Good day, and thank you for standing by. Welcome to the Franklin Electric Reports Q4 2021 Sales and earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I would now like to hand the conference over to your host today, Jeff Taylor, Chief Financial Officer. Please go ahead.
Thank you, Michelle, and welcome everyone to Franklin Electric's Q4 and full year 2021 earnings conference call. With me today is Gregg Sengstack, our Chairperson and CEO. On today's call, Greg will review our Q4 and full year business highlights, and I will review our Q4 and full year financial results in more detail. When we're finished, we'll have some time for questions and answers. Before we begin, let me remind you that as we conduct this call, we'll be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release.
All forward-looking statements made during the call are based on information currently available, and as required by law, the company assumes no obligation to update any forward-looking statements. With that, I'll now turn the call over to our Chairperson and CEO, Gregg Sengstack.
Thank you, Jeff, and thank you all for joining us. While this call with shareholders is to review our company's performance, I would like to start by taking a moment to publicly congratulate and thank the entire team at Franklin Electric for a record year. It takes a team effort to deliver outstanding results despite the many challenges we faced in 2021. For the Q4, sales, operating income, and EPS were records for any Q4 in our history. The Q4 closed out the highest performing year in Franklin's history as we established new all-time full-year records for sales, operating income, and earnings per share. Demand across the business remains strong, with continued strength in all end markets, fueling additional growth and a robust open order balance.
Our results substantiate our strategy as we capture the healthy demand across our end markets and advance Franklin as a global provider of water and fuel systems. Supply chain constraints continue to affect our industry, and we expect them to continue at least through the H1 of 2022, most likely through the balance of 2022 in the case of some input materials and geographic regions. Our team navigated these ongoing challenges and is well prepared to handle future volatility. Our current inventory levels are intentionally elevated when compared to the Q4 of last year in preparation for future volatility and in response to strong demand. Inflationary pressures continued in the Q4 , increasing material, freight, transportation, and labor costs. In response, we continued to implement our pricing strategy to offset these higher costs and are committed to maintaining margin discipline across the business.
Turning to our segments. In Water Systems, we delivered overall revenue growth of 36%, with organic revenue growth contributing 23%. As I have mentioned in prior quarters, demand has continued to be driven in large part by a robust housing market in the U.S., strong crop prices, dry weather in some regions of the U.S. and globally, in addition to ongoing strong demand in developing regions. In the U.S., groundwater pumping system revenue increased 34% in the quarter, supported by strong residential and agricultural demand. Overall, organic growth in the U.S. for Water Systems was 26%. Outside the U.S., Water Systems organic growth was 20%, with solid demand recovery and growth in all regions, led by Asia Pacific and EMEA.
Our Fueling Systems business also delivered a strong quarter, producing overall revenue growth of 21%, operating income growth of 18%, and operating margin of 28.1%. These results were supported by strong pent-up capital demand for infrastructure build-out in the U.S., which we see continuing through 2022. As the pandemic subsides, we expect greater focus on vapor recovery, management, and monitoring in countries outside the U.S. as well, driving additional growth for fueling. Our U.S. distribution business again delivered outstanding results, with overall revenue growth of 50% alongside operating income growth of 1,000% and operating margins of 4.8%, continuing to highlight the segment's role as a growth engine for our company. This growth has been supported by sustained demand across the country over recent quarters.
Looking ahead, we will integrate our recent acquisition and focus on growing our market share in the U.S. groundwater space. We are focused on developing and using proprietary technology to both improve availability and reduce working capital in this business. We also will continue to thoughtfully increase our geographic footprint. 2021 was a decisive year for strategic acquisitions, particularly in the water treatment space. During the Q4 , we completed a small but strategic bolt-on acquisition, B&R Industries, which was our third water treatment acquisition for the year. This latest acquisition is in the Southwestern United States, which is a key water treatment market. At the end of the year, we also announced the acquisition of Blake Group, a professional groundwater distributor with 14 locations throughout the Northeast United States.
As I mentioned, the distribution segment is a key catalyst for long-term growth, and with the integration of Blake, we expand our geographical footprint into New York and the New England markets. I want to welcome our new employees from B&R and Blake to the Franklin team. During the year, we maintained our strong free cash flow generation, but delivered less than 100% conversion as we battled through inflationary pressures and invested in working capital to support the strong growth we are experiencing. As we look to the future, we believe we are well-positioned to drive strong cash flow consistent with our past performance. Our capital allocation strategy remains unchanged. We will continue to invest in organic and inorganic growth, while at the same time returning cash to shareholders.
To that end, last month, we announced an 11% increase in our quarterly dividend, which marked the 30th consecutive year that Franklin has increased its dividend. This increase is a testament to the efficacy of our capital allocation strategy, our confidence in the outlook of the business, and our historical commitment to deliver increasing returns to our shareholders. Turning to our outlook. After experiencing significant growth in our business in 2021, we expect continued strong demand in our core markets and a preference for our products as we deliver value to our customers by leveraging our five key factors. At the same time, the challenges of global supply and labor constraints, logistics challenges, inflation remain. While we have entered 2022 with considerable momentum, we expect these challenges to persist at some level for most of the year.
As a result, we are initiating our 2022 full year revenue guidance in a range of $1.9 billion-$2.05 billion, with EPS in the range of $3.50-$3.75. In summary, 2021 was a pivotal year for Franklin. We were well-positioned to capture the pent-up demand, while at the same time building on our own strong foundation through strategic acquisitions to expand our core offerings and geographic reach, particularly in water treatment, distribution, and our Grid Solutions businesses. As we look to carry this momentum into 2022, our outlook is based on our five key factors for success, quality, availability, service, innovation, and cost.
Our goal is to become an indispensable partner to our customers while ultimately expanding the availability of clean water on a global scale and addressing safety and lowest total cost of ownership in the maintenance and operation of fuel stations globally. I will now turn the call back over to Jeff.
Thank you, Greg. Our fully diluted earnings per share were a record for any Q4 in the company's history at $0.85 for the Q4 of 2021 versus $0.57 for the Q4 of 2020. Q4 earnings per share before the impact of restructuring expenses was $0.86 compared to the 2020 Q4 earnings per share before restructuring of $0.57. The company's Q4 results included an estimated $0.12 earnings per share gain related to a $6.5 million one-time income gain on a bargain purchase price transaction on the income statement in the other income and expense section. While it is not our practice to call out items as non-GAAP adjustments in our reported results, we are mentioning this gain due to its size and since we do not consider it to be operational in nature.
Q4 of 2021 consolidated sales were a record $432.5 million compared to 2020 Q4 sales of $321.1 million, an increase of 35%. The increase from acquisition-related sales was $40 million, while organic growth contributed 24%. Sales revenue decreased by $6.6 million or about 2% in the Q4 of 2021 due to foreign currency translation. Water Systems sales in the U.S. and Canada were up about 58% compared to the Q4 of 2020. In the Q4 of 2021, sales from businesses acquired since the Q4 of 2020 were $29.6 million. Water Systems sales in the U.S. and Canada grew 26% organically in the Q4 . Sales of groundwater pumping equipment increased by about 34%.
Sales of dewatering equipment were up about 61%. Sales of other surface pumping equipment increased by about 11%, all due to strong end market demand. Water Systems sales in markets outside the U.S. and Canada increased by about 15% overall. Sales revenue decreased by $6.9 million or about 7% in the Q4 of 2021 due to foreign currency translation. Outside the U.S. and Canada, Water Systems organic sales increased by about 20%, driven primarily by higher sales in Europe, the Middle East, and Africa markets, as well as sales growth in the Asia Pacific and Latin America markets. Water Systems record operating income was $34.6 million in the Q4 of 2021, compared to $30.4 million in the Q4 of 2020.
While operating margin decreased by 200 basis points compared to the margin in the prior year quarter. The decline in operating margin was due to the dilution from water treatment at lower margins, higher SG&A and variable compensation, and higher inflation costs, not entirely offset by price realization. Distribution achieved record Q4 sales at $116.9 million this year versus Q4 2020 sales of $77.9 million. In the Q4 of 2021, sales from businesses acquired since the Q4 of 2020 were $8.5 million. The Distribution segment organic sales increased 39% compared to the Q4 of 2020. Revenue growth was driven by broad-based demand in all regions and product categories.
The distribution segment operating income was a record for the Q4 at $5.6 million, compared to the Q4 of 2020 operating income of $0.5 million. Operating income margin was 4.8% of sales in Distribution, primarily because of revenue growth and improved operating leverage. Fueling Systems sales were a record $79 million in the Q4 2021 and increased 21% versus the Q4 2020, which was entirely organic growth. Fueling Systems sales in the U.S. and Canada increased by about 30% compared to the Q4 2020. The increase was due to higher demand for Fuel Management Systems and pumping systems and piping. Outside the U.S. and Canada, Fueling Systems revenue were flat, and sales increases of 2% in the rest of the world outside of China were offset by lower sales in China.
Fueling Systems operating income in the Q4 was $22.2 million, a new record for any quarter, compared to $18.8 million in the Q4 of 2020, driven by higher sales. The Q4 2021 operating income margin was 28.1% compared to 28.7% of net sales in the prior year. Operating income margin in the Q4 decreased in Fueling Systems primarily due to higher inflation, particularly higher freight cost. The company's consolidated gross profit was $145.2 million for the Q4 of 2021, an increase from the Q4 2020 gross profit of $111.4 million.
The gross profit as a percentage of net sales was 33.6% in the Q4 of 2021 versus 34.7% in the Q4 of 2020, and was lower due in part to higher inflation costs. We experienced significant cost inflation in materials, components, freight, and tariffs, which were not completely offset by pricing, contributing to the lower gross profit margin. Selling, general, and administrative expenses were $97.7 million in the Q4 of 2021 compared to $76.7 million in the Q4 of 2020. SG&A expenses from acquired businesses were about $10 million. Excluding acquisitions, SG&A expenses were higher by $12 million due to higher variable performance-based compensation expenses and increased spending to support sales growth.
Consolidated operating income was a record $47.2 million compared to the prior year quarter at $34.4 million, an increase of 37%. Effective tax rate for 2021 was approximately 18%, essentially flat with the prior year. The tax rate for the full year 2022 is projected to be about 21%. Company ended the Q4 2021 with a cash balance of about $40 million and generated $130 million of net cash flow from operations during 2021 versus $212 million in 2020. The decrease was primarily due to higher working capital requirements in support of higher revenues, including higher inventory to compensate for ongoing supply issues. Free cash flow conversion was 65% and was below our expectations.
We plan on returning to a normal level of free cash flow generation in 2022 as we believe we are well-positioned to drive strong cash flow consistent with our past performance. As Greg mentioned earlier, on January 24th, the company announced a quarterly cash dividend of $0.195 that will be paid February 17th to shareholders of record on February 3rd. This represents an 11% increase from the prior quarterly dividend. This dividend increase will mark the 30th consecutive year that Franklin has increased its dividend, demonstrating its commitment to returning cash to shareholders and our confidence in the outlook of the business. This concludes our prepared remarks. We'll now turn the call back over to Michelle for questions.
Thank you. If you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead.
Hey, good morning, everyone.
Good morning, Mike.
A couple questions here on the guidance. First, you know, obviously really healthy guidance, strong growth year over year. Maybe help understand two components of it. One, volume versus price, or at least qualitatively, how you're thinking about those two pieces. Secondarily, when you think about trends through the year, pretty normal sequentials or is there some variance in how you're thinking about that pattern through the year?
Yeah. Good morning, Mike, and thanks for the question. In regard to our guidance, you know, there's a couple of components there. First of all, we have the full year acquisitions that were completed in 2021 built into our guidance. That's certainly gonna contribute, you know, to the volume component of it. We expect strong demand and organic growth to continue in our base business. Greg mentioned the ongoing supply chain and then inflation issues. Pricing versus volume, you know, we're seeing inflation in the mid-single- to high-single-digit ranges. You know, we're certainly pricing to offset that level of inflation. I think we're gonna, you know, certainly put pricing in to cover that and maintain our margin to the greatest extent possible.
Probably a little bit heavier on the price side, but there's strong volume growth in the guidance that we gave overall. In terms of the dynamic of the seasonality, we do expect Q1 H1 to be under a little bit more pressure than the second half of the year, and we see inflation probably impacting us greatest in that, once again, Q1 H1 of the year.
Was that a profitability response there o r was that more just on the revenue line or kind of a combination of both?
On the seasonality?
Yeah, yeah. The front half being a little bit more impacted than the back half comment.
Yeah. It'll impact our margins more in the H1 than it will in the H2.
That's a good bridge to the next question. You know, a lot of moving pieces here with the acquisitions you've brought in, with the price cost dynamics, inflation, timing, et cetera. Maybe a little directional help on how you're thinking about margins year-over-year by segment, or any kind of variances we should think about on that side.
Yeah. Mike, I guess, you know, quantitatively, we don't give margin guidance by segment. Certainly, you know, we do see, you know, if you look implied in the guidance range, I think if you look at the midpoint, you would see that generally, we're planning to maintain our margins within their normal ranges that we expect for our three business segments. The lower end of the guidance, you would probably see stronger inflation than what we built into the midpoint, and then vice versa on the higher end of the margin guidance. As you look at the segments, we would expect them to be in the normal ranges.
Okay. Appreciate it. Thank you.
Thank you. Our next question comes from the line of Matt Summerville with D.A. Davidson. Your line is open. Please go ahead.
Thanks. Couple questions. Just first on follow-up. Price cost, where would you have been in the Q4 ? With the price increases you're putting into place for 2022, is that more of a list price increase? Are there surcharges involved? I guess I'm trying to understand how permanent or not some of these increases might be for you guys.
Thanks, Matt. As you look at the full year of 2021, you know, inflation and pricing has been interesting. It's been dynamic. As we started out the H1 of the year, it was slower, and it seemed to accelerate as we moved through the year. As you know, as we kinda moved through the quarters, we had, you know, the Q2 , I believe we were slightly below in terms of pricing covering cost. We caught up on the Q3 . On the Q4 we were just slightly below on that price cost dynamic. But for the full year, we were ahead. We were able to at least maintain on the full year basis.
As you look at moving into 2022, we're continuing to implement and evaluate additional pricing actions. I would say that everything's on the table in terms of what those may be. Each business is a little bit different. We'll see, you know, list price increases on many of our businesses where it'll be, you know, the increase in the base price of the product. Other markets, there may be surcharges to offset specific materials, components, and/or freight. I think it's, you know, everything's on the table.
In the past, you guys have talked about, at least in the recent past, what I can't remember if you call it open orders or backlog, but what did that number look like coming out of the Q4 ? Did it increase sequentially relative to Q3? I guess maybe one for Gregg then around, you know, relative to your guide for the full year 2021, what surprised so much internally versus your plan to the upside in the Q4 ? Thank you.
Yeah. I'll take the latter part first, Matt Summerville. Is that just continued strong demand? You know, we do have some seasonality with the Northern Hemisphere being more Northern Hemisphere weighted, but just the continued strong demand across all three segments and beyond, you know, really kind of where we were forecasting it. It's just, you know, we don't have a lot of visibility in this business. We are a short-cycle business generally, with the exception of some of our large pumping systems, and in fueling, we do talk to some major marketers about their station build plans.
You know, this is a short-cycle business, so we look at current demand, we talk to the people in the marketplace, but we're just getting a lift in all segments and across the globe. That's so we outperformed on the top line and have been all year relative to internal planning, which has been, you know, of course, a struggle for us, you know, to keep up. We see that continuing into 2022.
Again, we're short cycle, but in talking with contractors the last couple weeks and looking at our dynamics for our backlog and some of our larger pumping systems, looking at our fueling business, is that at this point, we don't see it slowing down for us in 2022, given you know just kind of where the inventory levels are in the marketplace. Jeff can give you some more dynamics around our backlog. Again, it's not something that we typically talked about in the past because we typically don't have one, but or a very large one, but it's gotten to be sizable, and it continues to grow a little bit. Jeff, you have some information on that.
Yeah. The open order balance or backlog at the end of the year was approximately $175 million for the total company. That's an increase of about $30 million from the prior quarter. We did see it grow in the you know the Q4 and at year-end. We continue to see strong demand across certainly our Water Systems business, our Fueling Systems business, and then, you know, distribution performing exceptionally well.
Got it. Thank you, guys.
Thank you, Matt.
Thank you, Matt.
Thank you. Our next question comes from the line of Ryan Connors with B. Riley. Your line is open. Please go ahead.
Great. Thanks. Thanks for taking my question. I wanted to come at the distribution business more just from a big picture standpoint on the margins. I mean, it's been tough to sort of pin down where those margins shake out any given quarter. The results have certainly been improved on a run rate over time, but you know, still a lot of volatility quarter to quarter. How do we think about, you know, are we closer to where that business gets to a run rate where it's a little easier to think about and model or and where might that be?
Sure. Ryan, let me like, because I have the history with this, I'll give Jeff a break on this one. You go back to when we stood up distribution and we said, you know, it's gonna be. We said publicly we were looking at a 4%-6% OI range. The business is seasonal. You may recall the first couple of years, I mean, we actually lost money in Q1 and Q4 and made much more in Q2 and Q3 to make up for it. This year, we made money in all quarters. That's somewhat level of maturity of the business.
I've looked at some other distribution businesses that are where there's public information and how they've matured over time and saw a similar pattern where there's, you know, a seasonality aspect to it. That as the business grows and matures, while you still have the seasonality and you still have the margin change from quarter to quarter, you begin to make money in Q1 and Q4, and that's what we expect going forward. You know, we feel great about a 7% margin for the overall for the year with the strength, you know, in Q2 and Q3. You know, we won't declare the victory just yet.
It's the first year of doing, you know, being above the four to six range, but we feel pretty confident that this business is gonna continue to 2022 with similar dynamic and kind of a similar seasonality that you saw in 2021.
Got it. Okay. Yeah, the seasonality. That's helpful. The other one just has on fueling. You know, it does seem like we've had a few quarters now where China's been, you know, somewhat of a pretty material drag there. Can you just give us your updated thoughts strategically? I mean, is that something you see getting better? Is there a thought to monetize that piece of it at some point? I mean, what are your strategic thoughts about fueling in China?
Yeah, definitely not to monetize it. It is a piece of business, and we have a presence there. We have, you know, good brand recognition. The business is, you know, probably at a nadir now. It's at a run rate. I wouldn't expect a whole lot of deceleration from where it is today. It's in, you know, the low teens sales-wise. You know, what we are all kind of waiting for, you know, us and Gilbarco and Dover and others are is for China to start moving towards In-Station Diagnostics in a meaningful way. They have approved more local systems, but that said, we haven't seen really any initiative of any substance from the government to initiate that program. It's important in a country like China.
Look, you know, they're burning a lot of coal. There's a lot of challenge around pollution, but one of the easiest ways to recover VOCs is through vapor recovery systems at the gas station. We have a system, others have systems that are approved, and it works in China. It's just a question of when the government decides to get more serious about that aspect of their pollution control. It's a pretty opaque area to do business in China. We don't get a lot of forward visibility. When they decide to spend the money, they spend it, and we, that's when we have to react. Right now, I see it as being a good business. It's stable and again, the low teens, unfortunately.
We still see some upside, some pretty big upside if they get initiative behind In-Station Diagnostics.
Got it. Okay. Thanks for your time.
Sure. Thank you, Ryan.
Thank you, Ryan. Bye.
Thank you. I'm showing no further questions at this time, and I would like to turn the conference back over to Gregg Sengstack for any further remarks.
We appreciate you all joining us today, and we look forward to speaking to you after the end of the Q1 . Have a good week.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.