In the fourth quarter of 2012, the Company s adjusted EPS was $0.56, a 12 percent increase over the adjusted EPS during the fourth quarter 2011 (see table below for a reconciliation of GAAP EPS to the adjusted EPS). Fourth quarter 2012 sales were $205.2 million, an increase of 10 percent compared to 2011 fourth quarter sales of $187.2 million.
For the full year 2012, diluted earnings per share were $3.46, an increase of 31 percent compared to 2011 diluted earnings per share of $2.65. Adjusted earnings per share were $3.14, an increase of 16 percent versus the $2.70 adjusted earnings per share in 2011 (See the table below for a reconciliation of the GAAP EPS to the adjusted EPS). Full year 2012 sales were $891.3 million, an increase of about 9 percent compared to 2011 sales of $821.1 million.
Scott Trumbull, Franklin Chairman and Chief Executive, commented: "We are pleased to report a very positive ending to a record year for Franklin Electric. In the fourth quarter, the Company s revenue improved by 10 percent, our adjusted earnings per share increased by 12 percent and our adjusted operating income margin improved 170 basis points versus the fourth quarter of 2011. For the full year 2012, our revenue and adjusted earnings per share were at record levels for the third consecutive year and our total shareholder return during 2012 was nearly 40 percent.
In the fourth quarter, we benefitted significantly from sales in developing regions, a key strategic focus for the Company. About 40 percent of the Company s sales are derived from developing regions and during the fourth quarter those sales grew organically by 16 percent after excluding the impact of foreign currency translation.
Also in the fourth quarter, we continued to gain market share in the North American water systems pump market, launched our first Energy Systems artificial lift pumping products, broke ground on a new manufacturing facility in Brazil and our Fueling Systems business acquired Flex-ing Incorporated of Sherman, Texas."
Water Systems
Water Systems revenues were $157.5 million in the fourth quarter 2012, an increase of $13.6 million or about 9 percent versus the fourth quarter 2011. Water Systems organic sales growth, excluding acquisitions and foreign currency translation, was about 5 percent.
Water Systems operating income after non-GAAP adjustments increased by 19 percent and adjusted operating income margin improved by 120 basis points compared to the fourth quarter prior year. The operating income margin improvement was primarily attributable to lower converting costs and improved efficiencies that resulted from the Company s investment in world class manufacturing facilities in low cost regions.
Water Systems sales in the U.S. and Canada represented about 34 percent of the Company s consolidated sales and grew by about 10 percent during the quarter. After excluding acquisitions and foreign currency translation, U.S. and Canada Water Systems sales declined by about 4 percent during the quarter. The entire organic sales decline is attributable to two Original Equipment Manufacturer (OEM) customers that purchased a disproportionate share of their annual motor requirements during the fourth quarter of 2011 ahead of a price increase. Excluding these two customers, organic sales growth in the U.S. and Canada was about 4 percent driven by higher wastewater and residential pump sales.
Water Systems sales in Latin America were about 15 percent of consolidated sales during the fourth quarter and increased by about 10 percent compared to the prior year. Organic sales growth in Latin America was 18 percent excluding acquisitions and foreign currency translation. This organic growth was driven in large part by strong sales in Brazil, where the Company s introduction of a new line of submersible pumps and motors has been well received in the market place. In addition, sales from the Company s distribution center in Chile are also growing rapidly.
Water Systems sales in the Middle East and Africa were about 12 percent of consolidated sales and grew by about 8 percent compared to the fourth quarter 2011. Organic sales growth in this region was about 11 percent excluding acquisitions and foreign currency translation. Much of this organic growth can be attributed to strong sales of groundwater pumping equipment in Turkey and Southern Africa.
Water Systems sales in Europe were about 9 percent of consolidated sales and grew by about 6 percent compared to the fourth quarter 2011. Organic sales growth in Europe was 7 percent when excluding acquisitions and foreign currency translation and was led by sales of stainless steel pumps and components from the Company s Vertical business unit.
Water Systems sales in the Asia-Pacific region were about 7 percent of consolidated sales and increased by about 11 percent compared to the fourth quarter prior year. Organic sales growth in Asia-Pacific was 7 percent when excluding acquisitions and foreign currency translation. Growth in this region was led by double digit growth of both agricultural and residential pumps and motors in Australia and Southeast Asia.
Fueling Systems
Fueling Systems sales were about 23 percent of consolidated sales and increased by about 10 percent versus the fourth quarter 2011. Fueling Systems organic sales growth was about 8 percent excluding acquisitions and foreign currency translation, led by increases in developing regions where the organic sales growth rate was 22 percent compared to the prior year. The growing population of motor vehicles in the developing world is causing increased demand for Fueling Systems products. Fueling Systems sales are also benefiting from the long-term trend for station owners in international markets to convert from suction pumping technology to the Company s pressure pumping system.
During the fourth quarter the Company announced the purchase of Flex-ing Incorporated of Sherman, Texas. Flex-ing designs and manufactures a variety of fueling equipment that is distributed through the same channels as the core product offering of Franklin Fueling Systems. Key products include stainless steel flexible hose connectors, composite manhole covers and dispenser pump hose. Calendar year 2012 sales for Flex-ing were approximately $13 million.
Fueling Systems operating income after non-GAAP adjustments increased by 20 percent compared to the fourth quarter prior year. Operating income margin improved by 190 basis points over the same period prior year. The operating income margin improvement was due primarily to leverage from higher sales and tight control of fixed costs.
Overall
The Company s gross profit increased by about 12 percent and gross profit margins improved by 90 basis points compared to the fourth quarter prior year. The gross profit increase was primarily due to productivity and quality improvements in the Company s manufacturing facilities combined with a slowing rate of raw material inflation.
Selling, General, and Administrative (SG&A) expenses increased by about 7 percent compared to the fourth quarter prior year. Almost all of the increase can be attributed to businesses acquired since the fourth quarter of 2011. SG&A expenses as a percent of sales declined by about 65 basis points compared to the fourth quarter 2011.
The Company ended the fourth quarter of 2012 with a cash balance of about $103 million which was $50 million less than at the end of 2011. The cash balance decrease was caused primarily by the Pioneer Pump, Cerus and Flex-ing acquisitions.
In 2012, the Company committed approximately $43 million to capital expenditures driven in large part by the new Corporate Headquarters and Product Development center in Fort Wayne, Indiana. The Company expects 2013 capital spending to be approximately $63 million due to the completion of the Fort Wayne facility, the substantial completion of a new manufacturing facility in Brazil, investments in pump rental equipment in the United Kingdom and other productivity investments made by the Company in its facility in Linares, Mexico. The Company believes that in 2014, capital spending levels will decline sharply.
The Company had no outstanding balance on its revolving debt agreement at the end of the fourth quarter of 2012 or 2011.
Commenting on the outlook for the first quarter of 2013, Mr. Trumbull said:
"Although we remain mindful of the continuing economic uncertainty in many of our end markets, and the likelihood of foreign currency translation lowering our Water Systems sales by about two percent, we expect that during the first quarter of 2013 our Water Systems sales and operating income after non-GAAP adjustments will improve by 7 to 11 percent versus the first quarter of 2012. Additionally, we estimate that our Fueling Systems sales and operating income after non-GAAP adjustments will grow by 16 to 20 percent compared to the first quarter prior year led by increasing international sales. Overall we believe that our EPS after non-GAAP adjustments will increase by 8 to 12 percent compared to the record first quarter of 2012."
