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SMITH A O CORP

AOS
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Business Summary

A. O. Smith Corporation operates in the water heating, boilers, and water treatment industries, manufacturing and marketing comprehensive lines of residential and commercial gas and electric water heaters, boilers, heat pumps, tanks, and water treatment products. The company is comprised of two reporting segments: North America and Rest of World, with the Rest of World segment primarily comprised of China, India, and Europe. Both segments primarily manufacture and market in their respective regions of the world. The company sells its products in highly competitive markets, competing based on product design, reliability, quality, advanced technologies, energy efficiency, maintenance costs, and price.

In North America, the company believes it is the largest manufacturer and marketer of water heaters with a leading share in both the residential and commercial portions of the market. Its principal water heating and boiler competitors in North America include Rheem, Bradford White, Rinnai, Aerco, and Navien. Its principal water treatment competitors in the U.S. are Culligan, Kinetico, Pentair, Franklin Electric, and Ecowater. In China, the company believes it is one of the market leaders of water heaters and reverse osmosis water treatment products to the residential market in dollar terms, with primary competitors including Haier/Casarte, Midea/COLMO, and Rinnai in water heaters, and Angel, Haier/Casarte, Midea/COLMO, and Truliva in water treatment. In India, primary competitors are Racold, Bajaj, and Havells in water heaters and Eureka Forbes and Kent in water treatment.

The company generates revenue primarily from the sale of residential and commercial water heaters, boilers, and water treatment products. A significant portion of North America sales is derived from the replacement of existing products. The company sells through wholesale distribution channels, including approximately 800 independent wholesale plumbing distributors, retail channels including four of the six largest national hardware and home center chains with a long-standing exclusive relationship with Lowe's, and e-commerce channels. In China, the company sells through approximately 8,700 points of sale, of which approximately 3,800 are retail outlets in tier one through tier three cities and approximately 1,400 exclusively sell its products, as well as through e-commerce channels.

In the North America segment, the company offers water heaters in sizes ranging from 2.5 gallon point-of-use to 2,500 gallon products with varying efficiency ranges, including electric, natural gas, liquid propane tank-type, tankless, heat pump, and solar tank units. It offers residential and commercial boilers ranging in size from 45,000 British Thermal Units to 6.0 million BTUs. 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. The company also manufactures expansion tanks, commercial solar water heating systems, swimming pool and spa heaters, and related products and parts. In the Rest of World segment, the company manufactures and markets residential water heater and water treatment products, primarily incorporating reverse osmosis technology, and commercial dispensing water treatment products, and also designs and markets kitchen products (range hoods, cooktops, steam ovens, and dishwashers) and connected product technology in China.

In 2024, the company launched its newly designed ADAPT condensing gas tankless water heater and VERITUS air source commercial heat pump water heater, which were further expanded in 2025. The company also recently launched its Cyclone Flex commercial condensing water heater ahead of the upcoming October 2026 Department of Energy commercial rule. In the third quarter of 2025, the company initiated an assessment of strategic opportunities for its China business, including strategic partnerships and other alternatives. In November 2025, the company announced it signed a definitive agreement to acquire LVC Holdco LLC (Leonard Valve) for $470 million , subject to customary adjustments, which was completed in January 2026. On November 1, 2024, the company acquired Pureit from Unilever for approximately $125 million , subject to customary adjustments. In 2025, the Board of Directors approved adding 5,000,000 shares of Common Stock to an existing discretionary share repurchase authority, and the company repurchased 5,942,601 shares at an average price of $67.44 per share and at a total cost of $400.8 million . Dividends paid were $1.38 per share in 2025 compared with $1.30 per share in 2024.

Net sales for 2025 were $3,830.2 million , an increase of $12.1 million compared to 2024 sales of $3,818.1 million . Net earnings were $546.2 million in 2025 compared to $533.6 million in 2024. Diluted earnings per share were $3.85 in 2025 versus $3.63 in 2024. Gross profit margin was 38.8% in 2025 compared to 38.1% in 2024. Cash provided by operating activities was $616.8 million in 2025 compared to $581.8 million in 2024.

Business Outlook

Management expects 2026 consolidated sales to grow between two and five percent compared to 2025. The company expects 2026 full-year earnings of between $3.85 and $4.15 per share . This guidance excludes the impacts from potential future acquisitions, any potential outcomes of the assessment of the China business, and changes to tariffs. The company expects cash provided by operating activities to be between $605 million and $655 million in 2026, and free cash flow to be between $525 million and $575 million in 2026.

In the North America segment, the company projects 2026 industry residential unit volumes will be flat to down, driven by softness in new construction. Commercial water heater industry volumes are anticipated to increase mid-single digits in 2026 after growing approximately five percent in 2025, driven by the buy ahead of products that will be eliminated as part of the DOE regulatory change for commercial water heaters taking effect in October 2026. Boiler sales are expected to grow between six and eight percent in 2026 due to carryover pricing benefits and continued demand for commercial high efficiency condensing gas boilers. Sales of North America water treatment products are anticipated to grow between 10 and 12 percent primarily due to tariff-related pricing benefits and continued expansion of the dealer network.

In the Rest of World segment, the company projects third-party sales in China to decrease mid-single digits in local currency compared to 2025 due to continued softness in consumer demand. The company expects 2026 North America segment margin will be approximately 24.0 to 24.5 percent , and the Rest of World segment margin will be approximately eight to nine percent . The company estimates its annual effective income tax rate for the full year of 2026 will be approximately 24 to 24.5 percent .

The company is expanding its commercial water heater capacity in North America in preparation for the new efficiency rule for commercial water heaters that the Department of Energy has adopted that will take effect in October 2026. The company continues to mitigate the impact of tariffs through footprint optimization, strategic sourcing actions, and other cost containment initiatives.

The company projects that 2026 capital expenditures will be between $70 million and $80 million and full-year depreciation and amortization expense will be approximately $100 million . The company intends to spend approximately $200 million to repurchase Common Stock in 2026 through a combination of 10b5-1 plans and open-market purchases. The company increased its dividend by six percent in the fourth quarter of 2025, and the five-year compound annual growth rate of the dividend payment is approximately seven percent .

The company faces headwinds from continued weak consumer demand in China, which led to a twelve percent decline in local currency third-party sales in 2025. The company also faces constraints from import tariffs, taxes, and customs duties imposed by the U.S. government and retaliatory responses from other countries, which could significantly increase the prices paid for raw materials critical to manufacturing. The company noted that the current U.S. administration has imposed new tariffs and raised the possibility of imposing additional new or increased tariffs.

Risk Factors

The company faces material risks from its significant exposure to China, which accounted for approximately 18% of sales in 2025, with third-party sales in China decreasing twelve percent in local currency in 2025 due to weak consumer demand and the cessation of government appliance subsidy programs. The company also faces risks from import tariffs and trade regulations, which could significantly increase the prices paid for raw materials critical to manufacturing, and the company noted that the current U.S. administration has imposed new tariffs and raised the possibility of additional new or increased tariffs. Customer concentration is a key risk, as sales to the five largest customers represented approximately 41% of sales in 2025, with the two largest customers accounting for $599.7 million and $467.8 million in sales, representing 16% and 12% of net sales, respectively. The company also faces risks from foreign currency fluctuations, holding approximately $140 million of cash and marketable securities in foreign subsidiaries, substantially all in China, and $83 million of cash and marketable securities denominated in Chinese renminbi. Additionally, the company has significant goodwill and indefinite-lived intangible assets totaling $710.6 million and $269.0 million , respectively, which could be impaired if future operating performance does not meet expectations.

Management Priorities

Management's tone is cautiously optimistic, emphasizing strategic priorities including seeking acquisitions that enable growth, expand the core business, and establish adjacencies, as demonstrated by the Leonard Valve acquisition for $470 million and the Pureit acquisition for approximately $125 million . Management highlighted the company's commitment to realizing the potential upside in the China business while conducting a strategic assessment, and noted the company's focus on mitigating tariff impacts through pricing actions, footprint optimization, and cost containment. The company expects 2026 full-year earnings of between $3.85 and $4.15 per share , with consolidated sales growth of two to five percent compared to 2025.

View Source Annual Report on SEC.gov ↗

References

  1. [1] Item 7, MD&A — Overview
  2. [2] Item 7, MD&A — Overview
  3. [3] Item 5, Market for Registrant's Common Equity — Stock Repurchases
  4. [4] Item 5, Market for Registrant's Common Equity — Stock Repurchases
  5. [5] Item 5, Market for Registrant's Common Equity — Stock Repurchases
  6. [6] Item 5, Market for Registrant's Common Equity — Stock Repurchases
  7. [7] Item 7, MD&A — Liquidity and Capital Resources
  8. [8] Item 7, MD&A — Liquidity and Capital Resources
  9. [9] Item 7, MD&A — Results of Operations
  10. [10] Item 7, MD&A — Results of Operations
  11. [11] Item 7, MD&A — Results of Operations
  12. [12] Item 7, MD&A — Results of Operations
  13. [13] Item 7, MD&A — Results of Operations
  14. [14] Item 7, MD&A — Results of Operations
  15. [15] Item 7, MD&A — Results of Operations
  16. [16] Item 7, MD&A — Results of Operations
  17. [17] Item 7, MD&A — Liquidity and Capital Resources
  18. [18] Item 7, MD&A — Liquidity and Capital Resources
  19. [19] Item 7, MD&A — Outlook
  20. [20] Item 7, MD&A — Liquidity and Capital Resources
  21. [21] Item 7, MD&A — Liquidity and Capital Resources
  22. [22] Item 7, MD&A — Overview
  23. [23] Item 7, MD&A — Overview
  24. [24] Item 7, MD&A — North America Segment
  25. [25] Item 7, MD&A — Rest of World Segment
  26. [26] Item 7, MD&A — Results of Operations
  27. [27] Item 7, MD&A — Liquidity and Capital Resources
  28. [28] Item 7, MD&A — Liquidity and Capital Resources
  29. [29] Item 5, Market for Registrant's Common Equity — Stock Repurchases
  30. [30] Item 7, MD&A — Liquidity and Capital Resources
  31. [31] Item 8, Note 16 — Operations by Segment
  32. [32] Item 8, Note 16 — Operations by Segment
  33. [33] Item 1A, Risk Factors — International Operations
  34. [34] Item 1A, Risk Factors — Foreign Currencies
  35. [35] Item 8, Consolidated Balance Sheets
  36. [36] Item 8, Note 9 — Goodwill and Other Intangible Assets
  37. [37] Item 7, MD&A — Overview
  38. [38] Item 7, MD&A — Overview
  39. [39] Item 7, MD&A — Outlook
  40. [40] Item 7, MD&A — Outlook
  41. [41] Item 8, Consolidated Statements of Earnings
  42. [42] Item 8, Consolidated Statements of Earnings
  43. [43] Item 8, Consolidated Statements of Earnings
  44. [44] Item 8, Consolidated Statements of Earnings
  45. [45] Item 8, Consolidated Statements of Earnings
  46. [46] Item 8, Consolidated Statements of Earnings
  47. [47] Item 7, MD&A — Results of Operations
  48. [48] Item 7, MD&A — Results of Operations
  49. [49] Item 8, Consolidated Statements of Earnings
  50. [50] Item 8, Consolidated Statements of Earnings
  51. [51] Item 7, MD&A — Non-GAAP Measures
  52. [52] Item 7, MD&A — Non-GAAP Measures
  53. [53] Item 8, Note 10 — Debt
  54. [54] Item 8, Note 10 — Debt
  55. [55] Item 7, MD&A — Liquidity and Capital Resources
  56. [56] Item 7, MD&A — Liquidity and Capital Resources
  57. [57] Item 7, MD&A — Results of Operations
  58. [58] Item 7, MD&A — North America Segment
  59. [59] Item 7, MD&A — Rest of World Segment
  60. [60] Item 7, MD&A — North America Segment
  61. [61] Item 7, MD&A — North America Segment
  62. [62] Item 7, MD&A — North America Segment
  63. [63] Item 7, MD&A — North America Segment
  64. [64] Item 7, MD&A — Rest of World Segment
  65. [65] Item 7, MD&A — Rest of World Segment
  66. [66] Item 7, MD&A — Rest of World Segment
  67. [67] Item 7, MD&A — Rest of World Segment

Analysis on 6/21/2026