Franklin Electric Co., Inc. — Q1 2013 Form 10-Q
Business context and period. The filing covers the first quarter ended March 30, 2013; comparatives are for the first quarter ended March 31, 2012. Franklin Electric reports Water Systems and Fueling Systems. All per-share and share data reflect the two-for-one stock split distributed March 18, 2013.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $222.5 million | $201.9 million | Up 10% |
| Gross profit / margin | $73.9 million / 33.2% | $66.3 million / 32.8% | Profit up 11%; margin up 40 bps |
| Operating income | $23.2 million | $21.0 million | Up 10% |
| Income before taxes | $20.9 million | $31.6 million | Down 34% |
| Net income | $15.6 million | $23.2 million | Down 33% |
| Net income attributable to Franklin Electric | $15.5 million | $23.0 million | Down 33% |
| Diluted EPS | $0.32 | $0.48 | Down 33% |
| Operating cash flow | $(30.8) million | $(29.0) million | Greater cash use |
Sales growth included $12.8 million from acquired businesses and was reduced by $4.6 million from foreign-currency translation. Excluding acquisitions and currency effects, sales increased about 6%. Water Systems sales rose 7% to $176.4 million; Fueling Systems sales rose 25% to $46.1 million. Gross-margin improvement reflected lower raw-material, direct-labor, and variable costs, partly offset by higher fixed costs.
Cash and cash equivalents were $74.7 million at March 30, 2013, down from $103.3 million at December 29, 2012. Total debt was $190.8 million, versus $165.9 million, including $15.9 million of current maturities. The company had $50.0 million of capacity under its Prudential agreement and $145.4 million available under its $150 million revolving credit facility; it reported compliance with debt covenants. Current assets were $444.2 million and current liabilities were $129.8 million.
Investing cash use was $16.4 million, including $16.5 million in property, plant, and equipment additions. Financing provided $19.7 million, including approximately $25 million in new borrowing; the company also paid $5.6 million of Impo contingent consideration. The filing states that cash, operating cash flows, and available credit are expected to fund operations, capital expenditures, pension obligations, dividends, and debt service.
Material changes and unusual items
- Reported earnings were substantially lower year over year primarily because Q1 2012 included a one-time $12.2 million gain on remeasurement of Franklin’s prior Pioneer Pump investment. Q1 2013 had no comparable gain.
- Management’s non-GAAP adjusted diluted EPS was $0.33, up from $0.30; adjusted earnings were $15.9 million versus $14.3 million. These measures exclude specified items and are not GAAP results.
- Q1 2013 included $0.7 million of restructuring expense and $0.4 million for legal matters. Q1 2012 included a $0.1 million restructuring gain and $0.4 million of acquisition-related items.
- Other comprehensive income was a loss of $5.2 million, primarily reflecting $5.8 million of foreign-currency translation losses.
- The company paid a $0.07 dividend per share, unchanged from the prior-year quarter. It completed the two-for-one stock split during the quarter.
Outlook, commentary, and risks
- No specific full-year sales or earnings guidance is provided. Management said a 28% effective tax rate, before discrete items, was a reasonable estimate for 2013; the reported Q1 rate was about 25%.
- Management cited continued conversion from suction to pressure pumping systems in developing markets as a potential Fueling Systems growth opportunity. It also noted regional demand variation, including weaker mobile-pump sales in the U.S. oil and gas market and unusually cold, wet weather in Europe.
- The new Global Corporate Headquarters and Engineering Center of Excellence, approximately 110,000 square feet, was expected to be completed by mid-2013. Estimated land, improvement, and construction costs were $36–$38 million before economic-development incentives.
- California air-district litigation concerning a nozzle diaphragm retrofit remained material: CARB requested approximately $15.8 million and SCAQMD approximately $2.1 million after trial; the separate SMAQMD case sought at least $5.0 million and was scheduled for trial beginning May 20, 2013. The company denied liability and said an award or settlement could materially affect results, financial position, or cash flows. The filing text does not provide a clear amount accrued for these proceedings.
- On April 1, 2013, the Sixth Circuit affirmed dismissal of Sta-Rite/Pentair claims seeking damages exceeding $10 million for each claimant; the litigation was concluded unless the claimants sought Supreme Court review.
- Other cited risks include economic and currency conditions, housing starts and weather, market demand and competition, distribution changes, supply and raw-material costs, acquisition integration, and litigation or regulatory action. Management reported no material change in the company’s previously disclosed risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether organic sales growth and gross-margin gains continue, particularly given currency effects, regional demand, and product mix.
- How operating cash flow and working-capital needs evolve, and whether elevated capital spending remains consistent with the company’s liquidity expectations.
- Debt levels, facility availability, covenant compliance, and funding and completion costs for the new headquarters and engineering center.
- Developments and any financial provision related to the CARB, SCAQMD, and SMAQMD proceedings.
- The assumptions behind management’s 2013 tax-rate estimate and the comparability of non-GAAP adjusted earnings with GAAP results.