FRANKLIN ELECTRIC CO INC - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-Q
_________
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-362
FRANKLIN ELECTRIC CO., INC.
(Exact name of registrant as specified in its charter)
| Indiana | 35-0827455 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 9255 Coverdale Road | |||||||||||
| Fort Wayne, | Indiana | 46809 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(260) 824-2900
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Common Stock, $0.10 par value | FELE | NASDAQ | Global Select Market | ||||||||||||||
| (Title of each class) | (Trading symbol) | (Name of each exchange on which registered) | |||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | ☒ | No | ☐ | ||||||||
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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| Yes | ☒ | No | ☐ | ||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | ||||||||||||||||
| Emerging Growth Company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
| Yes | ☐ | No | ☒ | ||||||||
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Outstanding at | ||||||||
| Class of Common Stock Par Value | May 1, 2020 | |||||||
| $0.10 | 46,164,173 shares | |||||||
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FRANKLIN ELECTRIC CO., INC.
TABLE OF CONTENTS
| Page | |||||||||||
| PART I. | FINANCIAL INFORMATION | Number | |||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II. | OTHER INFORMATION | ||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 6. | |||||||||||
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| First Quarter Ended | |||||||||||
| (In thousands, except per share amounts) | March 31, 2020 | March 31, 2019 | |||||||||
| Net sales | $ | 266,754 | $ | 290,715 | |||||||
| Cost of sales | 176,437 | 201,209 | |||||||||
| Gross profit | 90,317 | 89,506 | |||||||||
| Selling, general, and administrative expenses | 75,623 | 76,299 | |||||||||
| Restructuring expense | 873 | 1,086 | |||||||||
| Operating income | 13,821 | 12,121 | |||||||||
| Interest (expense) | (1,234) | (2,342) | |||||||||
| Other income/(expense), net | (202) | 239 | |||||||||
| Foreign exchange income | 962 | 589 | |||||||||
| Income before income taxes | 13,347 | 10,607 | |||||||||
| Income tax expense | 2,555 | 1,480 | |||||||||
| Net income | $ | 10,792 | $ | 9,127 | |||||||
| Less: Net (income) attributable to noncontrolling interests | (149) | (71) | |||||||||
| Net income attributable to Franklin Electric Co., Inc. | $ | 10,643 | $ | 9,056 | |||||||
| Income per share: | |||||||||||
| Basic | $ | 0.23 | $ | 0.19 | |||||||
| Diluted | $ | 0.23 | $ | 0.19 | |||||||
See Notes to Condensed Consolidated Financial Statements.
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FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
| First Quarter Ended | |||||||||||
| (In thousands) | March 31, 2020 | March 31, 2019 | |||||||||
| Net income | $ | 10,792 | $ | 9,127 | |||||||
| Other comprehensive income/(loss), before tax: | |||||||||||
| Foreign currency translation adjustments | (37,722) | (2,810) | |||||||||
| Employee benefit plan activity | 901 | 650 | |||||||||
| Other comprehensive (loss) | (36,821) | (2,160) | |||||||||
| Income tax expense related to items of other comprehensive (loss) | (185) | (141) | |||||||||
| Other comprehensive (loss), net of tax | (37,006) | (2,301) | |||||||||
| Comprehensive income/(loss) | (26,214) | 6,826 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests | 154 | 32 | |||||||||
| Comprehensive income/(loss) attributable to Franklin Electric Co., Inc. | $ | (26,368) | $ | 6,794 | |||||||
See Notes to Condensed Consolidated Financial Statements.
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FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (In thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 39,987 | $ | 64,405 | |||||||
Receivables, less allowances of $3,907 and $3,705, respectively | 167,590 | 173,327 | |||||||||
| Inventories: | |||||||||||
| Raw material | 97,538 | 98,286 | |||||||||
| Work-in-process | 21,452 | 18,392 | |||||||||
| Finished goods | 191,016 | 183,568 | |||||||||
| Total inventories | 310,006 | 300,246 | |||||||||
| Other current assets | 25,472 | 29,466 | |||||||||
| Total current assets | 543,055 | 567,444 | |||||||||
| Property, plant, and equipment, at cost: | |||||||||||
| Land and buildings | 134,041 | 142,189 | |||||||||
| Machinery and equipment | 271,115 | 276,541 | |||||||||
| Furniture and fixtures | 42,984 | 43,631 | |||||||||
| Other | 26,824 | 29,293 | |||||||||
| Property, plant, and equipment, gross | 474,964 | 491,654 | |||||||||
| Less: Allowance for depreciation | (286,318) | (290,326) | |||||||||
| Property, plant, and equipment, net | 188,646 | 201,328 | |||||||||
| Right-of-Use Asset, net | 26,583 | 27,621 | |||||||||
| Deferred income taxes | 9,167 | 9,171 | |||||||||
| Intangible assets, net | 124,503 | 131,127 | |||||||||
| Goodwill | 255,772 | 256,059 | |||||||||
| Other assets | 1,807 | 1,993 | |||||||||
| Total assets | $ | 1,149,533 | $ | 1,194,743 | |||||||
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| March 31, 2020 | December 31, 2019 | ||||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 88,388 | $ | 82,593 | |||||||
| Accrued expenses and other current liabilities | 48,921 | 68,444 | |||||||||
| Current lease liability | 9,451 | 9,838 | |||||||||
| Income taxes | 2,907 | 3,010 | |||||||||
| Current maturities of long-term debt and short-term borrowings | 41,720 | 21,879 | |||||||||
| Total current liabilities | 191,387 | 185,764 | |||||||||
| Long-term debt | 92,563 | 93,141 | |||||||||
| Long-term lease liability | 17,134 | 17,785 | |||||||||
| Income taxes payable non-current | 11,964 | 11,965 | |||||||||
| Deferred income taxes | 27,117 | 27,598 | |||||||||
| Employee benefit plans | 37,057 | 38,288 | |||||||||
| Other long-term liabilities | 19,090 | 21,769 | |||||||||
| Commitments and contingencies (see Note 14) | — | — | |||||||||
| Redeemable noncontrolling interest | (245) | (236) | |||||||||
| Shareholders' equity: | |||||||||||
Common stock (65,000 shares authorized, $.10 par value) outstanding (46,144 and 46,391, respectively) | 4,614 | 4,639 | |||||||||
| Additional capital | 274,869 | 269,656 | |||||||||
| Retained earnings | 698,917 | 712,460 | |||||||||
| Accumulated other comprehensive loss | (227,221) | (190,210) | |||||||||
| Total shareholders' equity | 751,179 | 796,545 | |||||||||
| Noncontrolling interest | 2,287 | 2,124 | |||||||||
| Total equity | 753,466 | 798,669 | |||||||||
| Total liabilities and equity | $ | 1,149,533 | $ | 1,194,743 | |||||||
See Notes to Condensed Consolidated Financial Statements.
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FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | |||||||||||
| (In thousands) | March 31, 2020 | March 31, 2019 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 10,792 | $ | 9,127 | |||||||
| Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||
| Depreciation and amortization | 9,199 | 9,268 | |||||||||
| Non-cash lease expense | 1,962 | 2,805 | |||||||||
| Share-based compensation | 4,352 | 3,230 | |||||||||
| Deferred income taxes | (82) | (37) | |||||||||
| Loss on disposals of plant and equipment | 106 | 530 | |||||||||
| Foreign exchange income | (962) | (589) | |||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Receivables | (2,574) | (6,517) | |||||||||
| Inventory | (19,952) | (20,986) | |||||||||
| Accounts payable and accrued expenses | (4,223) | 1,309 | |||||||||
| Operating Leases | (1,962) | (2,804) | |||||||||
| Income taxes | 786 | (509) | |||||||||
| Employee benefit plans | (35) | (31) | |||||||||
| Other, net | (2,063) | 2,269 | |||||||||
| Net cash flows from operating activities | (4,656) | (2,935) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant, and equipment | (5,535) | (5,220) | |||||||||
| Proceeds from sale of property, plant, and equipment | 25 | 64 | |||||||||
| Cash paid for acquisitions, net of cash acquired | (5,626) | (5,405) | |||||||||
| Other, net | — | 3 | |||||||||
| Net cash flows from investing activities | (11,136) | (10,558) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of debt | 56,680 | 53,202 | |||||||||
| Repayment of debt | (37,010) | (33,533) | |||||||||
| Proceeds from issuance of common stock | 871 | 1,251 | |||||||||
| Purchases of common stock | (16,981) | (4,329) | |||||||||
| Dividends paid | (7,240) | (6,723) | |||||||||
| Net cash flows from financing activities | (3,680) | 9,868 | |||||||||
| Effect of exchange rate changes on cash | (4,946) | (1,184) | |||||||||
| Net change in cash and equivalents | (24,418) | (4,809) | |||||||||
| Cash and equivalents at beginning of period | 64,405 | 59,173 | |||||||||
| Cash and equivalents at end of period | $ | 39,987 | $ | 54,364 | |||||||
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| Three Months Ended | |||||||||||
| (In thousands) | March 31, 2020 | March 31, 2019 | |||||||||
| Cash paid for income taxes, net of refunds | $ | 3,126 | $ | 1,896 | |||||||
| Cash paid for interest | $ | 2,254 | $ | 3,113 | |||||||
| Non-cash items: | |||||||||||
| Additions to property, plant, and equipment, not yet paid | $ | 314 | $ | 368 | |||||||
| Right-of-Use Assets obtained in exchange for new operating lease liabilities | $ | 1,888 | $ | — | |||||||
| Payable to sellers of acquired entities | $ | 650 | $ | — | |||||||
See Notes to Condensed Consolidated Financial Statements.
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FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Page Number | ||||||||
| Note 1. | ||||||||
| Note 2. | ||||||||
| Note 3. | ||||||||
| Note 4. | ||||||||
| Note 5. | ||||||||
| Note 6. | ||||||||
| Note 7. | ||||||||
| Note 8. | ||||||||
| Note 9. | ||||||||
| Note 10. | ||||||||
| Note 11. | ||||||||
| Note 12. | ||||||||
| Note 13. | ||||||||
| Note 14. | ||||||||
| Note 15. | ||||||||
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet as of December 31, 2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of March 31, 2020, and for the first quarters ended March 31, 2020 and March 31, 2019 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all accounting entries and adjustments (including normal, recurring adjustments) considered necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Operating results for the first quarter ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. For further information, including a description of the critical accounting policies of Franklin Electric Co., Inc. (the "Company"), refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
2. ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step two from the goodwill impairment test and instead requires an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. The ASU is effective on a prospective basis for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The Company adopted the standard effective January 1, 2020. The standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses on certain financial instruments, including trade receivables. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. Amendments should be applied using a modified retrospective approach except for debt securities, which require a prospective transitions approach. The Company adopted the standard effective January 1, 2020. The standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
Accounting Standards Issued But Not Yet Adopted
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove disclosures that no longer are considered cost beneficial, including the estimated amounts in accumulated other comprehensive income expected to be recognized as components of net periodic expense over the next fiscal year. The amendments clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant, including the reasons for significant gains and losses related to change in the benefit obligation for the period. The ASU should be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2020. The Company is still determining the date of adoption for this ASU but does not anticipate the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is expected to reduce cost and complexity related to accounting for income taxes. ASU 2019-12 eliminates the need for the Company to analyze whether certain exceptions apply and improves financial statement preparers' application of income tax-related guidance. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020 with early adoption permitted. Amendments related to franchise taxes that are partially based on income should be applied on either a retrospective or modified retrospective basis. All other amendments should be applied on a prospective basis. The Company is still determining the date of adoption of this ASU. Adoption is not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
3. ACQUISITIONS
During the first quarter ended March 31, 2020, the Company acquired all of the assets of a company that manufactures line shaft turbines and other adjacent product lines for a purchase price of $6.3 million after working capital adjustments. The fair value of the assets acquired and liabilities assumed are preliminary as of March 31, 2020. In addition, the Company has not
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presented separate results of operations since closing or combined pro forma financial information of the Company and the acquired interest since the beginning of 2020, as the results of operations for this acquisition is immaterial.
During the third quarter ended September 30, 2019, the Company acquired 100 percent of the ownership interests of First Sales, LLC for a purchase price of approximately $15.5 million after working capital adjustments. The acquisition was not material, and the fair value of the assets acquired and liabilities assumed are preliminary as of March 31, 2020.
During the second quarter ended June 30, 2019, the Company acquired the remaining interest in Pluga Pumps and Motors Private Limited, India, increasing the Company's ownership to 100 percent. The redemption of this interest was immaterial.
During the first quarter ended March 31, 2019, the Company acquired 100 percent of the ownership interests of Mt. Pleasant, Michigan-based Milan Supply Company ("Milan Supply"). The fair value of the assets acquired and the liabilities assumed for the acquisition are considered final as of March 31, 2020, and the final purchase price was $6.1 million after working capital adjustments. The Company has not presented fair values of the assets acquired and the liabilities assumed as the values are not material.
Transaction costs were expensed as incurred under the guidance of FASB Accounting Standards Codification Topic 805, Business Combinations.
4. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures, provides guidance for defining, measuring, and disclosing fair value within an established framework and hierarchy. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs and to minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value within the hierarchy are as follows:
Level 1 – Quoted prices for identical assets and liabilities in active markets;
Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
As of March 31, 2020 and December 31, 2019, the assets measured at fair value on a recurring basis were as set forth in the table below:
| (In millions) | March 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| Cash equivalents | $ | 2.6 | $ | 2.6 | $ | — | $ | — | ||||||
| December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Cash equivalents | $ | 4.0 | $ | 4.0 | $ | — | $ | — | ||||||
The Company's Level 1 assets consist of cash equivalents which are generally comprised of foreign bank guaranteed certificates of deposit.
The Company has no assets measured on a recurring basis classified as Level 2 or Level 3.
Total debt, including current maturities, have carrying amounts of $134.3 million and $115.0 million and estimated fair values of $138.4 million and $121.0 million as of March 31, 2020 and December 31, 2019, respectively. In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily
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indicative of the amounts the Company could realize in a current market transaction. In determining the fair value of its debt, the Company uses estimates based on rates currently available to the Company for debt with similar terms and remaining maturities. Accordingly, the fair value of debt is classified as Level 2 within the valuation hierarchy.
5. FINANCIAL INSTRUMENTS
The Company’s deferred compensation stock program is subject to variable plan accounting and, accordingly, is adjusted for changes in the Company’s stock price at the end of each reporting period. The Company has entered into share swap transaction agreements (the "swap") to mitigate the Company’s exposure to the fluctuations in the Company's stock price. The swap has not been designated as a hedge for accounting purposes and is cancellable with 30 days' written notice by either party. As of March 31, 2020, the swap had a notional value based on 260,000 shares. For the first quarters ended March 31, 2020 and March 31, 2019, the swap resulted in a loss of $2.7 million and a gain $1.9 million, respectively. Gains and losses resulting from the the swap were primarily offset by gains and losses on the fair value of the deferred compensation stock liability. All gains or losses and expenses related to the swap are recorded in the Company's condensed consolidated statements of income within the “Selling, general, and administrative expenses” line.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amounts of the Company’s intangible assets are as follows:
| (In millions) | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||
| Amortizing intangibles: | ||||||||||||||||||||||||||
| Patents | $ | 7.4 | $ | (7.0) | $ | 7.4 | $ | (7.0) | ||||||||||||||||||
| Technology | 7.5 | (6.9) | 7.5 | (6.8) | ||||||||||||||||||||||
| Customer relationships | 151.3 | (71.8) | 155.4 | (71.4) | ||||||||||||||||||||||
| Other | 3.7 | (2.7) | 3.8 | (2.8) | ||||||||||||||||||||||
| Total | $ | 169.9 | $ | (88.4) | $ | 174.1 | $ | (88.0) | ||||||||||||||||||
| Unamortizing intangibles: | ||||||||||||||||||||||||||
| Trade names | 43.0 | — | 45.0 | — | ||||||||||||||||||||||
| Total intangibles | $ | 212.9 | $ | (88.4) | $ | 219.1 | $ | (88.0) | ||||||||||||||||||
Amortization expense related to intangible assets for the first quarters ended March 31, 2020 and March 31, 2019 was $2.4 million and $2.3 million, respectively.
Amortization expense for each of the five succeeding years is projected as follows:
| (In millions) | 2020 | 2021 | 2022 | 2023 | 2024 | |||||||||||||||||||||||||||
| $ | 9.2 | $ | 8.8 | $ | 8.6 | $ | 8.5 | $ | 8.3 | |||||||||||||||||||||||
The change in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2020, is as follows:
| (In millions) | ||||||||||||||||||||||||||
| Water Systems | Fueling Systems | Distribution | Consolidated | |||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | 151.0 | $ | 67.6 | $ | 37.5 | $ | 256.1 | ||||||||||||||||||
| Acquisitions | 2.7 | — | — | 2.7 | ||||||||||||||||||||||
| Foreign currency translation | (2.8) | (0.2) | — | (3.0) | ||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | 150.9 | $ | 67.4 | $ | 37.5 | $ | 255.8 | ||||||||||||||||||
7. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans - As of March 31, 2020, the Company maintained two domestic pension plans and three German pension plans. The Company used a December 31, 2019 measurement date for these plans. One of the Company's domestic pension plans covers one active management employee, while the other domestic plan covers all eligible employees (plan was frozen as of December 31, 2011). The two domestic and three German plans collectively comprise the 'Pension Benefits' disclosure caption.
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Other Benefits - The Company's other post-retirement benefit plan provides health and life insurance to domestic employees hired prior to 1992.
The following table sets forth the aggregated net periodic benefit cost for all pension plans for the first quarters ended March 31, 2020 and March 31, 2019:
| (In millions) | Pension Benefits | Other Benefits | |||||||||||||||||||||
| First Quarter Ended | First Quarter Ended | ||||||||||||||||||||||
| March 31, 2020 | March 31, 2019 | March 31, 2020 | March 31, 2019 | ||||||||||||||||||||
| Service cost | $ | 0.1 | $ | 0.2 | $ | — | $ | — | |||||||||||||||
| Interest cost | 1.1 | 1.5 | 0.1 | 0.1 | |||||||||||||||||||
| Expected return on assets | (1.7) | (2.0) | — | — | |||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||
| Prior service cost | — | — | — | — | |||||||||||||||||||
| Actuarial loss | 0.9 | 0.6 | — | — | |||||||||||||||||||
| Settlement cost | — | — | — | — | |||||||||||||||||||
| Net periodic benefit cost | $ | 0.4 | $ | 0.3 | $ | 0.1 | $ | 0.1 | |||||||||||||||
In the first quarter ended March 31, 2020, the Company made contributions of $0.1 million to the funded plans. The amount of contributions to be made to the plans during the calendar year 2020 will be finalized by September 15, 2020, based upon the funding level requirements identified and year-end valuation performed at December 31, 2019.
8. INCOME TAXES
The Company’s effective tax rate from continuing operations for the three month period ended March 31, 2020 was 19.1 percent as compared to 13.9 percent for the three month period ended March 31, 2019. The effective tax rate is lower than the U.S. statutory rate of 21 percent primarily due to foreign earnings taxed at rates below the U.S. statutory rate, the recognition of the U.S. foreign-derived intangible income (FDII) provisions, and certain discrete events including excess tax benefits from share-based compensation partially offset by state taxes.
The increase in the effective tax rate for the three months ended March 31, 2020, compared with the same period in 2019, was primarily a result of unfavorable discrete events of $0.4 million.
On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. While the Company is still assessing the impact of the legislation, the Company does not expect there to be a material impact to the consolidated financial statements at this time.
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9. DEBT
Debt consisted of the following:
| (In millions) | March 31, 2020 | December 31, 2019 | ||||||||||||
| Tax increment financing debt | 18.2 | 18.7 | ||||||||||||
| New York Life Agreement | 75.0 | 75.0 | ||||||||||||
| Credit Agreement | 39.0 | 19.0 | ||||||||||||
| Financing Leases | — | 0.1 | ||||||||||||
| Foreign subsidiary debt | 2.2 | 2.3 | ||||||||||||
| Less: unamortized debt issuance costs | (0.1) | (0.1) | ||||||||||||
| $ | 134.3 | $ | 115.0 | |||||||||||
| Less: current maturities | (41.7) | (21.9) | ||||||||||||
| Long-term debt | $ | 92.6 | $ | 93.1 | ||||||||||
Debt outstanding, excluding unamortized debt issuance costs, at March 31, 2020 matures as follows:
| (In millions) | Total | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | More Than 5 Years | |||||||||||||||||||||||||||||||||||||
| Debt | $ | 134.4 | $ | 41.7 | $ | 1.3 | $ | 1.3 | $ | 1.3 | $ | 1.4 | $ | 87.4 | ||||||||||||||||||||||||||||||
Prudential Agreement
The Company maintains the Third Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement"), which expires on July 30, 2021 and has an initial borrowing capacity of $250.0 million. As of March 31, 2020, the Company has $150.0 million borrowing capacity available under the Prudential Agreement.
Project Bonds
The Company, Allen County, Indiana and certain institutional investors maintain a Bond Purchase and Loan Agreement. Under the agreement, Allen County, Indiana issued a series of Project Bonds entitled “Taxable Economic Development Bonds, Series 2012 (Franklin Electric Co., Inc. Project)." The aggregate principal amount of the Project Bonds that were issued, authenticated, and are now outstanding thereunder was limited to $25.0 million. These Project Notes ("Tax increment financing debt") bear interest at 3.6 percent per annum. Interest and principal balance of the Project Notes are due and payable by the Company directly to the institutional investors in aggregate semi-annual installments commencing on July 10, 2013, and concluding on January 10, 2033.
New York Life Agreement
The Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life, and each of the undersigned holders of Notes (the "New York Life Agreement"), with a maximum aggregate borrowing capacity of $200.0 million. On September 26, 2018, the Company issued and sold $75.0 million of fixed rate senior notes due September 26, 2025. These senior notes bear an interest rate of 4.04 percent with interest-only payments due semi-annually. The proceeds from the issuance of the notes were used to pay off existing variable interest rate indebtedness. As of March 31, 2020, there was $125.0 million remaining borrowing capacity under the New York Life Agreement.
Credit Agreement
The Company maintains the Third Amended and Restated Credit Agreement (the "Credit Agreement”). The Credit Agreement has a maturity date of October 28, 2021 and commitment amount of $300.0 million. The Credit Agreement provides that the Borrowers may request an increase in the aggregate commitments by up to $150.0 million (not to exceed a total commitment of $450.0 million). Under the Credit Agreement, the Borrowers are required to pay certain fees, including a facility fee of 0.100% to 0.275% (depending on the Company's leverage ratio) of the aggregate commitment, which fee is payable quarterly in arrears. Loans may be made either at (i) a Eurocurrency rate based on LIBOR plus an applicable margin of 0.75% to 1.60% (depending on the Company's leverage ratio) or (ii) an alternative base rate as defined in the Credit Agreement.
As of March 31, 2020, the Company had $39.0 million in outstanding borrowings which were primarily used for working capital needs, the payment of existing indebtedness and acquisitions, $4.2 million in letters of credit outstanding, and $256.8 million of available capacity under the Credit Agreement.
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Covenants
The Company’s credit agreements contain customary financial covenants. The Company’s most significant agreements and restrictive covenants are in the New York Life Agreement, the Project Bonds, the Prudential Agreement, and the Credit Agreement; each containing both affirmative and negative covenants. The affirmative covenants relate to financial statements, notices of material events, conduct of business, inspection of property, maintenance of insurance, compliance with laws and most favored lender obligations. The negative covenants include limitations on loans, advances and investments, and the granting of liens by the Company or its subsidiaries, as well as prohibitions on certain consolidations, mergers, sales and transfers of assets. The covenants also include financial requirements including a maximum leverage ratio of 1.00 to 3.50 and a minimum interest coverage ratio of 1.00 to 3.00. Cross default is applicable with the Prudential Agreement, the Project Bonds, the New York Life Agreement, and the Credit Agreement but only if the Company is defaulting on an obligation exceeding $10.0 million. The Company was in compliance with all financial covenants as of March 31, 2020.
10. EARNINGS PER SHARE
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company's participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders.
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
The following table sets forth the computation of basic and diluted earnings per share:
| First Quarter Ended | |||||||||||
| (In millions, except per share amounts) | March 31, 2020 | March 31, 2019 | |||||||||
| Numerator: | |||||||||||
| Net income attributable to Franklin Electric Co., Inc. | $ | 10.6 | $ | 9.1 | |||||||
| Less: Earnings allocated to participating securities | — | 0.1 | |||||||||
| Net income available to common shareholders | $ | 10.6 | $ | 9.0 | |||||||
| Denominator: | |||||||||||
| Basic weighted average common shares outstanding | 46.4 | 46.3 | |||||||||
| Effect of dilutive securities: | |||||||||||
| Non-participating employee stock options and performance awards | 0.4 | 0.4 | |||||||||
| Diluted weighted average common shares outstanding | 46.8 | 46.7 | |||||||||
| Basic earnings per share | $ | 0.23 | $ | 0.19 | |||||||
| Diluted earnings per share | $ | 0.23 | $ | 0.19 | |||||||
There were 0.3 million and 0.1 million stock options outstanding for the first quarters ended March 31, 2020 and March 31, 2019, respectively, that were excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive.
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11. EQUITY ROLL FORWARD
The schedules below set forth equity changes in the first quarters ended March 31, 2020 and March 31, 2019:
| (In thousands) | Common Stock | Additional Paid in Capital | Retained Earnings | Minimum Pension Liability | Cumulative Translation Adjustment | Noncontrolling Interest | Total Equity | Redeemable Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | 4,639 | $ | 269,656 | $ | 712,460 | $ | (50,089) | $ | (140,121) | $ | 2,124 | $ | 798,669 | $ | (236) | |||||||||||||||||||||||||||||||
| Net income | 10,643 | 187 | 10,830 | (38) | |||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock ($0.155/share) | (7,240) | (7,240) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued | 2 | 869 | 871 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | (35) | (16,946) | (16,981) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 8 | 4,344 | 4,352 | ||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | (37,727) | (24) | (37,751) | 29 | |||||||||||||||||||||||||||||||||||||||||||
| Pension liability, net of tax | 716 | 716 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | $ | 4,614 | $ | 274,869 | $ | 698,917 | $ | (49,373) | $ | (177,848) | $ | 2,287 | $ | 753,466 | $ | (245) | |||||||||||||||||||||||||||||||
| (In thousands) | Common Stock | Additional Paid in Capital | Retained Earnings | Minimum Pension Liability | Cumulative Translation Adjustment | Noncontrolling Interest | Total Equity | Redeemable Noncontrolling Interest | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | $ | 4,632 | $ | 257,535 | $ | 654,724 | $ | (48,585) | $ | (134,434) | $ | 1,955 | $ | 735,827 | $ | 518 | |||||||||||||||||||||||||||||||
| Net income | 9,056 | 174 | 9,230 | (103) | |||||||||||||||||||||||||||||||||||||||||||
Dividends on common stock ($0.145/share) | (6,723) | (6,723) | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued | 6 | 1,245 | 1,251 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock repurchased | (9) | (4,320) | (4,329) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 8 | 3,222 | 3,230 | ||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | (2,771) | (32) | (2,803) | (7) | |||||||||||||||||||||||||||||||||||||||||||
| Pension liability, net of tax | 509 | 509 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2019 | $ | 4,637 | $ | 262,002 | $ | 652,737 | $ | (48,076) | $ | (137,205) | $ | 2,097 | $ | 736,192 | $ | 408 | |||||||||||||||||||||||||||||||
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12. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Changes in accumulated other comprehensive income/(loss) by component for the three months ended March 31, 2020 and March 31, 2019, are summarized below:
| (In millions) | |||||||||||||||||
| For the three months ended March 31, 2020: | Foreign Currency Translation Adjustments | Pension and Post-Retirement Plan Benefit Adjustments (2) | Total | ||||||||||||||
| Balance as of December 31, 2019 | $ | (140.2) | $ | (50.0) | $ | (190.2) | |||||||||||
| Other comprehensive income/(loss) before reclassifications | (37.7) | — | (37.7) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) (1) | — | 0.7 | 0.7 | ||||||||||||||
| Net other comprehensive income/(loss) | (37.7) | — | 0.7 | — | (37.0) | ||||||||||||
| Balance as of March 31, 2020 | $ | (177.9) | $ | (49.3) | $ | (227.2) | |||||||||||
| For the three months ended March 31, 2019: | |||||||||||||||||
| Balance as of December 31, 2018 | $ | (134.5) | $ | (48.5) | $ | (183.0) | |||||||||||
| Other comprehensive income/(loss) before reclassifications | (2.8) | — | (2.8) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) (1) | — | 0.5 | 0.5 | ||||||||||||||
| Net other comprehensive income/(loss) | (2.8) | — | 0.5 | — | (2.3) | ||||||||||||
| Balance as of March 31, 2019 | $ | (137.3) | — | $ | (48.0) | $ | (185.3) | ||||||||||
(1) This accumulated other comprehensive income/(loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details) and is included in the "Other income/(expense), net" line of the Company's condensed consolidated statements of income.
(2) Net of tax expense of $0.2 million and $0.1 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Amounts related to noncontrolling interests were not material.
13. SEGMENT AND GEOGRAPHIC INFORMATION
The accounting policies of the operating segments are the same as those described in Note 1 of the Company's Form 10-K. Revenue is recognized based on the invoice price at the point in time when the customer obtains control of the product, which is typically upon shipment to the customer. The Water and Fueling segments include manufacturing operations and supply certain components and finished goods, both between segments and to the Distribution segment. The Company reports these product transfers between Water and Fueling as inventory transfers as a significant number of the Company's manufacturing facilities are shared across segments for scale and efficiency purposes. The Company reports intersegment transfers from Water to Distribution as intersegment revenue at market prices to properly reflect the commercial arrangement of vendor to customer that exists between the Water and Distribution segments.
Segment operating income is a key financial performance measure. Operating income by segment is based on net sales less identifiable operating expenses and allocations and includes profits recorded on sales to other segments of the Company.
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Financial information by reportable business segment is included in the following summary:
| First Quarter Ended | |||||||||||
| (In millions) | March 31, 2020 | March 31, 2019 | |||||||||
| Net sales | |||||||||||
| Water Systems | |||||||||||
| External sales | |||||||||||
| United States & Canada | $ | 70.9 | $ | 86.8 | |||||||
| Latin America | 28.2 | 30.5 | |||||||||
| Europe, Middle East & Africa | 38.2 | 37.7 | |||||||||
| Asia Pacific | 13.8 | 22.2 | |||||||||
| Intersegment sales | |||||||||||
| United States & Canada | 13.0 | 11.2 | |||||||||
| Total sales | 164.1 | 188.4 | |||||||||
| Distribution | |||||||||||
| External sales | |||||||||||
| United States & Canada | 60.4 | 53.3 | |||||||||
| Intersegment sales | — | — | |||||||||
| Total sales | 60.4 | 53.3 | |||||||||
| Fueling Systems | |||||||||||
| External sales | |||||||||||
| United States & Canada | 37.4 | 35.1 | |||||||||
| All other | 17.9 | 25.1 | |||||||||
| Intersegment sales | — | — | |||||||||
| Total sales | 55.3 | 60.2 | |||||||||
| Intersegment Eliminations/Other | (13.0) | (11.2) | |||||||||
| Consolidated | $ | 266.8 | $ | 290.7 | |||||||
| First Quarter Ended | |||||||||||
| March 31, 2020 | March 31, 2019 | ||||||||||
| Operating income/(loss) | |||||||||||
| Water Systems | $ | 18.8 | $ | 19.2 | |||||||
| Distribution | (2.2) | (4.3) | |||||||||
| Fueling Systems | 12.1 | 12.3 | |||||||||
| Intersegment Eliminations/Other | (14.9) | (15.1) | |||||||||
| Consolidated | $ | 13.8 | $ | 12.1 | |||||||
| March 31, 2020 | December 31, 2019 | ||||||||||
| Total assets | |||||||||||
| Water Systems | $ | 635.2 | $ | 658.3 | |||||||
| Distribution | 192.5 | 180.2 | |||||||||
| Fueling Systems | 272.3 | 283.8 | |||||||||
| Other | 49.5 | 72.4 | |||||||||
| Consolidated | $ | 1,149.5 | $ | 1,194.7 | |||||||
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Other Assets are generally Corporate assets that are not allocated to the segments and are comprised primarily of cash and property, plant and equipment.
14. COMMITMENTS AND CONTINGENCIES
The Company is defending various claims and legal actions which have arisen in the ordinary course of business. In the opinion of management, based on current knowledge of the facts and after discussion with counsel, these claims and legal actions can be defended or resolved without a material effect on the Company’s financial position, results of operations, and net cash flows.
At March 31, 2020, the Company had $5.2 million of commitments primarily for capital expenditures and purchase of raw materials to be used in production.
The Company provides warranties on most of its products. The warranty terms vary but are generally two years to five years from date of manufacture or one year to five years from date of installation. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The Company actively studies trends of warranty claims and takes actions to improve product quality and minimize warranty claims. The Company believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.
The changes in the carrying amount of the warranty accrual, as recorded in the "Accrued expenses and other current liabilities" line of the Company's condensed consolidated balance sheet for the first quarter ended March 31, 2020, are as follows:
| (In millions) | ||||||||
| Balance as of December 31, 2019 | $ | 9.1 | ||||||
| Accruals related to product warranties | 2.1 | |||||||
| Additions related to acquisitions | — | |||||||
| Reductions for payments made | (2.5) | |||||||
| Balance as of March 31, 2020 | $ | 8.7 | ||||||
The Company maintains certain warehouses, distribution centers, office space, and equipment operating leases. The Company also has lease agreements that are classified as financing. These financing leases are immaterial to the Company.
The Company utilizes interest rates from lease agreements unless the lease agreement does not provide a readily determinable rate. In these instances, the Company utilizes its incremental borrowing rate based on the information available as of the adoption of ASU 2016-02 or at the inception of any new leases entered into thereafter when determining the present value of future lease payments.
Some of the Company’s leases include renewal options. The Company excludes these renewal options in the expected lease term unless the Company is reasonably certain that the option will be exercised.
The components of the Company’s operating lease portfolio as of the first quarter ended March 31, 2020 are as follows:
| Lease Cost (in millions): | ||||||||
| Operating lease cost | $ | 2.0 | ||||||
| Short-term lease cost | 0.1 | |||||||
| Other Information: | ||||||||
| Weighted-average remaining lease term | 4 years | |||||||
| Weighted-average discount rate | 3.8 | % | ||||||
The minimum rental payments for non-cancellable operating leases as of March 31, 2020, are as follows:
| (In millions) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||
| Future Minimum Rental Payments | $ | 8.1 | $ | 8.6 | $ | 5.1 | $ | 3.3 | $ | 1.5 | $ | 2.5 | ||||||||
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15. SHARE-BASED COMPENSATION
The Franklin Electric Co., Inc. 2017 Stock Plan (the "2017 Stock Plan") is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, stock unit awards, and stock appreciation rights ("SARs") to key employees and non-employee directors. The number of shares that may be issued under the Plan is 1,400,000. Stock options and SARs reduce the number of available shares by one share for each share subject to the option or SAR, and stock awards and stock unit awards settled in shares reduce the number of available shares by 1.5 shares for every one share delivered.
The Company also maintains the Franklin Electric Co., Inc. 2012 Stock Plan (the "2012 Stock Plan"), which is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, and stock unit awards to key employees and non-employee directors.
The 2012 Stock Plan authorized 2,400,000 shares for issuance as follows:
| 2012 Stock Plan | Authorized Shares | |||||||
| Stock Options | 1,680,000 | |||||||
| Stock/Stock Unit Awards | 720,000 | |||||||
The Company also maintains the Amended and Restated Franklin Electric Co., Inc. Stock Plan (the "2009 Stock Plan") which, as amended in 2009, provided for discretionary grants of stock options and stock awards. The 2009 Stock Plan authorized 4,400,000 shares for issuance as follows:
| 2009 Stock Plan | Authorized Shares | ||||
| Stock Options | 3,200,000 | ||||
| Stock Awards | 1,200,000 | ||||
All options in the 2009 Stock Plan have been awarded and no additional awards are granted out of the plan. However, there are still unvested awards and unexercised options under this plan.
The Company currently issues new shares from its common stock balance to satisfy option exercises and the settlement of stock awards and stock unit awards made under the outstanding stock plans.
Stock Options:
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with a single approach and amortized using a straight-line attribution method over the option’s vesting period.
The assumptions used for the Black-Scholes model to determine the fair value of options granted during the first quarters ended March 31, 2020 and March 31, 2019 are as follows:
| March 31, 2020 | March 31, 2019 | |||||||||||||
| Risk-free interest rate | 1.39 | % | 2.53 | % | ||||||||||
| Dividend yield | 1.04 | % | 1.05 | % | ||||||||||
| Volatility factor | 29.45 | % | 29.38 | % | ||||||||||
| Expected term | 5.5 years | 5.5 years | ||||||||||||
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A summary of the Company’s outstanding stock option activity and related information for the first quarter ended March 31, 2020 is as follows:
| (Shares in thousands) | March 31, 2020 | |||||||||||||
Stock Options | Shares | Weighted-Average Exercise Price | ||||||||||||
| Outstanding at beginning of period | 1,262 | $ | 37.99 | |||||||||||
| Granted | 214 | 59.71 | ||||||||||||
| Exercised | (23) | 36.86 | ||||||||||||
| Forfeited | — | — | ||||||||||||
| Outstanding at end of period | 1,453 | $ | 41.21 | |||||||||||
| Expected to vest after applying forfeiture rate | 1,450 | $ | 41.18 | |||||||||||
| Vested and exercisable at end of period | 960 | $ | 35.32 | |||||||||||
A summary of the weighted-average remaining contractual term and aggregate intrinsic value as of March 31, 2020 is as follows:
| Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value (000's) | |||||||||||||
| Outstanding at end of period | 6.25 years | $ | 12,774 | |||||||||||
| Expected to vest after applying forfeiture rate | 6.25 years | $ | 12,770 | |||||||||||
| Vested and exercisable at end of period | 4.87 years | $ | 11,814 | |||||||||||
The total intrinsic value of options exercised during the first quarters ended March 31, 2020 and March 31, 2019 was $0.5 million and $2.0 million, respectively.
As of March 31, 2020, there was $2.1 million of total unrecognized compensation cost related to non-vested stock options granted under the 2012 Stock Plan. That cost is expected to be recognized over a weighted-average period of 1.74 years.
Stock/Stock Unit Awards:
A summary of the Company’s restricted stock/stock unit award activity and related information for the first quarter ended March 31, 2020 is as follows:
| (Shares in thousands) | March 31, 2020 | |||||||||||||
| Restricted Stock/Stock Unit Awards | Shares | Weighted-Average Grant- Date Fair Value | ||||||||||||
| Non-vested at beginning of period | 463 | $ | 42.36 | |||||||||||
| Awarded | 114 | 59.66 | ||||||||||||
| Vested | (85) | 29.39 | ||||||||||||
| Forfeited | (1) | 46.71 | ||||||||||||
| Non-vested at end of period | 491 | $ | 48.61 | |||||||||||
As of March 31, 2020, there was $13.0 million of total unrecognized compensation cost related to non-vested restricted stock/stock unit awards granted under the stock plans. That cost is expected to be recognized over a weighted-average period of 1.79 years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
First Quarter 2020 vs. First Quarter 2019
OVERVIEW
Sales in the first quarter of 2020 decreased from the first quarter of last year. Sales in the quarter declined by $24 million or about 8 percent primarily due to lower Water and Fueling Systems sales volumes and foreign currency exchange partially offset by achieved price. The Company's consolidated gross profit was $90.3 million for the first quarter of 2020, an increase from the prior year’s first quarter. The gross profit as a percent of net sales was 33.9 percent in the first quarter of 2020 versus 30.8 percent during the first quarter 2019 and improved primarily due to better price realization and product sales mix.
EFFECTS OF THE GLOBAL PANDEMIC
The top priority of the Company is the health and welfare of its employees and partners around the world. In response to the health risks posed by the Global Pandemic, the Company implemented and has been following the recommended hygiene and social distancing practices promulgated by the United States Centers for Disease Control and the World Health Organization.
The Company’s products and services are generally viewed as essential in most jurisdictions in which the Company operates. Accordingly, the Company’s global manufacturing and distribution operations generally remain open subject to temporary government mandated closures which have occurred in China, Italy, South Africa, India and several countries in South America. These temporary closures have not had a material impact on the ability to supply products to the Company’s customers.
The Company has assessed the end markets it serves to determine changes in demand patterns and customer behaviors. From this assessment, the Company currently believes that the most significant risks to the previously provided financial outlook for 2020 are a reduction of large dewatering equipment sales in the Water Systems segment; Water Systems customers destocking their inventory, particularly in the U.S. and Canada plumbing channel; and, the deferral or cancellation of the construction of new filling stations in the Fueling Systems segment in the U.S and Canada. Additionally, the strengthening of the U.S. dollar versus most international currencies will result in lower translations of both net sales and earnings from many of the Company’s businesses outside the U.S. Beyond these specific end market considerations, the Company may experience other negative impacts to profitability from various government mandated closures and related customer behavior.
Additional adverse financial impacts from these risks include lost operational efficiencies, deleveraging of the manufacturing fixed costs base due to lower manufactured volumes, and the potential for higher bad debt expense. The Company has taken action to offset the negative impacts of these risks by implementing various reductions in all discretionary spending.
The Company ended the first quarter of 2020 with a cash balance of $40 million and had total incremental borrowing capacity of $478 million. The Company believes it has enough liquidity to meet its operating and cash flow requirements for the foreseeable future.
RESULTS OF OPERATIONS
Net Sales
Net sales in the first quarter of 2020 were $266.8 million, a decrease of $23.9 million or about 8 percent compared to 2019 first quarter sales of $290.7 million. The sales increase from acquisition related sales was $3.9 million. Sales revenue decreased by $8.1 million or about 3 percent in the first quarter of 2020 due to foreign currency translation. Excluding acquisitions and the impact of foreign currency translation, the Company’s organic sales growth was negative about 7 percent.
| Net Sales | |||||||||||||||||
| (In millions) | Q1 2020 | Q1 2019 | 2020 v 2019 | ||||||||||||||
| Water Systems | $ | 164.1 | $ | 188.4 | $ | (24.3) | |||||||||||
| Fueling Systems | 55.3 | 60.2 | $ | (4.9) | |||||||||||||
| Distribution | 60.4 | 53.3 | $ | 7.1 | |||||||||||||
| Eliminations/Other | (13.0) | (11.2) | $ | (1.8) | |||||||||||||
| Consolidated | $ | 266.8 | $ | 290.7 | $ | (23.9) | |||||||||||
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Net Sales-Water Systems
Water Systems revenues were $164.1 million in the first quarter 2020, a decrease of $24.3 million or about 13 percent versus the first quarter 2019 sales of $188.4 million. In the first quarter of 2020, sales from businesses acquired since the first quarter of 2019 were $3.9 million. Sales were decreased by $7.7 million or 4 percent in the quarter due to foreign currency translation. Water Systems sales were down about 11 percent, excluding acquisitions and foreign currency translation, in the first quarter of 2020 versus the first quarter of 2019.
Water Systems sales in the U.S. and Canada decreased by 14 percent overall compared to the first quarter 2019, primarily due to lower sales of dewatering equipment. Sales of dewatering equipment decreased by nearly 54 percent due to lower sales in rental channels and substantial uncertainty in oil production end markets. Sales of groundwater pumping equipment increased by 2 percent versus the first quarter 2019, in part due to more normal weather conditions than a year ago. Sales of surface pumping equipment decreased by 14 percent on lower sales of both wastewater and water transfer systems as customers in this channel began to feel the impact of the Global Pandemic and lowered their own inventory levels.
Water Systems sales in markets outside the U.S. and Canada decreased by 11 percent overall. Foreign currency translation decreased sales by 9 percent. Outside the U.S. and Canada, Water Systems organic sales decreased by 2 percent, primarily driven by the Asia Pacific markets as customers in Korea, Japan and China were impacted by the Global Pandemic.
Net Sales-Fueling Systems
Fueling Systems sales were $55.3 million in the first quarter of 2020, a decrease of $4.9 million or about 8 percent versus the first quarter 2019 sales of $60.2 million. Fueling Systems sales were decreased by $0.4 million or 1 percent in the quarter due to foreign currency translation. Fueling Systems sales, excluding foreign currency translation, declined by about 7 percent.
Fueling Systems sales in the U.S. and Canada increased by about 7 percent compared to the first quarter 2019. The increase was principally in the piping, pumping and fuel management systems product lines. Outside the U.S. and Canada, Fueling Systems revenues declined by about 30 percent, driven by lower sales in Asia Pacific, primarily China.
Net Sales-Distribution
Distribution sales were $60.4 million in the first quarter 2020, an increase of $7.1 million versus first quarter 2019 sales of $53.3 million. The Distribution segment organic sales increased about 13 percent compared to the first quarter of 2019. More favorable weather conditions versus the first quarter last year contributed to the revenue growth.
Cost of Sales
Cost of sales as a percentage of net sales for the first quarters of 2020 and 2019 was 66.1 percent and 69.2 percent, respectively. Correspondingly, the gross profit margin increased to 33.9 percent from 30.8 percent. The Company’s consolidated gross profit was $90.3 million for the first quarter of 2020, an increase from the first quarter of 2019 gross profit of $89.5 million. The gross profit margin improved primarily due to better price realization and product sales mix shifts.
Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $75.6 million in the first quarter of 2020 compared to $76.3 million in the first quarter of 2019. SG&A expenses from acquired businesses were $0.8 million and excluding the acquired entities, the Company’s SG&A expenses in the first quarter of 2020 were $74.8 million, a decrease of about 2 percent from the first quarter 2019. SG&A expenses were lower in part because of foreign currency translation versus the prior year, lower variable compensation expenses, and company wide efforts to lower spending in response to the pending impacts of the Global Pandemic.
Restructuring Expenses
There were $0.9 million of restructuring expenses for the first quarter of 2020. Restructuring expenses for the first quarter of 2020 were $0.6 million in the Water and $0.2 million in Fueling segments and related to continued miscellaneous manufacturing realignment activities, as well as $0.1 million in the Distribution segment related to miscellaneous branch closings and consolidation.
There were $1.1 million of restructuring expenses for the first quarter of 2019. Restructuring expenses for the first quarter of 2019 were $0.6 million in the Distribution segment and related to miscellaneous branch closings and consolidation. Restructuring expenses for the first quarter of 2019 were $0.5 million in the Water segment and related to continued miscellaneous manufacturing realignment activities.
Operating Income
Operating income was $13.8 million in the first quarter of 2020, up $1.7 million or about 14 percent from $12.1 million in the first quarter of 2019.
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| Operating income (loss) | ||||||||||||||||||||
| (In millions) | Q1 2020 | Q1 2019 | 2020 v 2019 | |||||||||||||||||
| Water Systems | $ | 18.8 | $ | 19.2 | $ | (0.4) | ||||||||||||||
| Fueling Systems | 12.1 | 12.3 | (0.2) | |||||||||||||||||
| Distribution | (2.2) | (4.3) | 2.1 | |||||||||||||||||
| Eliminations/Other | (14.9) | (15.1) | 0.2 | |||||||||||||||||
| Consolidated | $ | 13.8 | $ | 12.1 | $ | 1.7 | ||||||||||||||
Operating Income-Water Systems
Water Systems operating income was $18.8 million in the first quarter 2020, down $0.4 million versus the first quarter 2019. Operating income decreased in Water Systems primarily due to lower sales volume. The first quarter operating income margin was 11.5 percent, up 130 basis points from 10.2 percent in the first quarter of 2019. Operating income margin increased in Water Systems primarily due to better price realization and improved product sales mix.
Operating Income-Fueling Systems
Fueling Systems operating income was $12.1 million in the first quarter of 2020 compared to $12.3 million in the first quarter of 2019. The decrease in operating income was primarily related to lower sales. The first quarter Fueling Systems operating income margin was 21.9 percent, an increase of 150 basis points from the 20.4 percent of net sales in the first quarter of 2019. Operating income margin improved due to a better geographic and product sales mix.
Operating Income-Distribution
The Distribution segment recorded an operating loss of $2.2 million in the first quarter of 2020 compared to a $4.3 million loss in the first quarter of 2019. The Distribution loss was primarily due to lost leverage on fixed costs from lower sales. The Distribution segment’s operations are seasonal and product sales are significantly slower during the fourth and first quarters, i.e., the winter months in North America.
Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of intersegment sales and profit eliminations and unallocated general and administrative expenses. The intersegment profit elimination impact in the first quarter of 2020 versus the first quarter of 2019 was income of $0.7 million. The intersegment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until such time as the transferred product is sold from the Distribution segment to its end third party customer. General and administrative expenses were higher by $0.5 million or about 4 percent to last year.
Interest Expense
Interest expense for the first quarters of 2020 and 2019 was $1.2 million and $2.3 million, respectively. Interest expense was lower primarily due to lower debt.
Other Income or Expense
Other income or expense was a loss in the first quarter of 2020 of $0.2 million and a gain of $0.2 million in the first quarter of 2019.
Foreign Exchange
Foreign currency-based transactions produced a gain for the first quarters of 2020 and 2019 of $1.0 million and $0.6 million, respectively.
Income Taxes
The provision for income taxes in the first quarter of 2020 and 2019 was $2.6 million and $1.5 million, respectively. The effective tax rate for the first quarter of 2020 was about 19 percent and, before the impact of discrete events, was about 20 percent. The effective tax rate for the first quarter of 2019 was about 14 percent and, before the impact of discrete events, was about 20 percent. The increase in the effective tax rate was primarily the result of unfavorable discrete events of $0.4 million during the first quarter of 2020. The tax rate as a percentage of pre-tax earnings for the full year of 2020 is projected to be about 20 percent, compared to the full year 2019 tax rate of about 20 percent, both before discrete adjustments.
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Net Income
Net income for the first quarter of 2020 was $10.8 million compared to the prior year first quarter net income of $9.1 million. Net income attributable to Franklin Electric Co., Inc. for the first quarter of 2020 was $10.6 million, or $0.23 per diluted share, compared to the prior year first quarter net income attributable to Franklin Electric Co., Inc. of $9.1 million or $0.19 per diluted share.
CAPITAL RESOURCES AND LIQUIDITY
Sources of Liquidity
The Company's primary sources of liquidity are cash on hand, cash flows from operations, revolving credit agreements, and long-term debt funds available. The Company believes its capital resources and liquidity position at March 31, 2020 is adequate to meet projected needs for the foreseeable future. The Company expects that ongoing requirements for operations, capital expenditures, pension obligations, dividends, share repurchases, and debt service will be adequately funded from cash on hand, operations, and existing credit agreements.
As of March 31, 2020 the Company had a $300.0 million revolving credit facility. The facility is scheduled to mature on October 28, 2021. As of March 31, 2020, the Company had $256.8 million borrowing capacity under the Credit Agreement as $4.2 million in letters of commercial and standby letters of credit were outstanding and undrawn and $39.0 million in revolver borrowings were drawn and outstanding which were primarily used for working capital needs, the payment of existing indebtedness, and acquisitions.
The Company also has other long-term debt borrowing outstanding as of March 31, 2020. See Note 9 - Debt for additional specifics regarding these obligations and future maturities.
At March 31, 2020, the Company had $34.0 million of cash and cash equivalents held in foreign jurisdictions, which is intended to be used to fund foreign operations. There is currently no need or intent to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions.
Cash Flows
The following table summarizes significant sources and uses of cash and cash equivalents for the first three months of 2020 and 2019.
| (in millions) | 2020 | 2019 | ||||||||||||
| Net cash flows from operating activities | $ | (4.7) | $ | (2.9) | ||||||||||
| Net cash flows from investing activities | (11.1) | (10.6) | ||||||||||||
| Net cash flows from financing activities | (3.7) | 9.9 | ||||||||||||
| Impact of exchange rates on cash and cash equivalents | (4.9) | (1.2) | ||||||||||||
| Change in cash and cash equivalents | $ | (24.4) | $ | (4.8) | ||||||||||
Cash Flows from Operating Activities
2020 vs. 2019
Net cash used in operating activities was $4.7 million for the three months ended March 31, 2020 compared to $2.9 million used in operating activities for the three months ended March 31, 2019. The increase in cash used was due to a decrease of $4.3 million in other operating activities, primarily in long-term liabilities, offset by lower tax payments of $1.3 million as well as an increase in net income of $1.7 million.
Cash Flows from Investing Activities
2020 vs. 2019
Net cash used in investing activities was $11.1 million for the three months ended March 31, 2020 compared to $10.6 million used in investing activities for the three months ended March 31, 2019. The increase in cash used in investing activities is primarily attributable to increased acquisition activity and property, plant and equipment expenditures.
Cash Flows from Financing Activities
2020 vs. 2019
Net cash used in financing activities was $3.7 million for the three months ended March 31, 2020 compared to $9.9 million provided by financing activities for the three months ended March 31, 2019. The change in net cash from financing activities was primarily attributable to an increase of $12.7 million in common stock repurchases in the current year.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward-looking information, such as statements about the Company’s financial goals, acquisition strategies, financial expectations including anticipated revenue or expense levels, business prospects, market positioning, product development, manufacturing re-alignment, capital expenditures, tax benefits and expenses, and the effect of contingencies or changes in accounting policies. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” While the Company believes that the assumptions underlying such forward-looking statements are reasonable based on present conditions, forward-looking statements made by the Company involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those forward-looking statements as a result of various factors, including regional or general economic and currency conditions, various conditions specific to the Company’s business and industry, new housing starts, weather conditions, epidemics and pandemics, market demand, competitive factors, changes in distribution channels, supply constraints, effect of price increases, raw material costs and availability, technology factors, integration of acquisitions, litigation, government and regulatory actions, the Company’s accounting policies, and other risks, all as described in the Company's Securities and Exchange Commission filings, included in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and in Exhibit 99.1 thereto. Any forward-looking statements included in this Form 10-Q are based upon information presently available. The Company does not assume any obligation to update any forward-looking information, except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the Company's exposure to market risk during the first quarter ended March 31, 2020. For additional information, refer to Part II, Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15. Based upon that evaluation, the Company's Chief Executive Officer and the Company's Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective.
In the third quarter of 2016, the Company began the process of a multi-year implementation of a global enterprise resource planning (“ERP”) system. The new ERP system was designed to better support the Company's business needs in response to the changing operating environment and for many business units within the Company is an update to a legacy system product. The implementation of a worldwide ERP system affects the processes that constitute the Company's internal control over financial reporting and requires testing for effectiveness as the implementation progresses. The Company expects that the new ERP system will enhance the overall system of internal controls over financial reporting through further automation and integration of business processes, although it is not being implemented in response to any identified deficiency in the Company’s internal controls over financial reporting. The Conversion will happen in two stages. The first stage involved converting the primary legacy ERP system, and the second stage converted those companies that remained on their local ERP system after the date of acquisition. As of March 31, 2020, all material business units have been converted as part of the first and second stage.
Other than the ERP implementation, there have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors as set forth in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019 with the exception of the update to the following risk factor. Additional risks and uncertainties, not presently known to the Company or currently deemed immaterial, could negatively impact the Company’s results of operations or financial condition in the future.
Additional Risks to the Company. The Company is subject to various risks in the normal course of business as well as catastrophic events including severe weather events, earthquakes, fires, acts of war, terrorism, civil unrest, epidemics and pandemics and other unexpected events. Exhibit 99.1 sets forth risks and other factors that may affect future results, including those identified above, and is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Repurchases of Equity Securities
In April 2007, the Company's Board of Directors approved a plan to increase the number of shares remaining for repurchase from 628,692 to 2,300,000 shares. There is no expiration date for this plan. On August 3, 2015, the Company's Board of Directors approved a plan to increase the number of shares remaining for repurchase by an additional 3,000,000 shares. The authorization was in addition to the 535,107 shares that remained available for repurchase as of July 31, 2015. The Company repurchased 322,147 shares for approximately $15.2 million under the plan during the first quarter of 2020. The maximum number of shares that may still be purchased under this plan as of March 31, 2020 is 933,823.
| Period | Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Maximum Number of Shares that may yet to be Repurchased | ||||||||||||||||||||||
| January 1 - January 31 | — | — | — | 1,255,970 | ||||||||||||||||||||||
| February 1 - February 29 | 42,900 | 51.68 | 42,900 | 1,213,070 | ||||||||||||||||||||||
| March 1 - March 31 | 279,247 | 46.64 | 279,247 | 933,823 | ||||||||||||||||||||||
| Total | 322,147 | 47.31 | 322,147 | 933,823 | ||||||||||||||||||||||
ITEM 6. EXHIBITS
Exhibits are set forth in the Exhibit Index located on page 30.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FRANKLIN ELECTRIC CO., INC. | |||||||||||
| Registrant | |||||||||||
| Date: May 5, 2020 | By | /s/ Gregg C. Sengstack | |||||||||
| Gregg C. Sengstack, Chairman and Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: May 5, 2020 | By | /s/ John J. Haines | |||||||||
| John J. Haines | |||||||||||
| Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
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FRANKLIN ELECTRIC CO., INC.
EXHIBIT INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE FIRST QUARTER ENDED MARCH 31, 2020
| Number | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | ||||
*Management Contract, Compensatory Plan or Arrangement
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