A. O. Smith(AOS) - 2025 Q2 - Quarterly Results

Executive Summary & Q2 Highlights This section provides an overview of Q2 2025 financial results, key performance indicators, and strategic initiatives, including the assessment of the China business Q2 2025 Financial Performance A. O. Smith reported Q2 2025 diluted EPS of $1.07, a 1% YoY increase, despite a 1% decline in net sales to $1.01 billion and a 3% decrease in net earnings to $152.2 million. North America operating margin improved to 25.4%, and Rest of World operating margin showed sequential improvement to 10.5% Q2 2025 Financial Highlights | | Q2 2025 (millions USD) | Q2 2024 (millions USD) | % Change YoY | | --- | --- | --- | --- | | Net sales | $1,011.3 | $1,024.3 | -1% | | Net earnings | $152.2 | $156.2 | -3% | | Diluted earnings per share | $1.07 | $1.06 | 1% | - North America operating margin increased 30 basis points to 25.4%[3] - Rest of World operating margin continued sequential improvement to 10.5%[3] Strategic Initiatives and CEO Commentary CEO Steve Shafer highlighted steady growth in commercial boilers and North America water heater volumes, alongside strong growth in India. The company is initiating a formal assessment of its China business to explore strategic opportunities, including partnerships, to drive greater value through operational excellence, innovation, and portfolio management - Initiating assessment of strategic opportunities for China business[3][4] - New CEO Steve Shafer focuses on improved operational excellence, breakthrough innovation, and portfolio management[4] - Legacy India business grew 19% in local currency, and Pureit, a recent acquisition in India, contributed $16 million in sales[4] Segment-level Performance This section details the financial performance of the North America and Rest of World segments, highlighting regional sales, earnings, and margin trends North America Segment North America sales decreased 1% to $779.0 million compared to a challenging prior year, as higher boiler sales were offset by lower water heater volumes. Segment earnings remained essentially flat at $198.1 million, but segment margin expanded 30 basis points to 25.4%, driven by mix benefits from water treatment and high-efficiency water heaters North America Segment Performance | Metric | Q2 2025 (millions USD) | Q2 2024 (millions USD) | | :--- | :--- | :--- | | Sales | $779.0 | $790.7 | | Earnings | $198.1 | $198.4 | | Segment Margin | 25.4% | 25.1% | - Improved segment operating margin was driven by mix benefits from the water treatment priority channel strategy and growth in high efficiency water heaters[6] Rest of World Segment Rest of World sales decreased 2% to $240.1 million, primarily due to an 11% decline in China sales (local currency), largely offset by 19% organic sales growth in India and a $16 million contribution from the Pureit acquisition. Segment earnings were $25.3 million, with margin at 10.5%, remaining relatively flat due to restructuring and cost reduction actions offsetting lower China volumes Rest of World Segment Performance | Metric | Q2 2025 (millions USD) | Q2 2024 (millions USD) | | :--- | :--- | :--- | | Sales | $240.1 | $244.8 | | Earnings | $25.3 | $25.9 | | Segment Margin | 10.5% | 10.6% | - China sales decreased 11% in local currency year-over-year[7] - Organic sales in India grew 19% in local currency, and Pureit contributed $16 million to sales in the second quarter of 2025[7] Financial Position & Capital Allocation Overview of the company's balance sheet, liquidity, cash flow generation, and strategies for returning capital to shareholders Balance Sheet and Liquidity As of June 30, 2025, the company maintained a strong liquidity position with $177.9 million in cash and marketable securities and total debt of $303.4 million, resulting in a low leverage ratio of 14.1% as measured by total debt-to-total capitalization Key Balance Sheet and Liquidity Metrics | Metric (as of June 30, 2025) | Amount (millions USD) | | :--- | :--- | | Cash and marketable securities | $177.9 | | Total debt | $303.4 | | Leverage ratio (total debt-to-total capitalization) | 14.1% | Cash Flow and Shareholder Returns Cash provided by operations increased to $178.3 million and free cash flow to $139.9 million in the first six months of 2025, primarily due to lower working capital outlays. The company returned capital to shareholders by repurchasing $251.3 million of shares and approving a $0.34 per share dividend Cash Flow Performance | Metric (Six Months Ended June 30) | 2025 (millions USD) | 2024 (millions USD) | | :--- | :--- | :--- | | Cash provided by operations | $178.3 | $164.0 | | Free cash flow | $139.9 | $119.1 | - The Company repurchased 3.8 million shares at a cost of $251.3 million in the first six months of 2025[11] - The Company's board of directors approved a $0.34 per share dividend for shareholders of record on July 31, payable on Aug. 15[11] Full Year Outlook This section presents the updated full-year 2025 guidance for sales and diluted EPS, reflecting market confidence and operational benefits 2025 Guidance A. O. Smith raised its full-year 2025 sales outlook to grow between 1% and 3% and the midpoint of its diluted EPS outlook to a range of $3.70 to $3.90. This reflects confidence in managing tariffs, expected improved market share, and ongoing benefits from 2024 restructuring actions. The guidance excludes potential impacts from future acquisitions and the China business assessment Full Year 2025 Outlook | Metric | 2024 Actual (millions USD) | 2025 Outlook (Low End, millions USD) | 2025 Outlook (High End, millions USD) | | :--- | :--- | :--- | :--- | | Net sales | $3,818 | $3,850 | $3,930 | | Diluted earnings per share | $3.63 | $3.70 | $3.90 | | Adjusted earnings per share | $3.73 | $3.70 | $3.90 | - Consolidated sales are expected to grow between 1% and 3%[3][12] - Diluted EPS is projected with a range of $3.70 to $3.90[3][12] - The Company's guidance excludes the potential impacts from future acquisitions and any potential outcomes of the assessment of its China business[13] Additional Information This section clarifies non-GAAP financial measures, outlines forward-looking statement risks, and provides a brief company overview Non-GAAP Financial Measures The company provides non-GAAP measures like free cash flow (cash provided by operations less capital expenditures) and adjusted earnings/EPS (excluding restructuring and impairment charges) to offer improved transparency into its operating results - Free cash flow is defined as cash provided by operations less capital expenditures[15] - Adjusted earnings, adjusted EPS, adjusted segment earnings and adjusted corporate expenses exclude the impact of restructuring and impairment charges[15] Forward-Looking Statements This section outlines various risks and uncertainties that could cause actual results to differ materially from forward-looking statements, including international tariffs, softening demand, global inflationary pressures, supply chain issues, economic conditions in China, and competitive pressures - Forward-looking statements are subject to risks such as international tariffs, global inflationary pressures, supply chain issues, and economic conditions in China[16] - Uncertain outcomes and costs and other potential impacts of the Company's assessment relating to the Company's China business are identified as important factors[16] About A. O. Smith A. O. Smith Corporation, headquartered in Milwaukee, Wisconsin, is a global leader applying innovative technology and energy-efficient solutions to products manufactured and marketed worldwide, specializing in residential and commercial water heating equipment, boilers, and water treatment products - A. O. Smith is a global leader in residential and commercial water heating equipment and boilers, as well as a manufacturer of water treatment products[17] Financial Statements This section includes the condensed consolidated statements of earnings, balance sheet, and cash flows for the reported periods Condensed Consolidated Statement of Earnings This statement presents the company's revenues, costs, and profits for the three and six months ended June 30, 2025, and 2024, showing net sales of $1,011.3 million and net earnings of $152.2 million for Q2 2025 Condensed Consolidated Statement of Earnings (millions USD, except per share data) | | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,011.3 | $1,024.3 | $1,975.2 | $2,003.1 | | Cost of products sold | 614.2 | 628.3 | 1,202.7 | 1,222.4 | | Gross profit | 397.1 | 396.0 | 772.5 | 780.7 | | Selling, general and administrative expenses | 191.3 | 188.5 | 383.9 | 380.7 | | Interest expense | 4.6 | 1.8 | 7.5 | 2.8 | | Other income, net | (0.4) | (0.9) | (1.6) | (2.1) | | Earnings before provision for income taxes | 201.6 | 206.6 | 382.7 | 399.3 | | Provision for income taxes | 49.4 | 50.4 | 93.9 | 95.5 | | Net earnings | $152.2 | $156.2 | $288.8 | $303.8 | | Diluted earnings per share of common stock | $1.07 | $1.06 | $2.01 | $2.05 | | Average common shares outstanding (000's omitted) | 142,484 | 147,600 | 143,440 | 147,949 | Condensed Consolidated Balance Sheet This statement details the company's assets, liabilities, and stockholders' equity as of June 30, 2025, and December 31, 2024, showing total assets of $3,246.7 million at the end of Q2 2025 Condensed Consolidated Balance Sheet (millions USD) | ASSETS: | June 30, 2025 (millions USD) | December 31, 2024 (millions USD) | | :--- | :--- | :--- | | Cash and cash equivalents | $177.9 | $239.6 | | Marketable securities | — | 36.5 | | Receivables | 640.3 | 541.4 | | Inventories | 519.3 | 532.1 | | Other current assets | 51.0 | 43.3 | | Total Current Assets | 1,388.5 | 1,392.9 | | Net property, plant and equipment | 637.1 | 628.7 | | Goodwill and other intangibles | 1,085.6 | 1,082.8 | | Operating lease assets | 37.4 | 32.8 | | Other assets | 98.1 | 102.8 | | Total Assets | $3,246.7 | $3,240.0 | | LIABILITIES AND STOCKHOLDERS' EQUITY: | | | | Trade payables | $521.8 | $588.7 | | Accrued payroll and benefits | 80.2 | 78.5 | | Accrued liabilities | 148.3 | 153.0 | | Product warranties | 73.5 | 67.0 | | Debt due within one year | 19.2 | 10.0 | | Total Current Liabilities | 843.0 | 897.2 | | Long-term debt | 284.2 | 183.2 | | Operating lease liabilities | 28.2 | 23.5 | | Other liabilities | 245.4 | 252.6 | | Stockholders' equity | 1,845.9 | 1,883.5 | | Total Liabilities and Stockholders' Equity | $3,246.7 | $3,240.0 | Condensed Consolidated Statement of Cash Flows This statement outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2025, and 2024, showing cash provided by operating activities of $178.3 million for the first six months of 2025 Condensed Consolidated Statement of Cash Flows (millions USD) | Six Months Ended June 30, | 2025 (millions USD) | 2024 (millions USD) | | :--- | :--- | :--- | | Operating Activities | | | | Net earnings | $288.8 | $303.8 | | Depreciation & amortization | 41.2 | 39.2 | | Share based compensation expense | 8.6 | 10.4 | | Deferred income taxes | (9.1) | (1.5) | | Net changes in operating assets and liabilities: | | | | Current assets and liabilities | (159.0) | (173.2) | | Noncurrent assets and liabilities | 7.8 | (14.7) | | Cash Provided by Operating Activities | 178.3 | 164.0 | | Investing Activities | | | | Capital expenditures | (38.4) | (44.9) | | Acquisitions | — | (21.3) | | Investment in marketable securities | (22.6) | (50.9) | | Net proceeds from sale of marketable securities | 59.2 | 57.0 | | Cash Used in Investing Activities | (1.8) | (60.1) | | Financing Activities | | | | Long-term debt incurred | 108.2 | 14.3 | | Common stock repurchases | (251.3) | (153.2) | | Net (payments) proceeds from stock option activity | (0.5) | 9.4 | | Dividends paid | (97.5) | (94.2) | | Cash Used in Financing Activities | (241.1) | (223.7) | | Effect of exchange rate changes on cash and cash equivalents | 2.9 | (4.0) | | Net decrease in cash and cash equivalents | (61.7) | (123.8) | | Cash and cash equivalents - beginning of period | 239.6 | 339.9 | | Cash and Cash Equivalents - End of Period | $177.9 | $216.1 | Business Segments Data This section provides a breakdown of net sales and earnings for the North America and Rest of World segments for the three and six months ended June 30, 2025, and 2024, including inter-segment eliminations and corporate expenses Net Sales by Business Segment (millions USD) | Net sales | Three Months Ended June 30, 2025 (millions USD) | Three Months Ended June 30, 2024 (millions USD) | Six Months Ended June 30, 2025 (millions USD) | Six Months Ended June 30, 2024 (millions USD) | | :--- | :--- | :--- | :--- | :--- | | North America | $779.0 | $790.7 | $1,527.7 | $1,557.0 | | Rest of World | 240.1 | 244.8 | 466.8 | 471.7 | | Inter-segment sales | (7.8) | (11.2) | (19.3) | (25.6) | | Total Net Sales | $1,011.3 | $1,024.3 | $1,975.2 | $2,003.1 | Earnings by Business Segment (millions USD) | Earnings | Three Months Ended June 30, 2025 (millions USD) | Three Months Ended June 30, 2024 (millions USD) | Six Months Ended June 30, 2025 (millions USD) | Six Months Ended June 30, 2024 (millions USD) | | :--- | :--- | :--- | :--- | :--- | | North America | $198.1 | $198.4 | $383.3 | $397.1 | | Rest of World | 25.3 | 25.9 | 45.0 | 43.1 | | Inter-segment earnings elimination | (0.2) | (0.1) | (0.2) | (0.4) | | Corporate expense | (17.0) | (15.8) | (37.9) | (37.7) | | Interest expense | (4.6) | (1.8) | (7.5) | (2.8) | | Earnings before income taxes | 201.6 | 206.6 | 382.7 | 399.3 | | Provision for incomes taxes | 49.4 | 50.4 | 93.9 | 95.5 | | Net earnings | $152.2 | $156.2 | $288.8 | $303.8 | Non-GAAP Reconciliations This section provides reconciliations from GAAP measures to non-GAAP measures, specifically for free cash flow and adjusted EPS, offering a clearer view of operational performance by excluding certain charges Free Cash Flow Reconciliation (millions USD) | Free Cash Flow (Six Months Ended June 30) | 2025 (millions USD) | 2024 (millions USD) | | :--- | :--- | :--- | | Cash provided by operating activities (GAAP) | $178.3 | $164.0 | | Less: Capital expenditures | (38.4) | (44.9) | | Free cash flow (non-GAAP) | $139.9 | $119.1 | Adjusted EPS Reconciliation (USD per share) | EPS Guidance and Adjusted EPS | 2025 Guidance (USD) | 2024 (USD) | | :--- | :--- | :--- | | Diluted EPS (GAAP) | $3.70-3.90 | $3.63 | | Restructuring and impairment expense | — | 0.10 | | Adjusted EPS (non-GAAP) | $3.70-3.90 | $3.73 |