Franklin Electric Co., Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are with FY 2021. Franklin Electric designs, manufactures and distributes water and fuel pumping systems, related controls and equipment, and groundwater products. Its reportable segments are Water Systems, Fueling Systems and Distribution.
Financial performance
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Net sales | $2,043.7 million | $1,661.9 million | +23% |
| Gross profit / margin | $691.4 million / 33.8% | $576.1 million / 34.7% | Profit +20%; margin down 0.9 percentage points |
| Operating income / margin | $257.2 million / 12.6% | $189.2 million / 11.4% | Income +36% |
| Net income attributable to Franklin Electric | $187.3 million | $153.9 million | +22% |
| Diluted EPS | $3.97 | $3.25 | +22% |
| Cash from operations | $101.7 million | $129.8 million | Down $28.1 million |
| Capital expenditures | $41.9 million | $30.1 million | Up $11.8 million |
| Cash and cash equivalents at year-end | $45.8 million | $40.5 million | Up $5.3 million |
| Total debt, including current maturities | $216.1 million | $188.5 million | Up $27.6 million |
Revenue growth was primarily driven by pricing and acquisitions; foreign-currency translation reduced sales by approximately $77.1 million, or 5%. Acquired businesses contributed $131.9 million of incremental sales. Operating cash flow fell mainly because higher revenue required additional working capital, including increases in receivables and inventory. Gross margin declined amid supply disruptions, unfavorable absorption and higher inbound freight, partly offset by pricing actions.
Segment results
| Segment | FY 2022 sales | Sales change | FY 2022 operating income |
|---|---|---|---|
| Water Systems | $1,157.5 million | +20% | $172.3 million |
| Fueling Systems | $334.1 million | +16% | $96.8 million |
| Distribution | $668.1 million | +34% | $54.5 million |
Segment sales include intersegment activity; consolidated sales reflect $116.0 million of eliminations. Sales gains reflected pricing, demand and acquisitions, with the Distribution increase also supported by broad-based growth across regions and product categories.
Liquidity, debt and capital allocation
At year-end, the company had $122.8 million drawn on its $350 million revolving credit facility, $4.0 million of letters of credit outstanding and $223.2 million of available capacity. The facility matures May 13, 2026. It also reported $125 million of remaining capacity under its New York Life agreement, which matures July 30, 2024. Management said liquidity was adequate for foreseeable needs; the company was in compliance with financial covenants. Total debt maturities were $126.8 million in 2023, making near-term repayment or refinancing an important consideration.
Financing cash flow was a $48.5 million use, versus $50.9 million provided in 2021, reflecting lower net debt and stock issuance proceeds, higher repurchases and dividends, and deferred acquisition payments. The company paid $37.0 million in dividends and repurchased $36.3 million of shares in 2022. It reported 30 consecutive years of annual dividend increases.
Outlook, risks and unusual items
- The filing provides no specific FY 2023 revenue, earnings or margin guidance. Backlog was $294.9 million on February 6, 2023, versus $286.4 million a year earlier; orders were generally expected to ship in 2023. Management cautions that backlog has not been a significant indicator of future sales.
- Principal risks include economic and housing-market weakness, volatile raw-material and energy costs, supply constraints, competition, weather and seasonality, foreign-exchange movements, regulation of groundwater and fueling products, and acquisition integration. The company also relies on certain single- or limited-source suppliers.
- Turkey was treated as a highly inflationary economy beginning April 1, 2022; related remeasurement and transaction effects can add earnings volatility. Foreign-exchange losses were $7.2 million in 2022, compared with $2.3 million in 2021.
- Other expense included a $2.1 million loss from settling an indirect tax dispute. Interest expense rose to $11.5 million from $5.2 million, primarily due to higher debt and interest rates.
- A French proceeding concerning alleged damage at Esso filling stations remains unresolved. An expert report cited approximately €9.5 million of total damages; the company disputes that its products caused the damage. Its exposure was neither probable nor estimable, and a payment could be material depending on amount.
- The company’s annual goodwill and indefinite-lived trade-name impairment tests found fair values substantially above carrying values; a 10% decrease in estimated fair values would not have changed that conclusion. Goodwill was $328.0 million.
- The financial-statement auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Investor facts to verify
- How much of sales and earnings growth came from pricing and acquisitions versus underlying volume, and whether pricing can continue to offset cost inflation.
- Working-capital conversion and operating cash flow, given the substantial receivables and inventory build and lower operating cash flow in 2022.
- Debt repayment or refinancing plans for the $126.8 million due in 2023, and exposure to floating-rate borrowing costs.
- The outcome and potential financial exposure of the French fueling-piping litigation.
- Whether demand, foreign-exchange conditions, supply availability and backlog convert into sustained growth; the company states backlog is not a reliable sales predictor.