Franklin Electric Co., Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
Franklin Electric makes water and fueling systems and distributes related products. Management attributed higher sales to stronger Water Systems and Distribution volumes, pricing, and acquisitions. Organic sales growth, excluding acquisitions and currency effects, was approximately 17%.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $333.0 million | $266.8 million; up 25% |
| Gross profit and margin | $115.5 million; 34.7% | $90.3 million; 33.9% |
| Operating income and margin | $33.8 million; 10.1% | $13.8 million; 5.2% |
| Net income attributable to Franklin Electric | $27.9 million | $10.6 million |
| Diluted EPS | $0.59 | $0.23 |
| Operating cash flow | $5.4 million | $(4.7) million |
| Cash and cash equivalents | $118.3 million at March 31 | $130.8 million at December 31, 2020 |
| Total debt, including current maturities | $94.1 million | $94.6 million at December 31, 2020 |
Cash used in investing activities was $6.7 million, including $6.7 million of capital expenditures; cash used in financing was $8.4 million, including dividends of $8.1 million and share repurchases of $4.8 million. Current assets were $635.3 million and current liabilities $200.4 million. The company reported $296 million available under its revolving credit facility and $125 million under its New York Life shelf agreement; it was compliant with financial covenants.
Segment sales and operating income: Water Systems $197.6 million and $31.3 million; Distribution $95.7 million and $2.0 million; Fueling Systems $56.8 million and $14.9 million. Distribution moved from a $2.2 million operating loss to profit.
Material changes and management commentary
- Sales rose $66.2 million; acquisitions contributed $23.5 million, while foreign exchange reduced sales by $2.9 million. Distribution organic growth was approximately 31%, supported by broad demand, customer purchase pull-forwards, and the Texas winter storm.
- Gross margin improved 0.8 percentage points, which management attributed primarily to pricing, favorable product mix, and cost management. Operating income increased about 144%.
- Operating cash flow improved year over year, but higher receivables from increased sales drove working-capital needs. Cash declined $12.5 million during the quarter.
- Q1 effective tax rate was 13.5%, versus 19.1%; favorable share-based compensation tax benefits and a $0.8 million foreign tax-election benefit contributed. Management projected a 2021 full-year tax rate of about 20% before discrete items; no sales or earnings guidance was provided.
Outlook, risks, contingencies, and unusual items
Management said available cash, operating cash flow, and credit facilities should fund expected operating needs, capital expenditures, pension obligations, dividends, repurchases, and debt service. The revolving facility matures October 28, 2021; the Prudential Agreement expires July 30, 2021. The filing identifies economic and currency conditions, demand, weather, pandemics, competition, supply constraints, raw-material costs, pricing, and acquisition integration among factors that could affect results.
A French legal matter concerns alleged damage at filling stations; the company disputes that its products caused the damage. Potential exposure was neither probable nor estimable, but a payment could materially affect results depending on its amount. The company also reported $6.8 million of commitments, primarily capital expenditures and raw-material purchases.
After quarter-end, on April 1, 2021, the company acquired Puronics for approximately $28 million for Water Systems. Preliminary accounting for earlier acquisitions included estimated fair values exceeding purchase price by $2.9 million for Gicon; the company said a bargain-purchase gain would be recognized once valuation was finalized. Q1 2021 also included a foreign-exchange transaction loss of $0.1 million, compared with a $1.0 million gain in Q1 2020.
Important facts for investors to verify
- Whether strong organic demand persists, particularly after customer purchase pull-forwards and the Texas winter storm, and whether pricing and margin gains continue.
- How receivables and inventory affect cash conversion as sales grow.
- Renewal or replacement of the revolving and Prudential facilities before their stated maturities.
- Resolution of the French litigation and any resulting financial exposure.
- Final purchase accounting and recognition of the Gicon bargain-purchase gain, and integration and performance of recent and subsequent acquisitions.