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
30, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____ to _____
Commission
file number 0-362
FRANKLIN
ELECTRIC CO., INC.
(Exact
name of registrant as specified in its charter)
Indiana
|
|
35-0827455
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
400
East Spring Street
|
|
|
Bluffton,
Indiana
|
|
46714
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(260)
824-2900
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months, and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer x
|
Accelerated
Filer o
|
Non-Accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
Outstanding
at
|
Class
of Common Stock
|
|
September
30, 2006
|
$.10
par value
|
|
22,969,388
shares
|
FRANKLIN
ELECTRIC CO., INC.
Index
|
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
Number
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2006 and December
31,
2005
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Third Quarter and Nine
Months
Ended September 30, 2006 and October 1, 2005
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statements Of Cash Flows for the Nine Months Ended
September
30, 2006 and October 1, 2005
|
|
5
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6-14
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
15-16
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
17
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
17
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
|
Item
1A
|
Risk
Factors
|
|
18
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
18
|
|
|
|
|
Item
6.
|
Exhibits
|
|
18
|
|
|
|
|
Signatures
|
|
|
19
|
|
|
|
|
Exhibit
Index
|
|
|
20
|
|
|
|
|
Exhibits
|
|
|
21-93
|
PART
I.
FINANCIAL INFORMATION
Item
1. Financial Statements
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
29,996
|
|
$
|
52,136
|
|
Investments
|
|
|
-
|
|
|
35,988
|
|
Receivables,
less allowances of $2,767 and $2,204, respectively
|
|
|
53,178
|
|
|
30,165
|
|
Inventories
|
|
|
110,338
|
|
|
70,381
|
|
Other
current assets (including deferred income taxes of $12,258 and
$10,744,
respectively)
|
|
|
18,077
|
|
|
14,350
|
|
Total
current assets
|
|
|
211,589
|
|
|
203,020
|
|
Property,
plant and equipment, net
|
|
|
112,705
|
|
|
95,732
|
|
Deferred
and other assets (including deferred income taxes of $783 and $0,
respectively)
|
|
|
21,572
|
|
|
23,028
|
|
Goodwill
|
|
|
168,512
|
|
|
57,982
|
|
Total
assets
|
|
$
|
514,378
|
|
$
|
379,762
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and short-term borrowings
|
|
$
|
11,298
|
|
$
|
1,303
|
|
Accounts
payable
|
|
|
29,238
|
|
|
26,409
|
|
Accrued
expenses
|
|
|
45,333
|
|
|
34,223
|
|
Income
taxes
|
|
|
4,757
|
|
|
2,087
|
|
Total
current liabilities
|
|
|
90,626
|
|
|
64,022
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
62,122
|
|
|
12,324
|
|
Deferred
income taxes
|
|
|
4,784
|
|
|
4,296
|
|
Employee
benefit plan obligations
|
|
|
26,823
|
|
|
25,830
|
|
Other
long-term liabilities
|
|
|
5,536
|
|
|
5,728
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
Common
shares (45,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
outstanding
(22,969
and 22,485, respectively)
|
|
|
2,297
|
|
|
2,249
|
|
Additional
capital
|
|
|
92,813
|
|
|
74,717
|
|
Retained
earnings
|
|
|
225,235
|
|
|
190,381
|
|
Loan
to ESOP Trust
|
|
|
(200
|
)
|
|
(432
|
)
|
Accumulated
other comprehensive income
|
|
|
4,342
|
|
|
647
|
|
Total
shareowners' equity
|
|
|
324,487
|
|
|
267,562
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' equity
|
|
$
|
514,378
|
|
$
|
379,762
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In
thousands, except per share amounts)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
165,652
|
|
$
|
119,043
|
|
$
|
439,301
|
|
$
|
325,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
110,219
|
|
|
78,720
|
|
|
293,509
|
|
|
217,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
55,433
|
|
|
40,323
|
|
|
145,792
|
|
|
107,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and administrative expenses
|
|
|
28,972
|
|
|
19,072
|
|
|
78,213
|
|
|
55,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
expense
|
|
|
-
|
|
|
1,039
|
|
|
-
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
26,461
|
|
|
20,212
|
|
|
67,579
|
|
|
50,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,093
|
)
|
|
(198
|
)
|
|
(2,362
|
)
|
|
(553
|
)
|
Other
income, net
|
|
|
329
|
|
|
204
|
|
|
1,389
|
|
|
545
|
|
Foreign
exchange loss
|
|
|
173
|
|
|
239
|
|
|
47
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
25,870
|
|
|
20,457
|
|
|
66,653
|
|
|
50,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
9,087
|
|
|
7,211
|
|
|
23,729
|
|
|
17,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16,783
|
|
$
|
13,246
|
|
$
|
42,924
|
|
$
|
32,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.73
|
|
$
|
.59
|
|
$
|
1.88
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
.72
|
|
$
|
.57
|
|
$
|
1.84
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share
|
|
$
|
.11
|
|
$
|
.10
|
|
$
|
.32
|
|
$
|
.28
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
October
1,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
42,924
|
|
$
|
32,602
|
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,657
|
|
|
11,581
|
|
Stock-based
compensation
|
|
|
2,108
|
|
|
-
|
|
Deferred
income taxes
|
|
|
1,809
|
|
|
616
|
|
Loss/(gain)
on disposals of plant and equipment
|
|
|
(87
|
)
|
|
69
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(4,331
|
)
|
|
(4,057
|
)
|
Inventories
|
|
|
(6,378
|
)
|
|
(10,387
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(2,125
|
)
|
|
(41
|
)
|
Accrued
income taxes
|
|
|
8,156
|
|
|
5,780
|
|
Excess
tax from share-based payment arrangements
|
|
|
(5,683
|
)
|
|
-
|
|
Employee
benefit plan obligations
|
|
|
712
|
|
|
1,215
|
|
Other,
net
|
|
|
(4,065
|
)
|
|
671
|
|
Net
cash flows from operating activities
|
|
|
46,697
|
|
|
38,049
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to plant and equipment
|
|
|
(15,421
|
)
|
|
(10,374
|
)
|
Proceeds
from sale of plant and equipment
|
|
|
323
|
|
|
1,054
|
|
Additions
to deferred and other assets
|
|
|
(293
|
)
|
|
(5,083
|
)
|
Purchases
of securities
|
|
|
(63,500
|
)
|
|
(150,489
|
)
|
Proceeds
from sale of securities
|
|
|
99,488
|
|
|
128,473
|
|
Cash
paid for acquisitions, net of cash acquired
|
|
|
(158,028
|
)
|
|
(8,509
|
)
|
Net
cash flows from investing activities
|
|
|
(137,431
|
)
|
|
(44,928
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Additions
to long-term debt
|
|
|
130,000
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(70,219
|
)
|
|
(213
|
)
|
Proceeds
from issuance of common stock
|
|
|
9,731
|
|
|
11,739
|
|
Excess
tax from share-based payment arrangements
|
|
|
5,683
|
|
|
-
|
|
Purchases
of common stock
|
|
|
(198
|
)
|
|
(12,318
|
)
|
Reduction
of loan to ESOP Trust
|
|
|
232
|
|
|
233
|
|
Dividends
paid
|
|
|
(7,304
|
)
|
|
(6,203
|
)
|
Net
cash flows from financing activities
|
|
|
67,925
|
|
|
(6,762
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
669
|
|
|
(1,567
|
)
|
Net
change in cash and equivalents
|
|
|
(22,140
|
)
|
|
(15,208
|
)
|
Cash
and equivalents at beginning of period
|
|
|
52,136
|
|
|
50,604
|
|
Cash
and equivalents at end of period
|
|
$
|
29,996
|
|
$
|
35,396
|
|
|
|
|
|
|
|
|
|
See
Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1: Condensed Consolidated Financial Statements
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim
financial information and with the instructions to Form 10-Q and Article
10 of
Regulation S-X. Accordingly, they do not include all of the information and
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 ended
September 30, 2006 are not necessarily indicative of the results that may
be
expected for the fiscal year ending December 30, 2006. For further information,
including a description of Franklin Electric's critical accounting policies,
refer to the consolidated financial statements and notes thereto included
in
Franklin Electric Co., Inc.'s annual report on Form 10-K for the year ended
December 31, 2005.
Note
2: Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48 “Accounting For Uncertain
Tax Positions” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109 “Accounting for Income Taxes”.
It
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after
December 15, 2006. The Company is currently evaluating the impact of FIN
48 on
its financial position and results of operations.
In
September 2006, the FASB issued FASB Statement No. 158 “Employers’ Accounting
For Defined Benefit Pension and Other Postretirement Plans”. FASB Statement No.
158 requires a calendar year-end company with publicly traded equity securities
that sponsors a postretirement benefit plan to fully recognize, as an asset
or
liability, the over-funded or under-funded status of its benefit plan(s)
in its
2006 year-end balance sheet. Statement 158 is effective for fiscal years
ending
after December 15, 2006. Statement 158 also requires a company to measure
its
plan assets and benefit obligations as of its year-end balance sheet date.
Currently, an entity is permitted to choose a measurement date up to three
months prior to its year end to measure the plan assets and obligations.
The
provision to require measurement at the entity’s year-end balance sheet date
will be effective for fiscal years ending after December 15, 2008. The Company
is currently evaluating the impact of Statement 158 to its statement of
financial position.
In
September 2006, the FASB issued FASB Statement No. 157 “Fair Value
Measurements”. FASB Statement 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. While the Statement
does not add any new fair value measurements, it does change current practice.
The Company does not expect a material impact on it’s financial position and
results of operations.
Note
3: Acquisitions
During
April 2006, the Company completed its acquisition of all of the outstanding
shares of capital stock of Little Giant Pump Company (“Little Giant”) from
Tecumseh Products Company for a cash purchase price of $121 million, excluding
transaction costs and subject to a final post-closing working capital
adjustment. Transaction costs were approximately $2.0 million and included
in
the purchase accounting calculations under the guidance of FASB Statement
No.
141 “Business Combinations”. Accordingly, a portion of the aggregate purchase
price was allocated to net assets acquired based on preliminary estimated
fair
values. The excess of purchase price over preliminary fair value of the net
assets acquired, $82.6 million, has been recorded as goodwill.
The
acquisition of Little Giant Pump Company supports the Company’s position as a
global supplier of pumping equipment for residential and commercial markets.
Little Giant’s product lines - sump, sewage, effluent, condensate and industrial
submersible pumps - broaden the Company’s pump offering, allowing potential
growth of the Company’s customer base.
Little
Giant’s results of operations are included in the Company’s consolidated
statement of income, from the acquisition date through the third quarter
ended
September 30, 2006.
During
September 2006, the Company acquired Healy Systems, Inc. (“Healy Systems”) in a
stock purchase transaction. The purchase price was approximately $35 million
plus 5 percent of certain Healy Systems product sales over the next five
years,
and is subject to a post closing working capital adjustment. The purchase
price
was allocated to net assets based on preliminary estimated fair values. The
excess of purchase price over fair value of the net assets acquired, $26.8
million, has been recorded as goodwill.
The
acquisition of Healy Systems supports the Company’s position as a global
supplier of fuel pumping equipment. Healy Systems proprietary equipment and
technology provide a cost effective means for addressing one of the most
significant global environmental concerns - gasoline vapor emissions to the
atmosphere. They also address a serious economic issue for our
customers—gasoline losses due to evaporation. In addition, the Healy Systems
product line is complementary to Franklin’s existing fuel management product
offering and will present cross selling opportunities
Healy
Systems is included in the Company’s balance sheet as of September 30,
2006.
Pro
forma Results of Operations
The
following unaudited pro forma statements give effect to the acquisition of
Little Giant Pump Company, by Franklin Electric Co., Inc. The unaudited pro
forma combined condensed statements of operations for the third quarter ended
September 30, 2006 give effect to the acquisition of Little Giant Pump Company
as if the acquisition had occurred at the beginning of the periods reported.
These unaudited pro forma combined condensed financial statements are prepared
for informational purposes only and are not necessarily indicative of actual
results or financial position that would have been achieved had the acquisition
of Little Giant been consummated on the dates indicated and are not necessarily
indicative of future operating results or financial position of the consolidated
companies. The unaudited pro forma combined condensed financial statements
do
not give effect to any cost savings or incremental costs that may result
from
the integration of Franklin Electric Co., Inc. and Little Giant Pump
Company.
FRANKLIN
ELECTRIC CO., INC.
PRO
FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
millions, except per share amounts)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept
30,
|
|
Oct
1,
|
|
Sept
30,
|
|
Oct
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
165.7
|
|
$
|
147.6
|
|
$
|
472.3
|
|
$
|
406.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16.8
|
|
$
|
14.8
|
|
$
|
43.7
|
|
$
|
37.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.73
|
|
$
|
.66
|
|
$
|
1.92
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
.72
|
|
$
|
.64
|
|
$
|
1.87
|
|
$
|
1.60
|
|
Note
4: Investments
As
of
September 30, 2006, the Company held no investments in financial securities.
Income generated from investments held during the first nine months of 2006
was
recorded as other income, net in the Company’s statement of income. Cash paid
for these securities and proceeds from the sale of these securities was included
as part of the “Cash flows from investing activities” section in the Company’s
statements of cash flows.
The
Company holds a 35 percent equity interest, in Pioneer Pump, Inc. which is
accounted for using the equity method and is included as part of “Deferred and
other assets” in the balance sheet. The carrying amount of the investment is
adjusted for the Company’s proportionate share of earnings, losses, and
dividends. At September 30, 2006, the carrying value of the investment was
$6.0
million. At year end December 31, 2005, the carrying value of the investment
was
$6.0 million. Included in other income in the Company’s statement of income for
the third quarter 2006 is its share in Pioneer Pump, Inc.’s net income of $0.2
million and year to date, $0.5 million.
Note
5:
Inventories
Inventories
consist of the following:
(In
millions)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Raw
Materials
|
|
$
|
38.1
|
|
$
|
25.3
|
|
Work
in Process
|
|
|
14.5
|
|
|
10.6
|
|
Finished
Goods
|
|
|
78.5
|
|
|
51.8
|
|
LIFO
Reserve
|
|
|
(20.8
|
)
|
|
(17.3
|
)
|
Total
|
|
$
|
110.3
|
|
$
|
70.4
|
|
Note
6: Property, Plant and Equipment
Property,
plant and equipment, at cost, consist of the following:
(In
millions)
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Land
and Building
|
|
$
|
57.2
|
|
$
|
52.8
|
|
Machinery
and Equipment
|
|
|
191.7
|
|
|
164.9
|
|
|
|
|
248.9
|
|
|
217.7
|
|
|
|
|
|
|
|
|
|
Allowance
for Depreciation
|
|
|
(136.2
|
)
|
|
(122.3
|
)
|
Other
- Held for Sale
|
|
|
-
|
|
|
0.3
|
|
Total
|
|
$
|
112.7
|
|
$
|
95.7
|
|
Note
7: Goodwill and Other Intangible Assets
The
carrying amount of the Company’s intangible assets, which is included in
deferred and other assets include:
|
|
September
30,
|
|
December
31,
|
|
(In
millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Amortized
intangibles
|
|
|
|
|
|
|
|
Patents
|
|
$
|
6.3
|
|
$
|
5.9
|
|
Supply
agreements
|
|
|
10.4
|
|
|
10.0
|
|
Other
|
|
|
4.3
|
|
|
4.2
|
|
Accumulated
amortization
|
|
|
(12.4
|
)
|
|
(10.1
|
)
|
Total
|
|
$
|
8.6
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
168.5
|
|
$
|
58.0
|
|
Goodwill
was increased by $82.6 million due to the acquisition of Little Giant Pump
Company in April 2006 and by $26.8 million due to the acquisition of Healy
Systems, Inc. in September 2006. Other changes in the carrying amount of
goodwill reflect foreign currency fluctuations.
Amortization
expense related to intangible assets for the third quarter ended September
30,
2006 and October 1, 2005, was $0.7 million and $0.4 million respectively.
Amortization expense related to intangible assets for the nine months ended
September 30, 2006 and October 1, 2005, was $1.7 million and $1.1 million
respectively.
Amortization
expense for the next five years is projected as $2.3 million, $2.8 million,
$2.7
million, $2.7 million and $2.6 million for the fiscal years 2006, 2007, 2008,
2009 and 2010, respectively.
Note
8: Employee Benefits
The
following table sets forth aggregated net periodic benefit cost:
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Pension
Benefits
|
|
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept
30,
|
|
Oct
1,
|
|
Sept
30,
|
|
Oct
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
1.2
|
|
$
|
1.0
|
|
$
|
3.4
|
|
$
|
3.0
|
|
Interest
cost
|
|
|
1.9
|
|
|
2.0
|
|
|
6.1
|
|
|
5.9
|
|
Expected
return on assets
|
|
|
(2.6
|
)
|
|
(2.5
|
)
|
|
(7.8
|
)
|
|
(7.8
|
)
|
Amortization
of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)/Loss
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
Prior
service cost
|
|
|
0.4
|
|
|
0.4
|
|
|
1.2
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
0.9
|
|
|
0.9
|
|
|
3.0
|
|
|
2.4
|
|
Settlement
cost
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
0.2
|
|
Total
benefit cost
|
|
$
|
0.9
|
|
$
|
1.0
|
|
$
|
3.0
|
|
$
|
2.6
|
|
|
|
Other
Benefits
|
|
Other
Benefits
|
|
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept
30,
|
|
Oct
1,
|
|
Sept
30,
|
|
Oct
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
0.0
|
|
$
|
0.1
|
|
$
|
0.2
|
|
$
|
0.3
|
|
Interest
cost
|
|
|
0.2
|
|
|
0.2
|
|
|
0.6
|
|
|
0.6
|
|
Amortization
of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation/(asset)
|
|
|
0.2
|
|
|
0.1
|
|
|
0.4
|
|
|
0.4
|
|
Prior
service costs
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Loss/(Gain)
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
0.5
|
|
|
0.5
|
|
|
1.5
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefit cost
|
|
$
|
0.5
|
|
$
|
0.5
|
|
$
|
1.5
|
|
$
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
September 30, 2006 the Company made contributions to the plans of $1.9 million
and expects to make additional contributions of $0.7 million in 2006.
Note
9: Tax Rates
The
effective tax rate on income before income taxes in 2006 and 2005 varies
from
the United States statutory rate of 35 percent primarily due to the foreign
income exclusion and R & D credits and to the effects of state and foreign
income taxes net of federal tax benefits.
Note
10: Debt
In
September 2004, the Company entered into an unsecured, 60 month $80.0 million
revolving credit agreement (the “Agreement”). The Agreement includes a facility
fee of one-tenth of one percent on the committed amount. In June 2006, the
Company amended the agreement to increase the committed amount to $120 million.
As of September 30, 2006, the Company had $60.0 million of outstanding
borrowings under the agreement.
Long-term
debt consisted of:
(In
millions)
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
$60.0
million of outstanding borrowings of $120.0 million revolving credit
agreement
|
|
$
|
60.0
|
|
$
|
-
|
|
Insurance
Company - - 6.31 percent, principal payments of $1.0 million due
in annual
installments, with a balloon payment of $10.0 in 2008 ($1.9 denominated
in
JPY at 12/31/05)
|
|
|
12.1
|
|
|
12.3
|
|
Capital
Leases
|
|
|
1.3
|
|
|
1.3
|
|
|
|
|
73.4
|
|
|
13.6
|
|
Less
Current Maturities
|
|
|
(11.3
|
)
|
|
(1.3
|
)
|
|
|
$
|
62.1
|
|
$
|
12.3
|
|
Note
11: Shareowners' Equity
The
Company had 22,969,388 shares of common stock (45,000,000 shares authorized,
$.10 par value) outstanding as of September 30, 2006.
Year
to
date 2006, in the first quarter ended April 1, 2006, pursuant to a stock
repurchase program authorized by the Company’s Board of Directors, the Company
repurchased 5,000 shares for $0.2 million. All repurchased shares were
retired.
Note
12: Earnings Per Share
Following
is the computation of basic and diluted earnings per share:
(In
millions, except
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
per
share amounts)
|
|
Sept
30,
|
|
Oct
1,
|
|
Sept
30,
|
|
Oct
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
16.8
|
|
$
|
13.2
|
|
$
|
42.9
|
|
$
|
32.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.0
|
|
|
22.3
|
|
|
22.8
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.4
|
|
|
0.9
|
|
|
0.5
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.4
|
|
|
23.2
|
|
|
23.3
|
|
|
23.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
.73
|
|
$
|
.59
|
|
$
|
1.88
|
|
$
|
1.47
|
|
Diluted
earnings per share
|
|
$
|
.72
|
|
$
|
.57
|
|
$
|
1.84
|
|
$
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
|
0.1
|
|
Note
13: Other Comprehensive Income
Comprehensive
income is as follows:
(In
millions)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept
30,
|
|
Oct
1,
|
|
Sept
30,
|
|
Oct
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
16.8
|
|
$
|
13.2
|
|
$
|
42.9
|
|
$
|
32.6
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(0.7
|
)
|
|
1.1
|
|
|
3.7
|
|
|
(8.5
|
)
|
Comprehensive
income, net of tax
|
|
$
|
16.1
|
|
$
|
14.3
|
|
$
|
46.6
|
|
$
|
24.1
|
|
Accumulated
other comprehensive income consists of the following:
(In
millions)
|
|
Sept
30,
|
|
Dec
31,
|
|
|
|
2006
|
|
2005
|
|
Cumulative
translation adjustment
|
|
$
|
9.9
|
|
$
|
6.2
|
|
Minimum
pension liability adjustment, net of tax
|
|
|
(5.6
|
)
|
|
(5.6
|
)
|
Accumulated
other comprehensive income
|
|
$
|
4.3
|
|
$
|
0.6
|
|
Note
14: Warranty
The
Company provides warranties on most of its products. The warranty terms vary
but
are generally two years from date of manufacture or one year from date of
installation. Provisions for estimated expenses related to product warranty
are
made at the time products are sold or when specific warranty issues are
identified. These estimates are established using historical information
about
the nature, frequency, and average cost of warranty claims. The Company actively
studies trends of warranty claims and takes action to improve product quality
and minimize warranty claims. The Company believes that the warranty reserve
is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve.
Below
is
a table that shows the activity in the warranty accrual, as recorded in accrued
expenses in the Company’s balance sheet:
(In
millions)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
Sept
30,
|
|
Oct
1,
|
|
Sept
30,
|
|
Oct
1,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Beginning
balance
|
|
$
|
11.3
|
|
$
|
6.4
|
|
$
|
7.0
|
|
$
|
7.1
|
|
Accruals
related to product warranties
|
|
|
2.2
|
|
|
1.4
|
|
|
6.8
|
|
|
3.4
|
|
Additions
to warranty related to acquisition
|
|
|
-
|
|
|
-
|
|
|
2.8
|
|
|
-
|
|
Reductions
for payments made
|
|
|
(2.2
|
)
|
|
(1.3
|
)
|
|
(5.3
|
)
|
|
(4.0
|
)
|
Ending
balance
|
|
$
|
11.3
|
|
$
|
6.5
|
|
$
|
11.3
|
|
$
|
6.5
|
|
Note
15: Stock-Based Compensation
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
plans under the recognition and measurement provisions of APB Opinion No.
25,
“Accounting for Stock Issued to Employees,” and related Interpretations, as
permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation.”
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), “Share-Based Payment,” using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation cost for
all
share-based payments granted prior to, but not yet vested as of January 1,
2006,
based on the grant date fair value estimated in accordance with the original
provisions of Statement 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of Statement 123(R). Results
for prior periods have not been restated.
As
a
result of adopting Statement 123(R) on January 1, 2006, the Company’s income
before income taxes and net income for the third quarter ended September
30,
2006, were $0.6 million and $0.4 million lower, respectively, and basic and
diluted earnings per share for the quarter ended September 30, 2006 were
$0.02
and $0.01 lower, respectively. For the nine months ended September 30, 2006,
the
Company’s income before income taxes and net income were $2.1 million and $1.4
million lower, respectively. Basic and diluted earning per share for the
nine
months ended September 30, 2006, were $0.06 and $0.04 lower, respectively.
Prior
to
the adoption of Statement 123(R), the Company presented all tax benefits
of
deductions resulting from the exercise of stock options as operating cash
flows
in the Statement of Cash Flows. Statement 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of
the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The $5.7 million excess tax benefit
classified as a financing cash inflow would have been classified as an operating
cash inflow if the Company had not adopted Statement 123(R).
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of Statement
123
to options granted under the Company’s stock option plans in all periods
presented. For purposes of this pro forma disclosure, the value of the options
is estimated using a Black-Scholes option-pricing formula and amortized to
expense over the options’ vesting periods.
(In
millions, except per share amounts)
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
October
1,
|
|
|
|
2005
|
|
2005
|
|
Reported
net income
|
|
$
|
13.2
|
|
$
|
32.6
|
|
Deduct:
Total fair value computed stock-based compensation, net of tax*
|
|
|
0.3
|
|
|
1.2
|
|
Pro
forma net income
|
|
$
|
12.9
|
|
$
|
31.4
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
— as reported
|
|
$
|
.59
|
|
$
|
1.47
|
|
Basic
— pro forma
|
|
$
|
.58
|
|
$
|
1.41
|
|
Diluted
— as reported
|
|
$
|
.57
|
|
$
|
1.41
|
|
Diluted
— pro forma
|
|
$
|
.56
|
|
$
|
1.36
|
|
*Includes
expense related to restricted stock reported in net
income.
|
|
|
|
|
|
|
|
The
Company has authorized the grant of options to purchase common stock and
award
shares of common stock of the Company to employees and non-employee directors
of
the Company and its subsidiaries under two stock plans. The plans and the
original number of authorized shares available for grants are as
follows:
|
Authorized
Shares
|
Franklin
Electric Co., Inc. Stock Option Plan
|
3,600,000
|
Franklin
Electric Co., Inc. Stock Plan - options
|
1,150,000
|
Franklin
Electric Co., Inc. Stock Plan - stock awards
|
150,000
|
During
2005, all remaining authorized shares available for grant under the Franklin
Electric Co., Inc. Stock Option Plan were awarded. On April 29, 2005, the
Franklin Electric Co., Inc. Stock Plan (the “Stock Plan”) was approved by the
Company’s shareholders. Under the Stock Plan, employees and non-employee
directors may be granted stock options or stock awards. The Company currently
issues new shares from its common stock outstanding balance to satisfy share
option exercises and stock awards.
Stock
Option Grants:
Under
each of the above plans, the exercise price of each option equals the market
price of the Company’s common stock on the date of grant and the options expire
ten years after the date of the grant. Generally, options granted to nonemployee
directors vest 33 percent a year and become fully vested and exercisable
after
three years. Options granted to employees vest at 20 or 25 percent a year
and
become fully vested and exercisable after five years or four years,
respectively. Subject to the terms of the plans, in general, the aggregate
option price and any applicable tax withholdings may be satisfied in cash
or its
equivalent, or by the plan participant’s delivery of shares of the Company’s
common stock owned more than six months, having a fair market value at the
time
of exercise equal to the aggregate option price and/or the applicable tax
withholdings.
The
fair
value of each option award, both before and after the adoption of FASB 123(R),
is estimated on the date of grant using the Black-Scholes option valuation
model
with a single approach and amortized using a straight-line attribution method
over the option’s vesting period. Options granted to retirement eligible
employees were immediately expensed. In 2005, this amount was disclosed in
the
pro-forma exhibit while in 2006 it is recognized as an expense. The Company
uses
historical data to estimate the expected volatility of its stock; the weighted
average expected life, the period of time options granted are expected to
be
outstanding; and its dividend yield. The risk-free rates for periods within
the
contractual life of the option are based on the U.S. Treasury yield curve
in
effect at the time of the grant.
The
assumptions used for the Black-Scholes model to determine the fair value
of
options granted during the first nine months of 2006 is as follows:
Risk-free
interest rate
|
|
|
4.54
|
%
|
Dividend
yield
|
|
|
.70-.74
|
%
|
Weighted-average
dividend yield
|
|
|
.707
|
%
|
Volatility
factor
|
|
|
.3553-.3768
|
|
Weighted-average
volatility
|
|
|
.359
|
|
Expected
term
|
|
|
4-5
years
|
|
A
summary
of the Company’s stock option plans activity and related information, for the
nine months ended September 30, 2006 follows:
(shares
in thousands)
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
at beginning of period
|
|
|
1,793
|
|
$
|
23.60
|
|
|
|
|
|
|
|
Granted
|
|
|
125
|
|
|
45.90
|
|
|
|
|
|
|
|
Exercised
|
|
|
(469
|
)
|
|
20.78
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11
|
)
|
|
25.22
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,438
|
|
$
|
26.45
|
|
|
6.09
|
|
$
|
38,393
|
|
Vested
or expected to vest
At
end of period
|
|
|
1,400
|
|
$
|
26.18
|
|
|
.47
|
|
$
|
37,734
|
|
Exercisable
at end of period
|
|
|
798
|
|
$
|
21.73
|
|
|
5.05
|
|
$
|
25,057
|
|
The
weighted-average grant-date fair value of options granted during the first
nine
months of 2006 was $16.43. There were no options granted during the third
quarter. The total intrinsic value of options exercised during the third
quarter
of 2006 was $0.1 million and for the nine months ended September 30, 2006
was
$2.5 million.
A
summary
of the Company’s nonvested shares activity and related information, for the nine
months ended September 30, 2006 follows:
(shares
in thousands)
Nonvested
Shares
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair
Value
|
|
Nonvested
at beginning of period
|
|
|
736
|
|
$
|
7.03
|
|
Granted
|
|
|
125
|
|
|
16.43
|
|
Vested
|
|
|
(210
|
)
|
|
6.91
|
|
Forfeited
|
|
|
(11
|
)
|
|
5.84
|
|
Nonvested
at end of period
|
|
|
640
|
|
$
|
8.94
|
|
As
of
September 30, 2006 there was $3.8 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 1.7 years.
Stock
Awards:
Under
the
Stock Plan, nonemployee directors and employees may be granted stock awards
or
grants of restricted shares of the Company’s common stock, vesting subject to
the employees’ performance of certain goals. The Stock Plan is an amendment and
restatement of the Franklin Electric Co., Inc. Key Employee Performance
Incentive Stock Plan (the “Incentive Plan”), established in 2000. Prior to April
29, 2005, 16,300 shares had been awarded under the Incentive Plan and an
additional 150,000 shares were authorized for stock awards under the Stock
Plan.
The
stock
awards are granted at the market value on the date of grant and the restricted
stock awards cliff vest over either 4 or 5 years and the attainment of certain
performance goals. Dividends are paid to the recipient prior to vesting.
Stock
awards granted to retirement eligible employees were immediately expensed
in
2006. There were no grants made to retirement eligible employees in
2005.
A
summary
of the Company’s restricted stock award activity and related information, for
the nine months ended September 30, 2006 follows:
(shares
in thousands)
Nonvested
Shares
|
|
Shares
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Nonvested
at beginning of period
|
|
|
21
|
|
$
|
40.82
|
|
Awarded
|
|
|
26
|
|
|
49.25
|
|
Vested
|
|
|
(6
|
)
|
|
58.33
|
|
Forfeited
|
|
|
(1
|
)
|
|
40.72
|
|
Nonvested
at end of period
|
|
|
40
|
|
$
|
43.39
|
|
As
of
September 30, 2006 there was $1.2 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the Plan. That cost is expected to be recognized over a weighted-average
period
of 3.4 years.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Sales
and
earnings for the third quarter of 2006 were up from the same quarter of 2005.
The sales increase in the third quarter 2006 was primarily attributable to
growth due to acquisitions, as well as significantly increased demand for
Franklin’s Water Systems products sold directly to distributor customers.
Earnings improved in the third quarter of 2006 primarily due to the increased
sales. Earnings for the third quarter of 2006 were partially offset by increases
in raw material costs and other operating costs related to the sale and
distribution of Franklin products. The Company acquired Little Giant Pump
Company during the second quarter of 2006 and Healy Systems, a leading
manufacturer of gasoline vapor control equipment, in September of
2006.
Results
of Operations
Net
sales
for the third quarter of 2006 were $165.7 million, an increase of $46.6 million
or 39 percent from the third quarter of 2005. Sales related to
acquisitions, primarily Little Giant Pump Company, were $26.5 million during
the
third quarter. Changes in selling price increased net sales by $7.6 million
or
about 6 percent. Global Water Systems sales (exclusive of the Little Giant
acquisition) grew by 15 percent during the third quarter of 2006. The sales
growth occurred in spite of a North American industry-wide slowdown that
became
evident during the last half of the third quarter attributable to softness
in
new residential housing construction. Franklin Fueling System product sales
increased about 30 percent from the prior year third quarter, driven by strong
demand across all product lines and geographic regions. The Company’s first nine
months sales increased about $114.3 million or 35 percent from the three
quarters of 2005 due to increased demand for Water Systems products and Fueling
Systems products, as well as, acquisition related sales. Shipments of
submersible electric motors are up 21 percent in North America for the first
nine months of 2006 and the Company believes that a majority of this growth
is
attributable to inventory build up by OEM customers in response to previously
announced distribution plans for 2007.
Cost
of
sales as a percent of net sales for the third quarter of 2006 was 66.5 percent,
up from the third quarter of 2005 of 66.1 percent. Cost of sales as a percent
of
net sales increased primarily as a result of the increased material costs,
led
by copper, and the inclusion of Little Giant Pump Company. Cost of sales
as a
percent of net sales year to date was 66.8 percent and 67.0 percent for 2006
and
2005, respectively. Cost of sales as a percent of net sales decreased primarily
as a result of the increased sales noted above. The decrease in cost of sales
as
a percent of net sales during the first nine months of 2006 was partially
offset
by increased costs for certain commodities used in the manufacture of the
electric motors.
Selling
and administrative (“SG&A”) expenses, at $29.0 million for the third quarter
of 2006, were up $9.9 million from the third quarter of 2005. The increase
in
the third quarter of 2006 was due to incremental cost from acquisitions,
primarily Little Giant Pump Company. As well as, additional marketing and
selling expenses related to the Water Systems distribution channel initiative
and higher commissions and other compensation expenses tied to revenues and
earnings, both of which increased relative to the third quarter of 2005.
The
third quarter of 2006 included $0.5 million of expense related to stock based
compensation in accordance with the adoption of SFAS No. 123 (R) “Share-Based
Payment”. The increase of SG&A expense of $22.9 million in the first nine
months of 2006 from the same period for 2005 was primarily due to about $10.0
million of costs related to the acquired Little Giant Pump Company, about
$2.7
million of costs related to the distribution channel initiative, and $2.0
million of expense related to share-based compensation. Additional increases
in
SG&A expenses during the first nine months of 2006 over the same period for
the prior year were: commissions by $1.5 million due to higher sales,
professional fees, which included Sarbanes-Oxley expenses, and legal which
together increased by $1.0 million.
Interest
expense for the third quarter of 2006 was $1.1 million and $0.2 million for
the
same quarter of 2005. Interest expense for the first nine months of 2006
was
$2.4 million and $0.6 million for the same period of 2005. The increase in
2006,
for the quarter and year to date, was primarily related to bank debt incurred
to
finance the acquisition of Little Giant Pump Company.
Included
in other income for the third quarter of 2006 and 2005 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.
Other income in the third quarter of 2006 includes the minority income from
the
investment in Pioneer Pumps of $0.2 million. For the first nine months of
2006
and 2005 interest income was $1.6 million and $0.8 million, respectively,
again
primarily derived from the investment of cash balances in short-term U.S.
treasury and agency securities. The year to date minority income from the
investment in Pioneer Pumps for 2006 was $0.5 million. The investment in
Pioneer
Pumps was a September of 2005 activity.
The
provision for income taxes for the third quarter of 2006 is $9.1 million.
The
effective tax rate for 2006 is projected at 35.6 percent, up from the prior
year
rate of 35.3 percent, primarily because the R&D credit deduction has not
been renewed by Congress. The effective tax rate differs from the United
States
statutory rate of 35 percent, due to the foreign income exclusion and the
effects of state and foreign income taxes, net of federal tax
benefits.
Net
income for the third quarter of 2006 was $16.8 million, or $0.72 per diluted
share, compared to the third quarter of 2005 net income of $13.2 million,
or
$0.57 per diluted share. Net income for the first nine months of 2006 was
$42.9
million, or $1.84 per diluted share, compared to the first nine months of
2005
net income of $32.6 million, or $1.41 per diluted share.
Capital
Resources and Liquidity
Operating
activities generated approximately $46.7 million of cash during the first
nine
months of 2006 compared to cash generated during the same period for 2005
of
$38.0 million. The operating cash flow generated in 2006 is primarily related
to
net income. Accounts receivable, a use of cash, increased in the first nine
months of 2006 primarily due to the sales growth. Inventories, also a use
of
cash, increased during the same period of 2006, primarily in finished goods.
The
inventory increase in 2006 was less than the inventory increase in the prior
year due to the sales growth during the nine months of 2006. We anticipate
that
future cash flows from operations will be used for repayment of borrowings,
general business and corporate purposes, including to develop and acquire
businesses, to expand and improve existing facilities, to purchase property,
equipment, inventory, dividends, and stock repurchases.
The
primary use of cash for investing activities was the acquisition of Little
Giant
Pump Company during the second quarter of 2006 and the third quarter 2006
acquisition of Healy Systems. The other significant sources and uses of cash
for
investing activities for the nine months of 2006 and 2005 were for the buying
and selling of short term investment securities.
The
principal source of cash from financing activities during the nine months
of
2006 was borrowings related to the Little Giant Pump Company and Healy Systems
acquisitions and proceeds from issuance of common stock. The principal uses
of
cash during the nine months of 2006 were for repayment of borrowings and
payment
of dividends. The principal use of cash during the same period of 2005 was
for
purchases of Company common stock under the Company’s repurchase program and the
payment of dividends.
Cash
and
equivalents at the end of the first nine months of 2006 and 2005 were $30.0
million and $35.4 million, respectively.
In
September 2004, the Company entered into an unsecured, 60 month $80.0 million
revolving credit agreement (the “Agreement”). The Agreement includes a facility
fee of one-tenth of one percent on the committed amount. In June 2006, the
Company amended the agreement to increase the committed amount to $120 million.
As of September 30, 2006, the Company had $60.0 million of outstanding
borrowings under the agreement.
As
of
September 30, 2006, the Company’s current outstanding commitments approximated
$7.5 million. Management believes that internally generated funds and existing
credit arrangements provide sufficient liquidity to meet current
commitments.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
The
Company is subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Foreign currency exchange rate risk is
mitigated through several means: maintenance of local production facilities
in
the markets served, invoicing of customers in the same currency as the source
of
the products, prompt settlement of inter-company balances utilizing a global
netting system and limited use of foreign currency denominated debt. Interest
rate exposure is limited to variable rate interest borrowings under the
Company's revolving credit agreement and an interest rate swap.
Item
4. Controls and Procedures
As
of the
end of the period covered by this report (the "Evaluation Date"), the Company
carried out an evaluation, under the supervision and with the participation
of
the Company's management, including the Company's Chief Executive Officer
and
the Company's Chief Financial Officer, of the effectiveness of the design
and
operation of the Company's disclosure controls and procedures (as such term
is
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, the Company's Chief Executive Officer and the Company's
Chief Financial Officer concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in timely alerting them
to
material information relating to the Company and its subsidiaries required
to be
included in the Company's periodic SEC filings.
During
the third fiscal quarter there have been no changes in the Company's internal
control over financial reporting that have materially affected or that are
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART
II. OTHER INFORMATION
Items
1A. Risk Factors
Item
1A.,
to the Company’s Form 10-K for the fiscal year ended December 31, 2005 and for
the first and second quarters ended April 1, 2006 and July 1, 2006 respectively,
summarize the principal risk factors affecting the Company and its business
and
are incorporated herein by reference. 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.
Additional
Risks to the Company
The
Company is also subject to various risks occurring in the normal course of
business. Exhibit 99.1, to the Company’s Form 10-K, sets forth a list of risks,
including those identified above, which may adversely affect the Company
and its
business and is incorporated herein by reference.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)
Issuer Repurchases of Equity Securities
In
February 2001, the Company’s Board of Directors unanimously approved a
resolution to repurchase 2,000,000 shares. The plan was announced in the
Company’s 10-Q for the third quarter ended September 29, 2001. In February
2005, the Company’s Board of Directors unanimously approved a resolution to
increase the number of shares remaining for repurchase from 827,412 to 1,000,000
shares. There is no expiration date for the plan.
The
Company did not repurchase any shares of its stock in the third quarter of
2006.
The maximum number of shares that may still be purchased under the Company’s
repurchase programs is 628,692.
Item
6. Exhibits
See
the
Exhibit Index located on page 20.
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
November
9, 2006
|
|
|
By
|
/s/
R. Scott Trumbull
|
|
|
|
|
R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal
Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
November
9, 2006
|
|
|
By
|
/s/
Thomas J. Strupp
|
|
|
|
|
Thomas
J. Strupp, Vice President and Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
|
FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR
THE
THIRD QUARTER ENDED SEPTEMBER 30, 2006
|
|
Number
|
Description
|
|
|
10.1
|
Stock
Purchase Agreement, dated September 15, 2006, by and among Franklin
Electric Co., Inc. and Healy Systems, Inc. (Schedules and exhibits
omitted)
|
|
|
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
|
|
|