A. O. Smith Q3 Sales Flat, China Majority Sale Planned

A. O. Smith (AOS) said it will sell an approximately 81% interest in its China business as the water technology company reported nearly flat third-quarter sales and a 1% decline in adjusted earnings per share. The transaction would reduce its exposure to China, where weak consumer demand contributed to a 17% local-currency sales decline during the quarter, while shifting the company toward a more North America-focused portfolio.

The company announced definitive agreements on October 27 with China-based alternative asset manager CPE, completing a strategic review launched in July 2025. The China business is valued at about $400 million on a cash-free, debt-free basis. A. O. Smith will retain an approximately 19% minority interest and receive royalties under a long-term licensing agreement for its brand in China.

Including the estimated value of future royalty payments, A. O. Smith expects the transaction’s total value to exceed $500 million. It also plans to repatriate about $80 million of cash held in China and prioritize share repurchases as a use of the after-tax proceeds and repatriated funds. The deal is expected to close in the first half of 2027, subject to regulatory approvals and customary closing conditions.

Third-quarter sales remain nearly unchanged

Net sales were $941 million in the third quarter of 2026, compared with $943 million a year earlier. Adjusted EPS decreased to $0.93 from $0.94.

North America sales increased 3% to $762 million, including $15 million from the Leonard Valve acquisition. Organic growth was 1%, supported by a 13% increase in boiler sales on higher volumes and pricing benefits. Water treatment sales rose 5%, while water heater sales declined 1% as lower residential volumes weighed on the category.

North America segment operating earnings were unchanged at $180 million. Segment margin fell 60 basis points to 23.6% from 24.2%, reflecting higher-than-expected input costs, including double-digit increases in steel and freight expenses. The company recorded $18 million of input-cost inflation, partly offset by $10 million of tariff refunds under the International Emergency Economic Powers Act and $6 million of other cost savings.

A. O. Smith also continued restructuring its North American water treatment operations. Operations at its Groveport, Ohio, facility have ceased, with production transferred to other locations.

China weakness pressures Rest of World results

Rest of World sales decreased 7% to $193 million, despite a favorable foreign-exchange impact of $5 million, primarily related to China. China sales fell 17% in local currency, which the company attributed to continued weak consumer demand and disruption associated with the recently completed strategic assessment.

Rest of World operating earnings declined to $11 million from $15 million, and segment margin contracted to 5.4% from 7.4%. Lower sales volumes in China drove the decline, although cost-control measures partly mitigated the impact.

2026 outlook excludes China business

A. O. Smith expects 2026 revenue growth of about 4% from a 2025 base of $3.16 billion that excludes China. Adjusted EPS is projected at $3.42 to $3.52, compared with $3.42 for 2025 on the same basis. The guidance also excludes restructuring and impairment expenses.

The company forecasts 2026 free cash flow of $525 million to $575 million. Its assumptions include a low-single-digit decline in the U.S. residential water heater industry, approximately flat U.S. commercial water heater demand, 10% to 12% growth in North American boiler sales and 3% to 4% growth in North American water treatment sales. Leonard Valve is expected to contribute about $65 million of revenue.

A. O. Smith expects an adjusted North America segment margin of about 24% and a Rest of World margin of roughly 5%. Other assumptions include capital expenditures of $50 million to $55 million, approximately $35 million of interest expense and an effective tax rate of about 25%.

Operating cash flow totaled $429 million through September 30, compared with $434 million in the prior-year period. The company spent $470 million on acquisitions and returned $410 million to shareholders, consisting of $149 million in dividends and $261 million in share repurchases. Its full-year share-repurchase target remains about $300 million. Debt as a percentage of capital increased to 27.0% from 9.2% a year earlier.

The planned China transaction remains subject to regulatory approval and other closing conditions. A. O. Smith also identified further weakness in U.S. water heater and construction demand, instability in replacement markets, input-cost and tariff pressures, foreign-exchange movements, and the possibility that the China transaction may be delayed or fail to deliver its expected benefits as material uncertainties.