Franklin Electric Co., Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Comparisons are with the corresponding 2020 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context and results
Franklin Electric supplies water and fueling systems and operates a distribution business. Management attributed sales growth to stronger volumes as markets recovered from pandemic-related disruption, plus acquired-business revenue. Results are not necessarily indicative of full-year performance.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $437.3 | $308.3 | $770.3 | $575.0 |
| Gross profit | $152.2 | $107.1 | $267.8 | $197.4 |
| Gross margin | 34.8% | 34.7% | 34.8% | 34.3% |
| Operating income | $51.6 | $33.9 | $85.4 | $47.8 |
| Net income attributable to Franklin Electric | $39.1 | $24.7 | $67.0 | $35.3 |
| Diluted EPS | $0.83 | $0.52 | $1.42 | $0.75 |
- Q2 sales rose approximately 42%; organic sales grew approximately 28%, with $38.9 million from acquisitions and about 2% sales growth from foreign currency translation.
- First-half sales increased approximately 34%. Segment organic growth was strongest in Distribution (about 37%); Water Systems grew about 20% and Fueling Systems about 14%.
- Q2 operating income increased about 52%; first-half operating income rose about 79%. First-half segment margins improved in Water Systems, Fueling Systems, and Distribution.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $35.5 million, down from $47.0 million, primarily because higher sales required more working capital. Capital expenditures were $12.8 million.
- Investing cash outflow was $193.7 million, including $180.9 million of acquisition payments. Financing cash inflow was $110.7 million, including $150.3 million of debt proceeds and $21.1 million of debt repayments.
- Cash declined by $49.2 million to $81.6 million. Of the ending cash balance, $65.1 million was held in foreign jurisdictions and intended for foreign operations.
- Total debt, including current maturities, was $223.7 million at June 30, 2021, versus $94.6 million at year-end 2020. Current maturities and short-term borrowings were $132.4 million; long-term debt was $91.3 million.
- The company reported $116.0 million of available capacity under its $250 million revolving credit facility, plus $125.0 million of remaining capacity under its New York Life shelf agreement at quarter-end. It said liquidity was adequate for foreseeable needs and was in compliance with financial covenants.
Material changes and notable items
- Four second-quarter acquisitions—Puronics, New Aqua, Power Integrity Services, and Atlantic Turbine Pump—were purchased for a combined $184.3 million after working-capital adjustments. They added $15.6 million of revenue after acquisition; acquired businesses had $97.3 million of combined 2020 revenue. Preliminary acquisition accounting included $115.6 million of identifiable intangible assets and $50.1 million of goodwill.
- Q2 gross margin was nearly unchanged year over year. In Water Systems, higher freight costs of about $3 million and roughly $2 million of transaction, legal, and other charges pressured operating margin. SG&A also increased with acquisitions, variable compensation, commissions, and administrative costs.
- First-half effective tax rate was 16.8%, versus 20.6%; management cited favorable discrete tax items. The company projected a full-year 2021 tax rate of about 20% before discrete adjustments.
- On July 30, 2021, the company entered into new uncommitted private shelf facilities with maximum capacities of $200 million from New York Life and $150 million from Prudential. These are subsequent events, not quarter-end borrowings.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management cited continued demand and expected operating needs, capital spending, pension obligations, dividends, share repurchases, and debt service to be funded from cash, operations, and credit facilities. Risks identified include economic and currency conditions, pandemic effects, demand, supply constraints, raw-material costs and availability, pricing, acquisition integration, litigation, and regulatory matters.
A French proceeding concerns alleged damage at fuel-station piping installations. A preliminary expert report estimated total Esso damages of approximately €12 million; the company disputes that its products caused the damage. The outcome is not predictable, and any exposure was neither probable nor estimable at the filing date; a resulting payment could materially affect results depending on its amount. Other ordinary-course claims were not expected by management to have a material effect.
Investor verification priorities
- Check the sustainability of organic demand and the extent to which comparisons reflect recovery from 2020 pandemic disruption.
- Monitor freight, raw-material, and other cost pressures, and whether pricing and mix protect margins.
- Review acquisition integration, preliminary purchase-price allocations, and the contribution and financing of acquired businesses.
- Reconcile the increase in debt and current maturities with acquisition funding, future maturities, and the post-quarter shelf agreements.
- Follow working-capital conversion, cash generation, and liquidity available after accounting for foreign-held cash and debt service.
- Track the French piping litigation, including the expert’s response expected by the court in June 2022, and any change in the company’s ability to estimate exposure.