A. O. Smith to Sell 81% of China Unit to CPE

The Tip Desk · October 29, 2026 · 4 min read

The water-technology company values the China business at about $400 million cash-free, debt-free, with total value including licensing expected to exceed $500 million.

A. O. Smith Corporation (AOS) announced definitive agreements on October 27, 2026 under which CPE, an alternative asset manager, will acquire an 81% interest in the company’s China business, completing a strategic assessment that began in July 2025.

The Milwaukee-based manufacturer of water heating equipment, boilers and water-treatment products said the transaction values the China business at approximately $400 million on a cash-free, debt-free basis, before the long-term brand-licensing royalty stream. Including the net present value of those licensing economics, total value is expected to exceed $500 million. A. O. Smith will retain a 19% stake and a long-term brand license, and the structure is expected to let it repatriate about $80 million of cash currently held in China. The company intends to prioritize share repurchases with after-tax proceeds and that cash after closing.

The deal is expected to close in the first half of 2027, subject to regulatory approvals. Chairman and Chief Executive Officer Steve Shafer said the agreements complete the strategic assessment and let the company focus capital on higher-return opportunities, while the retained stake and license let shareholders participate in future China growth under CPE’s leadership.

Third-quarter results still included China. Net sales were $940.5 million, versus $942.5 million a year earlier. Net earnings were $126.3 million, or $0.93 a share, compared with $132.0 million, or $0.94 a share, in the third quarter of 2025.

North America sales rose 3% to $761.6 million, slower than the 5% increase to $820.5 million in the second quarter. The company said the gain reflected a $15 million contribution from Leonard Valve, acquired in January 2026, 13% boiler sales growth and pricing actions, partially offset by lower residential water heater volumes. Excluding Leonard Valve, organic sales increased 1%, after 3% organic growth in the second quarter. Boiler growth had been 21% in the prior quarter.

North America segment earnings were $179.9 million and segment margin was 23.6%, versus $179.7 million and 24.2% a year earlier. The company attributed the 60-basis-point margin decline primarily to lower residential water heater volumes and higher steel and freight costs, more than offsetting boiler volumes, IEEPA tariff refunds, pricing and Leonard Valve earnings.

Rest of World sales fell 7% to $192.8 million, a smaller decline than the 19% drop to $194.9 million in the second quarter. China sales decreased 17% in local currency, matching the first-quarter local-currency decline, which the company said reflected weak consumer demand and disruption from the strategic-assessment process. Rest of World segment earnings were $10.5 million and segment margin was 5.4%, versus $15.4 million and 7.4% a year earlier.

The company said it expects to classify China as held for sale and report it as discontinued operations beginning in the fourth quarter of 2026, with prior periods recast, and to review its segment reporting structure in that quarter. Upon closing, it expects to deconsolidate China and account for the 19% interest under the equity method.

Full-year 2026 guidance was restated to exclude China for all of 2026: net sales excluding China of $3,270 million to $3,290 million, versus $3,155 million in 2025 excluding China, and adjusted EPS excluding China of $3.42 to $3.52. That outlook replaces the second-quarter guide of 2% to 3% sales growth, diluted EPS of $3.60 to $3.75 and adjusted EPS of $3.70 to $3.85. The new figures also exclude estimated full-year North America water-treatment pre-tax restructuring and impairment expenses of about $20 million.

Cash was $234.5 million and debt $673.1 million as of September 30, 2026, for a leverage ratio of 27.0%, which the company said rose versus 2025 because of a term loan used to acquire Leonard Valve. In the first nine months of 2026 it deployed $260.6 million to repurchase 4.2 million shares and projects full-year 2026 repurchases of about $300 million. On October 12, 2026, the board approved a 6% dividend increase.