Franklin Electric Reports Record Third Quarter Sales and Earnings

10.11.2011

Franklin Electric Co., Inc. reported third quarter 2011 diluted earnings per share (EPS) of $0.80, a record for any third quarter in the Company s history, and an increase of 54 percent compared to 2010 third quarter diluted EPS of $0.52.

In the third quarter of 2011, the Company s adjusted EPS were $0.82, a 55 percent increase over the adjusted EPS during the third quarter 2010. Third quarter 2011 sales were $224.4 million, a record for any third quarter in the Company s history and an increase of 19 percent compared to 2010 third quarter sales of $188.4 million.

Scott Trumbull, Franklin Chairman and Chief Executive, commented:

"Franklin people worldwide have again achieved outstanding quarterly financial results. Sales, operating income and net income were all records for any third quarter in the Company s history, while at the same time we invested in our future by increasing research, development and engineering (RD&E) spending by 31 percent.

Our gross profit margin as a percent of sales increased by 130 basis points compared to the third quarter last year; and our operating income margin after non-GAAP adjustments improved by 240 basis points. As has been the case during the first half of 2011, the third quarter continued to be negatively impacted by rising raw material costs. However, largely as a result of the facilities restructuring and lean initiatives that we have been implementing over the past several years, we were able to more than offset these increases with labor productivity improvements, fixed cost control, and operating leverage.

Although we have seen some recent material cost declines in certain commodity markets, our overall raw material costs continue to rise. As a result we have planned sales price increases of 3 to 5 percent effective in the first quarter 2012 in markets that represent about 75 percent of our consolidated sales. We currently plan to implement sales price increases on most of the balance of our markets in the second quarter of next year."

Water Systems

Water Systems sales were $179.4 million in the third quarter 2011, an increase of $26.5 million or 17 percent versus the third quarter 2010. Acquisition related sales during the third quarter were $9.9 million or about 6 percent of prior year sales. Excluding acquisitions, Water Systems sales grew by 11 percent. Foreign currency translation rate changes increased sales $5.7 million, or about 4 percent, compared to sales in the third quarter of 2010.

Water Systems sales in the U.S. and Canada were 41 percent of consolidated sales and grew by 13 percent compared to the third quarter prior year. Leading the Company s growth in the U.S. and Canada were sales of pumping systems for industrial and irrigation applications, which increased by about 30 percent during the quarter. The combination of high crop prices, which have led to more discretionary capital for farmers, along with dry conditions in portions of the Southwest and Midwest, have resulted in strong demand for agricultural irrigation products. Sales of pumping systems for residential and light commercial water and wastewater applications in the U.S. and Canada grew by about 9 percent compared to the third quarter prior year as replacement sales for these products remained robust.

Water Systems sales in EMENA, which is Europe, the Middle East, and North Africa, were 16 percent of consolidated sales and grew by 38 percent, or $10.2 million, compared to the third quarter prior year. Acquisition related sales during the third quarter were $9.9 million and foreign currency translation rate changes increased sales $2.7 million. EMENA sales declined by about 9 percent during the quarter when acquisition and foreign currency translation impacts are excluded primarily due to continued political and financial uncertainty throughout the region.

Water Systems sales in Latin America were about 12 percent of consolidated sales for the quarter and grew by 20 percent compared to the third quarter prior year. Sales in Latin America were led primarily by double digit growth in Brazil, Mexico and Argentina. Foreign currency translation added $1.5 million or about 7 percent to the growth rate.

Water Systems sales in the Asia Pacific region were 5 percent of consolidated sales and grew by 12 percent compared to the third quarter prior year. Asia Pacific sales growth was widespread across the region with solid double digit gains in several of the largest regional markets including Australia, Japan and China, offset by a decline in sales in South Korea.

Water Systems sales in Southern Africa represented 5 percent of consolidated sales during the quarter and were flat compared to the same quarter of the prior year.

Water Systems operating income, after non-GAAP adjustments, was $29.6 million in the third quarter 2011, an increase of 30 percent versus the third quarter 2010. The third quarter operating income margin after non-GAAP adjustments was 16.5 percent and increased by 170 basis points compared to the third quarter 2010. This increased profitability was the result of operating leverage on increased sales and improvements in productivity.

During the fourth quarter 2011, a long term submersible motor supply agreement with a major fueling equipment competitor will expire and will not be renewed. Over the past several years sales under this agreement have represented about 1 percent of the Company s consolidated sales and these sales have been reflected in the Water Systems segment.

Fueling Systems

Fueling Systems sales were $45.0 million in the third quarter 2011 and increased $9.5 million or about 27 percent from the third quarter 2010. Excluding acquisition sales of $6.6 million, third quarter sales were $38.4 million and grew by about 8 percent, with most of the growth in the U.S. and Canada. This growth was broad based across all product lines in the U.S. and Canada.

Fueling Systems operating income after non-GAAP adjustments was $9.6 million in the third quarter of 2011 compared to $6.6 million after non-GAAP adjustments in the third quarter 2010, an increase of 45 percent. The third quarter operating income margin after non-GAAP adjustments was 21.3 percent and increased by 270 basis points compared to the 18.6 percent of net sales in the third quarter 2010.

Overall

The Company s consolidated gross profit was $73.7 million for the third quarter of 2011, an increase of $14.3 million, or 24 percent, from the third quarter of 2010 and a record for any third quarter in the Company s history. The gross profit as a percent of net sales increased to 32.9 percent for the third quarter of 2011 from 31.5 percent for the third quarter of 2010. The gross profit margin improvement was due to leveraging fixed costs on higher sales and productivity initiatives.

Selling, General and Administrative (SG&A) expenses were $44.8 million in the third quarter of 2011 compared to the $39.6 million from the third quarter of 2010, an increase of $5.2 million or about 13 percent. In the third quarter 2011, increases in SG&A attributable to acquisitions were $2.6 million. Additional increases in SG&A costs during the third quarter of 2011 resulted from increased costs for marketing and selling-related expenses, increased RD&E expenses and increased information technology related expenditures for acquisition integrations.

At the end of the third quarter 2011, the Company s cash balance was $128.1 million which was $6.0 million higher than the end of the third quarter 2010. Since the end of 2010, the Company s cash position has declined by $12.0 million. Major uses of cash during the first nine months of 2011 included acquisition expenditures of $31.8 million, stock repurchases of $10.6 million and working capital increases of $21.3 million.

The Company had no outstanding balance on its revolving debt agreement at the end of the third quarter 2011 or at year-end 2010.

Commenting on the Company s outlook for the fourth quarter, Mr. Trumbull added:

"We are forecasting that our Water Systems sales will increase by 5 to 9 percent over the prior year quarter and that our Water Systems adjusted operating income will also grow by 5 to 9 percent as raw material costs continue to rise. Our announced price increases will not begin to impact our margins until the first quarter of next year.

We are also forecasting that our Fueling Systems sales will increase by 9 to 13 percent over the prior year quarter and that our Fueling Systems adjusted operating income will grow at a higher rate than sales, or by 16 to 21 percent. We anticipate improved Fueling Systems margins year-over-year in the fourth quarter as we continue to realize benefits from the Petrotechnik integration.

On a consolidated basis we believe that our fourth quarter sales will increase by 6 to 10 percent compared to the prior year; and that our consolidated adjusted operating income will grow by 8 to 12 percent and our consolidated earnings per share after non-GAAP adjustments will increase by 15 to 20 percent."

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