Franklin Electric Co., Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $551.7 million | $459.0 million | $1,554.3 million | $1,229.3 million |
| Gross profit | $190.6 million | $163.1 million | $525.2 million | $430.9 million |
| Operating income | $80.0 million | $56.6 million | $201.0 million | $142.0 million |
| Net income attributable to Franklin Electric | $58.6 million | $46.2 million | $147.8 million | $113.2 million |
| Diluted EPS | $1.24 | $0.98 | $3.13 | $2.40 |
- Q3 sales increased about 20%; nine-month sales increased about 26%. Growth reflected pricing, acquisitions, and higher volume, partly offset by foreign currency translation.
- Gross margin was 34.5% in Q3 versus 35.5% a year earlier, and 33.8% for the nine months versus 35.1%. Management cited inflationary costs, supply-related unfavorable absorption, and higher inbound freight; price increases did not fully offset these pressures.
- Operating income rose 41% in Q3 and 42% year to date. Segment operating income increased across Water Systems, Fueling Systems, and Distribution. Q3 segment margins improved year over year; year-to-date Water Systems margin was flat at 14.6%, while Fueling Systems and Distribution margins increased.
- Interest expense increased to $3.1 million in Q3 and $7.5 million year to date, primarily due to higher debt and interest rates. Foreign-exchange losses were $3.4 million in Q3 and $4.3 million year to date. Other expense included indirect-tax dispute settlement losses of $1.1 million for Q3 and $2.1 million year to date.
Cash flow, debt, and liquidity
- Operating cash flow was $7.2 million for the first nine months, down from $93.9 million in 2021. Management attributed the decline mainly to working-capital investment supporting supply-chain resilience and customer demand; receivables and inventory were significant uses of cash.
- Investing cash outflow was $30.9 million, including $29.3 million of capital expenditures. Financing provided $29.2 million, including $434.5 million of debt proceeds and $350.9 million of repayments; the company also repurchased $30.7 million of shares and paid $27.3 million in dividends.
- Cash and equivalents were $39.5 million at September 30, 2022, including $36.1 million held in foreign jurisdictions for foreign operations. Total debt, including current maturities, was $268.8 million, versus $188.5 million at December 31, 2021; $179.6 million was classified as current.
- Available capacity was $171.8 million under the $350 million revolving credit agreement and $125 million under the New York Life private shelf agreement. The company reported compliance with financial covenants and said liquidity was adequate for foreseeable needs. Financial covenants include maximum leverage of 3.50 to 1.00 and minimum interest coverage of 3.00 to 1.00.
Material changes and management commentary
- Acquisitions contributed $28.3 million of Q3 sales and $110.9 million of nine-month sales. Distribution organic sales rose about 22% in both periods; management described growth as supported by pricing and broad-based demand.
- Foreign currency translation reduced sales by $24.9 million in Q3 and $57.4 million year to date. The company reported transaction-related foreign-exchange losses, primarily associated with the Turkish lira and Argentine peso.
- Turkey was treated as a highly inflationary economy beginning April 1, 2022. Remeasurement gains and losses are recorded in earnings; the impact was not significant through September 30, but management warned that the change may increase earnings volatility.
- No full-year sales or earnings guidance is provided in the supplied filing text. Management projected a full-year 2022 tax rate of about 21% before discrete items and stated that available liquidity and funding sources should meet expected operating, investment, dividend, repurchase, pension, and debt-service needs.
Risks, contingencies, and unusual items
- A French proceeding concerns alleged damage at Esso filling stations linked to underground piping connections. An expert report estimated total damages of approximately €9.5 million. The company disputes that its products caused damage; exposure was not considered probable or estimable, but a resulting payment could materially affect results, financial position, or cash flows. The company’s response was due in January 2023.
- Other principal risks discussed include foreign-exchange movements, inflation and input costs, supply constraints, demand and economic conditions, and acquisition integration. Management reported no material change to other risk factors from its 2021 Form 10-K.
- Restructuring expense was $1.2 million in Q3 and $1.9 million year to date, mainly for manufacturing realignment and branch actions. The company also reported $13.9 million of commitments, primarily for capital expenditures and raw-material purchases.
Important facts for investors to verify
- Whether working-capital investment converts into stronger operating cash flow, and how inventory and receivables develop.
- Whether pricing continues to offset inflation, freight, and supply-related costs sufficiently to stabilize or improve gross margins.
- Debt maturities, borrowing levels, interest expense, and covenant headroom, particularly given the increase in current debt and interest rates.
- Developments in the French legal proceeding and any change in the company’s assessment of potential exposure.
- Effects of Turkish hyperinflation accounting and currency movements on reported earnings, sales, and comprehensive income.