Franklin Electric Co., Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited; comparisons are with the corresponding 2022 periods unless otherwise noted.
Business context and results
Franklin Electric reports Water Systems, Fueling Systems, and Distribution. Third-quarter consolidated sales declined primarily on lower volumes and unfavorable currency translation, partly offset by pricing. Nine-month sales increased mainly from price realization.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $538.4 million | $551.7 million | $1,592.2 million | $1,554.3 million |
| Gross profit | $186.3 million | $190.6 million | $537.0 million | $525.2 million |
| Gross margin | 34.6% | 34.5% | 33.7% | 33.8% |
| Operating income | $78.1 million | $80.0 million | $211.6 million | $201.0 million |
| Net income attributable to Franklin Electric | $57.8 million | $58.6 million | $154.7 million | $147.8 million |
| Diluted EPS | $1.23 | $1.24 | $3.29 | $3.13 |
Financial position, cash flow, and liquidity
- Cash and cash equivalents: $62.5 million at September 30, 2023, versus $45.8 million at December 31, 2022.
- Debt: $128.4 million total, including current maturities, down from $216.1 million at year-end 2022. The company reported $39.0 million outstanding under its credit agreement at a 6.3% weighted-average rate.
- Liquidity: $307.4 million available under the $350 million revolving credit facility; a further $125 million remained available under the New York Life private shelf agreement. Management said liquidity was adequate for projected needs.
- Operating cash flow: $198.6 million for the first nine months, compared with $7.2 million in 2022; management attributed the increase primarily to lower working-capital requirements.
- Investing and financing cash flow: Investing used $36.8 million, including $6.6 million for acquisitions. Financing used $140.3 million, primarily reflecting net debt repayments, alongside $31.3 million of dividends and $29.9 million of share repurchases.
- Other balance-sheet items: Total assets were $1.725 billion and shareholders’ equity was $1.180 billion at September 30, 2023. Inventory was $543.5 million, compared with $545.0 million at year-end 2022.
Material changes and segment performance
- Q3 sales fell 2% and nine-month sales rose 2%. Foreign currency translation reduced sales by 2 percentage points in Q3 and 3 points year to date.
- Water Systems: Sales increased 1% in Q3 and 5% year to date. Operating income rose to $52.7 million in Q3 and $152.5 million year to date, supported by price realization, cost management, and lower freight costs.
- Fueling Systems: Sales decreased 14% in Q3 and 7% year to date, largely due to lower volume. Q3 operating income declined to $25.8 million; year-to-date operating income increased slightly to $73.3 million.
- Distribution: Sales decreased 2% in Q3 and increased 1% year to date. Operating income fell to $10.7 million in Q3 and $33.2 million year to date. The company cited wet weather, customer inventory destocking, lower commodity-driven pricing, and margin pressure on commodity-based products.
- Q3 gross margin improved 0.1 percentage point, while nine-month gross margin declined 0.1 point. Price realization, product mix, and lower freight costs helped; Distribution pricing pressure partly offset those benefits.
- Q3 diluted EPS decreased $0.01 year over year, while nine-month diluted EPS increased $0.16. Nine-month interest expense rose to $10.3 million from $7.5 million, primarily due to higher interest rates; foreign-exchange expense rose to $8.1 million from $4.3 million.
Outlook, risks, and unusual items
- The filing provides no specific numerical revenue, earnings, or margin guidance. Management stated that existing cash, operating cash flow, and credit arrangements should fund expected operating needs, capital spending, pension obligations, dividends, repurchases, and debt service.
- Risks identified include economic and currency conditions, demand and weather, competition, distribution-channel changes, supply constraints, raw-material costs and availability, acquisition integration, and litigation. The company uses highly inflationary accounting for its Argentina and Turkey subsidiaries.
- A French legal matter concerning alleged damage at filling-station piping remains unresolved. An expert report estimated total damages to Esso at approximately €9.5 million; Franklin Electric disputes that its products caused damage. The company said any exposure is neither probable nor estimable, but a payment could materially affect results depending on its amount.
- The company acquired Phil-Good Products and Hydropompe in Q1 2023 for a combined all-cash purchase price of $8.7 million after working-capital adjustments; purchase accounting remained preliminary. The acquired businesses’ results were described as immaterial.
- Restructuring expense was $0.5 million in Q3 and $0.7 million year to date, mainly for manufacturing realignment and branch closures or consolidations. Management reported no material changes to risk factors or market-risk exposure and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Distribution’s sales, margins, and customer inventory levels recover, and whether wet-weather effects persist.
- How Water Systems and Fueling Systems volumes and pricing develop, including the effects of currency movements and regional demand.
- Whether the unusually strong year-to-date operating cash flow is sustainable, given the filing’s attribution to lower working-capital requirements.
- Debt maturities, borrowing costs, and cash available for capital spending, dividends, and share repurchases.
- Developments in the French piping litigation and any change in the company’s assessment of potential exposure.