Business context and reporting period
Franklin Electric Co., Inc. designs and manufactures products reported in Water Systems, Fueling Systems, and Distribution. This unaudited Form 10-Q covers the quarter ended March 31, 2020; comparisons are with the first quarter of 2019 unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $266.8 million | $290.7 million |
| Gross profit / margin | $90.3 million / 33.9% | $89.5 million / 30.8% |
| Operating income | $13.8 million | $12.1 million |
| Net income attributable to Franklin Electric | $10.6 million | $9.1 million |
| Diluted earnings per share | $0.23 | $0.19 |
| Net cash used in operating activities | $4.7 million | $2.9 million |
Sales fell $23.9 million, or about 8%; management cited lower Water and Fueling volumes and unfavorable currency translation, partly offset by pricing. Excluding acquisitions and currency effects, organic sales declined about 7%. Gross margin improved on better price realization and product mix. SG&A was $75.6 million versus $76.3 million; restructuring expense was $0.9 million versus $1.1 million. The effective tax rate was 19.1%, compared with 13.9%, primarily reflecting $0.4 million of unfavorable discrete items.
Segment sales and operating income were: Water Systems, $164.1 million and $18.8 million (prior year $188.4 million and $19.2 million); Fueling Systems, $55.3 million and $12.1 million (prior year $60.2 million and $12.3 million); Distribution, $60.4 million and a $2.2 million operating loss (prior year $53.3 million and a $4.3 million loss). Water and Fueling operating margins were 11.5% and 21.9%, respectively, both higher year over year; Distribution remained loss-making.
Cash, debt, and liquidity
Cash and equivalents were $40.0 million at March 31, 2020, down from $64.4 million at December 31, 2019. Operating activities used $4.7 million; investing activities used $11.1 million, including $5.5 million of capital expenditures and $5.6 million for acquisitions; financing activities used $3.7 million. Financing included $17.0 million of share repurchases and $7.2 million of dividends. Foreign-exchange effects reduced cash by $4.9 million.
Total debt, including current maturities, was $134.3 million, up from $115.0 million at year-end; $41.7 million was classified as current and $92.6 million as long-term. The company had $39.0 million drawn on its $300 million revolving credit facility, $4.2 million of letters of credit, and $256.8 million of available capacity. It also reported $150 million available under the Prudential Agreement and $125 million under the New York Life Agreement. Management reported compliance with financial covenants and said liquidity was adequate for the foreseeable future. Current assets were $543.1 million and current liabilities $191.4 million.
Outlook, risks, and unusual items
The filing provides no quantified updated 2020 revenue or earnings guidance. Management identified pandemic-related risks to its previously provided 2020 outlook: reduced large dewatering-equipment sales, customer inventory destocking—particularly in the U.S. and Canada plumbing channel—and deferrals or cancellations of new filling-station construction in the U.S. and Canada. A stronger U.S. dollar, government-mandated closures, lower production volumes, lost manufacturing efficiency, and possible higher bad-debt expense could also weigh on results. The company said operations generally remained open, subject to temporary closures in some countries, and those closures had not materially affected product supply as of the filing.
Management said it was cutting discretionary spending to mitigate impacts and did not expect the CARES Act to have a material financial-statement effect at that time. The quarter included a $6.3 million acquisition of assets in line-shaft turbines and adjacent products. Foreign-currency translation produced a $37.7 million loss in other comprehensive income, contributing to a $26.4 million comprehensive loss attributable to Franklin Electric despite positive net income. Management said ordinary-course legal claims were not expected to have a material effect; the company disclosed $5.2 million of commitments, primarily for capital expenditures and raw materials. Product warranty estimates may differ from actual claims.
Important facts for investors to verify
- Whether pandemic-driven declines, customer destocking, and delayed filling-station projects materially worsen sales or margins after quarter-end.
- Whether operating cash flow, inventory levels, and cash balances improve; inventory was $310.0 million at quarter-end versus $300.2 million at year-end.
- Debt maturities and available borrowing capacity, including the $41.7 million of current debt and the 2021 maturities of key credit agreements.
- Whether Water Systems demand and Distribution’s operating losses recover, and whether Fueling Systems margins hold up.
- How currency movements and any changes in warranty claims, bad debts, or other contingencies affect earnings and liquidity.