FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
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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.
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(Exact name of registrant as specified in its charter)
INDIANA 35-0827455
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 EAST SPRING STREET
BLUFFTON, INDIANA 46714
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(Address of principal executive offices) (Zip Code)
(260) 824-2900
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS OF COMMON STOCK JULY 26, 2002
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$.10 par value 10,828,059 shares
Page 1 of 12
2
FRANKLIN ELECTRIC CO., INC.
Index
Page
PART I. FINANCIAL INFORMATION Number
- --------------------------------- ------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 29, 2002 (Unaudited)
and December 29, 2001 (Unaudited)............. 3
Condensed Consolidated Statements of
Income for the Second Quarter and First
Half ended June 29, 2002 (Unaudited) and
June 30, 2001 (Unaudited)..................... 4
Condensed Consolidated Statements
Of Cash Flows for the First Half
Ended June 29, 2002 (Unaudited) and
June 30, 2001 (Unaudited)..................... 5
Notes to Condensed Consolidated
Financial Statements (Unaudited).............. 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations......................... 10-11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................. 11
PART II. OTHER INFORMATION
- -----------------------------
Item 6. Exhibits and Reports on Form 8-K.............. 11
Signatures................................................ 12
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3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) June 29, December 29,
2002 2001
---- ----
ASSETS
Current assets:
Cash and equivalents.................... $ 10,577 $ 20,750
Marketable securities................... - 2,999
Receivables, less allowances of
$2,016 and $1,658, respectively....... 40,970 27,486
Inventories (Note 2).................... 58,454 48,008
Other current assets (including
deferred income taxes of $8,786
and $8,667, respectively)............. 11,063 10,340
-------- --------
Total current assets.................. 121,064 109,583
Property, plant and equipment,
net (Note 3)............................ 69,261 58,839
Deferred and other assets (including
deferred income taxes of $72
and $17, respectively).................. 15,393 12,710
Goodwill.................................. 26,315 14,511
-------- --------
Total assets.............................. $232,033 $195,643
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Current maturities of long-term
debt and short-term borrowings........ $ 1,563 $ 1,058
Accounts payable........................ 18,142 11,683
Accrued expenses........................ 28,257 24,146
Income taxes............................ 3,330 3,538
-------- --------
Total current liabilities............. 51,292 40,425
Long-term debt............................ 25,819 14,465
Employee benefit plan obligations......... 13,884 13,199
Other long-term liabilities............... 5,179 4,285
Shareowners' equity:
Common stock (Note 5)................... 1,085 533
Additional capital...................... 28,230 23,882
Retained earnings....................... 112,444 109,103
Loan to ESOP Trust...................... (1,130) (1,362)
Accumulated other comprehensive
loss (Note 7)......................... (4,770) (8,887)
-------- --------
Total shareowners' equity............. 135,859 123,269
-------- --------
Total liabilities and shareowners' equity. $232,033 $195,643
======== ========
See Notes to Condensed Consolidated Financial Statements.
4
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Second Qtr. Ended First Half Ended
----------------- ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net sales.............................. $93,682 $82,860 $161,751 $148,759
Costs and expenses:
Cost of sales........................ 67,082 59,704 117,300 108,490
Selling and administrative expenses.. 13,428 11,807 25,089 23,148
Interest expense..................... 321 375 659 700
Other expense (income), net.......... 19 (71) (207) (214)
Foreign exchange loss (gain)......... (1,312) 376 (1,104) 1,103
------- ------- -------- --------
79,538 72,191 141,737 133,227
Income before income taxes............. 14,144 10,669 20,014 15,532
Income taxes........................... 5,138 4,055 7,326 5,902
------- ------- -------- --------
Net income............................. $ 9,006 $ 6,614 $ 12,688 $ 9,630
======= ======= ======== ========
Per share data (Note 6):
Net income per common share.......... $ 0.83 $ 0.60 $ 1.18 $ 0.87
======= ======= ======= ========
Net income per common share,
assuming dilution.................. $ 0.79 $ 0.58 $ 1.11 $ 0.84
======= ======= ======== ========
Dividends per common share........... $ 0.13 $ 0.12 $ 0.25 $ 0.23
======= ======= ======== ========
See Notes to Condensed Consolidated Financial Statements.
5
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) First Half Ended
----------------
June 29, June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income................................ $12,688 $ 9,630
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization........... 6,574 6,563
Loss on disposals of plant and
equipment............................. 2 195
Changes in assets and liabilities:
Receivables........................... (8,276) (6,252)
Inventories........................... (4,611) (17,468)
Accounts payable and other accrued
expenses............................ 1,293 240
Employee benefit plan obligations..... 562 662
Other, net............................ (1,425) (304)
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Net cash flows from
operating activities.............. 6,807 (6,734)
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Cash flows from investing activities:
Additions to plant and equipment.......... (3,887) (2,589)
Proceeds from sale of plant and
equipment............................... 18 27
Additions to deferred assets.............. (2,933) (358)
Cash paid for acquisition................. (17,475) -
Proceeds from maturities of marketable
securities ............................. 2,999 -
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Net cash flows from
investing activities.................. (21,278) (2,920)
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Cash flows from financing activities:
Borrowing on long-term debt............... 8,350 -
Repayment of long-term debt............... (9) (8)
Borrowing on line of credit
and short-term borrowings............... 3,000 11,055
Repayment of line of credit
and short-term borrowings............... (3,009) (7)
Proceeds from issuance of common stock.... 4,914 611
Purchases of common stock................. (6,667) (2,289)
Reduction of loan to ESOP Trust........... 232 232
Dividends paid............................ (2,693) (2,528)
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Net cash flows from
financing activities.................. 4,118 7,066
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Effect of exchange rate changes on cash..... 180 451
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Net change in cash and equivalents.......... (10,173) (2,137)
Cash and equivalents at beginning of period. 20,750 9,631
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Cash and equivalents at end of period....... $10,577 $ 7,494
======= =======
See Notes to Condensed Consolidated Financial Statements.
6
FRANKLIN ELECTRIC CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Condensed Consolidated Financial Statements
- ----------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the first half
ended June 29, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 28, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto included
in Franklin Electric Co., Inc.'s annual report on Form 10-K for the year ended
December 29, 2001.
Note 2: Inventories
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Inventories consist of the following:
(In thousands) June 29, December 29,
2002 2001
---- ----
Raw Materials........................ $17,321 $16,447
Work in Process...................... 7,825 6,005
Finished Goods....................... 43,167 35,662
LIFO Reserve......................... (9,859) (10,106)
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Total Inventory...................... $58,454 $48,008
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Note 3: Property, Plant and Equipment
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Property, plant and equipment, at cost, consists of the following:
(In thousands) June 29, December 29,
2002 2001
---- ----
Land and Building.................... $ 35,419 $ 25,343
Machinery and Equipment.............. 127,729 121,791
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163,148 147,134
Allowance for Depreciation........... 93,887 88,295
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$ 69,261 $ 58,839
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7
Note 4: Tax Rates
- ------------------
The effective tax rate on income before income taxes in 2002 and 2001 varies
from the United States statutory rate of 35 percent principally due to the
effect of state and foreign income taxes.
Note 5: Shareowners' Equity
- ----------------------------
The Company had 10,850,907 shares of common stock (25,000,000 shares
authorized, $.10 par value) outstanding as of June 29, 2002.
During the second quarter of 2002, pursuant to the stock repurchase program
authorized by the Company's Board of Directors, the Company repurchased a
total of 4,439 shares for $0.2 million. All repurchased shares were retired.
During the second quarter, under terms of a Company stock option plan,
participants remitted 129,488 shares of Company common stock as consideration
for stock issued upon the exercise of stock options. The total exercise price
of the respective stock options was $6.5 million, and the shares remitted to
the Company were subsequently retired.
Note 6: Earnings Per Share
- ---------------------------
Following is the computation of basic and diluted earnings per share:
(In thousands, except Second Qtr. Ended First Half Ended
per share amounts) ----------------- ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net Income..................... $9,006 $6,614 $12,688 $ 9,630
====== ====== ======= =======
Denominator:
Basic
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Weighted average common
shares....................... 10,824 10,978 10,760 10,988
Diluted
-------
Effect of dilutive securities:
Employee and director
incentive stock options
and awards................. 626 474 659 464
------ ------ ------- -------
Adjusted weighted average
common shares................ 11,450 11,452 11,419 11,452
====== ====== ======= =======
Basic earnings per share......... $ 0.83 $ 0.60 $ 1.18 $ 0.87
====== ====== ======= =======
Diluted earnings per share....... $ 0.79 $ 0.58 $ 1.11 $ 0.84
====== ====== ======= =======
8
Note 7: Comprehensive Income
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Comprehensive income is as follows:
(In thousands) Second Qtr. Ended First Half Ended
----------------- ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income......................... $ 9,006 $ 6,614 $12,688 $ 9,630
Other comprehensive (loss) gain:
Foreign currency translation
adjustments..................... 4,279 (695) 4,117 (2,011)
------- ------- ------- -------
Comprehensive income, net of tax... $13,285 $ 5,919 $16,805 $ 7,619
======= ======= ======= =======
Accumulated other comprehensive loss consists of the following:
(In thousands) June 29, December 29,
2002 2001
---- ----
Cumulative translation adjustment........... $(3,992) $(8,109)
Minimum pension liability adjustment,
net of tax................................ (778) (778)
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$(4,770) $(8,887)
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Note 8: Contingencies and Commitments
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The Company is defending various claims and legal actions which have arisen in
the ordinary course of business. The Company has attempted, where possible,
to assess the likelihood of an unfavorable outcome as a result of these
actions. Legal counsel has been retained to assist the Company in making
these determinations, and costs are accrued when an unfavorable outcome is
determined to be probable and a reasonable estimate can be made.
Note 9: Goodwill and Other Intangible Assets
- ---------------------------------------------
Statement of Financial Accounting Standards (SFAS) No. 141 and 142, "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively, were
published in June 2001. SFAS No. 141 requires the purchase method of
accounting for business combinations, and SFAS No. 142 changes the accounting
for goodwill from an amortization method to an impairment-only approach. The
Company adopted the provisions of SFAS Nos. 141 and 142 effective December 30,
2001, and accordingly, the Company's recorded goodwill is no longer being
amortized. In addition, during the first quarter of 2002, the Company
performed its initial impairment testing required by SFAS No. 142. No
impairment loss or transition adjustments were required.
9
The following sets forth a reconciliation of reported net income and earnings
per share to the same amounts adjusted to exclude amortization expense
recognized on goodwill in each respective period:
Second Qtr. Ended First Half Ended
----------------- ----------------
(In thousands, except June 29, June 30, June 29, June 30,
per share amounts) 2002 2001 2002 2001
---- ---- ---- ----
Reported net income................. $9,006 $6,614 $12,688 $9,630
Add back: Goodwill amortization.... - 197 - 394
------ ------ ------- -------
Adjusted net income................. $9,006 $6,811 $12,688 $10,024
====== ====== ======= =======
Basic earnings per share:
Reported net income................. $ 0.83 $ 0.60 $ 1.18 $ 0.87
Add back: Goodwill amortization.... - 0.02 - 0.04
------ ------ ------- -------
Adjusted net income................. $ 0.83 $ 0.62 $ 1.18 $ 0.91
====== ====== ======= =======
Diluted earnings per share:
Reported net income................. $ 0.79 $ 0.58 $ 1.11 $ 0.84
Add back: Goodwill amortization.... - 0.02 - 0.03
------ ------ ------- -------
Adjusted net income................. $ 0.79 $ 0.60 $ 1.11 $ 0.87
====== ====== ======= =======
10
Item 2. Management's Discussion And Analysis Of Financial Condition And
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Results Of Operations
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Operations
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Net sales for the second quarter of 2002 were $93.7 million, a 13.1 percent
increase from 2001 second quarter net sales of $82.9 million. Year to date
2002 net sales were $161.8 million, up 8.7 percent from year to date 2001 net
sales of $148.8 million. The increased sales for the quarter and year to date
were primarily the result of strong residential submersible electric motor
sales in North America, as well as the inclusion of Coverco, a January 2002
acquisition. These increases were partially offset by lower sales of
submersible fueling systems motors.
Cost of sales as a percent of net sales for the second quarter of 2002 was
71.6 percent, a decrease from 72.1 percent for the same period in 2001. Cost
of sales as a percent of net sales for the year to date 2002 was 72.5 percent,
a decrease from 72.9 percent for the same period in 2001. The decrease is
primarily the result of productivity improvement, cost reduction and other
operations initiatives.
Selling and administrative expenses as a percent of net sales for the second
quarter of 2002 were 14.3 percent compared to 14.2 percent for the same period
in 2001. Selling and administrative expenses as a percent of net sales for
the year to date 2002 was 15.5 percent compared to 15.6 percent for the year
to date 2001.
Interest expense was $0.3 million for the second quarter of 2002 compared to
$0.4 million for the second quarter of 2001. Interest expense for the year to
date 2002 and year to date 2001 was $0.7 million.
Included in other income for the second quarter of 2002 was $0.1 million of
interest income compared to $0.2 million of interest income for the second
quarter of 2001. Included in other income for the year to date 2002 was $0.2
million of interest income compared to $0.4 million of interest income for the
same period in 2001. Interest income was attributable to amounts invested
principally in short-term US treasury and agency securities.
Foreign currency based transactions for the second quarter of 2002 produced a
gain of $1.3 million compared to a $0.4 million loss for the same period in
2001. Foreign currency based transactions for the year to date 2002 produced
a gain of $1.1 million compared to a $1.1 million loss for the same period in
2001. The foreign currency transaction gain was due primarily to the
strengthening Euro relative to the U.S. dollar.
Net income for the second quarter of 2002 was $9.0 million, or $0.79 per
diluted share, a 36.2 percent increase compared to net income of $6.6 million,
or $0.58 per diluted share, for the same period in 2001. Year to date 2002
net income was $12.7 million, or $1.11 per diluted share, a 31.8 percent
increase compared to year to date 2001 net income of $9.6 million, or $0.84
per diluted share.
11
Capital Resources and Liquidity
- -------------------------------
Cash, cash equivalents and marketable securities decreased $13.2 million
during the first half of 2002. The principal use of cash for operating
activities was the seasonal increase in inventories. Working capital
increased $0.6 million during the first half of 2002 and the current ratio was
2.4 and 2.7 at June 30, 2001, and December 29, 2001, respectively.
Net cash flows used in investing activities were $21.3 million and were
principally used for the acquisition of Coverco.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
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1995
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Any forward looking statements contained herein involve risks and
uncertainties, including but not limited to, general economic and currency
conditions, various conditions specific to the Company's business and
industry, market demand, competitive factors, supply constraints, technology
factors, government and regulatory actions, the Company's accounting policies,
future trends, and other risks which are detailed in the Company's Securities
and Exchange Commission filings. These risks and uncertainties may cause
actual results to differ materially from those indicated by the forward
looking statements.
Item 3. 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 intercompany balances
utilizing a global netting system and limited use of foreign currency
denominated debt. Interest rate exposure is principally limited to any
marketable U.S. treasury and agency securities owned by the Company and is
mitigated by the short-term, generally less than 6 months, nature of these
investments.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits (Filed with this quarterly report)
None.
(b) Reports on Form 8-K
None.
12
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
FRANKLIN ELECTRIC CO., INC.
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Registrant
Date July 29, 2002 By /s/ William H. Lawson
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William H. Lawson, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date July 29, 2002 By /s/ Gregg C. Sengstack
----------------------- --------------------------------
Gregg C. Sengstack, Senior Vice
President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
5