A. O. Smith Reports $940.5 Million in Sales as Third-Quarter Profit Declines
Key Facts
A. O. Smith said on October 29 that net sales were $940.5 million in the third quarter of 2026, compared with $942.5 million in the same period last year. Net earnings fell to $126.3 million from $132.0 million, while diluted earnings per share declined to $0.93 from $0.94. The results came in a quarter marked by divergent trends: sales grew in North America and contracted in the Rest of the World, amid continued weak demand in China. The company’s statement did not provide an analyst consensus estimate for sales or earnings. Two days earlier, the company had announced an agreement to sell a majority stake in its Chinese business, while excluding China from its revised full-year guidance.
North American sales rose 3% to $761.6 million, driven by higher boiler sales volumes and pricing benefits, as well as a $15 million contribution from Leonard Valve. Excluding the acquired company’s contribution, organic sales rose 1% year over year. Segment earnings, however, were $179.9 million, compared with $179.7 million a year earlier, while the profit margin fell to 23.6% from 24.2%. The company attributed the margin pressure mainly to lower residential water heater volumes and higher steel and freight costs. Chief Executive Steve Shafer said the company faced "ongoing inflationary pressures, softness in North American residential water heater demand, and ongoing market challenges in China."
In the Rest of the World segment, sales fell 7% to $192.8 million, despite a positive $5 million currency translation impact. China sales declined 17% in local currency, amid weak consumer demand and disruption related to the strategic review of the company’s business there. Segment earnings fell to $10.5 million from $15.4 million in the year-earlier quarter, and the margin dropped to 5.4% from 7.4%. The company said lower sales volumes in China weighed on segment performance, while ongoing cost management limited some of the impact. The contrast between the two regions highlights North American growth’s reliance on boilers, pricing and the acquisition, against the weight of the China decline on Rest of the World results.
On October 27, the company announced definitive agreements under which CPE will acquire 81% of A. O. Smith’s China business, while the company retains a 19% stake and a long-term license for its brand. The deal values the business at about $400 million on a cash-free, debt-free basis, while the total value, including the economic benefits of the license, is expected to exceed $500 million. The company also expects to repatriate about $80 million of cash held in China after the deal closes. It said it intends to prioritize share repurchases using the after-tax proceeds from the deal and the repatriated cash. The deal is expected to close in the first half of 2027, subject to regulatory approvals and customary closing conditions.
A. O. Smith expects to classify its China business as held for sale and report it as discontinued operations beginning in the fourth quarter of 2026, with prior periods recast. After the deal closes, the business will be deconsolidated, and the company will account for its remaining 19% stake using the equity method. Its revised 2026 outlook excludes China for the full year and indicates net sales growth of about 4% and adjusted earnings per share of $3.42 to $3.52. The earnings-per-share outlook excludes about $20 million in estimated pretax restructuring and impairment charges in the North American water treatment segment. This exclusion establishes a separate basis for comparing continuing-business performance after the anticipated change in the presentation of results.
During the first nine months of 2026, cash generated from operations was $429.4 million, slightly below the year-earlier period, while free cash flow rose 4% to $396.2 million. Lower capital expenditures of $33.2 million, down from $53.2 million, helped support free cash flow. The company used $260.6 million to repurchase 4.2 million shares during the period and expects repurchases to total about $300 million for full-year 2026. The board also approved a 6% increase in the dividend rate on October 12; the five-year compound annual dividend growth rate was about 7%, following more than 30 consecutive years of increases. The company scheduled its third-quarter results call for October 29, 2026, at 10:00 a.m. U.S. Eastern time.