A. O. Smith Corporation

What they do

The company has two reporting segments, North America and Rest of World, both of which manufacture and market residential and commercial gas and electric water heaters, boilers, heat pumps, tanks and water treatment products. North America accounted for approximately 78 percent of 2025 total sales and sells primarily under the A. O. Smith and State brands through roughly 800 independent wholesale plumbing distributors, plus retail and MRO channels including an exclusive relationship with Lowe's. The Rest of World segment is primarily China, India and Europe, and the company also owns the Lochinvar boiler brand and water treatment brands including Aquasana, Hague and Water-Right.

Revenue drivers

• North America water heaters and boilers — The largest piece of the business, at about 78 percent of 2025 sales for the segment overall. Water heater sales rose 1 percent in 2025 and 2 percent in Q2 2026, while boiler sales grew 8 percent in 2025 and 21 percent in Q2 2026. Lochinvar-branded sales split roughly 45 percent water heaters and 55 percent boilers and related parts.
• North America water treatment — Sold through water quality dealers, e-commerce including Amazon, and regional home center chains under A. O. Smith, Aquasana, Hague, Water-Right and other brands. Management guided 2026 growth of 5 to 6 percent, revised down from 10 to 12 percent, and took a $22.6 million restructuring and impairment charge in Q2 2026 to optimize footprint and rationalize brands.
• Rest of World (China, India, Europe) — China is the core of the segment. Segment sales were $194.9 million in Q2 2026, down 19 percent, with China sales down 28 percent in local currency. Pureit, acquired from Unilever in November 2024, contributed $54 million to 2025 Rest of World sales.
• Leonard Valve (acquired January 2026) — Acquired for $470 million and projected to contribute approximately $70 million of 2026 sales in North America. It contributed about $16 million in Q2 2026 and $32 million in the first half of 2026 as a manufacturer of water temperature and flow solutions.

Recent performance

Q2 2026 net sales were $1,004.3 million, down 1 percent from $1,011.3 million a year earlier, with net earnings of $124.9 million versus $152.2 million and diluted EPS of $0.91 versus $1.07. North America sales rose 5 percent to $820.5 million on boiler growth, carryover pricing and the Leonard Valve acquisition, though segment margin fell to 21.6 percent from 25.4 percent because of $22.6 million of restructuring and impairment expenses. Rest of World sales fell 19 percent to $194.9 million and segment margin dropped to 5.2 percent from 10.5 percent. First-half 2026 sales were $1,949.9 million versus $1,975.2 million, and year-to-date operating cash flow rose 42 percent to $254 million.

Strategy

Management's stated priorities are growth through acquisitions and adjacencies, plus operational excellence. The January 2026 Leonard Valve purchase for $470 million was funded with a new term loan from a group of eight banks and is intended to expand the water management presence. The company announced a restructuring plan in the North America water treatment business for footprint optimization and brand rationalization, expecting roughly $6 million to $8 million of annual savings beginning in 2027. It is also expanding North America commercial water heater capacity ahead of the DOE commercial water heater efficiency rule and assessing strategic opportunities for the China business, including partnerships and other alternatives, with that assessment ongoing.

Risks

• China consumer weakness — China third-party sales fell 28 percent in local currency in Q2 2026 after the government appliance subsidy programs ended, and management projects a low double-digit local currency decline for full year 2026.
• Input costs and tariffs — Higher steel and other input costs, including tariffs, offset realized pricing in Q2 2026, and the company has responded with price increases of four to seven percent on most water heater and boiler products effective at the end of the second quarter.
• Residential construction softness — Management projects full year 2026 residential industry unit volumes to decline low single digits due to softness in new construction, pressuring the North America residential water heater business.
• Regulatory timing on commercial water heaters — The DOE announced an up-to-one-year enforcement delay of the October 2026 commercial gas efficiency rule, which the company had expected to drive 2026 buy-ahead volumes.

Outlook

For full year 2026, management guides consolidated sales growth of 2 to 3 percent and diluted EPS of $3.60 to $3.75, or adjusted EPS of $3.70 to $3.85, excluding restructuring and impairment expenses. North America boiler sales are expected to grow 6 to 8 percent and water treatment sales 5 to 6 percent, while China third-party sales are projected to fall low double digits in local currency. The 2026 share repurchase target was increased to $300 million, and guidance excludes potential future acquisitions, outcomes of the China assessment and recently announced tariff changes.