Franklin Electric - Q3 2014

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Franklin Electric Quarter Three 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. Should anyone require operator assistance, you may press star and then zero on your touchtone telephone. As a reminder, this conference is being recorded. I'd now like to turn the call over to our host for today, Mr. Jeffery Peer, Treasurer for Franklin Electric. Sir, you may begin.

Jeffery Peer (Treasurer)

Thank you, Ben, and welcome everyone to Franklin Electric's third quarter 2014 earnings conference call. With me today are Gregg Sengstack, our CEO, John Haines, our CFO, and Robert Stone, Senior Vice President and President of International Water Systems. On today's call, Gregg will review our third quarter and year-to-date business results, and then John will review our third quarter and year-to-date financial results. When John is through, we will have some time for questions and answers. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements.

A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release. All forward-looking statements made during this call are based on information currently available, and except as required by law, the company assumes no obligation to update any forward-looking statements. During this call, we will also discuss certain non-GAAP financial measures, which the company believes help investors understand underlying trends in the company's business more easily. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on the Franklin Electric's website. With that, I will now turn the call over to our CEO. Gregg?

Gregg Sengstack (CEO)

Thank you, Jeff. During the third quarter, the company achieved record sales. Our adjusted EPS equaled last year's third quarter earnings per share, which were the highest reported earnings for any third quarter in the company's history. However, our earnings were below our guidance and expectations, principally due to the mix of sales in our U.S. Water Systems business. During the third quarter, Water Systems sales in the U.S. and Canada, which were 41% of consolidated sales, increased by 5% compared to the prior year. U.S. and Canada sales of Pioneer-branded mobile pumping equipment increased by over 75% in the third quarter of 2014 compared to the prior year. As I mentioned last quarter, the contribution margins of Pioneer sales deteriorated year-over-year as we outsourced production and took other actions to assure timely customer deliveries during this period of rapid sales growth.

Sales of other surface water pumping equipment grew by 6% in the third quarter. These sales increases were partially offset by lower sales of groundwater pumping equipment, which declined about 16% in the quarter. Near perfect, meaning wet and cool, weather conditions across much of the country, particularly the Midwest Farm Belt, reduced demand for agricultural irrigation pumping systems, pushing sales below our expectations. A second contributing factor was reduced orders resulting from customer inventory imbalances due to the reset of our U.S. groundwater distribution footprint. We implemented this distribution change during the third quarter. This shift in mix from our vertically integrated, higher-margin, submersible pumping system sales to our less vertically integrated, lower-margin surface pumping system sales resulted in U.S. earnings below expectations. While our U.S. earnings were off due to this temporary mix shift, our Water Systems teams in developing regions continued to deliver solid performance.

For example, excluding acquisitions, Asia Pacific sales increased by about 24% compared to the third quarter prior year. Sales in Southeast Asia grew by 48%, as the company continues to benefit from the introduction of new products, as well as the advantage of having company-owned inventory in the region. Excluding acquisitions and the impact of foreign currency translation, water system sales in Latin America, which were about 14% of consolidated sales for the third quarter, increased 7%. In spite of the weak Brazilian economy, our water system sales in Brazil were up 10% in the quarter. Our distribution outlets in Chile and Colombia also contributed to increased sales in these markets compared to the third quarter of 2013. Water system sales in the Middle East and Africa, which were about 10% of consolidated sales, were flat compared to the third quarter of 2013.

However, excluding the impact of foreign currency translation, sales increased by about 6% compared to the third quarter of 2013. This, in spite of a double-digit decline in South Africa sales due to the month-long strike in July by the South African Metalworkers Union, which impacted many companies, including ours. While it has taken 3 months for the supply chain to recover, our South African revenue is now on pace with last year. Our business in Turkey continues to post record results, driven by strong sales of groundwater pumping equipment in Turkey... In Europe, where economic conditions remain weak, our sales declined by about 5% compared to the third quarter of 2013. Sales were flat across the Franklin Electric brand of Water Systems products in Europe, but down in the Pioneer branded mobile pumping equipment products in the third quarter of 2014.

Turning now to our fueling business. The fueling business team turned in another great quarter, ahead of expectations and guidance, with sales growing 19% and earnings growing by 26% compared to the third quarter prior year. Fueling Systems grew across all product lines and all regions of the globe. Fueling station owners continued to invest in Franklin pressure pumping systems for delivering fuel to dispensers, as well as our vapor control and leak detection systems. Returning to the subject of developing regions for a moment. We continue to be convinced that over the next decade, most of the world's growth and demand for our water and fueling products will occur in developing regions. We are pleased that during the third quarter, we completed two acquisitions in India, one on the water side of the business and one on the fueling side.

Both of these acquisitions, along with the Bombas Leão acquisition in Brazil during the second quarter, are part of our long-term strategy to expand our reach in developing markets. We believe that after the initial integration costs are behind us, these acquisitions will be accretive to earnings during 2015. Our overall sales in developing regions now stands at 40% of our consolidated revenue and grew by 20% versus the third quarter of last year. As we look forward to the fourth quarter, our Water Systems outlook assumes a continuation of many of the same factors we experienced in the third quarter. Although we believe organic revenue growth will be solid, product sales mix will continue to negatively affect our adjusted operating income, as we expect groundwater equipment sales to be lower in the U.S., due principally to the decline in the sale of agricultural irrigation pumping equipment.

As a result, we are projecting that our fourth quarter 2014 global water system sales will increase by 8%-10%, but our adjusted operating income will decline by about 10%-12%. However, we expect our Water Systems adjusted operating income margins will decline about 300-325 basis points as compared to the 430 basis point decline in the third quarter of this year. It's important to point out that this entire margin decline is a function of mix and not price erosion. As we move into 2015 and stability returns to our groundwater distribution network, we expect that our water system sales will-- sales mix will return to more historical levels. Finally, as we enter 2015, we are implementing controls that will materially slow the growth rate of fixed spending.

All these points should restore the operating leverage that the company has consistently achieved. We estimate that our fueling system sales and adjusted operating earnings will grow in the fourth quarter of 2014 by 4%-6% as compared to a record 2013 fourth quarter. And finally, despite the adjusted operating income decline, our consolidated adjusted earnings per share will grow in the 3%-5% range, due in part to continued tax planning with respect to our foreign operations. I would now like to turn the call over to John Haines, our CFO. John?

John J. Haines (CFO)

Thank you, Gregg. Our fully diluted earnings per share, as reported, were $0.46 for the third quarter of 2014, versus $0.51 for the third quarter of 2013. As we note in the tables in the earnings release, the company adjusts the as-reported GAAP operating income and earnings per share for items we consider not operational in nature. We believe presenting these matters in this way gives our investors a more accurate picture of the actual operational performance of the company. Non-GAAP expenses for the third quarter of 2014 were $3 million and included $2.2 million in restructuring costs, primarily for the European manufacturing realignment announced by the company on July 1, 2014, and $0.8 million for acquisition-related costs. The third quarter of 2014 non-GAAP adjustments had an EPS impact of $0.04.

The non-GAAP EPS adjustments in the third quarter of 2013 rounded to a $0.01 reduction in the reported EPS. So after considering these non-GAAP items, third quarter of 2014 adjusted EPS is $0.50, which is equal to the $0.50 adjusted EPS the company reported in the third quarter of 2013. Water system sales were $216.6 million in the third quarter of 2014, an increase of $18.7 million, or about 9%, versus the third quarter of 2013 sales of $197.9 million. Sales from businesses acquired since the third quarter of 2013 were $9.9 million, or about 5%. Water system sales were reduced by $2.9 million, or about 1% in the quarter, due to foreign currency translation.

Water Systems sales growth, excluding acquisitions and foreign currency translation, was about 6%. Water Systems operating income after non-GAAP adjustments was $31 million in the third quarter of 2014, a decrease of about 16% versus the third quarter of 2013. The third quarter operating income margin after non-GAAP adjustments was 14.3%, down 430 basis points from 18.6% in the third quarter of 2013. As Gregg has already mentioned, Water Systems adjusted operating income margin declined primarily due to a sales mix shift during the third quarter. Historical Water Systems sales mix is 65% groundwater and 35% surface pumping equipment....During the third quarter of 2014, the actual sales mix was 59% groundwater and 41% surface water pumping equipment.

This shift primarily occurred because of a 6% global decline in the sale of pumps for agricultural irrigation and a 60% increase in global sales of Pioneer branded mobile pumping equipment. The profit margin on agricultural irrigation pumps is significantly higher than the margin on surface pumps. Water Systems margins also declined in the quarter due to higher fixed costs, in part from the recent acquisitions. Fueling system sales represented 22% of consolidated sales and were $61.5 million in the third quarter of 2014, an increase of $9.6 million, or about 19% versus the third quarter of 2013 sales of $51.9 million. Fueling Systems sales increased by $0.3 million, or less than 1% in the quarter due to foreign currency translation. Fueling Systems acquisition-related sales in the third quarter were less than 1%.

Excluding acquisitions and the impact of foreign currency, fueling system sales increased about 18% compared to the third quarter of 2013. During the third quarter of 2014, Fueling Systems shipped about $3.5 million of equipment to India to partially fill a large customer order. Excluding the impact of these India sales, fueling system sales grew by about 11%. Sales growth was across all product lines in all regions of the world. Fueling Systems operating income after non-GAAP adjustments, was $15.7 million in the third quarter of 2014, compared to $12.5 million after non-GAAP adjustments in the third quarter of 2013, an increase of about 26%.

The third quarter operating income margin after non-GAAP adjustments was 25.5%, an increase of 140 basis points from the 24.1% of net sales in the third quarter of 2013. The increase was primarily driven by fixed cost leverage on higher sales. The company's consolidated gross profit was $89.2 million for the third quarter of 2014, an increase of $2.2 million, or about 3% from the third quarter of 2013, gross profit of $87 million. The gross profit as a percent of net sales was 32.1% in the third quarter of 2014, down about 270 basis points versus 34.8% during the third quarter of 2013.

A previously discussed mix shift in the Water Systems segment contributed to significantly lower gross profit margins in the quarter. Selling general and administrative, or SG&A expenses, were $55.6 million in the third quarter of 2014, compared to $48.4 million in the third quarter of the prior year, an increase of $7.2 million, or about 15%. Increase in SG&A expenses from acquired businesses were $3.2 million. Excluding the acquisitions, the company's overall SG&A expenses in the third quarter of 2014 increased by $4 million, or about 8% to the prior year third quarter. These remaining increases in SG&A were primarily driven by higher sales commissions, marketing and selling related costs in support of higher sales, and increases in research, development, and engineering spending.

The tax rate as a percent of pre-tax earnings for the third quarter of 2014 was about 23%, a decrease of about 5% from the third quarter of 2013, tax rate of about 28%, primarily due to the income mix by jurisdictions and the expiration of the statute of limitation for certain for some uncertain tax positions. The full year 2014 rate is estimated to be about 23%. As Gregg mentioned in our guidance, we expect the fourth quarter 2014 tax rate to be about 10% due to the continued benefit of restructuring of FE's international entities, which will result in the reversal of certain deferred tax liabilities, a discrete event in the quarter, as well as reduced tax expense in future periods.

The company ended the third quarter of 2014 with a cash balance of $77.4 million, which was $57.1 million lower than at the end of 2013. The cash balance decrease is primarily attributable to increased working capital needs and acquisitions. The company had borrowed $45.7 million on its revolving debt facilities at the end of the third quarter of 2014 versus no borrowings at the end of the third quarter of 2013. The company purchased about 59,000 shares of its common stock, for approximately $2.2 million in the open market during the third quarter of 2014. This brings our total share repurchases year-to-date, 2014, to about 203,000. The total remaining authorized shares that may be repurchased is about 910,000.

Finally, on October 24th, the board of directors of the company declared a quarterly cash dividend in the amount of $0.09 per share for outstanding shares of common stock on November 20th, 2014, with a record date of November 6th, 2014. This concludes our prepared remarks. We'd like to now turn the call over for questions.

Operator (participant)

Thank you, sir. Ladies and gentlemen, the phone lines. If you'd like to ask a question, please press star and then one now. If your question has been answered, or you would like to remove yourself from the queue for any reason, you may press the pound key. Again, for a question, please press star and then one now. Our first question comes from the line of Ryan O'Donnell of Robert W. Baird. Your line is open. Please go ahead.

Ryan O'Donnell (Director and Senior Research Analyst)

Good morning, guys. This is Ryan on for Mike.

John J. Haines (CFO)

Hey, Ryan. Good morning.

Ryan O'Donnell (Director and Senior Research Analyst)

Good morning. Could you guys just bucket out maybe the groundwater decline, you know, ag relative to kind of the near-term channel shifts you guys are seeing?

John J. Haines (CFO)

Yeah, Ryan, the way we would look at it is probably more than half of the decline was weather related, and less than half of the decline was inventory adjustments or lack of underlying demand, given the channel and the channel inventory levels.

Ryan O'Donnell (Director and Senior Research Analyst)

Okay. And then it sounds like, you know, ag should continue to be weak in 4Q. Is this still, you know, it sounds like primarily weather, but how much of it is maybe due to the underlying, you know, spending constraints that we're seeing in the market overall?

John J. Haines (CFO)

Well, I think, Ryan, for sure, one of the consequences of the weather on this on the sales of this type of equipment is that you do start to see channel inventory levels start to build. And I think as we look at our guidance in the fourth quarter and, you know, just to expand a bit on what Greg said, those channel inventory levels, which we don't have perfect visibility to, you know, please understand that, we think are high right now, and they're especially high in this mix of product, you know, this ag mix of product.

Ryan O'Donnell (Director and Senior Research Analyst)

Okay, that makes sense. And then I guess lastly, you know, I know you guys talked about 2015, the mix improving back toward normalized levels in Water Systems.

John J. Haines (CFO)

Mm-hmm.

Ryan O'Donnell (Director and Senior Research Analyst)

Could you just talk about kind of the shifts you're gonna see next year with, you know, I guess maybe Pioneer continuing to grow pretty fast and then maybe a bounce back in ag and, some of the channel shifts going away? Just, just talk about the moving pieces there.

John J. Haines (CFO)

Yeah, Ryan, the way we're looking at it is that Pioneer is now operating at a higher level. You're not gonna see that kind of growth next year, year-over-year. And what we're looking for in Pioneer is that now that we're operating at these levels, is to improve the underlying profitability of Pioneer over a period of time. With respect to the, you know, the ag and overall mix shift, you know, when you see a, you know, we have a challenge because it's been a soft market. We are going through, you know, changing our distribution footprint. You know, we terminated a relationship that's affected 30 outlets. We've added more than 50-60 additional outlets in replacement of those.

And so that's gonna work its way through, time, and we would expect that as the 2015 year unfolds, that we'll kind of go back towards history - historic levels, during the year.

Ryan O'Donnell (Director and Senior Research Analyst)

Yeah. Great. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from the line of Edward Marshall of Sidoti & Company. Your line is open. Please go ahead.

Edward Marshall (Senior Equity Research Analyst)

Good morning.

John J. Haines (CFO)

Hey, Edward.

Edward Marshall (Senior Equity Research Analyst)

Good morning.

How are you? So, I'm curious if you could potentially quantify maybe some of the lost margin potential that you've had on, say, Pioneer, by outsourcing that to some of those components to a supplier, to a cost to a supplier.

John J. Haines (CFO)

Yeah, Ed, I'm not gonna give you the exact margin differential, but when we look at our variable contribution margins, you know, net sales, less variable cost of sales, they're significantly lower than where they were this time last year. And as we said in our comments, you know, the URI relationship is a fantastic win for Franklin Electric, and we're in a position where they placed very large orders and had a very large demand on us, for, you know, the certainly in the second and third quarters of this year, and that will continue in the fourth quarter. And, you know, we wanted to meet that demand, you know, so customer service and meeting their requirements for fulfillment and delivery, in our mind, came first.

The price for that, however, was that we had to go outside, in many cases, to expand our capacity footprint, in some cases, to, you know, get the right mix of product that we, that customer wanted, and that cost us from a margin perspective, but it was very significant. Now, the good news there is when you look sequentially at this same variable contribution margin over the months, let's say, from, you know, call it from June to September, it is getting better. We would expect, we've reviewed this with the Pioneer team. We understand their 2015 plan, I think, fairly well, and we would expect that these variable contribution margins for Pioneer would kind of come back to 2013 levels, next year.

So, that's it. It's definitely an issue impacting us, but it's not one we see continuing into the future.

Edward Marshall (Senior Equity Research Analyst)

As that business continues to grow, and I understand you're gonna step off the growth rates you've seen, but I'm curious if there's any kind of plans for potential capital on your end, kind of expand your capacity there to maybe meet future demands?

John J. Haines (CFO)

Within the context of our overall capital investment in the company will fit within that plan. You know, we typically spend, as a company, between 3.5% and 4% of revenue on CapEx, and we look around the globe, and it'll fit within that those parameters.

Edward Marshall (Senior Equity Research Analyst)

Okay. And I understand your comments about maybe being tough at your end to kind of see the inventory in the channel, but I'm kind of curious if there's any way you can kind of- how do you gauge the pulse there? Or maybe how much inventory do you see, and how long does that persist? I guess there are equal people on both sides of the aisle that say, I could be up or down next year, but you know, kind of how do you see it? You're guiding to growth next year. I'm just kind of curious how you see that coming through with the inventories and how that flushes out. Is it more back-end loaded, or how do you see it?

John J. Haines (CFO)

Yeah, and you know, we have customers that are on annual purchase targets, and so that also adds a level of variability. But, you know, when people are coming into the back half of the year, and it's been a wet year, you know, they're a little reticent to carry inventory into the next year. To your point, next year's ag situation could be, you know, very dry and would be ideal for groundwater pumping. It could be another wet year, where it'll be an easier comp in that respect. But, you know, it's not like these distributors are carrying six or seven months inventory. They're carrying a couple, three months of inventory, but we just know coming in the end of the year, that it's heavy in, particularly in the Midwest region.

Edward Marshall (Senior Equity Research Analyst)

Okay. And when you look at your change in ag, is there a way for you to parse out maybe what has been distribution changes and what's been just sluggish demand and the impact of both, or the percentage change in both? I mean, is there any way to quantify that for us?

John J. Haines (CFO)

Yeah, again, I mentioned earlier that, you know, I think maybe half of the decline, maybe a little more half the decline is weather related, and the other is just kind of, again, restocking and destocking that we talked about would be occurring over the next couple quarters or last quarter and probably in the fourth quarter. To give you a point of reference, you know, in Brazil, where the economy apparently is not growing on a macro basis, you know, our sales are up 10%, and they're up 10% in part because it's been relatively dry, and people are looking to Franklin Electric to solve their groundwater needs. And when you get into wet and dry years, you can have that level of variance.

And so that just gives you another market where we're seeing, you know, relatively dry conditions being a nice boost to our business when the economy in Brazil has been, you know, kind of weak.

Edward Marshall (Senior Equity Research Analyst)

I see. Okay, guys. Thanks.

Operator (participant)

Thank you. Ladies and gentlemen, that does conclude our Q&A session. I'd like to hand the conference back over to Mr. Gregg Sengstack, CEO, for any closing remarks.

John J. Haines (CFO)

He just came.

Gregg Sengstack (CEO)

Hang on a second here, Ben. I think we have another analyst who'd like to ask a question, if you can bring him online.

John J. Haines (CFO)

We see, Ben, that David Rose just came into the queue. Is David on?

Operator (participant)

Mr. Rose from Wedbush Securities, your line is now open. Please go ahead.

James Bailey (Managing Director)

Yeah. Hi, this is actually James in for David today.

Gregg Sengstack (CEO)

Hey, James.

John J. Haines (CFO)

Hey, James.

James Bailey (Managing Director)

So I had a question here on expenses. So looking at Q4, other than the negative sales mix you expect, are you guys expecting any incremental expenses in the quarter? I mean, if I were to look at maybe Q4 of last year, you guys had a lot of non-recurring, kind of one-time charges related to, you know, IT expenses at the new headquarters. You had some expenses related to pump rental initiative and commercializing artificial lift, and et cetera, et cetera. So I wanted to see if any of those expenses actually roll off, and you may see some either tailwinds or headwinds from those.

John J. Haines (CFO)

Well, I think in the, James, in the corporate segment or that corporate group that, you know, we captured just cost in, I would expect that to be up, you know, 3%-4% in the fourth quarter of 2014. So there's some inflation in that. There's some incremental increase in that, but, that that's what our current expectation is for that bucket of expenses.

James Bailey (Managing Director)

Okay. So for your expectation, you're just mainly the negative impact is from the sales mix in Q4?

John J. Haines (CFO)

Uh, the-

James Bailey (Managing Director)

For the water-

John J. Haines (CFO)

Yeah, the Q4, as Greg pointed out in our guidance, James, you know, we're expecting our water operating income to decline in the fourth quarter, and that decline is almost entirely the result of the continuation of these factors we've been discussing: the mix shift from groundwater to surface, the lower-than-expected margins on the Pioneer product sales. So those factors will continue into the fourth quarter, and when you look at that operating income decline in water, those are the primary factors contributing to that.

James Bailey (Managing Director)

Okay. Going back to the groundwater pumping equipment, you talked about, obviously, weaker demand, you know, driven in part by the distributor reset. I think last quarter, you didn't see much of that, but that seems to have changed, and you talked about just overall ag being down and inventory levels sort of having to reset. Is that the main impact, or was there any change in the distribution network that you could point out?

John J. Haines (CFO)

No, James. What, you know, going into the third quarter, things were, as you pointed out, kind of going unfolding as planned. We actually didn't make the, the change. We announced the change, earlier, but we didn't actually make the change until the third quarter. And so, we really, that's, that's when it unfolded, and then that, along with the, you know, the poor climatic conditions, just doesn't encourage people to take a lot of additional inventory, and they got to work off that, which they have. So, it was just a compounding factor, in Q3, the weather being, really pretty ideal for farming, but not so ideal for pumping.

James Bailey (Managing Director)

... Okay. And last question, actually, regarding the sales mix. I know, you know, obviously, Pioneer had a very strong quarter, driven by URI. Was that the increase mainly driven by URI, or was there kind of a broader uptick in the business? And then another question is, you know, when you talk about sales mix, going back to the historical levels, is that because you're expecting—I know you mentioned it before, but expecting the, you know, surface water, kind of the Pioneer brand demand decline next year, or going back to the historical levels, like you said, despite the ag kind of environment being weak at this point?

John J. Haines (CFO)

Okay, two-part question. I'd say that as you look into 2015, what I, I mentioned earlier, is that we expect the Pioneer sales to now be operating at a new level, much higher, obviously, than 2013. And then what we expected to see a recovery in our submersible groundwater pumping business in 2015 so that the mix will rebalance. With respect to your first question about Pioneer sales mix, I'm going to ask Robert Stone to address that question to you.

Robert J. Stone (SVP and President of International Water Systems)

The URI has been a significant driver, and we're actually expecting that their, their demand in terms of fleet build will start to taper, going into 2015. But we've also seen a lot of growth in other market areas, such as Australia, where we've had, very nice growth this year, and we're expecting more growth in Australia next year. So we'll have, a little bit of an offsetting condition with the URI volume, but improving margins for the Pioneer piece, in 2015.

Gregg Sengstack (CEO)

And again, James, as John J. Haines pointed out earlier in the call, you know, we're expecting the operating margin, while it's gonna be a decline, we expect it to be a decline in the fourth quarter of the water business, it will be a smaller decline than in the third quarter. And that shows some recovery, and to Robert's point, some improvement in profitability at Pioneer.

James Bailey (Managing Director)

Okay. All right. Thank you, gentlemen.

Operator (participant)

Thank you. We also have a follow-up from the line of Edward Marshall of Sidoti & Company. Your line is open. Please go ahead.

Edward Marshall (Senior Equity Research Analyst)

So just a quick follow-up. You, you mentioned the tax rate. I guess I'd be remiss about not asking. Did you say it was a—I think you said it was a 10% tax rate in the quarter, I think you were taking some, reversing some deferred tax liabilities. What would be your effective tax rate for the fourth quarter? Is it still along those 28%? And, and I guess the same question for 2015.

John J. Haines (CFO)

Yeah, the effective tax rate for the full year 2014, Ed, is that what you're asking?

Edward Marshall (Senior Equity Research Analyst)

Well, I mean, if you X out these deferred tax liabilities that you're gonna be taking in the quarter, what would your tax rate look like? Would it be closer to that 28% range? You did say it was coming down a bit.

John J. Haines (CFO)

Yeah. It's in the 27, 27% range.

Edward Marshall (Senior Equity Research Analyst)

I see, and as we look out to 2015, same kind of outlook, 27% on the go forward?

John J. Haines (CFO)

Yeah, 25-27, somewhere in that range.

Edward Marshall (Senior Equity Research Analyst)

Okay, so that lowers it quite considerably. What, what region of the world is this adjustment?

John J. Haines (CFO)

It's mainly Latin American entities that are going into this international tax structure that we have, Ed, so it's the addition of the largest ones or the additions of the Brazilian entities.

Edward Marshall (Senior Equity Research Analyst)

I see. Okay, great. Thanks, guys. I appreciate it.

Operator (participant)

Thank you. I'm showing no further questions in queue. I'd like to turn the conference back over to Mr. Gregg Sengstack, CEO.

Gregg Sengstack (CEO)

Thank you, Ben, and we appreciate everyone following Franklin Electric, and we'll talk to you after the first of the year.

Operator (participant)

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect.