Franklin Electric Co., Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the third quarter and nine months ended September 28, 2013; comparisons are with the periods ended September 29, 2012. Franklin Electric reports Water Systems and Fueling Systems. Per-share figures reflect the two-for-one stock split effective March 18, 2013.
Financial performance and position
- Third quarter: Net sales were $249.8 million, up 5%; gross profit was $87.0 million, up about 5%, with gross margin unchanged at 34.8%. Operating income was $37.7 million, up 13%. Net income attributable to Franklin Electric was $25.1 million versus $21.9 million; diluted EPS was $0.51 versus $0.46, up 11%.
- Nine months: Net sales were $735.8 million, up 7%; gross profit was $255.5 million, up about 10%, and gross margin improved to 34.7% from 34.0%. Operating income rose to $101.6 million from $92.0 million. Net income attributable to Franklin Electric was $68.7 million versus $69.7 million; diluted EPS was $1.41 versus $1.46.
- Segments: Q3 Water Systems sales increased 4% to $197.9 million and Fueling Systems sales increased 9% to $51.9 million. For nine months, sales increased 5% in Water Systems and 15% in Fueling Systems.
- Cash flow: Nine-month operating cash flow was $55.0 million, compared with $26.1 million. Investing used $52.6 million, including $50.8 million of property and equipment additions; financing provided $14.1 million. Cash increased to $118.1 million from $103.3 million at year-end 2012.
- Debt and liquidity: Debt, including current maturities, was $190.6 million, versus $165.9 million at December 29, 2012. The company had $50.0 million available under its Prudential agreement and $145.7 million available under its revolving credit agreement. It reported compliance with debt covenants.
- Other metrics: Q3 dividends were $0.0775 per share; nine-month dividends were $0.2275 per share. Total assets were $1,044.8 million and shareowners’ equity was $571.7 million at September 28, 2013.
Changes versus comparable periods
- Q3 sales growth reflected acquisitions, price and volume gains, partly offset by $3.7 million of unfavorable currency translation. Excluding acquisitions and currency, sales increased about 5%.
- Nine-month sales included $27.4 million from acquired businesses and were reduced by $10.3 million from currency translation; excluding both effects, sales increased about 5%.
- Q3 gross margin was flat year over year: fixed-cost leverage was offset by higher raw-material and other variable costs. Nine-month margin improved on lower raw-material and direct-labor costs and higher-volume leverage.
- Reported nine-month earnings comparisons were affected by a $12.2 million pretax gain on the 2012 Pioneer Pump Holdings transaction. Management’s adjusted diluted EPS was $1.43 versus $1.29; Q3 adjusted diluted EPS was $0.50 versus $0.46. These are non-GAAP measures.
- Foreign currency translation reduced nine-month comprehensive income; other comprehensive loss, net of tax, was $10.2 million, principally reflecting currency translation.
Outlook, commentary, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management expected ongoing operating needs, capital expenditures, pension obligations, dividends and debt service to be funded by cash, operations and existing credit agreements. Management estimated a full-year 2013 effective tax rate of about 28% before discrete items.
- Management described Q3 sales and EPS as the highest for any third quarter in company history. It cited growth in dewatering and wastewater pumps, developing markets and Fueling Systems, while noting lower groundwater-pump demand after unusually strong drought-related shipments in 2012 and a Q3 Southeast Asia slowdown associated with distributor inventory adjustments.
- Q3 restructuring charges were $0.8 million, mainly for the headquarters and engineering-center relocation, manufacturing realignments and Flexing acquisition integration. Nine-month charges were $2.2 million. Q3 SG&A included a $1.6 million benefit from reversing a reserve for previously established legal claims.
- Operating risks identified include regional economic and currency conditions, weather and housing trends, demand, competition, distribution changes, supply constraints, raw-material costs, acquisition integration, litigation and regulatory actions. Management reported no material change in the risk factors from its 2012 Form 10-K.
- In the California CARB case concerning a nozzle component, the court issued a complete defense verdict on July 25, 2013; an appeal remained possible pending entry of judgment. A related Sacramento matter was settled, with no payment due following the defense verdict. Management said other ordinary-course claims were not expected to have a material adverse effect.
- The company had $15.7 million of commitments, primarily for building expansions and machinery and equipment. Its Impo minority holders may require redemption of their interests after May 2, 2014.
Important facts for investors to verify
- Whether sales and margin growth persist after separating acquisition contributions, foreign-exchange effects and non-GAAP adjustments.
- Whether working-capital demands, particularly receivables and inventory, affect operating cash flow, and how elevated capital spending trends after completion of the headquarters project.
- Debt levels, covenant headroom, refinancing needs and the timing and amount of any Impo minority-interest redemption.
- Developments in the CARB appeal process and the final resolution of other legal, environmental and warranty matters.
- The assumptions behind management’s tax-rate estimate and indefinite reinvestment of foreign earnings.