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 October 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
|
(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)
during the preceding 12 months.
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.:
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
|
|
October 3, 2009
|
$.10
par value
|
|
23,105,808
shares
|
FRANKLIN
ELECTRIC CO., INC.
TABLE OF
CONTENTS
|
|
|
Page
|
PART I.
|
FINANCIAL INFORMATION
|
|
Number
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income for the Third Quarter and Nine
Months Ended October 3, 2009 and September 27,
2008
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of October 3, 2009 and January 3,
2009
|
|
5-6
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended October 3,
2009 and September 27, 2008
|
|
7
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
8-18
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
19-25
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
25
|
|
|
|
|
PART II.
|
OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
25
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
26
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
26
|
|
|
|
|
Item
6.
|
Exhibits
|
|
26
|
|
|
|
|
Signatures
|
|
|
27
|
|
|
|
|
Exhibit Index
|
|
|
28
|
|
|
|
|
Exhibits
|
|
|
29-32
|
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
October
3,
|
|
|
September
27,
|
|
|
October
3,
|
|
|
September
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
166,007 |
|
|
$ |
215,815 |
|
|
$ |
481,082 |
|
|
$ |
593,521 |
|
Cost
of sales
|
|
|
115,764 |
|
|
|
149,347 |
|
|
|
338,479 |
|
|
|
410,877 |
|
Gross
profit
|
|
|
50,243 |
|
|
|
66,468 |
|
|
|
142,603 |
|
|
|
182,644 |
|
Selling,
general and administrative expenses
|
|
|
33,817 |
|
|
|
38,875 |
|
|
|
102,898 |
|
|
|
113,460 |
|
Restructuring
expenses
|
|
|
964 |
|
|
|
- |
|
|
|
5,610 |
|
|
|
82 |
|
Operating
income
|
|
|
15,462 |
|
|
|
27,593 |
|
|
|
34,095 |
|
|
|
69,102 |
|
Interest
expense
|
|
|
(2,471 |
) |
|
|
(2,684 |
) |
|
|
(7,245 |
) |
|
|
(8,088 |
) |
Other
income
|
|
|
445 |
|
|
|
747 |
|
|
|
978 |
|
|
|
1,202 |
|
Foreign
exchange gain/(loss)
|
|
|
(520 |
) |
|
|
436 |
|
|
|
(143 |
) |
|
|
45 |
|
Income
before income taxes
|
|
|
12,916 |
|
|
|
26,092 |
|
|
|
27,685 |
|
|
|
62,261 |
|
Income
taxes
|
|
|
4,094 |
|
|
|
8,711 |
|
|
|
8,801 |
|
|
|
21,153 |
|
Net
income
|
|
|
8,822 |
|
|
|
17,381 |
|
|
|
18,884 |
|
|
|
41,108 |
|
Less:
Net income attributable to noncontrolling interests
|
|
|
(190 |
) |
|
|
(121 |
) |
|
|
(579 |
) |
|
|
(419 |
) |
Net
income attributable to Franklin Electric Co., Inc.
|
|
$ |
8,632 |
|
|
$ |
17,260 |
|
|
$ |
18,305 |
|
|
$ |
40,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$ |
0.37 |
|
|
$ |
0.75 |
|
|
$ |
0.79 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings
|
|
$ |
0.37 |
|
|
$ |
0.74 |
|
|
$ |
0.79 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
$ |
0.38 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Financial Accounting Standards Board Accounting Standards Codification (“ASC”)
Topic 810.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In
thousands, except per share amounts)
|
|
October
3,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
71,229 |
|
|
$ |
46,934 |
|
Receivables,
less allowances of $2,622 and $2,091, respectively
|
|
|
75,287 |
|
|
|
68,048 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
54,227 |
|
|
|
67,785 |
|
Work-in-process
|
|
|
13,795 |
|
|
|
15,204 |
|
Finished
goods
|
|
|
85,646 |
|
|
|
105,496 |
|
LIFO
reserve
|
|
|
(16,037 |
) |
|
|
(18,612 |
) |
|
|
|
137,631 |
|
|
|
169,873 |
|
Deferred
income taxes
|
|
|
17,295 |
|
|
|
16,511 |
|
Other
current assets
|
|
|
10,943 |
|
|
|
16,294 |
|
Total
current assets
|
|
|
312,385 |
|
|
|
317,660 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
and buildings
|
|
|
83,283 |
|
|
|
79,284 |
|
Machinery
and equipment
|
|
|
187,625 |
|
|
|
172,706 |
|
Furniture
and fixtures
|
|
|
15,194 |
|
|
|
13,807 |
|
Other
|
|
|
5,739 |
|
|
|
11,556 |
|
|
|
|
291,841 |
|
|
|
277,353 |
|
Allowance
for depreciation
|
|
|
(144,888 |
) |
|
|
(132,818 |
) |
|
|
|
146,953 |
|
|
|
144,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
89,839 |
|
|
|
75,737 |
|
Goodwill
|
|
|
156,877 |
|
|
|
148,082 |
|
Other
assets
|
|
|
8,442 |
|
|
|
8,043 |
|
Total
assets
|
|
$ |
714,496 |
|
|
$ |
694,057 |
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Financial Accounting Standards Board Accounting Standards Codification (“ASC”)
Topic 810.
(In
thousands, except per share amounts)
|
|
October
3,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
32,933 |
|
|
$ |
24,505 |
|
Accrued
liabilities
|
|
|
45,776 |
|
|
|
47,991 |
|
Income
taxes, net
|
|
|
5,361 |
|
|
|
8,239 |
|
Current
maturities of long-term debt and short-term borrowings
|
|
|
688 |
|
|
|
677 |
|
Total
current liabilities
|
|
|
84,758 |
|
|
|
81,412 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
151,776 |
|
|
|
185,528 |
|
Deferred
income taxes
|
|
|
6,945 |
|
|
|
4,161 |
|
Employee
benefit plan obligations
|
|
|
67,014 |
|
|
|
69,142 |
|
Other
long-term liabilities
|
|
|
7,865 |
|
|
|
3,707 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Redeemable
noncontrolling interest
|
|
|
6,825 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Shareowners’
equity:
|
|
|
|
|
|
|
|
|
Common
shares (65,000 shares authorized, $.10 par value)
|
|
|
|
|
|
|
|
|
outstanding
(23,106 and 23,018, respectively)
|
|
|
2,311 |
|
|
|
2,302 |
|
Additional
capital
|
|
|
117,920 |
|
|
|
113,397 |
|
Retained
earnings
|
|
|
280,674 |
|
|
|
271,274 |
|
Accumulated
other comprehensive loss
|
|
|
(13,008 |
) |
|
|
(38,036 |
) |
Total
shareowners’ equity
|
|
|
387,897 |
|
|
|
348,937 |
|
Noncontrolling
interest
|
|
|
1,416 |
|
|
|
1,170 |
|
Total
Equity
|
|
|
389,313 |
|
|
|
350,107 |
|
Total
liabilities and equity
|
|
$ |
714,496 |
|
|
$ |
694,057 |
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Financial Accounting Standards Board Accounting Standards Codification (“ASC”)
Topic 810.
FRANKLIN
ELECTRIC CO., INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Nine Months Ended
|
|
|
|
October
3,
|
|
|
September
27,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,884 |
|
|
$ |
41,108 |
|
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,778 |
|
|
|
18,349 |
|
Stock-based
compensation
|
|
|
4,189 |
|
|
|
2,940 |
|
Deferred
income taxes
|
|
|
1,493 |
|
|
|
1,814 |
|
Loss
on disposals of plant and equipment
|
|
|
2,940 |
|
|
|
76 |
|
Excess
tax from share-based compensation arrangements
|
|
|
(61 |
) |
|
|
(804 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
3,196 |
|
|
|
(31,132 |
) |
Inventories
|
|
|
39,988 |
|
|
|
(5,972 |
) |
Accounts
payable and other accrued liabilities
|
|
|
(1,706 |
) |
|
|
7,938 |
|
Income
taxes, net
|
|
|
6,904 |
|
|
|
4,379 |
|
Employee
benefit plan obligations
|
|
|
(1,755 |
) |
|
|
(3,479 |
) |
Other,
net
|
|
|
(4,561 |
) |
|
|
(7,395 |
) |
Net
cash flows from operating activities
|
|
|
88,289 |
|
|
|
27,822 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(8,215 |
) |
|
|
(17,781 |
) |
Proceeds
from sale of property, plant and equipment
|
|
|
64 |
|
|
|
10 |
|
Additions
to other assets
|
|
|
- |
|
|
|
(749 |
) |
Purchases
of securities
|
|
|
- |
|
|
|
(9,000 |
) |
Proceeds
from sale of securities
|
|
|
- |
|
|
|
9,000 |
|
Cash
paid for acquisitions, net of cash acquired
|
|
|
(16,767 |
) |
|
|
(38,392 |
) |
Net
cash flows from investing activities
|
|
|
(24,918 |
) |
|
|
(56,912 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from short-term debt
|
|
|
28,000 |
|
|
|
70,000 |
|
Repayment
of short-term debt
|
|
|
(63,000 |
) |
|
|
(30,019 |
) |
Repayment
of long-term debt
|
|
|
(734 |
) |
|
|
(1,087 |
) |
Proceeds
from issuance of common stock
|
|
|
282 |
|
|
|
3,127 |
|
Excess
tax from share-based compensation arrangements
|
|
|
61 |
|
|
|
804 |
|
Purchases
of common stock
|
|
|
- |
|
|
|
(7,813 |
) |
Dividends
paid
|
|
|
(9,002 |
) |
|
|
(8,494 |
) |
Net
cash flows from financing activities
|
|
|
(44,393 |
) |
|
|
26,518 |
|
Effect
of exchange rate changes on cash
|
|
|
5,317 |
|
|
|
(1,853 |
) |
Net
change in cash and equivalents
|
|
|
24,295 |
|
|
|
(4,425 |
) |
Cash
and equivalents at beginning of period
|
|
|
46,934 |
|
|
|
65,252 |
|
Cash
and equivalents at end of period
|
|
$ |
71,229 |
|
|
$ |
60,827 |
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
6,242 |
|
|
$ |
14,783 |
|
Cash
paid for interest
|
|
$ |
7,254 |
|
|
$ |
8,362 |
|
|
|
|
|
|
|
|
|
|
Non-cash
items:
|
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment, not yet paid
|
|
$ |
25 |
|
|
$ |
341 |
|
Payable
to seller of Healy Systems, Inc.
|
|
$ |
1,439 |
|
|
$ |
2,443 |
|
Payable
to seller of Western Pumps, LLC
|
|
$ |
77 |
|
|
$ |
- |
|
Capital
equipment lease
|
|
$ |
- |
|
|
$ |
1,039 |
|
See Notes
to Condensed Consolidated Financial Statements.
See Note
2 for discussion of financial presentation changes with the adoption of
Financial Accounting Standards Board Accounting Standards Codification (“ASC”)
Topic 810.
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 October 3, 2009 and for the
third quarter and nine months ended October 3, 2009 and September 27, 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 third quarter and nine
months ended October 3, 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 Franklin Electric's critical accounting
policies, refer to the consolidated financial statements and notes thereto
included in Franklin Electric Co., Inc.'s Annual Report on Form 10-K for the
year ended January 3, 2009.
2. ACCOUNTING
PRONOUNCEMENTS
The Financial Instruments Topic
825 of the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) increases the frequency of fair value disclosures for
financial instruments within the scope of Topic 825 to a quarterly basis rather
than annually. This guidance is effective for interim periods ending after
June 15, 2009. The Company’s adoption of this guidance did not
have a material impact on the Company’s consolidated financial statements,
except for the disclosure requirements.
FASB ASC
810, Consolidation,
required presentation changes to the Company’s 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.
FASB ASC
105, Generally Accepted
Accounting Principles, identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States.
The guidance is effective for interim periods ending after September 15,
2009. The Company’s adoption of this statement in the third quarter
did not have a material effect on the Company’s consolidated financial position,
results of operations or cash flows; however it impacts all references to
authoritative accounting literature.
FASB ASC 855, Subsequent
Events, establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date, but before financial statements are issued or are
available to be issued. The guidance is effective for interim periods ending
after June 15, 2009. The adoption of this statement did not have a material
effect on the Company’s consolidated financial position or results of
operations. The Company evaluated all events or transactions that
occurred after October 3, through November 4, 2009, the date it issued these
financial statements. During this period, the Company did not have any material
recognizable subsequent events.
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
goodwill of $3.2 million relates primarily to the new product line of stainless
steel pumps and components from which the Company will benefit. 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
|
|
$ |
13.4 |
|
Property,
plant and equipment
|
|
|
6.3 |
|
Intangible
assets
|
|
|
11.6 |
|
Goodwill
|
|
|
3.2 |
|
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 were finalized in the third quarter
2009. 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.
There
were no acquisition-related costs included in selling, general and
administrative expenses in the Company’s statement of income for the third
quarters ended October 3, 2009 and September 27, 2008, respectively, and $0.3
million and zero for the nine months ended October 3, 2009 and September 27,
2008, respectively.
4. FAIR
VALUE MEASUREMENTS
FASB ASC
Topic 825, Financial
Instruments, 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. Disclosures about instruments measured at fair
value were expanded and 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 was established. 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 October 3, 2009, and January
3, 2009, assets measured at fair value on a recurring basis were as
follows:
(in
millions)
|
|
October 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
|
|
$ |
12.4 |
|
|
$ |
12.4 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
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. 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 October 3, 2009, and January 3,
2009, respectively. The Company’s proportionate share of Pioneer
Pump, Inc. earnings, included in “Other income/(expense)” in the Company’s
statements of income was zero and $0.1 million for the third quarter ended
October 3, 2009 and September 27, 2008, respectively, and $0.1 and $0.5 million
for the nine months ended October 3, 2009 and September 27, 2008,
respectively.
6.
INTANGIBLE ASSETS AND GOODWILL
The
carrying amounts of the Company’s intangible assets are as follows:
(In
millions)
|
|
October 3, 2009
|
|
|
January 3, 2009
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$ |
8.0 |
|
|
$ |
(4.2 |
) |
|
$ |
6.7 |
|
|
$ |
(3.8 |
) |
Supply
agreements
|
|
|
7.2 |
|
|
|
(6.1 |
) |
|
|
7.2 |
|
|
|
(5.7 |
) |
Technology
|
|
|
7.0 |
|
|
|
(1.5 |
) |
|
|
7.0 |
|
|
|
(1.2 |
) |
Customer
relationships
|
|
|
68.1 |
|
|
|
(8.6 |
) |
|
|
54.1 |
|
|
|
(5.6 |
) |
Other
|
|
|
2.1 |
|
|
|
(2.0 |
) |
|
|
2.0 |
|
|
|
(1.9 |
) |
Total
|
|
$ |
92.4 |
|
|
$ |
(22.4 |
) |
|
$ |
77.0 |
|
|
$ |
(18.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
names
|
|
|
19.8 |
|
|
|
- |
|
|
|
16.9 |
|
|
|
- |
|
Total
intangibles
|
|
$ |
112.2 |
|
|
$ |
(22.4 |
) |
|
$ |
93.9 |
|
|
$ |
(18.2 |
) |
Amortization
expense related to intangible assets for the third quarter ended October 3, 2009
and September 27, 2008 was $1.2 million and $1.1 million, respectively, and for
the nine months ended October 3, 2009 and September 27, 2008, $3.7 million and
$3.5 million, respectively. Increases are related to
acquisitions.
Amortization
expense is projected as follows:
(In
millions)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
|
$ |
5.1 |
|
|
$ |
5.0 |
|
|
$ |
4.9 |
|
|
$ |
4.5 |
|
|
$ |
4.2 |
|
The
changes in the carrying amount of goodwill for the nine months ended October 3,
2009, are as follows:
(In
millions)
|
|
Water
|
|
|
Fueling
|
|
|
|
|
|
|
Systems
|
|
|
Systems
|
|
|
Consolidated
|
|
Balance
as of January 3, 2009
|
|
$ |
96.5 |
|
|
$ |
51.6 |
|
|
$ |
148.1 |
|
Acquired
|
|
|
3.2 |
|
|
|
- |
|
|
|
3.2 |
|
Adjustments
to prior year acquisitions
|
|
|
(0.5 |
) |
|
|
1.5 |
|
|
|
1.0 |
|
Foreign
currency translation
|
|
|
4.6 |
|
|
|
- |
|
|
|
4.6 |
|
Balance
as of October 3, 2009
|
|
$ |
103.8 |
|
|
$ |
53.1 |
|
|
$ |
156.9 |
|
7.
EMPLOYEE BENEFIT PLANS
Defined
Benefit Plans – As of October 3, 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 the third
quarter and nine months ended October 3, 2009 and September 27,
2008:
(In
millions)
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
3,
|
|
|
September
27,
|
|
|
October
3,
|
|
|
September
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
1.1 |
|
|
$ |
0.9 |
|
|
$ |
2.5 |
|
|
$ |
2.8 |
|
Interest
cost
|
|
|
2.7 |
|
|
|
2.3 |
|
|
|
7.4 |
|
|
|
6.8 |
|
Expected
return on assets
|
|
|
(3.0 |
) |
|
|
(2.7 |
) |
|
|
(8.1 |
) |
|
|
(8.1 |
) |
Loss
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Prior
service cost
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.5 |
|
Settlement
cost
|
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
0.4 |
|
Total
net periodic benefit cost
|
|
$ |
1.0 |
|
|
$ |
0.9 |
|
|
$ |
2.3 |
|
|
$ |
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth other benefit cost for the third quarter and nine
months ended October 3, 2009 and September 27, 2008:
(In
millions)
|
|
Other Benefits
|
|
|
Other Benefits
|
|
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
October
3,
|
|
|
September
27,
|
|
|
October
3,
|
|
|
September
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
cost
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
Obligation/asset
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.1 |
) |
Total
net periodic benefit cost
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
0.2 |
|
|
$ |
(0.2 |
) |
Through
October 3, 2009, the Company made contributions to the plans of $5.7
million. The amount of contributions to be made to the Plan during
calendar year 2009 was finalized September 15, 2009 based upon the Plan’s year
end valuation at December 31, 2008 and the desired funding level to be achieved
as of December 31, 2008.
8. 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.
9.
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 and $1.4 million for foreign tax liabilities based on evaluations
during the first half of 2009. In the third quarter 2009, the
unrecognized tax benefits were further reduced $0.1 million for federal and
state income tax liabilities. The Company had gross unrecognized tax
benefits, excluding accrued tax and penalties, of $5.1 million as of October 3,
2009. The majority of the unrecognized tax benefits, including the
foreign tax liability noted above, are related to acquisitions occurring prior
to 2009 for which indemnification was provided for in the respective purchase
agreements. The effect of these tax benefits on the effective tax
rate is considered insignificant. For the balance of unrecognized tax
benefits, 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 $0.2 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 October 3, 2009 and as of January 3, 2009 was approximately $0.4
million and $0.4 million, respectively. Interest and penalties
recorded through third quarter of 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 2006.
10.
DEBT
Debt
consisted of the following:
(In
millions)
|
|
October
3,
|
|
|
January
3,
|
|
|
|
2009
|
|
|
2009
|
|
Prudential
Agreement - 5.79 percent
|
|
$ |
150.0 |
|
|
$ |
150.0 |
|
Capital
leases
|
|
|
1.5 |
|
|
|
1.2 |
|
Other
debt
|
|
|
1.0 |
|
|
|
- |
|
Agreement
(i.e. revolving credit) - average rate for third quarter 2009 was 0.79
percent based on the London Interbank Offered Rates plus
an
|
|
|
|
|
|
|
|
|
interest
spread
|
|
|
- |
|
|
|
35.0 |
|
|
|
|
152.5 |
|
|
|
186.2 |
|
Less
current maturities
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
Long-term
debt
|
|
$ |
151.8 |
|
|
$ |
185.5 |
|
The
estimated fair value of long term debt was $144.3 million and $130.4 million at
October 3, 2009 and January 3, 2009, 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.
As of
October 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
|
|
$ |
151.0 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
0.2 |
|
|
$ |
- |
|
|
$ |
150.0 |
|
Capital
leases
|
|
|
1.5 |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
$ |
152.5 |
|
|
$ |
0.7 |
|
|
$ |
0.6 |
|
|
$ |
0.6 |
|
|
$ |
0.5 |
|
|
$ |
0.1 |
|
|
$ |
150.0 |
|
11.
EARNINGS PER SHARE
Following
is the computation of basic and diluted earnings per share:
(In
millions, except per share amounts)
|
|
Third Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
October
3,
|
|
|
September
27,
|
|
|
October
3,
|
|
|
September
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Franklin Electric Co., Inc.
|
|
$ |
8.6 |
|
|
$ |
17.3 |
|
|
$ |
18.3 |
|
|
$ |
40.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
23.1 |
|
|
|
23.0 |
|
|
|
23.1 |
|
|
|
22.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
and director incentive stock options and awards
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted average common shares
|
|
|
23.4 |
|
|
|
23.3 |
|
|
|
23.3 |
|
|
|
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.37 |
|
|
$ |
0.75 |
|
|
$ |
0.79 |
|
|
$ |
1.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.37 |
|
|
$ |
0.74 |
|
|
$ |
0.79 |
|
|
$ |
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options
|
|
|
0.8 |
|
|
|
0.4 |
|
|
|
1.1 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive
stock options price range – low
|
|
$ |
32.19 |
|
|
$ |
32.19 |
|
|
$ |
29.95 |
|
|
$ |
32.19 |
|
Anti-dilutive
stock options price range – high
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
|
$ |
48.87 |
|
12.
EQUITY ROLL FORWARD
The
schedule below sets forth equity changes in the nine months ended October 3,
2009:
(In
thousands)
Description
|
|
Common
|
|
|
Additional
Paid In Capital
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
18,305 |
|
|
|
|
|
|
|
|
|
|
|
385 |
|
|
|
18,690 |
|
|
|
194 |
|
Dividends
on common stock
|
|
|
|
|
|
|
|
|
|
|
(8,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,652 |
) |
|
|
|
|
Common
stock issued
|
|
|
10 |
|
|
|
1,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,651 |
|
|
|
|
|
Common
stock repurchased or received for stock options exercised
|
|
|
(1 |
) |
|
|
- |
|
|
|
(253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254 |
) |
|
|
|
|
Performance
stock
|
|
|
- |
|
|
|
2,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,821 |
|
|
|
|
|
Tax
benefit of
stock
options
exercised
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
Noncontrolling
dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(350 |
) |
|
|
(350 |
) |
|
|
|
|
Adjustment
to acquired fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,631 |
|
Currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,431 |
|
|
|
211 |
|
|
|
24,642 |
|
|
|
|
|
Pension
liability, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
597 |
|
|
|
|
|
Balance
- 10/03/09
|
|
$ |
2,311 |
|
|
$ |
117,920 |
|
|
$ |
280,674 |
|
|
$ |
(31,698 |
) |
|
$ |
18,690 |
|
|
$ |
1,416 |
|
|
$ |
389,313 |
|
|
$ |
6,825 |
|
13. OTHER
COMPREHENSIVE INCOME
Comprehensive
income is as follows:
(In
millions)
|
|
Third Quarter
Ended
|
|
|
Nine Months
Ended
|
|
|
|
Oct.
3,
|
|
|
Sept.
27,
|
|
|
Oct.
3,
|
|
|
Sept.
27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
8.8 |
|
|
$ |
17.4 |
|
|
$ |
18.9 |
|
|
$ |
41.1 |
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
10.4 |
|
|
|
(16.4 |
) |
|
|
24.6 |
|
|
|
(5.9 |
) |
Pension
liability adjustment, net of tax
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
0.7 |
|
Total
comprehensive income
|
|
|
19.3 |
|
|
|
1.2 |
|
|
|
44.1 |
|
|
|
35.9 |
|
Less:
Comprehensive income attributable to noncontrolling
interest
|
|
|
(0.2 |
) |
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
(0.4 |
) |
Comprehensive
income attributable to Franklin Electric Co., Inc., net of
tax
|
|
$ |
19.1 |
|
|
$ |
1.1 |
|
|
$ |
43.5 |
|
|
$ |
35.5 |
|
14. SEGMENT
INFORMATION
Financial
information by reportable business segment is included in the following
summary:
(In
millions)
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
October
3,
2009
|
September
27,
2008
|
|
October 3,
2009
|
September
27,
2008
|
|
Net
sales to external customers
|
Water
Systems
|
$137.4
|
$154.6
|
|
$386.3
|
$448.7
|
Fueling
Systems
|
28.6
|
61.2
|
|
94.8
|
144.8
|
Other
|
-
|
-
|
|
-
|
-
|
Consolidated
|
$166.0
|
$215.8
|
|
$481.1
|
$593.5
|
|
|
|
|
|
|
|
Third
Quarter Ended
|
|
Nine
Months Ended
|
|
October
3,
2009
|
September
27,
2008
|
|
October
3,
2009
|
September
27, 2008
|
|
Operating
income (loss)
|
Water
Systems
|
$20.8
|
$18.7
|
|
$45.9
|
$60.3
|
Fueling
Systems
|
3.9
|
19.3
|
|
15.8
|
39.2
|
Other
|
(9.2)
|
(10.4)
|
|
(27.6)
|
(30.4)
|
Consolidated
|
$15.5
|
$27.6
|
|
$34.1
|
$69.1
|
|
|
|
|
|
October
3,
2009
|
January
3,
2009
|
|
|
|
|
|
Total
assets
|
|
|
|
|
Water
Systems
|
$444.3
|
$397.4
|
|
|
|
|
Fueling
Systems
|
199.4
|
219.7
|
|
|
|
|
Other
|
70.8
|
76.9
|
|
|
|
|
Consolidated
|
$714.5
|
$694.0
|
|
|
|
|
|
|
|
|
|
|
|
Cash is
the major asset group in “Other” of total assets. Prior year
presentation has been reclassified to conform to current year segment
presentation.
15. CONTINGENCIES
AND COMMITMENTS
At
October 3, 2009, the Company had $2.9 million of commitments primarily for the
purchase of machinery and equipment and building expansions.
The
Company provides warranties on most of its products. The warranty terms vary but
are generally two years from date of manufacture or one year from date of
installation. In 2007, the Company began offering an extended warranty program
to certain Water Systems customers which will provide warranty coverage up to
five years from the date of manufacture. Provisions for estimated expenses
related to product warranty are made at the time products are sold or when
specific warranty issues are identified. These estimates are established using
historical information about the nature, frequency, and average cost of warranty
claims and expected customer returns. The Company actively studies trends of
warranty claims and takes action to improve product quality and minimize
warranty claims. The Company believes that the warranty reserve is appropriate;
however, actual claims incurred could differ from the original estimates,
requiring adjustments to the reserve.
The
changes in the carrying amount of the warranty accrual, as recorded in “Accrued
liabilities” in the Company’s balance sheet for the nine months ended October 3,
2009 are as follows:
(In
millions)
|
|
|
|
|
|
|
|
Balance
as of January 3, 2009
|
|
$ |
9.3 |
|
Accruals
related to product warranties
|
|
|
6.1 |
|
Accruals
related to acquisitions
|
|
|
- |
|
Reductions
for payments made
|
|
|
(7.9 |
) |
Balance
as of October 3, 2009
|
|
$ |
7.5 |
|
16.
SHARE-BASED COMPENSATION
Prior to
March 9, 2009, the Company had 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 (“Original Stock Plan”)
|
|
|
- |
|
Options
|
|
|
1,150,000 |
|
|
|
|
- |
|
Awards
|
|
|
150,000 |
|
During
the first quarter ended April 4, 2009, all remaining authorized shares available
for grant under the Original 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,
subject to shareholder approval. Under the Stock Plan, employees and
non-employee directors may be granted stock options or awards. The Stock Plan
amended and restated the Original Stock Plan 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 as follows:
|
|
Authorized Shares
|
|
Options
|
|
|
1,600,000 |
|
Awards
|
|
|
600,000 |
|
The
Company currently issues new shares from its common stock balance to satisfy
option exercises and stock awards.
Stock Option
Grants
The fair
value of each option award for options granted or vesting 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 nine months ended October 3, 2009 and September
27, 2008 are as follows:
|
|
October 3, 2009
|
|
|
September 27, 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
nine months ended October 3, 2009 and September 27, 2008 follows:
(Shares
in thousands)
|
|
October 3, 2009
|
|
|
September 27, 2008
|
|
Stock Options
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding
beginning of period
|
|
|
1,435 |
|
|
$ |
31.13 |
|
|
|
1,252 |
|
|
$ |
29.99 |
|
Granted
|
|
|
675 |
|
|
|
17.34 |
|
|
|
347 |
|
|
|
32.45 |
|
Exercised
|
|
|
(14 |
) |
|
|
20.27 |
|
|
|
(133 |
) |
|
|
23.51 |
|
Forfeited
|
|
|
(71 |
) |
|
|
27.91 |
|
|
|
(8 |
) |
|
|
37.87 |
|
Outstanding
end of period
|
|
|
2,025 |
|
|
$ |
26.72 |
|
|
|
1,458 |
|
|
$ |
31.12 |
|
Expected
to vest after applying forfeiture rate
|
|
|
2,001 |
|
|
$ |
26.78 |
|
|
|
1,439 |
|
|
$ |
31.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
1,095 |
|
|
$ |
29.39 |
|
|
|
919 |
|
|
$ |
27.64 |
|
A summary
of the weighted average remaining contractual term and aggregate intrinsic value
for the nine months ended October 3, 2009 is as follows:
Stock Options
|
|
Weighted-Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
(000’s)
|
|
Outstanding
end of period
|
|
|
6.37 |
|
|
$ |
9,874 |
|
Expected
to vest after applying forfeiture rate
|
|
|
6.34 |
|
|
$ |
9,692 |
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable end of period
|
|
|
4.15 |
|
|
$ |
3,666 |
|
There
were no options granted during the third quarter 2009. The total intrinsic value
of options exercised during the third quarter ended October 3, 2009 and
September 27, 2008 was $0.2 million and $2.7 million,
respectively. There were no share-based liabilities paid during the
third quarter 2009.
As of
October 3, 2009, there was $5.3 million of total unrecognized compensation cost
related to nonvested options granted under the Plans. That cost is expected to
be recognized over a weighted-average period of 2.76 years.
Stock
Awards
A summary
of the Company’s stock award activity and related information for the nine
months ended October 3, 2009 and September 27, 2008 follows:
(Shares
in thousands)
|
|
October 3, 2009
|
|
|
September 27, 2008
|
|
Nonvested Stock Awards
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant
Date Fair Value
|
|
Nonvested
at beginning of period
|
|
|
62 |
|
|
$ |
44.12 |
|
|
|
61 |
|
|
$ |
45.24 |
|
Awarded
|
|
|
88 |
|
|
|
19.04 |
|
|
|
16 |
|
|
|
36.58 |
|
Vested
|
|
|
(74 |
) |
|
|
18.41 |
|
|
|
(8 |
) |
|
|
40.17 |
|
Forfeited
|
|
|
(4 |
) |
|
|
48.59 |
|
|
|
(1 |
) |
|
|
40.72 |
|
Nonvested
at end of period
|
|
|
72 |
|
|
$ |
39.86 |
|
|
|
68 |
|
|
$ |
43.84 |
|
As of
October 3, 2009, there was $1.0 million of total unrecognized compensation cost
related to nonvested stock awards granted under the Plan. That cost is expected
to be recognized over a weighted-average period of 1.77 years.
17. RESTRUCTURING
During
the nine months ended October 3, 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 largely complete and is
anticipated to reduce manufacturing labor and overhead costs. Other
restructuring expenses incurred in the first nine months 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.
As of
October 3, 2009, the total cost of the rationalization and transfer continued to
be estimated between $6.0 million and $8.0 million.
Costs
incurred in the three months ended October 3, 2009 and nine months ended October
3, 2009, included in the Restructuring expense line of the income statement, are
as follows:
|
|
Third
Quarter Ended
|
|
|
Nine
Months Ended
|
|
(In
millions)
|
|
October 3, 2009
|
|
|
October 3, 2009
|
|
|
|
|
|
|
|
|
Severance
and other employee assistance costs
|
|
$ |
0.5 |
|
|
$ |
1.8 |
|
Equipment
relocations
|
|
|
0.3 |
|
|
|
0.8 |
|
Asset
write-off
|
|
|
0.2 |
|
|
|
2.9 |
|
Other
|
|
|
0.0 |
|
|
|
0.1 |
|
Total
|
|
$ |
1.0 |
|
|
$ |
5.6 |
|
As of the
nine months ended October 3, 2009 there was $0.3 million in restructuring
reserves primarily for severance. There were no restructuring
reserves as of September 27, 2008.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Third Quarter 2009 VS. Third
Quarter 2008
OVERVIEW
Sales for
the third quarter of 2009 were down from the same quarter last
year. Sales for 2009 continued to trail the prior year in the third
quarter primarily due to the recession, the housing decline and the end of the
sales surge for vapor recovery systems to meet regulatory requirements in
California. Earnings decreased in 2009 due to the lower sales in
Fueling Systems and restructuring expenses. Water Systems, which
represents over 80 percent of the Company’s sales in the third quarter of 2009,
reported a 12 percent increase in operating income before restructuring charges
compared to the third quarter 2008 and improved operating income margins before
restructuring charges of 320 basis points compared to the prior
year. Water Systems operating income after restructuring charges
increased 11 percent compared to the third quarter 2008 and the Water Systems
segment improved operating income margins before restructuring charges of 300
basis points compared to the prior year. The rate of sales decline in
Water Systems has abated sequentially each quarter this year. Cash
flow from operations increased by $60.5 million compared to the first nine
months of 2008 and net debt has been reduced from $141 million at the end of the
third quarter last year to $81 million at the end of the third quarter
2009.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
Q3
2009
|
|
|
|
Q3
2008
|
|
|
|
2009
v 2008
|
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$
|
137.4
|
|
|
$
|
154.6
|
|
|
$
|
(17.2
|
)
|
Fueling
Systems
|
|
$
|
28.6
|
|
|
$
|
61.2
|
|
|
$
|
(32.6
|
)
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
|
|
$
|
166.0
|
|
|
$
|
215.8
|
|
|
$
|
(49.8
|
)
|
Third
quarter sales were $166.0 million, down $49.8 million or 23 percent compared to
$215.8 million in 2008. Sales from businesses acquired during the
last 12 months were $6.5 million or 3 percent. Sales revenue
decreased by $5.5 million or 2 percent in the quarter due to foreign currency
translation. Overall sales declined organically, exclusive of
acquisitions and foreign currency translation, $50.8 million or 24 percent for
the third quarter.
Net
Sales-Water Systems
Water
Systems sales worldwide were $137.4 million, down $17.2 million or 11 percent
for the third quarter of 2009 compared to the same period for 2008. Sales from
businesses acquired during the last 12 months were $6.5
million. Sales revenue decreased by $5.4 million in the quarter due
to foreign currency translation. The organic sales decline, excluding
foreign currency translation and acquisitions, was $18.3 million or 12 percent.
In international markets, Water Systems sales declined organically by 6 percent
as sales gains in Latin America and the Asia/Pacific region were offset by a
decline in Europe and Africa. In the United States and Canada, Water
Systems sales declined organically by 17 percent due primarily to the housing
recession and inventory reductions by distributors.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $28.6 million, a decrease of $32.6 million or 53
percent for the third quarter of 2009 compared to the same period for
2008. The decline was primarily caused by reduced sales of the
Company’s vapor recovery products in the State of California, a reduction of 90
percent compared to the same period in the prior year. In California,
the Company estimates that there are approximately 1,800 stations that have yet
to comply with the mandate out of the total 10,600 stations in the
State. However, the Company believes that many station owners are
waiting to assess the State’s policy on enforcing major fines for non-compliance
and the Company also believes that some station owners are having difficulty
arranging financing. As a result, it is difficult for the Company to
predict with certainty what percentage of the remaining stations will ultimately
comply.
Cost
of Sales
Cost of
sales as a percent of net sales for the third quarter of 2009 and 2008 was 69.7
percent and 69.2 percent, respectively. The Company’s gross profit margin for
the third quarter of 2009 and 2008 was 30.3 percent and 30.8 percent,
respectively. The Company’s consolidated gross profit was $50.2 million
for the third quarter of 2009, down $16.2 million from $66.5
million
in the third quarter of 2008. The gross profit was significantly
impacted by the decline in Fueling Systems sales in the third
quarter. However, due to the improvement of Water Systems gross
profit margin in the quarter, overall gross profit margin only declined by 50
basis points to 30.3 percent.
Restructuring
Expenses
Restructuring
expenses for the third quarter of 2009 were approximately $1.0
million. Restructuring expenses included asset impairments, severance
expenses and manufacturing equipment relocation costs.
Selling,
General and Administrative (“SG&A”)
Selling,
general, and administrative expenses decreased by $5.1 million or 13 percent in
the third quarter of 2009 compared to the third quarter last
year. Acquisitions, primarily Vertical in Italy, added $0.8 million
of SG&A expenses to the Water Systems segment for the third quarter of
2009. SG&A expense as a percent of net sales for the third
quarter of 2009 and 2008 was 20.4 percent and 18.0 percent,
respectively. The increase in percentage terms is due to lower sales
as SG&A decreases, consistent with management’s fixed cost reduction
initiatives, were not as large in percentage terms as the Company’s drop in
sales volume.
Operating
Income
|
|
|
Q3
2009
|
|
|
|
Q3
2008
|
|
|
|
2009
v 2008
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$
|
20.8
|
|
|
$
|
18.7
|
|
|
$
|
2.1
|
|
Fueling
Systems
|
|
$
|
3.9
|
|
|
$
|
19.3
|
|
|
$
|
(15.4
|
)
|
Other
|
|
$
|
(9.2
|
)
|
|
$
|
(10.4
|
)
|
|
$
|
1.2
|
|
Consolidated
|
|
$
|
15.5
|
|
|
$
|
27.6
|
|
|
$
|
(12.1
|
)
|
Operating
income was $15.5 million in the third quarter of 2009 down $12.1 million from
the third quarter of 2008 operating income of $27.6 million.
Operating
Income-Water Systems
Water
Systems operating income was $20.8 million for the third quarter, up $2.1
million or 11 percent versus the third quarter of 2008. Operating
income was reduced by restructuring expenses of $0.2 million in the third
quarter of 2009. Operating margin before restructuring expenses for
Water Systems was 15.3 percent of sales versus 12.1 percent in the third quarter
2008, an improvement of 320 basis points compared to prior year. The
margin improvement was a result of raw material costs reductions, reduced price
promotional activity, fixed cost reductions and the benefit from continued
expansion of production operations in the Linares, Mexico facility.
Operating
Income-Fueling Systems
During
the third quarter last year Fueling Systems achieved record earnings on surging
sales in California as station owners purchased the Company’s products in order
to comply with the State’s vapor control regulations. With
approximately 85 percent of the California conversion complete, Fueling Systems
sales were significantly lower this year. Fueling Systems operating
income was $3.9 million, a decrease of $15.4 million or 80 percent versus third
quarter 2008. Operating income was reduced by restructuring expenses
of $0.1 million in the third quarter of 2009. Operating margin before
restructuring expenses in Fueling Systems was 14.0 percent of sales in the third
quarter 2009 versus 31.5 percent of sales in the third quarter 2008, primarily
attributable to lost leverage on fixed manufacturing and SG&A expenses from
lower sales volumes.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. Decreases in general and administrative expenses were
primarily compensation and other employee-related expense
reductions.
Interest
Expense
Interest
expense for the third quarter of 2009 and 2008 was $2.5 million and $2.7
million, respectively. Interest expense decreased in 2009 due
primarily to less debt.
Other
Income or Expense
Other
Income or Expense for the third quarter of 2009 and 2008 was $0.4 million and
$0.7 million income, respectively. In other income for the third
quarter of 2009 and 2008 was interest income of $0.3 million and $0.6 million,
respectively, primarily derived from the investment of cash balances in
short-term U.S. treasury and agency securities.
Foreign
Exchange
Foreign
currency-based transactions produced a loss for the third quarter of 2009 of
$0.5 million due to differences between the Czech crown to the euro and the
South African rand, Mexican peso and Canadian dollar to the U.S.
dollar. Foreign currency-based transactions produced a gain for the
third quarter of 2008 of about $0.4 million primarily due to euro rate changes
relative to other currencies.
Income
Taxes
The
provision for income taxes in the third quarter of 2009 and 2008 was $4.1
million and $8.7 million, respectively. The projected effective tax rate for the
balance of 2009 is 33.1 percent, a decrease from the prior year’s rate of 34.2
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 third quarter of 2009 was $8.8 million compared to 2008 third
quarter net income of $17.4 million. Net income attributable to
Franklin Electric Co., Inc. for the third quarter of 2009 was $8.6 million, or
$0.37 per diluted share, compared to 2008 third quarter net income attributable
to Franklin Electric Co., Inc. of $17.3 million or $0.74 per diluted
share.
First Nine Months of 2009 VS
First Nine Months of 2008
OVERVIEW
Sales for
the first nine months of 2009 were down from the first nine months of
2008. Sales in 2009 trail prior year due to the recession, the
housing decline, and reduced demand for vapor recovery systems in
California. Earnings decreased in the first nine months of 2009
primarily due to the lower sales and restructuring expenses.
RESULTS OF
OPERATIONS
Net
Sales
|
|
|
YTD
9 2009
|
|
|
|
YTD
9 2008
|
|
|
|
2009
v 2008
|
|
|
|
Net
Sales
|
|
Water
Systems
|
|
$
|
386.3
|
|
|
$
|
448.7
|
|
|
$
|
(62.4
|
)
|
Fueling
Systems
|
|
$
|
94.8
|
|
|
$
|
144.8
|
|
|
$
|
(50.0
|
)
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Consolidated
|
|
$
|
481.1
|
|
|
$
|
593.5
|
|
|
$
|
(112.4
|
)
|
Net sales
for the first nine months of 2009 were $481.1 million, a decrease of $112.4
million or 19 percent compared to sales of $593.5 million in the same period of
2008. The primary factor causing the Company’s earnings decline
during the first nine months of 2009 was the sales volume reduction that was a
result of the continuing recession and reduced sales of the Company’s vapor
recovery products in the State of California. The ongoing slump in
housing combined with customers’ desire to reduce inventories contributed to
soft end market demand and fewer shipments for the Company’s
products. Sales declined by 17 percent or $103.5 million in the first
nine months of 2009 due to volume, exclusive of acquisitions and foreign
currency translation. The first nine months of 2009 sales were lower
by $27.8 million or 5 percent versus the sales in the first nine months of 2008
due to foreign currency translations as a result of a stronger U.S.
dollar. Additionally, incremental sales related to acquisitions for
2009 were $18.9 million or 3 percent of sales.
Net
Sales-Water Systems
Water
Systems sales worldwide were $386.3 million, down $62.4 million or 14 percent
for the first nine months of 2009 compared to the same period of
2008. Sales from businesses acquired during the last 12 months were
$18.9 million. Sales revenue decreased by $26.9 million in the first
nine months of 2009 due to foreign currency translation rate
changes. The organic sales decline, excluding foreign currency
translation and acquisitions, was $54.4 million or about 12
percent. In international markets, Water Systems sales declined
organically by 3 percent as sales gains in Latin America and the Asia/Pacific
region were offset by a decline in Europe and Africa. In the United
States and Canada, Water Systems sales declined organically by 19 percent due
primarily to the housing recession and inventory reductions by
distributors.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $94.8 million, a decrease of $50.0 million or 35
percent for the first nine months of 2009 compared to the same period of
2008. The decline was primarily caused by reduced sales of the
Company’s vapor recovery products in the State of California.
Cost
of Sales
Cost of
sales as a percent of net sales for the first nine months of 2009 and 2008 was
70.4 percent and 69.2 percent, respectively. Correspondingly, the
gross profit margin decreased to 29.6 percent from 30.8 percent. The
gross profit margin changes in the first nine months of 2009 are consistent with
the explanations covered in detail under the third quarter review.
Selling,
General and Administrative (“SG&A”)
SG&A
expenses decreased by $10.6 million or approximately 9 percent, in the first
nine months of 2009 compared to the first nine months of last
year. Acquisitions, primarily Vertical in Italy added $2.6 million of
SG&A expenses to the Water Systems segment. SG&A expense as a percent of
net sales for the first nine months of 2009 and 2008 was 21.4 percent and 19.1
percent, respectively. The increase in percentage terms is due to lower sales as
SG&A decreases, consistent with management’s fixed cost reduction
initiatives, were not as large in percentage terms as the Company’s drop in
sales volume.
Restructuring
Expenses
Restructuring
expenses for the first nine months of 2009 were approximately $5.6 million with
no restructuring charges recorded in 2008. Restructuring expenses
included asset impairments, severance expenses and manufacturing equipment
relocation costs.
Operating
Income
|
|
|
YTD
9 2009
|
|
|
|
YTD
9 2008
|
|
|
|
2009
v 2008
|
|
|
|
Operating
income (loss)
|
|
Water
Systems
|
|
$
|
45.9
|
|
|
$
|
60.3
|
|
|
$
|
(14.4
|
)
|
Fueling
Systems
|
|
$
|
15.8
|
|
|
$
|
39.2
|
|
|
$
|
(23.4
|
)
|
Other
|
|
$
|
(27.6
|
)
|
|
$
|
(30.4
|
)
|
|
$
|
2.8
|
|
Consolidated
|
|
$
|
34.1
|
|
|
$
|
69.1
|
|
|
$
|
(35.0
|
)
|
Operating
income was $34.1 million in the first nine months of 2009, down $35.0 million
from $69.1 million in the first nine months of 2008.
Operating
Income-Water Systems
Water
Systems operating income was $45.9 million for the first nine months of 2009,
down $14.4 million or 24 percent versus the same period a year
ago. Operating income was reduced by restructuring expenses of $4.5
million in the first nine months of 2009. Operating margin before
restructuring expenses for Water Systems was 13.0 percent of sales versus 13.4
percent in the same nine months of 2008. SG&A expenses were lower in the
first nine months of 2009 by $6.1 million from the same period of 2008, which
partially offset the impact of lower sales volumes. The factors
producing this result were substantially the same as those summarized in the
quarter vs. quarter discussion above.
Operating
Income-Fueling Systems
Fueling
Systems operating income was $15.8 million for the first nine months of 2009,
down $23.4 million or 60 percent versus the first nine months of
2008. Operating income was reduced by restructuring expenses of $0.2
million in the first nine months of 2009. Operating margin before
restructuring expenses in Fueling Systems was 16.9 percent of sales in the first
nine months of 2009 versus 27.1 percent of sales in the same period of 2008,
attributable to lost leverage on the fixed manufacturing and SG&A expenses
from lower sales volumes. The factors producing this result were
substantially the same as those summarized in the quarter vs. quarter discussion
above
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. Decreases in general and administrative expenses were
primarily compensation and other employee related expense
reductions. During the first nine months of 2009, Corporate staff
headcount has been reduced by 17 percent.
Interest
Expense
Interest
expense for the first nine months of 2009 and 2008 was $7.2 million and $8.1
million, respectively. Interest expense decreased in 2009 due to less
Company debt outstanding.
Other
Income or Expense
Other
Income or Expense for the first nine months of 2009 and 2008 was $1.0 million
and $1.2 million income, respectively. Included in other income for
the first nine months of 2009 and 2008 was interest income of $0.8 million and
$1.6 million, respectively, primarily derived from the investment of cash
balances in short-term U.S. treasury and agency securities. Also
included in other income in the first nine months of 2009 and 2008 was income
from equity investments of $0.1 million and $0.5 million. Offsetting
the 2008 income was a pre-tax expense of $0.9 million recorded in the second
quarter to settle a trademark licensing dispute.
Foreign
Exchange
Foreign
currency-based transactions produced a loss for the first nine months of 2009 of
about $0.1 million, and foreign currency-based transactions were not significant
for the same period in the prior year.
Income
Taxes
The
provision for income taxes in 2009 and 2008 was $8.8 million and $21.2 million,
respectively. The projected effective tax rate for the balance of
2009 is 33.1 percent, a decrease from the prior year’s rate of 34.2
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 nine months of 2009 was $18.9 million compared to net
income of $41.1 million in the same nine months of 2008. Net income
attributable to Franklin Electric Co., Inc. for the first nine months of 2009
was $18.3 million, or $0.79 per diluted share, compared to 2008 first nine
months net income attributable to Franklin Electric Co., Inc. of $40.7 million
or $1.75 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 October 3, 2009 the Company had no amounts outstanding
and $116.9 borrowing capacity under the Agreement and $25 million of
borrowing capacity under the Prudential Agreement. Amounts available
under the Agreement have been reduced by outstanding standby letters of
credit. The recent volatility 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 cash flows from operations and 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 October 3, 2009, the Company was in compliance
with all covenants.
Net cash
inflows from operating activities were $88.3 million in the nine months ended
October 3, 2009 compared to cash inflows of $27.8 million in the nine months
ended September 27, 2008. Inventory was a $40.0 million net source of
cash in the first nine months of 2009. The Company made contributions
to the funded employee benefit plans of $5.7 million during 2009. The amount of
contributions to be made to the funded employee benefit plans during calendar
year 2009 were finalized and made before 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, 2008.
Net cash
used in investing activities was $24.9 million in the nine months ended October
3, 2009 compared to $56.9 million for the nine months ended September 27,
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 nine months ended September 27, 2008, the Company acquired Industrias
Schneider for an aggregate purchase price of $35.5 million, net of cash
acquired.
Net cash
used by financing activities of $44.4 million in the nine months ended October
3, 2009 was primarily related to payments on short-term debt. Also
included was the payment of $8.6 million in dividends to the Company’s common
shareholders and $0.4 million to non-controlling interests. Net cash
provided by financing activities of $26.5 million in the nine months ended
September 27, 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 $8.5 million in dividends to
its shareholders.
The
Company presents the non-GAAP financial measures of operating income before
restructuring expense to net sales (“margin”) because the Company believes the
information helps investors understand the underlying trends in the Company’s
business more easily. The differences between these measures and the
most comparable GAAP measures are reconciled in the tables below.
Operating
Income and Margin Percentages
|
|
|
|
|
Before
and After Restructuring Expense
|
|
|
|
|
|
(in
millions)
|
Third
Quarter 2009
|
|
First
Nine Months 2009
|
|
Water
|
Fueling
|
|
Water
|
Fueling
|
Reported
Operating Income
|
$ 20.8
|
$ 3.9
|
|
$ 45.9
|
$ 15.8
|
Restructuring
Expense
|
$ 0.2
|
$ 0.1
|
|
$ 4.5
|
$ 0.2
|
Operating
Income before Restructuring Expense
|
$ 21.0
|
$ 4.0
|
|
$ 50.4
|
$ 16.0
|
%
Operating Income To Net Sales
|
15.1%
|
13.6%
|
|
11.9%
|
16.7%
|
%
Operating Income Before Restructuring Expense To Net Sales
|
15.3%
|
14.0%
|
|
13.0%
|
16.9%
|
|
|
|
|
|
|
|
Third
Quarter 2008
|
|
First
Nine Months 2008
|
|
Water
|
Fueling
|
|
Water
|
Fueling
|
Reported
Operating Income
|
$ 18.7
|
$ 19.3
|
|
$ 60.3
|
$ 39.2
|
Restructuring
Expense
|
$ -
|
$ -
|
|
$ -
|
$ -
|
Operating
Income before Restructuring Expense
|
$ 18.7
|
$ 19.3
|
|
$ 60.3
|
$ 39.2
|
%
Operating Income To Net Sales
|
12.1%
|
31.5%
|
|
13.4%
|
27.1%
|
%
Operating Income Before Restructuring Expense To Net Sales
|
12.1%
|
31.5%
|
|
13.4%
|
27.1%
|
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 3, 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 second fiscal quarter that have materially
affected, or are reasonably likely to materially affect the Company’s internal
control over financial reporting.
PART II. OTHER
INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
In
September 2006, the Company acquired Healy Systems, Inc. from its principal
shareholder, James Healy (the “Seller”). During the first half of
2008, the Company completed a retrofit program in which it replaced a third
party supplied component part in its “Healy Brand” nozzle part 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. The
Company is engaged in discussions with CARB in an attempt to resolve this matter
and any related proceedings involving local agencies. Resolution of
the matter is not expected to adversely affect the Company’s sale of Enhanced
Vapor Recovery Systems in California. Depending upon the amount of
any penalty paid by the Company in any agreed resolution or resulting from a
proceeding if discussions do not result in agreement, resolution of the matter
could have a material effect on the Company’s results of
operations. The Company has retained a portion of the purchase price
and the earn-out payments otherwise due to the Seller of Healy Systems, to
satisfy the Company’s claims that the Seller’s breaches of the purchase
agreement led to the recall and the NOV. The Seller has initiated
litigation seeking recovery of the amounts retained by the
Company. The Company intends to defend vigorously its rights to
retain these amounts. The CARB NOV matter was previously described in
the Company’s Quarterly Report on Form 10-Q for the quarters ended July 4, 2009
and April 4, 2009.
ITEM 1A.
RISK FACTORS
Changes
in tax legislation regarding our foreign earnings could materially affect our
future results.
Since the
Company operates in different countries and is subject to taxation in different
jurisdictions, the Company’s future effective tax rates could be impacted by
changes in such countries’ tax laws or their interpretations. Both
domestic and international tax laws are subject to change as a result of changes
in fiscal policy, changes in legislation, evolution of regulation and court
rulings. The application of these tax laws and related regulations is
subject to legal and factual interpretation, judgment and uncertainty.
Recently, proposed changes to the U.S. international tax laws would limit U.S.
deductions for expenses related to un-repatriated foreign-source income and
modify the U.S. foreign tax credit and “check-the-box” rules. The Company
cannot predict whether these proposals will be enacted into law or what, if any,
changes may be made to such proposals prior to their being enacted into
law. If the U.S. tax laws change in a manner that increases the Company’s
tax obligation, it could result in a material adverse impact on the
Company’s net income and financial position.
Additional
Risks to the Company
Additional
risk factors are set forth in Part 1, Item 1A, in the Company’s annual report on
Form 10-K for the fiscal year ended 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
|
In April
2007, the Company’s Board of Directors unanimously approved a resolution to
increase the number of shares remaining for repurchase from 628,692 to 2,300,000
shares. There is no expiration date for the plan. During the third quarter of
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 6.
EXHIBITS
See the Exhibit Index located on page
28.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this quarterly report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
FRANKLIN ELECTRIC CO.,
INC.
|
|
|
|
Registrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
November 4, 2009
|
|
By
|
/s/ R. Scott Trumbull
|
|
|
|
R.
Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
November 4, 2009
|
|
By
|
/s/ John J. Haines
|
|
|
|
John
J. Haines, Vice President and Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
|
FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE
THIRD QUARTER ENDED OCTOBER 3, 2009
|
|
Number
|
Description
|
|
|
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
|
|
|