A. O. Smith NYSE: AOS reported first-quarter 2026 sales of $946 million, down 2% year-over-year, as modest growth in North America was more than offset by continued weakness in China. Earnings per share were $0.85, an 11% decline that Chief Financial Officer Chuck Lauber attributed to lower volumes and transaction-related expenses tied to the company’s January acquisition of Leonard Valve.
Chief Executive Officer Steve Shafer said the quarter also included weather-related disruptions at the company’s Ashland City, Tennessee facility, where damage to a portion of the roof led to production and shipping constraints. Despite those headwinds, management emphasized strong free cash flow performance driven by working capital management.
Segment performance: North America growth offset by China declines
North America sales increased 1% to $753 million, while Rest of World sales decreased 11% to $201 million. Lauber said North America results benefited from carryover pricing and Leonard Valve’s sales contribution, but those positives were “largely offset by lower residential water heater volumes and weather-related production and shipping constraints.”
North America segment earnings were $175 million, with a segment margin of 23.3%, down $10 million and 140 basis points from the prior-year period. Lauber said the decline was “primarily the result of lower residential water heater volumes,” while pricing benefits more than offset cost inflation in the quarter.
Rest of World segment earnings were $12 million and segment margin was 6.2%, down $8 million and 250 basis points year-over-year. Lauber said the decrease was “primarily due to lower sales volumes,” partially offset by continued cost management efforts in China.
China remains challenged amid low demand and strategic review
Shafer said China sales declined 17% in local currency in the first quarter, consistent with management’s expectations and broader market conditions. He cited the discontinuation of most government stimulus programs, low consumer confidence, and a difficult environment for premium products. “We expect this softness to persist,” Shafer said.
Shafer also said the company’s ongoing strategic assessment of its China business has created uncertainty that “has delayed certain investments, putting further pressure on our business.” He said A. O. Smith is “moving with urgency” and expects to provide greater clarity “in the coming months.”
During the Q&A, Shafer told analysts the company did not see “any meaningful market share loss” in China in the first quarter, based on third-party data, and said the strategic review has taken longer partly due to the challenging market environment. He added that the company’s brand and pricing power have been validated through discussions with potential partners.
North America: Weather disruption, share stabilization, and Leonard Valve contribution
In North America water heating, Shafer said sales decreased 2% year-over-year, impacted by production and shipping constraints tied to adverse weather and “softer than anticipated residential industry demand early in the year.” He noted that wholesale residential conditions remain pressured by softer new construction and retailer initiatives to expand service to professional customers. Still, Shafer said the company was “encouraged by the stabilization of our market share in the wholesale channel in the first quarter,” and said retail channel share performance and partnerships remained strong.
Shafer said North America boiler sales grew 2% year-over-year, with residential volume and carryover pricing benefits offsetting lower commercial volumes. North America water treatment sales increased 1%, as 10% growth in the priority dealer channel was largely offset by weakness in specialty plumbing wholesale. Shafer said consumer-facing channels were flat amid a cautious environment and a “trade-down to lower-priced products,” while the company expanded water treatment operating margin by almost 100 basis points.
Leonard Valve contributed $16 million to first-quarter sales, which Shafer said was led by strong performance in the valve business. He said the company exited the quarter with a “strong backlog,” and that Leonard remains on track for another year of double-digit growth. Lauber said transaction-related expenses for the deal totaled $0.03 per share in the quarter.
Cash flow, capital allocation, and updated guidance
A. O. Smith generated free cash flow of $119 million in the first three months of 2026, which Lauber said was a “significant increase over 2025” driven by working capital management and the timing of customer payments. The company ended March with $204 million in cash and a net debt position of $412 million. Lauber said the leverage ratio rose due to a term loan used to acquire Leonard Valve, and added the company still has “significant available capacity for future acquisitions.”
On capital returns, Lauber said the board approved a quarterly dividend of $0.36 per share. The company repurchased about 700,000 shares for $51 million in the first quarter and expects to repurchase $200 million of shares during full-year 2026.
Management updated its 2026 outlook, calling for adjusted EPS of $3.70 to $4.00. Lauber said the figure excludes a “relatively net cash neutral” North America water treatment restructuring and impairment charge of about $20 million expected in the second quarter.
Key cost assumptions in the updated outlook included:
- Steel costs: expected to be up approximately 15% year-over-year in 2026 versus 2025.
- Freight, non-steel materials, and tariffs: expected to increase total company cost of goods sold by about 3% in 2026.
- Capex: $70 million to $80 million.
- Free cash flow: $525 million to $575 million.
- Interest expense: $30 million to $40 million, reflecting additional debt taken on for Leonard Valve.
Shafer said the company announced price increases of about 4% to 7% for most North America water heater and boiler products in response to rising steel and freight costs, with benefits expected to begin in the third quarter. Lauber told analysts the company expects some cost pressure in the second quarter before pricing takes effect.
On end-market assumptions, Shafer reiterated a view that full-year 2026 residential water heater industry shipments will be “flat to down,” with steady replacement demand and softness in new construction. The company revised its commercial outlook after a recent Department of Energy statement indicating a one-year enforcement delay related to an October 6 commercial regulatory change, which Shafer said introduces uncertainty and should reduce pre-buy activity.
For China, Shafer said the company now expects full-year sales to be down low double digits in local currency. Lauber added that the company expects China in the second quarter to be down roughly 15% from the first quarter, with channel inventory balancing efforts contributing to near-term pressure and a more typical seasonal pickup expected in the fourth quarter.
In water treatment, Shafer said the business is “just over $250 million” in revenue and described additional steps to improve profitability through manufacturing footprint optimization and brand rationalization, with an emphasis on the A. O. Smith brand. He said the company expects a restructuring charge of about $20 million in the second quarter and projected annual savings of $6 million to $8 million beginning in 2027.
About A. O. Smith NYSE: AOS
A. O. Smith Corporation, based in Milwaukee, Wisconsin, is a leading manufacturer of water heating and water treatment products for residential and commercial applications. Since its founding in 1874, the company has built a reputation for producing reliable, energy-efficient water heaters, boilers and pressure vessels. Its product portfolio encompasses gas, electric, condensing and tankless water heaters, as well as specialty boilers designed to meet a variety of building and industrial needs.
The company operates through two primary segments: North America and Asia.
Further Reading
This instant news alert was generated by narrative science technology and financial data from MarketBeat in order to provide readers with the fastest reporting and unbiased coverage. Please send any questions or comments about this story to contact@marketbeat.com.
Before you consider A. O. Smith, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and A. O. Smith wasn't on the list.
While A. O. Smith currently has a Hold rating among analysts, top-rated analysts believe these five stocks are better buys.
View The Five Stocks Here
Just getting into the stock market? These 10 simple stocks can help beginning investors build long-term wealth without knowing options, technicals, or other advanced strategies.
Get This Free Report
