Franklin Electric Co., Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are U.S. dollars; financial statement amounts are in millions unless noted. The company reports Water Systems, Fueling Systems, and Distribution.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $459.0 | $351.2 | $1,229.3 | $926.2 |
| Gross profit | $163.1 | $124.3 | $430.9 | $321.7 |
| Gross margin | 35.5% | 35.4% | 35.1% | 34.7% |
| Operating income | $56.6 | $48.4 | $142.0 | $96.1 |
| Net income | $46.5 | $38.6 | $114.0 | $74.2 |
| Diluted EPS | $0.98 | $0.82 | $2.40 | $1.57 |
Q3 sales grew about 31%; management attributed the increase to volume, pricing, and acquisitions. Acquired businesses contributed $47.4 million of Q3 sales and $109.8 million for the nine-month period. Nine-month operating cash flow was $93.9 million, versus $133.7 million a year earlier; the decrease reflected higher working-capital needs supporting revenue growth. Capital expenditures were $20.3 million.
At September 30, cash and cash equivalents were $76.0 million. Total debt was $196.8 million, including $106.3 million classified as current. The company reported $140.9 million of available capacity under its revolving credit agreement and $125.0 million remaining capacity under its New York Life private shelf agreement; the latter is uncommitted. The company said liquidity was adequate for foreseeable needs and reported compliance with financial covenants.
Changes versus the prior comparable period
- For the first nine months, sales rose 33%, operating income rose 48%, and diluted EPS increased from $1.57 to $2.40.
- Nine-month gross margin improved to 35.1% from 34.7%, supported by pricing, product mix, and cost management. Q3 gross margin was nearly unchanged year over year as pricing offset material inflation.
- Water Systems’ Q3 operating margin declined to 14.1% from 18.0%, with inflation, higher SG&A, and lower-margin Water Treatment mix among the factors. Fueling Systems’ and Distribution’s Q3 margins improved, supported by higher volumes and operating leverage.
- Cash used in investing rose to $213.4 million from $21.4 million, primarily due to acquisitions. Financing provided $68.1 million, compared with $58.5 million used in the prior-year period; debt proceeds helped fund acquisitions.
Outlook, commentary, and risks
- Management projected a full-year 2021 tax rate of about 20% before discrete adjustments, compared with about 21% for 2020. The filing provides no specific full-year sales or EPS guidance.
- The company completed several 2021 acquisitions, including water-treatment, pumping, and fueling-related businesses. Their preliminary purchase accounting included $121.4 million of identifiable intangible assets and $55.5 million of goodwill; acquired-business results were described as immaterial for purposes of separate pro forma presentation.
- Management cited supply constraints and inflation in materials, components, freight, and tariffs; risks also include raw-material availability and costs, demand, competition, currency movements, acquisition integration, and effects of epidemics and pandemics.
- A French proceeding concerning alleged damage at filling stations remains unresolved. A preliminary expert report estimated total damages to Esso at approximately 12 million euros. Franklin disputes that its products caused the damage; its potential exposure was neither probable nor estimable at the filing date, and a material effect is possible depending on any eventual payment.
- A $2.5 million gain from settlement of an indirect tax dispute contributed to other income in both Q3 and the nine-month period. Foreign-currency transaction losses were $1.7 million for the nine months, primarily related to the Argentine peso.
Important facts for investors to verify
- Whether pricing continues to offset input, freight, and tariff inflation, particularly in Water Systems, and whether its segment margin stabilizes.
- Working-capital trends and cash conversion, given the year-over-year decline in operating cash flow and inventory and receivables increases.
- Acquisition integration, realized revenue and profitability, and final purchase-price allocations, which were preliminary at quarter-end.
- Debt maturities and liquidity: $106.3 million of debt was classified as current, while revolving-credit availability and the private shelf capacity have different terms and commitments.
- Developments in the French litigation and any change in management’s assessment of the probability or estimability of exposure.