A.O. Smith Corporation
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ITEM 1 – BUSINESS
As used in this annual report on Form 10-K, references to the “Company,” “A. O. Smith,” “AOS,” “we,” “us,” and “our” refer to A. O. Smith and its consolidated subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under “Item 8 Financial Statements and Supplementary Data” in this annual report on Form 10-K. Our company is comprised of two reporting segments: North America and Rest of World. Both segments manufacture and market comprehensive lines of residential and commercial gas and electric water heaters, boilers, heat pumps, tanks and water treatment products. Both segments primarily manufacture and market in their respective regions of the world. Our Rest of World segment is primarily comprised of China, India, and Europe.
NORTH AMERICA
Sales in our North America segment accounted for approximately 78 percent of our total sales in 2025. This segment serves residential and commercial end markets with a broad range of products including:
Water heaters. Our residential and commercial water heaters primarily come in sizes ranging from 40 to 80 gallon models. However, we also offer sizes as low as 2.5 gallon (point-of-use) and as high as 2,500 gallon products with varying efficiency ranges. We offer electric, natural gas and liquid propane tank-type models as well as tankless (gas and electric), heat pump and solar tank units. Typical applications for our water heaters include residences, restaurants, hotels, office buildings, laundries, car washes, schools and small businesses.
Boilers. Our residential and commercial boilers range in size from 45,000 British Thermal Units (BTUs) to 6.0 million BTUs. Boilers are closed loop water heating systems used primarily for space heating or hydronic heating. Our boilers are primarily used in applications in commercial settings for hospitals, schools, hotels and other large commercial buildings while residential boilers are used in homes, apartments and condominiums.
Water treatment products. Our water treatment products range from point-of-entry water softeners, solutions for problem well water, whole-home water filtration products and point-of-use carbon and reverse osmosis products. We also offer a comprehensive line of commercial water treatment and filtration products. Typical applications for our water treatment products include residences, restaurants, schools and offices.
Other. In our North America segment, we also manufacture expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, related products and parts.
A significant portion of our North America sales is derived from the replacement of existing products.
We believe we are the largest manufacturer and marketer of water heaters in North America with a leading share in both the residential and commercial portions of the market. In the commercial segments of the market for both water heating and space heating, we believe our comprehensive product lines and our high-efficiency products give us a competitive advantage. Our wholesale distribution channel, where we sell our products primarily under the A. O. Smith and State brands, includes approximately 800 independent wholesale plumbing distributors serving residential and commercial end markets. We also sell our residential water heaters through the retail and maintenance, repair and operations (MRO) channels. In the retail channel, our customers include four of the six largest national hardware and home center chains, including a long-standing exclusive relationship with Lowe’s where we sell A. O. Smith branded products.
Our Lochinvar brand is one of the leading residential and commercial boiler brands in North America. Approximately 45 percent of Lochinvar branded sales consist of residential and commercial water heaters while the remaining 55 percent of Lochinvar branded sales consist primarily of boilers and related parts. Our commercial boiler distribution channel is primarily comprised of manufacturer representative firms with the remainder of our Lochinvar branded products being distributed through wholesale channels.
In our water treatment business we sell through a variety of channels. We sell our A. O. Smith branded water treatment products primarily through our water quality dealer network and Amazon. Our Aquasana branded products are primarily sold directly to consumers through e-commerce channels. Our water softener products and problem well water solutions, which include the Hague, Water-Right, Master Water, Atlantic Filter, Impact, and Water Tec brands, are sold through water quality dealers and contractors. Our water softener and undersink filter products are also sold through regional home center retail chains.
Our energy-efficient product offerings continue to be a sales driver for our business. Our condensing commercial water heaters and boilers continue to be an option for commercial customers looking for high-efficiency water and space heating with a short payback period through energy savings. We offer residential heat pumps, condensing tank-type and tankless
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water heaters in North America, as well as other higher efficiency water heating solutions to round out our energy-efficient product offerings. In 2024, we launched our newly designed ADAPT condensing gas tankless water heater and VERITUS air source commercial heat pump water heater to align with greenhouse gas emission reduction trends across the U.S. The VERITUS and ADAPT model lines were further expanded in 2025. We also recently launched our Cyclone Flex commercial condensing water heater with advanced features ahead of the upcoming October 2026 Department of Energy (DOE) commercial rule that will require all commercial water heaters to be condensing.
We sell our products in highly competitive markets. We compete in each of our targeted market segments based on product design, reliability, quality of products and services, advanced technologies, energy efficiency, maintenance costs and price. Our principal water heating and boiler competitors in North America include Rheem, Bradford White, Rinnai, Aerco and Navien. Numerous other manufacturing companies also compete. Our principal water treatment competitors in the U.S. are Culligan, Kinetico, Pentair, Franklin Electric and Ecowater as well as numerous regional assemblers.
REST OF WORLD
Sales in our Rest of World segment accounted for approximately 22 percent of our total sales in 2025, a majority of which were in China. We have operated in China for 30 years. In that time, we have established A. O. Smith brand recognition in the residential and commercial markets. We manufacture and market residential water heater and water treatment products, primarily incorporating reverse osmosis technology, and commercial dispensing water treatment products. The Chinese water heater market is predominantly comprised of electric wall-hung, gas tankless, combi-boiler, heat pump and solar water heaters. We believe we are one of the market leaders of water heaters and reverse osmosis water treatment products to the residential market in China in dollar terms. We also design and market kitchen products (range hoods, cooktops, steam ovens, and dishwashers) and connected product technology in China.
We sell our products in approximately 8,700 points of sale in China, of which approximately 3,800 are retail outlets in tier one through tier three cities and approximately 1,400 exclusively sell our products. We also sell our products through e-commerce channels. Our primary competitors in China in the water heater market segment are Haier/Casarte, Midea/COLMO, and Rinnai. Our principal competitors in the water treatment market are Angel, Haier/Casarte, Midea/COLMO, and Truliva. In the third quarter of 2025, we initiated an assessment of strategic opportunities for our China business, including strategic partnerships and other alternatives. We believe the China market has substantial long-term prospects and are committed to realizing the potential upside inherent in our China business
In 2008, we established a sales office in India and began importing products specifically designed for India. We began manufacturing water heaters in India in 2010 and water treatment products in 2015. In 2024, we expanded our product offerings and geographic footprint with the acquisition of Pureit, formerly a Unilever PLC business. Pureit offers a broad range of residential water purification solutions in India and other South Asian markets. We continue to increase our product offerings and sales in India, primarily through wholesale, e-commerce and retail channels. Our primary competitors in India are Racold, Bajaj and Havells in the water heater market and Eureka Forbes and Kent in the water treatment market. We also sell water heaters in the European, Middle East, and Far East markets and water treatment products in Vietnam, all of which combined comprised less than 22 percent of total Rest of World sales in 2025.
RAW MATERIALS
Raw materials for our manufacturing operations, primarily consisting of steel, are generally available in adequate quantities. A portion of our customers are contractually obligated to accept price changes based on fluctuations in steel prices. There has been volatility in steel costs over the last several years. In addition, tariffs have increased volatility in input materials.
BACKLOG
Due to the short-cycle nature of our businesses, our operations do not normally sustain significant backlogs.
RESEARCH AND DEVELOPMENT
To improve our competitiveness by generating new products and processes, we conduct research and development at our Corporate Technology Center in Milwaukee, Wisconsin, our Global Engineering Center in Nanjing, China, and our operating locations. Our total expenditures for research and development in 2025, 2024 and 2023 were $95.0 million, $101.7 million and $97.5 million, respectively.
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PATENTS AND TRADEMARKS
We invest, own and use in our businesses various trademarks, trade names, patents, trade secrets and licenses. We monitor our intellectual property for infringements. Although we believe our trademarks, trade names, patents, trade secrets, and licenses to constitute a valuable asset in the aggregate, we do not regard our business as being materially dependent on any single trademark, trade name, patent, trade secret, license or any group of related such rights. Our trade name is important with respect to our products, particularly in China, India, and North America.
HUMAN CAPITAL
We employed approximately 11,500 employees as of December 31, 2025 with approximately 6,500 in North America and 5,000 in Rest of World. A small portion of our workforce in the U.S. is represented by a labor union, while outside the U.S., we have employees in certain countries that are represented by employee representative organizations, such as an employee association, union, or works council.
Our Guiding Principles and Values. The foundation of how we conduct business and interact with our employees is outlined in A. O. Smith Corporation’s Guiding Principles and our Statement of Values. These principles and values help to shape how we hire, train and treat our employees, emphasizing teamwork and promoting diversity in seeking our objectives. We believe that our Guiding Principles and Values shape the critical elements of our effort to attract, retain and develop talent. In 2025, we were named by Ethisphere on the list of the World’s Most Ethical Companies for a second consecutive year. The annual list recognizes global companies dedicated to integrity, sustainability, governance, and community with a commitment to ethical behavior, accountability, and driving positive change. As reflected in our Guiding Principles, we strive to create a workplace where people from all backgrounds can thrive and achieve their fullest potential. Our commitment to this objective starts at the top with our Board of Directors, which is 40 percent diverse from either a gender or ethnic/racial perspective.
Culture and Employee Engagement. We conduct a Global Employee Engagement Survey on a biannual basis. This third party managed survey measures employees’ level of engagement against external norms and provides us with actionable feedback that drives improvement priorities. Participation in our most recent survey in 2024 was 93 percent, which we believe reflects our employees’ desire to share their perspectives and a commitment to continuous improvement. Survey results help shape action plans to further improve our culture and we will conduct the survey again in 2026.
Compensation and Benefits. We provide what we believe is a robust total compensation program designed to be market-competitive and internally equitable to attract, retain, motivate and reward a high-performance workforce. Regular internal and external analysis is performed to ensure there is market alignment. In addition to salaries, these programs, which vary by country, can include annual performance-based bonuses, stock-based compensation awards, retirement plans with employee matching opportunities, health benefits, health savings and flexible spending accounts, paid time off, family leave, and tuition assistance, among others.
Training and Development. We provide all employees with a wide range of professional development experiences, both formal and informal, to help them achieve their full potential. All of our salaried employees are given formal development plans. Some of the formal development programs that employees have access to include early-career leadership development programs, front-line leadership development programs, continuous improvement skill-building programs, core process technology councils and tuition reimbursement for degree programs or trade schools. To maintain our focus on career development all our salaried employees worldwide are required to have career conversations with their manager. Globally, all office and professional employees also have formal performance reviews and development plans with a focus on learning by doing. We expect our managers to work closely with their employees to ensure performance feedback and to conduct development discussions on a regular basis.
Safety. The safety of our people is always at the forefront of what we do. We provide safety training in our production facilities, designed to empower our employees with the knowledge and tools they need to make safe choices and mitigate risks. In addition to traditional training, we use standardized signage and visual management throughout our facilities. Since 1954, we have annually awarded the Lloyd B. Smith President's Safety Award, which acknowledges an A. O. Smith facility that demonstrates the most improvement over one year in the area of workplace safety.
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GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
Our operations, including the manufacture, packaging, labeling, storage, distribution, advertising and sale of our products, are subject to various federal, state, local and foreign laws and regulations. In the U.S., many of our products are regulated by the Department of Energy, the Consumer Product Safety Commission, and the Federal Trade Commission. State and local governments, through laws, regulations, and building codes, also regulate our water heating and water treatment products. Whether at the federal, state, or local level, these laws are intended to improve energy efficiency and product safety, and protect public health and the environment. In recent years, a number of states and local authorities have proposed or implemented bans on gas-fired products in new construction in an effort to address greenhouse gas emissions. Similar laws and regulations have been adopted by government authorities in other countries in which we manufacture, distribute, and sell our products. We offer a complete line of water and hydronic heating products, including electric-powered water heaters and boilers, and we believe that any reduction in fossil fuel-powered products would be counterbalanced by a corresponding increase in demand for our non-fossil fuel powered products. We are confident that our continued emphasis on product design and innovation, including energy efficiency, will keep us well positioned to deliver products demanded by customers, regardless of fuel source.
In addition, our operations are subject to federal, state and local environmental laws. We are subject to regulations of the U.S. Environmental Protection Agency and the Occupational Health and Safety Administration and their counterpart state agencies. Compliance with government regulations and environmental laws has not had and is not expected to have a material effect upon the capital expenditures, earnings, or competitive position of our company. See Item 3.
AVAILABLE INFORMATION
We maintain a website with the address www.aosmith.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practical after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission (SEC). All reports we file with the SEC are also available free of charge via EDGAR through the SEC’s website at www.sec.gov.
We are committed to sound corporate governance and have documented our corporate governance practices by adopting the A. O. Smith Corporate Governance Guidelines. The Corporate Governance Guidelines, Criteria for Selection of Directors, Financial Code of Ethics, the A. O. Smith Guiding Principles, as well as the charters for the Audit, Personnel and Compensation, Nominating and Governance and the Investment Policy Committees of the Board of Directors and other corporate governance materials, may be viewed on the Company’s website. Any waiver of or amendments to the Financial Code of Conduct or the A. O. Smith Guiding Principles would be posted on this website; to date there have been none. Copies of these documents will be sent to stockholders free of charge upon written request of the corporate secretary at the address shown on the cover page of this Annual Report on Form 10-K.
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Financial statements
data from SEC XBRL filings. Values are as-reported; restatements supersede originals. Values reported in .
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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our company is comprised of two reporting segments: North America and Rest of World. Our Rest of World segment is primarily comprised of China, India, and Europe. Both segments manufacture and market comprehensive lines of residential and commercial gas, heat pump and electric water heaters, boilers, tanks, and water treatment products. Both segments primarily manufacture and market in their respective region of the world.
Consistent with our stated strategic priorities, we continue to seek acquisitions that enable growth, expand our core business, and establish adjacencies. In January 2026, we acquired LVC Holdco LLC (Leonard Valve) for $470 million, subject to customary adjustments, and was funded with cash borrowed under a new term loan with a group of eight banks. Leonard Valve is a leading manufacturer of water temperature and flow solutions and we believe it represents a compelling strategic fit and a meaningful advancement into our presence in the water management market. Leonard Valve is projected to contribute approximately $70 million in sales in 2026 in the North America segment. Leonard Valve contributed approximately $16 million and $32 million to sales in the second quarter and first half of 2026, respectively. In the first quarter, we recognized $6 million of acquisition-related transaction expenses.
Consistent with our Operational Excellence strategic priority, the Company announced a restructuring plan in its North America water treatment business designed to increase operational efficiency and accelerate growth through footprint optimization as well as brand rationalization. In the second quarter, the Company recognized a restructuring charge of $22.6 million, the majority of which is due to non-cash impairment expenses. Beginning in 2027, annual savings are projected to be approximately $6 million to $8 million.
In our North America segment, water heater sales grew two percent in the second quarter of 2026. Water heater sales were flat in the first half of 2026 as pricing benefits were offset by lower residential volumes. We project that full year 2026 residential industry unit volumes will decrease low single digits, due to softness in new construction and a slower than expected start to the year. We project that commercial water heater industry volumes will be similar to last year. The Department of Energy recently announced an up-to-one-year enforcement delay of the October 2026 regulatory change related to energy efficiency requirements on commercial gas products. In response to higher steel and other input costs, in April, we announced price increases of four to seven percent on most of our water heater and boiler products that went into effect at the end of the second quarter. Our boiler sales grew 21 percent and 12 percent in the second quarter and first half of 2026, respectively, due to carryover pricing benefits, a strong response to our annual seasonal pre-buy programs and pre-buy ahead of 2026 price increase. We expect our boiler sales to grow between six and eight percent in 2026. We anticipate sales of our North America water treatment products will grow between five and six percent primarily due to the benefits of pricing actions and as we continue to expand our dealer network, partially offset by softness in our consumer channels.
In our Rest of World segment, China third-party sales declined 28 percent in local currency in the second quarter of 2026 due to continued challenging market conditions including the cessation of the government appliance subsidy programs. For the full year 2026, based on our caution around a recovery timeline of our China business, we project our third-party sales in China to decrease low double-digits in local currency sales compared to 2025. In 2025, we initiated an assessment of strategic opportunities for our China business, including strategic partnerships and other alternatives. We believe the China market has substantial long-term prospects and are committed to realizing the potential upside inherent in our China business. The assessment is ongoing.
Combining all of these factors, we expect our 2026 consolidated sales to grow between two and three percent compared to 2025. Our guidance excludes the impacts from potential future acquisitions, any potential outcomes of the assessment of the China business and and the potential impact of recently announced changes in tariff policy.
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Results of Operations
| (dollars in millions) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||
| Net sales | $ | 1,004.3 | $ | 1,011.3 | $ | 1,949.9 | $ | 1,975.2 | ||||||||||||||
| Cost of products sold | 616.5 | 614.2 | 1,196.4 | 1,202.7 | ||||||||||||||||||
| Gross profit | 387.8 | 397.1 | 753.5 | 772.5 | ||||||||||||||||||
| Gross profit margin % | 38.6 | % | 39.3 | % | 38.6 | % | 39.1 | % | ||||||||||||||
| Selling, general and administrative expenses | 197.7 | 191.3 | 401.6 | 383.9 | ||||||||||||||||||
| Restructuring and impairment expenses | 22.6 | — | 22.6 | — | ||||||||||||||||||
| Interest expense | 8.1 | 4.6 | 15.2 | 7.5 | ||||||||||||||||||
| Other expense (income), net | 1.4 | (0.4) | 1.4 | (1.6) | ||||||||||||||||||
| Earnings before provision for income taxes | 158.0 | 201.6 | 312.7 | 382.7 | ||||||||||||||||||
| Provision for income taxes | 33.1 | 49.4 | 69.8 | 93.9 | ||||||||||||||||||
| Net Earnings | $ | 124.9 | $ | 152.2 | $ | 242.9 | $ | 288.8 | ||||||||||||||
Our sales in the second quarter of 2026 were $1,004.3 million and were slightly lower than the second quarter of 2025 sales of $1,011.3 million. Sales in the first six months of 2026 were $1,949.9 million and lower than sales of $1,975.2 in the first six months of 2025. Compared to the prior year quarter, our net sales decrease was primarily driven by lower sales in China due to continued weak consumer demand partially offset by the sales contribution from the acquisition of Leonard Valve, and the three percent organic growth in our North America business. Our net sales decrease in the first six months of 2026 was primarily driven by lower sales in China partially offset by the sales contribution from the acquisition of Leonard Valve, and the one percent organic growth in our North America business.
Our gross profit margin in the second quarter of 2026 was 38.6 percent compared to 39.3 percent in the second quarter of 2025. Gross profit margin in the first six months of 2026 was 38.6 compared to 39.1 percent in the first six months of 2025. The decrease in gross profit margin for the second quarter and first six months of 2026 compared to the prior year periods was primarily due to lower sales volumes and higher material cost.
Selling, general, and administrative (SG&A) expenses in the second quarter of 2026 increased $6.4 million compared to the second quarter of 2025. SG&A expenses increased $17.7 million in the first six months of 2026 compared to the prior year period. The increases in SG&A expenses in the second quarter of 2026 compared to the prior year period were primarily due to the Leonard Valve acquisition including higher amortization expenses, and consulting costs. The increases in first six months of 2026 compared to the prior year period were primarily due to higher employee costs, amortization expense and transaction costs related to the acquisition of Leonard Valve and consulting cost.
Restructuring and impairment expense in the three and six months ended June 30, 2026 was $22.6 million, and was associated with a restructuring plan designed to increase operational efficiency and accelerate growth through footprint optimization and brand rationalization. The expense was related to our water treatment business and recorded in the North America segment.
Interest expense in the second quarter of 2026 was $8.1 million compared to $4.6 million in the same period last year. Interest expense in the first six months of 2026 was $15.2 million compared to $7.5 million in the same period last year. The increase in interest expense in the second quarter and first six months of 2026 was primarily due to higher debt levels as a result of the Leonard Valve acquisition.
Other expense (income), net for the second quarter of 2026 was expense of $1.4 million compared to income of $0.4 million for the second quarter of 2025. Other expense (income), net for the first six months of 2026 was expense of $1.4 million, compared to income of $1.6 million for the first six months of 2025. The change in Other expense (income), net in the second quarter of 2026 was primarily due to higher foreign currency translation losses. The change in Other expense (income), net in the first six months of 2026 was primarily due to higher foreign currency translation losses and lower interest income.
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Our effective income tax rate for the three and six months ended June 30, 2026 was 20.9 percent and 22.3 percent, respectively. The effective income tax rate for the three and six months ended June 30, 2025 was 24.5 percent. The change in the effective income tax rate for the three and six months ended June 30, 2026 compared to the effective income tax rate for the three and six months ended June 30, 2025 was primarily due to a discrete tax benefit recognized during the period ended June 30, 2026 related to U.S. cross border tax elections. We estimate that our annual effective income tax rate for the full year of 2026 will be approximately 24.0 percent.
We are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted earnings per share (EPS), total segment earnings and adjusted segment earnings) that exclude the impact of restructuring and impairment expenses, as well as organic growth (decline) that excludes the impact of acquisitions and divestitures and foreign exchange from year-over-year comparisons. Reconciliations from GAAP measures to non-GAAP measures are provided in the Non-GAAP Measures section below. We believe that the measures of adjusted earnings, adjusted EPS, total segment earnings, organic growth (decline) and adjusted segment earnings provide useful information to investors about our performance and allow management and our investors to better understand our performance between periods without regard to items that we do not consider to be a component of our core operating performance or recurring in nature.
North America Segment
| (dollars in millions) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||
| Net Sales | $ | 820.5 | $ | 779.0 | $ | 1,573.9 | $ | 1,527.7 | ||||||||||||||
| Segment Earnings | 177.2 | 198.1 | 352.6 | 383.3 | ||||||||||||||||||
| Segment margin | 21.6 | % | 25.4 | % | 22.4 | % | 25.1 | % | ||||||||||||||
Sales in our North America segment were $820.5 million in the second quarter of 2026, an increase of $41.5 million from $779.0 million in the second quarter of 2025. Sales in the first six months of 2026 were $1,573.9 million, or $46.2 million higher than sales of $1,527.7 million in the same period last year. Compared to the prior year quarter, our net sales increase was primarily driven by the benefits of 2025 pricing actions, incremental sales of approximately $16 million from the 2026 acquisition of Leonard Valve, and increased boiler volumes partially offset by lower residential water heater volumes. Our net sales increase in the first six months compared to the prior year period was primarily driven by the benefits of 2025 pricing actions, incremental sales of approximately $32 million from the 2026 acquisition of Leonard Valve, and increased boiler volumes largely offset by lower residential water heater volumes.
North America segment earnings were $177.2 million in the second quarter of 2026, or $20.9 million lower than segment earnings of $198.1 million in the second quarter of 2025. North America segment earnings were $352.6 million in the first six months of 2026, or $30.7 million lower than segment earnings of $383.3 million in the first six months of 2025. Segment margins were 21.6 percent and 25.4 percent in the second quarter of 2026 and 2025, respectively. Segment margins were 22.4 percent and 25.1 percent in the first six months of 2026 and 2025, respectively. Adjusted segment earnings were $199.8 million in the second quarter of 2026 and $375.2 million for the first six months of 2026, with adjusted segment margins of 24.4% and 23.8%, respectively. These adjusted results exclude the $22.6 million of pretax restructuring and impairment charges as outlined above. Lower segment earnings and margins in the second quarter 2026 were driven by the restructuring and impairment charges. Lower segment earnings and segment margin in the first six months of 2026 were primarily driven by the restructuring and impairment charges, increased material and input cost including steel and lower residential water heater volumes that more than offset the pricing benefits of our 2025 pricing actions and the earnings contribution from Leonard Valve. We estimate our 2026 full year adjusted North America segment margin will be approximately 24 percent.
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Rest of World Segment
| (dollars in millions) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||
| Net Sales | $ | 194.9 | $ | 240.1 | $ | 395.6 | $ | 466.8 | ||||||||||||||
| Segment Earnings | 10.2 | 25.3 | 22.6 | 45.0 | ||||||||||||||||||
| Segment margin | 5.2 | % | 10.5 | % | 5.7 | % | 9.6 | % | ||||||||||||||
Sales in the Rest of World segment were $194.9 million in the second quarter of 2026, a decrease of $45.2 million from $240.1 million in the second quarter of 2025. Sales in the first six months of 2026 were $395.6 million, or $71.2 million lower than sales of $466.8 million in the same period last year. The decrease in sales in the second quarter of 2026 compared to the same period in 2025 was primarily due to lower sales in China that more than offset the favorable foreign currency translation impact of approximately $6 million resulting from the appreciation of foreign currencies compared to the U.S. dollar. The decrease in sales in the first six months of 2026 compared to same period in 2025 was primarily due to lower sales in China that more than offset the favorable foreign currency translation impact of approximately $14 million resulting from the appreciation of foreign currencies compared to the U.S. dollar.
Rest of World segment earnings were $10.2 million in the second quarter of 2026, or $15.1 million lower compared to $25.3 million in the second quarter of 2025. Segment earnings in the first six months of 2026 were $22.6 million, a decrease of $22.4 million compared to segment earnings of $45.0 million in the same period last year. Segment margins were 5.2 percent and 10.5 percent in the second quarter of 2026 and 2025, respectively. Segment margins were 5.7 percent and 9.6 percent in the first six months of 2026 and 2025, respectively. The lower segment earnings and segment margin in the second quarter and first six months of 2026 compared to the prior periods were primarily driven by lower sales in China due to continued weak consumer demand, partially offset by tight spending controls in China. We estimate our 2026 full year Rest of World segment margin will be approximately six to seven percent.
Outlook
We have narrowed our full year sales growth outlook from our prior guidance of an increase of between two and four percent to an increase of between two and three percent. We have also narrowed our full-year diluted EPS to be between $3.60 and $3.75 from our prior guidance of between $3.60 and $3.90, and adjusted EPS to be between $3.70 and $3.85 from our prior guidance of between $3.70 and $4.00, reflecting persistent softness in the residential water heater industry volumes in North America. Our guidance excludes the impacts of potential future acquisitions, any potential outcomes of the assessment of the China business, and the potential impact of recently announced changes in tariff policy.
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Liquidity & Capital Resources
Our working capital was $517.6 million at June 30, 2026, compared with $429.0 million at December 31, 2025. The increase in working capital was primarily related to higher accounts receivable balances. As of June 30, 2026, cash balances were positively impacted by changes in foreign currency during the quarter of $1.2 million. Cash and cash equivalents used to fund our operations are primarily generated through operating activities and our existing credit facilities. We believe our available cash and existing credit facilities are sufficient to cover our cash needs for the foreseeable future. We use a global cash pooling arrangement, intercompany borrowing, and some local credit lines to meet funding needs and allocate capital resources among various entities. We have historically made and anticipate future cash repatriations from certain foreign subsidiaries. In the first six months of 2026, we repatriated approximately $38 million of cash from our foreign subsidiaries and used the proceeds to pay down outstanding debt balances.
| (dollars in millions) | Six Months Ended June 30, | ||||||||||
| 2026 | 2025 | ||||||||||
| Cash provided by operating activities | $ | 253.8 | $ | 178.3 | |||||||
| Cash used in investing activities | (471.8) | (1.8) | |||||||||
| Cash provided by (used in) financing activities | 223.6 | (241.1) | |||||||||
Cash provided by operations in the first six months of 2026 was $253.8 million, an increase of $75.5 million from $178.3 million in the first six months of 2025, primarily due to working capital management that more than offset lower earnings. Our free cash flow in the first six months of 2026 and 2025 was $233.3 million and $139.9 million, respectively. We expect cash provided by operating activities to be between $595 million and $645 million in 2026. We expect free cash flow to be between $525 million and $575 million in 2026. Free cash flow is a non-GAAP measure described in more detail in the Non-GAAP Measures section below.
Capital expenditures totaled $20.5 million in the first six months of 2026 compared with $38.4 million in the same period last year. We project that 2026 capital expenditures will be approximately $60 to $70 million and full-year depreciation and amortization expense will be approximately $100 million.
In 2024, we renewed and amended our $500 million revolving credit facility ("facility") which now expires on August 23, 2029. The facility is with a group of nine banks and has an accordion provision that allows it to be increased up to $1 billion if certain conditions (including lender approval) are satisfied. Borrowing rates under the facility are determined by our leverage ratio. The facility requires us to maintain two financial covenants, a leverage ratio test and an interest coverage test, and we were in compliance with the covenants as of June 30, 2026, and expect to be in compliance for the foreseeable future. The facility backs up commercial paper and credit line borrowings. At June 30, 2026, we had $40.0 million borrowings outstanding under the facility and an available borrowing capacity of $460.0 million. We believe the combination of available borrowing capacity and operating cash flows will provide sufficient funds to finance our existing operations for the foreseeable future.
In the first quarter of 2026, we completed the acquisition of Leonard Valve for $470 million. The acquisition was funded under a new three-year, $470 million term loan with a group of eight banks. The Company borrowed the full available amount and used the proceeds to finance the purchase. Our leverage, as measured by the ratio of total debt to total capitalization, was 25.7 percent at June 30, 2026, compared with 7.7 percent at December 31, 2025. Our total debt increased by $482.5 million in the first six months of 2026.
In the first quarter of 2026, our Board of Directors approved adding 5,000,000 shares of common stock to the existing discretionary share repurchase authority. Under the share repurchase program, common stock may be purchased through a combination of Rule 10b5-1 automatic trading plan and discretionary purchases in accordance with applicable securities laws. The stock repurchase authorization remains effective until terminated by our Board of Directors which may occur at any time, subject to the parameters of any Rule 10b5-1 automatic trading plan that we may then have in effect. During the second quarter of 2026, we repurchased 1,885,727 shares at an average price of $58.93 per share and at a total cost of $111.1 million. As of June 30, 2026, there were 3,202,304 shares remaining on the existing repurchase authorization. Depending on factors such as stock price, working capital requirements, and alternative investment opportunities, we expect to spend approximately $300 million on stock repurchases in 2026 through a combination of any Rule 10b5-1 automatic trading plan and open market repurchases.
On July 13, 2026, our Board of Directors declared a regular quarterly cash dividend of $0.36 per share on our Common Stock and Class A common stock. The dividend is payable on August 17, 2026, to shareholders of record on July 31, 2026.
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Non-GAAP Financial Information
We are providing non-U.S. Generally Accepted Accounting Principles (GAAP) measures (adjusted earnings, adjusted EPS, total segment earnings and adjusted segment earnings) that exclude the impact of restructuring and impairment expenses. Reconciliations from GAAP measures to non-GAAP measures are provided below. We believe that the measure of adjusted earnings, adjusted EPS, and adjusted segment earnings provide useful information to investors about our performance and allow management and our investors to better understand our performance between periods without regard to items that we do not consider to be a component of our core operating performance or recurring in nature.
Organic sales growth (decline) is a non-GAAP financial measure of sales growth (decline) excluding the effects of acquisitions and divestitures and foreign exchange from year-over-year comparisons. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth (decline) on a consistent basis.
Free cash flow is cash provided by operations less capital expenditures. We believe that free cash flow provides useful additional information concerning cash flow available to meet future debt service obligations and working capital requirements.
A. O. SMITH CORPORATION
Adjusted Earnings and Adjusted Earnings Per Share
(dollars in millions, except per share data)
(unaudited)
The following is a reconciliation of net earnings and diluted earnings per share to adjusted earnings (non-GAAP) and adjusted earnings per share (non-GAAP):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||||||||||
| Net Earnings (GAAP) | $ | 124.9 | $ | 152.2 | $ | 242.9 | $ | 288.8 | ||||||||||||||||||||||||||
| Restructuring and impairment expenses, before tax | 22.6 | — | 22.6 | — | ||||||||||||||||||||||||||||||
| Tax effect on above items | (5.5) | — | (5.5) | — | ||||||||||||||||||||||||||||||
| Adjusted Earnings (non-GAAP) | $ | 142.0 | $ | 152.2 | $ | 260.0 | $ | 288.8 | ||||||||||||||||||||||||||
Diluted Earnings Per Share (GAAP)(1) | $ | 0.91 | $ | 1.07 | $ | 1.75 | $ | 2.01 | ||||||||||||||||||||||||||
| Restructuring and impairment expenses, per diluted share, before tax | 0.16 | — | 0.16 | — | ||||||||||||||||||||||||||||||
| Tax effect on above items per diluted share | (0.04) | — | (0.04) | — | ||||||||||||||||||||||||||||||
Adjusted Earnings Per Share (non-GAAP)(1) | $ | 1.03 | $ | 1.07 | $ | 1.87 | $ | 2.01 | ||||||||||||||||||||||||||
(1) Earnings per share amounts are calculated discretely and, therefore, may not add up to the total due to rounding.
25
A. O. SMITH CORPORATION
Sales Growth (Decline)
(unaudited)
The following table provides the components of net sales growth (decline):
| Three Months Ended June 30, 2026 | |||||||||||||||||
| North America | Rest of World | Total | |||||||||||||||
| Sales Growth (Decline) | 5 | % | (19) | % | (1) | % | |||||||||||
Acquisition Impact(1) | 2 | % | — | 1 | % | ||||||||||||
| Foreign Exchange Impact | — | 3 | % | 1 | % | ||||||||||||
| Organic Sales Growth (Decline) (non-GAAP) | 3 | % | (22) | % | (3) | % | |||||||||||
| Six Months Ended June 30, 2026 | |||||||||||||||||
| North America | Rest of World | Total | |||||||||||||||
| Sales Growth (Decline) | 3 | % | (15) | % | (1) | % | |||||||||||
Acquisition Impact(1) | 2 | % | — | 2 | % | ||||||||||||
| Foreign Exchange Impact | — | 3 | % | 1 | % | ||||||||||||
| Organic Sales Growth (Decline) (non-GAAP) | 1 | % | (18) | % | (4) | % | |||||||||||
(1) The acquisition effect includes the sales impact of the Leonard Valve acquisition in 2026.
A. O. SMITH CORPORATION
Adjusted Segment Earnings
(dollars in millions)
(unaudited)
The following is a reconciliation of reported earnings before provision for income taxes to total segment earnings (non-GAAP) and adjusted segment earnings (non-GAAP):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||||||||||||||||||||
| Earnings Before Provision for Income Taxes (GAAP) | $ | 158.0 | $ | 201.6 | $ | 312.7 | $ | 382.7 | ||||||||||||||||||||||||||
| Add: Corporate expense | 21.3 | 17.0 | 47.3 | 37.9 | ||||||||||||||||||||||||||||||
| Add: Interest expense | 8.1 | 4.6 | 15.2 | 7.5 | ||||||||||||||||||||||||||||||
| Total Segment Earnings (non-GAAP) | $ | 187.4 | $ | 223.2 | $ | 375.2 | $ | 428.1 | ||||||||||||||||||||||||||
North America(1) | $ | 177.2 | $ | 198.1 | $ | 352.6 | $ | 383.3 | ||||||||||||||||||||||||||
| Rest of World | 10.2 | 25.3 | 22.6 | 45.0 | ||||||||||||||||||||||||||||||
| Inter-segment earnings elimination | — | (0.2) | — | (0.2) | ||||||||||||||||||||||||||||||
| Total Segment Earnings (non-GAAP) | $ | 187.4 | $ | 223.2 | $ | 375.2 | $ | 428.1 | ||||||||||||||||||||||||||
| Additional Information | ||||||||||||||||||||||||||||||||||
(1)North America Segment Earnings | $ | 177.2 | $ | 198.1 | $ | 352.6 | $ | 383.3 | ||||||||||||||||||||||||||
| Restructuring and impairment expenses, before tax | 22.6 | — | 22.6 | — | ||||||||||||||||||||||||||||||
| Adjusted North America Segment Earnings (non-GAAP) | $ | 199.8 | $ | 198.1 | $ | 375.2 | $ | 383.3 | ||||||||||||||||||||||||||
26
A. O. SMITH CORPORATION
Free Cash Flow
(dollars in millions)
(unaudited)
The following is a reconciliation of reported cash flow from operating activities to free cash flow (non-GAAP):
| Six Months Ended June 30, | |||||||||||||||||
| 2026 | 2025 | ||||||||||||||||
| Cash provided by operating activities (GAAP) | $ | 253.8 | $ | 178.3 | |||||||||||||
| Less: Capital expenditures | (20.5) | (38.4) | |||||||||||||||
| Free cash flow (non-GAAP) | $ | 233.3 | $ | 139.9 | |||||||||||||
A. O. SMITH CORPORATION
2026 Adjusted EPS Guidance and 2025 EPS
(unaudited)
The following is a reconciliation of diluted EPS to adjusted EPS (non-GAAP) (all items are net of tax):
| 2026 Guidance | 2025 | ||||||||||||||||||
| Diluted EPS (GAAP) | $ | 3.60-3.75 | $ | 3.85 | |||||||||||||||
| Restructuring and impairment expenses | 0.10 | (1) | — | ||||||||||||||||
| Adjusted EPS (non-GAAP) | $ | 3.70-3.85 | $ | 3.85 | |||||||||||||||
(1)Includes North America water treatment pre-tax restructuring and impairment expenses of approximately $20.0 million of which $22.6 million was recognized in the second quarter. Anticipated proceeds from the sale of certain assets are expected to occur in late 2026.
27
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the U.S., which requires the use of estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The critical accounting policies that we believe could have the most significant effect on our reported results or require complex judgment by management are contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2025. We believe that at June 30, 2026, there was no material change to this information.
Recent Accounting Pronouncements
Refer to Recent Accounting Pronouncements in Note 1 – Basis of Presentation in the notes to our condensed consolidated financial statements included in Part 1 Financial Information.
Forward Looking Statements
This filing contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “continue,” “guidance,” “outlook”, “confident” or words of similar meaning. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this filing. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: further softening in U.S. residential and commercial water heater demand; further weakening in North American residential or commercial construction or instability in the Company’s replacement markets; failure to realize the expected benefits of acquisitions or expected synergies; difficulties in predicting results of operations of an acquired business; negative impact to the Company’s businesses from international tariffs, including any new or increased tariffs that could also trigger retaliatory responses from other countries, as well as trade disputes and geopolitical differences, including the conflicts in Ukraine and the Middle East; negative impacts to the Company, particularly the demand for its products, resulting from global inflationary pressures or a potential recession in one or more of the markets in which the Company participates; the Company’s ability to continue to obtain commodities, components, parts and accessories on a timely basis through its supply chain and at expected costs, including the recent volatility in fuel and other material prices; inability of the Company to implement or maintain pricing actions; inconsistent recovery of the Chinese economy or a further decline in the growth rate of consumer spending or housing sales in China; the availability, timing or effects of China stimulus programs; uncertain outcomes and costs and other potential impacts of the Company’s assessment relating to the Company’s China business; the failure to realize the expected benefits of restructuring actions; further weakening in the high-efficiency gas boiler segment in the U.S.; substantial defaults in payment by, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer; foreign currency fluctuations; failure to realize the expected benefits, timing and extent of regulatory changes; competitive pressures on the Company’s businesses, including new technologies and new competitors; the impact of potential information technology or data security breaches; negative impact of changes in government regulations or regulatory requirements; the inability to respond to secular trends toward decarbonization and energy efficiency; and adverse developments in general economic, political and business conditions in key regions of the world. A more detailed description of these risks is contained under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2025. Forward-looking statements included in this filing are made only as of the date of this filing, and the Company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward-looking statements attributed to the Company, or persons acting on its behalf, are qualified entirely by these cautionary statements.
Next expected filings
- ~2027-02-09 10-K expected by 2027-02-24 (in 103 days)
- ~2027-04-30 10-Q expected by 2027-05-12 (in 183 days)
- ~2027-07-30 10-Q expected by 2027-08-11 (in 274 days)
- ~2027-10-28 10-Q expected by 2027-11-09 (in 364 days)
Predicted from historical filing cadence; not an SEC commitment.
Recent SEC filings
- 2026-07-30 8-K Earnings Release; Financial Statements and Exhibits
- 2026-07-30 10-Q Quarterly Report
- 2026-06-22 8-K Officer/Director Change; Financial Statements and Exhibits
- 2026-05-19 8-K Officer/Director Change; Financial Statements and Exhibits
- 2026-04-30 8-K Earnings Release; Financial Statements and Exhibits
- 2026-04-30 10-Q Quarterly Report
- 2026-04-17 8-K Shareholder Vote Results; Other Events
- 2026-02-10 10-K Annual Report
- 2026-01-29 8-K Earnings Release; Financial Statements and Exhibits
- 2026-01-06 8-K Material Financial Obligation; Other Events; Financial Statements and Exhibits
- 2025-11-12 8-K Other Events; Financial Statements and Exhibits
- 2025-10-28 10-Q Quarterly Report
- 2025-10-28 8-K Earnings Release; Financial Statements and Exhibits
- 2025-08-28 8-K Officer/Director Change; Financial Statements and Exhibits
- 2025-07-24 10-Q Quarterly Report