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FELE > SEC Filings for FELE > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FRANKLIN ELECTRIC CO INC

Form 10-Q for FRANKLIN ELECTRIC CO INC


8-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Second Quarter 2013 vs. Second Quarter 2012

OVERVIEW

Sales and earnings in the second quarter of 2013 were up from last year. The sales increase was related to the Company's acquisitions, price and volume increases which were partially offset by the negative impact of foreign currency translation. The Company's consolidated gross profit was $94.6 million for the second quarter of 2013, an increase of $10.3 million or about 12 percent from the prior year's second quarter. The gross profit as a percent of net sales increased 170 basis points to 35.9 percent in 2013 from 34.2 percent in second quarter of 2012. The gross profit margin increase was primarily due to fixed cost leverage on higher sales, lower raw material, direct labor and other variable conversion costs and a favorable product sales mix in the quarter. The Company completed a 2-for-1 stock split on March 18, 2013, and all EPS amounts are presented on a post-split basis.

RESULTS OF OPERATIONS

Net Sales
Net sales for the second quarter of 2013 were $263.4 million, an increase of
$16.7 million or 7 percent compared to 2012 second quarter sales of $246.7
million.  The incremental impact of sales from businesses acquired since the
second quarter of 2012 was $9.3 million or about 4 percent. Sales revenue
decreased by $2.0 million or about 1 percent in the second quarter of 2013 due
to foreign currency translation. The sales change for the second quarter of
2013, excluding acquisitions and foreign currency translation, was an increase
of $9.4 million or about 4 percent.

(In millions)    Q2 2013     Q2 2012     2013 v 2012
                              Net Sales
Water Systems   $  213.7    $  202.8    $        10.9
Fueling Systems     49.7        43.9              5.8
Consolidated    $  263.4    $  246.7    $        16.7

Net Sales-Water Systems
Water Systems revenues were $213.7 million in the second quarter 2013, an increase of $10.9 million or about 5 percent versus the second quarter 2012. Sales from businesses acquired since the second quarter of 2012 were $6.2 million or 3 percent. Water Systems sales were reduced by $2.2 million or about 1 percent in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was 3 percent.

Water Systems sales in the U.S. and Canada were 44 percent of consolidated sales and grew by about 6 percent compared to the second quarter of the prior year. Sales from businesses acquired since the second quarter of 2012 were $6.2 million or 6 percent. Water Systems sales were reduced by $0.1 million in the quarter due to foreign currency translation. Water Systems sales were flat in the U.S. and Canada, excluding acquisitions and foreign currency translation.

Residential and light commercial is the Company's largest end use category in the U.S. and Canada and water and wastewater sales in this market increased by 9 percent compared to the second quarter prior year. The sales increase was driven by increased demand for new housing and favorable weather conditions in the Eastern part of the United States versus the same period last year. U.S. and Canada Water Systems sales were down by a double digit reduction in the Pioneer mobile pumping equipment product line. This sales reduction is attributable to a slowdown in demand for mobile pumps in the upstream oil and gas market. Based on order backlogs, the Company currently estimates Pioneer sales will grow at a double digit rate during the back half of the year.

Irrigation and industrial pumping equipment sales declined in the U.S. and Canada by about 2 percent compared to the second quarter of 2012. Last year much of the U.S. was experiencing abnormally dry weather which contributed to heavy shipments of groundwater pumping equipment. This year drought conditions persist west of the Mississippi but it has been unusually wet in the East. Based upon feedback from customers, the Company believes that distributor inventories in the West are in line with demand; but distributors in the East are concerned that inventory levels may be too high unless weather conditions normalize and demand levels increase.


Water Systems sales in the Middle East and Africa were about 12 percent of consolidated sales and declined by about 1 percent compared to the second quarter 2012. The decline was primarily attributable to foreign currency translation. Water Systems in the Middle East and Africa were reduced by $1.4 million or about 5 percent in the quarter due to foreign currency translation. Excluding acquisitions and the impact of foreign currency translation, sales were up about 4 percent compared to the second quarter 2012. Sales in the Gulf region increased by more than 40 percent as the governments in both Saudi Arabia and the UAE are supporting investments in groundwater based irrigation projects. Sales in Botswana and Zambia increased in the second quarter and the Company plans to open a new distribution center in Zambia during the fourth quarter of this year. The Company experienced a sales decline in the Near East including a double digit decline in Turkey. The Company believes this is most likely due to the timing of customer orders as sales in Turkey grew at a double digit rate in the first quarter and are projected to grow at a double digit rate in the third quarter as well.

Water Systems sales in Latin America were about 11 percent of consolidated sales for the second quarter and were up about 8 percent compared to the second quarter of the prior year. Water Systems sales in Latin America were reduced by $0.5 million or about 2 percent in the quarter due to foreign currency translation. Excluding acquisitions and the impact of foreign currency translation, Latin American sales were up about 10 percent compared to the second quarter 2012. The sales growth in Latin America was driven in large part by strong sales in Brazil, as a result of increasing demand for Franklin submersible pumps and motors, customer acceptance of the many product line upgrades that have been implemented over the past two years, and general market conditions. Also, the Company will be opening new distribution centers in Sao Paulo, Brazil and Bogota, Colombia by the end of the third quarter 2013.

Water Systems sales in Europe were about 8 percent of consolidated sales and grew by about 3 percent compared to the second quarter 2012. Water Systems sales improved in Europe by $0.1 million or less than 1 percent in the quarter primarily due to the negative impact of foreign currency translation. Excluding acquisitions and the impact of foreign currency translation, European sales increased about 2 percent compared to the second quarter 2012. The second quarter was impacted by sluggish demand growth for the Company's products across Southern and Western Europe due to the generally weak economic conditions in that region, however sales in Eastern Europe grew by over 30 percent in the quarter, albeit from a small base, due to increased sales and marketing efforts in this region.

Water Systems sales in the Asia Pacific region were 6 percent of consolidated sales and increased by about 13 percent compared to the second quarter prior year. Water Systems sales were reduced by $0.3 million or about 2 percent in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was 15 percent. Over the past several years the Company has focused on building a strong distribution network in Southeast Asia which has contributed to increased sales. Most of the Asia Pacific sales growth occurred in Thailand, the Philippines and Indonesia as populations in these regions are increasingly turning to groundwater sources for their fresh water requirements.

Net Sales-Fueling Systems
Fueling Systems sales were $49.7 million in the second quarter 2013, an increase of $5.8 million or about 13 percent versus the second quarter 2012 sales of $43.9 million. Sales from businesses acquired since the second quarter of 2012 were $3.1 million or about 7 percent. Fueling Systems sales increased by $0.2 million or less than 1 percent in the quarter. Fueling Systems sales growth, excluding acquisitions and foreign currency translation, was about 6 percent.

The second quarter Fueling Systems sales growth was led by sales increases in international markets, which grew by 10 percent compared to the prior year, as customers outside North America continue to invest in the Company's pressure pumping systems for transferring gasoline from underground tanks. As well, adoption of the Company's electronic fuel management products is increasing among international customers. Fueling sales in the U.S. and Canada grew organically by 4 percent as growth of pumping, fuel management, pipe and containment product lines were offset by declines in dispensing equipment and tank truck hardware.

Cost of Sales
Cost of sales as a percent of net sales for the second quarter of 2013 and 2012 was 64.1 percent and 65.8 percent, respectively. Correspondingly, the gross profit margin improved to 35.9 percent from 34.2 percent, a 170 basis point increase. The gross profit margin increase was primarily due to fixed costs leverage on higher sales and lower raw material, direct labor and other variable conversion costs.

Selling, General and Administrative ("SG&A") Selling, general, and administrative (SG&A) expenses were $53.2 million in the second quarter of 2013 compared to $46.8 million from the second quarter of prior year, an increase of $6.4 million or about 14 percent. In the second quarter of 2013, increases in SG&A attributable to acquisitions were $1.7 million. Additional increases in SG&A cost during the second quarter


of 2013 resulted from increased cost for marketing and selling-related expenses of $2.2 million and higher research, development and engineering (RD&E) expenses of $0.9 million. These costs increased to support the integration of the Cerus product line, the launch of the Company's pump rental initiatives, the commercialization of the Company's new artificial lift product offering and opening new product distribution centers.

Restructuring Expenses
Restructuring expenses for the second quarter of 2013 were $0.7 million or about $0.01 diluted earnings per share. Restructuring expenses for the second quarter 2013 included $0.5 million of expenses primarily related to relocation to the new corporate headquarters and engineering center in Fort Wayne, Indiana and $0.2 million related to integration costs of the previously announced Flexing acquisition in Franklin Fueling Systems. Restructuring expenses for the second quarter of 2012 were $0.1 million and had no impact on diluted earnings per share. Restructuring expenses in the second quarter of 2012 were related to the Siloam Springs, Arkansas facility.

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