Franklin Electric Reports Record Fourth Quarter 2013 Sales and Earnings

Fourth quarter 2013 sales were $229.7 million, an increase of 12 percent compared to 2012 fourth quarter sales of $205.2 million. The Company’s organic sales growth was 13 percent excluding acquisitions and the impact of foreign currency translation.

Scott Trumbull, Franklin Electric’s Chairman and Chief Executive Officer, commented: "We are pleased to report that our sales and adjusted net income for both the fourth quarter and full year 2013 were again records for any fourth quarter and year in the Company’s history, as we ended the year on a strong note. During the fourth quarter 2013, our consolidated sales grew by 12 percent and consolidated operating income after non-GAAP adjustments grew by 14 percent compared to the fourth quarter prior year. Our global Water Systems business had a very strong quarter with sales increasing by 13 percent and operating income, after non-GAAP adjustments, increasing by 18 percent. While our Water Systems business grew in virtually all regions of the world, our teams in the U.S. and Canada were our star performers, providing 39 percent of our consolidated sales during the fourth quarter and achieving 25 percent sales growth led by strong demand for mobile dewatering systems, residential and light commercial groundwater pumps, and drives and controls."

Water Systems

Water Systems sales were $178.4 million in the fourth quarter 2013, an increase of $20.9 million or about 13 percent versus the fourth quarter 2012 sales of $157.5 million. Sales from businesses acquired since the fourth quarter of 2012 were $0.6 million or less than 1 percent. Water Systems sales were reduced by $4.9 million or about 3 percent in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was about 16 percent.

Water Systems sales in the U.S. and Canada represented 39 percent of consolidated sales and grew by about 25 percent compared to the prior year. All of this growth was organic excluding the impact of foreign currency translation. There were three primary products that accounted for the sales growth in the U.S. and Canada: dewatering equipment; groundwater pumps; and drives and controls.

U.S. demand for the Company’s Pioneer branded mobile dewatering equipment grew rapidly during the fourth quarter in the upstream oil and gas market. In addition, the Company believes that Pioneer is gaining share in the U.S. pump rental market because of that brand’s reputation for efficiency and durability. Pioneer branded products also achieved significant sales gains in the commercial construction market in Western Canada during the fourth quarter.

U.S. and Canadian residential and light commercial groundwater pumps sales increased by 25 percent during the fourth quarter. As previously reported, in the third quarter 2013 distributor orders for residential and light commercial groundwater pumps declined and the Company believes this decline resulted in distributors inventories falling below their target levels. As a result, a portion of the 25 percent sales increase during the fourth quarter is attributable to distributors rebuilding stocks to target levels in the face of growing demand in the residential construction market. The Company also believes that during the fourth quarter a number of distributors increased purchases in order to achieve annual sales volume rebate targets.

U.S. and Canadian drive and control sales grew by 18 percent in the fourth quarter. Sales of drives and controls in the residential and light commercial market grew by over 20 percent during the quarter, a reflection of more robust new home construction activity. The Company’s line of drives for agricultural and industrial applications also grew at a strong double digit rate.

Water Systems sales in Latin America were about 13 percent of consolidated sales for the fourth quarter and increased by about 2 percent compared to the fourth quarter of the prior year. Excluding acquisitions and the impact of foreign currency translation, Latin American sales increased by about 8 percent compared to the fourth quarter 2012. Most of the sales growth in Latin America occurred in Brazil, where demand for 4 inch groundwater pumps and motors that were launched two years ago continued to grow. In total, sales in Brazil grew organically by 13 percent excluding the impact of foreign currency translation. The new factory being built in Brazil to support additional growth is scheduled to open in the second quarter of 2014.

Water Systems sales in the Middle East and Africa were about 12 percent of consolidated sales and grew by about 3 percent compared to the fourth quarter 2012. Excluding acquisitions and the impact of foreign currency translation, sales increased by about 9 percent compared to the fourth quarter 2012. Growing demand for the line of Impo branded groundwater pumps and motors, produced in the Company’s Turkish factory, accounted for much of the growth in the Middle East and Africa during the fourth quarter.

Water Systems sales in Europe were about 7 percent of consolidated sales and grew by about 5 percent compared to the fourth quarter 2012. Excluding acquisitions and the impact of foreign currency translation, European sales increased about 5 percent compared to the fourth quarter 2012. Growing demand for Pioneer branded mobile dewatering equipment and for the Company’s newly launched line of condensate pumps more than offset a modest decline in demand for groundwater pumps in Europe during the fourth quarter.

Water Systems sales in the Asia Pacific region were 7 percent of consolidated sales and increased by about 7 percent compared to the fourth quarter prior year. Excluding acquisitions and the impact of foreign currency translation, Asia Pacific sales increased by about 11 percent compared to the fourth quarter 2012. The Asia Pacific region experienced very strong sales growth in Southeast Asia and China in high horsepower groundwater motors and pumps used for irrigation, industrial, and municipal applications. Together, sales in Southeast Asia and China grew by 40 percent during the fourth quarter compared to the prior year. This growth offset a modest decline in sales in the more mature markets in the region, primarily Australia.

Water Systems operating income, after non-GAAP adjustments, was $26.1 million in the fourth quarter 2013, an increase of 18 percent versus the fourth quarter 2012. The fourth quarter operating income margin after non-GAAP adjustments was 14.6 percent, up 50 basis points from 14.1 percent in the fourth quarter of 2012. Operating income margin after non-GAAP adjustments increased in Water Systems primarily due to fixed costs leverage on higher sales.

Fueling Systems

Fueling Systems sales represented 22 percent of consolidated sales and were $51.3 million in the fourth quarter 2013, an increase of $3.6 million or about 7 percent versus the fourth quarter 2012 sales of $47.7 million. Sales from businesses acquired since the fourth quarter of 2012 were $2.1 million or about 4 percent. Fueling Systems sales were increased by $0.5 million or about 1 percent in the quarter due to foreign currency translation. Fueling Systems sales growth, excluding acquisitions and foreign currency translation, was about 2 percent.

Developing regions represented 32 percent of the Fueling Systems sales during the fourth quarter and grew by 24 percent. The Company’s growth rates in Brazil, China, and the rest of the Asia Pacific region were strong and were partially offset by lower sales for fueling equipment in Europe. Fueling equipment sales in the U.S. and Canada grew by about 7 percent driven primarily by the Flexing product line acquired in the fourth quarter of 2012, but tempered by a decline in dispensing product sales.

Fueling Systems operating income after non-GAAP adjustments was $11.8 million in the fourth quarter of 2013 compared to $11.0 million after non-GAAP adjustments in the fourth quarter of 2012, an increase of about 7 percent. The fourth quarter operating income margin after non-GAAP adjustments was 23.0 percent, flat to the 23.1 percent of net sales in the fourth quarter of 2012.

Overall

The Company’s consolidated gross profit was $76.0 million for the fourth quarter of 2013, an increase of $7.5 million, or about 11 percent, from the fourth quarter of 2012 gross profit of $68.5 million. The gross profit as a percent of net sales was 33.1 percent in the fourth quarter of 2013 flat to the fourth quarter of 2012.

Selling, general, and administrative (SG&A) expenses were $52.3 million in the fourth quarter of 2013 compared to $47.4 million in the fourth quarter of prior year, an increase of $4.9 million or about 10 percent. SG&A expenses as a percentage of sales were 22.8 percent in the fourth quarter, 30 basis points lower than the fourth quarter 2012. SG&A expense increases in the fourth quarter of 2013 related to certain strategic initiatives including new product development expenses, the launch of the Company’s pump rental initiative, the commercialization of the Company’s new artificial lift product offering and opening new product distribution centers.

Non-GAAP expenses for the fourth quarter 2013 were $2.4 million and included $1.5 million in restructuring cost, of which $1.3 million related to an asset write down on the sale of a property in Oklahoma City, OK. Additionally, relocation costs for the new headquarters were $0.2 million and other legal and advisory costs primarily related to potential acquisitions were $0.9 million. The fourth quarter 2013 non-GAAP adjustments round to an EPS impact of about $0.03.

During the fourth quarter, the Company incurred foreign exchange losses of $2.2 million primarily as a result of rapidly changing foreign currency valuations versus the U.S. dollar primarily in Turkey, Brazil and Canada.

The Company ended the fourth quarter of 2013 with a cash balance of $134.6 million, which was $31.2 million higher than at the end of 2012. The cash balance increased primarily as a result of cash generated from operations and proceeds from debt offset by additions to property, plant and equipment of approximately $67.6 million in 2013.

The Company had no outstanding balance on its revolving debt agreement at the end of the fourth quarter of 2013 or 2012.

Commenting on the outlook for the first quarter of 2014, Mr. Trumbull said: "We expect that during the first quarter of 2014 our Water Systems sales will improve by 6 to 8 percent and our adjusted operating income to improve by 8 to 10 percent versus the record first quarter of 2013. Operating income is expected to grow at a higher rate than sales due to a favorable sales mix and better operating leverage on fixed costs than the first quarter 2013. We estimate that our Fueling Systems sales will be flat in the first quarter of 2014, but that the adjusted operating income will grow by 12 to 14 percent primarily due to improved sales mix. Last year in the first quarter, the Fueling Systems business had large shipments of products to customers in India. While we anticipate Fueling Systems sales in India for full year 2014 to exceed 2013, we do not forecast that increase in the first quarter 2014. Overall, we are expecting our consolidated first quarter sales and adjusted EPS to grow by 6 to 8 percent compared to the first quarter 2013."