Franklin Electric Second Quarter 2007 form 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 June
30, 2007
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
|
|
June
30, 2007
|
$.10
par value
|
|
22,957,554
shares
|
FRANKLIN
ELECTRIC CO., INC.
TABLE
OF
CONTENTS
|
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
Number
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Second Quarter and Six
Months
Ended June 30, 2007 and July 1, 2006
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2007 and December 30,
2006
|
|
|
|
|
|
4
|
|
Condensed
Consolidated Statements Of Cash Flows for the Six Months Ended June
30,
2007 and July 1, 2006
|
|
5
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6-14
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
15-19
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
19
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
20
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
21
|
|
|
|
|
Item
6.
|
Exhibits
|
|
21
|
|
|
|
|
Signatures
|
|
|
22
|
|
|
|
|
Exhibit
Index
|
|
|
23
|
|
|
|
|
Exhibits
|
|
|
24-27
|
PART
I.
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
152,529
|
|
$
|
152,186
|
|
$
|
283,025
|
|
$
|
253,925
|
|
Cost
of sales
|
|
|
109,216
|
|
|
99,464
|
|
|
200,783
|
|
|
165,774
|
|
Gross
profit
|
|
|
43,313
|
|
|
52,722
|
|
|
82,242
|
|
|
88,151
|
|
Selling
and administrative expenses
|
|
|
31,806
|
|
|
26,472
|
|
|
61,261
|
|
|
46,907
|
|
Restructuring
expense
|
|
|
369
|
|
|
-
|
|
|
1,607
|
|
|
-
|
|
Operating
income
|
|
|
11,138
|
|
|
26,250
|
|
|
19,374
|
|
|
41,244
|
|
Interest
expense
|
|
|
(2,196
|
)
|
|
(1,076
|
)
|
|
(3,408
|
)
|
|
(1,269
|
)
|
Other
income
|
|
|
921
|
|
|
615
|
|
|
1,219
|
|
|
1,060
|
|
Foreign
exchange income/(loss)
|
|
|
399
|
|
|
(81
|
)
|
|
646
|
|
|
(126
|
)
|
Income
before income taxes
|
|
|
10,262
|
|
|
25,708
|
|
|
17,831
|
|
|
40,909
|
|
Income
taxes
|
|
|
3,622
|
|
|
9,198
|
|
|
6,294
|
|
|
14,689
|
|
Income
from continuing operations
|
|
|
6,640
|
|
|
16,510
|
|
|
11,537
|
|
|
26,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(68
|
)
|
|
-
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,640
|
|
$
|
16,442
|
|
$
|
11,537
|
|
$
|
26,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
continuing operations
|
|
$
|
0.29
|
|
$
|
0.72
|
|
$
|
0.50
|
|
$
|
1.15
|
|
Basic
discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
0.29
|
|
$
|
0.72
|
|
$
|
0.50
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
continuing operations
|
|
$
|
0.28
|
|
$
|
0.70
|
|
$
|
0.49
|
|
$
|
1.13
|
|
Diluted
discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
0.28
|
|
$
|
0.70
|
|
$
|
0.49
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.23
|
|
$
|
0.21
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
June
30,
|
|
December
30,
|
|
ASSETS
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
41,685
|
|
$
|
33,956
|
|
Investments
|
|
|
22,093
|
|
|
-
|
|
Receivables,
less allowances of $2,705 and $2,786, respectively
|
|
|
80,939
|
|
|
52,679
|
|
Inventories
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
51,776
|
|
|
39,195
|
|
Work-in-process
|
|
|
20,979
|
|
|
14,414
|
|
Finished
goods
|
|
|
98,697
|
|
|
76,661
|
|
LIFO
reserve
|
|
|
(20,485
|
)
|
|
(18,707
|
)
|
|
|
|
150,967
|
|
|
111,563
|
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
5,193
|
|
|
4,678
|
|
Deferred
income taxes
|
|
|
15,387
|
|
|
14,914
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
316,264
|
|
|
217,790
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
56,670
|
|
|
56,352
|
|
Machinery
and equipment
|
|
|
178,807
|
|
|
169,119
|
|
|
|
|
235,477
|
|
|
225,471
|
|
Less
allowance for depreciation
|
|
|
114,125
|
|
|
109,495
|
|
|
|
|
121,352
|
|
|
115,976
|
|
|
|
|
|
|
|
|
|
Other
assets (including deferred income taxes of $1,872 and $1,269,
respectively)
|
|
|
15,249
|
|
|
14,375
|
|
Intangible
assets
|
|
|
43,616
|
|
|
45,257
|
|
Goodwill
|
|
|
135,583
|
|
|
133,527
|
|
Total
assets
|
|
$
|
632,064
|
|
$
|
526,925
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
32,032
|
|
$
|
30,832
|
|
Accrued
liabilities
|
|
|
41,879
|
|
|
40,166
|
|
Income
taxes
|
|
|
6,252
|
|
|
11,649
|
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
1,317
|
|
|
11,310
|
|
Total
current liabilities
|
|
|
81,480
|
|
|
93,957
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
161,550
|
|
|
51,043
|
|
Deferred
income taxes
|
|
|
4,578
|
|
|
4,597
|
|
Employee
benefit plan obligations
|
|
|
26,505
|
|
|
25,969
|
|
Other
long-term liabilities
|
|
|
5,542
|
|
|
5,528
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
Common
shares (45,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
outstanding
(22,957
and 23,009, respectively)
|
|
|
2,296
|
|
|
2,301
|
|
Additional
capital
|
|
|
100,194
|
|
|
94,356
|
|
Retained
earnings
|
|
|
234,717
|
|
|
236,780
|
|
Loan
to ESOP Trust
|
|
|
-
|
|
|
(200
|
)
|
Accumulated
other comprehensive income
|
|
|
15,202
|
|
|
12,594
|
|
Total
shareowners' equity
|
|
|
352,409
|
|
|
345,831
|
|
Total
liabilities and shareowners' equity
|
|
$
|
632,064
|
|
$
|
526,925
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,537
|
|
$
|
26,141
|
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,976
|
|
|
8,452
|
|
Stock-based
compensation
|
|
|
2,400
|
|
|
1,549
|
|
Deferred
income taxes
|
|
|
1,095
|
|
|
2,498
|
|
Gain/loss
on disposals of plant and equipment
|
|
|
464
|
|
|
(69
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(23,112
|
)
|
|
(15,801
|
)
|
Inventories
|
|
|
(30,411
|
)
|
|
(7,484
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(1,583
|
)
|
|
(5,243
|
)
|
Accrued
income taxes
|
|
|
(4,258
|
)
|
|
4,807
|
|
Excess
tax from share-based compensation arrangements
|
|
|
(1,169
|
)
|
|
(5,399
|
)
|
Employee
benefit plans
|
|
|
1,125
|
|
|
334
|
|
Other,
net
|
|
|
(3,559
|
)
|
|
(3,836
|
)
|
Net
cash flows from operating activities
|
|
|
(37,495
|
)
|
|
5,949
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(10,697
|
)
|
|
(8,749
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
303
|
|
|
323
|
|
Additions
to other assets
|
|
|
(3
|
)
|
|
(293
|
)
|
Purchases
of securities
|
|
|
(146,700
|
)
|
|
(63,500
|
)
|
Proceeds
from sale of securities
|
|
|
124,607
|
|
|
99,488
|
|
Cash
paid for acquisitions
|
|
|
(13,331
|
)
|
|
(122,713
|
)
|
Proceeds
from sale of business
|
|
|
1,310
|
|
|
-
|
|
Net
cash flows from investing activities
|
|
|
(44,511
|
)
|
|
(95,444
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
160,000
|
|
|
70,000
|
|
Repayment
of long-term debt
|
|
|
(60,161
|
)
|
|
(10,144
|
)
|
Proceeds
from issuance of common stock
|
|
|
2,165
|
|
|
9,225
|
|
Excess
tax from share-based compensation arrangements
|
|
|
1,169
|
|
|
5,399
|
|
Purchases
of common stock
|
|
|
(8,118
|
)
|
|
(198
|
)
|
Reduction
of loan to ESOP Trust
|
|
|
200
|
|
|
232
|
|
Dividends
paid
|
|
|
(5,308
|
)
|
|
(4,780
|
)
|
Net
cash flows from financing activities
|
|
|
89,947
|
|
|
69,734
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(212
|
)
|
|
556
|
|
Net
change in cash and equivalents
|
|
|
7,729
|
|
|
(19,205
|
)
|
Cash
and equivalents at beginning of period
|
|
|
33,956
|
|
|
52,136
|
|
Cash
and equivalents at end of period
|
|
$
|
41,685
|
|
$
|
32,931
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
11.7
|
|
$
|
11.8
|
|
Cash
paid for interest
|
|
$
|
2.4
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$
|
0.3
|
|
$
|
0.3
|
|
Payable
to seller of Healy Systems, Inc.
|
|
$
|
0.9
|
|
$
|
-
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying condensed consolidated balance sheet as of December 30, 2006,
which
has been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements as of June 30, 2007 and for the
six
months ended, June 30, 2007 and July 1, 2006, 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 notes 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. Operating results for the second quarter and six months ended June 30,
2007 are not necessarily indicative of the results that may be expected for
the
fiscal year ending December 29, 2007. For further information, including a
description of Franklin Electric's critical accounting policies, refer to the
consolidated financial statements and notes thereto included in Franklin
Electric Co., Inc.'s annual report on Form 10-K for the year ended December
30,
2006.
2.
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No.
157 gives guidance for measuring assets and liabilities using fair value. Fair
value is a market-based measurement, not an entity-specific measurement, and
sets out a fair value hierarchy with the highest priority being quoted prices
in
active markets. The fair value measurements are disclosed by level within that
hierarchy. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, although earlier application is
encouraged. The Company continues to evaluate the impact of adopting
SFAS No. 157 on its financial statements, but does not believe the adoption
of this standard will have a material impact on the Company’s results of
operations, financial position, or statement of cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at
fair
value that are not currently required to be measured at fair value. SFAS No.
159
is effective for fiscal years beginning after November 15, 2007, with early
adoption permitted, provided the entity also elects to apply the provisions
of
SFAS No. 157. The Company is currently evaluating the impact of adopting
SFAS No. 159 on its financial statements.
3.
INVESTMENTS - EQUITY SECURITIES
As
of
June 30, 2007 the Company held $22.1 million of current investments consisting
of auction rate municipal bonds classified as available-for-sale securities
and
titled “Investments” in the current balance sheet. Investments in these
securities are recorded at cost, which approximates fair market value due to
the
variable interest rates, which typically reset every 7 to 35 days. All income
generated from these current investments was recorded as “Other income” in the
statements of income. Cash paid for these securities and proceeds from the
sale
of these securities have been included in the “Cash flows from investing
activities” section of the cash flows statements.
4.
EQUITY
INVESTMENTS
The
Company holds a 35 percent equity interest, in Pioneer Pump, Inc., which is
accounted for using the equity method and included in “Other assets” on the face
of the balance sheet. The carrying amount of the investment is adjusted for
the
Company’s proportionate share of earnings, losses, and dividends. The carrying
value of the investment was $6.6 million as of June 30, 2007, and $6.1 million
at year end December 30, 2006. The Company’s proportionate share of Pioneer
Pump, Inc. earnings, included in “Other income” in the Company’s statements of
income, was $0.3 million, for the second quarter ended June 30, 2007 and July
1,
2006, and $0.4 million and $0.3 million for the six months ended June 30, 2007
and July 1, 2006, respectively.
5.
GOODWILL AND OTHER INTANGIBLE ASSETS
The
carrying amounts of the Company’s intangible assets are as follows:
(In
millions)
|
|
June
30, 2007
|
|
December
30, 2006
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
6.3
|
|
|
($3.0
|
)
|
$
|
6.3
|
|
|
($2.8
|
)
|
Supply
agreements
|
|
|
7.2
|
|
|
(4.7
|
)
|
|
7.2
|
|
|
(4.3
|
)
|
Technology
|
|
|
3.8
|
|
|
(0.4
|
)
|
|
3.8
|
|
|
(0.3
|
)
|
Customer
relationships
|
|
|
26.8
|
|
|
(1.8
|
)
|
|
26.8
|
|
|
(0.8
|
)
|
Other
|
|
|
1.8
|
|
|
(1.7
|
)
|
|
1.7
|
|
|
(1.6
|
)
|
Total
|
|
|
45.9
|
|
|
(11.6
|
)
|
|
45.8
|
|
|
(9.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
9.3
|
|
|
-
|
|
|
9.3
|
|
|
-
|
|
Total
intangibles
|
|
$
|
55.2
|
|
|
($11.6
|
)
|
$
|
55.1
|
|
|
($9.8
|
)
|
Amortization
expense related to intangible assets for the second quarter ended June 30,
2007
and July 1, 2006 was $1.0 million and $0.6 million, respectively, and for the
six months ended June 30, 2007 and July 1, 2006, $1.7 million and $1.0 million,
respectively.
Amortization
expense for each of the five succeeding years is projected as
follows:
(In
millions)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
$
|
3.3
|
|
$
|
3.2
|
|
$
|
3.1
|
|
$
|
3.0
|
|
$
|
2.9
|
|
The
changes in the carrying amount of goodwill for the six months ended June 30,
2007, are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of December 30, 2006
|
|
$
|
133.5
|
|
Increase
in goodwill acquired during the period
|
|
|
1.7
|
|
Foreign
currency translation
|
|
|
0.4
|
|
Balance
as of June 30, 2007
|
|
$
|
135.6
|
|
6.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans - As of June 30, 2007, the Company maintained three domestic
pension plans and one German pension plan. The Company uses a December 31
measurement date for its plans. In 2006, the Company adopted SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans”.
The
following table sets forth aggregated net periodic benefit cost for the second
quarter and six months ended June 30, 2007 and July 1, 2006:
(In
millions)
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1.1
|
|
$
|
1.1
|
|
$
|
2.3
|
|
$
|
2.2
|
|
Interest
cost
|
|
|
2.1
|
|
|
2.0
|
|
|
4.6
|
|
|
4.2
|
|
Expected
return on assets
|
|
|
(2.5
|
)
|
|
(2.4
|
)
|
|
(5.6
|
)
|
|
(5.2
|
)
|
Loss
|
|
|
.
-
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
Prior
service cost
|
|
|
0.3
|
|
|
0.4
|
|
|
0.7
|
|
|
0.8
|
|
Total
net periodic benefit cost
|
|
$
|
1.0
|
|
$
|
1.1
|
|
$
|
2.1
|
|
$
|
2.1
|
|
(In
millions)
|
|
|
|
Other
Benefits
|
|
Other
Benefits
|
|
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.2
|
|
Interest
cost
|
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
Obligation/asset
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Loss
|
|
|
.-
|
|
|
0.1
|
|
|
-
|
|
|
0.1
|
|
Prior
service cost
|
|
|
0.1
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
Total
net periodic benefit cost
|
|
$
|
0.4
|
|
$
|
0.5
|
|
$
|
0.8
|
|
$
|
1.0
|
|
As
of
June 30, 2007 the Company made contributions to the plans of $1.2
million.
7.
INCOME
TAXES
The
effective tax rate on income before income taxes in 2007 and 2006 varies from
the United States statutory rate of 35 percent primarily due to the foreign
income exclusion, research and development credits and the effects of state
and
foreign income taxes net of federal tax benefits.
8.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
The
Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes,” in the first quarter 2007. The
implementation of FIN 48 did not have a significant impact on the Company’s
financial position or results of operations.
As
of the
beginning of fiscal year 2007, the Company had unrecognized tax benefits of
$2.0
million, including accrued interest and penalties. There has been no significant
change in the unrecognized tax benefits during the second quarter or six months
ended June 30, 2007. If recognized, the effective tax rate would be affected
by
the unrecognized tax benefits.
The
Company recognizes interest and penalties related to unrecognized tax benefits
as interest and operating expenses, respectively. The Company accrued about
$0.2
million for interest and penalties as of June 30, 2007. Interest and penalties
recorded during the second quarter ended June 30, 2007 were not considered
significant.
The
Company is subject to periodic audits by domestic and foreign tax authorities.
Currently, the Company is undergoing routine periodic audits in both domestic
and foreign tax jurisdictions. It is reasonably possible that the amounts of
unrecognized tax benefits could change in the next 12 months as a result of
the
audits. Based on the current audits in process, the payment of taxes as a result
of audit settlements could be from $0.1 to $0.2 million.
For
the
majority of tax jurisdictions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for
years before 2003.
9.
DEBT
On
December 14, 2006, the Company entered into an amended and restated unsecured,
60-month $120.0 million revolving credit agreement (the “Agreement”). The
Agreement provides for various borrowing rate options including interest rates
based on the London Interbank Offered Rates (LIBOR) plus interest spreads keyed
to the Company’s ratio of debt to earnings before interest, taxes, depreciation,
and amortization (“EBITDA”). The Agreement contains certain financial covenants
with respect to borrowings, interest coverage, loans or advances and
investments. The Company had outstanding borrowings of $40.0 million under
the
Agreement at June 30, 2007, and $50.0 million at December 30, 2006.
On
April
9, 2007, the Company entered into the Amended and Restated Note Purchase and
Private Shelf Agreement (the "Prudential Agreement") in the amount of $175.0
million. Under the Prudential Agreement, the Company issued notes in an
aggregate principal amount of $110.0 million on April 30, 2007 bearing a coupon
of 5.79 percent and an average life of ten years with a final maturity in 2019.
Principal installments of $22.0 million are payable commencing on April 30,
2015
and continuing to and including April 30, 2019, with any unpaid balance due
at
maturity. The Prudential Agreement contains certain financial covenants with
respect to borrowings, interest coverage, loans or advances and investments.
The
Company also has certain overdraft facilities at its foreign subsidiaries,
of
which none were outstanding at June 30, 2007 and at December 30,
2006.
Long-term
debt consisted of:
(In
millions)
|
|
|
|
June
30,
|
|
December
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
Insurance
Company - - 6.31 percent, principal payments of $1.0 million due
in annual
installments, with a balloon payment of $10.0 in 2008 ($1.9 denominated
in
JPY at 6/30/07)
|
|
$
|
11.1
|
|
$
|
11.3
|
|
Capital
Leases
|
|
|
1.8
|
|
|
1.1
|
|
Credit
Agreement
|
|
|
40.0
|
|
|
50.0
|
|
Prudential
Agreement
|
|
|
110.0
|
|
|
-
|
|
|
|
|
162.9
|
|
|
62.4
|
|
Less
Current Maturities
|
|
|
(1.3
|
)
|
|
(11.3
|
)
|
|
|
$
|
161.6
|
|
$
|
51.1
|
|
The
following debt payments are expected to be paid in accordance with the following
schedule:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
More
than 5 years
|
|
Debt
|
|
$
|
161.1
|
|
$
|
1.0
|
|
$
|
10.1
|
|
$
|
-
|
|
$
|
150.0
|
|
Capital
leases
|
|
|
1.8
|
|
|
0.2
|
|
|
.0.4
|
|
|
.
111.2
|
|
|
-
|
|
|
|
$
|
162.9
|
|
$
|
1.2
|
|
$
|
10.5
|
|
$
|
1.2
|
|
$
|
150.0
|
|
10.
EARNINGS PER SHARE
Following
is the computation of basic and diluted earnings per share:
(In
millions, except per share amounts)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
6.6
|
|
$
|
16.5
|
|
$
|
11.5
|
|
$
|
26.2
|
|
Income
from discontinued operations
|
|
|
0.0
|
|
|
(0.1
|
)
|
|
0.0
|
|
|
(0.1
|
)
|
Net
income
|
|
$
|
6.6
|
|
$
|
16.4
|
|
$
|
11.5
|
|
$
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.1
|
|
|
22.9
|
|
|
23.1
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.4
|
|
|
0.5
|
|
|
0.4
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.5
|
|
|
23.4
|
|
|
23.5
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
from continuing operations
|
|
$
|
0.29
|
|
$
|
0.72
|
|
$
|
0.50
|
|
$
|
1.15
|
|
Basic
from discontinuing operations
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
Total
basic earnings per share
|
|
$
|
0.29
|
|
$
|
0.72
|
|
$
|
0.50
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
from continuing operations
|
|
$
|
0.28
|
|
$
|
0.70
|
|
$
|
0.49
|
|
$
|
1.13
|
|
Diluted
from discontinuing operations
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
|
0.0
|
|
Total
diluted earnings per share
|
|
$
|
0.28
|
|
$
|
0.70
|
|
$
|
0.49
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
0.3
|
|
|
0.1
|
|
|
0.3
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options price range - low
|
|
$
|
40.93
|
|
$
|
45.90
|
|
$
|
44.51
|
|
$
|
40.93
|
|
Anti-dilutive
stock options price range - high
|
|
$
|
48.87
|
|
$
|
45.90
|
|
$
|
48.87
|
|
$
|
45.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
OTHER
COMPREHENSIVE INCOME
Comprehensive
income is as follows:
(In
millions)
|
|
Second
Quarter Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
|
$
|
6.6
|
|
$
|
16.4
|
|
$
|
11.5
|
|
$
|
26.1
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
1.2
|
|
|
2.4
|
|
|
1.6
|
|
|
4.4
|
|
Pension
liability adjustment, net of tax
|
|
|
0.4
|
|
|
-
|
|
|
1.0
|
|
|
-
|
|
Comprehensive
income, net of tax
|
|
$
|
8.2
|
|
$
|
18.8
|
|
$
|
14.1
|
|
$
|
30.5
|
|
Accumulated
other comprehensive income consists of the following:
(In
millions)
|
|
June
30,
|
|
December
30,
|
|
|
|
2007
|
|
2006
|
|
Cumulative
foreign currency translation adjustments
|
|
$
|
16.2
|
|
$
|
14.6
|
|
Pension
liability adjustment, net of tax
|
|
|
(1.0
|
)
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
15.2
|
|
$
|
12.6
|
|
12.
CONTINGENCIES AND COMMITMENTS
At
June
30, 2007, the Company had $3.3 million of commitments primarily for the purchase
of machinery and equipment, and building expansions.
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.
The
changes in the carrying amount of the warranty accrual, as recorded in “Accrued
liabilities” in the Company’s balance sheet for the six months ended June 30,
2007, are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of December 30, 2006
|
|
$
|
10.0
|
|
Accruals
related to product warranties
|
|
|
3.3
|
|
Reductions
for payments made
|
|
|
(3.7
|
)
|
Balance
as of June 30, 2007
|
|
$
|
9.6
|
|
13.
STOCK-BASED COMPENSATION
The
Company has authorized the grant of options to purchase common stock and the
award of 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 and the types of awards are as
follows:
|
|
|
Authorized
Shares
|
Franklin
Electric Co., Inc. Stock Option Plan
|
-
|
Options
|
3,600,000
|
Franklin
Electric Co., Inc. Stock Plan
|
-
|
Options
|
1,150,000
|
|
-
|
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 stock 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 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 are immediately expensed. 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 to determine the fair value of options granted during the
first
six months of 2007 are as follows:
Risk-free
interest rate
|
4.74-4.78%
|
Dividend
yield
|
.65-.67%
|
Weighted-average
dividend yield
|
.653%
|
Volatility
factor
|
.3529-.3701
|
Weighted-average
volatility
|
.3554
|
Expected
term
|
5.3-6.2
years
|
Forfeiture
rate
|
4.18%
|
A
summary
of the Company’s stock option plans activity and related information, for the
six months ended June 30, 2007 follows:
(shares
in thousands)
Stock
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
at beginning of the period
|
|
|
1,398
|
|
$
|
26.65
|
|
|
|
|
|
|
|
Granted
|
|
|
131
|
|
|
48.87
|
|
|
|
|
|
|
|
Exercised
|
|
|
(111
|
)
|
|
20.57
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31
|
)
|
|
29.38
|
|
|
|
|
|
|
|
Outstanding
at the end of the period
|
|
|
1,387
|
|
$
|
29.17
|
|
|
5.54
|
|
$
|
25,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable at end of the period
|
|
|
928
|
|
$
|
24.50
|
|
|
4.47
|
|
$
|
21,061
|
|
There
were no options granted during the second quarter. The total intrinsic value
of
options exercised during the second quarter June 30, 2007 and July 1, 2006
was
$0.03 million and $1.6 million, respectively, and for the six months ended
June
30, 2007 and July 1, 2006, $3.3 million and $2.4 million, respectively. There
were no share-based liabilities paid during the second quarter 2007. As a result
of the Company’s policy of issuing shares upon share option exercise, during the
2007 fiscal year, the Company expects to repurchase up to 400,000 shares.
A
summary
of the Company’s nonvested stock options activity and related information, for
the six months ended June 30, 2007 follows:
(shares
in thousands)
Nonvested
Stock Options
|
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Nonvested
at beginning of period
|
|
|
556
|
|
$
|
33.95
|
|
Granted
|
|
|
131
|
|
|
48.87
|
|
Vested
|
|
|
(203
|
)
|
|
33.31
|
|
Forfeited
|
|
|
(26
|
)
|
|
31.66
|
|
Nonvested
at end of period
|
|
|
458
|
|
$
|
38.63
|
|
As
of
June 30, 2007, there was $4.4 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
1.94 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 and 2007.
A
summary
of the Company’s restricted stock award activity and related information, for
the six months ended June 30, 2007 follows:
(shares
in thousands)
Nonvested
Stock Awards
|
|
|
Shares
|
|
Weighted-Average
Grant
Date
Fair Value
|
|
Nonvested
at beginning of period
|
|
|
40
|
|
$
|
43.39
|
|
Awarded
|
|
|
30
|
|
|
47.59
|
|
Vested
|
|
|
(7
|
)
|
|
43.51
|
|
Forfeited
|
|
|
(3
|
)
|
|
47.44
|
|
Nonvested
at end of period
|
|
|
60
|
|
$
|
45.32
|
|
As
of
June 30, 2007, there was $1.8 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
years.
14.
RESTRUCTURING
During
the first quarter of 2007, the Company initiated Phase 2 of its Global
Manufacturing Realignment Program (the “Realignment Program”). Phase 2 of the
Realignment Program includes the expansion of recently established facilities
in
lower-cost regions and the further shifting of production out of higher cost
manufacturing facilities. Phase 2 also includes the process of consolidating
certain Fueling Systems product manufacturing into its Madison, Wisconsin
facility.
Restructuring
expenses, primarily manufacturing equipment relocation and production
re-alignment, for the second quarter and six months ended June 30, 2007 were
approximately $0.4 million (pre-tax) and $1.6 million (pre-tax), respectively.
As of June 30, 2007, there was no restructuring reserve in the Company’s
consolidated balance sheet.
ITEM
2. MANAGEMENT’S DISCUSSTION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Q2
2007 vs Q2 2006
OVERVIEW
Sales
for
second quarter 2007 were up slightly from second quarter 2006. Second quarter
sales, excluding the Little Giant Pump Company and Healy Systems acquisitions,
declined about 12 percent from the same period a year ago. The sales decline
was
primarily attributable to lower Water Systems product sales in the United States
and Canada. Earnings declined in second quarter 2007 primarily due to the
significant decline in Water Systems small submersible motor product sales
volume. The Company also incurred increased fixed costs in connection with
selling, general and administrative spending resulting from the Company’s
strategy of selling to a more diversified customer base by marketing its Water
Systems products directly to distributors. During the second quarter, the
Company acquired all the outstanding stock of Pump Brands, Inc., a South African
company providing pumping systems primarily in the African market. Pump Brands
results included in Franklin’s statements for the second quarter of 2007 were
not significant as the Company completed its acquisition in the second half
of
June.
RESULTS
OF OPERATIONS
Net
sales
for second quarter 2007 were $152.5 million, an increase of $0.3 million
compared to second quarter 2006 sales of $152.2 million. Incremental sales
related to acquisitions, primarily from Little Giant Pump Company, for 2007
were
$18.7 million or 12 percent of sales.
Global
Water Systems sales for second quarter 2007 decreased by 7 percent from the
same
period a year ago. However, excluding acquisitions, primarily Little Giant
Pump
Company, and a foreign exchange rate benefit, global Water Systems sales
decreased by 17 percent versus second quarter 2006. Sales of 4-inch submersible
motor units in the United States and Canada declined primarily due to the
liquidation of these stockpiled motors by several large integrated pump original
equipment manufacturers (“OEMs”) and weak overall water systems industry demand
in the United States and Canada due to lower new housing construction and harsh
weather conditions in key regions. Sales, primarily related to the Little Giant
and Healy Systems acquisition, and overall volume were the primary factors
in
the Water Systems sales change in the second quarter. Changes in selling price
increased net sales by about 4 percent and foreign exchange rate changes
increased net sales by about 1 percent.
Global
Fueling Systems sales for second quarter 2007 increased by 41 percent over
the
same period a year ago primarily due to the acquisition of Healy Systems.
Excluding the Healy acquisition, second quarter Fueling System sales increased
by 8 percent over last year. The volume growth across all product lines was
led
by continued penetration of the fuel management electronics platform. Changes
in
selling price increased net sales by about 2 percent.
Cost
of
sales as a percent of net sales for second quarters 2007 and 2006 was 71.6
percent and 65.4 percent, respectively. The gross profit margin declined from
about 35 percent to 28 percent. The gross profit margin on sales of Water
Systems products in regions outside the United States and Canada increased
during the quarter as did the gross profit margin on Fueling Systems sales.
These increases were offset by a decline in gross profit margin on the sale
of
Water Systems products in the United States and Canada. There are four principal
reasons for the gross profit margin decline on Water Systems products sold
in
the United States and Canada. First, approximately 25 percent of the gross
profit margin decline can be attributed to fixed cost coverage as the Company
has experienced reduced manufacturing and sales of submersible motors during
the
quarter. Second, approximately 25 percent of the gross profit margin decline
can
be attributed to promotional price discounting as competitors react to
Franklin’s pump sales growth and the weak overall industry conditions. Third,
approximately 20 percent of the gross profit margin decline on United States
and
Canadian Water Systems products can be attributed to product mix changes as
sales included a broadening pump and accessory product line and fewer sales
of
submersible motor sales to pump OEMs. Finally, 10 percent of the gross profit
decline is due to increasing freight costs resulting from fuel surcharges and
an
increased level of shipments to a more diverse customer base.
Selling,
general and administrative (“SG&A”) expense as a percent of net sales for
2007 and 2006 was 20.9 percent and 17.4 percent, respectively. SG&A expense
increased by $5.3 million in second quarter 2007 compared to second quarter
2006. Acquisition related SG&A costs were $2.5 million of the 2007 increase,
primarily Little Giant and Healy, compared to last year. $2.0 million of the
increase was to support the Company’s strategy to sell to a more diversified
customer base, increase penetration in groundwater and related pumping systems,
and introduce new pump product technology in the North American
region.
During
the first quarter 2007, the Company announced Phase 2 of its Global
Manufacturing Realignment program. Phase 2 includes the expansion of motor
manufacturing capacity in Linares, Mexico, the construction and start-up of
a
new pump manufacturing plant in Linares, Mexico, the consolidation of Fueling
operations into the recently enlarged Madison, Wisconsin plant and the
streamlining of motor manufacturing operations in Europe. With the expansion
of
submersible motor manufacturing capacity at the new Linares motor plant, a
corresponding downsizing of motor capacity at the Siloam Springs, Arkansas
facility is underway. Staffing in Siloam Springs is expected to be reduced
from
about 400, as of July 2007, to just under 300 by year end. Construction is
presently underway on the new Linares adjacent pump manufacturing plant. The
new
TRI-SEAL™ 4-inch submersible and the VERSA- JET™ product lines will be in full
production in Linares in the first quarter of 2008. Restructuring expenses
for the second quarter of 2007 were approximately $0.4 million (pre-tax) and
reduced EPS by approximately $0.01 per share. Full year 2007 restructuring
expenses are estimated to be $6.0 million (pre-tax) and will include severance
and other employee expenses as well as manufacturing equipment relocation
costs. Franklin management anticipates savings will be realized in 2008
and beyond from this initiative.
Interest
expense for second quarter 2007 and 2006 was $2.2 million and $1.1 million,
respectively. Interest expense increased in 2007 due primarily to debt increases
associated with the acquisitions of Little Giant Pump Company and Healy Systems,
as well as, increased working capital for inventory and accounts receivable.
Interest
income of $0.6 million and $0.5 million, included in “Other income” for second
quarter 2007 and 2006, was primarily derived from cash investments in short-term
U.S. treasury and agency securities. Also, included in other income for second
quarter 2007 and 2006 was income from equity investments of $0.3 million and
$0.3 million.
Foreign
currency-based transactions produced a gain for second quarter 2007 of about
$0.4 million primarily due to euro rate changes relative to the U.S.
dollar. Foreign currency-based transactions resulted in a loss in the
second quarter 2006 of about $0.1 million.
The
provision for income taxes in 2007 and 2006 was $3.6 million and $9.2 million,
respectively. The effective tax rates for the second quarter of 2007 and 2006
were 35.3 and 35.8 percent, respectively. The effective tax rate differs from
the United States statutory rate of 35 percent, generally due to foreign income
exclusion, research and development credits and the effects of state and foreign
income taxes, net of federal tax benefits.
Net
income for second quarter 2007 was $6.6 million, or $0.28 per diluted share,
compared to second quarter 2006 net income of $16.4 million or $0.70 per diluted
share.
First
Half of 2007 vs First Half of 2006
OVERVIEW
Sales
for
the first half of 2007 were up from the first half of 2006 by $29.1 million
or
about 12 percent. The increase in sales was primarily related to sales from
the
Company’s acquisitions. First half sales, excluding acquisitions, declined about
10 percent from the same period a year ago. Earnings declined in 2007 primarily
due to the significant decline in Water Systems small submersible motor product
sales volume. The contribution margin of small submersible motors is more than
other Water Systems products, resulting in a further decline of earnings due
to
the product mix change. The Company also incurred increased fixed costs in
connection with selling, general and administrative spending resulting from
the
Company’s strategy of selling to a more diversified customer base by marketing
its Water Systems products directly to distributors.
RESULTS
OF OPERATIONS
Net
sales
for the first half of 2007 were $283.0 million, an increase of $29.1 million
or
12 percent compared to the same period of 2006 sales of $253.9 million.
Incremental sales related to acquisitions for 2007 were $54.5 million or 19
percent of sales. The majority of the sales growth from acquisitions resulted
from sales by Little Giant Pump Company.
Global
Water Systems sales for the first half of 2007 increased by 3 percent from
the
same period a year ago. However, excluding acquisitions, primarily Little Giant
Pump Company, and a foreign exchange rate benefit, global Water Systems sales
decreased by 15 percent versus the first half of 2006. Sales of 4-inch
submersible motor units in the United States and Canada declined primarily
due
to the liquidation of these stockpiled motors by several large integrated pump
OEMs and weak overall water systems industry demand in the United States and
Canada due to lower new housing construction and harsh weather conditions in
key
regions. Acquisition and volume changes were the primary factors in Water
Systems sales changes in the second quarter. Changes in selling price increased
net sales by about 4 percent and foreign exchange rate changes increased net
sales by about 1 percent
Global
Fueling Systems sales for the second half of 2007 increased by 51 percent over
the same period a year ago primarily due to the acquisition of Healy Systems.
Excluding the Healy acquisition, first half Fueling System sales increased
by 11
percent over last year. The volume growth across product lines was led by
continued penetration of the fuel management electronics platform. Changes
in
selling price increased net sales by about 3 percent in the first half of 2007.
Cost
of
sales as a percent of net sales for the first half of 2007 and 2006 was 70.9
percent and 65.3 percent, respectively. Correspondingly, the gross profit margin
declined to about 29 percent from 35 percent. The gross profit margin changes
in
the first half of 2007 were consistent with the explanations above covered
in
detail under the second quarter review; sales and gross profit margin of Water
Systems products in regions outside the United States and Canada increased,
as
did the gross profit margin on Fueling Systems sales, offset by a decline in
gross profit margin on the sale of Water Systems products in the United States
and Canada.
SG&A
expense as a percent of net sales for 2007 and 2006 was 21.6 percent and 18.5
percent, respectively. SG&A expense increased by $14.4 million in 2007
compared to first half of last year. The increase due to the inclusion of
acquisitions was $9.5 million for the first half of 2007 compared to last year.
The increase due to higher selling and administrative expenses in the global
Water Systems business in order to support the Company’s strategy change
mentioned above was $2.8 million. Other first half 2007 increases in selling,
general and administrative expenses include higher expenses for professional
fees and information systems, $1.4 million, and stock-based compensation
expense, $0.5 million.
Restructuring
expenses under Phase 2 of the Global Manufacturing Realignment program for
the
first half of 2007 were approximately $1.6 million (pre-tax) and reduced EPS
by
approximately $0.04 per share.
Interest
expense for the first half of 2007 and 2006 was $3.4 million and $1.3 million,
respectively. Interest expense increased in 2007 due primarily to debt increases
associated with the acquisitions of Little Giant Pump Company and Healy Systems,
as well as, increased working capital for inventory and accounts receivable.
Interest
income of $0.9 million and $1.2 million, included in “Other income” for the
first half of 2007 and 2006, was primarily derived from cash investments in
short-term U.S. treasury and agency securities. Also, included in other income
in the first half of 2007 and 2006 was income from equity investments of $0.4
million and $0.3 million.
Foreign
currency-based transactions produced a gain for the first half of 2007 of about
$0.6 million primarily due to euro rate changes relative to the U.S.
dollar. Foreign currency-based transactions were a loss in 2006, for the
same period, of about $0.1 million.
The
provision for income taxes in 2007 and 2006 was $6.3 million and $14.7 million,
respectively. The effective tax rates for the first half of 2007 and 2006 were
35.3 and 35.9 percent, respectively. The effective tax rate differs from the
United States statutory rate of 35 percent, generally due to foreign income
exclusion, research and development credits and the effects of state and foreign
income taxes, net of federal tax benefits.
Net
income for the first half of 2007 was $11.5 million, or $0.49 per diluted share,
compared to the same half of 2006 net income of $26.1 million or $1.13 per
diluted share.
CAPITAL
RESOURCES AND LIQUIDITY
Operating
activities consumed approximately $37.5 million of cash during the first six
months of 2007 compared to cash flows provided in the first six months of 2006
of $5.9 million. The operating cash flows used in the first six months of 2007
were primarily related to increases in receivables and inventory. The increase
in receivables was due to higher sales, and increasing days of sales outstanding
due to more diversified customer sales terms, of about $23.1 million. The
increase in inventory, about $30.4 million, was primarily in finished goods
due
to weaker than normal Water Systems product demand in the United States and
Canada and seasonal and strategic inventory buildup. In the first six months
of
2007, income tax payments exceeded tax accruals during the period due to lower
earnings. The operating cash flows generated in the first half of 2006 were
primarily related to net income. Due to the sales growth in the first half
of
2006, receivables and inventory increased by $15.8 million and $7.5 million,
respectively. Cash outflows in accounts payable and other accrued expenses
for
2006, $5.2 million, were primarily attributable to the timing of payments made
to vendors, increased inventories and payments for employee
benefits.
Net
cash
flows used for investing activities were $44.5 million during the first six
months of 2007 and $95.4 million in 2006. Cash flows used in 2007 and 2006
were
primarily for second quarter 2007 and 2006 acquisitions, $13.3 million for
Pump
Brands (Pty) Limited and $122.7 million for Little Giant Pump Company,
respectively and the purchase of property, plant and equipment, $10.7 million
and $8.7 million, respectively. Cash flows used to purchase securities were
$22.1 million in the first six months of 2007. Cash flows generated from net
investments in equity securities during the first six months of 2006 were $36.0
million.
Cash
flows from financing activities in the first six months of 2007 and 2006 were
$89.9 million and $69.7 million respectively, primarily from the proceeds from
long-term debt. The Company repurchased shares of its common stock for $8.1
million in the first half of 2007. Additionally, the Company paid $5.3 million
and $4.8 million in dividends on the Company’s common stock in the first six
months of 2007 and 2006, respectively.
Cash
and
cash equivalents at the end of the first six months of 2007 were $41.7 million
compared to $34.0 million at the end of fiscal year 2006. Working capital
increased $111.0 million in the first six months of 2007 from year end 2006.
Working capital increased in equity securities, accounts receivable and
inventory as noted above.
On
December 14, 2006, the Company entered into an amended and restated unsecured,
60-month, $120.0 million revolving credit agreement (the “Agreement”). The
Company had outstanding borrowings of $40.0 million under the Agreement at
June
30, 2007 and $50.0 million at December 30, 2006.
The
Company amended and restated an uncommitted shelf agreement with Prudential
Capital in the amount of $175.0 million in the second quarter. Under the
shelf agreement the Company issued notes for $110.0 million in the second
quarter at a fixed rate of 5.79 percent with a 10-year average life, and which
includes financial covenants similar to the Company’s other borrowing
agreements. Proceeds of the facility will be used to further reduce short
term variable rate borrowings, fund future acquisitions and purchase Company
stock. The Company plans to issue an additional $40.0 million of notes in the
third quarter, also with a rate of 5.79 percent and similar terms.
The
Company also has certain overdraft facilities at its foreign subsidiaries,
of
which none were outstanding at June 30, 2007 and December 30, 2007.
The
Company is subject to certain financial covenants with respect to borrowings,
interest coverage, working capital, loans or advances, and investments. The
Company was in compliance with all debt covenants at all times in the first
six
months ended 2007 and 2006.
At
June
30, 2007, the Company had $3.3 million of commitments primarily for the purchase
of machinery and equipment, and building expansions. Management believes that
internally generated funds and existing credit arrangements provide sufficient
liquidity to meet these current commitments.
FACTORS
THAT MAY AFFECT FUTURE RESULTS
Any
forward-looking statements contained herein involve risks and uncertainties,
including, but not limited to, general economic and currency conditions, various
conditions specific to the Company’s business and industry, market demand,
competitive factors, changes in distribution channels, supply constraints,
technology factors, litigation, government and regulatory actions, the Company’s
accounting policies, future trends, and other risks, all as described in Part
II, Item 1A of this Form 10-Q and in Part 1, Item 1A in the Company’s Form 10-K
for the fiscal year ended December 30, 2006. These risks and uncertainties
may
cause actual results to differ materially from those indicated by the
forward-looking statements. Any forward-looking statements included in this
Form
10-Q are based upon information presently available. The Company does not assume
any obligation to update any forward-looking information.
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 pursuant to
Exchange Act Rule 13a-15. 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 were
effective in bringing to their attention on a timely basis material information
relating to the Company to be included in the Company’s periodic filings under
the Exchange Act.
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rules 13a-15 and 15d-15
under the Exchange Act during the second fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1A. RISK FACTORS
Refer
to
the risk factors set forth in Part 1, Item 1A, in the Company’s annual report on
Form 10-K for the fiscal year ended December 30, 2006. In addition, the
following risks may affect our business results of operations or financial
condition. Additional risks and uncertainties, not presently known to the
Company or currently deemed immaterial, could negatively impact the Company’s
business results of operations or financial condition in the future.
The
growth of municipal
water systems and increased
government restrictions on groundwater pumping could
reduce demand for private water wells and the Company’s products, thereby
reducing revenues and earnings.
Demand
for certain Company products is affected by rural communities shifting from
private and individual water well systems to city or municipal water systems.
Many economic and other factors outside the Company’s control, including Federal
and State regulations on water quality, tax credits and incentives, could impact
the demand for private and individual water wells. A decline in private and
individual water well systems in the United States or other economies in the
international markets the Company serves could reduce demand for the Company’s
products and adversely impact sales, gross margins and operating
results.
Demand
for fueling systems products is impacted by environmental legislation which
may
cause significant increases in product demand and may be followed by
significantly reduced demand after meeting compliance
requirements.
Environmental
legislation related to air quality and fueling containment can create demand
for
certain fueling systems products which must be supplied in a relatively short
time frame to meet the governmental mandate. During this period of increased
demand the Company’s revenues and profitability can increase significantly. The
Company is at risk of not having capacity to meet demand or cost overruns due
to
inefficiencies during ramp up to the higher production levels. After the
Company’s customers have met the compliance requirements, the Company’s revenues
and profitability may decrease significantly as the demand for certain products
declines substantially. The Company is at risk of not reducing production costs
in relation to the decreased demand as well as reduced revenues adversely
impacting gross margins and operating results.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) |
Issuer
Repurchases of Equity Securities
|
The
following table shows certain information related to the Company’s repurchases
of common stock for the three months ended June 30, 2007, under the Company’s
stock repurchase program.
|
|
Total
number of shares purchased
|
|
Average
price paid per share
|
|
Total
number of shares purchased as part of publicly announced
plan
|
|
Maximum
number of shares that may yet be purchased under the
plan
|
|
Month
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
|
|
|
40,000
|
|
$
|
42.71
|
|
|
40,000
|
|
|
2,260,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
|
|
|
147,600
|
|
$
|
43.43
|
|
|
147,600
|
|
|
2,112,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
187,600
|
|
$
|
43.28
|
|
|
187,600
|
|
|
2,112,400
|
|
In
April
2007, the Company’s Board of Directors unanimously approved a resolution to
increase the number of shares remaining for repurchase from 628,692 to 2,300,000
shares. There is no expiration date for the plan. During the second quarter
of
2007, the Company repurchased 187,600 shares of its stock for $8.1 million.
All
repurchased shares were retired.
ITEM
6. EXHIBITS
See
the
Exhibit Index located on page 23.
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
8, 2007
|
|
By
|
/s/
R. Scott Trumbull
|
|
|
|
R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
August
8, 2007
|
|
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
FIRST QUARTER ENDED MARCH 31, 2007
|
|
Number
|
Description
|
|
|
10.1
|
Second
Amended Rights Agreement between Franklin Electric Co., Inc. and
LaSalle
Bank National Association (incorporated by reference to Exhibit 4.1
of the
Company's Form 8-K dated on July 11, 2007)
|
|
|
10.2
|
Amended
and Restated Note Purchase and Private Shelf Agreement dated April
30,
2007 between the Company and the Prudential Insurance Company of
America
(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
April 30, 2007)
|
|
|
10.3
|
Shareholder
Agreement dated July 11, 2007 between the Company and Select Equity
Group,
Inc. (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K
dated July 11, 2007)
|
|
|
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
|
|
|