Franklin Electric Reports Second Quarter 2017 Sales and Earnings

Gregg Sengstack, Franklin Electric’s Chairman and Chief Executive Officer, commented: “We’re pleased with the overall performance of our Company in the second quarter in which we achieved solid organic sales growth in both our Water and Fueling Systems segments, led by a 10 percent Water Systems sales growth in the United States and Canada. The Distribution companies that we acquired in the quarter, reported in a new segment, started off with a strong second quarter achieving higher than expected operating income margins and exceeding our earnings expectation. Although our reported earnings per share of $0.64 were a record for any second quarter in our history, about six cents of this amount was related to a one-time gain. We are optimistic about the second half of 2017 and are raising our full year 2017 earnings per share guidance range to $1.87 to $1.97.”

Water Systems

Water Systems sales were $203.4 million in the second quarter 2017, an increase of $8.8 million or about 5 percent versus the second quarter 2016 sales of $194.6 million. Water Systems sales decreased by $1.8 million or about 1 percent in the quarter due to foreign currency translation. Water Systems organic sales were up about 6 percent compared to the second quarter 2016.

Water Systems sales in the U.S. and Canada were up about 10 percent compared to the prior year second quarter. Sales of dewatering equipment increased by 25 percent in the second quarter when compared to the prior year resulting from the continued diversification of customers and new channel development for Pioneer branded equipment. Sales of other surface pumping equipment increased by 8 percent in part due to wet weather conditions in the upper Midwest and Canada. Sales of groundwater pumping equipment increased about 5 percent.

Water Systems sales in markets outside the U.S. and Canada overall declined by about 1 percent, due primarily to the impact of foreign currency translation. International Water Systems sales were led by improved sales in Europe, the Middle East and Africa, but were offset by lower sales volumes in the Latin American and Asia Pacific markets in the quarter compared to last year.

Water Systems operating income was $32.8 million in the second quarter 2017, up $1.3 million or 4 percent versus the second quarter 2016 and operating income margin was 16.1 percent compared to the 16.2 percent in the second quarter 2016.

Fueling Systems

Fueling Systems sales were $61.4 million in the second quarter 2017, an increase of $3.9 million or about 7 percent versus the second quarter 2016 sales of $57.5 million. Fueling Systems sales decreased by $0.7 million or about 1 percent in the quarter due to foreign currency translation. Fueling Systems organic sales increased about 8 percent compared to the second quarter of 2016.

Fueling Systems sales in the U.S. and Canada grew by about 4 percent during the quarter. The increase was primarily in pumping systems. Outside of the U.S. and Canada, Fueling Systems revenues grew by about 18 percent, led by stronger sales in Europe, Africa and Asia.

Fueling Systems operating income was $14.9 million in the second quarter of 2017, down $0.6 million or about 4 percent compared to $15.5 million in the second quarter of 2016 and the second quarter operating income margin was 24.3 percent, a decrease of 270 basis points from the 27.0 percent of net sales in the second quarter of 2016. The decline in operating income was primarily due to adverse product and geography sales mix shifts.

Distribution

Distribution sales were $59.1 million in the second quarter 2017. Based on the information provided for second quarter 2016 sales, management estimates second quarter Distribution sales declined by about 2 percent from the second quarter of 2016 primarily driven by adverse weather conditions in the Western portion of the United States.

Distribution operating income was $3.7 million in the second quarter of 2017 and the second quarter operating income margin was 6.3 percent.

Overall

The Company’s consolidated gross profit was $102.8 million for the second quarter of 2017, an increase of $12.1 million, or about 13 percent, from the second quarter of 2016 gross profit of $90.7 million. The gross profit as a percent of net sales was 33.7 percent in the second quarter of 2017 and decreased about 230 basis points versus 36.0 percent during the second quarter 2016. The gross profit increase was primarily due to higher sales. The decline in gross profit margin percentage is primarily due to the lower gross profit margin of the Distribution segment. Excluding the Distribution segment, gross profit margin was 34.5 percent.

Selling, general, and administrative (SG&A) expenses were $68.3 million in the second quarter of 2017 compared to $58.0 million in the second quarter of the prior year, an increase of $10.3 million or about 18 percent. The increase in SG&A expenses from acquired businesses were $13.0 million. Excluding the acquired entities, the Company’s SG&A expenses in the second quarter of 2017 decreased by $2.7 million or about 5 percent.

The Company’s second quarter 2017 earnings include a gain on the previously held equity investments in the three Distribution entities as indicated in the announcement made on April 10, 2017 regarding the acquisition of the controlling interests of these entities. This gain, included in “Other Income” in the Company’s Income Statement, represents about $4.8 million of pre-tax earnings or $0.06 of earnings per share.

The Company ended the second quarter of 2017 with a cash balance of about $55 million versus about $104 million at the end of 2016, down primarily due to acquisitions and increased working capital needs. Inventory levels at the end of the second quarter 2017 were $297 million versus year end 2016 of $203 million. About $60 million of the inventory increase is due to the Distribution segment acquisitions.

Commenting on the outlook, Mr. Sengstack said: “As we look forward to the back half of 2017, we are encouraged by the start we’ve had in our new Distribution segment and the strength of our Water Systems businesses in North America. However, we remain mindful of continued weakness in many of the international Water Systems end markets that we serve. We expect our Fueling Systems segment to have a strong top and bottom line in the second half. As a result of this outlook for the rest of the year, and the six-cent gain that was taken on the Distribution segment minority investments in the second quarter, we are increasing our full year 2017 earnings per share guidance from a range of $1.77 to $1.87 to a range of $1.87 to $1.97.”