Franklin Electric Co., Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing. Franklin Electric designs, manufactures, and distributes water and fuel pumping systems. It reported approximately 5,200 employees and operates Water Systems and Fueling Systems segments.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $949.9 million | $924.9 million |
| Gross profit / margin | $331.4 million / 34.9% | $297.6 million / 32.2% |
| Operating income / margin | $110.8 million / 11.7% | $90.4 million / 9.8% |
| Net income attributable to Franklin Electric | $78.7 million | $72.9 million |
| Diluted EPS | $1.65 | $1.50 |
| Operating cash flow | $115.4 million | $99.6 million |
| Capital expenditures | $37.6 million | $25.9 million |
- Sales increased about 3%; excluding acquisitions and currency translation, sales increased about 5%. Gross margin improved 270 basis points, attributed mainly to favorable pricing, lower direct material costs, and improved fixed-cost absorption.
- Water Systems sales were $723.2 million, up 2%; Fueling Systems sales were $226.7 million, up 4%. Segment operating income was $108.2 million for Water and $56.3 million for Fueling.
- Cash and equivalents were $104.3 million, versus $81.6 million a year earlier. Working capital was $326.1 million and the current ratio was 3.1.
- Total debt was about $190.2 million, including $33.7 million of current maturities; long-term debt was $156.5 million. The company had no revolver borrowings and $294.1 million of available capacity under its $300 million facility. It reported compliance with debt covenants.
- Fourth-quarter sales were $239.6 million versus $219.3 million in Q4 2015; net income was $17.8 million versus $16.3 million, and diluted EPS was $0.37 versus $0.33.
Material changes versus prior year
- Revenue, operating profit, net income, diluted EPS, gross margin, and operating cash flow improved from 2015. Currency translation reduced 2016 sales by $23.2 million; volume and pricing drove the increase.
- Water Systems growth included stronger groundwater sales in North America and growth in Asia Pacific, partly offset by weaker mobile dewatering demand tied to oil and gas. Fueling Systems growth was led by North America and India, partly offset by lower European storage-tank sales.
- Income tax expense rose to $24.8 million from $12.6 million, and the effective tax rate increased to 23.8% from 14.6%. The 2015 rate benefited from discrete tax items, including a Pioneer-related tax benefit.
- Financing activities used $51.7 million of cash, including net debt repayments; the company paid $19.1 million in dividends. Capital spending rose, partly due to a building purchase, offset in part by proceeds from a property sale in Brazil.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management stated that liquidity and capital resources were adequate for projected operating needs, capital expenditures, pension obligations, dividends, and debt service.
- Backlog was $64.6 million as of February 15, 2017, up from $59.4 million a year earlier; orders were expected to be filled in fiscal 2017. Management cautioned that backlog has not been a significant indicator of future sales.
- Key risks include economic and housing-market weakness, commodity and energy-sector cycles, seasonal and weather-related demand, foreign currency movements, competition and pricing, raw-material and supplier constraints, acquisition integration, regulatory requirements, and product acceptance. The company also cited risks from foreign operations, manufacturing realignment, tax-law changes, and potential goodwill impairment.
- 2016 included a net restructuring gain of $0.6 million, mainly reflecting a $2.0 million gain on the sale of a Brazil facility, as well as $1.2 million of executive-transition costs. Goodwill was $199.6 million; the annual impairment test found fair values substantially above carrying values.
- The company held $74.5 million of cash in foreign jurisdictions and considers foreign earnings indefinitely reinvested. It also disclosed $1.3 million of unrecognized tax benefits and $1.1 million of related accrued interest and penalties.
- A multi-year global ERP implementation began in 2016. The company expects the system to improve controls, but implementation could be costly, divert management attention, or disrupt operations. The fiscal year will move to a calendar-year basis beginning in 2017.
- Management said ordinary-course legal claims can be defended or resolved without a material effect. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether improved gross and segment margins persist, particularly if material costs rise or pricing weakens.
- Whether reported and adjusted earnings are comparable: review the company’s non-GAAP adjustments and the different effects of restructuring and tax items.
- Debt maturities, floating-rate exposure, covenant headroom, and the availability of credit facilities.
- Whether foreign cash remains available for operations without creating material repatriation tax costs, and how tax uncertainties evolve.
- Progress, cost, and control implications of the ERP rollout and the fiscal-calendar change.
- Exposure to weaker oil-and-gas demand, regional economic or political disruption, currency movements, and seasonal or weather-related demand.