Franklin Electric Co., Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with FY 2022. Franklin Electric designs, manufactures, and distributes water-pumping, water-treatment, fuel-pumping, and related systems through Water Systems, Fueling Systems, and Distribution segments.
Financial performance
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Net sales | $2,065.1 million | $2,043.7 million | Up 1% |
| Gross profit | $697.0 million | $691.4 million | Up $5.6 million |
| Gross margin | 33.8% | 33.8% | Unchanged |
| Operating income | $262.4 million | $257.2 million | Up 2% |
| Net income attributable to Franklin Electric | $193.3 million | $187.3 million | Up 3% |
| Diluted EPS | $4.11 | $3.97 | Up 4% |
| Cash from operating activities | $315.7 million | $101.7 million | Up $214.0 million |
- Segment sales: Water Systems $1,203.7 million, up 4%; Fueling Systems $296.5 million, down 11%; Distribution $673.3 million, up 1%.
- Segment operating income: Water Systems $196.6 million, up $24.3 million; Fueling Systems $92.7 million, down $4.1 million; Distribution $34.3 million, down $20.2 million.
- Consolidated gross margin held steady. Price realization, mix, and lower freight benefited margins, while commodity-product pricing pressured Distribution.
- Operating cash flow improved primarily from working-capital actions, including inventory reductions as supply-chain resilience and lead times improved. Investing cash outflow was $74.3 million, including $34.8 million of net cash paid for acquisitions; financing cash outflow was $192.2 million.
Balance sheet, debt, and liquidity
- At year-end, cash and equivalents were $85.0 million; total debt, including current maturities, was $100.5 million, compared with $216.1 million at the end of 2022. Long-term debt was $88.1 million.
- The $350 million revolving credit facility had $11.0 million drawn and $335.4 million available after letters of credit. The company reported compliance with financial covenants and said liquidity was adequate for foreseeable needs.
- Inventory declined to $508.7 million from $545.0 million. Total assets were $1.73 billion and shareholders’ equity was $1.21 billion.
- Dividends were $0.90 per share for 2023, up from $0.78; the company reported 31 consecutive years of annual dividend increases. It repurchased $32.5 million of shares during the year, including $12.6 million in the fourth quarter under its public plan.
Material changes, outlook, and risks
- Sales growth was primarily price-driven; foreign-currency translation reduced reported sales by 3 percentage points. Water Systems growth was partly offset by Fueling Systems’ lower volumes and customer inventory destocking, and by weaker Distribution margins from commodity-based pricing.
- Fueling Systems demand was also affected by higher interest rates, labor constraints, and permitting delays that shifted some station construction plans into 2024. Management reported no quantified full-year 2024 earnings or sales guidance in the filing.
- Backlog at February 7, 2024 was $160.6 million, down from $294.9 million a year earlier. The company expected to fill these orders in 2024 but cautioned that backlog has not been a significant indicator of future sales.
- The company completed several 2023 acquisitions in water treatment, dewatering, and groundwater distribution. It reported that acquisition results were immaterial to consolidated results; preliminary purchase-price allocations remained subject to adjustment.
- Foreign-exchange expense rose to $12.1 million from $7.2 million, principally reflecting transactions involving the Turkish lira, Argentine peso, and Mexican peso. Turkey and Argentina are accounted for as highly inflationary economies; management noted these conditions had materially affected consolidated results and could continue to do so.
- Key risks include housing and agricultural demand, weather and commodity cycles, raw-material costs and limited-source suppliers, competition and pricing, acquisition integration, foreign-currency and political risks, regulatory changes, and cybersecurity or operational disruption. The company does not generally hedge commodity exposures.
- A French proceeding concerning alleged damage at fuel stations remains unresolved. The expert estimated total damages to Esso at approximately €9.5 million; Franklin Electric disputes that its products caused the damage. The company said its exposure was neither probable nor reasonably estimable, but a payment could materially affect results depending on its amount.
- Other contractual commitments include $100.6 million of debt principal, $61.9 million of undiscounted operating lease payments, and $11.1 million of purchase obligations. A contingent acquisition payment liability was valued at $3.0 million and could reach $5.0 million if a profitability milestone is achieved.
- Annual goodwill and indefinite-lived trade-name impairment testing found fair values substantially above carrying values; no impairment was recorded. Goodwill was $342.4 million. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the sharp year-over-year backlog decline signals a sustained slowdown, particularly in Water Systems and Fueling Systems.
- Whether Distribution can recover margins after the 2023 decline in operating income and margin.
- How 2024 volume, customer destocking, station project delays, pricing, and foreign-exchange movements affect sales and earnings.
- Whether working-capital cash-flow gains are repeatable, and how acquisition spending, dividends, repurchases, and debt maturities affect liquidity.
- Developments in the French fuel-station litigation and any resulting change in the company’s ability to estimate potential exposure.
- Integration and performance of 2023 acquisitions, and the continued carrying value of goodwill and acquired intangible assets.