A. O. Smith Corporation (AOS) Earnings & Analysis

Latest quarter

A. O. Smith reported third-quarter revenue of $940.5 million, below the consensus of $960.0 million. Adjusted earnings per share were $0.93, above the consensus of $0.90. Revenue was down from $942.5 million a year earlier, while diluted earnings per share fell from $0.94 to $0.93.

The company’s filing attributed the sales decline primarily to lower China sales and residential water heater volumes, partly offset by Leonard Valve’s contribution, higher boiler volumes and pricing. North America sales rose to $761.6 million from $742.8 million, while Rest of World sales fell to $192.8 million from $207.9 million. The filing said China’s local-currency sales declined 17 percent amid weak consumer demand and disruption related to the strategic assessment.

A. O. Smith reported gross margin of 38.8%, compared with 38.7% a year earlier, and operating margin of 18.6% in both periods. Quarterly free cash flow fell to $162.9 million from $240.6 million.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO Stephen Shafer said A. O. Smith agreed to sell an 81% interest in its China business to CPE at a $400 million business valuation. The company will retain 19% and license its brand in China under a multidecade agreement, he said. Shafer expects the transaction to close in the first half of 2027, subject to regulatory approvals and customary conditions, and said the company intends to prioritize after-tax proceeds and repatriated cash for share repurchases.

CFO Carrie Anderson said North America’s quarterly organic growth came primarily from boilers and water treatment, partly offset by lower water heater sales. She attributed boiler demand to residential share gains, commercial demand and pricing. For Leonard Valve, Anderson said delays to energy-efficiency projects in the New York region affected boiler-control orders and would moderate its seasonal fourth-quarter increase.

On costs, Anderson said higher-than-expected inputs reduced North America earnings by $18 million in the quarter, partly offset by tariff refunds and other savings. In the Q&A, she said fourth-quarter margin would face pressure because of the lag before additional price increases take effect. Shafer said the company announced an increase of up to 9.5% on most water heater products, effective in December, and was also pursuing procurement and supply-chain savings.

Shafer said the timing of price changes, the holiday period and customer responses made the year-end water heater outlook variable. Discussing competition, he said serving the market requires a full product portfolio, channel inventory, technical service and brand support.

Anderson said the transfer of water treatment production from Groveport would cause near-term shipment delays. She expects an elevated year-end backlog to convert to sales as output increases into 2027.

Guidance

A. O. Smith now expects 2026 sales excluding China to grow approximately 4% and adjusted EPS of $3.42 to $3.52. Its previous adjusted EPS outlook was $3.70 to $3.85; Anderson said there was no direct bridge because China assumptions had changed.

Anderson raised expected boiler sales growth to 10% to 12% from 6% to 8%. She lowered North America water treatment growth to approximately 3% to 4% from 5% to 6%, citing consumer-channel weakness and shipment timing. She also reduced expected Leonard Valve sales to approximately $55 million from approximately $70 million, citing regional project delays.