A. O. Smith Q3 Earnings Call Highlights

Key Points

• A. O. Smith plans to sell an 81% stake in its China business to CPE for approximately $400 million, with total transaction value—including future royalties—expected to exceed $500 million. The deal is targeted to close in the first half of 2027, and proceeds may fund roughly $350 million in share repurchases.
• North America sales rose 3% in the third quarter, driven by 13% boiler growth and 5% water-treatment growth, while water-heater sales declined 1%. Higher input costs pressured margins, prompting an additional water-heater price increase of up to 9.5% effective in December.
• Excluding China, A. O. Smith expects approximately 4% sales growth and adjusted 2026 EPS of $3.42 to $3.52. The company raised its boiler-growth outlook to 10%–12% but lowered its water-treatment forecast to 3%–4%.

A. O. Smith NYSE: AOS reported third-quarter sales of $941 million, essentially unchanged from a year earlier, and earnings per share of $0.93, while outlining plans to sell a majority interest in its China business and sharpen its focus on North American water-related markets.

Chairman, President and Chief Executive Officer Steve Shafer said the company reached definitive agreements on Oct. 27 to sell an 81% interest in its China business to CPE, an alternative asset manager with experience in the Chinese market. The business is valued at approximately $400 million, while A. O. Smith will retain a 19% minority stake and license its brand to the business under a multi-decade agreement.

Including the estimated value of future royalties, Shafer said the transaction’s total value is expected to exceed $500 million. The company expects to close the deal during the first half of 2027, subject to regulatory approvals and customary closing conditions.

China transaction shifts portfolio focus

Shafer said the strategic review concluded that the China operation would be better positioned under a local owner prepared to invest in the business amid a more competitive and changing market. He said CPE brings market knowledge and capabilities that could support the business’s next phase.

The company expects to prioritize after-tax transaction proceeds, along with roughly $80 million of cash it expects to repatriate from China, for share repurchases. Chief Financial Officer Carrie Anderson estimated that after-tax proceeds and repatriated cash could provide about $350 million for that purpose following the transaction’s close.

Beginning in the fourth quarter, A. O. Smith expects to classify the China business as held for sale and report it as discontinued operations, with prior periods recast accordingly.

Excluding China, Shafer said A. O. Smith’s 2025 revenue would have been approximately $3.2 billion and would have grown about 3%, compared with flat reported growth. He said EBIT margin would have been approximately 200 basis points higher without China, while North America would account for about 94% of company revenue, compared with 77% previously.

North America grows as boilers and water treatment offset water-heater softness

North America segment sales rose 3% to $762 million in the third quarter. Organic growth accounted for about 1%, while Leonard Valve, acquired this year, contributed 2 percentage points and $15 million in quarterly sales.

Boiler sales increased 13%, supported by residential share gains, demand for high-efficiency commercial condensing boilers and pricing actions. Water-treatment sales rose 5%, led by professional dealer and specialty wholesale channels. The company has added about 30 water-treatment dealers since the beginning of the year, Anderson said.

Water-heater sales declined 1%, as lower residential volumes more than offset pricing benefits. Shafer said the company maintained market share amid continued softness in residential demand, particularly in the wholesale channel, while commercial water-heater volumes remained resilient.

North America segment earnings were flat at $180 million, and segment margin declined 60 basis points to 23.6%. Lower volumes reduced earnings by $3 million, while Leonard Valve added $5 million. Higher input costs reduced earnings by $18 million, partially offset by $16 million from IEEPA tariff refunds and other cost savings.

The company expects both steel and freight costs to rise approximately 15% for the full year compared with 2025. In response, it has announced an additional price increase of up to 9.5% on most water-heater products, effective in December. Shafer said competitors have announced similar pricing actions and that the industry is facing comparable steel and freight pressures.

Water treatment transition and Leonard Valve outlook

A. O. Smith ceased manufacturing at its Groveport, Ohio, water-treatment facility in October and transferred production to other sites. Anderson said the transition is expected to result in near-term shipment delays as production lines ramp up, leaving the company with an elevated year-end backlog that it expects to convert into sales during 2027.

The footprint and portfolio initiatives are expected to generate annual savings of approximately $6 million to $8 million, including about $1 million in the second half of 2026.

Leonard Valve is now expected to generate about $65 million in 2026 sales, down from the prior outlook of approximately $70 million. The company said its mixing and digital valve business is performing in line with expectations, but boiler-controls sales have been affected by delays in energy-efficiency upgrade projects in the New York region.

Shafer said the project delays do not represent a structural shift in the business. He said building owners are still expected to pursue efficiency improvements over time, supporting the longer-term opportunity for Leonard Valve’s controls business.

Updated outlook and capital allocation

For full-year 2026, excluding China, A. O. Smith expects sales growth of approximately 4% and adjusted earnings per share of $3.42 to $3.52. The company maintained its outlook for North America segment margin of approximately 24% for the year.

• Residential water-heater industry demand is expected to decline by low single digits, while commercial water-heater demand is expected to be flat with 2025.
• Boiler sales are now expected to grow 10% to 12%, up from a prior forecast of 6% to 8%.
• Water-treatment sales are expected to rise approximately 3% to 4%, compared with a previous 5% to 6% outlook.
• India sales, including Pureit, are expected to grow at a double-digit rate in local currency.

For the first nine months of 2026, operating cash flow was $429 million, compared with $434 million a year earlier. Capital expenditures declined to $33 million from $53 million. The company spent $470 million on acquisitions during the year, primarily for Leonard Valve, and returned $410 million to shareholders through $149 million in dividends and $261 million in share repurchases.

A. O. Smith increased its full-year share-repurchase target earlier this year to $300 million, leaving about $39 million planned for the fourth quarter. Anderson said the company’s balance sheet and cash flow should allow it to pursue acquisitions, invest in growth and return cash to shareholders as it builds its water-treatment and water-management platforms.

About A. O. Smith (NYSE:AOS)

A. O. Smith Corporation is a manufacturer of water heating and water treatment products for residential, commercial and industrial customers. Its portfolio includes gas and electric storage water heaters, tankless water heaters, boilers, heat pump water heaters, water filtration systems, water softeners and reverse-osmosis products.

The company markets products under the A. O. Smith brand and other regional brands, serving applications ranging from homes and apartments to hotels, hospitals, schools, manufacturing facilities and other commercial properties.

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.