form10_q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________
FORM
10-Q
_________
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended September 27,
2008
OR
o TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _____ to _____
Commission
file number 0-362
FRANKLIN ELECTRIC CO.,
INC.
(Exact
name of registrant as specified in its charter)
Indiana
|
|
35-0827455
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
400
East Spring Street
|
|
|
Bluffton, Indiana
|
|
46714
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(260)
824-2900
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer
x
|
Accelerated Filer o
|
Non-Accelerated Filer
o
|
Smaller Reporting Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
Outstanding
at
|
Class of Common Stock
|
|
September 27, 2008
|
$.10
par value
|
|
23,004,059
shares
|
FRANKLIN
ELECTRIC CO., INC.
TABLE OF
CONTENTS
|
|
|
Page
|
PART I.
|
FINANCIAL INFORMATION
|
|
Number
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Third Quarter and Nine
Months Ended September 27, 2008 and September 29,
2007
|
|
3
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of September 27, 2008 and December 29,
2007
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
27, 2008 and September 29, 2007
|
|
5
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6-15
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
16-20
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
21
|
|
|
|
|
PART II.
|
OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
22
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
22
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
22
|
|
|
|
|
Item
6.
|
Exhibits
|
|
22
|
|
|
|
|
Signatures
|
|
|
23
|
|
|
|
|
Exhibit Index
|
|
|
24
|
|
|
|
|
Exhibits
|
|
|
25-28
|
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
215,815 |
|
|
$ |
165,264 |
|
|
$ |
593,521 |
|
|
$ |
448,289 |
|
Cost
of sales
|
|
|
149,347 |
|
|
|
117,307 |
|
|
|
410,877 |
|
|
|
318,090 |
|
Gross
profit
|
|
|
66,468 |
|
|
|
47,957 |
|
|
|
182,644 |
|
|
|
130,199 |
|
Selling,
general and administrative expenses
|
|
|
38,875 |
|
|
|
28,185 |
|
|
|
113,460 |
|
|
|
89,446 |
|
Restructuring
expenses
|
|
|
0 |
|
|
|
342 |
|
|
|
82 |
|
|
|
1,949 |
|
Operating
income
|
|
|
27,593 |
|
|
|
19,430 |
|
|
|
69,102 |
|
|
|
38,804 |
|
Interest
expense
|
|
|
(2,684 |
) |
|
|
(2,286 |
) |
|
|
(8,088 |
) |
|
|
(5,694 |
) |
Other
income
|
|
|
626 |
|
|
|
699 |
|
|
|
783 |
|
|
|
1,918 |
|
Foreign
exchange gain/(loss)
|
|
|
436 |
|
|
|
(203 |
) |
|
|
45 |
|
|
|
443 |
|
Income
before income taxes
|
|
|
25,971 |
|
|
|
17,640 |
|
|
|
61,842 |
|
|
|
35,471 |
|
Income
taxes
|
|
|
8,711 |
|
|
|
5,956 |
|
|
|
21,153 |
|
|
|
12,250 |
|
Net
income
|
|
$ |
17,260 |
|
|
$ |
11,684 |
|
|
$ |
40,689 |
|
|
$ |
23,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$ |
0.75 |
|
|
$ |
0.51 |
|
|
$ |
1.77 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings
|
|
$ |
0.74 |
|
|
$ |
0.50 |
|
|
$ |
1.75 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
|
$ |
0.38 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except per share amounts)
|
|
September
27,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
60,827 |
|
|
$ |
65,252 |
|
Receivables,
less allowances of $2,478 and $2,594, respectively
|
|
|
98,891 |
|
|
|
64,972 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
67,657 |
|
|
|
57,958 |
|
Work-in-process
|
|
|
18,152 |
|
|
|
17,128 |
|
Finished
goods
|
|
|
101,514 |
|
|
|
99,974 |
|
LIFO
reserve
|
|
|
(22,926 |
) |
|
|
(18,914 |
) |
|
|
|
164,397 |
|
|
|
156,146 |
|
Deferred
income taxes
|
|
|
17,181 |
|
|
|
17,127 |
|
Other
current assets
|
|
|
10,987 |
|
|
|
5,982 |
|
Total
current assets
|
|
|
352,283 |
|
|
|
309,479 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
77,732 |
|
|
|
64,350 |
|
Machinery
and equipment
|
|
|
174,344 |
|
|
|
161,280 |
|
Furniture
and fixtures
|
|
|
12,494 |
|
|
|
12,595 |
|
Other
|
|
|
19,266 |
|
|
|
16,909 |
|
|
|
|
283,836 |
|
|
|
255,134 |
|
Allowance
for depreciation
|
|
|
(132,369 |
) |
|
|
(120,203 |
) |
|
|
|
151,467 |
|
|
|
134,931 |
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
80,372 |
|
|
|
66,925 |
|
Goodwill
|
|
|
150,869 |
|
|
|
140,034 |
|
Deferred
income taxes
|
|
|
747 |
|
|
|
- |
|
Other
assets
|
|
|
11,973 |
|
|
|
10,868 |
|
Total
assets
|
|
$ |
747,711 |
|
|
$ |
662,237 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
34,214 |
|
|
$ |
27,986 |
|
Accrued
liabilities
|
|
|
56,344 |
|
|
|
46,085 |
|
Income
taxes
|
|
|
10,468 |
|
|
|
6,180 |
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
35,319 |
|
|
|
10,398 |
|
Total
current liabilities
|
|
|
136,345 |
|
|
|
90,649 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
166,456 |
|
|
|
151,287 |
|
Deferred
income taxes
|
|
|
14,301 |
|
|
|
11,686 |
|
Employee
benefit plan obligations
|
|
|
20,643 |
|
|
|
24,713 |
|
Other
long-term liabilities
|
|
|
5,287 |
|
|
|
5,358 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
|
Common
shares (65,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
|
outstanding
(23,004 and 23,091, respectively)
|
|
|
2,300 |
|
|
|
2,309 |
|
Additional
capital
|
|
|
112,284 |
|
|
|
105,428 |
|
Retained
earnings
|
|
|
270,730 |
|
|
|
246,324 |
|
Accumulated
other comprehensive income
|
|
|
19,365 |
|
|
|
24,483 |
|
Total
shareowners' equity
|
|
|
404,679 |
|
|
|
378,544 |
|
Total
liabilities and shareowners' equity
|
|
$ |
747,711 |
|
|
$ |
662,237 |
|
See Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine Months Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
40,689 |
|
|
$ |
23,221 |
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,349 |
|
|
|
14,729 |
|
Stock-based
compensation
|
|
|
2,940 |
|
|
|
3,112 |
|
Deferred
income taxes
|
|
|
1,814 |
|
|
|
1,643 |
|
Loss
on disposals of plant and equipment
|
|
|
76 |
|
|
|
455 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(31,132 |
) |
|
|
(13,575 |
) |
Inventories
|
|
|
(5,972 |
) |
|
|
(32,363 |
) |
Accounts
payable and other accrued expenses
|
|
|
7,938 |
|
|
|
(1,438 |
) |
Accrued
income taxes
|
|
|
4,379 |
|
|
|
678 |
|
Excess
tax from share-based compensation arrangements
|
|
|
(804 |
) |
|
|
(1,594 |
) |
Employee
benefit plans
|
|
|
(3,479 |
) |
|
|
1,634 |
|
Other,
net
|
|
|
(6,976 |
) |
|
|
(7,401 |
) |
Net
cash flows from operating activities
|
|
|
27,822 |
|
|
|
(10,899 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(17,781 |
) |
|
|
(18,564 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
10 |
|
|
|
303 |
|
Additions
to other assets
|
|
|
(749 |
) |
|
|
(3 |
) |
Purchases
of securities
|
|
|
(9,000 |
) |
|
|
(246,700 |
) |
Proceeds
from sale of securities
|
|
|
9,000 |
|
|
|
240,694 |
|
Cash
paid for acquisitions
|
|
|
(38,392 |
) |
|
|
(36,836 |
) |
Proceeds
from sale of business
|
|
|
- |
|
|
|
1,310 |
|
Net
cash flows from investing activities
|
|
|
(56,912 |
) |
|
|
(59,796 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from revolver
|
|
|
70,000 |
|
|
|
- |
|
Repayment
of revolver
|
|
|
(30,019 |
) |
|
|
- |
|
Proceeds
from long-term debt
|
|
|
- |
|
|
|
200,000 |
|
Repayment
of long-term debt
|
|
|
(1,087 |
) |
|
|
(100,322 |
) |
Proceeds
from issuance of common stock
|
|
|
3,127 |
|
|
|
3,004 |
|
Excess
tax from share-based payment arrangements
|
|
|
804 |
|
|
|
1,594 |
|
Purchases
of common stock
|
|
|
(7,813 |
) |
|
|
(8,118 |
) |
Reduction
of loan to ESOP Trust
|
|
|
- |
|
|
|
200 |
|
Dividends
paid
|
|
|
(8,494 |
) |
|
|
(8,063 |
) |
Net
cash flows from financing activities
|
|
|
26,518 |
|
|
|
88,295 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and equivalents
|
|
|
(1,853 |
) |
|
|
2,080 |
|
Net
change in cash and equivalents
|
|
|
(4,425 |
) |
|
|
19,680 |
|
Cash
and equivalents at beginning of period
|
|
|
65,252 |
|
|
|
33,956 |
|
Cash
and equivalents at end of period
|
|
$ |
60,827 |
|
|
$ |
53,636 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
14,783 |
|
|
$ |
12,389 |
|
Cash
paid for interest
|
|
$ |
8,362 |
|
|
$ |
4,845 |
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$ |
341 |
|
|
$ |
438 |
|
Payable
to seller of Healy Systems, Inc.
|
|
$ |
2,443 |
|
|
$ |
1,126 |
|
Capital
equipment lease
|
|
$ |
1,039 |
|
|
$ |
- |
|
See Notes
to Condensed Consolidated Financial Statements.
FRANKLIN
ELECTRIC CO., INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying condensed consolidated balance sheet as of December 29, 2007, which
has been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements as of September 27, 2008 and for the
third quarter and nine months ended, September 27, 2008 and September 29, 2007,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. In the opinion of management, all accounting
entries and adjustments (including normal, recurring accruals) considered
necessary for a fair presentation of the financial position and the results of
operation for the interim period have been made. Operating results for the third
quarter and nine months ended September 27, 2008 are not necessarily indicative
of the results that may be expected for the fiscal year ending January 3, 2009.
For further information, including a description of Franklin Electric's critical
accounting policies, refer to the consolidated financial statements and notes
thereto included in Franklin Electric Co., Inc.'s Annual Report on Form 10-K for
the year ended December 29, 2007.
2. ACCOUNTING
PRONOUNCEMENTS
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
Measurements. This statement defines fair value in generally accepted accounting
principles and expands disclosures about fair value measurements that are
required or permitted under other accounting pronouncements. This
statement was effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years. The Company’s adoption of this statement had no impact on its
consolidated financial position, results of operations and cash
flows. The Company also adopted the deferral provisions of SFAS No.
157-2, which delayed the effective date of SFAS No. 157 for all nonrecurring
fair value measurements of non-financial assets and liabilities until fiscal
years beginning after November 15, 2008. The Company is in the
process of determining the impact of adopting SFAS No. 157-2 on its consolidated
financial position, results of operations and cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This statement was effective as of the beginning of the first
fiscal year beginning after November 15, 2007. Upon the Company’s
adoption of SFAS No. 159, it did not elect the fair value option for any assets
or liabilities. Therefore this statement had no impact on the
Company’s consolidated financial position, results of operations and cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations—a
replacement of FASB No. 141. SFAS No. 141(R) establishes principles
and requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for
financial statements issued for fiscal years beginning after December 15,
2008. Earlier adoption is prohibited. The Company is in
the process of determining the impact of adopting this new accounting principle
on its consolidated financial position, results of operations and cash
flows. SFAS No. 141(R) generally applies to acquisitions completed
after its effective date.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
(“ARB”) No. 51. SFAS No. 160 (a) amends ARB No. 51 to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and the deconsolidation of a subsidiary; (b) changes the way the
consolidated income statement is presented; (c) establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation; (d) requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated; and (e) requires
expanded disclosures in the consolidated financial statements that clearly
identify and distinguish between the interests of the parent’s owners and the
interests of the non-controlling owners of a subsidiary. SFAS No. 160
must be applied prospectively; however, the presentation and disclosure
requirements must be applied retrospectively to provide comparability in the
financial statements. Early adoption is
prohibited. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. The Company is in the process of determining the impact of adopting this
new accounting principle on its consolidated financial position, results of
operations and cash flows.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The statement amends SFAS No. 133 and requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. The
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The Company is in the process of determining the impact
of adopting this new accounting principle on its consolidated financial
position, results of operations and cash flows.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS 142-3, Determination of
the Useful Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R),
Business Combinations,
and other U.S. generally accepted accounting principles (GAAP). This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The Company is in the process of determining the
impact of adopting this new accounting position on its consolidated financial
position, results of operations and cash flows.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. This statement is effective as of
November 15, 2008. The Company does not believe that this new accounting
principle will have a material impact on its consolidated financial position,
results of operations and cash flows.
3. FAIR
VALUE MEASUREMENTS
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurement, which
provides a framework for measuring fair value under GAAP. The
adoption of this statement had no impact on the Company’s financial
statements. The Company also adopted the deferral provisions of SFAS
No. 157-2, which delays the effective date of SFAS No. 157 for all nonrecurring
fair value measurements of non-financial assets and liabilities until fiscal
years beginning after November 15, 2008. The Company is in the
process of determining the impact of adopting SFAS No. 157-2 on its consolidated
financial position, results of operations and cash flows.
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 expands
disclosures about instruments measured at fair value and establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used
to measure fair value:
Level 1 –
Quoted prices for identical assets and liabilities in active
markets;
Level 2 –
Quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not
active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets;
and
Level 3 –
Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
The
Company designates the cash equivalents as Level 1, as they are Money Market
accounts backed by Treasury Bills. As of September 27, 2008, and
December 29, 2007, our assets measured at fair value on a recurring basis were
as follows:
(In
millions)
|
|
September 27, 2008
|
|
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
Equivalents
|
|
$ |
27.4 |
|
|
$ |
27.4 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
December 29, 2007
|
|
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
Equivalents
|
|
$ |
36.2 |
|
|
$ |
36.2 |
|
|
$ |
- |
|
|
$ |
- |
|
4. INVESTMENTS
– SECURITIES
As of
September 27, 2008 and December 29, 2007, the Company held no investments
in financial securities. Income generated from investments for the first
nine months of 2008 was included in “Other income” in the statement of
income. Cash paid for these securities and proceeds from the sale of
these securities were included in the “Cash flows from investing activities”
section of the cash flows statements.
5. EQUITY
INVESTMENTS
The
Company holds a 35 percent equity interest in Pioneer Pump, Inc., which is
accounted for using the equity method and included in “Other assets” on the face
of the balance sheet. The carrying amount of the investment is adjusted for the
Company’s proportionate share of earnings, losses and dividends. The
carrying value of the investment was $7.5 million and $6.9 million as of
September 27, 2008, and December 29, 2007, respectively. The Company’s
proportionate share of Pioneer Pump, Inc. earnings, included in “Other income”
in the Company’s statements of income, was $0.1 million and $0.1 million, for
the third quarter ended September 27, 2008 and September 29, 2007, respectively
and $0.5 million and $0.6 million for the nine months ended September 27, 2008
and September 29, 2007, respectively.
6.
INTANGIBLE ASSETS AND GOODWILL
The
carrying amounts of the Company’s intangible assets are as follows:
(In
millions)
|
|
September 27, 2008
|
|
|
December 29, 2007
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
6.8 |
|
|
$ |
(3.7 |
) |
|
$ |
6.3 |
|
|
$ |
(3.3 |
) |
Supply
agreements
|
|
|
7.2 |
|
|
|
(5.5 |
) |
|
|
7.2 |
|
|
|
(5.0 |
) |
Technology
|
|
|
6.8 |
|
|
|
(1.1 |
) |
|
|
6.1 |
|
|
|
(0.8 |
) |
Customer
relationships
|
|
|
56.5 |
|
|
|
(5.1 |
) |
|
|
48.3 |
|
|
|
(2.8 |
) |
Other
|
|
|
2.3 |
|
|
|
(2.0 |
) |
|
|
2.1 |
|
|
|
(2.0 |
) |
Total
|
|
$ |
79.6 |
|
|
$ |
(17.4 |
) |
|
$ |
70.0 |
|
|
$ |
(13.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
18.1 |
|
|
|
- |
|
|
|
10.9 |
|
|
|
- |
|
Total
intangibles
|
|
$ |
97.7 |
|
|
$ |
(17.4 |
) |
|
$ |
80.9 |
|
|
$ |
(13.9 |
) |
Amortization
expense related to intangible assets for the third quarter ended September 27,
2008 and September 29, 2007 was $1.1 million and $0.9 million,
respectively, and for the nine months ended September 27, 2008 and September 29,
2007, $3.5 million and $2.6 million, respectively. Increases are related to
acquisitions.
Amortization
expense is projected as follows:
(In
millions)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
$ |
4.7 |
|
|
$ |
4.5 |
|
|
$ |
4.4 |
|
|
$ |
4.3 |
|
|
$ |
3.9 |
|
The
changes in the carrying amount of goodwill for the nine months ended September
27, 2008, are as follows:
(In
millions)
|
|
Water
|
|
|
Fueling
|
|
|
|
|
|
|
Systems
|
|
|
Systems
|
|
|
Consolidated
|
|
Balance
as of December 29, 2007
|
|
$ |
92.9 |
|
|
$ |
47.1 |
|
|
$ |
140.0 |
|
Increase
in goodwill acquired
|
|
|
35.3 |
|
|
|
- |
|
|
|
35.3 |
|
Purchase
accounting adjustments
|
|
|
(26.4 |
) |
|
|
3.6 |
|
|
|
(22.8 |
) |
Foreign
currency translation
|
|
|
(1.6 |
) |
|
|
- |
|
|
|
(1.6 |
) |
Balance
as of September 27, 2008
|
|
$ |
100.2 |
|
|
$ |
50.7 |
|
|
$ |
150.9 |
|
The
acquired goodwill in the Water Systems segment was primarily related to the
Company’s acquisition of Industrias Schneider SA, in the first quarter
2008.
Purchase
accounting adjustments included the completed valuation of certain assets and
liabilities including property, plant, and equipment, and intangible assets
related to the acquisition of Pump Brands (Pty) Limited, and the preliminary
valuation of Industrias Schneider SA.
7.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans – As of September 27, 2008, the Company maintained three domestic
pension plans and one German pension plan. The Company uses a
December 31 measurement date for its plans.
The
following table sets forth aggregated net periodic benefit cost for the third
quarter and nine months ended September 27, 2008 and September 29,
2007:
(In
millions)
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
|
$ |
2.8 |
|
|
$ |
3.2 |
|
Interest
cost
|
|
|
2.3 |
|
|
|
1.5 |
|
|
|
6.8 |
|
|
|
6.0 |
|
Expected
return on assets
|
|
|
(2.7 |
) |
|
|
(1.7 |
) |
|
|
(8.1 |
) |
|
|
(7.4 |
) |
Obligation/asset
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Loss
|
|
|
0.1 |
|
|
|
- |
|
|
|
0.2 |
|
|
|
0.1 |
|
Prior
service cost
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.9 |
|
Settlement
cost
|
|
|
0.1 |
|
|
|
- |
|
|
|
0.4 |
|
|
|
- |
|
Total
net periodic benefit cost
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
|
$ |
2.6 |
|
|
$ |
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth other benefit cost for the third quarter and nine
months ended September 27, 2008 and September 29, 2007:
(In
millions)
|
|
Other Benefits
|
|
|
Other Benefits
|
|
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.1 |
|
Interest
cost
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
0.6 |
|
Obligation/asset
|
|
|
- |
|
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
0.2 |
|
Loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Prior
service cost
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Settlement
cost
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
net periodic benefit cost
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
(0.2 |
) |
|
$ |
1.0 |
|
Through
September 27, 2008, the Company made contributions to the plans of $7.6
million. A continuation of the volatility of interest rates and
negative equity returns under current market conditions may result in greater
contributions to the Plan in the future. The amount of contributions
necessary or desirable to be made to the Plan cannot be determined until
actuarial analysis based on the Plan’s year end valuation at December 31, 2008
has been completed.
8. INCOME
TAXES
The
effective tax rate on income before income taxes in 2008 and 2007 varies from
the United States statutory rate of 35 percent primarily due to the effects of
state and foreign income taxes net of federal tax benefits.
9.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
As of the
beginning of fiscal year 2008, the Company had unrecognized tax benefits of $2.0
million, excluding accrued interest and penalties. The unrecognized
tax benefits were reduced by $0.2 million for state income tax liabilities based
on an evaluation during the first quarter of 2008 and were reduced an additional
$0.2 million due to the settlement of a state audit during the second quarter of
2008. There was no change in the third quarter of
2008. The Company had unrecognized tax benefits, excluding accrued
tax and penalties, of $1.6 million for the nine months ended September 27,
2008. If recognized, the effective tax rate would be affected by the
net unrecognized tax benefits of $1.1 million, which is net of a federal benefit
of state tax of $0.5 million.
The
Company recognizes interest and penalties related to unrecognized tax benefits
as interest and operating expense, respectively. The Company’s reserve for
interest and penalties as of September 27, 2008 and as of December 29, 2007 was
approximately $0.1 million and $0.2 million, respectively. Interest
and penalties were reduced $0.1 million during the second quarter of 2008
related to the settlement of a state audit. Interest and penalties
recorded during 2007 were not considered significant.
The
Company is subject to periodic audits by domestic and foreign tax authorities.
Currently, the Company is undergoing routine periodic audits in both domestic
and foreign tax jurisdictions. It is reasonably possible that the amounts of
unrecognized tax benefits could change in the next 12 months as a result of the
audits.
For the
majority of tax jurisdictions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for
years before 2005.
10.
DEBT
On
December 14, 2006, the Company entered into an amended and restated unsecured,
60-month $120.0 million revolving credit agreement (the “Revolver”). The
Revolver 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 Revolver contains certain financial
covenants with respect to borrowings, interest coverage, loans or advances and
investments, and the Company was in compliance with the covenants as of
September 27, 2008 and December 29, 2007. The Company had $40.0
million of outstanding borrowings under the Revolver at September 27,
2008. The Company had no outstanding borrowings at December 29,
2007.
On
April 9, 2007, the Company entered into the Amended and Restated Note Purchase
and Private Shelf Agreement (the “Prudential Agreement") in the amount of $175.0
million. Under the Prudential Agreement, the Company issued notes in
an aggregate principal amount of $110.0 million on April 30, 2007 (the “B-1
Notes”) and $40.0 million on September 7, 2007 (the “B-2 Notes). The
B-1 and B-2 Notes bear a coupon of 5.79 percent and have an average life of ten
years with a final maturity in 2019. Principal installments of $30.0
million are payable commencing on April 30, 2015 and continuing to and including
April 30, 2019, with any unpaid balance due at maturity. The
Prudential Agreement contains certain financial covenants with respect to
borrowings, interest coverage, loans or advances and investments, and the
Company was in compliance with the covenants as of September 27, 2008 and
December 29, 2007.
The
Company also has certain overdraft facilities at its foreign subsidiaries, of
which none were outstanding at September 27, 2008 and at December 29,
2007.
Long-term
debt consisted of:
(In
millions)
|
|
September
27,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
Prudential
Agreement - - 5.79 percent
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Prudential
Agreement - - 6.31 percent, principal payments of $10.0 million due in
November 2008 ($2.1 million denominated in JPY at 9/27/08)
|
|
|
10.0 |
|
|
|
10.0 |
|
Capital
leases
|
|
|
1.6 |
|
|
|
0.9 |
|
Other
debt
|
|
|
0.2 |
|
|
|
0.8 |
|
Revolver
- - average rate for third quarter 2008 was 2.92 percent
|
|
|
|
|
|
|
|
|
based
on the London Interbank Offered Rates plus an interest
spread
|
|
|
40.0 |
|
|
|
- |
|
|
|
|
201.8 |
|
|
|
161.7 |
|
Less
current maturities
|
|
|
(35.3 |
) |
|
|
(10.4 |
) |
Long-term
debt
|
|
$ |
166.5 |
|
|
$ |
151.3 |
|
The
following debt payments are expected to be paid in accordance with the following
schedule:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
More than 5 years
|
|
Debt
|
|
$ |
200.2 |
|
|
$ |
35.0 |
|
|
$ |
15.0 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
150.2 |
|
Capital
leases
|
|
|
1.6 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
201.8 |
|
|
$ |
35.3 |
|
|
$ |
15.7 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
- |
|
|
$ |
150.2 |
|
11.
EARNINGS PER SHARE
Following
is the computation of basic and diluted earnings per share:
(In
millions, except per share amounts)
|
|
Third Quarter Ended
|
|
|
Nine Months
Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
17.3 |
|
|
$ |
11.7 |
|
|
$ |
40.7 |
|
|
$ |
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.0 |
|
|
|
23.0 |
|
|
|
22.9 |
|
|
|
23.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.3 |
|
|
|
23.4 |
|
|
|
23.2 |
|
|
|
23.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.75 |
|
|
$ |
0.51 |
|
|
$ |
1.77 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.74 |
|
|
$ |
0.50 |
|
|
$ |
1.75 |
|
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options price range – low
|
|
$ |
32.19 |
|
|
$ |
40.93 |
|
|
$ |
32.19 |
|
|
$ |
44.51 |
|
Anti-dilutive
stock options price range – high
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
12. OTHER
COMPREHENSIVE INCOME
Comprehensive
income is as follows:
(In
millions)
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
17.3 |
|
|
$ |
11.7 |
|
|
$ |
40.7 |
|
|
$ |
23.2 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(16.4 |
) |
|
|
7.1 |
|
|
|
(5.9 |
) |
|
|
8.7 |
|
Pension
liability adjustment, net of tax
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
1.4 |
|
Comprehensive
income, net of tax
|
|
$ |
1.1 |
|
|
$ |
19.2 |
|
|
$ |
35.5 |
|
|
$ |
33.3 |
|
Accumulated
other comprehensive income consists of the following:
(In
millions)
|
|
September 27,
|
|
|
December
29,
|
|
|
|
2008
|
|
|
2007
|
|
Cumulative
foreign currency translation adjustments
|
|
$ |
21.3 |
|
|
$ |
27.2 |
|
Pension
liability adjustment, net of tax
|
|
|
(2.0 |
) |
|
|
(2.7 |
) |
|
|
$ |
19.3 |
|
|
$ |
24.5 |
|
13. SEGMENT
INFORMATION
Financial
information by reportable business segment is included in the following
summary:
(In
millions)
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
|
Net
sales to external customers
|
|
Water
Systems
|
|
$ |
154.6 |
|
|
$ |
133.6 |
|
|
$ |
448.7 |
|
|
$ |
354.2 |
|
Fueling
Systems
|
|
|
61.2 |
|
|
|
31.7 |
|
|
|
144.8 |
|
|
|
94.1 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consolidated
|
|
$ |
215.8 |
|
|
$ |
165.3 |
|
|
$ |
593.5 |
|
|
$ |
448.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$ |
18.6 |
|
|
$ |
21.1 |
|
|
$ |
59.8 |
|
|
$ |
46.5 |
|
Fueling
Systems
|
|
|
19.3 |
|
|
|
5.2 |
|
|
|
39.2 |
|
|
|
15.8 |
|
Other
|
|
|
(10.3 |
) |
|
|
(6.8 |
) |
|
|
(29.8 |
) |
|
|
(23.5 |
) |
Consolidated
|
|
$ |
27.6 |
|
|
$ |
19.4 |
|
|
$ |
69.1 |
|
|
$ |
38.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
Water
Systems
|
|
$ |
463.1 |
|
|
$ |
398.6 |
|
|
|
|
|
|
|
|
|
Fueling
Systems
|
|
|
226.8 |
|
|
|
203.1 |
|
|
|
|
|
|
|
|
|
Other
|
|
|
57.8 |
|
|
|
60.5 |
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
747.7 |
|
|
$ |
662.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash is
the major asset group in “Other” of total assets. The above tables may not add
due to rounding.
14. CONTINGENCIES
AND COMMITMENTS
At
September 27, 2008, the Company had $2.4 million of commitments primarily for
the purchase of machinery and equipment and building expansions.
The
Company provides warranties on most of its products. The warranty terms vary but
are generally two years from date of manufacture or one year from date of
installation. In 2007, the Company began offering an extended warranty program
to certain Water Systems customers which will provide warranty coverage up to
five years from the date of manufacture. Provisions for estimated expenses
related to product warranty are made at the time products are sold or when
specific warranty issues are identified. These estimates are established using
historical information about the nature, frequency, and average cost of warranty
claims, and expected customer returns. The Company actively studies trends of
warranty claims and takes action to improve product quality and minimize
warranty claims. The Company believes that the warranty reserve is appropriate;
however, actual claims incurred could differ from the original estimates,
requiring adjustments to the reserve.
The
changes in the carrying amount of the warranty accrual, as recorded in “Accrued
liabilities” in the Company’s balance sheet for the nine months ended September
27, 2008 are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of December 29, 2007
|
|
$ |
9.7 |
|
Accruals
related to product warranties
|
|
|
7.4 |
|
Reductions
for payments made
|
|
|
(7.4 |
) |
Balance
as of September 27, 2008
|
|
$ |
9.7 |
|
15.
STOCK-BASED COMPENSATION
The
Company has authorized stock option grants to purchase common stock and common
stock awards to employees and non-employee directors of the Company and its
subsidiaries under two stock plans. The plans and the original number of
authorized shares available for grant are as follows:
|
|
|
Authorized Shares
|
Franklin
Electric Co., Inc. Stock Option Plan
|
-
|
Options
|
3,600,000
|
Franklin
Electric Co., Inc. Stock Plan
|
-
|
Options
|
1,150,000
|
Franklin
Electric Co., Inc. Stock Plan
|
-
|
Awards
|
150,000
|
Stock Option
Grants
Under
each of the above plans, the exercise price of each option equals the market
price of the Company’s common stock on the date of grant and the options expire
ten years after the date of the grant. Generally, options granted to
non-employee directors vest 33 percent a year and become fully vested and
exercisable after three years. Options granted to employees generally
vest at 20 or 25 percent a year and become fully vested and exercisable after
five years or four years, respectively. Subject to the terms of the
plans, in general, the aggregate option price and any applicable tax
withholdings may be satisfied in cash or its equivalent, or by the plan
participant’s delivery of shares of the Company’s common stock owned more than
six months, having a fair market value at the time of exercise equal to the
aggregate option price and/or the applicable tax withholdings.
The fair
value of each option award for options granted or vesting after the adoption of
FASB 123(R) is estimated on the date of grant using the Black-Scholes option
valuation model with a single approach and amortized using a straight-line
attribution method over the option’s vesting period. Options granted
to retirement eligible employees are immediately expensed. The Company uses
historical data to estimate the expected volatility of its stock; the weighted
average expected term, the period of time options granted are expected to be
outstanding; and its dividend yield. The risk-free rates for periods within the
contractual life of the option are based on the U.S. Treasury yield curve in
effect at the time of the grant.
The
assumptions used for the Black-Scholes model to determine the fair value of
options granted during the first nine months ended September 27, 2008 and
September 29, 2007 are as follows:
|
|
September 27, 2008
|
|
|
September 29, 2007
|
|
Risk-free
interest rate
|
|
|
2.91
- 3.15 |
% |
|
|
4.74
– 4.78 |
% |
Dividend
yield
|
|
|
1.11
- 1.12 |
% |
|
|
0.65
– 0.67 |
% |
Weighted-average
dividend yield
|
|
|
1.119 |
% |
|
|
0.653 |
% |
Volatility
factor
|
|
|
0.3552
– 0.3714 |
|
|
|
0.3529
– 0.3701 |
|
Weighted-average
volatility
|
|
|
0.3691 |
|
|
|
0.3554 |
|
Expected
term
|
|
5.0
– 6.0 years
|
|
|
5.3
– 6.2 years
|
|
Forfeiture
rate
|
|
|
3.61 |
% |
|
|
4.18 |
% |
A summary
of the Company’s stock option plans activity and related information for the
nine months ended September 27, 2008 and September 29, 2007
follows:
(Shares
in thousands)
|
|
September 27, 2008
|
|
|
September 29, 2007
|
|
Stock Options
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
beginning of period
|
|
|
1,252 |
|
|
$ |
29.99 |
|
|
|
1,398 |
|
|
$ |
26.65 |
|
Granted
|
|
|
347 |
|
|
|
32.45 |
|
|
|
131 |
|
|
|
48.87 |
|
Exercised
|
|
|
(133 |
) |
|
|
23.51 |
|
|
|
(151 |
) |
|
|
20.59 |
|
Forfeited
|
|
|
(8 |
) |
|
|
37.87 |
|
|
|
(32 |
) |
|
|
29.38 |
|
Outstanding
end of period
|
|
|
1,458 |
|
|
$ |
31.12 |
|
|
|
1,346 |
|
|
$ |
29.43 |
|
Expected
to vest after applying forfeiture rate
|
|
|
1,439 |
|
|
$ |
31.60 |
|
|
|
1,304 |
|
|
$ |
29.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
919 |
|
|
$ |
27.64 |
|
|
|
890 |
|
|
$ |
24.72 |
|
A summary
of the weighted average remaining contractual term and aggregate intrinsic value
for the nine months ended September 27, 2008 is as follows:
Stock Options
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
end of period
|
|
|
5.83 |
|
|
$ |
20,747 |
|
Expected
to vest after applying forfeiture rate
|
|
|
5.79 |
|
|
$ |
20,561 |
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
4.17 |
|
|
$ |
16,108 |
|
There
were no options granted during the third quarter. The total intrinsic value
of options exercised during the third quarter ended September 27, 2008 and
September 27, 2007 was $2.7 million and $1.2 million,
respectively. There were no share-based liabilities paid during the
third quarter 2008.
A summary
of the Company’s nonvested shares activity and related information for the nine
months ended September 27, 2008 and September 29, 2007 follows:
(Shares
in thousands)
|
|
September 27, 2008
|
|
|
September 29, 2007
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Nonvested
at beginning of period
|
|
|
416 |
|
|
$ |
39.99 |
|
|
|
556 |
|
|
$ |
33.95 |
|
Granted
|
|
|
347 |
|
|
|
32.45 |
|
|
|
131 |
|
|
|
48.87 |
|
Vested
|
|
|
(217 |
) |
|
|
35.25 |
|
|
|
(205 |
) |
|
|
33.40 |
|
Forfeited
|
|
|
(8 |
) |
|
|
37.69 |
|
|
|
(26 |
) |
|
|
31.66 |
|
Nonvested
at end of period
|
|
|
538 |
|
|
$ |
37.07 |
|
|
|
456 |
|
|
$ |
38.61 |
|
As of
September 27, 2008, there was $5.0 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 2.51 years.
Stock
Awards
Under the
Stock Plan, nonemployee directors and employees may be granted stock awards or
grants of restricted shares of the Company’s common stock, with vesting for
employee awards or grants subject to the employees’ performance of certain
goals. The Stock Plan is an amendment and restatement of the Franklin
Electric Co., Inc. Key Employee Performance Incentive Stock Plan (the “Incentive
Plan”), established in the year 2000.
The stock
awards are granted at the market value on the date of grant and the restricted
stock awards cliff vest after either 4 or 5 years and the attainment of certain
performance goals. Dividends are paid to the recipient prior to
vesting. Stock awards granted to retirement eligible employees were
immediately expensed in 2007 and 2008, while all other stock awards were
expensed in a straight line amortization method over the 4 or 5
years.
A summary
of the Company’s restricted stock award activity and related information for the
nine months ended September 27, 2008 and September 29, 2007
follows:
(Shares
in thousands)
|
|
September 27, 2008
|
|
|
September 29, 2007
|
|
Nonvested Stock Awards
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Nonvested
at beginning of period
|
|
|
61 |
|
|
$ |
45.24 |
|
|
|
40 |
|
|
$ |
43.39 |
|
Awarded
|
|
|
16 |
|
|
|
36.58 |
|
|
|
31 |
|
|
|
47.59 |
|
Vested
|
|
|
(8 |
) |
|
|
40.17 |
|
|
|
(8 |
) |
|
|
43.77 |
|
Forfeited
|
|
|
(1 |
) |
|
|
40.72 |
|
|
|
(3 |
) |
|
|
47.44 |
|
Nonvested
at end of period
|
|
|
68 |
|
|
$ |
43.84 |
|
|
|
60 |
|
|
$ |
45.31 |
|
As of
September 27, 2008, there was $1.3 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 1.94 years.
16. RESTRUCTURING
The
Company has completed Phase II of its Global Manufacturing Realignment
Program. Restructuring expenses, primarily manufacturing equipment
relocation and production realignment, for the third quarters ended September
27, 2008 and September 29, 2007 were $0.0 million and $0.3 million,
respectively, and for the nine months ended September 27, 2008 and September 29,
2007, $0.1 million and $1.9 million, respectively. As of September
27, 2008 and December 29, 2007, there was no restructuring reserve in the
Company’s consolidated balance sheet.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Q3 2008//Q3
2007
OVERVIEW
Sales for
the third quarter of 2008 were up 31 percent from the same quarter last
year. The increase in sales was primarily related to organic growth
in the Fueling Systems segment and acquisitions. The Water Systems
segment represented 72 percent of overall sales during the quarter and grew by
16 percent during the third quarter. The Fueling Systems segment
represented 28 percent of overall sales during the quarter and grew by 93
percent versus the third quarter of the prior year. Earnings increased in
the third quarter of 2008 primarily due to the higher sales.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
Q3
2008
|
|
|
|
Q3
2007
|
|
|
|
2008
v 2007
|
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$
|
154.6
|
|
|
$
|
133.6
|
|
|
$
|
21.0
|
|
Fueling
Systems
|
|
$
|
61.2
|
|
|
$
|
31.7
|
|
|
$
|
29.5
|
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
|
|
$
|
215.8
|
|
|
$
|
165.3
|
|
|
$
|
50.5
|
|
Third
quarter sales were $215.8 million, up $50.5 million or 31 percent compared to
$165.3 million in 2007. Sales from businesses acquired during the
last 12 months were $18.7 million and these businesses achieved organic growth
of $3.2 million or 21 percent in the third quarter. Sales revenue
increased by $5.9 million in the quarter due to foreign exchange rate
changes. Overall organic growth for the quarter, including organic
growth achieved by acquired businesses and foreign exchange rate changes, was
$35.0 million or 21 percent.
Net
Sales-Water Systems
Water
Systems sales worldwide were $154.6 million, up $21.0 million or 16 percent for
the third quarter of 2008 compared to the same period for 2007. The
Water Systems segment organic sales growth was 4 percent during the quarter
including the organic growth from acquired companies. Water Systems sales in
international markets represented 47 percent of total Water Systems sales and
grew by 24 percent during the quarter. Sales in the US and Canada represented 53
percent of total sales and grew by 10 percent during the quarter. In most
markets, sales of pumping systems products for agricultural and commercial
applications experienced solid organic growth of about 8 percent, while the
sales of pumping systems products for residential applications grew at a slower
rate.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $61.2 million, up $29.5 million for the third
quarter of 2008 compared to the same period for 2007. All of the Fueling
Systems’ sales growth was organic. The sales increase was driven primarily by
vapor recovery equipment sold into California. Fueling Systems sales also
increased in key international markets including China, other areas of Asia,
Latin America, Europe and the Middle East during the quarter.
Cost
of Sales
Cost of
sales as a percent of net sales for the third quarter of 2008 and 2007 was 69.2
percent and 71.0 percent, respectively. Cost of sales as a percent of net sales
decreased in the third quarter of 2008 from 2007 primarily due to fixed cost
leverage which resulted from higher worldwide sales volume combined with
controlled increases in the Company’s fixed cost base. The Company’s gross
profit margin for the third quarter of 2008 and 2007 was 30.8 percent and 29.0
percent, respectively. The Company’s gross profit was $66.5 million,
up by $18.5 million or 180 basis points from the third quarter of
2007. Of the $18.5 million increase, about $12.4 was the result of
volume and sales mix improvements; and about $5.9 million was attributable to
the acquisitions. Sales price increases however, were partially offset by higher
material, freight and warranty expenses in the quarter versus 2007.
Selling,
General and Administrative (“SG&A”)
Selling,
general, and administrative (“SG&A”) expenses for the Company increased by
$10.7 million in the third quarter of 2008 compared to the third quarter last
year. The acquisitions of the pump division of Monarch Industries (Canada),
Schneider Motobombas (Brazil), and Western Pumps (United States) added
approximately $4.1 million of selling, general and administrative expenses to
the Water Systems segment for the third quarter of 2008. Other SG&A expense
changes included increased compensation and commissions of $4.8 million, and
increased R&D related expenses of $0.5 million.
Restructuring
Expenses
There
were no restructuring expenses in third quarter of 2008 and $0.3 million in the
third quarter of 2007. During the fourth quarter of 2008 we expect to
complete plans for the phased move of an estimated 500,000 man-hours of
manufacturing activity to our low cost plant complex in Linares, Mexico by the
middle of next year. This move will significantly reduce both direct
labor and fixed overhead costs.
Operating
Income
Operating
income was $27.6 million in the third quarter 2008 up $8.2 million from the
third quarter, 2007 operating income of $19.4 million.
|
|
|
Q3
2008
|
|
|
|
Q3
2007
|
|
|
|
2008
v 2007
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$
|
18.6
|
|
|
$
|
21.1
|
|
|
$
|
(2.5
|
)
|
Fueling
Systems
|
|
$
|
19.3
|
|
|
$
|
5.2
|
|
|
$
|
14.1
|
|
Other
|
|
$
|
(10.3
|
)
|
|
$
|
(6.9
|
)
|
|
$
|
(3.5
|
)
|
Consolidated
|
|
$
|
27.6
|
|
|
$
|
19.4
|
|
|
$
|
8.2
|
|
Operating
Income-Water Systems
Water
Systems operating income was $18.6 million for the quarter, down $2.5 million or
12 percent versus the third quarter of 2007. Water Systems operating
income margin was down 380 basis points from the third quarter of 2007. This
decline was primarily driven by three factors. First, reduced manufacturing
capacity utilization lowered operating income margin by 150 basis points. The
reduced capacity utilization is the result of our decision to lower inventories,
primarily in our North American factories. Our inventories in these factories at
the end of the third quarter this year are 26 percent lower than third quarter
last year, while our year to date sales from these factories are up
approximately 10 percent. Our plan is to continue curtailing
production in order to reduce inventories through the fourth quarter of this
year. Second, operating expenses of acquired business units not
included in the third quarter of 2007 have increased SG&A costs as a
percentage of sales by about 100 basis points. Third, because the Company’s
sales and earnings performance through September 2008 are significantly better
than through September 2007, additional expenses for incentive compensation were
incurred in the third quarter of 2008 which increased SG&A expenses as a
percent of sales by 100 basis points.
Operating
Income-Fueling Systems
Fueling
Systems operating income was $19.3 million, an increase of $14.1 million or
about 270 percent versus third quarter 2007. Fueling Systems
operating income margin was 31.5 percent in the third quarter, up significantly
from the third quarter of 2007 primarily due to higher sales and leveraging on
fixed costs.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. General and administrative expense increases were primarily
due to the realignment of general and administrative expenses of acquired
companies within the Water Systems segment into the corporate structure. Other
SG&A increases were related to higher compensation expenses.
Interest
Expense
Interest
expense for the third quarter of 2008 and 2007 was $2.7 million and $2.3
million, respectively. Interest expense increased in 2008 due primarily to debt
increases associated with the acquisitions, as well as, increased working
capital for inventory and accounts receivable.
Other
Income
Other
income for the third quarter of 2008 and 2007 was $0.6 million and $0.7 million
income, respectively. In other income for the third quarter of 2008 and 2007 was
interest income of $0.6 million and $0.7 million, respectively, primarily
derived from the investment of cash balances in short-term U.S. treasury and
agency securities.
Foreign
Exchange
Foreign
currency-based transactions produced a gain for the third quarter of 2008 of
about $0.4 million primarily due to euro rate changes relative to other
currencies. Foreign currency-based transactions produced a loss for the
same quarter 2007 of $0.2 million.
Income
Taxes
The
provision for income taxes in the third quarter of 2008 and 2007 was $8.7
million and $6.0 million, respectively. The projected effective tax rate for the
balance of 2008 is 35.1 percent before the impact of once-off adjustments,
compared to the prior year’s rate of 35.0 percent. The once-off
adjustments are related to discrete events such as state tax law changes and
true-up of estimates. The effective tax rate differs from the United
States statutory rate of 35 percent, generally due to foreign income exclusion
and due to the effects of state and foreign income taxes, net of federal tax
benefits.
Net
Income
Net
income for the third quarter of 2008 was $17.3 million, or $0.74 per diluted
share, compared to 2007 third quarter net income of $11.7 million or $0.50 per
diluted share.
YTD 2008 // YTD
2007
OVERVIEW
Sales for
the first nine months of 2008 were up from the first nine months of 2007 by
$145.2 million or about 32 percent. The increase in sales was due to two
factors; sales from the Company’s acquisitions, accounting for about 17
percentage points of the increase and by organic growth, accounting for about 15
percent. Earnings increased in 2008 primarily due to the higher sales and
improved margins. The margin has improved as a result of improved fixed cost
leverage due to higher sales and from a change in sales mix, primarily more
Fueling Systems products.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
YTD
9 2008
|
|
|
|
YTD
9 2007
|
|
|
|
2008
v 2007
|
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$
|
448.7
|
|
|
$
|
354.2
|
|
|
$
|
94.5
|
|
Fueling
Systems
|
|
$
|
144.8
|
|
|
$
|
94.1
|
|
|
$
|
50.8
|
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
|
|
$
|
593.5
|
|
|
$
|
448.3
|
|
|
$
|
145.2
|
|
Net sales
for the first nine months of 2008 were $593.5 million, an increase of $145.2
million or 32 percent compared to the same period of 2007 sales of $448.3
million. Sales from businesses acquired during the last 12 months were $77.4
million and these businesses achieved organic growth of $12.8 million or 20
percent for the first nine months of 2008. Sales revenue increased by
$19.8 million in the first nine months of 2008 due to foreign exchange rate
changes. Overall organic growth for the first nine months of 2008,
including organic growth achieved by acquired businesses and foreign exchange
rate changes, was $80.7 million or 18 percent.
Net
Sales-Water Systems
Global
Water Systems sales for the first nine months of 2008 increased by 27 percent
from the same period a year ago. Excluding acquisitions, global Water Systems
sales increased by 8 percent versus the first nine months of 2007.
Net
Sales-Fueling Systems
Global
Fueling Systems sales for the first nine months of 2008 were $144.8 million, an
increase of $50.8 million or 54 percent compared to the same period for
2007. All of the sales increase was organic. Fueling
revenue growth was led by vapor recovery system sales into California and sales
in international markets. Changes in selling price increased net sales by 5
percent in the first nine months of 2008.
Cost
of Sales
Cost of
sales as a percent of net sales for the first nine months of 2008 and 2007 was
69.2 percent and 71.0 percent, respectively. Correspondingly, the gross profit
margin increased to 30.8 percent from 29.0 percent as a result of the same
factors described above under the third quarter review. The Company’s gross
profit was $182.6 million, up by $52.4 million or 180 basis points from the same
period of 2007. Of the $52.4 million increase, about $25.9 was the
result of volume and sales mix improvements; and about $23.1 million was
attributable to acquisitions. Sales price increases, however, were
partially offset by higher material, freight and warranty expenses in the
quarter versus 2007.
Selling,
General and Administrative (“SG&A”)
Selling,
general and administrative (“SG&A”) expense as a percent of net sales for
2008 and 2007 was 19.1 percent and 20.0 percent, respectively. SG&A expense
spending increased by $24.0 million in 2008 compared to the first nine months of
last year. Acquisitions added approximately $15.7 million of SG&A
expenses to the Water Systems segment for the first nine months of 2008. Other
SG&A expense changes included increased compensation and commissions of $7.7
million
Restructuring
Expenses
There
were $0.1 million in the first nine months of 2008 and $1.9 million in the first
nine months of 2007.
Operating
Income
Operating
income was $69.1 million in the first nine months of 2008, up $30.3 million from
the first nine months of 2007 operating income of $38.8 million.
|
|
|
YTD
9 2008
|
|
|
|
YTD
9 2007
|
|
|
|
2008
v 2007
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$
|
59.8
|
|
|
$
|
46.5
|
|
|
$
|
13.3
|
|
Fueling
Systems
|
|
$
|
39.2
|
|
|
$
|
15.8
|
|
|
$
|
23.4
|
|
Other
|
|
$
|
(29.8
|
)
|
|
$
|
(23.5
|
)
|
|
$
|
(6.4
|
)
|
Consolidated
|
|
$
|
69.1
|
|
|
$
|
38.8
|
|
|
$
|
30.3
|
|
Operating
Income-Water Systems
Water
Systems operating income was $59.8 million for the first nine months of 2008, up
$13.3 million or 29 percent versus the same period a year
ago. Operating margins improved to 13.3 percent to sales in the first
nine months of 2008 versus year ago margins of 13.1 percent of
sales. Water Systems operating income increased on higher sales
volume and earnings from acquisitions, offset by the inventory reduction actions
described above.
Operating
Income-Fueling Systems
Fueling
Systems operating income was $39.2 million, an increase of $23.4 million or
about 148 percent versus the first nine months of 2007. Operating
margins improved to 27.1 percent of sales versus year ago period margins of 16.8
percent. Fueling Systems operating income improved primarily as a
result of sales volume increases.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. General and administrative expense increases were primarily
due to the realignment of general and administrative expenses of acquired
companies within the Water Systems segment into the corporate structure. Other
SG&A increases were related to higher compensation expenses.
Interest
Expense
Interest
expense for the first nine months of 2008 and 2007 was $8.1 million and $5.7
million, respectively. Interest expense increased in 2008 due primarily to debt
increases associated with acquisitions, as well as increased working capital for
inventory and accounts receivable.
Other
Income
Other
income for the first nine months of 2008 and 2007 was $0.8 million income and
$1.9 million income, respectively. Included in “Other income” for the
first nine months of both 2008 and 2007 was interest income of $1.6 million,
primarily derived from the investment of cash balances in short-term U.S.
treasury and agency securities. Also included in other income in the first nine
months of 2008 and 2007 was income from equity investments of $0.5 million and
$0.6 million. Offsetting the 2008 income was a pre-tax expense of
$0.9 million recorded in the second quarter to settle a trademark licensing
dispute.
Foreign
Exchange
For the
first nine months of 2008 foreign currency-based transactions were not
significant and were a gain of about $0.4 million for the same period in the
prior year.
Income
Taxes
The
provision for income taxes in 2008 and 2007 was $21.2 million and $12.3 million,
respectively. The effective tax rates for the first nine months of 2008 and 2007
were 34.2 and 34.5 percent, respectively. The effective tax rate differs from
the United States statutory rate of 35 percent, generally due to foreign income
exclusion and due to the effects of state and foreign income taxes, net of
federal tax benefits.
Net
Income
Net
income for the first nine months of 2008 was $40.7 million, or $1.75 per diluted
share, compared to the first nine months of 2007 net income of $23.2 million or
$0.99 per diluted share.
CAPITAL RESOURCES AND
LIQUIDITY
Operating
activities provided approximately $27.8 million of cash during the nine months
ended September 27, 2008 compared to cash consumption of $10.9 million for the
nine months ended September 29, 2007. The primary source of cash from
operations in 2008 was earnings of $40.7 million, which were offset by working
capital increases.
The
operating cash flows used in 2008 were primarily related to increases in
receivables of $31.1 million and inventory of $6.0 million. The increase in
receivables was primarily due to the strong sales volume in the final weeks of
the quarter. The increase in inventory was primarily due to increased
demand in Fueling offset by decreases in the Water Systems inventory in the
United States. The operating cash flow generated for the first nine
months of 2007 was primarily related to net income of $23.2
million. In 2007, accounts receivable increased approximately $13.6 million
primarily due to sales growth, while inventories increased about $32.4 million,
primarily in finished goods.
Net cash
flows used in investing activities were $56.9 million and $59.8 million during the first
nine months of 2008 and 2007, respectively. In 2008, the Company paid an
aggregate of $38.4 million for acquisitions, net of cash acquired, primarily for
Industrias Schneider in Brazil. In the first nine months of 2007, cash flow
used for acquisitions was $36.8 relating to the Pump Brands (Pty) Limited and
Monarch Industries acquisitions. Uses of cash in 2008 and 2007 were
also for the purchase of property, plant and equipment, of $17.8 million and
$18.6 million, respectively.
Cash
flows from financing activities were $26.5 million and $88.3 million during the
first nine months of 2008 and 2007, respectively. The Company received
proceeds from debt, net of repayments, of $38.9 million and $99.7 million in the
first nine months of 2008 and 2007, respectively. The Company paid
$8.5 million and $8.1 million in dividends on the Company’s common stock in the
first nine months of 2008 and 2007, respectively. The Company
repurchased $7.8 million of common stock under the Company’s repurchase program
in the first nine months of 2008 and $8.1 million in the first nine months of
2007.
Cash and
cash equivalents at the end of the first nine months of 2008 were $60.8 million
compared to $53.6 million for the same period of 2007. The Company’s working
capital and current ratio decreased in the first nine months of 2008 from year
end 2007 due to an increase in the current portion of debt.
At
September 27, 2008, the Company had $2.4 million of commitments, primarily for
the purchase of machinery and equipment and building expansions. The Company’s
net debt as a percent of total capital was 23 percent. Management
believes that internally generated funds and existing credit arrangements
provide sufficient liquidity to meet these current commitments and service
existing debt. The Company is in compliance with the covenant
restrictions of its credit agreements. The uncertainty in the
financial and credit markets has not impacted the liquidity of the Company and
the Company’s existing bank and financing arrangements are sufficient to meet
its operating needs.
FACTORS THAT MAY AFFECT
FUTURE RESULTS
Any
forward-looking statements contained herein, including those relating to the
Company’s financial results, business goals and sales growth, involve risks and
uncertainties, included but not limited to risks and uncertainties with respect
to general economic and currency conditions, availability of debt, various
conditions specific to the Company’s business and industry, raw materials and
transportation costs, new housing starts, weather conditions, market demand,
competitive factors, changes in distribution channels, supply constraints,
technology factors, litigation, government and regulatory actions, the Company’s
accounting policies, future trends, and other risks which are detailed in the
Company’s Securities and Exchange Commission filings, included in Part 1, Item
1A, of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 29, 2007, in Exhibit 99.1 attached thereto, and in Part II, Item 1A of
this Quarterly Report of Form 10-Q. These risks and uncertainties may
cause actual results to differ materially from those indicated by the
forward-looking statements. Any forward-looking statements included in this Form
10-Q are based upon information currently available, and the Company assumes no
obligation to update any forward-looking statements.
ITEM 4. CONTROLS AND
PROCEDURES
As of the
end of the period covered by this report (the “Evaluation Date”), the Company
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including the Company’s Chief Executive Officer and
the Company’s Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Company’s
Chief Executive Officer and the Company’s Chief Financial Officer concluded
that, as of the Evaluation Date, the Company’s disclosure controls and
procedures were effective in bringing to their attention, on a timely basis,
material information relating to the Company to be included in the Company’s
periodic filings under the Exchange Act.
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rules 13a–15 and 15d–15
under the Exchange Act during the second fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Company’s internal
control over financial reporting.
PART II. OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
The
Company’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2008
explained that the Company had substantially completed a retrofit program in
which it replaced a third party supplied component part in the nozzle of the
Enhanced Vapor Recovery Systems installed in California filling
stations. The California Air Resources Board (“CARB” has given the
Company an opportunity to review a Notice of Violation alleging that the
circumstances leading to the retrofit program violated California environmental
executive orders and statutes. The proceedings contemplated would
have no effect on the Company’s sale of Enhanced Vapor Recovery Systems in
California. The Company intends to accept CARB’s invitation to meet
in order to attempt to resolve this matter, and does not expect the resolution
of this matter, and any related proceedings involving local agencies, to have a
material effect on the Company’s financial condition or results of
operations. This matter was also described in Part II, Item 1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 28,
2008.
ITEM 1A. RISK
FACTORS
The
Company’s business may be affected by the current economic
environment.
The
recent worldwide financial and credit market disruptions and uncertainty have
reduced the availability of credit generally necessary to fund a continuation
and expansion of global economic activity. The shortage of credit combined with
recent substantial losses in equity markets and other economic developments
could lead to an extended worldwide economic recession. A general slowdown in
economic activity caused by a recession could adversely affect our business in
several ways. A continuation or worsening of the current difficult financial and
economic conditions could reduce sales and adversely affect our customers’
ability to meet the terms of sale and our suppliers’ ability to fully perform
their commitments to us. Given this uncertainty, the Company cannot
predict what additional credit may be available in the future. If
additional credit is not available, it may impact the Company’s ability to
complete acquisitions, develop new products or restructure existing operations
among other effects. Additionally, the cost of new credit in the
future may be higher than the existing credit arrangements currently in
place.
In
addition, the financial disruption may have an effect on the Plan assets of the
Defined Benefit Plans. The amount of contributions necessary or
desirable to be made to the Plan for 2009 cannot be determined until actuarial
analysis based on the Plan’s year end valuation at December 31, 2008 has been
completed. A continuation of the volatility of interest rates and
negative equity returns under current market conditions may result in greater
contributions to the Plan in the future.
Additional
Risks to the Company
Additional
risk factors are set forth in Part 1, Item 1A, in the Company’s annual report on
Form 10-K for the fiscal year ended December 29, 2007. Additional
risks and uncertainties, not presently known to the Company or currently deemed
immaterial, could negatively impact the Company’s results of operations or
financial condition in the future.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
(c)
|
Issuer
Repurchases of Equity Securities
|
In April
2007, the Company’s Board of Directors unanimously approved a resolution to
increase the number of shares remaining for repurchase from 628,692 to 2,300,000
shares. There is no expiration date for the plan. During the third quarter of
2008, the Company did not repurchase any of its stock. The maximum
number of shares that may still be purchased under the Company plan is
1,877,400.
ITEM 6.
EXHIBITS
See the Exhibit Index located on page
24.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
FRANKLIN ELECTRIC CO.,
INC.
|
|
|
|
Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
November 6, 2008
|
|
By
|
/s/ R. Scott Trumbull
|
|
|
|
R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
November 6, 2008
|
|
By
|
/s/ John J. Haines
|
|
|
|
John
J. Haines, Vice President and Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
|
FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE
THIRD QUARTER ENDED SEPTEMBER 27, 2008
|
|
Number
|
Description
|
|
|
10.1
|
Third
Amendment to Rights Agreement between Franklin Electric Co.,
Inc. and Wells Fargo Bank, National Association, as Rights
Agent (incorporated by reference to Exhibit 4.4 of the Company’s Form
8-A/A filed on September 23, 2008)
|
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
32.2
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of
2002
|
|
|