form10_q.htm
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 March 29,
2008
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, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer
x
|
Accelerated Filer o
|
Non-Accelerated Filer
o
|
Smaller Reporting Company
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
|
|
March 29,
2008
|
$.10
par value
|
|
22,866,325
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 First Quarter Ended March 29,
2008 and March 31, 2007
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 29, 2008 and December 29,
2007
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the First Quarter Ended March
29, 2008 and March 31, 2007
|
|
5
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6-15
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
16-19
|
|
|
|
|
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
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
20
|
|
|
|
|
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)
|
|
First Quarter Ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
176,010 |
|
|
$ |
130,496 |
|
Cost
of sales
|
|
|
124,551 |
|
|
|
91,567 |
|
Gross
profit
|
|
|
51,459 |
|
|
|
38,929 |
|
Selling,
general and administrative expenses
|
|
|
36,311 |
|
|
|
29,455 |
|
Restructuring
expenses
|
|
|
82 |
|
|
|
1,238 |
|
Operating
income
|
|
|
15,066 |
|
|
|
8,236 |
|
Interest
expense
|
|
|
(2,624 |
) |
|
|
(1,212 |
) |
Other
income
|
|
|
471 |
|
|
|
298 |
|
Foreign
exchange (loss)/income
|
|
|
(327 |
) |
|
|
247 |
|
Income
before income taxes
|
|
|
12,586 |
|
|
|
7,569 |
|
Income
taxes
|
|
|
4,438 |
|
|
|
2,672 |
|
Net
income
|
|
$ |
8,148 |
|
|
$ |
4,897 |
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$ |
0.35 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings
|
|
$ |
0.35 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.12 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except per share amounts)
|
|
March
29,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
33,623 |
|
|
$ |
65,252 |
|
Receivables,
less allowances of $2,505 and $2,594, respectively
|
|
|
99,513 |
|
|
|
64,972 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
63,072 |
|
|
|
57,958 |
|
Work-in-process
|
|
|
18,139 |
|
|
|
17,128 |
|
Finished
goods
|
|
|
102,690 |
|
|
|
99,974 |
|
LIFO
reserve
|
|
|
(19,308 |
) |
|
|
(18,914 |
) |
|
|
|
164,593 |
|
|
|
156,146 |
|
Deferred
income taxes
|
|
|
17,300 |
|
|
|
17,127 |
|
Other
current assets
|
|
|
8,925 |
|
|
|
5,982 |
|
Total
current assets
|
|
|
323,954 |
|
|
|
309,479 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
69,244 |
|
|
|
64,350 |
|
Machinery
and equipment
|
|
|
171,532 |
|
|
|
161,280 |
|
Furniture
and Fixtures
|
|
|
13,968 |
|
|
|
12,595 |
|
Other
|
|
|
20,154 |
|
|
|
16,909 |
|
|
|
|
274,898 |
|
|
|
255,134 |
|
Allowance
for depreciation
|
|
|
(131,322 |
) |
|
|
(120,203 |
) |
|
|
|
143,576 |
|
|
|
134,931 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
67,544 |
|
|
|
66,925 |
|
Goodwill
|
|
|
172,584 |
|
|
|
140,034 |
|
Other
assets (including deferred income taxes of $402 and $0,
respectively)
|
|
|
11,093 |
|
|
|
10,868 |
|
Total
assets
|
|
$ |
718,751 |
|
|
$ |
662,237 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
32,221 |
|
|
$ |
27,986 |
|
Accrued
liabilities
|
|
|
46,287 |
|
|
|
46,085 |
|
Income
taxes
|
|
|
8,692 |
|
|
|
6,180 |
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
55,577 |
|
|
|
10,398 |
|
Total
current liabilities
|
|
|
142,777 |
|
|
|
90,649 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
152,202 |
|
|
|
151,287 |
|
Deferred
income taxes
|
|
|
12,135 |
|
|
|
11,686 |
|
Employee
benefit plan obligations
|
|
|
24,473 |
|
|
|
24,713 |
|
Other
long-term liabilities
|
|
|
5,134 |
|
|
|
5,358 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
|
Common
shares (65,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
|
outstanding
(22,866 and 23,091, respectively)
|
|
|
2,287 |
|
|
|
2,309 |
|
Additional
capital
|
|
|
106,774 |
|
|
|
105,428 |
|
Retained
earnings
|
|
|
243,912 |
|
|
|
246,324 |
|
Accumulated
other comprehensive income
|
|
|
29,057 |
|
|
|
24,483 |
|
Total
shareowners' equity
|
|
|
382,030 |
|
|
|
378,544 |
|
Total
liabilities and shareowners' equity
|
|
$ |
718,751 |
|
|
$ |
662,237 |
|
See Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
First Quarter Ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
8,148 |
|
|
$ |
4,897 |
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,229 |
|
|
|
4,730 |
|
Stock-based
compensation
|
|
|
1,106 |
|
|
|
1,363 |
|
Deferred
income taxes
|
|
|
(126 |
) |
|
|
365 |
|
Gain/loss
on disposals of plant and equipment
|
|
|
42 |
|
|
|
20 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(30,047 |
) |
|
|
(17,984 |
) |
Inventories
|
|
|
(4,141 |
) |
|
|
(20,716 |
) |
Accounts
payable and other accrued expenses
|
|
|
(5,222 |
) |
|
|
(10,604 |
) |
Accrued
income taxes
|
|
|
1,351 |
|
|
|
(7,415 |
) |
Excess
tax from share-based compensation arrangements
|
|
|
(64 |
) |
|
|
(1,158 |
) |
Employee
benefit plans
|
|
|
(639 |
) |
|
|
574 |
|
Other,
net
|
|
|
(1,921 |
) |
|
|
(1,150 |
) |
Net
cash flows from operating activities
|
|
|
(25,284 |
) |
|
|
(47,078 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(6,758 |
) |
|
|
(4,584 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
10 |
|
|
|
16 |
|
Additions
to other assets
|
|
|
(500 |
) |
|
|
- |
|
Purchases
of securities
|
|
|
(9,000 |
) |
|
|
- |
|
Proceeds
from sale of securities
|
|
|
9,000 |
|
|
|
- |
|
Cash
paid for acquisitions
|
|
|
(35,465 |
) |
|
|
- |
|
Proceeds
from sale of business
|
|
|
- |
|
|
|
1,310 |
|
Net
cash flows from investing activities
|
|
|
(42,713 |
) |
|
|
(3,258 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Additions
to short-term debt
|
|
|
45,000 |
|
|
|
- |
|
Repayment
of short-term debt
|
|
|
(19 |
) |
|
|
- |
|
Additions
to long-term debt
|
|
|
- |
|
|
|
50,000 |
|
Repayment
of long-term debt
|
|
|
(107 |
) |
|
|
(79 |
) |
Proceeds
from issuance of common stock
|
|
|
176 |
|
|
|
2,266 |
|
Excess
tax from share-based compensation arrangements
|
|
|
64 |
|
|
|
1,158 |
|
Purchases
of common stock
|
|
|
(7,813 |
) |
|
|
- |
|
Reduction
of loan to ESOP Trust
|
|
|
- |
|
|
|
200 |
|
Dividends
paid
|
|
|
(2,771 |
) |
|
|
(2,536 |
) |
Net
cash flows from financing activities
|
|
|
34,530 |
|
|
|
51,009 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,838 |
|
|
|
(133 |
) |
Net
change in cash and equivalents
|
|
|
(31,629 |
) |
|
|
540 |
|
Cash
and equivalents at beginning of period
|
|
|
65,252 |
|
|
|
33,956 |
|
Cash
and equivalents at end of period
|
|
$ |
33,623 |
|
|
$ |
34,496 |
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
2.3 |
|
|
$ |
10.4 |
|
Cash
paid for interest
|
|
$ |
2.6 |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$ |
0.2 |
|
|
$ |
0.6 |
|
Payable
to seller of Healy Systems, Inc.
|
|
$ |
0.9 |
|
|
$ |
0.5 |
|
Capital
equipment lease
|
|
$ |
1.1 |
|
|
$ |
- |
|
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 29, 2007, which
has been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements as of March 29, 2008 and for the
three months then ended, 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. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to those rules and regulations. 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 first quarter ended March 29, 2008 are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 3, 2009. 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 29, 2007.
2. ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements. This statement defines fair value in generally accepted accounting
principles and expands disclosures about fair value measurements that are
required or permitted under other accounting pronouncements. This
statement was effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. The Company’s adoption of this statement had an immaterial
impact on its consolidated financial position, results of operations and cash
flows. The Company also adopted the deferral provisions of SFAS No.
157-2, which delayed the effective date of SFAS No. 157 for all nonrecurring
fair value measurements of non-financial assets and liabilities until fiscal
years beginning after November 15, 2008.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This statement was effective as of the beginning of the first
fiscal year beginning after November 15, 2007. Upon the Company’s
adoption of SFAS No. 159 it did not elect the fair value option for any assets
or liabilities. Therefore this statement had no impact on the
Company’s consolidated financial position, results of operations and cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations—a
replacement of FASB No. 141. SFAS No. 141(R) establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141( R) is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The Company is in the process of determining the impact of
adopting this new accounting principle on its consolidated financial position,
results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
(“ARB”) No. 51. SFAS No. 160 (a) amends ARB No. 51 to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and the
deconsolidation of a subsidiary; (b) changes the way the consolidated income
statement is presented; (c) establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation; (d) requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated; and (e) requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent’s owners and the interests of
the non-controlling owners of a subsidiary. SFAS No. 160 must be applied
prospectively; however, the presentation and disclosure requirements must be
applied retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS No.
160 is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. The Company is in the process of
determining the impact of adopting this new accounting principle on its
consolidated financial position, results of operations and cash
flows.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The statement amends SFAS No. 133 and requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. The
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company is in the process of determining the impact
of adopting this new accounting principle on its consolidated financial
position, results of operations and cash flows.
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under FASB Statement No. 142 and the period of expected cash
flows used to measure the fair value of the asset under FASB Statement No. 141
(Revised 2007), Business
Combinations, and other U.S. generally accepted accounting principles
(GAAP). This FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The Company is in the process of
determining the impact of adopting this new accounting position on its
consolidated financial position, results of operations and cash
flows.
3. FAIR
VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurement, which
provides a framework for measuring fair value under accounting principles
generally accepted in the United States of America. The adoption of
this statement had an immaterial impact on our financial
statements. The Company also adopted the deferral provisions of FSP
SFAS No. 157-2, which delays the effective date of SFAS No. 157 for all
nonrecurring fair value measurements of non-financial assets and liabilities
until fiscal years beginning after November 15, 2008.
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 also
expands disclosures about instruments measured at fair value and establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used
to measure fair value:
Level 1 –
Quoted prices for identical assets and liabilities in active
markets;
Level 2 –
Quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not
active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets;
and
Level 3 –
Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
The
Company designates the cash equivalents as Level 1, as they are Money Market
accounts backed by Treasury Bills. As of March 29, 2008, and December
29, 2007, our assets measured at fair value on a recurring basis were as
follows:
(in
millions)
|
|
March 29, 2008
|
|
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
Equivalents
|
|
$ |
14.3 |
|
|
$ |
14.3 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
December 29, 2007
|
|
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
Equivalents
|
|
$ |
36.2 |
|
|
$ |
36.2 |
|
|
$ |
- |
|
|
$ |
- |
|
4. INVESTMENTS
– SECURITIES
As of
March 29, 2008 and December 29, 2007 the Company held no investments in
financial securities. Income generated from investments held during
first quarter ended March 29, 2008 was recorded as “Other income” in the
statement of income. Cash paid for these securities and proceeds from
the sale of these securities were included in the “Cash flows from investing
activities” section of the cash flows statements.
5. 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 $7.2 million, and $6.9 million as of March 29, 2008,
and December 29, 2007, respectively. The Company’s proportionate
share of Pioneer Pump, Inc. earnings, included in “Other income” in the
Company’s statements of income, was $0.2 million and $0.1 million, for the first
quarter ended March 29, 2008 and March 31, 2007, respectively.
6.
INTANGIBLE ASSETS AND GOODWILL
The
carrying amounts of the Company’s intangible assets are as follows:
(In
millions)
|
|
March 29, 2008
|
|
|
December 29, 2007
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
6.3 |
|
|
$ |
(3.4 |
) |
|
$ |
6.3 |
|
|
$ |
(3.3 |
) |
Supply
agreements
|
|
|
7.2 |
|
|
|
(5.2 |
) |
|
|
7.2 |
|
|
|
(5.0 |
) |
Technology
|
|
|
6.6 |
|
|
|
(0.9 |
) |
|
|
6.1 |
|
|
|
(0.8 |
) |
Customer
relationships
|
|
|
49.6 |
|
|
|
(3.8 |
) |
|
|
48.3 |
|
|
|
(2.8 |
) |
Other
|
|
|
2.3 |
|
|
|
(2.1 |
) |
|
|
2.1 |
|
|
|
(2.0 |
) |
Total
|
|
$ |
72.0 |
|
|
$ |
(15.4 |
) |
|
$ |
70.0 |
|
|
$ |
(13.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
10.9 |
|
|
|
- |
|
|
|
10.9 |
|
|
|
- |
|
Total
intangibles
|
|
$ |
82.9 |
|
|
$ |
(15.4 |
) |
|
$ |
80.9 |
|
|
$ |
(13.9 |
) |
Amortization
expense related to intangible assets for the first quarters ended March 29, 2008
and March 31, 2007 was $1.3 million and $0.7 million, respectively.
Amortization
expense for each of the five succeeding years is projected as
follows:
(In
millions)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
$ |
4.8 |
|
|
$ |
4.6 |
|
|
$ |
4.5 |
|
|
$ |
4.4 |
|
|
$ |
4.0 |
|
The
change in the carrying amount of goodwill for the first quarter ended March 29,
2008, is as follows:
(In
millions)
|
|
Water
|
|
|
Fueling
|
|
|
|
|
|
|
Systems
|
|
|
Systems
|
|
|
Consolidated
|
|
Balance
as of December 29, 2007
|
|
$ |
92.9 |
|
|
$ |
47.1 |
|
|
$ |
140.0 |
|
Increase
in goodwill acquired
|
|
|
32.6 |
|
|
|
- |
|
|
|
32.6 |
|
Purchase
accounting adjustments
|
|
|
(1.7 |
) |
|
|
1.0 |
|
|
|
(0.7 |
) |
Foreign
currency translation
|
|
|
0.7 |
|
|
|
- |
|
|
|
0.7 |
|
Balance
as of March 29, 2008
|
|
$ |
124.5 |
|
|
$ |
48.1 |
|
|
$ |
172.6 |
|
The
acquired goodwill in the Water Systems segment was related to the Company’s
acquisition of Industrias Schneider SA, in first quarter 2008.
7.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans – As of March 29, 2008, the Company maintained three domestic
pension plans and one German pension plan. The Company uses a
December 31 measurement date for its plans.
The
following table sets forth aggregated net periodic benefit cost for the first
quarter ended March 29, 2008 and March 31, 2007:
(In
millions)
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
First
Quarter Ended
|
|
|
First
Quarter Ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1.0 |
|
|
$ |
1.2 |
|
|
$ |
- |
|
|
$ |
0.1 |
|
Interest
cost
|
|
|
2.2 |
|
|
|
2.5 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Expected
return on assets
|
|
|
(2.7 |
) |
|
|
(3.1 |
) |
|
|
- |
|
|
|
- |
|
Obligation/asset
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
Loss
|
|
|
. - |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Prior
service cost
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
- |
|
|
|
- |
|
Settlement
cost
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
net periodic benefit cost
|
|
$ |
0.9 |
|
|
$ |
1.0 |
|
|
$ |
0.3 |
|
|
$ |
0.4 |
|
As of
March 29, 2008, the Company made contributions to the plans of $1.5
million.
8. INCOME
TAXES
The
effective tax rate on income before income taxes in 2008 and 2007 varies from
the United States statutory rate of 35 percent primarily due to the effects of
state and foreign income taxes net of federal tax benefits.
9.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
As of the
beginning of fiscal year 2008, the Company had unrecognized tax benefits of $2.0
million, excluding accrued interest and penalties. The unrecognized
tax benefits were reduced by $0.2 million for state income tax liabilities based
on an evaluation during the first quarter of 2008. The Company had
unrecognized tax benefits, as of March 29, 2008, of $1.8 million. If
recognized, the effective tax rate would be affected by the net unrecognized tax
benefits of $1.2 million, which is net of a federal benefit of state tax of $0.6
million.
The
Company recognizes interest and penalties related to unrecognized tax benefits
as tax expense. The Company has accrued approximately $0.2 million for interest
and penalties as of March 29, 2008. Interest and penalties recorded during the
first quarter ended March 29, 2008 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 2004.
10.
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 March
29, 2008 and December 29, 2007. The Company had $45 million of
outstanding borrowings under the Agreement at March 29, 2008. The
Company had no outstanding borrowings at December 29, 2007.
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 March 29, 2008 and December
29, 2007.
The
Company also has certain overdraft facilities at its foreign subsidiaries, of
which none were outstanding at March 29, 2008 and at December 29,
2007.
Long-term
debt consisted of:
(In
millions)
|
|
March
29,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
Prudential
Agreement - - 5.79 percent
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Prudential
Agreement - - 6.31 percent, principal payments of $10.0 million due in
November 2008 ($3.5 million denominated in JPY at 3/29/08)
|
|
$ |
10.0 |
|
|
$ |
10.0 |
|
Capital
leases
|
|
|
2.0 |
|
|
|
0.9 |
|
Other
|
|
|
0.8 |
|
|
|
0.8 |
|
Agreement
- - average rate for first quarter 2008 was 4.5 percent
based
|
|
|
|
|
|
|
|
|
on
the London Interbank Offered Rates plus an interest spread
|
|
|
45.0 |
|
|
|
- |
|
|
|
|
207.8 |
|
|
|
161.7 |
|
Less
current maturities
|
|
|
(55.6 |
) |
|
|
(10.4 |
) |
Long-term
debt:
|
|
$ |
152.2 |
|
|
$ |
151.3 |
|
The
following debt payments are expected to be paid in accordance with the following
schedule:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
More than 5 years
|
|
Debt
|
|
$ |
205.8 |
|
|
$ |
55.0 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
150.8 |
|
Capital
leases
|
|
|
2.0 |
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
207.8 |
|
|
$ |
55.6 |
|
|
$ |
0.8 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
- |
|
|
$ |
150.8 |
|
11.
EARNINGS PER SHARE
Following
is the computation of basic and diluted earnings per share:
(In
millions, except per share amounts)
|
|
First Quarter Ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
Net
income
|
|
$ |
8.1 |
|
|
$ |
4.9 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.0 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.3 |
|
|
|
23.5 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.35 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.35 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options price range – low
|
|
$ |
32.19 |
|
|
$ |
44.51 |
|
Anti-dilutive
stock options price range – high
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
|
|
|
|
|
|
|
|
|
12. OTHER
COMPREHENSIVE INCOME
Comprehensive
income is as follows:
(In
millions)
|
|
First Quarter Ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
8.1 |
|
|
$ |
4.9 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
4.3 |
|
|
|
0.4 |
|
Pension
liability adjustment, net of tax
|
|
|
0.2 |
|
|
|
0.6 |
|
Comprehensive
income, net of tax
|
|
$ |
12.6 |
|
|
$ |
5.9 |
|
Accumulated
other comprehensive income consists of the following:
(In
millions)
|
|
March 29,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
Cumulative
foreign currency translation adjustments
|
|
$ |
31.5 |
|
|
$ |
27.2 |
|
Pension
liability adjustment, net of tax
|
|
|
(2.5 |
) |
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
29.0 |
|
|
$ |
24.5 |
|
13. SEGMENT
INFORMATION
Financial
information by reportable business segment is included in the following
summary:
(In
millions)
|
|
March
29,
2008
|
|
|
March
31, 2007
|
|
|
March
29, 2008
|
|
|
March
31, 2007
|
|
|
|
Net
sales to external customers
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$ |
136.7 |
|
|
$ |
100.6 |
|
|
$ |
15.0 |
|
|
$ |
11.2 |
|
Fueling
Systems
|
|
|
39.3 |
|
|
|
29.9 |
|
|
|
9.0 |
|
|
|
4.6 |
|
Other
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(8.9 |
) |
|
|
(7.5 |
) |
Consolidated
|
|
$ |
176.0 |
|
|
$ |
130.5 |
|
|
$ |
15.1 |
|
|
$ |
8.3 |
|
|
|
March
29,
2008
|
|
|
December
29,
2007
|
|
|
|
Total
assets
|
|
Water
Systems
|
|
$ |
479.3 |
|
|
$ |
398.6 |
|
Fueling
Systems
|
|
|
210.4 |
|
|
|
203.1 |
|
Other
|
|
|
29.1 |
|
|
|
60.5 |
|
Consolidated
|
|
$ |
718.8 |
|
|
$ |
662.2 |
|
Cash is
the major asset group in “Other” of total assets.
14. CONTINGENCIES
AND COMMITMENTS
At March
29, 2008, the Company had $1.4 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 first quarter ended March
29, 2008 is as follows:
(In
millions)
|
|
|
|
|
|
March 29, 2008
|
|
Balance
at beginning of the year
|
|
$ |
9.7 |
|
Accruals
related to product warranties
|
|
|
2.2 |
|
Reductions
for payments made
|
|
|
(2.1 |
) |
Balance
at end of period
|
|
$ |
9.8 |
|
15.
STOCK-BASED COMPENSATION
The
Company has authorized stock option grants to purchase common stock and common
stock awards to employees and non-employee directors of the Company and its
subsidiaries under two stock plans. The plans and the original number of
authorized shares available for grant 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
|
Franklin
Electric Co., Inc. Stock Plan - Awards
|
150,000
|
Stock Option
Grants
Under
each of the above plans, the exercise price of each option equals the market
price of the Company’s common stock on the date of grant and the options expire
ten years after the date of the grant. Generally, options granted to
non-employee 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 owned
more than six months, having a fair market value at the time of exercise equal
to the aggregate option price and/or the applicable tax
withholdings.
The fair
value of each option award, both before and after the adoption of FASB 123(R),
is estimated on the date of grant using the Black-Scholes option valuation model
with a single approach and amortized using a straight-line attribution method
over the option’s vesting period. Options granted to retirement
eligible employees were immediately expensed. The Company uses historical data
to estimate the expected volatility of its stock; the weighted average expected
life, the period of time options granted are expected to be outstanding; and its
dividend yield. The risk-free rates for periods within the contractual life of
the option are based on the U.S. Treasury yield curve in effect at the time of
the grant.
The
assumptions used for the Black-Scholes model to determine the fair value of
options granted during the first quarter ended March 29, 2008 and March 31, 2007
are as follows:
|
March 29, 2008
|
March 31, 2007
|
Risk-free
interest rate
|
2.91
- 3.15%
|
4.74
– 4.78%
|
Dividend
yield
|
1.11
- 1.12%
|
0.65
– 0.67%
|
Weighted-average
dividend yield
|
1.119%
|
0.653%
|
Volatility
factor
|
0.3552
– 0.3714
|
0.3529
– 0.3701
|
Weighted-average
volatility
|
0.3691
|
0.3554
|
Expected
term
|
5 –
6 years
|
5.3
– 6.2 years
|
Forfeiture
rate
|
3.61%
|
4.18%
|
A summary
of the Company’s stock option plans activity and related information, for the
first quarters ended March 29, 2008 and March 31, 2007 follows:
(shares
in thousands)
|
|
March 29, 2008
|
|
|
March 31, 2007
|
|
Stock Options
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
beginning of period
|
|
|
1,252 |
|
|
$ |
29.99 |
|
|
|
1,398 |
|
|
$ |
26.65 |
|
Granted
|
|
|
337 |
|
|
|
32.21 |
|
|
|
131 |
|
|
|
48.87 |
|
Exercised
|
|
|
(10 |
) |
|
|
17.63 |
|
|
|
(110 |
) |
|
|
20.60 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
(5 |
) |
|
|
33.32 |
|
Outstanding
end of period
|
|
|
1,579 |
|
|
$ |
30.54 |
|
|
|
1,414 |
|
|
$ |
29.15 |
|
Expected
to vest after applying forfeiture rate
|
|
|
1,546 |
|
|
$ |
30.42 |
|
|
|
1,369 |
|
|
$ |
28.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
1,025 |
|
|
$ |
27.01 |
|
|
|
911 |
|
|
$ |
24.06 |
|
A summary
of the weighted average remaining contractual term and aggregate intrinsic value
for the first quarter of 2008 is as follows:
Stock Options
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
end of period
|
|
|
6.3 |
|
|
$ |
10,422 |
|
Expected
to vest after applying forfeiture rate
|
|
|
6.2 |
|
|
$ |
10,367 |
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
4.3 |
|
|
$ |
9,583 |
|
There
were 336,500 options granted during the first quarter. The total intrinsic value
of options exercised during the first quarter March 29, 2008 and March 31, 2007
was $0.2 million and $3.2 million, respectively. There were no
share-based liabilities paid during the first quarter 2008.
A summary
of the Company’s nonvested shares activity and related information, for the
first quarter ended March 29, 2008 and March 31, 2007 follows:
(shares
in thousands)
|
|
March 29, 2008
|
|
|
March 31, 2007
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Nonvested
at beginning of period
|
|
|
416 |
|
|
$ |
39.99 |
|
|
|
556 |
|
|
$ |
33.95 |
|
Granted
|
|
|
337 |
|
|
|
32.21 |
|
|
|
131 |
|
|
|
48.87 |
|
Vested
|
|
|
(199 |
) |
|
|
34.93 |
|
|
|
(179 |
) |
|
|
32.48 |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
(6 |
) |
|
|
33.32 |
|
Nonvested
at end of period
|
|
|
554 |
|
|
$ |
37.08 |
|
|
|
502 |
|
|
$ |
38.37 |
|
As of
March 29, 2008, there was $6.1 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
3.0 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, with vesting for
employee awards or grants 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 2007 and 2008, while all other stock awards were
expensed in a straight line amortization method over the 4 or 5
years.
A summary
of the Company’s restricted stock award activity and related information, for
the first quarter ended March 29, 2008 and March 31, 2007 follows:
(shares
in thousands)
|
|
March 29, 2008
|
|
|
March 31, 2007
|
|
Nonvested Stock Awards
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Nonvested
at beginning of period
|
|
|
61 |
|
|
$ |
45.24 |
|
|
|
40 |
|
|
$ |
43.39 |
|
Awarded
|
|
|
- |
|
|
|
- |
|
|
|
23 |
|
|
|
48.87 |
|
Vested
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Nonvested
at end of period
|
|
|
61 |
|
|
$ |
45.24 |
|
|
|
63 |
|
|
$ |
45.42 |
|
As of
March 29, 2008, there was $1.4 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
2.2 years.
16. STOCK
REPURCHASE
In April
of 2007, the Company’s Board of Directors increased the number of shares
authorized for repurchase to 2.3 million. Share repurchases are
considered on an opportunistic basis and could therefore range between 0.0 and
1.9 million shares, the remaining shares authorized. During the first
quarter 2008, the Company repurchased 0.2 million shares for $7.8
million.
17.
RESTRUCTURING
During
the first quarter of 2008, the Company completed Phase 2 of its Global
Manufacturing Realignment Program (the “Realignment Program”). Phase
2 of the Realignment Program included 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 included 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 first quarter ended March 29, 2008 were approximately $0.1
million (pre-tax). As of March 29, 2008 and December 29, 2007, there
were no restructuring reserves in the Company’s consolidated balance
sheet.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Sales for
the first quarter of 2008 were a record and up from the same quarter last year.
The increase in sales was primarily related to sales from acquisitions. Growth
in the Water Systems segment occurred in spite of the drop in housing starts in
the United States as pump product lines continued to gain market share. Fueling
Systems business benefited from high demand for vapor recovery systems in
California as gas stations upgrade emissions control systems to be in compliance
with clean air regulatory standards. Earnings
increased in the first quarter primarily due to the increased
sales.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
Q1
2008 |
|
|
|
Q1
2007 |
|
|
|
2008
v 2007 |
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$ |
136.7 |
|
|
$ |
100.6 |
|
|
$ |
36.1 |
|
Fueling
Systems
|
|
$ |
39.3 |
|
|
$ |
29.9 |
|
|
$ |
9.4 |
|
Other
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Consolidated
|
|
$ |
176.0 |
|
|
$ |
130.5 |
|
|
$ |
45.5 |
|
Net sales
for the first quarter of 2008 were $176.0 million, an increase of $45.5 million
or 35 percent compared to 2007 first quarter sales of $130.5
million. First quarter sales attributed to acquisitions were $28.7
million, of which $4.9 million was post-acquisition, organic growth within the
acquired companies. The Company’s total organic growth was about 17 percent for
the quarter, including organic growth achieved by acquired companies and $7.0
million or 5 percent growth from foreign exchange rate changes. Changes in
selling price increased net sales by about 3 percent. In response to rising
commodity costs (e.g.,
aluminum, copper and steel), the Company announced market price increases for
most of its product lines effective during the first and second quarters of
2008.
Net
Sales-Water Systems
Water
Systems sales worldwide were $136.7 million, up $36.1 million or 36 percent for
the first quarter of 2008 compared to the same period for 2007. Water
Systems’ total organic growth was about 12 percent for the quarter. The growth
was primarily attributable to increased sales in the United States, Canada,
Latin America and the Middle East. During the first quarter, sales in
developing regions represented about 35 percent of our total Water Systems
revenues and grew organically by approximately 14 percent.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $39.3 million, an increase of approximately 31
percent for the first quarter of 2008 compared to the same period for
2007. Fueling Systems’ sales growth was organic and driven by
increased sales of vapor recovery and electronic fuel management systems in both
California and international markets.
Cost
of Sales
Cost of
sales as a percent of net sales for the first quarter of 2008 and 2007 was 70.8
percent and 70.2 percent, respectively. Cost of sales as a percent of net sales
increased in the first quarter of 2008 from 2007 primarily as a result of
reduced facility utilization consistent with management’s plan to reduce
finished goods inventory and increase inventory turns over the course of the
year. The Company’s gross profit margin for the first quarter of 2008
and 2007 was 29.2 percent and 29.8 percent, respectively. The
Company’s gross profit increased $12.5 million to $51.5 million compared to the
same period in the prior year primarily due to acquisitions and volume, which
was approximately $15.1 million, and sales price increases of about $4.0
million. Reduced factory utilization, noted above, and other fixed
costs reduced the gross profit by about $4.1 million. Also reducing
gross profit in the first quarter of 2008 were product costs of approximately
$0.6 million related to a retrofit program for a third party supplied component
part in the nozzle of the Enhanced Vapor Recovery Systems installed in
California fueling stations. The retrofit program, which has had a
total cost of about $1.0 million, has been substantially
completed.
Restructuring
Expenses
During
the first quarter of 2007, the Company initiated Phase 2 of its Global
Manufacturing Realignment Program. Phase 2 of the Realignment Program included
expanding facilities in low-cost regions and shifting production out of higher
cost manufacturing facilities. During the first quarter 2008, having
finished construction of the new pump plant in Linares, Mexico and the
consolidation of other manufacturing facilities, the Company completed Phase 2 of the
Global Manufacturing Realignment Program. In total, this phase
included severance and equipment relocation costs of $4.0 million pre-tax, with
$3.9 million in 2007 and $0.1 million in the first quarter 2008. As
previously disclosed, Phase 1 of the Realignment Program, which was completed in
December 2005, resulted in $7.5 million of pre-tax restructuring
expenses.
Selling,
General and Administrative (“SG&A”)
Selling,
general, and administrative expenses increased by $6.9 million in the first
quarter of 2008 compared to first quarter last year. The acquisitions of Pump
Brands (South Africa), the pump division of Monarch Industries (Canada) and
Schneider Motobombas (Brazil) added approximately $6.1 million to selling,
general and administrative expenses for the first quarter of 2008.
Operating
Income
Operating
income was a record high in the first quarter 2008.
|
|
|
Q1
2008 |
|
|
|
Q1
2007 |
|
|
|
2008
v 2007 |
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$ |
15.0 |
|
|
$ |
11.2 |
|
|
$ |
3.8 |
|
Fueling
Systems
|
|
$ |
9.0 |
|
|
$ |
4.5 |
|
|
$ |
4.5 |
|
Other
|
|
$ |
(8.9 |
) |
|
$ |
(7.5 |
) |
|
$ |
(1.4 |
) |
Consolidated
|
|
$ |
15.1 |
|
|
$ |
8.2 |
|
|
$ |
6.9 |
|
Operating
Income-Water Systems
Water
Systems operating income increased on higher sales volume and accretive income
from acquisitions. Other factors affecting the operating income for
the Water Systems segment were higher material and freight costs offset by fixed
cost spending reductions.
Operating
Income-Fueling Systems
Fueling
Systems operating income improved primarily as a result of sales volume
increases.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. General and administrative expense increases were primarily
due to the realignment of general and administrative expenses of acquired
companies within the Water Systems segment into the corporate
structure.
Interest
Expense
Interest
expense increased by $1.4 million due to the debt incurred to fund acquisitions
during the quarter and the related growth in working capital associated with
acquisitions in the second and third quarters of 2007.
Other
Income or Expense
Included
in other income for the first quarter of 2008 and 2007 was interest income of
$0.4 million and $0.3 million, respectively, primarily derived from the
investment of cash balances in short-term U.S. treasury and agency
securities. Also included in other income for the first quarter of
2008 and same quarter last year was income from equity investments of $0.2
million and $0.1 million, respectively.
Foreign
Exchange
Foreign
currency-based transactions produced a loss for the first quarter of 2008 of
about $0.3 million primarily due to euro rate changes relative to other
currencies in Europe and the weakening U.S. dollar. Foreign currency-based
transactions produced a gain for the same quarter of 2007 of $0.2 million
primarily due to euro rate changes relative to the U.S. dollar.
Income
Taxes
The
provision for income taxes in the first quarter of 2008 and 2007 was $4.4
million and $2.7 million, respectively. The effective tax rate for the first
quarter of 2008 was 35.3 percent after the adjustment to the unrecognized tax
benefits during the quarter. The projected effective tax rate for the balance of
2008 is 36.3 percent, an increase from the prior year’s rate of 35.0
percent. The increase is primarily due to the loss of the research
and development tax credit which has not been renewed by Congress at this
time.
Net
Income
Net
income for the first quarter of 2008 was $8.1 million, or $0.35 per diluted
share, compared to 2007 first quarter net income of $4.9 million or $0.21 per
diluted share.
CAPITAL RESOURCES AND
LIQUIDITY
Net cash
out-flows from operating activities were $25.3 million and $47.1 million in the
first quarters 2008 and 2007, respectively. The primary source of cash from
operations was earnings of $8.1 million. The operating cash flows used in 2008
were primarily related to increases in receivables. The increase in receivables
was primarily due to the strong sales volume in the final weeks of the quarter
and the issuance of customer discounts that were unrealized in the fourth
quarter of 2007 accounts receivable balance. The operating cash flow
generated for the same quarter in 2007 was primarily related to net income of
$4.9 million. In 2007, accounts receivable increased approximately $18.0 million
primarily due to sales growth, while inventories increased about $20.7 million,
primarily in finished goods.
Net cash
flows used in investing activities were $42.7 million and $3.3 million in the first
quarter of 2008 and 2007, respectively. In 2008, the Company paid an aggregate
of $35.5 million for acquisitions, net of cash acquired, primarily for Schneider
Motobambas in Brazil. Uses of cash in 2008 and 2007 were also for the purchase
of property, plant and equipment, of $6.8 million and $4.6 million,
respectively.
Cash
flows from financing activities were $34.5 million and $51.0 million in the
first quarter of 2008 and 2007, respectively. The Company received proceeds from
debt of $45.0 million and $50.0 million in the first quarter 2008 and 2007,
respectively. The Company paid $2.8 million and $2.5 million in
dividends on the Company’s common stock in the first quarter of 2008 and 2007,
respectively. In 2008, another principal use of cash was purchases of Company
common stock under the Company’s repurchase program. During the first quarter of
2008, the Company repurchased 235,000 shares of its common stock for $7.8
million. There were no stock repurchases in the first quarter of
2007.
Cash and
cash equivalents at the end of the first quarter of 2008 were $33.6 million
compared to $34.5 million at the end of the first quarter of 2007. The Company’s
working capital and current ratio decreased in the quarter due to reduced cash
on hand and an increase in the current portion of 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
Company had borrowings under the Agreement of $45.0 million at March 29, 2008
and none at December 29, 2007. The remaining $75.0 million is
unrestricted and available for use.
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. The notes have 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 March 29, 2008 or at December 29,
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 during the
quarter.
At March
29, 2008, the Company had $1.4 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 and existing debt, and
finance business growth.
FACTORS THAT MAY AFFECT
FUTURE RESULTS
Any
forward-looking statements contained herein, including those relating to the
Company’s financial results, business goals and sales growth, involve risks and
uncertainties, included but not limited to risks and uncertainties with respect
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 which are
detailed in the Company’s Securities and Exchange Commission filings, included
in Part 1, Item 1A, of the Company’s Annual Report on Form 10-K for the fiscal
year ended December 29, 2007, Exhibit 99.1 attached thereto. 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 currently available, and
the Company assumes no obligation to update any forward-looking
statements.
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 first 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
were 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 29,
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
|
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 first quarter of
2008, the Company repurchased 235,000 shares for $7.8 million. The
maximum number of shares that may still be purchased under the Company plan is
1,877,400. All repurchased shares were retired.
The
following table shows certain information related to the Company’s repurchases
of common stock for the three months ended March 29, 2008, under the Company’s
stock repurchase program.
Period
|
|
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
|
|
December
30-February 2
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,112,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
3-March 1
|
|
|
55,000 |
|
|
$ |
32.48 |
|
|
|
55,000 |
|
|
|
2,057,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
2-March 29
|
|
|
180,000 |
|
|
$ |
33.48 |
|
|
|
180,000 |
|
|
|
1,877,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
235,000 |
|
|
$ |
33.25 |
|
|
|
235,000 |
|
|
|
1,877,400 |
|
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
The 2008
Annual Meeting of Shareholders of the Company was held on May 2, 2008
to: 1) elect three directors for terms expiring at the 2011 Annual
Meeting of Shareholders; and 2) ratify the appointment of Deloitte & Touche
LLP as the Company’s independent registered public accounting firm for the 2008
fiscal year. Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Exchange Act of 1934, and there was no
solicitation in opposition to the Board’s nominees for director.
All of
the matters submitted to a vote of shareholders were approved, as shown by the
following voting results:
1)
Elect three directors for terms expiring at the 2011 Annual Meeting of
Shareholders.
|
|
|
|
Nominees for Director
|
For
|
Withhold Authority
|
David
A. Brown
|
19,527,221
|
1,246,548
|
David
T. Roberts
|
19,814,171
|
959,598
|
Howard
B. Witt
|
19,761,117
|
1,012,652
|
2)
Ratification of Deloitte & Touche LLP as the Company’s independent
registered public accounting firm for the 2008 fiscal
year.
|
|
|
|
For
|
Against
|
Abstain
|
20,673,590
|
85,644
|
14,535
|
Total
shares represented at the Annual Meeting in person or by proxy were 20,773,769
of a total of 23,091,325 shares outstanding as of the February 29, 2008 record
date. They represented 90.0 percent of the Company common stock and
constituted a quorum.
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:
May 8, 2008
|
|
By
|
/s/ R. Scott Trumbull
|
|
|
|
R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
May 8, 2008
|
|
By
|
/s/ John J. Haines
|
|
|
|
John
J. Haines, 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 29, 2008
|
|
Number
|
Description
|
|
|
10.1
|
Employment
Agreement dated April 1, 2008 between the Company and John J. Haines
(incorporated herein by reference to Exhibit 10.1 of the Company’s Form
8-K dated April 1, 2008)
|
|
|
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
|
|
|