Franklin Eelectric 2nd Quarter 2006, 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________
FORM
10-Q
_________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended July
1, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____ to _____
Commission
file number 0-362
FRANKLIN
ELECTRIC CO., INC.
(Exact
name of registrant as specified in its charter)
Indiana
|
|
35-0827455
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
400
East Spring Street
|
|
|
Bluffton,
Indiana
|
|
46714
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(260)
824-2900
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer x
|
Accelerated
Filer o
|
Non-Accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
Outstanding
at
|
Class
of Common Stock
|
|
July
1, 2006
|
$.10
par value
|
|
22,943,388
shares
|
FRANKLIN
ELECTRIC CO., INC.
Index
|
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
Number
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of July 1, 2006 and December 31,
2005
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Second Quarter and Six
Months
Ended July 1, 2006 and July 2, 2005
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statements Of Cash Flows for the Six Months Ended July
1,
2006 and July 2, 2005
|
|
5
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6-14
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
15-16
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
16
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
16
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
Item
1A
|
Risk
Factors
|
|
17
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
17
|
|
|
|
|
Item
6.
|
Exhibits
|
|
17
|
|
|
|
|
Signatures
|
|
|
18
|
|
|
|
|
Exhibit
Index
|
|
|
19
|
|
|
|
|
Exhibits
|
|
|
20-29
|
PART
I.
FINANCIAL INFORMATION
Item
1. Financial Statements
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands)
|
|
July
1,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
32,931
|
|
$
|
52,136
|
|
Investments
|
|
|
-
|
|
|
35,988
|
|
Receivables,
less allowances of $2,761 and $2,204, respectively
|
|
|
62,327
|
|
|
30,165
|
|
Inventories
|
|
|
107,012
|
|
|
70,381
|
|
Other
current assets (including deferred income taxes of $12,836 and $10,744,
respectively)
|
|
|
17,305
|
|
|
14,350
|
|
Total
current assets
|
|
|
219,575
|
|
|
203,020
|
|
Property,
plant and equipment, net
|
|
|
108,289
|
|
|
95,732
|
|
Deferred
and other assets (including deferred income taxes of $574 and $0,
respectively)
|
|
|
21,957
|
|
|
23,028
|
|
Goodwill
and other intangible assets
|
|
|
141,512
|
|
|
57,982
|
|
Total
assets
|
|
$
|
491,333
|
|
$
|
379,762
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and short-term borrowings
|
|
$
|
11,300
|
|
$
|
1,303
|
|
Accounts
payable
|
|
|
26,722
|
|
|
26,409
|
|
Accrued
expenses
|
|
|
43,359
|
|
|
34,223
|
|
Income
taxes
|
|
|
1,674
|
|
|
2,087
|
|
Total
current liabilities
|
|
|
83,055
|
|
|
64,022
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
62,434
|
|
|
12,324
|
|
Deferred
income taxes
|
|
|
4,464
|
|
|
4,296
|
|
Employee
benefit plan obligations
|
|
|
26,475
|
|
|
25,830
|
|
Other
long-term liabilities
|
|
|
5,344
|
|
|
5,728
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
Common
shares (45,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
outstanding
(22,943
and 22,485, respectively)
|
|
|
2,294
|
|
|
2,249
|
|
Additional
capital
|
|
|
91,467
|
|
|
74,717
|
|
Retained
earnings
|
|
|
210,976
|
|
|
190,381
|
|
Loan
to ESOP Trust
|
|
|
(200
|
)
|
|
(432
|
)
|
Accumulated
other comprehensive income
|
|
|
5,024
|
|
|
647
|
|
Total
shareowners' equity
|
|
|
309,561
|
|
|
267,562
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' equity
|
|
$
|
491,333
|
|
$
|
379,762
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In
thousands, except per share amounts)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
162,669
|
|
$
|
123,537
|
|
$
|
273,649
|
|
$
|
205,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
108,902
|
|
|
82,117
|
|
|
183,290
|
|
|
139,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
53,767
|
|
|
41,420
|
|
|
90,359
|
|
|
66,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
27,626
|
|
|
19,976
|
|
|
49,241
|
|
|
36,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
expense
|
|
|
-
|
|
|
505
|
|
|
-
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
26,141
|
|
|
20,939
|
|
|
41,118
|
|
|
29,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,076
|
)
|
|
(183
|
)
|
|
(1,269
|
)
|
|
(355
|
)
|
Other
income, net
|
|
|
615
|
|
|
190
|
|
|
1,060
|
|
|
341
|
|
Foreign
exchange loss
|
|
|
(81
|
)
|
|
(43
|
)
|
|
(126
|
)
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
25,599
|
|
|
20,903
|
|
|
40,783
|
|
|
29,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
9,157
|
|
|
7,358
|
|
|
14,642
|
|
|
10,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16,442
|
|
$
|
13,545
|
|
$
|
26,141
|
|
$
|
19,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings per Share
|
|
$
|
.72
|
|
$
|
.61
|
|
$
|
1.15
|
|
$
|
.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings per Share
|
|
$
|
.70
|
|
$
|
.59
|
|
$
|
1.13
|
|
$
|
.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
.11
|
|
$
|
.10
|
|
$
|
.21
|
|
$
|
.18
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
26,141
|
|
$
|
19,356
|
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
8,452
|
|
|
7,783
|
|
Stock
based compensation
|
|
|
1,549
|
|
|
-
|
|
Deferred
income taxes
|
|
|
2,498
|
|
|
694
|
|
Loss/(gain)
on disposals of plant and equipment
|
|
|
(69
|
)
|
|
51
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(15,801
|
)
|
|
(9,244
|
)
|
Inventories
|
|
|
(7,484
|
)
|
|
(16,879
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(436
|
)
|
|
6,879
|
|
Excess
tax from share-based payment arrangements
|
|
|
(5,399
|
)
|
|
-
|
|
Employee
benefit plan obligations
|
|
|
334
|
|
|
451
|
|
Other,
net
|
|
|
(3,836
|
)
|
|
(234
|
)
|
Net
cash flows from operating activities
|
|
|
5,949
|
|
|
8,857
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to plant and equipment
|
|
|
(8,749
|
)
|
|
(5,569
|
)
|
Proceeds
from sale of plant and equipment
|
|
|
323
|
|
|
1,048
|
|
Additions
to deferred and other assets
|
|
|
(293
|
)
|
|
(1,005
|
)
|
Purchases
of securities
|
|
|
(63,500
|
)
|
|
(93,500
|
)
|
Proceeds
from sale of securities
|
|
|
99,488
|
|
|
77,975
|
|
Cash
paid for acquisitions, net of cash acquired
|
|
|
(122,713
|
)
|
|
-
|
|
Net
cash flows from investing activities
|
|
|
(95,444
|
)
|
|
(21,051
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Additions
to long-term debt
|
|
|
70,000
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(10,144
|
)
|
|
(142
|
)
|
Proceeds
from issuance of common stock
|
|
|
9,225
|
|
|
4,356
|
|
Excess
tax from share-based payment arrangements
|
|
|
5,399
|
|
|
-
|
|
Purchases
of common stock
|
|
|
(198
|
)
|
|
(12,318
|
)
|
Reduction
of loan to ESOP Trust
|
|
|
232
|
|
|
233
|
|
Dividends
paid
|
|
|
(4,780
|
)
|
|
(3,970
|
)
|
Net
cash flows from financing activities
|
|
|
69,734
|
|
|
(11,841
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
556
|
|
|
(1,089
|
)
|
Net
change in cash and equivalents
|
|
|
(19,205
|
)
|
|
(25,124
|
)
|
Cash
and equivalents at beginning of period
|
|
|
52,136
|
|
|
50,604
|
|
Cash
and equivalents at end of period
|
|
$
|
32,931
|
|
$
|
25,480
|
|
|
|
|
|
|
|
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1: Condensed Consolidated Financial Statements
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all accounting entries
and
adjustments (including normal recurring accruals) considered necessary for
a
fair presentation of the financial position and the results of operation for
the
interim period have been made. Prior year amounts are reclassified when
necessary to conform to current year presentation. Operating results for the
second quarter ended July 1, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 30, 2006. For further
information, including a description of Franklin Electric's critical accounting
policies, refer to the consolidated financial statements and footnotes thereto
included in Franklin Electric Co., Inc.'s annual report on Form 10-K for the
year ended December 31, 2005.
Note
2: Investments
As
of
July 1, 2006, the Company held no investments in current assets. All income
generated from investments held during the second quarter ended July 1, 2006
was
recorded as other income, net. Cash paid for these securities and proceeds
from
the sale of these securities have been included as part of “Cash flows from
investing activities” section of the cash flow statement.
The
Company holds a 35 percent equity interest, in Pioneer Pump, Inc. which is
accounted for using the equity method and is included as part of “Deferred and
other assets” in the balance sheet. The carrying amount of the investment is
adjusted for the Company’s proportionate share of earnings, losses, and
dividends. At July 1, 2006, the carrying value of the investment was $5.8
million.
Note
3:
Inventories
Inventories
consist of the following:
(In
millions)
|
|
July
1,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Raw
Materials
|
|
$
|
36.2
|
|
$
|
25.3
|
|
Work
in Process
|
|
|
13.1
|
|
|
10.6
|
|
Finished
Goods
|
|
|
77.2
|
|
|
51.8
|
|
LIFO
Reserve
|
|
|
(19.5
|
)
|
|
(17.3
|
)
|
Total
Inventory
|
|
$
|
107.0
|
|
$
|
70.4
|
|
Note
4: Property, Plant and Equipment
Property,
plant and equipment, at cost, consist of the following:
(In
millions)
|
|
July
1,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Land
and Building
|
|
$
|
58.2
|
|
$
|
52.8
|
|
Machinery
and Equipment
|
|
|
179.8
|
|
|
164.9
|
|
|
|
|
238.0
|
|
|
217.7
|
|
Allowance
for Depreciation
|
|
|
(129.7
|
)
|
|
(122.3
|
)
|
|
|
|
|
|
|
|
|
Other
- Held for Sale
|
|
|
0.0
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108.3
|
|
$
|
95.7
|
|
Note
5: Goodwill and Other Intangible Assets
The
carrying amount of the Company’s intangible assets, which is included in
deferred and other assets, and goodwill include:
|
|
July
1,
|
|
Dec
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Amortized
intangibles
|
|
|
|
|
|
|
|
Patents
|
|
$
|
6.0
|
|
$
|
5.9
|
|
Supply
agreements
|
|
|
10.2
|
|
|
10.0
|
|
Other
|
|
|
4.3
|
|
|
4.2
|
|
Accumulated
amortization
|
|
|
(11.2
|
)
|
|
(10.1
|
)
|
Total
|
|
$
|
9.3
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
Goodwill
and other intangible assets
|
|
$
|
141.5
|
|
$
|
58.0
|
|
Other
changes in the carrying amount of intangibles and goodwill reflect foreign
currency fluctuations.
Amortization
expense related to intangible assets for the six months ended July 1, 2006
and
July 2, 2005, was $1.0 million.
During
the second fiscal quarter, there has been no change in the projected
amortization expense for each of the five succeeding years, as reported in
the
Company’s annual report on Form 10-K for the year ended December 31, 2005.
Acquisition
During
April 2006, the Company completed its acquisition of all of the outstanding
shares of capital stock of Little Giant Pump Company (“Little Giant”) from
Tecumseh Products Company (“Tecumseh”) for a cash purchase price of $121
million, excluding transaction costs and subject to a final post-closing working
capital adjustment. This acquisition was accounted for using the purchase method
of accounting. Accordingly, a portion of the aggregate purchase price was
allocated to the net assets acquired based on preliminary estimated fair values.
The excess of purchase price over the fair value of the net assets acquired
has
been recorded as goodwill.
Note
6: Employee Benefits
The
following table sets forth aggregated net periodic benefit cost:
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
1.1
|
|
$
|
0.9
|
|
$
|
2.2
|
|
$
|
2.0
|
|
Interest
cost
|
|
|
2.0
|
|
|
2.1
|
|
|
4.2
|
|
|
3.9
|
|
Expected
return on assets
|
|
|
(2.4
|
)
|
|
(2.8
|
)
|
|
(5.2
|
)
|
|
(5.3
|
)
|
Amortization
of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)/Loss
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Prior
service cost
|
|
|
0.4
|
|
|
0.5
|
|
|
0.8
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
1.1
|
|
|
0.8
|
|
|
2.1
|
|
|
1.5
|
|
Settlement
cost
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Total
benefit cost
|
|
$
|
1.1
|
|
$
|
0.8
|
|
$
|
2.1
|
|
$
|
1.6
|
|
|
|
Other
Benefits
|
|
Other
Benefits
|
|
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.2
|
|
$
|
0.2
|
|
Interest
cost
|
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
Amortization
of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation/(asset)
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
Prior
service costs
|
|
|
0.0
|
|
|
0.0
|
|
|
0.1
|
|
|
0.1
|
|
Loss/(Gain)
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
0.5
|
|
|
0.6
|
|
|
1.0
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefit cost
|
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
1.0
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
July 1, 2006 the Company has made contributions to the plans of $0.9 million
and
expects to make additional contributions of $1.7 million in 2006.
Note
7: Tax Rates
The
effective tax rate on income before income taxes in 2006 and 2005 varies from
the United States statutory rate of 35 percent primarily due to the foreign
income exclusion and R & D credits and to the effects of state and foreign
income taxes net of federal tax benefits.
Note
8: Shareowners' Equity
The
Company had 22,943,388 shares of common stock (45,000,000 shares authorized,
$.10 par value) outstanding as of July 1, 2006.
Year
to
date 2006, pursuant to a stock repurchase program authorized by the Company’s
Board of Directors, the Company repurchased 5,000 shares for $0.2 million.
All
repurchased shares were retired.
Note
9: Earnings Per Share
Following
is the computation of basic and diluted earnings per share:
(In
millions, except
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
per
share amounts)
|
|
|
July
1,
|
|
|
July
2,
|
|
|
July
1,
|
|
|
July
2,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
16.4
|
|
$
|
13.5
|
|
$
|
26.1
|
|
$
|
19.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
22.9
|
|
|
22.0
|
|
|
22.7
|
|
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.5
|
|
|
1.0
|
|
|
0.5
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.4
|
|
|
23.0
|
|
|
23.2
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.72
|
|
$
|
.61
|
|
$
|
1.15
|
|
$
|
.88
|
|
Diluted
earnings per share
|
|
$
|
.70
|
|
$
|
.59
|
|
$
|
1.13
|
|
$
|
.84
|
|
Note
10: Other Comprehensive Income
Comprehensive
income is as follows:
(In
millions)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
16.4
|
|
$
|
13.5
|
|
$
|
26.1
|
|
$
|
19.4
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
2.4
|
|
|
(5.5
|
)
|
|
4.4
|
|
|
(9.6
|
)
|
Comprehensive
income, net of tax
|
|
$
|
18.8
|
|
$
|
8.0
|
|
$
|
30.5
|
|
$
|
9.8
|
|
Accumulated
other comprehensive income consists of the following:
(In
millions)
|
|
July
1,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Cumulative
translation adjustment
|
|
$
|
10.6
|
|
$
|
6.2
|
|
Minimum
pension liability adjustment, net of tax
|
|
|
(5.6
|
)
|
|
(5.6
|
)
|
Accumulated
other comprehensive income
|
|
$
|
5.0
|
|
$
|
0.6
|
|
Note
11: Warranty
The
Company provides warranties on most of its products. The warranty terms vary
but
are generally two years from date of manufacture or one year from date of
installation. Provisions for estimated expenses related to product warranty
are
made at the time products are sold or when specific warranty issues are
identified. These estimates are established using historical information about
the nature, frequency, and average cost of warranty claims. The Company actively
studies trends of warranty claims and takes action to improve product quality
and minimize warranty claims. The Company believes that the warranty reserve
is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve.
Below
is
a table that shows the activity in the warranty accrual accounts:
(In
millions)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Beginning
Balance
|
|
$
|
7.2
|
|
$
|
6.3
|
|
$
|
7.0
|
|
$
|
7.1
|
|
Accruals
related to product warranties
|
|
|
5.6
|
|
|
1.2
|
|
|
7.4
|
|
|
2.0
|
|
Reductions
for payments made
|
|
|
(1.5
|
)
|
|
(1.1
|
)
|
|
(3.1
|
)
|
|
(2.7
|
)
|
Ending
Balance
|
|
$
|
11.3
|
|
$
|
6.4
|
|
$
|
11.3
|
|
$
|
6.4
|
|
Note
12: Stock-Based Compensation
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
plans under the recognition and measurement provisions of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations, as
permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation.”
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), “Share-Based Payment,” using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1,
2006,
based on the grant date fair value estimated in accordance with the original
provisions of Statement 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of Statement 123(R). Results
for prior periods have not been restated.
As
a
result of adopting Statement 123(R) on January 1, 2006, the Company’s income
before income taxes and net income for the second quarter ended July 1, 2006,
are $0.7 million and $0.4 million lower, respectively, and basic and diluted
earnings per share for the quarter ended July 1, 2006 are $0.02 and $0.01 lower,
respectively. For the first half ended, the Company’s income before income taxes
and net income are $1.6 million and $1.0 million lower, respectively. Basic
and
diluted earning per share for the first half ended July 1, 2006, are $0.04
and
$0.02 lower, respectively.
Prior
to
the adoption of Statement 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. Statement 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of
the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The $5.4 million excess tax benefit
classified as a financing cash inflow would have been classified as an operating
cash inflow if the Company had not adopted Statement 123(R).
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of Statement
123
to options granted under the Company’s stock option plans in all periods
presented. For purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes option-pricing formula and amortized to
expense over the options’ vesting periods.
(In
millions, except per share amounts)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
2,
|
|
July
2,
|
|
|
|
2005
|
|
2005
|
|
Reported
net income
|
|
$
|
13.5
|
|
$
|
19.4
|
|
Add:
Stock-based employee compensation expense, net of tax
|
|
|
-
|
|
|
-
|
|
Deduct:
Total fair value computed stock-based compensation, net of tax*
|
|
|
(0.4
|
)
|
|
(0.9
|
)
|
Pro
forma net income
|
|
$
|
13.1
|
|
$
|
18.5
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
— as reported
|
|
$
|
.61
|
|
$
|
.88
|
|
Basic
— pro forma
|
|
$
|
.59
|
|
$
|
.84
|
|
Diluted
— as reported
|
|
$
|
.59
|
|
$
|
.84
|
|
Diluted
— pro forma
|
|
$
|
.57
|
|
$
|
.80
|
|
*Includes
expense related to restricted stock reported in net
income.
|
|
|
|
|
|
|
|
The
Company has authorized the grant of options to purchase common stock and award
shares of common stock of the Company to employees and non-employee directors
of
the Company and its subsidiaries under two stock plans. The plans and the
original number of authorized shares available for grants are as
follows:
|
Authorized
Shares
|
Franklin
Electric Co., Inc. Stock Option Plan
|
3,600,000
|
Franklin
Electric Co., Inc. Stock Plan - options
|
1,150,000
|
Franklin
Electric Co., Inc. Stock Plan - awards
|
150,000
|
During
2005, all remaining authorized shares available for grant under the Franklin
Electric Co., Inc. Stock Option Plan were awarded. On April 29, 2005, the
Franklin Electric Co., Inc. Stock Plan (the “Stock Plan”) was approved by the
Company’s shareholders. Under the Stock Plan, employees and non-employee
directors may be granted stock options or stock awards. The Company currently
issues new shares from its common stock outstanding balance to satisfy share
option exercises and stock awards.
Stock
Option Grants:
Under
each of the above plans, the exercise price of each option equals the market
price of the Company’s common stock on the date of grant and the options expire
ten years after the date of the grant. Generally, options granted to nonemployee
directors vest 33 percent a year and become fully vested and exercisable after
three years. Options granted to employees vest at 20 or 25 percent a year and
become fully vested and exercisable after five years or four years,
respectively. Subject to the terms of the plans, in general, the aggregate
option price and any applicable tax withholdings may be satisfied in cash or
its
equivalent, or by the plan participant’s delivery of shares of the Company’s
common stock owned more than six months, having a fair market value at the
time
of exercise equal to the aggregate option price and/or the applicable tax
withholdings.
The
fair
value of each option award, both before and after the adoption of FASB 123(R),
is estimated on the date of grant using the Black-Scholes option valuation
model
with a single approach and amortized using a straight-line attribution method
over the option’s vesting period. Options granted to retirement eligible
employees were immediately expensed. In 2005, this amount was disclosed in
the
pro-forma exhibit while in 2006 it is recognized as an expense. The Company
uses
historical data to estimate the expected volatility of its stock; the weighted
average expected life, the period of time options granted are expected to be
outstanding; and its dividend yield. The risk-free rates for periods within
the
contractual life of the option are based on the U.S. Treasury yield curve in
effect at the time of the grant.
The
assumptions used for the Black-Scholes model to determine the fair value of
options granted in the first six months of 2006 is as follows:
Risk-free
interest rate
|
|
|
4.54
|
%
|
Dividend
yield
|
|
|
.70-.74
|
%
|
Weighted-average
dividend yield
|
|
|
.707
|
%
|
Volatility
factor
|
|
|
.3553-.3768
|
|
Weighted-average
volatility
|
|
|
.359
|
|
Expected
term
|
|
|
4-5
years
|
|
A
summary
of the Company’s stock option plans activity and related information, for the
first half ended July 1, 2006 follows:
(shares
in thousands)
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
at beginning of period
|
|
|
1,793
|
|
$
|
23.600
|
|
|
|
|
|
|
|
Granted
|
|
|
125
|
|
|
45.900
|
|
|
|
|
|
|
|
Exercised
|
|
|
(443
|
)
|
|
20.856
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11
|
)
|
|
25.215
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,464
|
|
$
|
26.327
|
|
|
6.29
|
|
$
|
37,071
|
|
Vested
or expected to vest
At
end of period
|
|
|
1,417
|
|
$
|
26.022
|
|
|
.56
|
|
$
|
36,296
|
|
Exercisable
at end of period
|
|
|
816
|
|
$
|
21.634
|
|
|
5.25
|
|
$
|
24,471
|
|
The
weighted-average grant-date fair value of options granted during the first
six
months of 2006 was $16.43. There were no options granted during the second
quarter. The total intrinsic value of options exercised during the second
quarter of 2006 was $1.6 million and for the first half ended was $2.4
million.
A
summary
of the Company’s nonvested shares activity and related information, for the
first half ended July 1, 2006 follows:
(shares
in thousands)
Nonvested
Shares
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair
Value
|
|
Nonvested
at beginning of period
|
|
|
736
|
|
$
|
7.033
|
|
Granted
|
|
|
125
|
|
|
16.429
|
|
Vested
|
|
|
(202
|
)
|
|
6.939
|
|
Forfeited
|
|
|
(11
|
)
|
|
5.844
|
|
Nonvested
at end of period
|
|
|
648
|
|
$
|
8.904
|
|
As
of
July 1, 2006 there was $4.3 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plans. That cost is expected to be recognized over a weighted-average period
of
1.9 years.
Stock
Awards:
Under
the
Stock Plan, nonemployee directors and employees may be granted stock awards
or
grants of restricted shares of the Company’s common stock, vesting subject to
the employees’ performance of certain goals. The Stock Plan is an amendment and
restatement of the Franklin Electric Co., Inc. Key Employee Performance
Incentive Stock Plan (the “Incentive Plan”), established in 2000. Prior to April
29, 2005, 16,300 shares had been awarded under the Incentive Plan and an
additional 150,000 shares were authorized for stock awards under the Stock
Plan.
The
stock
awards are granted at the market value on the date of grant and the restricted
stock awards cliff vest over either 4 or 5 years and the attainment of certain
performance goals. Dividends are paid to the recipient prior to vesting. Stock
awards granted to retirement eligible employees were immediately expensed in
2006. There were no grants made to retirement eligible employees in
2005.
A
summary
of the Company’s restricted stock award activity and related information, for
the first half ended July 1, 2006 follows:
(shares
in thousands)
Nonvested
Shares
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Nonvested
at beginning of period
|
|
|
21
|
|
$
|
40.824
|
|
Awarded
|
|
|
26
|
|
|
49.245
|
|
Vested
|
|
|
(6
|
)
|
|
58.330
|
|
Forfeited
|
|
|
(1
|
)
|
|
40.720
|
|
Nonvested
at end of period
|
|
|
40
|
|
$
|
43.388
|
|
As
of
July 1, 2006 there was $1.3 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period
of
3.6 years.
Note
13: Acquisition
During
April 2006, the Company completed its acquisition of all of the outstanding
shares of capital stock of Little Giant Pump Company (“Little Giant”) from
Tecumseh Products Company (“Tecumseh”) for a cash purchase price of $121
million, excluding transaction costs and subject to a final post-closing working
capital adjustment. Transaction costs are approximately $2.0 million and
included in the purchase accounting calculations under the guidance of FASB
Statement No. 141 “Business Combinations”. Accordingly, a portion of the
aggregate purchase price was allocated to net assets acquired based on
preliminary estimated fair values. The excess of purchase price over fair value
of the net assets acquired, $82.2 million, has been recorded as goodwill.
The
acquisition of Little Giant Pump Company supports the Company’s position as a
global supplier of pumping equipment for residential and commercial markets.
Little Giant’s product lines - sump, sewage, effluent, condensate and industrial
submersible pumps - broaden the Company’s pump offering, allowing potential
growth of the Company’s customer base.
Little
Giant’s results of operations are included in the Company’s consolidated
statement of income, from the acquisition date through the second quarter ended
July 1, 2006.
Pro
forma Results of Operations
The
following unaudited pro forma statements give effect to the acquisition of
Little Giant Pump Company, a wholly-owned subsidiary of Tecumseh Products
Company, by Franklin Electric Co., Inc. using the purchase method of accounting.
The unaudited pro forma combined condensed statements of operations for the
second quarter ended July 1, 2006 give effect to the acquisition of Little
Giant
Pump Company as if it had occurred on April 2, 2006. These unaudited pro forma
combined condensed financial statements are prepared for informational purposes
only and are not necessarily indicative of actual results or financial position
that would have been achieved had the acquisition of Little Giant been
consummated on the dates indicated and are not necessarily indicative of future
operating results or financial position of the consolidated companies. The
unaudited pro forma combined condensed financial statements do not give effect
to any cost savings or incremental costs that may result from the integration
of
Franklin Electric Co., Inc. and Little Giant Pump Company.
FRANKLIN
ELECTRIC CO., INC.
PRO
FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
millions, except per share amounts)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
July
2,
|
|
July
1,
|
|
July
2,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
168.9
|
|
$
|
152.7
|
|
$
|
306.6
|
|
$
|
259.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16.3
|
|
$
|
15.6
|
|
$
|
26.9
|
|
$
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.71
|
|
$
|
.71
|
|
$
|
1.19
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
.70
|
|
$
|
.68
|
|
$
|
1.15
|
|
$
|
0.96
|
|
Note
14: Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48 “Accounting For Uncertain
Tax Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109 “Accounting for Income Taxes”.
It
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after
December 15, 2006. The Company is currently evaluating the impact of FIN 48
to
its financial position and results of operations.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Sales
and
earnings for the second quarter of 2006 were up from the same quarter of 2005.
The sales increase in the second quarter 2006 was primarily attributable to
growth due to acquisitions, as well as increased demand for Water Systems
products, largely pump and control products, from North American distributors
and increased demand for Fueling Systems products. Earnings improved in the
second quarter of 2006 primarily due to the increased sales. Earnings for the
second quarter of 2006 were partially offset by increases in raw material costs
and other operating costs related to the sale and distribution of Water Systems
products.
Results
of Operations
Net
sales
for the second quarter of 2006 were $162.7 million, an increase of $39.1 million
or 32 percent from the second quarter of 2005. Sales related to
acquisitions were $26.2 million during the second quarter of which the
acquisition of the Little Giant Pump Company was $25.4 million. Changes in
selling price increased net sales by $5.2 million or about 4 percent. Sales
were
also driven by demand for Water Systems products largely from North American
distributors. Western Hemisphere submersible motor sales, coming off unusually
strong sales growth in the first quarter of 2006, were flat to prior year in
the
second quarter. However, a portion of the Western Hemisphere submersible
motor sales growth during the first half of 2006 may be attributable to
submersible motor inventory increases by pump OEM’s (original equipment
manufacturers) purchasing additional quantities as a hedge against future supply
uncertainties resulting from Franklin’s distribution strategy change and
other changes in the marketplace. Franklin’s Water Systems pump sales unit
volumes increased more than 75 percent in second quarter 2006 versus 2005.
Franklin Fueling System product sales also increased about 40 percent from
the
prior year second quarter, primarily due to increased demand for pipe products.
Net sales of Water Systems products for the European and African regions were
down about 8 percent in the second quarter of 2006 compared to last year due
to
the soft market conditions. The Company’s first six months sales increased about
$67.7 million or 33 percent from the first half of 2005 primarily due to
increased demand for Water Systems products and Fueling Systems products, as
well as, acquisition related sales.
Cost
of
sales as a percent of net sales for the second quarter of 2006 was 66.9 percent,
up from the second quarter of 2005 of 66.5 percent. Cost of sales as a percent
of net sales increased primarily as a result of the increased material costs,
led by copper, and the inclusion of Little Giant Pump Company. Cost of sales
as
a percent of net sales year to date was 67.0 percent and 67.5 percent for 2006
and 2005, respectively. Cost of sales as a percent of net sales continues to
decrease primarily as a result of the increased sales noted above. The decrease
in cost of sales as a percent of net sales during the first half of 2006 was
partially offset by increased costs for certain commodities used in the
manufacture of the electric motors.
Selling
and administrative (“SG&A”) expenses, at $27.6 million for the second
quarter of 2006, were up $7.7 million from the second quarter of 2005. The
increase in the second quarter of 2006 was due to incremental cost from
acquisitions, primarily Little Giant Pump Company, as well as additional
marketing and selling expenses related to the Water Systems distribution channel
initiative and higher commissions and other compensation expenses tied to
revenues and earnings both of which increased relative to the second quarter
of
2005. The second quarter of 2006 included $0.6 million of expense related to
stock based compensation in accordance with the adoption of SFAS No. 123 (R)
“Share Based Payments”. The increase of SG&A expense of $13.0 million in the
first half of 2006 from the same period for 2005 was primarily due to about
$4.1
million of costs related to the acquired Little Giant Pump Company, about $2.0
million of costs related to the distribution channel initiative, and $1.5
million of expense related to stock based compensation.
Interest
expense for the second quarter of 2006 was $1.1 million and $0.2 million for
the
same quarter of 2005. The increase in 2006 was primarily related to bank debt
incurred to finance the acquisition of Little Giant.
The
provision for income taxes for the second quarter of 2006 is $9.2 million.
The
effective tax rate for 2006 is projected at 35.9 percent, up from the prior
year
rate of 35.3 percent, primarily because the R&D credit deduction has not
been renewed by Congress. The effective tax rate differs from the United States
statutory rate of 35 percent, due to the foreign income exclusion and the
effects of state and foreign income taxes, net of federal tax
benefits.
Net
income for the second quarter of 2006 was $16.4 million, or $0.70 per diluted
share, compared to the second quarter of 2005 net income of $13.5 million,
or
$0.59 per diluted share.
Capital
Resources and Liquidity
Operating
activities generated approximately $5.9 million of cash during the first half
of
2006 compared to cash generated during the first half of 2005 of $8.9 million.
The operating cash flow generated in the first half of 2006 is primarily related
to net income. Accounts receivable, a use of cash, increased in the first half
of 2006 primarily due to the sales growth in the first half of 2006.
Inventories, also a use of cash, increased during the first half of 2006,
primarily in finished goods. The inventory increase in the first half of 2006
was less than the inventory increase in the first half of the prior year due
to
the sales growth during the first half of 2006.
The
primary use of cash for investing activities was the acquisition of Little
Giant
Pump Company during the second quarter of 2006. The other significant sources
and uses of cash for investing activities for the first half of 2006 and 2005
were for the buying and selling of short term investment securities (see
footnote for further discussion of these securities).
The
principal source of cash from financing activities during the first half of
2006
was borrowings related to the Little Giant Pump Company acquisition. The
principal uses of cash during the first half of 2006 were for repayment of
borrowings and payment of dividends. The principal use of cash during the first
half of 2005 was for purchases of Company common stock under the Company’s
repurchase program and the payment of dividends.
Cash
and
equivalents at the end of the first half of 2006 and 2005 were $32.9 million
and
$25.5 million, respectively.
In
September 2004, the Company entered into an unsecured, 60 month $80.0 million
revolving credit agreement (the “Agreement”). The Agreement includes a facility
fee of one-tenth of one percent on the committed amount. In June 2006, the
Company amended the agreement to increase the committed amount to $120 million.
As of July 1, 2006, the Company had $60.0 million of outstanding borrowings
under the agreement.
As
of
July 1, 2006, the Company’s current outstanding commitments approximated $3.0
million. Management believes that internally generated funds and existing credit
arrangements provide sufficient liquidity to meet current
commitments.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
The
Company is subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Foreign currency exchange rate risk is
mitigated through several means: maintenance of local production facilities
in
the markets served, invoicing of customers in the same currency as the source
of
the products, prompt settlement of inter-company balances utilizing a global
netting system and limited use of foreign currency denominated debt. Interest
rate exposure is limited to variable rate interest borrowings under the
Company's revolving credit agreement and an interest rate swap.
Item
4. Controls and Procedures
As
of the
end of the period covered by this report (the "Evaluation Date"), the Company
carried out an evaluation, under the supervision and with the participation
of
the Company's management, including the Company's Chief Executive Officer and
the Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as such term
is
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, the Company's Chief Executive Officer and the Company's
Chief Financial Officer concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company and its subsidiaries required
to be
included in the Company's periodic SEC filings.
During
the second fiscal quarter there have been no changes in the Company's internal
control over financial reporting that have materially affected or that are
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART
II.
OTHER INFORMATION
Items
1A. Risk Factors
Item
1A.,
to the Company’s Form 10-K for the fiscal year ended December 31, 2005 and Item
1A to the Company’s Form 10-Q for the fiscal quarter ended April 1, 2006
summarize the principal risk factors affecting the Company and its business
and
are incorporated by reference herein. The following describes additional risk
factors identified or arising subsequent to the quarter ended April 1, 2006.
Additional risks and uncertainties, not presently known to the Company or
currently deemed immaterial, could negatively impact the Company’s results of
operations or financial condition in the future.
The
Company must successfully implement its new marketing and operating strategies.
The
Company changed its marketing strategy in 2004 and began selling Water System
products directly to specialty water systems distributors as well as to original
equipment manufacturers (OEMs) of pumps. This change, together with the
Company’s acquisition of the former Jacuzzi brand pump manufacturer and the
Little Giant Pump Company, has resulted in a broader customer base and fewer
sales to pump OEMs. Most recently, in or about July 2006, the Company announced
that effective January 1, 2007, it will sell all of its submersible products,
including 2HP and smaller submersible electric motors and associated products,
on a direct basis to specialty water systems distributors. Exceptions will
be
made where Franklin determines, on a case-by-case basis, that sales to a
particular pump OEM would add significant customer value to the distribution
of
Franklin products. This change will decrease overall sales to pump OEMs.
Management expects that these decreased sales will be offset by increased sales
to distributors and other customers, although there can be no assurances given
the competitiveness of the marketplace.
Additional
Risks to the Company
The
Company is also subject to various risks occurring in the normal course of
business. Exhibit 99.1, to the Company’s Form 10-K, sets forth a list of risks,
including those identified above, which may adversely affect the Company and
its
business and is incorporated herein by reference.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)
Issuer Repurchases of Equity Securities
In
February 2001, the Company’s Board of Directors unanimously approved a
resolution to repurchase 2,000,000 shares. The plan was announced in the
Company’s 10-Q for the third quarter ending September 29, 2001. In
February 2005, the Company’s Board of Directors unanimously approved a
resolution to increase the number of shares remaining for repurchase from
827,412 to 1,000,000 shares. There is no expiration date for the plan.
The
Company did not repurchase any shares of its stock in the second quarter of
2006. The maximum number of shares that may still be purchased under the
Company’s repurchase programs is 628,692.
Item
6. Exhibits
See
the
Exhibit Index located on page 19.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
FRANKLIN
ELECTRIC CO., INC.
|
|
|
|
Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
August
2, 2006
|
|
|
By
|
/s/
R. Scott Trumbull
|
|
|
|
|
R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
August
2, 2006
|
|
|
By
|
/s/
Thomas J. Strupp
|
|
|
|
|
Thomas
J. Strupp, Vice President and Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
|
FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR
THE
SECOND QUARTER ENDED JULY 1, 2006
|
|
Number
|
Description
|
|
|
10.1
|
Amendment
No. 1 to the $80,000,000 Credit Agreement dated as of September 9,
2004
between the Company and JPMorgan Chase Bank, N.A. (successor by merger
to
Bank One, NA), as Administrative Agent
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350
As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350
As
Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of
2002
|
|
|