Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. Our EPS was $0.85, a decrease of 11% due to lower volumes and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition. Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter.
Production and shipping constraints caused by adverse weather, most notably at our Ashland City, Tennessee facility, combined with softer than anticipated residential industry demand early in the year, negatively impacted the quarter. As we discussed on our January earnings call, the wholesale residential channel continues to face challenges, including a soft market in new construction and continued initiatives by retailers to expand into serving the professional. Our North America boiler sales grew 2% compared to 2025 as residential boiler volume growth and carryover pricing benefits more than offset lower commercial volumes. 10% growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel.
A cautious consumer environment led to flat growth in our more consumer-facing channels, with a general trend towards a trade-down to lower-priced products. We expanded operating margin by almost 100 basis points despite the slower start to the year as we continue to work on improving the profitability of this platform. We exited the quarter with a strong backlog, and Leonard remains on track to achieve another year of double-digit growth. Because of our team's swift response and our insurance coverage, we project minimal impact to our full-year performance.
| Metric | Period | Current guidance |
|---|---|---|
| Adjusted EPS | FY2026 | $3.70-$4.00, excluding a ~$20 million North America water treatment restructuring/impairment charge |
| Total company top-line growth | FY2026 | approximately 2%-4% |
| China sales (local currency) | FY2026 | down low double digits, with Q2 down approximately 15% vs Q1 |
| U.S. commercial water heater industry volumes | FY2026 | similar to last year (flat) after DOE one-year enforcement delay |
| North America boiler sales growth | FY2026 | 6%-8% (unchanged) |
| North America water treatment sales growth | FY2026 | 5%-6% |
| Leonard Valve sales | FY2026 | double-digit growth, ~$70 million (unchanged) |
| India (incl. Pureit) top-line growth | FY2026 | ~10% (unchanged) |
| North America segment margin | FY2026 | approximately 24% |
| Rest of World segment margin | FY2026 | 6%-7% |
| Steel cost assumption (YoY) | FY2026 | increase of approximately 15% vs 2025 |
| Freight, non-steel material and tariff cost impact on total company COGS | FY2026 | increase of approximately 3% |
| Capital expenditures | FY2026 | $70-$80 million (maintained) |
| Free cash flow | FY2026 | $525-$575 million |
| Interest expense | FY2026 | $30-$40 million (higher due to $470 million debt for Leonard Valve) |
| Corporate and other expenses | FY2026 | $80-$85 million (incl. $6 million Leonard Valve transaction expenses) |
| Effective tax rate | FY2026 | 24%-24.5% |
| Diluted shares outstanding | end of 2026 | 138 million |
| Share repurchases | FY2026 | $200 million |
| North America water treatment restructuring charge | Q2 2026 | approximately $20 million, with projected annual savings of $6-$8 million beginning in 2027 |
| North America water treatment operating margin | 2026 / 2027 | expand ~200 bps to ~15% in 2026, with an incremental ~200 bps in 2027 |
| Metric | YoY | Note |
|---|---|---|
| Total company sales | -2% to $946 million | Lower Rest of World/China volumes, partly offset by a 1% increase in North America |
| Adjusted EPS | -11% to $0.85 | Lower volumes and Leonard Valve transaction-related expenses recognized in the quarter |
| North America segment sales | +1% to $753 million | Carryover pricing and Leonard Valve contributions largely offset by lower residential water heater volumes and weather-related constraints |
| North America segment earnings / margin | earnings -$10M to $175M; margin -140 bps to 23.3% | Lower residential water heater volumes more than offset Leonard Valve's earnings contribution; prior year benefited from pull-forward demand and richer mix |
| Rest of World segment sales | -11% to $201 million | Continued weak consumer demand in China, partially offset by favorable foreign currency |
| Rest of World segment earnings / margin | earnings -$8M to $12M; margin -250 bps to 6.2% | Lower sales volumes, partially offset by continued cost management in China |
| China sales (local currency) | -17% | Discontinuation of most government stimulus and continued low consumer confidence, especially in the premium market |
| North America water heater sales | -2% | Weather-related production/shipping constraints at Ashland City and softer-than-anticipated early residential demand |
| North America boiler sales | +2% | Residential boiler volume growth and carryover pricing more than offset lower commercial volumes |
| North America water treatment sales | +1% | 10% priority dealer channel growth largely offset by softness in specialty plumbing wholesale and a trade-down to lower-priced products |
| Leonard Valve sales contribution | +$16 million (new) | Strong performance in the valve business following the January 6th acquisition |
| Free cash flow | $119 million, significant increase over 2025 | Diligent working capital management and timing of customer payments |
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| China strategic assessment | Ongoing evaluation of strategic alternatives | Assessment maturing but taking longer amid a very challenging market; many performance-improvement actions pending its conclusion, with clarity targeted within the next few months | — |
| North America water treatment reset | Exiting on-the-shelf retail as the first step of the reset | Next step: brand rationalization (favoring the A. O. Smith brand) and footprint optimization, with a ~$20M Q2 restructuring charge and margin expansion goals | — |
| Operational excellence and AI | AOS Operating System driving continuous improvement | Adding process intelligence and AI agents (order management, warranty claims, technical service) to lift productivity and margins | — |
| Water management M&A platform | Water treatment scale-up focus over the last seven-eight years | Leonard Valve as the foundation of the water management strategy, viewed as the richest area for future M&A | — |
| Pricing versus cost inflation | Carryover pricing offsetting cost inflation | New 4%-7% price increases on most water heater and boiler products announced, with benefit expected from Q3 against rising steel, freight and oil-linked costs | — |
| DOE commercial water heater regulation | October 6 commercial regulatory change expected to drive pre-buy activity | DOE issued a one-year enforcement delay to October 2027, so less pre-buy is now assumed and commercial industry volumes projected similar to last year | — |