Most international companies with a supply chain link to China have a watch underway to monitor any impact from the coronavirus outbreak there, and Franklin Electric Co. is no exception.
The Fort Wayne-based company was unable to sustain during the fourth quarter the recovery it was making from a slow start last year and wound up with a 10% earnings decline for 2019, compared with the prior year.
It expects this year’s financial performance to surpass 2018’s, with growth above last year in the 5% to 7% range for its distribution and water systems segments. It makes and markets pumps and other equipment for water and fuel movement.
Its fueling business will post strong results domestically and see modest growth internationally outside of China.
It had expected Chinese regulatory initiatives around the installation of in-station diagnostics (ISD) for vapor monitoring to offset some Fueling business decline on lower sales in underground pipe, but that view changed in January.
Franklin now expects uncertainty surrounding the economic impact of the coronavirus outbreak to delay the start of ISD installations there.
The company reported 2019 earnings of $95.5 million, or $2.03 per share, down from $105.9 million, or $2.23 per share, for 2018 as its sales grew 1% to $1.31 billion from $1.3 billion.
Its fourth-quarter earnings fell 18% to $19.8 million, or 42 cents per share, from $24.2 million, or 51 cents per share, for the prior-year period as its sales rose 1% to $320.1 million from $316.7 million.
“We benefitted from stronger sales in our Distribution business, our water treatment acquisition and continued strength in Fueling Systems, all of which was offset by the expected decline in our dewatering pump systems sales in the quarter,” Gregg Sengstack, Franklin’s chairman and CEO, said in an earnings report.
With lower selling, general and administrative expenses offsetting the fourth-quarter dewatering pump systems sales decline, higher foreign exchange transactional losses that were non-operational in nature and below the operating income line drove the fourth-quarter earnings per share decline, he said.
The fourth-quarter transactional foreign exchange losses of $3.8 million compared with foreign exchange gains of $2.4 million for the same period the prior year.
The difference amounted to 11 cents per share and resulted mainly from a strengthening of the U.S. dollar compared to currencies in emerging markets, particularly the Argentina peso.
“In 2019, our team executed well in a tough end market environment. While earnings were below our expectations, our free cash flow conversion of net income increased from 101% in 2018 to 163% in 2019,” Sengstack said.
“As we look towards 2020, we feel confident in our ability to grow earnings and sustain operating cash generation in excess of net income while achieving organic growth in our Water Systems and Distribution segments,” he said.
“Although Fueling Systems global demand remains robust, we expect revenues in this segment to be flat in 2020 due to a significant decline in China.”
Key assumptions contributing to the company’s 2020 outlook, he said, included:
• More normal North America precipitation rates than the record levels seen in 2019
• Organic growth, net of foreign exchange, of about 5% to 7% in water systems and distribution, but flat in fueling systems
• Free cash flow conversion of net income between 120% and 140%
• An effective tax rate between 18% and 20%
• Capital spending of around $30 million, and depreciation and amortization of around $38 million
As contributing factors fall within those parameters, Franklin expects 2020 earnings per share before restructuring charges to range between $2.25 and $2.35, Sengstack said.
He told securities industry analysts in a conference call that sales and earnings will accelerate through the year after Franklin gets past challenges in China and their impact on its fueling systems business, combined with a slow start for the sale of the company’s large dewatering equipment into rental and oil and gas applications.
“Beyond the impact of the current coronavirus outbreak on the China economy, our supply chain leadership continues to monitor the post Chinese New Year startup of our supply base to best anticipate the potential disruptions, both direct and indirect, to our supply chain,” Sengstack said.
“While we are encouraged with the information that our own factory and many of our Tier 1 suppliers’ factories have reopened, it’s still unclear as to the degree delivery commitments will be impacted,” he said.
“Our global supply organization continues to monitor the situation daily and has contingency plans in place for many, but not all sourced items.”