UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-Q
_________
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-362
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(260 ) 824-2900
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| 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.
| ☒ | No | ☐ | |||||||||
Indicate by check mark whether the registrant has submitted electronically 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).
| ☒ | No | ☐ | |||||||||
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
| ☒ | 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 | July 24, 2024 | |||||||
| $ | ||||||||
2
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 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands, except per share amounts) | June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general, and administrative expenses | |||||||||||||||||||||||
| Restructuring expense | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Foreign exchange expense | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Less: Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to Franklin Electric Co., Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
4
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (In thousands) | June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income/(loss), before tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | |||||||||||||||||||||
| Employee benefit plan activity | |||||||||||||||||||||||
| Other comprehensive income/(loss) | ( | ( | |||||||||||||||||||||
| Income tax expense related to items of other comprehensive income/(loss) | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income/(loss), net of tax | ( | ( | |||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Less: Comprehensive income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income attributable to Franklin Electric Co., Inc. | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (In thousands, except per share amounts) | June 30, 2024 | December 31, 2023 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Receivables, less allowances of $ | |||||||||||
| Inventories: | |||||||||||
| Raw material | |||||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant, and equipment, at cost: | |||||||||||
| Land and buildings | |||||||||||
| Machinery and equipment | |||||||||||
| Furniture and fixtures | |||||||||||
| Other | |||||||||||
| Property, plant, and equipment, gross | |||||||||||
| Less: Allowance for depreciation | ( | ( | |||||||||
| Property, plant, and equipment, net | |||||||||||
| Lease right-of-use assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
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| June 30, 2024 | December 31, 2023 | ||||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current lease liability | |||||||||||
| Income taxes | |||||||||||
| Current maturities of long-term debt and short-term borrowings | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Long-term lease liability | |||||||||||
| Income taxes payable non-current | |||||||||||
| Deferred income taxes | |||||||||||
| Employee benefit plans | |||||||||||
| Other long-term liabilities | |||||||||||
| Commitments and contingencies (see Note 15) | |||||||||||
| Redeemable noncontrolling interest | |||||||||||
| Shareholders' equity: | |||||||||||
Common stock ( | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders' equity | |||||||||||
| Noncontrolling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements.
7
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended | |||||||||||
| (In thousands) | June 30, 2024 | June 30, 2023 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash lease expense | |||||||||||
| Share-based compensation | |||||||||||
| Deferred income taxes | ( | ||||||||||
| (Gain)/loss on disposals of plant and equipment | ( | ||||||||||
| Foreign exchange expense | |||||||||||
| Changes in assets and liabilities, net of acquisitions: | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventory | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Operating leases | ( | ( | |||||||||
| Income taxes | ( | ( | |||||||||
| Income taxes-U.S. Tax Cuts and Jobs Act | ( | ( | |||||||||
| Employee benefit plans | ( | ||||||||||
| Other, net | |||||||||||
| Net cash flows from operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to property, plant, and equipment | ( | ( | |||||||||
| Proceeds from sale of property, plant, and equipment | |||||||||||
| Cash paid for acquisitions, net of cash acquired | ( | ( | |||||||||
| Other, net | |||||||||||
| Net cash flows from investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of debt | |||||||||||
| Repayments of debt | ( | ( | |||||||||
| Proceeds from issuance of common stock | |||||||||||
| Purchases of common stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Deferred payments for acquisitions | ( | ( | |||||||||
| Net cash flows from financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
8
| Non-cash items: | |||||||||||
| Additions to property, plant, and equipment, not yet paid | $ | $ | |||||||||
| Right-of-Use Assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
| Payable to sellers of acquired entities | $ | $ | |||||||||
| Non-cash investment to acquire property in lieu of cash payment for products provided | $ | $ | |||||||||
| Payable for share repurchases | $ | $ | |||||||||
9
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, 2023, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of June 30, 2024, and for the second quarters and six months ended June 30, 2024 and June 30, 2023 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 second quarter and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024. 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, 2023.
2. ACCOUNTING PRONOUNCEMENTS
Accounting Standards Issued But Not Yet Adopted
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07 is intended to improve reportable segment disclosure requirements, primarily through additional and more detailed information about a reportable segment's expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The guidance is to be applied retrospectively to all prior periods presented in the financial statements. The Company plans to adopt this ASU for its fiscal year end December 31, 2024 disclosures, but does not anticipate the adoption to have a material impact on the Company's financial disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures. This amendment modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation and additional information for reconciling items that meet a quantitative threshold, (2) the amount of income taxes paid (net of refunds received) (disaggregated by federal, state, and foreign taxes) as well as individual jurisdictions in which income taxes paid is equal to or greater than 5 percent of total income taxes paid net of refunds, (3) the income or loss from continuing operations before income tax expense or benefit (disaggregated between domestic and foreign) and (4) income tax expense or benefit from continuing operations (disaggregated by federal, state and foreign). ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. ASU 2023-09 should be applied on a prospective basis, while retrospective application is permitted. 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 financial disclosures.
3. ACQUISITIONS
2023
During the fourth quarter ended December 31, 2023, the Company acquired substantially all of the assets of Aqua Systems of Fort Myers, a water treatment systems distributor. In another separate transaction, the Company acquired substantially all of the assets of Action Manufacturing and Supply, Inc., a water treatment equipment provider located in southwest Florida. The Company also acquired, in a separate transaction, substantially all of the assets of LCA Pump, LLC, which operates Water Works Pump, a Missouri based professional groundwater distributor. The combined purchase price for the acquisitions in the fourth quarter of 2023, was $36.0 million, including contingent consideration with an estimated fair value of $4.3 million, after purchase price adjustments based on the level of working capital acquired. In the first quarter of 2024, the Company recorded a measurement period adjustment of $1.3 million to increase the acquisition-date fair value of the contingent consideration transferred. The measurement period adjustment resulted in an increase to acquired identifiable intangible assets of $2.3 million and a reduction to acquired goodwill of $1.0 million. The measurement period adjustments did not have a significant impact on the Company’s results of operations. The fair value of the assets acquired and liabilities assumed for the above acquisitions is preliminary as of June 30, 2024.
During the first quarter ended March 31, 2023, the Company acquired all of the assets of Phil-Good Products, Inc. ("Phil-Good"). Phil-Good is an injection molded plastics component manufacturer. In another separate transaction in the first quarter of 2023, the Company acquired 100 percent of the ownership interests of Hydropompe S.r.l. ("Hydropompe"). Hydropompe is a pump manufacturer with a focus in dewatering and sewage products. The combined, all-cash purchase price for both
11
acquisitions in the first quarter of 2023 was $8.7 million after purchase price adjustments based on the level of working capital acquired. The fair value of the assets acquired and liabilities assumed for both acquisitions was final as of March 31, 2024.
The Company has not presented separate results of operations of the acquired companies since the closing of the acquisitions or combined pro forma financial information of the Company and the acquired interests as the results of operations for all 2023 acquisitions are immaterial.
Transaction costs were expensed as incurred under the guidance of FASB Accounting Standards Codification Topic 805, Business Combinations and were insignificant for all periods presented.
4. FAIR VALUE MEASUREMENTS
FASB Accounting Standards Codification 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 June 30, 2024 and December 31, 2023, the assets and liabilities measured at fair value on a recurring basis were as set forth in the table below:
| (In millions) | June 30, 2024 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| Assets: | ||||||||||||||
| Cash equivalents | $ | $ | $ | $ | ||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||
| Share swap transaction | $ | $ | $ | $ | ||||||||||
| Forward currency contracts | ||||||||||||||
| Contingent payments related to acquisition | ||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||
| (In millions) | December 31, 2023 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| Assets: | ||||||||||||||
| Cash equivalents | $ | $ | $ | $ | ||||||||||
| Share swap transaction | ||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||
| Contingent payments related to acquisition | $ | $ | $ | $ | ||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||
12
The Company’s Level 1 cash equivalents assets are generally comprised of foreign bank guaranteed certificates of deposit and short term deposits. The share swap transaction asset is recorded within the "Receivables" line of the condensed consolidated balance sheets, and the share swap transaction and forward currency contracts liabilities are recorded within the "Accounts payable" lines of the condensed consolidated balance sheets and are further described in Note 5 - Financial Instruments.
The Company's Level 3 category includes contingent consideration related to acquisitions, which valuation inputs are unobservable and significant to the fair value measurement. Projections and estimated probabilities are used to estimate future contingent earn-out payments, which are discounted back to present value to compute contingent earn-out liabilities. The following table provides a roll-forward of the contingent consideration liability, which is included in "Other long-term liabilities" as of December 31, 2023 and "Accrued expenses and other current liabilities" as of June 30, 2024 in the condensed consolidated balance sheets:
| Second Quarter Ended | Six Months Ended | |||||||
| (In millions) | June 30, 2024 | June 30, 2024 | ||||||
| Fair value at beginning of period | $ | $ | ||||||
| Adjustments to prior year acquisition | ||||||||
| Change in fair value recognized in earnings | ||||||||
| Payments | ||||||||
| Fair value at end of period | $ | $ | ||||||
5. FINANCIAL INSTRUMENTS
The Company’s non-employee directors' 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 June 30, 2024 and December 31, 2023, the swap had a notional value based on 240,000 2.9 million, and $0.8 million, respectively. For the second quarter and six months ended June 30, 2023, changes in the fair value of the swap resulted in gains of $1.7 million and $4.7 million, respectively. Gaines and losses resulting from the swap were largely 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.
The Company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business including making sales and purchases of raw materials and finished goods in foreign denominated currencies with third party customers and suppliers as well as to wholly owned subsidiaries of the Company. To reduce its exposure to foreign currency exchange rate volatility, the Company enters into various forward currency contracts to offset these fluctuations. The Company uses forward currency contracts only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings volatility associated with foreign currency exchange rate fluctuations and has not elected to use hedge accounting. Decisions on whether to use such derivative instruments are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency. As of June 30, 2024, the Company had a notional amount of $28.2 million in forward currency contracts outstanding and the related fair value of those contracts was not material. As of December 31, 2023, the Company had no foreign currency contracts outstanding. For the second quarter and six months ended June 30, 2024, changes in the fair value of the forward currency contracts resulted in losses of $0.9 million and $0.3 million, respectively. For the second quarter and six months ended June 30, 2023, changes in the fair value of the forward currency contracts resulted in gains of $0.6 million and $1.6 million, respectively. These gains and losses are recorded in the Company's condensed consolidated statements of income within the "Foreign exchange expense" line.
13
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amounts of the Company’s intangible assets, excluding goodwill, are as follows:
| (In millions) | June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||
| Amortizing intangibles: | ||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||
| Technology | ( | ( | ||||||||||||||||||||||||
| Trade names | ( | ( | ||||||||||||||||||||||||
| Other | ( | ( | ||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Non-amortizing intangibles: | ||||||||||||||||||||||||||
| Trade names | — | — | ||||||||||||||||||||||||
| Total intangibles | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
Amortization expense related to intangible assets for the second quarters ended June 30, 2024 and June 30, 2023 was $4.7 million and $4.3 million, respectively, and for six months ended June 30, 2024 and June 30, 2023 was $9.5 million and $8.5 million, respectively.
The change in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2024 is as follows:
| (In millions) | ||||||||||||||||||||||||||
| Water Systems | Fueling Systems | Distribution | Consolidated | |||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||
| Adjustments to prior year acquisitions | ( | ( | ( | |||||||||||||||||||||||
| Foreign currency translation | ( | ( | ||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ||||||||||||||||||||||
7. EMPLOYEE BENEFIT PLANS
The following table sets forth the aggregated net periodic benefit cost for all pension plans for the second quarters and six months ended June 30, 2024 and June 30, 2023:
| (In millions) | Pension Benefits | ||||||||||||||||||||||
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||
| Prior service cost | |||||||||||||||||||||||
| Actuarial loss | |||||||||||||||||||||||
| Settlement cost | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
14
The following table sets forth the aggregated net periodic benefit cost for the other post-retirement benefit plan for the second quarters and six months ended June 30, 2024 and June 30, 2023:
| (In millions) | Other Benefits | ||||||||||||||||||||||
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on assets | |||||||||||||||||||||||
| Amortization of: | |||||||||||||||||||||||
| Prior service cost | |||||||||||||||||||||||
| Actuarial loss | |||||||||||||||||||||||
| Settlement cost | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of:
| (In millions) | June 30, 2024 | December 31, 2023 | ||||||||||||
| Salaries, wages, and commissions | $ | $ | ||||||||||||
| Product warranty costs | ||||||||||||||
| Insurance | ||||||||||||||
| Employee benefits | ||||||||||||||
| Other | ||||||||||||||
| Total | $ | $ | ||||||||||||
9. INCOME TAXES
The Company’s effective tax rate for the six-month period ended June 30, 2024 was 22.5 percent as compared to 20.0 percent for the six-month period ended June 30, 2023. The effective tax rate differs from the U.S. statutory rate of 21 percent primarily due to state taxes and foreign earnings taxed at rates higher than the U.S. statutory rate partially offset by the recognition of the U.S. foreign-derived intangible income (FDII) provisions and certain discrete events including excess tax benefits from share-based compensation. For the second quarter of 2024, the effective tax rate was 22.9 percent compared to 19.1 percent for the second quarter of 2023.
The increase in the effective tax rate for the second quarter and first six months of 2024 compared to the comparable period in the prior year was a result of less favorable discrete events in 2024, primarily related to excess tax benefits from share-based compensation, in addition to an increase in the rate on foreign earnings with the implementation of the European Union’s Pillar Two Directive.
10. DEBT
Debt consisted of the following:
| (In millions) | June 30, 2024 | December 31, 2023 | ||||||||||||
| New York Life Agreement | $ | $ | ||||||||||||
| Credit Agreement | ||||||||||||||
| Tax increment financing debt | ||||||||||||||
| Foreign subsidiary debt | ||||||||||||||
| Less: unamortized debt issuance costs | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
| Less: current maturities | ( | ( | ||||||||||||
| Long-term debt | $ | $ | ||||||||||||
15
Prudential Agreement
The Company maintains the Fourth Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement") with PGIM, Inc. and its affiliates. On May 15, 2024, the Company entered into Amendment No. 1 that increased the total available facility amount from lenders to $250.0 million from $150.0 million and changed the expiration date from July 30, 2024 to May 15, 2027.
New York Life Agreement
The Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC and its affiliates (the "New York Life Agreement"). On May 15, 2024, the Company entered into Amendment No. 1 that increased the total available facility amount from lenders to $250.0 million from $200.0 million and changed the expiration date from July 30, 2024 to May 15, 2027.
Credit Agreement
As of June 30, 2024, the Company had $41.0 million outstanding borrowings with a weighted-average interest rate of 6.3 percent, $3.5 million in letters of credit outstanding, and $305.5 million of available capacity under its credit agreement. As of December 31, 2023, the Company had $11.0 million outstanding borrowings with a weighted-average interest rate of 6.3 percent, $3.6 million in letters of credit outstanding, and $335.4 million of available capacity under its credit agreement.
The Company also has overdraft lines of credit for certain subsidiaries with various expiration dates. The aggregate maximum borrowing capacity of these overdraft lines of credits is $17.4 million. As of June 30, 2024, there were no outstanding borrowings and $17.4 million of available capacity under these lines of credit. As of December 31, 2023, there were $17.9 million overdraft lines of credit with no outstanding borrowings and $17.9 million of available capacity under these lines of credit.
11. 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 non-forfeitable 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:
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions, except per share amounts) | June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Franklin Electric Co., Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Less: Earnings allocated to participating securities | |||||||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic weighted average common shares outstanding | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Non-participating employee stock options, performance awards, and deferred shares to non-employee directors | |||||||||||||||||||||||
| Diluted weighted average common shares outstanding | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
16
12. EQUITY ROLL FORWARD
The schedules below set forth equity changes in the second quarters and six months ended June 30, 2024 and June 30, 2023:
| (In thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Noncontrolling Interest | Total Equity | Redeemable Noncontrolling Interest | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common stock repurchased | ( | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Dividend to noncontrolling interest | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Pension and other post retirement plans, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
| (In thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Noncontrolling Interest | Total Equity | Redeemable Noncontrolling Interest | ||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common stock repurchased | ( | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Pension and other post retirement plans, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
17
| (In thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Noncontrolling Interest | Total Equity | Redeemable Noncontrolling Interest | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net Income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common stock repurchased | ( | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Dividend to noncontrolling interest | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||
| Pension and other post retirement plans, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
| (In thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income/(Loss) | Noncontrolling Interest | Total Equity | Redeemable Noncontrolling Interest | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net Income | — | — | — | ||||||||||||||||||||||||||||||||||||||
Dividends on common stock ($ | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Common stock issued | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common stock repurchased | ( | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Pension and other post retirement plans, net of taxes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||
18
13. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Changes in accumulated other comprehensive income/(loss) by component for the six months ended June 30, 2024 and June 30, 2023, are summarized below:
| (In millions) | Foreign Currency Translation Adjustments | Pension and Post-Retirement Plan Benefit Adjustments (2) | Total | ||||||||||||||
| For the six months ended June 30, 2024: | |||||||||||||||||
| Balance as of December 31, 2023 | $ | ( | $ | ( | $ | ( | |||||||||||
| Other comprehensive income/(loss) before reclassifications | ( | ( | |||||||||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) (1) | |||||||||||||||||
| Net other comprehensive income/(loss) | ( | ( | |||||||||||||||
| Balance as of June 30, 2024 | $ | ( | $ | ( | $ | ( | |||||||||||
| For the six months ended June 30, 2023: | |||||||||||||||||
| Balance as of December 31, 2022 | $ | ( | $ | ( | $ | ( | |||||||||||
| Other comprehensive income/(loss) before reclassifications | |||||||||||||||||
Amounts reclassified from accumulated other comprehensive income/(loss) (1) | |||||||||||||||||
| Net other comprehensive income/(loss) | |||||||||||||||||
| Balance as of June 30, 2023 | $ | ( | $ | ( | $ | ( | |||||||||||
(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, net" line of the Company's condensed consolidated statements of income.
(2) Net of tax expense of $0.3
Amounts related to noncontrolling interests were not material.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The accounting policies of the operating segments are the same as those described in Note 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2023. 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.
19
Financial information by reportable business segment is included in the following summary:
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| (In millions) | June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Water Systems | |||||||||||||||||||||||
| External sales | |||||||||||||||||||||||
| United States & Canada | $ | $ | $ | $ | |||||||||||||||||||
| Latin America | |||||||||||||||||||||||
| Europe, Middle East & Africa | |||||||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Intersegment sales | |||||||||||||||||||||||
| United States & Canada | |||||||||||||||||||||||
| Total sales | |||||||||||||||||||||||
| Distribution | |||||||||||||||||||||||
| External sales | |||||||||||||||||||||||
| United States & Canada | |||||||||||||||||||||||
| Intersegment sales | |||||||||||||||||||||||
| Total sales | |||||||||||||||||||||||
| Fueling Systems | |||||||||||||||||||||||
| External sales | |||||||||||||||||||||||
| United States & Canada | |||||||||||||||||||||||
| All other | |||||||||||||||||||||||
| Intersegment sales | |||||||||||||||||||||||
| Total sales | |||||||||||||||||||||||
| Intersegment Eliminations/Other | ( | ( | ( | ( | |||||||||||||||||||
| Consolidated | $ | $ | $ | $ | |||||||||||||||||||
| Second Quarter Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | ||||||||||||||||||||
| Operating income/(loss) | |||||||||||||||||||||||
| Water Systems | $ | $ | $ | $ | |||||||||||||||||||
| Distribution | |||||||||||||||||||||||
| Fueling Systems | |||||||||||||||||||||||
| Intersegment Eliminations/Other | ( | ( | ( | ( | |||||||||||||||||||
| Consolidated | $ | $ | $ | $ | |||||||||||||||||||
| June 30, 2024 | December 31, 2023 | ||||||||||
| Total assets | |||||||||||
| Water Systems | $ | $ | |||||||||
| Distribution | |||||||||||
| Fueling Systems | |||||||||||
| Other | |||||||||||
| Consolidated | $ | $ | |||||||||
Other Assets are generally Corporate assets that are not allocated to the segments and are comprised primarily of cash and property, plant and equipment.
20
15. COMMITMENTS AND CONTINGENCIES
In 2011, the Company became aware of a review of alleged issues with certain underground piping connections installed in filling stations in France owned by the French Subsidiary of Exxon Mobile, Esso S.A.F. A French court ordered that a designated, subject-matter expert review 103 filling stations to determine what, if any, damages are present and the cause of those damages. The Company has participated in this investigation since 2011, along with several other third parties including equipment installers, engineering design firms who designed and provided specifications for the stations, and contract manufacturers of some of the installed equipment. In May 2022, the subject-matter expert issued its final report, which indicates that total damages incurred by Esso amounted to approximately 9.5 million Euro. It is the Company’s position that its products were not the cause of any alleged damage. The Company submitted its response to the expert's final report in February 2023. The Company cannot predict the ultimate outcome of this matter. If payments result from a resolution of this matter, depending on the amount, they could have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company is defending other 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 June 30, 2024, the Company had $7.5 million of commitments primarily for capital expenditures and purchase of raw materials to be used in production and finished goods.
At June 30, 2024, the Company has a contingent consideration liability with an estimated fair value of $4.6 million that could result in a payment of up to $5.0 million if a future profitability milestone is achieved.
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 six months ended June 30, 2024, are as follows:
| (In millions) | ||||||||
| Balance as of December 31, 2023 | $ | |||||||
| Accruals related to product warranties | ||||||||
| Reductions for payments made | ( | |||||||
| Balance as of June 30, 2024 | $ | |||||||
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Second Quarter 2024 vs. 2023
OVERVIEW
Net sales in the second quarter and first six months of 2024 were $543.3 million and $1.0 billion, respectively, and decreased 5 percent from the prior-year periods. The sales decreases were primarily due to lower volumes and the negative impact of foreign currency translation, partially offset by the incremental sales impact from recent acquisitions. The Company's consolidated gross profit was $199.8 million and $363.4 million, respectively, for the second quarter and first six months of 2024, increases of 6 percent and 4 percent, respectively, from the prior-year periods. Diluted earnings per share was $1.26 and $1.97, respectively, for the second quarter and first six months of 2024, decreases of $0.01 and $0.09, respectively, from the prior-year periods.
RESULTS OF OPERATIONS
Net Sales
Net sales in the second quarter and first six months of 2024 were $543.3 million and $1.0 billion, respectively, and decreased 5 percent as compared to the prior-year periods. Sales were negatively impacted by changes in foreign exchange rates, principally due to the strengthening of the U.S. Dollar relative to the Argentine Peso and Turkish Lira. However, the Company increases prices in the local currency to offset the impact of currency devaluation in the Argentina and Turkey hyperinflationary economies. As a result, the net negative impact of foreign currency exchange rates on net sales was 1 percent in the second quarter and first six months of 2024 compared to the same periods in the prior year.
| Net Sales | |||||||||||||||||
| (In millions) | Q2 2024 | Q2 2023 | 2024 v 2023 | ||||||||||||||
| Water Systems | $ | 315.6 | $ | 321.7 | $ | (6.1) | |||||||||||
| Fueling Systems | 73.1 | 80.4 | (7.3) | ||||||||||||||
| Distribution | 190.5 | 193.1 | (2.6) | ||||||||||||||
| Eliminations/Other | (35.9) | (26.1) | (9.8) | ||||||||||||||
| Consolidated | $ | 543.3 | $ | 569.1 | $ | (25.8) | |||||||||||
| Net Sales | |||||||||||||||||
| (In millions) | YTD June 30, 2024 | YTD June 30, 2023 | 2024 v 2023 | ||||||||||||||
| Water Systems | $ | 602.2 | $ | 628.3 | $ | (26.1) | |||||||||||
| Fueling Systems | 135.2 | 153.1 | (17.9) | ||||||||||||||
| Distribution | 337.5 | 336.1 | 1.4 | ||||||||||||||
| Eliminations/Other | (70.7) | (63.8) | (6.9) | ||||||||||||||
| Consolidated | $ | 1,004.2 | $ | 1,053.7 | $ | (49.5) | |||||||||||
Net Sales-Water Systems
Water Systems net sales decreased 2 percent in the second quarter and 4 percent in the first six months of 2024, as compared to the prior-year periods. This sales decline was primarily due to lower volumes, which decreased due to weaker end market demand for large dewatering equipment. Sales decreased 2 percent in the second quarter and 1 percent in the first six months of 2024 due to the negative impact from foreign exchange rates, as compared to prior-year periods. The incremental sales impact from recent acquisitions favorably impacted sales 2 percent in the second quarter and first six months of 2024.
Water Systems net sales in the U.S. and Canada decreased 5 percent in the second quarter and 8 percent in the first six months of 2024, as compared to the prior-year periods. In the second quarter of 2024, sales of large dewatering equipment decreased 44 percent, sales of water treatment products increased 13 percent, sales of all other surface pumping equipment increased 11 percent and sales of groundwater pumping equipment increased 6 percent compared to 2023. In the first half of 2024, sales of large dewatering equipment decreased 47 percent, sales of groundwater pumping equipment decreased 1 percent, sales of water treatment products increased 13 percent and sales of all other surface pumping equipment increased 6 percent compared to 2023.
22
Water Systems net sales in markets outside the U.S. and Canada increased 3 percent in the second quarter and first six months of 2024, as compared to the prior-year periods. Sales decreased 4 percent in the second quarter and 3 percent in the first six months of 2024 due to the negative impact from foreign exchange rates, as compared to prior-year periods. In both the second quarter and first half of 2024, outside the U.S. and Canada, excluding the impact of foreign currency translation, sales increased in all three major regions: EMEA, Latin America and Asia Pacific.
Net Sales-Fueling Systems
Fueling Systems net sales decreased 9 percent in the second quarter and 12 percent in the first six months of 2024, as compared to the prior-year periods. This sales decline was primarily due to lower volumes.
Fueling Systems net sales in the U.S. and Canada decreased 4 percent in the second quarter and 6 percent in the first six months of 2024, as compared to the prior-year periods. The decrease was primarily in fuel management systems and pumping systems. Outside the U.S. and Canada, Fueling Systems sales decreased 7 percent in the second quarter and 6 percent in the first six months of 2024, as compared to the prior-year periods, due primarily to lower sales in European and Asia Pacific markets.
Net Sales - Distribution
Distribution net sales decreased 1 percent in the second quarter and were flat in the first six months of 2024, as compared to the prior-year periods. The Distribution segment sales were negatively impacted by unfavorable weather conditions and commodity pricing declines, partially offset by the incremental sales impact from a recent acquisition which favorably impacted net sales by 2 percent in the second quarter and first six months of 2024.
Gross Profit and Expenses Ratios
| Three Months Ended June 30, | |||||||||||||||||||||||
| (In Millions) | 2024 | % of Net Sales | 2023 | % of Net Sales | |||||||||||||||||||
| Gross Profit | $ | 199.8 | 36.8 | % | $ | 188.5 | 33.1 | % | |||||||||||||||
| Selling, General and Administrative Expense | 120.6 | 22.2 | % | 107.4 | 18.9 | % | |||||||||||||||||
Six Months Ended June 30, | |||||||||||||||||||||||
| (In Millions) | 2024 | % of Net Sales | 2023 | % of Net Sales | |||||||||||||||||||
| Gross Profit | $ | 363.4 | 36.2 | % | $ | 350.7 | 33.3 | % | |||||||||||||||
| Selling, General and Administrative Expense | 236.3 | 23.5 | % | 217.0 | 20.6 | % | |||||||||||||||||
Gross Profit
The gross profit margin ratio was 36.8 percent and 36.2 percent in the second quarter and first six months of 2024, respectively, and 33.1 percent and 33.3 percent in the second quarter and first six months of 2023, respectively. The gross profit margin was impacted in the second quarter and first six months of 2024 by cost management, including lower freight costs in Water Systems and Fueling Systems, and a favorable product and geographic sales mix shift.
Selling, General, and Administrative ("SG&A")
SG&A expenses were $120.6 million in the second quarter and $236.3 million in the first half of 2024 compared to $107.4 million in the second quarter and $217.0 million in the first half of 2023. SG&A expenses increased in the second quarter and first half of 2024 primarily due to higher compensation costs and advertising and marketing expenses. The SG&A expenses ratio was 22.2 percent and 23.5 percent in the second quarter and first six months of 2024, respectively, and 18.9 percent and 20.6 percent in the second quarter and first six months of 2023, respectively.
Restructuring Expenses
There were no restructuring expenses in the second quarter and first six months of 2024, and $0.1 million and $0.3 million in the second quarter and first six months of 2023, respectively. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities, branch closings and consolidations.
Operating Income
Operating income in the second quarter and first half of 2024 was $79.1 million and $127.1 million, respectively, decreases of 2 percent and 5 percent, respectively, as compared to the prior-year periods.
23
| Operating income (loss) | ||||||||||||||||||||
| (In millions) | Q2 2024 | Q2 2023 | 2024 v 2023 | |||||||||||||||||
| Water Systems | $ | 62.3 | $ | 50.8 | $ | 11.5 | ||||||||||||||
| Fueling Systems | 26.0 | 26.7 | (0.7) | |||||||||||||||||
| Distribution | 9.8 | 17.8 | (8.0) | |||||||||||||||||
| Eliminations/Other | (19.0) | (14.4) | (4.6) | |||||||||||||||||
| Consolidated | $ | 79.1 | $ | 80.9 | $ | (1.8) | ||||||||||||||
| Operating income (loss) | ||||||||||||||||||||
| (In millions) | YTD June 30, 2024 | YTD June 30, 2023 | 2024 v 2023 | |||||||||||||||||
| Water Systems | $ | 109.5 | $ | 99.8 | $ | 9.7 | ||||||||||||||
| Fueling Systems | 44.8 | 47.5 | (2.7) | |||||||||||||||||
| Distribution | 11.7 | 22.5 | (10.8) | |||||||||||||||||
| Eliminations/Other | (38.9) | (36.3) | (2.6) | |||||||||||||||||
| Consolidated | $ | 127.1 | $ | 133.5 | $ | (6.4) | ||||||||||||||
Operating Income-Water Systems
Water Systems operating income in the second quarter and first six months of 2024 was $62.3 million and $109.5 million, respectively, increases of $11.5 million and $9.7 million, respectively, as compared to the prior-year periods. The increases were primarily due to cost management and a favorable product and geographic sales mix shift. The second quarter operating income margin was 19.7 percent, an increase of 390 basis points from 15.8 percent in the second quarter of 2023. The first six months of 2024 operating income margin was 18.2 percent, an increase of 230 basis points from 15.9 percent in the first six months of 2023. Operating income margin increased primarily due to cost management and a favorable product and geographic sales mix shift.
Operating Income-Fueling Systems
Fueling Systems operating income in the second quarter and first six months of 2024 was $26.0 million and $44.8 million, respectively, decreases of $0.7 million and $2.7 million, respectively, as compared to the prior-year periods. The decreases were primarily due to lower sales. The second quarter operating income margin was 35.6 percent, an increase of 240 basis points from 33.2 percent in the second quarter of 2023. The first six months of 2024 operating income margin was 33.1 percent, an increase of 210 basis points from 31.0 percent in the first six months of 2023. Operating income margin increased primarily due to price realization and cost management.
Operating Income-Distribution
Distribution operating income in the second quarter and first six months of 2024 was $9.8 million and $11.7 million, respectively, decreases of $8.0 million and $10.8 million, respectively, as compared to the prior-year periods. The second quarter operating income margin was 5.1 percent, a decrease of 410 basis points from 9.2 percent in the second quarter of 2023. The first six months of 2024 operating income margin was 3.5 percent, a decrease of 320 basis points from 6.7 percent in the first six months of 2023. Operating income and operating income margin decreased primarily due to the negative impact on sales from wet weather across much of the United States, decreases in pricing of commodity-based products sold through the business and increased SG&A costs.
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 second quarter and first six months of 2024 compared to the prior-year periods of 2023 was an unfavorable $2.9 million and $1.4 million, respectively. 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 increased $1.7 million and $1.2 million, respectively, compared to the prior-year periods, primarily due to higher compensation and professional fees.
Interest Expense
Interest expense was $2.0 million and $3.4 million in the second quarter and first six months of 2024, respectively, and $4.2 million and $7.3 million in the second quarter and first six months of 2023, respectively. The decreases in the second quarter and first six months of 2024 were primarily driven by lower debt.
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Other Income, Net
Other income, net was $0.2 million and $0.9 million in the second quarter and first six months of 2024, respectively, and $1.2 million and $1.6 million in the second quarter and first six months of 2023, respectively. The decreases were primarily due to lower interest income.
Foreign Exchange
Foreign currency-based transactions produced an expense of $0.4 million and $5.3 million in the second quarter and first six months of 2024, respectively, and an expense of $3.6 million and $5.6 million in the second quarter and first six months of 2023, respectively. The expense in 2024 was primarily due to transaction losses associated with the Argentine Peso and Turkish Lira relative to the U.S. dollar. The expense in 2023 was primarily due to transaction losses associated with the Turkish Lira, Argentine and Mexican Peso relative to the U.S. dollar. The Company reports the results of its subsidiaries in Argentina and Turkey using highly inflationary accounting, which requires that the functional currency of the entity be changed to the reporting currency of its parent.
Income Taxes
The provision for income taxes in the second quarter and first six months of 2024 was $17.6 million and $26.8 million, respectively, and $14.2 million and $24.4 million in the second quarter and first six months of 2023, respectively. The effective tax rate for the second quarter and first six months of 2024 was 22.9 percent and 22.5 percent, respectively, and 19.1 percent and 20.0 percent in the second quarter and the first six months of 2023, respectively. The increase in the effective tax rates for the second quarter and first six months of 2024 compared to the comparable periods in the prior year was a result of less favorable discrete events in 2024, primarily related to excess tax benefits from share-based compensation, in addition to an increase in the rate on foreign earnings with the implementation of European Union’s Pillar Two Directive.
Net Income
Net income in the second quarter and first six months of 2024 was $59.3 million and $92.4 million, respectively, and $60.2 million and $97.7 million in the second quarter and first six months of 2023, respectively. Net income attributable to Franklin Electric Co., Inc. in the second quarter and first six months of 2024 was $59.1 million and $92.1 million, respectively, or $1.26 and $1.97 per diluted share. Net income attributable to Franklin Electric Co., Inc. in the second quarter and first six months of 2023 was $59.6 million and $96.9 million, respectively, or $1.27 and $2.06 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 June 30, 2024 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 June 30, 2024, the Company had a $350.0 million revolving credit facility. The facility is scheduled to mature on May 13, 2026. As of June 30, 2024, the Company had $305.5 million borrowing capacity under its credit agreement as $3.5 million in letters of commercial and standby letters of credit were outstanding and undrawn and $41.0 million in revolver borrowings were drawn and outstanding, which were primarily used for funding working capital requirements.
In addition, 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"). On May 15, 2024, the Company entered into Amendment No. 1 that increased the total available facility amount from lenders to $250.0 million from $200.0 million. As of June 30, 2024, the remaining borrowing capacity on the New York Life Agreement was $175.0 million. The Company also maintains the Fourth Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement") with PGIM, Inc. and its affiliates. On May 15, 2024, the Company entered into Amendment No. 1 that increased the total available facility amount from lenders to $250.0 million from $150.0 million. The maturity dates of both agreements were extended from July 30, 2024 to May 15, 2027.
The Company also has other long-term debt borrowings outstanding as of June 30, 2024. See Note 10 - Debt included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, for additional information regarding these obligations and future maturities as well as Note 10 - Debt of this current quarterly report for changes to these agreements since December 31, 2023.
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At June 30, 2024, the Company had $53.0 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 the majority of 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 six months of 2024 and 2023.
| (in millions) | 2024 | 2023 | ||||||||||||
| Net cash flows from operating activities | $ | 35.0 | $ | 43.0 | ||||||||||
| Net cash flows from investing activities | (20.2) | (26.9) | ||||||||||||
| Net cash flows from financing activities | (38.7) | (5.4) | ||||||||||||
| Impact of exchange rates on cash and cash equivalents | (3.0) | (3.3) | ||||||||||||
| Change in cash and cash equivalents | $ | (26.9) | $ | 7.4 | ||||||||||
Cash Flows from Operating Activities
2024 vs. 2023
Net cash provided by operating activities was $35.0 million for the six months ended June 30, 2024 compared to $43.0 million provided by operating activities for the six months ended June 30, 2023. The change in operating cash flow was primarily due to lower earnings, partially offset by continued actions to improve working capital.
Cash Flows from Investing Activities
2024 vs. 2023
Net cash used in investing activities was $20.2 million for the six months ended June 30, 2024 compared to $26.9 million used in investing activities for the six months ended June 30, 2023. The change in investing cash flow was primarily attributable to decreased acquisition activity in the first six months of 2024.
Cash Flows from Financing Activities
2024 vs. 2023
Net cash used in financing activities was $38.7 million for the six months ended June 30, 2024 compared to $5.4 million used in financing activities for the six months ended June 30, 2023. The change in financing cash flow was primarily due to increased share repurchase activity and higher dividends in 2024 compared to 2023, partially offset by lower proceeds from option exercises and lower net borrowings under the Company's credit facility.
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, 2023, 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.
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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 second quarter ended June 30, 2024. 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, 2023.
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.
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 1. LEGAL PROCEEDINGS
The Company is defending various claims and legal actions which have arisen in the ordinary course of business. For a description of the Company's material legal proceedings, refer to Note 15 - Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1, "Notes to Condensed Consolidated Financial Statements (Unaudited)," of this Quarterly Report on Form 10-Q, which is incorporated into this Item 1 by reference. In the opinion of management, based on current knowledge of the facts and after discussion with counsel, other 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.
ITEM 1A. RISK FACTORS
There have been no material changes to the Company's risk factors as set forth in the annual report on Form 10-K for the fiscal year ended December 31, 2023. 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.
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. In February 2023, the Company’s Board of Directors approved a plan to increase the number of shares remaining for repurchase by an additional 1,000,000 shares. The authorization was in addition to the 215,872 shares that remained available for repurchase as of February 16, 2023. The Company repurchased 378,985 shares for approximately $37.0 million under the plan during the second quarter of 2024. The maximum number of shares that may still be purchased under this plan as of June 30, 2024 is 459,566.
| 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 | ||||||||||||||||||||||
| April 1 - April 30 | 51,682 | $ | 99.74 | 51,682 | 786,869 | |||||||||||||||||||||
| May 1 - May 31 | 140,340 | $ | 98.50 | 140,340 | 646,529 | |||||||||||||||||||||
| June 1 - June 30 | 186,963 | $ | 96.61 | 186,963 | 459,566 | |||||||||||||||||||||
| Total | 378,985 | $ | 97.74 | 378,985 | 459,566 | |||||||||||||||||||||
ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
| Number | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | First Amendment to Amended and Restated Note Purchase and Private Shelf Agreement, dated May 15, 2024, by and among Franklin Electric Co., Inc., Franklin Electric B.V., NYL Investors LLC , and the purchasers named therein (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on May 16, 2024) | ||||
| 10.6 | First Amendment to Fourth Amended and Restated Note Purchase and Private Shelf Agreement, dated May 15, 2024, by and among Franklin Electric Co., Inc., Franklin Electric B.V., Prudential Insurance Company, and the purchasers named therein (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed on May 16, 2024) | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following financial information from Franklin Electric Co., Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Statements of Income for the second quarters and six months ended June 30, 2024 and 2023 (ii) Condensed Consolidated Statements of Comprehensive Income/(Loss) for the second quarter and six months ended June 30, 2024 and 2023, (iii) Condensed Consolidated Balance Sheets as of June 30, 2024, and December 31, 2023, (iv) Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2024 and 2023, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith) | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
*Management Contract, Compensatory Plan or Arrangement
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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: July 26, 2024 | By | /s/ Joseph A. Ruzynski | |||||||||
Joseph A. Ruzynski , Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
Date: July 26, 2024 | By | /s/ Jeffery L. Taylor | |||||||||
Jeffery L. Taylor, Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial and Accounting Officer) | |||||||||||
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