Second Quarter 2020 vs. Second Quarter 2019
OVERVIEW
Sales in the second quarter of 2020 decreased from the second quarter of last
year. The sales decrease was primarily from lower volumes, in part created by
uncertainty and general disruptions around the global pandemic as the World
Health Organization categorized the spread of the novel coronavirus on March 11,
2020 (the "Global Pandemic") . The Company's consolidated gross profit was
$107.1 million for the second quarter of 2020, a decrease from the prior year's
second quarter. The gross profit as a percent of net sales was 34.7 percent in
the second quarter of 2020 versus 33.7 percent during the second quarter 2019
and improved primarily due to better price realization and product sales mix.
EFFECTS OF THE GLOBAL PANDEMIC
The top priority of the Company is the health and welfare of its employees and
partners around the world. In response to the health risks posed by the Global
Pandemic, the Company implemented and has been following the recommended hygiene
and social distancing practices promulgated by the United States Centers for
Disease Control and the World Health Organization.
The Company's products and services are generally viewed as essential in most
jurisdictions in which the Company operates. Effectively, all the Company's
global manufacturing and distribution operations are operating.
The primary impacts of the Global Pandemic on the Company's end markets continue
to be a reduction of large dewatering equipment sales in the Water Systems
segment; Water Systems customers de-stocking their inventory, particularly in
the U.S. and Canada plumbing channel; and, the deferral or cancellation of the
construction of new filling stations in the Fueling Systems segment.
Additionally, the strengthening of the U.S. dollar versus most international
currencies has resulted in lower translations of both Net Sales and earnings
from many of the Company's businesses outside the U.S. The Company's financial
results were also impacted negatively by government mandated closures and
related customer behaviors.
RESULTS OF OPERATIONS
Net Sales
Net sales in the second quarter of 2020 were $308.3 million, a decrease of $47.0
million or about 13 percent compared to 2019 second quarter sales of $355.3
million. Acquisition related sales were $3.3 million. Sales revenue decreased by
$12.2 million or about 3 percent in the second quarter of 2020 due to foreign
currency translation. Organic sales decreased about 10 percent compared to the
second quarter of 2019.
Net Sales
(In millions) Q2 2020 Q2 2019 2020 v 2019
Water Systems $ 178.4 $ 205.0 $ (26.6)
Fueling Systems 56.0 78.0 $ (22.0)
Distribution 92.1 87.1 $ 5.0
Eliminations/Other (18.2) (14.8) $ (3.4)
Consolidated $ 308.3 $ 355.3 $ (47.0)Net Sales-Water Systems
Water Systems sales were $178.4 million in the second quarter 2020, a decrease
of $26.6 million or about 13 percent versus the second quarter 2019 sales of
$205.0 million. Acquisition related sales were $3.3 million. Water Systems sales
were reduced by $11.6 million or about 6 percent in the quarter due to foreign
currency translation. Excluding acquisitions and foreign currency translation,
Water Systems sales were down $18.3 million or about 9 percent compared to the
second quarter 2019.
Water Systems sales in the U.S. and Canada were down compared to the second
quarter 2019. The impact of foreign currency translation decreased sales by
about 1 percent. Sales of dewatering equipment decreased by nearly 70 percent
due to lower sales in rental channels and substantial uncertainty in oil
production end markets. Sales of groundwater pumping equipment increased by 5
percent versus the second quarter 2019. Sales of surface pumping equipment
decreased by 18 percent on lower sales of both wastewater and water transfer
systems as customers in this channel began to feel the impact of the Global
Pandemic and lowered their own inventory levels.
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Water Systems sales in markets outside the U.S. and Canada declined by 9 percent
overall. The impact of foreign currency translation decreased sales by about 12
percent. Excluding the impact of foreign currency translation, Water Systems
sales in markets outside the U.S. and Canada, increased by 3 percent, primarily
driven by higher sales in Latin America and Asia Pacific, as well as increased
sales in both Europe and the Middle East, offset by lower sales in the South
African market.
Net Sales-Fueling Systems
Fueling Systems sales were $56.0 million in the second quarter 2020, a decrease
of $22.0 million or about 28 percent versus the second quarter 2019 sales of
$78.0 million. Fueling Systems sales decreased by $0.6 million or about 1
percent in the quarter due to foreign currency translation. Fueling Systems
organic sales decreased about 27 percent compared to the second quarter of 2019.
Fueling Systems sales in the U.S. and Canada decreased by 22 percent compared to
the second quarter 2019. The decrease was in all product lines and due to
declining demand for new filling stations. Outside the U.S. and Canada, Fueling
Systems revenues declined by 35 percent, driven by lower sales in Asia Pacific,
primarily China.
Net Sales-Distribution
Distribution sales were $92.1 million in the second quarter 2020, versus second
quarter 2019 sales of $87.1 million. The Distribution segment organic sales
increased 6 percent compared to the second quarter of 2019. More favorable
weather conditions versus the second quarter last year contributed to the
revenue growth.
Cost of Sales
Cost of sales as a percent of net sales for the second quarter of 2020 was 65.3
percent and 66.3 percent for the second quarter of 2019. Correspondingly, the
gross profit margin was 34.7 percent and 33.7 percent for the second quarters of
2020 and 2019, respectively. The Company's consolidated gross profit was $107.1
million for the second quarter of 2020, down $12.6 million from the gross profit
of $119.7 million in the second quarter of 2019. The gross profit decrease was
due to lower sales. In the second quarter, the gross profit margin percentage
improvement was primarily due to better selling price realization and improved
product sales mix.
Selling, General, and Administrative ("SG&A")
Selling, general, and administrative (SG&A) expenses were $72.3 million in the
second quarter of 2020 compared to $75.8 million in the second quarter of 2019.
SG&A expenses were lower versus the prior year due to companywide efforts to
lower spending in response to the impacts of the Global Pandemic and in part
because of foreign currency translation.
Restructuring Expenses
Restructuring expenses for the second quarter of 2020 were $0.9 million and
related to continued miscellaneous manufacturing and distribution realignment
activities in the Water segment. Restructuring expenses for the second quarter
of 2019 were $0.2 million and related to branch consolidations and other asset
rationalizations in the Headwater distribution segment.
Operating Income
Operating income was $33.9 million in the second quarter of 2020, down $9.8
million or about 22 percent from $43.7 million in the second quarter of 2019.
Operating income (loss)
(In millions) Q2 2020 Q2 2019 2020 v 2019
Water Systems $ 28.7 $ 30.9 $ (2.2)
Fueling Systems 13.5 21.7 (8.2)
Distribution 6.8 4.5 2.3
Eliminations/Other (15.1) (13.4) (1.7)
Consolidated $ 33.9 $ 43.7 $ (9.8)Operating Income-Water Systems
Water Systems operating income was $28.7 million in the second quarter 2020,
down $2.2 million or 7 percent versus the second quarter 2019 and operating
income margin was 16.1 percent compared to the 15.1 percent in the second
quarter 2019 primarily due to product and geographic sales mix shifts.
Operating Income-Fueling Systems
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Fueling Systems operating income was $13.5 million in the second quarter of
2020, down $8.2 million or about 38 percent compared to $21.7 million in the
second quarter of 2019 and the second quarter operating income margin was 24.1
percent, a decrease of 370 basis points from the 27.8 percent of net sales in
the second quarter of 2019. The decrease in operating income margin was
primarily due to lost leverage on fixed cost from lower sales.
Operating Income-Distribution
Distribution operating income was $6.8 million in the second quarter of 2020 and
the second quarter operating income margin was 7.4 percent. Distribution
operating income was $4.5 million in the second quarter of 2019 and the second
quarter operating income margin was 5.2 percent. The increase in operating
income margin is primarily related to higher revenues.
Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of unallocated general
and administrative expenses and inter-segment sales and profit eliminations. The
inter-segment profit elimination impact in the second quarter of 2020 versus the
second quarter of 2019 was $1.1 million. General and administrative expenses
were higher by $0.6 million.
Interest Expense
Interest expense for the second quarter of 2020 and 2019 was $1.1 million and
$2.3 million, respectively.
Other Income or Expense
Other income or expense was a loss of $0.4 million and $0.3 million in the
second quarter of 2020 and 2019, respectively.
Foreign Exchange
Foreign currency-based transactions produced a loss for the second quarter of
2020 of $0.9 million, primarily due to the Argentinian peso relative to the U.S.
dollar. Foreign currency-based transactions produced a loss for the second
quarter of 2019 of $0.5 million, primarily due to the Turkish Lira relative to
the U.S. dollar.
Income Taxes
The provision for income taxes in the second quarter of 2020 and 2019 was $6.7
million and $7.8 million, respectively. The effective tax rate for the second
quarter of 2020 was about 21 percent and, before the impact of discrete events,
was about 20 percent. The effective tax rate for the second quarter of 2019 was
about 19 percent and, before the impact of discrete events, was about 21
percent. The increase in the effective tax rate was primarily a result of net
unfavorable discrete events recorded in the second quarter of 2020 compared to
net favorable discrete events in the second quarter of 2019. Discrete events in
the second quarter 2020 included tax expense for a valuation allowance on
foreign deferred tax assets and withholding tax on a foreign distribution and
tax benefit on the release of a foreign deferred tax liability on foreign
exchange from the settlement of an intercompany loan. The tax rate as a
percentage of pre-tax earnings for the full year 2020 is projected to be about
20 percent, compared to the full year 2019 tax rate of about 20 percent, both
before discrete adjustments.
Net Income
Net income for the second quarter of 2020 was $24.8 million compared to the
prior year second quarter net income of $32.8 million. Net income attributable
to Franklin Electric Co., Inc. for the second quarter of 2020 was $24.7 million,
or $0.52 per diluted share, compared to the prior year second quarter net income
attributable to Franklin Electric Co., Inc. of $32.7 million or $0.70 per
diluted share.
First Half of 2020 vs. First Half of 2019
OVERVIEW
Sales in the first half of 2020 were down from the same period last year. The
sales decrease was primarily from lower volumes, in part created by uncertainty
and general disruptions around the Global Pandemic. The Company's consolidated
gross profit was $197.4 million for the first half of 2020, a decrease of $11.8
million or about 6 percent from the first half of 2019. Diluted earnings per
share in the first half of 2020 were down from the same period last year.
RESULTS OF OPERATIONS
Net Sales
Net sales in the first half of 2020 were $575.0 million, a decrease of $71.1
million or about 11 percent compared to 2019 first half sales of $646.1 million.
The incremental impact of sales from acquired businesses was $7.2 million. Sales
revenue decreased by $20.3 million or about 3 percent in the first half of 2020
due to foreign currency translation.
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Net Sales
(In millions) YTD June 30, 2020 YTD June 30, 2019 2020 v 2019
Water Systems $ 342.5 $ 393.4 $ (50.9)
Fueling Systems 111.2 138.3 $ (27.1)
Distribution 152.5 140.4 $ 12.1
Eliminations/Other (31.2) (26.0) $ (5.2)
Consolidated $ 575.0 $ 646.1 $ (71.1)Net Sales-Water Systems
Water Systems sales were $342.5 million in the first half of 2020, a decrease of
$50.9 million or about 13 percent versus the first half of 2019. The incremental
impact of sales from acquired businesses was $7.2 million. Foreign currency
translation changes decreased sales $19.3 million, or about 5 percent, compared
to sales in the first half of 2019. The Water Systems sales change in the first
half of 2020, excluding acquisitions and foreign currency translation, was a
decrease of $38.8 million or about 10 percent.
Water Systems sales in the U.S. and Canada decreased by about 15 percent
compared to the first half of 2019. The incremental impact of sales from
acquired businesses was $7.2 million. Sales revenue decreased by $0.7 million in
the first half of 2020 due to foreign currency translation. In the first half of
2020, sales of dewatering equipment decreased by about 60 percent due to lower
sales in rental channels and substantial uncertainty in oil production end
markets. Sales of groundwater pumping equipment increased by 4 percent versus
the first half of 2019. Sales of other surface pumping equipment decreased by 16
percent on lower sales of both wastewater and water transfer systems as
customers in this channel began to feel the impact of the Global Pandemic and
lowered their own inventory levels.
Water Systems sales in markets outside the U.S. and Canada decreased by about 10
percent compared to the first half of 2019. Sales revenue decreased by $18.6
million or about 10 percent in the first half of 2020 due to foreign currency
translation. International Water Systems sales change in the first half of 2020,
excluding foreign currency translation, was flat or less than 1 percent
increase. International Water Systems sales growth in Latin America and EMENA
were partially offset by lower sales in the Asia Pacific markets.
Net Sales-Fueling Systems
Fueling Systems sales were $111.2 million in the first half 2020, a decrease of
$27.1 million or about 20 percent from the first half of 2019. Foreign currency
translation changes decreased sales $1.0 million or about 1 percent compared to
sales in the first half of 2019. The Fueling Systems sales change in the first
half of 2020, excluding acquisitions and foreign currency translation, was a
decrease of about 19 percent.
Fueling Systems sales in the U.S. and Canada declined by about 10 percent during
the first half. The decrease was in all product lines and due to declining
demand for new filling stations. Internationally, Fueling Systems revenues
declined by about 33 percent, driven by lower sales in Asia Pacific, primarily
China and India.
Net Sales-Distribution
Distribution sales were $152.5 million in the first half of 2020, versus the
first half of 2019 sales of $140.4 million. Distribution segment organic sales
increased about 9 percent compared to the first half of 2019 primarily due to
more favorable weather conditions versus last year.
Cost of Sales
Cost of sales as a percent of net sales for the first half of 2020 and 2019 was
65.7 percent and 67.6 percent, respectively. Correspondingly, the gross profit
margin was 34.3 percent and 32.4 percent, respectively. The Company's
consolidated gross profit was $197.4 million for the first half of 2020, down
$11.8 million from the gross profit of $209.2 million in the first half of 2019.
The gross profit decrease was primarily due to lower sales. The improvement in
gross profit margin percentage is partially attributable to better selling price
realization and improved product and geographic sales mix shifts.
Selling, General, and Administrative ("SG&A")
Selling, general, and administrative expenses were $147.9 million in the first
half of 2020 and decreased by $4.2 million or 3 percent in the first half of
2020 compared to $152.1 million the first half of last year. SG&A expenses were
lower versus the prior year due to companywide efforts to lower spending in
response to the impacts of the Global Pandemic and in part because of foreign
currency translation.
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Restructuring Expenses
Restructuring expenses for the first half of 2020 were $1.7 million.
Restructuring expenses were $1.5 million in the Water segment and $0.1 million
in the Fueling segment from continued miscellaneous manufacturing and
distribution realignment activities and $0.1 in distribution related to branch
consolidations and other asset rationalizations in the Headwater distribution
segment. Restructuring expenses for the first half of 2019 were $1.3 million.
Restructuring expenses were $0.5 million in the Water segment from continued
miscellaneous manufacturing realignment activities and $0.8 in distribution
related to branch consolidations and other asset rationalizations in the
Headwater distribution segment.
Operating Income
Operating income was $47.8 million in the first half of 2020, down $8.0 million
or about 14 percent from $55.8 million in the first half of 2019.
Operating income (loss)
(In millions) YTD June 30, 2020 YTD June 30, 2019 2020 v 2019
Water Systems $ 47.5 $ 50.1 $ (2.6)
Fueling Systems 25.6 34.0 (8.4)
Distribution 4.6 0.2 4.4
Eliminations/Other (29.9) (28.5) (1.4)
Consolidated $ 47.8 $ 55.8 $ (8.0)Operating Income-Water Systems
Water Systems operating income was $47.5 million in the first half of 2020
compared to $50.1 million in the first half of 2019, a decrease of about 5
percent. The first half operating income margin was 13.9 percent and increased
by 120 basis points compared to the first half of 2019. Operating income margin
increased in Water Systems primarily due to product and geographic sales mix
shifts.
Operating Income-Fueling Systems
Fueling Systems operating income was $25.6 million in the first half of 2020
compared to $34.0 million in the first half of 2019. The first half operating
income margin was 23.0 percent compared to 24.6 percent of net sales in the
first half of 2019, a decrease of 160 basis points. The decrease in operating
income margin was primarily due to lost leverage on fixed cost from lower sales.
Operating Income-Distribution
Distribution operating income was $4.6 million in the first half of 2020 and
operating income margin was 3.0 percent. Distribution operating income was $0.2
million in the first half of 2019 and operating income margin was 0.1 percent.
Operating income margin increased in Distribution due to higher sales volumes.
Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of inter-segment sales
and profit eliminations and unallocated general and administrative expenses. The
inter-segment profit elimination impact in the first half of 2020 versus the
first half of 2019 was $0.3 million. General and administrative expenses were
higher by $1.1 million or about 4 percent to last year in the first half.
Interest Expense
Interest expense for the first half of 2020 and 2019 was $2.4 million and $4.6
million, respectively.
Other Income or Expense
Other income or expense was a loss of $0.6 million in the first half of 2020.
Other income or expense was a loss of $0.1 million in the first half of 2019.
Foreign Exchange
Foreign currency-based transactions for the first half of 2020 was a gain $0.1
million due to movements in several currencies relative to the U.S. dollar, none
of which individually were significant. Foreign currency-based transactions for
the first half of 2019 was a gain of $0.1 million due to movements in several
currencies relative to the U.S. dollar, none of which individually were
significant.
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Income Taxes
The provision for income taxes in the first half of 2020 and 2019 was $9.3
million for both. The effective tax rate for the first half of 2020 was about 21
percent and, before the impact of discrete events, was about 20 percent. The
effective tax rate in the first half of 2019 was about 18 percent and, before
the impact of discrete events, was about 21 percent. The increase in the
effective tax rate was primarily a result of net unfavorable discrete events
recorded in the first half of 2020 compared to net favorable discrete events in
the first half of 2019. The Company estimates its effective tax rate for 2020
after discrete events will be about 20 percent, or about 2 points higher than
the effective tax rate of 18 percent in 2019.
Net Income
Net income for the first half of 2020 was $35.6 million compared to 2019 first
half net income of $41.9 million. Net income attributable to Franklin Electric
Co., Inc. for the first half of 2020 was $35.3 million, or $0.75 per diluted
share, compared to 2019 first half net income attributable to Franklin Electric
Co., Inc. of $41.8 million or $0.89 per diluted share.
CAPITAL RESOURCES AND LIQUIDITY
Sources of Liquidity
The Company's primary sources of liquidity are cash on hand, cash flows from
operations, revolving credit agreements, and long-term debt funds available. The
Company believes its capital resources and liquidity position at June 30, 2020
is adequate to meet projected needs for the foreseeable future. The Company
expects that ongoing requirements for operations, capital expenditures, pension
obligations, dividends, share repurchases, and debt service will be adequately
funded from cash on hand, operations, and existing credit agreements.
As of June 30, 2020 the Company had a $300.0 million revolving credit facility.
The facility is scheduled to mature on October 28, 2021. As of June 30, 2020,
the Company had $294.1 million borrowing capacity under the Credit Agreement as
$4.2 million in letters of commercial and standby letters of credit were
outstanding and undrawn and $1.7 million in revolver borrowings were drawn and
outstanding which were primarily used for working capital needs and the payment
of existing indebtedness.
The Company also has other long-term debt borrowing outstanding as of June 30,
2020. See Note 9 - Debt for additional specifics regarding these obligations and
future maturities.
At June 30, 2020, the Company had $33.8 million of cash and cash equivalents
held in foreign jurisdictions, which is intended to be used to fund foreign
operations. There is currently no need or intent to repatriate these funds in
order to meet domestic funding obligations or scheduled cash distributions.
Cash Flows
The following table summarizes significant sources and uses of cash and cash
equivalents for the first six months of 2020 and 2019.
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FRANKLIN ELECTRIC CO., INC. 
