Franklin Electric Reports First Quarter 2009 Results

06.05.2009

Franklin Electric Co., Inc. reported diluted earnings per share of $0.17 for the first quarter 2009, a decrease of 51 percent compared to 2008 first quarter earnings per share of $0.35.

Franklin Electric Reports First Quarter 2009 Results

Earnings per share before restructuring charges were $0.19, a decrease of 46 percent versus the prior year. First quarter 2009 sales were $149.8 million, a decrease of

15 percent compared to first quarter 2008 sales of $176.0 million.

Scott Trumbull, Franklin Chairman and Chief Executive commented:

"The major factor causing our earnings decline during the first quarter of 2009 was the sales volume reduction that we experienced as a result of the continuing recession. The ongoing slump in housing combined with our customer s desire to reduce their inventories both contributed to soft end market demand and fewer shipments for the Company s products in the first quarter. Additionally, our first quarter 2009 sales were lower by $13.3 million versus the first quarter 2008 due to foreign currency translations as a result of a stronger U.S. dollar."

Water Systems

Water Systems represent about 75 percent of the Company s total sales.

During the first quarter 2009, Water Systems revenues declined by 16 percent overall and by 11 percent organically before the impact of foreign currency translations. Virtually the entire organic sales decline occurred as a result of weakness in the U.S. and Canada markets which represents about half of total Water Systems sales. Based on trade association data, management estimates that first quarter industry wide groundwater pump sales were down more than 33 percent versus the prior year. While the Company s sales did not decline as much, sales nevertheless were impacted by the extraordinary drop in the overall market. Management believes the industry sales decline was caused by the ongoing slump in housing, with housing starts off by about 50 percent versus first quarter 2008. In addition, downstream distributor and contractor customers reduced inventories during the quarter which negatively impacted shipments.

International water sales represent about half of the Water Systems revenues and were up about 3 percent in local currencies but were negatively impacted by $12.8 million due to foreign currency translations. During the quarter, organic sales growth in Asia/Pacific, Latin America and Southern Africa offset a decline in Europe and the Middle East. Additionally, the Company completed the acquisition of 75 percent of Vertical S.p.A in Italy during the quarter as the Company continues to focus on building product capability while expanding international reach. Vertical s performance met Company expectations in the first quarter.

Operating income for Water Systems declined to 9.2 percent of sales before restructuring expenses versus 11.1 percent in the first quarter 2008. Selling, general and administrative (SG&A) expenses before the impact of acquisitions were lower by $2.6 million which partially offset the impact of lower sales volumes.

Fueling Systems

Fueling Systems represent about 25 percent of the Company s total revenues, and sales in this segment declined by about 10 percent during the quarter. Fueling Systems sales in the U.S. grew by about 2 percent, with sales growth in California offsetting an 8 percent decline in the balance of the country. Fueling sales in international markets declined sharply during the quarter because last year in the first quarter there were heavy shipments of vapor control systems to the Beijing area as part of China s program to reduce air pollution prior to the Summer Olympics. The Company is encouraged that in March overall Fueling sales were up 19 percent versus March 2008 as station owners in California continued their capital spending projects to comply with that state s vapor control mandate, and station owners outside of California also moved ahead with upgrade, replacement and expansion projects.

Management estimates that at the end of the first quarter 2009, approximately two thirds of the California filling stations requiring vapor recovery retrofit were completed and that the Company s market share of these retrofits was approximately 90 percent. Of the roughly 4,100 stations remaining to complete the retrofit, the Company expects to win an approximately 60 to 70 percent share and that approximately 80 percent of the remaining station conversions will take place in the second and third quarters of 2009.

Operating margins in Fueling Systems were 19.8 percent of sales in the first quarter 2009 versus 22.9 percent of sales in the first quarter 2008, primarily attributable to lost leverage on the SG&A expenses from lower sales volumes.

The Company s consolidated gross profit was $43.2 million for the first quarter of 2009, down $8.3 million from $51.5 million in the first quarter of 2008. The gross profit margin decreased to 28.8 percent for the first quarter of 2009 from 29.2 percent for the first quarter of 2008, a decline of only 40 basis points. Gross profit margins remained nearly unchanged in the quarter in spite of the significant sales volume reduction as year over year price increases in both the Water and Fueling segments exceeded cost increases.

During the first quarter 2009, SG&A expenses decreased by $1.9 million consistent with management s fixed cost reduction initiatives started in the fourth quarter of 2008.

Restructuring expenses for the first quarter of 2009 were approximately

$0.9 million and reduced diluted earnings per share by approximately

$0.02 per share. Restructuring expenses include severance and other employee expenses as well as manufacturing equipment relocation costs.

Due to the seasonality of our businesses, the Company generally uses cash in the first half of the year and generates cash in the second half of the year. The Company used $24.3 million less cash in operations in the first quarter 2009 versus the first quarter 2008 and, in addition, capital spending levels decreased by $3.7 million in the quarter versus a year ago

The Company believes that cash on hand, internally generated funds and existing credit arrangements provide sufficient liquidity to meet current commitments and service existing debt. At the end of the first quarter 2009, the Company s ratio of gross debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA) was 2.2 versus 2.4 at the end of the first quarter 2008. The Company s revolving loan agreement with its banks is in place until the end of

2011 and the Company has no scheduled principal payments on its long term debt until 2015.

Mr. Trumbull added:

"Given the uncertainty related to the global recession, and the impacts on our customers, it is very difficult to predict 2009 sales levels.

However, as we indicated in our fourth quarter 2008 earnings release, we are managing the Company for cost reductions and liquidity. We have aggressive cost reduction efforts in place in three broad categories:

  1. Reductions in raw material prices, including copper, steel, resins, petroleum and purchased components. We believe for the balance of 2009, these reductions will result in approximately $5 to $7 million of cost benefits depending on the required manufactured volume and sales mix of our products.
  2. Direct labor costs reductions resulting from the move of our Siloam Springs, Arkansas factory to Linares, Mexico. We will be moving 325,000 man hours during 2009 with an average labor savings of $16 per hour. We believe that for the balance of 2009 this will result in $3 to $5 million in cost reductions depending on the required manufactured volume and sales mix of our products.
  3. Fixed costs reductions which include curtailing manufacturing fixed costs in Siloam Springs, a reduction of our global salary headcount of approximately 8 percent, and reductions in employee benefits and other discretionary spending. We believe for the balance of 2009 these fixed costs initiatives, including the impact of the stronger dollar, will result in reductions of about $15 million including the added expenses of acquisitions.

In total, the Company expects to realize 2009 cost savings of between

$23 and $27 million. We are confident we can obtain these savings, which will be realized primarily in the last two quarters of the year.

Nothing that we are doing to reduce costs will jeopardize our reputation for superior quality and customer service. Our response to this recession will enable us to emerge a leaner enterprise with lower SG&A and fixed manufacturing costs-and thus a lower breakeven point."

About Franklin Electric

Franklin Electric is a global leader in the production and marketing of systems and components for the movement of water and automotive fuels.

Recognized as a technical leader in its specialties, Franklin serves customers around the world in residential, commercial, agricultural, industrial, municipal, and fueling applications.

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