# How A. O. Smith makes money

CXProWealth Business Lens · A. O. Smith (AOS) · Q3 FY2026

Read from the 10-Q for the period 2026-07-01 to 2026-09-30, filed 2026-10-29 with the SEC (accession 0000091142-26-000104): https://www.sec.gov/Archives/edgar/data/91142/000009114226000104/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $940.5M (-0.2% on the year)
- Operating income: — (operating margin —)
- Net income: $126.3M (net margin 13.4%)
- Gross margin: 38.8%
- Free cash flow: $162.9M (17.3% of revenue)
- Cash conversion (operating cash flow / net income): 1.39x
- Capital expenditure: 1.4% of revenue

## Where the money goes (Q3 FY2026)

- North America → Net sales: $756.8M
- Rest of World → Net sales: $183.7M
- Net sales → Cost of products sold: $575.8M
- Net sales → Gross profit: $364.7M
- Gross profit → Interest expense: $7.7M
- Gross profit → Selling, general and administrative expenses: $189.5M
- Gross profit → Other expense (income), net: $800.0K
- Gross profit → Earnings before provision for income taxes: $166.7M
- Earnings before provision for income taxes → Provision for income taxes: $40.4M
- Earnings before provision for income taxes → Net Earnings: $126.3M

## Where the revenue comes from

### Segments (Segment Results - Schedule of Reportable Segment (Details))

| Member | Value | Share |
|---|---:|---:|
| North America | $756.8M | 80.5% |
| Rest of World | $183.7M | 19.5% |

The members sum to total revenue.

### ConsolidationItems (Revenue Recognition - Schedule of Segment Sales Disaggregated by Major Product Line (Details))

| Member | Value | Share |
|---|---:|---:|
| Operating Segments | $954.4M | 101.5% |
| Inter-segment sales | -$13.9M | -1.5% |

The members sum to total revenue.

## Key insights

### China exit leaves a North American water heating company

Agreeing to sell control of a shrinking China business concentrates the company on North American replacement demand.

North America brought in $756.8M of the quarter's $940.5M in net sales to outside customers, 80.5% of the total. Rest of World, which the filing describes as primarily China, India and Europe, brought in $183.7M, or 19.5%. Total net sales were close to flat against $942.5M a year earlier. _(from the filing)_
The two regions moved in opposite directions. In North America the filing credits the Leonard Valve acquisition, a 13% rise in boiler sales and pricing actions, partly offset by lower water heater sales. China sales fell 17% in local currency, which the filing attributes to continued weak consumer demand and disruption from the strategic assessment. _(from the filing)_
After the quarter ended, the company agreed to sell a majority interest in its China business to CPE, keeping a minority stake and a long-term brand licensing agreement. It expects to report China as discontinued operations from the fourth quarter, recast prior periods, and prioritize share repurchases with the after-tax proceeds. _(from the filing)_
Analysis: growth rates after the recast will not compare cleanly with those reported before it. The business that remains leans even more on North American replacement demand, so the steadiness of that demand, rather than a recovery in China, becomes the main driver of results. _(analysis)_

### The profit dip sits below the operating line

Operating earnings held flat, so borrowing for Leonard Valve and a higher tax rate explain the lower net earnings.

Earnings before interest and taxes were $174.4M against $175.4M a year earlier, almost unchanged. Gross profit was $364.7M against $364.5M, and selling, general and administrative expenses were $189.5M against $188.9M. _(from the filing)_
Interest expense rose to $7.7M from $3.6M, which the filing attributes to higher debt taken on for the Leonard Valve acquisition. Interest now takes 4.4% of earnings before interest and taxes, against 2.1% a year earlier. _(from the filing)_
The tax rate rose to 24.2% of pre-tax earnings from 23.2%, which the filing puts down to an unfavorable geographical earnings mix. Pre-tax earnings were $166.7M against $171.8M, and net earnings fell 4.3% to $126.3M from $132.0M, a net margin of 13.4% of sales. _(from the filing)_
Diluted earnings per share fell less than net earnings, to $0.93 from $0.94, because share repurchases lowered the weighted share count. _(from the filing)_
Analysis: the operating business absorbed higher steel and freight costs without losing ground; the financing choice is what shows in net earnings. Whether the acquisition pays depends on Leonard Valve earning more over time than its interest and amortization. _(analysis)_

### Earnings arrive as cash, with little reinvestment needed

Capital spending is a sliver of sales, so most profit turns into cash for dividends, buybacks and debt repayment.

Operating cash flow was $175.6M, 1.39 times net earnings of $126.3M. Capital spending was $12.7M, 1.35% of net sales, leaving free cash flow of $162.9M, 17.3% of sales and more than net earnings. _(from the filing)_
Full years show the same shape. In FY2025 free cash flow was $546.0M against net earnings of $546.2M, with capital spending of $70.8M, 1.8% of revenue of $3,830.2M. In FY2020 free cash flow of $505.3M exceeded net earnings of $344.9M. _(from the filing)_
The quarter was lower than a year earlier: operating cash flow of $175.6M against $255.4M, and free cash flow of $162.9M against $240.6M. Cash flow swings between quarters; in Q1 FY2025 free cash flow was only $17.4M. _(from the filing)_
The quarterly dividend rose to $0.36 a share from $0.34, equal to 38.7% of diluted earnings per share of $0.93, even as earnings per share slipped. _(from the filing)_
Analysis: because the plants need little new capital, cash flow rather than reported growth sets what the company can return to shareholders or spend on adjacencies such as Leonard Valve. _(analysis)_

## For members

Signed-in members read, on the page: the investor's and the founder's views of A. O. Smith (its fundamentals against its peers, where the profit is made, how the model works, where every $100 of revenue goes against the industry, the path to scale), its performance over time with every line as filed, and the edge and the risks. Membership is free.

## Member research

Signed-in members read, on the page: what A. O. Smith's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- A. O. Smith 10-Q for the period to 2026-09-30: https://www.sec.gov/Archives/edgar/data/91142/000009114226000104/ (2026-10-29)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-03 · as of 2026-11-03