A. O. Smith NYSE: AOS executives told investors the company delivered record earnings per share in 2025, supported by margin improvement in both operating segments, strong free cash flow generation, and capital returns to shareholders. Management also outlined its 2026 outlook, discussed a newly completed acquisition, and provided commentary on market conditions in North America, China, and India during the company’s fourth quarter 2025 earnings call.
Full-year 2025 results: record EPS and margin expansion
CEO Steve Shafer said 2025 sales increased slightly, as pricing benefits and higher commercial water heater and boiler volumes offset lower China sales. Adjusted EPS rose 6% to a record $3.85, which management attributed to profitability improvements in both the North America and Rest of World segments.
CFO Chuck Lauber said total 2025 sales were $3.8 billion. North America segment sales were $3.0 billion, up slightly, while Rest of World sales were $880 million, down 4% year-over-year.
- North America segment earnings: $728 million, up 2% versus 2024 adjusted segment earnings; margin of 24.4%, up 20 basis points.
- Rest of World segment earnings: $76 million, flat versus 2024 adjusted segment earnings; margin of 8.7%, up 40 basis points.
Shafer highlighted that North America margin improvement was led by profitability gains in water treatment and favorable mix from higher commercial sales. In Rest of World, he pointed to benefits from 2024 restructuring actions and cost controls in China, which helped expand margins despite lower sales.
Fourth quarter: flat sales, higher EPS
For the fourth quarter, Lauber said sales were $913 million, flat compared to the same period in 2024. Earnings were $0.90 per share, up 6% compared to adjusted earnings of $0.85 per share in the prior-year quarter.
North America fourth-quarter sales increased 3% to $714 million primarily due to pricing benefits, while segment earnings rose 7% to $165 million. Segment margin improved 70 basis points to 23.1%, with pricing and actions to improve water treatment profitability partially offset by higher input costs.
Rest of World fourth-quarter sales declined 13% to $206 million, driven primarily by lower China sales. Rest of World segment earnings were $16 million with a margin of 7.8%, down from adjusted segment earnings of $19 million and an 8.1% margin in the prior-year quarter, with restructuring benefits and cost savings only partially offsetting the China volume decline.
North America demand: channel dynamics, boilers, and water treatment profitability
Shafer said North America water heater sales rose 1% in 2025 as tariff- and cost-related pricing and higher commercial volumes offset lower wholesale residential volumes. Management estimated that full-year 2025 U.S. residential industry unit volumes were roughly flat year-over-year, while commercial water heater industry volumes increased approximately 5%.
However, Shafer noted challenges in the wholesale residential channel during the fourth quarter, citing pressure from a slowdown in new construction and retailer initiatives to serve professional customers, which has increased competitive intensity. In response, he said the company is working with select customers and focusing on geographies and product offerings under the most pressure, with the goal of improving outcomes in 2026.
North America boiler sales grew 8% in 2025, driven by higher commercial and residential volumes and pricing benefits. Shafer said demand remains strong for the company’s high-efficiency boiler products, and later added that the Lochinvar brand continues to perform well and is taking share.
In water treatment, North America sales declined 2% in 2025 as the company shifted away from the “on-the-shelf” retail channel. Shafer said sales in priority channels—dealer, direct-to-consumer, and e-commerce—grew 10% in 2025. He also said operating margin expanded by 400 basis points to “almost 13%,” and management expects another 200 basis points of margin improvement in 2026, which would place the business in the mid-teens.
International markets: China headwinds, India growth, and ongoing China assessment
Shafer said China third-party sales fell 12% in local currency in 2025 due to economic weakness and soft consumer demand, particularly in the second half as government subsidy programs were discontinued. Despite the sales decline, he said restructuring actions taken in late 2024 and continued expense management drove a 130-basis-point profitability improvement.
For 2026, management forecast continued pressure in China from low consumer confidence, discontinued subsidies, and competitive intensity, with sales projected to decline in the mid-single digits. Shafer said the first half of 2026 is expected to be “particularly difficult” given comparisons against 2025 stimulus programs, and he anticipates a return to growth in the second half of the year as the company moves past those comparisons and demand normalizes around remodel and refurbishment activity. Executives also reiterated that the company’s China strategic assessment is ongoing, with Shafer citing “high-quality discussions” with potential partners, but noting there was no update on narrowed options or outcomes.
In India, Lauber said Rest of World results included 13% sales growth in the company’s “legacy India” business during 2025, and Pureit contributed $54 million of sales in the year. Shafer projected approximately 10% top-line growth in India in 2026 inclusive of Pureit, emphasizing innovation and leveraging brand synergies as key drivers.
Cash flow, shareholder returns, Leonard Valve acquisition, and 2026 outlook
Lauber said 2025 free cash flow was $546 million, up 15% year-over-year, driven by lower capital investments, higher earnings, and a benefit from a one-time tax adjustment. Free cash flow conversion was 100%. The company ended December with $193 million in cash and a net cash position of $38 million, with a leverage ratio of 7.7% (total debt to total capital).
Management said it returned $597 million to shareholders in 2025 through dividends and share repurchases. The board approved the next quarterly dividend of $0.36 per share and noted the company has increased its dividend for more than 30 consecutive years. The company repurchased about 5.9 million shares in 2025 for $401 million, and the board approved an additional 5 million shares for repurchase authorization; management expects roughly $200 million of repurchases in 2026.
Shafer also discussed the acquisition of Leonard Valve, which was announced in the fourth quarter and completed earlier in the month. He said the deal expands A. O. Smith’s reach into the water management market, adds the Leonard and Heat-Timer brands, and enhances digital capabilities. Management said connected products represent about 30% of Leonard Valve sales and are growing, and that the business has predictable demand with roughly 80% of volume tied to repair and replacement. The company expects Leonard Valve to contribute approximately $70 million in sales in 2026, and executives said Leonard’s recent growth has been driven largely by the “digital transition” of mixing valves.
Looking ahead, A. O. Smith guided to 2026 EPS of $3.85 to $4.15, with the midpoint implying 4% growth over 2025. Management said the outlook assumes steel prices will rise about 10% in 2026 versus 2025, and that other material and freight costs, including tariff carryover impacts, will also be higher. The company’s guidance assumes no change to current tariff levels. The company also projected 2026 capital spending of $70 million to $80 million and free cash flow of $525 million to $575 million, while interest expense is expected to rise to $30 million to $40 million due to $470 million of additional debt used to acquire Leonard Valve.
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
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