A. O. Smith Cuts Profit Guidance as China Sales Collapse
The water-heater maker's adjusted earnings guidance midpoint fell for the second straight quarter after China local-currency sales dropped 28%.
A. O. Smith (AOS) reported second-quarter net earnings of $124.9 million, down 18% from a year earlier, as a $22.6 million restructuring and impairment charge in its North America water treatment business and a deepening slide in China combined to erase most of the pricing gains the company had banked earlier in the year.
The quarter marks a clear break from the trajectory A. O. Smith had been on. Diluted earnings per share fell 15% to $0.91, compared with 15% growth in the third quarter of 2025 and a roughly flat first quarter of 2026, when earnings were down 14% on a 2% sales decline. Net sales slipped 1% to $1,004.3 million, and on an organic basis, stripping out the Leonard Valve acquisition and currency effects, consolidated sales fell 3% in the quarter and 4% for the first half of the year, a reversal from the positive organic trends the company had reported in North America through 2025.
The restructuring charge, tied to an April 2026 announcement, was the first such charge the company has taken since 2024. A. O. Smith introduced adjusted earnings metrics this quarter specifically to exclude it and said the associated cost cuts should generate $6 million to $8 million in annual savings starting in 2027.
Margin pressure showed up in both reporting segments. North America operating margin, which had held at 25.4% a year earlier and 24.2% in the third quarter of 2025, fell to 23.3% in the first quarter of 2026 and then to 21.6% on a GAAP basis (24.4% adjusted) in the second quarter, as restructuring costs and higher steel and input prices outpaced pricing actions. Rest of World margin, which had been improving as recently as the fourth quarter of 2025 at 8.7% for the full year, dropped to 6.2% in the first quarter of 2026 and 5.2% in the second.
China drove most of that deterioration. Local-currency sales there fell 28% in the quarter, an acceleration from an 11% decline a year earlier, 12% in the third quarter of 2025 and 17% in the first quarter of 2026. Rest of World segment sales overall fell 19% to $194.9 million, extending an 11% decline in the first quarter after roughly flat prior-year comparisons in the back half of 2025. In North America, reported sales growth of 1% to 3% on an organic basis increasingly depended on the Leonard Valve acquisition, which added 2 points, rather than underlying volume, a shift from the 6% organic growth the segment posted in the third quarter of 2025.
A. O. Smith narrowed its full-year 2026 sales growth guidance to 2%-3%, down from the 2%-4% range it had reaffirmed as recently as the first quarter, due to continued softness in residential water heater demand. Adjusted earnings-per-share guidance was cut to $3.70-$3.85 from $3.70-$4.00, with diluted EPS guidance narrowed to $3.60-$3.75 from $3.60-$3.90.
Cash generation was the counterpoint. Operating cash flow for the first half rose 42% to $253.8 million and free cash flow rose 67% to $233.3 million, both accelerating from the growth rates the company reported for the first nine months of 2025. A. O. Smith used that strength to raise its 2026 share repurchase target 50% to $300 million from $200 million.
The balance sheet carries more debt than it did a year ago. The company's leverage ratio climbed to 25.7% at quarter-end from 24.7% in the first quarter and just 9.2% in the third quarter of 2025, after A. O. Smith took on a term loan to fund the $470 million Leonard Valve acquisition it closed in January.