Franklin Electric Co., Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This annual report is not a standalone fourth-quarter filing; quarterly figures are unaudited. Franklin Electric designs, manufactures, and distributes water and fuel pumping systems and related equipment. It reported three segments: Water Systems, Fueling Systems, and Distribution.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,124.9 million | $949.9 million |
| Gross profit / margin | $377.0 million / 33.5% | $331.4 million / 34.9% |
| Operating income | $107.0 million | $110.8 million |
| Net income attributable to Franklin Electric | $78.2 million | $78.7 million |
| Diluted EPS | $1.65 | $1.65 |
| Cash from operating activities | $66.8 million | $115.4 million |
| Capital expenditures | $33.4 million | $37.6 million |
- Sales increased about 18%, primarily due to acquisitions. Excluding acquisitions and foreign-currency effects, sales decreased $4.4 million, or less than 1%.
- Gross margin fell 140 basis points, mainly from product and geographic mix and higher raw-material costs. Operating income declined about 3% despite higher revenue.
- Net cash declined $37.1 million to $67.2 million. Operating cash flow fell substantially, principally due to a $46.4 million inventory increase, vendor payments, and lower accrued liabilities.
- Year-end working capital was $343.2 million and the current ratio was 2.4. Total debt, including current maturities, was approximately $226.1 million; long-term debt was $125.6 million. The $300 million revolving facility had $67.0 million drawn and $227.5 million available, including the effect of letters of credit.
- Annual dividends were $0.4225 per share, up from $0.3975. The company reported 25 consecutive annual dividend increases.
Segments and material changes
- Water Systems: Sales were $748.6 million, up about 4%; operating income was $102.0 million versus $108.2 million. Margin pressure reflected mix, raw-material costs, and restructuring.
- Fueling Systems: Sales were $245.9 million, up about 8%; operating income increased to $60.0 million from $56.3 million.
- Distribution: Added as a reportable segment following the 2017 acquisition of three U.S. groundwater distributors, collectively known as Headwater. The acquired businesses contributed $176.7 million of sales and $1.4 million of net income from acquisition dates through year-end; segment operating income was $3.7 million.
- Headwater’s combined purchase price was approximately $57.4 million. Revaluation of previously held equity interests generated a $5.2 million gain. Preliminary acquisition accounting included $33.9 million of goodwill.
- Fourth-quarter net income attributable to Franklin Electric was $8.1 million, compared with $17.5 million in the prior-year quarter; diluted EPS was $0.17 in both quarters.
Outlook, commentary, and risks
- Management estimated a 2018 effective tax rate of 13%–17%, primarily reflecting the Tax Cuts and Jobs Act. The 2017 results included a provisional net tax expense of $10.2 million; the company said its Tax Act accounting would be completed in 2018 and adjustments could materially affect tax expense or the effective rate.
- Backlog was $100.5 million at February 13, 2018, compared with $64.6 million a year earlier; management expected it to be filled in 2018 but cautioned that backlog had not been a significant indicator of future sales.
- The company approved closure of its Wadcorpp India joint-venture manufacturing operations. Closure was expected to conclude by the end of 2018, with estimated charges of $2 million–$4 million; Franklin Electric said it would continue selling fueling products in India.
- Key risks include housing and end-market cycles, weather and seasonality, commodity and raw-material prices, competition, supplier concentration, foreign-currency and political exposure, acquisition integration, regulatory requirements, and potential goodwill impairment. A hypothetical 10% adverse movement in raw-metal prices was estimated to reduce gross margin by about 100 basis points.
- Management said liquidity was adequate for foreseeable needs and the company was in compliance with its financial covenants at year-end. The company’s financial-statement and internal-control audits received unqualified opinions; the acquired Headwater businesses were excluded from management’s internal-control assessment for 2017.
Important facts for investors to verify
- Whether inventory growth and weaker operating cash conversion reverse, and whether inventory levels align with actual demand.
- Organic sales trends and margins by segment, especially the performance and integration economics of Distribution and Headwater.
- The final Tax Act accounting, transition-tax installments, and realization of management’s projected 2018 tax rate.
- Debt maturities: approximately $100.5 million was classified as current at year-end 2017; confirm repayment, refinancing, and continued covenant headroom.
- Actual closure costs and timing for Wadcorpp, and whether its India sales can be maintained without local manufacturing.
- Whether backlog converts to shipments; the filing expressly cautions that backlog is not a reliable indicator of future sales.