Franklin Electric Co Inc 2026 Q3 Earnings Call

Thank you, Andrew, and welcome everyone to Franklin Electric's third quarter 2026 earnings conference call. Joining me today is Jennifer Wolfenbarger, our Chief Financial Officer, and Joe Ruzynski, our Chief Executive Officer. On today's call, Joe will review our third quarter business highlights. Jennifer will provide additional details on our financial performance, and then Joe will make some additional comments highlighting our Energy Systems segment and recent acquisitions. We will then take your questions. A replay link of the webcast will be archived for seven days, and a transcript and audio version of this call will be available on our website tomorrow. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and today's earnings release. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. All forward-looking statements made during this call are based on information currently available, and except as required by law, the company assumes no obligation to update any forward-looking statements. Earlier today, we published the slide deck to accompany our prepared remarks. The slides can be found in the investor relations section of our corporate website at www.franklin-electric.com. With that, I will now turn the call over to Joe.

Thank you, Dean, and good morning, everyone. Thank you for joining today's call. We had a very busy quarter, and I'm pleased to share our progress with you today. Let's move to slide 3. We had a very solid third quarter. I'm proud of our team's performance in light of a sometimes challenging global backdrop. Not just executing for our customers every day and operating in a challenging environment, but bringing new products to market, growing our business, optimizing our footprint, and executing our strategy. Our strategy discipline remains strong and our balance sheet healthy. We saw some market softness localized in Eastern Europe and the Middle East, and in South America, as the Brazilian elections are providing some headwinds during the quarter. Excited to share today that we have found some great additions to our portfolio in Cat Pumps and now Challenge Pumps.

We will talk about this later during the call, but both of these deals are aligned with our strategy of a portfolio pointed towards faster-growing markets, where our legacy channel and expertise can help us integrate and grow these acquisitions. As we expect in the future, acquisitions will play an important and balanced role in our growth. The first month of Cat Pumps was a great start, and our teams are excited about the future. Moving to slide four. Our business was up 9% in revenue, with nearly 5% of our growth coming from our legacy business. We did see some pressure on our gross margins as we worked through some operational headwinds during plant moves and dealt with a more inflationary environment throughout the quarter. We delivered adjusted OI growth of over 11%, and we delivered 15% growth in EPS during the quarter.

We are very satisfied with our overall performance as a company. As we exited the quarter, our order rates remain healthy. Our inventory positions are balanced in the channel, and our team continues to find great opportunities to win. We continue to work on pricing and productivity to offset this pressure and have implemented some important restructuring efforts to ensure our business is positioned well from a cost perspective. Jennifer Wolfenbarger will give some detail to these efforts shortly. Importantly, these efforts and some other recent consolidation and value chain repositioning efforts will bring productivity in 2027. If we can move to slide five, I'd like to share our progress on some of our strategic priorities. Our strategy is clear. We are focused on markets that are growing faster, supported by wider macro trends while diversifying our end markets.

We are adding new channels and customers by bringing innovation and our leading services to broader end markets. In Q3, we saw strong growth again from new products, delivering over $28 million in new sales year to date, accelerating our growth and showing the desire for new Franklin innovations. We continue to expand our reach and saw strong dealer adds in water treatment, and our recently deployed OSI containers helped us to achieve $32 million of sales in the quarter and increases in our share with current customers. As we add muscle and focus to our productivity with our new Chief Supply Chain Officer and Value Acceleration Office, we are building and executing on a sizable funnel as we enter 2027. And as a company with a healthy balance sheet and strong cash generation, we are excited about our recent deals and their performance.

We are announcing a new and exciting one with Challenge Pumps today. That puts us in the operating cycle of the fast-growing mineral extraction market, adding to two great deals we've done in the past few years in this space. As talent and culture are Franklin's bedrock, we are excited to announce Luciana Amaro as our new Chief Human Resources Officer. She brings a strong history of helping companies grow globally and will be a great addition to our team and help us with key integration of the new additions to our Franklin team. Finally, and most importantly, we are focused not only on building the strongest team in our industry, but growing a company that attracts, develops, and retains this great talent. Thank you to our Franklin team for your tireless support of our customers and execution of our strategy.

I'd like to turn it over now to Jennifer to review our financials in more detail.

Thank you, Joe. Please turn to Slide 6. Our fully diluted earnings per share was $1.35 for the third quarter 2026 versus $0.37 for the third quarter 2025. Third quarter adjusted diluted EPS was $1.50, a new third quarter record, compared to our 2025 third quarter adjusted diluted EPS of $1.31. The 15% year-over-year expansion in our adjusted diluted EPS was primarily driven by the expansion in our adjusted operating income year-over-year as a result of volume growth above market, price discipline, and cost management. This is a continued demonstration of our commitment to expand the earnings power of our business and our dedication to delivering durable earnings even in challenging market environments. In the quarter, we recorded $5 million in acquisition-related costs, $300,000 in Water Systems segment and $4.7 million in the Energy Systems segment.

In addition, we amortized in cost of sales $3.6 million from the impact of marking up acquired inventory to fair value as part of acquisition accounting for our most recent acquisitions, $500,000 in Water Systems and $3.1 million in Energy Systems, compared to $1 million in the prior year third quarter. There were $300,000 in restructuring costs related to continued site consolidation work in the third quarter of 2026, compared to $100,000 in the prior year third quarter. The effective tax rate was 24.4% for the quarter, compared to 26.9% in the prior year quarter. The decrease in effective tax rate was primarily due to a mix of foreign earnings taxed at rates different than the U.S. statutory rate. Moving to Slide 7. Third quarter 2026 consolidated sales were $633.6 million, an increase year-over-year of 9%.

The sales increase in the third quarter was primarily driven by organic price and volume growth, the incremental sales impact from recent acquisitions followed by favorable foreign currency translation. Franklin Electric's consolidated gross profit was $224 million in the third quarter of 2026, up from prior year's gross profit of $208.7 million. The gross profit as a percentage of net sales was 35.4% in the third quarter of 2026, compared to the third quarter of 2025 gross profit margin of 35.9%, a decrease of 50 basis points compared to the prior year. The gross profit margin was unfavorably impacted in the third quarter of 2026 by inefficiencies driven by recent manufacturing site moves, inflationary material, and freight costs, as well as the previously mentioned impact of purchase accounting associated with marking up acquired inventory.

The work that we are doing in terms of site consolidation and restructuring will result in productivity that will read out nicely in 2027. Selling general and administrative expenses were $137.2 million in the third quarter of 2026, compared to $123.5 million in the third quarter of 2025. The increase in SG&A expenses was primarily due to the incremental impact of acquisitions in the past year. SG&A as a percentage of net sales was 21.7% in the third quarter of 2026 and 21.2% in the third quarter of 2025. Without the incremental impact of acquisitions and the additional acquisition-related deal costs, our SG&A as a percentage of the net sales was 20.7%, an improvement year-over-year of 50 basis points. Consolidated operating income was $86.5 million in the third quarter 2026, up $1.4 million or 2% from $85.1 million in the third quarter of 2025.

The increase in operating income was primarily due to favorable price and higher sales volumes in the third quarter. As previously mentioned, there were $5 million in acquisition-related costs and $3.6 million from the impact of marking up acquired inventory to fair value as part of acquisition accounting and $300,000 in restructuring costs in the third quarter of 2026. The prior year third quarter had $1 million from the impact of purchase accounting associated with marking up acquired inventory and $100,000 in restructuring costs. Excluding those items, consolidated adjusted operating income was $95.4 million in the third quarter 2026, up $9.2 million or 11% from $86.2 million in the third quarter of 2025. The third quarter 2026 adjusted operating income margin was 15.1% versus 14.8% in the third quarter of last year, a 30 basis point improvement year-over-year. Moving to the segment results starting on slide 8.