The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 20232024 are not necessarily indicative of the results expected for the full year. It is suggested the accompanying condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20222023 filed with the SEC on February 14, 2023.13, 2024.

Substantially all of the Company’s sales are from contracts with customers for the purchase of its products. Contracts and customer purchase orders are used to determine the existence of a sales contract. Shipping documents are used to verify shipment. For substantially all of its products, the Company transfers control of products to the customer at the point in time when title and risk are passed to the customer, which generally occurs upon shipment of the product. Each unit sold is considered an independent, unbundled performance obligation. The Company’s sales arrangements do not include other performance obligations that are material in the context of the contract.

The nature, timing and amount of revenue for a respective performance obligation are consistent for each customer. The Company measures the sales transaction price based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Sales and value added taxes are excluded from the measurement of the transaction price. The Company’s payment terms for the majority of its customers are 30 to 90 days from shipment.

Additionally, certain customers in China pay the Company prior to the shipment of products resulting in a customer deposits liability of $70.3$62.9 million and $85.7$59.7 million at March 31, 20232024 and December 31, 2022,2023, respectively. Customer deposit liabilities are short term in nature, recognized into revenue within one year of receipt. The Company assesses the collectability of customer receivables based on the creditworthiness of a customer as determined by credit checks and analysis, as well as the customer’s payment history. In determining the allowance for credit losses, the Company also considers various factors including the aging of customer accounts and historical write-offs. In addition, the Company monitors other risk factors including forward-looking information when establishing adequate allowances for credit losses, which reflects the current estimate of credit losses expected to be incurred over the life of the receivables. The Company’s allowance for credit losses was $10.2$11.4 million and $10.1 million at March 31, 20232024 and $9.5 million at December 31, 2022.2023, respectively.

Rebates and incentives are based on pricing agreements and are tied to sales volume. The amount of revenue is reduced for variable consideration related to customer rebates which are calculated using expected values and are based on program specific factors such as expected rebate percentages based on expected volumes. In situations where the customer has the right to return eligible products, the Company reduces revenue for its estimates of expected product returns, which are primarily based on an analysis of historical experience. Changes in such accruals may be required if actual sales volume differs from estimated sales volume or if future returns differ from historical experience. Shipping and handling costs billed to customers are included in net sales and the related costs are included in cost of products sold and are activities performed to fulfill the promise to transfer products.

The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. 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 regions of the world.

The North America segment's major product lines are defined as the following:

During the first quarter of 2023, the Company entered into negotiationsdetermined that the disposal group met the criteria to sell its business in Turkey (disposal group), which is included in the Company's Rest of World segment. The Company determinedbe classified as held for sale and that the fair value of the disposal group, less cost to sell, was lower than its carrying amount. As a result, in the first quarter of 2023, the Company recorded an impairment expense of $15.6 million, of which $12.5 million was recorded in the Rest of World segment, and $3.1 million was recorded in Corporate Expense. The impairment was recorded as a net reduction of $4.5 million to the assets and liabilities and $11.1 million for the anticipated liquidation of the cumulative foreign currency translation adjustment associated with the disposal group. The accrual for the impairment is recorded in Accrued liabilities in the condensed consolidated balance sheet.

The following table presents the components of the Company’s inventory balances:

The Company offers warranties on the sales of certain of its products with terms that are consistent with the market and records an accrual for the estimated future claims. The following table presents the Company’s warranty liability activity:

In 2021, the Company renewed and amended its $500 million multi-year multi-currency revolving credit agreement with a new expiration date of April 1, 2026. The facility has an accordion provision that allows it to be increased up to $850 million if certain conditions (including lender approval) are satisfied. Borrowings under the Company's bank credit lines and commercial paper borrowings are supported by a $500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s commercial paper and credit line borrowings are classified as long-term debt at March 31, 2023.2024. At its option, the Company either maintains cash balances or pays fees for bank credit and services. The facility requires the Company to maintain two financial covenants, a leverage ratio test and an interest coverage test. The Company was in compliance with the covenants as of March 31, 2023.2024.

The numerator for the calculation of basic and diluted earnings per share is net earnings. The following table sets forth the computation of basic and diluted weighted-average shares used in the earnings per share calculations:

The Company adopted the A. O. Smith Combined Incentive Compensation Plan (the Incentive Plan) effective January 1, 2007. The2007, and the Incentive Plan was most recently reapproved by stockholders on April 15, 2020. The Incentive Plan is a continuation of the A. O. Smith Combined Executive Incentive Compensation Plan which was originally approved by stockholders in 2002. The number of shares available for granting of share units at March 31, 20232024 was 2,491,654.2,293,586. Upon stock option exercise or share unit

vesting, shares are issued from treasury stock. Total stock based compensation expense recognized in the three months ended March 31, 2024 and 2023 and 2022 was $7.0$8.3 million and $7.6$7.0 million, respectively.

TheBeginning in 2023, the Company decided to no longer grantgrants stock options beginning with fiscal year 2023.options. Stock options previously granted have a three year pro rata vesting from the date of grant. Stock options were issued at exercise prices equal to the fair value of the Company’s Common Stock on the date of grant. For active employees, all options granted expire ten years after the date of grant. The Company’s stock options are expensed ratably over the three year vesting period; however, included in the stock option expense for the three months ended March 31, 2022 was expense associated with the accelerated vesting of stock option awards for certain employees who either are retirement eligible or become retirement eligible during the vesting period. Stock based compensation expense attributable to stock options in the three months ended March 31, 2024 and 2023 and 2022 was $0.3$0.2 million and $3.9$0.3 million, respectively.

Participants ofin the Incentive Plan may also be awarded share units. Share units vest three years after the date of grant. The Company granted 165,686189,792 and 88,894165,686 share units under the Incentive Plan in the three months ended March 31, 20232024 and 2022,2023, respectively.

The share units were valued at $11.1$15.6 million and $6.6$11.1 million at the date of issuance in 20232024 and 2022,2023, respectively, based on the price of the Company’s Common Stock at the date of grant. The share units are recognized as compensation expense ratably over the three-year vesting period; however, included in share unit expense in the three months ended March 31, 20232024 and 20222023 was expense associated with accelerated vesting of share unit awards for certain employees who are retirement eligible or will become retirement eligible during the vesting period. Stock based compensation expense attributable to share units of $6.6$7.8 million and $3.7$6.6 million was recognized in the three months ended March 31, 20232024 and 2022,2023, respectively. Certain non-U.S.-based employees receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

A summary of share unit activity under the Incentive Plan is as follows for the three months ended March 31, 2023:2024:

Beginning in 2023, certain executives may also be awarded performance stock units under the Incentive Plan. Performance stock units vest over three years following the date of the grant. Performance stock units vest under a set of measurement criteria which are based upon achievement of certain Environmental, Social, and Governance targets. Potential payouts range from zero to 150% of the target awards and changes from target amounts are reflected as performance adjustments. The Company granted 28,390 and 24,580 performance stock units under the Incentive Plan in the three months ended March 31, 2023.2024 and 2023, respectively.

The performance stock units were valued at $2.3 million and $1.7 million at the date of issuance in 2024 and 2023, respectively, based on the price of the Company’s Common Stock at the date of grant. The weighted average grant date value for the units granted was $67.14. The performance stock units are recognized as compensation expense ratably over the three-year vesting period. Stock based compensation expense attributable to performance stock units of $0.3 million and $0.1 million was recognized in the three months ended March 31, 2023.2024 and 2023, respectively. Certain non-U.S.-based executives receive the cash value of the share price at the vesting date in lieu of shares. Unvested cash-settled awards are remeasured at each reporting period.

The following table presents the components of the Company’s net pension expense:

The Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. The following table presents the Company’s segment results:

The Company utilizes certain derivative instruments to enhance its ability to manage currency exposure as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.

With the exception of its net investment hedges, the Company designates all of its hedging instruments as cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), gains or losses on the derivative instrument are reported as a component of other comprehensive loss, net of tax, and are reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings.

The Company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of business. Principal currencies for which the Company utilizes foreign currency forward contracts from time to time include the British pound, Canadian dollar, Euro and Mexican peso.

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the consolidated statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective. The majority of the amounts in accumulated other comprehensive loss for cash flow hedges are expected to be reclassified into earnings within one year.

The Company enters into certain foreign currency forward contracts to hedge the exposure to a portion of the Company’s net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges,

The Company periodically enters into foreign exchange contracts to mitigate the foreign currency volatility relative to certain intercompany loans. These foreign exchange contracts did not qualify for hedge accounting in accordance with ASC 815 and as such were marked to market through earnings. The fair value of the foreign exchange contracts was zeroa liability balance of $(0.3) million as of March 31, 2023.2024 which was recorded in Accrued liabilities within the consolidated balance sheet. The fair value of the foreign exchange contracts was an asseta liability balance of $0.1$(0.8) million as of December 31, 2022 and2023 which was recorded in Other current assetsAccrued liabilities within the consolidated balance sheet.

The following table summarizes the contractual amounts of the Company's foreign exchange contracts that are designated as balance sheet hedges:

The Company’s effective income tax rate for the three months ended March 31, 20232024 was 25.9 percent compared to 23.5 percent for the three months ended March 31, 2022.23.4 percent. The Company estimates that its annual effective income tax rate for the full year 20232024 will be approximately 24.0between 24 and 24.5 percent. The effective income tax rate for the three months ended March 31, 2023 was 25.9 percent. The change in the effective income tax rate for the three months ended March 31, 20232024 compared to the effective income tax rate for the three months ended March 31, 20222023 was primarily due to a change in geographical earnings mix as well as a $15.6 million impairment expense recorded in the prior year period with no associated tax benefit. Refer to Note 3 - Acquisition and Dispositions for additional information regarding the impairment expense.

As of March 31, 2023,2024, the Company had $15.0$17.2 million of unrecognized tax benefits of which $2.9$3.5 million would affect its effective income tax rate if recognized. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company’s U.S. federal income tax returns and its U.S. state and local income tax returns are subject to audit for the years 2017-20232017-2024 and 2009-2023,2007-2024, respectively. The Company is subject to examinations in foreign tax jurisdictions for the years 2017-2023.2018-2024.

The Company maintains a commercial relationship with a supply-chain service provider (the Provider) in connection with the Company’s business in China. In this capacity, the Provider offers order-entry, warehousing and logistics support. The Provider also offers asset-backed financing to certain of the Company’s distributors in China to facilitate their working capital needs. To facilitate its financing support business, the Provider has collateralized lending facilities in place with multiple Chinese banks under which the Company has agreed to repurchase inventory if both requested by the banks and certain defined conditions are met, primarily related to the aging of the distributors’ notes.

The Provider is required to indemnify the Company for any losses the Company would incur in the event of an inventory repurchase under these arrangements. Potential losses under the repurchase arrangements represent the difference between the repurchase price and net proceeds from the resale of the product plus costs incurred in the process, less related distributor rebates.

Changes to accumulated other comprehensive loss by component are as follows:

Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europe and India. 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 saw improvement in ourOur supply chain during 2022, particularly in the second halfhas been relatively stable. However, we continue to monitor potential disruptions and increase our safety stock of the year and remained relatively stable through the first quarter of 2023.key components when we believe it is warranted. We remain in close contact with our suppliers and logistics providers to resolve supply chain constraints as they arise.

We continue to seek acquisitions that enable geographic growth, expand our core business, and establish adjacencies. In the first quarter of 2024, we acquired Impact Water Products, a California-based water treatment company. The acquisition supports our growth strategy by expanding the West Coast presence of our water treatment business. We will also continue to look for opportunities to add to our existing operationsproduct portfolio in high growth regions demonstrated by our previous introductions of water treatmentkitchen products in IndiaChina. We also recently introduced our internally designed and range hoods and cooktopsmanufactured gas tankless water heaters in China.

In our North America segment, we saw resilientstrong water heater demand in the residential water heater industry in the first quarter. We continue to monitor proactive replacement and new home completions.quarter that benefited from increased orders ahead of our March 1st price increases. We project 20232024 industry residential unit volumes will be flat after approximately flat to 2022. Demandsix percent growth in 2023. Proactive replacement has been above historical levels for commercial electric water heaters was strongthe last several years and we project that will continue in the first quarter of 20232024. We believe that new home construction remains in a deficit and will be flat compared to the first quarter of 2022 and our orders remain strong in April. Therefore, we expect2023. We anticipate that commercial water heater industry volumes will increase mid-singlegrow low single digits in 2024 compared to 2022.2023 as demand for commercial electric water heaters greater than 55 gallon continues a positive trend toward pre-2022 levels. Sales of our boilers and water treatment products were negatively impacted by elevated channel inventories in 2023. We believe that channel inventories returned to near normal levels at the beginning of 2024 for both product categories. We expect to see a mid-single digitan eight to ten percent increase in our sales of boilers in 20232024 compared to 2022, driven by pricing and demand for our high2023 as we continue to benefit from the transition to higher efficiency commercial boilers. We anticipate sales of our North America water treatment products will increase approximately fiveeight to seventen percent in 2023,2024, compared to 2022, primarily driven by pricing and consumer demand.2023, as we continue our geographic expansion.

In our Rest of World segment, ourwe saw local currency third-party sales growth in China business performed as we expectedof six percent in the first quarter and we saw sequential month over month improvement in sales. We believe it will take time for consumer confidence to strengthen and for the economy to improve.quarter. We project our third-party sales in China will growbe flat to up three to five percent in 20232024 in local currency compared to 2022.2023 driven by innovative new products and resilient demand for our core products. Our guidance assumes volume will improve sequentially throughout the year. We assume thatan unfavorable currency translation will negatively impact on sales byof approximately two percent.one percent in 2024.

Combining all of these factors, we expect our 20232024 consolidated sales to be approximately flatincrease between three and five percent compared to 2022 with a range of plus or minus two percent.2023. Our guidance excludes the impacts from potential future acquisitions.

Our sales in the first quarter of 20232024 were $966.4$978.8 million, or 1.21.3 percent lowerhigher than the first quarter 20222023 sales of $977.7$966.4 million. Compared to the prior year quarter, our change inthe increased sales waswere primarily driven by highera positive mix shift towards high efficiency commercial water heater volumes in North America, partially offset by lower sales in China.heaters including heat pumps. In addition, our sales in our Restthe first quarter of World segment2024 were unfavorably impacted by approximately $17$9 million in the first quarter of 2023 due to the deprecationdepreciation of foreign currencies compared to the U.S. dollar.

Our gross profit margin in the first quarter of 20232024 was 38.739.3 percent and increased compared to 34.938.7 percent in the first quarter of 2022.2023. The higher gross profit margin in the first quarter of 20232024 compared to the same period last year was primarily due to lower steel and other material costs.

Impairment expense in the first quarter of 2023 was $15.6 million which is related to our commitment to sellthe sale of our business in Turkey. Of the $15.6 million impairment, $12.5 million was recorded in the Rest of World segment and $3.1 million in Corporate Expense. There was no impairment expense recorded in Corporate Expense.the first quarter of 2024.

Interest expense in the first quarter of 20232024 was $1.0 million compared to $4.0 million and higherin the same period last year. The decrease in interest expense in the first quarter of 2024 compared to $1.5the same period last year was primarily due to lower debt levels.

Other income, net was $1.2 million in the first quarter of 2022 primarily due2024 compared to higher debt levels and interest rates.

The Plan represented over 95 percent of the Company's pension plan liability. In the fourth quarter of 2022, the Company settled Plan liabilities through lump-sum payments from existing plan assets to eligible participants who elected to receive them and through the purchase of annuities.

Sales in our North America segment were $766.3 million in the first quarter of 2024, or $13.6 million higher than sales of $752.7 million in the first quarter of 2023 or $22.6 million higher than sales of $730.1 million in the first quarter of 2022.2023. Higher sales in the first quarter of 20232024 were primarily driven by higher residential andvolumes of commercial water heater volumes, partially offset by lower pricing.heaters and a positive product mix shift towards high efficiency water heaters, including heat pumps.

North America segment earnings were $198.7 million in the first quarter of 2024, an increase of approximately 5.4 percent compared to segment earnings of $188.6 million in the first quarter of 2023, an increase of approximately 24.2 percent compared to segment earnings of $151.8 million in the first quarter of 2022.2023. Segment margins were 25.125.9 percent and 20.825.1 percent in the first quarter of 2024 and 2023, and 2022, respectively.

Higher segment earnings and margins in the first quarter of 20232024 compared to the first quarter of 2022prior year were primarily due to the benefits of the positive product mix shift toward high efficiency products, higher volumes of commercial and residential water heatersheater volumes, and lower steel costs.costs that were partially offset by higher selling and advertising expenses. We estimate our 20232024 North America segment margin will be approximately between 23 and 23.525 percent.

Sales in the Rest of World segment earnings and adjusted segment marginwere $226.9 million in the first quarter of 2022 were $154.42024, or $7.8 million and 21.1 percent, respectively. Adjusted segment earnings and adjusted segment margin in the first quarter of 2022 exclude $2.6 million of pension expense.

Rest of World segment earnings were $17.2 million in the first quarter of 2024, compared to $5.3 million in the first quarter of 2023, compared to $24.8 million in the first quarter of 2022.2023. Segment margins were 2.47.6 percent and 9.72.4 percent in the first quarter of 2024 and 2023, and 2022, respectively. LowerHigher segment earnings and segment margin in the first quarter of 2023,2024 were primarily driven by the absence of the nonrecurring impairment expense of $12.5 million associated with our commitment to sellthe sale of our business in Turkey and lower salesrecorded in China.the first quarter of 2023. We estimate our 2024 Rest of World segment margin will be approximately ten percent.

Adjusted segment earnings and adjusted segment margin in the first quarter of 2023 were $17.8 million and 8.1 percent, respectively. Adjusted segment earnings and adjusted segment margin in the first quarter of 2023 exclude the $12.5 million of impairment expense. We estimate our 2023 Rest of World adjusted segment margin will be approximately 10 percent, excluding the impairment expense.

We expect our consolidated sales to increase in 2023 to be flat to 2022 with a range of plus or minus two2024 between three and five percent. Our sales projection is driven by expected flat industry residential unit volumescontinued end-market demand in North America, increased commercial water heater volumes, higherheating and the rebound that we expect in boiler and water treatment salesvolumes after 2023 corrections in North America,end-market inventories. In our Rest of the World segment, we expect overall growth in China driven by new products and higher sales in China.resilient demand for core product offerings. We assume that currency translation will negatively impact sales by approximately two percent. As a result, we expect to achieve full-year earnings of between $3.20$3.90 and $3.40 per share and adjusted earnings of between $3.30 and $3.50$4.15 per share. Our guidance excludes the impacts from potential future acquisitions.

Our working capital was $748.1$578.1 million at March 31, 2023, and higher2024, compared with $699.5$555.0 million at December 31, 2022.2023. The increase in working capital was primarily driven byrelated to higher inventory balances, lower accounts payable and payroll-related accruals and inventory balances than at December 31, 2022, which were partially offset by higher accrued liabilities. In addition,lower cash balances asbalances. As of March 31, 20232024, cash balances were positivelynegatively impacted by $2.4$3.1 million due to the effects of changes in foreign currency during the year. Cash and cash equivalents used to fund our operations are primarily generated through operating activities and provided by 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 to the United States from certain foreign subsidiaries.