OREANDA-NEWS. Franklin Electric Co., Inc. (NASDAQ:FELE) reported second quarter 2016 GAAP fully diluted earnings per share (EPS) of $0.50, versus a GAAP fully diluted EPS in the second quarter 2015 of $0.33, an increase of 52 percent.  In the second quarter of 2016, the Company’s adjusted EPS was $0.51 compared to 2015 second quarter adjusted EPS of $0.35, a 46 percent increase (see table below for a reconciliation of GAAP EPS to the adjusted EPS).

Second quarter 2016 sales were $252.1 million, an increase of 2 percent compared to 2015 second quarter sales of $247.4 million.  The Company’s organic sales growth was 5 percent excluding the impact of foreign currency translation.

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 five percent organic sales growth that was broad based and led by higher groundwater sales in the United States combined with strong Water Systems sales in Latin America and Asia Pacific.  Consolidated adjusted operating income increased 33 percent as we realized the continuing benefits of lower raw material costs, pricing and a favorable sales mix. Fueling Systems adjusted operating income was $15.5 million, an increase of 22 percent versus the second quarter 2015 and a record for any second quarter in the segment’s history.”

Key Performance Indicators:

         
Earnings Before and After Non-GAAP Adjustments   For the Second Quarter
(in millions)     2016     2015   Change
         
Net Income attributable to FE Co., Inc. Reported   $    24.0   $    16.2     48 %
Allocated Undistributed Earnings   $   (0.5 ) $   (0.2 )  
Earnings for EPS Calculations   $    23.5   $    16.0     47 %
         
Non-GAAP adjustments (before tax):        
Restructuring   $   -    $   0.8    
Non-GAAP items   $   0.3   $   0.9    
         
Non-GAAP adjustments, net of tax:        
Restructuring   $   -    $   0.5    
Non-GAAP items   $   0.2   $   0.5    
         
Earnings after Non-GAAP Adjustments   $    23.7   $    17.0     39 %
         
         
Earnings Per Share   For the Second Quarter
Before and After Non-GAAP Adjustments     2016     2015   Change
(in millions except Earnings Per Share)        
         
Average Fully Diluted Shares Outstanding       46.7       48.1     -3 %
         
Fully Diluted Earnings Per Share ("EPS") Reported   $    0.50   $    0.33     52 %
         
Restructuring Per Share, net of tax   $   -    $   0.01    
Non-GAAP items, net of tax   $   0.01   $   0.01    
         
Fully Diluted EPS after Non-GAAP Adjustments
(Adjusted EPS)		   $    0.51   $    0.35     46 %
               
  Net Sales
  United States Latin Europe, Middle Asia Total    
(in millions) & Canada America East & Africa Pacific Water Fueling Consolidated
               
Q2 2015 $ 91.2   $ 31.3   $ 48.4   $ 20.7   $ 191.6   $ 55.8   $ 247.4  
Q2 2016 $ 96.3   $ 31.7   $ 43.1   $ 23.5   $ 194.6   $ 57.5   $ 252.1  
Change $ 5.1   $ 0.4   $ (5.3 ) $ 2.8   $ 3.0   $ 1.7   $ 4.7  
% Change   6 %   1 %   -11 %   14 %   2 %   3 %   2 %
                                           
Foreign currency translation   $ (0.7 ) $ (3.9 ) $ (2.4 ) $ (0.2 ) $ (7.2 ) $ (0.3 ) $ (7.5 )
% Change   -1 %   -12 %   -5 %   -1 %   -4 %   -1 %   -3 %
                                           
Volume/Price $ 5.8   $ 4.3   $ (2.9 ) $ 3.0   $ 10.2   $ 2.0   $ 12.2  
% Change   7 %   13 %   -6 %   15 %   6 %   4 %   5 %
               
Operating Income and Margins           
Before and After Non-GAAP Adjustments          
(in millions)   For the Second Quarter 2016
    Water Fueling Other Consolidated
Reported Operating Income / (Loss)   $   31.5   $   15.5   $   (14.3 ) $   32.7  
% Operating Income To Net Sales     16.2 %   27.0 %         13.0 %
                           
Non-GAAP Adjustments:                          
Restructuring   $   -    $   -    $   -    $   -   
Non-GAAP   $   -    $   -    $   0.3   $   0.3  
                   
Operating Income/(Loss) after Non-GAAP Adjustments   $   31.5   $   15.5   $   (14.0 ) $   33.0  
% Operating Income to Net Sales After non-GAAP adjustments (Operating Income Margin after Non-GAAP Adjustments)       16.2 %   27.0 %     13.1 %
               
Operating Income and Margins               
Before and After Non-GAAP Adjustments              
(in millions)   For the Second Quarter 2015
    Water Fueling Other Consolidated
Reported Operating Income / (Loss)   $   24.3   $   12.4   $   (13.5 ) $   23.2  
% Operating Income To Net Sales     12.7 %   22.2 %         9.4 %
                           
Non-GAAP Adjustments:                          
Restructuring   $   0.6   $   0.2   $   -    $   0.8  
Non-GAAP   $   0.5   $   0.1   $   0.3   $   0.9  
                           
Operating Income/(Loss) after Non-GAAP Adjustments   $   25.4   $   12.7   $   (13.2 ) $   24.9  
% Operating Income to Net Sales After non-GAAP adjustments (Operating Income Margin after Non-GAAP Adjustments)     13.3 %   22.8 %     10.1 %
           
           

Water Systems

Water Systems sales were $194.6 million in the second quarter 2016, an increase of $3.0 million or about 2 percent versus the second quarter 2015 sales of $191.6 million.  Foreign currency translation reduced Water Systems sales by $7.2 million or about 4 percent in the quarter.  Excluding foreign currency translation, Water Systems sales grew about 6 percent compared to the second quarter 2015.

Water Systems sales in the U.S. and Canada were up about 7 percent compared to the prior year second quarter, excluding the impact of foreign currency. In the second quarter 2016, sales of groundwater pumping equipment grew by about 9 percent.  The growth in groundwater equipment sales was led by an 8 percent increase in residential systems and a 13 percent increase in agricultural products.  Water Systems sales in markets outside the U.S. and Canada experienced overall growth of about 4 percent, after excluding the impact of foreign currency translation.  International Water Systems sales growth was led by improved groundwater product sales in the Asia Pacific and Latin America markets, but was offset by a decline in sales in Europe, the Middle East and Gulf regions.

Water Systems operating income was $31.5 million in the second quarter 2016, up $7.2 million or 30 percent versus the second quarter 2015 as reported and up $6.1 million or 24 percent versus the second quarter 2015 after non-GAAP adjustments. The second quarter operating income margin was 16.2 percent, up 290 basis points from 13.3 percent in the second quarter of 2015 after non-GAAP adjustments.

Fueling Systems

Fueling Systems sales were $57.5 million in the second quarter 2016, an increase of $1.7 million or about 3 percent versus the second quarter 2015 sales of $55.8 million.  Fueling Systems sales decreased by $0.3 million or about 1 percent in the quarter due to foreign currency translation. Fueling Systems sales were up about 4 percent, after excluding foreign currency translation. 

Fueling Systems sales in the U.S. and Canada grew by about 6 percent during the quarter with most of the sales growth coming from fuel management systems.  Internationally, Fueling Systems revenues were down overall with Asia Pacific sales growth being more than offset by lower sales in Europe and Latin America.

Fueling Systems operating income was $15.5 million in the second quarter of 2016, up $3.1 million or about 25 percent compared to $12.4 million in the second quarter of 2015 as reported, and up $2.8 million or 22 percent compared to $12.7 million after non-GAAP adjustments in the second quarter of 2015. The second quarter operating income margin was 27.0 percent, an increase of 420 basis points from the 22.8 percent of net sales in the second quarter of 2015 after non-GAAP adjustments. Fueling Systems operating income in the second quarter of 2016 was a record for any second quarter in the history of the segment.

Overall

The Company’s consolidated gross profit was $90.7 million for the second quarter of 2016, an increase of $10.5 million, or about 13 percent, from the second quarter of 2015 gross profit of $80.2 million. The gross profit as a percent of net sales was 36.0 percent in the second quarter of 2016 and increased about 360 basis points versus 32.4 percent during the second quarter 2015.  The gross profit margin increase was primarily due to favorable pricing, lower direct material costs, a better sales mix and lower fixed cost.

Selling, general, and administrative (SG&A) expenses were $58.0 million in the second quarter of 2016 compared to $56.3 million in the second quarter of the prior year, an increase of $1.7 million or about 3 percent.  The Company’s SG&A expenses increased by $2.5 million in the quarter due to higher variable compensation expenses, which were partially offset by lower fixed cost from the effect of foreign currency translation.   

The Company ended the second quarter of 2016 with a cash balance of about $72 million, which was $10 million lower than at the end of 2015.  The cash balance decreased primarily due to higher capital expenditures and seasonal working capital requirements in the Northern hemisphere.

Commenting on the outlook, Mr. Sengstack said:

“As we look to the second half of the year we believe the underlying organic demand for our products is steadily improving.  We remain cautious about our business in the Middle East and specifically, Turkey, as recent political disruptions create uncertainty.  Considering these factors, we re-affirm our annual guidance of $1.60 to $1.70 adjusted earnings per share for full year 2016.”

 
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
               
(In thousands, except per share amounts)              
               
  Second Quarter Ended   Six Months Ended
  July 2,   July 4,   July 2,   July 4,
    2016       2015       2016       2015  
               
Net sales  $   252,081     $   247,427     $   470,511     $   473,155  
               
Cost of sales      161,403         167,219         305,597         321,457  
               
Gross profit      90,678         80,208         164,914         151,698  
               
Selling, general, and administrative expenses     57,954         56,278         110,299         111,438  
               
Restructuring expense     45         758         865         1,221  
               
Operating income      32,679         23,172         53,750         39,039  
     
Interest expense      (2,221 )       (2,405 )       (4,648 )       (5,113 )
Other income, net     1,373         1,390         1,341         4,409  
Foreign exchange income/(expense)     315         (359 )       238         57  
               
Income before income taxes      32,146         21,798         50,681         38,392  
               
Income tax expense      7,959         5,360         12,914         1,978  
               
Net income  $   24,187     $   16,438     $   37,767     $   36,414  
               
Less:  Net income attributable to noncontrolling interests       (205 )       (274 )       (328 )       (455 )
               
Net income attributable to Franklin Electric Co., Inc. $   23,982     $   16,164     $   37,439     $   35,959  
               
Income per share:              
  Basic $   0.51     $   0.33     $   0.79     $   0.74  
  Diluted $   0.50     $   0.33     $   0.78     $   0.74  
               
 
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
       
(In thousands)      
       
  July 2,   January 2,
   2016      2016  
ASSETS      
       
Cash and equivalents $   71,582     $   81,561  
Receivables     161,972         127,251  
Inventories     210,642         194,594  
Other current assets     29,531         34,715  
  Total current assets     473,727         438,121  
               
Property, plant, and equipment, net     195,916         190,039  
Goodwill and other assets     371,320         367,951  
  Total assets $   1,040,963     $   996,111  
       
       
LIABILITIES AND EQUITY      
       
Accounts payable $   56,983     $   57,822  
Accrued expenses and other current liabilities     61,636         53,903  
Current maturities of long-term debt and short-term borrowings     55,673         32,946  
  Total current liabilities     174,292         144,671  
       
Long-term debt     157,203         187,806  
Deferred income taxes     39,289         33,404  
Employee benefit plans     42,337         47,398  
Other long-term liabilities     18,660         16,511  
 
Redeemable noncontrolling interest     7,617         6,856  
       
Total equity     601,565         559,465  
  Total liabilities and equity $   1,040,963     $   996,111  
       
 
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Six Months Ended
(In thousands)      
  July 2,   July 4,
    2016       2015  
Cash flows from operating activities:      
  Net income $   37,767     $   36,414  
  Adjustments to reconcile net income to net cash flows from operating activities:       
    Depreciation and amortization     17,633         18,044  
    Share-based compensation     4,155         3,457  
    Realized gain on share purchase liability     -         (2,723 )
    Other     4,404         (6,777 )
    Changes in assets and liabilities:      
      Receivables     (31,221 )       (16,655 )
      Inventory     (10,982 )       (6,355 )
      Accounts payable and accrued expenses     3,091         (15,110 )
      Other     4,464         (3,263 )
       
Net cash flows from operating activities   29,311       7,032  
       
Cash flows from investing activities:      
  Additions to property, plant, and equipment     (19,490 )       (9,758 )
  Proceeds from sale of property, plant, and equipment     2,166         402  
  Acquisitions and investments     -         (4,028 )
  Other investing activities     178         174  
       
Net cash flows from investing activities     (17,146 )       (13,210 )
       
Cash flows from financing activities:      
  Change in debt     (7,851 )       47,777  
  Proceeds from issuance of common stock     610         1,240  
  Excess tax from share-based payment arrangements     -         811  
  Purchases of common stock     (4,736 )       (6,218 )
  Dividends paid     (9,821 )       (9,783 )
  Share purchase liability payment     -         (20,200 )
Net cash flows from financing activities     (21,798 )       13,627  
       
Effect of exchange rate changes on cash     (346 )       (3,556 )
Net change in cash and equivalents   (9,979 )     3,893  
Cash and equivalents at beginning of period     81,561         59,141  
Cash and equivalents at end of period $   71,582     $   63,034