Franklin Electric Co Inc: Form 10-Q for the period ended Jun 30, 2025

Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2024 for management’s discussion and analysis of its financial condition and results of operations. The following is management’s discussion and analysis of the Company's financial condition and results of operations for the second quarter and six months ended June 30, 2025 and 2024.

In the first quarter of 2025, the Company acquired Barnes de Colombia S.A. (Barnes), a leading manufacturer and distributor of industrial and commercial pumps based in Colombia. Also in the first quarter of 2025, the Company acquired PumpEng Pty Ltd ("PumpEng"), an Australia-based company that specializes in the design, manufacture and service of submersible pumps for the mining sector. Acquisitions contributed approximately $21.0 million of incremental net sales in the first six months of 2025. Refer to Note 2 in Item 1 of this Quarterly Report on Form 10-Q for additional information on the Barnes and PumpEng acquisitions.

The impact that the imposition of tariffs and changes to global trade policies will have on the Company's consolidated results of operations is uncertain. The Company expects tariffs on goods imported into the U.S. from Canada, Mexico, and China, and other countries upon which tariffs may be imposed, to continue to be met with retaliatory tariffs from those countries which would impact the Company's consolidated results of operations. The extent and duration of tariffs and the resulting impact on macroeconomic conditions and on the Company's business are uncertain and may depend on various factors, including negotiations between the U.S. and affected countries, retaliation imposed by other countries, tariff exemptions, negative sentiment toward U.S. companies and products, and availability of lower cost inputs that may be sourced domestically. The Company will continue to evaluate the nature and extent of the impact to its business and consolidated results of operations.

Second Quarter 2025 vs. 2024

OVERVIEW

Net sales in the second quarter and first six months of 2025 increased 8 percent and 4 percent, respectively, as compared to the prior-year periods. The sales increases were due to higher volumes, price realization, and the incremental sales impact from recent acquisitions, partially offset by the negative impact of foreign currency translation. The Company's consolidated gross profit was $211.8 million and $375.7 million, respectively, for the second quarter and first six months of 2025, increases of 6 percent and 3 percent, respectively, from the prior-year periods. Diluted earnings per share was $1.31 and $1.97, respectively, for the second quarter and first six months of 2025, increases of $0.05 and unchanged, respectively, from the prior-year periods.

RESULTS OF OPERATIONS

Net Sales

Net sales in the second quarter and first six months of 2025 were $587.4 million and $1.0 billion, respectively, and increased 8 percent and 4 percent, respectively, as compared to the prior-year periods. Sales were negatively impacted by changes in foreign exchange rates, partly due to the strengthening of the U.S. Dollar relative to the Argentine Peso and Turkish Lira. However, the Company increases prices in the local currency to offset the impact of currency devaluation in the Argentina and Turkey hyperinflationary economies. As a result, the net negative impact of foreign currency exchange rates on net sales was less than 1 percent in the second quarter and 1 percent in the first six months of 2025 compared to the same period in the prior year.

(In millions)

28

(In millions)

Net Sales-Water Systems

Water Systems net sales increased 8 percent in the second quarter and 4 percent in the first six months of 2025, as compared to the prior-year periods. The sales growth in the second quarter and the first six months of 2025 was due to incremental sales impact from recent acquisitions of approximately 5 percent and 3 percent, respectively, favorable volumes, and price realization. These increases were partially offset by the negative impact from foreign exchange rates. Sales decreased less than 1 percent in the second quarter and approximately 1 percent in the first six months of 2025 due to the negative impact from foreign exchange rates, as compared to prior-year periods.

Water Systems net sales in the U.S. and Canada increased 5 percent in the second quarter and 4 percent in the first six months of 2025, as compared to the prior-year periods. In the second quarter of 2025, sales of large dewatering equipment increased 20 percent, sales of water treatment products increased 7 percent, sales of all other surface pumping equipment increased 2 percent and sales of groundwater pumping equipment decreased 4 percent compared to 2024. In the first six months of 2025, sales of large dewatering equipment increased 7 percent, sales of water treatment products increased 7 percent, sales of groundwater pumping equipment increased 1 percent and sales of all other surface pumping equipment decreased 2 percent compared to 2024.

Water Systems net sales in markets outside the U.S. and Canada increased 12 percent in the second quarter and 5 percent in the first six months of 2025, as compared to the prior-year periods. The sales growth in the second quarter and the first six months of 2025 was to due incremental sales impact from recent acquisitions of 11 percent and 8 percent, respectively. Sales decreased 1 percent in the second quarter and 3 percent in the first six months of 2025 due to the negative impact from foreign exchange rates, as compared to prior-year periods, while sales increased 11 percent and 8 percent, respectively, compared to prior-year periods due to the incremental sales impact from recent acquisitions. Excluding the impact of foreign currency translation and acquisitions, in both the second quarter and first six months of 2025, sales growth in the Latin America and Asia Pacific regions was partly offset by sales declines in the European region.

Net Sales-Energy Systems

Energy Systems net sales increased 6 percent in the second quarter and 7 percent in the first six months of 2025, as compared to the prior-year periods. This sales increase was primarily due to price realization and favorable volumes.

Energy Systems net sales in the U.S. and Canada increased 6 percent in the second quarter and 8 percent in the first six months of 2025, as compared to the prior-year periods. The increase was primarily in fuel management systems and pumping systems. Outside the U.S. and Canada, Energy Systems sales increased 14 percent in the second quarter and 3 percent in the first six months of 2025, as compared to the prior-year periods, due primarily to sales growth in the Asia Pacific region.

Net Sales - Distribution

Distribution net sales increased 5 percent in the second quarter and 1 percent in the first six months of 2025, as compared to the prior-year periods. The Distribution segment sales increased due to favorable volumes partly offset by the negative impact of commodity pricing declines.

Gross Profit and Expenses Ratios

(In millions)

29

(In millions)

Gross Profit

The gross profit margin ratio was 36.1 percent and 36.0 percent in the second quarter and first six months of 2025, respectively, and 36.8 percent and 36.2 percent in the second quarter and first six months of 2024, respectively. The gross profit margin was unfavorably impacted in the second quarter and first six months of 2025 by Water Systems which was impacted by an unfavorable product and geographic sales mix shift.

Selling, General, and Administrative ("SG&A")

SG&A expenses were $123.5 million in the second quarter and $243.2 million in the first six months of 2025 compared to $120.6 million in the second quarter and $236.3 million in the first six months of 2024. SG&A expenses increased in the second quarter and first six months of 2025 primarily due higher employee compensation costs, including incremental expenses associated with the Company’s executive leadership transitions, and the incremental expense impact of recent acquisitions. The SG&A expenses ratio was 21.0 percent and 23.3 percent in the second quarter and first six months of 2025, respectively, and 22.2 percent and 23.5 percent in the second quarter and first six months of 2024, respectively.

Restructuring Expenses

There were $0.2 million and $0.3 million in restructuring expenses in the second quarter and first six months of 2025, compared to no restructuring expenses in the second quarter and first six months of 2024. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities.

Operating Income

Operating income in the second quarter and first six months of 2025 was $88.1 million and $132.2 million, respectively, increases of 11 percent and 4 percent, respectively, as compared to the prior-year periods.

(In millions)

(In millions)

Operating Income-Water Systems

Water Systems operating income in the second quarter and first six months of 2025 was $61.8 million and $105.3 million, respectively, decreases of $0.5 million and $4.2 million, respectively, as compared to the prior-year periods. The second quarter operating income margin was 18.1 percent, a decrease of 160 basis points from 19.7 percent in the second quarter of 2024. The first six months of 2025 operating income margin was 16.8 percent, a decrease of 140 basis points from 18.2 percent in the first six months of 2024. The decrease in operating income and margin was primarily due to incremental expenses associated with recent acquisitions and an unfavorable product and geographic sales mix shift.

Operating Income-Energy Systems

Energy Systems operating income in the second quarter and first six months of 2025 was $29.1 million and $51.0 million, respectively, increases of $3.1 million and $6.2 million, respectively, as compared to the prior-year periods. The increases were primarily due to higher sales. The second quarter operating income margin was 37.5 percent, an increase of 190 basis points from 35.6 percent in the second quarter of 2024. The first six months of 2025 operating income margin was 35.3 percent, an increase of 220 basis points from 33.1 percent in the first six months of 2024. Operating income margin increased primarily due to price realization, cost management, and a favorable product sales mix shift.

Operating Income-Distribution

Distribution operating income in the second quarter and first six months of 2025 was $16.1 million and $18.2 million, respectively, increases of $6.3 million and $6.5 million, respectively, as compared to the prior-year periods. The second quarter operating income margin was 8.1 percent, an increase of 300 basis points from 5.1 percent in the second quarter of 2024. The first six months of 2025 operating income margin was 5.3 percent, an increase of 180 basis points from 3.5 percent in the first six months of 2024. Operating income and operating income margins increased primarily due to higher sales and reduced SG&A expenses as a result of cost actions implemented in 2024 to improve the performance of the segment.

Operating Income-Eliminations/Other

Operating income-Eliminations/Other is composed primarily of intersegment sales and profit eliminations and unallocated general and administrative expenses. The intersegment profit elimination impact in the second quarter and first six months of 2025 compared to the prior-year periods of 2024 was a favorable $2.0 million and $0.7 million, respectively. The intersegment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until such time as the transferred product is sold from the Distribution segment to its end third party customer. General and administrative expenses increased $1.9 million and $4.1 million, respectively, compared to the prior-year periods, primarily due to higher employee compensation costs, including incremental expenses associated with the Company’s executive leadership transitions.

Interest Expense

Interest expense was $2.8 million and $4.6 million in the second quarter and first six months of 2025, respectively, and $2.0 million and $3.4 million in the second quarter and first six months of 2024, respectively. The increases in the second quarter and first six months of 2025 were primarily driven by higher average amount of outstanding debt.

Other Income, Net

Other income / Expense, net was a net loss of $(0.2) million and a net gain of $0.7 million in the second quarter and first six months of 2025, respectively, and net gains of $0.2 million and $0.9 million in the second quarter and first six months of 2024, respectively.

Foreign Exchange

Foreign currency-based transactions produced an expense of $4.5 million and $5.8 million in the second quarter and first six months of 2025, respectively, and an expense of $0.4 million and $5.3 million in the second quarter and first six months of 2024, respectively. The results in the second quarters and first six months of 2025 and 2024 are primarily due to transaction losses associated with the Argentine Peso and Turkish Lira relative to the U.S. dollar The Company reports the results of its subsidiaries in Argentina and Turkey using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent.

Income Taxes

The provision for income taxes in the second quarter and first six months of 2025 was $20.1 million and $30.5 million, respectively, and $17.6 million and $26.8 million in the second quarter and first six months of 2024, respectively. The effective tax rate for both the second quarter and first six months of 2025 was 24.9 percent, and 22.9 percent and 22.5 percent in the second quarter and the first six months of 2024, respectively. The increase in the effective tax rate was due to mix of foreign earnings taxed at rates different than the U.S. statutory rate, a decreased benefit in the U.S. foreign-derived intangible income (FDII) provision related to a prior year prepayment of inventory from foreign subsidiaries, and less favorable discrete events in 2025, primarily related to excess tax benefits from share-based compensation.

Net Income

Net income in the second quarter and first six months of 2025 was $60.6 million and $91.9 million, respectively, and $59.3 million and $92.4 million in the second quarter and first six months of 2024, respectively. Net income attributable to Franklin Electric Co., Inc. in the second quarter and first six months of 2025 was $60.1 million and $91.1 million, respectively, or $1.31 and $1.97 per diluted share. Net income attributable to Franklin Electric Co., Inc. in the second quarter and first six months of 2024 was $59.1 million and $92.1 million, respectively, or $1.26 and $1.97 per diluted share.

CAPITAL RESOURCES AND LIQUIDITY

Sources of Liquidity

The Company's primary sources of liquidity are cash on hand, cash flows from operations, revolving credit agreements, and long-term debt funds available. The Company believes its capital resources and liquidity position at June 30, 2025 is adequate to meet projected needs for the foreseeable future. The Company expects that ongoing requirements for operations, capital expenditures, pension obligations, dividends, share repurchases, and debt service will be adequately funded from cash on hand, operations, and existing credit agreements.

As of June 30, 2025, the Company had a $350.0 million revolving credit facility. The facility is scheduled to mature on May 14, 2030. As of June 30, 2025, the Company had $159.4 million borrowing capacity under its credit agreement as $4.6 million in letters of commercial and standby letters of credit were outstanding and undrawn and $186.0 million revolver borrowings were drawn or outstanding.

In addition, the Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life, and each of the undersigned holders of Notes (the "New York Life Agreement") with a remaining borrowing capacity on the New York Life Agreement was $175.0 million as of June 30, 2025. The maturity date of the agreement is May 15, 2027.

The Company also has other long-term debt borrowings outstanding as of June 30, 2025. See Note 6 - Debt included in the Company's Annual Report on Form 10-K for the year ended December 31, 2024, for additional information regarding these obligations and future maturities as well as Note 5 - Debt of this current quarterly report for changes to these agreements since December 31, 2024.

At June 30, 2025, the Company had $97.6 million of cash and cash equivalents held in foreign jurisdictions, which is intended to be used to fund foreign operations. There is currently no need or intent to repatriate the majority of these funds in order to meet domestic funding obligations or scheduled cash distributions.

Cash Flows

The following table summarizes significant sources and uses of cash and cash equivalents for the first six months of 2025 and 2024.

(In millions)

Cash Flows from Operating Activities

2025 vs. 2024

Net cash provided by operating activities was $32.0 million for the six months ended June 30, 2025 compared to $35.0 million used by operating activities for the six months ended June 30, 2024. The change in operating cash flow was primarily attributable to changes in working capital.

Cash Flows from Investing Activities

2025 vs. 2024

Net cash used in investing activities was $127.3 million for the six months ended June 30, 2025 compared to $20.2 million used in investing activities for the six months ended June 30, 2024. The change in investing cash flow was primarily attributable to the Barnes and PumpEng acquisitions in the first six months of 2025.

Cash Flows from Financing Activities

2025 vs. 2024

Net cash used in financing activities was $22.1 million for the six months ended June 30, 2025 compared to $38.7 million used in financing activities for the six months ended June 30, 2024. The change in financing cash flow was primarily due to higher net borrowings under the Company's credit facility in 2025 compared to 2024, partially offset by increased repurchases of Company stock.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This quarterly report on Form 10-Q contains certain forward-looking information, such as statements about the Company’s financial goals, acquisition strategies, financial expectations including anticipated revenue or expense levels, business prospects, market positioning, product development, manufacturing re-alignment, capital expenditures, tax benefits and expenses, and the effect of contingencies or changes in accounting policies. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” While the Company believes that the assumptions underlying such forward-looking statements are reasonable based on present conditions, forward-looking statements made by the Company involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those forward-looking statements as a result of various factors, including regional or general economic and currency conditions, various conditions specific to the Company’s business and industry, new housing starts, weather conditions, epidemics and pandemics, market demand, competitive factors, changes in distribution channels, supply constraints, effect of price increases, raw material costs and availability, technology factors, integration of acquisitions, litigation, government and regulatory actions, changes in tariffs or the impact of any such changes on the Company's financial results, the Company’s accounting policies, and other risks, all as described in the Company's Securities and Exchange Commission filings, included in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and in Exhibit 99.1 thereto. Any forward-looking statements included in this Form 10-Q are based upon information presently available. The Company does not assume any obligation to update any forward-looking information, except as required by law.

There have been no significant changes in the Company's exposure to market risk during the second quarter ended June 30, 2025. For additional information, refer to Part II, Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

As of the end of the period covered by this report (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15. Based upon that evaluation, the Company's Chief Executive Officer and the Company's Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective.

There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

There have been no material changes to the Company's risk factors as set forth in the annual report on Form 10-K for the fiscal year ended December 31, 2024, other than as set forth below.

Changes in foreign trade policies and other factors beyond our control may adversely impact our business and financial performance.

The U.S. government recently implemented significant trade policy and tariff actions, including but not limited to tariffs on imported steel and aluminum products, multiple tariffs on certain imports from China, tariffs on certain imports from Canada and Mexico, and baseline tariffs on most imports from most other countries. These actions have increased the cost of certain raw materials and components and created significant uncertainty and potential risks for our business. Certain countries have announced retaliatory tariffs in response to such actions. The U.S. government or other foreign governments may in the future propose and implement additional changes to international trade agreements, tariffs, taxes, and other government rules and regulations and, if initiated, retaliatory tariffs or other actions may be taken by certain governments. While the future financial impact of these actions and potential additional tariff actions and retaliatory actions by the U.S. or other countries remain unknown, the impacts could have a material adverse effect on our financial statements in any particular reporting period.