Attached files
file | filename |
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EX-23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - FRANKLIN ELECTRIC CO INC | exhibit23.htm |
EX-21 - SUBSIDIARIES OF THE REGISTRANT - FRANKLIN ELECTRIC CO INC | exhibit21.htm |
EX-32.2 - EXHIBIT 32.2 CERTIFICATION - FRANKLIN ELECTRIC CO INC | exhibit32_2.htm |
EX-10.7 - AMENDED EMPLOYMENT AGREEMENT - TRUMBULL - FRANKLIN ELECTRIC CO INC | exhibit10_7.htm |
EX-99.1 - FORWARD LOOKING STATEMENTS - FRANKLIN ELECTRIC CO INC | exhibit99_1.htm |
EX-31.2 - EXHIBIT 31.2 CERTIFICATION - FRANKLIN ELECTRIC CO INC | exhibit31_2.htm |
EX-32.1 - EXHIBIT 32.1 CERTIFICATION - FRANKLIN ELECTRIC CO INC | exhibit32_1.htm |
EX-31.1 - EXHIBIT 31.1 CERTIFICATION - FRANKLIN ELECTRIC CO INC | exhibit31_1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
____________________
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended January 2, 2010
OR
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to _____
Commission
file number 0-362
FRANKLIN
ELECTRIC CO., INC.
(Exact
name of registrant as specified in its charter)
Indiana
|
35-0827455
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
400
East Spring Street
|
||
Bluffton,
Indiana
|
46714-3798
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(260)
824-2900
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, $0.10 par value
|
NASDAQ
Global Select Market
|
|
Preference
Stock Purchase Rights
|
NASDAQ
Global Select Market
|
|
(Title
of each class)
|
(Name
of each exchange on which
registered)
|
Securities
registered pursuant to Section 12(g) of the Act:
None
(Title
of each class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES
|
NO x
|
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
YES
|
NO x
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES x
|
NO
|
- 1
-
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.
YES
|
NO
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or 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
|
Non-Accelerated Filer
|
Smaller Reporting Company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
YES
|
NO x
|
The
aggregate market value of the registrant's common stock held by non-affiliates
of the registrant at July 4, 2009 (the last business day of the registrant’s
most recently completed second quarter) was $569,433,891. The stock
price used in this computation was the last sales price on that date, as
reported by NASDAQ Global Select Market. For purposes of this calculation, the
registrant has excluded shares held by executive officers and directors of the
registrant, including restricted shares and except for shares owned by the
executive officers through the registrant's ESOP or 401K Plan. Determination of
stock ownership by non-affiliates was made solely for the purpose of responding
to this requirement and the registrant is not bound by this determination for
any other purpose.
Number of shares of common stock
outstanding at February 25, 2010:
23,130,308 shares
DOCUMENTS
INCORPORATED BY REFERENCE
A portion
of the Proxy Statement for the Annual Meeting of Shareholders to be held on
April 30, 2010 (Part III).
- 2
-
TABLE
OF CONTENTS
|
||
Part
I
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Page
|
|
Item
1.
|
Business
|
4 –
7
|
Item
1A.
|
Risk
Factors
|
7 -
10
|
Item
1B.
|
Unresolved
Staff Comments
|
10
|
Item
2.
|
Properties
|
10
|
Item
3.
|
Legal
Proceedings
|
10
|
Item
4.
|
Reserved
|
|
Supplemental
Item - Executive Officers of the Registrant
|
11
|
|
Part
II
|
||
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
|
12
|
Item
6.
|
Selected
Financial Data
|
13
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
– 24
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
24
- 25
|
Item
8.
|
Financial
Statements and Supplementary Data
|
26
– 58
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
59
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Item
9A.
|
Controls
and Procedures
|
59
– 60
|
Item
9B.
|
Other
Information
|
61
|
Part
III
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
61
|
Item
11.
|
Executive
Compensation
|
61
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
62
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
62
|
Item
14.
|
Principal Accounting
Fees and Services
|
62
|
Part
IV
|
||
Item
15.
|
Exhibits,
Financial Statement Schedules
|
62
– 64
|
Signatures
|
65
|
|
Exhibit
Index
|
66
- 67
|
|
- 3
-
PART I
ITEM 1.
BUSINESS
General
Franklin
Electric Co., Inc. is an Indiana corporation founded in 1944 and incorporated in
1946 that, together with its subsidiaries, designs, manufactures and distributes
groundwater and fuel pumping systems, composed primarily of submersible pumps
and motors, electronic controls and related parts and equipment. The Company’s
business consists of two reporting segments based on the principal end market
served: the Water Systems segment and the Fueling Systems segment. The Company
includes unallocated corporate expenses in an “Other” segment that together with
Water and Fueling represent the Company. Except where the context
otherwise requires, “Franklin Electric” or the “Company”, shall refer to
Franklin Electric Co., Inc. and its consolidated subsidiaries.
The
Company’s products are sold in North America, Europe, the Middle East, South
Africa, Brazil, Mexico, Australia, Japan, China, and other world markets. The
Company’s products are sold by its employee sales force and independent
manufacturing representatives. The Company offers normal and
customary trade terms to its customers, no significant part of which is of an
extended nature. Special inventory requirements are not necessary, and customer
merchandise return rights do not extend beyond normal warranty
provisions.
The
market for the Company’s products is highly competitive and includes diversified
accounts by size and type. The Company’s Water Systems and Fueling Systems
products and related equipment are sold to specialty distributors and some
original equipment manufacturers (“OEMs”), as well as industrial and petroleum
equipment distributors and major oil and utility companies.
In North
America, the Company is continuing the rationalization of manufacturing capacity
between its manufacturing complex in Linares, Mexico and its other North
American plants. The manufacturing 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
was largely complete as of the second quarter of 2009. The Linares
facility is projected to have available capacity to absorb additional
manufacturing activity and the Company is in the process of developing plans to
further rationalize manufacturing operations in 2010.
Business Segments and
Products
Segment
and geographic information set forth under Note 17, “Segment and Geographic
Information,” to the consolidated financial statements is incorporated herein by
reference.
Water Systems
Segment
Water
Systems is a global leader in the production and marketing of groundwater
pumping systems and is a technical leader in submersible pumps and motors,
drives, electronic controls, and monitoring devices. The Water Systems segment
designs, manufactures and sells motors, pumps, electronic controls and related
parts and equipment primarily for use in submersible water and other fluid
system applications.
Water
Systems motors and pumps are used principally in submersible applications for
pumping fresh water, wastewater, and other liquids in a variety of residential,
agricultural, and industrial applications, off-shore drilling, and
mining. Water Systems also manufacture electronic drives and controls
for the motors which control functionality and provide protection from various
hazards, such as electric surges, over-heating, or dry wells and
tanks.
Beginning
in 2004, the Company changed its North American business model to sell Water
Systems products primarily directly to wholesale specialty Water Systems
distributors. Previously, the Company sold its Water Systems products
primarily to pump OEMs (i.e., the Company was primarily a supplier of
submersible motors and controls to the OEMs) who then re-sold the Water Systems
products, usually combined with pumps and related products, to the wholesale
specialty Water Systems distributors. To facilitate this transition,
the Company acquired several pump manufacturers during and since 2004 (most
significantly, JBD Pump Company in 2004 and Little
- 4
-
Giant
Pump Company in 2006). As of the end of fiscal year 2004,
approximately 42 percent of the Company’s consolidated sales were attributable
to two customers, both of which were pump OEMs. Customer sales
concentration declined from 2004 to 2006, and since 2007, no single customer
accounted for more than 10 percent of the Company’s consolidated
sales.
The
Company further expanded its global market penetration by acquisitions in
developing regions (Pump Brands (Pty) Limited in South Africa in 2007 and
Industrias Schneider in Brazil in 2008). Sales in developing regions
increased more than 400 percent in total from 2002 to 2009.
During
the first quarter of 2009, the Company acquired Vertical S.p.A. (“Vertical”), a
pump component manufacturer in Italy. Vertical designs, develops, and
manufactures pressed and welded stainless steel pumps and pump
components. The acquisition was targeted to address the growing
worldwide demand for stainless steel water pumps as well as to broaden the
Company’s product offerings. Vertical’s sales were not material as a component
of the Company’s consolidated sales for 2009.
Water
Systems products are sold in highly competitive markets. Water Systems competes
in each of its targeted market segments based on product design, quality of
products and services, performance, availability, and price. The Company’s
principal competitors in the specialty water products industry are Grundfos
Management A/S, Pentair, Inc., and ITTCorporation.
2009
Water Systems research and development expenditures were primarily related to
the following activities:
·
|
New
horizontal booster pump based upon the Tri-Seal™
hydraulics
|
·
|
New
additions to sprinkler pumps
|
·
|
Rounded
out 6” turbine pumps with 225 gpm and 275 gpm
designs
|
·
|
Rounded
out 8” turbine pumps with 1000 gpm
design
|
·
|
New
4” submersible pumps branded Water Horse® based upon revised Lexan®
hydraulics
|
·
|
New
SubDrive electronic products addressing both a previously untapped market
segment and new designs to survive difficult
environments
|
·
|
Developed
1/3HP – 3 phase high efficiency motor for geothermal
wells
|
·
|
Improved
corrosion resistant 4” motor products (316 stainless steel
shell)
|
·
|
New
products and packaging for the PondWorks®
brand
|
·
|
New
products for the Coleman® brand
|
·
|
New
additions to skimmer and falls
products
|
Lexan® is
a registered trademark of Sabic Innovative Plastics IP B.V. Company
Netherlands.
Coleman®
is a registered trademark of The Coleman Company, Inc.
Fueling Systems
Segment
Fueling
Systems is a global leader in the production and marketing of fuel pumping
systems and is a technical leader in electronic controls and monitoring devices.
This segment designs, manufactures and sells pumps, electronic controls and
related parts and equipment primarily for use in submersible fueling system
applications. It also integrates and sells motors and electronic
controls produced by the Water Systems segment.
Along
with the fueling motor and pump applications, Fueling Systems supplies a variety
of products to the petroleum equipment industry such as: flexible piping, vapor
recovery components and systems, electronic tank monitoring equipment,
mechanical and electronic leak detection equipment, and fittings. The
Company expanded its product offerings through internal development and
acquisitions. The most notable recent acquisition was Healy Systems,
Inc. in 2006 whose products included fueling dispenser nozzles and complete
vapor recovery systems. The vapor recovery systems and components
enjoyed particular success in California from late 2007 to early 2009, due to
California Air Resource Board certification requirements for conversion of fuel
dispensing stations to certified dispensers such as those of Healy Systems,
largely completed in 2009. All products, including vapor recovery
systems, are sold internationally.
Fueling
Systems’ products are sold in highly competitive markets. Fueling Systems
competes in each of its targeted market segments based on product design,
quality of products and services, performance availability and price.
The
- 5
-
Company’s
principal competitors in the petroleum equipment industry are Danaher
Corporation and Dover Corporation.
2009
Fueling Systems research and development expenditures were primarily related to
the following activities:
·
|
Introduction
of a new tank gauge platform. The initial product, Colibri®,
was developed for the developing international markets and established
markets requiring tank inventory and leak detection. Colibri®
uses the Company’s established state-of-the-art software, on a new, low
cost, electronic platform.
|
·
|
Ongoing
work on a new line of conventional and vapor recovery nozzles and related
equipment for use in international
markets
|
·
|
A
new 5 gallon secondary containment ‘spill bucket’ to address the growing
US regulatory mandate for retail gas stations to have double wall spill
containment.
|
·
|
A
new series of pressure vent valves to comply for the broader US
regulatory market and the California EVR market in
particular
|
Research and
Development
The
Company incurred research and development expense as follows:
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
Research
and development expense
|
$ | 6.9 | $ | 6.8 | $ | 7.3 |
These
expenses were for activities related to the development of new products,
improvement of existing products and manufacturing methods, and other applied
research and development.
The
Company owns a number of patents, trademarks and licenses. In the
aggregate, these patents are of material importance to the operation of the
business; however, the Company believes that its operations are not dependent on
any single patent or group of patents.
Raw
Materials
The
principal raw materials used in the manufacture of the Company’s products are
coil and bar steel, stainless steel, copper wire, and aluminum ingot. Major
components are capacitors, motor protectors, forgings, gray iron castings and
bearings. Most of these raw materials are available from multiple sources in the
United States and world markets. In the opinion of management, no single supply
source is critical to the Company’s business. Availability of fuel and energy is
adequate to satisfy current and projected overall operations unless interrupted
by government direction or allocation.
Employees
The
Company employed approximately 3,500 persons at the end of 2009.
Backlog
The
dollar amount of backlog at February 18, 2010 and February 20, 2009 by segment
was as follows:
(In
millions)
|
2010
|
2009
|
||||||
Water
Systems
|
$ | 35.8 | $ | 25.0 | ||||
Fueling
Systems
|
2.7 | 2.5 | ||||||
Total | $ | 38.5 | $ | 27.5 |
The
backlog is composed of written orders at prices adjustable on a
price-at-the-time-of-shipment basis for products, primarily standard catalog
items. All backlog orders are expected to be filled in fiscal
2010. The Company’s sales in the first quarter are generally less
than its sales in other quarters due to generally lower construction activity
during
- 6
-
that
period in the northern hemisphere. Beyond that, there is no seasonal pattern to
the backlog and the backlog has not proven to be a significant indicator of
future sales.
Environmental
Matters
The
Company believes that it is in compliance with all applicable federal, state and
local laws concerning the discharge of material into the environment, or
otherwise relating to the protection of the environment. The Company has not
experienced any material costs in connection with environmental compliance, and,
subject to the disclosure in Item 3. Legal Proceedings, below, does not believe
that such compliance will have any material adverse effect upon the financial
position, results of operation, cash flows, or competitive position of the
Company.
Available
Information
The
Company’s website address is www.franklin-electric.com.
The Company makes available free of charge on or through its website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports, as soon as reasonably practicable
after such material is electronically filed with or furnished to the Securities
and Exchange Commission. Additionally, the Company’s website includes the
Company’s corporate governance guidelines, its Board committee charters, and the
Company’s code of business conduct and ethics. Information contained on the
Company’s website is not part of this annual report on Form 10-K.
ITEM 1A. RISK
FACTORS
The
following describes the principal risks affecting the Company and its
business. Additional risks and uncertainties, not presently known to
the Company or currently deemed material, could negatively impact the Company’s
results of operations or financial condition in the future.
The Company’s
acquisition strategy entails expense, integration risks, and other risks that
could affect the Company’s earnings and financial
condition. One of the Company’s continuing strategies is
to increase revenues and expand market share through acquisitions that will
provide complementary Water and Fueling Systems products. The Company
spends significant time and effort expanding existing businesses through
identifying, pursuing, completing, and integrating acquisitions which generates
additional expense whether or not acquisitions are actually
completed. Competition for acquisition candidates may limit the
number of opportunities and may result in higher acquisition
prices. There is uncertainty related to successfully acquiring,
integrating and profitably managing additional businesses without substantial
costs, delays or other problems. There can also be no assurance that
acquired companies will achieve revenues, profitability or cash flows that
justify the Company’s investment in them. Failure to manage or
mitigate these risks could adversely affect the Company’s earnings and financial
condition.
The Company’s
products are sold in highly competitive markets with numerous competitors whose
actions could negatively impact sales volume, pricing and
profitability. The Company is a global leader in the
production and marketing of groundwater and fuel pumping systems. End
user demand, distribution relationships, industry consolidation, new product
capabilities of the Company’s competitors, new competitors, and many other
factors contribute to a highly competitive environment. Additionally,
some of the Company’s competitors have substantially greater financial resources
than the Company. Although the Company believes that consistency of
product quality, timeliness of delivery, service, and continued product
innovation, as well as price, are principal factors considered by customers in
selecting suppliers, competitive factors described above may lead to declines in
sales or in the prices of all the Company’s products which could have an adverse
impact on its profitability and financial condition.
The Company’s
business may be adversely affected by the current economic
environment. The worldwide financial and credit market
disruptions and uncertainty seen in the last two years have reduced the
availability of credit generally necessary to support global economic activity.
The shortage of credit combined with declines in equity markets and other
economic developments have led to a recession in the United States and many
other markets whose duration is uncertain. A continuation or
worsening of these difficult financial and economic conditions could further
reduce sales and adversely affect our customers’ ability to meet the terms of
sale and our suppliers’ ability to fully perform their commitments to
us. Also, if credit continues to be restricted or
becomes
- 7
-
more so,
there may be an adverse impact on the Company’s ability to complete
acquisitions, develop new products or restructure existing operations as well as
other negative effects. The cost of new credit in the future may also
be higher than the existing credit arrangements the Company currently has in
place.
In
addition, the financial disruption has affected and may further affect the Plan
assets of the Defined Benefit Plans. Further volatility of interest
rates and negative equity returns as seen under some market conditions in the
past two years may result in greater contributions to the Plans in the
future.
A decline in
housing starts could lead to reduced demand for the Company’s products, thereby
reducing revenues and earnings. Demand for certain Company
products is affected by housing starts. A decline in housing starts
or general slowdown in the United States or other economies in the international
markets the Company serves, such as those that have occurred in the United
States and many other markets, could continue to affect or further reduce demand
and adversely impact gross margins and operating results.
Increases in the
prices of raw materials, components, finished goods and other commodities could
adversely affect operations. The Company purchases most of the
raw materials for its products on the open market and relies on third parties
for the sourcing of certain finished goods. Accordingly, the cost of
its products may be affected by changes in the market price of raw materials,
sourced components, or finished goods. Natural gas and electricity
prices have historically been volatile. The Company does not
generally engage in commodity hedging for raw materials. Significant
increases in the prices of commodities, sourced components, finished goods, or
other commodities could cause product prices to increase, which may reduce
demand for products or make the Company more susceptible to
competition. Furthermore, in the event the Company is unable to pass
along increases in operating costs to its customers, margins and profitability
may be adversely affected.
The Company is
exposed to political, economic and other risks that arise from operating a
multinational business. The Company has significant operations
outside the United States, including Europe, South Africa, Brazil, Mexico and
China. Further, the Company obtains raw materials and finished goods
from foreign suppliers. Accordingly, the Company’s business is
subject to political, economic, and other risks that are inherent in operating a
multinational business. These risks include, but are not limited to,
the following:
·
|
Difficulty
in enforcing agreements and collecting receivables through foreign legal
systems
|
·
|
Trade
protection measures and import or export licensing
requirements
|
·
|
Imposition
of tariffs, exchange controls or other
restrictions
|
·
|
Difficulty
in staffing and managing widespread operations and the application of
foreign labor regulations
|
·
|
Compliance
with foreign laws and regulations
|
·
|
Changes
in general economic and political conditions in countries where the
Company operates
|
Additionally,
the Company’s operations outside the United States could be negatively impacted
by changes in treaties, agreements, policies and laws implemented by the United
States.
If the
Company does not anticipate and effectively manage these risks, these factors
may have a material adverse impact on the results and financial condition of its
international operations or on the business as a whole.
Transferring
operations of the Company to low cost regions may not result in the intended
cost benefits, either temporarily or for a longer term. The
Company may continue to rationalize its manufacturing capacity among the
manufacturing complexes in low cost regions such as Mexico, the Czech Republic
and China and its other existing manufacturing facilities. To
implement this strategy, the Company must complete the transfer of assets and
intellectual property between operations. Each of these transfers
involves the risk of disruptions of uncertain duration to our manufacturing
capability, supply chain and, ultimately, to our ability to service customers
and generate revenues and profits.
The Company has
significant investments in foreign entities and has significant sales and
purchases in foreign denominated currencies creating exposure to foreign
currency exchange rate fluctuations. The Company has
significant investments outside the United States, including Europe, South
Africa, Brazil, Mexico and China.
- 8
-
Further,
the Company has sales and makes purchases of raw materials and finished goods in
foreign denominated currencies. Accordingly, the Company has exposure
to fluctuations in foreign currency exchange rates relative to the US
dollar. Foreign currency exchange rate risk is reduced through
several means: maintenance of local production facilities in the markets served,
invoicing of customers in the same currency as the source of the products,
prompt settlement of inter-company balances utilizing a global netting system
and limited use of foreign currency denominated debt. To the extent that these
mitigating strategies are not sufficient or successful, foreign currency rate
fluctuations can have a material adverse impact on its international operations
or on the business as a whole.
Delays in
introducing new products or the inability to achieve or maintain market
acceptance with existing or new products may cause the Company’s revenues to
decrease. The industries to which the Company belongs are
characterized by intense competition, changes in end-user requirements, and
evolving product offerings and introductions. The Company believes
future success will depend, in part, on the ability to anticipate and adapt to
these factors and offer, on a timely basis, products that meet customer
demands. Failure to develop new and innovative products or to enhance
existing products could result in the loss of existing customers to competitors
or the inability to attract new business, either of which may adversely affect
the Company’s revenues.
Certain Company
products are subject to regulation and government performance requirements in
addition to the warranties provided by the Company. The
Company’s product lines have expanded significantly and certain products are
subject to government regulations and standards under environmental, consumer
safety and other laws and regulations covering certification, manufacture,
assembly, and performance of the products, in addition to the warranties
provided by the Company. The Company’s failure to meet all such
standards or perform in accordance with warranties could result in significant
warranty or repair costs, lost sales and profits, damage to the Company’s
reputation, and fines and penalties required by Governmental
organizations. Changes to these standards may require the Company to
modify its business objectives and incur additional costs to
comply.
The Company’s
products used in consumer and other applications may be subject to recall laws
in the United States and other foreign jurisdictions. Various
products manufactured and sold by the Company are intended for consumer use and
may be subject to product recall if it is determined a threat of harm or injury
exists due to a defect in design, manufacture or other
failure. Product recalls involve notification of government agencies
and customers of the defective product, replacement or repair of products both
in service and in inventory and can result in significant financial expenditures
to remedy. The Company’s reputation and brand may also be harmed by
such recalls.
The growth of municipal water systems and
increased government
restrictions on groundwater pumping could reduce demand for private
water wells and the Company’s products, thereby reducing revenues and
earnings.
Demand
for certain Company products is affected by rural communities shifting from
private and individual water well systems to city or municipal water systems.
Many economic and other factors outside the Company’s control, including Federal
and State regulations on water quality, tax credits and incentives, could impact
the demand for private and individual water wells. A decline in private and
individual water well systems in the United States or other economies in the
international markets the Company serves could reduce demand for the Company’s
products and adversely impact sales, gross margins and operating
results.
Demand for
Fueling Systems products is impacted by environmental legislation which may
cause significant increases in product demand and may be followed by
significantly reduced demand after meeting compliance
requirements. Environmental legislation related to air quality
and fueling containment may create demand for certain Fueling Systems products
which must be supplied in a relatively short time frame to meet the governmental
mandate, as occurred in California with respect to vapor control and monitoring
systems. During this period of increased demand the Company’s
revenues and profitability generally increase significantly. The
Company is at risk of not having capacity to meet demand or cost overruns due to
inefficiencies during ramp up to the higher production levels. After
the Company’s customers have met the compliance requirements, the Company’s
revenues and profitability may decrease significantly as the demand for certain
products declines substantially. The Company is at risk of not
reducing production costs in relation to the decreased demand as well as reduced
revenues adversely impacting gross margins and operating results.
- 9
-
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. 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
The
Company is subject to various risks in the normal course of business. Exhibit
99.1 sets forth risks and other factors that may affect future results,
including those identified above, and is incorporated herein by
reference.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2.
PROPERTIES
The
Company maintains its principal executive offices in Bluffton,
Indiana.
Manufacturing
plants or primary distribution centers in the Water Systems segment are located
in the following countries: Australia, Brazil, Canada, China, The
Czech Republic, Germany, Italy, Japan, Mexico, Republic of Botswana, South
Africa, and the United States. Within the United States, significant
manufacturing facilities are located in Grant County, Indiana (owned); Little
Rock, Arkansas (leased), Wilburton, Oklahoma (owned); and Oklahoma City,
Oklahoma (owned).
Manufacturing
plants or primary distribution centers in the Fueling Systems segment are
located in the following countries: China, Germany, South Africa, and the United
States. Within the United States, a significant manufacturing
facility is located in Madison, Wisconsin (leased).
The
Company also maintains leased warehouse facilities in Bluffton, Indiana; Orange,
California; Sanford, Florida; Winnipeg, Manitoba, Canada; and Bolton, Ontario,
Canada.
In the
Company’s opinion, its facilities are suitable for their intended use, adequate
for the Company’s business needs, and in good condition.
ITEM 3. LEGAL
PROCEEDINGS
In
September 2006, the Company acquired Healy Systems, Inc. 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 900 Series nozzle,
which is part of the Company’s Enhanced Vapor Recovery Systems installed in
California gasoline filling stations. In October 2008, the California
Air Resources Board (“CARB”) issued 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 regulatory 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 James Healy (the principal former
owner of Healy Systems) to satisfy the Company’s claims that Mr. Healy’s
breaches of the purchase agreement led to the retrofit and the
NOV. In December 2008, Mr. Healy initiated litigation seeking
recovery of the amounts retained by the Company. The Company intends
to defend vigorously its rights to retain these amounts. In addition,
Franklin Fueling Systems, Inc. has filed a complaint against Mr. Healy for
breach of a separate consulting agreement that was executed in connection with
the acquisition. That complaint has been
- 10
-
consolidated
with the original complaint, and Mr. Healy has denied liability. The
parties are in the process of conducting discovery.
EXECUTIVE OFFICERS OF THE
REGISTRANT
Current
executive officers of the Company, their ages, current position, and business
experience during at least the past five years as of January 2, 2010 are as
follows:
Name
|
Age
|
Position
Held
|
Period
Holding Position
|
R.
Scott Trumbull
|
61
|
Chairman
of the Board and Chief Executive Officer
|
2003-present
|
Gregg
C. Sengstack
|
51
|
Senior
Vice President and President Fueling and International Water
Group
|
2005-present
|
Robert
J. Stone
|
45
|
Senior
Vice President and President, Americas Water Systems Group
|
2007-present
|
Vice
President of Sales, Marketing, and Engineering, Western
Hemisphere
Water Systems
|
2004-2007
|
||
Peter
C. Maske
|
59
|
Senior
Vice President and President, Europa/South Africa Water
Systems
|
1999-present
|
Daniel
J. Crose
|
61
|
Vice
President, North America Product Supply
|
2009-present
|
Vice
President and Director, North American Operations
|
2003-2009
|
||
Delancey
W. Davis
|
44
|
Vice
President and President US/Canada Commercial Business Unit
|
2009-present
|
Vice
President and Business Unit Manager, US/Canada Water
Systems
|
2008-2009
|
||
Vice
President and Director of Sales, Western Hemisphere Water
Systems
|
2005-2008
|
||
John
J. Haines
|
46
|
Vice
President, Chief Financial Officer, and Secretary
|
2008-present
|
Managing
Director and Chief Executive Officer, HSBC Auto Finance, a provider of
consumer automobile financing
|
2004-2008
|
||
Thomas
J. Strupp
|
56
|
Vice
President, Franklin Electric and President, Consumer and Specialty Markets
Business Unit
|
2009-present
|
Vice
President, Franklin Electric and President, Water Transfer
Systems
|
2008-2009
|
||
Vice
President, Chief Financial Officer, Secretary, and President Water
Transfer
Systems
|
2005-2008
|
All
executive officers are elected annually by the Board of Directors at the Board
meeting held in conjunction with the annual meeting of shareowners. All
executive officers hold office until their successors are duly elected or until
their death, resignation, or removal by the Board.
- 11
-
PART
II
ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF
EQUITY SECURITIES
The
number of shareowners of record as of February 25, 2010 was
1,024. The Company's stock is traded on NASDAQ Global Select Market:
Symbol FELE.
Dividends
paid and the price range per common share as quoted by the NASDAQ Global Select
Market for 2009 and 2008 were as follows:
DIVIDENDS
PER SHARE
|
PRICE
PER SHARE
|
|||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||
Low
|
High
|
Low
|
High
|
|||||||||||||||||||||
1st
Quarter
|
$ | .125 | $ | .120 | $ | 17.12 | $ | 30.55 | $ | 30.71 | $ | 40.49 | ||||||||||||
2nd
Quarter
|
$ | .125 | $ | .125 | $ | 21.50 | $ | 27.18 | $ | 32.77 | $ | 44.99 | ||||||||||||
3rd
Quarter
|
$ | .125 | $ | .125 | $ | 22.80 | $ | 34.50 | $ | 35.02 | $ | 54.55 | ||||||||||||
4th
Quarter
|
$ | .125 | $ | .125 | $ | 26.61 | $ | 29.96 | $ | 23.76 | $ | 44.00 |
Issuer
Purchases of Equity Securities:
The
Company did not purchase, under the Company’s stock repurchase program, any
shares of its common stock during the three months ended January 2,
2010.
- 12
-
ITEM 6. SELECTED FINANCIAL
DATA
The
following selected financial data should be read in conjunction with the
Company’s consolidated financial statements. The information set forth below is
not necessarily indicative of future operations.
FIVE YEAR
FINANCIAL SUMMARY (a)
(In
thousands, except per share amounts and ratios)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Operations:
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|||||||||||||||
Net
sales
|
$ | 625,991 | $ | 745,627 | $ | 602,025 | $ | 557,948 | $ | 403,413 | ||||||||||
Gross
profit
|
187,839 | 226,925 | 172,820 | 191,557 | 142,821 | |||||||||||||||
Interest
expense
|
9,548 | 10,968 | 8,147 | 3,373 | 766 | |||||||||||||||
Income
tax expense
|
12,168 | 22,925 | 15,434 | 30,671 | 24,953 | |||||||||||||||
Net
income attributable to Franklin Electric Co., Inc.
|
25,986 | 44,111 | 28,683 | 56,762 | 45,796 | |||||||||||||||
Depreciation
and amortization
|
25,385 | 24,164 | 20,359 | 17,989 | 14,971 | |||||||||||||||
Capital
expenditures
|
13,889 | 26,860 | 28,797 | 23,715 | 18,266 | |||||||||||||||
Balance
sheet:
|
||||||||||||||||||||
Working
capital (g)
|
$ | 228,450 | $ | 236,248 | $ | 218,830 | $ | 123,833 | $ | 138,998 | ||||||||||
Property,
plant and equipment, net
|
147,171 | 144,535 | 134,931 | 115,976 | 95,732 | |||||||||||||||
Total
assets
|
718,298 | 694,057 | 662,237 | 526,925 | 379,762 | |||||||||||||||
Long-term
debt
|
151,242 | 185,528 | 151,287 | 51,043 | 12,324 | |||||||||||||||
Shareowners’
equity
|
388,173 | 348,937 | 378,544 | 345,831 | 267,562 | |||||||||||||||
Other
data:
|
||||||||||||||||||||
Net
income attributable to Franklin Electric
Co., Inc.,
to sales
|
4.2 | % | 5.9 | % | 4.8 | % | 10.2 | % | 11.4 | % | ||||||||||
Net
income attributable to Franklin Electric Co., Inc., to average total
assets
|
3.7 | % | 6.5 | % | 4.8 | % | 12.5 | % | 12.8 | % | ||||||||||
Current
ratio (h)
|
3.7 | 3.9 | 3.4 | 2.3 | 3.2 | |||||||||||||||
Number
of common shares outstanding
|
23,128 | 23,018 | 23,091 | 23,009 | 22,485 | |||||||||||||||
Per
share:
|
||||||||||||||||||||
Market
price range
|
||||||||||||||||||||
High
|
$ | 34.50 | $ | 54.55 | $ | 52.55 | $ | 62.95 | $ | 45.29 | ||||||||||
Low
|
$ | 17.12 | $ | 23.76 | $ | 36.07 | $ | 38.70 | $ | 34.54 | ||||||||||
Net
income attributable to Franklin Electric Co., Inc., per weighted-average
common share
|
$ | 1.13 | $ | 1.92 | $ | 1.24 | $ | 2.49 | $ | 2.06 | ||||||||||
Net
income attributable to Franklin Electric Co., Inc., per
weighted-average common share, assuming dilution
|
$ | 1.12 | $ | 1.90 | $ | 1.22 | $ | 2.43 | $ | 1.97 | ||||||||||
Book
value (i)
|
16.67 | 15.02 | 16.12 | 14.84 | 11.54 | |||||||||||||||
Dividends
per common share
|
$ | 0.50 | $ | 0.50 | $ | 0.47 | $ | 0.43 | $ | 0.38 |
(a) The
five year financial presentation excludes the sales and earnings of the
Engineered Motor Products Division (EMPD) which was sold during the fourth
quarter of 2006, for 2005 to 2006.
(b)
Includes the results of operations of the Company’s 75% owned subsidiary,
Vertical S.p.A. acquired in the first quarter of 2009.
(c)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Industrias Schneider SA, and Western Pump LLC, since their acquisitions in the
first and second quarter of 2008, respectively.
(d)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Pump Brands (Pty) Limited and the pump division of Monarch Industries Limited,
since their acquisitions in the second and third quarters of 2007,
respectively.
(e)
Includes the results of operations of the Company’s wholly-owned subsidiaries,
Little Giant Pump Company and Healy Systems, Inc., since their acquisition in
the second and third quarters of 2006, respectively.
(f)
Includes the results of operations of the Company’s wholly-owned subsidiary,
Phil-Tite Enterprises, and the effect of an equity investment in Pioneer Pump,
Inc., both acquired in the third quarter of 2005.
(g)
Working capital = Current assets minus Current liabilities.
(h)
Current ratio = Current assets divided by Current liabilities.
(i) Book
value = Shareowners’ equity divided by weighted average common shares, assuming
full dilution.
- 13
-
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
2009 //
2008
OVERVIEW
While
Franklin’s overall sales declined from 2008 to 2009, Water Systems operating
income margin as a percent of sales improved from 2008 to 2009 and the Company
generated record cash flow from operating activities as it reduced inventories,
and paid down debt. Sales for 2009 decreased 16 percent from
2008. Water Systems product sales were down from 2008 about 9 percent
due primarily to the housing recession and inventory reductions by
distributors. Fueling Systems product sales decreased 35 percent
coming off a record year in 2008 which benefited from the sales surge for vapor
recovery systems to meet regulatory requirements in
California. Despite the decline in sales volume the gross profit
margin as a percent of net sales remained flat at about 30 percent. The Company
generated $112.6 million in cash from operations during the full year 2009
compared to $44.4 million in 2008. Lower inventory balances contributed $43.9
million, representing a source of cash for the full year 2009 compared to higher
inventory balances representing a use of cash of $15.6 million in 2008. The
Company had no outstanding balance on its revolving debt agreement at year end
2009 compared to $35.0 million outstanding at the end of 2008.
RESULTS OF
OPERATIONS
Net
Sales
(In millions)
|
2009
|
2008
|
2009
v 2008
|
|||||||||
Net
Sales
|
||||||||||||
Water
Systems
|
$
|
504.2
|
$
|
557.0
|
$
|
(52.8)
|
||||||
Fueling
Systems
|
$
|
121.8
|
$
|
188.6
|
$
|
(66.8)
|
||||||
Other
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Consolidated
|
$
|
626.0
|
$
|
745.6
|
$
|
(119.6)
|
Net sales
for 2009 were $626.0 million, a decrease of $119.6 million or about 16 percent
compared to 2008 sales of $745.6 million. The full year incremental impact of
sales from businesses acquired during 2008 and acquisitions in 2009 was $24.5
million. Sales revenue decreased by $19.6 million or about 3 percent
in 2009 due to foreign exchange. The sales change for 2009, excluding
acquisitions and foreign exchange, was a decline of $124.5 million or about 17
percent.
Net
Sales-Water Systems
Water
Systems sales worldwide were $504.2 million, down $52.8 million or 9 percent for
2009 compared to 2008. Water Systems revenues represent about 80
percent of the Company’s total sales. Sales from businesses acquired
during 2008 and acquisitions in 2009 were $24.5 million, primarily
Vertical. Sales revenue decreased by $18.9 million in 2009 due to
foreign currency translation. The sales decline, excluding foreign
currency translation and acquisitions, was $58.4 million or 10
percent. In international markets, Water Systems sales declined 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 by 18 percent due primarily to the housing recession and
inventory reductions by distributors.
Net
Sales-Fueling Systems
Fueling
Systems sales worldwide were $121.8 million, a decrease of $66.8 million or 35
percent for 2009 compared to 2008. Fueling Systems represent about 20
percent of the Company’s total revenues. Fueling Systems sales in the
United States fell by about $60 million. The decline was primarily caused by
reduced sales of the Company’s vapor recovery products in the State of
California, a reduction of 63 percent or about $47 million in sales revenue in
2009 compared to the prior year. The Company estimates that as of year-end 2009,
there are less than 1,000 stations in California that have yet to comply with
the original mandate for vapor recovery system upgrades. The political and
economic environments in the State make it nearly impossible to estimate with
certainty how many or when these remaining stations may
convert. Fueling Systems sales in international markets declined
during 2009 primarily due
- 14
-
to
unusually high shipments of vapor control systems in 2008 to the Beijing area as
part of China’s program to reduce air pollution prior to the Summer
Olympics.
Cost
of Sales
Cost of
sales as a percent of net sales for 2009 and 2008 was 70.0 percent and 69.6
percent, respectively. Correspondingly, the gross profit margin was 30.0 percent
for 2009 compared to 30.4 percent for 2008. The Company’s gross profit was
$187.8 million, a decline of $39.1 million from the $226.9 million in
2008. The Company’s gross profit declined about $69.2 million due to
lower sales volume. Offsetting the sales volume decline were fixed
cost improvements of about $10.2 million. Gross profit for 2009 was further
improved by lower freight and warranty costs of about $7.2 million, compared to
2008. The benefit from earnings attributable to acquisitions was
about $5.8 million and lastly gross profit was improved overall by about $5.6
million from selling price and lower raw material costs net of other costs and
product mix.
Selling,
General and Administrative (“SG&A”)
Selling,
general, and administrative (“SG&A”) expenses decreased by $14.4 million or
about 10 percent in 2009 compared to the prior year. Acquisitions, primarily
Vertical in Italy, added $3.5 million of SG&A expenses to the Water Systems
segment in 2009. SG&A expense as a percent of net sales for 2009
and 2008 was 21.3 percent and 19.8 percent, respectively. The increase, in
percentage terms, is due to lower sales since SG&A expense decreases,
consistent with management’s fixed cost reduction initiatives, were not as large
in percentage terms as the Company’s decrease in sales volume. Additionally,
expenses related to variable performance based compensation decreased by
approximately $7.0 million in 2009 versus
2008.
Restructuring
Expenses
There
were $6.2 million of nonrecurring restructuring expenses in 2009 compared to
$2.2 million in 2008.
In
December 2008, the Company announced Phase 3 of its Global Manufacturing
Realignment Program for its manufacturing facilities in North America and
Brazil. Under Phase 3 in North America the Company is continuing the
rationalization of manufacturing capacity between the manufacturing complex in
Linares, Mexico and its other North American plants. Initially, Phase 3 of the
realignment plan included the phased move of approximately 500,000 man hours of
manufacturing activity to Linares, approximately 80 percent of which was from
Siloam Springs, Arkansas. The transfer was largely complete as of June, 2009 and
reduced manufacturing labor and overhead costs. The cost savings were estimated
at $8.0 million annually, primarily related to lower manufacturing labor and
overhead costs (i.e., cost of sales), based on 2008 volumes and other operating
variables in 2008. These cost savings reduce inventory costs. They
are realized when the lower cost inventory is shipped (usually 1 to 2 quarters
after production) and are impacted by sales and production
volumes. The Company began to realize cost savings in the third
quarter of 2009 and expects to realize savings in line with its estimates by the
end of 2010. The Company incurred pretax charges for Phase 3
restructuring expenses of $8.4 million ($2.2 million in 2008 and $6.2 million in
2009) including severance expenses, pension charges, asset write-offs, and
equipment relocation costs. Approximately two thirds of these charges
were non-cash.
As a
follow-on step to Phase 3 of the Global Manufacturing Realignment Program, the
Company has announced, in 2010, its plan to close its Siloam Springs, Arkansas
manufacturing facility. The Company has estimated that this final step will
include pre-tax restructuring costs of $3.8 million to $4.5 million to be
incurred over the next three quarters beginning with the first quarter of 2010.
These costs will include severance expenses, pension charges, asset write-offs,
and equipment relocation costs. These charges are in addition to those incurred
through 2009. Approximately 80 percent of these costs will be
non-cash, primarily asset write-offs and pension curtailment
charges.
- 15
-
Operating
Income
Operating
income was $48.0 million in 2009, down $28.7 million from 2008 operating income
of $76.7 million.
(In millions)
|
2009
|
2008
|
2009
v 2008
|
|||||||||
Operating
income/ (loss)
|
||||||||||||
Water
Systems
|
$
|
62.9
|
$
|
68.4
|
$
|
(5.5)
|
||||||
Fueling
Systems
|
$
|
20.7
|
$
|
49.4
|
$
|
(28.7)
|
||||||
Other
|
$
|
(35.6
|
)
|
$
|
(41.1
|
)
|
$
|
5.5
|
||||
Consolidated
|
$
|
48.0
|
$
|
76.7
|
$
|
(28.7)
|
Operating
Income-Water Systems
Water
Systems operating income was $62.9 million for 2009, down $5.5 million or about
8 percent versus the same period a year ago. Operating margins were
up slightly at 12.5 percent of sales in 2009 versus 12.3 percent in the prior
year. Operating income declined primarily as a result of sales volume
decreases.
Operating
Income-Fueling Systems
Fueling
Systems operating income was $20.7 million, a decrease of $28.7 million or about
58 percent versus 2008. Operating margins were 17.0 percent of sales
versus 26.2 percent in the prior year. Fueling Systems operating
income declined primarily as a result of sales volume decreases.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. General and administrative expense decreases were primarily
due to lower variable compensation expenses. Other SG&A decreases were
related to the management’s fixed cost reduction initiatives started in the
fourth quarter of 2008.
Interest
Expense
Interest
expense for 2009 and 2008 was $9.5 million and $11.0 million, respectively.
Interest expense decreased in 2009 due primarily to decreases in
debt.
Other
Income or Expense
Other
Income or Expense was not significant for 2009 and was $1.8 million income in
2008. Included in “Other income” for 2009 and 2008 was interest
income of $1.1 million and $2.1 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 2009 and 2008 was
income from equity investments of $0.1 million and $0.7 million,
respectively. In 2009, other expenses included the reversal of a
receivable related to the indemnification of an acquired contingent tax
liability for $1.5 million. The contingent tax liability was also
reversed and the benefit was recorded in the income tax
provision. There was no net income impact to the Company in 2009 for
the reversal of this tax contingency. Also, in 2008 the Company
reached an agreement in principle to settle a trademark licensing dispute and
recorded a pre-tax expense of $0.9 million to reflect the settlement
payment.
Foreign
Exchange
For 2009
foreign currency-based transactions were a gain of about $0.5 million due to
gains in the Australian dollar, Canadian dollar and Mexican Peso offset by
losses in the Euro and Chinese Yuan to the U.S. dollar. For 2008
foreign currency-based transactions were not significant.
Income
Taxes
The
provision for income taxes in 2009 and 2008 was $12.2 million and $22.9 million,
respectively. The effective tax rates for 2009 and 2008 were 31.3 and 33.9
percent, respectively. The effective tax rate differs from the United States
statutory rate of 35 percent, generally due to foreign income exclusion and due
to the effects of state and foreign income taxes, net of federal tax benefits.
The full year 2009 actual tax rate was 31.3 percent and was lower than the prior
year rate of 33.9 percent and the United States statutory rate of 35 percent
primarily due to the benefit of restructuring certain foreign subsidiaries which
resulted in a one-time adjustment for certain foreign tax benefits and other
one-time discrete events lowering the rate about 132 basis
points. The on-going effective tax rate is projected at about 32.5
percent. The projected tax rate will continue to be lower than the
2008 rate and the statutory
- 16
-
rate
primarily due to the indefinite reinvestment of foreign earnings and reduced
taxes on foreign and repatriated earnings after the restructuring of certain
foreign entities. The Company has the ability to indefinitely
reinvest these foreign earnings based on the earnings and cash projections of
its other operations as well as cash on hand and available credit.
Net
Income
Net
income for 2009 was $26.7 million compared to 2008 net income of $44.7
million. Net income attributable to Franklin Electric Co., Inc. for
2009 was $26.0 million, or $1.12 per diluted share, compared to 2008 net income
attributable to Franklin Electric Co., Inc. of $44.1 million or $1.90 per
diluted share.
2008 //
2007
OVERVIEW
Sales for
2008 were up a total of 24 percent from 2007. About 15 percent was
attributable to sales from the Company’s acquisitions and about 9 percent from
organic growth. Fueling Systems product sales increased to 25 percent of the
Company’s total 2008 sales from about 22 percent in 2007. Earnings
increased in 2008 primarily due to the higher sales volume and product mix
changes. Fueling Systems product sales increased about 40
percent from 2007 resulting in significant earnings improvement as the Segment
leveraged its fixed costs. Sales growth of the Company slowed
significantly in the fourth quarter of 2008 primarily as a result of broad
economic deterioration in our end markets.
RESULTS OF
OPERATIONS
Net
Sales
(In millions)
|
2008
|
2007
|
2008
v 2007
|
|||||||||
Net
Sales
|
||||||||||||
Water
Systems
|
$
|
557.0
|
$
|
466.8
|
$
|
90.2
|
||||||
Fueling
Systems
|
$
|
188.6
|
$
|
135.2
|
$
|
53.4
|
||||||
Other
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Consolidated
|
$
|
745.6
|
$
|
602.0
|
$
|
143.6
|
Net sales
for 2008 were $745.6 million, an increase of $143.6 million or about 24 percent
compared to 2007 sales of $602.0 million. The full year incremental impact of
sales from businesses acquired during 2007 and acquisitions in 2008 was $87.7
million. Sales revenue increased by $6.3 million or about 1 percent
in 2008 due to foreign exchange rate changes. However the U.S. dollar
strengthened against most foreign currencies late in 2008, negatively impacting
fourth quarter sales. Overall organic growth for 2008, including
foreign exchange rate changes, was $55.9 million or about 9
percent.
Net
Sales-Water Systems
Globally,
Water Systems sales increased in 2008 by about 19 percent from
2007. The increase in Water Systems sales was due primarily to sales
attributable to acquisitions. Excluding acquisitions, Water Systems
sales increased about 1 percent versus 2007. Sales growth was impacted by the
reduction in the number of new housing starts in the United States and portions
of Western Europe and a reduction in inventory held by distributors and
contractors.
Net
Sales-Fueling Systems
Globally,
Fueling Systems sales for 2008 were $188.6 million, an increase of $53.4 million
or about 40 percent compared to 2007. All of the sales increase was
organic. Fueling Systems revenue growth was led by vapor recovery
system sales in California. Management estimates that as of year-end
2008, 45 to 50 percent of the 11,200 filling stations in California had
installed vapor control systems and that Franklin Fueling Systems supplied over
90 percent of these installations. In late 2008, the rate of
vapor recovery system installations in California slowed. The Company
believes that some of this slowing was due to the general economic environment
and the difficulty
- 17
-
station
owners had in obtaining debt financing for new equipment. Additionally, a
competitive vapor management control system was introduced by Veeder-Root
Company.
Fueling
Systems sales also increased in key international markets including China, other
areas of Asia, and Latin America during the year.
Cost
of Sales
Cost of
sales as a percent of net sales for 2008 and 2007 was 69.6 percent and 71.3
percent, respectively. Correspondingly, the gross profit margin increased to
30.4 percent from 28.7 percent. The Company’s gross profit was $226.9 million,
up by $54.1 million from the $172.8 million in 2007. Of the $54.1
million increase, about $29.0 was the result of volume and sales mix
improvements; and about $26.9 million was attributable to
acquisitions. Gross profit was reduced by $6.8 million as a result of
reduced facility utilization consistent with management’s plan to reduce
finished goods inventory and increase inventory turns over the course of the
year. Sales price was also a factor in the gross profit increase,
partially offset by higher material, freight and warranty expenses in the year
versus 2007. During the fourth quarter of 2008 raw materials
commodity costs declined significantly.
Selling,
General and Administrative (“SG&A”)
Selling
and administrative (“SG&A”) expense as a percent of net sales for 2008 and
2007 was 19.8 percent and 19.9 percent, respectively. SG&A expense spending
increased by $28.2 million in 2008 compared to last year. The
acquisitions of Pump Brands (South Africa), the pump division of Monarch
Industries (Canada), Industrias Schneider SA (Brazil), Western Pumps and Cal
Pump (United States) added approximately $18.0 million of selling, general and
administrative expenses to the Water Systems segment during 2008. Excluding
acquisitions, the Company’s overall marketing and selling expenses in 2008
increased by $3.7 million to the prior year. Additionally, expenses related to
variable performance based compensation increased by approximately $3.9 million
in 2008 versus 2007.
Restructuring
Expenses
There
were $2.2 million of nonrecurring restructuring expenses in 2008 compared to
$3.9 million in 2007. In December 2008, the Company announced Phase 3
of its Global Manufacturing Realignment Program for its manufacturing facilities
in North America and Brazil as described above. Of the Company’s
pretax charge of $8.4 million in Phase 3, $2.2 million was incurred in the
fourth quarter of 2008.
During
the first quarter of 2007, the Company initiated Phase 2 of its Global
Manufacturing Realignment Program. Phase 2 of the realignment plan included
expanding facilities in low-cost regions and shifting production out of higher
cost manufacturing facilities. During the first quarter 2008, having
finished construction of the new pump plant in Linares, Mexico and the
consolidation of other manufacturing facilities, the Company completed Phase 2 of the
Global Manufacturing Realignment Program. In total, this phase
included severance and equipment relocation costs of $4.0 million pre-tax, with
$3.9 million in 2007 and $0.1 million in the first quarter
2008.
Operating
Income
Operating
income was $76.7 million in 2008, up $27.5 million from 2007 operating income of
$49.2 million.
(In
millions)
|
2008
|
2007
|
2008
v 2007
|
|||||||||
Operating
income/ (loss)
|
||||||||||||
Water
Systems
|
$
|
67.6
|
$
|
56.7
|
$
|
10.9
|
||||||
Fueling
Systems
|
$
|
49.4
|
$
|
24.6
|
$
|
24.8
|
||||||
Other
|
$
|
(40.3
|
)
|
$
|
(32.1
|
)
|
$
|
(8.2
|
)
|
|||
Consolidated
|
$
|
76.7
|
$
|
49.2
|
$
|
27.5
|
Operating
Income-Water Systems
Water
Systems operating income was $67.6 million for 2008, up $10.9 million or about
19 percent versus the same period a year ago. Operating margins were
basically unchanged at 12.1 percent to sales in 2008 versus in the prior year of
12.2 percent.
- 18
-
Operating
Income-Fueling Systems
Fueling
Systems operating income was $49.4 million, an increase of $24.8 million or
about 100 percent versus 2007. Operating margins improved to 26.2
percent of sales versus 18.2 percent in the prior year. Fueling
Systems operating income improved primarily as a result of sales volume
increases.
Operating
Income-Other
Operating
income other is composed primarily of unallocated general and administrative
expenses. General and administrative expense increases were primarily
due to higher compensation expenses. Other SG&A increases were related to
the realignment of general and administrative expenses of acquired companies
within the Water Systems segment into the corporate structure.
Interest
Expense
Interest
expense for 2008 and 2007 was $11.0 million and $8.1 million, respectively.
Interest expense increased in 2008 due primarily to debt increases associated
with the acquisitions, as well as increased working capital.
Other
Income or Expense
Other
Income or Expense for 2008 and 2007 was $1.8 million income and $3.4 million
income, respectively. Included in “Other income” for both 2008 and
2007 was interest income of $2.1 and $2.2 million, primarily derived from the
investment of cash balances in short-term U.S. treasury and agency securities.
Also, included in other income in 2008 and 2007 was income from equity
investments of $0.7 million and $0.9 million. In 2008, the Company
reached an agreement in principle to settle a trademark licensing dispute and
recorded a pre-tax expense of $0.9 million to reflect the settlement
payment.
Foreign
Exchange
For 2008
foreign currency-based transactions were not significant and were a gain of
about $0.1 million for 2007.
Income
Taxes
The
provision for income taxes in 2008 and 2007 was $22.9 million and $15.4 million,
respectively. The effective tax rates for 2008 and 2007 were 33.9 and 34.6
percent, respectively. The effective tax rate differs from the United States
statutory rate of 35 percent, generally due to foreign income exclusion and due
to the effects of state and foreign income taxes, net of federal tax
benefits.
Net
Income
Net
income for 2008 was $44.7 million compared to 2007 net income of $29.1
million. Net income attributable to Franklin Electric Co., Inc. for
2008 was $44.1 million, or $1.90 per diluted share, compared to 2007 net income
attributable to Franklin Electric Co., Inc. of $28.7 million or $1.22 per
diluted share.
CAPITAL RESOURCES AND
LIQUIDITY
The
Company’s primary sources of liquidity are cash flows from operations and funds
available under its committed, unsecured, revolving credit agreement maturing
2011 (the “Agreement”) in the amount of $120.0 million and its amended and
restated uncommitted note purchase and private shelf agreement (the “Prudential
Agreement”) in the amount of $175.0 million. The Company has no
scheduled principal payments on the Prudential Agreement until
2015. As of January 2, 2010 the Company had $117.8 million borrowing
capacity under the Agreement and $25.0 million borrowing capacity under the
Prudential Agreement. The uncertainty in the financial and credit
markets has not impacted the liquidity of the Company and the Company expects
that ongoing requirements for operations, capital expenditures, dividends, and
debt service will be adequately funded from its existing credit
agreements. The Agreement and the Prudential Agreement do not contain
any material adverse changes, or similar provisions that would accelerate the
maturity of amounts drawn under either agreement. The Agreement and Prudential
Agreement contain various customary conditions and covenants, which limit, among
other things, borrowings, interest coverage, loans or advances and
investments. As of January 2, 2010, the Company was in compliance
with all covenants.
The
Company believes that internally generated funds and existing credit
arrangements provide sufficient liquidity to meet current commitments and
service existing debt. As of year-end 2009, the Company’s key debt covenant
ratio of gross debt divided by earnings before interest, taxes, depreciation and
amortization (EBITDA) was 1.9 compared
- 19
-
to the
current covenant limit per the debt agreement of 3.0 and compared to 1.8 at
year-end 2008. The Company’s revolving loan agreement with its banks is in place
until the end of 2011 and the Company has no scheduled principal payments on its
long term debt until 2015. The Company presents the non-GAAP measure
gross debt to EBITDA (earnings before interest, taxes, depreciation and
amortization) ratio because maintaining the ratio below 3.0 is an important
covenant in the Company's principal credit agreements that is closely monitored
by management. The table below shows how EBITDA is derived from net
income.
EBITDA
reconciliation to net income
|
2009
|
2008
|
2007
|
|||||||||
(In
millions)
|
||||||||||||
Net
income
|
$ | 26.0 | $ | 44.1 | $ | 28.7 | ||||||
Depreciation
and amortization
|
25.4 | 24.2 | 20.4 | |||||||||
Interest
expense, net
|
9.5 | 11.0 | 8.1 | |||||||||
Provision
for income taxes
|
12.2 | 22.9 | 15.4 | |||||||||
Estimated
EBITDA for acquisitions (a)
|
4.4 | |||||||||||
Add-back
for certain costs (b)
|
5.9 | 2.1 | - | |||||||||
Earnings
before interest, taxes, depreciation and amortization
(EBITDA)
|
$ | 79.0 | $ | 104.3 | $ | 77.0 | ||||||
Total
debt
|
$ | 152.0 | $ | 186.2 | $ | 161.7 | ||||||
Total
debt divided by EBITDA
|
1.9 | 1.8 | 2.1 |
(a)
Proforma pre-acquisition EBITDA for acquired entities per the covenant
terms
(b) In
2008 and 2009, the Company agreed with the lenders that certain of the
restructuring costs and one time tax adjustments for uncertain tax positions
will be added back to the EBITDA calculation
Net cash
flows from operating activities were $112.6 million in 2009 compared to $44.4
million in 2008 and $4.2 million in 2007. The operating cash flow
improvement in 2009 was primarily a result of lower accounts receivable, due to
lower sales and the timing of customer payments, reduced inventories, as
management focused on reducing inventory levels due to economic and business
conditions including the reduced year over year sales, and the timing of tax
payments in 2009. Income taxes were a source of cash in 2009 as tax
payments were decreased in 2009, consistent with estimated payment requirements,
versus an overpayment of taxes in 2008. The operating cash flow
improvement in 2008 was largely a result of greater Fueling Systems income from
continuing operations and normal fluctuations in operating assets and
liabilities related to overall results of operations. Fueling Systems
revenue growth in 2008 was led by strong vapor recovery system sales in
California.
Net cash
used in investing activities was $28.7 million in 2009 compared to $65.0 million
in 2008 and $63.2 million in 2007. During 2009 the Company acquired
Vertical S.p.A. for $16.8 million, net of acquired cash. The
acquisition was funded with cash on hand. Additionally, $12.0 million
was used for property, plant and equipment additions in 2009. The
2008 activities were primarily related to $38.4 million, net of cash acquired,
used to acquire Industrias Schneider on January 9, 2008. The
acquisition was funded with cash and long-term borrowings under the
Agreement. Additionally, $25.6 million was used for property, plant
and equipment additions in 2008. During 2007 the Company acquired
Pump Brands (Pty) Limited in the second quarter and the pump division of Monarch
Industries Limited in the third quarter at an aggregate purchase price of $37.0
million, net of cash acquired, and utilized $28.3 million to fund property,
plant and equipment additions.
Net cash
used in financing activities of $47.3 million in 2009 was primarily related to
short-term debt repayments, net of short-term debt proceeds, and dividends of
$11.9 million paid to shareholders. Net cash provided by financing
activities of $8.9 million in 2008 was primarily related to proceeds from new
debt incurred, net of repayments to date. Also included was the
repurchase of approximately 235,100 shares of the Company’s common stock for
$7.8 million and the payment of $11.4 million in dividends to its
shareholders. Net cash provided by financing activities of $87.0
million in 2007 was primarily related to proceeds from new debt incurred, net of
repayments to date, the repurchase of approximately 187,600 shares of common
stock for $8.1 million, and the payment of $10.8 million in dividends to
shareholders.
- 20
-
2009 AGGREGATE CONTRACTUAL
OBLIGATIONS
Most of
the Company’s contractual obligations to third parties are debt obligations. In
addition, the Company has certain contractual obligations for future lease
payments, contingency payments and purchase obligations. The payment schedule
for these contractual obligations is as follows:
(In
millions)
|
Less
than
|
More
than
|
||||||||||||||||||
Total
|
1
Year
|
1-3
Years
|
3-5
Years
|
5
Years
|
||||||||||||||||
Debt
|
$ | 150.7 | $ | 0.2 | $ | 0.5 | $ | 0.0 | $ | 150.0 | ||||||||||
Debt
interest
|
65.2 | 8.7 | 17.4 | 17.4 | 21.7 | |||||||||||||||
Capital
leases
|
1.2 | 0.5 | 0.5 | 0.2 | 0.0 | |||||||||||||||
Operating
leases
|
21.7 | 7.0 | 8.4 | 2.1 | 4.2 | |||||||||||||||
Contingencies
from acquisitions (Healy Systems and Western Pump)
|
1.7 | 1.7 | - | - | - | |||||||||||||||
Purchase
obligations
|
1.5 | 1.5 | - | - | - | |||||||||||||||
$ | 242.0 | $ | 19.6 | $ | 26.8 | $ | 19.7 | $ | 175.9 |
The
calculated debt interest was based on the fixed rate of 5.79 percent for the
Company’s long-term debt under the Prudential Agreement and the six month Euro
Interbank Offered Rate (“Euribor”) plus one percent paid on subsidiary debt of
€0.6 million maturing in 2012.
The Healy
Systems stock purchase agreement provided for additional contingent payments of
5 percent of certain Healy Systems product sales over the next five years from
the year of acquisition in 2006. The Western Pump stock purchase
agreement provided for additional contingent payments of 7.5 percent of business
net sales for the two year period commencing April 1, 2008; however the
aggregate amount shall not exceed $0.8 million.
The
Company has pension and other post-retirement benefit obligations not included
in the table above which will result in future payments of $15.9
million. The Company also has unrecognized tax benefits, none of
which are included in the table above. The unrecognized tax benefits
of approximately $6.8 million have been recorded as liabilities and the Company
is uncertain as to if or when such amounts may be settled. Related to the
unrecognized tax benefits, the Company has also recorded a liability for
potential penalties and interest of $0.7 million.
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.
- 21
-
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.
CRITICAL ACCOUNTING
ESTIMATES
Management’s
discussion and analysis of its financial condition and results of operations are
based upon the Company’s consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. Management evaluates its estimates
on an on-going basis. Estimates are based on historical experience
and on other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. There were no material changes to
estimates in 2009.
The
Company’s critical accounting estimates are identified below:
Allowance
for Uncollectible Accounts:
Accounts
receivable is comprised of balances due from customers net of estimated
allowances for uncollectible accounts. In determining allowances, historical
collection experience, current trends, aging of accounts receivable, and
periodic credit evaluations of customers’ financial condition are analyzed to
arrive at appropriate allowances. Allowance levels change as customer-specific
circumstances and the other analysis areas noted above change. Based
on current knowledge, the Company does not believe there is a reasonable
likelihood that there will be a material change in the estimates or assumptions
used to determine the allowance.
Inventory
Valuation:
The
Company uses certain estimates and judgments to value inventory. Inventory is
recorded at the lower of cost or market. The Company reviews its inventories for
excess or obsolete products or components. Based on an analysis of historical
usage, management’s evaluation of estimated future demand, market conditions and
alternative uses for possible excess or obsolete parts, carrying values are
adjusted. The carrying value is reduced regularly to reflect the age
and current anticipated product demand. If actual demand differs from the
estimates, additional reductions would be necessary in the period such
determination is made. The Company’s reserve for excess or obsolete
products or components as of year end 2009 was $11.8 million. Excess
and obsolete inventory is periodically disposed of through sale to third
parties, scrapping or other means, and the reserves are appropriately
reduced.
Business
Combinations:
The
Company follows the guidance under FASB ASC 805, Business Combinations. The
acquisition purchase price is allocated to the assets acquired and liabilities
assumed based upon their respective fair values. The Company shall
report in its financial statements provisional amounts for the items for which
accounting is incomplete. Goodwill is adjusted for any changes to
provisional amounts made within the measurement period. The
Company utilizes management estimates and an independent third-party valuation
firm to assist in determining the fair values of assets acquired and liabilities
assumed. Such estimates and valuations require the Company to make
significant assumptions, including projections of future events and operating
performance. The Company has not made any material changes to the
method of valuing fair values of assets acquired and liabilities assumed during
the last three years.
Redeemable
Noncontrolling Interest:
In the
first quarter of 2009 the Company completed the acquisition of 75 percent of
Vertical S.p.A. The remaining 25 percent noncontrolling interest was
recorded at fair value as of the acquisition date. The
noncontrolling interest holders have the option to require the Company to redeem
their ownership interests in the future with cash. The redemption
value will be derived using a specified formula based on an earnings multiple
adjusted by the net debt position of Vertical, subject to a redemption floor
value. Impairment assessments are performed on a
quarterly
- 22
-
basis. When
the redemption amount is greater than the carrying amount (after the allocation
of income or loss to the noncontrolling interest), an entity should record an
additional entry for the excess by recording the excess in shareowners’ equity
of the consolidated balance sheets.
Trade
Names and Goodwill:
According
to FASB ASC 350, Intangibles –
Goodwill and Other, intangible assets with indefinite lives must be
tested for impairment at least annually or more frequently if events or
circumstances indicate that assets might be impaired. The Company
uses a variety of methodologies in conducting impairment assessments including
discounted cash flow models, which the Company believes are consistent with
hypothetical market data. For indefinite-lived assets apart from
goodwill, primarily trade names for the Company, if the fair value is less than
the carrying amount, an impairment charge is recognized in an amount equal to
that excess. The Company has not made any material changes to the
method of evaluating impairments during the last three years. Based
on current knowledge, the Company does not believe there is a reasonable
likelihood that there will be a material change in the estimates or assumptions
used to determine impairment.
Also
under the guidance of FASB ASC 350, goodwill is not amortized; however it is
tested at the reporting unit level for impairment annually or more frequently
whenever events or changes in circumstances indicate that there may be
impairment. Reporting units are operating segments or one level
below, known as components, which can be aggregated for testing
purposes. The Company has determined its components meet the
aggregation criteria and as a result, goodwill is allocated to the Company’s
reporting units, Water Systems and Fueling Systems for testing. In
assessing the recoverability of goodwill (i.e., impairment testing), the Company
looks at both the market valuation approach, where the Company’s current and
projected financial results are compared to entities of similar size and
industry to determine the market value of the Company, and the cash flow
approach which requires assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective
assets. Such cash flows consider factors such as expected future
operating income and historical trends, as well as the effects of demand and
competition. If the Company’s assumptions and estimates change whereby fair
value of the reporting units is below their associated carrying values, the
Company may be required to record impairment. Goodwill
included on the balance sheet as of year ended 2009 was $161.8
million.
During
the fourth quarter of 2009, the Company completed its annual impairment test of
indefinite lived trade names and goodwill and determined there was no
impairment. Significant judgment is required to determine if an
indicator of impairment has taken place. Factors to be considered
include: adverse change in operating results, decline in strategic business
plans, significantly lower future cash flows, and sustainable decline in market
data such as market capitalization. A 10 percent decrease in the fair
value estimates used in the impairment test would not have changed this
determination. This sensitivity analysis required the use of judgment
and numerous subjective assumptions, which, if actual experience varies, could
result in material differences in the requirements for impairment
charges. Further, an extended downturn in the economy may impact
certain components of the operating segments more significantly and could result
in changes to the aggregation assumptions and impairment
determination.
Income
Taxes:
Under the
requirements of FASB ASC 740, Income Taxes, the Company
records deferred tax assets and liabilities for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The Company operates in multiple tax jurisdictions with
different tax rates, and determines the allocation of income to each of these
jurisdictions based upon various estimates and assumptions. In the normal course
of business the Company will undergo tax audits by various tax jurisdictions.
Such audits often require an extended period of time to complete and may result
in income tax adjustments if changes to the allocation are required between
jurisdictions with different tax rates. Although the Company has recorded all
probable income tax contingencies in accordance with FASB ASC 740, these
accruals represent estimates that are subject to the inherent uncertainties
associated with the tax audit process, and therefore include
contingencies. Management judgment is required in determining the
Company’s provision for income taxes, deferred tax assets and liabilities,
which, if actual experience varies, could result in material adjustments to
deferred tax assets and liabilities. The Company’s operations involve dealing
with uncertainties and judgments in the application of complex tax regulations
in multiple jurisdictions. The final taxes paid are dependent upon many factors,
including negotiations with taxing authorities in various jurisdictions and
resolution of disputes arising from federal, state, and international tax
audits.
- 23
-
The
Company has not made any material changes to the method of developing the income
tax provision during the last three years. Based on current
knowledge, the Company does not believe there is a reasonable likelihood that
there will be a material change in the estimates or assumptions use to develop
the income tax provision.
Pension
and Employee Benefit Obligations:
With the
assistance of the Company’s actuaries, the discount rates used to determine
pension and post-retirement plan liabilities are calculated using a yield-curve
approach. The yield-curve approach discounts each expected cash flow of the
liability stream at an interest rate based on high quality corporate bonds. The
present value of the discounted cash flows is summed and an equivalent
weighted-average discount rate is calculated. Market conditions have caused the
discount rate to move from 6.90 percent last year to 5.75 percent this year for
pension plans and from 6.90 percent last year to 5.50 percent this year for
postretirement health and life insurance. A change in the discount rate selected
by the Company of 25 basis points would result in a change of about $0.2 million
of employee benefit expense. The Company consults with actuaries and investment
advisors in making its determination of the expected long-term rate of return on
plan assets. Using input from these consultations such as long-term investment
sector expected returns, the correlations and standard deviations thereof, and
the plan asset allocation, the Company has assumed an expected long-term rate of
return on plan assets of 8.50 percent as of year-end 2009. This is the result of
stochastic modeling showing the 50th
percentile median return at least at or above 8.50 percent. A change in
the long-term rate of return selected by the Company of 25 basis points would
result in a change of about $0.3 million of employee benefit
expense.
Share-Based
Compensation:
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with a single approach and amortized using
a straight-line attribution method over the option’s vesting period. Options
granted to retirement eligible employees are immediately expensed. The Company
uses historical data to estimate the expected volatility of its stock; the
weighted average expected life; the period of time options granted are expected
to be outstanding; and its dividend yield. The risk-free rates for periods
within the contractual life of the option are based on the U.S. Treasury yield
curve in effect at the time of the grant. The Company has not made
any material changes to the method of estimating fair values during the last
three years. Based on current knowledge, the Company does not believe
there is a reasonable likelihood that there will be a material change in the
estimates or assumptions use to develop the fair value of stock based
compensation.
FACTORS THAT MAY AFFECT
FUTURE RESULTS
This
annual report on Form 10-K contains certain forward-looking information, such as
statements about the Company’s financial goals, acquisition strategies,
financial expectations including anticipated revenue or expense levels, business
prospects, market positioning, product development, manufacturing re-alignment,
capital expenditures, tax benefits and expenses, and the effect of contingencies
or changes in accounting policies. Forward-looking statements are
typically identified by words or phrases such as “believe,” “expect,”
“anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,”
“goal,” “target,” “strategy,” and similar expressions or future or conditional
verbs such as “may,” “will,” “should,” “would,” and “could.” While
the Company believes that the assumptions underlying such forward-looking
statements are reasonable based on present conditions, forward-looking
statements made by the Company involve risks and uncertainties and are not
guarantees of future performance. Actual results may differ materially from
those forward-looking statements as a result of various factors, including
general economic and currency conditions, various conditions specific to the
Company’s business and industry, new housing starts, weather conditions, market
demand, competitive factors, changes in distribution channels, supply
constraints, technology factors, litigation, government and regulatory actions,
the Company’s accounting policies, future trends, and other risks, all as
described in Item 1A and Exhibit 99.1 of this Form 10-K. Any
forward-looking statements included in this Form 10-K are based upon information
presently available. The Company does not assume any obligation to update any
forward-looking information.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company is subject to market risk associated with changes in foreign currency
exchange rates and interest rates. Foreign currency exchange rate risk is
mitigated through several means: maintenance of local production facilities in
the markets served, invoicing of customers in the same currency as the source of
the products, prompt settlement of inter-company balances utilizing a global
netting system and limited use of foreign currency denominated
debt.
- 24
-
The
results of operations are exposed to changes in interest rates primarily with
respect to borrowings under the Company’s revolving credit agreement (the
“Agreement”), where interest rates are tied to the prime rate or London
Interbank Offered Rates (LIBOR). The average interest rate associated with
borrowings against the credit facility paid by the Company in 2009 was 0.82
percent. As of January 2, 2010, the Company had no outstanding
borrowings under the Agreement. The Company does not, as a matter of
policy, enter into derivative contracts for speculative purposes.
- 25
-
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED
STATEMENTS OF INCOME
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
||||||||||||
(In
thousands, except per share amounts)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 625,991 | $ | 745,627 | $ | 602,025 | ||||||
Cost
of sales
|
438,152 | 518,702 | 429,205 | |||||||||
Gross
profit
|
187,839 | 226,925 | 172,820 | |||||||||
Selling,
general and administrative expenses
|
133,629 | 147,987 | 119,748 | |||||||||
Restructuring
expenses
|
6,195 | 2,228 | 3,898 | |||||||||
Operating
income
|
48,015 | 76,710 | 49,174 | |||||||||
Interest
expense
|
(9,548 | ) | (10,968 | ) | (8,147 | ) | ||||||
Other
income/(expense)
|
(26 | ) | 1,840 | 3,414 | ||||||||
Foreign
exchange income
|
451 | 5 | 80 | |||||||||
Income
before income taxes
|
38,892 | 67,587 | 44,521 | |||||||||
Income
taxes
|
12,168 | 22,925 | 15,434 | |||||||||
Net
income
|
26,724 | 44,662 | 29,087 | |||||||||
Less:
net income attributable to noncontrolling interests
|
(738 | ) | (551 | ) | (404 | ) | ||||||
Net
income attributable to Franklin Electric Co., Inc.
|
25,986 | 44,111 | 28,683 | |||||||||
|
||||||||||||
Income
per share:
|
||||||||||||
Basic
|
$ | 1.13 | $ | 1.92 | $ | 1.24 | ||||||
Diluted
|
$ | 1.12 | $ | 1.90 | $ | 1.22 | ||||||
Dividends
per common share
|
$ | 0.50 | $ | 0.50 | $ | 0.47 |
See Notes
to Consolidated Financial Statements.
- 26
-
CONSOLIDATED
BALANCE SHEETS
|
||||||||
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
||||||||
|
||||||||
(In
thousands)
|
|
|
||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 86,875 | $ | 46,934 | ||||
Receivables,
less allowances of
|
||||||||
$2,464
and $2,091, respectively
|
62,847 | 68,048 | ||||||
Inventories:
|
||||||||
Raw
material
|
53,889 | 67,785 | ||||||
Work-in-process
|
12,555 | 15,204 | ||||||
Finished
goods
|
82,288 | 105,496 | ||||||
LIFO
reserve
|
(14,328 | ) | (18,612 | ) | ||||
134,404 | 169,873 | |||||||
Deferred
income taxes
|
15,577 | 16,511 | ||||||
Other
current assets
|
11,890 | 16,294 | ||||||
Total
current assets
|
311,593 | 317,660 | ||||||
Property,
plant and equipment, at cost
|
||||||||
Land
and buildings
|
83,917 | 79,284 | ||||||
Machinery
and equipment
|
188,543 | 172,706 | ||||||
Furniture
& fixtures
|
18,772 | 13,807 | ||||||
Other
|
3,533 | 11,556 | ||||||
294,765 | 277,353 | |||||||
Less
allowance for depreciation
|
(147,594 | ) | (132,818 | ) | ||||
147,171 | 144,535 | |||||||
|
||||||||
|
||||||||
Intangible
assets
|
88,912 | 75,737 | ||||||
Goodwill
|
161,761 | 148,082 | ||||||
Other
assets
|
8,861 | 8,043 | ||||||
Total
assets
|
$ | 718,298 | $ | 694,057 | ||||
- 27
-
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 31,699 | $ | 24,505 | ||||
Accrued
expenses
|
44,261 | 47,991 | ||||||
Income
taxes
|
6,448 | 8,239 | ||||||
Current
maturities of long-term
|
||||||||
debt
and short-term borrowings
|
735 | 677 | ||||||
Total
current liabilities
|
83,143 | 81,412 | ||||||
Long-term
debt
|
151,242 | 185,528 | ||||||
Deferred
income taxes
|
3,266 | 4,161 | ||||||
Employee
benefit plan obligations
|
74,179 | 69,142 | ||||||
Other
long-term liabilities
|
8,865 | 3,707 | ||||||
Commitments
and contingencies
|
- | - | ||||||
Redeemable
noncontrolling interest
|
7,393 | - | ||||||
Shareowners'
equity:
|
||||||||
Common
stock (65,000 shares authorized, $.10 par value)
|
||||||||
outstanding
(23,128 and 23,018, respectively)
|
2,313 | 2,302 | ||||||
Additional
capital
|
119,133 | 113,397 | ||||||
Retained
earnings
|
285,467 | 271,274 | ||||||
Accumulated
other comprehensive income/(loss)
|
(18,740 | ) | (38,036 | ) | ||||
Total
shareowners' equity
|
388,173 | 348,937 | ||||||
Noncontrolling
interest
|
2,037 | 1,170 | ||||||
Total
equity
|
390,210 | 350,107 | ||||||
Total
liabilities and equity
|
$ | 718,298 | $ | 694,057 | ||||
|
See Notes
to Consolidated Financial Statements.
- 28
-
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
|
||||||||||||
(In
thousands)
|
|
|
||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income
|
$ | 26,724 | $ | 44,662 | $ | 29,087 | ||||||
Adjustments
to reconcile net income to net
|
||||||||||||
cash
flows from operating activities:
|
||||||||||||
Depreciation
and amortization
|
25,385 | 24,164 | 20,359 | |||||||||
Share
based compensation
|
4,976 | 3,683 | 3,762 | |||||||||
Deferred
income taxes
|
(1,543 | ) | 12,395 | 913 | ||||||||
Loss
on disposals of plant and equipment
|
3,283 | 176 | 800 | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Receivables
|
15,968 | (2,750 | ) | (6,018 | ) | |||||||
Inventories
|
43,884 | (15,611 | ) | (29,092 | ) | |||||||
Accounts
payable and other accrued expenses
|
(6,798 | ) | (7,693 | ) | (4,473 | ) | ||||||
Income
taxes
|
9,415 | (8,973 | ) | (3,698 | ) | |||||||
Excess
tax from share-based payment arrangements
|
(144 | ) | (856 | ) | (2,182 | ) | ||||||
Employee
benefit plans
|
(1,604 | ) | (215 | ) | 726 | |||||||
Other
|
(6,961 | ) | (4,534 | ) | (5,945 | ) | ||||||
Net
cash flows from operating activities
|
112,585 | 44, 448 | 4, 239 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Additions
to plant and equipment
|
(12,039 | ) | (25,641 | ) | (28,281 | ) | ||||||
Proceeds
from sale of plant and equipment
|
73 | 21 | 347 | |||||||||
Additions
to other assets
|
(5 | ) | (965 | ) | (3 | ) | ||||||
Purchases
of securities
|
- | (9,000 | ) | (420,575 | ) | |||||||
Proceeds
from sale of securities
|
- | 9,000 | 420,575 | |||||||||
Cash
paid for acquisitions, net of cash acquired
|
(16,767 | ) | (38,380 | ) | (37,015 | ) | ||||||
Proceeds
from sale of business
|
- | - | 1,725 | |||||||||
Net
cash flows from investing activities
|
(28,738 | ) | (64,965 | ) | (63,227 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from long-term debt
|
28,000 | 70,000 | 200,000 | |||||||||
Repayment
of long-term debt
|
(64,212 | ) | (46,236 | ) | (101,428 | ) | ||||||
Proceeds
from issuance of common stock
|
666 | 3,446 | 5,038 | |||||||||
Excess
tax from share-based payment arrangements
|
144 | 856 | 2,182 | |||||||||
Purchases
of common stock
|
- | (7,816 | ) | (8,118 | ) | |||||||
Reduction
of loan to ESOP Trust
|
- | - | 200 | |||||||||
Dividends
paid
|
(11,890 | ) | (11,369 | ) | (10,834 | ) | ||||||
Net
cash flows from financing activities
|
(47,292 | ) | 8,881 | 87,040 | ||||||||
Effect
of exchange rate changes on cash
|
3,386 | (6,682 | ) | 3,244 | ||||||||
Net
change in cash and equivalents
|
39,941 | (18,318 | ) | 31,296 | ||||||||
Cash
and equivalents at beginning of period
|
46,934 | 65,252 | 33,956 | |||||||||
Cash
and equivalents at end of period
|
$ | 86,875 | $ | 46,934 | $ | 65,252 | ||||||
- 29
-
(In
thousands)
|
||||||||||||
Cash
paid for income taxes
|
$ | 15,657 | $ | 22,345 | $ | 19,074 | ||||||
Cash
paid for interest
|
$ | 9,522 | $ | 11,234 | $ | 7,144 | ||||||
Non
–cash items:
|
||||||||||||
Payable
to seller of Healy Systems, Inc.
|
$ | 1,585 | $ | 569 | $ | 1,887 | ||||||
Payable
to seller of Western Pump, Inc.
|
$ | 118 | $ | 77 | - | |||||||
Additions
to property, plant, and equipment, not yet paid
|
$ | 1,822 | $ | 185 | $ | 517 | ||||||
Capital
equipment lease
|
$ | - | $ | 925 | - | |||||||
Receivable
from sale of EMPD
|
$ | - | - | $ | 427 | |||||||
Stock
issued in connection with stock option exercises,
|
$ | 291 | - | $ | 88 | |||||||
forfeitures,
or stock retirements
|
See Notes to Consolidated Financial
Statements.
- 30
-
CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME/(LOSS)
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
(In
thousands)
|
Common
Shares Outstanding
|
Common
Stock
|
Additional
Capital
|
Retained
Earnings
|
Loan
to ESOP Trust
|
Accumulated
Other Comprehensive Income/ (Loss)
|
Comprehensive
Income/(Loss)
|
Non
controlling
Interest
|
||||||||||||||||||||||||
Balance
year end 2006
|
23,009 | $ | 2,301 | $ | 94,356 | $ | 236,780 | $ | (200 | ) | $ | 12,594 | $ | 1,025 | ||||||||||||||||||
Net
income
|
28,683 | $ | 28,683 | 404 | ||||||||||||||||||||||||||||
Currency
translation adjustment
|
12, 630 | 12, 630 | ||||||||||||||||||||||||||||||
Minimum
pension liability adjustment, net of tax $26
|
(741 | ) | (741 | ) | ||||||||||||||||||||||||||||
Comprehensive
income
|
$ | 40, 572 | ||||||||||||||||||||||||||||||
Dividends
on common stock
|
(10,834 | ) | ||||||||||||||||||||||||||||||
Noncontrolling
dividend
|
(365 | ) | ||||||||||||||||||||||||||||||
Common
stock issued
|
245 | 24 | 5,128 | |||||||||||||||||||||||||||||
Share-based
compensation
|
32 | 3 | 3,762 | |||||||||||||||||||||||||||||
Common
stock repurchased or received for stock options exercised
|
(195 | ) | (19 | ) | (8,305 | ) | ||||||||||||||||||||||||||
Tax
benefit of stock options exercised
|
2,182 | |||||||||||||||||||||||||||||||
Loan
payment from ESOP
|
200 | |||||||||||||||||||||||||||||||
Balance
year end 2007
|
23,091 | $ | 2,309 | $ | 105,428 | $ | 246,324 | $ | - | $ | 24,483 | $ | 1,064 |
Net
income
|
$ | 44,111 | $ | 44,111 | $ | 551 | |||||||||||||||||||||||
Currency
translation adjustment
|
$ | (32,939 | ) | (32,939 | ) | ||||||||||||||||||||||||
Minimum
pension liability adjustment, net of tax $18,071
|
(29,580 | ) | (29,580 | ) | |||||||||||||||||||||||||
Comprehensive
loss
|
$ | (18,408 | ) | ||||||||||||||||||||||||||
Dividends
on common stock
|
(11,369 | ) | |||||||||||||||||||||||||||
Noncontrolling
dividend
|
(445 | ) | |||||||||||||||||||||||||||
Common
stock issued
|
147 | $ | 15 | $ | 3,430 | ||||||||||||||||||||||||
Share-based
compensation
|
16 | 2 | 3,683 | ||||||||||||||||||||||||||
Common
stock repurchased or received for stock options exercised
|
(236 | ) | (24 | ) | (7,792 | ) | |||||||||||||||||||||||
Tax
benefit of stock options exercised
|
856 | ||||||||||||||||||||||||||||
Balance
year end 2008
|
23,018 | $ | 2,302 | $ | 113,397 | $ | 271,274 |
$-
|
$ | (38, 036 | ) | $ | 1,170 |
- 31
-
Common
Shares Outstanding
|
Common
Stock
|
Additional
Capital
|
Retained
Earnings
|
Loan
to ESOP Trust
|
Accumulated
Other Comprehensive Income (Loss)
|
Comprehensive
Income/(Loss)
|
Non
controlling
Interest
|
Redeemable
Noncontrolling
Interest
|
|||||||||||||||||||||||||
Net
income
|
$ | 25,986 | $ | 25,986 | $ | 521 | $ | 217 | |||||||||||||||||||||||||
Currency
translation adjustment
|
$ | 23,797 | 23,797 | 696 | 545 | ||||||||||||||||||||||||||||
Minimum
pension liability adjustment, net of tax $2,800
|
(4,501 | ) | (4,501 | ) | |||||||||||||||||||||||||||||
Comprehensive
income
|
$ | 45,282 | |||||||||||||||||||||||||||||||
Dividends
on common stock
|
(11,540 | ) | |||||||||||||||||||||||||||||||
Noncontrolling
dividend
|
(350 | ) | |||||||||||||||||||||||||||||||
Common
stock issued
|
36 | $ | 3 | $ | 625 | ||||||||||||||||||||||||||||
Share-based
compensation
|
88 | 9 | 4,967 | ||||||||||||||||||||||||||||||
Common
stock repurchased or received for stock options exercised
|
(14 | ) | (1 | ) | (253 | ) | |||||||||||||||||||||||||||
Adjustment
to acquired fair value
|
6,631 | ||||||||||||||||||||||||||||||||
Tax
benefit of stock options exercised
|
144 | ||||||||||||||||||||||||||||||||
Balance
year end 2009
|
23,128 | $ | 2,313 | $ | 119,133 | $ | 285,467 |
$-
|
$ | (18,740 | ) | $ | 2,037 | $ | 7,393 |
See Notes
to Consolidated Financial Statements.
- 32
-
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FRANKLIN
ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Company--“Franklin Electric”
or the “Company” shall refer to Franklin Electric Co., Inc. and its consolidated
subsidiaries.
Fiscal Year--The Company's
fiscal year ends on the Saturday nearest December 31. The financial statements
and accompanying notes are as of and for the years ended January 2, 2010 (52
weeks), January 3, 2009 (53 weeks), and December 29, 2007 (52 weeks) and
referred to as 2009, 2008, and 2007, respectively.
Principles of
Consolidation--The consolidated financial statements include the accounts
of Franklin Electric Co., Inc. and its consolidated subsidiaries. All
intercompany transactions have been eliminated.
Revenue Recognition--Products
are shipped utilizing common carriers direct to customers or, for consignment
products, to customer specified warehouse locations. Sales are recognized when
the Company’s products are shipped direct or, in the case of consignment
products, transferred from the customer specified warehouse location to the
customer, at which time transfer of ownership and risk of loss pass to the
customer. The Company records net sales revenues after discounts at the time of
sale based on specific discount programs in effect, historical data, and
experience.
Research and Development
Expense--The Company’s research and development activities are charged to
expense in the period incurred. The Company incurred expenses of approximately
$6.9 million in 2009, $6.8 million in 2008, and $7.3 million in
2007.
Fair Value of Financial
Instruments--The carrying amount of long-term debt was $151.2 at January
2, 2010 and $185.5 million at January 3, 2009,
respectively. The estimated fair value was $154.3 and $130.4
million at January 2, 2010 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. The Company’s
off-balance sheet instruments consist of operating leases, which are not
significant.
Accounts Receivable, Earned
Discounts, and Allowance for Uncollectible Accounts--Accounts receivable
are stated at estimated net realizable value. Accounts receivable are comprised
of balances due from customers, net of earned discounts and estimated allowances
for uncollectible accounts. Earned discounts are based on specific customer
agreement terms. In determining allowances for uncollectible accounts,
historical collection experience, current trends, aging of accounts receivable,
and periodic credit evaluations of customers’ financial condition are
reviewed. The Company believes that the allowance is appropriate;
however, actual experience could differ from the original estimates, requiring
adjustments to the reserve.
Inventories--Inventories are
stated at the lower of cost or market. The majority of the cost of domestic and
foreign inventories is determined using the first-in, first-out (FIFO) method; a
portion of inventory costs is determined using the last-in, first-out (LIFO)
method. Inventories stated on the LIFO method were approximately
14.9 percent and 12.3
percent of total inventories in 2009 and 2008, respectively. The Company reviews
its inventories for excess or obsolete products or components. Based on an
analysis of historical usage and management’s evaluation of estimated future
demand, market conditions and alternative uses for possible excess or obsolete
parts, reserves are recorded.
Property, Plant and
Equipment--Property, plant and equipment are stated at
cost. Depreciation of plant and equipment is calculated on a straight
line basis over the estimated useful lives of 5 to 20 years for land
improvements and buildings, 5 to 10 years for machinery and equipment, and 5
years for furniture and fixtures.
- 33
-
Maintenance,
repairs, and renewals of a minor nature are expensed as incurred. Betterments
and major renewals which extend the useful lives of buildings, improvements, and
equipment are capitalized. Accelerated methods are used for income tax purposes.
The Company reviews its property, plant and equipment for impairment at the
asset group level whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The Company’s
depreciation expense was $20.2 million, $19.5 million, and $16.5 million in
2009, 2008, and 2007, respectively.
Goodwill and Other Intangible
Assets-- The Company performs goodwill impairment testing for its
reporting units, which have been determined to be Water Systems and Fueling
Systems. In compliance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and
Other, the Company has evaluated the aggregation criteria and determined
that its components can be aggregated. Goodwill testing is performed
on an annual basis in the fourth quarter or more frequently whenever events or a
change in circumstances indicate that there may be impairment. In
testing for impairment, the Company determines the fair value of its reporting
units. Fair value is assessed using a combination of an income
approach, which estimates fair value based upon future revenue, expenses and
cash flows discounted to their present value, and a market approach, which
estimates fair value using market multipliers of various financial measures
compared to a set of comparable public companies.
If the
carrying value of the reporting unit is higher than its fair value, there is an
indication that impairment may exist and the second step of testing as outlined
in FASB ASC 350, must be performed to measure the amount of impairment
loss. The amount of impairment is determined by comparing the implied
fair value of reporting unit goodwill to its carrying value in the same manner
as if the reporting units were being acquired in a business
combination. Specifically, the Company would allocate the fair value
to all of the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that would calculate
the implied fair value of goodwill. If the implied fair value of
goodwill is less than the recorded goodwill, the Company would record an
impairment charge for the difference.
The
Company also tests its indefinite lived trademarks for impairment
annually. Fair value is determined using an income approach,
which estimates fair value based upon future revenue.
Amortization
is recorded for other intangible assets with definite lives calculated on a
basis that reflects cash flows over the estimated useful lives. The
weighted average number of years over which each intangible class is amortized
is 17 years for patents, 6 years for supply agreements, 15 years for technology,
17-20 years for customer relationships, and 8 years for all others.
Warranty Obligations--Warranty
terms are generally two years from date of manufacture or one year from date of
installation. The general warranty liability is recorded when revenue is
recognized and is based on actual historical return rates from the most recent
warranty periods. In 2007, the Company began offering an
extended warranty program to certain Water Systems customers, which provides
warranty coverage up to five years from the date of manufacture. Provisions for
estimated expenses related to product warranty are made at the time products are
sold or when specific warranty issues are identified. These estimates are
established using historical information about the nature, frequency, and
average cost of warranty claims, and expected customer returns. The Company
actively studies trends of warranty claims and takes action to improve product
quality and minimize warranty claims. The Company believes that the warranty
reserve is appropriate; however, actual claims incurred could differ from the
original estimates, requiring adjustments to the reserve.
Income Taxes --Income taxes
are accounted for in accordance with FASB ASC 740, Income
Taxes. Under this guidance, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities and net operating loss and
credit carry forwards using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized. The Company records a liability for uncertain tax positions
by establishing a recognition threshold and measurement attribute for
recognition and measurement of a tax position taken or expected to be taken in a
tax return.
Share-Based Compensation-- The
Company accounts for compensation costs for all share-based payments based on
the grant-date fair value estimated in accordance with fair value
provisions.
- 34
-
Pension--The Company makes its
determination for pension, postretirement and post employment benefit plans
liabilities based on management estimates and consultation with actuaries,
incorporating estimates and assumptions of future plan service costs, future
interest costs on projected benefit obligations, rates of compensation
increases, employee turnover rates, anticipated mortality rates, expected
investment returns on plan assets, asset allocation assumptions of plan assets,
and other factors.
Earnings Per Common
Share--Basic and diluted earnings per share are computed and disclosed in
accordance with FASB ASC 260, Earnings Per Share. Earnings
per share are based on the weighted-average number of common shares outstanding.
Diluted earnings per share is computed based upon earnings applicable to common
shares divided by the weighted-average number of common shares outstanding
during the period adjusted for the effect of other dilutive
securities.
Translation of Foreign
Currencies--All assets and liabilities of foreign subsidiaries in
functional currency other than the U.S. dollar are translated at year end
exchange rates. All revenue and expense accounts are translated at average rates
in effect during the respective period. Adjustments for translating foreign
currency assets and liabilities in U.S. dollars are included as a component of
other comprehensive income. Transaction gains and losses that arise from
exchange rate fluctuations are included in the results of operations in “Foreign
exchange income/(loss)”, as incurred.
Significant Estimates--The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting periods. Significant estimates and assumptions by management affect
accrued expenses, allowance for uncollectible accounts, inventory valuation,
business combinations, redeemable noncontrolling interest, trade names and
goodwill, income taxes, pension and share-based compensation.
Although
the Company regularly assesses these estimates, actual results could materially
differ. The Company bases its estimates on historical experience and various
other assumptions that it believes to be reasonable under the
circumstances.
2. ACCOUNTING
PRONOUNCEMENTS
The Financial Instruments Topic
825 of the FASB 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. The Statement
of Equity and Comprehensive Income/(Loss) was updated to show separate columns
for noncontrolling interest and redeemable noncontrolling interest.
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.
- 35
-
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.
3. ACQUISITIONS
|
In the
first quarter of 2009, the Company added to its Water Systems segment by
completing the acquisition of 75 percent of the outstanding shares of Vertical
S.p.A. (“Vertical”). 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 difference
between actual sales for the Company and proforma annual sales including
Vertical as if it were acquired at the beginning of the year, was not material
as a component of the Company’s consolidated sales for 2009.
The
aggregate purchase price for the 75 percent share of Vertical was €15.0 million,
$19.9 million at the then current exchange rate, subject to certain terms and
conditions. The
fair value of the acquisition was estimated by applying the income approach and
a market approach to identify the total enterprise value and then the
proportionate acquisition percentage was applied. The Company
utilized management estimates and consultation with an independent third-party
valuation firm to assist in the valuation.
Transaction
costs were expensed as incurred under the guidance of FASB ASC 805, Business
Combinations. There were $0.3 million of transaction costs
included in selling, general, and administrative expense in the Company’s
statement of income for the year ended 2009. There were no
acquisition related costs included in selling, general and administrative
expense in the Company’s income statement for the years ended 2008 and
2007.
The
aggregate purchase price was allocated to net assets acquired based on the
preliminary fair market values. Final market values were determined within
the measurement period. The excess purchase price over fair value of the
net assets acquired, $7.4 million, was recorded as goodwill, all of which is not
deductible for tax purposes. An immaterial adjustment to deferred
taxes of $4.2 million was included in goodwill during the fourth quarter of 2009
after the close of the measurement period. The results of operations
for the acquisition were included in the Company’s consolidated statement of
income, from its acquisition date through the year ended January 2,
2010.
The
purchase price assigned to each major identifiable asset and liability of
Vertical was as follows:
(In
millions)
|
||||
Assets:
|
||||
Current
assets (including cash acquired)
|
$ | 13.4 | ||
Property,
plant and equipment
|
6.3 | |||
Intangible
assets
|
11.6 | |||
Goodwill
|
7.4 | |||
Total
assets
|
$ | 38.7 | ||
Liabilities
|
(12.2 | ) | ||
Total
identifiable net assets
|
$ | 26.5 | ||
Noncontrolling
interest
|
(6.6 | ) | ||
Total
purchase price
|
$ | 19.9 |
During
2008, the Company added two pump manufacturers to its Water Systems
segment. In the first quarter of 2008, the Company completed the
acquisition of Industrias Schneider SA. Industrias Schneider is a
leading Brazilian producer of pumps for the residential, agricultural, and light
commercial markets. The acquisition advances the Company’s strategy
to expand its business base in developing regions where the demand for its
products is rapidly growing. In the second quarter of 2008, the
Company acquired Western Pumps LLC (“Western”) in Fresno,
California. Western designs, develops, and manufactures centrifugal
pumps specific to the water truck, agricultural irrigation, and center pivot
industries and was targeted to expand growth on the west coast
- 36
-
of the
United States as well as broaden the Company’s product
offerings. Industrias Schneider sales were not material as a
component of the Company’s consolidated sales for 2008. On a pro
forma annual basis, Western Pump sales were not material as a component of the
Company’s consolidated sales for 2008.
The
aggregate purchase price for the two acquisitions was $44.1 million. The
Western Pump LLC purchase agreement provided for additional payments of 7.5
percent of business net sales for the two year period ending March 31,
2010. The transaction costs and the post-closing working capital
adjustments were included in the total purchase accounting calculations.
The Company utilized management estimates and consultation with an independent
third-party valuation firm to assist in performing its fair market valuations in
2008. The aggregate purchase prices were allocated to net assets acquired
based on the preliminary fair market values. Final market values were
determined within the end of the respective measurement periods. The
excess purchase price over fair value of the net assets acquired, $11.8 million,
was recorded as goodwill, all of which is deductible for tax
purposes. The results of operations for the acquisitions were
included in the Company’s consolidated statement of income, from their
respective acquisition dates through the year ended January 2,
2010.
The
purchase price assigned to each major asset and liability of Industrias
Schneider was as follows:
(In
millions)
|
||||
Assets:
|
||||
Current
assets (including cash acquired)
|
$ | 16.2 | ||
Property
plant and equipment
|
11.2 | |||
Intangible
assets
|
13.8 | |||
Goodwill
|
11.1 | |||
Other
assets
|
0.1 | |||
Total
assets
|
$ | 52.4 | ||
Liabilities
|
(10.4 | ) | ||
Total
purchase price
|
$ | 42.0 | ||
The
following unaudited proforma financial information for the year ended December
29, 2007 gives effect to the acquisition of Industrias Schneider by the Company
as if the acquisition had occurred at the beginning of the period
reported. These unaudited proforma combined condensed financial
statements are prepared for informational purposes only and are not necessarily
indicative of actual results or financial position that would have been achieved
had the acquisition of Industrias Schneider been consummated on the dates
indicated and are not necessarily indicative of future operating results or
financial position of the consolidated companies. The unaudited
proforma combined condensed financial statements do not give effect to any cost
savings or incremental costs that may result from the integration of Industrias
Schneider with the Company.
FRANKLIN
ELECTRIC CO., INC.
PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In
millions, except per share
amounts) (Unaudited)
2007
|
||||
Net
sales
|
$ | 642.7 | ||
Net
income
|
$ | 32.0 | ||
Per
share data:
|
||||
Basic
earnings per share
|
$ | 1.39 | ||
Diluted
earnings per share
|
$ | 1.36 |
During
2007, the Company acquired two pump manufacturers. In the second
quarter of 2007, the Company completed the acquisition of Pump Brands (Pty)
Limited, Johannesburg, South Africa (“Pump Brands”) in a stock
- 37
-
transaction.
Pump Brands, through its wholly owned subsidiary Denorco (Pty) Limited, offers a
broad range of pumping system products for the agricultural irrigation,
residential, light commercial, industrial, and municipal markets.
Locally-manufactured pumps are complemented by alliances with international
partners. In the third quarter of 2007, the Company acquired the pump
division of Monarch Industries Limited, Winnipeg, Canada (“Monarch”) in an asset
transaction. The Monarch acquisition expanded both the existing pump
product lines and the distribution coverage in the North American
market. Pro forma annual sales for the above acquisitions were not a
material component of the Company’s consolidated sales for 2007.
The
aggregate cash purchase price for the two acquisitions was $37.0 million,
including direct transaction costs and a post-closing working capital
adjustment. The transaction costs and the post-closing working
capital adjustment were included in the total purchase accounting
calculations. The Company utilized management estimates and an
independent third-party valuation firm to assist in completing an independent
fair market valuation in 2008. The aggregate purchase price was
allocated to net assets acquired based on the final fair market
values. The excess purchase price over fair value of the net assets
acquired, $12.2 million, was recorded as goodwill all of which was deductible
for tax purposes. The results of operations for the acquisitions were included
in the Company’s consolidated statement of income, from their respective
acquisition dates through the year ended January 2, 2010.
4. REDEEMABLE
NONCONTROLLING INTEREST
In first
quarter 2009, the Company completed the acquisition of 75 percent of Vertical
S.p.A. The 25 percent noncontrolling interest was recorded at fair
value as of the acquisition date. The noncontrolling interest
holders have the option, which is embedded in the noncontrolling interest, to
require the Company to redeem their ownership interests between November 17,
2013 and January 16, 2014. The cash payment upon redemption will be
derived using a specified formula based on an earnings multiple adjusted by the
net debt position of Vertical, subject to a redemption floor
value. The combination of a noncontrolling interest and a redemption
feature resulted in a redeemable noncontrolling interest. The put
option is not separated from the noncontrolling interest as an embedded
derivative, because the noncontrolling interest is not readily convertible to
cash.
The
noncontrolling interest is redeemable at other than fair value as the redemption
value is determined based on a specified formula, as described
above. The noncontrolling interest becomes redeemable
after the passage of time, and therefore the Company records the carrying amount
of the noncontrolling interest at the greater of 1) the initial carrying amount,
increased or decreased for the noncontrolling interest’s share of net income or
loss and its share of other comprehensive income or loss and dividends
(“carrying amount”) or 2) the redemption value which is determined based on the
greater of the redemption floor value or the then-current specified earnings
multiple. According to FASB ASC 810, Consolidation, the redeemable
noncontrolling interest was classified outside of permanent equity, as a
mezzanine item, in the balance sheet.
According
to the authoritative accounting guidance for redeemable noncontrolling interests
issued in the form of common securities, to the extent that the noncontrolling
interest holder has a contractual right to receive an amount upon share
redemption that is other than the fair value of such shares, then the
noncontrolling interest holder has, in substance, received a dividend
distribution that is different from other common shareholders. Therefore,
adjustments to the noncontrolling interest to reflect the redemption amount
should be reflected in the computation of earnings per share using the two-class
method. Under the two-class method, the Company has elected to treat as a
dividend only the portion of the periodic redemption value adjustment (if any)
that reflects a redemption value in excess of fair value. No
adjustment to the carrying amount of the noncontrolling interest was necessary
in 2009, and therefore, no adjustment to the earnings per share computation was
necessary.
The
redeemable noncontrolling interest is currently recorded as the carrying amount
under ASC 810 as it exceeds the redemption value. Since no redemption
value adjustments were necessary in 2009, there were no incremental adjustments
in the earnings per share computation.
- 38
-
5. FAIR
VALUE MEASUREMENTS
Fair
value is 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. There
are 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 designated the cash equivalents as Level 1, as they are Money Market
accounts backed by Treasury Bills. As of January 2, 2010 and January
3, 2009, assets measured at fair value on a recurring basis were as
follows:
(In
millions)
|
January 2, 2010
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||||||
Cash
Equivalents
|
$ | 11.1 | $ | 11.1 | $ | - | $ | - |
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 | $ | - | $ | - |
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
consolidated balance sheets. The carrying amount of the investment is
adjusted for the Company’s proportionate share of earnings, losses, and
dividends. The carrying value of the investment was $7.7 million as
of January 2, 2010, and $7.7 million at year end January 3, 2009. The
Company’s proportionate share of Pioneer Pump, Inc. earnings, included in “Other
income/(expense)” in the Company’s statements of income, was $0.1 million, $0.7
million and $0.8 million, for 2009, 2008, and 2007, respectively.
7. GOODWILL
AND OTHER INTANGIBLE ASSETS
The
Company uses the purchase method of accounting for business
combinations. Annual goodwill impairment testing and trade name
impairment testing is performed during the fourth quarter of each year; unless
events or circumstances indicate earlier impairment testing is required. No
impairment loss was recognized for 2009, 2008, or 2007.
- 39
-
The
carrying amounts of the Company’s intangible assets were as
follows:
(In
millions)
|
2009
|
2008
|
||||||||||||||
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
Amortized
intangibles:
|
||||||||||||||||
Patents
|
$ | 8.0 | $ | (4.3 | ) | $ | 6.7 | $ | (3.8 | ) | ||||||
Supply
agreements
|
7.2 | (6.2 | ) | 7.2 | (5.7 | ) | ||||||||||
Technology
|
7.2 | (1.7 | ) | 7.0 | (1.2 | ) | ||||||||||
Customer
relationships
|
68.2 | (9.5 | ) | 54.1 | (5.6 | ) | ||||||||||
Other
|
2.1 | (2.0 | ) | 2.0 | (1.9 | ) | ||||||||||
Total
amortized intangibles
|
92.7 | (23.7 | ) | 77.0 | (18.2 | ) |
Unamortized
intangibles:
|
||||||||||||||||
Trade
names
|
19.9 | - | 16.9 | - | ||||||||||||
Total
intangibles
|
$ | 112.6 | $ | (23.7 | ) | $ | 93.9 | $ | (18.2 | ) |
The
weighted average number of years over which each intangible class is amortized
is as follows:
Class
|
Years
|
|||
Patents
|
17 | |||
Supply
agreements
|
6 | |||
Technology
|
15 | |||
Customer
relationships
|
17 - 20 | |||
Other
|
8 |
Amortization
expense related to intangible assets for the years ended January 2, 2010,
January 3, 2009, and December 29, 2007, was $5.1 million, $4.7 million, and $3.8
million, respectively.
Amortization
expense for each of the five succeeding years is projected as
follows:
(In
millions)
|
2010
|
2011
|
2012
|
2013
|
2014
|
|||||||||||||||
Amortization
expense
|
$ | 5.1 | $ | 5.0 | $ | 4.5 | $ | 4.3 | $ | 4.2 |
- 40
-
The
change in the carrying amount of goodwill by reporting segment for 2009 and 2008
was as follows:
2009
|
||||||||||||
(In
millions)
|
Water
|
Fueling
|
Total
|
|||||||||
Balance
as of January 3, 2009
|
$ | 96.5 | $ | 51.6 | $ | 148.1 | ||||||
Acquired
|
7.4 | - | 7.4 | |||||||||
Adjustments
to prior year acquisitions
|
(0.3 | ) | 1.8 | 1.5 | ||||||||
Foreign
currency translation
|
4.8 | - | 4.8 | |||||||||
Balance
as of January 2, 2010
|
$ | 108.4 | $ | 53.4 | $ | 161.8 |
2008
|
||||||||||||
(In
millions)
|
Water
|
Fueling
|
Total
|
|||||||||
Balance
as of December 29, 2007
|
$ | 92.9 | $ | 47.1 | $ | 140.0 | ||||||
Acquired
|
12.4 | - | 12.4 | |||||||||
Adjustments
to prior year acquisitions
|
(3.3 | ) | 4.5 | 1.2 | ||||||||
Foreign
currency translation
|
(5.5 | ) | - | (5.5 | ) | |||||||
Balance
as of January 3, 2009
|
$ | 96.5 | $ | 51.6 | $ | 148.1 |
The 2009
acquired goodwill in the Water Systems segment was primarily related to the
Company’s acquisition of Vertical S.p.A. The 2008 acquired goodwill
in the Water Systems segment was primarily related to the Company’s acquisition
of Industrias Schneider SA.
The 2006
purchase agreement for Healy Systems provided for additional payments of 5
percent of certain Healy Systems product sales through
2011. Adjustments to prior year acquisitions primarily include those
contingency commitments to Healy Systems, Inc.
8. EMPLOYEE
BENEFIT PLANS
Defined Benefit Plans - As of
January 2, 2010, the Company maintains three domestic pension plans and one
German pension plan. The Company used a December 31 measurement date for these
plans.
The
following table sets forth aggregated information related to the Company’s
pension benefits and other postretirement benefits, including changes in the
benefit obligations, changes in plan assets, funded status, amounts recognized
in the Balance Sheet, amounts recognized in Other Accumulated Comprehensive
Income, and actuarial assumptions that the Company considered in its
determination of benefit obligations and plan costs:
(In
millions)
|
||||||||||||||||
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Accumulated
benefit obligation, end of year
|
$ | 157.8 | $ | 141.5 | $ | 13.0 | $ | 11.9 | ||||||||
Change
in benefit obligation:
|
||||||||||||||||
Projected
benefit obligation, beginning of year
|
$ | 145.9 | $ | 143.8 | $ | 11.9 | $ | 12.1 | ||||||||
Service
cost
|
3.1 | 3.6 | 0.1 | 0.1 | ||||||||||||
Interest
cost
|
9.7 | 8.8 | 0.8 | 0.8 | ||||||||||||
Actuarial
gain (loss)
|
15.7 | 1.3 | 1.4 | 0.3 | ||||||||||||
Settlements
paid
|
- | (0.1 | ) | - | - | |||||||||||
Benefits
paid
|
(10.5 | ) | (12.5 | ) | (1.2 | ) | (1.2 | ) | ||||||||
Liability
(gain)/loss due to curtailment**
|
- | 1.5 | - | (0.2 | ) | |||||||||||
Foreign
currency exchange
|
0.3 | (0.5 | ) | - | - | |||||||||||
Projected
benefit obligation, end of year
|
$ | 164.2 | $ | 145.9 | $ | 13.0 | $ | 11.9 |
- 41
-
Change
in plan assets:
|
||||||||||||||||
Fair
value of assets, beginning of year
|
$ | 87.2 | $ | 131.5 | $ | - | $ | - | ||||||||
Actual
return on plan assets
|
19.5 | (37.7 | ) | - | - | |||||||||||
Company
contributions
|
4.4 | 5.9 | 1.2 | 1.2 | ||||||||||||
Employee
contributions
|
- | 0.3 | - | - | ||||||||||||
Settlements
paid
|
- | (0.1 | ) | - | - | |||||||||||
Benefits
paid
|
(10.5 | ) | (12.5 | ) | $ | (1.2 | ) | (1.2 | ) | |||||||
Foreign
currency exchange
|
0.1 | (0.2 | ) | - | - | |||||||||||
Plan
assets, end of year
|
$ | 100.7 | $ | 87.2 | $ | - | $ | - | ||||||||
Funded
status of the plan
|
(63.5 | ) | (58.7 | ) | (13.0 | ) | (11.9 | ) | ||||||||
Amounts
Recognized in Balance Sheet:
|
||||||||||||||||
Noncurrent
assets
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Deferred
tax asset
|
21.2 | 18.9 | 1.0 | 0.6 | ||||||||||||
Current
liabilities
|
(1.1 | ) | (0.3 | ) | (1.2 | ) | (1.2 | ) | ||||||||
Noncurrent
liabilities
|
(62.4 | ) | (58.4 | ) | (11.8 | ) | (10.7 | ) | ||||||||
Net
pension liability, end of year
|
$ | (42.3 | ) | $ | (39.8 | ) | $ | (12.0 | ) | $ | (11.3 | ) | ||||
Amount
Recognized in Accumulated Other Comprehensive Income:
|
||||||||||||||||
Net
Transition Obligation
|
$ | - | $ | - | $ | 0.4 | $ | 0.5 | ||||||||
Prior
Service Cost
|
0.3 | 0.5 | 0.3 | 0.4 | ||||||||||||
Net
Actuarial Loss
|
35.1 | 31.1 | 1.0 | 0.1 | ||||||||||||
Total
Recognized in Accumulated Other Comprehensive Income
|
$ | 35.4 | $ | 31.6 | $ | 1.7 | $ | 1.0 |
** These
items are related to the headcount reduction at the Siloam Springs, Arkansas
facility associated with the current realignment plan.
The
following table sets forth Other Changes in Plan Assets and Benefit Obligation
Recognized in Other Comprehensive Income for 2009 and 2008:
(In
millions)
|
Pension
Benefits
|
Other
Benefits
|
||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
actuarial (gain)/loss
|
$ | 6.6 | $ | 49.9 | $ | 1.4 | $ | 0.1 | ||||||||
Prior
service cost
|
- | - | - | - | ||||||||||||
Amortization
of:
|
||||||||||||||||
Net
actuarial gain/(loss)
|
(0.1 | ) | (0.7 | ) | - | - | ||||||||||
Prior
service cost/(credit)
|
(0.3 | ) | (0.6 | ) | (0.1 | ) | (0.3 | ) | ||||||||
Transition
(asset)/obligation
|
- | - | (0.2 | ) | (0.6 | ) | ||||||||||
Deferred
tax asset
|
(2.4 | ) | (18.5 | ) | (0.4 | ) | 0.3 | |||||||||
Total
recognized in other comprehensive income
|
$ | 3.8 | $ | 30.1 | $ | 0.7 | $ | (0.5 | ) | |||||||
Total
recognized in net periodic benefit cost and other comprehensive
income
|
$ | 6.8 | $ | 34.6 | $ | 1.9 | $ | 1.3 |
Assumptions
used to determine domestic benefit obligations:
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Discount
rate
|
5.75 | % | 6.90 | % | 5.50 | % | 6.90 | % | ||||||||
Rate
of increase in future compensation
|
3.00-8.00 | % | 3.00-8.00 | % | 3.00-8.00 | % | 3.00-8.00 | % | ||||||||
(Graded)
|
(Graded)
|
(Graded)
|
(Graded)
|
- 42
-
Assumptions
used to determine domestic periodic benefit cost:
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Discount
rate
|
6.90 | % | 6.40 | % | 6.90 | % | 6.40 | % | ||||||||
Rate
of increase in future compensation
|
3.00-8.00 | % | 3.00-8.00 | % | 3.00-8.00 | % | 3.00-8.00 | % | ||||||||
(Graded)
|
(Graded)
|
(Graded)
|
(Graded)
|
|||||||||||||
Expected
long-term rate of return on plan assets
|
8.50 | % | 8.50 | % | - | - |
The
accumulated benefit obligation for the Company’s qualified and German defined
benefit pension plans was $151.6 million and $135.8 million for the years ended
2009 and 2008.
The
following table sets forth the aggregated net periodic benefit cost for 2009,
2008, and 2007:
(In
millions)
|
||||||||||||||||||||||||
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
Service
cost
|
$ | 3.1 | $ | 3.6 | $ | 4.1 | $ | 0.1 | $ | 0.1 | $ | 0.2 | ||||||||||||
Interest
cost
|
9.7 | 8.8 | 8.5 | 0.8 | 0.8 | 0.7 | ||||||||||||||||||
Expected
return on assets
|
(10.3 | ) | (10.8 | ) | (10.7 | ) | - | - | - | |||||||||||||||
Amortization
of transition obligation
|
- | - | - | 0.2 | 0.3 | 0.3 | ||||||||||||||||||
Prior
service cost
|
0.4 | 0.6 | 1.2 | 0.1 | 0.1 | 0.1 | ||||||||||||||||||
Loss
|
0.1 | 0.1 | 0.3 | - | - | - | ||||||||||||||||||
Net
periodic benefit cost
|
$ | 3.0 | $ | 2.3 | $ | 3.4 | $ | 1.2 | $ | 1.3 | $ | 1.3 | ||||||||||||
Curtailment
expense**
|
- | 1.5 | (0.8 | ) | - | 0.5 | - | |||||||||||||||||
Settlement
cost
|
- | 0.5 | 0.2 | - | - | - | ||||||||||||||||||
Total
net periodic benefit cost
|
$ | 3.0 | $ | 4.3 | $ | 2.8 | $ | 1.2 | $ | 1.8 | $ | 1.3 |
** These
items are related to the headcount reduction at the Siloam Springs, Arkansas
facility associated with the current realignment plan.
The
estimated net actuarial (gain)/loss, prior service cost/(credit), and transition
(asset)/obligation that will be amortized from accumulated other comprehensive
income into net periodic benefit cost during the 2010 fiscal year are $1.8
million, $0.2 million and $0.0 million, respectively, for the pension plans and
$0.0 million, $0.1 million, and $0.2 million respectively, for all other
benefits.
The
Company has consulted with a third party investment manager for the funded
domestic defined benefit plan assets. The plan assets are currently
invested in pooled funds, where each fund in turn is composed of mutual funds
that have at least daily net asset valuations. Thus the Company’s funded
domestic defined benefit plan assets are invested in a “fund of funds”
approach.
The
Company’s Board has delegated oversight and guidance to an appointed Employee
Benefits Committee. The Committee has the tasks of reviewing plan
performance and asset allocation; ensuring plan compliance with applicable laws;
establishing plan policies, procedures, and controls; monitoring expenses; and
other related activities.
The
plans’ investment policies and strategies focus on the ability to fund benefit
obligations as they come due. Considerations include the plans’ current funded
level, plan design, benefit payment assumptions, funding regulations, impact of
potentially volatile business results on the Company’s ability to make certain
levels of contributions, and interest rate and asset return volatility among
other considerations. The Company currently attempts to maintain plan funded
status at approximately 80 percent or greater. Given the plan’s current funded
status, the Company’s cash on hand, cash historically generated from business
operations, and cash available under committed credit facilities, the Company
sees ample liquidity to achieve this goal.
Risk
management and continuous monitoring requirements are met through monthly
investment portfolio reports, quarterly Employee Benefits Committee meetings,
annual valuations, asset/liability studies, and the annual assumption
process focusing primarily on the return on asset assumption and the discount
rate assumption.
- 43
-
As of
January 2, 2010, funds were invested in equity, fixed income and other
investments as follows:
Equity
o |
U.S.
Large
Cap 40%
|
o
|
U.S.
Small / Mid
Cap 7%
|
o
|
World
Equity
ex-U.S. 16%
|
§
|
Subtotal
63%
|
Fixed
Income
o
|
U.S.
Core Fixed
Income 24%
|
o
|
High
Yield Fixed
Income
3%
|
o
|
Emerging
Markets
Debt
3%
|
§
|
Subtotal
30%
|
Other
o
|
Franklin
Electric
Stock 1%
|
o
|
Insurance
Contracts 6%
|
TOTAL 100%
The
Company does not see any particular concentration of risk within the plans, nor
any plan assets that pose difficulties for fair value assessment. The Company
currently has no allocation to potentially illiquid or potentially difficult to
value assets such as hedge funds, venture capital, private equity, and real
estate.
The
Company works with actuaries and consultants in making its determination of the
asset rate of return assumption and also the discount rate
assumption.
Asset
class assumptions are set using a combination of empirical and forward-looking
analysis for long-term rate of return on plan assets. A variety of models
are applied for filtering historical data and isolating the fundamental
characteristics of asset classes. These models provide empirical return
estimates for each asset class, which are then reviewed and combined with a
qualitative assessment of long-term relationships between asset classes before a
return estimate is finalized. This provides an additional means for
correcting for the effect of unrealistic or unsustainable short-term valuations
or trends, opting instead for return levels and behavior that is more likely to
prevail over long periods. With that, the Company has assumed an
expected long-term rate of return on plan assets of 8.50 percent. This is
the result of stochastic modeling showing the 50th
percentile median return at or above 8.5 percent.
The
Company uses the Hewitt Top Quartile curve to determine the discount
rate. Basically all cash flow obligations under the plans are matched
to bonds in the Hewitt Top Quartile of liquid, high-quality, non-callable /
non-putable corporate bonds with outliers removed. From that matching
exercise, a discount rate is determined. Recent volatility in credit markets
prompted the Company to compare results of this method to results using another
curve constructed by another source, the Citi Above Median Curve, and similar
results were observed.
The
Company’s European pension plan is funded by insurance contract policies whereby
the insurance company guarantees a fixed minimum return. Due to tax
legislation, individual pension benefits can only be financed using direct
insurance polices up to certain maximums. These maximum amounts in
respect of each member are paid into such an arrangement on a yearly
basis.
The
Company designated the domestic plan assets as Level 1, as they are Mutual
Funds. The German plan assets are designated as Level 2 inputs as the
fair value of the insurance contracts is measured by the reserve that is
supervised by the German Federal Financial Supervisory
Authority.
- 44
-
The fair
values of the Company’s pension plan assets for 2009 and 2008 by asset category
are as follows:
(In
millions)
|
2009
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Equity
|
U.S.
Large Cap
|
$ | 40.0 | $ | 40.0 | $ | - | $ | - | ||||||||
U.S.
Small/Mid Cap
|
6.8 | 6.8 | - | - | |||||||||||||
World
Equity ex-U.S.
|
15.5 | 15.5 | - | - | |||||||||||||
Stock
|
Franklin
Electric Co., Inc.
|
1.1 | 1.1 | ||||||||||||||
Fixed
Income
|
U.S.
Core Fixed Income
|
24.3 | 24.3 | - | - | ||||||||||||
High
Yield Fixed Income
|
3.1 | 3.1 | - | - | |||||||||||||
Emerging
Markets Debt
|
3.5 | 3.5 | - | - | |||||||||||||
Other
|
Insurance
Contracts
|
5.6 | - | 5.6 | - | ||||||||||||
Cash
and Equivalents
|
0.8 | 0.8 | - | - | |||||||||||||
Total
|
$ | 100.7 | $ | 95.1 | $ | 5.6 | $ | - |
(In
millions)
|
2008
|
Quoted
prices in Active Markets for Identical Assets
(Level 1)
|
Significant
Other Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Equity
|
U.S.
Large Cap
|
$ | 32.7 | $ | 32.7 | $ | - | $ | - | ||||||||
U.S.
Small/Mid Cap
|
5.5 | 5.5 | - | - | |||||||||||||
World
Equity ex-U.S.
|
12.8 | 12.8 | - | - | |||||||||||||
Stock
|
Franklin
Electric Co., Inc.
|
1.1 | 1.1 | ||||||||||||||
Fixed
Income
|
U.S.
Core Fixed Income
|
24.4 | 24.4 | - | - | ||||||||||||
High
Yield Fixed Income
|
2.7 | 2.7 | - | - | |||||||||||||
Emerging
Markets Debt
|
3.0 | 3.0 | - | - | |||||||||||||
Other
|
Insurance
Contracts
|
4.9 | - | 4.9 | - | ||||||||||||
Cash
Equivalents
|
0.1 | 0.1 | - | - | |||||||||||||
Total
|
$ | 87.2 | $ | 82.3 | $ | 4.9 | $ | - |
Equity
securities include Company stock of $1.1 million (1.1 percent of total plan
assets) and $1.1 million (1.3 percent of total plan assets) at year end 2009 and
2008, respectively.
One of
the Company’s four pension plans covers only certain management employees. The
Company does not fund this plan, and its assets were zero in 2009 and 2008. The
plan’s projected benefit obligation and accumulated benefit obligation were
$6.7 million and
$6.2 million, respectively, for 2009, and $6.0 million and $5.6 million,
respectively, for 2008.
The
Company estimates total contributions to the plans of $15.9 million in
2010.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
(In
millions)
|
Pension
|
Other
|
||||||
Benefits
|
Benefits
|
|||||||
2010
|
$ | 11.8 | $ | 1.2 | ||||
2011
|
13.5 | 1.2 | ||||||
2012
|
12.3 | 1.2 | ||||||
2013
|
11.2 | 1.1 | ||||||
2014
|
11.6 | 1.1 | ||||||
Years
2015 through 2019
|
61.8 | 5.0 |
- 45
-
The
Company’s other postretirement benefit plans provide health and life insurance
benefits to domestic employees hired prior to 1992. The Company effectively
capped its cost for those benefits through plan amendments made in 1992,
freezing Company contributions for insurance benefits at 1991 levels for current
and future beneficiaries with actuarially reduced benefits for employees who
retire before age 65.
Defined Contribution Plans -
The Company maintains a 401(k) Plan and an Employee Stock Ownership Plan
(ESOP). The Company's cash contributions are made to the Company
stock fund of the 401(k) and ESOP Trusts and allocated to participants'
accounts.
The
following table sets forth Company contributions to the ESOP and 401(k)
Plans.
(In
millions)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Company
contributions to the plan
|
$ | 0.9 | $ | 1.8 | $ | 1.8 |
9. ACCRUED
EXPENSES
Accrued
expenses consist of:
(In
millions)
|
2009
|
2008
|
||||||
Salaries,
wages, and commissions
|
$ | 13.7 | $ | 20.9 | ||||
Product
warranty costs
|
8.8 | 9.3 | ||||||
Insurance
|
4.2 | 4.3 | ||||||
Employee
benefits
|
5.3 | 4.8 | ||||||
Healy
and Western Pump additional purchase price
|
4.6 | 3.0 | ||||||
Other
|
7.7 | 5.7 | ||||||
$ | 44.3 | $ | 48.0 |
10. INCOME
TAXES
|
Income
before income taxes consisted of:
|
(In
millions)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Domestic
|
$ | 0.5 | $ | 28.6 | $ | 18.8 | ||||||
Foreign
|
38.4 | 39.0 | 25.7 | |||||||||
$ | 38.9 | $ | 67.6 | $ | 44.5 |
The
income tax provision consisted of:
(In
millions)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current
payable:
|
||||||||||||
Federal
|
4.4 | $ | (1.7 | ) | $ | 4.7 | ||||||
Foreign
|
8.1 | 12.0 | 9.0 | |||||||||
State
|
1.2 | 0.2 | 0.7 | |||||||||
Deferred:
|
||||||||||||
Federal
|
(2.3 | ) | 11.8 | 0.7 | ||||||||
Foreign
|
1.1 | (1.1 | ) | (0.2 | ) | |||||||
State
|
(0.3 | ) | 1.7 | 0.5 | ||||||||
$ | 12.2 | $ | 22.9 | $ | 15.4 |
- 46
-
Significant
components of the Company's deferred tax assets and liabilities were as
follows:
(In
millions)
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Accrued
expenses and reserves
|
$ | 9.2 | $ | 9.8 | ||||
Compensation
and employee benefits
|
34.7 | 26.4 | ||||||
Other
items
|
10.0 | 6.0 | ||||||
Total
deferred tax assets
|
53.9 | 42.2 | ||||||
Deferred
tax liabilities:
|
||||||||
Accelerated
depreciation on fixed assets
|
12.4 | 10.3 | ||||||
Amortization
of intangibles
|
18.0 | 17.5 | ||||||
Other
items
|
11.2 | 2.0 | ||||||
Total
deferred tax liabilities
|
41.6 | 29.8 | ||||||
Net
deferred tax assets
|
$ | 12.3 | $ | 12.4 |
The
portions of current and non-current deferred tax assets and liabilities were as
follows:
(In
millions)
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Deferred
Tax Assets
|
Deferred
Tax Liabilities
|
Deferred
Tax Assets
|
Deferred
Tax Liabilities
|
|||||||||||||
Current
|
$ | 18.3 | $ | 2.7 | $ | 17.0 | $ | 0.4 | ||||||||
Non-current
|
35.6 | 38.9 | 25.2 | 29.4 | ||||||||||||
$ | 53.9 | $ | 41.6 | $ | 42.2 | $ | 29.8 |
2009
|
2008
|
2007
|
||||||||||
U.S.
Federal statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State
income taxes, net of federal benefit
|
1.6 | 1.9 | 2.2 | |||||||||
Foreign
operations
|
(5.2 | ) | (1.2 | ) | (1.1 | ) | ||||||
Sec
199 Manufacturing deduction
|
(0.2 | ) | (0.8 | ) | (0.5 | ) | ||||||
R&D
tax credits
|
(1.2 | ) | (0.9 | ) | (1.2 | ) | ||||||
Other
items
|
1.3 | (0.1 | ) | 0.2 | ||||||||
Effective
tax rate
|
31.3 | % | 33.9 | % | 34.6 | % | ||||||
The
Company considers earnings from Germany, The Netherlands, Mexico, Italy, and a
portion of South Africa to be indefinitely reinvested. The Company
identified the accumulated earnings for the affiliates that were not
indefinitely reinvested and computed the tax associated with the subsequent
repatriation. This computation considered the impact of applicable
withholding taxes and the availability of U.S. foreign tax credits. The Company
calculated that the repatriation of all the accumulated earnings that are not
indefinitely reinvested which resulted in a net tax liability of $2.3 million
recorded by the Company. Approximately, $8.0 million of South Africa's
unremitted earnings are considered indefinitely reinvested. The Company
changed its tax assertion under FASB ASC 740 Income Taxes, as it relates
to the former APB 23, Accounting for Income Taxes-Special
Areas, for Germany during 2009; due to restructuring in
Europe. German earnings are now considered indefinitely
reinvested.
- 47
-
11. ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES
The
Company adopted the provision of FASB ASC 740, Income Taxes, as it relates
to the adoption of the former FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN48) in the first quarter of 2007. The implementation
did not have significant impact on the Company’s financial position or results
of operations.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
for 2009, 2008, and 2007 (excluding interest and penalties) is as
follows:
(In
millions)
|
2009
|
2008
|
2007
|
|||||||||
Beginning
balance
|
$ | 6.8 | $ | 2.0 | $ | 1.9 | ||||||
Additions
based on tax positions related to the current year
|
1.0 | 2.9 | 0.1 | |||||||||
Additions
for tax positions of prior years
|
0.8 | 2.9 | 0.1 | |||||||||
Reductions
for tax positions of prior years
|
(1.8 | ) | (0.7 | ) | (0.1 | ) | ||||||
Settlements
|
- | (0.3 | ) | - | ||||||||
Ending
balance
|
$ | 6.8 | $ | 6.8 | $ | 2.0 |
If
recognized, the effective tax rate would be affected by the net unrecognized tax
benefits of $5.7 million. These amounts are primarily associated with
uncertain tax positions taken by acquired companies in tax years prior to the
acquisition of these companies by the Company. The stock purchase
agreements related to these acquisitions provide the Company rights to recover
tax liabilities related to pre-acquisition tax years from the
sellers. Other amounts are associated with domestic state tax issues,
such as nexus, as well as other federal and state uncertain tax
positions.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. The Company has accrued approximately $0.7
million for interest and penalties as of January 2, 2010. Interest
and penalties recorded during 2009 related to the federal and state tax
positions.
The
Company is subject to periodic audits by domestic and foreign tax
authorities. Currently, the Company is undergoing routine periodic
audits in both domestic and foreign tax jurisdictions. It is
reasonably possible that the amounts of unrecognized tax benefits could change
in the next twelve months as a result of the audits. Based on the
current audits in process, the payment of taxes as a result of audit settlements
could be from $0.0 to $0.5 million.
For the
majority of tax jurisdictions, the Company is no longer subject to U.S. federal,
state and local, or non-U.S. income tax examinations by tax authorities for
years before 2006.
12. DEBT
On
December 14, 2006, the Company entered into an amended and restated unsecured,
60-month $120.0 million revolving credit agreement (the “Agreement”). The
Agreement provides for various borrowing rate options including interest rates
based on the London Interbank Offered Rates (LIBOR) plus interest spreads keyed
to the Company’s ratio of debt to earnings before interest, taxes, depreciation,
and amortization (“EBITDA”). The Agreement contains certain financial covenants
with respect to borrowings, interest coverage, loans or advances and
investments. The Company was in compliance with the covenants as of
January 2, 2010 and January 3, 2009. The Company had zero borrowings
under the Agreement at January 2, 2010 and $35.0 million at January 3,
2009.
On April
9, 2007, the Company entered into the Amended and Restated Note Purchase and
Private Shelf Agreement (the "Prudential Agreement") in the amount of $175.0
million. Under the Prudential Agreement, the Company issued notes in an
aggregate principal amount of $110.0 million on April 30, 2007 (the “B-1 Notes”)
and $40.0 million on September 7, 2007 (the “B-2 Notes”). The B-1 and B-2 Notes
bear a coupon of 5.79 percent and have an average life of ten years with a final
maturity in 2019. Principal installments of $30.0 million are payable annually
commencing on April 30, 2015 and continuing to and including April 30, 2019,
with any unpaid balance due at maturity. The Prudential Agreement contains
certain financial covenants with respect to borrowings,
interest
- 48
-
coverage,
loans or advances and investments. The Company was in compliance with
the covenants as of January 2, 2010 and January 3, 2009.
The
Company also has certain overdraft facilities at its foreign subsidiaries, of
which none were outstanding at January 2, 2010 or January 3, 2009.
Long-term
debt consisted of:
|
||||||||
(In
millions)
|
2009
|
2008
|
||||||
Prudential
Agreement - 5.79 percent.
|
$ | 150.0 | $ | 150.0 | ||||
Capital
Leases
|
1.2 | 1.2 | ||||||
Other
|
0.7 | - | ||||||
Agreement
- the average interest rate for 2009 was 0.82 percent based on the London
Interbank Offered Rates (LIBOR) plus an interest spread.
|
- | 35.0 | ||||||
151.9 | 186.2 | |||||||
Less
Current Maturities
|
(0.7 | ) | (0.7 | ) | ||||
Long-term
debt:
|
$ | 151.2 | $ | 185.5 |
The
following debt payments are expected to be paid:
(In
millions)
|
More
than
|
|||||||||||||||||||||||||||
Total
|
2010
|
2011
|
2012
|
2013
|
2014
|
5 years
|
||||||||||||||||||||||
Debt
|
$ | 150.7 | $ | 0.2 | $ | 0.3 | $ | 0.2 | $ | - | $ | - | $ | 150.0 | ||||||||||||||
Capital
Leases
|
$ | 1.2 | 0.5 | 0.5 | 0.2 | - | - | - | ||||||||||||||||||||
$ | 151.9 | $ | 0.7 | $ | 0.8 | $ | 0.4 | $ | - | $ | - | $ | 150.0 |
13. INTEREST
RATE RISK
On
September 24, 2003 the Company entered into a fixed-to-variable interest rate
swap to achieve a desired proportion of variable vs. fixed rate
debt. The fixed-to-variable interest rate swap was accounted for as a
fair value hedge, with effectiveness assessed based on changes in the fair value
of the underlying debt using incremental borrowing rates available on loans with
similar terms and maturities. The gain or loss on the interest rate
swap and that of the underlying debt were equal and offsetting resulting in no
net effect to earnings.
The swap
contract had a notional amount of $10 million and matured on November 10, 2008
and was not renewed. Per the terms of the swap contract the Company
received interest at a fixed rate of 6.31 percent and paid interest at a
variable rate based on three month LIBOR plus a spread. The average
variable rate paid by the Company in 2008 was 5.79 percent. The
differential in interest rates on the swap was recognized as an adjustment of
interest expense over the term of the swap.
14.
|
SHAREOWNERS'
EQUITY
|
The
Company had 23,127,808 shares of common stock (65,000,000 shares authorized,
$.10 par value) outstanding at the end of 2009.
During
2009, 2008, and 2007, pursuant to a stock repurchase program authorized by the
Company’s Board of Directors, the Company repurchased and retired the following
amounts and number of shares:
(Amounts
in millions, except share amounts)
2009
|
2008
|
2007
|
||||||||||
Repurchases
|
$ | - | $ | 7.8 | $ | 8.1 | ||||||
Shares
|
- | 235,100 | 187,600 |
In 2009,
the Company retired 14,403 shares that were received by employees as payment for
taxes owed upon the release of their restricted awards. During 2008,
the Company retired 700 shares that had been previously granted
as
- 49
-
a stock
award to an employee, but were forfeited upon his voluntary
termination. As well, the Company retired 106 shares that were
received by employees as payment for taxes owed upon the release of their
restricted awards. During 2007, under terms of a Company stock option
plan, participants delivered 3,843 shares for $0.2 million of Company common
stock as consideration for stock issued upon the exercise of stock options. Also
in 2007, the Company retired 2,901 shares that had been previously granted as
stock awards to executive officers, but were forfeited upon their
retirement. As well, the Company retired 288 shares that were
received by the retiring executive officers as payment for taxes owed upon the
release of their restricted awards.
In 2009,
2008, and 2007, the Company recorded $0.1 million, $0.9 million, and $2.2
million, respectively, as a reduction in tax liability and an increase to
shareowners’ equity as a result of stock option exercises.
Accumulated
other comprehensive income (loss), consisting of the currency translation
adjustment and the pension liability adjustment, was $18.4 million and ($37.1)
million, respectively at January 2, 2010 and ($5.4) million and ($32.6) million,
respectively at January 3, 2009.
15. EARNINGS
PER SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
(In
millions, except per share amounts)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Numerator:
|
||||||||||||
Net
income attributable to Franklin Electric Co., Inc.
|
$ | 26.0 | $ | 44.1 | $ | 28.7 | ||||||
Denominator:
|
||||||||||||
Basic
|
||||||||||||
Weighted
average common shares
|
23.1 | 23.0 | 23.1 | |||||||||
Diluted
|
||||||||||||
Effect
of dilutive securities:
|
||||||||||||
Employee
and director incentive stock options and awards
|
0.2 | 0.2 | 0.4 | |||||||||
Adjusted
weighted average common shares
|
23.3 | 23.2 | 23.5 | |||||||||
Basic
earnings per share
|
$ | 1.13 | $ | 1.92 | $ | 1.24 | ||||||
Diluted
earnings per share
|
$ | 1.12 | $ | 1.90 | $ | 1.22 | ||||||
Anti-dilutive
stock options
|
1.0 | 0.8 | 0.3 | |||||||||
Anti-dilutive
stock options price range – low
|
$ | 29.95 | $ | 32.19 | $ | 40.93 | ||||||
Anti-dilutive
stock options price range – high
|
$ | 48.87 | $ | 48.87 | $ | 48.87 |
16. SHARE-BASED
COMPENSATION
Prior to
March 9, 2009, the Company made 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 |
- 50
-
During
the first quarter ended April 4, 2009, all remaining authorized shares then
available for grant under the Franklin Electric Co., Inc. Stock Plan were
awarded. All shares available for grant under the Franklin
Electric Co., Inc. Stock Option Plan were previously 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
|
||||
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.
The total
share-based compensation recognized in 2009, 2008, and 2007 was $5.0 million,
$3.7 million, and $3.8 million, respectively.
Stock
Options:
Under
each of the above plans, the exercise price of each option equals the market
price of the Company’s common stock on the date of grant and the options expire
ten years after the date of the grant. Generally, options granted to
non-employee directors vest 33 1/3 percent a year and become fully vested and
exercisable after three years. Options granted to employees vest at
20 or 25 percent a year and become fully vested and exercisable after five years
or four years, respectively. Subject to the terms of the plans, in
general, the aggregate option price and any applicable tax withholdings may be
satisfied in cash or its equivalent, by the plan participant’s delivery of
shares of the Company’s common stock having a fair market value at the time of
exercise equal to the aggregate option price and/or the applicable tax
withholdings or, under the Stock Plan, by having shares otherwise subject to the
award withheld by the Company or via cash-less exercise through a
broker-dealer.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model with a single approach and amortized using
a straight-line attribution method over the option’s vesting
period. Options granted to retirement eligible employees are
immediately expensed. The Company uses historical data to estimate
the expected volatility of its stock; the weighted average expected life, the
period of time options granted are expected to be outstanding; and its dividend
yield. The risk-free rates for periods within the contractual life of
the option are based on the U.S. Treasury yield curve in effect at the time of
the grant.
The
assumptions used for the Black-Scholes model to determine the fair value of
options granted during 2009, 2008 and 2007 are as follows:
2009
|
2008
|
2007
|
||||||||||
Risk-free
interest rate
|
0.70 – 3.55 | % | 2.91 – 3.15 | % | 4.74 – 4.78 | % | ||||||
Dividend
yield
|
1.32 – 2.04 | % | 1.11 – 1.12 | % | 0.65 - 0.67 | % | ||||||
Weighted-average
dividend yield
|
1.670 | % | 1.119 | % | 0.653 | % | ||||||
Volatility
factor
|
0.3766 – 0.5478 | 0.3552 – 0.3714 | 0.3529 - 0.3701 | |||||||||
Weighted-average
volatility
|
0.3982 | 0.3691 | 0.3554 | |||||||||
Expected
term
|
5.6
years
|
5.0
– 6.0 years
|
5.3-6.2
years
|
|||||||||
Forfeiture
rate
|
2.58 | % | 3.61 | % | 4.18 | % |
- 51
-
A summary
of the Company’s stock option plans activity and related information is as
follows:
(Shares in
thousands)
Stock
Options:
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic
Value (000’s)
|
||||
Outstanding
at beginning of 2007
|
1,398
|
$26.65
|
||||||
Granted
|
131
|
48.87
|
||||||
Exercised
|
(245)
|
21.05
|
||||||
Forfeited
|
(32)
|
29.38
|
||||||
Outstanding
at beginning of 2008
|
1,252
|
$29.99
|
||||||
Granted
|
347
|
32.45
|
||||||
Exercised
|
(147)
|
23.45
|
||||||
Forfeited
|
(13)
|
39.15
|
||||||
Outstanding
at beginning of 2009
|
1,439
|
$31.17
|
||||||
Granted
|
665
|
17.34
|
||||||
Exercised
|
(36)
|
18.49
|
||||||
Forfeited
|
(89)
|
28.28
|
||||||
Outstanding
at end of period
|
1,979
|
$26.84
|
6.16
|
$11,566
|
||||
Expected
to vest after applying forfeiture rate
|
1,959
|
$26.91
|
6.13
|
$11,384
|
||||
Vested
and exercisable at end of period
|
1,068
|
$29.59
|
3.97
|
$4,431
|
2009
|
2008
|
2007
|
||||||||||
Weighted
average grant-date fair value of options
|
$ | 5.64 | $ | 11.64 | $ | 19.75 | ||||||
(In
millions)
|
||||||||||||
Intrinsic
value of options exercised
|
$ | 0.4 | $ | 2.9 | $ | 6.3 | ||||||
Cash
received from the exercise of options
|
$ | 0.7 | $ | 3.4 | $ | 5.0 | ||||||
Fair
value of shares vested
|
$ | 2.8 | $ | 4.0 | $ | 2.7 | ||||||
Tax
benefit
|
$ | 0.1 | $ | 0.9 | $ | 2.2 |
There
were no share-based liabilities paid during the 2009 and 2008 fiscal
years.
A summary
of the Company’s nonvested shares activity and related information, for fiscal
year ended January 2, 2010 and January 3, 2009 follows:
2009
(Shares in thousands)
|
||||||||
Nonvested Shares
|
Shares
|
Weighted-Average
Grant-
Date
Fair Value
|
||||||
Nonvested
at beginning of period
|
536 | $ | 37.06 | |||||
Granted
|
665 | 17.34 | ||||||
Vested
|
(225 | ) | 36.70 | |||||
Forfeited
|
(66 | ) | 24.66 | |||||
Nonvested
at end of period
|
910 | $ | 23.62 |
- 52
-
2008
(Shares in thousands)
Nonvested Shares
|
Shares
|
Weighted-Average
Grant-
Date
Fair Value
|
||||||
Nonvested
at beginning of period
|
416 | $ | 39.99 | |||||
Granted
|
347 | 32.44 | ||||||
Vested
|
(215 | ) | 35.19 | |||||
Forfeited
|
(12 | ) | 38.83 | |||||
Nonvested
at end of period
|
536 | $ | 37.06 |
As of
January 2, 2010 there was $4.5 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan related to stock options. That cost is expected to be recognized
over a weighted-average period of 2.56 years.
Stock
Awards:
Under the
Stock Plan, non-employee directors and employees may be granted stock awards,
including grants of restricted shares of the Company’s common
stock.
The stock
awards are granted at the market value on the date of grant. Stock
awards to non-employee directors are fully vested when made. Stock
awards to employees cliff vest over either 1, 4 or 5 years and may be contingent
on the attainment of certain performance goals. Dividends are paid to the
recipient prior to vesting, except that dividends on performance-based stock
awards under the Stock Plan will be paid only to the extent the performance
goals are met. Stock awards granted to retirement eligible employees
were immediately expensed in 2009 and 2008.
A summary
of the Company’s restricted stock award activity and related information, for
the fiscal years ended January 2, 2010 and January 3, 2009 follows:
2009
(Shares in thousands)
|
||||||||
Nonvested Shares
|
Shares
|
Weighted-Average
Grant-
Date
Fair Value
|
||||||
Nonvested
at beginning of period
|
63 | $ | 44.06 | |||||
Awarded
|
88 | 19.04 | ||||||
Vested
|
(75 | ) | 18.41 | |||||
Forfeited
|
(4 | ) | 48.59 | |||||
Nonvested
at end of period
|
72 | $ | 39.86 |
2008
(Shares in thousands)
|
||||||||
Nonvested Shares
|
Shares
|
Weighted-Average
Grant-
Date
Fair Value
|
||||||
Nonvested
at beginning of period
|
61 | $ | 45.24 | |||||
Awarded
|
16 | 36.58 | ||||||
Vested
|
(13 | ) | 40.37 | |||||
Forfeited
|
(1 | ) | 40.72 | |||||
Nonvested
at end of period
|
63 | $ | 44.06 |
As of
January 2, 2010, there was $0.8 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Stock Plan related to stock awards. That cost is expected to be
recognized over a weighted-average period of 1.6 years.
- 53
-
17. SEGMENT
AND GEOGRAPHIC INFORMATION
The
Company’s business consists of the following operating segments, based on the
principal end market served: Water Systems and Fueling Systems. The
Company includes unallocated corporate expenses and inter-company eliminations
in an “Other” segment that together with Water and Fueling represent the
Company.
The Water
Systems segment designs, manufactures and sells motors, pumps, electronic
controls and related parts and equipment primarily for use in submersible water
and other fluid system applications. The Fueling Systems segment designs,
manufactures and sells pumps, electronic controls and related parts and
equipment primarily for use in submersible fueling system applications. The
Fueling Systems segment integrates and sells motors and electronic controls
produced by the Water Systems segment.
The
accounting policies of our operating segments are the same as those described in
the summary of significant accounting policies. Performance is evaluated based
on the sales and operating income of the segments and a variety of ratios to
measure performance. These results are not necessarily indicative of the results
of operations that would have occurred had each segment been an independent,
stand-alone entity during the periods presented.
Financial
information by reportable business segment is included in the following
summary:
(In
millions)
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
Net
sales to external customers
|
Operating
income (loss)
|
|||||||||||||||||||||||
Water
Systems
|
$ | 504.2 | $ | 557.0 | $ | 466.8 | $ | 62.9 | $ | 68.4 | $ | 57.5 | ||||||||||||
Fueling
Systems
|
$ | 121.8 | $ | 188.6 | $ | 135.2 | $ | 20.7 | $ | 49.4 | $ | 24.6 | ||||||||||||
Other
|
$ | - | $ | - | $ | - | $ | (35.6 | ) | $ | (41.1 | ) | $ | (32.9 | ) | |||||||||
Consolidated
|
$ | 626.0 | $ | 745.6 | $ | 602.0 | $ | 48.0 | $ | 76.7 | $ | 49.2 | ||||||||||||
Total
assets
|
Depreciation
|
|||||||||||||||||||||||
Water
Systems
|
$ | 431.9 | $ | 397.4 | $ | 17.6 | $ | 16.7 | $ | 14.6 | ||||||||||||||
Fueling
Systems
|
$ | 279.9 | $ | 219.7 | $ | 1.2 | $ | 1.1 | $ | 0.8 | ||||||||||||||
Other
|
$ | 6.5 | $ | 76.9 | $ | 1.4 | $ | 1.7 | $ | 1.1 | ||||||||||||||
Consolidated
|
$ | 718.3 | $ | 694.0 | $ | 20.2 | $ | 19.5 | $ | 16.5 | ||||||||||||||
Amortization
|
Capital
Expenditures
|
|||||||||||||||||||||||
Water
Systems
|
$ | 3.3 | $ | 2.8 | $ | 1.8 | $ | 9.5 | $ | 17.6 | $ | 23.6 | ||||||||||||
Fueling
Systems
|
$ | 1.8 | $ | 1.9 | $ | 2.0 | $ | 0.3 | $ | 2.7 | $ | 3.9 | ||||||||||||
Other
|
$ | - | $ | - | $ | - | $ | 4.1 | $ | 6.6 | $ | 1.3 | ||||||||||||
Consolidated
|
$ | 5.1 | $ | 4.7 | $ | 3.8 | $ | 13.9 | $ | 26.9 | $ | 28.8 |
Cash is
the major asset group in “Other” of total assets.
- 54
-
Total
Company Geographic Information
(In
millions)
|
Net
Sales
|
Long-lived
assets
|
||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
||||||||||||||||
United
States
|
$ | 279.0 | $ | 392.1 | $ | 337.1 | $ | 266.5 | $ | 256.4 | ||||||||||
Foreign
|
347.0 | 353.5 | 264.9 | 140.2 | 120.0 | |||||||||||||||
Total
|
$ | 626.0 | $ | 745.6 | $ | 602.0 | $ | 406.7 | $ | 376.4 |
No single
customer accounted for more than 10 percent of the Company’s consolidated sales
in 2009, 2008, or 2007.
18. CONTINGENCIES
AND COMMITMENTS
In
September 2006, the Company acquired Healy Systems, Inc. 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 900 Series nozzle,
which is part of the Company’s Enhanced Vapor Recovery Systems installed in
California gasoline filling stations. In October 2008, the California
Air Resources Board (“CARB”) issued 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 regulatory 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 James Healy (the principal former
owner of Healy Systems) to satisfy the Company’s claims that Mr. Healy’s
breaches of the purchase agreement led to the retrofit and the
NOV. In December 2008, Mr. Healy initiated litigation seeking
recovery of the amounts retained by the Company. The Company intends
to defend vigorously its rights to retain these amounts. In addition,
Franklin Fueling Systems, Inc. has filed a complaint against Mr. Healy for
breach of a separate consulting agreement that was executed in connection with
the acquisition. That complaint has been consolidated with the
original complaint, and Mr. Healy has denied liability. The parties
are in the process of conducting discovery.
The
Company is defending various claims and legal actions, including environmental
matters, which have arisen in the ordinary course of business. In the opinion of
management, based on current knowledge of the facts and after discussion with
counsel, these claims and legal actions can be successfully defended or resolved
without a material adverse effect on the Company’s financial position, results
of operations, and net cash flows.
Total
rent expense charged to operations for operating leases including contingent
rentals was $7.6 million, $8.3 million, and $7.9 million for 2009, 2008 and
2007, respectively.
The
future minimum rental payments for non-cancelable operating leases as of January
2, 2010 are as follows:
(In
millions)
|
||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
||||||||||||||||
Future
minimum rental payments
|
$ | 6.9 | $ | 4.6 | $ | 3.8 | $ | 1.1 | $ | 1.0 |
Rental
commitments subsequent to 2014 are not significant by year, but aggregated are
$4.2 million in total.
At
January 2, 2010, the Company had $1.5 million of commitments primarily for the
purchase of machinery and equipment, and building expansions.
- 55
-
Below is
a table that shows the activity in the warranty accrual accounts:
(In
millions)
|
||||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$ | 9.3 | $ | 9.7 | ||||
Accruals
related to product warranties
|
9.8 | 10.7 | ||||||
Additions
related to acquisitions
|
- | 0.1 | ||||||
Reductions
for payments made
|
(10.3 | ) | (11.2 | ) | ||||
Ending
balance
|
$ | 8.8 | $ | 9.3 |
19. RESTRUCTURING
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 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
January 2, 2010, the total cost of the rationalization and transfer continued to
be estimated between $6.0 million and $8.0 million.
Costs
incurred in the twelve months ended January 2, 2010, included in the
Restructuring expense line of the income statement are as follows:
(In
millions)
|
Twelve
Months Ended
|
|||
January 2, 2010
|
||||
Severance
and other employee assistance costs
|
$ | 2.1 | ||
Equipment
relocations
|
1.0 | |||
Asset
write-off
|
3.0 | |||
Other
|
0.1 | |||
Total
|
$ | 6.2 |
Restructuring
expenses of $2.2 million were incurred in 2008 primarily for pension curtailment
costs. As of January 2, 2010 and January 3, 2009, there were $0.3
million and $0.1 million in restructuring reserves primarily for
severance.
As a
follow-up step to Phase 3 of the Global Manufacturing Realignment Program, the
Company has announced its plan to close its Siloam Springs, Arkansas
manufacturing facility. The Company has estimated that this final
step will include pre-tax restructuring costs of $3.8 million to $4.5 million to
be incurred over the next three quarters beginning with the first quarter of
2010. These costs will include severance expenses, pension charges,
asset write-offs, and equipment relocation costs. These charges are
in addition to those incurred through 2009.
- 56
-
20. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited
quarterly financial information for 2009 and 2008, from continuing operations,
is as follows:
(In
millions, except per share amounts)
|
||||||||||||||||||||||||
Net
Sales
|
Gross
Profit
|
Net
Income
|
Net
Income Attributable to Franklin Electric Co., Inc.
|
Basic
Earnings Per Share (a)
|
Diluted
Earnings Per Share
|
|||||||||||||||||||
2009
|
||||||||||||||||||||||||
1st
Quarter
|
$ | 149.8 | $ | 43.2 | $ | 4.1 | $ | 3.8 | $ | 0.17 | $ | 0.17 | ||||||||||||
2nd
Quarter
|
165.3 | 49.2 | 6.0 | 5.8 | 0.25 | 0.25 | ||||||||||||||||||
3rd
Quarter
|
166.0 | 50.2 | 8.8 | 8.6 | 0.37 | 0.37 | ||||||||||||||||||
4th
Quarter
|
144.9 | 45.2 | 7.8 | 7.8 | 0.33 | 0.33 | ||||||||||||||||||
$ | 626.0 | $ | 187.8 | $ | 26.7 | $ | 26.0 | $ | 1.13 | $ | 1.12 | |||||||||||||
2008
|
||||||||||||||||||||||||
1st
Quarter
|
$ | 176.0 | $ | 51.5 | $ | 8.3 | $ | 8.1 | $ | 0.35 | $ | 0.35 | ||||||||||||
2nd
Quarter
|
201.7 | 64.7 | 15.4 | 15.3 | 0.67 | 0.66 | ||||||||||||||||||
3rd
Quarter
|
215.8 | 66.5 | 17.4 | 17.3 | 0.75 | 0.74 | ||||||||||||||||||
4th
Quarter
|
152.1 | 44.3 | 3.6 | 3.4 | 0.15 | 0.15 | ||||||||||||||||||
$ | 745.6 | $ | 227.0 | $ | 44.7 | $ | 44.1 | $ | 1.92 | $ | 1.90 |
During
the fourth quarter of 2008, the Company significantly decreased its LIFO
inventory provision due to changes in commodity and component
prices. Therefore the LIFO provision included in the fourth quarter
2008 reduced cost of sales by $4.3 million.
(a)
Earnings per common share amounts are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly earnings per
share may not equal the annual earnings per share.
- 57
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareowners and Directors, Franklin Electric Co., Inc.:
We have
audited the accompanying consolidated balance sheets of Franklin Electric Co.,
Inc. and subsidiaries (the "Company") as of January 2, 2010 and January 3, 2009,
and the related consolidated statements of income, equity and comprehensive
income, and cash flows for each of the three years in the period ended January
2, 2010. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Franklin Electric Co., Inc. and subsidiaries
as of January 2, 2010 and January 3, 2009, and the results of their operations
and their cash flows for each of the three years in the period ended January 2,
2010, in conformity with accounting principles generally accepted in the United
States of America.
As
discussed in Notes 2 and 4, on January 4, 2009, the Company adopted the
provisions of FASB Accounting Standards Codification (“ASC”) Topic 810, Consolidation, as it relates
to the adoption of the former FASB Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements.
As
discussed in Note 11, on January 1, 2007, the Company adopted the provisions of
FASB ASC 740, Income
Taxes, as it relates to the adoption of the former FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of January 2, 2010, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 3, 2010, expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/DELOITTE
& TOUCHE LLP
Chicago,
Illinois
March 3,
2010
- 58
-
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND
PROCEDURES
As of the
end of the period covered by this report (the “Evaluation Date”), the Company
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including the Company’s Chief Executive Officer and
the Company’s Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief
Executive Officer and the Company’s Chief Financial Officer concluded that, as
of the Evaluation Date, the Company’s disclosure controls and procedures were
effective.
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by Rules 13a-15 under the
Exchange Act during the last fiscal quarter that have materially affected, or
are reasonably likely to materially affect the Company’s internal control over
financial reporting.
MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
System of
Internal Control over Financial Reporting:
Management
is responsible for establishing and maintaining an adequate system of internal
control over financial reporting of the Company. This system is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of
America.
The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance with respect to financial statement
preparation and may not prevent or detect misstatements. Further, because of
changes in conditions, effectiveness of internal controls over financial
reporting may vary over time.
Management
conducted an evaluation of the effectiveness of the system of internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework (the “Framework”) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management did not include in
the scope of this evaluation Vertical S.p.A., which was acquired during 2009 and
whose financial statements constitute 5.8 percent of net assets, 5.8 percent of
total assets, 3.3 percent of revenues, and 2.6 percent of net income
attributable to Franklin Electric Co., Inc. of the consolidated financial
statement amounts as of and for the year ended January 2, 2010. Based
on its evaluation, management concluded that the Company’s system of internal
control over financial reporting was effective as of January 2,
2010.
Our
independent registered accounting firm has issued an audit report on the
effectiveness of the Company’s internal control over financial reporting. This
report appears on page 60.
- 59
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareowners and Directors, Franklin Electric Co., Inc.:
We have
audited the internal control over financial reporting of Franklin Electric Co.,
Inc. and subsidiaries (the "Company") as of January 2, 2010 based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s Report on
Internal Control over Financial Reporting, management did not include in the
scope of this evaluation Vertical S.p.A., acquired during fiscal 2009, whose
financial statements constitute 5.8 percent of net assets, 5.8 percent of total
assets, 3.3 percent of revenues, and 2.6 percent of net income
attributable to Franklin Electric Co., Inc. of the consolidated financial
statement amounts as of and for the year ended January 2, 2010. Accordingly, our
audit did not include the internal control over financial reporting at Vertical
S.p.A. The Company's management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 2, 2010, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and
for the year ended January 2, 2010 of the Company and our report dated March 3,
2010 expressed an unqualified opinion on those financial statements and includes
explanatory paragraphs regarding the adoption of the provisions of FASB
Accounting Standards Codification (“ASC”) Topic 810, Consolidation, as it relates
to the adoption of the former FASB Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements, on January 4, 2009,
and FASB ASC 740,
Income Taxes, as it
relates to the adoption of the former FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, adopted January 1, 2007.
/s/DELOITTE
& TOUCHE LLP
Chicago,
Illinois
March 3,
2010
- 60
-
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information concerning directors and director nominees required by this Item 10
is set forth in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 2010, under the headings
of “PROPOSAL 1: ELECTION OF DIRECTORS” and “INFORMATION CONCERNING
NOMINEES AND CONTINUING DIRECTORS,” and is incorporated herein by
reference.
The
information concerning executive officers required by this Item 10 is contained
in Part I of this Form 10-K under the heading of “EXECUTIVE OFFICERS OF THE
REGISTRANT,” and is incorporated herein by reference.
The
information concerning Regulation S-K, Item 405 disclosures of delinquent Form
3, 4 or 5 filers required by this Item 10 is set forth in the Company’s Proxy
Statement for the Annual Meeting of Shareholders to be held on April 30, 2010,
under the heading of “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,”
and is incorporated herein by reference.
The
information concerning the procedures for shareholders to recommend nominees to
the Company’s board of directors required by this Item 10 is set forth in the
Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on
April 30, 2010 under the heading “INFORMATION ABOUT THE BOARD AND ITS
COMMITTEES,” and is incorporated herein by reference.
In
compliance with Regulation S-K, Item 406, the Company has adopted a code of
business conduct and ethics for its directors, principal financial officer,
controller, principal executive officer, and other employees. The Company has
posted its code of ethics on the Company website at www.franklin-electric.com.
The Company will disclose any amendments to the Code and any waivers from the
Code for directors and executive officers by posting such information on its
website.
The
information concerning the Audit Committee and Audit Committee Financial Experts
required by this Item 10 is set forth in the Company’s Proxy Statement for the
Annual Meeting of Shareholders to be held April 30, 2010, under the heading
“INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” and is incorporated herein by
reference.
ITEM 11. EXECUTIVE
COMPENSATION
The
information required by Item 11 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 30, 2010, under the
headings of “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” “MANAGEMENT
ORGANIZATION AND COMPENSATION COMMITTEE REPORT,” “COMPENSATION DISCUSSION AND
ANALYSIS,” “SUMMARY COMPENSATION TABLE,” “2009 GRANT OF PLAN BASED AWARDS
TABLE,” “2009 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE,” “2009 OPTION
EXCERCISES AND STOCK VESTED TABLE,” “2009 PENSION BENEFITS TABLE,” “2009
NON-QUALIFIED DEFERRED COMPENSATION,” “POTENTIAL PAYMENTS UPON TERMINATION OR
CHANGE IN CONTROL OF THE COMPANY,” and “DIRECTOR COMPENSATION,” and is
incorporated herein by reference.
- 61
-
ITEM 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by Item 12 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 30, 2010, under the
headings of “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,” “SECURITY
OWNERSHIP OF MANAGEMENT” and “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY
COMPENSATION PLANS,” and is incorporated herein by reference.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The
information required by Item 13 is set forth in the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held on April 30, 2010, under the
headings of “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” and is
incorporated herein by reference.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The
information required by Item 14 is set forth in the Company’s Proxy Statement
for the Annual Meeting of Shareholders to be held on April 30, 2010, under the
heading “PROPOSAL 3: RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE
LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2010
FISCAL YEAR,” and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
Form
10-K Annual Report(page)
|
||||
(a)
1. Financial Statements - Franklin Electric Co., Inc.
|
||||
Report
of Independent Registered Public Accounting Firm
|
60 | |||
Consolidated
Statements of Income for the three years ended January 2,
2010
|
26 | |||
Consolidated
Balance Sheets as of January 2, 2010 and January 3, 2009
|
27 – 28 | |||
Consolidated
Statements of Cash Flows for the three years ended January 2,
2010
|
29 – 30 | |||
Consolidated
Statements of Equity for the three years ended January 2,
2010
|
31 – 32 | |||
Notes
to Consolidated Financial Statements(including quarterly financial
data)
|
33 - 57 | |||
2.
Financial Statement Schedules - Franklin Electric Co.,
Inc.
|
||||
II.
Valuation and Qualifying Accounts
|
63 |
Schedules
other than those listed above are omitted for the reason that they are not
required or are not applicable, or the required information is disclosed
elsewhere in the financial statements and related notes.
- 62
-
3. Exhibits
See the
Exhibit Index located on pages 66-67. Management Contract, Compensatory Plan, or
Arrangement is denoted by an asterisk (*).
SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
For the
years 2009, 2008, and 2007
(In
millions)
Description
|
Balance
at beginning of
period
|
Additions
charged to costs and expenses
|
Deductions (A)
|
Other (B)
|
Balance
at end of period
|
|||||||||||||||
Allowance
for doubtful accounts:
|
||||||||||||||||||||
2009
|
$ | 2.1 | $ | 0.3 | $ | 0.2 | $ | 0.3 | $ | 2.5 | ||||||||||
2008
|
$ | 2.6 | $ | 0.3 | $ | 0.8 | $ | 0.0 | $ | 2.1 | ||||||||||
2007
|
$ | 2.8 | $ | 0.0 | $ | 0.7 | $ | 0.5 | $ | 2.6 |
NOTES:
(A)
|
Uncollectible
accounts written off, net of recoveries.
|
(B)
|
Allowance
for doubtful accounts related to accounts receivable of acquired companies
at date of acquisition.
|
- 63
-
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareowners and Directors, Franklin Electric Co., Inc.:
We have
audited the consolidated financial statements of Franklin Electric Co., Inc. and
subsidiaries (the "Company") as of January 2, 2010 and January 3, 2009, and for
each of the three years in the period ended January 2, 2010, and have issued our
report thereon dated March 3, 2010 (which report expresses an unqualified
opinion on those financial statements and includes explanatory paragraphs
regarding the adoption of the provisions of FASB Accounting Standards
Codification (“ASC”) Topic 810, Consolidation, as it relates
to the adoption of the former FASB Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements, on January 4, 2009,
and FASB ASC 740,
Income Taxes, as it
relates to the adoption of the former FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), adopted January 1, 2007) and the Company's internal
control over financial reporting as of January 2, 2010, and have issued our
report thereon dated March 3, 2010; such reports are included elsewhere in this
Form 10-K. Our audits also included the consolidated financial statement
schedule of the Company listed in Item 15. The consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/DELOITTE
& TOUCHE LLP
Chicago,
Illinois
March 3,
2010
- 64
-
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Franklin
Electric Co., Inc.
|
|
/s/
R. SCOTT TRUMBULL
|
|
R.
Scott Trumbull
|
|
Chairman
of the Board and Chief
|
|
Date:
March 3, 2010
|
Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on March 3, 2010.
/s/
R. SCOTT TRUMBULL
|
Chairman
of the Board and Chief
|
R.
Scott Trumbull
|
Executive
Officer (Principal
|
Executive
Officer)
|
|
/s/
JOHN J. HAINES
|
Vice
President, Chief
|
John
J. Haines
|
Financial
Officer and Secretary
|
(Principal
Financial and Accounting
|
|
Officer)
|
|
/s/
JEROME D. BRADY
|
|
Jerome
D. Brady
|
Director
|
/s/
DAVID T. BROWN
|
|
David
T. Brown
|
Director
|
/s/
DAVID A. ROBERTS
|
|
David
A. Roberts
|
Director
|
/s/
DAVID M. WATHEN
|
|
David
M. Wathen
|
Director
|
/s/
HOWARD B. WITT
|
|
Howard
B. Witt
|
Director
|
/s/
THOMAS L. YOUNG
|
|
Thomas
L. Young
|
Director
|
- 65
-
FRANKLIN
ELECTRIC CO., INC.
EXHIBIT
INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR THE
FISCAL YEAR ENDED JANUARY 2, 2010
Exhibit
Number
|
Description
|
3.1
|
Amended
and Restated Articles of Incorporation of Franklin Electric Co., Inc.
(incorporated by reference to the Company's Form 8-K filed on May 3,
2007)
|
3.2
|
By-Laws
of Franklin Electric Co., Inc. as amended July 25, 2008 (incorporated by
reference to Exhibit 3.1 of the Company’s Form 8-K filed on July 29,
2008)
|
4.1
|
Rights
Agreement, dated as of October 15, 1999, by and between Franklin Electric
Co., Inc. and Illinois Stock Transfer Company, as Rights Agent
(incorporated by reference to Exhibit 4.1 to the Registrant’s Registration
Statement on Form 8-A dated October 19, 1999, File No.
000-00362).
|
4.2
|
First
Amendment to Rights Agreement, dated as of December 1, 2006, between
Franklin Electric Co., Inc. and LaSalle Bank National Association
(incorporated by reference to Exhibit 4.2 of the Company's Form 8-A/A
filed on December 8, 2006)
|
4.3
|
Second
Amendment to Rights Agreement, dated as of July 11, 2007, between Franklin
Electric Co., Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 4.1 of the Company’s Form 8-K filed on July 16,
2007)
|
4.4
|
Third
Amendment to Rights Agreement between Franklin Electric Co.,
Inc. and Wells Fargo Bank, National Association, as Rights
Agent (incorporated by reference to Exhibit 4.4 of the Company’s Form
8-A/A filed on September 23, 2008)
|
4.5
|
Shareholder’s
Agreement, dated as of July 11, 2007, between Franklin Electric Co., Inc.,
and Select Equity Group, Inc. and Select Offshore Advisors, LLC
(incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed
on July 16, 2007)
|
10.1
|
Franklin
Electric Co., Inc. Stock Option Plan (incorporated by reference to Exhibit
10.4 of the Company’s Form 10-K for the fiscal year ended January 3,
2004)*
|
10.2
|
Franklin
Electric Co., Inc. Stock Plan (incorporated by reference to the Company’s
2005 Proxy Statement for the Annual Meeting held on April 29, 2005, and
included as Exhibit A to the Proxy Statement)*
|
10.3
|
Franklin
Electric Co., Inc. Amended and Restated Stock Plan (incorporated by
reference to the Company’s 2009 Proxy Statement for the Annual Meeting
held on April 24, 2009, and included as Exhibit A to the Proxy
Statement)*
|
10.4
|
Franklin
Electric Co., Inc. Non-employee Directors’ Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for
the quarter ended on April 1, 2006)*
|
10.5
|
Amended
and Restated Franklin Electric Co., Inc. Pension Restoration Plan
(incorporated by reference to Exhibit 10.4 of the Company’s Form 10-K
filed for the fiscal year ended January 3, 2009)*
|
10.6
|
Franklin
Electric Co., Inc. Deferred Compensation Plan effective December 12, 2008
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed
on December 17, 2008)*
|
10.7
|
Employment
Agreement dated December 3, 2002 between the Company and Scott Trumbull
and amended on February 18, 2009 and March 2, 2010 (incorporated by
reference to Exhibit 10.10 of the Company’s Form 10-K for the fiscal year
ended December 28, 2002 and Exhibit 10.6 of the Company’s Form 10-K for
the fiscal year ended January 3, 2009; amendment filed
herewith)*
|
10.8
|
Amended
Employment Agreement dated December 20, 2002 between the Company and Gregg
C. Sengstack and amended on July 25, 2008 and February 20, 2009
(incorporated by reference to Exhibit 10.2 of the Company’s Form 10-K for
the fiscal year ended December 28, 2008; Exhibit 10.1 of the Company’s
Form 8-K dated July 23, 2005; and Exhibit 10.7 of the Company’s Form 10-K
for the fiscal year ended January 3, 2009)*
|
10.9
|
Employment
Agreement dated as of April 14, 2008 between the Company and John J.
Haines and amended on February 18, 2009 (incorporated by reference to
Exhibit 10.1 of the Company’s Form 8-K dated April 7, 2008 and Exhibit
10.8 of the Company’s Form 10-K for the fiscal year ended January 3,
2009)*
|
10.10
|
Managing
Director Service Contract dated August 1, 2003 between Franklin Electric
Europa GmbH and Mr. Peter-Christian Maske (incorporated by reference to
Exhibit 10.14 of the Company’s Form 10-K for the fiscal year ended January
1, 2005)*
|
10.11
|
Form
of Confidentiality and Non-Compete Agreement between the Company and R.
Scott Trumbull, Gregg C. Sengstack, Daniel J. Crose, Donald R. Hobbs,
Thomas A. Miller, Kirk M. Nevins, Robert J. Stone, Gary D. Ward, Thomas J.
Strupp, Delancey W. Davis and John J. Haines (incorporated by reference to
Exhibit 10.15 of the Company’s Form 10-K for the fiscal year ended January
1, 2005)*
|
10.12
|
Executive
Officer Annual Incentive Cash Bonus Program (incorporated by reference to
Exhibit 10.17 of the Company’s Form 10-K for the fiscal year ended January
1, 2005)*
|
10.13
|
Long
Term Bonus Program (incorporated by reference to Item 5.02 of the
Company’s Form 8-K filed on March 5, 2009)*
|
10.14
|
Form
of Non-Qualified Stock Option Agreement for Non-Director Employees
(incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for
the quarter ended April 2, 2005)*
|
10.15
|
Form
of Non-Qualified Stock Option Agreement for Director Employees
(incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q for
the quarter ended April 2, 2005)*
|
10.16
|
Form
of Restricted Stock Agreement for Non-Director Employees (incorporated by
reference to Exhibit 10.20 of the Company’s Form 10-K for the fiscal year
ended December 31, 2005)*
|
10.17
|
Form
of Restricted Stock Agreement for Director Employees (incorporated by
reference to Exhibit 10.21 of the Company’s Form 10-K for the fiscal year
ended December 31, 2005)*
|
10.18
|
Form
of Restricted Stock Agreement for Non-Employee Directors (incorporated by
reference to Exhibit 10.23 of the Company’s Form 10-K for the fiscal year
ended December 30, 2006)*
|
10.19
|
Form
of Non-Qualified Stock Option Agreement for Non-Director Employees
(incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q for
the quarter ended April 4, 2009)*
|
10.20
|
Form
of Non-Qualified Stock Option Agreement for Director Employees
(incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q for
the quarter ended April 4, 2009)*
|
10.21
|
Form
of Restricted Stock Agreement for Non-Director Employees (incorporated by
reference to Exhibit 10.4 of the Company’s Form 10-Q for the quarter ended
April 4, 2009)*
|
10.22
|
Form
of Employment Security Agreement between the Company and DeLancey W.
Davis, Daniel J. Crose, Robert J. Stone, Thomas J. Strupp, and Gary D.
Ward (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
filed on December 17, 2008)*
|
10.23
|
Franklin
Electric Co., Inc. Deferred Compensation Plan effective December 12, 2008
(incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed
on December 17, 2008)*
|
10.24
|
$120,000,000
Amended and Restated Credit Agreement dated December 14, 2006, between the
Company and JPMorgan Chase, as Administrative Agent (incorporated by
reference to Exhibit 2.04 of the Company’s Form 8-K filed on December 21,
2006)
|
10.25
|
Amendment
No. 1 to the $120,000,000 Amended and Restated Credit Agreement, dated
February 26, 2008, between the Company and JPMorgan Chase, as
Administrative Agent (incorporated by reference to Exhibit 10.20 of the
Company’s Form 10-K for the fiscal year ended January 3,
2009)
|
10.26
|
Second
Amended and Restated Note Purchase and Private Shelf Agreement dated
September 9, 2004 between the Company and the Prudential Insurance Company
of America and others (incorporated by reference to Exhibit 10.12 of the
Company’s Form 10-Q for the quarter ended October 2,
2004)
|
10.27
|
Amendment
and PruShelf Renewal and Extension, dated April 9, 2007, between the
Company and Prudential Insurance Company of America and others
(incorporated by reference to the Company’s Form 8-K filed on May 3,
2007)
|
10.28
|
Amendment
No. 2 to the Second Amended and Restated Note Purchase and Private Shelf
Agreement, dated February 26, 2008, between the Company and the Prudential
Insurance Company of America and others (incorporated by reference to
Exhibit 10.23 of the Company’s Form 10-K for the fiscal year ended January
3, 2009)
|
21
|
Subsidiaries
of the Registrant
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes–Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes–Oxley
Act of 2002
|
32.1
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
99.1
|
Forward-Looking
Statements
|
*
Management Contract, Compensatory Plan, or Arrangement
- 66
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