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 January 3, 2009
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
|
|
NASDAQ
Global Select Market
|
Preference
Stock Purchase Rights
|
|
NASDAQ
Global Select 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
|
Smaller Reporting Company
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 June 28, 2008 (the last business day of the registrant’s
most recently completed second quarter) was $873,901,341. The stock
price used in this computation was the last sales price on that date, as
reported by NASDAQ Global Select Market. For purposes of this calculation, the
registrant has excluded shares held by executive officers and directors of the
registrant, including restricted shares and except for shares owned by the
executive officers through the registrant's ESOP or 401K Plan. 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 February 14, 2009:
23,018,453 shares
DOCUMENTS
INCORPORATED BY REFERENCE
A portion
of the Proxy Statement for the Annual Meeting of Shareholders to be held on
April 24, 2009 (Part III).
TABLE
OF CONTENTS
|
Part
I
|
|
Page
|
Item
1.
|
Business
|
4 –
5
|
Item
1A.
|
Risk
Factors
|
6 -
9
|
Item
1B.
|
Unresolved
Staff Comments
|
9
|
Item
2.
|
Properties
|
9 -
10
|
Item
3.
|
Legal
Proceedings
|
10
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
10
|
|
Supplemental
Item - Executive Officers of the Registrant
|
11
|
|
|
|
Part
II
|
|
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
|
12
|
Item
6.
|
Selected
Financial Data
|
13
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
– 24
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
|
Item
8.
|
Financial
Statements and Supplementary Data
|
25
– 58
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
59
|
Item
9A.
|
Controls
and Procedures
|
59
– 61
|
Item
9B.
|
Other
Information
|
62
|
|
|
|
Part
III
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
62
|
Item
11.
|
Executive
Compensation
|
62
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
63
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
63
|
Item
14.
|
Principal
Accountant Fees and
Services
|
63
|
|
|
|
Part
IV
|
|
|
Item
15.
|
Exhibits,
Financial Statement Schedules
|
63
– 65
|
Signatures
|
|
66
|
Exhibit
Index
|
|
67
- 68
|
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, designs, manufactures and distributes
groundwater and fuel pumping systems, composed primarily of submersible pumps
and motors, electronic controls and related parts and equipment. The Company’s
business consists of two reporting segments based on the principal end market
served: the Water Systems segment and the Fueling Systems segment. The Company
includes unallocated corporate expenses in an “Other” segment that together with
Water and Fueling represent the Company. Except where the context
otherwise requires, “Franklin Electric” or the “Company”, shall refer to
Franklin Electric Co., Inc. and its consolidated subsidiaries.
The
principal raw materials used in the manufacture of the Company’s products are
coil and bar steel, 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 supply
source 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’s products are sold in North America, Europe, the Middle East, South
Africa, Australia, Mexico, Brazil, Japan, China, and other world markets. The
Company’s products are sold by its employee sales force and independent
manufacturing representatives.
In North
America, the Company is continuing the rationalization of manufacturing capacity
between the manufacturing complex in Linares, Mexico and its other North
American plants. The current realignment plan includes the phased move of
approximately 500,000 man hours of manufacturing activity to Linares,
approximately 80 percent of which is from Siloam Springs, Arkansas. The transfer
is expected to be largely complete by June 2009.
The
market for the Company’s products is highly competitive and includes diversified
accounts by size and type. The Company’s Water Systems and Fueling Systems
products and related equipment are sold to specialty Water Systems distributors
and some original equipment manufactures (“OEMs”), as well as industrial
equipment distributors, fuel service station operators, and major oil and
utility companies.
Beginning
in 2004, the Company began moving to a North American business model in which it
sells Water Systems products primarily directly to wholesale specialty Water
Systems distributors. 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. To facilitate this transition,
the Company acquired several pump manufacturers in the U.S. and
Canada. 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. In 2008, no single customer accounted for more
than 10 percent of the Company’s consolidated sales.
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
Company employed approximately 3,500 persons at the end of
2008.
Research and
Development
The
Company incurred research and development expense as follows:
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Research
and development expense
|
|
$ |
6.8 |
|
|
$ |
7.3 |
|
|
$ |
8.1 |
|
These
expenses were for activities related to the development of new products,
improvement of existing products and manufacturing methods, and other applied
research and development.
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 2008 and 2007 by segment was as
follows:
(In
millions)
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Water
Systems
|
|
$ |
18.6 |
|
|
$ |
21.3 |
|
Fueling
Systems
|
|
|
2.6 |
|
|
|
4.5 |
|
|
|
$ |
21.2 |
|
|
$ |
25.8 |
|
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 2009. 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, results of operation, cash flows, or competitive
position of the Company.
Available
Information
The
Company’s website address is www.franklin-electric.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 business conduct and ethics. Information contained on the
Company’s website is not part of this annual report on Form 10-K.
Business Segments and
Products
Segment
and geographic information set forth below under Note 18, “Segment and
Geographic Information,” to the consolidated financial statements is
incorporated herein by reference.
Water Systems
Segment
Water
Systems is a global leader in the production and marketing of groundwater
pumping systems and is a technical leader in submersible pumps and motors,
drives, electronic controls, and monitoring devices. 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.
Water
Systems motors and pumps are used principally in submersible applications for
pumping fresh water, wastewater, and other liquids in a variety of residential,
agricultural, and industrial applications, off-shore drilling, and
mining. Water Systems 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.
During
2008, the Company added two pump manufacturers in its Water Systems
segment. In the first quarter of 2008, the Company completed the
acquisition of Industrias Schneider SA. Industrias Schneider is a leading
Brazilian producer of pumps for the residential, agricultural, and light
commercial markets. The acquisition advances the Company’s strategy to expand
its business base in developing regions where product demand is growing
rapidly. In the second quarter of 2008, the Company acquired Western
Pumps LLC, located in Fresno, California. Western Pump designs,
develops, and manufactures centrifugal pumps specific to the water truck,
agricultural irrigation, and center pivot industries and was targeted to expand
growth on the west coast of the United States as well as broaden the Company’s
product offerings. Industrias Schneider sales were not material as a component
of the Company’s consolidated sales for 2008. On a pro forma annual
basis, Western Pump sales were not material as a component of the Company’s
consolidated sales for 2008.
In 2008,
Water Systems segment research and development expenditures were primarily
related to:
§
|
A
new line of 4” pumps with a different
construction
|
§
|
New
additions to sprinkler pump market
|
§
|
Addition
to the tri-seal line to round out
offering
|
§
|
New
SubDrive that can survive difficult
environments
|
§
|
New
fountain motor aimed at high flow, shallow set
applications
|
§
|
New
condensate pumps for heating, ventilation, and air conditioning (HVAC)
applications
|
Fueling Systems
Segment
Fueling
Systems is a global leader in the production and marketing of fuel pumping
systems and is a technical leader in electronic controls and monitoring devices.
This segment designs, manufactures and sells pumps, electronic controls and
related parts and equipment primarily for use in submersible fueling system
applications. It also integrates and sells motors and electronic
controls produced by the Water Systems segment.
Along
with the fueling motor and pump applications, Fueling Systems supplies a variety
of products to the petroleum equipment industry included in the submersible
pumping systems, such as flexible piping, vapor recovery systems and components,
electronic tank monitoring equipment, and fittings. The vapor
recovery systems and components have enjoyed particular success in California,
due to California Air Resource Board certification.
In 2008,
Fueling Systems segment research and development expenditures were primarily
related to:
§
|
DTU
Wiredless Technology that allows the installation of the Company’s Incon
ISD vapor monitoring systems quickly, without the need to break concrete
to connect to the Company’s Healy fuel dispenser mounted
sensors
|
§
|
A
new API bottom loading tank truck valve with enhanced features for the
tank truck market
|
§
|
A
new 15 gallon secondary contained Spill Container, that handles large
overfill events at the service station, installation is achieved without
the need to break concrete
|
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’s acquisition strategy entails expense, integration risks, and other
risks.
One of
the Company’s continuing strategies is to increase revenues and expand market
share through acquisitions that will provide complementary Water and Fueling
Systems products. The Company spends 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,
integrating and profitably managing additional businesses without substantial
costs, delays or other problems. There can also be no assurance that
acquired companies will achieve revenues, profitability or cash flows that
justify the investment in them. Failure to manage or mitigate these
risks could adversely affect the Company’s earnings and financial
condition.
The
Company’s products are sold in highly competitive markets, by numerous
competitors whose actions could negatively impact sales volume, pricing and
profitability.
The
Company is a global leader in the production and marketing of groundwater and
fuel pumping systems. End user demand, distribution relationships,
industry consolidation, new product capabilities of the Company’s competitors or
new competitors, and many other factors contribute to a highly competitive
environment. Additionally, some of the Company’s competitors have
substantially greater financial resources than the Company. Although
the Company believes that consistency of product quality, timeliness of
delivery, service, and continued product innovation, as well as price, are
principal factors considered by customers in selecting suppliers, competitive
factors described above may lead to declines in sales or in the prices of all
the Company’s products which could have an adverse impact on profitability and
financial condition.
The
Company’s business may be adversely 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 declines 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 have an adverse impact on the
Company’s ability to complete acquisitions, develop new products or restructure
existing operations as well as other negative effects. The cost of
new credit in the future may also be higher than the existing credit
arrangements the Company currently has 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 by the Company during the Company’s fiscal year
2009 is estimated at $15.7 million. A continuation of the volatility
of interest rates and negative equity returns under current market conditions
may result in greater contributions to the Plans in the future.
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. A decline
in housing starts or general slowdown in the United States or other economies in
the international markets the Company serves, such as those presently occurring
in the United States and many other markets, 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,
South Africa, Brazil, 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
|
Additionally,
the Company’s operations outside the United States could be negatively impacted
by changes in treaties, agreements, policies and laws implemented by the United
States.
If the
Company does not anticipate and effectively manage these risks, these factors
may have a material adverse impact on its international operations or on the
business as a whole.
Transferring
operations of the Company to low cost regions may not result in the intended
cost benefits.
The
Company is continuing its rationalization of manufacturing capacity between all
existing manufacturing facilities and the manufacturing complexes in low cost
regions such as Mexico, the Czech Republic and China. To implement
this strategy, the Company must complete the transfer of assets and intellectual
property between operations. Each of these transfers involves the
risk of disruption to our manufacturing capability, supply chain and,
ultimately, to our ability to service customers and generate revenues and
profits.
The
Company has significant investments in foreign entities and has significant
sales and purchases in foreign denominated currencies creating exposure to
foreign currency exchange rate fluctuations.
The
Company has significant investments outside the United States, including Europe,
South Africa, Brazil, Mexico and China. Further, the Company has
sales and makes purchases of raw materials and finished goods in foreign
denominated currencies. Accordingly, the Company has exposure to
fluctuations in foreign currency exchange rates relative to the US
dollar. Foreign currency exchange rate risk is reduced 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. To the extent that these
mitigating strategies are not successful, foreign currency rate fluctuations can
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.
Certain Company
products are subject to regulation and government performance requirements in
addition to the warranties provided by the Company.
The Company’s product lines have
expanded significantly and certain products are subject to government
regulations and standards for manufacture, assembly, and performance in
addition to the warranties provided by the Company. The Company’s
failure to meet all such standards or perform in accordance with warranties
could result in significant warranty or repair costs, lost sales and profits,
damage to the Company’s reputation, and fines or penalties from Governmental
organizations. Changes to these standards may require the Company to
modify its business objectives and incur additional costs to
comply.
The growth of municipal water systems and
increased government
restrictions on groundwater pumping could reduce demand for private
water wells and the Company’s products, thereby reducing revenues and
earnings.
Demand
for certain Company products is affected by rural communities shifting from
private and individual water well systems to city or municipal water systems.
Many economic and other factors outside the Company’s control, including Federal
and State regulations on water quality, tax credits and incentives, could impact
the demand for private and individual water wells. A decline in private and
individual water well systems in the United States or other economies in the
international markets the Company serves could reduce demand for the Company’s
products and adversely impact sales, gross margins and operating
results.
Demand
for Fueling Systems products is impacted by environmental legislation which may
cause significant increases in product demand and may be followed by
significantly reduced demand after meeting compliance requirements.
Environmental
legislation related to air quality and fueling containment may create demand for
certain Fueling Systems products which must be supplied in a relatively short
time frame to meet the governmental mandate, as is currently occurring in
California with respect to vapor control and monitoring
systems. During this period of increased demand the Company’s
revenues and profitability could increase significantly. The Company
is at risk of not having capacity to meet demand or cost overruns due to
inefficiencies during ramp up to the higher production levels. After
the Company’s customers have met the compliance requirements, the Company’s
revenues and profitability may decrease significantly as the demand for certain
products declines substantially. The Company is at risk of not
reducing production costs in relation to the decreased demand as well as reduced
revenues adversely impacting gross margins and operating results.
Additional
Risks to the Company
The
Company is subject to various risks in the normal course of business. Exhibit
99.1 sets forth risks and other factors that may affect future results,
including those identified above, 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 in the Water Systems segment are located
in the following countries: Australia, Brazil, Canada, China, The
Czech Republic, Germany, Italy, Japan, Mexico, Republic of Botswana, South
Africa, and the United States. Within the United States, significant
manufacturing facilities are located in Grant County, Indiana; Little Rock,
Arkansas; Siloam Springs, Arkansas; Wilburton, Oklahoma; and Oklahoma City,
Oklahoma.
Manufacturing
plants or primary distribution centers in the Fueling Systems segment are
located in the following countries: China, Germany, South Africa, and the United
States. Within the United States, a significant manufacturing
facility is located in Madison, Wisconsin.
The
Company also maintains warehouse facilities in Bluffton, Indiana; Orange,
California; Sanford, Florida; Winnipeg, Manitoba, Canada; and Bolton, Ontario,
Canada.
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
During
the first half of 2008, the Company 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. In
October 2008, the California Air Resources Board (“CARB”) provided a Notice of
Violation to the Company alleging that the circumstances leading to the retrofit
program violated California statutes and regulations. Proceedings under
the NOV are not expected to adversely affect the Company’s sale of Enhanced
Vapor Recovery Systems in California. The Company intends to attempt to
resolve this matter in discussions with CARB, as CARB invited it to do, 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 position,
results of operations, and cash flows.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE
REGISTRANT
Current
executive officers of the Company, their ages, current position, and their
business experience during at least the past five years as of January 3, 2009
are as follows:
Name
|
Age
|
Position
Held
|
Period
Holding Position
|
R.
Scott Trumbull
|
60
|
Chairman
of the Board and Chief Executive Officer
|
2003-present
|
Peter
C. Maske
|
58
|
Senior
Vice President and President of Europa
|
1999-present
|
Gregg
C. Sengstack
|
50
|
Senior
Vice President and President International & Fueling
Group
|
2005-present
|
|
|
Senior
Vice President, Chief Financial Officer
|
2001-2005
|
Robert
J. Stone
|
44
|
Senior
Vice President and President Americas Water Systems
|
2007-present
|
|
|
Vice
President of Sales, Marketing, and Engineering of Western
Hemisphere
Water Systems
|
2004-2007
|
Thomas
J. Strupp
|
55
|
Vice
President, Franklin Electric and President of the Water Transfer
Systems
|
2008-present
|
|
|
Vice
President, Chief Financial Officer, Secretary, and President Water
Transfer
Systems
|
2005-2008
|
|
|
Vice
President of Sales and Marketing, Pentair Water Group, Inc., a company
specializing in water flow and filtration systems, and enclosures that
house electrical components
|
2004-2005
|
Daniel
J. Crose
|
60
|
Vice
President and Director of North American Operations
|
2003-present
|
Gary
D. Ward
|
53
|
Vice
President and Director of Human Resources
|
2004-present
|
Delancey
W. Davis
|
43
|
Vice
President and Business Unit Manager US/Canada Water
Systems
|
2008-present
|
|
|
Vice
President and Director of Sales Western Hemisphere Water
Systems
|
2005-2008
|
|
|
Vice
President of Sales and Marketing, Flexcon Industries, a company
specializing in the manufacture of pressurized diaphragm expansion tanks
for water wells
|
1999-2005
|
John
J. Haines
|
45
|
Vice
President, Chief Financial Officer and Secretary
|
2008-present
|
|
|
Managing
Director and Chief Executive Officer, HSBC Auto Finance, a provider of
consumer automobile financing
|
2004-2008
|
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.
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 February 14, 2009 was 994. The Company's
stock is traded on NASDAQ Global Select Market: Symbol FELE.
Dividends
paid and the price range per common share as quoted by the NASDAQ Global Select
Market for 2008 and 2007 were as follows:
DIVIDENDS
PER SHARE
|
|
|
PRICE
PER SHARE
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
1st
Quarter
|
|
$ |
.120 |
|
|
$ |
.110 |
|
|
$ |
30.71 |
|
|
$ |
40.49 |
|
|
$ |
44.68 |
|
|
$ |
52.08 |
|
2nd
Quarter
|
|
$ |
.125 |
|
|
$ |
.120 |
|
|
$ |
32.77 |
|
|
$ |
44.99 |
|
|
$ |
41.87 |
|
|
$ |
49.90 |
|
3rd
Quarter
|
|
$ |
.125 |
|
|
$ |
.120 |
|
|
$ |
35.02 |
|
|
$ |
54.55 |
|
|
$ |
40.00 |
|
|
$ |
52.55 |
|
4th
Quarter
|
|
$ |
.125 |
|
|
$ |
.120 |
|
|
$ |
23.76 |
|
|
$ |
44.00 |
|
|
$ |
36.07 |
|
|
$ |
47.60 |
|
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 January 3,
2009.
ITEM 6. SELECTED FINANCIAL
DATA
The
following selected financial data should be read in conjunction with the
Company’s consolidated financial statements. The information set forth below is
not necessarily indicative of future operations.
FIVE YEAR
FINANCIAL SUMMARY (a)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Operations:
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
Net
sales
|
|
$ |
745,627 |
|
|
$ |
602,025 |
|
|
$ |
557,948 |
|
|
$ |
403,413 |
|
|
$ |
370,070 |
|
Gross
profit
|
|
|
226,925 |
|
|
|
172,820 |
|
|
|
191,557 |
|
|
|
142,821 |
|
|
|
126,191 |
|
Interest
expense
|
|
|
10,968 |
|
|
|
8,147 |
|
|
|
3,373 |
|
|
|
766 |
|
|
|
488 |
|
Income
tax expense
|
|
|
22,925 |
|
|
|
15,434 |
|
|
|
30,671 |
|
|
|
24,953 |
|
|
|
21,126 |
|
Income
from continuing operations
|
|
|
44,111 |
|
|
|
28,683 |
|
|
|
56,762 |
|
|
|
45,796 |
|
|
|
38,368 |
|
Depreciation
and amortization
|
|
|
24,164 |
|
|
|
20,359 |
|
|
|
17,989 |
|
|
|
14,971 |
|
|
|
15,143 |
|
Capital
expenditures
|
|
|
25,641 |
|
|
|
28,281 |
|
|
|
23,190 |
|
|
|
17,845 |
|
|
|
21,110 |
|
Balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (g)
|
|
$ |
236,248 |
|
|
$ |
218,830 |
|
|
$ |
123,833 |
|
|
$ |
138,998 |
|
|
$ |
111,697 |
|
Property,
plant and equipment, net
|
|
|
144,535 |
|
|
|
134,931 |
|
|
|
115,976 |
|
|
|
95,732 |
|
|
|
95,924 |
|
Total
assets
|
|
|
694,057 |
|
|
|
662,237 |
|
|
|
526,925 |
|
|
|
379,762 |
|
|
|
333,473 |
|
Long-term
debt
|
|
|
185,528 |
|
|
|
151,287 |
|
|
|
51,043 |
|
|
|
12,324 |
|
|
|
13,752 |
|
Shareowners’
equity
|
|
|
348,937 |
|
|
|
378,544 |
|
|
|
345,831 |
|
|
|
267,562 |
|
|
|
234,333 |
|
Other
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations, to sales
|
|
|
5.9 |
% |
|
|
4.8 |
% |
|
|
10.2 |
% |
|
|
11.4 |
% |
|
|
10.4 |
% |
Income
from continuing operations, to
average total
assets
|
|
|
6.5 |
% |
|
|
4.8 |
% |
|
|
12.5 |
% |
|
|
12.8 |
% |
|
|
12.5 |
% |
Current
ratio (h)
|
|
|
3.9 |
|
|
|
3.4 |
|
|
|
2.3 |
|
|
|
3.2 |
|
|
|
3.1 |
|
Number
of common shares outstanding
|
|
|
23,018 |
|
|
|
23,091 |
|
|
|
23,009 |
|
|
|
22,485 |
|
|
|
22,041 |
|
Per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
price range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
54.55 |
|
|
$ |
52.55 |
|
|
$ |
62.95 |
|
|
$ |
45.29 |
|
|
$ |
43.48 |
|
Low
|
|
|
23.76 |
|
|
|
36.07 |
|
|
|
38.70 |
|
|
|
34.54 |
|
|
|
29.01 |
|
Income,
from continuing operations, per weighted-average common
share
|
|
|
1.92 |
|
|
|
1.24 |
|
|
|
2.49 |
|
|
|
2.06 |
|
|
|
1.75 |
|
Income,
from continuing operations, per weighted-average common share, assuming
dilution
|
|
|
1.90 |
|
|
|
1.22 |
|
|
|
2.43 |
|
|
|
1.97 |
|
|
|
1.67 |
|
Book
value (i)
|
|
|
15.02 |
|
|
|
16.12 |
|
|
|
14.84 |
|
|
|
11.54 |
|
|
|
10.17 |
|
Dividends
per common share
|
|
|
0.50 |
|
|
|
0.47 |
|
|
|
0.43 |
|
|
|
0.38 |
|
|
|
0.31 |
|
___________________________________________________________________________________________
(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 2004 to 2006.
(b)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Industrias Schneider SA, and Western Pump, since their acquisitions in the first
and second quarter of 2008, respectively.
(c)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Pump Brands and the pump division of Monarch, since their acquisitions in the
second and third quarters of 2007, respectively.
(d)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Little Giant Pump Company and Healy Systems, Inc., since their acquisition in
the second and third quarters of 2006, respectively.
(e)
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.
(f)
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.
(g)
Working capital = Current assets minus Current liabilities.
(h)
Current ratio = Current assets divided by Current liabilities.
(i) 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
2008 //
2007
OVERVIEW
Sales for
2008 were up a total of 24 percent from 2007. About 15 percent is
attributable to sales from the Company’s acquisitions and about 9 percent from
organic growth. Fueling Systems product sales increased to 25 percent of the
Company’s total 2008 sales from about 22 percent in 2007. Earnings
increased in 2008 primarily due to the higher sales volume and product mix
changes. Fueling Systems product sales increased about 40
percent from 2007 resulting in significant earnings improvement as the Segment
leveraged its fixed costs. Sales growth of the Company slowed
significantly in the fourth quarter of 2008 primarily as a result of broad
economic deterioration in our end markets.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
v 2007
|
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$
|
557.0
|
|
|
$
|
466.8
|
|
|
$
|
90.2
|
|
Fueling
Systems
|
|
$
|
188.6
|
|
|
$
|
135.2
|
|
|
$
|
53.4
|
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
|
|
$
|
745.6
|
|
|
$
|
602.0
|
|
|
$
|
143.6
|
|
Net sales
for 2008 were $745.6 million, an increase of $143.6 million or about 24 percent
compared to 2007 sales of $602.0 million. The full year incremental impact of
sales from businesses acquired during 2007 and acquisitions in 2008 was $87.7
million. Sales revenue increased by $6.3 million or about 1 percent
in 2008 due to foreign exchange rate changes. However the U.S. dollar
strengthened against most foreign currencies late in 2008, negatively impacting
fourth quarter sales. Overall organic growth for 2008, including
foreign exchange rate changes, was $55.9 million or about 9
percent.
Net
Sales-Water Systems
Globally,
Water Systems sales increased in 2008 by about 19 percent from
2007. The increase in Water Systems sales was due primarily to sales
attributable to acquisitions. Excluding acquisitions, Water Systems
sales increased by about 1 percent versus 2007. Sales growth was impacted by the
reduction in the number of new housing starts in the United States and portions
of Western Europe and a reduction in inventory held by distributors and
contractors. Management expects the reduction in new housing starts
and inventory to continue into 2009.
Net
Sales-Fueling Systems
Globally,
Fueling Systems sales for 2008 were $188.6 million, an increase of $53.4 million
or about 40 percent compared to 2007. All of the sales increase was
organic. Fueling revenue growth was led by vapor recovery system
sales in California. Management estimates that as of year end 2008,
45 to 50 percent of the 11,200 filling stations in California have installed
vapor control systems and that Franklin Fueling Systems has supplied over 90
percent of these installations. In late 2008, the rate of vapor
recovery system installations in California slowed. The Company
believes that some of this slowing is due to the general economic environment
and the difficulty station owners are having in obtaining debt financing for new
equipment. Additionally, a competitive vapor management control system was
introduced by Veeder Root. The Company filed a lawsuit (i) alleging that
Veeder Root, in an effort to gain market share, has engaged in unfair
competition and (ii) seeking to prevent any further adverse effect on the
Company’s business in California. The Company expects that it will
continue to win a majority share of the remaining California
installations.
Fueling
Systems sales also increased in key international markets including China, other
areas of Asia, and Latin America during the year.
Cost
of Sales
Cost of
sales as a percent of net sales for 2008 and 2007 was 69.6 percent and 71.3
percent, respectively. Correspondingly, the gross profit margin increased to
30.4 percent from 28.7 percent. The Company’s gross profit was $226.9 million,
up by $54.1 million from the $172.8 million in 2007. Of the $54.1
million increase, about $29.0 was the result of volume and sales mix
improvements; and about $26.9 million was attributable to
acquisitions. Gross profit was reduced by $6.8 million as a result of
reduced facility utilization consistent with management’s plan to reduce
finished goods inventory and increase inventory turns over the course of the
year. Sales price was also a factor in the gross profit increase,
partially offset by higher material, freight and warranty expenses in the year
versus 2007. During the fourth quarter of 2008 raw materials
commodity costs declined significantly. Management believes commodity
costs will be lower on average in 2009 than in 2008.
Selling,
General and Administrative (“SG&A”)
Selling
and administrative (“SG&A”) expense as a percent of net sales for 2008 and
2007 was 19.8 percent and 19.9 percent, respectively. SG&A expense spending
increased by $28.2 million in 2008 compared to last year. The
acquisitions of Pump Brands (South Africa), the pump division of Monarch
Industries (Canada), Industrias Schneider SA (Brazil), Western Pumps and Cal
Pump (United States) added approximately $18.0 million of selling, general and
administrative expenses to the Water Systems segment during 2008. Excluding
acquisitions, the Company’s overall marketing and selling expenses in 2008
increased by $3.7 million to prior year. Additionally, expenses related to
variable performance based compensation increased by approximately $3.9 million
in 2008 versus 2007.
Restructuring
Expenses
There
were $2.2 million of nonrecurring restructuring expenses in 2008 compared to
$3.9 million in 2007. In December 2008, the Company announced Phase 3
of its Global Manufacturing Realignment Program for its manufacturing facilities
in North America and Brazil. In North America the Company is
continuing the rationalization of manufacturing capacity between the
manufacturing complex in Linares, Mexico and its other North American plants.
Initially, Phase 3 of the realignment plan includes the phased move of
approximately 500,000 man hours of manufacturing activity to Linares,
approximately 80 percent of which is from Siloam Springs, Arkansas. The transfer
is expected to be largely complete by June, 2009 and is anticipated to reduce
manufacturing labor and overhead costs. The Company has estimated the pretax
charge at $6.0 million to $8.0 million over three to four quarters beginning
with the fourth quarter of 2008 and includes severance expenses, pension
charges, asset write-offs, and equipment relocation costs. Approximately two
thirds of these charges will be non-cash. After this transfer is complete, the
Linares facility will have sufficient capacity to absorb additional
manufacturing activity and plans are being made to further rationalize capacity
in late 2009 and 2010.
In
Brazil, in order to support sales growth, the Company will transfer its
manufacturing operations in Joinville to a new facility and will sell the
existing facility. The Company believes this transfer will begin in
late 2009 or early 2010. It is anticipated that relocation costs for
this move will be approximately $0.3 million. When more definitive
estimates of the timing and costs of the transfer are known, the Company will
announce them.
During
the first quarter of 2007, the Company initiated Phase 2 of its Global
Manufacturing Realignment Program. Phase 2 of the realignment plan included
expanding facilities in low-cost regions and shifting production out of higher
cost manufacturing facilities. During the first quarter 2008, having
finished construction of the new pump plant in Linares, Mexico and the
consolidation of other manufacturing facilities, the Company completed Phase 2 of the
Global Manufacturing Realignment Program. In total, this phase
included severance and equipment relocation costs of $4.0 million pre-tax, with
$3.9 million in 2007 and $0.1 million in the first quarter 2008. As
previously disclosed, Phase 1 of the realignment plan, which was completed in
December 2005, resulted in $7.5 million of pre-tax restructuring
expenses
Operating
Income
Operating
income was $76.7 million in 2008, up $27.5 million from 2007 operating income of
$49.2 million.
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2008
v 2007
|
|
|
|
Operating
income/ (loss)
|
|
Water
Systems
|
|
$
|
67.6
|
|
|
$
|
56.7
|
|
|
$
|
10.9
|
|
Fueling
Systems
|
|
$
|
49.4
|
|
|
$
|
24.6
|
|
|
$
|
24.8
|
|
Other
|
|
$
|
(40.3
|
)
|
|
$
|
(32.1
|
)
|
|
$
|
(8.2
|
)
|
Consolidated
|
|
$
|
76.7
|
|
|
$
|
49.2
|
|
|
$
|
27.5
|
|
Operating
Income-Water Systems
Water
Systems operating income was $67.6 million for 2008, up $10.9 million or about
19 percent versus the same period a year ago. Operating margins were
basically unchanged at 12.1 percent to sales in 2008 versus in the prior year of
12.2 percent.
Operating
Income-Fueling Systems
Fueling
Systems operating income was $49.4 million, an increase of $24.8 million or
about 100 percent versus 2007. Operating margins improved to 26.2
percent of sales versus 18.2 percent in the prior year
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 higher compensation expenses. Other SG&A increases were related to
the realignment of general and administrative expenses of acquired companies
within the Water Systems segment into the corporate structure.
Interest
Expense
Interest
expense for 2008 and 2007 was $11.0 million and $8.1 million, respectively.
Interest expense increased in 2008 due primarily to debt increases associated
with the acquisitions, as well as increased working capital.
Other
Income or Expense
Other
Income or Expense for 2008 and 2007 was $1.3 million income and $3.0 million
income, respectively. Included in “Other income” for both 2008 and
2007 was interest income of $2.1 and $2.2 million, primarily derived from the
investment of cash balances in short-term U.S. treasury and agency securities.
Also, included in other income in 2008 and 2007 was income from equity
investments of $0.7 million and $0.9 million. In 2008, the Company
reached an agreement in principle to settle a trademark licensing dispute and
recorded a pre-tax expense of $0.9 million to reflect the settlement
payment.
Foreign
Exchange
For 2008
foreign currency-based transactions were not significant and were a gain of
about $0.1 million for 2007.
Income
Taxes
The
provision for income taxes in 2008 and 2007 was $22.9 million and $15.4 million,
respectively. The effective tax rates for 2008 and 2007 were 34.2 and 35.0
percent, respectively. The effective tax rate differs from the United States
statutory rate of 35 percent, generally due to foreign income exclusion and due
to the effects of state and foreign income taxes, net of federal tax
benefits.
Net
Income
Net
income for 2008 was $44.1 million, or $1.90 per diluted share, compared to the
same period of 2007 net income of $28.7 million or $1.22 per diluted
share.
2007 //
2006
OVERVIEW
Sales for
2007 were up from 2006. The increase in sales was primarily related to sales
from acquisitions. Sales growth was further benefited by significant
organic growth in Water Systems pump unit shipments and international sales of
Water Systems products, as well as organic growth in Fueling Systems product
shipments, primarily vapor recovery systems. Earnings declined in 2007
primarily due to the decreased sales of submersible motor units in the United
States and Canada. The Company’s margins were also impacted by higher
commodity costs, increased fixed costs incurred in connection with
manufacturing, engineering, 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 direct to distributors as well as
price discounting in the submersible motor and pump industry within the United
States and Canada. The Company also incurred significant
restructuring costs related to the 2007 phase of its Global Manufacturing
Realignment program, which also decreased operating income.
RESULTS OF
OPERATIONS
Net
Sales
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
|
2007
v 2006 |
|
|
|
Net
sales to external customers
|
|
Water
Systems
|
|
$ |
466.8 |
|
|
$ |
465.6 |
|
|
$ |
1.2 |
|
Fueling
Systems
|
|
$ |
135.2 |
|
|
$ |
92.3 |
|
|
$ |
42.9 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Consolidated
|
|
$ |
602.0 |
|
|
$ |
557.9 |
|
|
$ |
44.1 |
|
Net sales
for fiscal year 2007 were $602.0 million, an increase of $44.1 million or 8
percent compared to 2006 sales of $557.9 million. Excluding acquisition related
sales and changes in foreign exchange rates; net sales decreased about 8
percent. Incremental sales related to acquisitions for fiscal year 2007 were
about $79 million or 14 percent of prior year sales. Acquisition sales growth
was attributable to the full year impact on 2007 of the Little Giant Pump
Company and Healy Systems acquisitions from 2006, as well as the 2007
acquisitions of Pump Brands and the pump division of Monarch. The
Company also realized organic growth in Fueling Systems sales and in all
submersible Water Systems sales in regions outside the United States and
Canada.
Net
Sales-Water Systems
Water
Systems sales worldwide were $466.8 million, up $1.2 million for fiscal year
2007 compared to 2006. Excluding acquisition related sales and changes in
foreign exchange rates; net sales decreased about 15 percent. The decrease was
primarily attributable to a significant decline in unit sales of 4 inch
submersible motors in the United States and Canada. Partially
offsetting the decline was a significant increase in pump product unit sales in
the United States and Canada, as well as increases across all submersible
product sales outside of the region.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $135.2 million an increase of approximately 47
percent in 2007 from fiscal year 2006. Fueling Systems sales growth
benefited from both organic sales growth, primarily related to vapor recovery
systems and electronic fuel management systems, as well as acquisition related
sales. Excluding acquisition related sales and changes in foreign exchange
rates; net sales increased about 29 percent.
Cost
of Sales
Cost of
sales as a percent of net sales for 2007 and 2006 was 71.3 percent and 65.7
percent, respectively. Cost of sales as a percent of net sales increased in 2007
from 2006 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. Fixed costs increased as a
percentage of sales for Water Systems sales in the United States as shipments
declined faster than related costs. Other less significant increases
in cost of sales during 2007 were freight, warranty and obsolescence
expenses.
Restructuring
expenses
During
2007, the Company continued to execute its Global Manufacturing Realignment
program. This phase included the expansion of small submersible motor
manufacturing in Linares, Mexico; the construction and start-up of a new pump
manufacturing plant in Linares; the consolidation of Fueling Systems operations
into the recently enlarged Madison, Wisconsin plant; and the streamlining of
motor manufacturing operations in Siloam Springs, Arkansas and Wittlich,
Germany. The Company also announced the phased relocation of the Little Rock,
Arkansas Water Systems pump manufacturing to the new pump plant in Linares,
Mexico. Restructuring expenses for 2007 were approximately $3.9 million
(pre-tax) and reduced diluted earnings per share by approximately $0.11 per
share for year ending December 2007. Full year 2007 restructuring expenses
include severance and other employee expenses as well as manufacturing equipment
relocation costs.
Selling, General
and Administrative (“SG&A”)
SG&A
expense as a percent of net sales for 2007 and 2006 was 19.9 percent and 18.4
percent, respectively. The increase in SG&A was about $17.3 million in 2007
over 2006, $13.2 million of which was due to acquisitions. Other increases in
SG&A costs were 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 and increased variable commissions on stronger Fueling Systems
sales.
Operating
Income
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
|
2007
v 2006 |
|
|
|
Operating
income/ (loss)
|
|
Water
Systems
|
|
$ |
56.7 |
|
|
$ |
104.4 |
|
|
$ |
(47.7 |
) |
Fueling
Systems
|
|
$ |
24.6 |
|
|
$ |
15.0 |
|
|
$ |
9.6 |
|
Other
|
|
$ |
(32.1 |
) |
|
$ |
(30.3 |
) |
|
$ |
(1.8 |
) |
Consolidated
|
|
$ |
49.2 |
|
|
$ |
89.1 |
|
|
$ |
(39.9 |
) |
Operating
Income-Water Systems
Water
Systems operating income decreased primarily as a result of lower unit sales of
4” submersible motors to major OEMs in the US and Canada. In
addition, other factors affecting the decrease in operating income for the Water
Systems segments were product mix changes, about $5.5 million primarily from
declining motor shipments as a percentage of Water Systems sales, higher freight
costs of $4.5 million, slow moving and obsolescence expense of $1.4 million
related to change over and implementing new product designs, and warranty costs
of $0.8 million. Partially offsetting the decline in operating
income were earnings from acquisitions and increased Water Systems product sales
and related earnings from regions outside of the US and Canada.
Operating
Income-Fueling Systems
Fueling
Systems operating income improved primarily as a result of sales volume
increases. Fueling Systems margins improved by 90 basis points due to
the product mix benefit of the sales growth and as sales increased at a greater
rate than fixed manufacturing costs.
Operating
Income-Other
Other
operating income is composed primarily of unallocated general and administrative
expenses. General and administrative expense increases were primarily
due to increased expenses associated with acquisitions.
Interest
expense
Interest
expense for 2007 and 2006 was $8.1 million and $3.4 million, respectively.
Interest expense increased in 2007 due to the debt incurred for acquisitions and
increased working capital requirements.
Other
income or expense
Included
in other income for 2007 and 2006 was interest income of $2.2 million and $1.9
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 2007 and 2006 was income from equity investments of $0.9
million and $0.7 million, respectively.
Foreign
exchange
Foreign
currency-based transactions produced a gain for 2007 of about $0.1 million
primarily due to rate changes of the euro, the Canadian dollar and the South
African Rand relative to the U.S. dollar. Foreign currency-based
transactions produced a loss for 2006 of $0.1 million primarily due to euro rate
changes relative to other currencies in Europe and the U.S. dollar.
Income
taxes
The
provision for income taxes from continuing operations in 2007 and 2006 was $15.4
million and $30.7 million, respectively. The effective tax rates were 35.0 and
35.1 percent for 2007 and 2006, 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
Income
from continuing operations for 2007 was $28.7 million, or $1.22 per diluted
share, compared to 2006 income from continuing operations of $56.8 million or
$2.43 per diluted share.
CAPITAL RESOURCES AND
LIQUIDITY
The
Company’s primary sources of liquidity are cash flows from operations and funds
available under its committed, unsecured, revolving credit agreement maturing
2011 (the “Agreement”) in the amount of $120.0 million and its amended and
restated uncommitted note purchase and private shelf agreement (the “Prudential
Agreement”) in the amount of $175.0 million. The Company has no
scheduled principal payments on the Prudential Agreement until
2015. As of January 3, 2009 the Company had $85.0 million and $25.0
million of borrowing capacity under the respective agreements. The
uncertainty in the financial and credit markets has not impacted the liquidity
of the Company and the Company expects that ongoing requirements for operations,
capital expenditures, dividends, and debt service will be adequately funded from
its existing credit agreements. The Agreement and the Prudential
Agreement do not contain any material adverse changes or similar provisions that
would accelerate the maturity of amounts drawn under either agreement. The
Agreement and Prudential Agreement do contain various customary conditions and
covenants, which limit, among other things, borrowings, interest coverage, loans
or advances and investments. As of January 3, 2009, the Company was
in compliance with all covenants.
Net cash
flows from operating activities were $44.4 million in 2008 compared to $4.2
million in 2007 and $55.4 million in 2006. The operating cash flow
improvement was largely a result of greater Fueling Systems income from
continuing operations and normal fluctuations in operating assets and
liabilities related to overall results of operations. Fueling revenue
growth was led by strong vapor recovery system sales in California.
Net cash
used in investing activities was $65.0 million in 2008 compared to $63.2 million
in 2007 and $131.6 million in 2006. The 2008 activities were
primarily related to $38.4 million, net of cash acquired, used to acquire
Industrias Schneider on January 9, 2008. The acquisition was
funded with cash and long term borrowings under the
Agreement. Additionally, $25.6 million was used for property, plant
and equipment additions in 2008. During 2007 the Company acquired
Pump Brands in the second quarter and the pump division of Monarch Industries
Limited in the third quarter at an aggregate purchase price of $37.0 million,
net of cash acquired, and utilized $28.3 million to fund property, plant and
equipment additions. In 2006, the Company completed its acquisition
of Little Giant Pump Company for a cash purchase price of $120.8 million and
Healy Systems, Inc. in a stock purchase transaction for a cash purchase price of
$35.1 million. Additionally, $23.1 million was used to fund property,
plant and equipment additions in 2006.
Net cash
provided by financing activities of $8.9 million in 2008 was primarily related
to proceeds from new debt incurred, net of repayments to date. Also
included was the repurchase of approximately 235,000 shares of its common stock
for $7.8 million and the payment of $11.4 million in dividends to its
shareholders. Net cash provided by financing activities of $87.0
million in 2007 was primarily related to proceeds from new debt incurred, net of
repayments to date, the repurchase of approximately 187,600 shares of its common
stock for $8.1 million, and the payment of $10.8 million in dividends to its
shareholders. In 2006, net cash provided by financing activities
of
$54.8
million was primarily related to proceeds from new debt incurred, net of
repayments to date, as well as the payment of $9.8 million in dividends to its
shareholders.
2008 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, contingency 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
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5
Years
|
|
Debt
|
|
$ |
185.0 |
|
|
$ |
0.0 |
|
|
$ |
35.0 |
|
|
$ |
0.0 |
|
|
$ |
150.0 |
|
Debt
interest
|
|
|
76.1 |
|
|
|
9.5 |
|
|
|
18.5 |
|
|
|
17.7 |
|
|
|
30.4 |
|
Capital
leases
|
|
|
1.2 |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.0 |
|
Operating
leases
|
|
|
20.4 |
|
|
|
5.6 |
|
|
|
7.2 |
|
|
|
2.4 |
|
|
|
5.2 |
|
Contingencies
from acquisitions (Healy Systems and Western Pump)
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
Purchase
obligations
|
|
|
2.1 |
|
|
|
2.1 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
$ |
285.4 |
|
|
$ |
18.5 |
|
|
$ |
61.1 |
|
|
$ |
20.2 |
|
|
$ |
185.6 |
|
Debt
interest includes interest under the Company’s current credit agreement. The
average interest rate for 2008 was 3.2 percent based on the LIBOR plus an
interest spread. The remaining interest calculated was based on the fixed rate
of 6.31 percent for the Company’s short-term insurance company debt and 5.79
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 from
the year of acquisition. The Western Pump stock purchase agreement
provided for additional contingent payments of 7.5 percent of business net sales
for the two year period commencing April 1, 2008; however the aggregate amount
shall not exceed $0.8 million.
The
Company has pension and other post-retirement benefit obligations not included
in the table above which will result in future payments of $15.7
million. The Company also has unrecognized tax benefits related to
FASB Interpretation 48 obligations, none of which are included in the table
above. The unrecognized tax benefits of approximately $6.8 million
have been recorded as liabilities in accordance with FASB Interpretation No. 48
Uncertainty in Income Taxes, and we are uncertain as to if or when such amounts
may be settled. Related to the unrecognized tax benefits, the Company
has also recorded a liability for potential penalties and interest of $0.4
million.
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 in first quarter 2008
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, for those
non-financial assets and liabilities deferred, 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 reviewed the impact on its financial statements and does not
believe that the adoption of this standard will have a significant impact on the
Company’s 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 adoption
encouraged. The Company reviewed the impact on its financial
statements and does not believe that the adoption of this standard will have a
significant impact on the Company’s 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 reviewed the impact on its financial
statements and does not believe that the adoption of this standard will have a
significant impact on the Company’s 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 has adopted this standard with no
impact on the Company’s consolidated financial position, results of operations
and cash flows.
CRITICAL ACCOUNTING
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. Management evaluates its estimates
on an on-going basis. Estimates are based 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. There were no material changes to
estimates in 2008.
The
Company’s critical accounting estimates are identified below:
Allowance
for Uncollectible Accounts:
Accounts
receivable is comprised of balances due from customers net of estimated
allowances for uncollectible accounts. In determining allowances, historical
collection experience, current trends, aging of accounts receivable, and
periodic credit evaluations of customers’ financial condition are analyzed to
arrive at appropriate allowances. Allowance levels change as customer-specific
circumstances and the other analysis areas noted above change.
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, management’s evaluation of estimated future demand, market conditions and
alternative uses for possible excess or obsolete parts, carrying values are
adjusted. For all inventory, the carrying value is reduced regularly
to reflect the age and current anticipated product demand. If actual demand
differs from the estimates, additional reductions would be necessary in the
period such determination is made. The Company’s reserve for excess
or obsolete products or components as of year end 2008 was $8.7
million. Excess and obsolete inventory is periodically disposed of
through sale to third parties, scrapping or other means, and the reserves are
appropriately reduced.
Long-lived
Assets:
The
Company reviews long-lived assets by asset group for impairment whenever events
or changes in circumstances indicate that the related carrying amounts may not
be recoverable. Determining whether impairment has occurred typically requires
various estimates and assumptions, including determining which cash flows are
directly related to the potentially impaired asset, the amount and useful life
over which cash flows will occur and the asset's residual value, if any. In
turn, measurement of an impairment loss requires a determination of fair value,
which is based on the best information available given the Company’s historical
experience and internal business plans.
Business
Combinations:
The
Company has followed 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 an independent third-party valuation firm 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:
The
Company follows the guidance under SFAS No. 142, Goodwill and Other Intangible
Assets, to record goodwill. Goodwill is not amortized; however it is
tested at the reporting unit level for impairment annually or more frequently
whenever events or changes in circumstances indicate that there may be
impairment. Reporting units are operating segments or one level
below, known as components, which can be aggregated for testing
purposes. The Company has determined its components meet the
aggregation criteria and as a result, goodwill is allocated to the Company’s
reporting units, Water Systems and Fueling Systems for testing. In
assessing the recoverability of goodwill (i.e.,
impairment
testing), the Company looks at both the market valuation approach, where the
Company’s current and projected financial results are compared to entities of
similar size and industry to determine the market value of the Company, and the
cash flow approach which requires assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective
assets. Such cash flows consider factors such as expected future
operating income and historical trends, as well as the effects of demand and
competition. If the Company’s assumptions and estimates change whereby fair
value of the reporting units is below their associated carrying values, the
Company may be required to record impairment. Goodwill included on
the balance sheet as of year end 2008 was $148.1 million. During the
first period of the fourth quarter of 2008, the Company completed its annual
impairment test of goodwill and determined there was no impairment. A
10 percent decrease in the fair value estimates used in the fourth quarter 2008
impairment test would not have changed this determination. This
sensitivity analysis required the use of judgment and numerous subjective
assumptions, which, if actual experience varies, could result in material
differences in the requirements for impairment charges. Further, an
extended downturn in the economy may impact certain components of the operating
segments more significantly and could result in changes to the aggregation
assumptions and impairment determination.
Significant
judgment is required to determine if an indicator of impairment has taken
place. Factors to be considered include; adverse change in operating
results, decline in strategic business plans, significantly lower future cash
flows, and sustainable decline in market data such as market
capitalization. Given the changing economic conditions during the
fourth quarter of 2008, the Company experienced a decline in its market
capitalization. As of January 3, 2009, market capitalization was $650
million compared to book value of $349 million. SFAS No. 142 requires
the performance of an interim goodwill impairment test if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. The Company evaluated the
move in its stock price, along with the Company’s fourth quarter performance,
and industry outlook. Based on this evaluation, the Company concluded
that it did not have a triggering event in the fourth quarter that would require
the performance of an interim goodwill impairment test.
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. The Company operates in multiple tax jurisdictions with
different tax rates, and determines the allocation of income to each of these
jurisdictions based upon various estimates and assumptions. In the normal course
of business the Company will undergo tax audits by various tax jurisdictions.
Such audits often require an extended period of time to complete and may result
in income tax adjustments if changes to the allocation are required between
jurisdictions with different tax rates. Although the Company has recorded all
probable income tax contingencies in accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes and SFAS No. 109, Accounting for
Income Taxes, these accruals represent estimates that are subject to the
inherent uncertainties associated with the tax audit process, and therefore
include contingencies. 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. The Company’s operations involve dealing
with uncertainties and judgments in the application of complex tax regulations
in multiple jurisdictions. The final taxes paid are dependent upon many factors,
including negotiations with taxing authorities in various jurisdictions and
resolution of disputes arising from federal, state, and international tax
audits.
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. Market conditions have caused
the discount rate to move from 6.40 percent last year to 6.90 percent this year.
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 in making its determination of the expected long-term rate of return on
plan assets. Using input from these consultations such as long term
investment sector expected returns, the correlations and standard deviations
thereof, and the plan asset
allocation,
the Company has assumed an expected long-term rate of return on plan assets of
8.5 percent as of 2007. This is the result of stochastic modeling showing
the 50th
percentile median return at or above 8.5 percent. A change in the
long-term rate of return selected by the Company of 25 basis points would result
in a change of about $0.3 million of employee benefit expense.
Stock-Based
Compensation:
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123(R), Share-Based Payment. The fair value of
each option award is estimated on the date of grant using the Black-Scholes
option valuation model with a single approach and amortized using a
straight-line attribution method over the option’s vesting period. Options
granted to retirement eligible employees are immediately expensed. The Company
uses historical data to estimate the expected volatility of its stock; the
weighted average expected life; the period of time options granted are expected
to be outstanding; and its dividend yield. The risk-free rates for periods
within the contractual life of the option are based on the U.S. Treasury yield
curve in effect at the time of the grant.
FACTORS THAT MAY AFFECT
FUTURE RESULTS
This
annual report on Form 10-K contains certain forward-looking information, such as
statements about the Company’s financial goals, acquisition strategies,
financial expectations including anticipated revenue or expense levels, business
prospects, market positioning, product development, manufacturing re-alignment,
capital expenditures, tax benefits and expenses, and the effect of contingencies
or changes in accounting policies. Forward-looking statements are
typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,”
“goal,” “target,” “strategy,” and similar expressions or future or conditional
verbs such as “may,” “will,” “should,” “would,” and “could.” While
the Company believes that the assumptions underlying such forward-looking
statements are reasonable based on present conditions, forward-looking
statements made by the Company involve risks and uncertainties and are not
guarantees of future performance. Actual results may differ materially from
those forward-looking statements as a result of various factors, including
general economic and currency conditions, various conditions specific to the
Company’s business and industry, new housing starts, weather conditions, market
demand, competitive factors, changes in distribution channels, supply
constraints, technology factors, litigation, government and regulatory actions,
the Company’s accounting policies, future trends, and other risks, all as
described in Item 1A and Exhibit 99.1 of this Form 10-K. 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 London Interbank
Offered Rates (LIBOR). The average interest rate associated with borrowings
against the credit facility paid by the Company in 2008 was 3.3
percent. As of January 3, 2009, the Company had $35.0 million in
outstanding borrowings under the Agreement. Based on the Company’s
variable rate debt at January 3, 2009, a hypothetical 1.0 percent increase in
interest rates would have resulted in an annual increase in interest expense of
approximately $0.1 million. 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 received a fixed
rate of interest of 6.3 percent and paid 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 2008 was 5.8 percent. The fixed-to-variable
interest rate swap was 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 were equal and offsetting resulting in no net effect to
earnings. The swap contract matured on November 10, 2008 and was not
renewed.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED
STATEMENTS OF INCOME
|
|
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
745,627 |
|
|
$ |
602,025 |
|
|
$ |
557,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
518,702 |
|
|
|
429,205 |
|
|
|
366,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
226,925 |
|
|
|
172,820 |
|
|
|
191,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
147,987 |
|
|
|
119,748 |
|
|
|
102,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
expenses
|
|
|
2,228 |
|
|
|
3,898 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
76,710 |
|
|
|
49,174 |
|
|
|
89,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(10,968 |
) |
|
|
(8,147 |
) |
|
|
(3,373 |
) |
Other
income
|
|
|
1,289 |
|
|
|
3,010 |
|
|
|
1,791 |
|
Foreign
exchange income/(loss)
|
|
|
5 |
|
|
|
80 |
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
67,036 |
|
|
|
44,117 |
|
|
|
87,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
22,925 |
|
|
|
15,434 |
|
|
|
30,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
44,111 |
|
|
|
28,683 |
|
|
|
56,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
381 |
|
Income
taxes
|
|
|
- |
|
|
|
- |
|
|
|
145 |
|
Income
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
44,111 |
|
|
$ |
28,683 |
|
|
$ |
56,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
continuing operations
|
|
$ |
1.92 |
|
|
$ |
1.24 |
|
|
$ |
2.49 |
|
Basic
discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
$ |
1.92 |
|
|
$ |
1.24 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
continuing operations
|
|
$ |
1.90 |
|
|
$ |
1.22 |
|
|
$ |
2.43 |
|
Diluted
discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
$ |
1.90 |
|
|
$ |
1.22 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.50 |
|
|
$ |
0.47 |
|
|
$ |
0.43 |
|
See Notes to Consolidated Financial
Statements.
CONSOLIDATED
BALANCE SHEETS
|
|
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
46,934 |
|
|
$ |
65,252 |
|
Receivables,
less allowances of
|
|
|
|
|
|
|
|
|
$2,091
and $2,594, respectively
|
|
|
68,048 |
|
|
|
64,972 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw
material
|
|
|
67,785 |
|
|
|
57,958 |
|
Work-in-process
|
|
|
15,204 |
|
|
|
17,128 |
|
Finished
goods
|
|
|
105,496 |
|
|
|
99,974 |
|
LIFO
reserve
|
|
|
(18,612 |
) |
|
|
(18,914 |
) |
|
|
|
169,873 |
|
|
|
156,146 |
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
16,511 |
|
|
|
17,127 |
|
Other
current assets
|
|
|
16,294 |
|
|
|
5,982 |
|
Total
current assets
|
|
|
317,660 |
|
|
|
309,479 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
79,284 |
|
|
|
64,350 |
|
Machinery
and equipment
|
|
|
172,706 |
|
|
|
161,280 |
|
Furniture
& Fixtures
|
|
|
13,807 |
|
|
|
12,595 |
|
Other
|
|
|
11,556 |
|
|
|
16,909 |
|
|
|
|
277,353 |
|
|
|
255,134 |
|
Less
allowance for depreciation
|
|
|
(132,818 |
) |
|
|
(120,203 |
) |
|
|
|
144,535 |
|
|
|
134,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
75,737 |
|
|
|
66,925 |
|
Goodwill
|
|
|
148,082 |
|
|
|
140,034 |
|
Other
assets
|
|
|
8,043 |
|
|
|
10,868 |
|
Total
assets
|
|
$ |
694,057 |
|
|
$ |
662,237 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
24,505 |
|
|
$ |
27,986 |
|
Accrued
expenses
|
|
|
47,991 |
|
|
|
46,085 |
|
Income
taxes
|
|
|
8,239 |
|
|
|
6,180 |
|
Current
maturities of long-term
|
|
|
|
|
|
|
|
|
debt
and short-term borrowings
|
|
|
677 |
|
|
|
10,398 |
|
Total
current liabilities
|
|
|
81,412 |
|
|
|
90,649 |
|
Long-term
debt
|
|
|
185,528 |
|
|
|
151,287 |
|
Deferred
income taxes
|
|
|
4,161 |
|
|
|
11,686 |
|
Employee
benefit plan obligations
|
|
|
69,142 |
|
|
|
24,713 |
|
Other
long-term liabilities
|
|
|
4,877 |
|
|
|
5,358 |
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
|
Common
stock (65,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
|
outstanding
(23,018 and 23,091, respectively)
|
|
|
2,302 |
|
|
|
2,309 |
|
Additional
capital
|
|
|
113,397 |
|
|
|
105,428 |
|
Retained
earnings
|
|
|
271,274 |
|
|
|
246,324 |
|
Accumulated
other comprehensive income/(loss)
|
|
|
(38,036 |
) |
|
|
24,483 |
|
Total
shareowners' equity
|
|
|
348,937 |
|
|
|
378,544 |
|
Total
liabilities and shareowners' equity
|
|
$ |
694,057 |
|
|
$ |
662,237 |
|
|
|
|
|
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
44,111 |
|
|
$ |
28,683 |
|
|
$ |
56,998 |
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
24,164 |
|
|
|
20,359 |
|
|
|
17,989 |
|
Stock
based compensation
|
|
|
3,683 |
|
|
|
3,762 |
|
|
|
3,206 |
|
Deferred
income taxes
|
|
|
12,395 |
|
|
|
913 |
|
|
|
(9,933 |
) |
(Gain)/loss
on disposals of plant and equipment
|
|
|
176 |
|
|
|
800 |
|
|
|
(4,637 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(2,750 |
) |
|
|
(6,018 |
) |
|
|
(5,380 |
) |
Inventories
|
|
|
(15,611 |
) |
|
|
(29,092 |
) |
|
|
(10,978 |
) |
Accounts
payable and other accrued expenses
|
|
|
(7,693 |
) |
|
|
(4,473 |
) |
|
|
(4,540 |
) |
Income
taxes
|
|
|
(8,973 |
) |
|
|
(3,698 |
) |
|
|
15,012 |
|
Excess
tax from share-based payment arrangements
|
|
|
(856 |
) |
|
|
(2,182 |
) |
|
|
(5,743 |
) |
Employee
benefit plans
|
|
|
(215 |
) |
|
|
726 |
|
|
|
4,956 |
|
Other
|
|
|
(3,983 |
) |
|
|
(5,541 |
) |
|
|
(1,561 |
) |
Net
cash flows from operating activities
|
|
|
44,448 |
|
|
|
4,239 |
|
|
|
55,389 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to plant and equipment
|
|
|
(25,641 |
) |
|
|
(28,281 |
) |
|
|
(23,190 |
) |
Proceeds
from sale of plant and equipment
|
|
|
21 |
|
|
|
347 |
|
|
|
343 |
|
Additions
to other assets
|
|
|
(965 |
) |
|
|
(3 |
) |
|
|
- |
|
Purchases
of securities
|
|
|
(9,000 |
) |
|
|
(420,575 |
) |
|
|
(63,500 |
) |
Proceeds
from sale of securities
|
|
|
9,000 |
|
|
|
420,575 |
|
|
|
99,488 |
|
Cash
paid for acquisitions, net of cash acquired
|
|
|
(38,380 |
) |
|
|
(37,015 |
) |
|
|
(159,205 |
) |
Proceeds
from sale of business
|
|
|
- |
|
|
|
1,725 |
|
|
|
14,470 |
|
Net
cash flows from investing activities
|
|
|
(64,965 |
) |
|
|
(63,227 |
) |
|
|
(131,594 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
70,000 |
|
|
|
200,000 |
|
|
|
130,000 |
|
Repayment
of long-term debt
|
|
|
(46,236 |
) |
|
|
(101,428 |
) |
|
|
(81,296 |
) |
Proceeds
from issuance of common stock
|
|
|
3,446 |
|
|
|
5,038 |
|
|
|
10,120 |
|
Excess
tax from share-based payment arrangements
|
|
|
856 |
|
|
|
2,182 |
|
|
|
5,743 |
|
Purchases
of common stock
|
|
|
(7,816 |
) |
|
|
(8,118 |
) |
|
|
(198 |
) |
Reduction
of loan to ESOP Trust
|
|
|
- |
|
|
|
200 |
|
|
|
232 |
|
Dividends
paid
|
|
|
(11,369 |
) |
|
|
(10,834 |
) |
|
|
(9,833 |
) |
Net
cash flows from financing activities
|
|
|
8,881 |
|
|
|
87,040 |
|
|
|
54,768 |
|
Effect
of exchange rate changes on cash
|
|
|
(6,682 |
) |
|
|
3,244 |
|
|
|
3,257 |
|
Net
change in cash and equivalents
|
|
|
(18,318 |
) |
|
|
31,296 |
|
|
|
(18,180 |
) |
Cash
and equivalents at beginning of period
|
|
|
65,252 |
|
|
|
33,956 |
|
|
|
52,136 |
|
Cash
and equivalents at end of period
|
|
$ |
46,934 |
|
|
$ |
65,252 |
|
|
$ |
33,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
22,345 |
|
|
$ |
19,074 |
|
|
$ |
24,400 |
|
Cash
paid for interest
|
|
$ |
11,234 |
|
|
$ |
7,144 |
|
|
$ |
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
–cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to seller of Healy Systems, Inc.
|
|
$ |
569 |
|
|
$ |
1,887 |
|
|
$ |
3,066 |
|
Payable
to seller of Western Pump, Inc.
|
|
$ |
77 |
|
|
|
- |
|
|
|
- |
|
Additions
to property, plant, and equipment, not yet paid
|
|
$ |
185 |
|
|
$ |
517 |
|
|
$ |
525 |
|
Capital
equipment lease
|
|
$ |
925 |
|
|
|
- |
|
|
|
- |
|
Receivable
from sale of EMPD
|
|
|
- |
|
|
$ |
427 |
|
|
$ |
2,147 |
|
Stock
issued in connection with stock option exercises,
|
|
|
- |
|
|
$ |
88 |
|
|
|
- |
|
forfeitures,
or stock retirements
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF SHAREOWNERS’ EQUITY AND COMPREHENSIVE INCOME/(LOSS)
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/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
28,683 |
|
|
|
|
|
|
$ |
28,683 |
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,630 |
|
|
|
12,630 |
|
Minimum
pension liability adjustment, net of tax $26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(741 |
) |
|
|
(741 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,572 |
|
Dividends
on common stock
|
|
|
|
|
|
|
|
|
|
|
|
(10,834 |
) |
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
245 |
|
|
|
24 |
|
|
|
5,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
32 |
|
|
|
3 |
|
|
|
3,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock repurchased or received for stock options exercised
|
|
|
(195 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
(8,305 |
) |
|
|
|
|
|
|
|
|
|
Tax
benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
2,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payment from ESOP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
Balance
year end 2007
|
|
|
23,091 |
|
|
$ |
2,309 |
|
|
$ |
105,428 |
|
|
$ |
246,324 |
|
$-
|
|
$ |
24,483 |
|
|
|
|
|
|
|
Common
Shares Outstanding
|
|
|
Common
Stock
|
|
|
Additional
Capital
|
|
|
Retained
Earnings
|
|
Loan
to ESOP Trust
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Comprehensive
Income/(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
44,111 |
|
|
|
|
|
|
$ |
44,111 |
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,939 |
) |
|
|
(32,939 |
) |
Minimum
pension liability adjustment, net of tax $18,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,580 |
) |
|
|
(29,580 |
) |
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(18,408 |
) |
Dividends
on common stock
|
|
|
|
|
|
|
|
|
|
|
|
(11,369 |
) |
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
147 |
|
|
|
15 |
|
|
|
3,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
16 |
|
|
|
2 |
|
|
|
3,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock repurchased or received for stock options exercised
|
|
|
(236 |
) |
|
|
(24 |
) |
|
|
|
|
|
|
(7,792 |
) |
|
|
|
|
|
|
|
|
|
Tax
benefit of stock options exercised
|
|
|
|
|
|
|
|
|
|
|
856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
year end 2008
|
|
|
23,018 |
|
|
$ |
2,302 |
|
|
$ |
113,397 |
|
|
$ |
271,274 |
|
$-
|
|
$ |
(38,036 |
) |
|
|
|
|
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 January 3, 2009 (53
weeks), December 29, 2007 (52 weeks), and December 30, 2006 (52 weeks) and
referred to as 2008, 2007, and 2006, respectively.
Principles of
Consolidation--The consolidated financial statements include the accounts
of Franklin Electric Co., Inc. and its consolidated subsidiaries. All
intercompany transactions have been 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 incurred expenses of approximately
$6.8 million in 2008, $7.3 million in 2007, and $8.1 million in
2006.
Fair Value of Financial
Instruments--The carrying amount of long term debt was $185.0 and $150.0
million at January 3, 2009 and December 29, 2007,
respectively. The estimated fair value was $130.4 and $146.0
million at January 3, 2009 and December 29, 2007, respectively. In
the absence of quoted prices in active markets, considerable judgment is
required in developing estimates of fair value. Estimates are not
necessarily indicative of the amounts the Company could realize in a current
market transaction. In determining the fair value of its long term
debt the Company uses estimates based on rates currently available to the
Company for debt with similar terms and remaining maturities. The
Company’s off-balance sheet instruments consist of operating leases, which are
not significant.
Accounts Receivable, Earned
Discounts, and Allowance for Uncollectible Accounts--Accounts receivable
are stated at estimated net realizable value. Accounts receivable are 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 for uncollectible accounts,
historical collection experience, current trends, aging of accounts receivable,
and periodic credit evaluations of customers’ financial condition are
reviewed. The Company believes that the allowance is appropriate;
however, actual experience could differ from the original estimates, requiring
adjustments to the reserve.
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 inventory costs are determined using the last-in, first-out (LIFO)
method. Inventories stated on the LIFO method were approximately 12.3 percent and 22.2
percent of total inventories in 2008 and 2007, 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.
Property, Plant and
Equipment--Property, plant and equipment are stated at cost. Depreciation
of plant and equipment is calculated on a straight line basis over the estimated
useful lives of 5 to 20 years for land improvements and buildings, 5 to 10 years
for machinery and equipment, and 5 years for furniture and fixtures.
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 at the
asset group level whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The Company’s
depreciation expense was $19.5, $16.5, and $15.8 million in 2008, 2007, and
2006, respectively.
Goodwill and Other Intangible
Assets-- The Company performs goodwill impairment testing for its
reporting units, which have been determined to be Water Systems and Fueling
Systems. In compliance with SFAS 142, Goodwill and Other Intangible
Assets, the Company has evaluated the aggregation criteria and determined that
its components can be aggregated. Goodwill testing is performed on an
annual basis in the fourth quarter or more frequently whenever events or a
change in circumstances indicate that there may be impairment. In
testing for impairment, the Company makes a determination of the fair value of
its reporting units. Fair value is determined using a combination of
an income approach, which estimates fair value based upon future revenue,
expenses and cash flows discounted to their present value, and a market
approach, which estimates fair value using market multipliers of various
financial measures compared to a set of comparable public
companies.
If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that an impairment may exist and the second step of testing as
outlined in SFAS No. 142, must be performed to measure the amount of impairment
loss. The amount of impairment is determined by comparing the implied
fair value of reporting unit goodwill to its carrying value in the same manner
as if the reporting units were being acquired in a business
combination. Specifically, the Company would allocate the fair value
to all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of
goodwill is less than the recorded goodwill, the Company would record an
impairment charge for the difference.
Amortization
is recorded for other intangible assets with definite lives calculated on a
basis that reflects cash flows over the estimated useful lives. The
weighted average number of years over which each intangible class is amortized
is 17 years for patents, 6 years for supply agreements, 15 years for technology,
17-20 years for customer relationships, and 8 years for all others.
Warranty Obligations--Warranty
terms are generally two years from date of manufacture or one year from date of
installation. The general warranty liability is recorded when revenue is
recognized and is based on actual historical return rates from the most recent
warranty periods. In 2007, the Company began offering an
extended warranty program to certain Water Systems customers, which provides
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.
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 carry forwards 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. The Company adopted FASB
Interpretation No. 48 (“FIN 48”) in the first quarter of 2007. This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109 by establishing a recognition
threshold and measurement attribute for recognition and measurement of a tax
position taken or expected to be taken in a tax return.
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 this transition method,
compensation cost recognized starting January 1, 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).
Pension--The Company makes its
determination for pension, postretirement and post employment benefit plans
liabilities based on management estimates and consultation with actuaries,
incorporating estimates and assumptions of future plan service costs, future
interest costs on projected benefit obligations, rates of compensation
increases, employee turnover rates, anticipated mortality rates, expected
investment returns on plan assets, asset allocation assumptions of plan assets,
and other factors.
Earnings Per Common
Share--Basic and diluted earnings per share are computed and disclosed in
accordance with 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 “Foreign
exchange income/(loss)”, as incurred.
Significant Estimates--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, allowance for uncollectible accounts, inventory valuation,
long-lived assets, business combinations, goodwill, taxes, pension and
stock-based compensation.
Although
the Company regularly assesses these estimates, actual results could materially
differ. The Company bases its estimates on historical experience and various
other assumptions that it believes to be reasonable under the
circumstances.
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 in first quarter 2008
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, for those
non-financial assets and liabilities deferred, 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 reviewed the impact on its financial statements and does not
believe that the adoption of this standard will have a significant impact on the
Company’s 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 adoption
encouraged. The Company reviewed the impact on its financial
statements and does not believe that the adoption of this standard will have a
significant impact on the Company’s 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 reviewed the impact on its financial
statements and does not believe that the adoption of this standard will have a
significant impact on the Company’s 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 has adopted this standard with no
impact on the Company’s consolidated financial position, results of operations
and cash flows.
3.
ACQUISITIONS
During
2008, the Company added two pump manufacturers to its Water Systems
segment. In the first quarter of 2008, the Company completed the
acquisition of Industrias Schneider SA. Industrias Schneider is a
leading Brazilian producer of pumps for the residential, agricultural, and light
commercial markets. The acquisition
advances
the Company’s strategy to expand its business base in developing regions where
the demand for its products is rapidly growing. In the second quarter
of 2008, the Company acquired Western Pumps LLC (“Western”) in Fresno,
California. Western designs, develops, and manufactures centrifugal
pumps specific to the water truck, agricultural irrigation, and center pivot
industries and was targeted to expand growth on the west coast of the United
States as well as broaden the Company’s product offerings. Industrias
Schneider sales were not material as a component of the Company’s consolidated
sales for 2008. On a pro forma annual basis, Western Pump sales were
not material as a component of the Company’s consolidated sales for
2008.
The
aggregate purchase price for the two acquisitions was $44.1 million. The
Western Pump LLC purchase agreement provided for additional payments of 7.5
percent of business net sales for the two year period ending March 31,
2010. The transaction costs and the post-closing working capital
adjustments were included in the total purchase accounting calculations under
the guidance of SFAS No. 141 Business Combinations. The Company utilized
management estimates and consultation with an independent third-party valuation
firm to assist in performing its fair market valuations in 2008. The
aggregate purchase prices were allocated to net assets acquired based on the
preliminary fair market values. Final market values will be determined
within the end of the respective measurement periods. The excess purchase
price over fair value of the net assets acquired, $11.8 million, was recorded as
goodwill, all of which is deductible for tax purposes. The results
of operations for the acquisitions were included in the Company’s consolidated
statement of income, from their respective acquisition dates through the year
ended January 3, 2009.
The
purchase price assigned to each major asset and liability of Industrias
Schneider was as follows:
(In
millions)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
Current
assets (including cash acquired)
|
|
$ |
16.2 |
|
Property
plant and equipment
|
|
|
11.2 |
|
Intangible
assets
|
|
|
13.8 |
|
Goodwill
|
|
|
11.1 |
|
Other
assets
|
|
|
0.1 |
|
Total
assets
|
|
$ |
52.4 |
|
Less
liabilities
|
|
|
10.4 |
|
Total
purchase price
|
|
$ |
42.0 |
|
|
|
|
|
|
The
following unaudited proforma financial information for the year ended December
29, 2007 gives effect to the acquisition of Industrias Schneider by the Company
as if the acquisition had occurred at the beginning of the period
reported. These unaudited proforma combined condensed financial
statements are prepared for informational purposes only and are not necessarily
indicative of actual results or financial position that would have been achieved
had the acquisition of Industrias Schneider been consummated on the dates
indicated and are not necessarily indicative of future operating results or
financial position of the consolidated companies. The unaudited
proforma combined condensed financial statements do not give effect to any cost
savings or incremental costs that may result from the integration of Industrias
Schneider with the Company.
FRANKLIN
ELECTRIC CO., INC.
PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
millions, except per share
amounts) (Unaudited)
|
|
2007
|
|
|
|
|
|
Net
sales
|
|
$ |
642.7 |
|
|
|
|
|
|
Net
income
|
|
|
32.0 |
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
1.39 |
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
1.36 |
|
During
2007, the Company acquired two pump manufacturers. In the second
quarter of 2007, the Company completed the acquisition of Pump Brands (Pty)
Limited, Johannesburg, South Africa (“Pump Brands”) in a stock transaction. Pump
Brands, through its wholly owned subsidiary Denorco (Pty) Limited, offers a
broad range of pumping system products for the agricultural irrigation,
residential, light commercial, industrial, and municipal markets.
Locally-manufactured pumps are complemented by alliances with international
partners. The Company’s brands, Jacuzzi, Normaflo, Mono, Orbit, Rotorflo, Super
D and Tsunami, are sold throughout Africa. In the third quarter of
2007, the Company acquired the pump division of Monarch Industries Limited,
Winnipeg, Canada (“Monarch”) in an asset transaction. The Monarch
acquisition expanded both the existing pump product lines and the distribution
coverage in the North American market. Pro forma annual sales for the
above acquisitions were not a material component of the Company’s consolidated
sales for 2007.
The
aggregate cash purchase price for the two acquisitions was $37.0 million,
including direct transaction costs and a post-closing working capital
adjustment. The transaction costs and the post-closing working
capital adjustment were included in the total purchase accounting calculations
under the guidance of SFAS No. 141 Business Combinations. The Company utilized
management estimates and an independent third-party valuation firm to assist in
completing an independent fair market valuation in 2008. The
aggregate purchase price was allocated to net assets acquired based on the final
fair market values. The excess purchase price over fair value of the
net assets acquired, $12.2 million, was recorded as goodwill all of which was
deductible for tax purposes. The results of operations for the acquisitions were
included in the Company’s consolidated statement of income, from their
respective acquisition dates through the year ended January 3,
2009.
During
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, were
included in the purchase accounting calculations under the guidance of SFAS No.
141 Business Combinations. Accordingly, a portion of the aggregate purchase
price was allocated to net assets acquired based on a fair market valuation. The
excess purchase price over fair value of the net assets acquired, $47.3 million,
was recorded as goodwill. The $47.3 million recorded as goodwill was
deductible for tax purposes.
Little
Giant’s results of operations were included in the Company’s consolidated
statement of income, from the acquisition date through the year ended January 3,
2009.
During
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 provided for additional payments of 5 percent of certain
Healy Systems product sales for the first five years following the year of
acquisition. As of December 29, 2007, the total transaction costs, $0.4 million,
and the post closing working capital adjustment, $2.7 million, were included in
the total purchase accounting calculations under the guidance of SFAS No. 141
Business Combinations. The Company
continued,
from the original 2006 acquisition date, to account for additional purchase
price adjustments into 2007. The purchase price was allocated to net
assets based on a fair market valuation. The excess of purchase price over
estimated fair value of the net assets acquired, $18.6 million, was recorded as
goodwill. No portion of the $18.6 million recorded as goodwill was
deductible for tax purposes. The initial excess purchase price over
fair value of the net assets acquired, $26.4 million originally recorded as
goodwill, was adjusted to $18.6 million for the fair market values assigned to
fixed assets, customer relationships, technology, other intangible assets, and a
deferred tax adjustment.
Healy
Systems results of operations were included in the Company’s consolidated
statement of income, from the acquisition date through the year ended January 3,
2009.
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 give effect to the
acquisition of Little Giant Pump Company and Healy Systems as if the
acquisitions had occurred at the beginning of the period reported. This
unaudited pro forma combined condensed financial statement is prepared for
informational purposes only and is 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
statement does 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) (Unadudited)
|
|
2006
|
|
|
|
|
|
Net
sales
|
|
$ |
615.7 |
|
|
|
|
|
|
Net
income
|
|
$ |
59.3 |
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
2.60 |
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
2.55 |
|
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 final
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 in 2006. 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 and resulting in a net pre-tax loss of $0.8
million for 2006. The net pre-tax loss is included in the statement of income
for 2006, as part of discontinued operations.
Net sales
from discontinued operations, were $36.8 million for 2006. The income
before tax, related to discontinued operations, was $0.4 million for
2006.
5.
|
FAIR
VALUE MEASUREMENTS
|
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements,
which provides a framework for measuring fair value under GAAP. 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 January 3, 2009 and December
29, 2007, assets measured at fair value on a recurring basis were as
follows:
(In
millions)
|
|
January 3, 2009
|
|
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
Equivalents
|
|
$ |
21.1 |
|
|
$ |
21.1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
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 |
|
|
$ |
- |
|
|
$ |
- |
|
6. INVESTMENTS
- SECURITIES
As of
January 3, 2009 and December 29, 2007, the Company held no current investments
in equity securities. During 2008 and 2007, the Company held
investments consisting of auction rate municipal bonds classified as
available-for-sale securities. All income generated from these
current investments was recorded as “Other income” in the statements of income.
Cash paid for these securities and proceeds from the sale of these securities
were included in the “Cash flows from investing activities” section of the cash
flows statements.
7. 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 $7.7 million as of January 3, 2009, and $6.9 million
at year end December 29, 2007. The Company’s proportionate share of Pioneer
Pump, Inc. earnings, included in “Other income” in the Company’s statements of
income, was $0.7 million, $0.8 million and $0.7 million, for 2008, 2007, and
2006, respectively.
8. GOODWILL
AND OTHER INTANGIBLE ASSETS
The
Company uses the purchase method of accounting for business combinations, in
accordance with SFAS No. 141, Business Combinations. In accordance
with SFAS No. 142, Goodwill and Other Intangible Assets, the Company performs
its annual impairment testing during the fourth quarter of each year; unless
events or circumstances indicate earlier impairment testing is required. No
impairment loss was recognized for 2008, 2007, or 2006.
The
carrying amounts of the Company’s intangible assets were as
follows:
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
6.7 |
|
|
$ |
(3.8 |
) |
|
$ |
6.3 |
|
|
$ |
(3.3 |
) |
Supply
agreements
|
|
|
7.2 |
|
|
|
(5.7 |
) |
|
|
7.2 |
|
|
|
(5.0 |
) |
Technology
|
|
|
7.0 |
|
|
|
(1.2 |
) |
|
|
6.1 |
|
|
|
(0.8 |
) |
Customer
relationships
|
|
|
54.1 |
|
|
|
(5.6 |
) |
|
|
48.3 |
|
|
|
(2.8 |
) |
Other
|
|
|
2.0 |
|
|
|
(1.9 |
) |
|
|
2.1 |
|
|
|
(2.0 |
) |
Total
amortized intangibles
|
|
|
77.0 |
|
|
|
(18.2 |
) |
|
|
70.0 |
|
|
|
(13.9 |
) |
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
16.9 |
|
|
|
- |
|
|
|
10.9 |
|
|
|
- |
|
Total
intangibles
|
|
$ |
93.9 |
|
|
$ |
(18.2 |
) |
|
$ |
80.9 |
|
|
$ |
(13.9 |
) |
The
weighted average number of years over which each intangible class is amortized
is as follows:
Class
|
Years
|
Patents
|
17
|
Supply
agreements
|
6
|
Technology
|
15
|
Customer
relationships
|
17
- 20
|
Other
|
8
|
Amortization
expense related to intangible assets for the years ended January 3, 2009,
December 29, 2007, and December 30, 2006, was $4.7, $3.8, and $2.2 million,
respectively.
Amortization
expense for each of the five succeeding years is projected as
follows:
(In
millions)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
|
$ |
4.3 |
|
|
$ |
4.2 |
|
|
$ |
4.1 |
|
|
$ |
3.8 |
|
|
$ |
3.6 |
|
The
change in the carrying amount of goodwill by reporting segment for 2008 and 2007
was as follows:
|
|
2008
|
|
(In
millions)
|
|
Water
|
|
|
Fueling
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 29, 2007
|
|
$ |
92.9 |
|
|
$ |
47.1 |
|
|
$ |
140.0 |
|
Acquired
|
|
|
12.4 |
|
|
|
0.0 |
|
|
|
12.4 |
|
Adjustments
to prior year acquisitions
|
|
|
(3.3 |
) |
|
|
4.5 |
|
|
|
1.2 |
|
Foreign
currency translation
|
|
|
(5.5 |
) |
|
|
0.0 |
|
|
|
(5.5 |
) |
Balance
as of January 3, 2009
|
|
$ |
96.5 |
|
|
$ |
51.6 |
|
|
$ |
148.1 |
|
|
|
2007
|
|
(In
millions)
|
|
Water
|
|
|
Fueling
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 30, 2006
|
|
$ |
78.7 |
|
|
$ |
54.8 |
|
|
$ |
133.5 |
|
Acquired
|
|
|
12.2 |
|
|
|
0.0 |
|
|
|
12.2 |
|
Adjustments
to prior year acquisitions
|
|
|
0.0 |
|
|
|
(7.7 |
) |
|
|
(7.7 |
) |
Foreign
currency translation
|
|
|
2.0 |
|
|
|
0.0 |
|
|
|
2.0 |
|
Balance
as of December 29, 2007
|
|
$ |
92.9 |
|
|
$ |
47.1 |
|
|
$ |
140.0 |
|
The 2008
acquired goodwill in the Water Systems segment was primarily related to the
Company’s acquisition of Industrias Schneider SA. The 2007 acquired
goodwill in the Water Systems segment was related to the Company’s acquisitions
of Pump Brands (Pty) Limited, and the pump division of Monarch Industries
Limited.
Purchase
accounting adjustments primarily 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 Healy
Systems, Inc.
9. EMPLOYEE
BENEFIT PLANS
Defined Benefit Plans - As of
January 3, 2009, the Company maintains three domestic pension plans and one
German pension plan. The Company used a December 31 measurement date for these
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, amounts recognized
in the Balance Sheet, amounts recognized in Other Accumulated Comprehensive
Income, and actuarial assumptions that the Company considered in its
determination of benefit obligations and plan costs:
(In
millions)
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Accumulated
benefit obligation, end of year
|
|
$ |
141.5 |
|
|
$ |
139.1 |
|
|
$ |
11.9 |
|
|
$ |
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation, beginning of year
|
|
$ |
143.8 |
|
|
$ |
152.7 |
|
|
$ |
12.1 |
|
|
$ |
13.0 |
|
Service
cost
|
|
|
3.6 |
|
|
|
4.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
Interest
cost
|
|
|
8.8 |
|
|
|
8.5 |
|
|
|
0.8 |
|
|
|
0.7 |
|
Plan
amendments
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
Actuarial
gain (loss)
|
|
|
1.3 |
|
|
|
(6.8 |
) |
|
|
0.3 |
|
|
|
(0.6 |
) |
Settlements
paid
|
|
|
(0.1 |
) |
|
|
(0.5 |
) |
|
|
- |
|
|
|
- |
|
Benefits
paid
|
|
|
(12.5 |
) |
|
|
(15.5 |
) |
|
|
(1.2 |
) |
|
|
(1.2 |
) |
Liability
(gain)/loss due to curtailment**
|
|
|
1.5 |
|
|
|
- |
|
|
|
(0.2 |
) |
|
|
- |
|
Foreign
currency exchange
|
|
|
(0.5 |
) |
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
Projected
benefit obligation, end of year
|
|
$ |
145.9 |
|
|
$ |
143.8 |
|
|
$ |
11.9 |
|
|
$ |
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets, beginning of year
|
|
$ |
131.5 |
|
|
$ |
144.3 |
|
|
$ |
- |
|
|
$ |
- |
|
Actual
return on plan assets
|
|
|
(37.7 |
) |
|
|
1.2 |
|
|
|
- |
|
|
|
- |
|
Company
contributions
|
|
|
5.9 |
|
|
|
1.3 |
|
|
|
1.2 |
|
|
|
1.2 |
|
Employee
contributions
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Settlements
paid
|
|
|
(0.1 |
) |
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
Benefits
paid
|
|
|
(12.5 |
) |
|
|
(15.5 |
) |
|
|
(1.2 |
) |
|
|
(1.2 |
) |
Foreign
currency exchange
|
|
|
(0.2 |
) |
|
|
0.5 |
|
|
|
- |
|
|
|
- |
|
Plan
assets, end of year
|
|
$ |
87.2 |
|
|
$ |
131.5 |
|
|
$ |
- |
|
|
$ |
- |
|
Funded
status of the plan
|
|
|
(58.7 |
) |
|
|
(12.3 |
) |
|
|
(11.9 |
) |
|
|
(12.1 |
) |
Net
liability, end of year
|
|
$ |
(58.7 |
) |
|
$ |
(12.3 |
) |
|
$ |
(11.9 |
) |
|
$ |
(12.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized in Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
|
$ |
- |
|
|
$ |
3.3 |
|
|
$ |
- |
|
|
|
- |
|
Deferred
tax asset
|
|
|
18.9 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
1.0 |
|
Current
liabilities
|
|
|
(0.3 |
) |
|
|
(1.9 |
) |
|
|
(1.2 |
) |
|
|
(1.1 |
) |
Noncurrent
liabilities
|
|
|
(58.4 |
) |
|
|
(13.7 |
) |
|
|
(10.7 |
) |
|
|
(11.0 |
) |
Net
pension liability, end of year
|
|
$ |
(39.8 |
) |
|
$ |
(11.8 |
) |
|
$ |
(11.3 |
) |
|
$ |
(11.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
Recognized in Accumulated Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Transition Obligation
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.5 |
|
|
$ |
0.9 |
|
Prior
Service Cost
|
|
|
0.5 |
|
|
|
0.9 |
|
|
|
0.4 |
|
|
|
0.6 |
|
Net
Actuarial Loss
|
|
|
31.1 |
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
- |
|
Total
Recognized in Other Comprehensive Income
|
|
$ |
31.6 |
|
|
$ |
1.5 |
|
|
$ |
1.0 |
|
|
$ |
1.5 |
|
** These
items are related to the headcount reduction at the Siloam Springs, Arkansas
facility associated with the current realignment plan.
The
following table sets forth Other Changes in Plan Assets and Benefit Obligation
Recognized in Other Comprehensive Income for 2008 and 2007:
(In
millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
actuarial (gain)/loss
|
|
$ |
49.9 |
|
|
$ |
2.6 |
|
|
$ |
0.1 |
|
|
$ |
(0.6 |
) |
Prior
service cost
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial gain/(loss)
|
|
|
(0.7 |
) |
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
Prior
service cost/(credit)
|
|
|
(0.6 |
) |
|
|
(1.2 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
Transition
(asset)/obligation
|
|
|
- |
|
|
|
- |
|
|
|
(0.6 |
) |
|
|
(0.3 |
) |
Deferred
tax asset
|
|
|
(18.5 |
) |
|
|
(0.4 |
) |
|
|
0.3 |
|
|
|
0.4 |
|
Total
recognized in other comprehensive income
|
|
$ |
30.1 |
|
|
$ |
1.3 |
|
|
$ |
(0.5 |
) |
|
$ |
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic benefit cost and other comprehensive
income
|
|
$ |
34.6 |
|
|
$ |
4.1 |
|
|
$ |
1.3 |
|
|
$ |
0.7 |
|
Assumptions
used to determine domestic benefit obligations:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.90 |
% |
|
|
6.40 |
% |
|
|
6.90 |
% |
|
|
6.40 |
% |
Rate
of increase in future compensation
|
|
|
3-8.00 |
% |
|
|
3-8.00 |
% |
|
|
3-8.00 |
% |
|
|
3-8.00 |
% |
|
|
(Graded)
|
|
|
(Graded)
|
|
|
(Graded)
|
|
|
(Graded)
|
|
Assumptions
used to determine domestic periodic benefit cost:
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
6.40 |
% |
|
|
5.85 |
% |
|
|
6.40 |
% |
|
|
5.85 |
% |
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 and German defined
benefit pension plans was $127.3 million and $124.2 million for the years ended
2008 and 2007.
The
following table sets forth the aggregated net periodic benefit cost for 2008,
2007, and 2006:
(In
millions)
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
3.6 |
|
|
$ |
4.1 |
|
|
$ |
4.7 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
Interest
cost
|
|
|
8.8 |
|
|
|
8.5 |
|
|
|
8.1 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.8 |
|
Expected
return on assets
|
|
|
(10.8 |
) |
|
|
(10.7 |
) |
|
|
(10.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of transition obligation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.5 |
|
Prior
service cost
|
|
|
0.6 |
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
Loss
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Net
periodic benefit cost
|
|
$ |
2.3 |
|
|
$ |
3.4 |
|
|
$ |
4.0 |
|
|
$ |
1.3 |
|
|
$ |
1.3 |
|
|
$ |
1.9 |
|
Curtailment
expense**
|
|
|
1.5 |
|
|
|
(0.8 |
) |
|
|
1.1 |
|
|
|
0.5 |
|
|
|
- |
|
|
|
1.9 |
|
Special
termination benefits*
|
|
|
- |
|
|
|
- |
|
|
|
1.4 |
|
|
|
- |
|
|
|
- |
|
|
|
0.2 |
|
Settlement
cost
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
net periodic benefit cost
|
|
$ |
4.3 |
|
|
$ |
2.8 |
|
|
$ |
6.8 |
|
|
$ |
1.8 |
|
|
$ |
1.3 |
|
|
$ |
4.0 |
|
*These
items relate to the divestiture of the Engineered Motor Products Division in
2006.
** These
items are related to the headcount reduction at the Siloam Springs, Arkansas
facility associated with the current realignment plan.
The
estimated net actuarial (gain)/loss, prior service cost/(credit), and transition
(asset)/obligation that will be amortized from accumulated other comprehensive
income into net periodic benefit cost during the 2009 fiscal year are $0.2, $0.4
and $0.0, respectively, for the pension plans and $0.0, $0.1 and $0.2
respectively, for all other benefits.
The
Company consults with actuaries, asset allocation consultants and investment
advisors in making its determination of the expected long-term rate of return on
plan assets. Using input from these consultations such as long term
investment sector expected returns, the correlations and standard deviations
thereof, and the plan asset allocation, the Company has assumed an expected
long-term rate of return on plan assets of 8.5 percent. This is the result
of stochastic modeling showing the 50th
percentile median return at or above 8.5 percent. 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 domestic and international growth,
value, and 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. A 25 basis point change to the long-term rate of return
assumption would result in approximately a $0.3 million change in pension
expense.
The
qualified and German plans asset allocations for the years ended 2008 and 2007,
by asset category are as follows:
|
|
Plan
Assets at December 31
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Equity
Securities
|
|
|
63 |
% |
|
|
70 |
% |
Fixed
Income Securities
|
|
|
37 |
% |
|
|
30 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
Equity
securities include Company stock of $1.1 million (1.3 percent of total plan
assets) and $12.2 million (10.0 percent of total plan assets) at year
end 2008 and 2007, 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 only certain management employees. The
Company does not fund this plan, and its assets were zero in 2008 and 2007. The
plan’s projected benefit obligation and accumulated benefit obligation were
$6.0 million and
$5.6 million, respectively, for 2008, and $6.2 million and $5.9 million,
respectively, for 2007.
The
Company estimates total contributions to the plans of $15.7 million in
2009.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
(In
millions)
|
|
Pension
|
|
|
Other
|
|
|
|
Benefits
|
|
|
Benefits
|
|
2009
|
|
$ |
10.3 |
|
|
$ |
1.2 |
|
2010
|
|
|
10.5 |
|
|
|
1.2 |
|
2011
|
|
|
10.6 |
|
|
|
1.2 |
|
2012
|
|
|
11.0 |
|
|
|
1.2 |
|
2013
|
|
|
11.2 |
|
|
|
1.2 |
|
Years
2014 through 2018
|
|
|
66.0 |
|
|
|
5.4 |
|
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.
Defined Contribution Plans -
The Company maintains a 401(k) Plan and an Employee Stock Ownership Plan
(ESOP). The Company's cash contributions are made to the Company
stock fund of the 401(k) and ESOP Trusts and allocated to participants'
accounts.
The
following table sets forth Company contributions to the ESOP and 401(k)
Plans.
(In
millions)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Company
contributions to the plan
|
|
$ |
1.8 |
|
|
$ |
1.8 |
|
|
$ |
1.1 |
|
10. ACCRUED
LIABILITIES
Accrued
liabilities consist of:
(In
millions)
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Salaries,
wages, and commissions
|
|
$ |
20.9 |
|
|
$ |
15.9 |
|
Product
warranty costs
|
|
|
9.3 |
|
|
|
9.7 |
|
Insurance
|
|
|
4.3 |
|
|
|
5.8 |
|
Employee
benefits
|
|
|
4.8 |
|
|
|
5.8 |
|
Other
|
|
|
8.7 |
|
|
|
8.9 |
|
|
|
$ |
48.0 |
|
|
$ |
46.1 |
|
11. INCOME
TAXES
|
Income
before income taxes consisted of:
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$ |
28.6 |
|
|
$ |
18.8 |
|
|
$ |
70.9 |
|
Foreign
|
|
|
38.4 |
|
|
|
25.3 |
|
|
|
16.5 |
|
Continuing
operations
|
|
|
67.0 |
|
|
|
44.1 |
|
|
|
87.4 |
|
Discontinued
operations
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.4 |
|
|
|
$ |
67.0 |
|
|
$ |
44.1 |
|
|
$ |
87.8 |
|
The
income tax provision consisted of:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Current
payable:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(1.7 |
) |
|
$ |
4.7 |
|
|
$ |
28.6 |
|
Foreign
|
|
|
12.0 |
|
|
|
9.0 |
|
|
|
7.0 |
|
State
|
|
|
0.2 |
|
|
|
0.7 |
|
|
|
5.0 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
11.8 |
|
|
|
0.7 |
|
|
|
(7.1 |
) |
Foreign
|
|
|
(1.1 |
) |
|
|
(0.2 |
) |
|
|
(0.7 |
) |
State
|
|
|
1.7 |
|
|
|
0.5 |
|
|
|
(2.1 |
) |
Continuing
operations
|
|
|
22.9 |
|
|
|
15.4 |
|
|
|
30.7 |
|
Discontinued
operations
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
$ |
22.9 |
|
|
$ |
15.4 |
|
|
$ |
30.8 |
|
Significant
components of the Company's deferred tax assets and liabilities were as
follows:
(In
millions)
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Accrued
expenses and reserves
|
|
$ |
9.8 |
|
|
$ |
10.4 |
|
Compensation
and employee benefits
|
|
|
26.4 |
|
|
|
13.7 |
|
Other
items
|
|
|
6.0 |
|
|
|
5.6 |
|
Total
deferred tax assets
|
|
|
42.2 |
|
|
|
29.7 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Accelerated
depreciation on fixed assets
|
|
|
10.3 |
|
|
|
8.4 |
|
Amortization
of intangibles
|
|
|
17.5 |
|
|
|
14.7 |
|
Other
items
|
|
|
2.0 |
|
|
|
1.2 |
|
Total
deferred tax liabilities
|
|
|
29.8 |
|
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$ |
12.4 |
|
|
$ |
5.4 |
|
The
portions of current and non-current deferred tax assets and liabilities were as
follows:
(In
millions)
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets
|
|
|
Deferred
Tax Liabilities
|
|
|
Deferred
Tax Assets
|
|
|
Deferred
Tax Liabilities
|
|
Current
|
|
$ |
17.0 |
|
|
$ |
0.4 |
|
|
$ |
17.5 |
|
|
$ |
0.4 |
|
Non-current
|
|
|
25.2 |
|
|
|
29.4 |
|
|
|
12.2 |
|
|
|
23.9 |
|
|
|
$ |
42.2 |
|
|
$ |
29.8 |
|
|
$ |
29.7 |
|
|
$ |
24.3 |
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State
income taxes, net of federal benefit
|
|
|
1.9 |
|
|
|
2.2 |
|
|
|
2.1 |
|
Extraterritorial
income exclusion
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(0.6 |
) |
Foreign
operations
|
|
|
(0.9 |
) |
|
|
(0.7 |
) |
|
|
0.3 |
|
Sec
199 Manufacturing deduction
|
|
|
(0.8 |
) |
|
|
(0.5 |
) |
|
|
(0.8 |
) |
R&D
tax credits
|
|
|
(0.9 |
) |
|
|
(1.2 |
) |
|
|
(0.7 |
) |
Other
items
|
|
|
(0.1 |
) |
|
|
0.2 |
|
|
|
(0.2 |
) |
Effective
tax rate
|
|
|
34.2 |
% |
|
|
35.0 |
% |
|
|
35.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company considers earnings from The Netherlands, Mexico, Italy, and a portion of
South Africa to be indefinitely reinvested. The Company identified the
accumulated earnings for the affiliates that were not indefinitely reinvested
and computed the tax associated with the subsequent repatriation. This
computation considered the impact of applicable withholding taxes and the
availability of U.S. foreign tax credits. The Company calculated that the
repatriation of all the accumulated earnings that are not indefinitely
reinvested would result in a net tax liability of $1.5 million. The
Company changed its APB 23, Accounting for Income Taxes-Special Areas, assertion
for South Africa during 2008; approximately $6.0 million of South Africa's
unremitted earnings are considered permanently reinvested.
12. ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES
The
Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income
Taxes, in the first quarter of 2007. The implementation of FIN 48 did
not have a significant impact on the Company’s financial position or results of
operations.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
for 2008 (excluding interest and penalties) is as follows:
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
2.0 |
|
|
$ |
1.9 |
|
Additions
based on tax positions related to the current year
|
|
|
2.9 |
|
|
|
0.1 |
|
Additions
for tax positions of prior years
|
|
|
2.9 |
|
|
|
0.1 |
|
Reductions
for tax positions of prior years
|
|
|
(0.7 |
) |
|
|
(0.1 |
) |
Settlements
|
|
|
(0.3 |
) |
|
|
- |
|
Ending
balance
|
|
$ |
6.8 |
|
|
$ |
2.0 |
|
If
recognized, the effective tax rate would be affected by the net unrecognized tax
benefits of $1.0 million. These amounts are primarily associated with
uncertain tax positions taken by acquired companies in tax years prior to the
acquisition of these companies by the Company. The stock purchase
agreements related to these acquisitions provide the Company rights to recover
tax liabilities related to pre-acquisition tax years from the
sellers. Other amounts are associated with domestic state tax issues,
such as nexus, as well as other federal and state uncertain tax
positions.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. The Company has accrued approximately $0.4
million for interest and penalties as of January 3, 2009. Interest
and penalties recorded during 2008 primarily related to the subsidiary
pre-acquisition tax positions.
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 twelve months as a result of the audits. Based on the
current audits in process, the payment of taxes as a result of audit settlements
could be from $0.0 to $2.7 million.
For the
majority of tax jurisdictions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for
years before 2005.
13. DEBT
On
December 14, 2006, the Company entered into an amended and restated unsecured,
60-month $120.0 million revolving credit agreement (the “Agreement”). The
Agreement provides for various borrowing rate options including interest rates
based on the London Interbank Offered Rates (LIBOR) plus interest spreads keyed
to the Company’s ratio of debt to earnings before interest, taxes, depreciation,
and amortization (“EBITDA”). The Agreement contains certain financial covenants
with respect to borrowings, interest coverage, loans or advances and
investments. The Company was in compliance with the covenants as of
January 3, 2009 and December 29, 2007. The Company had $35.0 million in
borrowings under the Agreement at January 3, 2009. There were 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
annually
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. The Company was in compliance with the
covenants as of January 3, 2009 and December 29, 2007.
The
Company also has certain overdraft facilities at its foreign subsidiaries, of
which none were outstanding at January 3, 2009 or December 29,
2007.
Long-term
debt consisted of:
|
|
|
|
|
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Prudential
Agreement-- 5.79 percent.
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Prudential
Agreement-- 6.31 percent, principal of $10.0 million paid in November
2008
|
|
|
0.0 |
|
|
|
10.0 |
|
Capital
Leases
|
|
|
1.2 |
|
|
|
0.9 |
|
Other
|
|
|
0.0 |
|
|
|
0.8 |
|
Agreement--
the average interest rate for 2008 was 3.29 percent based on the London
Interbank Offered Rates (LIBOR) plus an interest spread.
|
|
|
35.0 |
|
|
|
0.0 |
|
|
|
|
186.2 |
|
|
|
161.7 |
|
Less
Current Maturities
|
|
|
(0.7 |
) |
|
|
(10.4 |
) |
Long-term
debt:
|
|
$ |
185.5 |
|
|
$ |
151.3 |
|
The
following debt payments are expected to be paid:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Debt
|
|
$ |
185.0 |
|
|
$ |
0.0 |
|
|
$ |
0.0 |
|
|
$ |
35.0 |
|
|
$ |
0.0 |
|
|
$ |
150.0 |
|
Capital
Leases
|
|
$ |
1.2 |
|
|
$ |
0.7 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.1 |
|
|
$ |
0.0 |
|
|
|
$ |
186.2 |
|
|
$ |
0.7 |
|
|
$ |
0.2 |
|
|
$ |
35.2 |
|
|
$ |
0.1 |
|
|
$ |
150.0 |
|
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 was 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 were
equal and offsetting resulting in no net effect to earnings. The swap
contract, which had a notional amount of $10 million, matured on November 10,
2008 and was not renewed. The fair value of this hedge instrument was
zero at December 30, 2007. Per the terms of the swap contract the
Company received interest at a fixed rate of 6.31 percent and paid interest at a
variable rate based on the three month LIBOR rate plus a spread. The
average variable rate paid by the Company was 5.79 percent in 2008 and 7.90
percent in 2007. The differential in interest rates on the swap was
recognized as an adjustment of interest expense over the term of the
agreement.
The Company had 23,018,453 shares of
common stock (65,000,000 shares authorized, $.10 par value) outstanding at the
end of 2008.
During
2008, 2007, and 2006, pursuant to a stock repurchase program authorized by the
Company’s Board of Directors, the Company repurchased and retired the following
amounts and number of shares:
(Amounts
in millions, except share amounts)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Repurchases
|
|
$ |
7.8 |
|
|
$ |
8.1 |
|
|
$ |
0.2 |
|
Shares
|
|
|
235,100 |
|
|
|
187,600 |
|
|
|
5,000 |
|
During
2008, the Company retired 700 shares that had been previously granted as a stock
award to an employee, but were forfeited upon his voluntary
termination. As well, the Company retired 106 shares that were
received by employees as payment for taxes owed upon the release of their
restricted awards. During 2007, under terms of a Company stock option
plan, participants delivered 3,843 shares for $0.2 million of Company common
stock as consideration for stock issued upon the exercise of stock options. Also
in 2007, the Company retired 2,901 shares that had been previously granted as
stock awards to executive officers, but were forfeited upon their
retirement. As well, the Company retired 288 shares that were
received by the retiring executive officers as payment for taxes owed upon the
release of their restricted awards. During 2006, participants
delivered 9,619 shares for $0.6 million. All of the shares
received were from officers of the Company.
In 2008,
2007, and 2006, the Company recorded $0.9 million, $2.2 million, and $5.7
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 ($5.4) million and ($32.6)
million, respectively at January 3, 2009 and $27.1 million and ($3.0) million,
respectively, at December 29, 2007.
16. EARNINGS
PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
44.1 |
|
|
$ |
28.7 |
|
|
$ |
56.8 |
|
Income
from discontinued operations
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.2 |
|
Net
income
|
|
$ |
44.1 |
|
|
$ |
28.7 |
|
|
$ |
57.0 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares
|
|
|
23.0 |
|
|
|
23.1 |
|
|
|
22.8 |
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.5 |
|
Adjusted
weighted-average common shares
|
|
|
23.2 |
|
|
|
23.5 |
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
from continuing operations
|
|
$ |
1.92 |
|
|
$ |
1.24 |
|
|
$ |
2.49 |
|
Basic
from discontinuing operations
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
Total
basic earnings per share
|
|
$ |
1.92 |
|
|
$ |
1.24 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
from continuing operations
|
|
$ |
1.90 |
|
|
$ |
1.22 |
|
|
$ |
2.43 |
|
Diluted
from discontinuing operations
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.01 |
|
Total
diluted earnings per share
|
|
$ |
1.90 |
|
|
$ |
1.22 |
|
|
$ |
2.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options excluded
|
|
|
0.8 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Anti-dilutive
stock options price range – low
|
|
$ |
32.19 |
|
|
$ |
40.93 |
|
|
$ |
36.97 |
|
Anti-dilutive
stock options price range – high
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
|
$ |
45.90 |
|
17. 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
2008, 2007 and 2006 was $3.7, $3.8 million and $3.2 million,
respectively.
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 excess tax benefit classified as a
financing cash inflow in 2007 and 2006, $2.2 million and $5.7 million,
respectively, would have been classified as 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
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
|
There are
no shares available for further grants under the Franklin Electric Co., Inc.
Stock Option Plan, although outstanding options remain. 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 1/3 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, 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 are immediately expensed. The Company
uses historical data to estimate the expected volatility of its stock; the
weighted average expected life, the period of time options granted are expected
to be outstanding; and its dividend yield. The risk-free rates for periods
within the contractual life of the option are based on the U.S. Treasury yield
curve in effect at the time of the grant.
The
assumptions used for the Black-Scholes model to determine the fair value of
options granted during 2008, 2007 and 2006 are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Risk-free
interest rate
|
|
|
2.91
– 3.15 |
% |
|
|
4.74
– 4.78 |
% |
|
|
4.54 |
% |
Dividend
yield
|
|
|
1.11
– 1.12 |
% |
|
|
0.65
- 0.67 |
% |
|
|
0.70
– 0.74 |
% |
Weighted-average
dividend yield
|
|
|
1.119 |
% |
|
|
0.653 |
% |
|
|
0.707 |
% |
Volatility
factor
|
|
|
0.3552
– 0.3714 |
|
|
|
0.3529
- 0.3701 |
|
|
|
0.3553
– 0.3768 |
|
Weighted-average
volatility
|
|
|
0.3691 |
|
|
|
0.3554 |
|
|
|
0.3590 |
|
Expected
term
|
|
5.0
– 6.0 years
|
|
|
5.3-6.2
years
|
|
|
4.0
– 5.0 years
|
|
Forfeiture
rate
|
|
|
3.61 |
% |
|
|
4.18 |
% |
|
|
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
Intrinsic
Value (000’s)
|
Outstanding
at beginning of 2006
|
1,793
|
$23.60
|
|
|
Granted
|
125
|
45.90
|
|
|
Exercised
|
(509)
|
20.69
|
|
|
Forfeited
|
(11)
|
25.22
|
|
|
|
|
|
|
|
Outstanding
at beginning of 2007
|
1,398
|
$26.65
|
|
|
Granted
|
131
|
48.87
|
|
|
Exercised
|
(245)
|
21.05
|
|
|
Forfeited
|
(32)
|
29.38
|
|
|
|
|
|
|
|
Outstanding
at beginning of 2008
|
1,252
|
$29.99
|
|
|
|
Granted
|
347
|
32.45
|
|
|
|
Exercised
|
(147)
|
23.45
|
|
|
|
Forfeited
|
(13)
|
39.15
|
|
|
|
Outstanding
at end of period
|
1,439
|
$31.17
|
5.60
|
$4,512
|
|
|
|
|
|
|
|
Expected
to vest after applying forfeiture rate
|
1,423
|
$31.12
|
5.57
|
$4,512
|
|
Vested
and exercisable at end of period
|
903
|
$27.68
|
3.95
|
$4,512
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Weighted
average grant-date fair value of options
|
|
$ |
11.64 |
|
|
$ |
19.75 |
|
|
$ |
16.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of options exercised
|
|
$ |
2.9 |
|
|
$ |
6.3 |
|
|
$ |
2.7 |
|
Cash
received from the exercise of options
|
|
|
3.4 |
|
|
|
5.0 |
|
|
|
10.1 |
|
Fair
value of shares vested
|
|
|
4.0 |
|
|
|
2.7 |
|
|
|
2.7 |
|
Tax
benefit
|
|
|
0.9 |
|
|
|
2.2 |
|
|
|
5.7 |
|
There
were no share-based liabilities paid during the 2008 and 2007 fiscal
years.
The
Company is authorized to repurchase up to 1.9 million shares under an
authorization approved by its Board of Directors. Share repurchases will
be considered on an opportunistic basis and could therefore range between zero
and 1.9 million shares in 2009. As a result of the Company’s policy
of issuing shares upon share option exercises the Company attempts to repurchase
at a minimum the number of shares issued in a given year.
A summary
of the Company’s nonvested shares activity and related information, for fiscal
year ended January 3, 2009 and December 29, 2007 follows:
2008
(Shares in thousands)
|
|
|
|
|
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-
Date
Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
at beginning of period
|
|
|
416 |
|
|
$ |
39.99 |
|
Granted
|
|
|
347 |
|
|
|
32.44 |
|
Vested
|
|
|
(215 |
) |
|
|
35.19 |
|
Forfeited
|
|
|
(12 |
) |
|
|
38.83 |
|
Nonvested
at end of period
|
|
|
536 |
|
|
$ |
37.06 |
|
2007
(Shares in thousands)
|
|
|
|
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-
Date
Fair Value
|
|
|
|
|
|
|
Nonvested
at beginning of period
|
|
|
556 |
|
|
$ |
33.95 |
|
Granted
|
|
|
131 |
|
|
|
48.87 |
|
Vested
|
|
|
(245 |
) |
|
|
31.89 |
|
Forfeited
|
|
|
(26 |
) |
|
|
31.66 |
|
Nonvested
at end of period
|
|
|
416 |
|
|
$ |
39.99 |
|
As of
January 3, 2009 there was $4.3 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
2.2 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. 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. Stock
awards cliff vest over either 1, 4 or 5 years and may be contingent on 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 2008 and 2007.
A summary
of the Company’s restricted stock award activity and related information, for
the fiscal year ended January 3, 2009 and December 29, 2007
follows:
2008
(Shares in thousands)
|
|
|
|
|
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-
Date
Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
at beginning of period
|
|
|
61 |
|
|
$ |
45.24 |
|
Awarded
|
|
|
16 |
|
|
|
36.58 |
|
Vested
|
|
|
(13 |
) |
|
|
40.37 |
|
Forfeited
|
|
|
(1 |
) |
|
|
40.72 |
|
Nonvested
at end of period
|
|
|
63 |
|
|
$ |
44.06 |
|
2007
(shares in thousands)
|
|
|
|
|
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-
Date
Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
at beginning of period
|
|
|
40 |
|
|
$ |
43.39 |
|
Awarded
|
|
|
32 |
|
|
|
47.40 |
|
Vested
|
|
|
(8 |
) |
|
|
43.77 |
|
Forfeited
|
|
|
(3 |
) |
|
|
47.44 |
|
Nonvested
at end of period
|
|
|
61 |
|
|
$ |
45.24 |
|
As of
January 3, 2009 there was $1.1 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Stock Plan. That cost is expected to be recognized over a weighted-average
period of 1.83 years.
18. SEGMENT
AND GEOGRAPHIC INFORMATION
Segments
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 the
following operating segments, based on the principal end market served: Water
Systems and Fueling Systems. The Company disaggregated the segment
information starting with the 2007 annual report due to growth from acquisitions
and other operational changes which diversified the operating
segments. The Company includes unallocated corporate expenses and
inter-company eliminations in an “Other” segment that together with Water and
Fueling represent the Company.
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.
The
accounting policies of our operating segments are the same as those described in
the summary of significant accounting policies. Performance is evaluated based
on the sales and operating income of the segments and a variety of ratios to
measure performance. These results are not necessarily indicative of the results
of operations that would have occurred had each segment been an independent,
stand-alone entity during the periods presented.
Financial
information by reportable business segment is included in the following
summary:
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Net
sales to external customers
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$ |
557.0 |
|
|
$ |
466.8 |
|
|
$ |
465.6 |
|
|
$ |
67.6 |
|
|
$ |
56.7 |
|
|
$ |
104.4 |
|
Fueling
Systems
|
|
$ |
188.6 |
|
|
$ |
135.2 |
|
|
$ |
92.3 |
|
|
$ |
49.4 |
|
|
$ |
24.6 |
|
|
$ |
15.0 |
|
Other
|
|
$ |
0.0 |
|
|
$ |
0.0 |
|
|
$ |
0.0 |
|
|
$ |
(40.3 |
) |
|
$ |
(32.1 |
) |
|
$ |
(30.3 |
) |
Consolidated
|
|
$ |
745.6 |
|
|
$ |
602.0 |
|
|
$ |
557.9 |
|
|
$ |
76.7 |
|
|
$ |
49.2 |
|
|
$ |
89.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
Depreciation
|
|
Water
Systems
|
|
$ |
397.4 |
|
|
$ |
398.6 |
|
|
|
|
|
|
$ |
16.7 |
|
|
$ |
14.6 |
|
|
$ |
12.8 |
|
Fueling
Systems
|
|
$ |
219.7 |
|
|
$ |
203.1 |
|
|
|
|
|
|
$ |
1.1 |
|
|
$ |
0.8 |
|
|
$ |
0.7 |
|
Other
|
|
$ |
76.9 |
|
|
$ |
60.5 |
|
|
|
|
|
|
$ |
1.7 |
|
|
$ |
1.1 |
|
|
$ |
1.1 |
|
Consolidated
|
|
$ |
694.0 |
|
|
$ |
662.2 |
|
|
|
|
|
|
$ |
19.5 |
|
|
$ |
16.5 |
|
|
$ |
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Capital
Expenditures
|
|
Water
Systems
|
|
$ |
2.8 |
|
|
$ |
1.8 |
|
|
$ |
1.2 |
|
|
$ |
17.6 |
|
|
$ |
23.6 |
|
|
$ |
20.1 |
|
Fueling
Systems
|
|
$ |
1.9 |
|
|
$ |
2.0 |
|
|
$ |
1.0 |
|
|
$ |
2.7 |
|
|
$ |
3.9 |
|
|
$ |
0.9 |
|
Other
|
|
$ |
0.0 |
|
|
$ |
0.0 |
|
|
$ |
0.0 |
|
|
$ |
6.6 |
|
|
$ |
1.3 |
|
|
$ |
2.2 |
|
Consolidated
|
|
$ |
4.7 |
|
|
$ |
3.8 |
|
|
$ |
2.2 |
|
|
$ |
26.9 |
|
|
$ |
28.8 |
|
|
$ |
23.2 |
|
Cash is
the major asset group in “Other” of total assets.
Total
Company Geographic Information
(In
millions)
|
|
Net
Sales
|
|
|
Long-lived
assets
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
United
States
|
|
$ |
392.1 |
|
|
$ |
337.1 |
|
|
$ |
364.7 |
|
|
$ |
256.4 |
|
|
$ |
249.5 |
|
Foreign
|
|
|
353.5 |
|
|
|
264.9 |
|
|
|
193.2 |
|
|
|
120.0 |
|
|
|
103.3 |
|
Total
|
|
$ |
745.6 |
|
|
$ |
602.0 |
|
|
$ |
557.9 |
|
|
$ |
376.4 |
|
|
$ |
352.8 |
|
In 2008
and 2007, no single customer accounted for more than 10 percent of the Company’s
consolidated sales. ITT Industries, Inc., and its various
subsidiaries and affiliates, accounted for 11 percent of the Company’s
consolidated sales in 2006. Pentair Corporation and its various subsidiaries and
affiliates, accounted for 12 percent of the Company’s consolidated sales in
2006. ITT Industries and Pentair Corporation were customers in the
Water Systems segment.
19. CONTINGENCIES
AND COMMITMENTS
During
the first half of 2008, the Company 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. In
October 2008, the California Air Resources Board (“CARB”) provided a Notice of
Violation to the Company alleging that the circumstances leading to the retrofit
program violated California statutes and regulations. Proceedings under
the NOV are not expected to adversely affect the Company’s sale of Enhanced
Vapor Recovery Systems in California. The Company intends to attempt to
resolve this matter in discussions with CARB, as CARB invited it to do, 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 position,
results of operations, and cash flows. As of January 3, 2009, there
was no contingency recorded for this legal matter.
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 $8.3 million, $7.9 million, and $5.8 million for 2008, 2007 and
2006, respectively.
The
future minimum rental payments for non-cancelable operating leases as of January
3, 2009 are as follows:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
Future
minimum rental payments
|
|
$ |
5.6 |
|
|
$ |
3.9 |
|
|
$ |
3.2 |
|
|
$ |
1.2 |
|
|
$ |
1.1 |
|
Rental
commitments subsequent to 2013 are not significant by year, but aggregated are
$5.2 million in total.
At
January 3, 2009, the Company had $2.1 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)
|
|
2008
|
2007
|
Beginning
balance
|
$9.7
|
$10.0
|
Accruals
related to product warranties
|
10.7
|
6.3
|
Additions
related to acquisitions
|
0.1
|
0.7
|
Reductions
for payments made
|
(11.2)
|
(7.3)
|
Ending
balance
|
$9.3
|
$9.7
|
20. RESTRUCTURING
In North
America the Company is continuing the rationalization of manufacturing capacity
between the manufacturing complex in Linares, Mexico and its other North
American plants. The current realignment plan includes the phased
move of approximately 500,000 man hours of manufacturing activity to Linares,
approximately 80 percent of which is from Siloam Springs, Arkansas. The transfer
is expected to be largely complete by June, 2009 and is anticipated to reduce
manufacturing labor and overhead costs.
The cost
of the rationalization and transfer is estimated to be between $6.0 million and
$8.0 million. The major categories of cost include:
Severance
and other employee assistance
costs $0.8
- $1.1
Pension
curtailments
$1.7 - $2.0
Asset
write-downs $2.8 -
$3.2
Equipment
relocations
$0.7 - $1.7
After
this transfer is complete, the Linares facility will have sufficient capacity to
absorb additional manufacturing activity and plans are being made to further
rationalize capacity in late 2009 and 2010.
Restructuring
expenses of $2.2 million were incurred in 2008 primarily for pension curtailment
costs. Restructuring expenses of $3.9 million were incurred in 2007,
primarily for manufacturing equipment relocation and production re-alignment
under a prior phase. As of January 3, 2009 and December 29, 2007,
there were no significant restructuring reserves in the Company’s consolidated
balance sheet.
21. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited
quarterly financial information for 2008 and 2007, 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
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$ |
176.0 |
|
|
$ |
51.5 |
|
|
$ |
8.1 |
|
|
$ |
0.35 |
|
|
$ |
0.35 |
|
2nd
Quarter
|
|
|
201.7 |
|
|
|
64.7 |
|
|
|
15.3 |
|
|
|
0.67 |
|
|
|
0.66 |
|
3rd
Quarter
|
|
|
215.8 |
|
|
|
66.5 |
|
|
|
17.3 |
|
|
|
0.75 |
|
|
|
0.74 |
|
4th
Quarter
|
|
|
152.1 |
|
|
|
44.3 |
|
|
|
3.4 |
|
|
|
0.15 |
|
|
|
0.15 |
|
|
|
$ |
745.6 |
|
|
$ |
227.0 |
|
|
$ |
44.1 |
|
|
$ |
1.92 |
|
|
$ |
1.90 |
|
|
|
During
the fourth quarters of 2008 and 2007, the Company significantly decreased
its LIFO inventory provision due to changes in commodity and component
prices. Therefore the LIFO provision included in the fourth quarters
reduced cost of sales by $4.3 million and $2.4 million,
respectively.
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st
Quarter
|
|
$ |
130.5 |
|
|
$ |
38.9 |
|
|
$ |
4.9 |
|
|
$ |
0.21 |
|
|
$ |
0.21 |
|
2nd
Quarter
|
|
|
152.5 |
|
|
|
43.3 |
|
|
|
6.6 |
|
|
|
0.29 |
|
|
|
0.28 |
|
3rd
Quarter
|
|
|
165.3 |
|
|
|
48.0 |
|
|
|
11.7 |
|
|
|
0.51 |
|
|
|
0.50 |
|
4th
Quarter
|
|
|
153.7 |
|
|
|
42.6 |
|
|
|
5.5 |
|
|
|
0.24 |
|
|
|
0.23 |
|
|
|
$ |
602.0 |
|
|
$ |
172.8 |
|
|
$ |
28.7 |
|
|
$ |
1.24 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
22. SUBSEQUENT
EVENTS
In an
agreement dated January 16, 2009, between Franklin Electric and Vertical S.p.A.,
the Company acquired 75 percent of the outstanding shares of the entity for
approximately €15.0 million, $19.9 million at the then current exchange rate,
subject to certain terms and conditions. Vertical specializes in the
design, development and manufacture of pressed and welded stainless steel pumps
and pump components. Franklin has a strong global water systems
distribution network and can now partner with Vertical to address the growing
worldwide demand for stainless steel water pumps.
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 January 3, 2009 and December 29,
2007, 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 January 3, 2009. 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 January 3, 2009 and December 29, 2007, and the results of their operations
and their cash flows for each of the three years in the period ended January 3,
2009, in conformity with accounting principles generally accepted in the United
States of America.
As
discussed in Notes 1 and 12, on January 1, 2007, the Company adopted the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
As
discussed in Notes 1 and 17, on January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, and on
December 30, 2006.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of January 3, 2009, 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 March 4, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
March 4,
2009
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 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 in
the scope of this evaluation Industrias Schneider SA and Western Pump LLC both
acquired during 2008 and whose financial statements collectively constitute 10.3
percent and 6.0 percent of net and total assets, respectively, 6.4 percent of
revenues, and 9.0 percent of net income of the consolidated financial statement
amounts as of and for the year ended January 3, 2009. Based on its
evaluation, management concluded that the Company’s system of internal control
over financial reporting was effective as of January 3, 2009.
Our
independent registered accounting firm has issued an audit report on the
effectiveness of the Company’s internal control over financial reporting. This
report appears on page 60-61.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareowners and Directors, Franklin Electric Co., Inc.:
We
have audited the internal control over
financial reporting of Franklin Electric Co., Inc. and subsidiaries (the
"Company") as of January
3, 2009, 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 did
not include in the scope of this evaluation Industrias Schneider SA and Western
pump LLC both acquired during 2008 and whose financial statements collectively
constitute 10.3 percent and 6.0 percent of net and total assets, respectively,
6.4 percent of revenues, and 9.0 percent of net income of the consolidated
financial statement amounts as of and for the year ended January 3, 2009.
Accordingly, our audit did not include the internal control
over financial reporting at Industrias Schneider SA and Western pump LLC.
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, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.
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.
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 January 3, 2009 of the Company and our
report dated March 4, 2009 expressed an unqualified opinion on those financial
statements and includes explanatory paragraphs regarding the adoption of the
provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007 and the adoption of the provisions of Statement
of Financial Accounting Standards No. 123(R), Share-Based Payment, on
December 30, 2006.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
March 4,
2009
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 24, 2009, under the headings of "ELECTION OF
DIRECTORS" and "INFORMATION CONCERNING NOMINEES AND CONTINUING 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," and is incorporated herein by reference.
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 24, 2009,
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 for the Annual Meeting of Shareholders to be held on
April 24, 2009 under the heading “INFORMATION ABOUT THE BOARD AND ITS
COMMITTEES,” and is incorporated herein by reference.
The
Company’s board of directors has determined that Jerome D. Brady, Thomas L.
Young, and David M. Wathen, 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 www.franklin-electric.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 24, 2009, under the
headings of “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” “MANAGEMENT
ORGANIZATION AND COMPENSATION COMMITTEE REPORT,” “COMPENSATION, DISCUSSION AND
ANALYSIS,” “SUMMARY COMPENSATION TABLE,” “GRANT OF PLAN BASED AWARDS TABLE,”
“OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE,” “OPTION EXCERCISES AND
STOCK VESTED TABLE,” “PENSION BENEFITS TABLE,” “NON-QUALIFIED DEFERRED
COMPENSATION,” “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 24, 2009, 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 24, 2009, under the
headings of “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” and is
incorporated herein by reference.
ITEM 14. PRINCIPAL
ACCOUNTANT 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 24, 2009, under the
heading “PROPOSAL
3: RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE
COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,” and is incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
Form
10-K Annual Report(page)
|
|
|
(a)
1. Financial Statements - Franklin Electric Co., Inc.
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
65
|
Consolidated
Statements of Income for the three years ended January 3,
2009
|
25
|
Consolidated
Balance Sheets as of January 3, 2009 and December 29, 2007
|
26
- 27
|
Consolidated
Statements of Cash Flows for the three years ended January 3,
2009
|
28
- 29
|
Consolidated
Statements of Shareowners' Equity for the three years ended January 3,
2009
|
30
- 31
|
Notes
to Consolidated Financial Statements(including quarterly financial
data)
|
32
- 57
|
|
|
2.
Financial Statement Schedules - Franklin Electric Co.,
Inc.
|
|
|
|
II.
Valuation and Qualifying Accounts
|
64
|
|
|
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 67-68. Management Contract, Compensatory Plan, or
Arrangement is denoted by an asterisk (*).
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
For the
years 2008, 2007, and 2006
(In
millions)
Description
|
|
Balance
at beginning of
period
|
|
|
Additions
charged to costs and expenses
|
|
|
Deductions
|
|
|
Other
|
|
|
Balance
at end of period
|
|
|
|
Allowance
for doubtful accounts:
|
|
|
|
2008
|
|
$ |
2.6 |
|
|
$ |
0.3 |
|
|
$ |
0.8 |
(A) |
|
$ |
0.0 |
(B) |
|
$ |
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
2.8 |
|
|
$ |
0.0 |
|
|
$ |
0.7 |
(A) |
|
$ |
0.5 |
(B) |
|
$ |
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
0.5 |
(A) |
|
$ |
0.8 |
(B) |
|
$ |
2.8 |
|
NOTES:
(A)
|
Uncollectible
accounts written off, net of recoveries.
|
(B)
|
Allowance
for doubtful accounts related to accounts receivable of acquired companies
at date of acquisition.
|
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 January 3, 2009 and December 29, 2007, and
for each of the three years in the period ended January 3, 2009, and have issued
our report thereon dated March 4, 2009 (which report expresses an unqualified
opinion and includes explanatory paragraphs concerning the adoption of FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007 and the adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, on
December 30, 2006), and the Company's internal control over financial
reporting as of January 3, 2009, and have issued our report thereon dated March
4, 2009; 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, present fairly, in all
material respects, the information set forth therein.
/s/
DELOITTE & TOUCHE LLP
Chicago,
Illinois
March 4,
2009
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.
|
Franklin
Electric Co., Inc.
|
|
|
|
/s/
R. SCOTT TRUMBULL
|
|
R.
Scott Trumbull
|
|
Chairman
of the Board and Chief
|
Date:
March 4, 2009
|
Executive
Officer
|
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 March 4, 2009.
/s/
R. SCOTT TRUMBULL
|
Chairman
of the Board and Chief
|
R.
Scott Trumbull
|
Executive
Officer (Principal
|
|
Executive
Officer)
|
|
|
/s/
JOHN J. HAINES
|
Vice
President, Chief
|
John
J. Haines
|
Financial
Officer and Secretary
|
|
(Principal
Financial and Accounting
|
|
Officer)
|
|
|
|
|
/s/
JEROME D. BRADY
|
|
Jerome
D. Brady
|
Director
|
|
|
|
|
/s/
DAVID A. ROBERTS
|
|
David
A. Roberts
|
Director
|
|
|
|
|
/s/
DAVID M. WATHEN
|
|
David
M. Wathen
|
Director
|
|
|
|
|
/s/
HOWARD B. WITT
|
|
Howard
B. Witt
|
Director
|
|
|
|
|
/s/
THOMAS L. YOUNG
|
|
Thomas
L. Young
|
Director
|
|
|
|
|
|
|
/s/
DAVID T. BROWN
|
|
David
T. Brown
|
Director
|
FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR THE
FISCAL YEAR ENDED JANUARY 3, 2009
Exhibit
Number
|
Description
|
3.1
|
Amended
and Restated Articles of Incorporation of Franklin Electric Co., Inc.
(incorporated by reference to the Company's Form 8-K filed on May 3,
2007)
|
3.2
|
By-Laws
of Franklin Electric Co., Inc. as amended July 25, 2008 (incorporated by
reference to Exhibit 3.1 of the Company’s Form 8-K filed on July 29,
2008)
|
4.1
|
Rights
Agreement, dated as of October 15, 1999, by and between Franklin Electric
Co., Inc. and Illinois Stock Transfer Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrant’s Registration
Statement on Form 8-A dated October 19, 1999, File No.
000-00362).
|
4.2
|
First
Amendment to Rights Agreement, dated as of December 1, 2006, between
Franklin Electric Co., Inc. and LaSalle Bank National Association
(incorporated by reference to Exhibit 4.2 of the Company's Form 8-A/A
filed on December 8, 2006)
|
4.3
|
Second
Amendment to Rights Agreement, dated as of July 11, 2007, between Franklin
Electric Co., Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 4.1 of the Company’s Form 8-K filed on July 16,
2007)
|
4.4
|
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)
|
4.5
|
Shareholder’s
Agreement, dated as of July 11, 2007, between Franklin Electric Co., Inc.,
and Select Equity Group, Inc. and Select Offshore Advisors, LLC
(incorporated by reference to Exhibit 4.2 of the Company’s for 8-K filed
on July 16, 2007)
|
10.1
|
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)*
|
10.2
|
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)*
|
10.3
|
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)*
|
10.4
|
Amended
and Restated Franklin Electric Co., Inc. Pension Restoration Plan (filed
herewith)*
|
10.5
|
Franklin
Electric Co., Inc. Deferred Compensation Plan effective December 12, 2008
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed
on December 17, 2008)*
|
10.6
|
Employment
Agreement dated December 3, 2002 between the Company and Scott Trumbull
and amended on February 18, 2009 (incorporated by reference to Exhibit
10.10 of the Company’s Form 10-K for the fiscal year ended December 28,
2002; amendment filed herewith)*
|
10.7
|
Amended
Employment Agreement dated December 20, 2002 between the Company and Gregg
C. Sengstack and amended on July 25, 2008 and February 20, 2009
(incorporated by reference to Exhibit 10.2 of the Company’s Form 10-K for
the fiscal year ended December 28, 2008 and Exhibit 10.1 of the Company’s
Form 8-K dated July 23, 2005; second amendment filed
herewith)*
|
10.8
|
Employment
Agreement dated as of April 14, 2008 between the Company and John J.
Haines and amended on February 18, 2009 (incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K dated April 7, 2008; amendment
filed herewith)*
|
10.9
|
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)*
|
10.10
|
Form
of Confidentiality and Non-Compete Agreement 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, Gary D. Ward, Thomas J.
Strupp, Delancey W. Davis and John J. Haines (incorporated by reference to
Exhibit 10.15 of the Company’s Form 10-K for the fiscal year ended January
1, 2005)*
|
10.11
|
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)*
|
10.12
|
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)*
|
10.13
|
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)*
|
10.14
|
Form
of Restricted Stock Agreement for Non-Director Employees (incorporated by
reference to Exhibit 10.20 of the Company’s Form 10-K for the fiscal year
ended December 31, 2005)*
|
10.15
|
Form
of Restricted Stock Agreement for Director Employees (incorporated by
reference to Exhibit 10.21 of the Company’s Form 10-K for the fiscal year
ended December 31, 2005)*
|
10.16
|
Form
of Restricted Stock Agreement for Non-Employee Directors (incorporated by
reference to Exhibit 10.23 of the Company’s Form 10-K for the fiscal year
ended December 30, 2006)*
|
10.17
|
Form
of Employment Security Agreement between the Company and DeLancey W.
Davis, Daniel J. Crose, Robert J. Stone, Thomas J. Strupp, and Gary D.
Ward (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
filed on December 17, 2008)*
|
10.18
|
Franklin
Electric Co., Inc. Deferred Compensation Plan effective December 12, 2008
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed
on December 17, 2008)*
|
10.19
|
$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)
|
10.20
|
Amendment
No. 1 to the $120,000,000 Amended and Restated Credit Agreement, dated
February 26, 2008, between the Company and JPMorgan Chase, as
Administrative Agent (filed herewith)
|
10.21
|
Second
Amended and Restated Note Purchase and Private Shelf Agreement dated
September 9, 2004 between the Company and the Prudential Insurance Company
of America and others (incorporated by reference to Exhibit 10.12 of the
Company’s Form 10-Q for the quarter ended October 2,
2004)
|
10.22
|
Amendment
and PruShelf Renewal and Extension, dated April 9, 2007, between the
Company and Prudential Insurance Company of America and others
(incorporated by reference to the Company’s Form 8-K filed on May 3,
2007)
|
10.23
|
Amendment
No. 2 to the Second Amended and Restated Note Purchase and Private Shelf
Agreement, dated February 26, 2008, between the Company and the Prudential
Insurance Company of America and others (filed
herewith)
|
21
|
Subsidiaries
of the Registrant
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
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
|
99.1
|
Forward-Looking
Statements
|
|
|
*
Management Contract, Compensatory Plan, or Arrangement