COMPANY UPDATE ESTIMATE CHANGE Key Metrics FELE - NASDAQ - as of 2/20/18 $39.85 Price Target -- 52-Week Range $36.00 - $47.20 Shares Outstanding (mm) 46.6 Market Cap. ($mm) $1,856.9 1-Mo. Average Daily Volume 123,520 Institutional Ownership 80.4% Net Debt/Total Capital Q4'17 17.1% ROE TTM 11.8% Book Value / Share Q4'17 $14.95 Price / Book Value 2.7x Dividend Yield 1.1% EBITDA Margin FY'17 12.9% EPS FY 12/31 Prior Current Prior Current 2017A 2018E 2018E 2019E 2019E 1Q *$0.34 -- $0.46 -- -- 2Q *$0.58 -- $0.68 -- -- 3Q *$0.53 -- $0.58 -- -- 4Q *0.42 -- $0.50 -- -- Year $1.87 $2.12 $2.22 $2.37 $2.38 P/E 21.3x 18.0x 16.7x * adjusted for special items Revenue ($MM) Prior Current Prior Current 2017A 2018E 2018E 2019E 2019E 1Q $220 -- $314 -- -- 2Q $305 -- $362 -- -- 3Q $311 -- $350 -- -- 4Q $288 -- $325 -- -- Year $1,125 $1,341 $1,352 $1,412 $1,423 Company Description: Founded in 1944 and incorporated in 1946, Franklin Electric designs, manufactures and distributes water and fuel pumping systems and equipment. With headquarters in Ft. Wayne, IN, FELE s products are sold worldwide by its employee sales force and independent manufacturing representatives. As of year-end 2016, the company employed ~5,200 persons. Industrials Analyst: Spencer E. Joyce, CFA 502.588.8402 // sjoyce@hilliard.com Institutional Trading: George Moorin 502.588.9141 // gmoorin@hilliard.com J.J.B. Hilliard, W.L. Lyons, LLC February 21, 2018 Franklin Electric Co., Inc. FELE NASDAQ Neutral-3 Q4 Results for FELE; Reiterating Neutral. FELE reported Q4 17 adjusted EPS of $0.42 versus $0.38 in Q4 16; results fell two cents shy of our target, which was also consensus. FY17 adjusted EPS grew 12.7% to $1.87, due primarily to operating income growth at the Fueling Systems segment. Q4 GAAP results were EPS of $0.17, but include a $0.04 restructuring charge and a $0.21 net tax expense related to the Tax Cuts and Jobs Act (TCJA). FY 2017 GAAP EPS were $1.66. Sales of $288MM (+20.3%) in Q4 missed both our estimate and consensus for $313MM, partially as we search for normalized results from the Headwater Distribution acquisitions. FY 2017 sales grew 18.4% to $1.12B; organic topline on the year: Fueling Systems (FS) +8.2%, Water Systems (WS) +3.3%. FELE gross margin bettered our expectations in Q4 but were nonetheless down 100bps from the prior period; full year margin compressed by 140bps, and could compress further in 2018, in our view, based on incremental contribution from Headwater and rising raw materials costs. FELE initiated 2018 adjusted EPS guidance in the range of $2.16 to $2.28; both Water and Fuel segments are expected to produce organic growth in the midsingle digit range. FELE expects its 2018 effective tax rate to fall between 13% and 17%, down about ten percentage points from its prior assumption. Our 2018E EPS rises a dime to $2.22, aided substantially by lower taxes; our 2019E EPS rises just a penny to $2.38. We are reiterating our Neutral rating. Guidance for Fueling Systems was slightly disappointing, in our view, as is initial performance from Headwater. Valuation is becoming attractive, although we do not necessarily identify a tradable catalyst at this point. Note Important Disclosures on Pages 5-6 Note Analyst Certification on Page 5
SUITABILITY We assign FELE a suitability rating of 3. A complete description of our suitability scale is on page 5. In our view, Franklin holds good competitive positions and operates with generally favorable long-term growth tailwinds, but faces competition from a relatively strong docket of companies and must deal with cyclicality in developing regions and in energy/agriculture end-markets. FELE s SMID-cap status and volatile stock price keep Franklin below our 2 suitability rating. Conservative financial metrics, a base level of replacement/recurring revenue, and a long-term history of execution keep FELE well above our most aggressive 4 rating. CONSIDERATIONS AND RISKS We believe Franklin s sales are sensitive to macroeconomic conditions. As such, the company may experience difficulty due to trends that are both difficult to predict and are beyond the company s control. Additionally, the company is exposed to raw material and labor cost inflation. An inability to pass on higher input costs to customers may pressure margins, lower sales and/or decrease earnings. Franklin has acquired several companies over the past decade, and may acquire additional companies in the future. Failure to effectively integrate acquisitions or overpayment for operating assets may result in writedowns, decreased financial flexibility and/or lower earnings. Franklin generates a significant portion of sales outside of the United States and also maintains manufacturing plants, warehouses and distribution systems abroad. We believe world-wide operations expose the company to political and foreign exchange risk, as well as present operational challenges. Franklin operates in a fragmented market against several established competitors. Significant engineering breakthroughs by the company s competition could have a negative impact on FELE. Our Suitability rating is 3 on a 1-to-4 scale (1 = most conservative, 4 = most aggressive). Additional information is available upon request. Hilliard Lyons Equity Research 2 Industrials
Franklin Electric Co (FELE) ($'s in thousands) Income Statement Analysis FY'15 FY'16 Q1'17 Q2'17 Q3'17 Q4'17 FY'17 Q1'18E Q2'18E Q3'18E Q4'18E FY'18E FY'19E Net Sales $ 924,923 $ 949,856 $ 220,252 $ 305,349 $ 311,113 $ 288,195 $ 1,124,910 $ 314,360 $ 361,540 $ 350,490 $ 325,460 $ 1,351,850 $ 1,423,330 Cost of Sales 627,315 618,450 144,436 202,596 207,271 193,624 747,930 211,850 240,420 236,580 221,310 910,160 966,340 Gross Profit 297,608 331,406 75,816 102,753 103,842 94,571 376,980 102,510 121,120 113,910 104,150 441,690 456,990 % 32.2% 34.9% 34.4% 33.7% 33.4% 32.8% 33.5% 32.6% 33.5% 32.5% 32.0% 32.7% 32.1% Selling, G & A Expense 204,250 221,209 56,991 68,298 70,986 69,411 265,690 75,446 83,154 80,613 74,856 314,070 322,940 % 22.1% 23.3% 25.9% 22.4% 22.8% 24.1% 23.6% 24.0% 23.0% 23.0% 23.0% 23.2% 22.7% Restructuring (Income)/Expense 2,997 (598) 315 251 1,009 2,732 4,310 100 100 100 100 400 400 Operating Inc. 90,361 110,795 18,510 34,204 31,847 22,428 106,980 26,964 37,866 33,197 29,194 127,220 133,650 % 9.8% 11.7% 8.4% 11.2% 10.2% 7.8% 9.5% 8.6% 10.5% 9.5% 9.0% 9.4% 9.4% Interest (Expense) (10,039) (8,732) (3,514) (2,244) (2,297) (2,267) (10,320) (2,270) (1,980) (1,840) (1,840) (7,930) (6,210) Other Income / (Expense) 6,863 993 667 5,573 574 81 6,900 670 1,370 570 80 2,690 2,690 FX Income / (Expense) (869) 1,057 475 (372) 193 729 1,030 (10) (10) (10) (10) (40) (40) Pre Tax Inc. 86,316 104,113 16,138 37,161 30,317 20,971 104,590 25,354 37,246 31,917 27,424 121,940 130,090 Income Tax (Expense) (12,625) (24,798) (204) (6,917) (5,769) (13,104) (25,990) (3,803) (5,587) (4,788) (4,114) (18,290) (19,510) Tax Rate 14.6% 23.8% 1.3% 18.6% 19.0% 62.5% 24.8% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Net Income 73,691 79,315 15,934 30,244 24,548 7,867 78,600 21,551 31,659 27,130 23,311 103,650 110,580 % 8.0% 8.4% 7.2% 9.9% 7.9% 2.7% 7.0% 6.9% 8.8% 7.7% 7.2% 7.7% 7.8% Less: NI Attrib to non-ctrl interst (746) (570) (204) (335) (78) 204 (410) - - - - - - Net Income att to FELE Inc. 72,945 78,745 15,730 29,909 24,470 8,071 78,190 21,551 31,659 27,130 23,311 103,650 110,580 % 7.9% 8.3% 7.1% 9.8% 7.9% 2.8% 7.0% 6.9% 8.8% 7.7% 7.2% 7.7% 7.8% Shares Out. 47,538 46,994 47,000 47,000 47,000 47,009 47,002 46,934 46,859 46,783 46,708 46,821 46,520 Diluted EPS $ 1.51 $ 1.65 $ 0.33 $ 0.64 $ 0.52 $ 0.17 $ 1.66 $ 0.46 $ 0.68 $ 0.58 $ 0.50 $ 2.21 $ 2.38 Adjusted EPS $ 1.47 $ 1.66 $ 0.34 $ 0.58 $ 0.53 $ 0.42 $ 1.87 $ 0.46 $ 0.68 $ 0.58 $ 0.50 $ 2.22 $ 2.38 Dividends Paid $ 0.383 $ 0.398 $ 0.1000 $ 0.1075 $ 0.1075 $ 0.1075 $ 0.423 $ 0.1075 $ 0.1100 $ 0.1100 $ 0.1100 $ 0.438 $ 0.448 Rate of Change Analysis Revenue -11.7% 2.7% 0.8% 21.1% 29.8% 20.3% 18.4% 42.7% 18.4% 12.7% 12.9% 20.2% 5.3% Organic Rev-- ex-fx & Acq -5.2% 5.2% 0.9% 5.6% 6.3% 0.1% 3.3% 4.5% 4.0% 4.2% 4.1% 4.2% 5.3% Op Income -9.7% 22.6% -12.2% 4.7% 0.1% -11.1% -3.4% 45.7% 10.7% 4.2% 30.2% 18.9% 5.1% EPS--Adj if necessary -15.3% 12.7% 16.8% 13.7% 10.3% 11.5% 12.7% 35.7% 17.5% 9.6% 18.7% 18.8% 7.3% EBITDA--Adj if necessary -15.2% 11.6% -9.4% 5.6% 9.3% 2.9% -0.2% 32.3% 8.2% 1.4% 10.4% 14.5% 3.8% Working Capital 0.6% 3.0% 11.1% 37.7% 38.3% 49.3% 49.3% 29.2% 9.5% 5.7% 7.1% 7.1% 3.4% Inventory -11.8% 4.6% 13.5% 40.8% 40.1% 53.5% 53.5% 21.4% 9.2% 6.3% 6.5% 6.5% 2.7% *FY Guide: Rev +2-to- +4%, Adj EPS $1.62-$1.67 *Acq of Western Hydro, 2M, DSI--HdWtr Distrib Seg *April; $30MM 5.79% LTD due *Guidance Tightened to $1.88 - $1.92 *$0.21 TCJA adj; $0.04 restructure *FY Guide: EPS $1.87- $1.97 *Acq of Valley Farms Supply *April; $30MM 5.79% LTD due *FY Guide: EPS $2.16- $2.28 Source: Company reports and Hilliard Lyons estimates Hilliard Lyons Equity Research 3 Industrials
Franklin Electric Co (FELE) Summary Cash Flow FY'15 FY'16 Q1'17 Q2'17 Q3'17 Q4'17p FY'17p Q1'18E Q2'18E Q3'18E Q4'18E FY'18E FY'19E Net Income 73,691 79,315 15,934 30,244 24,548 7,867 78,600 21,551 31,659 27,130 23,311 103,650 110,580 D & A 37,210 35,534 8,924 9,488 10,006 10,088 38,506 9,750 9,680 10,250 9,730 39,410 39,290 Share-based Compensation 5,626 6,889 2,941 1,605 1,497 1,066 7,109 3,680 2,010 1,870 1,330 8,890 11,110 Deferred Income Tax (6,802) 2,978 (1,483) (1,878) 984 12,575 10,198 1,500 1,500 1,500 1,500 6,000 6,000 FX Expense (Income) 869 (1,057) (475) 372 (193) (729) (1,030) 10 10 10 10 40 40 Cash Provided (Used) by Wrk Cap (1,463) (7,320) (56,351) (46,876) 12,334 1,611 (124,282) (22,310) (28,777) 27,871 (3,350) (26,570) (13,580) Operating CF 109,131 116,339 (30,510) (7,045) 49,176 32,478 9,101 14,181 16,082 68,631 32,531 131,420 153,440 Cap Ex (26,171) (39,136) (4,908) (13,713) (3,896) (10,967) (33,484) (8,500) (9,000) (9,000) (8,500) (35,000) (40,000) Acquisitions, net of cash acq (24,088) (1,007) - (52,255) 472 - (51,783) (9,000) (500) (500) (500) (10,500) (2,000) Divestitures 1,542 6,028 34 75 98 4 211 50 50 50 50 200 200 Dividends (18,926) (19,137) (4,668) (5,531) (5,046) (5,044) (20,289) (5,045) (5,154) (5,146) (5,138) (20,480) (20,820) Free CF 41,488 63,087 (40,052) (78,469) 40,804 16,471 (96,244) (8,315) 1,477 54,035 18,443 65,640 90,820 Debt Proceeds 233,486 64,681 20,383 148,901-3,028 172,312-50,000 (50,000) - - - Debt (Repayments) (189,910) (95,066) (20,843) (101,245) (48,342) - (170,430) (500) (30,000) (400) - (30,900) (30,900) Stock Sale Proceeds 2,929 5,243 481 1,566 1,723 727 4,497 2,000 2,000 2,000 2,000 8,000 8,000 Stock (Repurchases) (48,579) (7,422) (655) (1,719) (889) (358) (3,621) (5,000) (5,000) (5,000) (5,000) (20,000) (20,000) Net CF 39,414 30,523 (40,686) (30,966) (6,704) 19,868 (93,486) (11,815) 18,477 635 15,443 22,740 47,920 Adjusted EBITDA 130,568 145,731 27,749 43,943 42,862 35,248 145,486 36,714 47,546 43,447 38,924 166,630 172,940 Adj EBITDA Margin 14.1% 15.3% 12.6% 14.4% 13.8% 12.2% 12.9% 11.7% 13.2% 12.4% 12.0% 12.3% 12.2% Adj EBITDA/Share $ 2.75 $ 3.10 $ 0.59 $ 0.93 $ 0.91 $ 0.75 $ 3.10 $ 0.78 $ 1.01 $ 0.93 $ 0.83 $ 3.56 $ 3.72 Summary Balance Sheet FY'15 FY'16 Q1'17 Q2'17 Q3'17 Q4'17p FY'17E Q1'18E Q2'18E Q3'18E Q4'18E FY'18E FY'19E Cash and Equivalents 81,561 104,331 70,651 55,095 60,129 67,233 67,233 55,420 73,900 74,530 89,970 89,970 137,890 A/R 127,251 145,999 154,701 190,650 176,286 171,007 171,007 213,760 216,920 192,770 185,510 185,510 195,400 Inventory 194,594 203,471 235,724 296,687 301,374 312,325 312,325 286,080 323,990 320,450 332,520 332,520 341,380 Other Current Assets 34,728 30,018 33,803 37,194 44,462 38,566 38,566 34,480 37,940 45,350 39,340 39,340 40,130 Total Current Assets 438,134 483,819 494,879 579,626 582,251 589,131 589,131 589,740 652,750 633,100 647,340 647,340 714,800 Net PP&E 190,039 196,137 197,412 214,652 213,206 215,694 215,694 218,890 218,410 217,360 216,330 216,330 217,840 Intangible Assets 141,357 134,667 133,675 136,818 135,768 135,800 135,800 135,800 135,800 135,800 135,800 135,800 135,800 Goodwill 199,847 199,609 200,407 236,153 236,981 237,000 237,000 241,500 241,800 242,100 242,400 242,400 243,600 Other Non-Current Assets 27,031 25,673 28,907 12,861 11,287 7,728 7,728 9,000 11,000 13,000 13,000 13,000 13,000 Total Assets 996,408 1,039,905 1,055,280 1,180,110 1,179,493 1,185,353 1,185,353 1,194,930 1,259,760 1,241,360 1,254,870 1,254,870 1,325,040 A/P 57,822 63,927 69,042 73,266 76,163 79,348 79,348 88,020 89,300 89,730 88,530 88,530 93,240 Accrued Expenses 52,109 60,119 43,497 57,047 63,704 61,320 61,320 44,370 58,190 64,980 62,550 62,550 63,800 Income Taxes 1,794 3,274 3,170 3,823 4,194 3,274 3,274 3,170 3,823 4,194 3,274 3,274 3,274 ST Borrowing and CP/LT Debt 32,946 32,946 33,783 145,381 104,081 100,453 100,453 100,100 130,600 80,600 80,600 80,600 80,600 Total Current Liabilities 144,671 160,266 149,492 279,517 248,142 245,901 245,901 235,660 281,913 239,504 234,954 234,954 240,914 Long-Term Debt 188,103 156,544 156,170 126,030 125,608 125,596 125,596 129,400 99,400 99,000 99,000 99,000 68,100 Employee Benefit Plans 47,398 45,307 43,527 42,705 42,180 42,178 42,178 42,180 40,180 38,180 48,180 48,180 54,180 Other LT Liabilities 56,771 62,700 68,283 58,809 61,429 67,555 67,555 67,560 67,560 67,560 67,560 67,560 67,560 Total Liabilities 436,943 424,817 417,472 507,061 477,359 481,230 481,230 474,800 489,053 444,244 449,694 449,694 430,754 Shareholders' Equity 557,700 613,445 636,003 671,433 700,263 702,621 702,621 720,130 770,707 797,116 805,176 805,176 894,286 Noncontrolling Interest 1,765 1,643 1,805 1,616 1,871 1,502 1,502 - - - - - - Book Value $ 11.94 $ 13.08 $ 13.53 $ 14.29 $ 14.90 $ 14.95 $ 14.95 $ 15.34 $ 16.45 $ 17.04 $ 17.24 $ 17.24 $ 19.27 Tangible Book Value $ 4.64 $ 5.95 $ 6.42 $ 6.35 $ 6.97 $ 7.02 $ 7.02 $ 7.30 $ 8.39 $ 8.96 $ 9.14 $ 9.14 $ 11.10 Current Ratio 3.0x 3.0x 3.3x 2.1x 2.3x 2.4x 2.4x 2.5x 2.3x 2.6x 2.8x 2.8x 3.0x Net LT Debt / Total Cap 14.3% 6.8% 10.8% 8.9% 7.9% 7.0% 7.0% 8.7% 2.9% 2.7% 1.0% 1.0% -7.3% Net Total Debt / Total Cap 17.9% 10.6% 14.4% 22.9% 18.2% 17.1% 17.1% 18.3% 15.6% 10.8% 9.1% 9.1% 1.0% TTM ROE--Unadjusted 12.8% 13.3% 18.9% 19.9% 33.7% 11.8% 11.8% 17.9% 17.6% 18.6% 13.7% 13.7% 13.0% Source: Company reports and Hilliard Lyons estimates Hilliard Lyons Equity Research 4 Industrials
Analyst Certification I, Spencer E. Joyce, CFA, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Important Disclosures Hilliard Lyons analysts receive bonus compensation based on Hilliard Lyons profitability. They do not receive direct payments from investment banking activity. Suitability Ratings 1 - A large cap, core holding with a solid history 2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks 3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage 4 - Speculative, due to small size, inconsistent profitability, erratic revenues, volatility, low trading volume or a narrow customer or product base Investment Ratings Buy - We believe the stock has significant total return potential in the coming 12 months. Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returns to be realized over a longer time frame than our Buy rated issues, typically 2-3 years. Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform - We believe the stock is vulnerable to a price setback in the next 12 months. Hilliard Lyons Equity Research 5 Industrials
Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 31 28% 10% 90% Hold/Neutral 74 66% 9% 91% Sell 7 6% 0% 100% As of 7 February 2018 Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 6 Industrials