Franklin Electric Co., Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended January 3, 2015 (53 weeks), compared with 52-week FY2013. The company designs, manufactures and distributes water-pumping and fueling systems through its Water Systems and Fueling Systems segments.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $1,047.8 million | $965.5 million | +9% |
| Gross profit / margin | $344.4 million / 32.9% | $331.5 million / 34.3% | Margin down 140 bps |
| Operating income | $100.1 million | $123.8 million | Down $23.7 million |
| Net income attributable to Franklin Electric | $69.8 million | $82.0 million | Down 15% |
| Diluted EPS | $1.41 | $1.68 | Down 16% |
| Adjusted diluted EPS (non-GAAP) | $1.76 | $1.72 | Up 2% |
| Operating cash flow | $47.3 million | $98.3 million | Down $51.0 million |
Water Systems sales rose 8% to $824.6 million, but reported operating income fell to $103.9 million from $131.3 million. Fueling Systems sales rose 12% to $223.2 million and operating income increased to $49.7 million from $42.6 million. Foreign-currency translation reduced consolidated sales by $24.1 million; acquisitions added $23.5 million.
At year-end, cash was $59.1 million, working capital $268.4 million and the current ratio 2.3, versus $134.6 million, $333.9 million and 3.4, respectively, a year earlier. Total debt was approximately $177.8 million, including $34.1 million current maturities; long-term debt was $143.7 million. The company had no revolver borrowings and reported $144.9 million of available revolver capacity and $50.0 million under its private shelf agreement. It was in compliance with debt covenants.
Capital expenditures were $42.4 million in the selected financial data. Cash used in investing activities was $77.7 million, including $35.6 million for acquisitions. Dividends paid were $17.4 million; the annual dividend per share increased to $0.3475 from $0.3050. Goodwill was $208.8 million; the annual impairment test found reporting-unit fair values substantially above carrying values, with no impairment recorded.
Material changes and unusual items
- Sales growth was driven by volume, pricing and acquisitions, partly offset by currency translation. Gross margin contracted primarily because of Water Systems product mix, including weaker groundwater-pump sales and stronger surface-pumping sales, as well as higher direct-material costs.
- Reported operating income included $16.6 million of restructuring charges and $7.7 million of other non-GAAP adjustments, including acquisition-related, executive-transition and software write-off costs. Restructuring charges reduced diluted EPS by approximately $0.24. Adjusted figures are company-defined non-GAAP measures.
- The effective tax rate fell to 21.0% from 25.9%, mainly due to reversal of deferred tax liabilities following a foreign-entity realignment and indefinite reinvestment of certain foreign earnings.
- FY2014 operating cash flow declined substantially as receivables and inventory absorbed cash. Management attributed elevated inventory to anticipated demand, product launches and seasonal build; receivables reflected higher sales and extended credit terms in some markets.
- Fourth-quarter sales were $253.8 million and net income attributable to the company was $3.0 million, versus $229.8 million and $13.3 million in Q4 2013. Quarterly diluted EPS was $0.06 versus $0.27.
Outlook, risks and contingencies
The filing provides no formal FY2015 revenue or earnings guidance. Management said early artificial-lift test results in several markets created opportunities for sustained business in 2015. The company expected to fund operations, capital spending, pension obligations, dividends and debt service from cash, operating cash flow and existing credit facilities. Backlog was $64.1 million at February 19, 2015, down from $88.1 million a year earlier; orders were expected to be filled in FY2015, but management cautioned backlog was not a significant indicator of future sales.
A manufacturing realignment, including closure of the Wittlich, Germany manufacturing facility and transfer of production to the Czech Republic, is expected to conclude by the end of 2016. Total charges were estimated at approximately $19.4 million; $16.6 million was incurred in 2014, and restructuring reserves were $13.1 million at year-end. The company also recorded a $22.9 million liability for the planned 2015 purchase of remaining Pioneer Pump shares.
Key risks include acquisition integration and returns, competition and pricing, raw-material and supplier availability and costs, foreign-currency and geopolitical exposures, housing and weather-related demand, energy and mining cycles, regulatory requirements, and potential goodwill impairment. CARB appealed a court decision that had fully favored the company in litigation concerning a component in its Healy 900 Series nozzle; the appeal remained pending. The company said the case had not affected product certification or sales. Other ordinary-course claims were not expected by management to have a material adverse effect. Pension obligations were sensitive to discount-rate assumptions; a 25-basis-point change would alter the reported liability by about $5.3 million.
Investor verification priorities
- Reconcile the sharp Q4 earnings decline with full-year reported and adjusted earnings, including restructuring and other adjustments.
- Assess whether working-capital investment reverses: receivables and inventory drove the operating-cash-flow decline, while year-end cash fell to $59.1 million.
- Track Water Systems margin recovery, product mix, material costs and the growth and profitability of Pioneer mobile-pumping products.
- Monitor execution and remaining costs of the European manufacturing realignment, and the 2015 Pioneer share purchase and related cash needs.
- Review the CARB appeal, tax exposures (including $4.4 million of unrecognized tax benefits and $2.5 million of accrued interest and penalties), and foreign-currency effects.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.