Franklin Electric Co., Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Franklin Electric reports Water Systems, Fueling Systems, and Distribution. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $290.7 million | $295.6 million |
| Gross profit / margin | $89.5 million / 30.8% | $99.0 million / 33.5% |
| Operating income / margin | $12.1 million / 4.2% | $22.7 million / 7.7% |
| Net income attributable to Franklin Electric | $9.1 million | $21.2 million |
| Diluted EPS | $0.19 | $0.45 |
| Operating cash flow | $(2.9) million | $(27.2) million |
| Investing cash flow | $(10.6) million | $(14.1) million |
| Financing cash flow | $9.9 million | $39.7 million |
Sales declined about 2%. Acquisitions added $8.6 million, while foreign currency translation reduced sales by $12.9 million; organic sales were flat excluding currency. Gross margin fell 270 basis points, reflecting lower volume, unfavorable product and geographic mix, and higher freight costs. Operating income declined about 47%.
Segment results
- Water Systems: Sales $188.4 million, down $4.2 million; operating income $19.2 million, down $5.9 million. Currency weighed on reported sales; North American groundwater demand was affected by adverse winter weather.
- Fueling Systems: Sales $60.2 million, up $1.6 million; operating income $12.3 million, down $1.4 million. Higher U.S. sales were offset by declines outside North America and higher fixed costs.
- Distribution: Sales $53.3 million, down $2.9 million; operating loss widened to $4.3 million from $0.8 million. Management cited unfavorable weather, lower volume, costs, and mix.
Financial position and liquidity
At March 31, 2019, cash and equivalents were $54.4 million, total debt was approximately $225.8 million, and net debt was approximately $171.4 million. Current assets were $605.7 million and current liabilities $284.1 million. Cash decreased $4.8 million during the quarter. Operating cash flow remained negative, although cash used improved from Q1 2018, primarily due to lower working-capital needs.
The $300 million revolving credit facility had $200.6 million of available capacity after $95.7 million of borrowings and $3.7 million of letters of credit. The company reported covenant compliance. A $30 million Prudential debt installment was due at maturity on April 30, 2019; the filing reported $150 million of remaining borrowing capacity under that agreement. Management said liquidity was adequate for foreseeable needs and noted that $49.9 million of cash was held in foreign jurisdictions for foreign operations.
Outlook, commentary, risks, and unusual items
- Management projected a full-year 2019 tax rate of about 20% before discrete items; the filing provides no specific full-year sales or earnings guidance.
- Q1 restructuring expense was $1.1 million, related to Distribution branch closures and consolidation and Water manufacturing realignment.
- The Q1 2018 comparison included a $5.4 million release of a tax valuation allowance, contributing to that period’s tax benefit and lower reported effective tax rate. Q1 2019’s effective tax rate was 13.9%, versus negative 8.7% in Q1 2018.
- The company acquired Milan Supply for approximately $6.1 million after working-capital adjustments. The acquisition was considered immaterial to reported results.
- Adoption of the new lease standard resulted in approximately $26.3 million of initial right-of-use assets and corresponding lease liabilities, with no retained-earnings adjustment. March 31 balances included $25.4 million of right-of-use assets and $25.4 million of lease liabilities.
- Risks discussed include economic and currency conditions, weather and demand, competition, distribution channels, supply and raw-material costs, acquisition integration, litigation, and regulatory matters. The company reported no material change to its previously disclosed risk factors and no significant change in market-risk exposure.
- Ordinary-course legal claims were assessed by management as resolvable without material effect. The company reported $7.8 million of commitments, primarily for capital expenditures and raw materials; warranty reserves were $8.8 million.
Important facts for investors to verify
- Whether sales and margins recover from weather-related volume weakness, unfavorable mix, and higher freight costs.
- Debt repayment and refinancing following the April 30, 2019 Prudential maturity, and ongoing covenant compliance.
- Working-capital trends and the path back to positive operating cash flow.
- Distribution segment performance and execution of restructuring and manufacturing realignment actions.
- Currency effects, acquisition contributions, and the assumptions behind the approximately 20% full-year tax-rate estimate.