Franklin Electric Co., Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the first quarter of 2022 unless noted. Franklin Electric operates Water Systems, Fueling Systems, and Distribution businesses. Interim results are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $484.6 million | $451.5 million | Up 7% |
| Gross profit / margin | $162.3 million / 33.5% | $145.3 million / 32.2% | Margin up 1.3 percentage points |
| Operating income | $52.6 million | $39.9 million | Up 32% |
| Net income attributable to Franklin Electric | $37.3 million | $29.8 million | Up 25% |
| Diluted EPS | $0.79 | $0.63 | Up $0.16 |
| Operating cash flow | $(12.0) million | $(61.3) million | Less cash used |
| Capital expenditures | $9.6 million | $9.5 million | Approximately flat |
Reported sales growth reflected price and volume increases, partly offset by a $15.0 million adverse foreign-currency translation effect. Gross margin improvement was attributed to price realization, cost management, and operating leverage. SG&A rose to $109.5 million from $104.7 million, mainly from higher marketing, selling, and engineering spending; as a share of sales, it declined to 22.6% from 23.2%.
Segments
- Water Systems: Sales of $306.6 million, up 12%; operating income of $49.0 million versus $33.2 million. Margin increased to 16.0% from 12.2%, supported by sales growth, pricing, cost management, and operating leverage. U.S. and Canada sales rose 21%; large dewatering equipment sales increased 144%.
- Fueling Systems: Sales of $72.7 million, approximately flat; operating income increased to $20.8 million from $17.7 million. Margin rose to 28.6% from 24.4%, helped by pricing and favorable product and geographic mix. Sales outside the U.S. and Canada fell 10%, partly reflecting the 2022 divestiture of the above-ground storage tank business and lower China sales.
- Distribution: Sales of $143.0 million, up 6%; operating income fell to $4.7 million from $9.4 million. Margin declined to 3.3% from 7.0%, due mainly to unfavorable pricing of commodity-based products and higher expenses associated with investment in six recently opened branches.
Cash, debt, and liquidity
Cash and cash equivalents were $51.9 million at March 31, 2023, versus $45.8 million at December 31, 2022. Operating activities used $12.0 million of cash, while investing activities used $14.6 million, including $5.0 million of net cash paid for acquisitions. Financing activities provided $33.1 million, including $57.7 million of net debt proceeds; the company also paid $10.4 million in dividends and repurchased $17.1 million of common stock. Cash increased by $6.1 million during the quarter.
Total debt, including current maturities, was $274.1 million, compared with $216.1 million at year-end. Current maturities and short-term borrowings were $185.3 million; long-term debt was $88.8 million. Credit-agreement borrowings were $182.5 million at a 5.6% weighted-average interest rate, with $163.9 million of remaining capacity. The company also reported $125.0 million of remaining capacity under its New York Life private shelf agreement. Management stated that liquidity was adequate for projected needs and expected operating requirements, capital expenditures, pension obligations, dividends, share repurchases, and debt service to be funded from cash, operations, and existing credit agreements.
Inventory was $600.7 million at March 31, 2023, up from $545.0 million at December 31, 2022. The company held $50.1 million of cash in foreign jurisdictions, primarily for foreign operations, and stated it did not currently intend to repatriate most of those funds for domestic needs.
Material changes, outlook, and risks
- Interest expense more than doubled to $3.1 million from $1.5 million, primarily due to higher debt balances and interest rates. Foreign-exchange expense was $2.0 million, primarily related to the Argentine and Mexican peso relative to the U.S. dollar.
- The company acquired Phil-Good Products and Hydropompe during the quarter for a combined all-cash purchase price of $6.9 million after working-capital adjustments. Preliminary purchase accounting was not complete; the acquisitions’ results were considered immaterial.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Risks identified include economic and currency conditions, demand and competitive pressures, housing starts and weather, supply constraints and raw-material costs, pricing, acquisition integration, litigation, and regulatory actions. The company reported no material changes to the risk factors in its 2022 Form 10-K.
- A French proceeding concerns alleged damage at filling stations involving underground piping connections. An expert report estimated total damages to Esso at approximately €9.5 million; the company disputes that its products caused damage. The company said its potential exposure was neither probable nor estimable, but a payment could materially affect results depending on its amount. It also reported $13.2 million of commitments, primarily for capital expenditures and production materials.
- Disclosure controls were concluded to be effective; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether Water Systems demand, pricing, and margin gains persist, and whether currency translation continues to weigh on reported sales.
- Whether Distribution’s pricing pressure and costs from new branches improve, given its lower operating income and margin.
- Working-capital trends, especially the increase in inventory and receivables, and the company’s ability to convert earnings into positive operating cash flow.
- Debt levels, borrowing costs, available credit capacity, and cash returned through dividends and repurchases.
- Developments in the French litigation and the final purchase-price allocations for the 2023 acquisitions.