Ferguson Enterprises Inc. /DE/ (FERG)

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to convey management’s perspective regarding the Company’s operational and financial performance for the three and six months ended June 30, 2026 and 2025, respectively. This MD&A should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing in “Item 1. Financial Statements” of this Quarterly Report (the “Condensed Consolidated Financial Statements”) and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data” of the Transition Report.

The following discussion contains trend information and other forward-looking statements. Actual results could differ materially from those discussed in these forward-looking statements, as well as from our historical performance, due to various factors, including, but not limited to, those referred to in “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Quarterly Report.

Overview

Ferguson is a value-added distributor of essential water and air solutions, serving the specialized professional in the residential and non-residential North American construction markets. We help make our customers’ complex projects simple, successful and sustainable by providing expertise and a wide range of products and services from plumbing, HVAC, appliances, and lighting to PVF, water and wastewater solutions, and more. Ferguson is headquartered in Newport News, Virginia.

The following table presents highlights of the Company’s performance for the periods below:

(1) The Company uses certain non-GAAP measures, which are not defined or specified under U.S. GAAP. See the section titled “Non-GAAP Reconciliations and Supplementary Information.”

For the second quarter of 2026, net sales increased by 4.6% compared with the second quarter of 2025, primarily due to price inflation, higher volume and incremental sales from acquisitions.

For the second quarter of 2026, operating profit increased by 6.1% (adjusted operating profit increased 2.9%), compared with the second quarter of 2025. The year-over-year change was driven by higher sales and the associated gross profit, partially offset by higher variable operating costs.

For the second quarter of 2026, diluted earnings per share was $3.43 (adjusted diluted earnings per share: $3.39), increasing 6.9% (5.3% on an adjusted basis) compared with the second quarter of 2025 due to higher net income and the impact of share repurchases.

Net cash provided by operating activities decreased to $716 million in the year-to-date period of 2026 compared with $1,123 million in the same period of 2025, primarily reflecting an increased investment in working capital and the timing of income tax payments due to the transition to a calendar year-end, partially offset by higher net income after adjusting for non-cash items.

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Results of Operations

Net sales

For the second quarter of 2026, net sales were $8.8 billion, an increase of $0.4 billion, or 4.6%, compared with the second quarter of 2025. The increase in net sales was primarily driven by low single digit price inflation, higher volume and incremental sales from acquisitions of 1.0%. The Company’s increase in net sales was driven by growth in non-residential markets and, to a lesser extent, residential markets within its United States segment.

Net sales were $16.2 billion in the year-to-date period of 2026, an increase of $0.6 billion, or 4.2%, compared with the same period in 2025. The increase in net sales was primarily driven by low to mid-single digit price inflation and incremental sales from acquisitions of 0.9%, partially offset by lower sales volume.

Gross profit

Gross profit in the second quarter of 2026 increased $99 million, or 3.8%, compared with the second quarter of 2025, primarily reflecting increased net sales. Gross profit as a percentage of sales was 31.0% in the second quarter of 2026. Gross profit as a percent of sales was 31.2% in the second quarter of 2025. The decrease of 0.2% primarily reflects the timing and extent of supplier price increases in the prior year.

Gross profit in the year-to-date period of 2026 increased $201 million, or 4.2%, compared with the same period in 2025. Gross profit as a percentage of sales was flat in the year-over-year comparison.

Selling, general and administrative (“SG&A”) expenses

SG&A expenses in the second quarter of 2026 increased $68 million, or 4.1%, compared with the second quarter of 2025. SG&A as a percentage of sales was 19.6% in the second quarter of 2026 compared with 19.7% in the second quarter of 2025. The decrease in SG&A as a percentage of sales primarily reflects the timing and extent of certain incentive accruals in the prior year.

SG&A expenses in the year-to-date period of 2026 increased $110 million, or 3.4%, compared with the same period in 2025. SG&A as a percentage of sales was 20.5% in the year-to-date period of 2026 compared with 20.6% in the same period in 2025. The factors impacting the year-to-date comparisons were largely the same as those noted above for the quarter.

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Income tax

Income tax expense was $180 million in the second quarter of 2026, an increase of $24 million, or 15.4%, compared with the second quarter of 2025. In the year-to-date period of 2026, income tax expense was $326 million, an increase of $46 million, or 16.4%, compared to the same period in 2025. In both year-over-year comparisons, the increases were mainly due to higher income before income taxes.

The Company’s effective tax rates were 21.3% and 19.7% for the second quarters of 2026 and 2025, respectively. The Company’s effective tax rates were 23.2% and 22.2% for the year-to-date periods of 2026 and 2025, respectively. In both year-over-year comparisons, the higher effective tax rates were primarily driven by adjustments related to prior year tax positions.

Net income

Net income for the second quarter and year-to-date periods of 2026 was $666 million and $1,080 million, respectively. These represented increases of $32 million, or 5.0%, and $101 million, or 10.3%, compared with the respective periods in 2025 due to the various elements described in the sections above.

Segment results

United States

Net sales for the United States segment were $8.3 billion in the second quarter of 2026, an increase of $0.4 billion, or 5.0%, compared with the second quarter of 2025. The increase in net sales was primarily driven by low single digit price inflation, along with volume growth and incremental sales from acquisitions of 1.0%. Net sales in non-residential markets, representing approximately half of revenue in the United States, increased approximately 8% compared with the second quarter of 2025. This increase was driven by commercial/mechanical, industrial and waterworks, including large capital project activity. Net sales in residential markets increased approximately 2% compared with the second quarter of 2025 due to growth in HVAC.

Net sales were $15.5 billion in the year-to-date period of 2026, an increase of $0.6 billion, or 4.3%, compared with the same period in 2025. The increase in net sales was primarily driven by low to mid-single digit price inflation and incremental sales from acquisitions of 0.8%. Net sales in non-residential markets increased approximately 8% compared with the year-to-date period of 2025. This increase was driven by commercial/mechanical, industrial and waterworks, including large capital project activity. Net sales in residential markets increased 1% compared with the year-to-date period of 2025 due to growth in HVAC, partially offset by weak new construction activity and soft repair, maintenance and improvement (“RMI”) work.

Adjusted operating profit for the United States segment was $925 million in the second quarter of 2026, an increase of $26 million, or 2.9%, compared with the second quarter of 2025, primarily reflecting higher sales and the associated gross profit, partially offset by higher variable operating costs.

Adjusted operating profit for the United States segment was $1.6 billion in the year-to-date period of 2026, an increase of $0.1 billion, or 4.7%, compared to the same period in 2025. The factors impacting the year-to-date comparison were largely the same as those noted above for the quarter.

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Canada

Net sales for the Canada segment were $408 million in the second quarter of 2026, a decrease of $8 million, or 1.9%, compared with the second quarter of 2025. This decrease in net sales was primarily driven by the impact of non-core business divestments of 3.6%, along with lower sales volume, partially offset by low-single digit price inflation.

Net sales were $734 million in the year-to-date period of 2026, an increase of $9 million, or 1.2%, compared with the same period in 2025. The increase was primarily driven by low-single digit price inflation, incremental sales from acquisitions of 2.6% and the impact of foreign currency exchange rates of 1.9%. These increases were partially offset by the impact of non-core business divestments of 4.1%, along with lower sales volume.

Adjusted operating profit for the Canada segment decreased by $1 million in the second quarter of 2026, compared with the second quarter of 2025 due to lower gross margins, partially offset by lower operating costs.

Adjusted operating profit for the Canada segment decreased

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is intended to convey management’s perspective regarding the Company’s operational and financial performance and should be read in conjunction with the Consolidated Financial Statements and related notes contained in this Annual Report. The discussion in this Annual Report generally focuses on fiscal 2025 compared to fiscal 2024. A discussion of our results of operations and changes in financial condition for fiscal 2024 compared to fiscal 2023 has been excluded from this report, but can be found in Part II, Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations of our fiscal 2024 Annual Report.

The following discussion contains trend information and forward-looking statements. Actual results could differ materially from those discussed in these forward-looking statements, as well as from our historical performance, due to various factors, including, but not limited to, those discussed in the “Risk Factors” and “Forward-Looking Statements and Risk Factor Summary” sections and elsewhere in this Annual Report.

Overview

Ferguson is a value-added distributor serving the water and air specialized professional in the residential and non-residential North American construction market. We help make our customers’ complex projects simple, successful and sustainable by providing expertise and a wide range of products and services from plumbing, HVAC, appliances, and lighting to PVF, water and wastewater solutions, and more. Ferguson is headquartered in Newport News, Virginia.

The following table presents highlights of our annual performance:

(1) The Company uses certain non-GAAP measures, which are not defined or specified under accounting principles generally accepted in the United States (“U.S. GAAP”). See the section titled “Non-GAAP Reconciliations and Supplementary Information.”

For fiscal 2025, net sales increased by 3.8%, primarily due to higher sales volume and incremental sales from acquisitions, partially offset by the impact of one less sales day in fiscal 2025 than in fiscal 2024. Pricing was slightly down year-over-year, primarily during the first half of fiscal 2025, due to deflation in certain commodity categories, which was partially offset by improvements in finished goods pricing.

For fiscal 2025, operating profit decreased 1.7% (adjusted operating profit increased 0.6%) compared to fiscal 2024. This decrease was primarily due to $80 million in non-recurring restructuring expenses, along with the profit impact of one less sales day in fiscal 2025. These decreases were partially offset by higher gross profit compared with fiscal 2024. Adjusted operating profit increased due to higher gross profit compared with fiscal 2024.

For fiscal 2025, diluted earnings per share was $9.32 (adjusted diluted earnings per share: $9.94), increasing 9.3% compared with the prior year due to higher net income and the impact of share repurchases. The higher year-over-year net income was primarily driven by non-recurring, non-cash deferred tax charges of $137 million incurred in fiscal 2024 in connection with establishing a new corporate structure to domicile our ultimate parent company in the United States. Adjusted diluted earnings per share increased 2.6%, primarily due the impact of the Company’s share repurchases, and to a lesser extent, higher adjusted operating profit.

Net cash provided by operating activities increased 1.9% to $1.9 billion in fiscal 2025. During fiscal 2025, the Company invested $301 million in acquisitions and $305 million in capital expenditures to meet the Company’s strategic objectives.

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Results of Operations

The table below summarizes the Company’s consolidated statements of earnings for the periods indicated.

Net sales

Net sales were $30.8 billion in fiscal 2025, an increase of $1.1 billion, or 3.8%, compared with 2024. The increase in net sales was primarily driven by higher sales volume and incremental sales from acquisitions of 1.0%, partially offset by the 0.4% impact of one less sales day in fiscal 2025. Pricing was slightly down year-over-year, primarily during the first half of fiscal 2025, due to deflation in certain commodity categories, which was partially offset by improvements in finished goods pricing. The Company’s increase in net sales was primarily driven by growth in non-residential markets, and to a lesser extent, in residential markets in its United States segment.

Gross profit

Gross profit was $9.4 billion in fiscal 2025, an increase of $382 million, or 4.2%, compared with fiscal 2024. Gross profit as a percent of sales was 30.7% in fiscal 2025 compared with 30.5% in the prior year. The increase reflected specific management actions to better capture the value provided to customers and the timing and extent of supplier price increases, partially offset by the impact of deflation in certain commodity categories, primarily during the first half of the year.

Selling, general and administrative expenses (“SG&A”)

SG&A expenses in fiscal 2025 increased $338 million, or 5.6%, compared with fiscal 2024. SG&A as a percentage of sales was 20.7% and 20.4% in fiscal 2025 and fiscal 2024, respectively. The increase in SG&A as a percent of sales primarily reflects higher performance based incentive compensation and the impact of cost inflation on labor, infrastructure and fleet.

Restructuring expenses

Corporate restructuring expenses

Corporate restructuring expenses were $7 million and $28 million in fiscal 2025 and 2024, respectively. During fiscal 2024, these expenses primarily related to establishing a new corporate structure to domicile our ultimate parent company in the United States. During fiscal 2025, these expenses were primarily related to transition activities following the establishment of our ultimate parent company’s domicile in the United States.

Business restructuring expenses

During the second half of fiscal 2025, the Company implemented targeted actions to streamline operations, enhancing speed and efficiency to better serve customers and drive further profitable growth. As a result of these actions, the Company recorded non-recurring business restructuring expenses of $73 million. No such amounts were recorded in fiscal 2024.

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Net interest expense

Net interest expense was $190 million in fiscal 2025 compared with $179 million in fiscal 2024. The increase in interest expense was due to higher average borrowings in fiscal 2025 compared with the prior year.

Income tax expense

Income tax expense was $567 million for fiscal 2025, a decrease of $162 million compared with fiscal 2024. The Company’s effective tax rate was 23.4% for fiscal 2025 compared with 29.6% for fiscal 2024. The decrease in income tax expense and the decrease in the effective tax rate were primarily driven by non-recurring, non-cash deferred tax charges of $137 million incurred in the prior fiscal year due to the elimination of certain pre-existing U.K. tax attributes of the Company in connection with establishing a new corporate structure to domicile our ultimate parent company in the United States, as well as the release of uncertain tax positions following the lapse of statute of limitations in fiscal 2025.

Net income

Net income for fiscal 2025 was $1.9 billion, an increase of $121 million, or 7.0%, compared with fiscal 2024 due to the elements described in the sections above.

Segment results of operations for fiscal 2025 and fiscal 2024

The Company’s reportable segments are the United States and Canada based on how the Company manages its business and allocates resources, which is on a geographical basis. The Company’s measure of segment profit is adjusted operating profit. For further segment information, see Note 2, Segment and net sales information of the Notes to the Consolidated Financial Statements.

United States

Net sales for the United States segment were $29.3 billion in fiscal 2025, an increase of $1.1 billion, or 3.8%, compared with the prior year. The increase in net sales was primarily driven by higher sales volume, along with incremental sales from acquisitions of 1.0%. These increases were partially offset by price deflation of approximately 1%, mainly within certain commodity categories in the first half of the fiscal year that was partially offset by improvements in finished goods pricing. In addition, net sales growth was partially offset by the impact of one fewer sales day of 0.4% in the year-over-year comparison. Net sales growth in the non-residential markets was 6.8% due to growth in each of Commercial, Civil/Infrastructure and Industrial. Net sales in the residential markets increased by 0.9%, with growth across both new construction and RMI.

Adjusted operating profit in the United States was $2.8 billion, an increase of 0.7% compared with the prior year, primarily reflecting higher gross profit, partially offset by higher operating costs in light of sales volume growth and cost inflation.

Canada

Net sales for the Canada segment were $1,493 million in fiscal 2025, an increase of $53 million, or 3.7%, compared with the prior year. This increase in net sales was primarily due to incremental sales from acquisitions of 4.7% and price inflation of approximately 2%, partially offset by the impacts of foreign currency exchange rates of 2.3%, one fewer sales day in the fiscal year of 0.5% and slightly lower sales volume.

Adjusted operating profit for the Canada segment increased compared with the prior year, primarily due to higher sales and gross profit, partially offset by higher operating costs compared with the same period of prior year.

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Non-GAAP Reconciliations and Supplementary Information

The Company reports its financial results in accordance with U.S. GAAP. However, the Company believes certain non-GAAP financial measures provide users of the Company’s financial information with additional meaningful information to assist in understanding financial results and assessing the Company’s performance from period to period. These non-GAAP financial measures include adjusted operating profit, adjusted net income and adjusted earnings per share (“adjusted EPS”) - dil

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