Ferguson Enterprises Inc DE

Notes to the Condensed Consolidated Financial Statements

Note 1: Summary of significant accounting policies

Background

Ferguson Enterprises, Inc. (including subsidiaries, the “Company”) (NYSE: FERG; LSE: FERG) is a Delaware corporation. Ferguson is a value-added distributor serving the 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. We sell through a common network of distribution centers, branches, counter service and specialist sales associates, showroom consultants and e-commerce channels. The corporate headquarters of the Company is located at 751 Lakefront Commons, Newport News, Virginia 23606.

Effective on August 1, 2024 (the “Effective Date”), the Company established a new corporate structure to domicile our ultimate parent company in the United States by completing a merger between entities under common control (the “Merger”). The Merger resulted in (i) Ferguson plc (the “predecessor”) becoming a direct, wholly owned subsidiary of Ferguson Enterprises Inc. (the “successor issuer”) and (ii) the shareholders of Ferguson plc at the designated record time for the Merger no longer holding ordinary shares of Ferguson plc but instead holding shares of common stock of Ferguson Enterprises Inc.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements and notes to the condensed consolidated financial statements are presented in accordance with the rules and regulations of the SEC and accounting principles generally accepted in the United States of America (“U.S. GAAP”), but do not include all disclosures normally required in annual consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented.

In light of the Merger, the July 31, 2024 condensed consolidated balance sheet was derived from the audited financial statements of the predecessor. For the three months ended October 31, 2023, the unaudited condensed consolidated statements of earnings, comprehensive income, stockholder’s equity, and cash flows represent the activities of the predecessor. The successor issuer had no operating activities prior to the Effective Date.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report. The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year.

Use of estimates

The preparation of the Company's interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions affecting certain reported amounts in the interim condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits with banks with original maturities of three months or less and overdrafts to the extent there is a legal right of offset and practice of net settlement with cash balances. Cash equivalents also include amounts due from third-party credit card processors as they are both short-term and highly liquid in nature and are typically converted to cash within a few days of the sales transaction.

Restricted cash primarily consists of deferred consideration for business combinations, subject to various settlement agreements. These amounts are recorded in prepaid and other current assets and other non-current assets in the Company’s condensed consolidated balance sheets.

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows.

Supplier finance program

In October 2023, the Company began a supplier financing program with a third party wherein certain shipping and logistics providers in the United States can opt to receive early payment at a nominal discount. The Company’s obligations to suppliers are unchanged and payment terms are consistent with the Company’s normal payment terms. All outstanding payables related to the supplier finance program are classified within accounts payable within our condensed consolidated balance sheets and were $44 million and $46 million as of October 31, 2024 and July 31, 2024, respectively.

Recently issued accounting standard updates (“ASU”)

In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” This ASU requires new financial statement disclosures disaggregating prescribed expense categories within relevant income statement expense captions, including information about purchases of inventory, employee compensation, depreciation, and intangible asset amortization for each relevant expense caption on the face of the income statement. This ASU is expected to be effective for fiscal years beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. The ASU can be adopted either prospectively or retrospectively. The Company is currently evaluating the ASU to determine the impact on its disclosures.

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU provides qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information in the rate reconciliation and disaggregation by jurisdiction of income taxes paid. The amendments in this ASU are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied prospectively; however, retrospective application is also permitted. The Company is currently evaluating the ASU to determine the impact on its disclosures.

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU expands public entities’ required segment disclosures, including disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items and interim disclosures of a reportable segment’s profit or loss and assets that are currently not required. This ASU is effective for fiscal years beginning after December 15, 2023, and interim reporting periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The impact to the Company’s consolidated financial statements and related disclosures is not expected to be material.

Recent accounting pronouncements pending adoption that are not discussed above are either not applicable, or will not have, or are not expected to have, a material impact on our consolidated financial condition, results of operations or cash flows.

Note 2: Revenue and segment information

The Company reports its financial results of operations on a geographical basis in the followingtwo reportable segments: United States and Canada. Each segment generally derives its revenues in the same manner. The Company uses adjusted operating profit as its measure of segment profit. A reporting segment’s adjusted operating profit is defined as profit before tax, excluding central and other costs, restructuring costs, amortization of acquired intangible assets, net interest expenses, as well as other items typically recorded in net other (expense) income such as (loss)/gain on disposal of businesses, pension plan changes/closure costs and amounts recorded in connection with the Company’s interests in investees. Certain income and expenses are not allocated to the Company’s segments and, thus, the information that management uses to make operating decisions and assess performance does not reflect such amounts.

Segment results were as follows:

(1)For the three months ended October 31, 2024, corporate restructurings primarily related to incremental costs in connection with transition activities following the establishment of our parent company’s domicile in the United States.

Our products are delivered through a common network of distribution centers, branches, counter service and specialist sales associates, showroom consultants and e-commerce channels. The Company recognizes revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), the transaction price is fixed or determinable, collection of consideration is probable and the Company has satisfied its performance obligation per the sales arrangement. The majority of the Company’s revenue originates from sales arrangements with a single performance obligation to deliver products, whereby the performance obligations are satisfied when control of the product is transferred to the customer which is the point the product is delivered to, or collected by, the customer.

The Company determined that disaggregating net sales by end market at the segment level achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows may be impacted by economic factors. The disaggregated net sales by end market are as follows:

No sales to an individual customer accounted for more than 10% of net sales during any of the periods presented.

The Company is a value-added distributor in North America, providing a wide range of products from plumbing, HVAC, appliances, and lighting to PVF, water and wastewater solutions, and more. We offer a broad line of products, and items are regularly added to and removed from the Company's inventory. Accordingly, it would be impractical to provide sales information by product category due to the way the business is managed, and the dynamic nature of the inventory offered.

Note 3: Weighted average shares

The following table shows the calculation of diluted shares:

(1)Represents the potential dilutive impact of share-based awards.

Note 4: Income tax

As of August 1, 2024, Ferguson is a U.S. corporation. The provision for income taxes for fiscal 2025 consists of provisions for the U.S. plus non-U.S. tax rate differentials with respect to other locations in which Ferguson’s operations are based. For fiscal years prior to 2025, Ferguson’s provision for income taxes consists of provisions for the U.K. plus non-U.K. tax rate differentials with respect to other locations in which the predecessor operated. Accordingly, the consolidated income tax rate is a composite rate reflecting earnings in various locations and the applicable tax rates.

The Company’s tax provision for each period presented was calculated using an estimated annual tax rate, adjusted for discrete items occurring during the applicable period to arrive at an effective tax rate. The effective income tax rates for the relevant periods were as follows:

During the three months ended October 31, 2024, there were no material changes to the Company’s unrecognized tax benefits when compared to those items disclosed in the Annual Report.

Note 5: Debt

The Company’s debt obligations consisted of the following:

Receivables Securitization Facility

The Company maintains a Receivables Securitization Facility (the “Receivables Facility”) which is primarily governed by the Receivables Purchase Agreement, dated July 31, 2013, as amended from time to time, among the following parties (the “Parties”): the Company, Ferguson Receivables, LLC (“FRL”) and certain other subsidiaries of the Company; the conduit purchasers, committed purchasers, and letter of credit banks from time to time party thereto; and Royal Bank of Canada, as administrative agent (the “Receivables Purchase Agreement”). Capitalized terms used in this summary have the meaning set forth in the Receivables Purchase Agreement, as amended by the Omnibus Amendment and Consent (Ferguson Receivables, LLC), dated October 29, 2024, among the Parties (the “Omnibus Amendment”).

The Receivables Facility consists of funding for up to $1.1 billion. Pursuant to the Omnibus Amendment, access to the swingline facility of up to $100 million in same day funding was terminated until such time as a Committed Purchaser agrees in writing to make Swingline Purchases. In addition, pursuant to the Omnibus Amendment, the termination date under the Receivables Purchase Agreement was extended to October 29, 2027 for all Purchase Groups except the TD Purchase Group, which has a termination date of October 7, 2025. Under the Receivables Facility, creditors of FRL have no recourse to the Company’s general credit and FRL’s assets can be used only to settle FRL’s obligations. As of October 31, 2024, $75 million in borrowings were outstanding under the Receivables Facility. There was no significant change in interest rates from those disclosed in the Annual Report.

Term Loan Agreement

The Company and Ferguson UK Holdings Limited previously maintained a Credit Agreement, dated October 7, 2022 (as amended from time to time, the “Term Loan Agreement”), providing for term loans (the “Term Loan”) in an aggregate principal amount of $500 million. In October 2024, the Term Loan was voluntarily repaid in full using a portion of the proceeds from the issuance of the 2034 Senior Notes (as defined below) and the Term Loan Agreement was terminated in accordance with its terms.

Revolving Credit Facility

The Company maintains a revolving credit facility (the “Revolving Facility”) that has aggregate total available credit commitments of $1.35 billion. As of October 31, 2024, no borrowings were outstanding under the Revolving Facility.

Private Placement Notes

Subsequent to October 31, 2024, the Company repaid $150 million related to the 3.44% private placement notes that matured in November 2024.

In September 2025, $400 million of private placement notes will mature.

2034 Senior Notes

On October 3, 2024, Ferguson Enterprises Inc. (the “Issuer”) issued and sold $750 million aggregate principal amount of unsecured senior notes, maturing in October 2034 (the “2034 Senior Notes”). The 2034 Senior Notes bear interest at a rate of 5.00%, payable semi-annually. The obligations of the Company under the 2034 Senior Notes are fully and unconditionally guaranteed by Ferguson UK Holdings Limited, an indirect subsidiary of the Company.

The 2034 Senior Notes may be redeemed, in whole or in part, (i) at 100% of the principal amount on the notes being redeemed plus a “make-whole” prepayment premium at any time prior to three months before the maturity date (the “Notes Par Call Date”) or (ii) after the Notes Par Call Date at 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest on the principal being redeemed. The 2034 Senior Notes include covenants, subject to certain exceptions, which include limitations on the granting of liens and on mergers and acquisitions.

Other

The Company was in compliance with all debt covenants that were in effect as of October 31, 2024.

Note 6: Assets and liabilities at fair value

The Company has not changed its valuation techniques for measuring the fair value of any financial assets or liabilities during the periods presented. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other debt instruments, such as the receivables securitization facility and term loans, approximated their fair values as of October 31, 2024 and July 31, 2024.

The Company’s derivatives (interest rate swaps which are considered fair value hedges) and investments in equity instruments are carried at fair value on the condensed consolidated balance sheets (Level 2 and Level 3 fair value inputs, respectively) and are not material. The notional amount of the Company’s outstanding fair value hedges was $300 million as of both October 31, 2024 and July 31, 2024.

Carrying amounts and the related estimated fair value of the Company’s long-term debt were as follows:

Note 7: Commitments and contingencies

The Company is, from time to time, involved in various legal proceedings considered to be normal course of business in relation to, among other things, the products that we supply, contractual and commercial disputes and disputes with employees. Provision is made if, on the basis of current information and professional advice, liabilities are considered probable. In the case of unfavorable outcomes, the Company may benefit from applicable insurance protection. The Company does not expect any of its pending legal proceedings to have a material adverse effect on its results of operations, financial position or cash flows.

Note 8: Accumulated other comprehensive loss

The change in accumulated other comprehensive loss was as follows:

Amounts reclassified from accumulated other comprehensive loss related to pension and other post-retirement items include the related income tax impacts. Such amounts consisted of the following:

Note 9: Retirement benefit obligations

The Company maintains pension plans in the U.K. and Canada. The components of net periodic pension cost, which are included in Other income (expense), net in the condensed consolidated statements of earnings, were as follows:

The impact of exchange rate fluctuations is included in the amortization of net actuarial losses line above.

Note 10: Stockholders’ equity

The following table presents a summary of the Company’s share activity:

Employee Benefit Trusts

Two Employee Benefit Trusts had been previously established in connection with the Company’s discretionary share award plans and long-term incentive plans. During fiscal 2024, each of these trusts were terminated with all shares disbursed or sold.

Share Repurchases

Share repurchases are being made under an authorization that allows up to $4.0 billion in share repurchases. As of October 31, 2024, the Company had completed $3.4 billion of the total authorized $4.0 billion share repurchase program.

Ordinary Shares and Treasury shares

As of August 1, 2024, the Company canceled all ordinary shares in connection with its completion of the Merger. As a result, in the first quarter of fiscal 2025,30,827,929 ordinary shares held in treasury were canceled,201,343,253 of outstanding ordinary shares not held in treasury were canceled and 201,343,253 shares of common stock were issued as consideration therefor.

Note 11: Share-based compensation

The Company grants share-based compensation awards that can be broadly characterized by the underlying vesting conditions as follows:

•Time vested, restricted stock units (“RSU”) vest over time. RSU awards granted prior to fiscal 2025 cliff vest, typically at the end ofthree years. RSU awards granted in fiscal 2025 will vest in equal, annual installments over three years. The fair value of these awards is based on the closing share price on the date of grant.

•Single metric performance stock units (“PSU”) typically vest following three-year performance cycles. The number of shares issued will vary based upon the Company’s performance against an adjusted operating profit measure. The fair value of the award is based on the closing share price on the date of grant.

•Multiple metric performance stock units granted to certain members of management (“PSU-EX”) typically vest following three-year performance cycles. The number of shares issued will vary based upon adjusted EPS growth (diluted), return on capital employed (“ROCE”) and relative total shareholder return (“rTSR”). The fair value of awards vesting based upon EPS growth and ROCE are equal to the closing share price on the date of grant and the fair value of rTSR awards are determined using a Monte-Carlo simulation.

The following table summarizes the share-based incentive awards activity for the three months ended October 31, 2024:

The following table relates to RSU, PSU and PSU-EX awards activity:

The following table relates to all share-based compensation awards:

Total unrecog nized share-based compensation expense for all share-based payment plans was $112 million at October 31, 2024, which is expected to be recognized over a weighted average period of 2.5 years.

Stock Options

In October 2024, the Company granted 65,760 stock options to certain members of management with an exercise price equal to the closing share price of the Company's common stock on the last trading day prior to the date of grant. These options vest and become exercisable over three years, in equal, annual installments beginningone year from the date of grant, and expire 10 years from the date of grant. The fair value of the Company's stock options was estimated on the date of grant using the Black-Scholes option-pricing model. Theshare-based compensation expense of these stock options is not material.