Free cash flow is defined as cash from operations plus capital expenditures. Smith team delivered third-quarter sales oi f $943 million, a year-over-year increase of 4%, and EPS of $0.94, a 15% increase over 2024. North America sales grew 6%, primarily as a result of our pricing actions and strong commercial water heater and boiler volumes. We achieved North America segment margin expansion of 110 basis points and rest of world segment margin expansion of 90 basis points.
Pureit contributed $17 million of sales in the quarter, and our legacy India business continued its strong double-digit growth trajectory by delivering 13% growth in local currency. North America water treatment sales decreased 5% in the third quarter, as continued growth in our priority channels was more than offset by an expected decrease from the retail channel. Our priority dealer, e-commerce, and direct-to-consumer channels grew 11% in the quarter. Despite these challenges and the resulting volume pressure, we achieved 90 basis points of margin expansion compared to last year through the restructuring initiatives we undertook in 2024 and other cost-saving measures.
North America segment earnings were $180 million, an 11% increase over the third quarter of 2024. Segment operating margin was 24.2%, an increase of 110 basis points year-over-year, primarily due to pricing actions and higher volumes, more than offsetting higher material and other input costs. Moving to slide seven, rest of the world segment sales of $208 million decreased slightly compared to last year and included $17 million of sales from the Pureit acquisition. Rest of the world segment earnings of $15 million increased year-over-year as continued expense management and the benefits of restructuring actions more than offset lower volumes in China.
| Metric | Period | Current guidance |
|---|---|---|
| Full-year EPS | FY2025 | $3.70-$3.85 |
| Full-year total sales growth | FY2025 | flat to up 1% |
| China sales (local currency) | FY2025 | decline of approximately 10% |
| U.S. residential water heater industry unit volumes | FY2025 | flat to slightly down |
| Commercial water heater industry volumes | FY2025 | up low single digits |
| North America boiler sales | FY2025 | increase of 4%-6% (unchanged) |
| North America water treatment sales | FY2025 | decline approximately 5% (unchanged) |
| Pureit sales contribution | FY2025 | approximately $55 million (slightly higher) |
| North America segment margin | FY2025 | 24%-24.5% |
| Rest of world segment margin | FY2025 | approximately 8% |
| Annualized tariff impact on total COGS | FY2025 | approximately 5% increase |
| CapEx | FY2025 | approximately $75 million |
| Free cash flow | FY2025 | approximately $500 million |
| Interest expense | FY2025 | approximately $15 million |
| Corporate and other expenses | FY2025 | approximately $75 million |
| Effective tax rate | FY2025 | approximately 24% |
| Diluted shares outstanding (year-end) | FY2025 | 142 million |
| Metric | YoY | Note |
|---|---|---|
| Total sales | +4% ($943 million) | North America pricing actions and strong commercial water heater and boiler volumes, partly offset by China weakness |
| EPS | +15% ($0.94) | Segment margin expansion and share repurchases |
| North America segment sales | +6% ($743 million) | Pricing actions plus higher commercial water heater and boiler volumes |
| North America segment earnings | +11% ($180 million) | Pricing actions and higher volumes more than offsetting higher material and input costs |
| North America operating margin | +110 bps (24.2%) | Pricing actions and higher volumes offsetting higher material and other input costs |
| North America water heater sales | +6% | Pricing actions in response to higher tariffs and input costs, plus higher commercial water heater volumes |
| North America boiler sales | +10% | Pricing actions and higher volumes of high-efficiency boilers |
| North America water treatment sales | -5% | Priority channel growth more than offset by an expected retail channel decline |
| North America water treatment priority channels | +11% | Growth in priority dealer, e-commerce, and direct-to-consumer channels |
| Rest of world segment sales | decreased slightly ($208 million) | China decline partly offset by India growth and $17 million from Pureit |
| Rest of world segment earnings | increased ($15 million) | Continued expense management and restructuring benefits more than offset lower China volumes |
| Rest of world operating margin | +90 bps (7.4%) | 2024 restructuring initiatives and other cost-saving measures |
| China third-party sales (local currency) | -12% | Ongoing economic challenges, reduced government subsidy programs, and an increasingly competitive environment lowering volumes |
| India legacy business (local currency) | +13% | Continued strong double-digit growth trajectory |
| Operating cash flow (nine months) | +21% ($434 million) | Lower inventory balances, partly offset by other working capital outlays including lower China customer deposits |
| Free cash flow (nine months) | +35% ($381 million) | Lower inventory balances, partly offset by other working capital outlays |
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| China strategic assessment | Announced intention of a formal China strategic assessment last quarter | Making good progress; commissioned a third-party market analysis that confirmed the brand remains strong, validated the smart-home/AI-link category expansion strategy, and identified go-to-market and business-model opportunities; no outcomes ruled out yet, still early | — |
| Portfolio management and M&A | Ongoing capital-deployment priority | Actively assessing strategic opportunities with sufficient dry powder; active pipeline focused on strengthening the core business or building new growth platforms; not dependent on the China decision | — |
| Operational excellence and innovation | CEO's stated focus areas laid out last quarter | Hosted a leadership summit of the top 140 leaders; welcomed new Chief Digital Information Officer Chris Howe (generative AI background) and a new CTO to bring more operating discipline and accelerate commercialization; opportunity not yet sized | — |
| Production level-loading efficiency | Production efficiency initiative limited first-half pre-buy impact | Level-loading closer to market drove Q3 commercial and residential water heater strength and enabled share gains despite a down residential industry | — |
| Gas tankless entry | Planned launch shifting from China to North America manufacturing | North America products and manufacturing capability ready; strategy changes caused delays; market under pressure tied to residential construction; roughly 20 bps of margin drag this quarter, down from the ~40 bps historically cited; positive customer feedback | — |
| Tariffs and pricing | Price increases effective in the second quarter | Tariffs began impacting Q3 and increase into Q4 (~20 bps on North America margins); annualized tariff impact held at ~5% of COGS; company comfortable with its price-cost relationship but expects some Q4 margin pressure | — |