Franklin Electric Reports First Quarter 2020 Sales and Earnings and Provides an Update on Effects of the Global Pandemic
First quarter 2020 sales were $266.8 million, compared to 2019 first quarter sales of $290.7 million. First quarter EPS before the impact of restructuring expenses was $0.24 compared to 2019 first quarter EPS before restructuring of $0.21 (see table below for a reconciliation of GAAP EPS to EPS before restructuring).
Gregg Sengstack, Franklin Electric’s Chairman and Chief Executive Officer, commented:
“Our first quarter results were better than our expectations. While manufacturing revenue was down double digits, improved mix, margins and reduced operating expenses produced an improvement in our operating income that was higher than our expectations. With more normal weather, our distribution revenue was ahead of expectations and results were better than last year. Overall, operating income before restructuring expense was up 11 percent on 8 percent lower sales and our earnings per share before restructuring expenses increased 14 percent versus the first quarter 2019.
As we look forward to the remainder of 2020, the Global Pandemic has created significant uncertainty in our outlook and caused disruptions to both our top and bottom lines. We are pleased to report that our employees around the globe are safe and Franklin Electric products are considered critical to the world’s infrastructure. Our Company’s balance sheet is strong, and whatever the eventual impact of this crisis, we are confident we can emerge even stronger and better prepared to serve our customers.”
Water Systems sales in the U.S. and Canada decreased by 14 percent overall compared to the first quarter 2019, primarily due to lower sales of dewatering equipment. Sales of dewatering equipment decreased by nearly 54 percent due to lower sales in rental channels and substantial uncertainty in oil production end markets. Sales of groundwater pumping equipment increased by 2 percent versus the first quarter 2019. Sales of surface pumping equipment decreased by 14 percent on lower sales of both wastewater and water transfer systems as customers in this channel began to feel the impact of the Global Pandemic and lowered their own inventory levels.
Water Systems sales in markets outside the U.S. and Canada decreased by 11 percent overall. Foreign currency translation decreased sales by 9 percent. Outside the U.S. and Canada, Water Systems organic sales decreased by 2 percent, primarily driven by the Asia Pacific markets as customers in Korea, Japan and China were impacted by the Global Pandemic.
Water Systems operating income was $18.8 million in the first quarter 2020, compared to $19.2 million in the first quarter 2019 primarily driven by lower revenues.
Fueling Systems sales in the U.S. and Canada increased by 7 percent compared to the first quarter 2019. The increase was principally in piping, pumping and fuel management systems product lines. Outside the U.S. and Canada, Fueling Systems revenues declined by 30 percent, driven by lower sales in Asia Pacific, primarily China.
Fueling Systems operating income was $12.1 million in the first quarter of 2020, compared to $12.3 million in the first quarter of 2019.
Distribution sales were $60.4 million in the first quarter 2020, versus first quarter 2019 sales of $53.3 million. The Distribution segment organic sales increased 13 percent compared to the first quarter of 2019. More favorable weather conditions versus the first quarter last year contributed to the revenue growth.
The Distribution segment recorded an operating loss of $2.2 million in the first quarter of 2020, compared to a loss of $4.3 million in the first quarter of 2019.
The Company’s consolidated gross profit was $90.3 million for the first quarter of 2020, an increase from the first quarter of 2019 gross profit of $89.5 million. The gross profit as a percentage of net sales was 33.9 percent in the first quarter of 2020 versus 30.8 percent in the first quarter of 2019 and improved primarily due to better price realization and product sales mix.
Selling, general, and administrative (SG&A) expenses were $75.6 million in the first quarter of 2020 compared to $76.3 million in the first quarter of 2019. SG&A expenses were lower in part because of foreign currency translation versus the prior year and companywide efforts to lower spending in response to the impacts of the Global Pandemic.
The Company believes it has enough liquidity to meet its operating and cash flow requirements for the foreseeable future.
Effects of the Global Pandemic
The top priority of the Company is the health and welfare of its employees and partners around the world. In response to the health risks posed by the Global Pandemic, the Company implemented and has been following the recommended hygiene and social distancing practices promulgated by the United States Centers for Disease Control and the World Health Organization.
The Company’s products and services are generally viewed as essential in most jurisdictions in which the Company operates. Accordingly, the Company’s global manufacturing and distribution operations generally remain open subject to temporary government mandated closures which have occurred in China, Italy, South Africa, India and several countries in South America. These temporary closures have not had a material impact on the ability to supply products to the Company’s customers.
The Company has assessed the end markets it serves to determine changes in demand patterns and customer behaviors. From this assessment, the Company currently believes that the most significant risks to the previously provided financial outlook for 2020 are a reduction of large dewatering equipment sales in the Water Systems segment; Water Systems customers “de-stocking” their inventory, particularly in the U.S. and Canada plumbing channel; and, the deferral or cancellation of the construction of new filling stations in the Fueling Systems segment in the U.S and Canada. Additionally, the strengthening of the U.S. dollar versus most international currencies will result in lower translations of both Net Sales and earnings from many of the Company’s businesses outside the U.S. Beyond these specific end market considerations, the Company may experience other negative impacts to profitability from various government mandated closures and related customer behavior.
Additional adverse financial impacts from these risks include lost operational efficiencies, de-leveraging of the manufacturing fixed costs base due to lower manufactured volumes, and the potential for higher bad debt expense.
The Company has taken action to offset the negative impacts of these risks by implementing various reductions in all discretionary spending.
Commenting on the outlook for 2020 and the effects of the Global Pandemic, Mr. Sengstack said:
“After considering the impacts of the Global Pandemic that we have outlined here, we are withdrawing our 2020 financial guidance. We will revisit the subject of guidance after the second quarter.
Despite the unprecedented and rapidly evolving environment we’re in, I remain confident in our Company’s ability to serve our customers and meet whatever marketplace demands we face. Our people are our greatest strength and are proving once again why Franklin Electric is such a great company.”
Source: Franklin Electric Co., Inc.