Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings, adjusted earnings per share, adjusted segment earnings exclude the impact of restructuring and impairment expenses. We continued to gain traction in North America, delivered strong free cash flow performance, and took additional actions to create value for shareholders. At the company level, sales were approximately $1 billion, and adjusted earnings per share were $1.03.
One of the highlights of the quarter was the North America sales increase of 5% to $821 million, which includes Leonard Valve, our recent acquisition that expands our water management and digital control capabilities. Excluding Leonard Valve, organic sales grew 3%, supported by strong boiler growth, carryover pricing actions, and continued focus on serving our customers. Free cash flow increased nearly 70% in the first half of the year, reflecting the strength and resilience of our operating model. Supported by that performance, we increased our 2026 share repurchase target by 50% to $300 million, reinforcing our commitment to disciplined capital deployment and returning cash to shareholders.
While the China appliance market remains challenging, particularly in the premium segment, we continue to manage the business thoughtfully while completing our strategic assessment. We expect to share our conclusion on that assessment by our next quarterly earnings call, and remain focused on identifying the best path forward to support long-term value creation. Residential water heater industry demand remained pressured by softness in new construction as well as existing home sales, which can weigh on replacement demand. In an environment where demand remains muted, our leading brands, broad channel presence, and strong customer relationships continue to differentiate A.
| Metric | Period | Current guidance |
|---|---|---|
| Full-year adjusted EPS | FY2026 | $3.70-$3.85 (range narrowed and lowered) |
| Full-year sales growth | FY2026 | +2% to +3% |
| U.S. residential water-heater industry volume | FY2026 | Down low double digits |
| North America boiler sales growth | FY2026 | +6% to +8% (maintained) |
| North America water-treatment sales growth | FY2026 | +5% to +6% (maintained) |
| China sales (local currency) | FY2026 | Down low double digits (maintained) |
| Steel cost inflation | FY2026 | ~+15% vs 2025, with second-half inflation somewhat higher than the first half |
| Metric | YoY | Note |
|---|---|---|
| Total company sales | ~$1.0B | North America growth and Leonard Valve offset by a 19% Rest-of-World decline driven by China weakness. |
| North America segment sales | +5% to $821M | 3% organic growth ($26M) from 21% boiler growth and carryover water-heater pricing, plus $16M from Leonard Valve, partially offset by lower residential water-heater volumes. |
| North America adjusted segment margin | -100 bps to 24.4% | Organic growth and Leonard Valve largely offset by ~20% higher steel costs, tariffs and other input inflation; IEEPA refunds minimal (~$0.01). |
| North America boiler sales | +21% | Strong commercial demand including seasonal early-buy orders plus residential boiler momentum and pre-buy ahead of price increases. |
| North America water-heater sales | +2% | Carryover pricing offset by soft residential demand tied to weak new construction and existing-home sales. |
| North America water-treatment sales | -2% | Priority dealer-channel growth offset by softer demand in other channels amid cautious consumers. |
| Rest of World segment sales | -19% to $195M | China sales down 28% in local currency on weak consumer demand, partially offset by favorable FX translation. |
| Rest of World segment earnings / margin | $10M; margin 5.2% (down significantly) | Lower China sales volumes, only partially offset by continued cost management. |
| First-half free cash flow | +67% to $233M | Working-capital management more than offset lower earnings. |
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| China strategic assessment | Ongoing assessment of the challenged China business (nearly a year in progress) | Assessment nearing completion; all outcomes still on the table (self-led restructuring, partnership, or a third party leading change); management expects to share its conclusion on the next quarterly call. | — |
| Price/cost management | Managing steel and tariff inflation with pricing | Q2 price/cost slightly positive; 4%-7% water-heater price increases (low end of recent years) delayed ~1 month, realized mid-Q3 with full benefit in Q4; price/cost expected to be roughly neutral in the second half. | — |
| Wholesale vs. retail channel shift | Retail gaining share; wholesale lumpy | Retail continues to gain industry share as big-box players organize around small pros and new construction pressures wholesale; A. O. Smith took targeted actions to win back wholesale share and sees stabilization. | — |
| Water-treatment portfolio optimization | Aquasana-anchored platform built over ~10 years | Footprint optimization and brand-portfolio streamlining underway (annual savings of ~$6M-$8M beginning 2027) to position for more profitable growth; still viewed as an attractive space. | — |
| Product innovation (tankless, heat pump, water treatment) | Multi-year investment in tankless and heat-pump technology | Continued investment complementing the traditional tank portfolio; heat-pump adoption tied to regulation/rebates; increased innovation focus in water treatment. | — |
| AI / productivity | Early AI experimentation | Deploying targeted AI use cases across order management, warranty processing and technical service; too early to size, expected to improve both customer experience and productivity over time. | — |
| Leadership transition | Chuck Lauber as CFO | Planned, orderly transition: Chuck Lauber retiring; Carrie Anderson joins as new CFO. | — |