Franklin Electric Thrid Quarter 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 September
29, 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
|
|
September
29, 2007
|
$.10
par value
|
|
22,997,242
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 Third Quarter and Nine
Months
Ended September 29, 2007 and September 30, 2006
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 29, 2007 and December
30,
2006
|
|
|
|
|
|
4
|
|
Condensed
Consolidated Statements Of Cash Flows for the Nine Months Ended September
29, 2007 and September 30, 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
|
|
20
|
|
|
|
|
Item
6.
|
Exhibits
|
|
20
|
|
|
|
|
Signatures
|
|
|
21
|
|
|
|
|
Exhibit
Index
|
|
|
22
|
|
|
|
|
Exhibits
|
|
|
23-26
|
PART
I.
FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
29,
|
|
Sept.
30,
|
|
Sept.
29,
|
|
Sept.
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
165,264
|
|
$
|
156,172
|
|
$
|
448,289
|
|
$
|
410,097
|
|
Cost
of sales
|
|
|
117,307
|
|
|
102,806
|
|
|
318,090
|
|
|
268,580
|
|
Gross
profit
|
|
|
47,957
|
|
|
53,366
|
|
|
130,199
|
|
|
141,517
|
|
Selling
and administrative expenses
|
|
|
28,185
|
|
|
27,792
|
|
|
89,446
|
|
|
74,699
|
|
Restructuring
expense
|
|
|
342
|
|
|
-
|
|
|
1,949
|
|
|
-
|
|
Operating
income
|
|
|
19,430
|
|
|
25,574
|
|
|
38,804
|
|
|
66,818
|
|
Interest
expense
|
|
|
(2,286
|
)
|
|
(1,093
|
)
|
|
(5,694
|
)
|
|
(2,362
|
)
|
Other
income
|
|
|
699
|
|
|
329
|
|
|
1,918
|
|
|
1,389
|
|
Foreign
exchange income/(loss)
|
|
|
(203
|
)
|
|
173
|
|
|
443
|
|
|
47
|
|
Income
before income taxes
|
|
|
17,640
|
|
|
24,983
|
|
|
35,471
|
|
|
65,892
|
|
Income
taxes
|
|
|
5,956
|
|
|
8,751
|
|
|
12,250
|
|
|
23,440
|
|
Income
from continuing operations
|
|
|
11,684
|
|
|
16,232
|
|
|
23,221
|
|
|
42,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
-
|
|
|
551
|
|
|
-
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,684
|
|
$
|
16,783
|
|
$
|
23,221
|
|
$
|
42,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
continuing operations
|
|
$
|
0.51
|
|
$
|
0.71
|
|
$
|
1.01
|
|
$
|
1.86
|
|
Basic
discontinued operations
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
|
|
$
|
0.51
|
|
$
|
0.73
|
|
$
|
1.01
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
continuing operations
|
|
$
|
0.50
|
|
$
|
0.70
|
|
$
|
0.99
|
|
$
|
1.82
|
|
Diluted
discontinued operations
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
|
|
$
|
0.50
|
|
$
|
0.72
|
|
$
|
0.99
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.35
|
|
$
|
0.32
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
Sept.
29,
|
|
December
30,
|
|
ASSETS
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
53,636
|
|
$
|
33,956
|
|
Investments
|
|
|
6,006
|
|
|
-
|
|
Receivables,
less allowances of $2,720 and $2,786, respectively
|
|
|
72,349
|
|
|
52,679
|
|
Inventories
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
58,779
|
|
|
39,195
|
|
Work-in-process
|
|
|
20,946
|
|
|
14,414
|
|
Finished
goods
|
|
|
99,809
|
|
|
76,661
|
|
LIFO
reserve
|
|
|
(21,326
|
)
|
|
(18,707
|
)
|
|
|
|
158,208
|
|
|
111,563
|
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
6,646
|
|
|
4,678
|
|
Deferred
income taxes
|
|
|
15,710
|
|
|
14,914
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
312,555
|
|
|
217,790
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
58,871
|
|
|
56,352
|
|
Machinery
and equipment
|
|
|
182,200
|
|
|
169,119
|
|
|
|
|
241,071
|
|
|
225,471
|
|
Less
allowance for depreciation
|
|
|
112,526
|
|
|
109,495
|
|
|
|
|
128,545
|
|
|
115,976
|
|
|
|
|
|
|
|
|
|
Other
assets (including deferred income taxes of $2,176 and $1,269,
respectively)
|
|
|
15,578
|
|
|
14,375
|
|
Intangible
assets
|
|
|
53,613
|
|
|
45,257
|
|
Goodwill
|
|
|
146,370
|
|
|
133,527
|
|
Total
assets
|
|
$
|
656,661
|
|
$
|
526,925
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
31,383
|
|
$
|
30,832
|
|
Accrued
liabilities
|
|
|
43,788
|
|
|
40,166
|
|
Income
taxes
|
|
|
11,067
|
|
|
11,649
|
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
1,334
|
|
|
11,310
|
|
Total
current liabilities
|
|
|
87,572
|
|
|
93,957
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
161,442
|
|
|
51,043
|
|
Deferred
income taxes
|
|
|
4,657
|
|
|
4,597
|
|
Employee
benefit plan obligations
|
|
|
27,021
|
|
|
25,969
|
|
Other
long-term liabilities
|
|
|
5,188
|
|
|
5,528
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
Common
shares (45,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
outstanding
(22,997
and 23,009, respectively)
|
|
|
2,300
|
|
|
2,301
|
|
Additional
capital
|
|
|
102,166
|
|
|
94,356
|
|
Retained
earnings
|
|
|
243,633
|
|
|
236,780
|
|
Loan
to ESOP Trust
|
|
|
-
|
|
|
(200
|
)
|
Accumulated
other comprehensive income
|
|
|
22,682
|
|
|
12,594
|
|
Total
shareowners' equity
|
|
|
370,781
|
|
|
345,831
|
|
Total
liabilities and shareowners' equity
|
|
$
|
656,661
|
|
$
|
526,925
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended
|
|
|
|
Sept.
29,
|
|
Sept.
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,221
|
|
$
|
42,924
|
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,729
|
|
|
13,657
|
|
Stock-based
compensation
|
|
|
3,112
|
|
|
2,108
|
|
Deferred
income taxes
|
|
|
1,643
|
|
|
1,809
|
|
Gain/loss
on disposals of plant and equipment
|
|
|
455
|
|
|
(87
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(13,575
|
)
|
|
(4,331
|
)
|
Inventories
|
|
|
(32,363
|
)
|
|
(6,378
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(1,438
|
)
|
|
(2,125
|
)
|
Accrued
income taxes
|
|
|
678
|
|
|
8,156
|
|
Excess
tax from share-based compensation arrangements
|
|
|
(1,594
|
)
|
|
(5,683
|
)
|
Employee
benefit plans
|
|
|
1,634
|
|
|
712
|
|
Other,
net
|
|
|
(7,401
|
)
|
|
(4,065
|
)
|
Net
cash flows from operating activities
|
|
|
(10,899
|
)
|
|
46,697
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(18,564
|
)
|
|
(15,421
|
)
|
Proceeds
from sale of property, plant and equipment
|
|
|
303
|
|
|
323
|
|
Additions
to other assets
|
|
|
(3
|
)
|
|
(293
|
)
|
Purchases
of securities
|
|
|
(246,700
|
)
|
|
(63,500
|
)
|
Proceeds
from sale of securities
|
|
|
240,694
|
|
|
99,488
|
|
Cash
paid for acquisitions
|
|
|
(36,836
|
)
|
|
(158,028
|
)
|
Proceeds
from sale of business
|
|
|
1,310
|
|
|
-
|
|
Net
cash flows from investing activities
|
|
|
(59,796
|
)
|
|
(137,431
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
200,000
|
|
|
130,000
|
|
Repayment
of long-term debt
|
|
|
(100,322
|
)
|
|
(70,219
|
)
|
Proceeds
from issuance of common stock
|
|
|
3,004
|
|
|
9,731
|
|
Excess
tax from share-based compensation arrangements
|
|
|
1,594
|
|
|
5,683
|
|
Purchases
of common stock
|
|
|
(8,118
|
)
|
|
(198
|
)
|
Reduction
of loan to ESOP Trust
|
|
|
200
|
|
|
232
|
|
Dividends
paid
|
|
|
(8,063
|
)
|
|
(7,304
|
)
|
Net
cash flows from financing activities
|
|
|
88,295
|
|
|
67,925
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
2,080
|
|
|
669
|
|
Net
change in cash and equivalents
|
|
|
19,680
|
|
|
(22,140
|
)
|
Cash
and equivalents at beginning of period
|
|
|
33,956
|
|
|
52,136
|
|
Cash
and equivalents at end of period
|
|
$
|
53,636
|
|
$
|
29,996
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
12.4
|
|
$
|
17.5
|
|
Cash
paid for interest
|
|
$
|
4.8
|
|
$
|
2.1
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$
|
0.4
|
|
$
|
0.4
|
|
Payable
to seller of Healy Systems, Inc.
|
|
$
|
1.1
|
|
$
|
0.0
|
|
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 September 29, 2007 and for
the
nine months ended, September 29, 2007 and September 30, 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 third quarter and
nine
months ended September 29, 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.
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
September 29, 2007 the Company held $6.0 million of current investments
consisting of auction rate municipal bonds classified as available-for-sale
securities, included in “Investments” in the current balance sheet. As of
December 30, 2006, the Company held no investments in financial instruments.
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 $6.7 million as of September 29, 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 $0.1 million and $0.2 million, for the third quarter
ended September 29, 2007 and September 30, 2006, respectively, and $0.6 million
and $0.5 million for the nine months ended September 29, 2007 and September
30,
2006, respectively.
5.
GOODWILL AND OTHER INTANGIBLE ASSETS
The
carrying amounts of the Company’s intangible assets are as follows:
(In
millions)
|
|
September
29, 2007
|
|
December
30, 2006
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
6.3
|
|
|
($3.1
|
)
|
$
|
6.3
|
|
|
($2.8
|
)
|
Supply
agreements
|
|
|
7.2
|
|
|
(4.8
|
)
|
|
7.2
|
|
|
(4.3
|
)
|
Technology
|
|
|
5.8
|
|
|
(0.6
|
)
|
|
3.8
|
|
|
(0.3
|
)
|
Customer
relationships
|
|
|
34.3
|
|
|
(2.2
|
)
|
|
26.8
|
|
|
(0.8
|
)
|
Other
|
|
|
2.0
|
|
|
(1.9
|
)
|
|
1.7
|
|
|
(1.6
|
)
|
Total
|
|
|
55.6
|
|
|
(12.6
|
)
|
|
45.8
|
|
|
(9.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
10.7
|
|
|
-
|
|
|
9.3
|
|
|
-
|
|
Total
intangibles
|
|
$
|
66.3
|
|
|
($12.6
|
)
|
$
|
55.1
|
|
|
($9.8
|
)
|
Amortization
expense related to intangible assets for the third quarter ended September
29,
2007 and September 30, 2006 was $0.9 million and $0.7 million, respectively,
and
for the nine months ended September 29, 2007 and September 30, 2006, $2.6
million and $1.7 million, respectively.
Amortization
expense for each of the five succeeding years is projected as
follows:
(In
millions)
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
$
|
3.4
|
|
$
|
3.4
|
|
$
|
3.3
|
|
$
|
3.2
|
|
$
|
3.1
|
|
The
changes in the carrying amount of goodwill for the nine months ended September
29, 2007, are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of December 30, 2006
|
|
$
|
133.5
|
|
Increase
in goodwill acquired
|
|
|
11.5
|
|
Foreign
currency translation
|
|
|
1.4
|
|
Balance
as of September 29, 2007
|
|
$
|
146.4
|
|
6.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans - As of September 29, 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 third
quarter and nine months ended September 29, 2007 and September 30,
2006:
(In
millions)
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
29,
|
|
Sept.
30,
|
|
Sept.
29,
|
|
Sept.
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0.9
|
|
$
|
1.2
|
|
$
|
3.2
|
|
$
|
3.4
|
|
Interest
cost
|
|
|
1.5
|
|
|
1.9
|
|
|
6.0
|
|
|
6.1
|
|
Expected
return on assets
|
|
|
(1.7
|
)
|
|
(2.6
|
)
|
|
(7.4
|
)
|
|
(7.8
|
)
|
Obligation/asset
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
Loss
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
Prior
service cost
|
|
|
0.2
|
|
|
0.4
|
|
|
0.9
|
|
|
1.2
|
|
Total
net periodic benefit cost
|
|
$
|
0.9
|
|
$
|
0.9
|
|
$
|
2.9
|
|
$
|
3.0
|
|
(In
millions)
|
|
|
|
Other
Benefits
|
|
Other
Benefits
|
|
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
29,
|
|
Sept.
30,
|
|
Sept.
29,
|
|
Sept.
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0.0
|
|
$
|
0.0
|
|
$
|
0.1
|
|
$
|
0.2
|
|
Interest
cost
|
|
|
0.2
|
|
|
0.2
|
|
|
0.6
|
|
|
0.6
|
|
Obligation/asset
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
Prior
service cost
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
Total
net periodic benefit cost
|
|
$
|
0.3
|
|
$
|
0.5
|
|
$
|
1.0
|
|
$
|
1.5
|
|
As
of
September 29, 2007 the Company made contributions to the plans of $2.2 million
for the year.
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 third quarter or nine months
ended September 29, 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 September 29, 2007. Interest and
penalties recorded during the third quarter ended September 29, 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, and the Company was in compliance with the covenants as of
September 29, 2007 and December 30, 2006. The Company had no outstanding
borrowings under the Agreement at September 29, 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 (the “B-1 Notes”)
and $40.0 million on September 7, 2007 (the “B-2 Notes). The B-1 and B-2 Notes
bear a coupon of 5.79 percent and have an average life of ten years with a
final
maturity in 2019. Principal installments of $30.0 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, and the Company was in compliance with the covenants
as of September 29, 2007 and December 30, 2006.
The
Company also has certain overdraft facilities at its foreign subsidiaries,
of
which none were outstanding at September 29, 2007 and at December 30,
2006.
Long-term
debt consisted of:
(In
millions)
|
|
|
|
September
29,
|
|
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 denominated
in
JPY at 9/29/07)
|
|
$
|
11.1
|
|
$
|
11.3
|
|
Capital
Leases
|
|
|
1.7
|
|
|
1.1
|
|
Credit
Agreement
|
|
|
-
|
|
|
50.0
|
|
Prudential
Agreement
|
|
|
150.0
|
|
|
-
|
|
|
|
|
162.8
|
|
|
62.4
|
|
Less
Current Maturities
|
|
|
(1.3
|
)
|
|
(11.3
|
)
|
|
|
$
|
161.5
|
|
$
|
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 3 years
|
|
Debt
|
|
$
|
161.1
|
|
$
|
1.0
|
|
$
|
10.1
|
|
$
|
-
|
|
$
|
150.0
|
|
Capital
leases
|
|
|
1.7
|
|
|
0.1
|
|
|
0.4
|
|
|
111.2
|
|
|
-
|
|
|
|
$
|
162.8
|
|
$
|
1.1
|
|
$
|
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)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
29,
|
|
Sept.
30,
|
|
Sept.
29,
|
|
Sept.
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
11.7
|
|
$
|
16.2
|
|
$
|
23.2
|
|
$
|
42.4
|
|
Income
from discontinued operations
|
|
|
0.0
|
|
|
0.6
|
|
|
0.0
|
|
|
0.5
|
|
Net
income
|
|
$
|
11.7
|
|
$
|
16.8
|
|
$
|
23.2
|
|
$
|
42.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.0
|
|
|
23.0
|
|
|
23.1
|
|
|
22.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.4
|
|
|
23.4
|
|
|
23.5
|
|
|
23.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
from continuing operations
|
|
$
|
0.51
|
|
$
|
0.71
|
|
$
|
1.01
|
|
$
|
1.86
|
|
Basic
from discontinuing operations
|
|
|
0.0
|
|
|
0.02
|
|
|
0.0
|
|
|
0.02
|
|
Total
basic earnings per share
|
|
$
|
0.51
|
|
$
|
0.73
|
|
$
|
1.01
|
|
$
|
1.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
from continuing operations
|
|
$
|
0.50
|
|
$
|
0.70
|
|
$
|
0.99
|
|
$
|
1.82
|
|
Diluted
from discontinuing operations
|
|
|
0.0
|
|
|
0.02
|
|
|
0.0
|
|
|
0.02
|
|
Total
diluted earnings per share
|
|
$
|
0.50
|
|
$
|
0.72
|
|
$
|
0.99
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
0.3
|
|
|
0.1
|
|
|
0.3
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options price range - low
|
|
$
|
40.93
|
|
$
|
44.51
|
|
$
|
44.51
|
|
$
|
44.51
|
|
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)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept.
29,
|
|
Sept.
30,
|
|
Sept.
29,
|
|
Sept.
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
|
$
|
11.7
|
|
$
|
16.8
|
|
$
|
23.2
|
|
$
|
42.9
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
7.1
|
|
|
(0.7
|
)
|
|
8.7
|
|
|
3.7
|
|
Pension
liability adjustment, net of tax
|
|
|
0.4
|
|
|
-
|
|
|
1.4
|
|
|
-
|
|
Comprehensive
income, net of tax
|
|
$
|
19.2
|
|
$
|
16.1
|
|
$
|
33.3
|
|
$
|
46.6
|
|
Accumulated
other comprehensive income consists of the following:
(In
millions)
|
|
Sept.
29,
|
|
December
30,
|
|
|
|
2007
|
|
2006
|
|
Cumulative
foreign currency translation adjustments
|
|
$
|
23.3
|
|
$
|
14.6
|
|
Pension
liability adjustment, net of tax
|
|
|
(0.6
|
)
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
22.7
|
|
$
|
12.6
|
|
12.
CONTINGENCIES AND COMMITMENTS
At
September 29, 2007, the Company had $4.1 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. In 2007, the Company began offering an extended warranty program
to certain water systems customers which will provide warranty coverage up
to
five years from the date of manufacture. 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, and expected customer returns. 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 nine months ended September
29, 2007, are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of December 30, 2006
|
|
$
|
10.0
|
|
Accruals
related to product warranties
|
|
|
2.0
|
|
Reductions
for payments made
|
|
|
(2.4
|
)
|
Balance
as of September 29, 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 generally vest 33 percent a year and become fully vested
and exercisable after three years. Options granted to employees generally 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, 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
nine 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
nine months ended September 29, 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
|
|
|
(151
|
)
|
|
20.59
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32
|
)
|
|
29.38
|
|
|
|
|
|
|
|
Outstanding
at the end of the period
|
|
|
1,346
|
|
$
|
29.43
|
|
|
5.35
|
|
$
|
17,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable at end of the period
|
|
|
890
|
|
$
|
24.72
|
|
|
4.26
|
|
$
|
14,792
|
|
There
were no options granted during the third quarter. The total intrinsic value
of
options exercised during the third quarter September 29, 2007 and September
30,
2006 was $1.2 million and $0.1 million, respectively, and for the nine months
ended September 29, 2007 and September 30, 2006, $4.5 million and $2.5 million,
respectively. There were no share-based liabilities paid during the third
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 option activity and related information, for
the nine months ended September 29, 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
|
|
|
(205
|
)
|
|
33.40
|
|
Forfeited
|
|
|
(26
|
)
|
|
31.66
|
|
Nonvested
at end of period
|
|
|
456
|
|
$
|
38.61
|
|
As
of
September 29, 2007, there was $3.6 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 1.71 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 the year 2000.
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 nine months ended September 29, 2007 follows:
(shares
in thousands)
Nonvested
Stock Awards
|
|
Shares
|
|
Weighted-Average
Grant
Date
Fair Value
|
|
Nonvested
at beginning of period
|
|
|
40
|
|
$
|
43.39
|
|
Awarded
|
|
|
31
|
|
|
47.59
|
|
Vested
|
|
|
(8
|
)
|
|
43.77
|
|
Forfeited
|
|
|
(3
|
)
|
|
47.44
|
|
Nonvested
at end of period
|
|
|
60
|
|
$
|
45.31
|
|
As
of
September 29, 2007, there was $1.6 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 2.7 years.
14.
RESTRUCTURING
During
the third quarter of 2007, the Company continued to execute 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 third quarter and nine months ended September 29, 2007
were approximately $0.3 million (pre-tax) and $1.9 million (pre-tax),
respectively. As of September 29, 2007, there was no restructuring reserve
in
the Company’s consolidated balance sheet.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Q3
2007 // Q3 2006
OVERVIEW
Sales
for
the third quarter of 2007 were up compared to the third quarter of 2006.
The
sales increase was primarily attributable to sales from acquisitions and
foreign
exchange rate changes. Third quarter 2007 sales increases were partially
offset
by a significant decline of Water Systems product sales in the United States
and
Canada, primarily related to small submersible motor products sold to large
pump
OEMs. While sales to large pump OEMs decreased, sales of small submersible
motor
and pump products and related accessories to distributors and small pump
manufacturers in the United States and Canada increased. This change in customer
base is consistent with the Company’s strategic change in its distribution
channel for Water Systems products in this region. Water Systems sales in
international markets increased during the quarter primarily due to
acquisitions. Water Systems acquisitions include Pump Brands, Ltd. (South
Africa), completed in June 2007, and the pump division of Monarch Industries
(Canada), completed in September 2007. Fueling Systems sales increased
during the third quarter compared to the same period a year ago with a
significant amount of the increased sales attributable to the September 2006
acquisition of Healy Systems. Sales increased across all fueling product
lines
in both domestic and international markets. Earnings declined in third quarter
2007 primarily due to the significant decline in Water Systems small submersible
motor product sales volume. The Company’s earnings were also reduced by
material, freight and other cost increases and promotional sales discounting
net
of sales price increases.
RESULTS
OF OPERATIONS
Net
sales
for the third quarter were $165.3 million, an increase of $9.1 million or
up 6
percent compared to $156.2 million in 2006. Acquisitions increased sales
by
about 12 percent during the quarter and foreign exchange rate changes increased
sales about 2 percent. Third quarter sales, excluding acquisitions and foreign
exchange rate changes, declined by 8 percent from the same period a year
ago.
Global Water Systems sales for third quarter 2007 decreased by $0.9 million
or 1
percent compared to a year ago. While Water Systems sales in the United States
and Canada declined by about $16 million or 18 percent, sales in regions
outside
the United States and Canada grew by about $15 million or 36 percent. The
decline in 2007 sales of Water Systems in the United States and Canada was
attributable to the Company’s decision to discontinue the distribution of its
Water Systems products in the United States and Canada through large pump
OEMs
in favor of selling direct to the water systems industry professional
distribution channel. Prior year sales to the large pump OEMs in the United
States and Canada for the third quarter of 2006 represented about $30 million
of
Water Systems sales in the region. In the third quarter of 2007, the Company
did
not have any sales to large integrated pump OEMs, but Franklin submersible
motor
products continued to flow into the market from the OEM channel. Another
key
factor adversely affecting the Company’s Water Systems sales in the United
States and Canada during the third quarter of 2007 was the weakness in industry
demand. In the third quarter, based upon trade association data, the Company
believes that North American Water Systems industry demand was down about
8
percent compared to last year. Global Fueling Systems sales, which represent
about 20 percent of the Company’s total sales, increased by 48 percent in the
third quarter of 2007 compared to the same period a year ago. Organic growth
during the third quarter for Fueling sales was about 29 percent. Product
sales
increased across all product lines, including vapor recovery and fuel management
systems. Healy Systems (vapor recovery) products had strong organic growth
during the third quarter of 2007 compared to prior year.
Cost
of
sales as a percent of net sales for third quarter 2007 and 2006 was 71.0
percent
and 65.8 percent, respectively. The gross profit margin declined to 29.0
percent
for the third quarter of 2007 from 34.2 percent in the third quarter of 2006.
Gross profit for the Company declined $5.4 million or 10 percent versus the
third quarter 2006. In the United States and Canada, 2006 gross profits
benefited from unusually high sales of submersible motors to large pump OEMs
as
their purchases were in excess of market demand. The loss of gross profit
on
sales of submersible motors to these OEMs in 2007 was partially offset by
increased gross profit on sales of Water Systems products to distributors
and
other customers throughout North America. Global Water Systems gross
profit margins declined about 540 basis points in the third quarter of 2007
compared to the third quarter of 2006. The gross profit margin decline pertained
to sales in the United States and Canada market with three principal causal
factors. First, approximately one-third was attributed to product mix changes.
Pumps have become a higher percentage of sales and they generally carry a
lower
gross profit margin than submersible motors. Second, approximately one-third
was
attributed to fixed cost coverage as the Company’s North American submersible
motor plants operated at lower capacity utilization rates during the third
quarter of 2007 compared to the third quarter of 2006. Third, about 30 percent
was due to increased costs of material and freight and promotional price
discounts net of market price increases. Fueling Systems gross profit increased
by $3.0 million or 43 percent versus the third quarter of 2006. Fueling Systems
gross profit margins declined modestly during the quarter due to an unusually
high mix of international tender sales during the third quarter of 2007.
Selling
and administrative expense as a percent of net sales for third quarter 2007
and
2006 was 17.1 percent and 17.8 percent, respectively. The Company’s overall
selling and administrative expenses for the third quarter of 2007 increased
by
$0.4 million from the same period in the prior year. Acquisitions increased
selling and administrative expenses in the third quarter of 2007 compared
to
last year by about $2.6 million. The incremental acquisition expenses were
offset by reduced spending in the base operations related primarily to incentive
compensation and commissions.
During
the third quarter of 2007, the Company continued to execute its Global
Manufacturing Realignment program. Phase 2 includes the recent expansion
of
motor manufacturing in Linares, Mexico to include all 4-inch Super Stainless
products (small submersible motor); the construction and start-up of a new
pump
manufacturing plant in Linares; the consolidation of Fueling Systems operations
into the recently enlarged Madison, Wisconsin plant; and, the streamlining
of
motor manufacturing operations in Siloam Springs, Arkansas and Wittlich,
Germany. The Company has also announced the phased relocation of the Little
Rock, Arkansas Water Systems pump manufacturing to the new pump plant in
Linares, Mexico over the next three to nine months. Restructuring expenses
year
to date 2007 were approximately $1.9 million (pre-tax) and reduced diluted
earnings per share by approximately $0.05 per share for the nine months ending
September 2007. Full year 2007 restructuring expenses are estimated to be
$4.0
million (pre-tax) and will include severance and other employee expenses
as well
as manufacturing equipment relocation costs. The estimated full year
restructuring expenses have decreased from our prior estimate of $6.0 million
as
actual expenses for equipment relocation and severance are less than previously
estimated and a small portion of these expenses will not be incurred until
2008.
Interest
expense for third quarter 2007 and 2006 was $2.3 million and $1.1 million,
respectively. Interest expense increased by $1.2 million during the third
quarter versus the same period in the prior year due to the debt incurred
to
fund acquisitions and increased working capital requirements.
Interest
income of $0.6 million and $0.4 million, included in “Other income” for third
quarter 2007 and 2006 respectively, was primarily derived from cash investments
in short-term U.S. treasury and agency securities. Also, included in “Other
income” for third quarter 2007 and 2006 was income from equity investments of
$0.1 million and $0.2 million, respectively.
Foreign
currency-based transactions produced a loss for third quarter 2007 of about
$0.2
million. Foreign currency-based transactions resulted in a gain in the
third quarter 2006 of about $0.2 million.
The
provision for income taxes in 2007 and 2006 was $6.0 million and $8.8 million,
respectively. The effective tax rates for the third quarter of 2007 and 2006
were 33.8 and 35.0 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. The income tax rate for the third
quarter of 2007 was less than the prior year primarily due to one-time tax
adjustments, including an income tax rate reduction passed in Germany in
the
third quarter of 2007.
Net
income, from continuing operations, for third quarter 2007 was $11.7 million,
or
$0.50 per diluted share, compared to third quarter 2006 net income of $16.2
million or $0.70 per diluted share.
YTD
2007 // YTD 2006
OVERVIEW
Sales
for
the first nine months of 2007 were up from the same period last year. The
increase in sales was primarily related to sales from the Company’s
acquisitions. 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 in the prior year was 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
acquisitions and higher selling, general and administrative spending 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 nine months of 2007 were $448.3 million, an increase of $38.2
million or 9 percent compared to the same period of 2006 sales of $410.1
million. Incremental sales related to acquisitions for 2007 were $62.9 million
or 15 percent of sales. Foreign exchange rate changes increased sales about
1
percent in the first nine months of 2007. Year to date sales, excluding
acquisition sales and foreign exchange rate changes, declined by about 7
percent
from the same period a year ago. Global Water Systems sales for the first
nine months of 2007 increased by 2 percent compared to 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 13
percent versus the first nine months of 2006. Sales of 4-inch submersible
motor
units in the United States and Canada declined primarily due to the liquidation
of Franklin motor inventory held by large pump OEMs and weak overall water
systems industry demand in the United States and Canada. The year-to-date
industry demand through September 2007 was down in excess of 12 percent,
according to trade association data, compared to the same period in the prior
year. The industry decline for the first nine months of 2007 period was due
to
harsh weather conditions in key markets early in the year and a continuing
decrease in new housing starts compared to the prior year. Changes in selling
prices increased net sales by about 3 percent and foreign exchange rate changes
increased net sales by about 1 percent compared to the first nine months
of
2006. Global Fueling Systems sales for the first nine months of 2007 increased
by 53 percent compared to the same period a year ago due to the acquisition
of
Healy Systems and organic volume. Excluding the Healy acquisition, the first
nine months Fueling System sales increased by 28 percent compared to last
year.
The volume growth across product lines was led by the fuel management
electronics platform products.
Cost
of
sales as a percent of net sales for the first nine months of 2007 and 2006
was
71.0 percent and 65.5 percent, respectively. Correspondingly, the gross profit
margin declined to 29.0 percent from 34.5 percent. The gross profit margin
changes in the first nine months of 2007 were consistent with the explanations
covered in detail above under the third quarter review. In summary, sales
and
gross profit of Water Systems products in regions outside the United States
and
Canada increased, as did the gross profit on Fueling Systems sales, offset
by a
decline in gross profit on the sale of Water Systems products in the United
States and Canada.
Selling
and administrative expense for the first nine months as a percent of net
sales
for 2007 and 2006 was 20.0 percent and 18.2 percent, respectively. Selling
and
administrative expense for the first nine months increased by $14.7 million
in
2007 compared to the first nine months of last year. The increase was primarily
due to the inclusion of acquisitions, or about $12.1 million, for the first
nine
months of 2007 compared to last year. The increase due to higher selling
and
administrative expenses in support of the Company’s strategy change in the Water
Systems channel in the United States and Canada, as discussed above, was
approximately $2.6 million.
Restructuring
expenses under Phase 2 of the Global Manufacturing Realignment program for
the
first nine months of 2007 were approximately $1.9 million (pre-tax) and reduced
EPS by approximately $0.05 per share.
Interest
expense for the first nine months of 2007 and 2006 was $5.7 million and $2.4
million, respectively. Interest expense increased in 2007 due primarily to
debt
increases associated with funding acquisitions, as well as, increased working
capital for inventory and accounts receivable.
Interest
income of $1.6 million, included in “Other income” for the first nine months 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
nine
months of 2007 and 2006 was income from equity investments of $0.6 million
and
$0.5 million, respectively.
Foreign
currency-based transactions produced a gain for the first nine months of
2007 of
$0.4 million primarily due to euro rate changes relative to the U.S.
dollar. Foreign currency-based transactions for the same period in 2006
were neutral.
The
provision for income taxes in 2007 and 2006 was $12.2 million and $23.4 million,
respectively. The effective tax rates for the first nine months of 2007 and
2006
were 34.5 and 35.6 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, from continuing operations, for the first nine months of 2007 was
$23.2
million, or $0.99 per diluted share, compared to the same period for 2006
at
$42.5 million or $1.82 per diluted share.
CAPITAL
RESOURCES AND LIQUIDITY
Operating
activities consumed approximately $10.9 million of cash during the first nine
months of 2007 compared to cash flows provided in the first nine months of
2006
of $46.7 million. The operating cash flows used in the first nine months of
2007
were primarily related to increases in inventory and receivables. The increase
in inventory, about $32.4 million, was primarily in finished goods due to weaker
than normal Water Systems product demand in the United States and Canada. The
increase in receivables, about $13.6 million, was due to higher sales, and
a
more diversified customer base and sales terms. The operating cash flow
generated for the same period in 2006 was primarily related to net income of
$42.9 million. Accounts receivable, a use of cash, increased approximately
$4.3
million primarily due to sales growth, while inventories, also a use of cash,
increased about $6.4 million, primarily in finished goods.
Net
cash
flows used for investing activities were $59.8 million during the first nine
months of 2007 and $137.4 million in 2006. Cash flows used in the first nine
months of 2007 and 2006 were primarily for acquisitions, $13.3 million for
Pump
Brands (Pty) Limited and $23.4 million for Monarch Industries in 2007, and
$122.7 million for Little Giant Pump Company in 2006. Uses of cash in 2007
and
2006 were also for the purchase of property, plant and equipment, $18.6 million
and $15.4 million, respectively. Cash flows used to purchase securities were
$6.0 million in the first nine months of 2007. Cash proceeds from net
investments in equity securities during the first nine months of 2006 were
$36.0
million.
Cash
flows from financing activities in the first nine months of 2007 and 2006 were
$88.3 million and $67.9 million respectively, primarily from the proceeds of
long-term debt. The Company repurchased shares of its common stock for $8.1
million in the first nine months of 2007. Additionally, the Company paid $8.1
million and $7.3 million in dividends on the Company’s common stock in the first
nine months of 2007 and 2006, respectively.
Cash
and
cash equivalents at the end of the first nine months of 2007 were $53.6 million
compared to $33.9 million at the end of fiscal year 2006. Working capital
increased $101.2 million in the first nine months of 2007 from year end 2006,
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 no outstanding borrowings under the Agreement at September 29,
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 of 2007.
Under the shelf agreement the Company issued notes for $110.0 million on April
30, 2007 and $40.0 million on September 7, 2007 at a fixed rate of 5.79 percent
with a 10-year average life, which includes financial covenants similar to
the
Company’s other borrowing agreements. Proceeds of the facility were used
to pay down short term variable rate borrowings and will be used to fund future
acquisitions and Company stock purchases.
The
Company also has certain overdraft facilities at its foreign subsidiaries,
of
which none were outstanding at September 29, 2007 and December 30, 2006.
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
nine
months of 2007 and 2006.
At
September 29, 2007, the Company had $4.1 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, new housing starts,
weather conditions, 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 1, Item 1A, in the Company’s annual report on
Form 10-K for the fiscal year ended December 30, 2006, Exhibit
99.1 attached thereto and in Item 1A of Part II of the Company’s Quarterly
Report on Form 10-Q for the second quarter ended June 30, 2007. 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 Rules 13a-15 and 15d-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 third 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
There
are
no material changes 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, Exhibit
99.1 attached thereto and in Item 1A of Part II of the Company’s Quarterly
Report on Form 10-Q for the second quarter ended June 30, 2007. 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.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) |
Issuer
Repurchases of Equity Securities
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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 third quarter
of
2007, the Company did not repurchase any of its stock. The maximum number of
shares that may still be purchased under the Company plan is 2,112,400.
ITEM
6. EXHIBITS
See
the
Exhibit Index located on page 22.
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.
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FRANKLIN
ELECTRIC CO., INC.
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Registrant
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Date:
November
6, 2007
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By
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/s/
R. Scott Trumbull
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R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal
Executive
Officer)
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Date:
November
6, 2007
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By
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/s/
Thomas J. Strupp
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Thomas
J. Strupp, Vice President and Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
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FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR
THE
THIRD QUARTER ENDED SEPTEMBER 29, 2007
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Number
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Description
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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32.1
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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
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32.2
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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
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