Franklin Electric Co., Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial amounts are in U.S. dollars; unless noted otherwise, figures below are in millions.
Business context and results
Franklin Electric manufactures and distributes water and fueling systems and equipment. Sales growth reflected pricing, volume, acquisitions, and strong demand; foreign-currency translation reduced reported sales. Management cautions that interim results are not necessarily indicative of full-year results.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $551.1 | $437.3 | $1,002.6 | $770.3 |
| Gross profit | $189.3 | $152.2 | $334.6 | $267.8 |
| Gross margin | 34.3% | 34.8% | 33.4% | 34.8% |
| Operating income | $81.0 | $51.6 | $120.9 | $85.4 |
| Net income | $59.8 | $39.4 | $89.9 | $67.5 |
| Net income attributable to Franklin Electric | $59.4 | $39.1 | $89.1 | $67.0 |
| Diluted EPS | $1.26 | $0.83 | $1.89 | $1.42 |
Q2 sales rose 26% year over year; first-half sales rose 30%. Organic sales growth was approximately 23% in Q2 and 24% in the first half, led by pricing. Acquisitions contributed $34.4 million of Q2 sales and $82.6 million in the first half; foreign exchange reduced sales by $19.4 million and $32.5 million, respectively.
Segments and material period changes
- Water Systems: Q2 sales were $310.5 million, up $63.3 million; operating income was $49.0 million, up $14.4 million. First-half sales were $583.1 million and operating income $82.2 million. Strong demand and pricing supported growth, while supply constraints pressured first-half margin.
- Distribution: Q2 sales were $191.1 million, up $46.3 million; operating income was $23.3 million, up $7.3 million. First-half sales were $326.0 million and operating income $32.7 million. Acquisitions and broad-based demand contributed to growth.
- Fueling Systems: Q2 sales were $86.0 million, up $13.8 million; operating income was $26.1 million, up $7.6 million. First-half sales were $158.5 million and operating income $43.8 million. U.S. infrastructure demand was strong; lower China sales weighed on international results.
Despite higher sales and gross profit, gross margin declined 50 basis points in Q2 and 140 basis points for the first half. Management cited inflation and supply constraints that caused unfavorable manufacturing absorption; pricing actions offset inflationary costs. First-half operating income increased 42%, while interest expense rose to $4.4 million from $2.5 million, primarily due to higher debt and $0.7 million of interest penalties tied to a foreign indirect-tax settlement. The settlement also contributed approximately $1.0 million of other expense.
Cash flow, debt, and liquidity
- Operating cash flow was negative $62.5 million for the first half, versus positive $35.5 million a year earlier. Management attributed the change mainly to working-capital needs, including inventory and receivables, to support supply-chain resilience and customer demand.
- Investing cash outflow was $21.5 million, compared with $193.7 million in the prior-year period, which included substantial acquisition spending. Capital expenditures were $20.1 million.
- Financing cash inflow was $79.3 million. The company issued $341.8 million and repaid $215.5 million of debt; it repurchased $30.6 million of stock and paid $18.2 million in dividends.
- Cash was $33.2 million at June 30, 2022, down from $40.5 million at year-end 2021. Total debt, including current maturities, was $312.9 million, up from $188.5 million. Current maturities were $223.1 million; long-term debt was $89.8 million.
- The $350 million revolving credit facility had $217.7 million drawn and $128.3 million available, after letters of credit. The company also had $125 million of remaining capacity under its New York Life shelf agreement and $150 million under its Prudential facility. It was in compliance with financial covenants at quarter-end.
Management said available cash, operating cash flows, and credit agreements should adequately fund foreseeable requirements, including operations, capital expenditures, pensions, dividends, repurchases, and debt service. Cash held in foreign jurisdictions was $28.5 million and was intended to fund foreign operations.
Outlook, risks, contingencies, and unusual items
- The company projected a full-year 2022 tax rate of approximately 21% before discrete items; no specific revenue or earnings guidance was provided in the filing text.
- Key stated risks include supply constraints, raw-material costs and availability, pricing effects, demand and economic conditions, foreign exchange, acquisition integration, and regulatory or litigation matters.
- Turkey was deemed highly inflationary beginning April 1, 2022. Remeasurement-related gains and losses are now reflected in earnings; the impact through June 30 was not significant, but management warned the change could increase earnings volatility and could adversely affect results.
- A French proceeding concerning alleged damage at Esso filling stations remains unresolved. An expert report estimated total damages of approximately €9.5 million. The company disputes that its products caused damage; exposure was not considered probable or estimable, but a resolution could materially affect results depending on the amount.
- Other items include unfavorable discrete tax events versus favorable events in the prior-year period, and significant foreign-currency translation losses in other comprehensive income.
Important facts for investors to verify
- Whether strong organic growth and pricing continue, and whether volume and demand remain resilient across segments.
- Whether pricing can continue to offset inflation, and whether supply constraints and manufacturing absorption improve enough to stabilize margins.
- Whether working-capital investment converts to operating cash flow and how the elevated debt and near-term maturities are managed.
- Developments in the French claim, including the company’s response due in January 2023 and any subsequent assessment of exposure.
- The effects of Turkey’s highly inflationary accounting treatment, foreign-exchange movements, and the indirect-tax settlement on future earnings.