Franklin Electric Co., Inc. — Q1 2016 Form 10-Q
Reporting period: First quarter ended April 2, 2016; comparative quarter ended April 4, 2015. Franklin Electric operates Water Systems and Fueling Systems businesses.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $218.4 million | $225.7 million |
| Gross profit / margin | $74.2 million / 34.0% | $71.5 million / 31.7% |
| Operating income | $21.1 million | $15.9 million |
| Net income attributable to Franklin Electric | $13.5 million | $19.8 million |
| Diluted EPS | $0.28 | $0.41 |
| Operating cash flow | $(0.4) million | $(21.8) million |
Sales fell 3% year over year, primarily from a $13.8 million foreign-currency translation impact; organic sales excluding currency increased 3%, primarily due to price. Water Systems sales declined 6% to $168.8 million, while Fueling Systems sales rose 7% to $49.6 million. Gross margin improved 230 basis points, which management attributed mainly to lower raw-material costs, pricing and lower fixed costs. SG&A decreased 5% to $52.3 million, partly reflecting currency translation. Operating income increased 33%.
Reported earnings were affected by prior-year unusual items: Q1 2015 included a $2.7 million gain on a redeemable noncontrolling-interest liability and a $4.8 million tax benefit related to the Pioneer transaction. Adjusted diluted EPS, as presented by the company, was $0.29 in Q1 2016 versus $0.32 in Q1 2015. The effective tax rate was 26.7% in Q1 2016 versus negative 20.4% in Q1 2015, reflecting the prior-year discrete tax benefit.
Cash, debt and liquidity
Cash and equivalents were $74.6 million at April 2, 2016, down from $81.6 million at January 2, 2016. Operating cash use was $0.4 million; investing cash use was $11.0 million, including higher capital spending and a building purchase. Financing provided $3.6 million. The company reported total debt of approximately $232.6 million, including $45.3 million current maturities and short-term borrowings, versus approximately $220.7 million at year-end. It drew $11.5 million on its revolver for seasonal working capital needs.
Available borrowing capacity was reported as $133.3 million under the revolving credit agreement, $100 million under the Prudential agreement, and $75 million under the New York Life agreement. The company was in compliance with financial covenants, including maximum leverage of 3.50:1.00 and minimum interest coverage of 3.00:1.00. About 19% of cash on hand was in the U.S. and readily accessible; the remainder was held internationally.
Outlook, risks and notable items
Management projected a full-year 2016 tax rate of approximately 26% before discrete adjustments. It expected operating needs, capital expenditures, pension obligations, dividends and debt service to be funded by cash, operations and existing credit agreements. The ongoing Wittlich, Germany manufacturing realignment was estimated to conclude by year-end 2016, with total charges expected to be approximately $19.4 million. Q1 restructuring expense was $0.8 million.
Management cited exposure to regional and general economic conditions, currencies, housing starts, weather, demand, competition, distribution changes, supply constraints, pricing, raw-material costs, acquisition integration, litigation and regulatory actions. It reported no material change in risk factors or market-risk exposure. Ordinary-course legal claims were not expected by management to have a material effect; the company also disclosed $18.8 million of commitments, primarily for capital expenditures and raw materials. Actual warranty claims may differ from estimates. The filing states that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether sales and margins continue to improve after separating currency effects, pricing and changing regional demand, particularly in Latin America and North America.
- Whether operating cash flow turns positive as seasonal working-capital requirements ease, and how capital expenditures affect cash and borrowing.
- Debt maturities, revolver use, covenant headroom and practical access to international cash.
- Whether the approximately 26% tax-rate outlook and the expected completion and cost of the manufacturing realignment remain on track.
- The assumptions behind adjusted earnings and the potential variability of warranty costs, foreign exchange and regional market conditions.