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FRANKLIN ELECTRIC CO INC 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

Franklin Electric Co., Inc.

Filing date:

02/21/2025

TLDR:

Franklin Electric’s 2024 performance presents a mixed picture with increased gross profit but decreased net sales and diluted earnings per share. The company faces industry and business-specific risks but has opportunities in developing markets and strategic acquisitions.

ELI5:

Franklin Electric had a decent year, making more money on each sale, but selling slightly less overall. They face some challenges like economic uncertainty and competition, but also have chances to grow in new markets and by buying other companies.

Accession #:

0000038725-25-000026

Published on

Analyst Summary

  • Net Sales: $2.02 billion (2% decrease year-over-year)
  • Gross Profit: $717.3 million (increase of $20.3 million year-over-year)
  • Gross Profit Margin: 35.5% (vs. 33.8% in 2023)
  • Diluted Earnings per Share: $3.86 (6% decrease year-over-year)
  • Cash and Cash Equivalents: $220.5 million (increase from $85.0 million in 2023)
  • Available Borrowing Capacity (Revolving Credit Facility): $304.1 million
  • Current Ratio: 2.22 (2024) vs. 2.97 (2023)
  • Quick Ratio: 1.11 (2024) vs. 1.29 (2023)
  • Debt-to-Equity Ratio: 0.10 (2024) vs. 0.08 (2023)
  • Interest Coverage Ratio: 38.7 (2024) vs. 22.3 (2023)

Opportunities and Risks

  • Industry Risks: Reduced housing starts, volatility in commodity prices, growth of municipal water systems, and environmental legislation.
  • Business Risks: Political and economic risks in international operations, foreign currency exchange rate fluctuations, acquisition integration risks, intense competition, and reliance on key suppliers.
  • Cybersecurity Risks: Dependence on IT infrastructure and potential for disruptions due to cyberattacks.
  • Developing Markets: Expansion in developing markets with growing middle classes and increasing demand for water and energy systems.
  • Acquisitions: Strategic acquisitions to expand product lines and geographic reach.
  • Product Innovation: Continued investment in research and development to meet evolving customer needs.

Potential Implications

Stock Price

  • Monitor the company’s performance in key developing markets and the successful integration of recent acquisitions.
  • Closely monitor the performance of the Distribution segment and identify strategies to improve profitability.
  • Assess the impact of foreign currency fluctuations on earnings and implement hedging strategies where appropriate.
  • Continue to invest in research and development to maintain a competitive edge.

Franklin Electric Co., Inc. – 2024 10-K Filing Analysis

Executive Summary

This report analyzes Franklin Electric Co., Inc.’s 2024 10-K filing. Overall, the company presents a mixed picture. While gross profit increased, net sales decreased slightly, and diluted earnings per share declined. The company faces industry-specific risks related to housing starts, commodity prices, and environmental regulations, as well as business-specific risks associated with international operations, acquisitions, and competition. Opportunities exist in developing markets and through strategic acquisitions. A cautious approach is warranted, with a “Hold” recommendation. Further monitoring of macroeconomic conditions and the integration of recent acquisitions is advised.

Company Overview

Franklin Electric Co., Inc. (FELE) is a global manufacturer and distributor of water and fuel pumping systems. The company operates through three segments: Water Systems, Energy Systems, and Distribution. The company’s products are used in residential, agricultural, industrial, and fueling applications. Recent developments include the acquisition of PumpEng Pty Ltd. and a definitive agreement to acquire Barnes de Colombia S.A.

Detailed Analysis

Financial Statement Analysis

Key Financial Highlights

  • Net Sales: $2.02 billion (2% decrease year-over-year)
  • Gross Profit: $717.3 million (increase of $20.3 million year-over-year)
  • Gross Profit Margin: 35.5% (vs. 33.8% in 2023)
  • Diluted Earnings per Share: $3.86 (6% decrease year-over-year)

Segment Performance

Segment Net Sales (2024) Net Sales (2023) Operating Income (2024) Operating Income (2023)
Water Systems $1,184.0 million $1,203.7 million $197.9 million $196.6 million
Energy Systems $273.7 million $296.5 million $93.6 million $92.7 million
Distribution $685.5 million $673.3 million $24.3 million $34.3 million

Analysis: Water Systems sales decreased slightly, while operating income remained relatively flat. Energy Systems experienced a sales decline but improved operating income margin. Distribution saw increased sales but a significant decrease in operating income, attributed to weather, commodity pricing, and increased SG&A costs.

Liquidity and Capital Resources

  • Cash and Cash Equivalents: $220.5 million (increase from $85.0 million in 2023)
  • Available Borrowing Capacity (Revolving Credit Facility): $304.1 million

Analysis: The company maintains a strong liquidity position with significant cash reserves and available borrowing capacity. This provides flexibility for future investments and acquisitions.

Management’s Discussion and Analysis (MD&A) Insights

  • Management attributes the sales decrease to lower volumes and unfavorable foreign currency translation.
  • Gross profit margin improvement is attributed to cost management and favorable sales mix.
  • Increased SG&A expenses are due to higher employee compensation costs and acquisition-related expenses.

Risk and Opportunity Assessment

Key Risks

  • Industry Risks: Reduced housing starts, volatility in commodity prices, growth of municipal water systems, and environmental legislation.
  • Business Risks: Political and economic risks in international operations, foreign currency exchange rate fluctuations, acquisition integration risks, intense competition, and reliance on key suppliers.
  • Cybersecurity Risks: Dependence on IT infrastructure and potential for disruptions due to cyberattacks.

Key Opportunities

  • Developing Markets: Expansion in developing markets with growing middle classes and increasing demand for water and energy systems.
  • Acquisitions: Strategic acquisitions to expand product lines and geographic reach.
  • Product Innovation: Continued investment in research and development to meet evolving customer needs.

Uncommon Metrics & Red Flags

  • Foreign Currency Impact: The company is significantly impacted by foreign currency fluctuations, particularly in Argentina and Turkey, which are designated as highly inflationary economies.
  • Restructuring Expenses: Increased restructuring expenses in 2024 suggest ongoing efforts to optimize cost structure, potentially indicating areas of underperformance.
  • Distribution Segment Performance: The decline in operating income for the Distribution segment raises concerns and warrants further investigation.

Conclusion & Actionable Insights

Franklin Electric faces a complex environment with both challenges and opportunities. While the company has a strong market position and a solid liquidity profile, it is vulnerable to macroeconomic factors and integration risks.

  • Recommendation: Hold. Monitor the company’s performance in key developing markets and the successful integration of recent acquisitions.
  • Action Items:
    • Closely monitor the performance of the Distribution segment and identify strategies to improve profitability.
    • Assess the impact of foreign currency fluctuations on earnings and implement hedging strategies where appropriate.
    • Continue to invest in research and development to maintain a competitive edge.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin:

    • Calculation: Gross Profit / Net Sales = $717.3 million / $2,021.3 million = 35.5%
    • Trend: 35.5% (2024) vs. 33.8% (2023). Percentage Change: (35.5 – 33.8) / 33.8 = 5.03%
    • Industry: The average gross profit margin for the industrial machinery manufacturing industry is around 30-40%. FELE’s gross profit margin is within this range.
  • Operating Profit Margin:

    • Calculation: Operating Income / Net Sales = $243.6 million / $2,021.3 million = 12.1%
    • Trend: 12.1% (2024) vs. 12.7% (2023). Percentage Change: (12.1 – 12.7) / 12.7 = -4.72%
    • Industry: The average operating profit margin for the industrial machinery manufacturing industry is around 10-15%. FELE’s operating profit margin is within this range.
  • Net Profit Margin:

    • Calculation: Net Income / Net Sales = $181.6 million / $2,021.3 million = 9.0%
    • Trend: 9.0% (2024) vs. 9.4% (2023). Percentage Change: (9.0 – 9.4) / 9.4 = -4.26%
    • Industry: The average net profit margin for the industrial machinery manufacturing industry is around 5-10%. FELE’s net profit margin is within this range.
  • Return on Assets (ROA):

    • Calculation: Net Income / Total Assets = $181.6 million / $1,820.6 million = 10.0%
    • Trend: 10.0% (2024) vs. 11.3% (2023). Percentage Change: (10.0 – 11.3) / 11.3 = -11.50%
    • Industry: The average ROA for the industrial machinery manufacturing industry is around 5-10%. FELE’s ROA is above this range.
  • Return on Equity (ROE):

    • Calculation: Net Income / Total Equity = $181.6 million / $1,268.6 million = 14.3%
    • Trend: 14.3% (2024) vs. 16.1% (2023). Percentage Change: (14.3 – 16.1) / 16.1 = -11.18%
    • Industry: The average ROE for the industrial machinery manufacturing industry is around 10-15%. FELE’s ROE is within this range.
  • Earnings Per Share (EPS) – Basic and Diluted:

    • Basic EPS: $3.92
    • Diluted EPS: $3.86
    • Trend: Basic EPS decreased from $4.17 in 2023. Diluted EPS decreased from $4.11 in 2023.
    • Industry: EPS varies widely. It’s best to compare FELE’s EPS to its direct competitors.

Liquidity

  • Current Ratio:

    • Calculation: Current Assets / Current Liabilities = $964.2 million / $433.7 million = 2.22
    • Trend: 2.22 (2024) vs. 2.97 (2023). Percentage Change: (2.22 – 2.97) / 2.97 = -25.25%
    • Industry: A current ratio of 1.5 to 2.0 is generally considered healthy. FELE’s current ratio is within this range.
  • Quick Ratio (Acid-Test Ratio):

    • Calculation: (Current Assets – Inventories) / Current Liabilities = ($964.2 million – $483.9 million) / $433.7 million = 1.11
    • Trend: 1.11 (2024) vs. 1.29 (2023). Percentage Change: (1.11 – 1.29) / 1.29 = -13.95%
    • Industry: A quick ratio of 1.0 or greater is generally considered healthy. FELE’s quick ratio is slightly above this range.
  • Cash Ratio:

    • Calculation: Cash and Cash Equivalents / Current Liabilities = $220.5 million / $433.7 million = 0.51
    • Trend: 0.51 (2024) vs. 0.30 (2023). Percentage Change: (0.51 – 0.30) / 0.30 = 70.00%
    • Industry: A cash ratio of 0.5 or greater is generally considered healthy. FELE’s cash ratio is within this range.

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Calculation: Total Debt / Total Equity = ($11.6 million + $117.8 million) / $1,268.6 million = 0.10
    • Trend: 0.10 (2024) vs. 0.08 (2023). Percentage Change: (0.10 – 0.08) / 0.08 = 25.00%
    • Industry: A debt-to-equity ratio of 1.0 or less is generally considered healthy. FELE’s debt-to-equity ratio is well below this range.
  • Debt-to-Assets Ratio:

    • Calculation: Total Debt / Total Assets = ($11.6 million + $117.8 million) / $1,820.6 million = 0.07
    • Trend: 0.07 (2024) vs. 0.12 (2023). Percentage Change: (0.07 – 0.12) / 0.12 = -41.67%
    • Industry: A debt-to-assets ratio of 0.5 or less is generally considered healthy. FELE’s debt-to-assets ratio is well below this range.
  • Interest Coverage Ratio (Times Interest Earned):

    • Calculation: Operating Income / Interest Expense = $243.6 million / $6.3 million = 38.7
    • Trend: 38.7 (2024) vs. 22.3 (2023). Percentage Change: (38.7 – 22.3) / 22.3 = 73.54%
    • Industry: An interest coverage ratio of 1.5 or greater is generally considered healthy. FELE’s interest coverage ratio is well above this range.

Activity/Efficiency

  • Inventory Turnover:

    • Calculation: Cost of Sales / Average Inventory = $1,304.1 million / (($508.7 million + $483.9 million) / 2) = 2.63
    • Trend: 2.63 (2024) vs. 2.77 (2023). Percentage Change: (2.63 – 2.77) / 2.77 = -5.05%
    • Industry: Inventory turnover varies widely by industry. It’s best to compare FELE’s inventory turnover to its direct competitors.
  • Days Sales Outstanding (DSO):

    • Calculation: (Average Accounts Receivable / Net Sales) * 365 = (($226.8 million + $222.4 million) / 2) / $2,021.3 million * 365 = 41.4 days
    • Trend: 41.4 days (2024) vs. 39.4 days (2023). Percentage Change: (41.4 – 39.4) / 39.4 = 5.08%
    • Industry: DSO varies widely by industry. It’s best to compare FELE’s DSO to its direct competitors.
  • Days Payable Outstanding (DPO):

    • Calculation: (Average Accounts Payable / Cost of Sales) * 365 = (($157.0 million + $152.4 million) / 2) / $1,304.1 million * 365 = 42.4 days
    • Trend: 42.4 days (2024) vs. 40.7 days (2023). Percentage Change: (42.4 – 40.7) / 40.7 = 4.18%
    • Industry: DPO varies widely by industry. It’s best to compare FELE’s DPO to its direct competitors.
  • Asset Turnover:

    • Calculation: Net Sales / Average Total Assets = $2,021.3 million / (($1,820.6 million + $1,728.1 million) / 2) = 1.15
    • Trend: 1.15 (2024) vs. 1.20 (2023). Percentage Change: (1.15 – 1.20) / 1.20 = -4.17%
    • Industry: Asset turnover varies widely by industry. It’s best to compare FELE’s asset turnover to its direct competitors.

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Calculation: Stock Price / EPS = $104.24 / $3.92 = 26.6
    • Trend: N/A
    • Industry: The average P/E ratio for the industrial machinery manufacturing industry is around 20-30. FELE’s P/E ratio is within this range.
  • Price-to-Book Ratio (P/B):

    • Calculation: Market Cap / Book Value of Equity = (45.716 million shares * $104.24) / $1,266.1 million = 3.77
    • Trend: N/A
    • Industry: The average P/B ratio for the industrial machinery manufacturing industry is around 2-4. FELE’s P/B ratio is within this range.
  • Price-to-Sales Ratio (P/S):

    • Calculation: Market Cap / Net Sales = (45.716 million shares * $104.24) / $2,021.3 million = 2.36
    • Trend: N/A
    • Industry: The average P/S ratio for the industrial machinery manufacturing industry is around 1-3. FELE’s P/S ratio is within this range.
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Calculation: EV = Market Cap + Total Debt – Cash = (45.716 million shares * $104.24) + ($11.6 million + $117.8 million) – $220.5 million = $4,765.2 million + $129.4 million – $220.5 million = $4,674.1 million
    • EBITDA = Operating Income + Depreciation and Amortization = $243.6 million + $56.1 million = $299.7 million
    • EV/EBITDA = $4,674.1 million / $299.7 million = 15.6
    • Trend: N/A
    • Industry: The average EV/EBITDA ratio for the industrial machinery manufacturing industry is around 10-15. FELE’s EV/EBITDA ratio is slightly above this range.

Growth Rates

  • Revenue Growth:

    • Calculation: (Current Revenue – Previous Revenue) / Previous Revenue = ($2,021.3 – $2,065.1) / $2,065.1 = -2.12%
    • Trend: N/A
  • Net Income Growth:

    • Calculation: (Current Net Income – Previous Net Income) / Previous Net Income = ($181.6 – $194.7) / $194.7 = -6.73%
    • Trend: N/A
  • EPS Growth:

    • Calculation: (Current EPS – Previous EPS) / Previous EPS = ($3.92 – $4.17) / $4.17 = -6.00%
    • Trend: N/A

Other Relevant Metrics

  • Segment Performance:

    • Water Systems: Sales decreased from $1,203.7 million in 2023 to $1,184.0 million in 2024. Operating income increased slightly from $196.6 million to $197.9 million.
    • Energy Systems: Sales decreased from $296.5 million in 2023 to $273.7 million in 2024. Operating income increased slightly from $92.7 million to $93.6 million.
    • Distribution: Sales increased from $673.3 million in 2023 to $685.5 million in 2024. Operating income decreased from $34.3 million to $24.3 million.
  • Pension Plan:

    • The company has both pension and other post-retirement benefit plans. The pension plan is underfunded, with benefit obligations exceeding plan assets.
  • Share Repurchases:

    • The company repurchased $53.1 million of its common stock in 2024.

Commentary

Franklin Electric’s financial performance in 2024 shows a mixed picture. While gross profit margin improved, operating and net profit margins declined slightly, indicating increased operating expenses. Revenue decreased slightly, driven by declines in Water and Energy Systems, offset by growth in Distribution. The company maintains a strong balance sheet with healthy liquidity and low leverage. Overall, FELE remains financially sound, but needs to focus on improving operational efficiency and revenue growth.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️