A O Smith AOS · USD

Operations by SegmentThe Company is comprised of two reporting segments: North America and Rest of World. The Rest of World segment is primarily comprised of China, India, and Europe. 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 Company’s Chief Executive Officer (CEO) is the Chief Operating Decision Maker (CODM). The CODM allocates resources and makes operating decisions based on the financial information presented by the two reporting segments. The measures regularly reviewed by our CODM include segment sales, earnings, and segment margin. Segment earnings, defined by the Company as earnings before interest expense, taxes, corporate expense, and corporate research and development expenses, were used to measure the performance of the segments. Our CODM uses these financial measures to evaluate and allocate capital and company resources as critical determinants of segment performance.The accounting policies of the reportable segments are the same as those described in the “Summary of Significant Accounting Policies” outlined in Note 1 - Organization and Significant Accounting Policies. December 31, 2025(dollars in millions)North AmericaRest of WorldInter-segment EliminationTotal SegmentsLess: Corporate ExpensesTotalSales from external customers$2,964.4 $865.8 $— $3,830.2 $— $3,830.2 Inter-segment sales19.8 14.6 — 34.4 — 34.4 2,984.2 880.4 — 3,864.6 — 3,864.6 Elimination of Inter-segment sales(19.8)(14.6)— (34.4)— (34.4)Net Sales2,964.4 865.8 — 3,830.2 — 3,830.2 Cost of products sold1,792.2 550.6 — 2,342.8 — 2,342.8 Gross Profit1,172.2 315.2 — 1,487.4 — 1,487.4 Inter-segment Profit— 0.2 (0.2)— — — Selling, general and administrative expenses444.3 235.9 — 680.2 79.2 759.4 Other expense (income), net(1)— 3.1 — 3.1 (3.7)(0.6)Earnings$727.9 $76.4 $(0.2)$804.1 $(75.5)$728.6 Interest expense(13.5)Earnings before provision for income taxes$715.1 (1)Other expense (income), net consists primarily of interest income that is located within Corporate Expenses.December 31, 2024(dollars in millions)North AmericaRest of WorldInter-segment EliminationTotal SegmentsLess: Corporate ExpensesTotalSales from external customers$2,928.1 $890.0 $— $3,818.1 $— $3,818.1 Inter-segment sales22.0 28.6 — 50.6 — 50.6 2,950.1 918.6 — 3,868.7 — 3,868.

Revenue Recognition 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 $34.2 million and $54.4 million at December 31, 2025 and December 31, 2024, 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 $14.1 million and $12.9 million at December 31, 2025 and December 31, 2024, respectively.Rebates and incentives are based on pricing agreements and are tied to sales volume.

Commitments and ContingenciesEnvironmental Contingencies The Company is a potentially responsible party in judicial and administrative proceedings seeking to clean up sites which have been environmentally impacted. In each case, the Company has established reserves, insurance proceeds and/or a potential recovery from third parties. The Company believes any environmental claims will not have a material effect on its financial position or results of operations. Product LiabilityThe Company is subject to various claims and pending lawsuits for product liability and other matters arising out of the conduct of the Company’s business. For product liability claims, the Company self insures a portion of its product liability loss exposure. The Company has established reserves and insurance coverage that it believes are adequate to cover incurred claims. For the years ended December 31, 2025 and 2024, the Company had $125 million of product liability insurance for individual losses in excess of $7.5 million. At December 31, 2025 and 2024, the reserve for product liability was $26.6 million and $26.3 million, respectively. The Company periodically reevaluates its exposure on claims and lawsuits and makes adjustments to its reserves as appropriate. The Company believes, based on current knowledge, consultation with counsel, adequate reserves and insurance coverage that the outcome of such claims and lawsuits will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Purchase ObligationsThe Company utilizes blanket purchase orders to communicate expected annual requirements to certain suppliers. Requirements under blanket purchase orders generally do not become committed until several weeks prior to the scheduled unit production. The purchase obligations the Company considers firm as of December 31, 2025, is $211.7 million, most of which will be ordered in 2026.Inventory Repurchase ArrangementsThe Company maintained 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 offered order-entry, warehousing and logistics support. The Provider also offered asset-backed financing to certain of the Company’s distributors in China to facilitate their working capital needs.

DebtThe Company was obligated under the following debt instruments:December 31 (dollars in millions)20252024Revolving credit agreement borrowings, average year-end interest rates of 5.3% for 2024$— $30.0 Variable rate agreements, expiring 2029, average year-end interest rates of 7.4% for 2025 and 8.0% for 202446.6 49.0 Fixed rate agreements, expiring 2026-2034, average year-end interest rates of 3.3% for 2025 and 3.1% for 2024108.4 114.2 155.0 193.2 Long-term debt due within one year(42.3)(10.0)Long-term debt$112.7 $183.2 In 2024, the Company renewed and amended its $500 million multi-year multi-currency revolving credit agreement with a new expiration date of August 23, 2029. The facility has an accordion provision which allows it to be increased up to $1 billion if certain conditions (including lender approval) are satisfied. Borrowings under the Company’s bank credit lines and commercial paper borrowings are supported by the $500 million revolving credit agreement. As a result of the long-term nature of this facility, the Company’s credit line borrowings are classified as long-term debt at December 31, 2024 (no credit line borrowings existed at December 31, 2025). At its option, the Company either maintains cash balances or pays fees for bank credit and services. The Company has interest expense obligations of $15.3 million on outstanding debt as of December 31, 2025. Scheduled maturities of long-term debt within each of the five years subsequent to December 31, 2025 are as follows:Years ending December 31 (dollars in millions)Amount2026$42.3 202739.9 202824.9 202924.9 203010.

Income Taxes The components of the provision for income taxes consisted of the following: Years ended December 31 (dollars in millions)202520242023Current:Federal$99.8 $124.3 $124.9 State25.4 25.2 28.3 International34.8 22.5 27.5 Deferred:Federal11.9 (4.4)(4.8)State2.1 (0.5)(1.8)International(5.1)0.3 2.8 $168.9 $167.4 $176.9 The provision for income taxes differs from the U.S. federal statutory rate due to the following items: Years ended December 31202520242023DollarsPercentagesDollarsPercentagesDollarsPercentagesU.S. federal statutory tax rate$150.2 21.0 %$147.2 21.0 %$154.0 21.0 %State and local income tax, net of federal (national) benefit (1) 21.0 2.9 18.1 2.6 21.0 2.9 Foreign tax effectsChinaTax benefit from research and development expenditures(8.5)(1.2)(7.9)(1.1)(10.1)(1.4)Other4.2 0.6 3.2 0.5 5.3 0.7 Other foreign jurisdictions6.8 1.0 1.5 0.2 6.2 0.9 Other Adjustments(4.8)(0.7)5.3 0.7 0.5 0.0 $168.9 23.6 %$167.4 23.9 %$176.9 24.1 %(1)The state and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include California, Florida, Illinois, Massachusetts, Maryland, New Jersey, New York and New York City for 2025, California, Illinois, Maryland, Michigan, New Jersey, New York, Pennsylvania and Tennessee for 2024 and California, Florida, Illinois, Massachusetts, New Jersey, New York, Pennsylvania and Tennessee for 2023.Components of earnings before income taxes were as follows:Years ended December 31 (dollars in millions)202520242023U.S.$586.0 $577.2 $596.4 International129.1 123.8 137.1 $715.1 $701.0 $733.5 The cash taxes paid by the Company were as follows: Years ended December 31 (dollars in millions)202520242023Federal$119.2 $136.1 $134.8 State21.7 28.2 25.7 InternationalCanada11.4 11.4 11.6 China9.3 8.3 15.0 Other foreign jurisdictions3.6 3.7 2.4 $165.2 $187.7 $189.5 Undistributed earnings of the Company’s foreign subsidiaries amounted to $633.1 million at December 31, 2025. The Company had $4.8 million accrued for its estimate of withholding taxes due upon repatriation of approximately $93.0 million of foreign earnings it considers not permanently reinvested as of December 31, 2025. The Company considers $540.1 million of the total undistributed earnings to be permanently reinvested as a result of various factors including imposition of statutory restrictions at certain jurisdictions that prohibit the repatriation of a portion of the earnings.

LeasesThe Company’s lease portfolio consists of operating leases for buildings and equipment, such as forklifts and copiers, primarily in the United States and China. The Company defines a lease as a contract that gives the Company the right to control the use of a physical asset for a stated term. The Company pays the lessor for that right, with a series of payments defined in the contract and a corresponding right of use operating lease asset and liability are recorded. The Company has elected not to record leases with an initial term of 12 months or less on its consolidated balance sheet. To determine balance sheet amounts, required legal payments are discounted using the Company’s incremental borrowing rate as of the inception of the lease. The incremental borrowing rate is the rate of interest that the Company would incur if it were to borrow, on a collateralized basis, an amount equal to the value of the leased item over a similar term, in a similar economic environment. Variable lease components not based on an index or rate are excluded from the measurement of the lease asset and liability and expensed as incurred for all asset classes. Certain leases include one or more options to renew or terminate. Renewal terms can extend the lease term from one to five years and options to terminate can be effective within one year. The exercise of lease renewal or termination is at the Company’s discretion and when it is determined to be reasonably certain to renew or terminate, the option is reflected in the measurement of lease asset and liability. The Company’s lease agreements do not contain any arrangements related to material residual value guarantees, restrictive covenants or material subleases. Cash flows associated with leases are materially consistent with the expense recorded in the consolidated statement of earnings. Supplemental balance sheet information related to leases is as follows: (dollars in millions)December 31, 2025December 31, 2024LiabilitiesShort term: Accrued liabilities$10.8 $11.3 Long term: Operating lease liabilities37.1 23.5 Total operating lease liabilities$47.9 $34.8 Less: Rent incentives and deferrals(1.6)(2.0)AssetsOperating lease assets$46.3 $32.8 Lease Term and Discount RateDecember 31, 2025Weighted-average remaining lease term7.1 yearsWeighted-average discount rate5.

Acquisitions2024 AcquisitionsDuring the fourth quarter of 2024, the Company acquired Pureit, a residential water purification business in South Asia, from Unilever for an aggregate purchase price of $124.6 million. The acquired company is included in the Rest of World segment. The purchase price consists of an initial cash payment of $117.9 million upon the closing of the transaction and a separate payment of $6.7 million made under a transitional supply agreement with Unilever. The Company incurred acquisition costs of approximately $1.4 million. The following table summarizes the final allocation of the fair value of the assets acquired and liabilities assumed at the date of acquisition. Of the $56.4 million of acquired identifiable intangible assets, $48.5 million was assigned to trademarks that are not subject to amortization, $3.7 million was assigned to patents which are amortized over 15 years, and the remaining $4.2 million million was assigned to customer relationships which are amortized over two to three years. The excess of the acquisition purchase price over the fair value assigned to the assets acquired and liabilities assumed was recorded as goodwill. The allocation of the purchase price to goodwill decreased by $0.8 million in 2025 due to valuation adjustments related to identifiable intangible assets. (dollars in millions)Current assets$5.6 Property, plant and equipment0.6 Intangible assets56.4 Goodwill63.9 Total assets acquired126.5 Current liabilities(1.9)Net assets acquired$124.6 During the first quarter of 2024, the Company acquired a privately-held water treatment company. The Company paid an aggregate cash purchase price of $21.3 million, net of cash acquired. The Company also agreed to make contingent payments based on the amount by which sales of products increase over the next three years. The addition of the acquired company expanded the Company's water treatment footprint in North America. The acquired company is included in the North America segment.2023 AcquisitionsDuring the third quarter of 2023, the Company acquired a privately-held water treatment company. The Company paid an aggregate cash purchase price of $16.8 million, net of cash acquired. The addition of the acquired company expands the Company's water treatment platform. The acquired company is included in the North America segment.

We recognize the importance of maintaining the safety and security of our systems and data and have a holistic process for overseeing and managing cybersecurity and related risks. This process is supported by both our management and our Board of Directors.Our Chief Digital and Information Officer (CDIO) oversees our information systems and cybersecurity function and reports to our Chief Executive Officer (CEO). He has over 30 years of experience in leading information systems management, strategy, and operational execution, including incident management, prevention, and response. Our Chief Information Security Officer (CISO) reports to our CDIO and is responsible for the protection and defense of our networks and systems and managing cybersecurity risk. He has over 20 years of experience in managing cybersecurity and related risks, including threat identification, incident response, and defense strategies. Our CDIO and CISO are supported by a direct and cross-functional team of professionals with broad experience and expertise in threat assessment and detection, mitigation technologies, training, incident response, and regulatory compliance.Our Board of Directors is responsible for overseeing our enterprise risk management activities in general, which includes our management of information and cybersecurity risk. The full Board receives an update on our cyber risk management process and trends related to cybersecurity at least annually, or real-time if a material event occurs. The Audit Committee of the Board assists the full Board in its oversight of cybersecurity risks. As part of its oversight, the Audit Committee receives regular reports from management on information systems and security, including metrics and controls at each meeting, and other items at least annually including risk assessments, security software, incident response plans, and key updates to the cybersecurity program and its effectiveness.We have also established a committee of our executive leadership team to consider cybersecurity risks and to consider mitigation strategies in managing the risks. Our CDIO and CISO participate on this committee, which meets regularly. We have an established incident response plan led by our CDIO and CISO to assess, respond, and report in the event of a cybersecurity incident. Depending on the nature and severity of the incident, the plan requires escalating notifications up to our CEO, the Audit Committee and our Board.