UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
____________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 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
|
|
46714-3798
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(260)
824-2900
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $.10 par value
|
|
The
NASDAQ Stock Market
|
Preference
Stock Purchase Rights
|
|
The
NASDAQ Stock Market
|
(Title
of each class)
|
|
(Name
of each exchange on which
registered)
|
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of each class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act.
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 (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. o
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 Act).
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant at July 1, 2006 (the last business day of the registrant’s
most recently completed second quarter) was $1,184,796,556. The stock price
used
in this computation was the last sales price on that date, as reported by
The
Nasdaq Stock Market. Determination of stock ownership by non-affiliates was
made
solely for the purpose of responding to this requirement and the registrant
is
not bound by this determination for any other purpose.
Number
of shares of common stock outstanding at December 30, 2006:
23,009,513
shares
DOCUMENTS
INCORPORATED BY REFERENCE
A
portion
of the Proxy Statement for the Annual Meeting of Shareholders to be held on
April 27, 2007 (Part III).
TABLE
OF CONTENTS
|
Part
I
|
|
Page
|
|
|
|
Item
1.
|
Business
|
4-6
|
Item
1A.
|
Risk
Factors
|
6-8
|
Item
1B.
|
Unresolved
Staff Comments
|
8
|
Item
2.
|
Properties
|
8
|
Item
3.
|
Legal
Proceedings
|
8
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
8
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|
Supplemental
Item - Executive Officers of the Registrant
|
9
|
|
|
|
Part
II
|
|
|
|
|
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters, and
Issuer
Purchases of Equity Securities
|
10
|
Item
6.
|
Selected
Financial Data
|
11
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
12-19
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
Item
8.
|
Financial
Statements and Supplementary Data
|
21-46
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
47
|
Item
9A.
|
Controls
and Procedures
|
47
|
Item
9B.
|
Other
Information
|
49
|
|
|
|
Part
III
|
|
|
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
49
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Item
11.
|
Executive
Compensation
|
49
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
49
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
50
|
Item
14.
|
Principal
Accounting Fees and Services
|
50
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|
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|
Part
IV
|
|
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
51
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Signatures
|
|
53
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Exhibit
Index
|
|
54-55
|
PART
I
ITEM
1. BUSINESS
Franklin
Electric Co., Inc. is an Indiana corporation founded in 1944 and incorporated
in
1946 that, together with its subsidiaries, conducts business as a single
reportable segment: the design, manufacture and distribution of groundwater
and
fuel pumping systems, submersible pumps, motors, electronic controls and related
parts and equipment. The Company’s business consists of two operating segments
based on the principal end market served: the Water Systems segment and the
Fueling Systems segment. Except where the content otherwise requires, “Franklin
Electric” or the “Company”, shall refer to Franklin Electric Co., Inc. and its
consolidated subsidiaries.
Description
of Business
Franklin
Electric is a global leader in the production and marketing of groundwater
and
fuel pumping systems and is a technical leader in submersible pumps, motors,
drives, electronic controls, and monitoring devices. The Company is the world’s
largest manufacturer of Water and Fueling Systems motors, a leading manufacturer
of Water and Fueling Systems pumps, underground Fueling Systems hardware and
flexible piping systems. In 2006, the Company acquired a business specializing
in vapor recovery systems and components.
During
2006, the Company acquired two companies and divested its Engineered Motor
Products Division. In the second quarter of 2006, the Company
acquired Little
Giant Pump Company (“Little Giant”) in a stock purchase transaction. Little
Giant was a wholly-owned subsidiary of Tecumseh Products Company, and a leading
worldwide provider of commercial and consumer water transfer solutions. Little
Giant’s products include sump, sewage, effluent, condensate and industrial
submersible pumps and broaden the pump product offerings of Franklin Electric,
as well as expand the Company’s customer base. Little Giant’s 2006 annual pro
forma sales represented about 25 percent of the Company’s prior year sales. In
the third quarter of 2006 the Company acquired Healy Systems, Inc., (“Healy
Systems”) in a stock purchase transaction. Healy Systems is a worldwide provider
of Stage II Vapor Recovery Systems and Components used primarily at gasoline
stations to reduce gasoline vapor emissions during vehicle
refueling. The
Healy
Systems product line is complementary to Franklin’s existing fuel management
products and presents cross selling opportunities for the Company. Healy
Systems’ 2006 annual pro forma sales represented less than 10 percent of the
Company’s prior year sales. In the fourth quarter of 2006, the Company divested
its Engineered Motor Products Division (“EMPD”), which manufactured and sold
fractional horsepower electric motors primarily to original equipment
manufacturers for specialty applications such as ice cream dispensers, electric
hoists, paint mixing machines, and food processing. The Engineered Motor
Products Division’s revenue represented less than 10 percent of Franklin
Electric’s consolidated sales for 2006.
Franklin
Electric’s motors and pumps are used principally in submersible applications for
pumping fresh water, wastewater, fuel, and other liquids in a variety of
applications, including residential, industrial, agricultural, fueling,
off-shore drilling, and mining. Franklin Electric also manufactures electronic
drives and controls for the motors which control functionality and provide
protection from various hazards, such as electric surges, over-heating, or
dry
wells and tanks. Along with the fueling motor and pump applications, the Company
supplies a variety of products to the petroleum equipment industry included
with
the submersible pumping systems, such as flexible piping, vapor recovery systems
and components, electronic tank monitoring equipment, and fittings.
The
Company’s products are sold in North America, Europe, the Middle East, South
Africa, Australia, Mexico, Japan, China, and other world markets. The Company’s
products are sold by its sales force, manufacturing representatives, and repair
shops.
The
Company changed its marketing strategy in late 2004 and began selling certain
Water Systems products directly to specialty Water Systems distributors, as
well
as original equipment manufacturers (OEMs) of pumps. This change in marketing
strategy has resulted in a broader customer base with fewer sales to pump OEMs.
The Company has also announced that, beginning in 2007, Water Systems product
sales to integrated pump manufacturers will be significantly curtailed. The
market for the Company’s products is highly competitive and includes large and
small accounts. The Company’s Water Systems and Fueling Systems products and
related equipment are sold to pump OEMs and specialty Water Systems
distributors, as well as, industrial equipment distributors, major oil and
utility companies.
ITT
Industries, Inc. and its various subsidiaries and affiliates, accounted for
11
percent, 16 percent, and 20 percent of the Company’s consolidated sales in 2006,
2005, and 2004, respectively. Pentair Corporation and its various subsidiaries
and affiliates, accounted for 12 percent, 14 percent, and 22 percent of the
Company’s consolidated sales in 2006, 2005, and 2004, respectively.
The
Company offers normal and customary trade terms to its customers, no significant
part of which is of an extended nature. Special inventory requirements are
not
necessary, and customer merchandise return rights do not extend beyond normal
warranty provisions.
The
principal raw materials used in the manufacture of the Company’s products are
steel in coils and bars, stainless steel, copper wire, and aluminum ingot.
Major
components are capacitors, motor protectors, forgings, gray iron castings and
bearings. Most of these raw materials are available from multiple sources in
the
United States and world markets. In the opinion of management, no single source
of supply is critical to the Company's business. Availability of fuel and energy
is adequate to satisfy current and projected overall operations unless
interrupted by government direction or allocation.
The
Company employed approximately 3,100 persons at the end of 2006.
Segment
and Geographic Information
The
segment and geographic information set forth below under Note 15, “Segments and
Geographic Information,” to the consolidated financial statements is
incorporated herein by reference.
Research
and Development
The
Company spent approximately $8.1 million in 2006, $5.6 million in 2005, and
$4.2
million in 2004 on activities related to the development of new products,
improvement of existing products and manufacturing methods, and other applied
research and development.
In
2006,
the Company continued developing new pump products (including jet, centrifugal
and turbine pumps), extending current product offerings, and improving the
functional performance of all products. The Company introduced new hydraulic
technology (patent pending) which improved performance of residential
submersible pumps. The Company also continued to develop its motor drives and
controls systems improving performance in harsh environments. The Company
introduced the MonodriveXT system for single phase, 3-wire motors which added
to
the already extensive motor drives product line. Fueling Systems added
bio-diesel and ethanol (E85) fuel product offerings and established the next
generation tank gauge platform products. Further, the Company introduced new
electronics with liquid density monitoring equipment for the fueling industry.
Research continued on new materials and processes designed to achieve higher
quality and more cost-effective construction of the Company’s high volume
products.
The
Company owns a number of patents, trademarks and licenses. In aggregate, these
patents are of material importance in the operation of the business; however,
the Company believes that its operations are not dependent on any single patent
or group of patents.
Backlog
The
dollar amount of backlog at the end of 2006 and 2005 was as
follows:
|
|
(In
millions)
|
|
|
|
2006
|
|
2005
|
|
Backlog
|
|
$
|
24.1
|
|
$
|
21.1
|
|
The
backlog is composed of written orders at prices adjustable on a
price-at-the-time-of-shipment basis for products, primarily standard catalog
items. All backlog orders are expected to be filled in fiscal 2007. The
Company's sales in the first quarter are generally less than its sales in other
quarters due to generally lower construction activity during that period in
the
northern hemisphere. Beyond that, there is no seasonal pattern to the backlog
and the backlog has not proven to be a significant indicator of future
sales.
Environmental
Matters
The
Company believes that it is in compliance with all applicable federal, state
and
local laws concerning the discharge of material into the environment, or
otherwise relating to the protection of the environment. The Company has not
experienced any material costs in connection with environmental compliance,
and
does not believe that such compliance will have any material adverse effect
upon
the financial position, capital expenditures, earnings, or competitive position
of the Company.
Available
Information
The
Company’s website address is http://www.fele.com. The Company makes available
free of charge on or through its website: its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments
to those reports, as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission. Additionally, the Company’s website also includes the Company’s
corporate governance guidelines, its Board committee charters, and the Company’s
code of ethics. Information contained on the Company’s website is not part of
this annual report on Form 10-K.
ITEM
1A. RISK FACTORS
The
following describes the principal risks affecting the Company and its business.
Additional risks and uncertainties, not presently known to the Company or
currently deemed material, could negatively impact the Company’s results of
operations or financial condition in the future.
The
Company must successfully implement its new marketing and operating strategies.
From
2004
through 2006, the Company implemented significant new marketing and operating
strategies as follows:
- |
During
2004, the Company began selling its Water Systems products directly
to
wholesale specialty Water Systems distributors, as well as original
equipment manufacturers (OEMs) of pumps. Previously, the Company
sold its
Water Systems products primarily to pump OEMs (i.e., the Company
was
primarily a supplier of submersible motors and controls to the OEMs)
who
then re-sold the Water Systems products, usually combined with pumps
and
related products, to the wholesale specialty Water Systems distributors.
As a result of this change, the Company became a competitor, as well
as a
supplier to many of the pump OEMs.
|
- |
Also
in 2004, the Company purchased a pump manufacturer. The acquisition
of
certain assets of JBD, Inc. (formerly the Jacuzzi brand pump manufacturer)
was completed in the fourth quarter of
2004.
|
- |
During
2006, the Company acquired Little Giant Pump Company, a manufacturer
of
sump, sewage, effluent, condensate and industrial submersible pumps,
further expanding its pump product offerings and further increasing
its
competition with pump OEMs.
|
- |
Also
in 2006, the Company announced a new general sales policy, effective
January 1, 2007. The new general sales policy, effective for the
Water
Systems Industry in North America, will be to sell all of its products,
including 2HP and smaller submersible electric motors and associated
products, only on a direct basis to wholesale Water Systems distributors.
Exceptions will be made only where the Company determines, on a
case-by-case basis, that sales to a particular pump OEM will add
significant customer value to the distribution of its
products.
|
The
Company believes that these strategic changes will result in increased sales
and
earnings; however, actual results may vary.
The
Company’s acquisition strategy entails expense, integration risks, and other
risks.
One
of
the Company’s continued strategies is to increase revenues and expand market
share through acquisitions that will provide complementary Water and Fueling
Systems products. The Company will spend significant time and effort expanding
existing businesses through identifying, pursuing, completing, and integrating
acquisitions. Competition for acquisition candidates may limit the number of
opportunities and may result in higher acquisition prices. There is uncertainty
related to successfully acquiring and profitably managing additional companies
and integrating additional companies without substantial costs, delays or other
problems. There can also be no assurances that acquired companies will achieve
revenues, profitability or cash flows that justify the investment in them.
The
Company believes that these strategic acquisitions will result in increased
sales and earnings; however, actual results may vary.
The
Company’s sales have historically been dependent on a limited number of
customers.
As
of the
end of fiscal year 2004, approximately 42 percent of the Company’s consolidated
sales were attributable to two customers, both of which were pump OEMs. With
the
Company’s changes in marketing and operating strategies, the Company reduced its
dependency on the pump OEMs, which lowered the potential sales loss if one
of
these customers reduced its purchases from the Company. At the end of fiscal
year 2006, these two pump OEM customers accounted for approximately 23 percent
of the Company’s consolidated sales. The Company believes that the strategic
initiatives announced in 2004 through 2006 will continue to reduce the potential
sales risk associated with customer concentration; however, actual results
may
vary.
The
Company faces increased competition due to industry consolidation and new
entrants into the Company’s existing markets.
The
Company is a global leader in the production and marketing of groundwater and
fuel pumping systems. The industry in which the Company operates has experienced
significant consolidation in recent years, primarily in the pump OEM companies
but increasingly at the distributor level, as well as the addition of
submersible motor manufacturing by pump OEMs. Some of the Company’s competitors
have substantially greater financial resources than the Company. The Company
believes that consistency of product quality, timeliness of delivery, service,
continued product innovation, as well as price, are the principal factors
considered by customers in selecting suppliers. The Company further believes
that successful implementation of the strategic initiatives, previously
mentioned, will enhance its competitive position; however, actual results may
vary.
Competitive
pressures may lead to declines in sales or in the prices of submersible electric
motor products.
Pump
OEMs
have acquired the ability to produce submersible electric motors and have
purchased significant quantities of the Company submersible electric motors
during 2006, possibly in excess of 2006 requirements. Their ability to produce
these motors and the potential excess inventory supply of motors as of the
beginning of 2007 may result in a decline in motor unit sales or motor unit
prices during 2007. The Company cannot assure that these or other competitive
pressures will not adversely affect profitability or performance, which could
in
turn have materially adverse effects on the results of operations and financial
condition.
A
decline in housing starts could lead to reduced demand for the Company’s
products, thereby reducing revenues and earnings.
Demand
for certain Company products is affected by housing starts. Many economic and
other factors outside the Company’s control, including housing starts, could
impact operating results. A decline in housing starts or general slowdown in
the
United States or other economies in the international markets the Company serves
could reduce demand and adversely impact gross margins and operating
results.
Increases
in the prices of raw materials, components, finished goods and other commodities
could adversely affect operations.
The
Company purchases most of the raw materials for its products on the open market
and relies on third parties for the sourcing of certain finished goods.
Accordingly the cost of its products may be affected by changes in the market
price of raw materials, sourced components, or finished goods. Natural gas
and
electricity prices have historically been volatile. The Company does not
generally engage in commodity hedging for raw materials. Significant increases
in the prices of commodities, sourced components, finished goods, or other
commodities could cause product prices to increase, which may reduce demand
for
products or make the Company more susceptible to competition. Furthermore,
in
the event the Company is unable to pass along increases in operating costs
to
its customers, margins and profitability may be adversely affected.
The
Company is exposed to political, economic and other risks that arise from
operating a multinational business.
The
Company has significant operations outside the United States, including Europe,
Mexico and China. Further, the Company obtains raw materials and finished goods
from foreign suppliers. Accordingly, the Company’s business is subject to
political, economic, and other risks that are inherent in operating a
multinational business. These risks include, but are not limited to, the
following:
· |
Difficulty
in enforcing agreements and collecting receivables through foreign
legal
systems
|
· |
Trade
protection measures and import or export licensing
requirements
|
· |
Imposition
of tariffs, exchange controls or other
restrictions
|
· |
Difficulty
in staffing and managing widespread operations and the application
of
foreign labor regulations
|
· |
Compliance
with foreign laws and regulations
|
· |
Changes
in general economic and political conditions in countries where the
Company operates
|
Business
success depends in part on the ability to anticipate and effectively manage
these risks. The Company cannot assure that these and other factors will not
have a material adverse impact on its international operations or on the
business as a whole.
Delays
in introducing new products or the inability to achieve or maintain market
acceptance with existing or new products may cause the Company’s revenues to
decrease.
The
industries to which the Company belongs are characterized by intense
competition, changes in end-user requirements, and evolving product offerings
and introductions. The Company believes future success will depend, in part,
on
the ability to anticipate and adapt to these factors and offer on a timely
basis, products that meet customer demands. Failure to develop new and
innovative products or to enhance existing products could result in the loss
of
existing customers to competitors or the inability to attract new business,
either of which may adversely affect the Company’s revenues. The Company
believes that the successful introduction of new products will enhance
competitive position; however, actual results may vary.
Additional
Risks to the Company
The
Company is subject to various risks in the normal course of business. Exhibit
99.1 sets forth a list of risks, including those identified above, that may
adversely affect the Company and is incorporated herein by
reference.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Company maintains its principal executive offices in Bluffton, Indiana.
Manufacturing plants or primary distribution centers are located in the
following countries: Australia, China, The Czech Republic, Germany, Italy,
Japan, Mexico, South Africa, and the United States. Within the United States,
manufacturing facilities are located in Grant County, Indiana; Little Rock,
Arkansas; Siloam Springs, Arkansas; Wilburton, Oklahoma; Oklahoma City,
Oklahoma; Madison, Wisconsin; Saco, Maine; and Hudson, New Hampshire. The
Company also maintains warehouse facilities in Orange, California; Sanford,
Florida; and Bolton, Ontario, Canada. All principal properties are owned or
held
under operating leases.
In
the
Company’s opinion, its facilities are suitable for their intended use, adequate
for the Company’s business needs, and in good condition.
ITEM
3. LEGAL PROCEEDINGS
The
information set forth below under Note 16, “Contingencies and Commitments,” to
the consolidated financial statements is incorporate herein by
reference.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The
names, ages, and all positions and offices held by the executive officers of
the
Company as of December 30, 2006 are:
Name
|
Age
|
Positions
and Offices
|
In
This Office Since
|
|
|
|
|
R.
Scott Trumbull
|
58
|
Chairman
of the Board and Chief Executive Officer
|
2003
|
Peter
C. Maske
|
56
|
Senior
Vice President and President of Europa
|
1999
|
Gregg
C. Sengstack
|
48
|
Senior
Vice President, International & Fueling Systems
|
2005
|
Thomas
J. Strupp
|
53
|
Vice
President, Chief Financial Officer, Secretary, Water Transfer
Systems
|
2005
|
Thomas
A. Miller
|
57
|
Vice
President, Engineering and Electronic Technology
|
2005
|
Kirk
M. Nevins
|
63
|
Vice
President, Office of the Chairman
|
2005
|
Robert
J. Stone
|
42
|
Vice
President, Sales, Marketing and Technology
|
2005
|
Daniel
J. Crose
|
58
|
Vice
President, North American Submersible Operations
|
2003
|
Gary
D. Ward
|
51
|
Vice
President, Human Resources
|
2004
|
All
executive officers are elected annually by the Board of Directors at the Board
meeting held in conjunction with the annual meeting of shareowners. All
executive officers hold office until their successors are duly elected or until
their death, resignation, or removal by the Board. All executive officers have
been in executive or management positions of Franklin Electric for the last
five
years with the exception of R. Scott Trumbull and Thomas J. Strupp.
R.
Scott
Trumbull has been a Director of Franklin for the last seven years and was
Executive Vice President and Chief Financial Officer of Owens-Illinois, Inc.
prior to joining Franklin Electric as Chairman of the Board and Chief Executive
Officer in 2003.
Thomas
J.
Strupp was Vice President of Sales and Marketing at Pentair Water Group, Inc.
prior to joining Franklin Electric in 2005. Previously, he held other executive
positions in finance and general management with Sta-Rite Industries, Inc.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
The
number of shareowners of record as of January 12, 2007 was 935. The Company's
stock is traded on Nasdaq National Market: Symbol FELE.
All
share
and per share data included in this Form 10-K reflects the Company’s two-for-one
stock split effected in the form of a 100 percent stock distribution made on
June 15, 2004. Dividends paid and the price range per common share as quoted
by
the Nasdaq National Market for 2006 and 2005 were as follows:
DIVIDENDS
PER SHARE
|
|
PRICE
PER SHARE
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
1st
Quarter
|
|
$
|
.10
|
|
$
|
.08
|
|
$
|
38.70
|
|
$
|
55.72
|
|
$
|
37.36
|
|
$
|
44.31
|
|
2nd
Quarter
|
|
$
|
.11
|
|
$
|
.10
|
|
$
|
46.37
|
|
$
|
62.95
|
|
$
|
34.54
|
|
$
|
40.82
|
|
3rd
Quarter
|
|
$
|
.11
|
|
$
|
.10
|
|
$
|
45.70
|
|
$
|
54.19
|
|
$
|
37.01
|
|
$
|
45.29
|
|
4th
Quarter
|
|
$
|
.11
|
|
$
|
.10
|
|
$
|
49.50
|
|
$
|
57.35
|
|
$
|
39.20
|
|
$
|
44.75
|
|
Issuer
Purchases of Equity Securities:
The
Company did not purchase, under the Company’s stock repurchase program, any
shares of its common stock during the three months ended December 30,
2006.
ITEM
6. SELECTED FINANCIAL DATA
The
following selected financial data should be read in conjunction with our
consolidated financial statements. The information set forth below is not
necessarily indicative of future operations.
FIVE
YEAR
FINANCIAL SUMMARY (a)
FRANKLIN
ELECTRIC CO., INC.
|
|
(In
thousands, except per share amounts and ratios)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(b)
|
|
(c)
|
|
(d)
|
|
|
|
(e)
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
557,948
|
|
$
|
403,413
|
|
$
|
370,070
|
|
$
|
325,529
|
|
$
|
319,025
|
|
Gross
profit
|
|
|
191,557
|
|
|
142,821
|
|
|
126,191
|
|
|
106,670
|
|
|
99,707
|
|
Interest
expense
|
|
|
3,373
|
|
|
766
|
|
|
488
|
|
|
1,107
|
|
|
1,317
|
|
Income
taxes
|
|
|
30,671
|
|
|
24,953
|
|
|
21,126
|
|
|
16,950
|
|
|
17,730
|
|
Income
from continuing operations
|
|
|
56,762
|
|
|
45,796
|
|
|
38,368
|
|
|
34,649
|
|
|
31,318
|
|
Depreciation
and amortization
|
|
|
17,989
|
|
|
14,971
|
|
|
15,143
|
|
|
13,748
|
|
|
12,878
|
|
Capital
expenditures
|
|
|
23,190
|
|
|
17,845
|
|
|
21,110
|
|
|
15,261
|
|
|
15,568
|
|
Balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (f)
|
|
$
|
123,833
|
|
$
|
138,998
|
|
$
|
111,697
|
|
$
|
82,640
|
|
$
|
62,762
|
|
Property,
plant and equipment, net
|
|
|
115,976
|
|
|
95,732
|
|
|
95,924
|
|
|
83,916
|
|
|
76,033
|
|
Total
assets
|
|
|
526,925
|
|
|
379,762
|
|
|
333,473
|
|
|
281,971
|
|
|
258,583
|
|
Long-term
debt
|
|
|
51,043
|
|
|
12,324
|
|
|
13,752
|
|
|
14,960
|
|
|
25,946
|
|
Shareowners’
equity
|
|
|
345,831
|
|
|
267,562
|
|
|
234,333
|
|
|
192,938
|
|
|
153,138
|
|
Other
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income,
from continuing operations, to sales
|
|
|
10.2
|
%
|
|
11.4
|
%
|
|
10.4
|
%
|
|
10.6
|
%
|
|
9.8
|
%
|
Income,
from continuing operations, to average total assets
|
|
|
12.5
|
%
|
|
12.8
|
%
|
|
12.5
|
%
|
|
12.8
|
%
|
|
13.8
|
%
|
Current
ratio (g)
|
|
|
2.3
|
|
|
3.2
|
|
|
3.1
|
|
|
2.8
|
|
|
2.2
|
|
Number
of common shares outstanding
|
|
|
23,009
|
|
|
22,485
|
|
|
22,041
|
|
|
21,828
|
|
|
21,648
|
|
Per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
62.95
|
|
$
|
45.29
|
|
$
|
43.48
|
|
$
|
32.80
|
|
$
|
30.27
|
|
Low
|
|
|
38.70
|
|
|
34.54
|
|
|
29.01
|
|
|
23.00
|
|
|
19.95
|
|
Income,
from continuing operations, per weighted-average common share
|
|
|
2.49
|
|
|
2.06
|
|
|
1.75
|
|
|
1.60
|
|
|
1.45
|
|
Income,
from continuing operations, per weighted-average common share, assuming
dilution
|
|
|
2.43
|
|
|
1.97
|
|
|
1.67
|
|
|
1.53
|
|
|
1.38
|
|
Book
value (h)
|
|
|
14.84
|
|
|
11.54
|
|
|
10.17
|
|
|
8.53
|
|
|
6.74
|
|
Dividends
per common share
|
|
|
0.43
|
|
|
0.38
|
|
|
0.31
|
|
|
0.27
|
|
|
0.26
|
|
____________________________________________________________________________________________________
(a)
The
five year financial presentation excludes the sales and earnings of the
Engineered Motor Products Division (EMPD) which was sold during the fourth
quarter of 2006, for all periods presented.
(b)
Includes the results of operations of the Company’s wholly-owned subsidiary,
Little Giant Pump Company and Healy Systems, Inc., since their acquisition
in
the second and third quarter of 2006, respectively.
(c)
Includes the results of operations of the Company’s wholly-owned subsidiary,
Phil-Tite Enterprises, and the effect of an equity investment in Pioneer Pump,
Inc., both acquired in the third quarter of 2005.
(d)
Includes the results of operations of the Company’s wholly-owned subsidiary,
Franklin Pump Systems, since the acquisition of certain assets of JBD, Inc.
in
the third quarter of 2004.
(e)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Coverco S.r.l. and Intelligent Controls, Inc., since their acquisition in the
first and third quarters of 2002, respectively.
(f)
Working capital = Current assets minus Current liabilities
(g)
Current ratio = Current assets divided by Current liabilities
(h)
Book
value = Shareowners equity divided by weighted average common shares, assuming
full dilution
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
2006
// 2005
OVERVIEW
Sales
and
earnings from continuing operations for 2006 were up from 2005. The increase
in
sales was primarily related to sales from acquisitions. Sales growth benefited
from selling price realization gains and organic growth in Water Systems motor
and pump unit shipments as well as organic growth in Fueling Systems product
shipments, primarily flexible pipe. Earnings improved in 2006 primarily due
to
the increased sales as well as reduced manufacturing costs from the Company’s
growing production base in Mexico, The Czech Republic, and China. These
improvements were partially offset by higher commodity costs and increased
fixed
costs incurred in connection with selling, general and administrative spending
resulting from the Company’s strategy of selling to a more diversified customer
base by marketing its Water Systems products directly to distributors. Included
in the results for 2006 are stock-based compensation expenses recorded under
the
new accounting guidelines of Statement of Financial Accounting Standards (SFAS)
No. 123(R). The accounting pronouncement was adopted as of January 1, 2006.
During
the fourth quarter of 2006, the Company divested its Engineered Motor Products
Division (EMPD). For financial statement purposes, EMPD has been classified
as a
discontinued operation for all periods presented. As a discontinued operation,
EMPD’s sales and operational impact are excluded from the Company’s continuing
operations results and reported in the income statement section as “discontinued
operations”. EMPD’s sales for 2006 through the date of divestiture and for full
years 2005 and 2004 represented less than 10 percent of the Company’s total
sales. EMPD’s net earnings for 2006 through the date of divestiture and for full
year 2005 were about $0.01 per share in both years. EMPD had a net loss for
full
year 2004 of about $0.02 per share. Unless otherwise indicated, the following
discussion relates to continuing operations only.
RESULTS
OF OPERATIONS
Net
sales
from continuing operations for fiscal year 2006 were a record $557.9 million,
an
increase of $154.5 million or 38 percent compared to 2005 sales of $403.4
million. Incremental sales related to acquisitions for fiscal year 2006 were
about $86 million or 21 percent of prior year sales. The majority of the sales
growth from acquisitions resulted from the Little Giant Pump Company. Sales
growth benefited from price realization gains and organic growth in Water
Systems motor and pumps. Sales increased by gains in price realization of
approximately $20.6 million or 5 percent in 2006 resulting from increases in
product selling prices, changes in customer sales discount programs and greater
direct sales to distribution customers.
Water
Systems product sales worldwide were up about 37 percent for fiscal year 2006
compared to 2005. Sales revenue increased in all of Water Systems’ major product
categories during the year (including submersible motors, pumps, and drives
and
controls). Fueling Systems worldwide sales increased approximately 43 percent
in
2006 from fiscal year 2005.
Cost
of
sales from continuing operations as a percent of net sales for 2006 and 2005
was
65.7 percent and 64.6 percent, respectively. Cost of sales as a percent of
net
sales increased in 2006 from 2005 primarily as a result of product mix changes
as Fueling Systems’ products and complete Water Systems pumps (including Little
Giant product lines) represented a higher percentage of overall sales and these
product lines carry a higher cost of sales than submersible motor products.
Selling
and administrative (“SG&A”) expense as a percent of net sales for 2006 and
2005 was 18.4 percent and 17.6 percent, respectively. Incremental increases
in
SG&A expense were about $31.7 million in 2006 over 2005 primarily due to
acquisitions $15.5 million, stock-based compensation expense $2.7 million,
and
increased fixed costs incurred in connection with selling, general and
administrative spending resulting from the Company’s strategy of selling to a
more diversified customer base by marketing its Water Systems products directly
to distributors.
Interest
expense for 2006 and 2005 was $3.4 million and $0.8 million, respectively.
Interest expense increased in 2006 due to the debt incurred for the acquisitions
of the Little Giant Pump Company and Healy Systems.
Included
in other income for 2006 and 2005 was interest income of $1.9 million and $1.4
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 2006 and 2005 was income from equity investments of $0.7 million and $0.1
million, respectively.
Foreign
currency-based transactions produced a loss for 2006 of about $0.1 million
primarily due to euro rate changes relative to other currencies in Europe and
the U.S. dollar. Foreign currency-based transactions produced a gain for
2005 of $0.2 million primarily due to fluctuations between the U.S. dollar
and
the Chinese Yuan and Mexican Peso.
The
provision for income taxes for continuing operations in 2006 and 2005 was $30.7
million and $25.0 million, respectively. The effective tax rates were 35.1
and
35.3 percent for 2006 and 2005, respectively. The effective tax rate differs
from the United States statutory rate of 35 percent, generally due to foreign
income exclusion and R&D credits and due to the effects of state and foreign
income taxes, net of federal tax benefits.
Income
from continuing operations for 2006 was $56.8 million, or $2.43 per diluted
share, compared to 2005 income from continuing operations of $45.8 million
or
$1.97 per diluted share.
CAPITAL
RESOURCES AND LIQUIDITY
Cash
flows from operations provide the principal source of current liquidity. Net
cash flows provided by operating activities were $55.4 million and $74.2 million
in 2006 and 2005, respectively. The primary source of cash from operations
was
earnings. Significant uses of operating cash flow in 2006 and 2005 were
increases in inventory, $11.0 million and $10.6 million, respectively.
Inventories increased significantly in 2006 and 2005 as the Company increased
finished goods availability for pump products and distribution customers as
a
part of its new distribution channel strategy. Accounts receivable and accounts
payable and other accrued expenses were significant sources of operating cash
flow in 2005. Accounts receivable increases were primarily attributable to
the
timing of payments received from customers and increased sales during 2005.
Accounts payable increases were primarily attributable to the timing of payments
made to vendors and increased inventories during 2005.
Net
cash
flows used in investing activities were $131.6 million and $63.5 million
in 2006 and 2005, respectively. In 2006, the Company paid an aggregate of $159.2
million for acquisitions in 2006, net of cash acquired. The acquisitions
consisted of Little Giant Pump Company for $123.9 million and Healy Systems
for
$35.3 million. In 2005, the Company paid $36.0 million for short-term investment
securities, net of short-term investment securities sold. The Company paid
an
aggregate of $8.5 million for acquisitions in 2005, net of cash acquired. The
acquisitions consisted of $5.6 million for Phil-Tite and $2.9 million for an
equity investment in Pioneer.
Cash
flows from financing activities in 2006 were $54.8 million primarily from
long-term debt. Net cash flows used in financing activities were $9.0 million
in
2005. The Company paid $9.8 million and $8.5 million in dividends on the
Company’s common stock in 2006 and 2005, respectively. In 2005, another
principal use of cash was purchases of Company common stock under the Company’s
repurchase program. During 2005, the Company repurchased 366,308 shares of
its
common stock for $13.8 million.
Cash
and
cash equivalents at the end of 2006 were $34.0 million compared to $52.1 million
at the end of 2005. Working capital decreased $15.2 million in 2006 and the
current ratio of the Company was 2.3 for 2006 compared to a current ratio of
3.2
at the end of 2005. The Company’s working capital and current ratio decreased in
2006 as the Company invested its excess cash in acquisitions during the
year.
Principal
payments of $1.0 million per year on the Company’s $20.0 million of unsecured
long-term debt began in 1998 and will continue until 2008 when a balloon payment
of $10.0 million will fully retire the debt. In September 2004, the Company
entered into an unsecured, 60-month $80.0 million, amended and restated to
$120.0 million during December 2006, revolving credit agreement (the
“Agreement”). The Agreement includes a facility fee of one-tenth of one percent
on the committed amount. The Company had outstanding borrowings under the
Agreement of $50 million at December 30, 2006. The Company had no outstanding
borrowings under the Agreement at December 31, 2005. The Company is subject
to
certain financial covenants with respect to borrowings, interest coverage,
working capital, loans or advances, and investments. The Company was in
compliance with all debt covenants at all times in 2006 and 2005.
At
December 30, 2006, the Company had $5.9 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.
2005
//
2004
OVERVIEW
Sales
and
earnings for 2005 were up from 2004. The increase in sales was primarily related
to sales from acquisitions. Sales growth was benefited by price realization
gains and organic growth in Water Systems pump unit shipments. Earnings improved
in 2005 primarily due to the increased sales as well as reduced manufacturing
costs from the Company’s growing production base in Mexico, The Czech Republic,
and China. These improvements were partially offset by higher commodity costs
and increased fixed costs incurred in connection with the Company’s channel
strategy change for Water Systems product distribution. Included in the results
for 2005 are restructuring expenses of $1.9 million pre-tax, down from $5.5
million pre-tax in 2004.
RESULTS
OF OPERATIONS
Net
sales
from continuing operations for fiscal year 2005 were $403.4 million, an increase
of $33.3 million or 9 percent compared to 2004 sales of $370.1 million.
Incremental sales related to acquisitions for fiscal year 2005 were about $17.5
million or 4 percent of sales. The majority of the sales growth from
acquisitions resulted from the JBD, Inc. (the former Jacuzzi Brand) pump
company. Sales growth was benefited by price realization gains and organic
growth in Water Systems pump unit shipments. Water Systems product sales
worldwide were up about 10 percent for fiscal year 2005 compared to 2004. Sales
revenue increases in all of our Water Systems product categories during the
year
(including submersible motors, pumps, and drives and controls) were partially
offset by slightly lower unit volumes of motors and controls due to customers
buying ahead of announced price increases in 2004. The sales increase in 2005
for water related products by customers principally in the North American market
accounted for about $33.6 million or 15 percent. The sales increase by European
customers was about $1.8 million for
2005
or 2 percent (when comparing both years at the current year exchange rate).
Sales increased by gains in price realization of approximately $25 million
in
2005 resulting from increases in product selling prices, changes in customer
sales discount programs and greater direct sales to distribution customers.
Incremental sales for 2005 related to the acquisition of the assets of JBD,
Inc.
were about $16.1 million. Fueling Systems product sales worldwide were up about
2 percent compared to the prior year, mostly related to an acquisition in the
third quarter. Sales related to the acquisition of Phil-Tite Enterprises
(Phil-Tite), a manufacturer of fuel containment systems, were about $1.4 million
in 2005.
Cost
of
sales from continuing operations as a percent of net sales for 2005, and 2004
was 64.6 percent, and 65.9 percent, respectively. Cost of sales as a percent
of
net sales decreased in 2005 from 2004 primarily as a result of increased sales
volume, leveraging fixed costs, and improving profit margin. The improvement
in
gross profit from sales volume was offset by increased costs for certain
commodities used in the manufacture of the electric motors, primarily steel
and
copper, of $5.2 million for 2005. Manufacturing costs in 2005 were reduced
as
approximately 23 percent of global Water Systems manufacturing man-hours were
in
relatively low-cost countries (Mexico, The Czech Republic, and China) versus
about 13 percent in 2004. Gross profit was further improved by increases in
selling prices.
Selling
and administrative (“SG&A”) expense as a percent of net sales for 2005 and
2004 was 17.6 percent and 16.3 percent, respectively. SG&A costs increased
about $10.4 million in 2005 over 2004 partially due to increased selling and
marketing expenses of about $3.4 million related to the change in the Company’s
strategy of selling to a more diversified customer base by marketing its Water
Systems products direct to distributors. The Company expanded its sales force
and increased other selling expenses related to a broader customer base with
the
addition of the specialty Water Systems distributors as customers. Incremental
SG&A expenses related to acquisitions were about $2.7 million for 2005.
Restructuring
expenses of $1.9 million and $5.5 million were incurred during 2005 and 2004,
respectively. The expenses (included in “Restructure Expense” on the income
statement) related to the Global Manufacturing Realignment Program. The costs
were primarily for severance and other employee related expenses, as well as,
equipment transfers and travel. The Company completed phase one of the ongoing
program in 2005 and incurred pre-tax restructuring expense of about $7.5 million
over the two year period.
Interest
expense for 2005 and 2004 was $0.8 million and $0.5 million, respectively.
Interest expense increased in 2005 due to increased interest rates.
Included
in other income for 2005 and 2004 was interest income of $1.4 million and $0.5
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 2005 was income from equity investments of $0.1 million.
Foreign
currency-based transactions produced a gain for 2005 of $0.2 million primarily
due to fluctuations between the U.S. dollar and the Chinese Yuan and Mexican
Peso. The foreign currency-based transaction loss, $0.5 million, in 2004
was due primarily to the euro rate changes relative to other currencies in
Europe.
The
provision for income taxes from continuing operations in 2005 and 2004 was
$25.0
million, and $21.1 million, respectively. The effective tax rates were 35.3
and
35.5 percent for 2005 and 2004, respectively. The effective tax rate differs
from the United States statutory rate of 35 percent, generally due to foreign
income exclusion and R&D credits and due to the effects of state and foreign
income taxes, net of federal tax benefits.
Income
from continuing operations for 2005 was $45.8 million, or $1.97 per diluted
share, compared to 2004 income from continuing operations of $38.4 million,
or
$1.67 per diluted share. Per share data for 2004 reflects the Company’s
two-for-one stock split effected in the form of a 100 percent stock distribution
made on June 15, 2004.
CAPITAL
RESOURCES AND LIQUIDITY
Cash
flows from operations provide the principal source of current liquidity. Net
cash flows provided by operating activities were $74.2 million and $57.5 million
in 2005 and 2004, respectively. The primary source of cash from operations
was
earnings. Significant uses of operating cash flow in 2005 and 2004 were related
to increases in inventory, $10.6 million and $1.2 million, respectively.
Inventories increased significantly in 2005 as the Company increased finished
goods availability for distribution customers as a part of its new distribution
channel strategy. Accounts receivable and accounts payable and other accrued
expenses were significant sources of operating cash flow in 2005. Accounts
receivable increases were primarily attributable to the timing of payments
received from customers and increased sales during 2005. Accounts payable
increases were primarily attributable to the timing of payments made to vendors
and increased inventories during 2005. In 2004, a payment of $4.0 million was
made to qualified employee benefit plans.
Net
cash
flows used in investing activities were $63.5 million
and $30.4 million in 2005 and 2004, respectively. The Company paid $36.0 million
for short-term investment securities, net of short-term investment securities
sold in 2005. The Company paid an aggregate of $8.5 million for acquisitions
in
2005, net of cash acquired. The acquisitions consisted of $5.6 million for
Phil-Tite and $2.9 million for an equity investment in Pioneer. The primary
use
of cash for investing activities in 2004 was additions to property, plant and
equipment. Another use of cash in 2004 was for the acquisition of certain assets
of JBD, Inc. for $9.3 million.
Net
cash
flows used in financing activities were $9.0 million and $7.1 million in 2005
and 2004, respectively. The Company paid $8.5 million and $6.8 million in
dividends on the Company’s common stock in 2005 and 2004, respectively. Another
principal use of cash was purchases of Company common stock under the Company’s
repurchase program. During 2005 and 2004, the Company repurchased 366,308 shares
of its common stock for $13.8 million and 102,800 for $3.1 million,
respectively.
Cash
and
cash equivalents at the end of 2005 were $52.1 million compared to $50.6 million
at the end of 2004. Working capital increased $27.3 million in 2005 and the
current ratio of the Company was 3.2 for 2005 compared to a current ratio of
3.1
at the end of 2004.
Principal
payments of $1.0 million per year on the Company’s $20.0 million of unsecured
long-term debt began in 1998 and will continue until 2008 when a balloon payment
of $10.0 million will fully retire the 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. The Company had no outstanding borrowings
under
the Agreement at December 31, 2005. The Company is subject to certain financial
covenants with respect to borrowings, interest coverage, working capital, loans
or advances, and investments. The Company was in compliance with all debt
covenants at all times in 2005 and 2004.
At
December 31, 2005, the Company had $3.6 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.
2006
AGGREGATE
CONTRACTUAL OBLIGATIONS
Most
of
the Company’s contractual obligations to third parties are debt obligations. In
addition, the Company has certain contractual obligations for future lease
payments, as well as, purchase obligations. The payment schedule for these
contractual obligations is as follows:
(In
millions)
|
|
|
|
|
|
Less
Than
|
|
|
|
|
|
More
Than
|
|
|
|
Total
|
|
1
Year
|
|
2-3
Years
|
|
4-5
Years
|
|
5
Years
|
|
Debt
|
|
$
|
61.3
|
|
$
|
11.0
|
|
$
|
50.3
|
|
$
|
-
|
|
$
|
-
|
|
Debt
interest
|
|
|
5.7
|
|
|
3.3
|
|
|
2.4
|
|
|
-
|
|
|
-
|
|
Capital
leases
|
|
|
1.1
|
|
|
0.3
|
|
|
0.8
|
|
|
-
|
|
|
-
|
|
Operating
leases
|
|
|
22.4
|
|
|
5.3
|
|
|
7.1
|
|
|
3.1
|
|
|
6.9
|
|
Contingency
from Healy acquisition
|
|
|
0.4
|
|
|
0.4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchase
obligations
|
|
|
5.9
|
|
|
5.9
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
96.8
|
|
$
|
26.2
|
|
$
|
60.6
|
|
$
|
3.1
|
|
$
|
6.9
|
|
Debt
interest includes interest on the balance outstanding under the Company’s
fixed-to-variable interest rate swap. Per the swap contract, the Company
receives interest at a fixed rate of 6.3 percent and pays interest at a variable
rate based on the three month London Interbank Offered Rates (LIBOR) rate plus
a
spread. The average variable rate paid in 2006 was 7.9 percent. Debt interest
also includes interest under the Company’s current credit agreement. The average
interest rate for 2006 was 5.5 percent based on the LIBOR plus an interest
spread. The remaining interest is calculated based on the fixed rate of 6.3
percent for the Company’s long-term insurance company debt.
The
Healy
Systems stock purchase agreement provided for additional contingent payments
of
5 percent of certain Healy Systems product sales over the next five years,
of
which only one year could be estimated, therefore recognized and presented
above.
The
Company also has pension and other post-retirement benefit obligations not
included in the table above which will result in future payments.
ACCOUNTING
PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board (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 Statements of Financial
Accounting Standards (SFAS) 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 reviewed the impact of FIN 48 on its financial
statements and does
not
believe the adoption of this standard will have a significant impact on the
Company’s results of operations, financial position, or statement of cash flows.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS No.
157 gives guidance for measuring assets and liabilities using fair value. Fair
value is a market-based measurement, not an entity-specific measurement, and
sets out a fair value hierarchy with the highest priority being quoted prices
in
active markets. The fair value measurements are disclosed by level within that
hierarchy. While the Statement does not add any new fair value measurements,
it
does change current practice. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, although earlier application is
encouraged. The Company is currently evaluating the impact of adopting
SFAS No. 157 on its financial statements, but does not believe the adoption
of this standard will have a significant impact on the Company’s results of
operations, financial position, or statement of cash flows.
In
September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Financial Statements — Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements”. SAB No. 108
addresses how a registrant should quantify the effect of an error on the
financial statements. The SEC concludes that a dual approach should be used
to
compute the amount of a misstatement. Specifically, the amount should be
computed using both a “rollover” (current year income statement perspective) and
“iron curtain” (year-end balance sheet perspective) methods. SAB
108
is effective for fiscal years ending after November 15, 2006. The adoption
of
SAB 108 did not have a material impact on the Company’s results of operations,
financial position, or statement of cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”, which required
recognition of the funded status of defined benefit pension and other
postretirement plans, with a corresponding after-tax adjustment to accumulated
other comprehensive loss. In 2006, the Company adopted SFAS No. 158. The
adoption of SFAS No. 158, together with the annual remeasurement of our pension
plans, resulted in a net of tax, $1.3 million, decrease in Shareholders’ equity.
This decrease does not affect cash flows or the funded status of our benefit
plans.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at
fair
value that are not currently required to be measured at fair value. SFAS No.
159
is effective for fiscal years beginning after November 15, 2007, with early
adoption permitted provided the entity also elects to apply the provisions
of
SFAS No. 157. The Company is currently evaluating the impact of adopting
SFAS No. 159 on its financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis of its financial condition and results of operations
are
based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts
of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. On an on-going basis, management evaluates
its estimates, including those related to revenue recognition, allowance for
doubtful accounts, accounts receivable, inventories, recoverability of
long-lived assets, intangible assets, income taxes, warranty obligations,
stock-based compensation, pension and other employee benefit plan obligations,
and contingencies. Management bases its estimates on historical experience
and
on other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The
Company’s critical accounting policies are identified below:
Revenue
Recognition:
Products
are shipped utilizing common carriers direct to customers or, for consignment
products, to customer-specified warehouse locations. Sales are recognized when
the Company’s products are shipped direct or, in the case of consignment
products, transferred from the customer-specified warehouse location to the
customer, at which time transfer of ownership and risk of loss pass to the
customer. The Company records net sales revenues after discounts at the time
of
sale based on specific discount programs in effect, historical data, and
experience.
Warranty
Obligations:
Warranty
terms are generally two years from date of manufacture or one year from date
of
installation. Warranty liability is recorded when revenue is recognized and
is
based on actual historical return rates from the most recent warranty periods.
While the Company’s warranty costs have historically been within its calculated
estimates, it is possible that future warranty costs could exceed those
estimates.
Stock-Based
Compensation:
Prior
to
January 1, 2006, the Company accounted for stock-based employee compensation
plans under the measurement and recognition provisions of Accounting Principles
Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related Interpretations, as permitted by SFAS No. 123, “Accounting for
Stock-Based Compensation.” Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS No. 123(R), using the
modified prospective transition method. Under that transition method,
compensation expense recognized includes: (a) compensation expense for all
stock-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 SFAS No. 123; and (b) compensation expense
for all stock-based payments granted on or after January 1, 2006, based on
the grant date fair value estimated in accordance with the provisions of
SFAS No. 123(R).
The
fair
value of each option award, both before and after the adoption of SFAS No.
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 was 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 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
|
Forfeiture
rate
|
5.44%
|
In
accordance with SFAS No. 123, for periods prior to January 1, 2006, the Company
disclosed pro forma net income or loss and pro forma net income or loss per
share as if the fair value-based method in measuring compensation expense for
its stock-based incentive programs had been applied. 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.
Accounts
Receivable and Allowance for Uncollectible Accounts:
Accounts
receivable is comprised of balances due from customers net of estimated
allowances for uncollectible accounts. In determining allowances, historical
trends are evaluated and economic conditions and specific customer issues are
reviewed to arrive at appropriate allowances. Allowance levels change as
customer-specific circumstances and the other analysis areas noted above change.
Differences may result in the amount for allowances if actual experience differs
significantly from management estimates; such differences have not historically
been material.
Inventory
Valuation:
The
Company uses certain estimates and judgments to value inventory. Inventory
is
recorded at the lower of cost or market. The Company reviews its inventories
for
excess or obsolete products or components. Based on an analysis of historical
usage and management’s evaluation of estimated future demand, market conditions
and alternative uses for possible excess or obsolete parts, reserves are
recorded or changed. Significant fluctuations in demand or changes in market
conditions could impact management’s estimates of necessary reserves. Excess and
obsolete inventory is periodically disposed through sale to third parties,
scrapping or other means, and the reserves are appropriately reduced.
Differences may result in the amount for reserves if actual experience differs
significantly from management estimates; such differences have not historically
been material.
Business
Combinations:
The
Company follows the guidance under SFAS No. 141, “Business Combinations.” The
acquisition purchase price is allocated to the assets acquired and liabilities
assumed based upon their respective fair values and subject to change during
the
twelve month period subsequent to the acquisition date. The Company utilizes
management estimates and independent third-party valuation firms to assist
in
determining the fair values of assets acquired and liabilities assumed. Such
estimates and valuations require the Company to make significant assumptions,
including projections of future events and operating
performance.
Goodwill
and Other Intangible Assets:
Goodwill
is not amortized; however it is tested for impairment annually or more
frequently whenever events or changes in circumstances indicate that the asset
may be impaired. The Company performs impairment testing for its reporting
units
using future cash flows based on management’s judgments and assumptions. An
asset’s value is impaired if the estimate of the aggregate future cash flows,
undiscounted and without interest charges, to be generated are less than the
carrying amount of the reporting unit including goodwill. Such cash flows
consider factors such as expected future operating income and historical trends,
as well as the effects of demand and competition. To the extent impairment
has
occurred, the loss will be measured as the excess of the carrying amount of
the
reporting unit including goodwill over the fair value. Such estimates require
the use of judgment and numerous subjective assumptions, which, if actual
experience varies, could result in material differences in the requirements
for
impairment charges.
Income
Taxes:
Under
the
requirements of SFAS No. 109, “Accounting for Income Taxes”, the Company records
deferred tax assets and liabilities for the future tax consequences attributable
to differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Management judgment is required in determining the
Company’s provision for income taxes, deferred tax assets and liabilities,
which, if actual experience varies, could result in material adjustments to
deferred tax assets and liabilities. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
Pension
and Employee Benefit Obligations:
With
the
assistance of the Company’s actuaries, the discount rate used to determine
pension and post-retirement plan liabilities is selected using a yield-curve
approach. The yield-curve approach discounts each expected cash flow of the
liability stream at an interest rate based on high quality corporate bonds.
The
present value of the discounted cash flows is summed and an equivalent
weighted-average discount rate is calculated. A change in the discount rate
selected by the Company of 25 basis points would result in a change of about
$0.1 million of employee benefit expense. The Company consults with actuaries,
asset allocation consultants and investment advisors to determine the expected
long-term rate of return on plan assets based on historical and projected rates
of return on the types of assets in which the plans have invested. A change
in
the long-term rate of return selected by the Company of 25 basis points would
result in a change of about $0.4 million of employee benefit expense.
Contingencies:
The
Company is subject to the possibility of various loss contingencies arising
in
the ordinary course of business resulting from litigation, claims and other
commitments, and from a variety of environmental and pollution control laws
and
regulations. The Company considers the likelihood of loss or the incurrence
of a
liability, as well as the ability to reasonably estimate the amount of loss,
in
determining loss contingencies. The Company accrues an estimated loss
contingency when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. The amount of the reserves is
determined, if any, with the assistance of outside legal counsel or other
governmental regulatory agencies. The Company regularly evaluates current
information available to determine whether the accruals should be adjusted.
FACTORS
THAT MAY AFFECT FUTURE RESULTS
Any
forward-looking statements contained herein involve risks and uncertainties,
including, but not limited to, general economic and currency conditions, various
conditions specific to the Company’s business and industry, market demand,
competitive factors, changes in distribution channels, supply constraints,
technology factors, litigation, government and regulatory actions, the Company’s
accounting policies, future trends, and other risks, all as described in Item
1A
and Exhibit 99.1 of this Form 10-K. 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-K are based
upon information presently available. The Company does not assume any obligation
to update any forward-looking information.
ITEM
7A. 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.
The
results of operations are exposed to changes in interest rates primarily with
respect to borrowings under the Company’s revolving credit agreement (credit
facility), where interest rates are tied to the prime rate or LIBOR. The average
interest rate associated with borrowings against the credit facility paid by
the
Company in 2006 was 5.5 percent. As of December 30, 2006, the Company had $50.0
million outstanding under the credit facility. The Company does not, as a matter
of policy, enter into derivative contracts for speculative purposes. The
interest rate swap agreement entered into by the Company on September 24, 2003,
had a notional amount of $10.0 million under which the Company receives a fixed
rate of interest of 6.3 percent and pays interest at a variable rate based
on a
three month LIBOR rate plus a spread. The average rate associated with the
swap
agreement paid by the Company in 2006 was 7.9 percent. The fixed-to-variable
interest rate swap is accounted for as a fair value hedge, per SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”, with
effectiveness assessed based on changes in the fair value of the underlying
debt
using incremental borrowing rates currently available on loans with similar
terms and maturities. The effective gain or loss on the interest rate swap
and
that of the underlying debt are equal and offsetting resulting in no net effect
to earnings. Based on the Company’s variable rate debt at December 30, 2006, a
hypothetical 1.0 percent increase in interest rates would result in an annual
increase in interest expense of approximately $0.6 million.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED
STATEMENTS OF INCOME
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
(In
thousands, except per share amounts)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
557,948
|
|
$
|
403,413
|
|
$
|
370,070
|
|
Cost
of sales
|
|
|
366,391
|
|
|
260,592
|
|
|
243,879
|
|
Gross
profit
|
|
|
191,557
|
|
|
142,821
|
|
|
126,191
|
|
Selling
and administrative expenses
|
|
|
102,478
|
|
|
70,799
|
|
|
60,413
|
|
Restructure
expense
|
|
|
-
|
|
|
1,920
|
|
|
5,536
|
|
Operating
income
|
|
|
89,079
|
|
|
70,102
|
|
|
60,242
|
|
Interest
expense
|
|
|
(3,373
|
)
|
|
(766
|
)
|
|
(488
|
)
|
Other
income
|
|
|
1,791
|
|
|
1,200
|
|
|
219
|
|
Foreign
exchange income/(loss)
|
|
|
(64
|
)
|
|
213
|
|
|
(479
|
)
|
Income
before income taxes
|
|
|
87,433
|
|
|
70,749
|
|
|
59,494
|
|
Income
taxes
|
|
|
30,671
|
|
|
24,953
|
|
|
21,126
|
|
Income
from continuing operations
|
|
|
56,762
|
|
|
45,796
|
|
|
38,368
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
381
|
|
|
344
|
|
|
(460
|
)
|
Income
taxes
|
|
|
145
|
|
|
131
|
|
|
(175
|
)
|
Income/(loss)
from discontinued operations
|
|
|
236
|
|
|
213
|
|
|
(285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
56,998
|
|
$
|
46,009
|
|
$
|
38,083
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share
|
|
|
|
|
|
|
|
|
|
|
Basic
continuing operations
|
|
$
|
2.49
|
|
$
|
2.06
|
|
$
|
1.75
|
|
Basic
discontinued operations
|
|
|
0.01
|
|
|
0.01
|
|
|
(0.02
|
)
|
|
|
$
|
2.50
|
|
$
|
2.07
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
continuing operations
|
|
$
|
2.43
|
|
$
|
1.97
|
|
$
|
1.67
|
|
Diluted
discontinued operations
|
|
|
0.01
|
|
|
0.01
|
|
|
(0.02
|
)
|
|
|
$
|
2.44
|
|
$
|
1.98
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.43
|
|
$
|
0.38
|
|
$
|
0.31
|
|
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
BALANCE SHEETS
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
ASSETS
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$
|
33,956
|
|
$
|
52,136
|
|
Investments
|
|
|
-
|
|
|
35,988
|
|
Receivables
(less allowances of $2,786 and $2,204, respectively)
|
|
|
52,679
|
|
|
30,165
|
|
Inventories:
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
39,195
|
|
|
25,267
|
|
Work-in-process
|
|
|
14,414
|
|
|
10,647
|
|
Finished
goods
|
|
|
76,661
|
|
|
51,754
|
|
LIFO
reserve
|
|
|
(18,707
|
)
|
|
(17,287
|
)
|
|
|
|
111,563
|
|
|
70,381
|
|
|
|
|
|
|
|
|
|
Other
current assets (including deferred income taxes of $14,914 and $10,744,
respectively)
|
|
|
19,592
|
|
|
14,350
|
|
Total
current assets
|
|
|
217,790
|
|
|
203,020
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
56,352
|
|
|
53,106
|
|
Machinery
and equipment
|
|
|
169,119
|
|
|
164,926
|
|
|
|
|
225,471
|
|
|
218,032
|
|
Less
allowance for depreciation
|
|
|
(109,495
|
)
|
|
(122,300
|
)
|
|
|
|
115,976
|
|
|
95,732
|
|
|
|
|
|
|
|
|
|
Other
assets (including deferred income taxes of $1,269 and $0,
respectively)
|
|
|
14,375
|
|
|
13,064
|
|
Intangible
assets
|
|
|
45,257
|
|
|
9,964
|
|
Goodwill
|
|
|
133,527
|
|
|
57,982
|
|
Total
assets
|
|
$
|
526,925
|
|
$
|
379,762
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
30,832
|
|
$
|
26,409
|
|
Accrued
liabilities
|
|
|
40,166
|
|
|
34,223
|
|
Income
taxes
|
|
|
11,649
|
|
|
2,087
|
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
11,310
|
|
|
1,303
|
|
Total
current liabilities
|
|
|
93,957
|
|
|
64,022
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
51,043
|
|
|
12,324
|
|
Deferred
income taxes
|
|
|
4,597
|
|
|
4,296
|
|
Employee
benefit plan obligations
|
|
|
25,969
|
|
|
25,830
|
|
Other
long-term liabilities
|
|
|
5,528
|
|
|
5,728
|
|
|
|
|
|
|
|
|
|
Contingencies
and commitments (note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
Common
shares (45,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
outstanding
(23,009
and 22,485, respectively)
|
|
|
2,301
|
|
|
2,249
|
|
Additional
capital
|
|
|
94,356
|
|
|
74,717
|
|
Retained
earnings
|
|
|
236,780
|
|
|
190,381
|
|
Loan
to ESOP trust
|
|
|
(200
|
)
|
|
(432
|
)
|
Accumulated
other comprehensive income
|
|
|
12,594
|
|
|
647
|
|
Total
shareowners' equity
|
|
|
345,831
|
|
|
267,562
|
|
Total
liabilities and shareowners' equity
|
|
$
|
526,925
|
|
$
|
379,762
|
|
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
|
2006
|
|
2005
|
|
2004
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
56,998
|
|
$
|
46,009
|
|
$
|
38,083
|
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
17,989
|
|
|
14,971
|
|
|
15,143
|
|
Stock
based compensation
|
|
|
3,206
|
|
|
147
|
|
|
-
|
|
Deferred
income taxes
|
|
|
(9,933
|
)
|
|
284
|
|
|
1,219
|
|
Gain/loss
on divestiture and disposals of plant and equipment
|
|
|
(4,637
|
)
|
|
174
|
|
|
187
|
|
Changes
in assets and liabilities, before the effect of
acquisitions
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(5,380
|
)
|
|
7,354
|
|
|
(1,243
|
)
|
Inventories
|
|
|
(10,978
|
)
|
|
(10,642
|
)
|
|
(1,167
|
)
|
Accounts
payable and other accrued expenses
|
|
|
(4,540
|
)
|
|
5,930
|
|
|
2,276
|
|
Accrued
income taxes
|
|
|
15,012
|
|
|
8,076
|
|
|
5,029
|
|
Excess
tax from share-based compensation arrangements
|
|
|
(5,743
|
)
|
|
-
|
|
|
-
|
|
Employee
benefit plans
|
|
|
4,956
|
|
|
2,420
|
|
|
(3,491
|
)
|
Other,
net
|
|
|
(1,561
|
)
|
|
(559
|
)
|
|
1,471
|
|
Net
cash flows from operating activities
|
|
|
55,389
|
|
|
74,164
|
|
|
57,507
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Additions
to plant and equipment
|
|
|
(23,190
|
)
|
|
(17,845
|
)
|
|
(21,110
|
)
|
Proceeds
from sale of plant and equipment
|
|
|
343
|
|
|
1,073
|
|
|
29
|
|
Additions
to other assets
|
|
|
-
|
|
|
(2,184
|
)
|
|
(10
|
)
|
Purchase
of securities
|
|
|
(63,500
|
)
|
|
(236,773
|
)
|
|
-
|
|
Proceeds
from sale of securities
|
|
|
99,488
|
|
|
200,785
|
|
|
-
|
|
Cash
paid for acquisitions, net of cash acquired
|
|
|
(159,205
|
)
|
|
(8,509
|
)
|
|
(9,307
|
)
|
Proceeds
from sale of business
|
|
|
14,470
|
|
|
-
|
|
|
-
|
|
Net
cash flows from investing activities
|
|
|
(131,594
|
)
|
|
(63,453
|
)
|
|
(30,398
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
130,000
|
|
|
-
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(81,296
|
)
|
|
(1,280
|
)
|
|
(1,553
|
)
|
Proceeds
from issuance of common stock
|
|
|
10,120
|
|
|
14,298
|
|
|
4,110
|
|
Excess
tax from share-based compensation arrangements
|
|
|
5,743
|
|
|
-
|
|
|
-
|
|
Purchases
of common stock
|
|
|
(198
|
)
|
|
(13,775
|
)
|
|
(3,091
|
)
|
Reduction
of loan to ESOP Trust
|
|
|
232
|
|
|
233
|
|
|
232
|
|
Dividends
paid
|
|
|
(9,833
|
)
|
|
(8,447
|
)
|
|
(6,815
|
)
|
Net
cash flows from financing activities
|
|
|
54,768
|
|
|
(8,971
|
)
|
|
(7,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
3,257
|
|
|
(208
|
)
|
|
650
|
|
Net
change in cash and equivalents
|
|
|
(18,180
|
)
|
|
1,532
|
|
|
20,642
|
|
Cash
and equivalents at beginning of year
|
|
|
52,136
|
|
|
50,604
|
|
|
29,962
|
|
Cash
and equivalents at end of year
|
|
$
|
33,956
|
|
$
|
52,136
|
|
$
|
50,604
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
24.4
|
|
$
|
19.3
|
|
$
|
19.0
|
|
Cash
paid for interest
|
|
$
|
3.1
|
|
$
|
0.7
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
|
|
|
Payable
to seller of Healy Systems, Inc.
|
|
$
|
3.0
|
|
$
|
-
|
|
$
|
-
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$
|
0.5
|
|
$
|
0.5
|
|
$
|
0.1
|
|
Receivable
from sale of EMPD
|
|
$
|
2.2
|
|
$
|
-
|
|
$
|
-
|
|
See
Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF SHAREOWNERS’ EQUITY AND COMPREHENSIVE INCOME
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
(In
thousands)
|
|
|
|
Common
Shares
Outstanding
|
|
Common
Stock
|
|
Additional
Capital
|
|
Retained
Earnings
|
|
Loan
to ESOP Trust
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
year end 2003
|
|
|
21,828
|
|
$
|
2,182
|
|
$
|
45,826
|
|
$
|
139,057
|
|
$
|
(897
|
)
|
$
|
6,770
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
38,083
|
|
|
|
|
|
|
|
$
|
38,083
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,935
|
|
|
6,935
|
|
Minimum
pension liability adjustment, net of tax $141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211
|
)
|
|
(211
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,807
|
|
Dividends
on common stock
|
|
|
|
|
|
|
|
|
|
|
|
(6,815
|
)
|
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
337
|
|
|
35
|
|
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock repurchased or received for stock options exercised
|
|
|
(124
|
)
|
|
(13
|
)
|
|
|
|
|
(3,768
|
)
|
|
|
|
|
|
|
|
|
|
Tax
benefit of stock options exercised
|
|
|
|
|
|
|
|
|
2,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payment from ESOP
|
|
|
______
|
|
|
______
|
|
|
______
|
|
|
________
|
|
|
232
|
|
|
_______
|
|
|
|
|
Balance
year end 2004
|
|
|
22,041
|
|
$
|
2,204
|
|
$
|
52,743
|
|
$
|
166,557
|
|
$
|
(665
|
)
|
$
|
13,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
46,009
|
|
|
|
|
|
|
|
$
|
46,009
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,405
|
)
|
|
(9,405
|
)
|
Minimum
pension liability adjustment, net of tax $2,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,442
|
)
|
|
(3,442
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,162
|
|
Dividends
on common stock
|
|
|
|
|
|
|
|
|
|
|
|
(8,447
|
)
|
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
795
|
|
|
81
|
|
|
14,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
15
|
|
|
1
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock repurchased or received for stock options exercised
|
|
|
(366
|
)
|
|
(37
|
)
|
|
|
|
|
(13,738
|
)
|
|
|
|
|
|
|
|
|
|
Tax
benefit of stock options exercised
|
|
|
|
|
|
|
|
|
6,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payment from ESOP
|
|
|
______
|
|
|
______
|
|
|
______
|
|
|
________
|
|
|
233
|
|
|
____
|
|
|
|
|
Balance
year end 2005
|
|
|
22,485
|
|
$
|
2,249
|
|
$
|
74,717
|
|
$
|
190,381
|
|
$
|
(432
|
)
|
$
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
56,998
|
|
|
|
|
|
|
|
$
|
56,998
|
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,306
|
|
|
8,306
|
|
Minimum
pension liability adjustment, net of tax $(3,278)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,917
|
|
|
4,917
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,221
|
|
SFAS
158 transition amount, net of tax $851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,276
|
)
|
|
|
|
Dividends
on common stock
|
|
|
|
|
|
|
|
|
|
|
|
(9,833
|
)
|
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
513
|
|
|
50
|
|
|
10,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
26
|
|
|
3
|
|
|
3,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock repurchased or received for stock options exercised
|
|
|
(15
|
)
|
|
(1
|
)
|
|
|
|
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
Tax
benefit of stock options exercised
|
|
|
|
|
|
|
|
|
5,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payment from ESOP
|
|
|
______
|
|
|
______
|
|
|
______
|
|
|
________
|
|
|
232
|
|
|
_______
|
|
|
|
|
Balance
year end 2006
|
|
|
23,009
|
|
$
|
2,301
|
|
$
|
94,356
|
|
$
|
236,780
|
|
$
|
(200
|
)
|
$
|
12,594
|
|
|
|
|
See
Notes
to Consolidated Financial Statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company--“Franklin
Electric” or the “Company” shall refer to Franklin Electric Co., Inc. and its
consolidated subsidiaries.
Fiscal
Year--The
Company's fiscal year ends on the Saturday nearest December 31. The financial
statements and accompanying notes are as of and for the years ended December
30,
2006 (52 weeks), December 31, 2005 (52 weeks), and January 1, 2005 (52 weeks)
and referred to as 2006, 2005, and 2004, respectively.
Principles
of Consolidation--The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant inter-company balances and transactions are
eliminated.
Revenue
Recognition--Products
are shipped utilizing common carriers direct to customers or, for consignment
products, to customer specified warehouse locations. Sales are recognized when
the Company’s products are shipped direct or, in the case of consignment
products, transferred from the customer specified warehouse location to the
customer, at which time transfer of ownership and risk of loss pass to the
customer. The Company records net sales revenues after discounts at the time
of
sale based on specific discount programs in effect, historical data, and
experience.
Research
and Development Expense--The
Company’s research and development activities are charged to expense in the
period incurred. The Company spent approximately $8.1 million in 2006, $5.6
million in 2005, and $4.2 million in 2004 on research and development.
Cash
Equivalents--Cash
equivalents consist of highly liquid investments which are readily convertible
to cash, present insignificant risk of changes in value due to interest rate
fluctuations, and have original or purchased maturities of three months or
less.
Fair
Value of Financial Instruments--The
carrying amounts for cash and equivalents, and short-term debt approximate
fair
value. The fair value of long-term debt is estimated based on current borrowing
rates for similar issues and current exchange rates for foreign currency
denominated amounts, which is not materially different from the recorded value.
The Company’s off-balance sheet instruments consist of operating leases and an
interest rate swap, which are not significant.
Accounts
Receivable and Allowance for Uncollectible Accounts--Accounts
receivable are stated at estimated net realizable value. Accounts receivable
is
comprised of balances due from customers, net of earned discounts and estimated
allowances for uncollectible accounts. Earned discounts are based on specific
customer agreement terms. In determining allowances, historical trends are
evaluated and economic conditions and specific customer issues are reviewed
to
arrive at appropriate allowances. Allowance levels change as customer-specific
circumstances and the other analysis areas noted above change. Differences
may
result in the amount for allowances if actual experience differs significantly
from management estimates; such differences have not historically been
material.
Inventories--Inventories
are stated at the lower of cost or market. The majority of the cost of domestic
and foreign inventories is determined using the first-in, first-out (FIFO)
method; a portion of domestic inventory costs are determined using the last-in,
first-out (LIFO) method. Inventories stated on the LIFO method were
approximately 15.7 percent and
31.5
percent of total inventories in 2006 and 2005, respectively. The Company reviews
its inventories for excess or obsolete products or components. Based on an
analysis of historical usage and management’s evaluation of estimated future
demand, market conditions and alternative uses for possible excess or obsolete
parts, reserves are recorded or changed.
Property,
Plant and Equipment--Property,
plant and equipment are stated at cost. Depreciation of plant and equipment
is
provided principally on a straight line basis over the estimated useful lives
of
5 to 20 years for land improvements and buildings, 2 to 10 years for machinery
and equipment. Maintenance, repairs, and renewals of a minor nature are expensed
as incurred. Betterments and major renewals which extend the useful lives of
buildings, improvements, and equipment are capitalized. Accelerated methods
are
used for income tax purposes. The Company reviews its property, plant and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. The Company’s
depreciation expense was $15.8, $13.5, and $13.0 million in 2006, 2005, and
2004, respectively.
Asset
Retirement Obligations--The
Company recognizes and reports obligations associated with tangible asset
retirements that result from the acquisition, disposal, or normal operation
of a
long-lived asset. Obligations are recognized and recorded at fair value in
the
period in which the obligation is incurred and a reasonable estimate made,
or
recognized when a reasonable estimate can be made.
Goodwill
and Other Intangible Assets--The
Company performs goodwill impairment testing for its reporting units, annually
or more frequently whenever events or a change in circumstances indicate that
the asset may be impaired. Goodwill is then adjusted in the event of impairment.
Amortization is recorded for other intangible assets with definite lives.
Derivatives
and Hedging--On
September 24, 2003 the Company entered into a fixed-to-variable interest rate
swap to achieve a desired proportion of variable vs. fixed rate debt. The
fixed-to-variable interest rate swap is accounted for as a fair value hedge,
per
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,
with effectiveness assessed based on changes in the fair value of the underlying
debt using incremental borrowing rates currently available on loans with similar
terms and maturities. The effective gain or loss on the interest rate swap
and
that of the underlying debt are equal and offsetting resulting in no net effect
to earnings.
Warranty
Obligations--Warranty
terms are generally two years from date of manufacture or one year from date
of
installation. Warranty liability is recorded when revenue is recognized and
is
based on actual historical return rates from the most recent warranty periods.
Income
Taxes
--Income
taxes are accounted for in accordance with SFAS No. 109, “Accounting for
Income Taxes”. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
basis
of assets and liabilities and net operating loss and credit carryforwards using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-Based
Compensation--
Prior
to January 1, 2006, the Company accounted for stock-based employee compensation
plans under the recognition and measurement provisions of Accounting Principles
Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related Interpretations, as permitted by SFAS No. 123, “Accounting for
Stock-Based Compensation.” Effective January 1, 2006, the Company adopted the
fair value recognition provisions of SFAS 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 SFAS No. 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 SFAS No. 123(R). Results
for prior periods have not been restated.
For
pro
forma information regarding net income and earnings per share, the fair value
for the options awarded in 2005 and 2004, for all fixed stock option plans
was
estimated as of the date of the grant using a Black-Scholes option valuation
model. The Black-Scholes option valuation model used by the Company was
developed for use in estimating the fair value of fully tradable options which
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility.
Earnings
Per Common Share--Basic
and diluted earnings per share are computed and disclosed under SFAS No. 128,
“Earnings Per Share”. Earnings per share are based on the weighted-average
number of common shares outstanding. Diluted earnings per share is computed
based upon earnings applicable to common shares divided by the weighted-average
number of common shares outstanding during the period adjusted for the effect
of
other dilutive securities.
Translation
of Foreign Currencies--All
assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated at year end exchange rates. All
revenue and expense accounts are translated at average rates in effect during
the respective period. Adjustments for translating foreign currency assets
and
liabilities in U.S. dollars are included as a component of other comprehensive
income. Transaction gains and losses that arise from exchange rate
fluctuations are included in the results of operations in “Other income”, as
incurred.
Significant
Estimates and Assumptions--The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of expenses during the
reporting periods. Significant estimates and assumptions by management affect
accrued expenses, stock-based compensation, pension, goodwill impairment,
long-lived assets and inventory valuation.
Although
the Company regularly assesses these estimates, actual results could differ
materially from these estimates. The Company bases its estimates on historical
experience and various other assumptions that it believes to be reasonable
under
the circumstances.
Reclassifications--All
share and per share data included in these financial statements reflect the
Company’s two-for-one stock splits effected in the form of a 100 percent stock
distribution made on June 15, 2004.
2.
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board (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 SFAS 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 reviewed the impact of FIN 48 on its financial
statements and does
not
believe the adoption of this standard will have a significant impact on the
Company’s results of operations, financial position, or statement of cash flows.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS No.
157 gives guidance for measuring assets and liabilities using fair value. Fair
value is a market-based measurement, not an entity-specific measurement, and
sets out a fair value hierarchy with the highest priority being quoted prices
in
active markets. The fair value measurements are disclosed by level within that
hierarchy. While the Statement does not add any new fair value measurements,
it
does change current practice. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, although earlier application is
encouraged. The Company is currently evaluating the impact of adopting
SFAS No. 157 on its financial statements, but does not believe the adoption
of this standard will have a significant impact on the Company’s results of
operations, financial position, or statement of cash flows.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Financial
Statements — Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB
108 addresses how a registrant should quantify the effect of an error on the
financial statements. The SEC concludes that a dual approach should be used
to
compute the amount of a misstatement. Specifically, the amount should be
computed using both a “rollover” (current year income statement perspective) and
“iron curtain” (year-end balance sheet perspective) methods. SAB
108
is effective for fiscal years ending after November 15, 2006. The adoption
of
SAB 108 did not have a material impact on the Company’s results of operations,
financial position, or statement of cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”, which required
recognition of the funded status of defined benefit pension and other
postretirement plans, with a corresponding after-tax adjustment to accumulated
other comprehensive loss. In 2006, the Company adopted SFAS No. 158. The
adoption of SFAS No. 158, together with the annual remeasurement of our pension
plans, resulted in a net of tax, $1.3 million, decrease in Shareholders’ equity.
This decrease does not affect cash flows or the funded status of our benefit
plans.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 permits entities
to choose to measure many financial instruments and certain other items at
fair
value that are not currently required to be measured at fair value. SFAS No.
159
is effective for fiscal years beginning after November 15, 2007, with early
adoption permitted provided the entity also elects to apply the provisions
of
SFAS No. 157. The Company is currently evaluating the impact of adopting
SFAS No. 159 on its financial statements.
3.
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 $120.8 million, excluding
direct transaction costs and subject to a final post-closing working capital
adjustment. Transaction costs, approximately $2.4 million, and the final
post-closing working capital adjustment, approximately $0.7 million, are
included in the purchase accounting calculations under the guidance of SFAS
No.
141 “Business Combinations”. Accordingly, a portion of the aggregate purchase
price has been allocated to net assets acquired based on a fair market
valuation. The initial excess purchase price over fair value of the net assets
acquired, $82.6 million originally recorded as goodwill, has been adjusted
to
$47.3 million for the fair market values assigned to fixed assets, customer
relationships, technology and other intangible assets. Certain due to values
assigned, within property, plant and equipment, are considered preliminary
estimates and will be adjusted as additional information is received and
valuation assessments are completed. The $47.3 million recorded as goodwill,
will be deductible for tax purposes.
The
purchase price assigned to each major asset and liability of Little Giant Pump
Company is as follows:
(In
millions)
|
|
|
|
Assets:
|
|
|
|
Current
assets
|
|
$
|
45.6
|
|
Property,
plant and equipment
|
|
|
13.4
|
|
Intangible
assets
|
|
|
31.2
|
|
Goodwill
|
|
|
47.3
|
|
Other
assets
|
|
|
0.2
|
|
Total
assets
|
|
|
137.7
|
|
Less
liabilities
|
|
|
(13.8
|
)
|
Total
purchase price
|
|
$
|
123.9
|
|
Little
Giant’s results of operations were included in the Company’s consolidated
statement of income, from the acquisition date through the year ended December
30, 2006.
During
September 2006, the Company acquired Healy Systems, Inc. (“Healy Systems”) in a
stock purchase transaction for a cash purchase price of $35.1 million, excluding
direct transaction costs and a post-closing working capital adjustment. The
purchase agreement provides for additional payments of 5 percent of certain
Healy Systems product sales over the next five years. The transaction costs,
approximately $0.3 million, and the preliminary post closing working capital
adjustment, approximately $2.6 million are included in the total purchase
accounting calculations under the guidance of SFAS No. 141 “Business
Combinations”. The purchase price has been allocated to net assets based on
preliminary estimated fair values. The Company will complete an independent
fair
market valuation in 2007. The excess of purchase price over preliminary
estimated fair value of the net assets acquired, $26.4 million, has been
recorded as goodwill. No portion of the $26.4 million, recorded as goodwill,
will be deductible for tax purposes.
The
purchase price assigned to each major asset and liability of Healy Systems,
Inc.
is as follows:
(In
millions)
|
|
|
|
Assets:
|
|
|
|
|
Current
assets
|
|
$
|
8.1
|
|
Property,
plant and equipment
|
|
|
2.0
|
|
Intangible
assets
|
|
|
6.0
|
|
Goodwill
|
|
|
26.4
|
|
Total
assets
|
|
|
42.5
|
|
Less
liabilities:
|
|
|
|
|
Current
liabilities
|
|
|
(1.7
|
)
|
Deferred
income taxes
|
|
|
(2.4
|
)
|
Total
purchase price
|
|
$
|
38.4
|
|
Healy
Systems results of operations were included in the Company’s consolidated
statement of income, from the acquisition date through the year ended December
30, 2006.
Pro
forma
Results of Operations
The
following unaudited pro forma statements give effect to the acquisition of
Little Giant Pump Company and Healy Systems, by the Company. The unaudited
pro
forma combined condensed statements of income for 2006 and 2005 give effect
to
the acquisition of Little Giant Pump Company and Healy Systems as if the
acquisitions 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 acquisitions of
Little Giant and Healy Systems 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 Little Giant Pump Company and Healy Systems
with
the Company.
FRANKLIN
ELECTRIC CO., INC.
PRO
FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
615.7
|
|
$
|
529.6
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
59.3
|
|
$
|
52.8
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
2.60
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
2.55
|
|
$
|
2.28
|
|
4.
DISCONTINUED OPERATIONS
During
December 2006, the Company sold its Engineered Motor Products Division, (“EMPD”)
for an approximate $16.6 million selling price. Representing less than 10
percent of the Company’s consolidated sales, the Company no longer considered
EMPD to be a part of its core operations. Thus future growth potential would
be
limited. This transaction was recognized in accordance to the guidance within
SFAS No. 144 “Accounting for the Impairment and/or Disposal of Long-Lived
Assets.”
The
selling price included an initial sales price of $16.0 million and a preliminary
working capital adjustment of $0.6 million. Net book value of the disposed
assets was $11.9 million, including $14.5 million in total assets offset by
$2.5
million in assumed liabilities. The Company realized a net book gain of $4.7
million. Divestiture expenses, incurred by the Company, of $0.8 million and
$4.6
million for a one-time pension cost adjustment were recognized, offsetting
the
$4.7 million gain, resulting in a net pre-tax loss of $0.8 million. The net
pre-tax loss is included in the statement of income, as part of discontinued
operations.
Net
sales
for discontinued operations, were $36.8 million, $36.1 million, and 34.2
million, for 2006, 2005, and 2004, respectively. The income/loss before tax,
related to discontinued operations, was $0.4 million, $0.3 million, and ($0.5)
million, for 2006, 2005, and 2004 respectively.
5.
INVESTMENTS
As
of
December 30, 2006, the Company held no investments in financial securities.
As
of December 31, 2005, the Company held $36.0 million of investments in financial
securities. Income generated from investments was recorded as “Other income”, 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 statement 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 “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 December
30, 2006, the carrying value of the investment was $6.1 million. At December
31,
2005, the carrying value of the investment was $6.0 million. The Company’s
proportionate share of Pioneer Pump, Inc. earnings, included in “Other income”
in the Company’s results of operations, was $0.7 million for 2006 and $0.1 for
2005.
6.
GOODWILL AND OTHER INTANGIBLE ASSETS
The
Company uses the purchase method of accounting for business combinations, in
accordance with SFAS Nos. 141 and 142, “Business Combinations” and “Goodwill and
Other Intangible Assets”, respectively. During the fourth quarter of each year,
the Company performs its annual impairment testing required by SFAS No. 142,
unless events or circumstances indicate earlier impairment testing. No
impairment loss was recognized for 2006, 2005, or 2004.
The
carrying amount of the Company’s intangible assets and goodwill
include:
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Amortized
intangibles
|
|
|
|
|
|
|
|
Patents
|
|
$
|
6.3
|
|
$
|
5.9
|
|
Accumulated
amortization
|
|
|
(2.8
|
)
|
|
(2.0
|
)
|
Supply
agreements
|
|
|
7.2
|
|
|
10.0
|
|
Accumulated
amortization
|
|
|
(4.3
|
)
|
|
(6.6
|
)
|
Technology
|
|
|
3.8
|
|
|
2.7
|
|
Accumulated
amortization
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
Customer
relationships
|
|
|
26.8
|
|
|
0.0
|
|
Accumulated
amortization
|
|
|
(0.8
|
)
|
|
0.0
|
|
Other
|
|
|
1.7
|
|
|
1.5
|
|
Accumulated
amortization
|
|
|
(1.6
|
)
|
|
(1.4
|
)
|
|
|
|
36.0
|
|
|
10.0
|
|
Unamortized
intangibles
|
|
|
|
|
|
|
|
Trade
names
|
|
|
9.3
|
|
|
0.0
|
|
Total
intangibles
|
|
$
|
45.3
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
133.5
|
|
$
|
58.0
|
|
The
weighted average years over which each intangible class is amortized is as
follows:
Class
|
Years
|
|
|
Patents
|
17
|
Supply
Agreements
|
6
|
Technology
|
15
|
Customer
Relationships
|
20
|
Other
|
8
|
Amortization
expense related to intangible assets for the twelve months ended December 30,
2006, December 31, 2005, and January 1, 2005 was $2.2, $1.4, and $2.1 million,
respectively. Amortization expense for each of the five succeeding years is
projected as $2.7 million, $2.7 million, $2.6 million, $2.5 million and $2.4
million for fiscal 2007, 2008, 2009, 2010, and 2011, respectively.
In
the
second quarter 2006 acquisition of Little Giant Pump Company, $31.2 million
was
recorded as intangibles ($1.1 million technology, $9.3 million trade name,
and
$20.8 million customer relationships) and $47.3 million as goodwill. In the
third quarter 2006 acquisition of Healy Systems, Inc., $6.0 million was recorded
as intangibles, classified as customer relationships and subject to an
independent fair market valuation, and $26.4 million as goodwill.
Other
changes in the carrying amount of intangibles and goodwill reflect foreign
currency fluctuations.
7.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans -
As of
December 30, 2006, the Company maintained three domestic pension plans and
one
German pension plan. The Company uses a December 31 measurement date for its
plans. In 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”
The
following table sets forth aggregated information related to the Company’s
pension benefits and other postretirement benefits, including changes in the
benefit obligations, changes in plan assets, funded status, and amounts
recognized in the consolidated balance sheet, amounts recognized in Other
Comprehensive Income, and actuarial assumptions:
(In
millions)
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Accumulated
benefit obligation, end of year
|
|
$
|
150.0
|
|
$
|
145.1
|
|
$
|
13.0
|
|
$
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation, beginning of year
|
|
$
|
149.0
|
|
$
|
141.3
|
|
$
|
14.3
|
|
$
|
16.0
|
|
Service
cost
|
|
|
4.7
|
|
|
3.9
|
|
|
0.3
|
|
|
0.4
|
|
Interest
cost
|
|
|
8.1
|
|
|
7.7
|
|
|
0.8
|
|
|
0.8
|
|
Plan
amendments
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Actuarial
gain (loss)
|
|
|
(2.7
|
)
|
|
5.6
|
|
|
(0.1
|
)
|
|
(1.4
|
)
|
Settlements
paid
|
|
|
(0.2
|
)
|
|
(1.0
|
)
|
|
-
|
|
|
-
|
|
Benefits
paid
|
|
|
(9.2
|
)
|
|
(7.4
|
)
|
|
(1.3
|
)
|
|
(1.5
|
)
|
Liability
(gain)/loss due to curtailment*
|
|
|
0.5
|
|
|
-
|
|
|
(1.2
|
)
|
|
-
|
|
Special
termination benefits*
|
|
|
1.4
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
Exchange
|
|
|
1.2
|
|
|
(1.1
|
)
|
|
-
|
|
|
-
|
|
Projected
benefit obligation, end of year
|
|
$
|
152.8
|
|
$
|
149.0
|
|
$
|
13.0
|
|
$
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets, beginning of year
|
|
$
|
131.7
|
|
$
|
133.9
|
|
$
|
-
|
|
$
|
-
|
|
Actual
return on plan assets
|
|
|
19.9
|
|
|
6.2
|
|
|
-
|
|
|
-
|
|
Company
contributions
|
|
|
1.7
|
|
|
1.6
|
|
|
1.3
|
|
|
1.5
|
|
Settlements
paid
|
|
|
(0.2
|
)
|
|
(1.0
|
)
|
|
-
|
|
|
-
|
|
Benefits
paid
|
|
|
(9.2
|
)
|
|
(8.4
|
)
|
|
(1.3
|
)
|
|
(1.5
|
)
|
Exchange
|
|
|
0.4
|
|
|
(0.6
|
)
|
|
-
|
|
|
-
|
|
Fair
value of assets, end of year
|
|
$
|
144.3
|
|
$
|
131.7
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$
|
(8.5
|
)
|
$
|
(17.3
|
)
|
$
|
(13.0
|
)
|
$
|
(14.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in statement of financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
$
|
6.0
|
|
|
N/A**
|
|
|
-
|
|
|
N/A**
|
|
Deferred
tax asset
|
|
|
-
|
|
|
N/A**
|
|
|
1.4
|
|
|
|
|
Current
liabilities
|
|
|
(0.3
|
)
|
|
N/A**
|
|
|
(1.2
|
)
|
|
N/A**
|
|
Noncurrent
liabilities
|
|
|
(14.2
|
)
|
|
N/A**
|
|
|
(11.8
|
)
|
|
N/A**
|
|
Net
pension asset/(liability) at end of year
|
|
$
|
(8.5
|
)
|
|
N/A**
|
|
$
|
(11.6
|
)
|
|
N/A**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
transition (asset)/obligation
|
|
|
-
|
|
|
N/A**
|
|
|
1.1
|
|
|
N/A**
|
|
Prior
service cost (credit)
|
|
|
1.5
|
|
|
N/A**
|
|
|
0.6
|
|
|
N/A**
|
|
Net
actuarial (gain)/loss
|
|
|
(1.5
|
)
|
|
N/A**
|
|
|
0.4
|
|
|
N/A**
|
|
Total
recognized in other comprehensive income
|
|
$
|
-
|
|
|
N/A**
|
|
$
|
2.1
|
|
|
N/A**
|
|
*
These
items are primarily related to the divestiture of the Engineered Motor Products
Division in 2006.
**
The
requirements of SFAS No. 158 are not applied retrospectively and do not apply
to
disclosures
for fiscal 2005.
Plans
with accumulated benefit obligation in excess of plan assets as of December
31:
(In
millions)
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Projected
benefit obligation
|
|
$
|
115.2
|
|
$
|
112.5
|
|
$
|
13.0
|
|
$
|
14.3
|
|
Accumulated
benefit obligation
|
|
|
113.8
|
|
|
110.5
|
|
|
13.0
|
|
|
14.3
|
|
Fair
value of plan assets
|
|
|
100.8
|
|
|
91.7
|
|
|
-
|
|
|
-
|
|
Actuarial
assumptions used to determine benefit obligations:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Discount
rate
|
|
|
5.85
|
%
|
|
5.65
|
%
|
|
5.85
|
%
|
|
5.65
|
%
|
Rate
of increase in future compensation
|
|
|
3-8.00
|
%
|
|
3-8.00
|
%
|
|
3-8.00
|
%
|
|
3-8.00
|
%
|
|
|
|
(Graded)
|
|
|
(Graded
|
)
|
|
(Graded
|
)
|
|
(Graded
|
)
|
Actuarial
assumptions used to determine periodic benefit cost:
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Discount
rate
|
|
|
5.65
|
%
|
|
5.75
|
%
|
|
5.65
|
%
|
|
5.75
|
%
|
Rate
of increase in future compensation
|
|
|
3-8.00
|
%
|
|
3-8.00
|
%
|
|
3-8.00
|
%
|
|
3-8.00
|
%
|
|
|
|
(Graded)
|
|
|
(Graded
|
)
|
|
(Graded
|
)
|
|
(Graded
|
)
|
Expected
long-term rate of return on plan assets
|
|
|
8.50
|
%
|
|
8.50
|
%
|
|
-
|
|
|
-
|
|
The
accumulated benefit obligation for the Company’s qualified defined benefit
pension plans was $135.1 million and $131.1 million at December 31, 2006 and
2005.
The
following table sets forth aggregated net periodic benefit cost for 2006, 2005,
and 2004:
(In
millions)
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4.7
|
|
$
|
3.9
|
|
$
|
4.3
|
|
$
|
0.3
|
|
$
|
0.4
|
|
$
|
0.4
|
|
Interest
cost
|
|
|
8.1
|
|
|
7.7
|
|
|
7.5
|
|
|
0.8
|
|
|
0.8
|
|
|
0.9
|
|
Expected
return on assets
|
|
|
(10.5
|
)
|
|
(10.3
|
)
|
|
(10.9
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of transition (asset) obligation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Prior
service cost
|
|
|
1.4
|
|
|
1.7
|
|
|
1.4
|
|
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Loss/(Gain)
|
|
|
0.3
|
|
|
0.2
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
Net
periodic benefit cost
|
|
$
|
4.0
|
|
$
|
3.2
|
|
$
|
2.3
|
|
$
|
1.9
|
|
$
|
2.0
|
|
$
|
2.2
|
|
Curtailment
expense*
|
|
|
1.1
|
|
|
-
|
|
|
-
|
|
|
1.9
|
|
|
-
|
|
|
-
|
|
Special
termination benefits*
|
|
|
1.4
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
-
|
|
Settlement
cost
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
net periodic benefit cost
|
|
$
|
6.8
|
|
$
|
3.5
|
|
$
|
2.6
|
|
$
|
4.0
|
|
$
|
2.0
|
|
$
|
2.2
|
|
*
These
items relate to the divestiture of the Engineered Motor Products Division in
2006.
The
estimated net actuarial loss, prior service cost, and transition obligation
for
the defined benefit pension plans that will be amortized from accumulated other
comprehensive income into net periodic benefit cost during the 2007 fiscal
year
are $0.2, $1.2 and $0.0, respectively and for other benefits will be $0.0,
$0.1
and $0.3, respectively.
The
Company consults with actuaries, asset allocation consultants and investment
advisors to determine the expected long- term rate of return on plan assets.
Plan assets are invested in a diversified portfolio of equity and fixed-income
securities in order to maximize the long-term return for a prudent level of
risk. Furthermore, equity investments are diversified across growth, value,
small and large capitalizations. Investment risk is measured and monitored
on an
ongoing basis through investment portfolio reviews, annual liability
measurements, and periodic asset/liability studies.
Risk
tolerance is established through careful consideration of plan liabilities,
plan
funded status, plan liquidity needs and corporate financial condition. Based
on
these analyses the Company has assumed the expected long-term rate of return
on
plan assets will be 8.5 percent.
The
qualified plans asset allocations at December 31, 2006, and 2005, by asset
category are as follows:
|
|
Plan
Assets at December 31
|
|
(Percentages)
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
74
|
|
|
74
|
|
Fixed
income securities
|
|
|
26
|
|
|
26
|
|
Total
|
|
|
100
|
|
|
100
|
|
Equity
securities include Company stock of $18.9 million (13.0 percent of total plan
assets) and $18.5 million (14.0 percent of total plan assets) at December 31,
2006 and 2005, respectively.
The
Company’s German pension plan is partially funded with insurance contracts up to
maximums established by German tax legislation. Benefits above the statutory
maximums are recorded in the Company’s balance sheet.
One
of the Company’s four pension plans covers certain management employees. The
Company does not fund this plan, and its assets were zero in 2006 and 2005.
The
plan’s projected benefit obligation and accumulated benefit obligation were
$5.6 million and $4.4 million, respectively, at December
31, 2006, and $6.1 million and $4.8 million, respectively,
at December 31, 2005.
The
Company estimates total contributions to the plans of $2.6 million in
2007.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
(In
millions)
|
|
|
|
|
|
|
|
Pension
|
|
Other
|
|
|
|
Benefits
|
|
Benefits
|
|
2007
|
|
$
|
13.0
|
|
$
|
1.2
|
|
2008
|
|
|
8.6
|
|
|
1.2
|
|
2009
|
|
|
9.9
|
|
|
1.2
|
|
2010
|
|
|
9.3
|
|
|
1.1
|
|
2011
|
|
|
9.5
|
|
|
1.1
|
|
Years
2012 through 2016
|
|
|
53.5
|
|
|
5.0
|
|
The
Company’s other postretirement benefit plans provide health and life insurance
benefits to domestic employees hired prior to 1992. The Company effectively
capped its cost for those benefits through plan amendments made in 1992,
freezing Company contributions for insurance benefits at 1991 levels for current
and future beneficiaries with actuarially reduced benefits for employees who
retire before age 65.
The
following table illustrates the effects of the application of SFAS No. 158
on
individual line items in the consolidated balance sheets as of December 30,
2006
for the Company.
Incremental
Effect of Applying SFAS No. 158
|
|
on
Individual Line Items in the Statement of Financial
Position
|
|
December
30, 2006
|
|
|
|
Before
Application of SFAS
No. 158
|
|
Adjustments
|
|
After
Application of SFAS
No. 158
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
$
|
8.7
|
|
$
|
5.7
|
|
$
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
38.8
|
|
|
1.4
|
|
|
40.2
|
|
Deferred
income taxes
|
|
|
4.1
|
|
|
0.5
|
|
|
4.6
|
|
Employee
benefit plan obligation
|
|
|
20.9
|
|
|
5.1
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
13.9
|
|
|
(1.3
|
)
|
|
12.6
|
|
Defined
Contribution Plans
- The
Company maintains an integrated 401(k) and Employee Stock Ownership Plan (ESOP).
In 1992, the ESOP Trustee acquired shares of Company common stock on the open
market using the proceeds of a fifteen-year, $3.0 million loan from the Company.
Under the terms of the variable rate loan (6.31 percent at December 31, 2006),
principal plus interest is payable in equal annual installments. The shares
of
stock purchased with the loan proceeds are collateral for the loan and are
considered outstanding for purposes of calculating earnings per
share.
The
Company contributes a portion of its 401(k) matching contribution as well as
an
additional annual contribution, both subject to the Company's annual financial
results, to the ESOP Trust. The ESOP Trustee uses a portion of the Company's
contributions to make principal and interest payments on the loan. As loan
payments are made, shares of common stock are released as collateral and are
allocated to participants' accounts. The balance of the Company's contributions
in cash or common stock is made to the Company stock fund of the 401(k) and
ESOP
Trusts, and allocated to participants' accounts to satisfy the balance of the
Company's 401(k) matching contribution.
At
December 30, 2006, 382,693 shares were allocated to the accounts of
participants, 24,783 shares were committed to be released and allocated to
the
accounts of participants for service rendered during 2006, and 24,783 shares
were held by the ESOP Trust in suspense. The following table sets forth Company
contributions to the integrated ESOP and 401(k) Plan.
(In
millions)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Company
contributions to integrated plan
|
|
$
|
1.1
|
|
$
|
0.6
|
|
$
|
0.9
|
|
8.
ACCRUED LIABILITIES
Accrued
liabilities consist of:
(In
millions)
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Salaries,
wages, and commissions
|
|
$
|
14.6
|
|
$
|
13.5
|
|
Product
warranty costs
|
|
|
10.0
|
|
|
7.0
|
|
Insurance
|
|
|
6.3
|
|
|
5.2
|
|
Employee
benefits
|
|
|
4.0
|
|
|
2.2
|
|
Other
|
|
|
5.3
|
|
|
6.3
|
|
|
|
$
|
40.2
|
|
$
|
34.2
|
|
9.
INCOME
TAXES
Income
before income taxes consisted of:
(In
millions)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
70.9
|
|
$
|
54.9
|
|
$
|
48.6
|
|
Foreign
|
|
|
16.5
|
|
|
15.9
|
|
|
10.9
|
|
Continuing
operations
|
|
|
87.4
|
|
|
70.8
|
|
|
59.5
|
|
Discontinued
operations
|
|
|
0.4
|
|
|
0.3
|
|
|
(0.5
|
)
|
|
|
$
|
87.8
|
|
$
|
71.1
|
|
$
|
59.0
|
|
The
income tax provision consisted of:
(In
millions)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Current
payable:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
28.6
|
|
$
|
15.8
|
|
$
|
13.1
|
|
Foreign
|
|
|
7.0
|
|
|
6.6
|
|
|
5.0
|
|
State
|
|
|
5.0
|
|
|
2.3
|
|
|
1.8
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(7.1
|
)
|
|
0.6
|
|
|
1.8
|
|
Foreign
|
|
|
(0.7
|
)
|
|
(0.8
|
)
|
|
(0.7
|
)
|
State
|
|
|
(2.1
|
)
|
|
0.5
|
|
|
0.1
|
|
Continuing
operations
|
|
|
30.7
|
|
|
25.0
|
|
|
21.1
|
|
Discontinued
operations
|
|
|
0.1
|
|
|
0.1
|
|
|
(0.2
|
)
|
|
|
$
|
30.8
|
|
$
|
25.1
|
|
$
|
20.9
|
|
Significant
components of the Company's deferred tax assets and liabilities were as
follows:
(In
millions)
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Accrued
expenses and reserves
|
|
$
|
9.9
|
|
$
|
5.7
|
|
Compensation
and employee benefits
|
|
|
12.8
|
|
|
10.1
|
|
Other
items
|
|
|
4.8
|
|
|
3.4
|
|
Total
deferred tax assets
|
|
|
27.5
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Accelerated
depreciation on fixed assets
|
|
|
8.6
|
|
|
10.4
|
|
Amortization
of intangibles
|
|
|
5.9
|
|
|
1.8
|
|
Other
items
|
|
|
1.4
|
|
|
0.6
|
|
Total
deferred tax liabilities
|
|
|
15.9
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
11.6
|
|
$
|
6.4
|
|
The
portions of current and non-current deferred tax assets and liabilities were
as
follows:
(In
millions)
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax
Assets
|
|
Deferred
Tax
Liabilities
|
|
Deferred
Tax
Assets
|
|
Deferred
Tax
Liabilities
|
|
Current
|
|
$
|
15.3
|
|
$
|
0.4
|
|
$
|
11.0
|
|
$
|
0.3
|
|
Non-current
|
|
|
12.2
|
|
|
15.5
|
|
|
6.4
|
|
|
10.7
|
|
|
|
$
|
27.5
|
|
$
|
15.9
|
|
$
|
17.4
|
|
$
|
11.0
|
|
The
valuation allowance for deferred tax assets was not significant in
2005.
The
differences between the statutory and effective tax rates were as
follows:
(Percentages)
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
U.S.
Federal statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State
income taxes, net of federal benefit
|
|
|
2.1
|
|
|
2.5
|
|
|
2.1
|
|
Extraterritorial
income exclusion
|
|
|
(0.6
|
)
|
|
(1.0
|
)
|
|
(1.8
|
)
|
R&D
tax credits
|
|
|
(0.7
|
)
|
|
(0.5
|
)
|
|
(0.7
|
)
|
Other
items
|
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
0.9
|
|
Effective
tax rate
|
|
|
35.1
|
%
|
|
35.3
|
%
|
|
35.5
|
%
|
10.
DEBT
Long-term
debt consisted of:
(In
millions)
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
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 12/30/06)
|
|
$
|
11.3
|
|
$
|
12.3
|
|
Capital
Leases
|
|
|
1.1
|
|
|
1.3
|
|
Credit
Agreement - - the average interest rate for 2006 was 5.5
percent based on the London Interbank Offered Rates (LIBOR)
plus an interest spread.
|
|
|
50.0
|
|
|
-
|
|
|
|
|
62.4
|
|
|
13.6
|
|
Less
Current Maturities
|
|
|
(11.3
|
)
|
|
(1.3
|
)
|
|
|
$
|
51.1
|
|
$
|
12.3
|
|
The
following debt payments are expected to be paid:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
Debt
|
|
$
|
61.3
|
|
$
|
11.0
|
|
$
|
50.3
|
|
$
|
-
|
|
Capital
leases
|
|
|
1.1
|
|
|
0.3
|
|
|
0.4
|
|
|
0.4
|
|
|
|
$
|
62.4
|
|
$
|
11.3
|
|
$
|
50.7
|
|
$
|
0.4
|
|
On
September 9, 2004, the Company entered into an unsecured, 60-month, $80.0
million revolving credit agreement. This agreement was amended and restated
on
December 14, 2006 to be an unsecured, 60-month $120.0 million revolving credit
agreement (the “Agreement”). The Agreement provides for various borrowing rate
options including interest rates based on the London Interbank Offered Rates
(LIBOR) plus interest spreads keyed to the Company’s ratio of debt to earnings
before interest, taxes, depreciation, and amortization (“EBITDA”). The Agreement
contains certain financial covenants with respect to borrowings, interest
coverage, loans or advances and investments. The Company had outstanding
borrowings of $50.0 million under the Agreement at December 30, 2006. The
Company also has certain overdraft facilities at its foreign subsidiaries,
of
which none were outstanding at December 30, 2006.
The
Company was in compliance with all debt covenants, at all times, in 2006 and
2005.
11.
INTEREST
RATE RISK
On
September 24, 2003 the Company entered into a fixed-to-variable interest rate
swap to achieve a desired proportion of variable vs. fixed rate debt. The
fixed-to-variable interest rate swap is accounted for as a fair value hedge,
per
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”,
with effectiveness assessed based on changes in the fair value of the underlying
debt using incremental borrowing rates currently available on loans with similar
terms and maturities. The effective gain or loss on the interest rate swap
and
that of the underlying debt are equal and offsetting resulting in no net effect
to earnings. The fair value of this hedge instrument was $(0.3) million at
December 30, 2006 and December 31, 2005, and is recorded in other assets and
other long-term liabilities.
The
swap
contract has a notional amount of $10 million and matures on November 10, 2008.
Per the terms of the swap contract, the Company receives interest at a fixed
rate of 6.3 percent and pays interest at a variable rate based on the three
month LIBOR rate plus a spread. The average variable rate paid by the Company
in
2006 was 7.9 percent. The differential in interest rates on the swap is
recognized as an adjustment of interest expense over the term of the
agreement.
12.
SHAREOWNERS' EQUITY
The
Company had 23,009,513 shares of common stock (45,000,000 shares authorized,
$.10 par value) outstanding at the end of 2006.
During
2006, 2005, and 2004, pursuant to a stock repurchase program authorized by
the
Company’s Board of Directors, the Company repurchased a total of 5,000 shares
for $0.2 million, 366,308 shares for $13.8 million and 102,800 shares
for $3.1 million,
respectively. All repurchased shares were retired.
During
2006 and 2004, under terms of a Company stock option plan, participants
delivered 9,619 shares for $0.6 million and 21,312 shares for $0.7 million,
respectively, of Company common stock as consideration for stock issued upon
the
exercise of stock options. There were no such transactions in 2005. All of
the
shares received were from officers of the Company.
In
2006,
2005, and 2004, the Company recorded a $5.7 million, $7.0 million and $2.4
million, respectively, as a reduction in tax liability and an increase to
shareowners’ equity as a result of stock option exercises.
Accumulated
other comprehensive income (loss), consisting of the currency translation
adjustment and the pension liability adjustment, was $14.5 million and $(2.1)
million, respectively, at December 30, 2006, and $6.2 million and $(5.6)
million, respectively, at December 31, 2005.
13.
EARNINGS PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
(In
millions, except per share amounts)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
56.8
|
|
$
|
45.8
|
|
$
|
38.4
|
|
Income
from discontinued operations
|
|
|
0.2
|
|
|
0.2
|
|
|
(0.3
|
)
|
Net
income
|
|
$
|
57.0
|
|
$
|
46.0
|
|
$
|
38.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
|
|
|
22.8
|
|
|
22.2
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.5
|
|
|
1.0
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted-average common shares
|
|
|
23.3
|
|
|
23.2
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Basic
from continuing operations
|
|
$
|
2.49
|
|
$
|
2.06
|
|
$
|
1.75
|
|
Basic
from discontinuing operations
|
|
|
0.01
|
|
|
0.01
|
|
|
(0.02
|
)
|
Total
basic earnings per share
|
|
$
|
2.50
|
|
$
|
2.07
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Diluted
from continuing operations
|
|
$
|
2.43
|
|
$
|
1.97
|
|
$
|
1.67
|
|
Diluted
from discontinuing operations
|
|
|
0.01
|
|
|
0.01
|
|
|
(0.02
|
)
|
Total
diluted earnings per share
|
|
$
|
2.44
|
|
$
|
1.98
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options excluded
|
|
|
0.3
|
|
|
0.2
|
|
|
0.2
|
|
Anti-dilutive
stock options price range - low
|
|
$
|
36.97
|
|
$
|
36.97
|
|
$
|
29.95
|
|
Anti-dilutive
stock options price range - high
|
|
$
|
45.90
|
|
$
|
44.51
|
|
$
|
32.51
|
|
14.
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 SFAS No. 123, “Accounting for Stock-Based Compensation.” Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS 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 SFAS No. 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 SFAS No. 123(R). The total
stock-based compensation recognized in 2006 and 2005 was $3.2 million and
$0.1million, respectively. Results for prior periods have not been
restated.
Prior
to
the adoption of SFAS No. 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. SFAS No. 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 SFAS No. 123(R), and is included
in
“Income taxes” in the Company’s statement of financial position.
The
following table illustrates the effect on net income and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS No. 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)
|
|
|
|
|
|
2005
|
|
2004
|
|
Reported
net income
|
|
$
|
46.0
|
|
$
|
38.1
|
|
Add:
Total fair value computed stock-based compensation, net of
tax*
|
|
|
0.1
|
|
|
-
|
|
Deduct:
Total fair value computed stock-based compensation, net of
tax*
|
|
|
(1.6
|
)
|
|
(1.5
|
)
|
Pro
forma net income
|
|
$
|
44.5
|
|
$
|
36.6
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
— as reported
|
|
$
|
2.07
|
|
$
|
1.73
|
|
Basic
— pro forma
|
|
$
|
2.00
|
|
$
|
1.67
|
|
Diluted
— as reported
|
|
$
|
1.98
|
|
$
|
1.65
|
|
Diluted
— pro forma
|
|
$
|
1.92
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
Assumptions
used for the Black-Scholes Model
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.75
|
%
|
|
3.60
|
%
|
Dividend
yield
|
|
|
.77
|
%
|
|
.63
|
%
|
Volatility
factor
|
|
|
.194
|
|
|
.181
|
|
Weighted
average expected term
|
|
|
5.3
years
|
|
|
6
years
|
|
*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
Options:
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 SFAS No.
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 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
|
Forfeiture
rate
|
5.44%
|
A
summary
of the Company’s stock option plans activity and related information is as
follows:
(shares
in thousands)
Stock
Options:
|
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining Contractual
Term
|
|
|
Aggregate
IntrinsicValue
(000’s
|
)
|
Outstanding
at beginning of 2004
|
|
|
2,534
|
|
$
|
18.93
|
|
|
|
|
|
|
|
Granted
|
|
|
199
|
|
|
30.57
|
|
|
|
|
|
|
|
Exercised
|
|
|
(331
|
)
|
|
13.66
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of 2005
|
|
|
2,401
|
|
$
|
20.61
|
|
|
|
|
|
|
|
Granted
|
|
|
183
|
|
|
40.93
|
|
|
|
|
|
|
|
Exercised
|
|
|
(777
|
)
|
|
18.39
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(14
|
)
|
|
27.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of 2006
|
|
|
1,793
|
|
$
|
23.60
|
|
|
|
|
|
|
|
Granted
|
|
|
125
|
|
|
45.90
|
|
|
|
|
|
|
|
Exercised
|
|
|
(509
|
)
|
|
20.69
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11
|
)
|
|
25.22
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,398
|
|
$
|
26.65
|
|
|
5.58
|
|
$
|
34,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
to vest after applying forfeiture rate
|
|
|
1,344
|
|
$
|
26.32
|
|
|
5.50
|
|
$
|
33,687
|
|
Vested
and exercisable at end of period
|
|
|
842
|
|
$
|
21.82
|
|
|
4.37
|
|
$
|
24,905
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted
average grant-date fair value of options
|
|
$
|
16.43
|
|
$
|
9.60
|
|
$
|
7.47
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of options exercised
|
|
$
|
2.7
|
|
$
|
4.3
|
|
$
|
1.3
|
|
Cash
received from the exercise of options
|
|
$
|
10.1
|
|
$
|
14.3
|
|
$
|
4.0
|
|
Fair
value of shares vested
|
|
$
|
2.7
|
|
$
|
3.1
|
|
$
|
3.3
|
|
Tax
benefit realized from tax deductions
|
|
$
|
5.7
|
|
$
|
7.0
|
|
$
|
2.4
|
|
There
were no options granted during the fourth quarter. The total intrinsic value
of
options exercised during the fourth quarter of 2006 was $0.2 million. There
were
no share-based liabilities paid during the 2006 fiscal year. As a result of
the
Company’s policy for issuing shares upon share option exercise, during the 2007
fiscal year, the Company expects to repurchase up to 400,000 shares.
A
summary
of the Company’s nonvested shares activity and related information, for fiscal
year ended December 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
|
|
|
(294
|
)
|
|
6.50
|
|
Forfeited
|
|
|
(11
|
)
|
|
5.84
|
|
Nonvested
at end of period
|
|
|
556
|
|
$
|
9.47
|
|
As
of
December 30, 2006 there was $3.2 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 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 fiscal year ended December 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
December 30, 2006 there was $1.1 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
3.1 years.
15.
SEGMENT AND GEOGRAPHIC INFORMATION
Based
on
the management approach established by SFAS No. 131, “Disclosure About Segments
of an Enterprise and Related Information”, the Company’s business consists of
two operating segments based on the principal end market served: the Water
Systems segment and the Fueling Systems segment.
The
Water
Systems segment designs, manufactures and sells motors, pumps, electronic
controls and related parts and equipment primarily for use in submersible water
and other fluid system applications. The Fueling Systems segment designs,
manufactures and sells pumps, electronic controls and related parts and
equipment primarily for use in submersible fueling system applications. The
Fueling Systems segment integrates and sells motors and electronic controls
produced by the Water Systems segment.
Under
SFAS No. 131’s aggregation criteria, the Company’s operating segments have been
combined into a single reportable segment. As a result, there are no significant
differences between reportable segment financial information and the Company’s
consolidated results.
Net
sales
by product category, net of inter-company activity, are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
Water
Systems
|
|
$
|
459.1
|
|
$
|
334.5
|
|
$
|
304.2
|
|
Fueling
Systems
|
|
|
98.8
|
|
|
68.9
|
|
|
65.9
|
|
Total
|
|
$
|
557.9
|
|
$
|
403.4
|
|
$
|
370.1
|
|
Geographical
information
|
|
Net
Sales
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
United
States
|
|
$
|
364.7
|
|
$
|
240.9
|
|
$
|
221.6
|
|
$
|
241.8
|
|
$
|
116.5
|
|
$
|
101.7
|
|
Foreign
|
|
|
193.2
|
|
|
162.5
|
|
|
148.5
|
|
|
66.1
|
|
|
60.2
|
|
|
65.6
|
|
Total
|
|
$
|
557.9
|
|
$
|
403.4
|
|
$
|
370.1
|
|
$
|
307.9
|
|
$
|
176.7
|
|
$
|
167.3
|
|
ITT
Industries, Inc., and its various subsidiaries and affiliates, accounted for
11
percent, 16 percent and 20 percent of the Company’s consolidated sales in 2006,
2005, and 2004, respectively. Pentair Corporation and its various subsidiaries
and affiliates, accounted for 12 and 14 percent, of the Company’s consolidated
sales in 2006 and 2005, respectively. Sta-Rite Industries, Inc., formerly a
part
of the manufacturing subsidiary of Wisconsin Energy Corporation, accounted
for
22 percent of the Company’s consolidated sales in 2004. Sta-Rite Industries,
Inc. was acquired by Pentair Corporation during 2004 and its sales have been
included with Pentair’s sales for 2005 and 2006.
16.
CONTINGENCIES AND COMMITMENTS
The
Company is defending various claims and legal actions, including environmental
matters, which have arisen in the ordinary course of business. In the opinion
of
management, based on current knowledge of the facts and after discussion with
counsel, these claims and legal actions can be successfully defended or resolved
without a material adverse effect on the Company’s financial position, results
of operations, and net cash flows.
Total
rent expense charged to operations for operating leases including contingent
rentals was $5.8 million, $4.3 million and $3.4 million for 2006, 2005 and
2004,
respectively.
The
future minimum rental payments for non-cancelable operating leases as of
December 30, 2006, are as follows: 2007, $5.3 million; 2008, $4.3 million;
2009,
$2.8 million; 2010, $1.8 million; and 2011, $1.3 million. Rental commitments
subsequent to 2011 are not significant by year, but aggregated are $6.9 million
in total.
At
December 30, 2006, the Company had $5.9 million of commitments primarily for
the
purchase of machinery and equipment, and building expansions.
Below
is
a table that shows the activity in the warranty accrual accounts:
(In
millions)
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
7.0
|
|
$
|
7.1
|
|
|
|
|
|
|
|
|
|
Accruals
related to product warranties
|
|
|
7.9
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
Additions
related to acquisitions
|
|
|
2.8
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Reductions
for payments made
|
|
|
(7.7
|
)
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
10.0
|
|
$
|
7.0
|
|
17.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited
quarterly financial information for 2006 and 2005, from continuing operations,
is as follows:
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
Gross
Profit
|
|
Income
-
Cont.
Ops.
|
|
Basic
Earnings
Per Share (a)
|
|
Diluted
Earnings
Per Share
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
101.7
|
|
$
|
35.4
|
|
$
|
9.7
|
|
$
|
0.43
|
|
$
|
0.42
|
|
2nd
Quarter
|
|
|
152.2
|
|
|
52.6
|
|
|
16.5
|
|
|
0.72
|
|
|
0.70
|
|
3rd
Quarter
|
|
|
156.1
|
|
|
53.6
|
|
|
16.3
|
|
|
0.71
|
|
|
0.70
|
|
4th
Quarter
|
|
|
147.9
|
|
|
50.0
|
|
|
14.3
|
|
|
0.62
|
|
|
0.61
|
|
|
|
$
|
557.9
|
|
$
|
191.6
|
|
$
|
56.8
|
|
$
|
2.48
|
|
$
|
2.43
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$
|
73.5
|
|
$
|
24.3
|
|
$
|
5.9
|
|
$
|
0.27
|
|
$
|
0.25
|
|
2nd
Quarter
|
|
|
114.3
|
|
|
40.2
|
|
|
13.5
|
|
|
0.61
|
|
|
0.59
|
|
3rd
Quarter
|
|
|
109.9
|
|
|
39.1
|
|
|
13.2
|
|
|
0.59
|
|
|
0.56
|
|
4th
Quarter
|
|
|
105.7
|
|
|
39.2
|
|
|
13.2
|
|
|
0.59
|
|
|
0.57
|
|
|
|
$
|
403.4
|
|
$
|
142.8
|
|
$
|
45.8
|
|
$
|
2.06
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Earnings per common share amounts are computed independently for
each of
the quarters presented. Therefore, the sum of the quarterly earnings
per
share may not equal the annual earnings per share.
|
18.
SUBSEQUENT EVENT
In
an
agreement dated, February 21, 2007 between Franklin Electric and Howden Africa
Holdings Limited, Franklin will acquire Howden’s 42 percent shareholding in Pump
Brands (Pty) Limited, Johannesburg South Africa (“Pumps”) for an estimated $4.5
million, subject to certain terms and conditions, including the requirement
of
obtaining approval from the South African Competition Authority. Pumps is
involved in the design, manufacture, marketing and selling of pumps and related
products in South Africa and other African markets. Pumps offers a broad range
of products for the agricultural sector, water and effluent treatment industries
as well as for processing, pharmaceutical, food and beverage, petrochemical,
and
construction.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareowners and Directors, Franklin Electric Co., Inc.:
We
have
audited the accompanying consolidated balance sheets of Franklin Electric Co.,
Inc. and subsidiaries (the “Company”) as of December 30, 2006 and December 31,
2005, and the related consolidated statements of income, shareowners' equity
and
comprehensive income, and cash flows for each of the three years in the period
ended December 30, 2006. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Franklin Electric Co., Inc. and subsidiaries
as of December 30, 2006 and December 31, 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 30, 2006, in conformity with accounting principles generally accepted
in the United States of America.
As
discussed in Notes 1 and 7, on January 1, 2006, the Company adopted the
provisions of Statement of Financial Standards No. 123(R), Share-Based
Payment, and
on
December 31, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of December 30, 2006, based on the criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated February 26, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
February
26, 2007
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
As
of the
end of the period covered by this report (the “Evaluation Date”), the Company
carried out an evaluation, under the supervision and with the participation
of
the Company’s management, including the Company’s Chief Executive Officer and
the Company’s Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief
Executive Officer and the Company’s Chief Financial Officer concluded that, as
of the Evaluation Date, the Company’s disclosure controls and procedures were
effective in bringing to their attention on a timely basis material information
relating to the Company to be included in the Company’s periodic filings under
the Exchange Act.
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rules 13a-15 and 15d-15
under the Exchange Act during the last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
System
of
Internal Control over Financial Reporting:
Management
is responsible for establishing and maintaining an adequate system of internal
control over financial reporting of the Company. This system is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the
assets of the Company; (ii) provide reasonable assurance that transactions
are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation and may not prevent or detect misstatements. Further, because of
changes in conditions, effectiveness of internal controls over financial
reporting may vary over time.
Management
conducted an evaluation of the effectiveness of the system of internal control
over financial reporting based on the framework in Internal
Control-Integrated Framework (the
“Framework”) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Management did not include Little Giant Pump Company or
Healy
Systems in the scope of this evaluation and whose financial statements
collectively constitute 45 percent and 33 percent of net and total assets,
respectively, 15 percent of revenues, and 7 percent of net income of the
consolidated financial statement amounts as of and for the year ended December
30, 2006. Based on its evaluation, management concluded that the Company’s
system of internal control over financial reporting was effective as of December
30, 2006.
Our
independent registered accounting firm has issued an audit report on
management’s assessment of internal control over financial reporting. This
report appears on page 48.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareowners and Directors, Franklin Electric Co., Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that Franklin Electric
Co.,
Inc. and subsidiaries (the "Company") maintained effective internal control
over
financial reporting as of December 30, 2006, based on criteria established
in
Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. As
described in Management’s Report on Internal Control Over Financial Reporting,
management excluded from its assessment the internal control over financial
reporting at Little Giant Pump Company, which was acquired on April 21, 2006
and
Healy Systems, Inc., which was acquired on September 15, 2006, and whose
financial statements collectively constitute 45 percent and 33 percent of net
and total assets, respectively, 15 percent of revenues, and 7 percent of net
income of the consolidated financial statement amounts as of and for the year
ended December 30, 2006. Accordingly, our audit did not include the internal
control over financial reporting at Little Giant Pump Company and Healy Systems,
Inc. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to
express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company's internal control over financial reporting is a process designed by,
or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of December 30, 2006, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 30, 2006, based on
the
criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of
and
for the year ended December 30, 2006 of
the
Company and our report dated February 26, 2007 expressed
an unqualified opinions on those financial statements and included an
explanatory paragraph regarding the adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment,
on
January 1, 2006, and the adoption of Statement of Financial Accounting
Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
on
December 31, 2006.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
February
26, 2007
ITEM
9B.
OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information concerning directors and director nominees required by this Item
10
is set forth in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 27, 2007, under the headings of "ELECTION
OF
DIRECTORS" and "INFORMATION CONCERNING NOMINEES AND DIRECTORS," and is
incorporated herein by reference.
The
information concerning executive officers required by this Item 10 is contained
in Part I of this Form 10-K under the heading of "EXECUTIVE OFFICERS OF THE
REGISTRANT."
The
information concerning Regulation S-K, Item 405 disclosures of delinquent Form
3, 4 or 5 filers required by this Item 10 is set forth in the Company’s Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2007,
under the heading of “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,”
and is incorporated herein by reference.
The
information concerning the procedures for shareholders to recommend nominees
to
the Company’s board of directors required by this Item 10 is set forth in the
Company’s Proxy Statement to the Annual Meeting of Shareholders to be held on
April 27, 2007 under the heading “INFORMATION ABOUT THE BOARD AND ITS
COMMITTEES.”
The
Company’s board of directors has determined that Jerome D. Brady, Diana S.
Ferguson, and Thomas L. Young, the Audit Committee members, are “audit committee
financial experts” as defined by Item 401(h) of Regulation’s S-K of the Exchange
Act, and are “independent” within the meaning of Item 7 (d)(3)(iv) of Schedule
14A of the Exchange Act.
In
compliance with Regulation S-K, Item 406, the Company has adopted a code of
business conduct and ethics for its directors, principal financial officer,
controller, principal executive officer, and other employees. The Company has
posted its code of ethics on the Company website at http://www.fele.com. The
Company will disclose any amendments to the Code and any waivers from the Code
for directors and executive officers by posting such information on its
website.
ITEM
11. EXECUTIVE COMPENSATION
The
information required by Item 11 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 27, 2007, under
the
headings of "INFORMATION ABOUT THE BOARD AND ITS COMMITTEES," "MANAGEMENT
ORGANIZATION AND COMPENSATION COMMITTEE REPORT," "SUMMARY COMPENSATION TABLE,"
"GRANT OF PLAN BASED AWARDS TABLE" "OPTION EXCERCISES AND STOCK VESTED TABLE”,
"PENSION BENEFITS TABLE," "AGREEMENTS," “COMPENSATION, DISCUSSION AND ANALYSIS,”
“OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END,” “POTENTIAL PAYMENTS UPON
TERMINATION OR CHANGE IN CONTROL OF THE COMPANY” and “DIRECTOR COMPENSATION,”
and is incorporated herein by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
information required by Item 12 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 27, 2007, under
the
headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,” “SECURITY
OWNERSHIP OF MANAGEMENT" and “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY
COMPENSATION PLANS,” and is incorporated herein by reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by Item 13 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 27, 2007, under
the
headings of ‘INFORMATION ABOUT THE BOARD AND IT COMMITTEES-DIRECTOR
INDEPENDENCE; COMMITTEES-AUDIT COMMITTEE,” and is incorporated herein by
reference.
ITEM
14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The
information required by Item 14 is set forth in the Company’s Proxy Statement
for the Annual Meeting of Shareholders to be held on April 27, 2007 under the
heading “PROPOSAL
3:
RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY’S
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM”.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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Form
10-K Annual Report(page)
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(a)
1. Financial
Statements - Franklin Electric Co., Inc.
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Reports
of Independent Registered Public Accounting Firm
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46, 48, 52
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Consolidated
Statements of Income for the three years ended December 30,
2006
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21
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Consolidated
Balance Sheets as of December 30, 2006 and December 31,
2005
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22
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Consolidated
Statements of Cash Flows for the three years ended December 30,
2006
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23
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Consolidated
Statements of Shareowners' Equity for the three years ended December
30,
2006
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24
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Notes
to Consolidated Financial Statements(including quarterly financial
data)
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25-45
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2.
Financial
Statement Schedules - Franklin Electric Co., Inc.
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II.
Valuation and Qualifying Accounts
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51
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Schedules
other than those listed above are omitted for the reason that they are not
required or are not applicable, or the required information is disclosed
elsewhere in the financial statements and related notes.
3.
Exhibits
See
the
Exhibit Index located on pages 54-55. Management Contract, Compensatory Plan,
or
Arrangement is denoted by an asterisk (*).
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
For
the
years 2006, 2005, and 2004
(In
millions)
Description
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Balance
at beginning of
period
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Additions
charged to costs and expenses
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Deductions
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Other
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Balance
at end
of
period
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Allowance
for doubtful accounts:
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2006
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$
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2.2
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$
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0.3
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$
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0.5(A
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$
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0.8(B
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$
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2.8
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2005
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$
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2.3
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$
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0.1
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$
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0.2(A
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$
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0.0(B
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$
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2.2
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2004
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$
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1.9
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$
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0.3
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$
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0.0(A
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$
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0.1(B
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$
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2.3
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NOTES:
(A) |
Uncollectible
accounts written off, net of
recoveries.
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(B) |
Allowance
for doubtful accounts related to accounts receivable of acquired
companies
at date of acquisition.
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareowners and Directors, Franklin Electric Co., Inc.:
We
have
audited the consolidated financial statements of Franklin Electric Co., Inc.
and
subsidiaries (the “Company”) as of December 30, 2006 and December 31, 2005, and
for each of the three years in the period ended December 30, 2006, management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 30, 2006, and the effectiveness of the Company’s
internal control over financial reporting as of December 30, 2006, and have
issued our reports thereon dated February 26, 2007; such consolidated financial
statements and reports are included elsewhere in this Form 10-K. Our audits
also
included the consolidated financial statement schedule of the Company listed
in
Item 15. The consolidated financial statement schedule is the responsibility
of
the Company’s management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule,
when
considered in relation to the basic consolidated financial statements taken
as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
February
26, 2007
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
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Franklin
Electric Co., Inc.
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/s/
R. SCOTT
TRUMBULL
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R.
Scott Trumbull
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Chairman
of the Board and Chief
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Date:
February 26, 2007
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Executive
Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on February 26, 2007.
/s/
R. SCOTT TRUMBULL
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Chairman
of the Board and Chief
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R.
Scott Trumbull
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Executive
Officer (Principal
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Executive
Officer)
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/s/
THOMAS J. STRUPP
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Vice
President, Chief
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Thomas
J. Strupp
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Financial
Officer and Secretary
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(Principal
Financial and Accounting
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Officer)
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/s/
JEROME D. BRADY
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Jerome
D. Brady
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Director
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/s/
DIANA S. FERGUSON
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Diana
S. Ferguson
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Director
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/s/
DAVID
A. ROBERTS
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David
A. Roberts
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Director
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/s/
DAVID M. WATHEN
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David
M. Wathen
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Director
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/s/
HOWARD B. WITT
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Howard
B. Witt
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Director
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/s/
THOMAS L. YOUNG
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Thomas
L. Young
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Director
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FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR
THE
FISCAL YEAR ENDED DECEMBER 30, 2006
Exhibit
Number
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Description
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3.1
Amended
and Restated Articles of Incorporation of Franklin Electric Co., Inc.
(incorporated by reference to the Company's Form 10-Q for the quarter ended
October 1, 2005)
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3.2
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By-Laws
of Franklin Electric Co., Inc. as amended July 23, 2004 (incorporated
by
reference to the Company’s Form 10-Q for the quarter ended July 3,
2004)
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10.1
Rights Agreement, dated as of October 15, 1999 between Franklin Electric Co.,
Inc. and Illinois Stock Transfer Company (incorporated by reference to the
Company’s registration statement on form 8-A dated October 15,
1999)
10.2
First Amendment to Rights Agreement between Franklin Electric Co., Inc. and
LaSalle Bank National Association (incorporated by reference to Exhibit 4.1
of
the Company's Form 8-A/A filed on December 1, 2006)
10.3
Franklin Electric Co., Inc. Stock Option Plan (incorporated by reference to
Exhibit 10.4 of the Company’s Form 10-K for the fiscal year ended January 3,
2004)*
10.4
Franklin Electric Co., Inc. Stock Plan (incorporated by reference to the
Company’s 2005 Proxy Statement for the Annual Meeting held on April 29, 2005,
and included as Exhibit A to the Proxy Statement)*
10.5
Franklin Electric Co., Inc. Non-employee Directors’ Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the
first quarter ended on April 1, 2006)*
10.6
Amended and Restated Franklin Electric Co., Inc. Pension Restoration Plan
(incorporated by reference to Exhibit 10.9 of the Company’s Form 10-K for the
fiscal year ended December 29, 2001)*
10.7
Employment Agreement dated December 3, 2002 between the Company and Scott
Trumbull (incorporated by reference to Exhibit 10.10 of the Company’s Form 10-K
for the fiscal year ended December 28, 2002)*
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10.8
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Amended
Employment Agreement dated December 20, 2002 between the Company
and Gregg
C. Sengstack (incorporated by reference to Exhibit 10.12 of the Company’s
Form 10-K for the fiscal year ended December 28,
2002)*
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10.9
Amendment to Amended Employment Agreement dated July 25, 2005 between the
Company and Gregg C. Sengstack (incorporated by reference to Exhibit 10.1 of
the
Company’s Form 8-K dated July 23, 2005)*
10.10
Employment Agreement dated July 25, 2005 between the Company and Thomas J.
Strupp (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K
dated July 23, 2005)*
10.11
$120,000,000 Amended and Restated Credit Agreement dated December 14, 2006,
between the Company and JPMorgan Chase, as Administrative Agent (incorporated
by
reference to Exhibit 2.04 of the Company’s Form 8-K filed on December 21, 2006)
10.12
Amended and Restated Note Purchase and Private Shelf Agreement dated September
9, 2004 between the Company and the Prudential Insurance Company of America
(incorporated by reference to Exhibit 10.12 of the Company’s Form 10-Q for the
quarter ended October 2, 2004)
10.13
Consulting Agreement dated January 31, 2003 between the Company and William
H.
Lawson (incorporated by reference to Exhibit 10.15 of the Company’s Form 10-K
for the fiscal year ended December 28, 2002)*
10.14
Consulting Agreement dated August 1, 2005 between the Company and Jess B. Ford
(incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K dated
August 1, 2005)*
10.15
Managing Director Service Contract dated August 1, 2003 between Franklin
Electric Europa GmbH and Mr. Peter-Christian Maske (incorporated by reference
to
Exhibit 10.14 of the Company’s Form 10-K for the fiscal year ended January 1,
2005)*
10.16
Confidentiality and Non-Compete Agreement dated February 11, 2005 between the
Company and R. Scott Trumbull, Gregg C. Sengstack, Daniel J. Crose, Donald
R.
Hobbs, Thomas A. Miller, Kirk M. Nevins, Robert J. Stone, and Gary Ward and
dated July 25, 2005 between the Company and Thomas J. Strupp (incorporated
by
reference to Exhibit 10.15 of the Company’s Form 10-K for the fiscal year ended
January 1, 2005)*
10.17
Executive Officer Annual Incentive Cash Bonus Program (incorporated by reference
to Exhibit 10.17 of the Company’s Form 10-K for the fiscal year ended January 1,
2005)*
10.18
Agreement for Employee Stock Award dated March 3, 2005 between the Company
and
Robert Stone (incorporated by reference to Exhibit 10.1 of the Company’s Form
8-K dated March 3, 2005)*
10.19
Form of Non-Qualified Stock Option Agreement for Non-Director Employees
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the
quarter ended April 2, 2005)*
10.20
Form of Non-Qualified Stock Option Agreement for Director Employees
(incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q for the
quarter ended April 2, 2005)*
10.21
Form of Restricted Stock Agreement for Non-Director Employees (incorporated
by
reference to Exhibit 10.20 of the Company’s for 10-K for the fiscal year ended
December 31, 2005)*
10.22
Form of Restricted Stock Agreement for Director Employees (incorporated by
reference to Exhibit 10.20 of the Company’s for 10-K for the fiscal year ended
December 31, 2005)*
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10.23
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Form
of Restricted Stock Agreement for Non-Employee Directors*
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21
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Subsidiaries
of the Registrant
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23 Consent
of Independent Registered Public Accounting Firm
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002
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32.1
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Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350
As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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32.2
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Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350
As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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99.1
Forward-Looking
Statements
*
Management Contract, Compensatory Plan, or Arrangement