Franklin Electric Co., Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 28, 2013 (52 weeks); comparisons are with fiscal 2012. The filing also provides unaudited fourth-quarter results. Franklin Electric designs, manufactures, and distributes water and fuel pumping systems through its Water Systems and Fueling Systems segments.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $965.5 million | $891.3 million | +8% |
| Gross profit / margin | $331.5 million / 34.3% | $301.7 million / 33.8% | Margin +0.5 percentage point |
| Operating income | $123.8 million | $113.0 million | +10% |
| Net income attributable to Franklin Electric | $82.0 million | $82.9 million | -1% |
| Diluted EPS | $1.68 | $1.73 | -3% |
| Adjusted diluted EPS (non-GAAP) | $1.72 | $1.57 | +10% |
| Operating cash flow | $98.3 million | $70.2 million | +$28.1 million |
| Capital expenditures | $67.2 million | $42.1 million | +$25.1 million |
Gross-margin improvement reflected higher sales and fixed-cost leverage and lower labor and burden costs, partly offset by higher freight costs. Sales growth included $30.1 million from acquisitions and was reduced by $14.7 million from foreign-currency translation; excluding both, sales rose about 7%.
Segments: Water Systems sales were $766.4 million (+7%) and reported operating income was $131.3 million. Fueling Systems sales were $199.1 million (+13%) and reported operating income was $42.6 million. Corporate and other expenses were $50.1 million, versus $47.7 million in 2012.
Fourth quarter: Sales were $229.8 million versus $205.1 million. Net income attributable to Franklin Electric was $13.3 million versus $13.2 million, and diluted EPS was $0.27 in both periods.
Balance sheet and liquidity: Cash and equivalents were $134.6 million; total debt was approximately $189.6 million, including $15.4 million of current maturities, implying net debt of about $55 million. Working capital was $333.9 million and the current ratio was 3.4. The company reported $145.6 million of available capacity under its $150 million revolving credit agreement, after letters of credit. It was in compliance with debt covenants. Operating cash flow exceeded investing outflow of $76.5 million; investing was led by $67.6 million of property and equipment additions, including the new headquarters/engineering center and a Brazil facility.
Changes, outlook, and notable items
- Reported EPS declined despite higher sales and operating income, in part because 2012 included a $12.2 million one-time gain on remeasurement of the company’s prior Pioneer investment. The company’s adjusted EPS measure excludes that gain and certain restructuring, legal, and acquisition items; adjusted measures are non-GAAP.
- Water Systems growth was supported by North American dewatering, groundwater pumps, drives and controls, and Brazil; Fueling Systems growth was strongest in developing regions and included acquisition contributions.
- Research and development expense rose to $16.8 million from $9.9 million, including investment in artificial-lift products, controls, pumps, and engineering capability. Management reported successful 2013 artificial-lift test installations in North America, Australia, and Africa and anticipated further opportunities, including in China.
- Backlog was $88.1 million as of February 13, 2014, up from $64.6 million a year earlier; orders were expected to ship in fiscal 2014. The filing cautions backlog has not been a significant indicator of future sales. No specific company-wide revenue or earnings guidance is provided.
- Restructuring expense was $3.7 million, including asset write-downs, severance, headquarters relocation, and manufacturing realignment. The Oklahoma City facility was classified as held for sale and sold in the first quarter of 2014.
- California regulators appealed a court ruling that found for Franklin Electric in the CARB case concerning a component in its Healy nozzle system. The court awarded the company about $71,000 in costs; the company stated the litigation had not affected product certification or sales.
- Principal risks include competition and pricing, housing and weather-related demand, volatile commodity and foreign-exchange exposure, supplier concentration, international operations, acquisition integration, regulation and environmental mandates, and potential goodwill or intangible-asset impairment. The company reported no impairment in 2013; goodwill was $207.2 million.
Important facts for investors to verify
- Reconcile GAAP EPS and net income trends with management’s non-GAAP adjusted measures, particularly the 2012 Pioneer remeasurement gain and 2013 restructuring charges.
- Assess whether higher capital spending converts into growth and returns, and monitor working-capital needs and operating cash flow.
- Review debt maturities, covenant headroom, and cash accessibility: approximately 60% of reported cash was held outside the United States.
- Track the CARB appeal, the Impo minority-interest redemption terms, and other legal, tax, and contingent obligations.
- Evaluate the durability of segment growth and the limited predictive value of backlog, alongside the company’s exposure to seasonality, currencies, commodities, and end-market demand.