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FRANKLIN ELECTRIC CO INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 7, 2014

Second Quarter 2014 vs. Second Quarter 2013

OVERVIEW

Sales and adjusted earnings in the second quarter of 2014 increased from the second quarter last year. The sales increase was primarily due to volume increases which were partially offset by the negative impact of foreign currency translation. The Company's consolidated gross profit was $99.4 million for the second quarter of 2014, an increase of $4.8 million or about 5 percent from the prior year's second quarter.

RESULTS OF OPERATIONS



Net Sales Net sales in the second quarter of 2014 were $284.5 million, an increase of $21.1 million or about 8 percent compared to 2013 second quarter sales of $263.4 million. The incremental impact of sales from acquired businesses was $2.3 million or less than 1 percent. Sales revenue decreased by $3.5 million or about 1 percent in the second quarter of 2014 due to foreign currency translation. The sales change in the second quarter of 2014, excluding acquisitions and foreign currency translation, was an increase of $22.3 million or about 8 percent.

Net Sales (In millions) Q2 2014 Q2 2013 2014 v 2013 Water Systems $ 226.7$ 213.7$ 13.0 Fueling Systems 57.8 49.7 8.1 Consolidated $ 284.5$ 263.4$ 21.1



Net Sales-Water Systems Water Systems sales were $226.7 million in the second quarter 2014, an increase of $13.0 million or about 6 percent versus the second quarter 2013 sales of $213.7 million. Sales from businesses acquired since the second quarter of 2013 were $2.3 million or about 1 percent. Water Systems sales were reduced by $4.3 million or about 2 percent in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was about 7 percent.

Water Systems sales in the U.S. and Canada represented 43 percent of consolidated sales and increased by about 7 percent compared to the prior year. U.S. and Canada sales of groundwater pumping equipment declined about 4 percent in the quarter due, in part, to the regional distributor reset previously announced by the Company. Sales of Pioneer branded mobile pumping equipment and surface water pumping equipment grew at double digit pace in the quarter. U.S. and Canada sales excluding the impact of foreign currency translation grew by 8 percent compared to the second quarter 2013.

Water Systems sales in the Middle East and Africa were about 12 percent of consolidated sales and were flat compared to the second quarter 2013. Excluding the impact of foreign currency translation, sales increased by about 9 percent compared to the second quarter 2013. The growth was driven by strong sales of groundwater pumping equipment in Turkey.

Water Systems sales in Latin America were about 11 percent of consolidated sales for the second quarter and increased by about 4 percent compared to the second quarter 2013. Excluding the impact of foreign currency translation, Latin American sales increased by about 9 percent compared to the second quarter prior year. Acquisition-related sales were about 6 percent. New distribution outlets in Chile and Columbia contributed to significantly increased sales in these markets compared to the second quarter 2013.

During June 2014, the Company completed the acquisition of Bombas Leao S.A. based in Monte Azul Paulista, Brazil. Bombas Leao is a leading supplier of groundwater pumps principally used in agriculture, industrial and municipal applications. Additionally, the Company opened its new manufacturing facility in Brazil during the second quarter.

Water Systems sales in Europe were about 9 percent of consolidated sales and grew by about 22 percent compared to the second quarter 2013. Acquisition related sales were about 3 percent. The impact of foreign currency translation increased sales by about 4 percent compared to the second quarter 2013. Excluding acquisitions and the impact of foreign currency translation,

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European sales increased about 15 percent compared to the second quarter 2013. Sales improvements in Europe were broad based and include the Pioneer rental business in the United Kingdom which had nominal sales in the second quarter 2013.

Water Systems sales in the Asia Pacific region were 5 percent of consolidated sales and declined by about 6 percent compared to the second quarter 2013. Excluding the impact of foreign currency translation, Asia Pacific sales decreased by about 5 percent compared to the second quarter prior year. Sales increases in Australia and China were not enough to offset declines in Japan, Korea and Thailand. Pioneer product sales in the region improved significantly; however, this increase was offset by a double digit decline in other Water Systems pumping equipment sales due to timing of customer orders and the current political and economic uncertainty in Thailand.

Water Systems operating income, after non-GAAP adjustments, was $42.4 million in the second quarter 2014, a decrease of about 2 percent versus the second quarter 2013. The second quarter operating income margin after non-GAAP adjustments was 18.7 percent, down 160 basis points from 20.3 percent in the second quarter of 2013.

Water Systems adjusted operating income margin declined in the second quarter in part, due to a global shift in sales mix including a larger portion of Pioneer de-watering equipment sales. Additionally, in Asia Pacific, but also Southern Africa and Brazil, a combination of factors, primarily lost leverage, contributed to lower earnings in those regions. While sales in the U.S. and Canada excluding Pioneer products declined marginally, profitability for these same sales was flat compared to the second quarter 2013. Europe adjusted operating income margin also improved.

Net Sales-Fueling Systems Fueling Systems sales represented 20 percent of consolidated sales and were $57.8 million in the second quarter 2014, an increase of $8.1 million or about 16 percent versus the second quarter 2013 sales of $49.7 million. Fueling Systems sales increased by $0.8 million or about 1 percent in the quarter due to foreign currency translation. Fueling Systems sales increased 15 percent after excluding foreign currency translation.

During the second quarter, Fueling Systems shipped about $2.0 million of equipment to India to partially fill a large tender order. Excluding the impact of these India tender sales, Fueling Systems sales grew by about 12 percent. Sales growth was across all product lines and all regions of the world, with sales in Brazil, Russia, India and China more than doubling.

Cost of Sales Cost of sales as a percent of net sales for the second quarter of 2014 and 2013 was 65.1 percent and 64.1 percent, respectively. Correspondingly, the gross profit margin decreased to 34.9 percent from 35.9 percent, a 100 basis point decline. The Company's consolidated gross profit was $99.4 million for the second quarter of 2014, an increase of $4.8 million, or about 5 percent, from the second quarter of 2013 gross profit of $94.6 million. The gross profit margin decrease was primarily due to sales mix and loss of operating leverage in developing regions.

Selling, General, and Administrative ("SG&A") Selling, general, and administrative (SG&A) expenses were $60.0 million in the second quarter of 2014 compared to $53.2 million from the second quarter of prior year, an increase of $6.8 million or about 13 percent. There were $3.2 million of costs included in non-GAAP adjustments related to executive transition and pending or completed acquisitions. Excluding these non-GAAP adjustments, SG&A expenses increased by $3.6 million or about 7 percent from the second quarter 2013. In the second quarter 2014, increases in SG&A attributable to acquisitions were $0.5 million. Additional increases in SG&A were primarily driven by higher Marketing and Selling expenses of in support of higher sales and increased research, development and engineering expenses.

Restructuring Expenses Restructuring expenses for the second quarter of 2014 were $0.3 million and had no impact on diluted earnings per share and were primarily severance expenses and other miscellaneous manufacturing realignment activities. 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.


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Source: Edgar Glimpses


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