MILWAUKEE – October 29, 2026 -- A. O. Smith (NYSE: AOS) reported third-quarter 2026 sales of $941 million, net earnings of $126 million and diluted EPS of $0.93, while moving to sell 81% of its China business to alternative asset manager CPE and cutting China from its full-year outlook.
China sale values the unit at about $400 million before royalties
The definitive agreements, announced October 27, value the China business at approximately $400 million on a cash-free, debt-free basis, excluding the long-term brand licensing royalty stream. Including the net present value of licensing payments over a multi-decade period, total value is expected to exceed $500 million.
A. O. Smith will keep a 19% stake and license its brand long term. The structure also lets it repatriate roughly $80 million in cash now held in China. The company plans to prioritize share repurchases with after-tax proceeds and repatriated cash. Closing is expected in the first half of 2027, subject to regulatory approvals.
The deal follows a strategic review the company announced in July 2025. CEO Steve Shafer said the transaction lets the company focus capital on its highest-return opportunities.
China sales fall 17% in local currency, pulling Rest of World earnings down
Rest of World sales declined 7% to $192.8 million, including a favorable $5 million currency effect. China sales dropped 17% in local currency on weak consumer demand and disruption from the strategic assessment. Segment earnings fell to $10.5 million from $15.4 million, and margin slid to 5.4% from 7.4%.
North America sales rise 3% to $761.6 million, but margin slips 60 basis points
Boiler sales grew 13%, and Leonard Valve, acquired in January 2026, added $15 million. Excluding that acquisition, organic sales rose 1%. Lower residential water heater volumes partly offset the gains.
Segment earnings were $179.9 million, against $179.7 million a year earlier. Margin narrowed to 23.6% from 24.2% as lower water heater volumes and higher steel and freight costs outweighed boiler volumes, pricing, Leonard Valve earnings and IEEPA tariff refunds.
Free cash flow climbs 4% to $396.2 million on lower capital spending
Operating cash flow for the first nine months was $429.4 million, slightly below the prior year. Capital expenditures fell to $33.2 million from $53.2 million. The company spent $260.6 million to repurchase 4.2 million shares and expects full-year buybacks of about $300 million. Authority remains for roughly 1.6 million more shares.
At September 30, cash totaled $234.5 million and debt $673.1 million, a 27.0% debt-to-capitalization ratio. The increase from 2025 reflects the term loan used to buy Leonard Valve. On October 12, the board approved a 6% dividend increase, extending a record of more than 30 consecutive annual raises.
Guidance now excludes China, with adjusted EPS of $3.42 to $3.52
The updated 2026 outlook projects net sales growth of about 4% excluding China, and adjusted EPS between $3.42 and $3.52. From the fourth quarter, A. O. Smith will report China as discontinued operations with prior periods recast. After closing, it will deconsolidate the unit and account for its 19% stake under the equity method. The company will also review its segment reporting structure in the fourth quarter.