Franklin Electric Reports Fourth Quarter 2019 Sales and Earnings

02.03.2020
Franklin Electric Co., Inc. reported fourth quarter 2019 GAAP fully diluted earnings per share (EPS) of $0.42, versus a GAAP fully diluted EPS in the fourth quarter 2018 of $0.51.

Fourth quarter 2019 sales were $320.1 million, compared to 2018 fourth quarter sales of $316.7 million.  Fourth quarter EPS before the impact of restructuring expenses was $0.43 compared to 2018 fourth quarter EPS before restructuring of $0.52 (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 fourth quarter operating results were generally in line with our expectations which were to be about the same as the fourth quarter last year.  Our revenue was up 1 percent from last year as we benefitted from stronger sales in our Distribution business, our water treatment acquisition and continued strength in Fueling Systems, all of which was offset by the expected decline in our dewatering pump systems sales in the quarter.  These sales impacts were offset with lower selling, general and administrative expenses and resulted in operating income being flat in the quarter.  Our Earnings Per Share decline versus last year’s fourth quarter is entirely due to higher foreign exchange transactional losses that are non-operational in nature and below the operating income line.

“In 2019, our team executed well in a tough end market environment. While earnings were below our expectations, our free cash flow conversion of net income increased from 101 percent in 2018 to 163 percent in 2019.”

Water Systems

Water Systems sales were $188.2 million in the fourth quarter 2019, versus the fourth quarter 2018 sales of $196.9 million.  In the fourth quarter of 2019, sales from businesses acquired since the fourth quarter of 2018 were $3.1 million.  Water Systems sales decreased 3 percent in the quarter due to foreign currency translation. Water Systems organic sales were lower by 3 percent compared to the fourth quarter of 2018.

Water Systems sales in the U.S. and Canada decreased by 10 percent overall compared to the fourth quarter 2018, primarily due to lower sales volumes of dewatering equipment.  Sales of dewatering equipment decreased by nearly 50 percent due to lower sales in rental channels and a surge of sales in the fourth quarter 2018 driven by regulatory demand.  Sales of groundwater pumping equipment increased by 4 percent versus the fourth quarter 2018.  The increase in groundwater pumping systems was primarily due to increased sales of residential water systems. Sales of surface pumping equipment decreased by 5 percent on lower sales of both wastewater and water transfer systems.

Water Systems sales in markets outside the U.S. and Canada increased by 2 percent overall.  Foreign currency translation decreased sales by 6 percent.  Outside the U.S. and Canada, Water Systems organic sales increased by 8 percent, primarily driven by higher sales in Latin America, as well as increased sales in both the Europe, Middle East, and Africa markets, and the Asia Pacific markets.

Water Systems operating income was $24.5 million in the fourth quarter 2019, compared to $27.0 million in the fourth quarter 2018 primarily driven by lower revenues.

Fueling Systems

Fueling Systems sales were $77.3 million in the fourth quarter 2019 compared to fourth quarter 2018 sales of $75.0 million and were a record for any fourth quarter.  Fueling Systems sales decreased 1 percent in the quarter due to foreign currency translation. Fueling Systems organic sales increased 4 percent compared to the fourth quarter of 2018.

Fueling Systems sales in the U.S. and Canada increased by 7 percent compared to the fourth quarter 2018.  The increase was principally in the pumping and fuel management systems product lines.  Outside the U.S. and Canada, Fueling Systems revenues were flat, as increased sales in Europe, India and Latin America were offset by lower sales in China.

Fueling Systems operating income was a record for any fourth quarter at $20.2 million compared to $17.0 million in the fourth quarter of 2018.  Fueling Systems operating income was higher in the quarter primarily due to favorable product sales mix.

Distribution

Distribution sales were $64.4 million in the fourth quarter 2019, versus fourth quarter 2018 sales of $56.0 million.  In the fourth quarter of 2019, sales from businesses acquired since the fourth quarter of 2018 were $4.8 million.  The Distribution segment organic sales increased 6 percent compared to the fourth quarter of 2018.

The Distribution segment recorded an operating loss of $2.5 million in the fourth quarter of 2019, compared to a loss of $2.9 million in the fourth quarter of 2018.  Higher product costs not completely offset by price and higher operating expenses contributed to the Distribution segment earnings loss.

Overall

The Company’s consolidated gross profit was $101.3 million for the fourth quarter of 2019, a decrease from the fourth quarter of 2018 gross profit of $104.3 million.  The gross profit decrease was primarily due to lower Water Systems sales volume which more than offset gross profit increases on higher Fueling Systems and Distribution sales volume.  The gross profit as a percent of net sales was 31.6 percent in the fourth quarter of 2019 versus 33.0 percent in the fourth quarter of 2018.

Selling, general, and administrative (SG&A) expenses were $71.9 million in the fourth quarter of 2019 compared to $75.0 million in the fourth quarter of 2018. SG&A expenses from acquired businesses was $1.8 million and excluding the acquired entities, the Company’s SG&A expenses in the fourth quarter of 2019 were $70.1 million, a decrease of 7 percent from the fourth quarter 2018, partially due to lower variable performance based compensation expenses and due to the impact of foreign currency translation reducing expenses versus the prior year.

Transactional foreign exchange losses were $3.8 million in the fourth quarter 2019 versus foreign exchange gains of $2.4 million in the fourth quarter of 2018.  These foreign exchange gains and losses are below operating income, are non-operational in nature, are non-cash, and are not representative of ongoing results of the Company.  The change in foreign exchange gains and losses from the fourth quarter of 2018 represents about $0.11 cents of earnings per share and is primarily the result of the strengthening U.S. dollar compared to currencies in emerging markets, most notably the Argentina Peso.

Commenting on the outlook for 2020, Mr. Sengstack said:

“As we look towards 2020, we feel confident in our ability to grow earnings and sustain operating cash generation in excess of net income while achieving organic growth in our Water Systems and Distribution segments.  Although Fueling Systems global demand remains robust, we expect revenues in this segment to be flat in 2020 due to a significant decline in China.

Here are some of the key assumptions for our 2020 outlook:

  • More normal North America precipitation rates than the record levels seen in 2019
  • Organic Growth, net of foreign exchange, of about 5 to 7 percent in Water Systems and Distribution, but flat in Fueling Systems
  • Free Cash Flow conversion of net income between 120 percent and 140 percent
  • An effective tax rate between 18 and 20 percent
  • Capital spending of around $30 million and Depreciation and Amortization of around $38 million

As a result, we currently estimate our 2020 earnings per share before restructuring charges to be between $2.25 and $2.35.”

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