AOSA. O. Smith

In our North America segment, we saw soft residential and commercial water heater order demand sales increased one percent in the second half of 2025 compared to 2024 after a strong first half of the year. as pricing benefits and higher commercial volumes were partially offset by lower wholesale residential volumes. We believe estimate that a pre-buy ahead of our March 1st price increase pulled forward some demand into the first half of the year. We also believe our second half order demand was negatively impacted by our improved lead times. Those factors along with caution around softening of end market demand may have driven some customers to reduce their inventory levels. 2024 2025 residential industry unit volumes were approximately flat compared to the prior year and we project 2025 2026 industry residential unit volumes will be flat as well. Proactive replacement has been above historical levels for the last several years and we project that will continue to down, driven by softness in 2025. We believe that new home construction remains in a deficit and will be flat compared to 2024. construction. We anticipate that commercial water heater industry volumes will increase mid-single digits in 2026 after growing approximately five percent in 2025. We believe that the 2026 growth will come from the buy ahead of products that will be approximately flat eliminated as a part of the DOE regulatory change for commercial water heaters that will take effect in October 2026. In response to higher steel and other input costs, including tariffs, we announced price increases on most of our water heater and boiler products in the first half of 2025. In addition to pricing, we continue to mitigate the impact of tariffs through footprint optimization, strategic sourcing actions and other cost containment initiatives. Our boiler sales grew eight percent in 2025 after minimal growth in 2024 driven by growth in commercial electric water heaters greater than 55 gallons which was offset by lower shipments of commercial gas water heaters. primarily due to higher volumes and pricing benefits. We expect our boilers boiler sales to grow between three six and five eight percent in 2025 compared 2026 due to 2024 as we continue to benefit from the transition to higher carryover pricing benefits and continued demand for our commercial high efficiency condensing gas boilers. We anticipate sales of our North America water treatment products will be grow between $235 million 10 and $245 million, a year-over-year decrease of approximately five 12 percent primarily due to tariff-related pricing benefits and as we de-emphasize certain channels and focus on continue to expand our more profitable channels. dealer network.

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.

In December 2023, the FASB amended ASC 740 (issued under ASU 2023-09, “Improvements to Income Tax Disclosures”). This ASU requires added disclosures related to the tax rate reconciliation and income taxes paid and includes other amendments intended to improve effectiveness and comparability. The amendment update is effective for the Company beginning with its 2025 annual disclosures with early adoption permitted and should be applied on interim periods beginning in 2026. As a prospective basis. result of adoption, income tax disclosures for prior periods presented have been revised to conform to the new disclosure requirements. The Company is currently evaluating the impact the adoption of ASU 2023-09 will have on did not affect the Company’s financial position or its annual results of operations. Refer to Note 14, Income Taxes, for additional disclosures.

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 product plus costs incurred in the process, less related distributor rebates. As of December 31, 2025, the Company terminated the arrangement with the Provider. Existing loan balances will be paid down throughout 2026 with no new loans offered.