Franklin Electric Co., Inc. — Q2 2016 Form 10-Q
Reporting period: Second quarter and six months ended July 2, 2016; comparisons are with the periods ended July 4, 2015. Unaudited interim results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $252.1 million | $247.4 million | $470.5 million | $473.2 million |
| Gross profit / margin | $90.7 million / 36.0% | $80.2 million / 32.4% | $164.9 million / 35.0% | $151.7 million / 32.1% |
| Operating income | $32.7 million | $23.2 million | $53.8 million | $39.0 million |
| Net income attributable to Franklin Electric | $24.0 million | $16.2 million | $37.4 million | $36.0 million |
| Diluted EPS | $0.50 | $0.33 | $0.78 | $0.74 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $29.3 million | $7.0 million |
Q2 operating margin was 13.0%, versus 9.4% a year earlier; first-half operating margin was 11.4%, versus 8.2%. Management attributed improved gross margins to pricing, lower direct material costs, favorable mix, and lower fixed costs. The first-half effective tax rate was 25.5%, compared with 5.2% in 2015; the prior-year rate benefited from discrete Pioneer-related tax items.
Segments and material changes
- Q2: Water Systems sales rose 2% to $194.6 million, and Fueling Systems sales rose 3% to $57.5 million. Excluding currency effects, consolidated sales increased about 5%. Water Systems operating income increased to $31.5 million from $24.3 million; Fueling Systems increased to $15.5 million from $12.4 million.
- First half: Consolidated sales declined about 1%, primarily because foreign currency translation reduced sales by $21.3 million. Excluding currency and acquisitions, sales increased about 4%. Water Systems sales fell 2% to $363.4 million; Fueling Systems sales increased 5% to $107.1 million.
- Q2 demand was uneven by region: Water Systems grew in the U.S. and Canada, Latin America, and Asia Pacific, while Middle East and Africa sales declined 18%. Management cited weak Gulf-region investment and Turkish end-market demand. Fueling Systems U.S. and Canada sales increased, while international performance was mixed.
- First-half net income rose modestly, while adjusted diluted EPS (a company-defined non-GAAP measure) increased to $0.80 from $0.67. The comparison reflects, in part, the absence of the prior-year Pioneer-related tax benefit and share-purchase-liability gain in reported results.
Cash, debt, and liquidity
At July 2, 2016, cash was $71.6 million, total debt including current maturities was $212.9 million, and equity was $601.6 million. Current assets were $473.7 million and current liabilities were $174.3 million. Cash declined $10.0 million during the first half. Operating cash flow of $29.3 million was offset by $17.1 million of investing outflows and $21.8 million of financing outflows. Capital expenditures were $19.5 million, including the purchase of a building.
The company had $22.0 million drawn on its revolving credit facility and $122.5 million of remaining capacity under that facility; it also reported $100 million available under its Prudential agreement and $75 million under the New York Life agreement. The revolving credit agreement was scheduled to mature December 14, 2016. The company reported compliance with financial covenants and expected operating needs, capital expenditures, pension obligations, dividends, and debt service to be funded from cash, operations, and existing credit agreements. Approximately 20% of cash was in the U.S. and readily accessible.
Outlook, risks, and unusual items
- Management projected an effective tax rate of about 25% for the second half of 2016. The filing provides no specific consolidated revenue or earnings guidance.
- The Wittlich, Germany manufacturing relocation to Brno, Czech Republic, was expected to conclude by year-end 2016; total expected charges were approximately $19.4 million. No restructuring reserve remained at July 2, 2016.
- Second-quarter 2016 non-GAAP adjustments included $0.3 million for executive transition. First-half adjustments included $0.9 million of restructuring charges and $0.6 million for executive transition. These are management-defined adjustments, not GAAP results.
- There were $17.5 million of commitments, primarily capital expenditures and raw-material purchases. Management said ordinary-course legal claims could be defended or resolved without a material financial effect; warranty estimates may differ from actual claims.
- Risks identified include economic and currency conditions, housing starts, weather and demand, competition, distribution changes, supply and raw-material costs, acquisition integration, litigation, and regulatory actions. The filing reported no material change to previously disclosed risk factors.
- The company early adopted ASU 2016-09 on share-based compensation, affecting tax-benefit recognition and cash-flow presentation. The impacts of new lease and revenue-recognition standards were still being assessed.
Key facts for investors to verify
- Whether the margin gains and volume growth persist, particularly amid regional weakness and foreign-exchange pressure.
- The revolving facility’s December 2016 maturity, refinancing or renewal status, and continued covenant compliance.
- Cash accessibility by geography and the company’s ability to fund commitments, capital spending, dividends, and debt service.
- Progress and remaining costs for the Wittlich manufacturing relocation and any further restructuring charges.
- The assumptions behind management’s second-half 2016 tax-rate estimate and the effects of adopting new accounting standards.