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(Exact name of registrant as specified in its charter)
iIndiana
i35-0827455
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i9255 Coverdale Road
iFort
Wayne,
iIndiana
i46809
(Address of principal
executive offices)
(Zip Code)
(i260) i824-2900
(Registrant's telephone number, including area code)
iNot
Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
iCommon Stock, $0.10 par value
iFELE
iNASDAQ
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.
iYes
☒
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).
1
iYes
☒
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.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
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
i☐
No
☒
Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iCONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet as
of December 31, 2018, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of September 30, 2019, and for the third quarters and nine months ended September 30, 2019 and September 30, 2018 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 third quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019. 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, 2018.
2. iACCOUNTING
PRONOUNCEMENTS
i
Adoption of New Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). The ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The Company prospectively adopted the standard in the third quarter of 2019, and it did not have a material impact on the consolidated financial position, results of operations,
and cash flows.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act") and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and may be applied either at the beginning of the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The
Company adopted the standard effective January 1, 2019 and did not reclassify tax effects stranded in accumulated other comprehensive loss. As such, there is no impact on the Company’s consolidated financial position, results of operations, and cash flows as a result of the adoption of the ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases found in Accounting Standards Codification (“ASC”) Topic 840. This ASU requires lessees to present right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. In July 2018, the FASB issued ASU 2018-10, Codification Improvements
to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-10 clarifies certain aspects of Topic 842, including the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. ASU 2018-11 allows entities adopting ASU 2016-02 to choose an additional (and optional) transition method of adoption, under which an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, ASU 2018-11 allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The guidance is to
be applied using either the transition method prescribed in ASU 2018-11 or a modified retrospective approach at the beginning of the earliest comparative period in the financial statements.
The Company adopted the standard effective January 1, 2019 utilizing the optional transition method prescribed in ASU 2018-11. The Company utilized the transition practical expedients, per ASC 842-10-65-11, that are permitted with the new standard when elected as a package. The Company will also utilize other available practical expedients, including the election not to separate non-lease components and the election to use hindsight when determining
the lease terms. Finally, the Company has made an accounting policy election to not present leases with an initial term of 12 months or less (short-term leases) on the balance sheet.
11
The Company has recorded on the Balance Sheet ROU assets and lease liabilities. The initial ROU asset at the implementation of the standard was approximately $26.3 million with a corresponding lease liability of the same amount. The Company segregated the lease liabilities between short term and long term based on the related contractual maturities. The
Company has recognized the cash paid for lease liabilities in the Statement of Cash Flows. The Company did not have an adjustment to retained earnings as a result of the adoption of this standard. Additional disclosures regarding the Company’s leases can be found in Footnote 14 - Commitments and Contingencies.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09). Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”)
Topic 605, Revenue Recognition (“Topic 605”), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. The Company made the accounting policy election allowed by ASC 606-10-32-2A to continue to present sales tax on a net basis, consistent with current guidance in ASC 605-45-15-2(e). The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company adopted ASU 2014-09 during the first quarter
ended March 31, 2018 utilizing the modified retrospective approach. The adoption of this ASU did not have a material impact to the Company’s condensed consolidated financial position, results of operations, or cash flow; however, the adoption of this ASU requires the Company to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company completed its assessment of the additional disclosure requirements with the following results:
Disaggregation
of Revenue
The adoption of this ASU requires the Company to disaggregate revenue into categories to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors. As evidenced in Footnote 13 Segment and Geographic Information, the Company’s business consists of the Water, Fueling, Distribution, and Other segments. The Other segment includes unallocated corporate expenses and intersegment eliminations. A reconciliation of disaggregated revenue to segment revenue as well as Water Segment revenue by geographical regions is provided in Footnote 13, consistent with how the Company evaluates financial performance.
Performance
Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. The Company typically sells its products to customers by purchase order, and does not have any additional performance obligations included in contracts to customers other than the shipment of products. The Company records net sales revenues after discounts at the time of sale based on specific discount programs in effect, related historical data, and experience. The
Company typically ships products FOB shipping at which point control of the products passes to the customers. Any shipping and handling fees prior to shipment are considered activities required to fulfill the Company’s promise to transfer goods, and do not qualify as a separate performance obligation. Shipping and handling costs are recorded as a component of cost of sales. Additionally, the Company offers assurance-type warranties (vs. service warranties) which do not qualify as a separate performance obligation. Therefore, the Company allocates the transaction price based on a single performance obligation. The Company offers normal
and customary trade terms to its customers, no significant part of which is of an extended nature. The Company considers the performance obligation satisfied and recognizes revenue at a point in time, the time of shipment. The Company does not generally allow for refunds or returns to customers and does not have outstanding performance obligations for contracts with original durations of greater than one year at the end of the reporting period.
The
Company does not have outstanding contracts with an original term greater than one year; therefore, the Company expenses costs to obtain a contract as incurred.
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
12
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 January 2017, the FASB issued 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 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.
3. iACQUISITIONS
During the third quarter
ended September 30, 2019, the Company acquired i100 percent of the ownership interests of First Sales, LLC, an Indiana manufacturer of water treatment and filtration equipment for the residential and commercial markets, which are sold through some of the sames channels as other Company products
in the Water segment, for a purchase price of approximately $i15.5 million after working capital adjustments. The operating results from the date of acquisition through September 30, 2019 were not material to the Company as a whole. Annual net sales are estimated to be less than two percent of consolidated net sales and the fair value of the
acquired assets are estimated to be less than one percent of consolidated total assets. The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and the acquired interest since the beginning of 2019, as the results of operations for this acquisition is immaterial. The fair value of the assets acquired and liabilities assumed are preliminary as of September 30, 2019.
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 i100 percent. The redemption of this interest was immaterial.
During the first quarter ended March 31, 2019, the
Company acquired i100 percent of the ownership interests of Mt. Pleasant, Michigan-based Milan Supply Company ("Milan Supply"), for a purchase price of approximately $i6.1
million after working capital adjustments. Milan Supply is a professional groundwater distributor operating six locations in the State of Michigan. Milan Supply is part of the Company’s Distribution Segment, which is a collection of professional groundwater equipment distributors. The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and the acquired interest since the beginning of 2019, as the results of operations for this acquisition is immaterial. The fair value of the assets acquired and the liabilities assumed are preliminary as of September 30, 2019.
During
the third quarter ended September 30, 2018, the Company acquired, in separate transactions, substantially all of the assets of Stationary Power Division ("SPD") of Midtronics, Inc., and i100 percent of the ownership interest in Industrias Rotor Pump S.A. ("Industrias Rotor Pump"). The
fair value of the assets acquired and liabilities assumed for both acquisitions are considered final as of September 30, 2019 with a combined purchase price of $i37 million. The acquisitions were not material individually or in the aggregate.
Transaction costs were expensed as incurred under the guidance of FASB
Accounting Standards Codification Topic 805, Business Combinations. There were $i0.0 million and $i0.1
million of transaction costs included in the "Selling, general, and administrative expenses" line of the Company's condensed consolidated statements of income for the third quarter and nine months ended September 30, 2019 respectively. There were $i0.1
million and $i0.3 million of transaction costs incurred in the third quarter and nine months ended September 30, 2018, respectively.
4.
iFAIR 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:
13
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.
i
As of September 30, 2019 and December 31, 2018, the assets measured at fair value on a recurring basis were as set forth in the table below:
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Cash equivalents
$
i2.5
$
i2.5
$
i—
$
i—
/
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 $i173.9
million and $i206.3 million and estimated fair values of $i180.7
million and $i205.0 million as of September 30, 2019 and December 31, 2018, respectively. In the absence of quoted prices in active markets, considerable judgment
is required in developing estimates of fair value. Estimates are not necessarily 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. iFINANCIAL
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 i30
days' written notice by either party. As of September 30, 2019, the swap had a notional value based on i255,000 shares. For the third quarter and nine months ended September 30,
2019, the swap resulted in a gains of $i0.0 million and $i1.0
million, respectively. For the third quarter and nine months ended September 30, 2018, the swap resulted in gains of $i0.4
million and $i0.1 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. iGOODWILL AND OTHER INTANGIBLE ASSETS
ii
The
carrying amounts of the Company’s intangible assets are as follows:
Defined Benefit Plans - As of September 30, 2019, the Company maintained itwo
domestic pension plans and ithree German pension plans. The Company used a December 31, 2018 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 itwo domestic and ithree
German plans collectively comprise the 'Pension Benefits' disclosure caption.
Other Benefits - The Company's other post-retirement benefit plan provides health and life insurance to domestic employees hired prior to 1992.
i
The
following table sets forth the aggregated net periodic benefit cost for all pension plans for the third quarters and nine months ended September 30, 2019 and September 30, 2018:
In
the nine months ended September 30, 2019, the Company made contributions of $i1.5 million to the funded plans. The amount of contributions to be made to the plans during the calendar year 2019 was finalized by September 15, 2019, based upon
the funding level requirements identified and year-end valuation performed at December 31, 2018.
i
The following table sets forth the aggregated net periodic benefit cost for the other post-retirement benefit plan for the third quarters and nine months ended September 30,
2019 and September 30, 2018:
The Company’s effective tax rate from continuing operations for the nine month period ended September 30, 2019 was i18.9
percent as compared to i11.9 percent for the nine month period ended September 30, 2018. The effective tax rate is lower than the U.S. statutory rate of i21
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. For the third quarter of 2019 the effective tax rate was i19.8 percent as compared to i16.1
percent for the third quarter of 2018.
The increase in the effective tax rate for the nine months ended September 30, 2019, compared with the same period in 2018, was primarily a result of the release of a valuation allowance of $i5.4
million related to state net operating losses and incentives during the first quarter of 2018.
Debt
outstanding, excluding unamortized debt issuance costs, at September 30, 2019 matures as follows:
(In millions)
Total
Year
1
Year 2
Year 3
Year 4
Year 5
More Than 5 Years
Debt
$
i173.9
$
i80.7
$
i1.2
$
i1.3
$
i1.3
$
i1.4
$
i88.0
Financing
Leases
i0.1
i—
i0.1
i—
i—
i—
i—
$
i174.0
$
i80.7
$
i1.3
$
i1.3
$
i1.3
$
i1.4
$
i88.0
/
Prudential
Agreement
The Company maintains the Third Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement") with an initial borrowing capacity of $i250.0 million. The Company paid the remaining principal
balance of the previously issued notes during the second quarter of 2019. As of September 30, 2019, the Company has $i150.0 million borrowing capacity available under the Prudential Agreement. There is no additional borrowing capacity resulting from principal payments
made by the Company.
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 $i25.0
million. These Project Notes ("Tax increment financing debt") bear interest at i3.6 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 $i200.0
million. On September 26, 2018, the Company issued and sold $i75.0 million of fixed rate senior notes due September 26, 2025. These senior notes bear an interest
rate of i4.04 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 September 30, 2019, there was $i125.0
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 $i300.0
million. The Credit Agreement provides that the Borrowers may request an increase in the aggregate commitments by up to $i150.0 million (not to exceed a total commitment of $i450.0
million). Under the Credit Agreement, the Borrowers are required to pay certain fees, including a facility fee of i0.100% to i0.275% (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 i0.75% to i1.60% (depending
on the Company's leverage ratio) or (ii) an alternative base rate as defined in the Credit Agreement.
17
As of September 30, 2019, the Company had $i79.1
million in outstanding borrowings which were primarily used for working capital needs, the payment of existing indebtedness and acquisitions, $i5.0 million in letters of credit outstanding, and $i215.9
million of available capacity under the Credit Agreement.
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 i1.00 to i3.50
and a minimum interest coverage ratio of i1.00 to i3.00.
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 $i10.0 million. The Company was in compliance with all financial covenants as of September 30,
2019.
10. iEARNINGS 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.
i
The
following table sets forth the computation of basic and diluted earnings per share:
Net
income attributable to Franklin Electric Co., Inc.
$
i33.9
$
i30.0
$
i75.7
$
i81.7
Less:
Earnings allocated to participating securities
i0.2
i0.2
i0.5
i0.6
Net
income available to common shareholders
$
i33.7
$
i29.8
$
i75.2
$
i81.1
Denominator:
Basic
weighted average common shares outstanding
i46.4
i46.7
i46.3
i46.7
Effect
of dilutive securities:
Non-participating employee stock options and performance awards
i0.3
i0.5
i0.4
i0.5
Diluted
weighted average common shares outstanding
i46.7
i47.2
i46.7
i47.2
Basic
earnings per share
$
i0.73
$
i0.64
$
i1.62
$
i1.74
Diluted
earnings per share
$
i0.72
$
i0.63
$
i1.61
$
i1.72
/
There
were i0.3 million and i0.2
million stock options outstanding for the third quarters ended September 30, 2019 and September 30, 2018, and i0.3 million and i0.2
million stock options outstanding for the nine months ended September 30, 2019 and September 30, 2018 respectively, that were excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive.
12. iACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
i
Changes
in accumulated other comprehensive income/(loss) by component for the nine months ended September 30, 2019 and September 30, 2018, are summarized below:
(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.
Amounts related to noncontrolling interests were not material.
13. iSEGMENT
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. During the first quarter of 2019, the Company changed management reporting for transfers of certain products between the Water and Fueling
segments. This reclassification resulted in $i1.0 million of sales and $i0.0
million of operating income for the third quarter ended September 30, 2018 and $i2.8 million of sales and $i0.2
million of operating income for the nine months ended September 30, 2018 being reclassified between the Fueling segment and the Water segment. Additionally, the changes to management reporting had an impact on how the Company reviews and summarizes sales of geographical components within a
21
segment. The Company has updated the sales of geographical components of the Water Systems segment from prior year to align with current management reporting. The changes resulted in sales
reclassifications from Latin America, Asia Pacific, and Europe, Middle East, and Africa ("EMEA") to the U.S. and Canada for both the third quarter and nine months ended September 30, 2018. This resulted in $i3.4 million
and $i10 million of sales to be reclassified to the U.S. and Canada for the third quarter and nine months ended September 30, 2018, respectively. There is no impact on the
Company's previously reported consolidated financial position, results of operations, or cash flows.
i
Financial information by reportable business segment is included in the following summary:
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. iCOMMITMENTS 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 September 30, 2019, the Company had $i11.2
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 itwo years to ifive
years from date of manufacture or ione year to ifive 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.
i
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 nine months ended September 30, 2019, are as follows:
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.
i
The components of the
Company’s operating lease portfolio for both the third quarter and the nine months ended September 30, 2019 are as follows:
23
Lease Cost (in millions):
Third Quarter Ended
Nine
Months Ended
Operating lease cost
$
i2.4
$
i7.6
Short-term
lease cost
i—
i0.1
Other
Information:
Weighted-average remaining lease term
i6 years
Weighted-average
discount rate
i3.9
%
i
The
minimum rental payments for non-cancellable operating leases as of September 30, 2019, are as follows:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Future
Minimum Rental Payments
$
i2.5
$
i8.4
$
i5.8
$
i3.6
$
i2.5
$
i5.9
The
minimum rental payments for non-cancellable operating leases as of December 31, 2018, were reported as follows:
(In millions)
2019
2020
2021
2022
2023
Thereafter
Future
Minimum Rental Payments
$
i8.9
$
i5.9
$
i3.5
$
i2.0
$
i1.1
$
i5.7
/
15.
iSHARE-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 i1,400,000. Stock
options and SARs reduce the number of available shares by ione 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 i1.5
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.
i
The
2012 Stock Plan authorized i2,400,000 shares for issuance as follows:
2012 Stock Plan
Authorized
Shares
Stock Options
i1,680,000
Stock/Stock Unit Awards
i720,000
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 i4,400,000 shares for issuance as follows:
2009
Stock Plan
Authorized Shares
Stock Options
i3,200,000
Stock Awards
i1,200,000
/
All
options in the 2009 Stock Plan have been awarded.
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.
24
i
The
assumptions used for the Black-Scholes model to determine the fair value of options granted during the nine months ended September 30, 2019 and September 30, 2018 are as follows:
A
summary of the weighted-average remaining contractual term and aggregate intrinsic value as of September 30, 2019 is as follows:
Weighted-Average Remaining Contractual Term
Aggregate Intrinsic Value (000's)
Outstanding at end of
period
i6.27 years
$
i14,445
Expected
to vest after applying forfeiture rate
i6.26 years
$
i14,416
Vested
and exercisable at end of period
i4.88 years
$
i11,520
/
The
total intrinsic value of options exercised during the nine months ended September 30, 2019 and September 30, 2018 was $i3.8
million and $i9.4 million, respectively.
As of September 30, 2019, there was $i1.7
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 i1.69 years.
Stock/Stock Unit Awards:
i
A
summary of the Company’s restricted stock/stock unit award activity and related information for the nine months ended September 30, 2019 is as follows:
As
of September 30, 2019, there was $i10.0 million of total unrecognized compensation cost related to non-vested restricted stock/stock unit awards granted under the 2012 Stock Plan and the 2009 Stock Plan. That cost is expected to be recognized
over a weighted-average period of i1.48 years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Third
Quarter 2019 vs. Third Quarter 2018
OVERVIEW
Sales in the third quarter of 2019 increased from the third quarter last year. The sales increase was led by acquisition related sales, as well as all segments had sales increases from volume and price. The impact on sales due to foreign currency translation was a reduction of about 2 percent. The Company's consolidated gross profit was $117.6 million for the third quarter of 2019, an increase of $4.6 million or about 4 percent from the prior year’s third quarter. Earnings benefited from foreign exchange gains. Earnings per share in the third quarter of 2019 were up to the same period last year by about 14 percent.
RESULTS
OF OPERATIONS
Net Sales
Net sales in the third quarter of 2019 were $348.4 million, an increase of $6.5 million or about 2 percent compared to 2018 third quarter sales of $341.9 million. Acquisition related sales were $9.6 million. Sales revenue decreased by $5.8 million or about 2 percent in the third quarter of 2019 due to foreign currency translation.
Net
Sales
(In millions)
Q3 2019
Q3 2018
2019 v 2018
Water Systems
$
199.8
$
199.3
$
0.5
Fueling
Systems
78.1
77.8
$
0.3
Distribution
87.0
78.0
$
9.0
Eliminations/Other
(16.5
)
(13.2
)
$
(3.3
)
Consolidated
$
348.4
$
341.9
$
6.5
Net
Sales-Water Systems
Water Systems sales were $199.8 million in the third quarter 2019, an increase of $0.5 million versus the third quarter 2018 sales of $199.3 million. In the third quarter of 2019, sales from businesses acquired since the third quarter of 2018 were $2.3 million. Water Systems sales were reduced by $4.9 million or about 2 percent in the quarter due to foreign currency translation. Water Systems sales, excluding acquisitions and the impact of foreign currency translation, were up about 2 percent compared to the third quarter 2018.
Water Systems sales in the U.S. and Canada increased by 1 percent overall compared to the third quarter 2018, primarily related to sales from acquisitions. Sales of dewatering equipment increased by 2 percent on the continued diversification of product sales and channels. Sales of groundwater
pumping equipment increased by 1 percent versus the third quarter 2018. The increase in groundwater pumping systems was primarily due to improved weather conditions in North America and increased sales to the Company’s Headwater Distribution segment. Sales of surface pumping equipment decreased by 4 percent on lower sales of both wastewater and condensation removal equipment.
26
Water Systems sales in markets outside the U.S. and Canada declined by 1 percent overall. Foreign currency translation decreased sales by 5 percent. Outside the U.S. and Canada, Water Systems organic sales increased by 4 percent, primarily driven by higher sales in Latin America and Europe, Middle East and Africa markets, partially offset by sales declines
in Asia Pacific.
Net Sales-Fueling Systems
Fueling Systems sales were $78.1 million in the third quarter 2019, an increase of $0.3 million versus the third quarter 2018 sales of $77.8 million. In the third quarter of 2019, sales decreased by $0.9 million or about 1 percent in the quarter due to foreign currency translation. Fueling Systems organic sales increased about 2 percent compared to the third quarter of 2018.
Fueling Systems sales in the U.S. and Canada increased by 10 percent compared to the third quarter 2018. The increase was principally in the fuel management systems and service station hardware product lines. Outside the U.S. and Canada, Fueling Systems revenues declined by 6 percent, primarily due to lower sales in China.
Net Sales-Distribution
Distribution
sales were $87.0 million in the third quarter 2019, versus third quarter 2018 sales of $78.0 million. In the third quarter of 2019, sales from businesses acquired since the third quarter of 2018 were $7.3 million. The Distribution segment organic sales increased about 2 percent compared to the third quarter of 2018.
Cost of Sales
Cost of sales as a percent of net sales for the third quarter of 2019 and 2018 was 66.2 percent and 67.0 percent, respectively. Correspondingly, the gross profit margin as a percent of net sales was 33.8 percent in the third quarter of 2019 compared to 33.0 percent in the third quarter of 2018. The Company's consolidated gross profit was $117.6 million for the third quarter of 2019, an increase of $4.6 million from the gross profit
of $113.0 million in the third quarter of 2018. The gross profit increase was primarily due to higher sales. In the third quarter, achieved sales price increases exceeded raw material inflation.
Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $74.5 million in the third quarter of 2019 compared to $72.5 million in the third quarter of the prior year. The increase in SG&A expenses from acquired businesses was $1.5 million. Excluding the acquired entities, the Company’s SG&A expenses in the third quarter of 2019 were $73.0 million, an increase of less than 1 percent from the third quarter 2018, partially due to the effect of foreign currency translations in the third quarter of
2019 versus the prior year.
Restructuring Expenses
Restructuring expenses for the third quarter of 2019 were $0.4 million, primarily in the Water segment and related to miscellaneous manufacturing realignment activities. Restructuring expenses for the third quarter of 2018 were $0.3 million, primarily in the Distribution segment and related to miscellaneous branch closings and consolidation.
Operating Income
Operating income was $42.7 million in the third quarter of 2019, up $2.6 million or 6 percent from $40.1 million in the third quarter of 2018.
Operating
income (loss)
(In millions)
Q3 2019
Q3 2018
2019 v 2018
Water Systems
$
28.4
$
28.4
$
—
Fueling
Systems
21.6
20.9
0.7
Distribution
5.9
3.1
2.8
Eliminations/Other
(13.2
)
(12.3
)
(0.9
)
Consolidated
$
42.7
$
40.1
$
2.6
Operating
Income-Water Systems
Water Systems operating income was $28.4 million in the third quarter 2019, flat compared to the $28.4 million in the third quarter 2018. Operating income margin was 14.2 percent in both the third quarter of 2019 and 2018.
Operating Income-Fueling Systems
Fueling Systems operating income was $21.6 million in the third quarter of 2019, up $0.7 million or about 3 percent compared to $20.9 million in the third quarter of 2018. The increase in operating income was primarily due to higher favorable product
27
sales mix. The third quarter of 2019 operating income margin was 27.7 percent versus 26.9 percent of net sales in the third quarter of 2018.
Operating
Income-Distribution
Distribution operating income was $5.9 million in the third quarter of 2019 and the third quarter operating income margin was 6.8 percent. Distribution operating income was $3.1 million in the third quarter of 2018 and the third quarteroperating income margin was 4.0 percent. Distribution’s operating income was higher in the third quarter due to higher sales volumes and acquisitions and leverage on operating expenses.
Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of inter-segment sales and profit eliminations and unallocated general and administrative expenses. The inter-segment profit elimination impact in the third quarter of 2019 compared to the third quarter of 2018 reduced
operating income about $0.7 million. The inter-segment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until the transferred product is sold from the Distribution segment to its customer. Unallocated general and administrative expenses were higher by $0.2 million or about 2 percent.
Interest Expense
Interest expense for the third quarter of 2019 and 2018 was $2.0 million and $2.4 million, respectively.
Other Income or Expense
Other income or expense was a loss of $0.3 million and $0.4 million in the third quarter of 2019 and 2018, respectively.
Foreign
Exchange
Foreign currency-based transactions produced a gain for the third quarter of 2019 of $2.1 million, primarily due to a $2.1 million gain from the Argentinian Peso relative to the U.S. dollar. Foreign currency-based transactions produced a loss for the third quarter of 2018 of $1.6 million, primarily due to changes in the Turkish Lira, South African Rand and Brazilian Real relative to the U.S. dollar.
Income Taxes
The provision for income taxes in the third quarter of 2019 and 2018 was $8.4 million and $5.7 million, respectively. The effective tax rate for the third quarter of 2019 was about 20 percent. Discrete events in the third quarter of 2019 were not significant. The effective tax rate for the third quarter of 2018 was about 16 percent and, before the impact of discrete events,
was about 20 percent. Discrete events in the third quarter of 2018 included excess tax benefits on stock-based compensation and the statute expiration of uncertain tax positions. The tax rate as a percentage of pre-tax earnings for the full year of 2019 is projected to be about 21 percent, compared to the full year 2018 tax rate of about 19 percent, both before the impact of discrete events.
Net Income
Net income for the third quarter of 2019 was $34.1 million compared to the prior year third quarter net income of $29.9 million. Net income attributable to Franklin Electric Co., Inc. for the third quarter of 2019 was $33.9 million, or $0.72 per diluted share, compared to the prior year third quarter net income attributable to Franklin Electric Co., Inc. of $30.0 million or $0.63 per diluted share.
First
Nine Months of 2019 vs. First Nine Months of 2018
OVERVIEW
Sales in the first nine months of 2019 were up from the same period last year. The sales increase was led by acquisitions. The impact of foreign currency translation decreased sales by about 3 percent. The Company's consolidated gross profit was $326.8 million for the first nine months of 2019, a decrease of $1.2 million or less than 1 percent from the first nine months of 2018. Earnings in the first nine months of 2019 were down from the same period last year.
RESULTS OF OPERATIONS
Net Sales
Net
sales in the first nine months of 2019 were $994.5 million, an increase of $13.0 million or about 1 percent compared to 2018 first nine months sales of $981.5 million. The incremental impact of sales from acquired businesses was $30.2 million. Sales revenue decreased by $29.0 million or 3 percent in the first nine months of 2019 due to foreign currency translation.
Water Systems sales were $593.2 million in the first nine months 2019, a decrease of $10.1 million or about 2 percent versus the first nine months of 2018. The incremental impact of sales from acquired businesses was $9.9 million. Foreign currency translation changes decreased sales $25.1 million, or about 4 percent, compared to sales in the first nine months of 2018. The Water Systems organic sales change in the first nine months of 2019 was an increase of $5.1 million or about 1 percent.
Water Systems sales in the U.S. and Canada increased by about 1 percent compared to the first nine months of 2018. The incremental impact of sales from acquired businesses was $2.3 million or about 1 percent. Sales revenue decreased by $2.5 million or about 1 percent in the first nine months of 2019 due to foreign currency translation.
In the first nine months of 2019, sales of Pioneer branded dewatering equipment increased by about 7 percent when compared to the prior year due to strength in North American oil and gas markets and continued diversification of product sales channels and geographies. Sales of groundwater pumping equipment decreased by about 5 percent on lower residential and agricultural system sales primarily to the Headwater companies, versus the first nine months of 2018. Sales of other surface pumping equipment increased by about 2 percent in the first nine months of the year, in part due to wet weather conditions in the upper Midwest and Canada in the first half of the year.
Water Systems sales in markets outside the U.S. and Canada decreased by about 4 percent compared to the first nine months of 2018. The incremental impact of sales from acquired businesses was $7.6 million or about 3 percent. Sales
revenue decreased by $22.6 million or about 8 percent in the first nine months of 2019 due to foreign currency translation. International Water Systems sales change in the first nine months of 2019, excluding acquisitions and foreign currency translation, was an increase of about 1 percent. International Water Systems sales growth in the Asia Pacific and Latin America markets were partially offset by lower sales in the European, Middle East and African markets.
Net Sales-Fueling Systems
Fueling Systems sales were $216.4 million in the first nine months of 2019, an increase of $6.9 million or about 3 percent from the first nine months of 2018. The incremental impact of sales from acquired businesses was $3.2 million. Foreign currency translation changes decreased sales $3.9 million or about 2 percent compared to sales in the first nine
months of 2018. The Fueling Systems organic sales change in the first nine months of 2019 was an increase of $7.6 million or about 4 percent.
Fueling Systems sales in the U.S. and Canada grew by about 11 percent during the first nine months with most of the sales growth coming from fuel management systems and service station hardware product lines. Internationally, Fueling Systems revenues declined by about 6 percent due to lower sales in Europe, Africa and China partially offset by higher sales in India and other regions. China sales were about $34 million in the first nine months of 2019 compared to the first nine months of 2018 Fueling Systems China sales of about $36 million.
Net Sales-Distribution
Distribution sales were $227.4 million
in the first nine months of 2019, versus the first nine months of 2018 sales of $213.7 million. The incremental impact of sales from acquired businesses was $17.1 million. Distribution segment organic sales decreased about 2 percent compared to the first nine months of 2018.
Cost of Sales
Cost of sales as a percent of net sales for the first nine months of 2019 and 2018 was 67.1 percent and 66.6 percent, respectively. Correspondingly, the gross profit margin was 32.9 percent and 33.4 percent, respectively. The Company's consolidated gross profit was $326.8 million for the first nine months of 2019, down $1.2 million from the gross profit of $328.0 million in the first nine months of 2018. The gross profit decrease was primarily due to lower sales in the
Water segment.
29
Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative expenses were $226.6 million in the first nine months of 2019 and increased by $2.9 million compared to $223.7 million in the first nine months of last year. The increase in SG&A expenses from acquired businesses was $7.3 million. Excluding the acquired entities, the Company’s SG&A expenses in the first nine months of 2019 decreased by $4.4 million or about 2 percent, partially due to the effect of foreign currency translation in 2019 versus the prior year.
Restructuring Expenses
Restructuring
expenses for the first nine months of 2019 were $1.8 million. Restructuring expenses were $1.0 million in the Water segment and $0.8 million in the Distribution segment. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities and branch closings and consolidations in the Distribution segment. Restructuring expenses for the first nine months of 2018 were $1.0 million. Restructuring expenses were $0.5 million in the Water segment, $0.2 million in the Fueling segment and $0.3 million in the Distribution segment. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities and branch closings and consolidations in the Distribution segment.
Operating Income
Operating income was $98.5 million in the first nine months of 2019, down $4.8 million or 5 percent
from $103.3 million in the first nine months of 2018.
Water Systems operating income was $78.5 million in the first nine months of 2019 compared to $85.7 million in the first nine months of 2018, a decrease of 8 percent. The first nine months operating income margin was 13.2 percent compared to the first nine months of 2018 operating income margin of 14.2 percent. Operating income margin decreased in Water Systems primarily due to lower sales volumes and unfavorable product and geographic sales mix shifts.
Operating Income-Fueling Systems
Fueling Systems operating income was $55.6 million in the first nine months of 2019 compared to $53.6 million in the first nine months of 2018. The first nine months operating income margin was 25.7 percent compared to 25.6 percent of net sales in the first nine months of 2018. Operating income
margin increased in Fueling Systems primarily due to higher sales volumes and favorable product and geographic sales mix shifts.
Operating Income-Distribution
Distribution operating income was $6.1 million in the first nine months of 2019 and operating income margin was 2.7 percent. Distribution operating income was $6.3 million in the first nine months of 2018 and operating income margin was 2.9 percent. Operating income margin decreased in Distribution due to lower sales volumes, partially offset by acquisitions.
Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of inter-segment sales and profit eliminations and unallocated general and administrative expenses. The
inter-segment profit elimination impact in the first nine months of 2019 increased operating income about $0.1 million. The inter-segment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until the transferred product is sold from the Distribution segment to its third-party customer. Unallocated general and administrative expenses were lower by $0.5 million or about 1 percent to last year in the first nine months.
Interest Expense
Interest expense for the first nine months of 2019 and 2018 was $6.7 million and $7.5 million, respectively.
30
Other
Income or Expense
Other income or expense was a loss of $0.3 million and $0.6 million, respectively in the first nine months of 2019 and 2018.
Foreign Exchange
Foreign currency–based transactions produced a gain for the first nine months of 2019 of $2.2 million, primarily due to a $2.3 million gain from the Argentinian Peso relative to the U.S. dollar. Foreign currency-based transactions for the first nine months of 2018 was a loss of $3.2 million due to movements in several currencies relative to the U.S. dollar, with the Turkish Lira, South African Rand and Mexican Peso being the most significant.
Income Taxes
The provision for income taxes in the first nine
months of 2019 and 2018 was $17.7 million and $10.9 million, respectively. The effective tax rate for the first nine months of 2019 was about 19 percent and, before the impact of discrete events, was about 21 percent. The effective tax rate for the first nine months of 2018 was about 12 percent and, before the impact of discrete events, was about 20 percent. Discrete events in 2018 included a net benefit related to the release of valuation allowances on deferred taxes in multiple jurisdictions. The tax rate as a percentage of pre-tax earnings for the full year of 2019 is projected to be about 21 percent, compared to the full year 2018 tax rate of about 19 percent, both before the impact of discrete events.
Net Income
Net income for the first nine months of 2019 was $76.0 million compared to 2018 first nine months net income of $81.2 million. Net income attributable to Franklin Electric
Co., Inc. for the first nine months of 2019 was $75.7 million, or $1.61 per diluted share, compared to 2018 first nine months net income attributable to Franklin Electric Co., Inc. of $81.7 million or $1.72 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 September 30,
2019 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 September 30, 2019the Company had a $300.0 million revolving credit facility. The facility is scheduled to mature on October 28, 2021. As of September 30,
2019, the Company had $215.9 million borrowing capacity under the Credit Agreement as $5.0 million in letters of commercial and standby letters of credit were outstanding and undrawn and $79.1 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 September 30, 2019. See Note 9 - Debt for additional specifics regarding these
obligations and future maturities.
At September 30, 2019, the Company had $41.3 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 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 nine months of 2019 and 2018.
(in
millions)
2019
2018
Net cash flows from operating activities
$
90.2
$
60.4
Net
cash flows from investing activities
(35.6
)
(56.4
)
Net cash flows from financing activities
(61.0
)
(28.5
)
Impact
of exchange rates on cash and cash equivalents
(5.0
)
(1.6
)
Change in cash and cash equivalents
$
(11.4
)
$
(26.1
)
31
Cash Flows from Operating Activities
2019 vs. 2018
Net cash provided by operating activities was $90.2 million for the nine months ended September 30, 2019 compared to $60.4 million provided by operating activities for the nine months ended September 30, 2018. The increase in cash provided by operating activities was due to a decrease of $32.9 million in working capital requirements, primarily in accounts payable and accrued expenses due to better payment terms with vendors as well as lower tax payments and contributions to employee benefit plans. Increases in cash provided were offset by uses of cash for other assets, which consisted primarily of prepaid assets.
Cash
Flows from Investing Activities
2019 vs. 2018
Net cash used in investing activities was $35.6 million for the nine months ended September 30, 2019 compared to $56.4 million used in investing activities for the nine months ended September 30, 2018. The decrease in cash used in investing activities is primarily attributable to decreased acquisition activity.
Cash Flows from Financing Activities
2019 vs. 2018
Net cash used in financing activities was $61.0 million for the nine months ended September 30, 2019 compared to $28.5 million used in financing activities for the nine months ended September
30, 2018. The increase in cash used in financing activities was primarily attributable to higher debt repayments, up approximately $23.5 million in the current year consistent with reduced acquisition activity. Other uses of cash in financing activities include dividend payments, which increased by $3.9 million in the current year compared to dividends paid in the prior year, and proceeds from common stock issuance, which decreased $6.4 million compared to prior year. These were offset by a decrease in common stock repurchases of $1.8 million in the current year compared to common stock repurchases in the prior year.
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, 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, 2018, 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 third quarter ended September 30, 2019. 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, 2018.
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. As of the quarter ended, all
business units previously on the primary legacy system have converted to the new ERP system. The second stage will convert those companies that remained on their local ERP system after the date of acquisition. The second stage is ongoing as of September 30, 2019.
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, 2018. 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
The Company did not repurchase any shares under its outstanding plan during the third quarter of 2019. The maximum number of shares that may still be purchased under
this plan as of September 30, 2019 is 1,255,970.
ITEM 6. EXHIBITS
Exhibits are set forth in the Exhibit Index located on page 36.
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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.
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.
