form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_________
FORM
10-Q
_________
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended April 4,
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
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(260)
824-2900
(Registrant's
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer
x
|
Accelerated Filer o
|
Non-Accelerated Filer
o
|
Smaller Reporting Company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
|
Outstanding
at
|
Class of Common Stock
|
|
April 4, 2009
|
$.10
par value
|
|
23,062,673
shares
|
FRANKLIN
ELECTRIC CO., INC.
TABLE OF
CONTENTS
|
|
|
Page
|
PART I.
|
FINANCIAL INFORMATION
|
|
Number
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the First Quarter Ended
April
4, 2009 and March 29, 2008
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of April 4, 2009 and January 3,
2009
|
|
5-6
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the First Quarter Ended April 4,
2009 and March 29, 2008
|
|
7
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
8-18
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
19-22
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
22
|
|
|
|
|
PART II.
|
OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
23
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
23
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
23
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
23-24
|
|
|
|
|
Item
6.
|
Exhibits
|
|
24
|
|
|
|
|
Signatures
|
|
|
25
|
|
|
|
|
Exhibit Index
|
|
|
26
|
|
|
|
|
Exhibits
|
|
|
27-30
|
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
First Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
149,797 |
|
|
$ |
176,010 |
|
Cost
of sales
|
|
|
106,601 |
|
|
|
124,551 |
|
Gross
profit
|
|
|
43,196 |
|
|
|
51,459 |
|
Selling,
general and administrative expenses
|
|
|
34,449 |
|
|
|
36,311 |
|
Restructuring
expenses
|
|
|
891 |
|
|
|
82 |
|
Operating
income
|
|
|
7,856 |
|
|
|
15,066 |
|
Interest
expense
|
|
|
(2,373 |
) |
|
|
(2,624 |
) |
Other
income
|
|
|
260 |
|
|
|
602 |
|
Foreign
exchange gain/(loss)
|
|
|
108 |
|
|
|
(327 |
) |
Income
before income taxes
|
|
|
5,851 |
|
|
|
12,717 |
|
Income
taxes
|
|
|
1,800 |
|
|
|
4,438 |
|
Net
income
|
|
|
4,051 |
|
|
|
8,279 |
|
Less:
Net income attributable to noncontrolling interests
|
|
|
(204 |
) |
|
|
(131 |
) |
Net
income attributable to Franklin Electric Co., Inc.
|
|
$ |
3,847 |
|
|
$ |
8,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings
|
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.125 |
|
|
$ |
0.120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements”.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
April 4, 2009
|
|
|
January 3, 2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
45,201 |
|
|
$ |
46,934 |
|
Receivables,
less allowances of $2,375 and $2,091, respectively
|
|
|
89,467 |
|
|
|
68,048 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
65,185 |
|
|
|
67,785 |
|
Work-in-process
|
|
|
16,116 |
|
|
|
15,204 |
|
Finished
goods
|
|
|
105,319 |
|
|
|
105,496 |
|
LIFO
reserve
|
|
|
(17,698 |
) |
|
|
(18,612 |
) |
|
|
|
168,922 |
|
|
|
169,873 |
|
Deferred
income taxes
|
|
|
16,996 |
|
|
|
16,511 |
|
Other
current assets
|
|
|
15,989 |
|
|
|
16,294 |
|
Total
current assets
|
|
|
336,575 |
|
|
|
317,660 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
79,271 |
|
|
|
79,284 |
|
Machinery
and equipment
|
|
|
193,567 |
|
|
|
172,706 |
|
Furniture
and fixtures
|
|
|
13,666 |
|
|
|
13,807 |
|
Other
|
|
|
10,596 |
|
|
|
11,556 |
|
|
|
|
297,100 |
|
|
|
277,353 |
|
Allowance
for depreciation
|
|
|
(148,253 |
) |
|
|
(132,818 |
) |
|
|
|
148,847 |
|
|
|
144,535 |
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
115 |
|
|
|
- |
|
Intangible
assets
|
|
|
87,305 |
|
|
|
75,737 |
|
Goodwill
|
|
|
150,663 |
|
|
|
148,082 |
|
Other
assets
|
|
|
8,078 |
|
|
|
8,043 |
|
Total
assets
|
|
$ |
731,583 |
|
|
$ |
694,057 |
|
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
April 4, 2009
|
|
|
January 3, 2009
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
33,921 |
|
|
$ |
24,505 |
|
Accrued
liabilities
|
|
|
41,652 |
|
|
|
47,991 |
|
Income
taxes
|
|
|
6,277 |
|
|
|
8,239 |
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
58,980 |
|
|
|
677 |
|
Total
current liabilities
|
|
|
140,830 |
|
|
|
81,412 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
153,050 |
|
|
|
185,528 |
|
Deferred
income taxes
|
|
|
5,069 |
|
|
|
4,161 |
|
Employee
benefit plan obligations
|
|
|
69,278 |
|
|
|
69,142 |
|
Other
long-term liabilities
|
|
|
5,073 |
|
|
|
3,707 |
|
|
|
|
|
|
|
|
|
|
Redeemable
noncontrolling interest
|
|
|
6,689 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity:
|
|
|
|
|
|
|
|
|
Common
shares (65,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
|
outstanding
(23,063 and 23,018, respectively)
|
|
|
2,306 |
|
|
|
2,302 |
|
Additional
capital
|
|
|
115,547 |
|
|
|
113,397 |
|
Retained
earnings
|
|
|
272,010 |
|
|
|
271,274 |
|
Accumulated
other comprehensive income
|
|
|
(39,813 |
) |
|
|
(38,036 |
) |
Total
shareowners' equity
|
|
|
350,050 |
|
|
|
348,937 |
|
Noncontrolling
interest
|
|
|
1,544 |
|
|
|
1,170 |
|
Total
Equity
|
|
|
351,594 |
|
|
|
350,107 |
|
Total
liabilities and shareowners' equity
|
|
$ |
731,583 |
|
|
$ |
694,057 |
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements”.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
First Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
4,051 |
|
|
$ |
8,279 |
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
6,149 |
|
|
|
6,229 |
|
Share-based
compensation
|
|
|
2,155 |
|
|
|
1,106 |
|
Deferred
income taxes
|
|
|
(311 |
) |
|
|
(126 |
) |
Loss
on disposals of plant and equipment
|
|
|
14 |
|
|
|
42 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(14,678 |
) |
|
|
(30,047 |
) |
Inventories
|
|
|
3,719 |
|
|
|
(4,141 |
) |
Accounts
payable and other accrued expenses
|
|
|
(2,490 |
) |
|
|
(5,222 |
) |
Income
taxes
|
|
|
963 |
|
|
|
1,351 |
|
Excess
tax from share-based payment arrangements
|
|
|
- |
|
|
|
(64 |
) |
Employee
benefit plans
|
|
|
543 |
|
|
|
(639 |
) |
Other
|
|
|
(1,104 |
) |
|
|
(2,052 |
) |
Net
cash flows from operating activities
|
|
|
(989 |
) |
|
|
(25,284 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(3,108 |
) |
|
|
(6,758 |
) |
Proceeds
from sale of plant and equipment
|
|
|
- |
|
|
|
10 |
|
Additions
to other assets
|
|
|
- |
|
|
|
(500 |
) |
Purchases
of securities
|
|
|
- |
|
|
|
(9,000 |
) |
Proceeds
from sale of securities
|
|
|
- |
|
|
|
9,000 |
|
Cash
paid for acquisitions, net of cash acquired
|
|
|
(16,767 |
) |
|
|
(35,465 |
) |
Net
cash flows from investing activities
|
|
|
(19,875 |
) |
|
|
(42,713 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from short term debt
|
|
|
23,000 |
|
|
|
45,000 |
|
Repayment
of long-term debt
|
|
|
(251 |
) |
|
|
(126 |
) |
Proceeds
from issuance of common stock
|
|
|
- |
|
|
|
176 |
|
Excess
tax from share-based payment arrangements
|
|
|
- |
|
|
|
64 |
|
Purchases
of common stock
|
|
|
- |
|
|
|
(7,813 |
) |
Dividends
paid
|
|
|
(2,877 |
) |
|
|
(2,771 |
) |
Net
cash flows from financing activities
|
|
|
19,872 |
|
|
|
34,530 |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and equivalents
|
|
|
(741 |
) |
|
|
1,838 |
|
Net
change in cash and equivalents
|
|
|
(1,733 |
) |
|
|
(31,629 |
) |
Cash
and equivalents at beginning of period
|
|
|
46,934 |
|
|
|
65,252 |
|
Cash
and equivalents at end of period
|
|
$ |
45,201 |
|
|
$ |
33,623 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
2,713 |
|
|
$ |
2,273 |
|
Cash
paid for interest
|
|
$ |
2,391 |
|
|
$ |
2,563 |
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$ |
82 |
|
|
$ |
238 |
|
Payable
to seller of Healy Systems, Inc.
|
|
$ |
784 |
|
|
$ |
931 |
|
Payable
to seller of Western Pump, Inc.
|
|
$ |
28 |
|
|
$ |
- |
|
Capital
equipment lease
|
|
$ |
- |
|
|
$ |
1,121 |
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements”.
FRANKLIN
ELECTRIC CO., INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying condensed consolidated balance sheet as of January 3, 2009, which
has been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements as of April 4, 2009 and for the
first quarter ended, April 4, 2009 and March 29, 2008, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations. In the opinion of management, all accounting entries and
adjustments (including normal, recurring accruals) considered necessary for a
fair presentation of the financial position and the results of operation for the
interim period have been made. Operating results for the first quarter ended
April 4, 2009 are not necessarily indicative of the results that may be expected
for the fiscal year ending January 2, 2010. For further information, including a
description of the Company’s critical accounting policies, refer to the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended January 3, 2009.
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’s adoption of
this statement in first quarter 2009 had no impact on its consolidated financial
position, results of operations and cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations—a
replacement of FASB No. 141. SFAS No. 141(R) establishes principles
and requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) is effective for
financial statements issued for fiscal years beginning after December 15,
2008. The Company’s adoption of this statement impacted the
accounting for its first quarter acquisition of Vertical S.p.A (see Note 3 for a
description of this acquisition). Preliminary asset valuation
estimates were booked on the statement of financial position and direct costs of
the business combination were expensed in the results of
operations.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling 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 noncontrolling 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 noncontrolling 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 adopted SFAS No. 160 and has included the required changes in the
presentation of its first quarter financial statements. The Company
currently has two subsidiaries that are each 75 percent owned by the
Company
and 25
percent owned by minority shareholders (i.e., the noncontrolling
interest). The change to the Statements of Income includes the
separate presentation of net income attributable to the noncontrolling interest
in its subsidiaries previously included in the “other income” line of the
Statement of Income. The changes to the Balance Sheets include a
separate presentation of noncontrolling interest previously included in “long
term liabilities” and the addition of a mezzanine equity item “redeemable
noncontrolling interest” for an acquisition related put option. The
change to the Statements of Cash Flows includes net income before net income
attributable to the noncontrolling interest in the presentation of cash flows
from operating activities.
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’s adoption of this statement in first quarter
2009 had no impact on its consolidated financial position, results of operations
and cash flows.
In April
2008, the FASB issued FASB Staff Position (“FSP”) SFAS 142-3, Determination of
the Useful Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R),
Business Combinations,
and other U.S. generally accepted accounting principles (GAAP). This FSP
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early adoption
is prohibited. The Company’s adoption of this FSP in first quarter 2009 had no
impact on its consolidated financial position, results of operations and cash
flows.
3. ACQUISITIONS
In an
agreement dated January 16, 2009, between the Company and Vertical S.p.A., the
Company acquired 75 percent of the outstanding shares of Vertical for
approximately €15.0 million, $19.9 million at the then current exchange rate,
subject to certain terms and conditions. The acquisition was funded
solely with cash.
Vertical
specializes in the design, development and manufacture of pressed and welded
stainless steel pumps and pump components. The Company has a strong
global water systems distribution network and will partner with Vertical to
address the growing worldwide demand for stainless steel water
pumps.
The
preliminary goodwill of $2.8 million consists primarily of the pump product
synergies from joining the Company and Vertical. The Company will
benefit from the added pump product line of stainless steel pumps and pump
components. All of the goodwill was recorded as part of the Water
Systems segment and is not expected to be deductible for tax
purposes.
The
purchase price assigned to each major identifiable asset and liability was as
follows:
(In
millions)
|
|
|
|
Assets:
|
|
|
|
Current
assets
|
|
$ |
13.5 |
|
Property,
plant and equipment
|
|
|
6.7 |
|
Intangible
assets
|
|
|
11.5 |
|
Goodwill
|
|
|
2.8 |
|
Total
assets
|
|
$ |
34.5 |
|
Liabilities
|
|
|
(8.0 |
) |
Total
identifiable net assets
|
|
$ |
26.5 |
|
Noncontrolling
interest
|
|
|
(6.6 |
) |
Total
purchase price
|
|
$ |
19.9 |
|
The fair
value of the identifiable intangible assets, property, plant and equipment and
noncontrolling interest are provisional amounts pending final
valuations. Trade receivable carrying value approximates fair value
as payment terms are within 60-90 days. The Company utilized
management estimates and consultation with an independent third-party valuation
firm to assist in the valuation.
Acquisition-related
costs, included in selling, general and administrative expenses in the Company’s
statement of income, were $0.2 million for the first quarter ended April 4,
2009.
4. FAIR
VALUE MEASUREMENTS
SFAS No.
157, Fair Value Measurements, provides a framework for measuring fair value
under generally accepted accounting principles. 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 April 4, 2009 and January 3,
2009, assets measured at fair value on a recurring basis were as
follows:
(In
millions)
|
|
April 4, 2009
|
|
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash
Equivalents
|
|
$ |
6.1 |
|
|
$ |
6.1 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
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 |
|
|
$ |
- |
|
|
$ |
- |
|
5. INVESTMENTS
– SECURITIES
As of
April 4, 2009 and January 3, 2009, the Company held no significant current
investments in equity securities. Income generated from investments
held during first quarter 2008 was recorded as “Other income” in the statements
of income. There was no such income in first quarter 2009. 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.
6. 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 April 4, 2009, and January 3,
2009, respectively. The Company’s proportionate share of Pioneer
Pump, Inc. earnings, included in “Other income” in the Company’s statements of
income, was zero and $0.2 million, for the first quarters ended April 4, 2009
and March 29, 2008, respectively.
7.
INTANGIBLE ASSETS AND GOODWILL
The
carrying amounts of the Company’s intangible assets are as follows:
(In
millions)
|
|
April 4, 2009
|
|
|
January 3, 2009
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
7.7 |
|
|
$ |
(3.9 |
) |
|
$ |
6.7 |
|
|
$ |
(3.8 |
) |
Supply
agreements
|
|
|
7.2 |
|
|
|
(5.8 |
) |
|
|
7.2 |
|
|
|
(5.7 |
) |
Technology
|
|
|
7.0 |
|
|
|
(1.3 |
) |
|
|
7.0 |
|
|
|
(1.2 |
) |
Customer
relationships
|
|
|
64.5 |
|
|
|
(6.4 |
) |
|
|
54.1 |
|
|
|
(5.6 |
) |
Other
|
|
|
1.9 |
|
|
|
(1.8 |
) |
|
|
2.0 |
|
|
|
(1.9 |
) |
Total
|
|
$ |
88.3 |
|
|
$ |
(19.2 |
) |
|
$ |
77.0 |
|
|
$ |
(18.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
18.2 |
|
|
|
- |
|
|
|
16.9 |
|
|
|
- |
|
Total
intangibles
|
|
$ |
106.5 |
|
|
$ |
(19.2 |
) |
|
$ |
93.9 |
|
|
$ |
(18.2 |
) |
Amortization
expense related to intangible assets for the first quarters ended April 4, 2009
and March 29, 2008 was $1.1 million and $1.3 million, respectively.
Amortization
expense is projected as follows:
(In
millions)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
$ |
5.0 |
|
|
$ |
5.0 |
|
|
$ |
4.8 |
|
|
$ |
4.6 |
|
|
$ |
4.2 |
|
The
changes in the carrying amount of goodwill for the first quarter ended April 4,
2009, are as follows:
(In
millions)
|
|
Water
|
|
|
Fueling
|
|
|
|
|
|
|
Systems
|
|
|
Systems
|
|
|
Consolidated
|
|
Balance
as of January 3, 2009
|
|
$ |
96.5 |
|
|
$ |
51.6 |
|
|
$ |
148.1 |
|
Acquired
|
|
|
2.8 |
|
|
|
- |
|
|
|
2.8 |
|
Adjustments
to prior year acquisitions
|
|
|
(0.5 |
) |
|
|
0.8 |
|
|
|
0.3 |
|
Foreign
currency translation
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
(0.5 |
) |
Balance
as of April 4, 2009
|
|
$ |
98.3 |
|
|
$ |
52.4 |
|
|
$ |
150.7 |
|
The
acquired goodwill in the Water Systems segment was related to the Company’s
acquisition of Vertical S.p.A., in the first quarter 2009.
8.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans – As of April 4, 2009, the Company maintained three domestic
pension plans and one German pension plan. The Company uses a
December 31 measurement date for its plans.
The
following table sets forth aggregated net periodic benefit cost for its pension
plans and other post-retirement benefit plans for the first quarters ended April
4, 2009 and March 29, 2008:
(In
millions)
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
First
Quarter Ended
|
|
|
First
Quarter Ended
|
|
|
|
April 4, 2009
|
|
|
March 29,2008
|
|
|
April 4, 2009
|
|
|
March 29,2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
0.8 |
|
|
$ |
1.0 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
cost
|
|
|
2.4 |
|
|
|
2.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Expected
return on assets
|
|
|
(2.7 |
) |
|
|
(2.7 |
) |
|
|
- |
|
|
|
- |
|
Obligation/asset
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Loss
|
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Prior
service cost
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
Settlement
cost
|
|
|
- |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
- |
|
Total
net periodic benefit cost
|
|
$ |
0.7 |
|
|
$ |
0.9 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through
April 4, 2009, the Company made contributions to the plans of $1.0
million. The amount of contributions to be made to the plans during
calendar year 2009 will be finalized by September 15, 2009 based upon the plans’
year end valuation at December 31, 2008 and the desired funding level to be
achieved as of December 31, 2009.
9. INCOME
TAXES
The
effective tax rate on income before income taxes in 2009 and 2008 varies from
the United States statutory rate of 35 percent primarily due to the effects of
state and foreign income taxes net of federal tax benefits.
10.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
As of the
beginning of fiscal year 2009, the Company had gross unrecognized tax benefits
of $6.8 million, excluding accrued interest and penalties. The
unrecognized tax benefits were reduced by $0.2 million for state income tax
liabilities based on an evaluation during the first quarter of
2009. The Company had gross unrecognized tax benefits, excluding
accrued tax and penalties, of $6.6 million for the three months ended April 4,
2009. If recognized, the effective tax rate would be affected by the
net unrecognized tax benefits of $0.8 million, which is net of a federal benefit
for state tax of $0.3 million.
The
Company recognizes interest and penalties related to unrecognized tax benefits
as income tax expense. The Company’s reserve for interest and
penalties as of April 4, 2009 and as of January 3, 2009 was approximately $0.4
million and $0.4 million, respectively. Interest and penalties
recorded during first quarter 2009 were not considered significant.
The
Company is subject to periodic audits by domestic and foreign tax authorities.
Currently, the Company is undergoing routine periodic audits in both domestic
and foreign tax jurisdictions. It is reasonably possible that the amounts of
unrecognized tax benefits could change in the next 12 months as a result of the
audits.
For the
majority of tax jurisdictions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for
years before 2005.
11.
DEBT
Debt
consisted of the following at first quarters ended April 4, 2009 and January 3,
2009:
(In
millions)
|
|
April 4, 2009
|
|
|
January 3, 2009
|
|
|
|
|
|
|
|
|
Prudential
Agreement - 5.79 percent
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Capital
leases
|
|
|
3.0 |
|
|
|
1.2 |
|
Other
debt
|
|
|
1.0 |
|
|
|
- |
|
Agreement
(i.e. revolving credit) - average rate for first quarter 2009 was 0.88
percent based on the London Interbank Offered Rates plus
an
|
|
|
|
|
|
|
|
|
interest
spread
|
|
|
58.0 |
|
|
|
35.0 |
|
|
|
|
212.0 |
|
|
|
186.2 |
|
Less
current maturities
|
|
|
(59.0 |
) |
|
|
(0.7 |
) |
Long-term
debt
|
|
$ |
153.0 |
|
|
$ |
185.5 |
|
The
Company has certain overdraft facilities at its foreign subsidiaries, of which
none were outstanding at April 4, 2009 and January 3, 2009.
The
following debt payments are expected to be paid in accordance with the following
schedule:
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Year 1
|
|
|
Year 2
|
|
|
Year 3
|
|
|
Year 4
|
|
|
Year 5
|
|
|
More than 5 years
|
|
Debt
|
|
$ |
209.0 |
|
|
$ |
58.4 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
- |
|
|
$ |
150.0 |
|
Capital
leases
|
|
|
3.0 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.5 |
|
|
|
- |
|
|
|
$ |
212.0 |
|
|
$ |
59.0 |
|
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
$ |
0.5 |
|
|
$ |
150.0 |
|
12.
EARNINGS PER SHARE
Following
is the computation of basic and diluted earnings per share:
(In
millions, except per share amounts)
|
|
First Quarter Ended
|
|
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Numerator:
|
|
|
|
|
|
|
Net
income attributable to Franklin Electric Co., Inc.
|
|
$ |
3.8 |
|
|
$ |
8.1 |
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.0 |
|
|
|
23.0 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.1 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.1 |
|
|
|
23.3 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.17 |
|
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
1.7 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options price range – low
|
|
$ |
24.08 |
|
|
$ |
32.19 |
|
Anti-dilutive
stock options price range – high
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
13.
EQUITY ROLL FORWARD
The
schedule below sets forth equity changes in the first quarter ended April 4,
2009:
(In
thousands)
Description
|
Common
|
APIC
|
Retained
Earnings
|
Minimum
Pension
Liability
|
Cumulative
Translation Adjustment
|
Non-
controlling
Interest
|
Total
Equity
|
Redeemable
Non-
controlling
Interest
|
Balance-
01/03/09
|
$2,302
|
$113,397
|
$271,274
|
($32,295)
|
($5,741)
|
$1,170
|
$350,107
|
$-
|
|
Net
income
|
|
|
3,847
|
|
|
146
|
3,993
|
58
|
|
Dividends
on common stock
|
|
|
(2,877)
|
|
|
|
(2,877)
|
|
|
Common
stock issued
|
6
|
996
|
|
|
|
|
1,002
|
|
|
Common
stock repurchased
|
(1)
|
-
|
(234)
|
|
|
|
(235)
|
|
|
Performance
stock
|
-
|
1,153
|
|
|
|
|
1,153
|
|
|
Adjustment
to redemption value
|
|
|
|
|
|
|
|
6,631
|
|
Currency
translation adjustment
|
|
|
|
|
(2,143)
|
228
|
(1,915)
|
|
|
Pension
liability, net of taxes
|
|
|
|
366
|
|
|
366
|
|
|
Balance
- 04/04/09
|
$2,306
|
$115,547
|
$272,010
|
($31,929)
|
($7,884)
|
$1,544
|
$351,594
|
$6,689
|
|
14. OTHER
COMPREHENSIVE INCOME
Comprehensive
income is as follows:
(In
millions)
|
|
First Quarter Ended
|
|
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Net
income
|
|
$ |
4.1 |
|
|
$ |
8.2 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(2.1 |
) |
|
|
4.3 |
|
Pension
liability adjustment, net of tax
|
|
|
0.3 |
|
|
|
0.2 |
|
Total
comprehensive income
|
|
|
2.3 |
|
|
|
12.7 |
|
Less
comprehensive income attributable to noncontrolling
interest
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Comprehensive
income attributable to Franklin Electric Co., Inc.
|
|
$ |
2.2 |
|
|
$ |
12.6 |
|
Accumulated
other comprehensive loss consists of the following:
(In
millions)
|
|
|
|
|
|
|
|
|
April 4, 2009
|
|
|
January 3, 2009
|
|
Cumulative
foreign currency translation adjustments
|
|
$ |
(7.9 |
) |
|
$ |
(5.7 |
) |
Pension
liability adjustment, net of tax
|
|
|
(31.9 |
) |
|
|
(32.3 |
) |
|
|
$ |
(39.8 |
) |
|
$ |
(38.0 |
) |
15. SEGMENT
INFORMATION
Financial
information by reportable business segment is included in the following
summary:
(In
millions)
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
|
|
Net
sales to external customers
|
|
Water
Systems
|
|
$ |
114.4 |
|
|
$ |
136.7 |
|
Fueling
Systems
|
|
|
35.4 |
|
|
|
39.3 |
|
Other
|
|
|
- |
|
|
|
- |
|
Consolidated
|
|
$ |
149.8 |
|
|
$ |
176.0 |
|
|
|
|
|
|
|
|
|
|
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$ |
9.6 |
|
|
$ |
15.2 |
|
Fueling
Systems
|
|
|
7.0 |
|
|
|
9.0 |
|
Other
|
|
|
(8.7 |
) |
|
|
(9.1 |
) |
Consolidated
|
|
$ |
7.9 |
|
|
$ |
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
April 4,2009
|
|
|
January 3, 2009
|
|
|
|
Total
assets
|
|
Water
Systems
|
|
$ |
442.8 |
|
|
$ |
397.4 |
|
Fueling
Systems
|
|
|
219.9 |
|
|
|
219.7 |
|
Other
|
|
|
68.9 |
|
|
|
76.9 |
|
Consolidated
|
|
$ |
731.6 |
|
|
$ |
694.0 |
|
|
|
|
|
|
|
|
|
|
Cash is
the major asset group in “Other” of total assets. Certain
administrative groups were reclassified to the “Other” segment in
2009. Prior year numbers have been reclassified to conform to this
presentation.
16. CONTINGENCIES
AND COMMITMENTS
At April
4, 2009, the Company had $1.4 million of commitments primarily for the purchase
of machinery and equipment and building expansions.
The
Company provides warranties on most of its products. The warranty terms vary but
are generally two years from date of manufacture or one year from date of
installation. In 2007, the Company began offering an extended warranty program
to certain Water Systems customers which will provide warranty coverage up to
five years from the date of manufacture. Provisions for estimated expenses
related to product warranty are made at the time products are sold or when
specific warranty issues are identified. These estimates are established using
historical information about the nature, frequency, and average cost of warranty
claims, and expected customer returns. The Company actively studies trends of
warranty claims and takes action to improve product quality and minimize
warranty claims. The Company believes that the warranty reserve is appropriate;
however, actual claims incurred could differ from the original estimates,
requiring adjustments to the reserve.
The
changes in the carrying amount of the warranty accrual, as recorded in “Accrued
liabilities” in the Company’s balance sheet for the three months ended April 4,
2009 are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of January 3, 2009
|
|
$ |
9.3 |
|
Accruals
related to product warranties
|
|
|
1.7 |
|
Reductions
for payments made
|
|
|
(2.7 |
) |
Balance
as of April 4, 2009
|
|
$ |
8.3 |
|
17.
SHARE-BASED COMPENSATION
Prior to
March 9, 2009, the Company has authorized stock option grants to purchase common
stock and common stock awards to employees and non-employee directors of the
Company and its subsidiaries under two stock plans. The plans and the original
number of authorized shares available for grant are as follows:
|
|
|
|
|
|
Authorized Shares
|
|
|
|
|
|
|
|
|
|
Franklin
Electric Co., Inc. Stock Option Plan
|
|
|
- |
|
Options
|
|
|
3,600,000 |
|
Franklin
Electric Co., Inc. Stock Plan
|
|
|
- |
|
Options
|
|
|
1,150,000 |
|
Franklin
Electric Co., Inc. Stock Plan
|
|
|
- |
|
Awards
|
|
|
150,000 |
|
During
the first quarter ended April 4, 2009, all remaining authorized shares available
for grant under the Franklin Electric Co., Inc. Stock Plan were
awarded.
On April
24, 2009, the Amended and Restated Franklin Electric Co., Inc. Stock Plan (the
“Stock Plan”) was approved by the Company’s shareholders. The Board
of Directors of the Company had approved the Stock Plan on March 9,
2009. Under the Stock Plan, employees and non-employee directors may
be granted stock options or awards. The Stock Plan was amended and restated to,
among other things, increase the number of shares available for issuance under
the Stock Plan from 1,300,000 to 2,200,000 shares. The number of
authorized shares available for grant under the Stock Plan is as
follows:
|
|
|
|
|
|
Authorized Shares
|
|
Amended
and Restated Franklin Electric Co., Inc. Stock Plan
|
|
|
- |
|
Options
|
|
|
1,600,000 |
|
Amended
and Restated Franklin Electric Co., Inc. Stock Plan
|
|
|
- |
|
Awards
|
|
|
600,000 |
|
The
Company currently issues new shares from its common stock balance to satisfy
share option exercises and stock awards.
Stock Option
Grants
The fair
value of each option award for options granted or vesting after the adoption of
FASB 123(R) is estimated on the date of grant using the Black-Scholes option
valuation model with a single approach and amortized using a straight-line
attribution method over the option’s vesting period.
The
assumptions used for the Black-Scholes model to determine the fair value of
options granted during the first quarters ended April 4, 2009 and March 29, 2008
are as follows:
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Risk-free
interest rate
|
|
|
0.70
- 3.55 |
% |
|
|
2.91
- 3.15 |
% |
Dividend
yield
|
|
|
1.32
– 2.04 |
% |
|
|
1.11
– 1.12 |
% |
Weighted-average
dividend yield
|
|
|
1.670 |
% |
|
|
1.119 |
% |
Volatility
factor
|
|
|
0.3493
– 0.3795 |
|
|
|
0.3552
– 0.3714 |
|
Weighted-average
volatility
|
|
|
0.3982 |
|
|
|
0.3691 |
|
Expected
term
|
|
5.6
years
|
|
|
5.0
– 6.0 years
|
|
Forfeiture
rate
|
|
|
2.58 |
% |
|
|
3.61 |
% |
A summary
of the Company’s stock option plans activity and related information for the
first quarters ended April 4, 2009 and March 29, 2008 follows:
(Shares
in thousands)
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Stock Options
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
beginning of period
|
|
|
1,439 |
|
|
$ |
31.17 |
|
|
|
1,252 |
|
|
$ |
29.99 |
|
Granted
|
|
|
561 |
|
|
|
17.34 |
|
|
|
337 |
|
|
|
32.21 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
(10 |
) |
|
|
17.63 |
|
Forfeited
|
|
|
(5 |
) |
|
|
39.54 |
|
|
|
- |
|
|
|
- |
|
Outstanding
end of period
|
|
|
1,995 |
|
|
$ |
27.26 |
|
|
|
1,579 |
|
|
$ |
30.54 |
|
Expected
to vest after applying forfeiture rate
|
|
|
1,954 |
|
|
$ |
27.35 |
|
|
|
1,546 |
|
|
$ |
30.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
1,094 |
|
|
$ |
29.46 |
|
|
|
1,025 |
|
|
$ |
27.01 |
|
A summary
of the weighted average remaining contractual term and aggregate intrinsic value
for the first quarter ended April 4, 2009 is as follows:
Stock Options
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
end of period
|
|
|
6.63 |
|
|
$ |
5,567 |
|
Expected
to vest after applying forfeiture rate
|
|
|
6.57 |
|
|
$ |
5,382 |
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
4.35 |
|
|
$ |
1,844 |
|
There
were 560,780 options granted during the first quarter of 2009. The total
intrinsic value of options exercised during the first quarters ended April 4,
2009 and March 29, 2008 was zero and $0.2 million,
respectively. There were no share-based liabilities paid during the
first quarter 2009.
A summary
of the Company’s nonvested shares activity and related information for the first
quarters ended April 4, 2009 and March 29, 2008 follows:
(Shares
in thousands)
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Nonvested
at beginning of period
|
|
|
536 |
|
|
$ |
37.06 |
|
|
|
416 |
|
|
$ |
39.99 |
|
Granted
|
|
|
561 |
|
|
|
17.34 |
|
|
|
337 |
|
|
|
32.21 |
|
Vested
|
|
|
(193 |
) |
|
|
37.96 |
|
|
|
(199 |
) |
|
|
34.93 |
|
Forfeited
|
|
|
(3 |
) |
|
|
37.76 |
|
|
|
- |
|
|
|
- |
|
Nonvested
at end of period
|
|
|
901 |
|
|
$ |
24.59 |
|
|
|
554 |
|
|
$ |
37.08 |
|
As of
April 4, 2009, there was $6.5 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plans. That cost is expected to be recognized over a weighted-average period of
3.04 years.
Stock
Awards
A summary
of the Company’s restricted stock award activity and related information for the
first quarters ended April 4, 2009 and March 29, 2008 follows:
(Shares
in thousands)
|
|
April 4, 2009
|
|
|
March 29, 2008
|
|
Nonvested Stock Awards
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Nonvested
at beginning of period
|
|
|
63 |
|
|
$ |
44.06 |
|
|
|
61 |
|
|
$ |
45.24 |
|
Awarded
|
|
|
58 |
|
|
|
17.34 |
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
(58 |
) |
|
|
17.34 |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Nonvested
at end of period
|
|
|
63 |
|
|
$ |
44.06 |
|
|
|
61 |
|
|
$ |
45.24 |
|
As of
April 4, 2009, there was $1.0 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of
1.58 years.
18. RESTRUCTURING
During
the first quarter 2009, the Company continued the rationalization of
manufacturing capacity between the manufacturing complex in Linares, Mexico and
its other North American facilities. The current Water Systems
segment 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. Other restructuring expenses incurred in the first quarter of
2009 were related to integration expenses of a fourth quarter 2008 acquisition
and other rationalization costs associated with global headcount reductions that
were initiated in the first quarter 2009
At the
end of first quarter 2009, the cost of the rationalization and transfer
continued to be estimated between $6.0 million and $8.0 million.
Costs
incurred in the first quarter ended April 4, 2009, included in the Restructuring
expense line of the income statement, are as follows:
|
|
First
Quarter Ended
|
|
(In
millions)
|
|
April 4, 2009
|
|
|
|
|
|
Severance
and other employee assistance costs
|
|
$ |
0.8 |
|
Equipment
relocations
|
|
|
0.1 |
|
Total
|
|
$ |
0.9 |
|
As of the
first quarter ended April 4, 2009 there was $0.4 million in restructuring
reserves primarily for severance. There were no restructuring
reserves as of March 29, 2008.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Sales for
the first quarter of 2009 were down from the same quarter last year. The major
factor causing the earnings decline during the quarter was the recession induced
sales volume decline. Gross profit decreased in dollars by about 16 percent, but
as a percentage of sales the decrease was only 40 basis points during the first
quarter of 2009 versus the first quarter of 2008.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
Q1
2009
|
|
|
|
Q1
2008
|
|
|
|
2009
v 2008
|
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$
|
114.4
|
|
|
$
|
136.7
|
|
|
$
|
(22.3)
|
|
Fueling
Systems
|
|
$
|
35.4
|
|
|
$
|
39.3
|
|
|
$
|
(3.9)
|
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
|
|
$
|
149.8
|
|
|
$
|
176.0
|
|
|
$
|
(26.2)
|
|
Net sales
for the first quarter of 2009 were $149.8 million, a decrease of $26.2 million
or 15 percent compared to 2008 first quarter sales of $176.0 million. A
major factor causing the Company’s earnings decline during the first quarter of
2009 was the sales volume reduction that was experienced as a result of the
continuing recession. The ongoing slump in housing combined with the customer’s
desire to reduce inventories contributed to soft end market demand and fewer
shipments for the Company’s products in the first quarter. Additionally, first
quarter 2009 sales were lower by $13.3 million versus the first quarter 2008 due
to foreign currency translations as a result of a stronger U.S.
dollar. First quarter sales attributed to acquisitions were $6.0
million.
Net
Sales-Water Systems
Water
Systems sales worldwide were $114.4 million, down $22.3 million or 16 percent
for the first quarter of 2009 compared to the same period for
2008. Water Systems revenues represent about 75 percent of the
Company’s total sales. During the first quarter 2009, Water Systems revenues
declined by 11 percent organically before the impact of foreign currency
translations. Virtually the entire organic sales decline occurred as a result of
weakness in the U.S. and Canada markets which
represents about half of total Water Systems sales. Based on trade association
data, management estimates that first quarter industry wide groundwater pump
sales were down about 33 percent versus the prior year. While the Company’s
sales did not decline as much, sales nevertheless were impacted by the
extraordinary drop in the overall market. Management believes the industry sales
decline was caused by the ongoing slump in housing, with housing starts off by
about 50 percent versus the first quarter 2008. In addition, downstream
distributor and contractor customers reduced inventories during the quarter
which negatively impacted shipments.
International
water sales represent about half of the Water Systems revenues and were up about
3 percent in local currencies but were negatively impacted by $12.8 million due
to foreign currency translations. During the quarter, organic sales growth in
Asia/Pacific, Latin America and Southern Africa offset a decline in Europe and
the Middle East. Additionally, the Company completed the acquisition of 75
percent of Vertical S.p.A in Italy during the quarter as the Company continues
to focus on building product capability while expanding international reach.
Vertical’s performance met Company expectations in the first
quarter.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $35.4 million, down $3.9 million or 10 percent for
the first quarter of 2009 compared to the same period for 2008.
Fueling Systems represent about 25 percent of the Company’s total
revenues. Fueling Systems sales in the U.S. grew by about 2 percent,
with sales growth in California offsetting an 8 percent decline in the balance
of the country. Fueling Systems sales in international markets declined during
the quarter because in the first quarter of 2008 there were heavy shipments of
vapor control systems to the Beijing area as part of China’s program to reduce
air pollution prior to the Summer Olympics. The Company is encouraged that in
March overall Fueling Systems sales were up 19 percent versus March 2008 as
station owners in California continued their capital spending projects to comply
with that state’s vapor control mandate, and station owners outside of
California also moved ahead with upgrade, replacement and expansion
projects.
Management
estimates that at the end of the first quarter 2009, approximately two thirds of
the California filling stations requiring vapor recovery retrofit were completed
and that the Company’s market-share of these retrofits was approximately 90
percent. Of the roughly 4,100 stations remaining to complete the retrofit, the
Company expects to win an approximately 60 to 70 percent share and that
approximately 80 percent of the remaining station conversions will take place in
the second and third quarters of 2009.
Cost
of Sales
Cost of
sales as a percent of net sales for the first quarter of 2009 and 2008 was 71.2
percent and 70.8 percent, respectively. Correspondingly, the
gross profit margin decreased to 28.8 percent from 29.2 percent, a decline of
only 40 basis points. Gross profit margins remained nearly unchanged
in the quarter in spite of the significant sales volume
reduction. The Company’s gross profit was $43.2 million, down by $8.3
million from the $51.5 million in 2008. Of the $8.3 million decrease,
about $15 million was the result of reduced sales. Offsetting the
decline in gross profit due to lower sales were the following: $2.5 million as a
result of better factory utilization, about $2 million attributable to
acquisitions, and sales price increases in excess of product cost
increases.
Restructuring
Expenses
Restructuring
expenses for the first quarter of 2009 were approximately $0.9 million and
reduced diluted earnings per share by approximately $0.02 per share.
Restructuring expenses incurred in the first quarter related primarily to the
announced manufacturing optimization plan which included charges for severance
and equipment relocations. Other restructuring expenses
incurred in the first quarter of 2009 were related to integration expenses of a
fourth quarter 2008 acquisition and other rationalization costs associated with
global headcount reductions that were initiated in the first quarter of
2009 The first quarter 2009 restructuring charges were primarily cash
items. The Company expects to take between $5 and $6 million in
additional restructuring charges in 2009 related to the Siloam Springs
relocation and other severance costs related to reductions in our global work
force. Approximately 2/3 of these remaining restructuring costs will
be noncash.
Selling,
General and Administrative (“SG&A”)
Selling,
general, and administrative (SG&A) expenses decreased by $1.9 million in the
first quarter of 2009 compared to first quarter last year. The acquisitions,
primarily of Vertical (Italy), added approximately $0.7 million to SG&A for
the first quarter of 2009. SG&A expenses before the impact of acquisitions
were lower by $2.6 million which partially offset the impact of lower sales
volumes.
Operating
Income
Operating
income was $7.9 million in the first quarter of 2009, down $7.2 million from
$15.1 million, a record for the first quarter 2008.
|
|
|
Q1
2009
|
|
|
|
Q1
2008
|
|
|
|
2009
v 2008
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$
|
9.6
|
|
|
$
|
15.2
|
|
|
$
|
(5.6
|
)
|
Fueling
Systems
|
|
$
|
7.0
|
|
|
$
|
9.0
|
|
|
$
|
(2.0
|
)
|
Other
|
|
$
|
(8.7
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
0.4
|
|
Consolidated
|
|
$
|
7.9
|
|
|
$
|
15.1
|
|
|
$
|
(7.2
|
)
|
Operating
Income-Water Systems
Operating
margins for Water Systems in the first quarter of 2009 declined to 8.4 percent
of sales versus 11.1 percent in the first quarter 2008. Operating margins for
Water Systems were down in the first quarter primarily attributable to the year
over year sales decline and restructuring expenses.
Operating
Income-Fueling Systems
Operating
margins in Fueling Systems were 19.8 percent of sales in the first quarter 2009
versus 22.9 percent of sales in the first quarter 2008, primarily attributable
to lost leverage on the SG&A expenses from lower sales.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. General and administrative expense decreases were
consistent with management’s fixed cost reduction initiatives started in the
fourth quarter of 2008
Interest
Expense
Interest
expense for the first quarter of 2009 was $2.4 million, a decrease of $0.2
million, compared to 2008 first quarter interest expense of $2.6
million.
Other
Income or Expense
Included
in other income for the first quarter of 2009 and 2008 was interest income of
$0.3 million and $0.4 million, respectively, primarily derived from the
investment of cash balances in short-term U.S. treasury and agency
securities. Also included in other income for the first quarter of
2008 was income from equity investments of $0.2 million.
Foreign
Exchange
Foreign
currency-based transactions produced a gain for the first quarter of 2009 of
about $0.1 million primarily due to euro rate changes relative to other
currencies in Europe. Foreign currency-based transactions produced a loss
for the same quarter of 2008 of $0.3 million primarily due to euro rate changes
relative to other currencies in Europe and the weakening U.S.
dollar.
Income
Taxes
The
provision for income taxes in the first quarter of 2009 and 2008 was $1.8
million and $4.4 million, respectively. The effective tax rate for the first
quarter of 2009 was 30.8 percent after the adjustment for one time credits and
tax benefits during the quarter. The projected effective tax rate for the
balance of 2009 is 34.3 percent. The effective tax rate differs from
the United States statutory rate of 35 percent, generally due to foreign income
exclusion and due to the effects of state and foreign income taxes, net of
federal tax benefits.
Net
Income
Net
income for the first quarter of 2009 was $4.1 million compared to 2008 first
quarter net income of $8.3 million. Net income attributable to
Franklin Electric Co., Inc. for the first quarter of 2009 was $3.8 million, or
$0.17 per diluted share, compared to 2008 first quarter net income attributable
to Franklin Electric Co., Inc. of $8.1 million or $0.35 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”) and its amended and restated uncommitted note purchase
and private shelf agreement (the “Prudential Agreement”). The Company
has no scheduled principal payments on the Prudential Agreement until
2015. As of April 4, 2009 the Company had $62.0 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 change or similar provisions that
would accelerate the maturity of amounts drawn under either agreement. The
Agreement and Prudential Agreement contain various customary conditions and
covenants, which limit, among other things, borrowings, interest coverage, loans
or advances and investments. As of April 4, 2009, the Company was in
compliance with all covenants and, based on current cash projections, has the
intentions to pay off the outstanding Agreement balance within
2009.
Net cash
out flows from operating activities were $1.0 million in first quarter 2009
compared to $25.3 million in first quarter 2008. Inventory was a $3.7
million net source of cash in the period. The
amount of contributions to be made to the funded employee benefit plans during
calendar year 2009 will be finalized by September 15, 2009 based upon the Plans’
year end valuation at December 31, 2008 and the desired funding level to be
achieved as of December 31, 2009.
The
Company continued its focus on liquidity in the quarter and used $24.3 million
less cash in operations than it did in the first quarter 2008.
Net cash
used in investing activities was $19.9 million in first quarter 2009 compared to
$42.7 million in first quarter 2008. The 2009 activities were
primarily related to $16.8 million, net of cash acquired, used to acquire
Vertical S.p.A on January 16, 2009. The acquisition was funded
solely with cash. During the first quarter 2008, the Company acquired
Industrias Schneider for an aggregate purchase price of $35.5 million, net of
cash acquired.
Net cash
provided by financing activities of $19.9 million in first quarter 2009 was
primarily related to proceeds from new debt incurred, net of repayments to
date. Also included was the payment of $2.9 million in dividends to
its shareholders. Net cash provided by financing activities of $34.5
million in first quarter 2008 was primarily related to proceeds from new debt
incurred, net of repayments to date, the repurchase of approximately 235,000
shares of its common stock for $7.8 million, and the payment of $2.8 million in
dividends to its shareholders.
FACTORS THAT MAY AFFECT
FUTURE RESULTS
This
quarterly report on Form 10-Q 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,” “project,” “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 the Company’s Securities and Exchange Commission filings, included
in Part 1, Item 1A of the Company’s Annual Report on Form 10K for the fiscal
year ended January 4, 2009, and in Exhibit 99.1 thereto. Any
forward-looking statements included in this Form 10-Q are based upon information
currently available. The Company does not assume any obligation to
update any forward-looking information.
ITEM 4. CONTROLS AND
PROCEDURES
As of the
end of the period covered by this report (the “Evaluation Date”), the Company
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including the Company’s Chief Executive Officer and
the Company’s Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Company’s
Chief Executive Officer and the Company’s Chief Financial Officer concluded
that, as of the Evaluation Date, the Company’s disclosure controls and
procedures were effective in bringing to their attention, on a timely basis,
material information relating to the Company to be included in the Company’s
periodic filings under the Exchange Act.
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rules 13a–15 and 15d–15
under the Exchange Act during the first fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Company’s internal
control over financial reporting.
PART II. OTHER
INFORMATION
ITEM 1. 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 (“NOV”) 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 1A. RISK
FACTORS
There
were no material changes to the risk factors set forth in Part 1, Item 1A, in
the Company’s annual report on Form 10-K for the fiscal year ended January 3,
2009. Additional risks and uncertainties, not presently known to the
Company or currently deemed immaterial, could negatively impact the Company’s
results of operations or financial condition in the future.
ITEM 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
(c)
|
Issuer
Repurchases of Equity Securities
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In April
2007, the Company’s Board of Directors unanimously approved a resolution to
increase the number of shares remaining for repurchase from 628,692 to 2,300,000
shares. There is no expiration date for the plan. During the first quarter of
2009, the Company did not repurchase shares under this plan. The
maximum number of shares that may still be purchased under the Company plan is
1,877,400.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
The 2009
Annual Meeting of Shareholders of the Company was held on April 24, 2009
to: 1) elect two directors for terms expiring at the 2012 Annual
Meeting of Shareholders; 2) approve the amendment and restatement of the
Franklin Electric Co., Inc. Stock Plan; and 3) ratify the appointment of
Deloitte & Touche LLP as the Company’s independent registered public
accounting firm for the 2009 fiscal year.
All of
the matters submitted to a vote of shareholders were approved, as shown by the
following voting results.
1)
Election of Directors
|
For
|
Withhold Authority
|
|
|
|
|
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Jerome
D. Brady
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17,998,826
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3,128,599
|
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David
M. Wathen
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16,794,285
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4,333,140
|
|
|
|
2)
Approval of the amendment and restatement of the Franklin Electric Co.,
Inc. Stock Plan.
|
|
|
|
For
|
Against
|
Abstain
|
Broker Non-Votes
|
14,588,972
|
4,532,723
|
10,759
|
1,994,971
|
|
|
3)
Ratification of Deloitte & Touche LLP as the Company’s independent
registered public accounting firm for the 2009 fiscal
year.
|
|
|
|
For
|
Against
|
Abstain
|
|
21,026,670
|
90,397
|
10,358
|
|
|
|
Total
shares represented at the Annual Meeting in person or by proxy were 21,127,425
of a total of 23,018,453 shares outstanding as of the February 20, 2009 record
date. This represented 91.78 percent of Company common stock and
constituted a quorum.
ITEM 6.
EXHIBITS
See the Exhibit Index located on page
26.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
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|
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FRANKLIN ELECTRIC CO.,
INC.
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|
|
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Registrant
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|
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Date:
May 6, 2009
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|
By
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/s/ R. Scott Trumbull
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|
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R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive
Officer)
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Date:
May 6, 2009
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By
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/s/ John J. Haines
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John
J. Haines, Vice President and Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
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FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE
FIRST QUARTER ENDED APRIL 4, 2009
|
|
|
Number
|
|
Description
|
|
|
|
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10.1 |
|
Amended
and Restated Franklin Electric Co., Inc. Stock Plan (incorporated herein
by reference to the Company’s 2009 Proxy Statement for the Annual Meeting
held on April 24, 2009)
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|
|
|
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10.2 |
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Form
of Non-Qualified Stock Option Agreement for Non-Director Employees (filed
herewith)*
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|
|
|
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10.3 |
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Form
of Non-Qualified Stock Option Agreement for Director Employees (filed
herewith)*
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|
|
|
|
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10.4 |
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Form
of Restricted Stock Agreement for Non-Director Employees (filed
herewith)*
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|
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31.1 |
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2 |
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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|
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32.1 |
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Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
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32.2 |
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Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of
2002
|