Group 1 - A. O. Smith Corporation (NYSE:AOS) is recognized as one of the largest producers of residential and commercial water heaters, boilers, and water treatment systems in North America [2][3] - The company is focused on enhancing its market position in North America, advancing energy-efficient technologies, and expanding its international presence, particularly in China and India [3] - A. O. Smith has a strong track record with 32 consecutive years of dividend growth, currently offering a quarterly dividend of $0.34 per share and a dividend yield of 1.86% as of September 19 [4] Group 2 - The company's extensive distribution network is supported by long-standing partnerships, including a significant relationship with Lowe's [2] - Long-term performance is contingent on controlling raw material costs, broadening the product lineup with innovations like high-efficiency water heaters, and maintaining strong distribution ties both domestically and internationally [3]

Leadership Changes - A. O. Smith Corporation appointed Paul Jones as senior vice president, general counsel, and chief compliance officer, effective October 1, 2025 [2] - Jim Stern, previously general counsel since 2007, will now focus on long-term initiatives as executive vice president of corporate development and strategy [2][3] - The leadership change reflects a planful succession approach, leveraging Jones' legal expertise and Stern's strategic vision [3] Analyst Sentiment - Analyst sentiment for A. O. Smith Corporation remains mixed as of early August 2025 [3] - Stifel reaffirmed a 'Buy' rating with a target price of $89 on August 11, 2025 [3] - Citi maintained a 'Hold' rating with a target price of $77 on August 8, 2025 [3] Company Overview - A. O. Smith Corporation is a leading global water technology company focused on new product development, global expansion, and strategic acquisitions and partnerships [4] - The company is included in a list of stocks recommended to sell [4][5]

Company Overview - A. O. Smith Corporation is a leading manufacturer of commercial and residential water heating equipment and water treatment products globally [11] - The company focuses on innovative and energy-efficient solutions [11] Investment Ratings - AOS currently holds a Zacks Rank of 3 (Hold) with a VGM Score of B [11] - The Value Style Score for AOS is B, supported by a forward P/E ratio of 18.75, indicating attractive valuation metrics [12] Earnings Estimates - Two analysts have revised their earnings estimates higher for fiscal 2025 in the last 60 days [12] - The Zacks Consensus Estimate for AOS has increased by $0.09 to $3.84 per share [12] - AOS has an average earnings surprise of +2.9% [12] Investment Considerations - With a solid Zacks Rank and strong Value and VGM Style Scores, AOS is recommended for investors' consideration [12]

Group 1 - A.O. Smith's stock surged by 6.5% following its earnings release on July 24th, indicating strong market reaction to the company's performance [1] - The company beat both top and bottom line estimates, showcasing its financial strength and operational efficiency [1] Group 2 - TQP Research focuses on a value-oriented investment approach, identifying businesses that align with long-term success criteria [1] - The research covers market analysis, macroeconomic trends, large-cap blue chip companies, and undervalued micro-cap and small-cap stocks [1]

Part I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's financial statements for the period ended June 30, 2025, show a slight decrease in net sales and net earnings for both the three and six-month periods compared to 2024. Total assets remained stable, while total liabilities increased slightly. Cash flow from operations improved, but cash used in financing activities, primarily for stock repurchases, led to a net decrease in cash and cash equivalents [Condensed Consolidated Statements of Earnings](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Earnings) Net sales and earnings saw a slight decline in Q2 and H1 2025, while diluted EPS remained stable or slightly decreased Consolidated Earnings Summary (in millions, except per share data) | Metric | Q2 2025 | Q2 2024 | Change | H1 2025 | H1 2024 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $1,011.3 | $1,024.3 | -1.3% | $1,975.2 | $2,003.1 | -1.4% | | **Gross Profit** | $397.1 | $396.0 | +0.3% | $772.5 | $780.7 | -1.1% | | **Net Earnings** | $152.2 | $156.2 | -2.6% | $288.8 | $303.8 | -5.0% | | **Diluted EPS** | $1.07 | $1.06 | +0.9% | $2.01 | $2.05 | -2.0% | - Dividends per share increased to **$0.34** in Q2 2025 from **$0.32** in Q2 2024, and to **$0.68** for H1 2025 from **$0.64** in H1 2024[8](index=8&type=chunk) [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The balance sheet shows stable total assets, a slight increase in total liabilities, and a decrease in cash and cash equivalents Balance Sheet Summary (in millions) | Account | June 30, 2025 | Dec 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $177.9 | $239.6 | | Total Current Assets | $1,388.5 | $1,392.9 | | Total Assets | $3,246.7 | $3,240.0 | | Total Current Liabilities | $843.0 | $897.2 | | Long-term debt | $284.2 | $183.2 | | Total Liabilities | $1,400.8 | $1,356.5 | | Total Stockholders' Equity | $1,845.9 | $1,883.5 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow improved, but significant stock repurchases led to a net decrease in cash and cash equivalents Cash Flow Summary - Six Months Ended June 30 (in millions) | Activity | 2025 | 2024 | | :--- | :--- | :--- | | Cash Provided by Operating Activities | $178.3 | $164.0 | | Cash Used in Investing Activities | $(1.8) | $(60.1) | | Cash Used in Financing Activities | $(241.1) | $(223.7) | | **Net decrease in cash** | **$(61.7)** | **$(123.8)** | - Financing activities in H1 2025 were primarily driven by common stock repurchases of **$251.3 million**, an increase from **$153.2 million** in H1 2024[13](index=13&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Revenue recognition, recent acquisitions, and the use of derivative instruments for risk management are detailed in the financial notes - The company's revenue is primarily recognized at the point in time when control of products is transferred to the customer, which generally occurs upon shipment[21](index=21&type=chunk) - In Q4 2024, the company acquired Pureit, a residential water purification business, for approximately **$124.6 million**. The acquisition is included in the Rest of World segment[31](index=31&type=chunk) - The company utilizes derivative instruments, including foreign currency forward contracts and interest rate swaps, to manage currency exposure and raw materials price risk, not for speculative purposes[52](index=52&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management reported a slight sales decline in H1 2025, driven by lower residential water heater volumes in North America and weak consumer demand in China, partially offset by strong boiler sales and contributions from the Pureit acquisition. Gross margins improved slightly due to a favorable product mix. The company is actively managing costs, including tariffs, through pricing actions and operational efficiencies. Full-year 2025 sales are expected to increase 1-3%, with EPS guidance of $3.70 to $3.90. The company maintains a strong liquidity position, funding operations, dividends, and significant share repurchases [Overview and Outlook](index=22&type=section&id=Overview%20and%20Outlook) The company's segments, recent acquisition impact, and full-year 2025 sales and EPS guidance are outlined, noting challenges in the China market - The company is comprised of two segments: North America and Rest of World (primarily China, Europe, and India)[73](index=73&type=chunk) - The acquisition of Pureit in November 2024 is expected to contribute approximately **$50 million** in sales for the full year 2025[74](index=74&type=chunk) - China sales declined **8%** in H1 2025 due to weak consumer demand. The company is assessing strategic opportunities for its China business[78](index=78&type=chunk) Full Year 2025 Outlook | Metric | Guidance | | :--- | :--- | | Consolidated Sales Growth | 1% to 3% increase vs 2024 | | North America Boiler Sales Growth | 4% to 6% increase vs 2024 | | China Third-Party Sales | 5% to 8% decrease (local currency) | | Diluted EPS | $3.70 to $3.90 | [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Q2 2025 sales decreased due to lower volumes in North America and China, while gross profit margin improved due to a favorable product mix - Q2 2025 sales decreased to **$1,011.3 million** from **$1,024.3 million** in Q2 2024, primarily due to lower residential water heater volumes in North America and lower sales in China[81](index=81&type=chunk) - Gross profit margin for Q2 2025 increased to **39.3%** from **38.7%** in Q2 2024, mainly driven by mix benefits toward more profitable channels in water treatment[82](index=82&type=chunk) - Interest expense increased in Q2 and H1 2025 compared to the prior year periods, primarily due to higher debt levels[84](index=84&type=chunk) [Segment Analysis](index=24&type=section&id=Segment%20Analysis) North America sales declined due to lower water heater volumes, while Rest of World sales decreased due to China, partially offset by the Pureit acquisition North America Segment Performance (in millions) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $779.0 | $790.7 | $1,527.7 | $1,557.0 | | **Segment Earnings** | $198.1 | $198.4 | $383.3 | $397.1 | | **Segment Margin** | 25.4% | 25.1% | 25.1% | 25.5% | - The North America sales decrease was driven by lower residential water heater volumes, partially offset by favorable pricing and higher boiler sales[87](index=87&type=chunk) Rest of World Segment Performance (in millions) | Metric | Q2 2025 | Q2 2024 | H1 2025 | H1 2024 | | :--- | :--- | :--- | :--- | :--- | | **Net Sales** | $240.1 | $244.8 | $466.8 | $471.7 | | **Segment Earnings** | $25.3 | $25.9 | $45.0 | $43.1 | | **Segment Margin** | 10.5% | 10.6% | 9.6% | 9.1% | - The Rest of World sales decrease was due to lower volumes in China, partially offset by incremental sales from the Pureit acquisition, which added approximately **$16 million** in Q2 and **$28 million** in H1 2025[89](index=89&type=chunk) [Liquidity & Capital Resources](index=26&type=section&id=Liquidity%20%26%20Capital%20Resources) Operating cash flow improved, but increased debt and significant share repurchases led to higher leverage, while dividends continued - Cash provided by operations in H1 2025 was **$178.3 million**, up from **$164.0 million** in H1 2024, due to lower cash outlays for working capital[94](index=94&type=chunk) - The company repurchased **3,786,073 shares** for **$251.3 million** in the first six months of 2025 and expects to spend approximately **$400 million** on stock repurchases for the full year[98](index=98&type=chunk)[99](index=99&type=chunk) - Total debt increased by **$110.2 million** in H1 2025, with leverage (debt-to-capitalization) rising to **14.1%** from **9.3%** at year-end 2024[97](index=97&type=chunk) - On July 7, 2025, the Board of Directors declared a quarterly cash dividend of **$0.34 per share**[100](index=100&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=28&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company is exposed to market risks, including currency and commodity price fluctuations. These risks are monitored continuously, and the company uses forward and futures contracts, primarily with terms of less than one year, to minimize these exposures. The company does not engage in speculative derivative strategies - The company's disclosures about market risk have not materially changed since the 2024 year-end report[110](index=110&type=chunk) [Controls and Procedures](index=29&type=section&id=Item%204.%20Controls%20and%20Procedures) Based on an evaluation conducted by management, including the CEO and CFO, the company's disclosure controls and procedures were concluded to be effective as of June 30, 2025. There were no material changes in internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of June 30, 2025[111](index=111&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[112](index=112&type=chunk) Part II. OTHER INFORMATION [Legal Proceedings](index=29&type=section&id=Item%201.%20Legal%20Proceedings) There have been no material changes in the legal and environmental matters from those disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes in legal proceedings were reported for the quarter[113](index=113&type=chunk) [Issuer Purchases of Equity Securities](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%2C%20Use%20of%20Proceeds%2C%20and%20Issuer%20Purchases%20of%20Equity%20Securities) In Q2 2025, the company repurchased 1,991,379 shares at a total cost of $130.7 million. As of June 30, 2025, 2,960,052 shares remained available for repurchase under the existing authorization, which was increased by 5,000,000 shares in Q1 2025 Issuer Purchases of Equity Securities (Q2 2025) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2025 | 564,851 | $63.72 | | May 2025 | 799,788 | $68.10 | | June 2026 | 626,740 | $64.24 | | **Q2 Total** | **1,991,379** | **$65.64** | - As of June 30, 2025, **2,960,052 shares** remained available for purchase under the company's repurchase program[114](index=114&type=chunk)

Core Insights - A. O. Smith Corporation (AOS) reported adjusted earnings of $1.07 per share for Q2 2025, exceeding the Zacks Consensus Estimate of 97 cents, with a year-over-year increase of 1% [1] - Net sales reached $1.01 billion, surpassing the consensus estimate of $990.9 million, although this represented a 1% decline year-over-year due to lower water heater volumes and decreased sales in China [1] Segmental Details - North America sales decreased by 1% year-over-year to $779 million, compared to an estimated $758.9 million, primarily due to lower water heater volumes [2] - Segmental earnings remained flat year-over-year at $198.1 million [2] - Sales in the Rest of the World segment totaled $240.1 million, down 2% year-over-year, with China sales decreasing by 11% and India sales increasing by 19% in local currency [3] Margin Details - Cost of sales was $614.2 million, down 2.2% year-over-year, while selling, general & administrative expenses rose by 1.5% to $191.3 million [4] - Gross profit increased by 0.3% year-over-year to $397.1 million, resulting in a gross margin of 39.3%, up from 38.7% in the previous year [4] - Interest expenses rose to $4.6 million from $1.8 million in the year-ago quarter [4] Liquidity & Cash Flow - As of June 30, 2025, cash and cash equivalents totaled $177.9 million, down from $239.6 million at the end of December 2024 [5] - Long-term debt increased to $284.2 million from $183.2 million at the end of December 2024 [5] - Cash provided by operating activities for the first half of 2025 was $178.3 million, compared to $164 million in the same period last year [5] Share Repurchases - In the first half of 2025, A. O. Smith repurchased 3.8 million shares for $251.3 million, with 3 million shares remaining under the existing repurchase authorization as of June 2025 [6] 2025 Outlook - A. O. Smith raised its sales outlook for 2025 to a range of $3.85-$3.93 billion, up from the previous estimate of $3.8-$3.9 billion, with reported sales of $3.82 billion in 2024 [7] - Adjusted earnings per share (EPS) forecast for 2025 is now projected to be between $3.70-$3.90, compared to the earlier expectation of $3.60-$3.90 [8]

Financial Data and Key Metrics Changes - The company reported sales of $1 billion in Q2 2025, a decrease of 1% year-over-year, while earnings per share increased by 1% to $1.07 [16] - North America segment sales were $779 million, down 1% compared to the previous year, with segment operating margin increasing by 30 basis points to 25.4% [16][17] - Operating cash flow for the first six months of 2025 was $178 million, with free cash flow of $140 million, both higher than the same period last year [19] Business Line Data and Key Metrics Changes - North America water heater sales decreased by 2% in Q2 2025, while boiler sales increased by 6% [9][10] - North America water treatment sales saw slight growth, driven by priority channels like e-commerce and direct-to-consumer, contributing to margin expansion [10][17] - In China, sales decreased by 11% in local currency due to economic challenges and limited government subsidies [10][12] Market Data and Key Metrics Changes - The company expects China sales to decrease by 5% to 8% in local currency for 2025, with ongoing economic challenges impacting performance [26] - The North America boiler sales projection was raised to an increase of 35% to 46% compared to 2024 [27] - The company anticipates a decline of approximately 5% in North America water treatment sales for 2025 [28] Company Strategy and Development Direction - The company is focused on operational excellence, technology investment, and innovation to drive future growth [32][34] - A strategic assessment of the China business is underway to explore options for improvement and competitiveness [11][12] - The company is committed to portfolio management and is open to M&A opportunities to strengthen its core business and explore new growth platforms [36][37] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's future, emphasizing the importance of operational efficiency and innovation [6][39] - The company remains cautious about the near-term market outlook, particularly in China, but sees long-term potential in the market [12][26] - Management highlighted the need to navigate tariff impacts and cost pressures while maintaining strong market leadership [39] Other Important Information - The company plans to increase its share repurchase program from $306 million in 2024 to approximately $400 million in 2025 [20] - The board approved a quarterly dividend of $0.34 per share [20] - The company is on track to achieve $15 million in annual benefits from restructuring initiatives [12] Q&A Session Summary Question: Why is the company assessing its China business now? - Management indicated that the assessment is to explore options for improving competitiveness and success in the challenging market environment [44][46] Question: What are the expectations for margins in the second half of the year? - Management expects continued headwinds in China but anticipates realizing full annual savings from cost reduction actions [48][49] Question: How did the company manage the pull forward of volumes in the first half? - The company worked closely with customers to smooth production schedules and avoid inefficiencies [72][75] Question: What is the outlook for the North America water heater business? - Management expects improved market share in the second half of the year due to better order management [55][56] Question: Is the company considering transformational M&A? - Management is open to transformational M&A but emphasizes the need for careful evaluation and alignment with strategic goals [81][83]

Financial Data and Key Metrics Changes - The company reported sales of $1 billion in Q2 2025, a decrease of 1% year over year, while earnings per share increased by 1% to $1.07 compared to the prior period [14] - North America segment sales were $779 million, also down 1% year over year, with segment operating margin increasing by 30 basis points to 25.4% [14][15] - Operating cash flow for the first six months of 2025 was $178 million, with free cash flow at $140 million, higher than the same period last year [17] Business Line Data and Key Metrics Changes - North America water heater sales decreased by 2% in Q2 2025 due to lower volumes, while boiler sales increased by 6% [7][8] - North America water treatment sales saw slight growth, offsetting expected retail declines, contributing to operating margin expansion [8][15] - In China, sales decreased by 11% in local currency due to economic challenges and limited government subsidies [8][10] Market Data and Key Metrics Changes - The company expects China sales to decrease by 5% to 8% in local currency for 2025, with ongoing economic challenges impacting performance [24] - The North America boiler sales projection was raised to an increase of 35% to 46% compared to 2024 [25] - The company anticipates North America water treatment sales to decline approximately 5% in 2025 [27] Company Strategy and Development Direction - The company is focused on operational excellence, innovation, and portfolio management to drive future growth [30][32][34] - A new product development center has been commissioned to enhance innovation capabilities [33] - The company is assessing its China business to explore options for improvement and strategic partnerships [9][10][34] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's future despite current macroeconomic challenges, highlighting the long-term potential of the China market [10][36] - The company is cautious about the near-term market outlook, particularly in China, but remains optimistic about operational efficiencies and margin improvements [24][36] - The leadership team is committed to leveraging the AOS operating system and driving innovation to enhance competitive positioning [38] Other Important Information - The company announced a quarterly dividend of $0.34 per share and plans to repurchase approximately $400 million of shares in 2025 [19] - The company is actively assessing strategic opportunities and has sufficient resources for suitable acquisitions [19] Q&A Session Summary Question: Why is the company assessing its China business now? - Management indicated that the assessment is to explore options for ensuring the business is positioned for success in a challenging environment [40][41] Question: What are the expectations for margins in the second half of the year? - Management expects continued headwinds in China and a cautious outlook for margins due to rising costs and tariff impacts [42][43] Question: How did the company manage the pull forward of volumes in the first half? - The company worked closely with customers to smooth production schedules and avoid inefficiencies caused by order surges [67][68] Question: What is the competitive landscape like in the North America water heater market? - Management noted that new entrants face challenges in gaining market share due to the need for a comprehensive product portfolio and the complexities of regulatory changes [96][97]

Financial Performance - Net sales decreased slightly to $1 billion[11] - Earnings Per Share (EPS) increased by 1% year-over-year to $1.07[11] - North America segment sales decreased by 1% year-over-year[11] - Rest of World segment sales decreased by 2% due to lower sales in China[11] - Free cash flow increased to $139.9 million compared to $119.1 million in the same period last year[43] Segment Analysis - North America segment margin increased to 25.4%[11] - Boiler sales in North America increased by 6%[19] - China third-party sales declined 11% in local currency due to weak consumer demand[23] Strategic Initiatives and Outlook - The company projects share repurchases of approximately $400 million for the full year[27] - Revenue is expected to increase by approximately 1% to 3% for 2025[30] - The company is initiating an assessment of its China business to ensure it is well-positioned for the future[40] - The company expects free cash flow between $500 million and $525 million[30]

Company Performance - A.O. Smith reported quarterly earnings of $1.07 per share, exceeding the Zacks Consensus Estimate of $0.97 per share, and showing a slight increase from $1.06 per share a year ago, resulting in an earnings surprise of +10.31% [1] - The company posted revenues of $1.01 billion for the quarter ended June 2025, surpassing the Zacks Consensus Estimate by 2.06%, although this represents a slight decrease from year-ago revenues of $1.02 billion [2] - Over the last four quarters, A.O. Smith has surpassed consensus EPS estimates two times and topped consensus revenue estimates three times [2] Stock Outlook - A.O. Smith shares have increased approximately 4.7% since the beginning of the year, compared to the S&P 500's gain of 8.1% [3] - The current consensus EPS estimate for the upcoming quarter is $0.89 on revenues of $927.15 million, and for the current fiscal year, it is $3.76 on revenues of $3.83 billion [7] - The estimate revisions trend for A.O. Smith was mixed ahead of the earnings release, resulting in a Zacks Rank 3 (Hold) for the stock, indicating expected performance in line with the market [6] Industry Context - The Manufacturing - Electronics industry, to which A.O. Smith belongs, is currently in the top 10% of over 250 Zacks industries, suggesting a favorable outlook for stocks within this sector [8] - Empirical research indicates a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can be tracked by investors [5]