SMITH A O CORPAOS
SMITH A O CORP Income Taxes Disclosure
Income Taxes
The components of the provision for income taxes consisted of the following:
| Years ended December 31 (dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 99.8 | $ | 124.3 | $ | 124.9 | |||||||||||
| State | 25.4 | 25.2 | 28.3 | ||||||||||||||
| International | 34.8 | 22.5 | 27.5 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 11.9 | (4.4) | (4.8) | ||||||||||||||
| State | 2.1 | (0.5) | (1.8) | ||||||||||||||
| International | (5.1) | 0.3 | 2.8 | ||||||||||||||
| $ | 168.9 | $ | 167.4 | $ | 176.9 | ||||||||||||
The provision for income taxes differs from the U.S. federal statutory rate due to the following items:
| Years ended December 31 | 2025 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
| Dollars | Percentages | Dollars | Percentages | Dollars | Percentages | ||||||||||||||||||||||||||||||
| U.S. federal statutory tax rate | $ | 150.2 | 21.0 | % | $ | 147.2 | 21.0 | % | $ | 154.0 | 21.0 | % | |||||||||||||||||||||||
State and local income tax, net of federal (national) benefit (1) | 21.0 | 2.9 | 18.1 | 2.6 | 21.0 | 2.9 | |||||||||||||||||||||||||||||
| Foreign tax effects | |||||||||||||||||||||||||||||||||||
| China | |||||||||||||||||||||||||||||||||||
| Tax benefit from research and development expenditures | (8.5) | (1.2) | (7.9) | (1.1) | (10.1) | (1.4) | |||||||||||||||||||||||||||||
| Other | 4.2 | 0.6 | 3.2 | 0.5 | 5.3 | 0.7 | |||||||||||||||||||||||||||||
| Other foreign jurisdictions | 6.8 | 1.0 | 1.5 | 0.2 | 6.2 | 0.9 | |||||||||||||||||||||||||||||
| Other Adjustments | (4.8) | (0.7) | 5.3 | 0.7 | 0.5 | 0.0 | |||||||||||||||||||||||||||||
| $ | 168.9 | 23.6 | % | $ | 167.4 | 23.9 | % | $ | 176.9 | 24.1 | % | ||||||||||||||||||||||||
(1)The state and local jurisdictions that contribute to the majority (greater than 50%) of the tax effect in this category include California, Florida, Illinois, Massachusetts, Maryland, New Jersey, New York and New York City for 2025, California, Illinois, Maryland, Michigan, New Jersey, New York, Pennsylvania and Tennessee for 2024 and California, Florida, Illinois, Massachusetts, New Jersey, New York, Pennsylvania and Tennessee for 2023.
Components of earnings before income taxes were as follows:
| Years ended December 31 (dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| U.S. | $ | 586.0 | $ | 577.2 | $ | 596.4 | |||||||||||
| International | 129.1 | 123.8 | 137.1 | ||||||||||||||
| $ | 715.1 | $ | 701.0 | $ | 733.5 | ||||||||||||
The cash taxes paid by the Company were as follows:
| Years ended December 31 (dollars in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Federal | $ | 119.2 | $ | 136.1 | $ | 134.8 | |||||||||||
| State | 21.7 | 28.2 | 25.7 | ||||||||||||||
| International | |||||||||||||||||
| Canada | 11.4 | 11.4 | 11.6 | ||||||||||||||
| China | 9.3 | 8.3 | 15.0 | ||||||||||||||
| Other foreign jurisdictions | 3.6 | 3.7 | 2.4 | ||||||||||||||
| $ | 165.2 | $ | 187.7 | $ | 189.5 | ||||||||||||
Undistributed earnings of the Company’s foreign subsidiaries amounted to $633.1 million at December 31, 2025. The Company had $4.8 million accrued for its estimate of withholding taxes due upon repatriation of approximately $93.0 million of foreign earnings it considers not permanently reinvested as of December 31, 2025. The Company considers $540.1 million of the total undistributed earnings to be permanently reinvested as a result of various factors including imposition of statutory restrictions at certain jurisdictions that prohibit the repatriation of a portion of the earnings. Accordingly, no provision for state, local and foreign withholding income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to state and local taxes, and withholding taxes payable to the various foreign countries. The Company expects to be able to take a 100 percent dividend received deduction to offset any US federal income tax liability. Determination of the amount of unrecognized state and local deferred income tax liability and associated foreign withholding taxes is not practicable due to the complexities associated with its hypothetical calculation.
The tax effects of temporary differences of assets and liabilities between income tax and financial reporting are as follows:
| December 31 (dollars in millions) | 2025 | 2024 | |||||||||||||||||||||
| Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
| Employee benefits | $ | 18.7 | $ | — | $ | 16.7 | $ | — | |||||||||||||||
| Product liability and warranties | 55.9 | — | 51.6 | — | |||||||||||||||||||
| Inventories | 3.1 | — | 2.0 | — | |||||||||||||||||||
| Accounts receivable | 12.4 | — | 12.0 | — | |||||||||||||||||||
| Property, plant and equipment | — | 51.9 | — | 49.8 | |||||||||||||||||||
| Intangibles | — | 80.9 | — | 58.6 | |||||||||||||||||||
| Environmental liabilities | 1.3 | — | 1.4 | — | |||||||||||||||||||
| Undistributed foreign earnings | — | 4.8 | — | 3.5 | |||||||||||||||||||
| Tax loss and credit carryovers | 22.7 | — | 9.7 | — | |||||||||||||||||||
| All other | 11.2 | — | 11.0 | — | |||||||||||||||||||
| Valuation allowance | (10.4) | — | (6.1) | — | |||||||||||||||||||
| $ | 114.9 | $ | 137.6 | $ | 98.3 | $ | 111.9 | ||||||||||||||||
| Net liability | $ | 22.7 | $ | 13.6 | |||||||||||||||||||
The Company believes it is more likely than not that it will realize its net deferred tax assets through the reduction of future taxable income. The Company considered historical operating results in determining the probability of the realization of the deferred tax assets.
A reconciliation of the beginning and ending amounts of tax loss carryovers, credit carryovers and valuation allowances is as follows:
| Net Operating Losses and Tax Credits | Valuation Allowances | ||||||||||||||||||||||
| December 31 (dollars in millions) | 2025 | 2024 | 2025 | 2024 | |||||||||||||||||||
| Beginning balance | $ | 9.7 | $ | 12.3 | $ | 6.1 | $ | 11.7 | |||||||||||||||
| Change in balance | 13.0 | (2.6) | 4.3 | (5.6) | |||||||||||||||||||
| Ending balance | $ | 22.7 | $ | 9.7 | $ | 10.4 | $ | 6.1 | |||||||||||||||
The Company has foreign net operating loss carryovers that expire in 2026 through 2031, with some net operating losses being carried forward indefinitely and state and local net operating loss carryovers that are carried forward indefinitely.
A reconciliation of the beginning and ending amount of unrecognized benefits is as follows:
| (dollars in millions) | 2025 | 2024 | |||||||||
| Balance at January 1 | $ | 16.2 | $ | 17.2 | |||||||
| Change to tax positions from prior years | (3.2) | (1.0) | |||||||||
| Balance at December 31 | $ | 13.0 | $ | 16.2 | |||||||
The amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is $4.9 million. The Company recognizes potential interest and penalties related to unrecognized tax benefits as a component of income tax expense. At December 31, 2025, there was an immaterial amount of interest and penalties accrued. The Company anticipates that there will not be a material decrease in the total amount of unrecognized tax benefits in 2026. The Company’s U.S. federal income tax returns and its U.S. state and local income tax returns are subject to audit for the years 2022-2025 and 2010-2025, respectively. The Company is subject to examinations in foreign tax jurisdictions for the years 2019-2025. If the examinations at certain foreign tax jurisdictions are resolved unfavorably, there could be additional assessments imposed by the relevant authorities.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.