A. O. Smith Q3 2026: sales flat at $940.5M, buybacks held EPS to −1% as it sells 81% of China

A. O. Smith, the largest US maker of water heaters and boilers, posted third-quarter 2026 sales of $940.5 million, essentially flat against $942.5 million a year earlier. Net earnings fell 4% to $126.3 million and diluted EPS slipped 1% to $0.93. The quarter had no restructuring charges, so the GAAP and adjusted figures are the same this time. Inside the flat total, North America grew 3%, mostly from an acquisition and boilers, while China sales fell 17% in local currency. Two days before the results, the company agreed to sell 81% of its China business to the investment firm CPE.

Q3 2026 in numbers

A. O. Smith does not report an operating income line. The operating margin shown here is gross profit ($364.7M) minus selling, general and administrative expenses ($189.5M), divided by sales. Operating margin is the share of sales left after making the products and running the business, before interest and tax.

Takeaway: Profit from running the business was flat at $175.2M against $175.6M, so the ongoing business held its ground in a weak quarter. The 4% drop in net earnings came from below that line: interest expense doubled to $7.7M on the term loan used to buy Leonard Valve, and the tax rate rose to 24.2% from 23.2%. Buybacks then shrank the EPS decline to 1%. What comes next depends on North American water heaters, because China is being sold and boilers alone cannot carry growth.

Segments

North America ($761.6M, +3%). Leonard Valve, a maker of water-mixing and -management valves bought in January 2026, added about $15M of sales. Without it, organic growth was 1%. Boiler sales rose 13% and price increases helped. Residential water heater volumes fell. Segment earnings were flat at $179.9M (vs $179.7M), and segment margin slipped 60 basis points to 23.6% (a basis point is one-hundredth of a percentage point). The company says lower residential water heater volumes and higher costs for steel and freight outweighed higher boiler volumes, pricing, Leonard Valve's earnings and refunds of tariffs paid under the International Emergency Economic Powers Act (IEEPA). The release does not give the size of those refunds.

Rest of World ($192.8M, −7%). This segment is mainly China, plus India and Europe. A weaker dollar added about $5M (2 points), so organic sales fell 9%. China sales fell 17% in local currency. The company cites weak consumer demand and disruption from the strategic review. Segment earnings fell to $10.5M from $15.4M, a 5.4% margin. That compares with 5.2% in Q2, so margins in China have stopped falling but remain low.

The China sale

On October 27, A. O. Smith agreed to sell 81% of its China business to CPE. It keeps 19% and licenses its brand to the business over the long term. The deal values the business at about $400M on a cash-free, debt-free basis. Including the present value of the brand royalties, the company puts the total value above $500M. The structure also lets it bring home about $80M of cash currently held in China. Management says it will put the after-tax proceeds and that cash mainly into share repurchases. The deal is expected to close in the first half of 2027, subject to regulatory approvals.

For scale, China contributed $674.9M of sales and $0.43 of EPS in 2025, against total company EPS of $3.85. It contributed $434.6M of sales and $0.20 of EPS in the first nine months of 2026. The China business will be reported as a discontinued operation from Q4 2026 and earlier periods will be restated. As a result, the next quarterly comparison will be on a smaller, North America-heavy company.

What the headline numbers hide

• Buybacks did most of the work on EPS. Net earnings fell 4.3%, but EPS fell only 1.1%, because the average diluted share count dropped 3.4% to 136.1M from 140.9M. The company repurchased about $98M of stock in Q3 ($260.6M year to date minus $162.4M through June) and expects about $300M for the full year. That implies only about $40M in Q4. About 1.6M shares of buyback authority remain.
• Below-the-line costs rose. Interest expense rose to $7.7M from $3.6M after the company borrowed $470M in January to buy Leonard Valve. Total debt is $673.1M, up from $155.0M at the end of 2025. The tax rate rose a point to 24.2%. These two items, not the operating business, account for the net earnings decline.
• A one-off helped North America's margin. The IEEPA tariff refunds are a one-time benefit that will not recur at the same level. Without them, North America's 60-basis-point margin decline would have been larger. The release does not quantify the refunds, so the size of that effect is unknown.
• The acquisition supported the sales line. Leonard Valve added 2 points to growth. Without it, total sales fell 2% and North America grew 1%, which is closer to the underlying trend in water heater demand.
• Cash conversion is solid. Operating cash flow over nine months was $429.4M against net earnings of $369.2M, about 1.16 times. Free cash flow (operating cash flow minus capital spending) rose 4% to $396.2M, partly because capital spending fell to $33.2M from $53.2M. Receivables ($612.9M, +5% since December) and inventories ($509.3M, +6%) rose, but both include Leonard Valve. The release does not split out the acquired balances, so this is not a warning sign on its own.
• No GAAP vs adjusted gap this quarter. There were no restructuring charges in Q3. The only adjustment so far this year is Q2's $22.6M North America water treatment restructuring. For the nine months, adjusted EPS is $2.80 and GAAP EPS is $2.68.
• The guidance change can't be checked like for like. The new range excludes China for the whole year, so it cannot be set directly against the old range of $3.70–$3.85 adjusted EPS including China (see Outlook).

On balance the quarter is flattered: EPS fell only 1% because a 3.4% smaller share count offset a 4% drop in net earnings, and North America's margin had help from one-off tariff refunds.

Did last time's read hold up?

Our Q2 2026 report said the 28% China sales decline mattered most and that the strategic review of China was unresolved. It also noted that guidance excluded both the China outcome and tariff effects. Both have now been addressed. China's decline eased to 17% in local currency but did not reverse, and the review ended in a majority sale rather than a turnaround. Tariffs turned into a benefit through the IEEPA refunds. In North America, boiler growth slowed from 21% to 13% and segment margin was 23.6%, below Q2's adjusted 24.4%. The cost pressure from steel and other inputs that we flagged in Q2 continued.

Outlook

New full-year 2026 guidance, excluding China for all of 2026:

• Net sales of $3,270–$3,290M, about 4% growth over 2025's $3,155M excluding China.
• Adjusted EPS of $3.42–$3.52, against $3.42 in 2025 excluding China, so flat to +3%. The range excludes about $20M of pre-tax North America water treatment restructuring and impairment costs.

The company reports adjusted EPS excluding China of $2.60 for the first nine months. That implies Q4 EPS excluding China of $0.82–$0.92. The release does not give the Q4 2025 comparison excluding China.

The release gives no China-inclusive guidance, so we can't directly say whether the outlook was cut. A rough check: the new midpoint ($3.47) plus the $0.20 China earned through September comes to $3.67. That is below the old $3.70–$3.85 range unless China adds about $0.03–$0.18 in Q4. China averaged roughly $0.07 per quarter so far this year. Read that way, the outlook for the core business looks slightly lower than in July. Management continues to cite softer residential water heater demand.

Our view: A. O. Smith without China is a North American water heater and boiler business with margins in the mid-20s, a growing valve and water-management line, and India as its main international growth market. Residential water heater volumes are the main thing to watch in Q4. Management named them as the main drag, and in July it projected that industry volumes would fall by a low single-digit percentage this year. Once the deal closes, after-tax proceeds plus about $80M of repatriated cash are meant to go to buybacks. That will keep lifting EPS faster than net earnings, so per-share growth will look better than profit growth in 2027 as well.