A. O. Smith — Third Quarter 2026 Earnings Summary

Financial Performance:

• Net sales for Q3 2026 were $940.5 million, flat compared to $942.5 million in Q3 2025.
• Net earnings were $126.3 million, a 4% decrease from $132.0 million in Q3 2025.
• Diluted earnings per share (EPS) were $0.93, a 1% decrease from $0.94 in Q3 2025.
• Year-to-date operating cash flow for the first nine months of 2026 was $429.4 million, slightly lower than $433.7 million in the prior year period.
• Free cash flow for the first nine months of 2026 increased 4% to $396.2 million, compared to $380.5 million in the prior year period, driven by lower capital expenditures of $33.2 million versus $53.2 million.
• Cash balances totaled $234.5 million as of September 30, 2026, with total debt of $673.1 million, resulting in a leverage ratio of 27.0%.
• The company deployed $260.6 million to repurchase 4.2 million shares in the first nine months of 2026.

Guidance and Future Outlook:

• Full-year 2026 guidance has been updated to exclude the China business for all of 2026.
• Projected net sales growth, excluding China, is approximately 4% for 2026.
• Projected adjusted EPS, excluding China, is between $3.42 and $3.52 for 2026.
• The guidance excludes full-year North America water treatment estimated pre-tax restructuring and impairment expenses of approximately $20 million.
• The China business is expected to be classified as held for sale and reported as discontinued operations beginning in Q4 2026, with prior periods recast accordingly.
• The company expects to deconsolidate the China business upon transaction closing and account for its retained 19% interest under the equity method.
• The company will review its segment reporting structure during Q4 2026.

Business Segments and Product Lines:

• North America segment sales increased 3% to $761.6 million, driven by 13% boiler sales growth, pricing actions, and $15 million in sales from the Leonard Valve acquisition (acquired January 2026).
• Excluding Leonard Valve, North America organic sales increased 1%.
• North America segment earnings were $179.9 million with a segment margin of 23.6%, down from $179.7 million and 24.2% in Q3 2025.
• The decline in North America segment margin was primarily due to lower residential water heater volumes and higher input costs (steel and freight), offsetting benefits from pricing, tariff refunds, and Leonard Valve.
• Rest of World segment sales decreased 7% to $192.8 million, including a favorable currency translation impact of $5 million.
• China sales decreased 17% in local currency, reflecting weak consumer demand and disruption from the strategic assessment process.
• Rest of World segment earnings were $10.5 million with a segment margin of 5.4%, compared to $15.4 million and 7.4% in Q3 2025.

Market and Competitive Landscape:

• The company cited persistent inflationary pressures and softer residential water heater demand in North America.
• Continued weakness in China's consumer appliance market impacted Rest of World performance.
• The company maintains leading market positions in water heating and boilers.
• Growth platforms identified include water treatment, water management, and India.

Risks and Challenges:

• Potential negative effects from the China business transaction, including failure to obtain regulatory approvals or satisfy closing conditions.
• Risks related to further softening in U.S. residential and commercial water heater demand or construction instability.
• Exposure to international tariffs, trade disputes, and geopolitical conflicts (Ukraine, Middle East).
• Global inflationary pressures and potential recession impacts on demand.
• Supply chain volatility regarding commodities, components, and fuel prices.
• Inability to implement or maintain pricing actions.
• Inconsistent recovery of the Chinese economy or decline in consumer spending/housing sales.
• Competitive pressures from new technologies and competitors.
• Risks associated with decarbonization trends and energy efficiency regulations.

Management Commentary and Tone:

• CEO Steve Shafer stated that disciplined execution remained a priority while navigating inflationary pressures and market challenges.
• Management expressed confidence in being well-positioned to address near-term headwinds and deliver long-term, profitable growth.
• Shafer noted the China transaction completes a strategic assessment, allowing the company to focus capital on highest-return opportunities while retaining a 19% stake and brand license to benefit from future China growth.
• Management indicated teams are committed to finishing the year strong and are excited about opportunities in North America and growth platforms.

Other Key Points:

• On October 27, 2026, the company announced definitive agreements with CPE to sell an 81% interest in its China business for approximately $400 million (cash-free, debt-free basis), with total value including licensing economics expected to exceed $500 million.
• A. O. Smith will retain a 19% stake and a long-term brand license agreement.
• The transaction enables the repatriation of approximately $80 million in cash currently held in China.
• Proceeds from the China sale and repatriated cash will be prioritized for share repurchases following closing, which is expected in the first half of 2027.
• The board approved a 6% increase in the dividend rate on October 12, 2026, resulting in a five-year compound annual dividend growth rate of approximately 7%.
• The company has increased its dividend for more than 30 consecutive years.
• As of September 30, 2026, authority remained to repurchase approximately 1.6 million additional shares, with full-year 2026 repurchase projections totaling approximately $300 million.