Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, Europe and India. Both segments manufacture and market comprehensive lines of residential and commercial gas, gas tankless and electric water heaters. Both segments primarily manufacture and market in their respective region of the world. Our North America segment also manufactures and globally markets specialty commercial water heating equipment, condensing and non-condensing boilers and water systems tanks. Primarily for Asia, our Rest of World segment also manufactures and markets water treatment products. We also market in-home air purification products in China.

In 2015, our North America segment sales were $1,703.0 million and our Rest of World segment sales were $866.1 million. Sales of our products in China grew significantly in 2015, increasing 13.7 percent over 2014. Excluding the impact from the strengthening U.S. dollar, sales in China increased 16.1 percent in 2015. We expect sales in 2016 in China to grow at a rate of approximately 15 percent in local currency, as we believe overall water heater market growth, geographic expansion, market share gains, growth in water treatment products and air purification products and improved product mix will contribute to our growth. Price increases for residential and commercial water heaters and higher volumes of commercial water heaters and condensing commercial boilers contributed to 2015 sales increases in our North America segment. Partially offsetting these factors was a decline in residential water heater volumes in the U.S. The 13 percent decline in the value of the Canadian dollar against the U.S. dollar during 2015 also negatively impacted sales. We expect North America residential and commercial water heater industry unit to show modest growth in 2016. Lochinvar-branded products contributed $296.0 million to our net sales in 2015, and we expect ten percent sales growth of Lochinvar-branded products in 2016, driven by the U.S. industry transition to higher efficiency products and our introduction of new products; particularly condensing boilers. Approximately 40 percent of Lochinvar-branded product sales consist of residential and commercial water heaters while the remaining 60 percent of Lochinvar-branded product sales consist primarily of boilers and related parts.

Our stated acquisition strategy includes a number of our water-related strategic initiatives. We will look to continue to grow our core residential and commercial water heating, boiler and water treatment businesses throughout the world. We will also continue to look for opportunities to add to our existing operations in the high growth regions of China and India demonstrated by our introduction of air purification products in China in 2015.

Consistent with our stated strategy to expand our core product offering, we acquired Lochinvar in 2011. Lochinvar, one of the leading manufacturers of residential and commercial boilers in the U.S., fit squarely within our stated strategic growth initiative to expand our core water heating business. In 2013, approximately 40 percent of boilers sold in the U.S. were condensing boilers, compared with five percent in 2003. Our Lochinvar brand is a leading brand of higher efficiency, condensing boilers. We expect the transition in the U.S. to higher efficiency boilers will continue into the foreseeable future.

RESULTS OF OPERATIONS

Our sales in 2015 were a record $2,536.5 million surpassing 2014 sales of $2,356.0 million by 7.7 percent. Excluding the impact from the strengthening U.S. dollar against the Canadian and Chinese currencies, our sales grew over nine percent in 2015. The increase in sales was due to higher prices in North America, higher sales of Lochinvar-branded products and commercial water heaters in the U.S., as well as continued demand for our water heating and water treatment products in China. Sales in China grew 13.7 percent in 2015. Excluding the impact from the stronger U.S. dollar, China sales increased 16.1 percent in 2015. Our sales in 2014 were higher than 2013 sales of $2,153.8 million by 9.4 percent. The increase in 2014 in sales was attributable to higher volumes of water heaters and boilers in the U.S. and higher sales of water heaters and water treatment products in China. Sales of water heaters and water treatment products in China grew 18.4 percent to $694.0 million in 2014 compared to 2013.

Our gross profit margin in 2015 increased to 39.8 percent from 36.5 percent in 2014. The higher margin in 2015 was due to price increases in the U.S. and Canada, higher U.S. sales of commercial boilers and commercial water heaters which have higher margins, lower steel costs and a reduction in pension-related costs. Our gross profit margin in 2014 increased slightly from 35.9 percent in 2013, primarily due to higher volumes of water heaters and boilers in the U.S., partially offset by higher material costs in the U.S., as well as higher volumes of water heaters and water treatment products in the China.

Selling, general and administrative (SG&A) expenses were $38.6 million higher in 2015 than in 2014. The increase in SG&A expenses in 2015 to $610.7 million was primarily due to higher selling and engineering costs in support of increased volumes in China as well as higher costs associated with the 2015 launch of air purification products in China which more than offset

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lower pension costs in the U.S. SG&A expenses were $47.6 million higher in 2014 than in 2013 primarily due to higher selling and advertising costs in support of increased volumes in North America and China and approximately $9 million of incremental enterprise resource planning system (ERP) implementation costs.

On March 28, 2013, our Board of Directors approved a plan to transfer residential water heater production from our Fergus, Ontario plant to our other North American facilities. The majority of our production was consolidated in the second quarter of 2013. As a result of the capacity rationalization, we incurred pre-tax restructuring and impairment expenses of $22.0 million in 2013 related to employee severance costs, impairments of assets and equipment relocation costs. In addition, included in operating earnings in 2013 is a pre-tax gain of $11.0 million resulting from a settlement with a former supplier related to previous overcharges and warranty costs.

Pension expense in 2015 was $0.1 million compared to $28.6 million in 2014 and $27.9 million in 2013. The significant decrease in pension expense in 2015 compared to prior years was due to the sunset of our pension plan for the majority of our employees on December 31, 2014. In 2015, we began making additional Company contributions to a defined contribution plan in lieu of benefits earned in our pension plan.

Interest expense was $7.4 million in 2015 compared to $5.7 million in 2014. Interest expense in 2013 was also $5.7 million. The higher interest expense in 2015 was primarily related to interest rates on term notes in the amount of $75 million issued in January 2015 that were higher than the interest rate on the revolving credit facility that it replaced as well as higher overall debt levels related to share repurchases.

Other income was $10.8 million in 2015 compared to $5.2 million in 2014 and $3.8 million in 2013. The increases in other income in 2015 and 2014 were primarily due to higher interest income compared to the preceding year.

Our effective tax rate was 29.7 percent in 2015, compared with 27.5 percent in 2014 and 28.2 percent in 2013. The higher effective tax rate in 2015 was primarily due to a change in geographic earnings mix as compared to the prior year.

North America

Our North America segment sales were $1,703.0 million in 2015 or $81.3 million higher than sales of $1,621.7 million in 2014. The sales increase in 2015 resulted from higher prices in the U.S. and Canada and higher volumes of commercial water heaters and condensing commercial boilers in the U.S., partially offset by lower residential volumes in the U.S. and an unfavorable currency impact in Canada. Sales in 2014 were $101.7 million higher than sales of $1,520.0 million in 2013. The sales increase in 2014 was primarily due to higher volumes of water heaters and boilers in the U.S., which were partially offset by lower water heaters sales in Canada, primarily due to a decline in the value of the Canadian dollar of approximately seven percent versus the U.S. dollar.

North America operating earnings were $339.9 million in 2015 compared to operating earnings of $238.7 million and $211.9 million in 2014 and 2013, respectively. Operating margins were 20.0 percent, 14.7 percent and 13.9 percent in 2015, 2014 and 2013, respectively. The significantly higher operating earnings and operating margin in 2015 were primarily due to higher prices in the U.S. and Canada, higher sales of Lochinvar-branded products and commercial water heaters in the U.S., lower steel costs and lower pension costs which more than offset lower residential water heater volumes in the U.S. Higher operating earnings in 2014 compared to 2013 were primarily due to higher volumes in the U.S. which were partially offset by higher material costs and approximately $9 million of incremental ERP implementation costs.

Rest of World

Sales in our Rest of World segment in 2015 were $866.1 million or $97.8 million higher than sales of $768.3 million in 2014. Sales in China increased approximately $95 million due to higher demand for water heaters, approximately $35 million of incremental sales of water treatment products and approximately $9 million in sales of our newly launched in-home air purification products. Sales in China grew 13.7 percent in 2015. Excluding the impact from the stronger U.S. dollar, China sales increased 16.1 percent in 2015. Sales for our Rest of World segment in 2014 were $100.3 million higher than sales of $668.0 million in 2013 due to an 18.4 percent increase in sales in China, driven by increased demand for water heaters and water treatment products and a higher priced product mix that was partially offset by lower sales in India resulting from weakness in the housing market and the termination of a co-branding relationship with our largest distributor.

Rest of World operating earnings were $113.0 million in 2015 compared to operating earnings of $106.7 million and $88.0 million in 2014 and 2013, respectively. Segment operating margins were 13.0 percent in 2015 as compared to 13.9 percent and 13.2 percent in 2014 and 2013, respectively. Higher operating earnings in 2015 were primarily due to higher sales in China and lower steel costs that were partially offset by lower sales of highly profitable commercial water heaters in China, increased SG&A expenses and approximately $1.5 million of higher losses in India as compared to 2014. China earnings were reduced by approximately $2.5 million due to currency translation. Higher selling and engineering costs in China as well as higher

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SG&A costs associated with the 2015 launch of air purification products were the primary drivers for the decreased operating margin in 2015 as compared to 2014. Higher operating earnings and margins in 2014 as compared to 2013 were due to higher sales of water heaters and water treatment products in China as well as a higher priced product mix as a result of product introductions with higher value features which was partially offset by larger losses in India. Losses in India were $7.5 million in 2014, including approximately $1 million of product development and advertising expenses in advance of our 2015 launch of water treatment products.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital was $802.1 million at December 31, 2015 compared with $713.8 million and $614.7 million at December 31, 2014 and December 31, 2013, respectively. Cash generated in China and sales-related increases in accounts receivable and inventory levels explain the majority of the increase in both 2015 and 2014. As of December 31, 2015, essentially all of the $645.2 million of cash, cash equivalents and marketable securities were held by our foreign subsidiaries. We would incur a cost to repatriate these funds to the U.S. and have an accrual of $47.9 million for the repatriation of a portion of these funds.

Cash provided by operating activities during 2015 was $344.4 million compared with $263.9 million during 2014 and $279.6 million during 2013. The improvement in cash flows in 2015 was primarily due to higher earnings from operations and lower outlays for working capital driven primarily by increases in accounts payable balances in China. Higher earnings in 2014 were more than offset by higher outlays for working capital. We expect cash provided by operating activities in 2016 to be approximately $320 million.

Our capital expenditures were $72.7 million in 2015, $86.1 million in 2014 and $97.7 million in 2013. Included in 2015 capital expenditures were approximately $16 million related to our ERP implementation and approximately $19 million related to capacity expansion in China and the U.S. to support growth. Included in 2014 capital expenditures was approximately $31 million related to our ERP implementation. Included in 2013 capital expenditures was approximately $45 million in China and India for the construction of a second water heater manufacturing plant in Nanjing, China and to continue the expansion of our manufacturing plant near Bangalore, India. Also included in 2013 capital expenditures was approximately $19 million related to the ERP implementation. We project 2016 capital expenditures will be between $120 and $130 million and depreciation and amortization expense in 2016 will be approximately $70 million. We expect capital spending in 2016 to include approximately $8 million related to our ERP implementation and approximately $40 million related to the initial phase of a new water treatment manufacturing facility in China as we will outgrow capacity in a leased facility in the next few years.

In December 2012, we completed a $400 million multi-currency five year revolving credit facility with a group of eight banks. The facility has an accordion provision which allows it to be increased up to $500 million if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of December 31, 2015. The facility backs up commercial paper and credit line borrowings, and it expires on December 12, 2017. As a result of the long-term nature of this facility, the commercial paper and credit line borrowings, as well as drawings under the facility are classified as long-term debt.

At December 31, 2015, we had available borrowing capacity of $253.0 million under this facility. We believe that the combination of cash, available borrowing capacity and operating cash flow will provide sufficient funds to finance our existing operations for the foreseeable future.

In January 2015, we issued $75 million of fixed rate term notes to an insurance company. Principal payments commence in 2020 and the notes mature in 2030. The notes have an interest rate of 3.52 percent. We used proceeds of the notes to pay down borrowings under our revolving credit facility.

Our total debt increased to $249.0 million at December 31, 2015 compared with $223.8 million at December 31, 2014, as our cash flows generated in the U.S were more than offset by our share repurchase activity. As a result, our leverage, as measured by the ratio of total debt to total capitalization, was 14.7 percent at the end of 2015 compared with 13.9 percent at the end of 2014.

Our U.S. pension plan continues to meet all funding requirements under ERISA regulations. We were not required to make a contribution to our pension plan in 2015 and we did not make any voluntary contributions. We forecast that we will not be required to make a contribution to the plan in 2016 and we do not plan to make any voluntary contributions in 2016. For further information on our pension plans, see Note 11 of the Notes to Consolidated Financial Statements.

During 2015, our Board of Directors authorized the purchase of an additional 2,000,000 shares of our Common Stock. In 2015, we repurchased 1,908,237 shares at an average price of $67.14 per share and a total cost of $128.1 million. At December 31,

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2015, a total of 2,589,756 shares remained on the existing repurchase authorization. Depending on factors such as stock price, working capital requirements and alternative investment opportunities, we expect to spend approximately $150 million on stock repurchase activity in 2016.

We have paid dividends for 76 consecutive years with payments increasing each of the last 24 years. We paid total dividends of $0.76 per share in 2015 compared with $0.60 per share in 2014. In January 2016, we increased our dividend by 26 percent and anticipate paying total dividends of $0.96 per share in 2016.

Aggregate Contractual Obligations

A summary of our contractual obligations as of December 31, 2015, is as follows:

(dollars in millions)		Payments due by period
Contractual Obligations		Total				Less Than 1 year				1 - 2 Years				3 - 5 Years				More than 5 years
Long-term debt		$	249.0			$	12.9			$	161.1			$	6.8			$	68.2
Fixed rate interest			25.6				3.8				6.0				5.0				10.8
Operating leases			39.5				19.7				8.1				4.5				7.2
Purchase obligations			98.0				97.2				0.8				—				—
Pension and post-retirement obligations			72.1				2.2				8.7				8.1				53.1
Total		$	484.2			$	135.8			$	184.7			$	24.4			$	139.3

As of December 31, 2015, our liability for uncertain income tax positions was $2.6 million. Due to the high degree of uncertainty regarding timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.

We utilize blanket purchase orders to communicate expected annual requirements to many of our suppliers. Requirements under blanket purchase orders generally do not become committed until several weeks prior to our scheduled unit production. The purchase obligation amount presented above represents the value of commitments that we consider firm.

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) amended Accounting Standard Codification (ASC) 740, Income Taxes (issued under Accounting Standards No. (ASN) 2015-17). This amendment requires that deferred tax assets and liabilities be classified as noncurrent in the statement of financial position. The amendment is effective for periods beginning January 1, 2016 and allows for either prospective adoption or retrospective adoption. We expect the adoption of amended ASC 740 to impact the classification of deferred taxes on our consolidated balance sheet.

In April 2015, the FASB amended ASC 835-30, Interest - Imputation of Interest (issued under ASN 2015-03). This amendment to ASC 835-30 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by this amendment. The amendment is effective for periods beginning January 1, 2016 and requires using a retrospective approach. We do not expect the adoption of amended ASC 835-30 to have a material impact on our consolidated balance sheet.

In May 2014, the FASB issued ASC 606-10, Revenue from Contracts with Customers (issued under ASN 2014-09). ASC 606-10 will replace all existing revenue recognition guidance when effective. In July 2015, the FASB approved a one year deferral of the effective date, with application permitted as of the original effective date, or periods beginning January 1, 2017. Either full retrospective adoption or modified retrospective adoption is allowed under ASC 606-10. We are in the process of determining whether the adoption of ASC 606-10 will have an impact on our consolidated financial condition, results of operations or cash flows.

Critical Accounting Policies

Our accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. Also as disclosed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

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The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the evaluation of the impairment of goodwill and indefinite-lived intangible assets, as well as significant estimates used in the determination of liabilities related to warranty activity, product liability and pensions. Various assumptions and other factors underlie the determination of these significant estimates. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience and trends, and in some cases, actuarial techniques. We monitor these significant factors and adjustments are made as facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

Goodwill and Indefinite-lived Intangible Assets

In conformity with U.S. GAAP, goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We perform impairment reviews for our reporting units using a fair-value method based on management’s judgments and assumptions. The fair value represents the estimated amount at which a reporting unit could be bought or sold in a current transaction between willing parties on an arm’s-length basis. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. We are subject to financial statement risk to the extent that goodwill and indefinite-lived intangible assets become impaired. Any impairment review is, by its nature, highly judgmental as estimates of future sales, earnings and cash flows are utilized to determine fair values. However, we believe that we conduct annual thorough and competent valuations of goodwill and indefinite-lived intangible assets and that there has been no impairment in goodwill or indefinite-lived assets in 2015.

Product warranty

Our products carry warranties that generally range from one to ten years and are based on terms that are generally accepted in the market. We provide for the estimated cost of product warranty at the time of sale. The product warranty provision is estimated based upon warranty loss experience using actual historical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed on a periodic basis. At times, warranty issues may arise which are beyond the scope of our historical experience. We provide for any such warranty issues as they become known and estimable. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costs could differ significantly from those estimates. The allocation of the warranty liability between current and long-term is based on the expected warranty liability to be paid in the next year as determined by historical product failure rates.

Product liability

Due to the nature of our products, we are subject to product liability claims in the normal course of business. We maintain insurance to reduce our risk. Most insurance coverage includes self-insured retentions that vary by year. In 2015, we maintained a self-insured retention of $7.5 million per occurrence with an aggregate insurance limit of $125.0 million per occurrence.

We establish product liability reserves for our self-insured retention portion of any known outstanding matters based on the likelihood of loss and our ability to reasonably estimate such loss. There is inherent uncertainty as to the eventual resolution of unsettled matters due to the unpredictable nature of litigation. We make estimates based on available information and our best judgment after consultation with appropriate advisors and experts. We periodically revise estimates based upon changes to facts or circumstances. We also use an actuary to calculate reserves required for estimated incurred but not reported claims as well as to estimate the effect of adverse development of claims over time. At December 31, 2015, our reserve for product liability was $38.7 million.

Pensions

We have significant pension benefit costs that are developed from actuarial valuations. The valuations reflect key assumptions regarding, among other things, discount rates, expected return on plan assets, retirement ages, and years of service. Consideration is given to current market conditions, including changes in interest rates in making these assumptions. Our assumption for the expected return on plan assets was 7.75 percent in 2015 and 2014. The discount rate used to determine net periodic pension costs decreased to 4.05 percent in 2015 from 4.85 percent in 2014. For 2016, our expected return on plan assets is 7.50 percent and our discount rate is 4.40 percent.

In developing our expected return on plan assets, we evaluate our pension plan’s current and target asset allocation, the expected long-term rates of return of equity and bond indices and the actual historical returns of our pension plan. Our plan’s target allocation to equity managers is approximately 50 percent, with the remainder allocated primarily to bond managers and a small allocation to private equity managers and real estate managers. Our actual asset allocation as of December 31, 2015,

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was 47 percent to equity managers, 39 percent to bond managers, nine percent to real estate managers and five percent to private equity managers. We regularly review our actual asset allocation and periodically rebalance our investments to our targeted allocation when considered appropriate. Our pension plan’s historical ten-year and 25-year compounded annualized returns are 6.1 percent and 9.5 percent, respectively. We believe that with our target allocation and the expected long-term returns of equity and bond indices as well as our actual historical returns, our 7.50 percent expected return on plan assets for 2016 is reasonable.

The discount rate assumptions used to determine future pension obligations at December 31, 2015 and 2014 were based on the AonHewitt AA Only Above Median yield curve, which was designed by AonHewitt to provide a means for plan sponsors to value the liabilities of their postretirement benefit plans. The AA Only Above Median yield curve represents a series of annual discount rates from bonds with AA minimum average rating as rated by Moody’s Investor Service, Standard &Poor’s and Fitch Ratings. We will continue to evaluate our actuarial assumptions at least annually, and we will adjust the assumptions as necessary.

As of December 31, 2015, we changed the method we used to estimate the service and interest components of net periodic pension benefit cost for our pension plan and post-retirement benefit plan. The change will result in an approximate $7 million decrease in the service and interest components in 2016.

As a result, we estimate that we will recognize pension income of approximately $7 million in 2016 compared to $0.1 million of pension expense in 2015. We estimate that costs associated with our replacement retirement plan in 2016 will be approximately $6 million, consistent with 2015. We made changes to our pension plan including closing the plan to new entrants effective January 1, 2010, and the sunset of our plan for the majority of our employees on December 31, 2014 which significantly decreased pension expense beginning in 2015. Lowering the expected return on plan assets by 25 basis points would increase our net pension expense for 2015 by approximately $1.8 million. Lowering the discount rate by 25 basis points would decrease our 2015 net pension expense by approximately $0.3 million.

Outlook

Despite volatile conditions in China, we continue to expect strong, profitable sales growth in China in 2016 at the rate of approximately 15 percent in local currency terms. We continue to experience strong consumer demand for our water heating and water treatment products in China, and our new air purification products have been well received by Chinese consumers. In the U.S. we expect the transition from non-condensing, lower efficiency boilers to condensing, higher efficiency boilers to continue in 2016, which combined with new products, should allow sales growth of Lochinvar-branded products to continue at ten percent. We expect modest growth in commercial and residential water heater volumes in North America driven by modest assumptions for new construction and steady replacement demand. Other income is expected to be approximately $5 million lower in 2016 as compared to 2015 primarily due to expected lower interest rates than last year on cash deposits in China. We anticipate ERP implementation related costs will be approximately $9 million higher or approximately $25 million in 2016 due to the increase in the number of scheduled go-live events in 2016. We also expect our effective tax rate to be between 30.5 percent and 31 percent due to a change in geographic earnings mix.

Combining all these factors, we expect sales growth of between nine and ten percent in local currency terms and between seven and eight percent in U.S. dollars in 2016 and earnings to be in the range of $3.40 to $3.55 per share for 2016.

OTHER MATTERS

Environmental

Our operations are governed by a number of federal, foreign, state, local and environmental laws concerning the generation and management of hazardous materials, the discharge of pollutants into the environment and remediation of sites owned by the company or third parties. We have expended financial and managerial resources complying with such laws. Expenditures related to environmental matters were not material in 2015 and we do not expect them to be material in any single year. We have reserves associated with environmental obligations at various facilities and we believe these reserves are sufficient to cover reasonably anticipated remediation costs. Although we believe that our operations are substantially in compliance with such laws and maintain procedures designed to maintain compliance, there are no assurances that substantial additional costs for compliance will not be incurred in the future. However, since the same laws govern our competitors, we should not be placed at a competitive disadvantage.

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Market Risk

We are exposed to various types of market risks, primarily currency. We monitor our risks in such areas on a continuous basis and generally enter into forward contracts to minimize such exposures for periods of less than one year. We do not engage in speculation in our derivatives strategies. Further discussion regarding derivative instruments is contained in Note 1 of Notes to Consolidated Financial Statements.

We enter into foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. At December 31, 2015, we had net foreign currency contracts outstanding of $79.8 million. Assuming a hypothetical ten percent movement in the respective currencies, the potential foreign exchange gain or loss associated with the change in rates would amount to $8.0 million. Gains and losses from our forward contract activities will be offset by gains and losses in the underlying transactions being hedged.

Our earnings exposure related to movements in interest rates is primarily derived from outstanding floating-rate debt instruments that are determined by short-term money market rates. At December 31, 2015, we had $147.0 million in outstanding floating-rate debt with a weighted-average interest rate of 1.3 percent at year end. A hypothetical ten percent annual increase or decrease in the year-end average cost of our outstanding floating-rate debt would result in a change in annual pre-tax interest expense of approximately $0.2 million.

Forward-Looking Statements

This filing contains statements that the company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “guidance” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further slowdown in the growth rate of the Chinese economy; potential weakening in the high efficiency boiler segment in the U.S.; significant volatility in raw material prices; inability to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in the Company’s replacement markets; uncertain costs, savings and timeframes associated with the implementation of the new enterprises resources planning system; foreign currency fluctuations; the ability to execute our acquisition strategy; competitive pressures on the company’s businesses and adverse general economic conditions and capital market deterioration. Forward-looking statements included in this filing are made only as of the date of this release, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements.