Business context and reporting period
Franklin Electric Co., Inc. designs, manufactures, and distributes water-pumping systems and fuel-station pumping and monitoring systems. Its reporting segments are Water Systems and Fueling Systems. This Form 10-K covers fiscal 2015, the 52 weeks ended January 2, 2016; quarterly figures below compare Q4 2015 with Q4 2014.
Financial performance and condition
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $924.9 million | $1,047.8 million |
| Gross profit / margin | $297.6 million / 32.2% | $344.4 million / 32.9% |
| Operating income | $90.4 million | $100.1 million |
| Net income attributable to Franklin Electric | $72.9 million | $69.8 million |
| Diluted EPS | $1.50 | $1.41 |
| Operating cash flow | $99.6 million | $47.3 million |
| Capital expenditures | $25.9 million | $42.4 million |
Q4 2015 net sales were $219.3 million versus $253.8 million in Q4 2014; net income was $16.3 million versus $3.2 million, and diluted EPS was $0.33 versus $0.06.
At year-end, cash and cash equivalents were $81.6 million, total debt including current maturities was approximately $220.9 million, and long-term debt was $188.1 million. Working capital was $293.5 million and the current ratio was 3.0. The company reported $144.8 million of available capacity under its revolving credit agreement, $100 million under the Prudential agreement, and $75 million under its New York Life agreement. It was in compliance with financial covenants.
Material changes versus prior comparable period
- Revenue fell 12% year over year. Foreign-currency translation reduced sales by $89.3 million; acquisitions added $21.3 million. Excluding currency and acquisitions, sales declined about 5%.
- Water Systems sales fell 14% to $707.6 million, with lower North American demand—especially mobile dewatering and groundwater equipment—partly offset by growth in some international markets. Fueling Systems sales declined 3% to $217.3 million, although sales excluding currency and acquisitions rose about 2%.
- Gross margin contracted 70 basis points, mainly from lower fixed-cost absorption on reduced sales and higher raw-material costs. Operating income fell about 10%.
- Reported diluted EPS increased 6%, but adjusted diluted EPS declined 16%, to $1.47 from $1.76. The filing’s non-GAAP adjustments include restructuring and other specified items, including a $4.8 million tax benefit reversal adjustment.
- Operating cash flow more than doubled, principally because lower sales and reduced inventory and receivables uses of cash improved working capital. Financing cash outflows included $46.3 million of share repurchases, $18.9 million of dividends, and a $20.2 million payment to acquire the remaining Pioneer Pump interest.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expects operating needs, capital spending, pension obligations, dividends, and debt service to be funded by cash, operations, and existing credit facilities, and did not foresee needing public-market financing in the near term.
- Management cited softer demand in North American agriculture and oil-and-gas-related dewatering, foreign-exchange headwinds, and weaker sales in some regions. It also identified housing activity, weather, commodity prices, competition, raw-material costs, foreign currencies, acquisitions and integration, suppliers, regulation, and goodwill impairment as risks.
- The company recorded $3.0 million of 2015 restructuring expense, primarily related to manufacturing realignment in Europe and Brazil. The Wittlich, Germany manufacturing transfer to the Czech Republic was expected to conclude by the end of 2016.
- Other notable items included a $2.7 million gain on settlement of the Pioneer share-purchase liability and tax benefits associated with that transaction. The effective tax rate was 14.6%, including discrete items; management said it was about 27% before discrete adjustments.
- The California Air Resources Board appeal concerning a fueling-system nozzle was affirmed in the company’s favor in December 2015; the filing says the case concluded. Management considered other ordinary-course claims defensible without material adverse effect.
- Foreign-currency translation losses reduced 2015 other comprehensive income; the company estimated a 10% strengthening of the U.S. dollar would reduce sales by about 5%. A hypothetical 10% adverse move in key metal prices could reduce gross margin by about 100 basis points.
Important facts for investors to verify
- Whether underlying demand and margins stabilize, particularly in North American Water Systems and oil-and-gas-related markets.
- How much future reported performance may be affected by currency movements versus organic sales and pricing.
- The sustainability of cash generation and capital allocation, including debt repayment, dividends, and repurchases.
- Execution and remaining costs of manufacturing realignment, and whether projected savings offset disruption and transition costs.
- Tax benefits and the indefinite reinvestment of foreign earnings, alongside approximately $2.4 million of unrecognized tax benefits and $2.3 million of accrued related interest and penalties.