Franklin Electric Co., Inc. — Q2 2014 Form 10-Q
Reporting period: Second quarter ended June 28, 2014; comparisons are with the quarter ended June 29, 2013. The filing also reports six-month results. Franklin Electric operates through Water Systems and Fueling Systems.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $284.5 million | $263.4 million | $515.9 million | $486.0 million |
| Gross profit | $99.4 million | $94.6 million | $177.5 million | $168.5 million |
| Operating income | $39.1 million | $40.7 million | $65.1 million | $63.9 million |
| Net income attributable to Franklin Electric | $27.1 million | $28.1 million | $44.0 million | $43.6 million |
| Diluted EPS | $0.55 | $0.58 | $0.90 | $0.90 |
- Q2 sales increased about 8%; excluding acquisitions and currency translation, sales rose about 8%. First-half sales increased about 6%, or about 8% excluding those effects. Q2 acquired-business sales contributed $2.3 million and currency translation reduced sales by $3.5 million.
- Q2 gross margin was 34.9%, down from 35.9%; operating margin was about 13.8%, versus 15.5%. For the first half, gross margin was 34.4% versus 34.7%, while operating margin was about 12.6% versus 13.1%.
- Management’s non-GAAP adjusted diluted EPS was $0.60 for Q2 versus $0.59, and $0.95 for the first half versus $0.93. Adjustments included restructuring and executive-transition and acquisition-related costs; these are company-defined non-GAAP measures.
- Water Systems led sales, with Q2 revenue of $226.7 million, up about 6%; Fueling Systems revenue was $57.8 million, up about 16%. Fueling Systems’ adjusted operating margin improved, while Water Systems’ adjusted margin declined amid sales mix shifts and lower operating leverage in some regions.
Cash, debt, and liquidity
- Cash and equivalents were $87.7 million at June 28, 2014, down from $134.6 million at December 28, 2013. Total debt was approximately $245.2 million, including $69.8 million classified as current; long-term debt was $175.4 million.
- First-half operating cash flow was negative $26.2 million, versus negative $5.6 million a year earlier. Management attributed the larger use primarily to seasonal inventory buildup and higher receivables associated with increased sales.
- First-half investing cash outflow was $55.1 million, including $29.8 million for acquisitions and $6.7 million for a minority equity investment. Financing provided $34.6 million, including increased revolver borrowing.
- The $150 million revolving facility had $48.2 million drawn and $96.4 million of available capacity, after letters of credit. The company also reported $50 million of borrowing capacity under its $200 million Prudential Agreement. It was in compliance with debt covenants at quarter-end and expected cash, operations, and credit facilities to fund requirements.
Material changes, outlook, and risks
- In June, Franklin acquired 100% of Brazilian pump maker Bombas Leao for approximately $30.7 million and assumed related debt and liabilities. Purchase accounting remained preliminary; acquired goodwill was approximately $5.2 million. Franklin also redeemed an additional 10% of Impo, raising ownership to 90%.
- On July 1, 2014, the company announced it would move manufacturing from Wittlich, Germany, to Brno, Czech Republic; its European Water Systems headquarters and distribution center would remain in Wittlich.
- Management projected an average effective tax rate of about 25% for the second half of 2014, citing foreign earnings and tax credits. The filing provides no specific full-year sales or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year performance.
- Key business risks identified include economic and currency conditions, market demand and weather, competition, distribution-channel changes, raw-material costs and availability, supply constraints, acquisition integration, and litigation or regulatory actions. CARB appealed a defense verdict in the nozzle case; the company stated its product certifications and ongoing sales had not been affected. Other ordinary-course claims were not expected by management to have a material adverse effect.
- Other notable items: the company recorded $4.1 million of additional unrecognized tax benefits associated with acquired companies’ pre-acquisition tax positions. The filing reported effective disclosure controls and no significant change in market-risk exposure.
Investor facts to verify
- Whether working-capital investment reverses as seasonal inventory and receivables convert to cash.
- Whether Water Systems margins recover and Fueling Systems’ growth and margin gains persist.
- Final Bombas Leao purchase accounting, integration outcomes, and the financial and execution effects of the Wittlich manufacturing transfer.
- Debt maturities, continued covenant compliance, and the adequacy of available liquidity as acquisition and operating needs evolve.
- Developments in the CARB appeal and resolution of acquired-company tax positions and other contingencies.