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

Part I. FINANCIAL INFORMATION Item 1. Financial Statements 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 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] Condensed Consolidated Balance Sheets 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 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] Notes to Condensed Consolidated Financial Statements 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] - 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] - 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] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - The acquisition of Pureit in November 2024 is expected to contribute approximately $50 million in sales for the full year 2025[74] - China sales declined 8% in H1 2025 due to weak consumer demand. The company is assessing strategic opportunities for its China business[78] 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 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] - 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] - Interest expense increased in Q2 and H1 2025 compared to the prior year periods, primarily due to higher debt levels[84] Segment Analysis 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] 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] Liquidity & Capital Resources 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] - 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][99] - 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] - On July 7, 2025, the Board of Directors declared a quarterly cash dividend of $0.34 per share[100] Quantitative and Qualitative Disclosures about Market Risk 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] Controls and Procedures 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] - 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] Part II. OTHER INFORMATION Legal Proceedings 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] Issuer Purchases of Equity Securities 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]