BLUFFTON, Ind., Oct. 27 /PRNewswire-FirstCall/ -- Franklin Electric Co., Inc. (Nasdaq: FELE) reported diluted earnings per share of $0.74 for the third quarter of 2008, an increase of 48 percent compared to third quarter 2007 earnings per share of $0.50, and a record for any quarter in the Company's history. Third quarter sales were $215.8 million, up $50.5 million or 31 percent compared to $165.3 million in 2007, and also a record for any quarter in the Company's history. Organic sales growth was 21 percent, primarily related to Fueling Systems and approximately $5.9 million of the sales increase is attributable to foreign exchange rate changes.
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Gross profit improved to 30.8 percent of sales in the third quarter of 2008 and was 180 basis points higher than the third quarter of 2007. The Company's operating income was a record $27.6 million in the third quarter, up $8.2 million or 42 percent compared to $19.4 million for the third quarter 2007. Operating margins for the quarter were 12.8 percent compared to 11.8 percent last year.
Franklin Electric Chairman and Chief Executive Officer R. Scott Trumbull stated, "We were particularly pleased with the strong performance of our Fueling Systems segment during the quarter. Our Fueling Systems shipments in support of the California vapor control mandate were stronger than expected. We estimate that the California conversion is now 35 to 40 percent complete and we are retaining a very high share of the vapor control systems and a growing share of the vapor monitoring systems sold into California. In addition, we achieved solid Fueling Systems growth in Asia, Latin America and Europe. Our Fueling Systems margins increased due to operating leverage from the growing sales and good manufacturing performance from our facility in Madison, Wisconsin."
"While our overall Water Systems sales increased by 16 percent during the quarter, our operating margins declined by 380 basis points. A major contributor to this decline was our decision to operate our Water Systems manufacturing operations at reduced utilization rates in order to improve inventory turns. Although this action will hurt our earnings performance during the second half of 2008, it will improve our cash flow and position us to operate at higher utilization rates in 2009. In addition, during the next 60 days we will finalize plans to consolidate more of our North American output into our new, world class manufacturing complex in Linares, Mexico. We expect to move approximately 500,000 additional man-hours of annual production activity into Linares by the end of the second quarter 2009. This will not only reduce direct labor costs, but also reduce fixed overheads as capacity is reduced in our other facilities."
Water Systems sales worldwide were $154.6 million, up $21.0 million or 16 percent for the third quarter of 2008 compared to the same period for 2007. The Water Systems segment organic sales growth was 4 percent during the quarter including the organic growth from acquired companies. Water Systems sales in international markets represented 47 percent of total Water Systems sales and grew by 24 percent during the quarter. Sales in the US and Canada represented 53 percent of total sales and grew by 10 percent during the quarter. In most markets, sales of pumping systems products for agricultural and commercial applications experienced solid organic growth while the sales of pumping systems products for residential applications grew at a slower rate.
Water Systems operating income margin was 12 percent in the third quarter, down 380 basis points from the third quarter of 2007. This decline was primarily driven by three factors. First, reduced manufacturing capacity utilization lowered operating income margin by 150 basis points. The reduced capacity utilization is the result of our decision to lower inventories, primarily in our North American factories. Our inventories in these factories at the end of the third quarter this year are 26 percent lower than last year, while our year to date sales from these factories are up approximately 10 percent. Our plan is to continue curtailing production in order to reduce inventories through the fourth quarter of this year, and then restore production levels in early 2009. Second, operating expenses of acquired business units not included in the third quarter of 2007 have increased SG&A costs as a percentage of sales by about 100 basis points. Third, because the Company's sales and earnings performance through September 2008 are significantly better than through September 2007, additional expenses for incentive compensation were incurred which increased SG&A expenses as a percent of sales by 100 basis points.
Despite the sales growth in our Water Systems segment, we continue to explore opportunities to improve utilization rates and lower our overall global manufacturing costs by consolidating our manufacturing operations into our lowest cost facilities. During the fourth quarter of 2008 we expect to complete plans for the phased move of an estimated 500,000 man-hours of manufacturing activity to our low cost plant complex in Linares, Mexico by the middle of next year. This move will significantly reduce both direct labor and fixed overhead costs. We will provide more information regarding the implementation cost and overall scope of this move when our planning is completed over the next 60 days.
Fueling Systems sales worldwide were $61.2 million, up $29.5 million for the third quarter of 2008 compared to the same period for 2007. All of the Fueling Systems' sales growth was organic. The sales increase was driven primarily by vapor recovery equipment sold into California. Fueling Systems sales also increased in key international markets including China, other areas of Asia, Latin America, Europe and the Middle East during the quarter. Fueling Systems operating income margin was 31.5 percent in the third quarter, up significantly from the third quarter of 2007 primarily due to higher sales.
Selling, general, and administrative expenses for the Company increased by $10.7 million in the third quarter of 2008 compared to the third quarter last year. The acquisitions of the pump division of Monarch Industries (Canada), Schneider Motobombas (Brazil), and Western Pumps (United States) added approximately $4.1 million of selling, general and administrative expenses to the Water Systems segment for the third quarter of 2008. Other SG&A expense changes included increased compensation and commissions of $4.8 million, and increased R&D related expenses of $0.5 million.
Fixed Costs (which we define as SG&A less commissions, fixed manufacturing costs, and restructuring costs) as a percentage of sales were 28.1 percent through the third quarter of 2008 versus 31.7 percent for full year 2007. The Company anticipates fixed spending leverage will improve operating margin about 220 basis points for the full year 2008 from 2007. The ramp up of the new pump plant in Linares, Mexico will cause the Company's fixed spending rate to increase in the fourth quarter.
Cash and equivalents on hand were $60.8 million at the end of the third quarter of 2008 versus $59.6 million of cash, equivalents and investments at the end of the third quarter 2007. The recent financial uncertainty has not impacted the liquidity of the Company and we believe our existing debt and bank financing arrangements are sufficient to fully support our operating needs.
Additionally, on Friday, October 24, the Board of Directors of Franklin Electric declared a quarterly cash dividend of twelve and one half cents per share payable November 20, 2008 to shareowners of record on November 6, 2008.
Mr. Trumbull added:
"While we are pleased with our strong third quarter results, we are mindful of the challenges we anticipate in the fourth quarter. The risk of general economic conditions declining further is having a negative impact on our sales outlook; we will continue to reduce Water Systems inventories which will require curtailing capacity utilization; and we expect our international sales and earnings growth to be reduced by the impact of the strengthening dollar on our translation rates. While we face these headwinds in the fourth quarter, we will continue to benefit from strong growth in Fueling Systems. As a result, we are maintaining our full year 2008 sales growth guidance of 25-30 percent. As we look to 2009, we anticipate earnings improvement in our Water Systems business as we restore utilization rates, experience deflation in the cost of several of our key raw materials and reap the benefits of consolidating North American production in our lowest cost facilities."
A conference call to review earnings and other developments in the business will commence today at approximately 5:00pm EDT. The call-in number is 877-407-0778 for domestic calls and 201-689-8565 for international calls. A replay of the conference call will be available until midnight on November 3, 2008, by dialing 877-660-6853 for domestic calls and 201-612-7415 for international calls. The replay account number is 286 and the conference ID is 300711.
Franklin Electric is a global leader in the production and marketing of systems and components for the movement of water and automotive fuels. Recognized as a technical leader in its specialties, Franklin serves customers around the world in residential, commercial, agricultural, industrial, municipal, and fueling applications.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including those relating to the Company's financial results, business goals and sales growth, involve risks and uncertainties, including but not limited to, risks and uncertainties with respect to general economic and currency conditions, various conditions specific to the Company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies, future trends, and other risks which are detailed in the Company's Securities and Exchange Commission filings, included in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year ending December 29, 2007, Exhibit 99.1 attached thereto and in Item 1A of Part II of the Company's Quarterly Reports on Form 10-Q. These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available, and the Company assumes no obligation to update any forward-looking statements.
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Third Quarter Ended Nine Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
2008 2007 2008 2007
Net sales $215,815 $165,264 $593,521 $448,289
Cost of sales 149,347 117,307 410,877 318,090
Gross profit 66,468 47,957 182,644 130,199
Selling, general and
administrative expenses 38,875 28,185 113,460 89,446
Restructuring expense - 342 82 1,949
Operating income 27,593 19,430 69,102 38,804
Interest expense (2,684) (2,286) (8,088) (5,694)
Other income 626 699 783 1,918
Foreign exchange gain/(loss) 436 (203) 45 443
Income before income taxes 25,971 17,640 61,842 35,471
Income taxes 8,711 5,956 21,153 12,250
Net income $17,260 $11,684 $40,689 $23,221
Net income per share:
Basic $0.75 $0.51 $1.77 $1.01
Diluted $0.74 $0.50 $1.75 $0.99
Weighted average shares and
equivalent shares outstanding:
Basic 22,946 22,980 22,950 23,091
Diluted 23,266 23,346 23,235 23,474
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) Sept. 27, Dec. 29,
2008 2007
ASSETS:
Cash and equivalents $60,827 $65,252
Receivables 98,891 64,972
Inventories 164,397 156,146
Other current assets 28,168 23,109
Total current assets 352,283 309,479
Property, plant and equipment, net 151,467 134,931
Goodwill and other assets 243,961 217,827
Total assets $747,711 $662,237
LIABILITIES AND SHAREOWNERS' EQUITY:
Accounts payable $34,214 $27,986
Accrued liabilities 66,812 52,265
Current maturities of long-term debt and
short-term borrowings 35,319 10,398
Total current liabilities 136,345 90,649
Long-term debt 166,456 151,287
Deferred income taxes 14,301 11,686
Employee benefit plan obligations 20,643 24,713
Other long-term liabilities 5,287 5,358
Shareowners' equity 404,679 378,544
Total liabilities and shareowners' equity $747,711 $662,237
FRANKLIN ELECTRIC CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Sept. 27, Sept. 29,
2008 2007
Cash flows from operating activities:
Net income $40,689 $23,221
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 18,349 14,729
Stock based compensation 2,940 3,112
Deferred income taxes 1,814 1,643
Loss on disposals of plant and equipment 76 455
Changes in assets and liabilities:
Receivables (31,132) (13,575)
Inventories (5,972) (32,363)
Accounts payable and other accrued
expenses 7,938 (1,438)
Accrued income taxes 4,379 678
Excess tax from share-based payment
arrangements (804) (1,594)
Employee benefit plans (3,479) 1,634
Other, net (6,976) (7,401)
Net cash flows from operating activities 27,822 (10,899)
Cash flows from investing activities:
Additions to property, plant and equipment (17,781) (18,564)
Proceeds from sale of plant and equipment 10 303
Additions to other assets (749) (3)
Purchases of securities (9,000) (246,700)
Proceeds from sale of securities 9,000 240,694
Cash paid for acquisitions (38,392) (36,836)
Proceeds from sale of business - 1,310
Net cash flows from investing activities (56,912) (59,796)
Cash flows from financing activities:
Proceeds from revolver 70,000 -
Repayment of revolver (30,019) -
Proceeds from long-term debt - 200,000
Repayment of long-term debt (1,087) (100,322)
Proceeds from issuance of common stock 3,127 3,004
Excess tax from share-based payment
arrangements 804 1,594
Purchases of common stock (7,813) (8,118)
Reduction of loan to ESOP Trust - 200
Dividends paid (8,494) (8,063)
Net cash flows from financing activities 26,518 88,295
Effect of exchange rate changes on cash and
equivalents (1,853) 2,080
Net change in cash and equivalents (4,425) 19,680
Cash and equivalents at beginning of period 65,252 33,956
Cash and equivalents at end of period $60,827 $53,636
SOURCE Franklin Electric Co., Inc.