Franklin Electric Co., Inc. (FELE) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals stable financial performance with strong distribution operating income growth and healthy backlog, despite some margin pressure. Product launches and a new factory indicate a focus on growth. The Q&A highlights positive organic growth expectations, improving market conditions, and successful integrations. The Value Acceleration Office and M&A pipeline suggest potential for future gains. Although management was vague on some details, overall sentiment remains positive, especially given the market cap's moderate size, which can magnify positive reactions.
Key Financial Performance
Sales (Q4 2025) $506.9 million, a year-over-year increase of 4.4%. The increase was due to incremental sales impact from recent acquisitions and favorable price.
Operating Income (Q4 2025) $51.6 million, up $8.6 million or 20% from $43 million in the prior year. The increase was primarily due to price, productivity, and SG&A cost management.
Gross Profit (Q4 2025) $171.5 million, up from $164.2 million in the prior year. Gross profit as a percentage of net sales was 33.8%, unchanged from the prior year, as higher costs from tariffs were offset by additional price and volume growth.
SG&A Expenses (Q4 2025) $119.6 million, compared to $117.8 million in the prior year. The increase was primarily due to acquisition-related expenses, but absent these, SG&A expenses decreased by approximately $3 million or 3% year-over-year.
Operating Income Margin (Q4 2025) 10.2%, up from 8.9% in the prior year, driven by price, productivity, and SG&A cost management.
Sales (Full Year 2025) $2.1 billion, a year-over-year increase of 5.4%. This was driven by favorable price, organic volume growth in Energy and Distribution, and the incremental sales impact of recent acquisitions.
Operating Income (Full Year 2025) $269 million, up $25.3 million or 10% from $243.6 million in the prior year. The increase was primarily due to price, productivity, and cost management.
Gross Profit (Full Year 2025) $755.9 million, up from $717.3 million in the prior year. Gross profit as a percentage of net sales was 35.5%, unchanged from the prior year, as higher costs from tariffs were offset by additional price and productivity savings.
SG&A Expenses (Full Year 2025) Improved 50 basis points year-over-year, including the impact of acquisitions. Excluding acquisitions, SG&A improved 130 basis points year-over-year, driven by structural cost actions in Distribution and Energy businesses.
Operating Income Margin (Full Year 2025) 12.6%, up 50 basis points from the prior year, driven by price, productivity, and cost management.
Cash Conversion (2025) 126%, representing the third consecutive year of cash conversion over 120%.
Global Water Systems Sales (Q4 2025) Up 4.3% year-over-year, driven by strong price and additional volume from recent acquisitions. Sales in the U.S. and Canada were down 4%, while sales outside these regions increased 15%.
Global Water Systems Operating Income (Q4 2025) $41.8 million, up $6.2 million or 17% versus the prior year. Operating income margin was 14.3%, an increase of 160 basis points from 12.7% in the prior year.
Energy Systems Sales (Q4 2025) $74.7 million, an increase of $5.9 million or 9% year-over-year. Sales in the U.S. and Canada increased 6%, while sales outside these regions increased 19%.
Energy Systems Operating Income (Q4 2025) $22.6 million, compared to $24.7 million in Q4 2024. Operating income margin was 30.3%, a decline of 560 basis points due to unfavorable geographic mix of sales and impacts of tariffs.
Distribution Sales (Q4 2025) $161.6 million, an increase of 3% year-over-year, driven by higher volumes and price realization.
Distribution Operating Income (Q4 2025) $5.3 million, a year-over-year increase of $4.8 million. Operating income margin was 3.3%, an improvement of 300 basis points, driven by higher volumes, positive price realization, and improved margins from structural cost actions.
Global Water Systems Sales (Full Year 2025) Up 6% year-over-year, driven by strong price and acquisitions. Sales in the U.S. and Canada were up 3%, while sales outside these regions increased 10%.
Global Water Systems Operating Income (Full Year 2025) $207.2 million, up $9.3 million or 5.2% versus the prior year. Operating margin was 16.5%, a decrease of 20 basis points due to acquisition-related costs.
Energy Systems Sales (Full Year 2025) $299 million, an increase of $25 million or 9% year-over-year. Sales in the U.S. and Canada increased 8%, while sales outside these regions increased 13%.
Energy Systems Operating Income (Full Year 2025) $99 million, an increase of $5.4 million or 6% versus 2024. Operating income margin was 33.1%, a decline of 110 basis points due to unfavorable geographic mix, growth investments, and tariffs.
Distribution Sales (Full Year 2025) $700.7 million, an increase of 2% year-over-year, driven by higher volumes and price realization.
Distribution Operating Income (Full Year 2025) $39.8 million, a year-over-year increase of $15.5 million or 64%. Operating margins expanded 210 basis points to 5.7%, driven by margin enhancement initiatives and structural improvements.
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Operating Highlights
New Products: Introduced over 35 new products in 2025, expected to generate over $160 million in revenue by year 3.
Market Share: Gained market share in several markets globally, with strong results across all segments.
Acquisitions: Completed $120 million in acquisitions to expand market reach and portfolio.
Operational Margins: Improved operating margins in Water treatment by over 400 basis points and in Distribution by 210 basis points in 2025.
Value Acceleration Office: Launched to streamline portfolio, enhance internal systems, and manage costs using AI and process engineering.
Strategic Investments: Increased capital spending and share buybacks ($160 million) to position for growth.
Talent Development: Focused on attracting and retaining talent to drive innovation and collaboration.
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Risk or Challenges
Pension Settlement Charge: The company's 2025 earnings were negatively impacted by a pension settlement charge of $41.5 million, which reduced EPS by $0.91. This represents a significant financial burden and could affect future financial flexibility.
Restructuring Charges: The company incurred restructuring charges in 2025, which, although minor at $0.01 EPS impact, indicate ongoing adjustments that may disrupt operations or incur additional costs.
Higher Costs from Tariffs: The company faced higher costs from tariffs, which impacted gross profit margins. Although offset by price increases, this remains a risk to profitability, especially if tariff conditions worsen.
Unfavorable Geographic Sales Mix: The Energy Systems segment experienced a decline in operating income margin due to an unfavorable geographic mix of sales, which could continue to pressure margins if not addressed.
Soft Market Conditions in Latin America and Asia: Sales in Latin America and Asia declined due to soft market conditions, which could hinder growth in these regions if the economic environment does not improve.
Acquisition-Related Costs: Acquisition-related costs negatively impacted operating margins in the Water Systems segment, highlighting the financial risks associated with integrating new acquisitions.
Higher Effective Tax Rate: The effective tax rate increased to 23.6% in 2025 from 21.7% in 2024, driven by a mix of foreign earnings taxed at higher rates and less favorable discrete items. This could reduce net income if the trend continues.
Tariff Impacts on Energy Systems: The Energy Systems segment's operating income margin decreased due to the impact of tariffs, which could continue to affect profitability if tariff policies remain unfavorable.
Soft HVAC Markets in Q4: The U.S. and Canada Water Systems sales were down 4% in Q4 2025, driven by softer HVAC markets, which could signal challenges in maintaining growth in this segment.
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Guidance & Outlook
2026 Sales Guidance: The company expects its full year 2026 sales to be in the range of $2.17 billion and $2.24 billion, representing a midpoint sales growth of just over 3%.
2026 Adjusted EPS Guidance: The company projects an adjusted EPS range of $4.40 to $4.60, reflecting a midpoint EPS growth of approximately 9%.
Future Margin Expansion: The Value Acceleration Office, leveraging 80-20 principles, AI, and process engineering, is expected to contribute to margin improvements in the coming years.
New Product Pipeline: The company plans to triple its new product pipeline over the next few years, positioning it as a catalyst for growth.
M&A and Capital Investments: The company will focus on acquisitions to round out its portfolio and expand its reach in key markets and regions, supported by a strong balance sheet.
Water Business Growth: The Water business is positioned to capitalize on urbanization, demand for high-quality water, increasing mineral demand, and the growth of computing power.
Energy Business Growth: The Energy business will focus on harnessing data, information, and energy to provide innovative solutions, such as EVO and OVERSITE, to improve operational efficiency for customers.
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Shareholder Return Plan
Quarterly Cash Dividend: On January 26, the company announced a quarterly cash dividend of $0.28. The dividend will be payable February 19 to shareholders of record on February 5. This represents a 5.7% increase from the prior quarterly dividend. This dividend will mark the 34th consecutive year that Franklin Electric has increased its dividend, demonstrating its commitment to returning cash to shareholders and confidence in the outlook of our business.
Share Buyback Program: The company repurchased approximately 350,000 shares of its common stock in the open market for roughly $34.3 million during the fourth quarter of 2025. At the end of the fourth quarter, the remaining share repurchase authorization is approximately 0.8 million shares. Additionally, the company completed about $160 million in share buybacks throughout 2025.
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Key Q&A
Q:What type of organic outlook across the 3 segments is implied in the revenue guide for the year, and how much is volume versus price?
A:For the Water business, growth is expected in the 3%-5% range with a blend of volume and price. The Energy business is expected to grow over 3%, with a mix of more volume than price. The Distribution business is projected to grow 3%-4%, with a 50-50 split between price and volume.
Q:Can you provide a walk around the key end markets and product lines within Water, including geographic demand expectations?
A:The Water business saw stabilization in the U.S. HVAC market and the Mexican market. Growth is expected in the U.S., Europe, Southern Latin America, and South Asia-Pacific regions. Asia is expected to remain stable. Key areas like groundwater, residential, and dewatering businesses are on track, with no housing recovery baked into the numbers.
Q:Can you unpack the HVAC headwind in Q4 and its expected duration?
A:The HVAC weakness in Q4 was isolated to the back end of the quarter, likely due to industry-wide softness. Normalization is expected, with signs of improvement already seen in January.
Q:Why was there a deceleration in large dewatering growth in Q4?
A:The deceleration was due to a typical pause in capital spending at the end of the year. However, the backlog remains healthy, and the business is expected to perform well in 2026.
Q:Why has the tariff pass-through been more difficult in the Energy business, and what is the outlook for 2026?
A:The difficulty was due to timing issues with price increases and a mix of international growth. Margins are expected to improve slightly in 2026, with price increases being realized and margins returning to mid-30s levels.
Q:How are the Barnes and PumpEng integrations progressing, and what is the M&A pipeline outlook?
A:PumpEng integration is ahead of schedule, with growth synergies materializing. Barnes integration is progressing well, though growth in the Mexican market was delayed due to economic conditions. The M&A pipeline looks healthy, with a focus on strategic acquisitions to enhance the portfolio.
Q:What is the Value Acceleration Office, and what impact is expected?
A:The Value Acceleration Office focuses on process reengineering, back-office alignment, and leveraging technology for growth and efficiency. It was formalized in mid-2025, with some projects already yielding results. More benefits are expected in 2026 and beyond.
Q:Where are the most opportunities for value creation across product lines?
A:Opportunities exist in consolidating overlapping SKUs in the submersible business, streamlining logistics in Water treatment and Distribution, and improving customer service efficiency. Recent acquisitions also present opportunities for portfolio alignment and operational productivity.
Q:How does the sequential pattern of growth look for the year, and what is the margin outlook for the segments?
A:Growth is expected across all quarters, following typical seasonality. Margins are projected to expand across all segments, with Distribution seeing the most significant improvement, followed by Water and Energy.
Q:What is the status of 80-20 initiatives, and which segments have the most potential?
A:The Water Systems business has the most 80-20 potential, with ongoing efforts to streamline the portfolio and launch new products. Distribution has made significant progress in SKU rationalization and supplier negotiations, with more opportunities ahead.
Q:What is the outlook for the fueling business, and how do above-ground and below-ground segments compare?
A:The fueling business is expected to grow mid-single digits, with strong build schedules in the U.S. and international markets. Above-ground is expected to perform slightly better, supported by new product launches like OVERSITE and EVO ONE.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the sequential growth patterns and margin outlook for individual segments, offering only general statements about typical seasonality and consistent growth. Additionally, the response to the question about the Value Acceleration Office lacked concrete examples of measurable outcomes or discrete targets for transformation savings.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
America region
Energy Distribution
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Global Water
SGA basis
SGA expense
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Systems income
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acquisition SGA
acquisition Water
cash conversion
charge
conversion balance
cost improvement
decline Latin
decline basis
decrease
effort
income price
increase Distribution
item Slide
margin basis
margin decline
margin increase
measure
percent sale
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price market
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FELE Transcript
Franklin Electric Co., Inc. (FELE) Q4 2025 Earnings Call Transcript
Positive2-17
The earnings call reveals stable financial performance with strong distribution operating income growth and healthy backlog, despite some margin pressure. Product launches and a new factory indicate a focus on growth. The Q&A highlights positive organic growth expectations, improving market conditions, and successful integrations. The Value Acceleration Office and M&A pipeline suggest potential for future gains. Although management was vague on some details, overall sentiment remains positive, especially given the market cap's moderate size, which can magnify positive reactions.
Franklin Electric Co., Inc. (FELE) Q3 2025 Earnings Call Transcript
Positive10-28
The earnings call summary and Q&A indicate a positive outlook with stable guidance, optimistic growth in international markets, and strategic investments. Despite some concerns like subdued U.S. markets and vague management responses, the company's strong position in emerging markets, product launches, and expansion plans suggest a positive sentiment. The market cap indicates moderate sensitivity, leading to a prediction of a 2% to 8% stock price increase.
Franklin Electric Co., Inc. (FELE) Q2 2025 Earnings Call Transcript
Positive7-29
The earnings call highlights strong financial performance with increased revenues, operating income, and cash flows. Positive developments include successful acquisitions and product innovation. While gross profit margins slightly declined, cost management and strategic initiatives are driving growth. The Q&A section reveals no significant concerns, with management providing clear answers and highlighting growth opportunities. Despite not raising EPS guidance, ongoing investments and a healthy M&A pipeline suggest a positive outlook. Given the market cap and overall sentiment, a positive stock price movement of 2% to 8% is anticipated.
Franklin Electric Co., Inc. (NASDAQ:FELE) Q1 2025 Earnings Call Transcript
Unknown4-30
The earnings call presents a mixed sentiment. The company missed EPS expectations and faced weather-related challenges, but strong energy systems performance and a robust backlog provide optimism. The share repurchase program is a positive, but risks like acquisition integration and executive transition costs persist. The Q&A highlighted uncertainties in tariff impacts and organic demand. Given the market cap, the stock is likely to experience a neutral reaction, with limited movement due to both positive and negative factors balancing each other out.
FELE Slides
FELE Report
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