Franklin Electric Co., Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and nine months ended September 30, 2020. Franklin Electric reports Water Systems, Fueling Systems, and Distribution. Management said operations continued with limited disruption during the global pandemic, but some end markets and customer activity remained affected.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $351.2m | $348.4m | $926.2m | $994.5m |
| Gross profit | $124.3m | $117.6m | $321.7m | $326.8m |
| Gross margin | 35.4% | 33.8% | 34.7% | 32.9% |
| Operating income | $48.4m | $42.7m | $96.1m | $98.5m |
| Net income attributable to Franklin Electric | $38.4m | $33.9m | $73.7m | $75.7m |
| Diluted EPS | $0.82 | $0.72 | $1.57 | $1.61 |
- Q3 drivers: Sales rose 1%; management attributed the increase to volume and price, partly offset by a roughly 3% foreign-currency translation impact. Gross margin improved on price realization, product mix, and cost management. Operating income increased 13% and diluted EPS increased about 14%.
- Segment trends: Q3 Water Systems sales rose to $202.9m and operating income increased to $36.6m, supported by stronger organic demand and margins. Distribution sales rose to $98.0m, helped by favorable weather. Fueling Systems sales declined to $68.4m and operating income to $18.9m amid weaker demand for new filling stations and lower international sales, particularly in China.
- Nine-month comparison: Sales fell 7%, primarily due to lower volumes and pandemic-related uncertainty and disruption, with foreign exchange reducing sales by about 3%. Water Systems and Fueling Systems sales declined; Distribution grew. Operating income decreased 2%, while gross margin improved 1.8 percentage points.
- Expenses and taxes: Q3 SG&A was $75.5m versus $74.5m; nine-month SG&A declined to $223.4m from $226.6m, reflecting spending reductions and currency effects. Nine-month restructuring expense was $2.2m. The Q3 effective tax rate was 17.3%; management projected a full-year 2020 rate of about 20% before discrete adjustments.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $133.7m, up from $90.2m, primarily due to lower working-capital requirements, including improved receivables collections and inventory management. Investing cash outflow was $21.4m; financing cash outflow was $58.5m.
- Cash and equivalents were $114.5m at September 30, 2020, compared with $64.4m at year-end 2019. Capital expenditures were $15.2m; the company paid $21.6m in dividends and repurchased $19.1m of shares during the nine months.
- Total debt, including current maturities, was $94.3m, down from $115.0m at December 31, 2019. There were no revolver borrowings; $295.7m of the $300m credit facility was available, and the New York Life agreement had $125m of remaining capacity. The company was in compliance with its financial covenants.
- Current assets were $602.5m and current liabilities were $187.9m. Management said available liquidity was adequate for projected needs for the foreseeable future. Cash held in foreign jurisdictions was $56.3m and was intended to fund foreign operations.
Outlook, risks, and contingencies
- Management identified continuing pandemic effects, including depressed dewatering equipment demand, delayed or canceled filling-station construction, government-mandated closures, and customer behavior. A stronger U.S. dollar also reduced translated international sales and earnings.
- The filing provides no specific revenue or earnings guidance; it does state an approximately 20% full-year 2020 effective tax-rate projection before discrete adjustments. Management cautioned that interim results are not necessarily indicative of full-year results.
- A French proceeding concerning alleged underground piping damage at filling stations remains unresolved. A preliminary expert report cited approximately €12m of total damages; the company disputes that its products caused the damage. The company said its exposure was neither probable nor estimable, but any resulting payment could materially affect results. It planned to respond by January 2021.
- Other stated risks include economic and currency conditions, demand, weather, competition, supply constraints and raw-material costs, acquisitions, litigation, and epidemics or pandemics. Management reported no material change to other risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether Water Systems and Distribution growth can offset continued weakness in Fueling Systems and dewatering markets.
- Whether improved operating cash flow and working-capital management are sustainable as pandemic conditions and demand evolve.
- Debt maturities and refinancing availability, particularly the stated October 2021 credit-facility maturity and July 2021 Prudential Agreement expiration.
- Developments, potential exposure, and timing in the French piping litigation, for which the company could not estimate its exposure.
- The effect of foreign exchange, pandemic-related disruptions, and the full-year tax rate on subsequent results.