FLOWSERVE CORP (FLS) FY 2024 MD&A

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is provided to increase the understanding of, and should be read in conjunction with, the accompanying consolidated financial statements and notes. See “Item 1A. Risk Factors” and the section titled “Forward-Looking Information is Subject to Risk and Uncertainty” included in this Annual Report on Form 10-K for the year ended December 31, 2024 ("Annual Report") for a discussion of the risks, uncertainties and assumptions associated with these statements. Unless otherwise noted, all amounts discussed herein are consolidated.

EXECUTIVE OVERVIEW

Our Company

We are a world-leading manufacturer and aftermarket service provider of comprehensive flow control systems. We develop and manufacture precision-engineered flow control equipment integral to the movement, control and protection of the flow of materials in our customers’ critical processes. Our product portfolio of pumps, valves, seals, automation and aftermarket services supports global infrastructure industries, including oil and gas, chemical, power generation including nuclear plants and water management, as well as general industrial markets where our products and services enable customers to achieve their goals. Through our manufacturing platform and global network of QRCs, we offer a broad array of aftermarket equipment services, such as installation, advanced diagnostics and turnkey maintenance programs. As of December 31, 2024, we have approximately 16,000 employees globally and a footprint of manufacturing facilities and QRCs in approximately 50 countries.

Our business model is significantly influenced by the capital and operating spending of global infrastructure industries for the placement of new products into service and maintenance spending for aftermarket services for existing operations. The worldwide installed base of our products is an important source of aftermarket revenue, where products are relied upon to maximize the operating time of many key industrial processes. We continue to invest in our aftermarket strategy to provide local support to drive customer investments in our offerings and use of our services to replace or repair installed products. The aftermarket portion of our business also helps provide business stability during various economic periods. The aftermarket business, which is primarily served by our network of 157 QRCs (some of which are shared by our two business segments) located around the globe, provides a variety of service offerings for our customers including spare parts, service solutions, product life cycle solutions and other value-added services. It is generally a higher margin business compared to our original equipment business and a key component of our profitable growth strategy.

Our operations are conducted through two business segments that are referenced throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"):

•FPD designs, manufactures, pretests, distributes and services highly custom engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals, auxiliary systems and replacement parts and related services; and

•FCD designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products and related equipment.

Our business segments share a focus on industrial flow control technology and have a high number of common customers. These segments also have complementary product offerings and technologies that are often combined in applications that provide us a net competitive advantage. Our segments also benefit from our global footprint, our economies of scale in reducing administrative and overhead costs to serve customers more cost effectively and our shared leadership for operational support functions, such as research and development, marketing and supply chain.

The reputation of our product portfolio is built on more than 50 well-respected brand names such as Worthington, IDP, SIHI, INNOMAG, Valtek, Limitorque, Durco and Argus, which we believe to be one of the most comprehensive in the industry. Our products and services are sold either directly or through designated channels to more than 10,000 customers, including some of the world’s leading engineering, procurement and construction ("EPC") firms, original equipment manufacturers, distributors and end users.

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Through the Flowserve Business System, we are committed to operational excellence, which includes continuous enhancements of our global supply chain capability to increase our ability to meet global customer demands and improve the quality and timely delivery of our products over the long term. Additionally, we continue to devote resources to improving the supply chain processes across our business segments to find areas of synergy and cost reduction and to improving our supply chain management capabilities to meet global customer demands. We also remain focused on improving on-time delivery and quality, while managing warranty costs across our global operations, through our operational excellence program. The goal of the program, which includes lean manufacturing, six sigma business management strategy and value engineering, is to maximize service fulfillment to customers through on-time delivery, reduced cycle time and quality at the highest internal productivity. Another main focus area of the Flowserve Business System is portfolio excellence. As part of these efforts, in 2024, we launched the complexity reduction ("CORE") program that focuses on product rationalization and continuous improvement of our overall product portfolio.

In the first quarter of 2023, we identified and initiated certain realignment activities concurrent with the consolidation of our FPD aftermarket and pump operations into a single operating model. This consolidated operating model was designed to better align our go-to-market strategy with our product offerings, enable end-to-end lifecycle responsibility and accountability, and to facilitate more efficient operations. Additionally, we committed to an estimated $50 million in cost reduction efforts beginning in 2023. Collectively, the above realignment activities are referred to as the "2023 Realignment Programs." The activities of the 2023 Realignment Programs were identified and implemented in phases throughout 2023 and 2024. In the fourth quarter of 2024, we launched the CORE program within the portfolio excellence category of the Flowserve Business System, referred to as the "CORE Realignment Program." Together with the 2023 Realignment Programs, all realignment activities are referred to as the "2023 and CORE Realignment Programs."

Our Markets

Our products and services are used in several distinct industries: oil and gas, chemical, power generation, water management, and several other industries, such as mining, food and beverage, steel, and pulp and paper, that are collectively referred to as "general industries."

Oil and Gas

The oil and gas industry represented approximately 37% and 38% of our bookings in 2024 and 2023, respectively. Customer repair and maintenance spending improved during 2024 supported by strong asset utilization, while larger project activity and short cycle investments continued in order to support global demand.

The outlook for the oil and gas industry is dependent on the overall macroeconomic environment, including fuel demand, demand growth from both mature markets and developing geographies as well as changes in the regulatory environment. We currently expect continued growth in our business, including increased investment related to energy security and decarbonization efforts in 2025. We further believe consistent asset utilization at our customers' facilities provides support for increased demand for our aftermarket products and services. We believe the medium and long-term fundamentals for this industry remain attractive and see a stabilized environment with expected increased fuel demand on expected global economic growth. In addition, we believe projected depletion rates of existing fields and forecasted long-term demand growth will require additional investments. With our long-standing reputation in providing successful solutions for upstream, mid-stream and downstream applications, along with the advancements in our portfolio of offerings, we believe that we continue to be well-positioned to assist our customers in this improving environment.

General Industries

General industries represented, in the aggregate, approximately 26% of our bookings in both 2024 and 2023, respectively. General industries comprise a variety of different businesses, including mining and ore processing, pulp and paper, food and beverage and other smaller applications, none of which individually represented more than 5% of total bookings in 2024 and 2023. General industries also include sales to distributors, whose end customers operate in the industries we primarily serve. General industry activity levels increased in 2024 for the second consecutive year, primarily due to customers' increased repair and maintenance budgets.

The outlook for this group of industries is heavily dependent upon the condition of global economies and consumer confidence levels. The long-term fundamentals of many of these industries remain sound, as many of the products produced by these industries are common staples of industrialized and urbanized economies. We believe that our specialty product offerings designed for these industries and our aftermarket service capabilities will provide continued business opportunities.

Chemical

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The chemical industry represented approximately 19% and 21% of our bookings in 2024 and 2023, respectively. The chemical industry is comprised of petrochemical, specialty chemical and pharmaceutical products. Customer spending in 2024 remained resilient for the fourth consecutive year following the pandemic's negative impact on demand for chemical products in 2020. Customers' repair and maintenance budgets increased in 2024 and 2023, and bookings levels returned to roughly pre-pandemic levels.

The outlook for the chemical industry remains heavily dependent on global economic conditions. As global economies and unemployment conditions improve, a rise in consumer spending should follow. An increase in spending would drive greater demand for petrochemical, specialty chemical and pharmaceutical products supporting improved levels of capital investment. We believe the chemical industry will continue to invest in North America and Middle East capacity additions, maintenance and upgrades for optimization of existing assets and that developing regions will selectively invest in capital infrastructure to meet current and future indigenous demand. We believe our global presence and our localized aftermarket capabilities are well-positioned to serve the potential growth opportunities in this industry.

Power Generation

The power generation industry represented approximately 13% and 11% of our bookings in 2024 and 2023, respectively. In 2024, energy security concerns drove continued investment in the power generation industry, including nuclear new build and life extensions as well as traditional thermal power sources.

Natural gas-fired combined cycle (“NGCC”) plants have increased their share of the energy mix, driven by market prices for gas remaining low and stable (partially due to the increasing global availability of LNG), low capital expenditures, and the ability of NGCC to stabilize unpredictable renewable sources provide base-load power. With the potential of unconventional sources of gas, the global power generation industry is forecasting an increased use of this form of fuel for power generation plants.

As countries around the world look for opportunities to gain additional energy independence, nuclear power remains an important contributor to the global energy mix and is a key factor in our Diversification strategy. We continue to support our significant installed base in the global nuclear fleet by providing aftermarket and life extension products and services. Due to our extensive history, we believe we are well positioned to take advantage of this ongoing source of aftermarket and new project opportunities.

Global efforts to limit the emissions of carbon dioxide may have some adverse effect on thermal power investment plans depending on the potential requirements imposed and the timing of compliance by country. However, many proposed methods of capturing and limiting carbon dioxide emissions offer business opportunities for our products and services. At the same time, we continue to take advantage of new investments in concentrated solar power generating capacity, where our pumps, valves, and seals are uniquely positioned for both molten salt applications as well as the traditional steam cycle.

We believe the long-term fundamentals for the power generation industry remain solid based on projected increases in demand for electricity driven by the continued use and proliferation of artificial intelligence systems and machine learning, global population growth, growth of urbanization in developing markets and the increased use of electricity driven transportation. We also believe that our long-standing reputation in the power generation industry, our portfolio of offerings for the various generating methods, our advancements in serving the renewable energy market and carbon capture methodologies, as well as our global service and support structure, position us well for the future opportunities in this important industry.

Water Management

The water management industry represented approximately 5% and 4% of our bookings in 2024 and 2023, respectively. Water management industry activity levels increased in 2024. Worldwide demand for fresh water, water treatment and re-use, desalination and flood control are expected to create requirements for new facilities or for upgrades of existing systems, many of which require products that we offer, particularly pumps. We expect capital and aftermarket spending to rise in developed and emerging markets with governments and private industry providing funding for critical projects.

The proportion of people living in regions that find it difficult to meet water requirements is expected to increase significantly in the coming years. We believe that the persistent demand for fresh water during all economic cycles supports continued investments, especially in North America and developing regions.

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Outlook for 2025

We have seen growth from the end-markets we serve and continue to focus on our strategic plan that takes a balanced approach to integrating both short-term and long-term initiatives and aims to accelerate growth through three key areas: diversification, decarbonization, and digitization, the "3D Strategy." Our sales volume is expected to deliver sustainable and healthy growth, while the Flowserve Business System is expected to unlock gains in organizational and operational efficiency. With our strong backlog, improved market environment and recent acquisition of MOGAS, we expect to deliver annual revenue growth in 2025.

Our bookings were $4.7 billion during 2024. Because a booking represents a contract that can be, in certain circumstances, modified or canceled, and can include varying lengths between the time of booking and the time of revenue recognition, there is no guarantee that bookings will result in comparable revenues or otherwise be indicative of future results. Assuming a positive general macroeconomic environment and continued supportive environments in our end markets, we expect full-year bookings growth in 2025.

On October 10, 2024, we entered into the Second Amended and Restated Credit Agreement, which includes a $800.0 million Revolving Credit Facility and $500.0 million Term Loan. On December 31, 2024, we had $991.5 million of fixed-rate Senior Notes outstanding.  We expect our interest expense in 2025 will be higher compared with amounts incurred in 2024 primarily as a result of term loan financing under our Second Amended and Restated Credit Agreement. Our results of operations may also be impacted by unfavorable foreign currency exchange rate movements. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” of this Annual Report.

We expect to generate sufficient cash from operations and have sufficient capacity under our Senior Credit Facility to fund any working capital, capital expenditures, dividend payments, share repurchases, debt payments and pension plan contributions in 2025. The amount of cash generated or consumed by working capital is dependent on our level of revenues, customer cash advances, backlog, customer-driven delays and other factors. We will seek to improve our working capital utilization, with a particular focus on improving the management of accounts receivable and inventory. In 2025, our cash flows for investing activities will be focused on strategic initiatives, information technology infrastructure, general upgrades and cost reduction opportunities and we currently estimate capital expenditures to be between $80 million and $90 million, before consideration of any acquisition activity. We currently anticipate that our contributions to our non-U.S. pension plans will be approximately $2 million in 2025, excluding direct benefits paid. We have no obligation to make contributions to our U.S. pension plans in 2025, but have authorization for contributions up to $10 million.

OUR RESULTS OF OPERATIONS

The following is the discussion and analysis of changes in the financial condition and results of operations for fiscal year December 31, 2024 compared to fiscal year 2023. The discussion and analysis of changes in the financial condition and results of operations for fiscal year 2023 compared to fiscal year 2022 that are not included in this Form 10-K may be found in Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 20, 2024.

Throughout this discussion of our results of operations, we discuss the impact of fluctuations in foreign currency exchange rates. We have calculated currency effects on operations by translating current year results on a monthly basis at prior year exchange rates for the same periods.

Effective October 15, 2024, we acquired for inclusion in FCD, all of the equity interests of MOGAS Industries, Inc., MOGAS Real Estate LLC and MOGAS Systems & Consulting LLC (such entities collectively, "MOGAS"), including 100% of MOGAS's valve products. The impact of the acquisition of MOGAS for the year ended December 31, 2024 includes bookings of $14 million, sales of $37 million, gross profit of $8 million, operating loss of $3 million (including acquisition related amortization charges of $4 million) and period end backlog of $87 million. Cumulative transaction and integration costs incurred by Flowserve in 2024 related to the acquisition were $10 million.

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The activities of the 2023 and CORE Realignment Programs were identified and implemented in phases throughout 2023 and 2024. We currently anticipate a total investment in realignment activities that have been evaluated and initiated of approximately $134 million of which $45 million is estimated to be non-cash. Based on the activities of the 2023 and CORE Realignment Programs initiated to date, we estimate that we recognized cost savings of approximately $114 million through December 31, 2024. Upon completion of the activities of the 2023 and CORE Realignment Programs that have been identified and initiated to date, we expect to achieve annualized cost savings in excess of $100 million. Actual savings could vary from expected savings, which represent management's best estimate to date. There are certain remaining realignment activities that are currently being evaluated, but have not yet been approved and therefore not included in the above anticipated total investment or estimated savings.

Realignment Activity

The following tables present our realignment activity by segment related to our 2023 and CORE Realignment Programs:

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(1) Loss on sale of business related to NAF AB control valves business as described within Note 1, "Significant Accounting Policies and Accounting Developments," to our consolidated financial statements included in this Annual Report.

Restructuring charges are included within Total Realignment charges and include charges related to approved, but not yet announced, facility closures.

Bookings and Backlog

We define a booking as the receipt of a customer order that contractually engages us to perform activities on behalf of our customer with regard to manufacturing, service or support. Bookings recorded and subsequently canceled within the

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year-to-date period are excluded from year-to-date bookings. Bookings cancelled from the prior fiscal periods are excluded from the reported bookings and represent less than 1% for all periods presented. Bookings of $4.7 billion in 2024 increased by $389.0 million, or 9.1%, as compared with 2023. The increase included negative currency effects of approximately $30 million. The increase was driven by increased customer bookings of $125 million in the power generation, $115 million in the oil and gas, $71 million in the general industries and $61 million water management industries, partially offset by decreased customer bookings of $13 million in the chemical industry. The increase in customer bookings was driven by both original equipment bookings and aftermarket bookings and included the impact of FPD orders booked in the second quarter of 2024 in excess of $150 million to supply pumps and related equipment to support the continued development of an onshore unconventional gas project and a petrochemical project in the Middle East.

Backlog represents the aggregate value of booked but uncompleted customer orders and is influenced primarily by bookings, sales, cancellations and currency effects. Backlog of $2.8 billion at December 31, 2024 increased by $94.5 million, or 3.5%, as compared with December 31, 2023. Currency effects yielded a decrease of approximately $84 million (currency effects on backlog are calculated using the change in period end exchange rates). Approximately 37% of the backlog at both December 31, 2024 and December 31, 2023 was related to aftermarket orders. We expect to recognize revenue on approximately 83% of the December 31, 2024 backlog during 2025. Backlog includes our unsatisfied (or partially unsatisfied) performance obligations related to contracts having an original expected duration in excess of one year of approximately $853 million as discussed in Note 3, "Revenue Recognition," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

Sales

Sales in 2024 increased by $237.2 million, or 5.5%, as compared with 2023. The increase included negative currency effects of approximately $21 million. The increased sales were driven by both aftermarket and original equipment customer sales, with increased customer sales of $86.1 million into the Middle East, $63.9 million into Europe, $52.4 million into Asia Pacific, $26.9 million into North America and $24.1 million into Latin America, partially offset by decreased customer sales of $2.5 million into Africa. Aftermarket sales represented approximately 51% of total sales, as compared with approximately 52% of total sales for the same period in 2023.

Sales to international customers, including export sales from the United States, were approximately 64% of total sales in 2024 and 62% in 2023. Sales into Europe, the Middle East and Africa ("EMA") were approximately 35% of total sales in 2024 and 34% in 2023. Sales into Asia Pacific were approximately 17% of total sales in both 2024 and 2023. Sales into Latin America were approximately 7% of total sales in both 2024 and 2023.

Gross Profit and Gross Profit Margin

Gross profit in 2024 increased by $157.4 million, or 12.3%, as compared with 2023. Gross profit margin in 2024 of 31.5% increased from 29.6% in 2023. The increase was primarily due to the favorable impact of previously implemented sales price increases, higher sales volumes, an improved selective bidding approach and lower broad-based annual incentive compensation, partially offset by increased charges of $10.6 million related to our 2023 and CORE Realignment Programs, $3.1 million in amortization of step-up in value of acquired inventories and acquisition related intangible assets associated with the MOGAS acquisition, and $2.7 million in one-time U.S. pension transition benefit expense as compared to the same period in 2023.

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SG&A

SG&A in 2024 increased by $16.8 million, or 1.7%, as compared with 2023. Currency effects yielded a decrease of approximately $3 million. In 2024, SG&A increased due to increased research and development costs of $21.2 million which includes the $7.2 million strategic acquisition of intellectual property related to certain LNG technology, $9.9 million of acquisition and integration expense related to the MOGAS acquisition, an increase in bad debt expense of $6.0 million, $2.3 million in one-time U.S. pension plan transition benefit expense, a $1.8 million discrete software asset impairment, increased asbestos-related costs of $1.7 million for IBNR asbestos liability accruals and $1.0 million in amortization of step-up in value of acquisition related intangible assets associated with the MOGAS acquisition, partially offset by decreased charges of $40.1 million related to our 2023 and CORE Realignment Programs, $8.5 million of expense related to the terminated Velan acquisition incurred in 2023 that did not recur, lower broad-based annual incentive compensation, a $2.9 million impairment of a licensing intangible in 2023 that did not recur and the reversal of previously recognized expenses of $2.0 million related to our financial exposure in Russia as compared with the same period in 2023. SG&A as a percentage of sales decreased 70 basis points primarily due to increased sales leverage.

Loss on Sale of Business

The loss on sale of business increased by $13.0 million from zero in 2023 to $13.0 million in 2024 due to the divestiture of NAF AB, a previously wholly owned subsidiary and control valves business within our FCD segment, including the NAF AB facility located in Linkoping, Sweden. See Note 1, "Basis of Presentation and Accounting Policies," to our consolidated financial statements included in this Annual Report for additional information on this transaction.

Net Earnings from Affiliates

Net earnings from affiliates represents our net income from investments in five joint ventures (one located in each of Chile, India, Saudi Arabia, South Korea and the United Arab Emirates) that are accounted for using the equity method of accounting. Net earnings from affiliates in 2024 increased by $1.2 million, or 6.7%, as compared to the prior year, primarily as a result of increased earnings of our FPD joint venture in South Korea.

Operating Income

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Operating income in 2024 increased by $128.7 million, or 38.6%, as compared with 2023. The increase included negative currency effects of approximately $5 million. The increase was primarily a result of the $157.4 million increase in gross profit, partially offset by $16.8 million increase in SG&A and $13.0 million loss on sale of business.

Interest Expense and Interest Income

Interest expense in 2024 increased by $2.4 million as compared with 2023. The increase was primarily attributable to higher outstanding debt during the year related to the issuance of the Second Amended and Restated Credit Agreement due October 10, 2029 as discussed in Note 13, "Debt and Finance Lease Obligations," as compared to 2023. Interest income in 2024 decreased by $1.6 million as compared to 2023. The decrease in interest income was primarily attributed to lower interest rates on our average cash balances compared with same period in 2023.

Other Income (Expense), net

Other expense, net decreased by $37.7 million as compared to 2023, primarily due to a $20.7 million decrease in losses from transactions in currencies other than our sites' functional currencies and a $22.7 million decrease in losses arising from transactions on foreign exchange forward contracts. The net currency related change was primarily due to the foreign currency exchange rate movements in the Euro, Argentinian peso, Hungarian forint and Mexican peso in relation to the U.S. dollar during the year ended December 31, 2024, as compared with the same period in 2023.

Income Tax and Tax Rate

Our effective tax rate of 22.0% for the year ended December 31, 2024 increased from 8.3% in 2023 and differed from the federal statutory tax rate of 21% primarily due to the net impact of foreign divestiture and foreign operations.

The 2023 effective tax rate differed from the federal statutory rate of 21% primarily due to the benefits of a tax planning strategy and the release of valuation allowances on the net deferred tax assets in Brazil and France, partially offset by the net impact of foreign operations.

Our effective tax rate is based upon current earnings and estimates of future taxable earnings for each domestic and international location. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates used in the underlying business. Changes in any of these and other factors, including our ability to utilize foreign tax credits and net operating losses or results from tax audits, could impact the tax rate in future periods. As of December 31, 2024, we had U.S. foreign tax credit carryforwards of $67.4 million, expiring in 2028-2034 tax years, against which we recorded a valuation allowance of $54.1 million related to the U.S. foreign tax credit carryforwards on foreign branch category income. Additionally, we have recorded other net deferred tax assets of $206.7 million, which relate to net operating losses, tax credits and other deductible temporary differences that are available to reduce taxable income in future periods, most of which do not have a definite expiration. Should we not be able to utilize all or a portion of these credits and losses, our effective tax rate would increase.

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Net Earnings and Earnings Per Share

Net earnings in 2024 increased by $96.1 million to $282.8 million, or to $2.14 per diluted share, as compared with 2023. The increase was primarily attributable to an increase in operating income of $128.7 million and a $37.7 million decrease in other expense, net, partially offset by a $66.3 million increase in tax expense and a $2.4 million increase in interest expense.

Other Comprehensive Income (Loss)

Other comprehensive loss in 2024 increased by $97.6 million from a loss of $4.6 million in 2023. The net loss in 2024 was primarily due to foreign currency translation adjustments resulting primarily from exchange rate movements of the Euro, Brazilian real and Mexican peso versus the U.S. dollar at December 31, 2024 as compared with 2023, partially offset by pension and other postretirement activity.

Business Segments

We conduct our operations through two business segments based on type of product and how we manage the business. We evaluate segment performance and allocate resources based on each segment’s operating income. See Note 20, "Business Segment Information," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report for further discussion of our segments. The key operating results for our two business segments, FPD and FCD, are discussed below.

Flowserve Pumps Division Segment Results

Our largest business segment is FPD, through which we design, manufacture, pretest, distribute and service highly custom engineered pumps, pre-configured industrial pumps, pump systems, mechanical seals and auxiliary systems (collectively referred to as "original equipment") and related services. FPD includes highly engineered pump products with longer lead times and mechanical seals that are generally manufactured within shorter lead times. FPD also manufactures replacement parts and related equipment and provides aftermarket services. FPD primarily operates in the oil and gas, power generation, chemical, water management and general industries. FPD operates in 49 countries with 37 manufacturing facilities worldwide, 12 of which are located in North America, 11 in Europe and the Middle East, eight in Asia Pacific and six in Latin America, and we have 130 QRCs, including those co-located in manufacturing facilities and/or shared with FCD.

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Bookings in 2024 increased by $363.1 million, or 12.3%, as compared with 2023. The increase included negative currency effects of approximately $26 million. The increase in customer bookings was driven by increased orders of $102 million in the oil and gas, $94 million in the power generation, $74 million in the general industries, $66 million the water management and $12 million in the chemical industries. Increased customer orders of $191.7 million into the Middle East, $116.5 million into North America, $108.0 million into Europe and $12.3 million into Africa were partially offset by decreased customer orders of $70.6 million into Asia Pacific and $9.2 million into Latin America. The increase in customer bookings was substantially driven by original equipment bookings, including the impact of original equipment orders booked in the second quarter of 2024 in excess of $150 million to supply pumps and related equipment to support the continued development of an onshore unconventional gas project and a petrochemical project in the Middle East. Of the $3.3 billion of bookings in 2024, approximately 39% were from oil and gas, 27% from general industries, 16% from chemical, 12% from power generation and 6% from water management.

Sales in 2024 increased $94.1 million, or 3.1%, as compared with 2023. The increase included negative currency effects of approximately $19 million. The increase was mostly driven by aftermarket customer sales, resulting from increased customer sales of $51.9 million into Europe, $30.5 million into North America, $24.3 million into Latin America and $14.5 million into the Middle East, partially offset by decreased customer sales of $9.9 million into Asia Pacific and $8.6 million into Africa.

Gross profit in 2024 increased by $110.2 million, or 12.2%, as compared with 2023. Gross profit margin in 2024 of 32.2% increased from 29.6% in 2023. The increase was primarily due to the favorable impact of previously implemented sales price increases, higher sales volume, an improved selective bidding approach, lower broad-based annual incentive compensation and slightly favorable mix as compared to the same period in 2023, partially offset by increased charges of $19.9 million related to our 2023 and CORE Realignment Programs and $1.7 million in one-time U.S. pension plan transition benefit expense as compared to the same period in 2023.

SG&A in 2024 decreased by $19.6 million, or 3.4%, as compared with 2023. Currency effects yielded a decrease of approximately $2 million. The decrease in SG&A was primarily due to realized cost savings associated with previously implemented 2023 Realignment Programs, decreased charges of $13.5 million related to our 2023 and CORE Realignment Programs, lower broad-based annual incentive compensation, a $2.9 million impairment of a licensing intangible in 2023 that did not recur, the reversal of previously recognized expenses of $2.0 million related to our financial exposure in Russia and a $0.3 million decrease in bad debt expense, partially offset by a $13.7 million increase in research and development costs which includes the $7.2 million strategic acquisition of intellectual property related to certain LNG technology and $0.8 million in one-time U.S. pension plan transition benefit expense as compared to the same period in 2023.

Operating income in 2024 increased by $131.3 million, or 37.6%, as compared with 2023. The increase included negative currency effects of approximately $5 million. The increase was primarily due to the $110.2 million increase in gross profit and the $19.6 million decrease in SG&A.

Backlog of $1.9 billion at December 31, 2024 increased by $38.7 million, or 2.0%, as compared with December 31, 2023. Currency effects yielded a decrease of approximately $66 million.

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Flow Control Division Segment Results

FCD designs, manufactures and distributes a broad portfolio of engineered-to-order and configured-to-order isolation valves, control valves, valve automation products and related equipment. FCD leverages its experience and application know-how by offering a complete menu of engineered services to complement its expansive product portfolio. FCD has a total of 46 manufacturing facilities and QRCs in 22 countries around the world, with seven of its 19 manufacturing operations located in Europe, six located in the United States, five located in Asia Pacific and one located in Latin America. Based on independent industry sources, we believe that FCD is the second largest industrial valve supplier on a global basis.

Bookings in 2024 increased $24.8 million, or 1.8%, as compared with 2023. The increase included negative currency effects of approximately $4 million. The increase in customer bookings was driven by increased orders of $31 million in the power generation and $13 million in the oil and gas industries, partially offset by $25 million in the chemical, $5 million in the water management and $3 million in the general industries industries. There were increased customer orders of $11.3 million into North America, $10.8 million into Europe and $10.6 million into Latin America, partially offset by decreased customer orders of $12.5 million into Asia Pacific, $6.6 million into Africa and $3.0 million into the Middle East. The increase in customer bookings was driven by aftermarket bookings. Of the $1.4 billion of bookings in 2024, approximately 33% were from oil and gas, 28% were from chemical, 24% from general, 14% from power generation and 1% from water management industries.

Sales in 2024 increased by $143.3 million, or 11.3%, as compared with 2023. The increase included negative currency effects of approximately $2 million. The increase was driven by both increased customer original equipment and aftermarket sales, resulting from increased customer sales of $71.5 million into the Middle East, $62.3 million into Asia Pacific, $12.1 million into Europe and $6.1 million into Africa, partially offset by decreased customer sales of $3.6 million into North America and $0.2 million into Latin America.

Gross profit in 2024 increased by $51.2 million, or 13.7%, as compared with 2023. Gross profit margin in 2024 of 30.1% increased from 29.4% in 2023. The increase in gross profit margin was primarily due to the favorable impact of previously implemented sales price increases, higher sales volume, decreased charges of $9.5 million related to our 2023 and CORE Realignment Programs and lower broad-based annual incentive compensation, partially offset by $3.1 million in amortization of step-up in value of acquired inventories and acquisition related intangible assets associated with the MOGAS acquisition, $0.8 million in one-time U.S. pension plan transition benefit expense and slightly unfavorable mix as compared to the same period in 2023.

SG&A in 2024 increased by $27.9 million, or 12.4% as compared with 2023. Currency effects yielded a decrease of less than a million. The increase in SG&A was primarily due to increased sales volume, $9.9 million of acquisition and integration related expense related to the MOGAS acquisition, $6.0 million increase in bad debt expense, $5.6 million increase in research and development costs, $1.0 million in amortization of step-up in value of acquisition related intangible assets associated with the MOGAS acquisition, and $0.4 million in one-time U.S. pension plan transition benefit expense, partially offset by $8.5 million of expense related to the terminated Velan acquisition incurred in 2023 that did not recur, decreased charges of $8.3 million related to our 2023 and CORE Realignment Programs and lower broad-based annual incentive compensation as compared to the same period in 2023.

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The loss on sale of business increased by $13.0 million from zero in 2023 to $13.0 million in 2024 due to the divestiture of NAF AB, a previously wholly owned subsidiary and control valves business within our FCD segment, including the NAF AB facility located in Linkoping, Sweden. The loss on sale of business is included within charges related to our 2023 Realignment Programs.

Operating income in 2024 increased by $10.3 million, or 7.0%, as compared with 2023. The increase included negative currency effects of approximately $1 million. The increase was primarily due to the $51.2 million increase in gross profit partially offset by the increase in SG&A of $27.9 million and $13.0 million loss on sale of business.

Backlog of $869.6 million at December 31, 2024 increased by $42.8 million, or 5.2%, as compared with December 31, 2023. Currency effects yielded a decrease of approximately $19 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Analysis

The following is a discussion and analysis of the Company’s liquidity and capital resources for the years ended December 31, 2024 and 2023. A discussion of changes in the Company’s liquidity and capital resources for the year ended December 31, 2023 and 2022 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 20, 2024.

Existing cash, cash generated by operations and borrowings available under our Second Amended and Restated Credit Agreement are our primary sources of short-term liquidity. We monitor the depository institutions that hold our cash and cash equivalents on a regular basis, and we believe that we have placed our deposits with creditworthy financial institutions. Our sources of operating cash generally include the sale of our products and services and the conversion of our working capital, particularly accounts receivable and inventories. Our cash balance at December 31, 2024 was $675.4 million, compared with $545.7 million at December 31, 2023.

For the year ended December 31, 2024 our cash provided by operating activities was $425.3 million, as compared to cash provided of $325.8 million in 2023. Working capital levels vary from period to period and are primarily affected by our volume of work, and can be impacted by billing schedules on our projects. Cash flow used by working capital increased in 2024, primarily due to increased cash flows used by, or decreased cash flows provided by, accounts receivable, prepaid expenses and other assets, accounts payable, contract liabilities, and accrued liabilities, partially offset by increased cash flows provided by, or decreased cash flows used by, inventories and contract assets as compared to the same period in 2023.

Increases in accounts receivable used $82.2 million of cash flow in 2024, compared to cash provided of $4.7 million in 2023. For the fourth quarter of 2024 our days' sales outstanding ("DSO") was 74 days as compared to 68 days in 2023. We have not experienced a significant increase in customer payment defaults in 2024.

Decreases in inventory provided $38.9 million of cash flow in 2024, compared with cash flows used of $59.8 million in 2023. Inventory turns were 3.8 times at December 31, 2024 and 3.6 times at 2023. Our calculation of inventory turns does not reflect the impact of advanced cash received from our customers.

Increases in contract assets used $18.5 million of cash flow and decreases in contract liabilities used $6.1 million of cash flow in 2024.

Decreases in accounts payable used $12.3 million of cash flow in 2024 compared with cash provided of $53.1 million in 2023. Increases in accrued liabilities provided $49.6 million of cash flow in 2024 compared to cash provided of $59.2 million in 2023.

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Cash flows used by investing activities were $387.2 million in 2024, as compared to $68.6 million in 2023. The increase of cash flows used in 2024 resulted primarily from the $305.9 million payment for the acquisition of MOGAS, $2.6 million payment for disposition of business, partially offset by higher cash flows proceeds provided from the disposal of assets of $2.2 million, an increase of $0.2 million as compared to 2023. Capital expenditures were $81.0 million in 2024, as compared to $67.4 million in 2023. In 2025, we currently estimate capital expenditures to be between $80 million and $90 million, before consideration of any acquisition activity.

Cash provided by financing activities was $117.5 million in 2024 compared to cash used of $153.0 million in 2023. Cash inflows during 2024 resulted primarily from $366.0 million in proceeds from our Term Loan, partially offset by $110.4 million in dividend payments, $95.4 million in payments on our Term Loan, $20.1 million in stock repurchase and $13.0 million in non controlling interest dividend payments.

In 2024 we repurchased 423,785 shares of our outstanding common stock. As of December 31, 2024, we had $279.9 million of remaining capacity for Board of Directors approved share repurchases. While we currently intend to continue to return cash through dividends and/or share repurchases for the foreseeable future, any future returns of cash through dividends will be reviewed individually, declared by our Board of Directors at its discretion and implemented by management.

Our material cash requirements for the next 12 months, include our estimated 2025 capital expenditures described above and our contractual obligations summarized below under the subheading "Contractual Obligations". In the aggregate, our cash needs vary based on working capital activity and will be evaluated throughout 2025. Considering our current debt structure and cash needs, we currently believe cash flows generated from operating activities combined with availability under our Second Amended and Restated Credit Agreement and our existing cash balance will be sufficient to meet our cash needs for our short-term (next 12 months) and long-term (beyond the next 12 months) business needs. However, cash flows from operations could be adversely affected by a decrease in the rate of general global economic growth and an extended decrease in capital spending of our customers, as well as economic, political and other risks associated with sales of our products, operational factors, competition, regulatory actions, fluctuations in foreign currency exchange rates and fluctuations in interest rates, among other factors. We believe that cash flows from operating activities and our expectation of continuing availability to draw upon our credit agreements are also sufficient to meet our cash flow needs for periods beyond the next 12 months.

Financing

On September 13, 2021, we amended and restated our credit agreement (the "Senior Credit Agreement") under our Senior Credit Facility ("Credit Facility") with Bank of America, N.A. and the other lenders to provide greater flexibility in maintaining adequate liquidity and access to available borrowings (the "Amended and Restated Credit Agreement"). The Amended and Restated Credit Agreement, (i) retained, from the previous credit agreement, the $800.0 million unsecured Revolving Credit Facility (the "Revolving Credit Facility"), which includes a $750.0 million sublimit for the issuance of letters of credit and a $30.0 million sublimit for swing line loans ii) provides for an up to $300 million unsecured Term Loan Facility (the "Term Loan"), (iii) extends the maturity date of the agreement to September 13, 2026, (iv) reduces commitment fees, (v) extends net leverage ratio covenant definition through the maturity of the agreement, and (vi) provides the ability to make certain adjustments to the otherwise applicable commitment fee, interest rate and letter of credit fees based on the Company’s performance against to-be-established key performance indicators with respect to certain of the Company’s environmental, social and governance targets. On February 3, 2023, we entered into an amendment to the Credit Facility (the “Amendment”) which (i) replaced LIBOR with Secured Overnight Financing Rate (“SOFR”) as the benchmark reference rate, (ii) lowered the Material Acquisition (as defined in the Credit Facility) threshold from $250 million to $200 million and (iii) extended compliance dates for certain financial covenants. Subsequently, on October 10, 2024, we amended and restated our Senior Credit Agreement and entered into the Second Amended and Restated Credit Agreement (the "Second Amended and Restated Credit Agreement") with Bank of America, N.A., as administrative agent, and the other lenders (together, the "Lenders") and letter of credit issuers party thereto to (i) retain from the Senior Credit Agreement the $800.0 million Revolving Credit Facility, and the right, subject to certain conditions including a Lender approving such increase, to increase the amount of such Revolving Credit Facility by an aggregate amount not to exceed $400.0 million, (ii) increase our Term Loan from $300.0 million to $500.0 million, and (iii) extend the maturity date to October 10, 2029. As of December 31, 2024, we had an available capacity of $656.0 million under our Second Amended and Restated Credit Agreement, which provided for a $800.0 million unsecured revolving credit facility. We believe this Second Amended and Restated Credit Agreement will provide greater flexibility

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and additional liquidity under our Credit Facility as we continue to pursue our business goals and strategy. Most other terms and conditions under the previous Credit Facility remained unchanged.

Under the terms and conditions of the Second Amended and Restated Credit Agreement, the interest rates per annum applicable to the Revolving Credit Facility and Term Loan, other than with respect to swing line loans, are adjusted Term Secured Overnight Financing Rate ("Adjusted Term SOFR") plus between 1.000% to 1.750%, depending on our debt rating by either Moody’s Investors Service, Inc. ("Moody's") or Standard & Poor’s Financial Services LLC ("S&P"), or, at our option, the Base Rate (as defined in the Second Amended and Restated Credit Agreement) plus between 0.000% to 0.750% depending on our debt rating by either Moody’s or S&P. At December 31, 2024, the interest rate on the Revolving Credit Facility was the Adjusted Term SOFR plus 1.375% in the case of Adjusted Term SOFR loans and the Base Rate plus 0.375% in the case of Base Rate loans. In addition, a commitment fee is payable quarterly in arrears on the daily unused portions of the Revolving Credit Facility. The commitment fee will be between 0.080% and 0.250% of unused amounts under the Revolving Credit Facility depending on our debt rating by either Moody’s or S&P. The commitment fee was 0.175% (per annum) during the period ended December 31, 2024. At December 31, 2024, the interest rate on the Term Loan was Adjusted Term SOFR plus 1.375% in the case of Adjusted Term SOFR loans and the Base Rate plus 0.250% in the case of Base Rate loans.

A discussion of our debt and related covenants is included in Note 13, "Debt and Finance Lease Obligations," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report. We were in compliance with the covenants as of December 31, 2024.

Liquidity Analysis

Our cash balance increased by $129.8 million to $675.4 million as of December 31, 2024 as compared with $545.7 million as of December 31, 2023. The cash increase included $425.3 million in operating cash inflows and $366.0 million from proceeds on our Term Loan, partially offset by the $305.9 million payment for the acquisition of MOGAS and $20.1 million payments for repurchases of common shares.

During 2024, we made $20.0 million cash contributions to our U.S. pension plan, compared to $2.0 million cash contributions in 2023. At December 31, 2024 and 2023, as a result of the values of the plan’s assets and our contributions to the plan, our U.S. pension plan was fully-funded as defined by applicable law. As of December 31, 2024 direct benefits paid by the U.S. pension plan were $1.8 million. We continue to maintain an asset allocation consistent with our strategy to maximize total return, while reducing portfolio risks through asset class diversification.

As of December 31, 2024, we had approximately $1,331 million of liquidity, consisting of cash and cash equivalents of $675 million and $656 million of borrowings available under our Credit Facility. In light of the liquidity currently available to us, and the costs savings measures planned and already in place, we expect to be able to maintain adequate liquidity over the next 12 months. We do not currently anticipate, nor are we aware of, any significant market conditions or commitments that would change any of our conclusions of the liquidity currently available to us. We will continue to actively monitor the credit markets in order to maintain sufficient liquidity and access to capital throughout 2025.

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Contractual Obligations

The following table presents a summary of our contractual obligations at December 31, 2024:

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(1)Fixed interest payments represent interest payments on the Senior Notes as defined in Note 13, "Debt and Finance Lease Obligations," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

(2)Purchase obligations are presented at the face value of the purchase order, excluding the effects of early termination provisions. Actual payments could be less than amounts presented herein.

(3)Retirement and postretirement benefits represent estimated benefit payments for our U.S. and non-U.S. defined benefit plans and our postretirement medical plans, as more fully described below and in Note 14, "Pension and Postretirements Benefits," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

The following table presents a summary of our commercial commitments at December 31, 2024:

We expect to satisfy these commitments through performance under our contracts.

PENSION AND POSTRETIREMENT BENEFITS OBLIGATIONS

Plan Descriptions

We and certain of our subsidiaries have defined benefit pension plans and defined contribution plans for full-time and part-time employees. Approximately 68% of total defined benefit pension plan assets and approximately 58% of defined benefit pension obligations are related to the U.S. qualified plan as of December 31, 2024. Unless specified

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otherwise, the references in this section are to all of our U.S. and non-U.S. plans. None of our common stock is directly held by these plans.

In August 2023, we amended the Company-sponsored qualified defined benefit pension plan in the United States (the "Qualified Plan") for non-union employees to discontinue future benefit accruals under the Qualified Plan and freeze existing accrued benefits effective January 1, 2025. Benefits earned by participants under the Qualified Plan prior to January 1, 2025, are not affected. We also amended the Company-sponsored non-qualified defined benefit pension plan in the United States (the "Non-Qualified Plan") that provides enhanced retirement benefits to select members of management. The Qualified Plan and the Non-Qualified Plan were closed to new entrants effective January 1, 2024, and September 1, 2023, respectively. The amendments resulted in a curtailment of both plans during the year ended December 31, 2023. The curtailment loss incurred and the change in projected benefit obligation was immaterial.

In conjunction with the amendment of the qualified plan, the Organization and Compensation Committee of our Board of Directors approved certain transition benefits associated with freezing the qualified plan. In January 2025, a one-time cash transition benefit was paid to a limited group of employees in the United States that meet certain criteria. We recorded a $5.0 million liability during the year ended December 31, 2024, included within accrued liabilities in our consolidated balance sheet to recognize this obligation, with corresponding expense included within cost of sales ("COS") and SG&A in our consolidated statements of income. We expect to issue approximately the same amount of value in the form of restricted shares to an additional group of employees in the United States in 2025. The restricted shares are expected to be subject to three year cliff-vesting.

Our U.S. defined benefit plan assets consist of a portfolio of equity and fixed income securities. Our non-U.S. defined benefit plan assets include a significant concentration of United Kingdom fixed income securities, as discussed in Note 14, "Pension and Postretirements Benefits," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report. We monitor investment allocations and manage plan assets to maintain an acceptable level of risk. At December 31, 2024, the estimated fair market value of U.S. and non-U.S. plan assets for our defined benefit pension plans decreased to $520.0 million from $540.6 million at December 31, 2023. Assets were allocated as follows:

The projected benefit obligation ("Benefit Obligation") for our defined benefit pension plans was $700.7 million and $715.2 million as of December 31, 2024 and 2023, respectively. Benefits under our defined benefit pension plans are based primarily on participants’ compensation and years of credited service.

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We sponsor defined benefit postretirement medical plans covering certain current retirees and a limited number of future retirees in the United States. These plans provide for medical and dental benefits and are administered through insurance companies. We fund the plans as benefits are paid, such that the plans hold no assets in any period presented. Accordingly, we have no investment strategy or targeted allocations for these plans. The benefits under the plans are not available to new employees or most existing employees.

The Benefit Obligation for our defined benefit postretirement medical plans was $11.8 million and $12.4 million as of December 31, 2024 and 2023, respectively.

Accrual Accounting and Significant Assumptions

We account for pension benefits using the accrual method, recognizing pension expense before the payment of benefits to retirees. The accrual method of accounting for pension benefits requires actuarial assumptions concerning future events that will determine the amount and timing of the benefit payments.

Our key assumptions used in calculating our cost of pension benefits are the discount rate, the rate of compensation increase and the expected long-term rate of return on plan assets. We, in consultation with our actuaries, evaluate the key actuarial assumptions and other assumptions used in calculating the cost of pension and postretirement benefits, such as discount rates, expected return on plan assets for funded plans, mortality rates, retirement rates and assumed rate of compensation increases, and determine such assumptions as of December 31 of each year to calculate liability information as of that date and pension and postretirement expense for the following year. See discussion of our accounting for and assumptions related to pension and postretirement benefits in the “Our Critical Accounting Estimates” section of this MD&A.

In 2024, the service cost component of the pension expense for our defined benefit pension plans included in operating income was $30.3 million compared to $26.0 million in 2023. The non-service cost portion of net pension expense (e.g., interest cost, actuarial gains and losses and expected return on plan assets) for our defined benefit pension plans included in other income (expense), net was $6.0 million in 2024, compared to $4.5 million in 2023.

The following are assumptions related to our defined benefit pension plans as of December 31, 2024:

The following provides a sensitivity analysis of alternative assumptions on the U.S. qualified, aggregate non-U.S. pension plans and U.S. postretirement plans.

Effect of Discount Rate Changes and Constancy of Other Assumptions:

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Effect of Changes in the Expected Return on Assets and Constancy of Other Assumptions:

As discussed below, accounting principles generally accepted in the U.S. (“U.S. GAAP”) provide that differences between expected and actual returns are recognized over the average future service of employees or over the remaining expected lifetime for plans with only inactive participants.

At December 31, 2024, as compared with December 31, 2023, we increased our discount rate for the U.S. plan from 5.41% to 5.73% based on an analysis of publicly traded investment grade U.S. corporate bonds, which had higher yields due to current market conditions. The average discount rate for the non-U.S. plans increased from 4.22% to 4.71% based on analysis of bonds and other publicly traded instruments, by country, which had higher yields due to market conditions. The average assumed rate of compensation for the U.S. plan was 4.00%, for both 2024 and 2023, and for our non-U.S. plans increased to 3.51% from 3.24% in 2023. To determine the 2024 pension expense, the expected rate of return on the U.S. plan assets was 6.00% for both 2024 and 2023, and on the non-US plan assets increased to 4.65% from 3.97% in 2023, based on our target allocations and expected long-term asset returns. As the expected rate of return on plan assets is long-term in nature, short-term market fluctuations do not significantly impact the rate. For all U.S. plans, we adopted the Pri-2012 mortality tables and the MP-2021 improvement scale published in October 2021. We applied the Pri-2012 tables based on the constituency of our plan population for union and non-union participants. We adjusted the improvement scale to utilize the Proxy SSA Long Term Improvement Rates, consistent with assumptions adopted by the Social Security Administration trustees, based on long-term historical experience. Currently, we believe this approach provides the best estimate of our future obligation. Most plan participants elect to receive plan benefits as a lump sum at the end of service, rather than an annuity. As such, the updated mortality tables had an immaterial effect on our pension obligation.

We expect that the net pension expense for our defined benefit pension plans included in earnings before income taxes will be approximately $22.3 million lower in 2025 than the $36.4 million in 2024, primarily due to the freezing of benefits on the U.S. qualified plan. We have used discount rates of 5.73%, 4.71% and 5.78% at December 31, 2024, in calculating our estimated 2025 net pension expense for the U.S. pension plans, non-U.S. pension plans and postretirement medical plans, respectively.

The assumed ranges for the annual rates of increase in health care costs were 7.00% for 2024, 7.00% for 2023 and 7.25% for 2022, with a gradual decrease to 5.00% for 2032 and future years. If actual costs are higher than those assumed, this will likely put modest upward pressure on our expense for retiree health care.

Plan Funding

Our funding policy for defined benefit plans is to contribute at least the amounts required under applicable laws and local customs. In 2024, we contributed $32.6 million, to our defined benefit plans, compared to $15.0 million in 2023. We have no obligation to make contributions to our U.S. pension plans in 2025, but have authorization for contributions up to $10 million. We expect to contribute approximately $2 million to our non-U.S. pension plans in 2025, excluding direct benefits paid.

For further discussion of our pension and postretirement benefits, see Note 14, "Pension and Postretirements Benefits," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

OUR CRITICAL ACCOUNTING ESTIMATES

The process of preparing financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions to determine reported amounts of certain assets, liabilities, revenues and expenses and the disclosure of related contingent assets and liabilities. These estimates and assumptions are based upon information available at the time of the estimates or assumptions, including our historical experience, where relevant. The most significant estimates made by management include: timing and amount of revenue recognition; deferred taxes, tax valuation allowances and tax reserves;

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reserves for contingent loss; pension and postretirement benefits; and valuation of goodwill, indefinite-lived intangible assets and other long-lived assets. The significant estimates are reviewed at least annually if not quarterly by management. Because of the uncertainty of factors surrounding the estimates, assumptions and judgments used in the preparation of our financial statements, actual results may differ from the estimates, and the difference may be material.

Our critical accounting policies are those policies that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following represent our critical accounting policies. For a summary of all of our significant accounting policies, see Note 1, "Basis of Presentation and Accounting Policies," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report. Management and our external auditors have discussed our critical accounting estimates and policies with the Audit Committee of our Board of Directors.

Business Combinations

We allocate the purchase price of acquired businesses to the estimated fair values of the assets acquired and liabilities assumed, as well as any contingent consideration, as of the date of acquisition. The fair values of the long-lived assets acquired, primarily intangible assets, are determined using calculations which can be complex and require significant judgment. Estimates include many factors such as the nature of the acquired company’s business, its historical financial position and results, technology obsolescence, customer retention rates, discount rates, royalty rates and expected future performance. Independent valuation specialists are used to assist in determining certain fair value calculations.

While we use our best estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, pre-acquisition contingencies and contingent considerations, the fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the Consolidated Statements of Income. The judgments required in determining the estimated fair values and expected useful lives assigned to each class of assets and liabilities acquired can affect net income.

Revenue Recognition

We recognize revenue when (or as) we satisfy a performance obligation by transferring control to a customer. Transfer of control is evaluated based on the customer’s ability to direct the use of and obtain substantially all of the benefits of a performance obligation. Revenue is recognized either over time or at a point in time, depending on the specific facts and circumstances for each contract, including the terms and conditions of the contract as agreed with the customer and the nature of the products or services to be provided. Service-related revenues do not typically represent a significant portion of the contracts with our customers and do not meet the thresholds requiring separate disclosure.

Our primary method for recognizing revenue over time is the percentage of completion ("POC") method, whereby progress towards completion is measured by applying an input measure based on costs incurred to date relative to total estimated costs at completion. If control of the products and/or services does not transfer over time, then control transfers at a point in time. We determine the point in time that control transfers to a customer based on the evaluation of specific indicators, such as title transfer, risk of loss transfer, customer acceptance and physical possession. For a discussion related to revenue recognition refer to Note 3, "Revenue Recognition," included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

Deferred Taxes, Tax Valuation Allowances and Tax Reserves

We recognize valuation allowances to reduce the carrying value of deferred tax assets to amounts that we expect are more likely than not to be realized. Our valuation allowances primarily relate to the deferred tax assets established for certain tax credit carryforwards, capital loss carryforwards, and net operating loss carryforwards for non-U.S. subsidiaries, and we evaluate the realizability of our deferred tax assets and adjust the amount of the valuation allowances, if necessary. We assess such factors as our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets in determining the sufficiency of our valuation allowances. Failure to achieve forecasted taxable income in the applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in our effective tax rate on future earnings. Implementation of different tax structures in certain jurisdictions could, if successful, result in future reductions of certain valuation allowances.

The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Significant judgment is required in determining income tax provisions and evaluating

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tax positions. We establish reserves for open tax years for uncertain tax positions that may be subject to challenge by various tax authorities. The consolidated tax provision and related accruals include the impact of such reasonably estimable losses and related interest and penalties as deemed appropriate. Tax benefits recognized in the financial statements from uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

While we believe we have adequately provided for any reasonably foreseeable outcomes related to these matters, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities. To the extent that the expected tax outcome of these matters changes, such changes in estimate will impact the income tax provision in the period in which such determination is made. For a discussion related to deferred taxes, tax valuation allowances and tax reserves refer to Note 19, "Income Taxes," included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

Reserves for Contingent Loss

We are a defendant in a number of lawsuits that seek to recover damages for personal injury allegedly resulting from exposure to asbestos-containing products formerly manufactured and/or distributed by heritage companies of the Company. We have estimated that the liability for pending and future claims not yet asserted, and which are probable and estimable, could be experienced through 2054, which represents the expected end of our asbestos liability exposure with no further ongoing claims expected beyond that date. In light of the uncertainties and variables inherent in the long-term projection of the total asbestos liability, as part of our ongoing review of asbestos claims, each year we will reassess the projected liability of unasserted asbestos claims to be filed through 2054, and we will continually reassess the time horizon over which a reasonable estimate of unasserted claims can be projected.

In connection with our ongoing review of asbestos-related claims, we have also reviewed the amount of potential insurance coverage for such claims, taking into account the remaining limits of such coverage, the number and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company’s insurers, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements and coverage available from solvent insurers not party to the coverage litigation. We review ongoing insurance coverage available for a significant amount of the potential future asbestos-related claims and in the future could secure additional insurance coverage as deemed necessary. For a discussion pertaining to asbestos claims refer to Note 16, "Legal Matters and Contingencies," included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

Liabilities are recorded for various non-asbestos contingencies arising in the normal course of business when it is both probable that a loss has been incurred and such loss is reasonably estimable. Assessments of reserves are based on information obtained from our independent and in-house experts, including recent legal decisions and loss experience in similar situations. The recorded legal reserves are susceptible to changes due to new developments regarding the facts and circumstances of each matter, changes in political environments, legal venue and other factors. Recorded environmental reserves could change based on further analysis of our properties, technological innovation and regulatory environment changes.

Pension and Postretirement Benefits

We provide pension and postretirement benefits to certain of our employees, including former employees, and their beneficiaries. The assets, liabilities and expenses we recognize and disclosures we make about plan actuarial and financial information are dependent on the assumptions and estimates used in calculating such amounts. The assumptions include factors such as discount rates, health care cost trend rates, inflation, expected rates of return on plan assets, retirement rates, mortality rates, turnover, rates of compensation increases and other factors.

The assumptions utilized to compute expense and benefit obligations are shown in Note 14, "Pension and Postretirements Benefits," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report. These assumptions are assessed annually in consultation with independent actuaries and investment advisors as of December 31 and adjustments are made as needed. We evaluate prevailing market conditions and local laws and requirements in countries where plans are maintained, including appropriate rates of return, interest rates and medical inflation (health care cost trend) rates. We ensure that our significant assumptions are within the reasonable range relative to market data. The methodology to set our significant assumptions includes:

•Discount rates are estimated using high quality debt securities based on corporate or government bond yields with a duration matching the expected benefit payments. For the United States, the discount rate is obtained from an analysis of publicly-traded investment-grade corporate bonds to establish a weighted average discount rate. For

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plans in the United Kingdom and the Eurozone we use the discount rate obtained from an analysis of AA-graded corporate bonds used to generate a yield curve. For other countries or regions without a corporate AA bond market, government bond rates are used. Our discount rate assumptions are impacted by changes in general economic and market conditions that affect interest rates on long-term high-quality debt securities, as well as the duration of our plans’ liabilities.

•The expected rates of return on plan assets are derived from reviews of asset allocation strategies, expected long-term performance of asset classes, risks and other factors adjusted for our specific investment strategy. These rates are impacted by changes in general market conditions, but because they are long-term in nature, short-term market changes do not significantly impact the rates. Changes to our target asset allocation also impact these rates.

•The expected rates of increase in compensation levels reflect estimates due to general price levels, seniority, age and other factors.

Depending on the assumptions used, the pension and postretirement expense could vary within a range of outcomes and have a material effect on reported earnings. In addition, the assumptions can materially affect benefit obligations and future cash funding. Actual results in any given year may differ from those estimated because of economic and other factors.

We evaluate the funded status of each retirement plan using current assumptions and determine the appropriate funding level considering applicable regulatory requirements, tax deductibility, reporting considerations, cash flow requirements and other factors. We discuss our funding assumptions with the Technology, Risk and Finance Committee of our Board of Directors.

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Other Long-Lived Assets

The initial recording of goodwill and intangible assets requires subjective judgments concerning estimates of the fair value of the acquired assets. We test the value of goodwill, indefinite-lived intangible assets and long-lived assets for impairment as of December 31 each year or whenever events or circumstances indicate such assets may be impaired. The test for goodwill impairment involves significant judgment in estimating projections of fair value generated through future performance of each of the reporting units. We did not record a material impairment for goodwill, indefinite-lived intangible assets or long-lived assets in 2024, 2023 or 2022.

Due to uncertain market conditions and potential changes in strategy and product portfolio, it is possible that forecasts used to support asset carrying values may change in the future, which could result in non-cash charges that would adversely affect our financial condition and results of operations. For a discussion pertaining to goodwill, indefinite-lived intangible assets and long-lived assets refer to Note 1 included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

ACCOUNTING DEVELOPMENTS

We have presented the information about accounting pronouncements not yet implemented in Note 1, "Basis of Presentation and Accounting Policies," to our consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report.

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