Free cash flow is defined as cash from operations less capital expenditures. Adjusted earnings, adjusted earnings per share, and adjusted segment earnings exclude the impact of restructuring and impairment expenses. 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. Our EPS increased 6% to a record $3.85, driven by profitability improvements in both segments.
North America segment margin improved 20 basis points over 2024 adjusted segment margin, led by profitability improvements in our water treatment business, as well as mix benefits from higher commercial sales. In our Rest of World segment, benefits from our 2024 restructuring actions and other cost control measures in China resulted in margin expansion of 40 basis points, even with lower China sales. We returned $597 million of capital to shareholders with our dividend and share repurchases. In the fourth quarter, we announced the acquisition of Leonard Valve, which we completed earlier this month.
This acquisition expands our water management market reach, digital capabilities, and integrated product portfolio. We project that full year 2025 residential industry unit volumes were roughly flat to 2024, and the commercial water heater industry volumes increased approximately 5%. Our North America boiler sales grew 8% compared to 2024 due to higher commercial and residential boiler volumes, as well as pricing benefits. We are pleased with our 2025 boiler performance and the continued strong demand for our market-leading high-efficiency products.
| Metric | Period | Current guidance |
|---|---|---|
| EPS | FY2026 | $3.85-$4.15 (midpoint ~4% growth) |
| Total top-line growth | FY2026 | approximately 2%-5% |
| North America segment margin | FY2026 | 24%-24.5% |
| Rest of World segment margin | FY2026 | 8%-9% |
| North America boiler sales growth | FY2026 | 6%-8% |
| North America water treatment sales growth | FY2026 | 10%-12% |
| Water treatment operating margin | FY2026 | improve additional 200 bps to ~15% |
| China sales | FY2026 | decrease mid-single digits (first half difficult, return to growth in second half) |
| India sales growth (incl. Pureit) | FY2026 | approximately 10% |
| U.S. residential industry unit volumes | FY2026 | flat to down |
| U.S. commercial water heater industry volumes | FY2026 | increase mid-single digits (buy-ahead of non-condensing gas products before Oct 2026 regulatory change) |
| Steel prices | FY2026 | increase approximately 10% year-over-year |
| Free cash flow | FY2026 | $525 million-$575 million |
| CapEx | FY2026 | $70 million-$80 million |
| Interest expense | FY2026 | $30 million-$40 million (Leonard Valve debt) |
| Corporate and other expenses | FY2026 | approximately $80 million-$85 million (incl. Leonard Valve advisory fees) |
| Effective tax rate | FY2026 | 24%-24.5% |
| Share repurchases | FY2026 | approximately $200 million (board approved 5 million additional shares) |
| Diluted shares outstanding (year-end) | FY2026 | 138 million |
| Quarterly dividend | Q1 2026 | $0.36 per share |
| Leonard Valve sales contribution | FY2026 | approximately $70 million |
| Metric | YoY | Note |
|---|---|---|
| Full-year sales | slight increase to $3.8 billion | pricing benefits and higher commercial water heater and boiler volumes offset by lower China sales |
| Full-year EPS | +6% to record $3.85 (vs adjusted $3.73) | profitability improvements in both segments |
| North America segment sales | slight increase to $3 billion | pricing actions and higher boiler and commercial water heater volumes offset by lower residential wholesale volumes |
| North America segment earnings | +2% to $728 million | improved water treatment profitability and higher commercial volumes |
| North America segment margin | +20 bps to 24.4% | water treatment profitability and higher commercial volumes |
| North America water heater sales | +1% | cost and tariff-related pricing and higher commercial volumes offset lower wholesale residential volumes |
| North America boiler sales | +8% | higher commercial and residential boiler volumes and pricing |
| North America water treatment sales | -2% | strategic shift away from on-the-shelf retail channel offset priority-channel growth |
| Rest of World segment sales | -4% to $880 million | lower China sales partially offset by 13% India growth and Pureit sales of $54 million |
| Rest of World segment earnings | flat at $76 million | lower China sales offset by 2024 restructuring and cost-saving measures |
| Rest of World segment margin | +40 bps to 8.7% | restructuring benefits and cost controls despite lower China sales |
| China third-party sales | -12% local currency | continued economic weakness and soft consumer demand as government subsidies were discontinued in the second half |
| China profitability | +130 bps | late-2024 restructuring actions and expense management |
| Q4 total sales | flat at $913 million | pricing benefits offset by lower China sales |
| Q4 EPS | +6% to $0.90 (vs adjusted $0.85) | segment profitability gains |
| Q4 North America segment sales | +3% to $714 million | pricing benefits |
| Q4 North America segment earnings | +7% to $165 million | pricing benefits and water treatment profitability actions, partially offset by higher input costs |
| Q4 North America segment margin | +70 bps to 23.1% | pricing benefits and water treatment profitability actions offset by higher input costs |
| Q4 Rest of World segment sales | -13% to $206 million | lower China sales |
| Q4 Rest of World segment earnings | -$3 million to $16 million (margin 7.8% vs 8.1%) | lower China sales partially offset by restructuring and cost-saving benefits |
| Q4 organic India sales | +18% local currency | brand strength and new-product innovation |
| Free cash flow | +15% to $546 million (100% conversion) | lower capital investments, higher earnings, and a one-time tax adjustment |
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| Portfolio management as a strategic value-creation lever | water treatment pursued largely as a standalone platform | three levers (portfolio management, innovation, operational excellence) with active portfolio transformation and periodic updates going forward | — |
| Expansion into the water management market | core business of water heaters and boilers plus water treatment | Leonard Valve acquisition (mixing valves, Leonard and Heat-Timer brands, ~30% connected products, ~80% repair/replacement) is the first action into the broader water management ecosystem | — |
| China strategic assessment | restructuring and cost management to protect profitability | ongoing assessment exploring strategic options with a number of potential partners to reposition the business for an eventual recovery | — |
| Water treatment repositioning | broad presence including on-the-shelf retail channel | prioritized higher-margin dealer/DTC/e-commerce channels, exited retail, expanded margin 400 bps with 200 bps more targeted in 2026 | — |
| Gas tankless investment | building a foundation in the category | continued investment to offer best-in-class product, with minimal projected 2026 North America margin impact as scale builds | — |
| M&A discipline and pipeline | water treatment platform build via multiple acquisitions | disciplined, opportunistic approach across water management, India, and water treatment, leveraging strong industry reputation and balance-sheet capacity | — |