Franklin Electric Reports Third Quarter 2014 Sales and Earnings

Third quarter 2014 sales were $278.1 million, an increase of 11 percent compared to 2013 third quarter sales of $249.8 million and a record for any third quarter in the Company s history. The Company s organic sales growth was about 8 percent excluding acquisitions and the impact of foreign currency translation.

Gregg Sengstack, Franklin Electric s Chief Executive Officer, commented:

"Despite an unfavorable sales mix shift in our Water businesses, we are pleased to report record sales for the third quarter of 2014 and adjusted earnings per share equal to last year s third quarter, which were the highest adjusted earnings per share for any third quarter in the Company s history.

Our Fueling Systems business contributed solid results in the quarter with revenues growing by nearly 20 percent and adjusted operating income increasing by 26 percent.

During the third quarter we announced two acquisitions in India, one in Water and one in Fueling. Both of these acquisitions, along with the Bombas Leao acquisition in Brazil during the second quarter, will further expand our reach and distribution channels into developing regions and markets. Sales in developing regions were about 40 percent of our consolidated revenues and were another solid achievement in the quarter, growing by 20 percent from the third quarter of the prior year."

Water Systems

Water Systems sales were $216.6 million in the third quarter 2014, an increase of $18.7 million or about 9 percent versus the third quarter 2013 sales of $197.9 million. Sales from businesses acquired since the third quarter of 2013 were $9.9 million or about 5 percent. Water Systems sales were reduced by $2.9 million or about 1 percent in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was about 6 percent.

Water Systems sales in the U.S. and Canada represented 41 percent of consolidated sales and increased by about 5 percent compared to the prior year. U.S. and Canada sales of Pioneer branded mobile pumping equipment increased by over 75 percent in the third quarter of 2014 compared to the prior year. Sales of surface water pumping equipment grew by 6 percent in the third quarter. These sales increases in the U.S and Canada were partially offset by lower sales of groundwater pumping equipment which declined about 16 percent in the quarter due principally to weaker demand in the agriculture sector as a result of less favorable weather and, to a lesser extent, the continuing inventory reset which has resulted from distributor changes in the channel.

Water Systems sales in Latin America were about 14 percent of consolidated sales for the third quarter and increased by about 34 percent compared to the third quarter 2013. Foreign currency translation had an insignificant impact on Latin American sales compared to the third quarter prior year. Acquisition related sales were about 27 percent, and after excluding acquisitions and the impact of foreign currency translation, Latin American sales increased 7 percent. Sales in Brazil were up 10 percent in the quarter and distribution outlets in Chile and Colombia also contributed to increased sales in these markets compared to the third quarter 2013.

Water Systems sales in the Middle East and Africa were about 10 percent of consolidated sales and were flat compared to the third quarter 2013. Excluding the impact of foreign currency translation, sales increased by about 6 percent compared to the third quarter 2013. The growth was driven by strong sales of groundwater pumping equipment in Turkey.

Water Systems sales in Europe were about 7 percent of consolidated sales and declined by about 5 percent compared to the third quarter 2013. Acquisition related sales were about 1 percent. The impact of foreign currency translation decreased sales by about 1 percent compared to the third quarter 2013. Excluding acquisitions and the impact of foreign currency translation, European sales decreased about 5 percent compared to the third quarter 2013. Sales were flat across the Franklin branded Water Systems products in Europe but down in the Pioneer branded mobile pumping equipment products in the third quarter 2014.

Water Systems sales in the Asia Pacific region were about 6 percent of consolidated sales and increased by about 38 percent compared to the third quarter 2013. Excluding acquisitions, Asia Pacific sales increased by about 24 percent compared to the third quarter prior year. Sales in Australia grew by 68 percent led by improved Pioneer product sales in the region and aided in part by the launch of the new solar powered water well pumping system. Sales in Southeast Asia grew by 48 percent compared to the third quarter prior year, as the Company continues to benefit from improved customer service levels attributable to Company owned inventory in the region.

Water Systems operating income, after non-GAAP adjustments, was $31.0 million in the third quarter 2014, a decrease of about 16 percent versus the third quarter 2013. The third quarter operating income margin after non-GAAP adjustments was 14.3 percent, down 430 basis points from 18.6 percent in the third quarter of 2013.

Water Systems adjusted operating income margin declined primarily due to a sales mix shift during the third quarter. Historical Water Systems sales mix is 65 percent groundwater and 35 percent surface pumping equipment. During the third quarter 2014, the actual sales mix was 59 percent groundwater and 41 percent surface water pumping equipment. The shift primarily occurred because of a decline in the sale of pumps for agricultural irrigation and rapid growth of the Pioneer branded mobile pumping equipment products. The profit margin on agricultural irrigation pumps is higher than that on surface pumps. Water Systems margins also declined in the quarter due to higher fixed costs, in part from recent acquisitions.

Fueling Systems

Fueling Systems sales represented 22 percent of consolidated sales and were $61.5 million in the third quarter 2014, an increase of $9.6 million or about 19 percent versus the third quarter 2013 sales of $51.9 million. Fueling Systems sales increased by $0.3 million or less than 1 percent in the quarter due to foreign currency translation. Fueling Systems acquisition related sales in the third quarter were less than 1 percent. Excluding acquisitions and the impact of foreign currency translation, Fueling Systems sales increased about 18 percent compared to the third quarter 2013.

During the third quarter, Fueling Systems shipped about $3.5 million of equipment to India to partially fill a large customer order. Excluding the impact of these India sales, Fueling Systems sales grew by about 11 percent. Sales growth was across all product lines and all regions of the world.

Fueling Systems operating income after non-GAAP adjustments was $15.7 million in the third quarter of 2014 compared to $12.5 million after non-GAAP adjustments in the third quarter of 2013, an increase of about 26 percent. The third quarter operating income margin after non-GAAP adjustments was 25.5 percent, an increase of 140 basis points from the 24.1 percent of net sales in the third quarter of 2013. The increase was primarily driven by fixed cost leverage on higher sales.

Overall

The Company s consolidated gross profit was $89.2 million for the third quarter of 2014, an increase of $2.2 million, or about 3 percent, from the third quarter of 2013 gross profit of $87.0 million. The gross profit as a percent of net sales was 32.1 percent in the third quarter of 2014, down about 270 basis points versus 34.8 percent during the third quarter 2013. The previously discussed mix shift in the Water Systems segment contributed significantly to lower gross profit margins in the quarter.

Selling, general, and administrative (SG&A) expenses were $55.6 million in the third quarter of 2014 compared to $48.4 million in the third quarter of prior year, an increase of $7.2 million or about 15 percent. The increase in SG&A expenses from acquired businesses was $3.2 million. Excluding the acquisitions, the Company s overall SG&A expenses in the third quarter of 2014 increased by $4.0 million or 8 percent to prior year third quarter. The remaining increases in SG&A were primarily driven by higher commissions, sales, marketing and selling related costs in support of higher sales and increases in Research Development and Engineering spending.

The Company ended the third quarter of 2014 with a cash balance of $77.4 million, which was $57.1 million lower than at the end of 2013. The cash balance decrease is primarily attributable to increased working capital needs and acquisitions.

Commenting on the outlook for the fourth quarter of 2014, Mr. Sengstack said:

"As we look forward to the fourth quarter, our Water Systems outlook assumes the continuation of many of the same factors we experienced in the third quarter. Although we believe organic revenue growth will be solid, product sales mix will continue to negatively affect our adjusted operating income as we expect ground water equipment sales to be lower in the U.S., due principally to the decline in the sale of agricultural irrigation pumping equipment. As a result, we are projecting that our fourth quarter 2014 global Water Systems sales will increase by 8 to 10 percent, but our adjusted operating income will decline 10 to 12 percent. It is important to note that as we move into 2015, we expect our Water Systems sales mix to return to more historical levels, restoring the operating margin profile the Company has consistently achieved.

We estimate that our Fueling Systems sales and adjusted operating earnings will grow in the fourth quarter of 2014 by 4 to 6 percent as compared to a record 2013 fourth quarter.

Finally, our consolidated adjusted earnings per share growth will be in the 3 to 5 percent range, due in part, to the continued benefit of tax planning with respect to our foreign operations."