Franklin Electric Co., Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are with the first quarter of 2021 unless noted. Franklin Electric reports Water Systems, Distribution, and Fueling Systems.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $451.5 million | $333.0 million | Up $118.5 million, about 36% |
| Gross profit / margin | $145.3 million / 32.2% | $115.5 million / 34.7% | Margin down 2.5 percentage points |
| Operating income | $39.9 million | $33.8 million | Up $6.1 million, about 18% |
| Net income | $30.1 million | $28.2 million | Up $2.0 million |
| Net income attributable to Franklin Electric | $29.8 million | $27.9 million | |
| Diluted earnings per share | $0.63 | $0.59 | |
| Cash from operating activities | $(61.3) million | $5.4 million | |
| Cash from investing activities | $(8.9) million | $(6.7) million | |
| Cash from financing activities | $68.7 million | $(8.4) million |
Gross margin declined as inflation and supply-chain challenges, along with an unfavorable sales mix, outpaced the benefit of pricing. Operating income increased, but growth was constrained by those cost pressures and higher SG&A, including performance-based compensation and costs supporting sales growth.
Segments and sales drivers
- Water Systems: Sales were $272.6 million, up about 38%; segment operating income was $33.2 million versus $31.3 million. Sales growth reflected price, volume, strong demand, and acquisitions; margin fell to 12.2% from 15.8%.
- Distribution: Sales were $134.9 million, up about 41%; operating income rose to $9.4 million from $2.0 million. Higher volume, pricing, and fixed-cost leverage contributed to the improvement.
- Fueling Systems: Sales were $72.5 million, up about 28%; operating income rose to $17.7 million from $14.9 million. Margin declined to 24.4% from 26.2% amid cost pressures.
Management attributed consolidated sales growth to price realization, acquisitions, and volume. Acquired businesses contributed $48.2 million of sales; foreign-currency translation reduced sales by $13.1 million. Organic sales growth, excluding acquisitions and currency translation, was about 25%.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $38.6 million at March 31, 2022, versus $40.5 million at December 31, 2021; $34.4 million was held in foreign jurisdictions for foreign operations.
- Total assets were $1.68 billion. Current assets were $833.6 million and current liabilities were $491.6 million.
- Total debt, including current maturities, was $284.7 million, up from $188.5 million at year-end. Current maturities and short-term borrowings were $194.8 million; long-term debt was $89.9 million.
- Under the $250 million revolving credit agreement, $191.8 million was drawn, $4.0 million was committed to letters of credit, and $54.2 million of capacity remained. The company also reported $125.0 million available under its New York Life shelf agreement and $150.0 million under its Prudential agreement.
- The company said liquidity was adequate for projected foreseeable needs and that it complied with financial covenants, including a maximum leverage ratio of 3.50 to 1.00 and minimum interest coverage of 3.00 to 1.00.
Operating cash outflow reflected increased working-capital needs, particularly receivables and inventory, as the company supported supply-chain resilience and customer demand. Financing inflows included $198.6 million of debt proceeds; the company repaid $101.7 million of debt, repurchased $19.3 million of shares, and paid $9.1 million in dividends.
Outlook, risks, and other matters
- Management projected a full-year 2022 effective tax rate of about 21% before discrete items. The filing provides no specific consolidated sales or earnings guidance.
- Management cited inflation, supply constraints, raw-material costs and availability, currency movements, demand, competition, acquisition integration, and pricing effectiveness among factors that could affect results. It said there were no material changes to the risk factors in the 2021 Form 10-K.
- A long-running French proceeding concerns alleged damage at filling stations involving underground piping connections. The company disputes that its products caused the damage. A court-appointed expert’s response was expected in June 2022; any exposure was described as neither probable nor estimable, but a payment could materially affect results depending on its size.
- At quarter-end, the company had $15.2 million of commitments, primarily for capital expenditures and production raw materials. Warranty reserves were $10.6 million; actual claims could differ from estimates.
- The company repurchased 187,078 shares for approximately $15.6 million under its public plan during the quarter. The remaining authorization was 554,236 shares.
Investor verification priorities
- Assess whether pricing can keep pace with inflation, supply-chain costs, and unfavorable product mix, particularly given the year-over-year gross-margin decline.
- Track working-capital conversion and operating cash flow after the $61.3 million quarterly outflow, including elevated inventory and receivables.
- Review debt maturity and refinancing needs: $194.8 million was classified as current at March 31, 2022, and total debt increased materially from year-end.
- Monitor the French litigation, including the court expert’s response and any change in the company’s ability to estimate or reserve for exposure.
- Separate organic growth from acquisition contributions and currency effects when evaluating sales trends and acquired-business performance.