the third quarter of 2022 decreased by$22.1 million compared to the third quarter of 2021. SG&A expenses decreased by$15.2 million in the first nine months of 2022 compared to the prior year period. The decrease in SG&A expenses in the third quarter of 2022 was primarily due to the recognition of an$11.5 million judgment against a competitor related to its infringement of one of our patents, partially offset by$4.3 million of expenses associated with a terminated acquisition and lower selling expenses. The decrease in SG&A expenses in the first nine months of 2022 was primarily due to the judgment discussed above, lower management incentive expenses, and lower engineering costs inChina , partially offset by increased selling expenses on higher net sales and the terminated acquisition expenses discussed above. Interest expense in the third quarter of 2022 was$2.4 million compared to$1.0 million in the same period last year. Interest expense in the first nine months of 2022 was$6.0 million compared to$2.9 million in the same period the previous year. The increase in interest expense in the third quarter and first nine months of 2022 compared to the same periods last year was primarily due to higher debt levels. Other expense was$2.4 million in the third quarter of 2022 compared to other income of$(4.7) million in the third quarter of 2021. Other expense was$6.4 million in the first nine months of 2022 compared to other income of($13.6) million in the first nine months of 2021. Pension expense in the third quarter of 2022 was$3.6 million compared to pension income of($2.9) million in the third quarter of 2021. Pension expense in the first nine months of 2022 was$10.9 million compared to pension income of($8.7) million in the first nine months of 2021. In 2021, our Board of Directors approved the termination of our largest defined benefit pension plan (the Plan), representing over 95 percent of our pension plan liabilities with a termination date ofDecember 31, 2021 . InApril 2022 , we received a determination letter from theIRS that allowed us to proceed with the termination process for the Plan. In 2022, we expect to annuitize the remaining Plan pension liability. The Plan settlement, which we expect to complete in the fourth quarter of 2022, will accelerate the recognition of approximately$445 million of non-cash, pre-tax pension expenses, or approximately$1.73 22
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per share after tax. In addition, to protect the Plan's funded status, the Plan transferred a significant portion of its assets to lower risk investments in 2021. The impact of this transition resulted in a lower expected rate of return on pension investments and accordingly, higher pension expenses in 2022 compared to previous years. The service cost component of our pension income is reflected in cost of products sold and SG&A expenses. All other components of our pension expense (income) are reflected in other expense (income). Our pension costs and credits are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service. We consider current market conditions, including changes in interest rates, in making these assumptions. Our assumption for the expected rate of return on plan assets is 3.00 percent in 2022 compared to 6.25 percent in 2021. The discount rate used to determine net periodic pension costs increased to 2.72 percent in 2022 from 2.45 percent in 2021. Our effective income tax rates for the third quarter and first nine months of 2022 were 24.1 percent and 23.7 percent, respectively. Our effective income tax rates for the third quarter and first nine months of 2021 were 20.9 percent and 21.7 percent, respectively. Our effective income tax rates in the third quarter and first nine months of 2022 were higher than our effective income tax rates in the same periods of 2021 primarily due to a non-recurring$4.2 million favorable tax impact recorded in the prior year periods related to amending a previously filed tax return and a change in geographic earnings mix. We estimate our annual effective income tax rate for the full year of 2022 will be between 23.5 and 24.0 percent. We are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expense) that exclude the impact of pension settlement expenses as well as legal judgment income, expenses associated with a terminated acquisition and non-operating pension income and 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 adjusted corporate expense provide useful information to investors about our performance and allow management and our investors to better understand our performance between periods without regard to items that we do not consider to be a component of our core operating performance.
North America Segment
Three Months Ended Nine Months Ended
(dollars in millions) September 30, September 30,
2022 2021 2022 2021
Net Sales $ 652.9 $ 658.2 $ 2,127.1 $ 1,814.7
Segment Earnings 141.8 151.8 453.5 423.9
Segment margin 21.7 % 23.1 % 21.3 % 23.4 %
Net sales in our North America segment were $652.9 million in the third quarter
of 2022 or $5.3 million lower than net sales of $658.2 million in the third
quarter of 2021. Net sales in the first nine months of 2022 were $2,127.1
million or $312.4 million higher than net sales of $1,814.7 million in the same
period last year. Lower net sales in the third quarter of 2022 were primarily
driven by lower residential water heater volumes which more than offset price
increases implemented in 2021, largely on water heaters, which were in response
to rising material and other input costs. The increased net sales in the first
nine months of 2022 compared to the prior year period were primarily driven by
the price increases discussed above which were partially offset by lower
residential water heater volumes. In addition, our acquisition of Giant added
$25.3 million and $88.1 million of incremental net sales in the third quarter
and first nine months of 2022, respectively.
North America segment earnings were $141.8 million in the third quarter of 2022,
a decrease of approximately seven percent compared to segment earnings of $151.8
million in the third quarter of 2021. Segment earnings during the first nine
months of 2022 were $453.5 million , an increase of approximately seven percent
compared to segment earnings of $423.9 million during the first nine months of
2021. Segment margins were 21.7 percent and 23.1 percent in the third quarter of
2022 and 2021, respectively. Segment margins were 21.3 percent and 23.4 percent
during the first nine months of 2022 and 2021, respectively. Lower segment
earnings in the third quarter of 2022 compared to the third quarter of 2021 were
primarily due to lower residential water heater volumes, higher material costs,
and production inefficiencies, partially offset by price increases implemented
in 2021 as discussed above and the $11.5 million patent infringement judgment
referenced above. Higher segment earnings in the first nine months of 2022
compared to the prior year period were primarily due to the price increases and
the judgment referenced above, partially offset by higher material and logistics
costs. Segment margin was lower in the third quarter and the first nine months
of 2022 primarily due to an overall increase in costs, including production
inefficiencies, outpacing pricing actions.
Adjusted segment earnings and adjusted segment margin in the third quarter of
2022 were $132.9 million and 20.4 percent, respectively. Adjusted segment
earnings and adjusted segment margin in the third quarter of 2021 were $149.2
million and 22.7
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percent, respectively. Adjusted segment earnings and adjusted segment margin in the first nine months of 2022 were$449.8 million and 21.1 percent, respectively. Adjusted segment earnings and adjusted segment margin in the first nine months of 2021 were$416.1 million and 22.9 percent, respectively. We estimate our 2022 North America adjusted segment margin will be approximately 21.5 percent, excluding legal judgment income and pension expense. Adjusted segment earnings and adjusted segment margin in the third quarter of 2022 and 2021 exclude$2.6 million and($2.6) million of pension expense (income), respectively, and the recognition of the$11.5 million patent infringement judgment. Adjusted segment earnings and adjusted segment margin in the first nine months of 2022 and 2021 exclude$7.8 million and($7.8) million of pension expense (income), respectively, and the recognition of the$11.5 million patent infringement judgment. Rest of World Segment Three Months Ended Nine Months Ended (dollars in millions) September 30, September 30, 2022 2021 2022 2021 Net Sales$ 230.2 $ 263.1 $ 716.1 $ 748.6 Segment Earnings 21.8 26.8 64.7 60.9 Segment margin 9.5 % 10.2 % 9.0 % 8.1 % Net sales in the Rest of World segment were$230.2 million in the third quarter of 2022, or$32.9 million lower than net sales of$263.1 million in the third quarter of 2021. Net sales during the first nine months of 2022 were$716.1 million , or$32.5 million lower than net sales of$748.6 million during the first nine months ended of 2021. Net sales inChina decreased approximately 15 percent inU.S. dollar terms and 10 percent in local currency in the third quarter of 2022 and approximately six percent inU.S. dollar terms and five percent in local currency in the first nine months of 2022 compared to the same period last year. Lower net sales inChina in the third quarter and first nine months of 2022 were primarily driven by lower consumer demand due to COVID-19 related shutdowns. In addition, our net sales in this segment were negatively impacted by approximately$16 million and$22 million in the third quarter and first nine months, respectively of 2022 compared to the same periods last year, due to the depreciation of foreign currencies compared to theU.S. dollar. Net sales inIndia increased approximately 16 percent in the third quarter of 2022 on strong demand for our water heater and water treatment products compared to the prior year quarter. Rest of World segment earnings were$21.8 million in the third quarter of 2022, compared to$26.8 million in the third quarter of 2021. Segment earnings during the first nine months of 2022 were$64.7 million , compared to$60.9 million during the nine months of 2021. Segment margins were 9.5 percent and 10.2 percent in the third quarter of 2022 and 2021, respectively. Segment margins were 9.0 percent and 8.1 percent during the first nine months of 2022 and 2021, respectively. Lower segment earnings in the third quarter of 2022, were driven by lower volumes inChina , partially offset by lower selling and advertising expenses. The decline in segment operating margin in the third quarter of 2022 was primarily due the impact of negative currency, partially offset by the increase inChina operating margins. Higher segment earnings and margin in the first nine months of 2022 compared to the prior year period were primarily driven by favorable mix and lower engineering, advertising and selling expenses inChina . We expect the full-year segment margin to be approximately 10 percent in 2022.
Outlook
We expect our consolidated net sales to increase between five and seven percent in 2022, which includes our acquisition of Giant adding approximately$100 million in incremental net sales. Our expected higher net sales are driven by pricing actions implemented in 2021 inNorth America , partially offset by lower volumes of residential water heaters inNorth America . We expect to achieve full-year earnings of between$1.29 and$1.39 per share and adjusted earnings of between$3.05 and$3.15 per share. Our 2022 guidance excludes the potential impacts from future acquisitions and assumes the COVID-19 related shutdowns inChina remain at current levels throughout the rest of the year and do not significantly impact our operations or our employees, customers or suppliers. 24
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Liquidity & Capital Resources
Our working capital was$668.7 million atSeptember 30, 2022 , and higher compared with$633.8 million atDecember 31, 2021 . A majority of the increase in working capital was driven by lower accounts payable and payroll-related accruals and higher inventory balances than atDecember 31, 2021 , due to higher levels of safety stock on higher cost inventory which were partially offset by lower accounts receivable, and cash balances. In addition, cash balances as ofSeptember 30, 2022 were negatively impacted by$37.4 million due to the effects of changes in foreign currency during the year. In the first nine months of 2022, we repatriated approximately$120 million of cash from our foreign subsidiaries. We used the proceeds to pay down outstanding debt balances. Nine Months Ended (dollars in millions) September 30, 2022 2021 Cash provided by operating activities$ 214.7 $ 376.8
Cash provided by (used in) investing activities 58.3 (135.3) Cash used in financing activities
(320.1) (328.5)
Cash provided by operating activities in the first nine months of 2022 was
$214.7 million compared with $376.8 million in the same period last year. Cash
provided by higher earnings in the first nine months of 2022 compared with the
prior year was more than offset by lower customer deposits in China , higher
incentive payments in 2022 due to record 2021 net sales and earnings, and
additional working capital cash outlays for higher levels of safety stock on
higher cost inventory. Our free cash flow in the first nine months of 2022 and
2021 was $163.8 million and $331.5 million , respectively. We expect free cash
flow to be between $400 million to $425 million in 2022. Free cash flow is a
non-GAAP measure and is described in more detail in the Non-GAAP Measures
section below.
Capital expenditures totaled
In 2021, we renewed and amended our$500 million revolving credit facility, which now expires onApril 1, 2026 . The renewed and amended facility, with a group of nine banks, has an accordion provision that allows it to be increased up to$850 million 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 ofSeptember 30, 2022 , and expect to be in compliance for the foreseeable future. The facility backs up commercial paper and credit line borrowings. AtSeptember 30, 2022 , we had$152.1 million outstanding under the facility and an available borrowing capacity of$347.9 million . We believe the combination of available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future. Our total debt increased by$94.6 million in the first nine months of 2022 and was primarily due to repurchases of our common stock. Our leverage, as measured by the ratio of total debt to total capitalization, was 14.1 percent atSeptember 30, 2022 , compared with 9.7 percent atDecember 31, 2021 . OurU.S. pension plans continues to meet all funding requirements under ERISA regulations. We were not required to make a contribution to our pension plan in 2021. We forecast that we will not be required to make a contribution to the plan in 2022, and we do not plan to make any voluntary contributions in 2022. In the first quarter of 2022, our Board of Directors approved adding 3,500,000 shares of common stock to our existing discretionary share repurchase authority. Under our share repurchase program, we may purchase our common stock through a combination of a Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The stock repurchase authorization remains effective until terminated by our Board of Directors, which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. During the first nine months of 2022, we repurchased 4,472,500 shares of our stock at a total cost of$282.0 million . AtSeptember 30, 2022 , we had 2,553,857 shares remaining on the share repurchase authority. Depending on factors such as stock price, working capital requirements, and alternative investment opportunities, we expect to spend approximately$400 million on stock repurchases in 2022 through a combination of our Rule 10b5-1 automatic trading plan and open market repurchases. OnOctober 12, 2022 , our Board of Directors declared a regular quarterly cash dividend of$0.30 per share on our Common Stock and Class A common stock, which represents an increase over the amount per share of our most recent dividend. The dividend is payable onNovember 15, 2022 , to shareholders of record onOctober 31, 2022 . 25
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Non-GAAP Financial Information
We provide non-GAAP measures of free cash flow, adjusted earnings, adjusted EPS,
adjusted segment earnings and adjusted corporate expense. We define free cash
flow as cash provided by operating activities less capital expenditures. Our
adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted
corporate expenses excludes the impact of pension settlement expenses,
non-operating pension income and expenses, legal judgment income, and expenses
associated with terminated acquisition costs.
We believe that free cash flow provides useful additional information concerning
cash flow available to meet future debt service obligations and working capital
requirements. We believe that the measure of adjusted earnings, adjusted EPS,
adjusted segment earnings and adjusted corporate expense provides useful
information to investors about our performance and allows management and our
investors to better understand our performance between periods without regard to
items we do not consider to be a component of our core operating performance.
A. O. SMITH CORPORATION
Adjusted Earnings and Adjusted EPS
(dollars in millions, except per share data)
(unaudited)
The following is a reconciliation of net earnings and diluted EPS to adjusted earnings (non-GAAP) and adjusted EPS (non-GAAP):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net Earnings (GAAP) $ 109.8
(11.5) - (11.5) -
Pension expense (income), before tax 3.0 (3.2) 8.9 (9.5)
Terminated acquisition-related expenses, before tax 4.3 - 4.3 -
Tax effect on above items 1.0 0.8 (0.4) 2.4
Adjusted Earnings (non-GAAP) $ 106.6 Diluted EPS (GAAP)(1)$ 0.71
- (0.07) -
Pension expense (income) per diluted share, before tax 0.02
(0.02) 0.06 (0.06)
Terminated acquisition-related expenses per diluted share, before tax
0.03 - 0.03 -
Tax effect on above items per diluted share - 0.01 (0.01) 0.02
Adjusted EPS (non-GAAP)(1) $ 0.69 (1) Earnings per share amounts are calculated discretely and, therefore, may not add up to the total due to rounding.
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A. O. SMITH CORPORATION
Adjusted Segment Earnings
(dollars in millions)
(unaudited)
The following is a reconciliation of reported segment earnings to adjusted segment earnings (non-GAAP):
Three Months Ended Nine Months Ended,
September 30, September 30,
2022 2021 2022 2021
Segment Earnings (GAAP)
North America $ 141.8 $ 151.8 $ 453.5 $ 423.9
Rest of World 21.8 26.8 64.7 60.9
Inter-segment earnings elimination - (0.1) (0.1) (0.1)
Total Segment Earnings (GAAP) $ 163.6 $ 178.5 $ 518.1 $ 484.7
Adjustments:
North America $ (8.9) $ (2.6) $ (3.7) $ (7.8)
Rest of World - - - -
Inter-segment earnings elimination - - - -
Total Adjustments $ (8.9) $ (2.6) $ (3.7) $ (7.8)
Adjusted Segment Earnings (non-GAAP)
North America $ 132.9 $ 149.2 $ 449.8 $ 416.1
Rest of World 21.8 26.8 64.7 60.9
Inter-segment earnings elimination - (0.1) (0.1) (0.1)
Total Adjusted Segment Earnings (non-GAAP) $ 154.7 $ 175.9 $ 514.4 $ 476.9
Additional Information
Adjustments: North America Segment
Pension expense (income), before tax $ 2.6 $ (2.6) $ 7.8 $ (7.8)
Legal judgment income, before tax (11.5) - (11.5) -
Total Adjustments $ (8.9) $ (2.6) $ (3.7) $ (7.8)
A. O. SMITH CORPORATION
Adjusted Corporate Expense
(dollars in millions)
(unaudited)
The following is a reconciliation of reported Corporate Expense to adjusted
Corporate Expense (non-GAAP):
Three Months Ended Nine Months Ended,
September 30, September 30,
2022 2021 2022 2021
Corporate Expense (GAAP) $ (16.5) $ (11.1) $ (45.5) $ (38.0) Adjustments:
Corporate pension expense (income) 0.4 (0.6) 1.1 (1.7) Terminated acquisition-related expenses 4.3 - 4.3 - Corporate Expense (non-GAAP)$ (11.8) $ (11.7) $ (40.1) $ (39.7) 27
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A. O. SMITH CORPORATION
Free Cash Flow
(dollars in millions)
(unaudited)
The following is a reconciliation of reported cash flow from operating activities to free cash flow (non-GAAP):
Nine Months Ended,
September 30,
2022 2021
Cash provided by operating activities (GAAP) $ 214.7 $ 376.8
Less: Capital expenditures (50.9) (45.3)
Free cash flow (non-GAAP) $ 163.8 $ 331.5
A. O. SMITH CORPORATION
2022 Adjusted EPS Guidance and 2021 Adjusted EPS
(unaudited)
The following is a reconciliation of diluted EPS to adjusted EPS (non-GAAP) (all
items are net of tax):
2022 Guidance 2021
Diluted EPS (GAAP) $ 1.29 - 1.39 $ 3.02
Estimated pension settlement charge 1.73 (1) -
Pension expense (income) 0.06 (2) (0.06) (3)
Legal judgment income (0.05) -
Terminated acquisition-related expenses 0.02 -
Adjusted EPS (non-GAAP) $ 3.05 - 3.15 $ 2.96 (1)Includes pre-tax pension settlement charges of
(2)Includes pre-tax pension expense of
(3)Includes pre-tax pension income of
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Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in theU.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 endedDecember 31, 2021 . We believe that atSeptember 30, 2022 , there was no material change to this information.
Recent Accounting Pronouncement
Refer to Recent Accounting Pronouncement in Note 1 - Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information. Forward Looking Statements This filing contains statements that the Company believes are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "forecast," "continue," "guidance", "outlook" or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: further softening inU.S. residential water heater demand resulting primarily from channel inventory destocking; 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, and to its operations and workforce as a result of the severity and duration of the COVID-19 pandemic; further weakening inU.S. residential or commercial construction or instability in the Company's replacement markets; inability of the Company to implement or maintain pricing actions; an uneven recovery of the Chinese economy or decline in the growth rate of consumer spending or housing sales inChina ; negative impact to the Company's business inChina as a result of future COVID-19 related shutdowns there; negative impact to the Company's businesses from international tariffs, trade disputes and geopolitical differences, including the conflict inUkraine ; potential weakening in the high-efficiency boiler segment in theU.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; competitive pressures on the Company's businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; and adverse developments in general economic, political and business conditions in key regions of the world. 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.
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