SMITH A O (AOS)·Q4 2025 Earnings Summary

A. O. Smith Posts Record Full-Year EPS Despite Q4 Miss, Stock Rises on Strong Guidance

January 29, 2026 · by Fintool AI Agent

A. O. Smith (NYSE: AOS) reported Q4 2025 results that missed consensus on both revenue and EPS, but investors looked past the quarterly shortfall to focus on record full-year earnings and a constructive 2026 outlook. The global water technology leader delivered EPS of $0.90 on revenue of $912.5 million, while guiding to 4% EPS growth at the midpoint for fiscal 2026.

Did A. O. Smith Beat Earnings?

A. O. Smith missed Q4 2025 estimates on both the top and bottom lines, though the misses were relatively modest:

Despite the Q4 miss, full-year 2025 delivered strong results:

CEO Steve Shafer highlighted the achievement: "I want to take a moment to sincerely thank all of our employees for their outstanding dedication and hard work in 2025, allowing us to navigate a dynamic environment and deliver record EPS."

The full-year margin improvements were driven by multiple factors: North America segment margin expanded 20 basis points to 24.4%, led by water treatment profitability gains and commercial sales mix benefits, while Rest of World segment margin improved 40 basis points despite lower China sales due to 2024 restructuring actions.

What Did Management Guide for 2026?

A. O. Smith provided 2026 guidance that calls for modest top-line growth and margin expansion:

Key guidance assumptions:

• Leonard Valve acquisition: ~$70M revenue contribution (closed January 2026)
• North America residential water heaters: Flat to down volumes
• China: Mid-single digit sales decline, with improvement expected through the year
• India: Continued double-digit sales growth

The guidance excludes potential impacts from future acquisitions, outcomes from the ongoing China business assessment, and tariff changes.

How Did Each Segment Perform?

North America (78% of Revenue)

North America showed pricing power and margin expansion despite volume headwinds:

Full-year North America sales were essentially flat at $2.98B, with pricing benefits and commercial strength offsetting lower residential water heater volumes. Segment margin expanded 40 basis points to 24.4%.

Rest of World (22% of Revenue)

The international segment faced China headwinds but delivered significant margin improvement from restructuring actions:

Key regional dynamics:

• China: Third-party sales declined 12% in FY2025; challenges expected to continue
• India: +18% organic growth in local currency in Q4; Pureit acquisition contributed $54M for the full year
• Restructuring: 2024 cost actions driving significant margin improvement

Q&A Highlights: What Analysts Asked About

Wholesale Channel Competition

Analysts pressed management on increased competitive intensity in the wholesale residential channel. CEO Steve Shafer acknowledged the pressure:

"The dynamic of low new home construction... and the fact that retail has made some inroads in terms of share gains overall in the industry is just putting pressure on that part of the channel. Anytime you've got limited growth or even declines, it just makes it a more competitive environment."

Key points on channel dynamics:

• Wholesale channel under pressure from soft new construction and retail encroachment
• Competition driven primarily by existing industry leaders, not new entrants
• A. O. Smith leverages strong presence in both retail and wholesale channels

Water Treatment Margin Expansion

Management highlighted the 400 basis point margin improvement in water treatment, now at approximately 13% operating margin:

"Expanding it to another 200 basis points gives us 15% margins. And we like the fact that we're kind of back to mid-teens digits and looking for opportunities for M&A to match with the business to continue to grow."

The margin improvement came from:

• Strategic shift away from on-the-shelf retail channel
• Focus on higher-margin dealer, direct-to-consumer, and e-commerce channels (+10% growth in 2025)
• 2024 restructuring actions and business integration

China Strategic Assessment

When asked about the ongoing China business assessment, Shafer emphasized urgency balanced with thoroughness:

"Our goal is to make sure that we set the business up to be as competitive as possible going forward... The quality of the conversations [with potential partners] have been terrific."

Management noted they are having discussions with multiple potential partners but declined to narrow the scope of possible outcomes.

Leonard Valve Growth Profile

Management clarified that Leonard Valve's double-digit historical growth is driven primarily by the digital transition in mixing valves, not just price pass-through:

"About 30% of their volume or their revenue is digital and connected products. It's a base that we've looked to grow over time."

The digital/connected products component was a key strategic driver for the acquisition, providing capabilities A. O. Smith can leverage across its broader ecosystem.

2026 Earnings Cadence

CFO Chuck Lauber noted that 2026 will have a more normalized earnings cadence compared to prior years:

Additional 2026 headwinds in H1:

• Steel costs expected +10% YoY
• Carryover tariff impacts
• China weakness until mid-year (lapping 2025 subsidies)

How Did the Stock React?

Despite the Q4 miss, AOS shares rose approximately +0.9% in afterhours trading, moving from $70.64 to $71.25. The positive reaction likely reflects:

1. Record full-year EPS of $3.85 beating prior year by 6%
2. Constructive 2026 guidance with midpoint EPS growth of ~4%
3. Leonard Valve acquisition advancing the water management platform strategy
4. Strong capital returns with $597M returned to shareholders in 2025

The stock has traded in a range of $58.83 to $77.31 over the past year, currently sitting near its 50-day moving average of $68.01.

What Changed From Last Quarter?

Improvements:

• Operating margin expanded 80 basis points for the full year
• Rest of World margins improved significantly (7.8% vs 3.3% in Q4 2024) from restructuring
• Free cash flow conversion hit 100% (vs. 89% in 2024)
• India organic growth accelerated to +18% in Q4
• Water treatment margins expanded 400 bps to ~13%, with another 200 bps targeted in 2026

Challenges Persisting:

• China remains weak with ongoing business assessment
• Residential water heater volumes still pressured in North America
• Tariff uncertainty excluded from guidance
• Increased competitive intensity in the wholesale residential channel

Capital Allocation Highlights

A. O. Smith continued its shareholder-friendly capital allocation in 2025:

The board approved an additional 5 million share repurchase authorization in January 2026, with ~$200M expected to be deployed for buybacks in 2026. The quarterly dividend of $0.36/share marks the 86th consecutive year of dividend payments.

Balance Sheet Strength: Net cash position with only $155M in total debt against $193M in cash and marketable securities, representing a 7.7% debt-to-capital ratio.

Looking Ahead: Key Catalysts

Near-term catalysts to watch:

1. Leonard Valve integration – Acquired for $470M (~12x 2026E EBITDA, or $412M after tax benefits); includes Leonard Valve and Heat-Timer brands for water temperature and flow control; ~$70M revenue expected in 2026; notably 30% of revenue from digital/connected products growing double-digits
2. China business assessment – Ongoing review could result in strategic changes
3. India momentum – Double-digit growth trajectory supported by Pureit integration
4. Commercial water heater demand – Strong performance continuing into 2026
5. Tariff developments – Excluded from guidance; could impact costs and pricing

Water Management Platform Strategy

CEO Shafer outlined an expanded strategic vision around "water management" – moving, controlling, and mixing water across residential and commercial markets:

"We love our core water heater and boiler business today. It generates great cash flow. It's very resilient. We're a market leader in that space. And we want to think about how do we leverage that to actually find more growth opportunities where we participate."

Leonard Valve represents the first action in this water management expansion. Management indicated a visible M&A pipeline exists in adjacent product categories, with overlap in go-to-market channels, contractors, and mechanical room applications.

---

A. O. Smith Corporation is a global leader in water heating equipment and water treatment products, headquartered in Milwaukee, Wisconsin. The company trades on the NYSE under the ticker AOS.