UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
--------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 EAST SPRING STREET 46714-3798
BLUFFTON, INDIANA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(260) 824-2900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE NONE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF EACH CLASS)
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
----- -----
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
YES X NO
----- -----
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant at June 29, 2002 (the last business day of the
registrant's most recently completed second quarter) was $432,296,293. The
stock price used in this computation was the last sales price on that date.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 14, 2003:
10,737,947 SHARES
-----------------
Page 1 of 51
2
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the Proxy Statement for the Annual Meeting of Shareholders to be
held on April 25, 2003 (Part III).
The exhibits filed with this Form 10-K are listed in the exhibit index located
on pages 43-44.
3
TABLE OF CONTENTS
Page
----
Part I
Item 1. Business........................................ 4-6
Item 2. Properties...................................... 6-7
Item 3. Legal Proceedings............................... 7
Item 4. Submission of Matters to a Vote of
Security Holders................................ 7
Supplemental Item - Executive
Officers of the Registrant...................... 7
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................. 8
Item 6. Selected Financial Data......................... 8-9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................... 10-13
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .................................... 13
Item 8. Financial Statements and Supplementary Data..... 14-34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 35
Part III
Item 10. Directors and Executive Officers
of the Registrant............................... 35
Item 11. Executive Compensation.......................... 35
Item 12. Security Ownership of Certain
Beneficial Owners and Management,
and Related Stockholder Matters................. 35
Item 13. Certain Relationships and Related
Transactions.................................... 36
Item 14. Controls and Procedures......................... 36
Part IV
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................... 37-38
Signatures ................................................ 39
Certifications ................................................ 40-43
Exhibit Index ................................................ 44-45
4
PART I
------
ITEM 1. BUSINESS
- -----------------
Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and
incorporated in 1946, that, together with its subsidiaries, conducts business
in a single reportable segment: the design, manufacture and distribution of
motors, electronic controls and related parts and equipment. Except where the
content otherwise requires, "Franklin Electric" or the "Company" shall refer
to Franklin Electric Co., Inc. and its consolidated subsidiaries.
Description of Business
- -----------------------
Franklin Electric, a technical leader in electric motors, drives and controls,
is the world's largest manufacturer of submersible water and fueling systems
motors, a manufacturer of underground fueling systems hardware and flexible
piping systems and a leader in engineered industrial motor products.
The principal application for Franklin Electric's submersible motors is
providing the electrical motors for water well pumping systems. These
submersible motors are also used in underground fueling systems and for the
pumping of wastewater.
Franklin Electric's fueling systems products are found all over the world in
industrial, commercial, and agricultural fueling applications. These products
consist of over 500 items, including submersible pumping systems, nozzles,
fittings, flexible piping, electronic tank monitoring equipment and vapor
recovery systems.
Franklin Electric's engineered industrial motor products and electronic drives
and controls are used in a wide variety of products, including gasoline
dispensers, paint handling equipment, electric hoists, explosion-proof vapor
exhaust fans, vacuum pumping systems, livestock systems, and soft-serve ice
cream machines.
The Company's products are sold principally by a single company sales force in
the United States, Canada, Mexico, Europe, Australia, South Africa, Mexico,
Japan, China and other world markets. The Company's products are also sold
through independent distributors and repair shops.
The market for the Company's products is highly competitive and includes both
large and small suppliers. The Company's submersible water, fueling and
industrial motor products are sold to original equipment manufacturers of
pumps, compressors, fans, swimming pool equipment, medical furniture and
business machines.
ITT Industries, Inc., and its various subsidiaries and affiliates, accounted
for 18.2 percent, 18.7 percent and 15.7 percent of the Company's consolidated
sales in 2002, 2001, and 2000, respectively. Sta-Rite Industries, Inc.
accounted for 11.5 percent of the Company's consolidated sales in 2002.
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.
5
The principal raw materials used in the manufacture of the Company's products
are steel in coils and bars, 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 many sources in the
United States and in many world markets. In the opinion of management, no
single source of supply 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.
During 2002, the Company paid $30.3 million for acquisitions, net of cash
acquired, of which $24.3 million was recorded as goodwill based on the
estimated fair values of the net assets acquired. Included in the
acquisitions were Coverco, a manufacturer of submersible and industrial
electric motors and controls in Italy, and Intelligent Controls, Inc. (INCON),
a producer of fueling systems electronic leak detection and inventory
management systems controls in Maine. During 2000, the Company acquired all
of the outstanding shares of capital stock of EBW, Inc. and Advanced Polymer
Technology, Inc., manufacturers of products for use in fueling systems. Also
in 2000, the Company completed transactions to integrate submersible motor
production of KSB AG into its Berzo Demo, Italy operations, and acquired
Mitsubishi Electric Company's submersible electric motor business. See also
Item 8 Footnote 2.
The Company employed 2,658 persons at the end of 2002.
Segment and Geographic Information
- ----------------------------------
Segment and geographic information is included within this Form 10-K at page
32.
Research and Development
- ----------------------------------------------------------------------------
The Company spent approximately $ 6.0 million in 2002, $ 5.2 million in 2001,
and $ 5.0 million in 2000 on activities related to the development of new
products, on improvements of existing products and manufacturing methods, and
on other applied research and development.
In 2002, the Company continued development of a more corrosion resistant 4"
submersible motor, developed a new rewindable 6" submersible motor, expanded
the line of variable speed constant pressure motor systems for residential
applications, and developed a Turbine Pump Interface controller for petroleum
products. Research continued on new materials and processes designed to
achieve higher quality and more cost-effective construction of the Company's
high volume products.
The Company owns a number of patents. In aggregate, these patents are of
material importance in the operation of the business; however, the Company
believes that its operations are not dependent on any single patent or group
of patents.
6
Backlog
- -------
The dollar amount of backlog at the end of 2002 and 2001 was as follows:
(In thousands)
2002 2001
---- ----
Backlog....................... $18,890 $15,136
The backlog is composed of written orders at prices adjustable on a price-at-
the-time-of-shipment basis for products, some of which are specifically
designed for the customer, but most of which are standard catalog items. Both
add-ons and cancellations of catalog items are made without charge to the
customer, but charges are generally made on any cancellation of a specifically
designed product. All backlog orders are expected to be filled in fiscal
2003.
The Company's sales and earnings are not substantially seasonal in nature.
There is no seasonal pattern to the backlog and the backlog has not proven to
be a significant indicator of future sales.
Environmental Matters
- ---------------------
Compliance with federal, state and local provisions regulating the discharge
of material into the environment, or otherwise relating to the protection of
the environment, is not expected to have any material adverse effect upon the
financial position, capital expenditures, earnings or competitive position of
the Company.
Website
- -------
The Company's website address is http://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.
ITEM 2. PROPERTIES
- -------------------
The Company maintains its principal executive offices in Bluffton, Indiana;
manufacturing plants are located in the United States and abroad. Location
and approximate square footage for the Company's principal facilities are
described below. All principal properties are owned or held under operating
leases.
The Company's principal properties are as follows:
Acres Approximate
Location of Land Square Feet
-------- ------- -----------
Bluffton, Indiana 35.8 405,660
Siloam Springs, Arkansas 32.6 240,400
Wilburton, Oklahoma 30.0 327,135
Jonesboro, Indiana (1) - 34,570
7
Grant County, Indiana 9.0 24,100
Muskegon, Michigan 10.8 113,951
Saco, Maine (1) - 27,800
Wittlich, Rhineland, Germany 6.9 76,937
Brno, Czech Republic 2.3 51,158
Berzo Demo, Italy (1) - 22,865
Motta di Livenza, Italy (1) - 39,152
Linares, Mexico 10.0 30,000
Fifteen facilities, each with less
than 56,500 square feet(2) 6.1 260,565
----- ---------
Total 143.5 1,654,293
===== =========
In the Company's opinion, its facilities are suitable for their intended use,
adequate for the Company's business needs and in good condition.
(1) Leased facility.
(2) Thirteen of the facilities are leased and in the aggregate have
approximately 183,474 square feet.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
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, after discussion with counsel, these
clams and legal actions can be successfully defended or resolved without a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The names, ages and all positions and offices held by the executive officers
of the Company are:
In this
Name Age Positions and Offices office since
---- --- --------------------- ------------
William H. Lawson 66 Chairman of the Board, 1985
Chief Executive Officer
and President
Jess B. Ford 51 Senior Vice President 1999
Peter C. Maske 52 Senior Vice President, 1999
Operations
Gregg C. Sengstack 44 Senior Vice President and 1999
Chief Financial Officer
Donald R. Hobbs 61 Vice President, Submersible 1996
Motor Marketing
Thomas A. Miller 53 Vice President, Submersible 1998
Motor Engineering
Kirk M. Nevins 59 Vice President, Sales 1995
Each executive officer is elected by the board of directors for a term of one
year or until his successor is elected and qualified. Each executive officer
was employed by the Company during the preceding five years as an officer or
in a management position.
8
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The number of shareowners of record as of February 14, 2003 was 968. The
Company's stock is traded on Nasdaq National Market: Symbol FELE.
All share and per share data included in this Form 10-K reflect the Company's
two-for-one stock split effected in the form of a 100 percent stock
distribution made on March 22, 2002. Dividends paid and the price range per
common share as quoted by the Nasdaq National Market for 2002 and 2001 were as
follows:
DIVIDENDS PER SHARE PRICE PER SHARE
2002 2001 2002 2001
---- ---- ---- ----
Low High Low High
--- ---- --- ----
1st Quarter... $.12 $.11 $40.600 $53.900 $32.000 $36.625
2nd Quarter... $.13 $.12 $43.520 $60.528 $33.040 $37.950
3rd Quarter... $.13 $.12 $39.900 $52.640 $34.125 $41.414
4th Quarter... $.13 $.12 $41.151 $51.000 $35.315 $42.640
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------
FIVE YEAR FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------
FRANKLIN ELECTRIC CO., INC.
(In thousands, except per share amounts)
2002 2001 2000 1999 1998
<F1> <F2>
- ------------------------------------------------------------------------------------------------------------
Operations:
Net sales.............................$354,872 $322,908 $325,731 $293,236 $272,533
Gross profit.......................... 104,935 92,871 85,186 84,171 79,955
Interest expense...................... 1,317 1,193 1,111 1,317 1,364
Income taxes ......................... 18,273 16,235 13,683 15,591 15,237
Net income............................ 32,204 27,150 22,226 26,805 24,784
Depreciation and amortization......... 12,878 12,660 10,839 7,460 6,687
Capital expenditures.................. 15,568 6,709 14,108 13,691 24,601
Balance sheet:
Working capital...................... 62,762 69,158 54,897 56,886 61,878
Property, plant and equipment, net... 76,033 58,839 64,604 57,047 51,461
Total assets......................... 258,583 195,643 197,179 176,101 167,590
Long-term debt....................... 25,946 14,465 15,874 17,057 18,089
Shareowners' equity.................. $153,138 $123,269 $115,998 $ 96,293 $ 91,597
Other data:
% Net income to sales................ 9.1% 8.4% 6.8% 9.1% 9.1%
% Net income to total
average assets..................... 14.2% 13.8% 11.9% 15.6% 15.0%
Current ratio........................ 2.2 2.7 2.2 2.2 2.4
Number of common shares
outstanding........................ 10,824 10,668 11,008 10,826 11,148
Per share:
Market price range
High................................. $ 60.53 $ 42.64 $ 36.50 $ 37.438 $ 36.25
Low.................................. 39.90 32.00 26.125 29.50 20.00
Net income per weighted-average
common share....................... 2.98 2.49 2.04 2.44 2.16
Net income per weighted-average
common share,
assuming dilution.................. 2.83 2.39 1.96 2.30 2.01
Book value........................... 13.47 10.84 10.21 8.27 7.42
Cash dividends on common
stock.............................. $ .51 $ 0.47 $ 0.43 $ 0.39 $ 0.33
- ------------------------------------------------------------------------------------------------------------
9
<FN>
<F1> Includes the results of operations of its wholly-owned subsidiaries
Coverco S.r.l. and Intelligent Controls, Inc., since their acquisition on
January 7, 2002 and July 16, 2002, respectively.
<F2> Includes the results of operations of its wholly-owned subsidiaries EBW,
Inc. and Advanced Polymer Technology, Inc., since their acquisition on
August 31, 2000.
</FN>
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales for 2002 were $354.9 million, a 9.9 percent increase from 2001 net
sales of $322.9 million. The increased sales 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, and INCON, a July
2002 acquisition. Sales from these acquisitions represented 5.2 percent of
sales for the year. These increases were partially offset by lower demand
from the petroleum equipment industry. Net sales for 2001 were $322.9
million, a 0.9 percent decrease from 2000 net sales of $325.7 million. The
decreased sales were primarily the result of the global manufacturing
recession as well as the strong U.S. dollar/weak euro and South African rand
that affected foreign sales. The lower sales were partially offset by the
inclusion of the full year results of EBW, Inc. ("EBW") and Advanced Polymer
Technology, Inc. ("APT") which were acquired in August 2000 as well as sales
to KSB AG and customers of Mitsubishi Electric Company under new motor supply
agreements for a full year in 2001. 2001 sales were approximately 8.0 percent
lower than 2000 excluding the incremental sales from these acquisitions and
supply agreements.
Cost of sales as a percent of net sales for 2002, 2001 and 2000 was 70.4
percent, 71.2 percent and 73.8 percent, respectively. Cost of sales as a
percent of net sales decreased in 2002 from 2001 primarily as a result of
productivity improvements, cost reductions and other operations initiatives as
well as lower costs in key commodities. The Company has achieved these
results by continually focusing on improving its quality and has combined
certain manufacturing operations on specific products to one location, as well
as identified alternative sources for certain materials. Cost of sales as a
percent of net sales decreased in 2001 from 2000 primarily as a result of
specific productivity initiatives and cost reduction which resulted in
improved labor efficiencies and lower material costs as well as lower costs in
key commodities.
Selling and administrative expense as a percent of net sales for 2002, 2001
and 2000 was 15.4 percent, 14.7 percent and 13.8 percent, respectively. The
addition of fixed expenses from acquired companies is the primary reason for
the increase in selling and administrative expense as a percent of net sales
for 2002 and 2001 (full year impact of 2000 acquisitions).
Interest expense for 2002, 2001 and 2000 was $1.3 million, $1.2 million and
$1.1 million, respectively.
During the third quarter of 2000, the Company recorded a one-time $3.2 million
($2.0 million after-tax) charge to earnings to recognize the costs of the
unsuccessful acquisition of the fuel pumping systems business of the Marley
Pump Company, a division of United Dominion Industries.
Included in other income for 2002, 2001 and 2000 was interest income of $0.5
million, $0.6 million and $1.2 million, respectively, primarily derived from
the investment of cash balances in short-term U.S. treasury and agency
securities.
Foreign currency-based transactions produced a gain for 2002 of $1.4 million.
The foreign currency-based transaction gain was due primarily to the
11
strengthening euro relative to the U.S. dollar during most of 2002. The
foreign currency-based transaction losses in 2001 and 2000 were primarily due
to the strengthening U.S. dollar relative to the euro and South African rand
resulting in losses of $0.5 million and $0.7 million, respectively.
The provision for income taxes in 2002, 2001 and 2000 was $18.3 million, $16.2
million and $13.7 million, respectively. The effective tax rate in 2002 of
36.2% is less than the 2001 rate of 37.4% as a result of tax planning savings
realized in 2002. The effective tax rate for each year differs from the
United States statutory rate of 35 percent, due principally to the effects of
state and foreign income taxes, net of federal tax benefits.
Net income for 2002 was $32.2 million, or $2.83 per diluted share, compared to
2001 net income of $27.2 million, or $2.39 per diluted share. Net income for
2000 was $22.2 million, or $1.96 per diluted share. All share and per share
data reflect the Company's two-for-one stock split effected in the form of a
100 percent stock distribution made on March 22, 2002.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Cash flows from operations provide the principal source of current liquidity.
Net cash flows provided by operating activities were $57.9 million, $39.9
million and $18.8 million in 2002, 2001 and 2000, respectively. The primary
source of cash from operations for 2002 was earnings. The increases in 2002
and 2001 were related to decreases in accounts receivable. The decrease in
2000 was related to increases in accounts receivable and decreases in accounts
payable.
Net cash flows used in investing activities were $57.2 million, $10.2 million
and $25.6 million in 2002, 2001 and 2000, respectively. The primary uses of
cash in 2002 were for the acquisitions of Coverco and INCON. The Company paid
an aggregate of $30.3 million for these two acquisitions, net of cash
acquired. During the third quarter of 2002, the Company paid $10.5 million in
cash (included in deferred assets) as contingent consideration in accordance
with the terms of an agreement entered into in 1998 in which the Company
purchased certain operating and intangible assets from a motor manufacturer.
The primary use of cash in 2001 was for additions to plant and equipment. The
primary uses of cash in 2000 were for the acquisition of EBW and APT and
additions to plant and equipment.
Net cash flows used in financing activities were $2.7 million, $19.0 million
and $12.3 million in 2002, 2001 and 2000, respectively. The primary uses of
cash in each of these three years related to the repurchase of shares of
Company common stock under the Company's repurchase program and the payment of
dividends. During 2002, 2001 and 2000, the Company repurchased, or received
as consideration for stock options exercised, 223,499, 408,200 and 253,400
shares of its common stock for $10.5 million, $14.2 million and $8.4 million,
respectively. The Company paid $5.5 million, $5.1 million and $4.7 million in
dividends on the Company's common stock in 2002, 2001 and 2000, respectively.
The Company has authority under its Board-approved stock repurchase program to
purchase an additional 655,253 shares of its common stock after December 28,
2002.
Cash, cash equivalents and marketable securities at the end of 2002 were $20.1
million compared to $23.7 million at the end of 2001. Working capital
decreased $6.4 million in 2002 and the current ratio of the Company was 2.2
and 2.7 at the end of 2002 and 2001, respectively.
12
Principal payments of $1.0 million per year on the Company's $20.0 million of
unsecured long-term debt began in 1998 and will continue until 2008 when a
balloon payment of $10.0 million will fully retire the debt. In November
2001, the Company entered into an unsecured, 38-month $60.0 million revolving
credit agreement (the "Agreement"). The amount available for borrowing under
the Agreement is reduced by the amount of certain standby letters-of-credit.
These standby letters-of-credit totaled $2,008 and $1,650 at December 28, 2002
and December 29, 2001, respectively. The Agreement includes a facility fee of
one-eighth of one percent on the committed amount. The Company's borrowings
under the Agreement totaled $10.1 million and $0 at December 28, 2002 and
December 29, 2001, respectively. The Company is subject to certain financial
covenants with respect to borrowings, interest coverage, working capital, net
worth, loans or advances, and investments. The Company was in compliance with
all debt covenants at all times in 2002 and 2001. See Note 6.
At December 28, 2002, the Company had $2.4 million of commitments for the
construction of a building in Linares, Mexico and the purchase of machinery
and equipment.
During 2003, the Company intends to continue to seek acquisition candidates
that are compatible with its existing product lines and that provide leveraged
growth potential.
Management believes that internally generated funds and existing credit
arrangements provide sufficient liquidity to meet current commitments.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and amends the related existing disclosure requirements. As more
fully described in Notes 1 and 9, the Company accounts for its stock-based
compensation under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, SFAS No. 148 does not have an impact on the Company's operating
results or financial position.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees it has issued and clarifies the accounting for such guarantees. The
initial recognition and measurement provisions of FIN No. 45 are effective on
a prospective basis to guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for periods ending after
December 15, 2002. The Company does not expect the adoption of FIN No. 45 to
have a material impact on its operating results or financial position.
CRITICAL ACCOUNTING POLICIES AND 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
13
related disclosure of contingent assets and liabilities. On an on-going basis,
management evaluates its estimates, including those related to allowance for
doubtful accounts, inventories, recoverability of long-lived assets,
intangible assets, income taxes, warranty obligations, pensions and other
employee benefit plan obligations, and contingencies. Management bases its
estimates 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
- -----------------------------------------------------------------------------
1995
- ----
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, all as described in Exhibit 99 of this Form
10-K. These risks and uncertainties may cause actual results to differ
materially from those indicated by the forward-looking statements. 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 intercompany balances
utilizing a global netting system and limited use of foreign currency
denominated debt. Interest rate exposure is principally limited to variable
rate interest borrowings under the Company's revolving credit agreement.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
2002 2001 2000
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
Net sales............................. $354,872 $322,908 $325,731
Cost of sales (including research
and development expenses of $6,035,
$5,232 and $4,978, respectively).... 249,937 230,037 240,545
-------- -------- --------
Gross profit.......................... 104,935 92,871 85,186
Selling and administrative expenses... 54,637 47,522 44,967
-------- -------- --------
Operating income...................... 50,298 45,349 40,219
Interest expense...................... (1,317) (1,193) (1,111)
Costs of unsuccessful acquisition..... - - (3,237)
Other income (expense),net............ 130 (239) 764
Foreign exchange income (loss)........ 1,366 (532) (726)
-------- -------- --------
Income before income taxes............ 50,477 43,385 35,909
Income taxes (Note 5)................. 18,273 16,235 13,683
-------- -------- --------
Net income............................ $ 32,204 $ 27,150 $ 22,226
======== ======== ========
Per share data (Note 8):
Net income per common share......... $ 2.98 $ 2.49 $ 2.04
======== ======== ========
Net income per common share,
assuming dilution................. $ 2.83 $ 2.39 $ 1.96
======== ======== ========
Dividends per common share.......... $ .51 $ .47 $ .43
======== ======== ========
See Notes to Consolidated Financial Statements.
15
CONSOLIDATED BALANCE SHEETS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
ASSETS
2002 2001
(In thousands)
- ------------------------------------------------------------------------------
Current assets:
Cash and equivalents........................ $ 20,133 $ 20,750
Marketable securities....................... - 2,999
Receivables (less allowances of $1,907
and $1,658, respectively)................. 31,711 27,486
Inventories:
Raw materials............................. 16,115 16,447
Work-in-process........................... 7,481 6,005
Finished goods............................ 33,905 35,662
LIFO reserve.............................. (9,233) (10,106)
-------- --------
48,268 48,008
Other current assets (including deferred
income taxes of $8,615 and $8,667,
respectively, Note 5)..................... 12,897 10,340
-------- --------
Total current assets.................... 113,009 109,583
Property, plant and equipment, at cost:
Land and buildings.......................... 34,126 25,343
Machinery and equipment..................... 141,347 121,791
-------- --------
175,473 147,134
Less allowance for depreciation........... 99,440 88,295
-------- --------
76,033 58,839
Deferred and other assets (including deferred
income taxes of $1,391 and $17,
respectively, Note 5)...................... 30,795 12,710
Goodwill...................................... 38,746 14,511
-------- --------
Total Assets.................................. $258,583 $195,643
======== ========
See Notes to Consolidated Financial Statements.
16
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
2002 2001
(In thousands)
- ------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt and
short-term borrowings (Note 6)............ $ 1,467 $ 1,058
Accounts payable............................ 18,584 11,683
Accrued expenses (Note 4)................... 28,484 24,146
Income taxes (Note 5)....................... 1,712 3,538
-------- --------
Total current liabilities................. 50,247 40,425
Long-term debt (Note 6)....................... 25,946 14,465
Employee benefit plan obligations (Note 3).... 23,988 13,199
Other long-term liabilities................... 5,264 4,285
Shareowners' equity (Note 7):
Common shares outstanding
(10,824 and 10,669, respectively)......... 1,082 1,067
Additional capital.......................... 34,079 23,348
Retained earnings........................... 125,308 109,103
Loan to ESOP Trust (Note 3)................. (1,130) (1,362)
Accumulated other comprehensive loss........ (6,201) (8,887)
-------- --------
Total shareowners' equity................ 153,138 123,269
-------- --------
Total Liabilities and Shareowners' Equity..... $258,583 $195,643
======== ========
See Notes to Consolidated Financial Statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
2002 2001 2000
(In thousands)
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................. $32,204 $27,150 $22,226
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization............ 12,878 12,660 10,839
Deferred income taxes.................... 664 2,916 (34)
Loss on disposals of plant
and equipment.......................... 428 1,980 275
Changes in assets and liabilities,
excluding the effects of acquisitions:
Receivables............................ 3,125 2,963 (7,473)
Inventories............................ 7,434 (697) (2,516)
Accounts payable and other
accrued expenses..................... 2,915 (8,028) (2,612)
Employee benefit plan obligations...... 1,128 (718) 2,156
Other, net............................. (2,923) 1,697 (4,113)
------- ------- -------
Net cash flows from operating activities..... 57,853 39,923 18,748
------- ------- -------
Cash flows from investing activities:
Additions to plant and equipment........... (15,568) (6,709) (14,108)
Proceeds from sale of plant and equipment.. 20 354 61
Additions to deferred assets............... (14,312) (802) (2,829)
Purchases of marketable securities......... - (2,999) (2,915)
Cash paid for acquisitions, net of cash
acquired (Note 2)........................ (30,344) - (17,687)
Proceeds from maturities of marketable
securities............................... 2,999 - 11,883
------- ------- -------
Net cash flows from investing activities..... (57,205) (10,156) (25,595)
------- ------- -------
Cash flows from financing activities:
Borrowing of long-term debt................ 8,575 - -
Repayment of long-term debt (Note 6)....... (1,408) (1,016) (1,017)
Borrowing on line of credit and short-term
borrowings............................... 3,000 11,055 -
Repayment of line of credit and short-term
borrowings............................... (3,017) (11,073) (41)
Proceeds from issuance of common stock..... 5,945 1,059 1,541
Purchases of common stock (Note 7)......... (10,517) (14,157) (8,351)
Reduction of loan to ESOP Trust............ 232 232 233
Dividends paid............................. (5,505) (5,122) (4,685)
------- ------- -------
Net cash flows from financing activities..... (2,695) (19,022) (12,320)
------- ------- -------
Effect of exchange rate changes on cash...... 1,430 374 954
------- ------- -------
Net change in cash and equivalents........... (617) 11,119 (18,213)
Cash and equivalents at beginning of year.... 20,750 9,631 27,844
------- ------- -------
Cash and equivalents at end of year.......... $20,133 $20,750 $ 9,631
======= ======= =======
Cash paid during 2002, 2001, and 2000 for interest was $1.3 million, $1.1
million and $1.1 million, respectively. Also, cash paid during 2002, 2001 and
2000 for income taxes was $16.6 million, $13.1 million and $14.6 million,
respectively.
See Notes to Consolidated Financial Statements.
18
<OPTION>
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share amounts)
Accumulated
Common Loan to Other
Shares Common Additional Retained ESOP Comprehensive Comprehensive
Outstanding Stock Capital Earnings Trust Income (Loss) Income
----------- ----- ------- -------- ----- ------------- ------
Balance year end 1999.............. 10,826,840 $1,083 $17,153 $ 84,242 $(1,827) $(4,358)
Net income......................... 22,226 $22,226
Currency translation adjustment... (1,693) (1,693)
Pension liability adjustment...... (387) (387)
-------
Comprehensive income, net of tax. $20,146
=======
Dividends on common stock.......... (4,685)
Common stock issued................ 35,294 44 11,497
Common stock repurchased or received
for stock options exercised...... (253,400) (26) 13 (8,338)
Tax benefit of stock options
exercised........................ 821
Loan payment from ESOP............. 233
---------- ------ ------- -------- ------- -------
Balance year end 2000.............. 11,008,734 1,101 29,484 93,445 (1,594) (6,438)
---------- ------ ------- -------- ------- -------
Net income......................... 27,150 $27,150
Currency translation adjustment... (2,353) (2,353)
Pension liability adjustment...... (96) (96)
-------
Comprehensive income, net of tax. $24,701
=======
Dividends on common stock.......... (5,122)
Common stock issued................ 68,000 6 1,053
Common stock repurchased or received
for stock options exercised...... (408,200) (40) (7,747) (6,370)
Tax benefit of stock options
exercised........................ 558
Loan payment from ESOP............. 232
---------- ------ ------- -------- ------- -------
Balance year end 2001.............. 10,668,534 1,067 23,348 109,103 (1,362) (8,887)
========== ====== ======= ======== ======= =======
Net income......................... 32,204 $32,204
Currency translation adjustment... 5,858 5,858
Pension liability adjustment...... (3,172) (3,172)
-------
Comprehensive income, net of tax. $34,890
=======
Dividends on common stock.......... (5,505)
Common stock issued................ 378,500 38 5,907
Common stock repurchased or received
for stock options exercised...... (223,499) (23) (10,494)
Tax benefit of stock options
exercised........................ 4,824
Loan payment from ESOP............. 232
---------- ------ ------- -------- ------- -------
Balance year end 2002.............. 10,823,535 $1,082 $34,079 $125,308 $(1,130) $(6,201)
========== ====== ======= ======== ======= =======
See Notes to Consolidated Financial Statements.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 December 28, 2002 (52 weeks), December 29, 2001 (52 weeks) and
December 30, 2000 (52 weeks) and are referred to as 2002, 2001 and 2000,
respectively.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries.
REVENUE RECOGNITION--Sales are recognized when the Company's products are
shipped, at which time transfer of ownership and risk of loss pass to the
customer.
CASH EQUIVALENTS--Cash equivalents consist of highly liquid investments which
are readily convertible to cash, present insignificant risk of changes in
value due to interest rate fluctuations and have original or purchased
maturities of three months or less.
MARKETABLE SECURITIES--Marketable securities consist of short-term U.S.
treasury and agency securities with maturities of greater than three months at
the date of purchase. All securities are categorized as held-to-maturity and
are stated at amortized cost. Due to the nature of these securities, the
difference between the amortized cost and fair value is not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts for cash and
equivalents, long-term debt and short-term debt approximate fair value. The
fair value of long-term debt is estimated based on current borrowing rates for
similar issues and current exchange rates for foreign currency denominated
amounts. The Company's off-balance sheet instruments consist of operating
leases which are not significant (see Footnote 11).
ACCOUNTS RECEIVABLE--Accounts receivable are stated at estimated net
realizable value. Accounts receivable comprise balances due from customers
net of estimated allowances for uncollectible accounts. In determining
collectibility, historical trends are evaluated and specific customer issues
are reviewed to arrive at appropriate allowances.
INVENTORIES--Inventories are stated at the lower of cost or market. The
majority of the cost of domestic inventories is determined using the last-in,
first-out (LIFO) method; all remaining inventory costs are determined using
the first-in, first-out (FIFO) method. Inventories stated on the LIFO method
approximated 44 percent and 53 percent of total inventories in 2002 and 2001,
respectively.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost. Depreciation of plant and equipment is provided principally on a
straight line basis over the estimated useful lives of 5 to 50 years for land
improvements and buildings, 2 to 10 years for machinery, equipment, furniture,
and fixtures and 3 to 5 years for automobiles and trucks. Accelerated methods
are used for income tax purposes. The Company reviews its property and
20
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
STOCK-BASED COMPENSATION--The Company accounts for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
EARNINGS PER COMMON SHARE--Basic and diluted earnings per share are computed
and disclosed under Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share". Diluted earnings per share is computed based upon
earnings applicable to common shares divided by the weighted-average number of
common shares outstanding during the period adjusted for the effect of other
dilutive securities.
TRANSLATION OF FOREIGN CURRENCIES--All assets and liabilities of foreign
subsidiaries whose functional currency is other than the U.S. dollar are
translated at year end exchange rates. All revenue and expense accounts are
translated at average rates in effect during the period.
USE OF ESTIMATES--Management's best estimates of certain amounts are required
in preparation of the consolidated financial statements in accordance with
generally accepted accounting principles, and actual results could differ from
those estimates.
RECLASSIFICATIONS--Certain prior year amounts are reclassified when necessary
to conform to the current year presentation. All share and per share data
included in these financial statements reflect the Company's two-for-one stock
split effected in the form of a 100 percent stock distribution made on March
22, 2002.
ACCOUNTING PRONOUNCEMENTS--In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the related
existing disclosure requirements. As more fully described above and in Note 9
below, the Company accounts for its stock-based compensation under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, SFAS No. 148
does not have an impact on the Company's operating results or financial
position.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor about its obligations under certain
guarantees it has issued and clarifies the accounting for such guarantees. The
initial recognition and measurement provisions of FIN No. 45 are effective on
a prospective basis to guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for periods ending after
December 15, 2002. The Company does not expect the adoption of FIN No. 45 to
have a material impact on its operating results or financial position.
21
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standards Nos. 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; accordingly, the Company's recorded goodwill is
no longer being amortized. 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. In addition, during
the fourth quarter of 2002, the Company performed its annual impairment
testing required by SFAS No. 142. No impairment loss was required to be
recognized.
Acquisitions
- ------------
During 2002, the Company paid $30.3 million for acquisitions, net of cash
acquired, of which $24.3 million was recorded as goodwill based on the
estimated fair values of the net assets acquired. These estimated fair values
will continue to be evaluated by the Company over a one-year period from the
respective dates of acquisition. In January 2002, the Company acquired certain
assets and liabilities of Coverco S.p.A., and Emco S.r.L.(jointly "Coverco")
manufacturers of submersible and industrial electric motors and controls in
Italy. In July 2002, the Company acquired all of the outstanding shares of
INCON, a producer of fueling systems electronic leak detection and inventory
management systems controls in Maine.
On August 31, 2000, the Company acquired all of the outstanding shares of
capital stock of EBW, Inc. and Advanced Polymer Technology, Inc. ("EBW" and
"APT"), manufacturers of equipment for use in fueling systems. The Company
paid to the selling shareholders of EBW and APT an aggregate of $20.3 million
at the closing date, consisting of $10.3 million in cash and the issuance of
$10.0 million of the Company's common stock. The Company also assumed an
aggregate of $7.5 million of EBW and APT's credit obligations, of which $7.4
million was paid to the creditors by the Company on the closing date. In
aggregate, the acquisition was recorded at a total purchase price of $27.9
million, including $0.1 million in acquisition costs, at the closing date.
The Company may pay additional consideration contingent on the future earnings
performance of EBW and APT through December 31, 2003.
These acquisitions were accounted for using the purchase method of accounting.
Accordingly, a portion of the aggregate purchase price was allocated to the
net assets acquired based on the estimated fair values. The excess of
purchase price over the fair value of the net assets acquired has been
recorded as goodwill which was being amortized on a straight-line basis over
20 years. The Company discontinued amortizing goodwill effective the first
quarter of the Company's 2002 fiscal year under the provisions of SFAS No.
142.
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:
22
(In thousands, except
per share amounts) 2002 2001 2000
---- ---- ----
Reported net income................. $32,204 $27,150 $22,226
Add back: Goodwill amortization.... - 757 258
------- ------- -------
Adjusted net income................. $32,204 $27,907 $22,484
======= ======= =======
Basic earnings per share:
Reported net income................. $ 2.98 $ 2.49 $ 2.04
Add back: Goodwill amortization.... - 0.07 0.02
------- ------- -------
Adjusted net income................. $ 2.98 $ 2.56 $ 2.06
======= ======= =======
Diluted earnings per share:
Reported net income................. $ 2.83 $ 2.39 $ 1.96
Add back: Goodwill amortization.... - 0.07 0.02
------- ------- -------
Adjusted net income................. $ 2.83 $ 2.46 $ 1.98
======= ======= =======
Other
- -----
In September 2002, the Company paid $10.5 million in cash (included in
deferred assets) as contingent consideration in accordance with the terms of
an agreement entered into in 1998 in which the Company purchased certain
operating and intangible assets from a motor manufacturer. The payment
settled all contingencies remaining from the original transaction. The
Company has determined that the intangible assets that arose from this
agreement, which total $18.9 million at December 28, 2002, have an indefinite
life; accordingly, the Company ceased amortizing these intangible assets after
making this payment.
During the third quarter of 2000, the Company recorded a one-time $3.2 million
($2.0 million after-tax) charge to earnings to recognize the costs of the
unsuccessful acquisition of the fuel pumping systems business of the
Marley Pump Company, a division of United Dominion Industries.
3. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PLANS - As of December 28, 2002, the Company's domestic
operations maintain three separate pension plans.
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.
The following table sets forth aggregated information related to the Company's
domestic pension benefits and other postretirement benefits, including changes
in the benefit obligations, changes in plan assets, funded status, amounts
recognized in the Consolidated Balance Sheets, and actuarial assumptions:
23
(In thousands)
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
2002 2001 2002 2001
---- ---- ---- ----
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation, b/o/y......$109,209 $100,746 $ 12,450 $ 12,118
Service cost................... 3,276 3,163 312 307
Interest cost.................. 7,588 7,487 859 872
Plan amendments................ 1,409 717 - -
Actuarial loss................. 2,923 5,111 495 360
Settlements paid............... (445) - - -
Benefits paid.................. (8,216) (8,015) (1,202) (1,207)
-------- -------- -------- --------
Benefit obligation, e/o/y......$115,744 $109,209 $ 12,914 $ 12,450
======== ======== ======== ========
Change in plan assets:
Fair value of assets, b/o/y....$109,190 $112,732 $ - $ -
Actual return on plan assets... (3,125) 1,383 - -
Company contributions.......... 551 3,090 1,202 1,207
Settlements paid............... (445) - - -
Benefits paid.................. (8,216) (8,015) (1,202) (1,207)
-------- -------- -------- --------
Fair value of assets, e/o/y....$ 97,955 $109,190 $ - $ -
======== ======== ======== ========
Reconciliation of funded status:
Funded status..................$(17,789) $ (19) $(12,914) $(12,450)
Unrecognized net (gain) loss... 5,860 (11,223) 2,898 2,547
Unrecognized transition
obligation................... - - 4,889 5,378
Unrecognized prior service
cost.......................... 5,699 5,504 - -
-------- -------- -------- --------
Net amount recognized..........$ (6,230) $ (5,738) $ (5,127) $ (4,525)
======== ======== ======== ========
Amounts recognized in the
Consolidated Balance Sheets:
Accrued benefit liability......$(17,611) $ (7,647) $ (5,127) $ (4,525)
Intangible asset............... 4,802 615 - -
Deferred tax asset............. 2,630 516 - -
Accumulated other comprehensive
loss.......................... 3,949 778 - -
-------- -------- -------- --------
Net amount recognized..........$ (6,230) $ (5,738) $ (5,127) $ (4,525)
======== ======== ======== ========
Actuarial assumptions:
Discount rate.................. 6.75% 7.25% 6.75% 7.25%
Rate of increase in future
compensation................. 2.5-7.00% 3.5-9.00% 2.5%-7.00% 3.5-9.00%
(Graded) (Graded) (Graded) (Graded)
Expected long-term rate of
return on plan assets........ 9.25% 9.25% - -
- ------------------------------------------------------------------------------
24
The following table sets forth aggregated net domestic periodic benefit cost
for 2002, 2001 and 2000:
(In thousands)
- ------------------------------------------------------------------------------
Pension Benefits Other Benefits
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Service cost.... $3,276 $3,163 $3,100 $ 312 $ 307 $ 289
Interest cost... 7,588 7,487 7,056 859 872 868
Expected return
on assets...... (10,433) (9,835) (9,171) - - -
Amortization of
unrecognized:
obligation
(asset)...... - - (112) 489 489 489
Prior service
cost......... 1,214 913 819 - - -
Loss (Gain)... (719) (770) (677) 144 135 122
------ ------ ------ ------ ------ ------
Net periodic
benefit cost... $ 926 $ 958 $1,015 $1,804 $1,803 $1,768
Settlement cost. 117 - - - - -
------ ------ ------ ------ ------ ------
Total benefit cost $1,043 $ 958 $1,015 $1,804 $1,803 $1,768
====== ====== ====== ====== ====== ======
- ------------------------------------------------------------------------------
The plan assets of the pension plans consist primarily of common stocks and
bonds, including $25,399 and $24,888 of the Company's common stock in 2002 and
2001, respectively. The company consults with its investment advisors as to
the expected return on plan assets. While past performance is not a guarantee
of future returns, the plan assets of the pension plans for the past fifteen
years have averaged in excess of 11% annually and the composition of the plan
assets leads the company to expect a long term rate of return in excess of
9.25% despite the recent downturn in the broader stock market.
One of the Company's three pension plans covers certain management employees.
The Company does not fund this plan, and its assets were zero in 2002 and
2001. The plan's projected benefit obligation and accumulated benefit
obligation were $5,898 and $5,231, respectively, at December 28, 2002, and
$5,312 and $4,885, respectively, at December 29, 2001.
The Company's German subsidiary, which does not report pension information
under the Employee Retirement Income Security Act of 1974, calculates the
pension liability based on local requirements. The long-term pension
liability for the German subsidiary was $1,250 at December 28, 2002 and $1,036
at December 29, 2001. The difference between calculating the pension
liability under local requirements versus SFAS No. 87 requirements is not
significant. Pension liabilities for other foreign subsidiaries are not
significant.
DEFINED CONTRIBUTION PLANS - The Company maintains an integrated 401(k) and
Employee Stock Ownership Plan (ESOP).
25
In 1996 and 1992, the ESOP Trustee acquired shares of Company common stock on
the open market using the proceeds of a ten-year, $0.3 million loan and a
fifteen-year, $3.0 million loan, respectively, from the Company. Under the
terms of the variable rate loan (6.31 percent at December 28, 2002), principal
plus interest is payable in equal annual installments. The shares of stock
purchased with the loan proceeds are collateral for the loan and are
considered outstanding for purposes of calculating earnings per share.
The Company contributes a portion of its 401(k) matching contribution as well
as an additional annual contribution, both subject to the Company's annual
financial results, to the ESOP Trust. The ESOP Trustee uses a portion of the
Company's contributions to make principal and interest payments on the loan.
As loan payments are made, shares of common stock are released as collateral
and are allocated to participants' accounts. The balance of the Company's
contributions in cash or common stock is made to the Company stock fund of the
401(k) and ESOP Trusts, and allocated to participants' accounts to satisfy the
balance of the Company's 401(k) matching contribution.
At December 28, 2002, 263,079 shares were allocated to the accounts of
participants, 17,220 shares were committed to be released and allocated to the
accounts of participants for service rendered during 2002, and 76,116 shares
were held by the ESOP Trust in suspense.
The following table sets forth the interest expense and Company contributions
to the integrated ESOP and 401(k) Plan.
(In thousands)
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Interest expense incurred by the plan
on ESOP debt............................. $ 74 $ 88 $ 104
Company contributions to integrated plan... $1,118 $1,199 $1,308
- ------------------------------------------------------------------------------
4. ACCRUED EXPENSES
Accrued expenses consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2002 2001
---- ----
Salaries, wages and commissions....... $ 11,595 $ 8,116
Product warranty costs................ 5,308 4,970
Insurance............................. 5,762 5,926
Employee benefits..................... 2,116 1,994
Other................................. 3,703 3,140
------- -------
$28,484 $24,146
======= =======
- ------------------------------------------------------------------------------
26
5. INCOME TAXES
Income before income taxes consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Domestic.................... $45,344 $35,643 $27,202
Foreign..................... 5,133 7,742 8,707
------- ------- -------
$50,477 $43,385 $35,909
======= ======= =======
- ------------------------------------------------------------------------------
The income tax provision consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Currently payable:
Federal................... $ 11,890 $ 9,145 $ 8,328
Foreign................... 2,934 2,622 3,412
State..................... 2,785 1,552 1,977
Deferred:
Federal................... 1,435 2,320 (188)
Foreign................... (826) 152 68
State..................... 55 444 86
------- ------- -------
$18,273 $16,235 $13,683
======= ======= =======
- ------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities
were as follows:
(In thousands)
- ------------------------------------------------------------------------------
2002 2001
Deferred tax assets:
Accrued expenses and reserves.............. $ 5,094 $ 5,861
Compensation and employee benefits......... 10,636 8,277
Other items................................ 2,488 2,381
------- -------
Total deferred tax assets................ 18,218 16,519
------- -------
Deferred tax liabilities:
Accelerated depreciation on fixed assets... 7,043 6,564
Other items................................ 1,169 1,271
------- -------
Total deferred tax liabilities........... 8,212 7,835
------- -------
Net deferred tax assets...................... $10,006 $ 8,684
======= =======
- ------------------------------------------------------------------------------
27
The portions of current and non-current deferred tax assets and liabilities
were as follows:
(In thousands)
- ------------------------------------------------------------------------------
2002 2001
---- ----
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Current........ $ 8,797 $ 182 $ 9,474 $ 807
Non-current.... 9,421 8,030 7,045 7,028
------- ------- ------- -------
$18,218 $ 8,212 $16,519 $ 7,835
======= ======= ======= =======
- ------------------------------------------------------------------------------
There was no valuation allowance for deferred tax assets required in 2002 or
2001.
The differences between the statutory and effective tax rates were as follows:
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
U.S. Federal statutory rate...... 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit................ 3.7 3.0 3.4
Extraterritorial Income Exclusion (1.9) (1.4) (1.1)
R&D Tax Credits.................. (1.3) - -
Other Items...................... .7 0.8 0.8
----- ----- -----
36.2% 37.4% 38.1%
===== ===== =====
28
6. DEBT
Long-term debt consisted of:
(In thousands)
- ------------------------------------------------------------------------------
2002 2001
---- ----
Insurance Company--6.31%, principal
payments of $1.0 million due in
annual installments, with a balloon
payment of $10,000 in 2008 ($2,920
denominated in yen at 12/28/02)........ $14,697 $15,448
Revolving Credit Agreement--average
Interest rate of 3.60% due in 2006,
denominated in euros at 12/28/02....... 10,128 -
Other.................................... 2,564 34
------ -------
27,389 15,482
Less current maturities.................. (1,443) (1,017)
------- -------
$25,946 $14,465
======= =======
- ------------------------------------------------------------------------------
The Company's short-term borrowings were $24 and $41 at December 28, 2002 and
December 29, 2001, respectively.
On November 26, 2001, the Company entered into an unsecured, 38-month, $60.0
million revolving credit agreement (the "Agreement"). The amount available
for borrowing under the Agreement is reduced by the amount of certain standby
letters-of-credit. These standby letters-of-credit totaled $2,008 and $1,650
at December 28, 2002 and December 29, 2001, respectively. The Agreement
includes a facility fee of one-eighth of one percent on the committed amount.
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,
working capital, net worth, loans or advances and investments.
The Company was in compliance with all debt covenants at all times in 2002 and
2001.
7. SHAREOWNERS' EQUITY
The Company had 10,824,000 shares of common stock (25,000,000 shares
authorized, $.10 par value) outstanding at the end of 2002.
During 2002 and 2001, pursuant to stock repurchase programs authorized by the
Company's Board of Directors, the Company repurchased a total of 85,131 shares
for $3.6 million and 408,200 shares for $14.2 million, respectively. Of these
shares, 40,000 were repurchased from an officer of the Company in 2001. All
repurchased shares were retired.
29
During 2002, under terms of a Company stock option plan, participants
delivered 138,368 shares of Company common stock as consideration for stock
issued upon the exercise of stock options. Of these shares, 138,248 were from
an officer of the Company. The total exercise price of the respective stock
options was $6.9 million. The Company recorded a $4.8 million reduction in
its deferred tax liability and an increase to shareowners' equity as a result
of these exercises. The shares delivered to the Company were subsequently
retired.
Accumulated other comprehensive loss, consisting of the currency translation
adjustment and the pension liability adjustment, were $2,251 and $3,950,
respectively, at December 28, 2002, and $8,109 and $778, respectively, as of
December 29,2001.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
- ------------------------------------------------------------------------------
Numerator:
Net Income.......................... $32,204 $27,150 $22,226
======= ======= =======
Denominator:
Basic
-----
Weighted-average common shares..... 10,792 10,886 10,908
Diluted
-------
Effect of dilutive securities:
Employee and director incentive
stock options and awards........ 574 484 460
------- ------- -------
Adjusted weighted-average common
shares.......................... 11,366 11,370 11,368
======= ======= =======
Basic earnings per share.............. $ 2.98 $ 2.49 $ 2.04
======= ======= =======
Diluted earnings per share............ $ 2.83 $ 2.39 $ 1.96
======= ======= =======
- ------------------------------------------------------------------------------
30
9. STOCK-BASED COMPENSATION
The Company has authorized the grant of options to purchase common stock of
the Company to employees and non-employee directors of the Company and its
subsidiaries under four fixed stock option plans. The plans and the original
number of authorized shares available for grants are as follows:
- -----------------------------------------------------------------------------
Shares
------
Employee Plans:
1986 Non-Qualified Stock Option Plan 1,110,000
1996 Employee Stock Option Plan 1,200,000
Non-Employee Director Plans:
1990 Non-Employee Director Stock Option Plan 120,000
Amended and Restated 1996 Non-Employee Director Stock Option Plan 600,000
- -----------------------------------------------------------------------------
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 under the Employee Plans vest 20 percent a year and become fully
vested and exercisable after five years. Options granted under the Non-
Employee Director Plans vest 33 percent a year and become fully vested and
exercisable after three years.
A summary of the Company's fixed stock option plans activity and related
information for 2002, 2001 and 2000 follows:
- ------------------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------- ------------------------- ------------------------- -------------------------
Outstanding at
beginning of year 1,662,300 $26.30 1,421,700 $23.45 1,179,834 $19.40
Granted 230,500 48.18 322,000 36.90 368,666 32.51
Exercised (378,500) 15.71 (68,000) 15.58 (126,800) 12.15
Forfeited (50,400) 36.96 (13,400) 31.96 - -
--------- --------- ---------
Outstanding at
end of year 1,463,900 $32.12 1,662,300 $26.30 1,421,700 $23.45
========= ========= =========
- ------------------------------------------------------------------------------------------------------------
The following summarizes information about fixed stock options outstanding
at December 28, 2002:
- ------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/28/02 Contractual Life Exercise Price at 12/28/02 Exercise Price
- --------------- ----------- ---------------- ----------------- ----------- ---------------
$12.25 to 31.37 411,000 3.00 years $17.76 411,000 $17.76
31.38 to 42.44 832,400 7.58 34.84 358,600 34.68
42.45 to 49.95 220,500 9.66 48.61 - -
--------- -------
$12.25 to 49.95 1,463,900 6.61 $32.12 769,600 $25.64
========= =======
- ------------------------------------------------------------------------------------------------------------
31
For pro forma information regarding net income and earnings per share, the
fair value for the options awarded in 2002, 2001 and 2000 for all fixed stock
option plans was estimated as of the date of the grant using a Black-Scholes
option valuation model. The following table sets forth the weighted-average
assumptions for 2002, 2001 and 2000, respectively.
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Risk-free interest rate............ 4.23% 4.93% 6.19%
Dividend yield..................... 1.10% 1.30% 1.30%
Volatility factor.................. .207 .204 .198
Weighted-average expected life..... 6 years 6 years 6 years
- ------------------------------------------------------------------------------
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the option's vesting period. Therefore, in the year of
adoption and subsequently affected years, the effects of applying SFAS No. 123
for providing pro forma net income and earnings per share are not likely to be
representative of the effects on reported income in future years. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Reported net income................. $32,204 $27,150 $22,226
Less: Total fair value computed
stock-based compensation, net of tax (1,270) (1,086) (967)
------- ------- -------
Pro forma net income................ $30,934 $26,064 $21,259
======= ======= =======
Reported net income available
per common share.................. $2.98 $2.49 $2.04
Pro forma net income available
per common share.................. $2.87 $2.39 $1.96
Reported net income available per
common share, assuming dilution... $2.83 $2.39 $1.96
Pro forma net income available per
common share, assuming dilution... $2.72 $2.29 $1.87
- ------------------------------------------------------------------------------
The Black-Scholes option valuation model used by the Company was developed for
use in estimating the fair value of fully tradable options which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. It is management's opinion that the
Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, the existing models
do not necessarily provide a reliable single measure of the fair value of its
stock options.
32
During 2000, the Franklin Electric Co., Inc. Key Employee Performance
Incentive Stock Plan (Incentive Plan) was established. Under the Incentive
Plan, employees may be granted restricted shares of the Company's common
stock, vesting subject to the performance of certain goals. No shares were
awarded under the Incentive Plan in 2002 and 2001. At December 28, 2002,
200,000 shares were available for future awards.
The Company has 1,776,000 shares of its common stock available for issuance
under the 1988 Executive Stock Purchase Plan (1988 Purchase Plan). Under the
1988 Purchase Plan, executives of the Company are awarded the right to
purchase shares of its common stock through a Company loan at the closing
price on the day prior to the date of purchase. In 1998, the Company extended
the 1988 Purchase Plan ten additional years. At December 28, 2002, 1,025,600
shares were available for future awards. At December 28, 2002 there were no
outstanding loans to Company executives; further, the Sarbanes-Oxley Act of
2002 prohibits the type of loan contemplated under the 1988 Purchase Plan.
10. SEGMENT AND GEOGRAPHIC INFORMATION
Based on the management approach established by SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information", the Company's
business consists of two operating segments that offer different products: the
motor segment and the electronic controls segment.
The motor segment designs, manufactures and sells motors and related parts and
equipment for use in submersible water and fueling systems, and in a wide
variety of industrial motor products. The electronic controls segment designs
and manufactures electronic controls for the principal purpose of being a
supplier to the motor segment.
Under SFAS No. 131's quantitative threshold and aggregation criteria, the
Company's two operating segments have been combined into a single reportable
segment. As a result, there are no significant differences between reportable
segment financial information and the Company's consolidated results.
The Company's products are primarily sold to original equipment manufacturers
and through independent distributors in the United States, Canada, Mexico,
Europe, Australia, South Africa, Mexico, Japan, China and other world markets.
Net sales attributed to customers located in the United States were $232.3
million, $218.8 million and $224.4 million in 2002, 2001 and 2000,
respectively. Net sales attributed to foreign customers were $122.6 million,
$104.1 million and $101.3 million in 2002, 2001 and 2000, respectively, of
which no single country was significant. Long-lived assets located in the
United States totaled $47.8 million, $47.4 million and $53.0 million in 2002,
2001 and 2000, respectively. Long-lived assets in foreign countries totaled
$28.2 million, $11.4 million and $11.6 million in 2002, 2001 and 2000,
respectively, of which no single country was significant.
ITT Industries, Inc. accounted for 18.2 percent, 18.7 percent, and 15.7
percent of the Company's consolidated sales in 2002, 2001 and 2000,
respectively. Sta-Rite Industries, Inc. accounted for 11.5% of the Company's
consolidated sales in 2002.
33
11. CONTINGENCIES AND COMMITMENTS
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, 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 or results of operations.
Total rent expense charged to operations for operating leases including
contingent rentals was $2.7 million, $2.4 million and $2.2 million for 2002,
2001 and 2000, respectively. The future minimum rental payments for
noncancellable operating leases as of December 28, 2002, are as follows:
2003, $1.7 million; 2004, $1.1 million; and 2005, $0.7 million. Rental
commitments subsequent to 2005 are not significant.
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial information for 2002 and 2001 is as follows:
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
Basic Diluted
Net Gross Net Earnings Earnings
Sales Profit Income Per Share Per Share
----- ------ ------ --------- ---------
2002
- ----
1st Quarter..... $ 68,069 $ 17,851 $ 3,682 $ .34 $ .32
2nd Quarter..... 93,682 26,600 9,006 .83 .79
3rd Quarter..... 97,125 29,553 9,628 .89 .85
4th Quarter..... 95,996 30,931 9,888 .91 .88
-------- -------- -------
$354,872 $104,935 $32,204 $2.98 $2.83
======== ======== =======
2001
- ----
1st Quarter..... $ 65,899 $ 17,113 $ 3,016 $ .27 $ .26
2nd Quarter..... 82,860 23,156 6,614 .60 .58
3rd Quarter..... 86,764 25,035 8,192 .75 .72
4th Quarter..... 87,385 27,567 9,328 .87 .83
-------- -------- -------
$322,908 $ 92,871 $27,150 $2.49 $2.39
======== ======== =======
- ------------------------------------------------------------------------------
34
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Shareowners and Directors, Franklin Electric Co., Inc.:
We have audited the accompanying consolidated balance sheets of Franklin
Electric Co., Inc. and consolidated subsidiaries as of December 28, 2002 and
December 29, 2001 and the related consolidated statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended December 28, 2002. Our audits also included the financial statement
schedule listed in the index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
consolidated subsidiaries as of December 28, 2002 and December 29, 2001, and
the results of their operations and their cash flows for each of the three
years in the period ended December 28, 2002, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such 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
Deloitte & Touche LLP
Chicago, Illinois
January 24, 2003
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information concerning 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 25, 2003, under the headings of "ELECTION OF DIRECTORS" and
"INFORMATION CONCERNING NOMINEES AND 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."
The information concerning 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 25, 2003, under the
heading of "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE," 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 25, 2003,
under the headings of "INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,"
"COMPENSATION COMMITTEE REPORT," "SUMMARY COMPENSATION TABLE," "OPTION GRANTS
IN 2002 FISCAL YEAR," "AGGREGATED OPTION EXCERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES", "PENSION PLANS" and "AGREEMENTS," and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ----------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
- ---------------------------
The information required by Item 12 is set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 25, 2003,
under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and "SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS," and is incorporated herein by reference.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
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 25, 2003,
under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" and "AGREEMENTS," and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
- ---------------------------------
Within the 90 days prior to the date of 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-14. 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 are effective in timely alerting them to
material information relating to the Company and its subsidiaries required to
be included in the Company's periodic SEC filings. Since the Evaluation Date
there have been no significant changes in the Company's internal controls or
in other factors which could significantly affect internal controls.
37
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
Form 10-K
Annual Report
(page)
-------------
(a) 1. Financial Statements - Franklin Electric
----------------------------------------
Independent Auditors' Report........................ 34
Consolidated Statements of Income for the
three years ended December 28, 2002............... 14
Consolidated Balance Sheets as of
December 28, 2002 and December 29, 2001........... 15-16
Consolidated Statements of Cash Flows
for the three years ended December 28, 2002....... 17
Consolidated Statements of Shareowners' Equity
for the three years ended December 28, 2002....... 18
Notes to Consolidated Financial Statements
(including quarterly financial data).............. 19-33
2. Financial Statement Schedules - Franklin Electric
-------------------------------------------------
II Valuation and Qualifying Accounts................ 38
Schedules other than those listed above are omitted for
the reason that they are not required or are not
applicable, or the required information is disclosed
elsewhere in the financial statements and related notes.
3. Exhibits
--------
See the Exhibit Index located on pages 44-45.
Management Contract or Compensatory Plan or
Arrangement is denoted by an asterisk (*).
(b) Reports on Form 8-K filed during the fourth quarter
ended December 28, 2002:
None.
(c) See the Exhibit Index located on pages 44-45.
(d) Individual financial statements and all other schedules
of the Registrant are omitted as they are not required.
38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years 2002, 2001 and 2000
(In thousands)
--------------
Additions
Balance at charged to Balance
beginning costs and at end
Description of period expenses Deductions Other of period
- ----------- --------- -------- ---------- ----- ---------
Allowance for doubtful accounts:
2002 $1,658 $142 $296 (A) $403 $1,907
====== ==== ==== ==== ======
2001 $1,949 $172 $463 (A) $ - $1,658
====== ==== ==== ==== ======
2000 $1,333 $673 $ 99 (A) $ 42 $1,949
====== ==== ==== ==== ======
NOTES:
- ------
(A) Uncollectible accounts written off, net of recoveries.
39
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/ WILLIAM H. LAWSON
----------------------
William H. Lawson
Chairman of the Board, Chief
Date: February 14, 2003 Executive Officer and President
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 and on the dates indicated.
/s/ WILLIAM H. LAWSON Chairman of the Board, Chief
- ------------------------------------- Executive Officer and President
William H. Lawson February 14, 2003 (Principal Executive
Officer)
/s/ GREGG C. SENGSTACK Senior Vice President and Chief
- ------------------------------------- Financial Officer (Principal
Gregg C. Sengstack February 14, 2003 Financial and Accounting
Officer)
/s/ JEROME D. BRADY
- ------------------------------------- Director
Jerome D. Brady February 14, 2003
/s/ JOHN B. LINDSAY
- ------------------------------------- Director
John B. Lindsay February 14, 2003
/s/ ROBERT H. LITTLE
- ------------------------------------- Director
Robert H. Little February 14, 2003
/s/ PATRICIA SCHAEFER
- ------------------------------------- Director
Patricia Schaefer February 14, 2003
/s/ DONALD J. SCHNEIDER
- ------------------------------------- Director
Donald J. Schneider February 14, 2003
/s/ R. SCOTT TRUMBULL
- ------------------------------------- Director
R. Scott Trumbull February 14, 2003
/s/ JURIS VIKMANIS
- ------------------------------------- Director
Juris Vikmanis February 14, 2003
/s/ HOWARD B. WITT
- ------------------------------------- Director
Howard B. Witt February 14, 2003
40
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
----------------------------------------
I, William H. Lawson, Chairman, Chief Executive Officer and President of
Franklin Electric Co., Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Electric
Co., Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
41
6. The registrant's other certifying officer and I have indicated in this
Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
-----------------------
/s/ William H. Lawson
-----------------------
William H. Lawson
Chairman, Chief Executive Officer
and President
Franklin Electric Co., Inc.
42
CERTIFICATION OF CHIEF FINANCIAL OFFICER
----------------------------------------
I, Gregg C. Sengstack, Senior Vice President and Chief Financial Officer
of Franklin Electric Co., Inc., certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Electric
Co., Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Annual Report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Annual Report (the "Evaluation Date"); and
c. presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
43
6. The registrant's other certifying officer and I have indicated in this
Annual Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 14, 2003
----------------------
/s/ Gregg C. Sengstack
----------------------
Gregg C. Sengstack
Senior Vice President and Chief Financial Officer
Franklin Electric Co., Inc.
44
FRANKLIN ELECTRIC CO., INC.
EXHIBIT INDEX TO THE ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2002
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of
Franklin Electric Co., Inc. (incorporated herein by
reference to the Company's Form 10-Q for the quarter
ended April 3, 1999)
3.2 By-Laws of Franklin Electric Co., Inc. as amended
to date
10.1 Rights Agreement dated as of October 15, 1999
between Franklin Electric Co., Inc. and Illinois
Stock Transfer Company (incorporated herein by
reference to the Company's registration
statement on Form 8-A dated October 15, 1999)
10.2 Amended 1988 Executive Stock Purchase Plan
(incorporated herein by reference to the Company's
1998 Proxy Statement for the Annual Meeting held on
April 17, 1998, and included as Exhibit A to the Proxy
Statement)*
10.3 Amended 1986 Stock Option Plan (incorporated
herein by reference to the Company's 1988 Proxy
Statement for the Annual Meeting held on April
15, 1988, and included as Exhibit C to the Proxy
Statement)*
10.4 1990 Franklin Electric Non-Employee Director Stock
Option Plan (incorporated herein by reference to
the Company's 1991 Proxy Statement for the Annual
Meeting on April 19, 1991)*
10.5 1996 Franklin Electric Co., Inc., Employee Stock Option
Plan (incorporated herein by reference to the Company's
1996 Proxy Statement for the Annual Meeting held on
April 12, 1996, and included as Exhibit A to the Proxy
Statement)*
10.6 Franklin Electric Co., Inc. Amended and Restated 1996
Nonemployee Director Stock Option Plan (incorporated herein
by reference to the Company's 2000 Proxy Statement for the
Annual Meeting held on April 14, 2000, and included as
Exhibit A to the Proxy Statement)*
10.7 Franklin Electric Co., Inc. Key Employee Performance
Incentive Stock Plan (incorporated herein by reference to
the Company's 2000 Proxy Statement for the Annual Meeting
held on April 14, 2000, and included as Exhibit B
to the Proxy Statement)*
45
10.8 Franklin Electric Co., Inc. Nonemployee Directors' Deferred
Compensation Plan (incorporated herein by reference to Exhibit
10.9 of the Company's Form 10-K for the fiscal year ended December
30, 2000)*
10.9 Amended and Restated Franklin Electric Co., Inc. Pension
Restoration Plan (incorporated herein by reference to Exhibit
10.9 of the Company's Form 10-K for the fiscal year ended December
29, 2001)*
10.10 Employment Agreement dated December 3, 2002 between
the Company and Scott Trumbull*
10.11 Employment Agreement dated October 23, 1995 between
the Company and Jess B. Ford (incorporated herein by
reference to Exhibit 10.7 of the Company's Form 10-K for
the fiscal year ended December 30, 1995)*
10.12 Amended Employment Agreement dated December 20, 2002 between the
Company and Gregg C. Sengstack*
10.13 $60,000,000 Credit Agreement dated as of November 26, 2001
between the Company and various commercial banks (incorporated
herein by reference to Exhibit 10.13 of the Company's Form 10-K
for the fiscal year ended December 29, 2001)
10.14 Amended and Restated Note Purchase and Private Shelf Agreement
dated March 1, 2002 between the Company and the Prudential
Insurance Company of America (incorporated herein by reference to
Exhibit 10.1 of the Company's Form 10-Q for the quarter ended
March 30, 2002)
10.15 Consulting Agreement dated January 31, 2003 between the
Company and William H. Lawson*
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
99.1 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
99.2 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
99.3 Forward-Looking Statements
* Management contract or compensatory plan or arrangement
46
EXHIBIT 21
----------
FRANKLIN ELECTRIC CO., INC.
SUBSIDIARIES OF THE REGISTRANT
------------
Percent of
State or country voting
of incorporation stock owned
---------------- -----------
Subsidiaries consolidated:
Advanced Polymer Technology, Inc. Michigan 100
Coverco S.r.l. Italy 100
EBW, Inc. Michigan 100
FE Petro, Inc. Indiana 100
Franklin Electric International, Inc. Delaware 100
Franklin Electric Subsidiaries, Inc.
[inactive] Indiana 100
Franklin Electric Foreign Sales
Corporation U.S. Virgin Islands 100
Franklin Electric B.V. Netherlands 100
Franklin Electric Europa, GmbH Germany 100
Franklin Electric spol s.r.o. Czech Republic 100
Franklin Electric (Australia) Pty. Ltd. Australia 100
Franklin Electric (South Africa)
Pty. Limited South Africa 100
Franklin Electric (Suzhou) Co., Ltd. China 100
Intelligent Controls, Inc. Maine 100
Motores Electricos Sumergibles De
Mexico S De Rl De Co Mexico 100
Motores Franklin S.A. de C.V. Mexico 100
Motori Sommersi Riavvolgibili S.r.l. Italy 75
Servicios De Mesmex S De Rl De Co Mexico 100
47
EXHIBIT 23
----------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Franklin Electric Co., Inc. on Form S-8 (file numbers 2-90330, 33-05034, 33-
21303, 33-35958, 33-35960, 33-35962, 33-38200, 333-01957, 333-01959, 333-
59771, 333-93121, 333-34992, 333-34994 and 333-34996) of our report dated
January 24, 2003 appearing in this Annual Report on Form 10-K of Franklin
Electric Co., Inc. for the year ended December 28, 2002.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Chicago, Illinois
February 14, 2003
48
EXHIBIT 99.1
------------
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
-----------------------------------------------------------------
In connection with the Annual Report of Franklin Electric Co., Inc. (the
"Company") on Form 10-K for the period ending December 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William H. Lawson, Chairman, Chief Executive Officer and President of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Date: February 14, 2003
-------------------------
/s/ William H. Lawson
-------------------------
William H. Lawson
Chairman, Chief Executive Officer
and President
Franklin Electric Co., Inc.
49
EXHIBIT 99.2
------------
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
-----------------------------------------------------------------
In connection with the Annual Report of Franklin Electric Co., Inc. (the
"Company") on Form 10-K for the period ending December 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Gregg C. Sengstack, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: February 14, 2003
-------------------------
/s/ Gregg C. Sengstack
-------------------------
Gregg C. Sengstack
Senior Vice President and Chief Financial Officer
Franklin Electric Co., Inc.
50
EXHIBIT 99.3
------------
ADDITIONAL EXHIBITS
Forward-Looking Statements
- --------------------------
Written and oral statements provided by the Company from time to time,
including in the Company's annual report to shareholders and its annual report
on Form 10-K and other filings under the Securities Exchange Act of 1934, may
contain certain forward-looking information, as that term is defined by the
Private Securities Litigation Reform Act of 1995 (the "Act") and in releases
made by the Securities and Exchange Commission ("SEC"). 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 in the Company's
written or oral forward-looking statements as a result of various factors,
including, but not limited to, the following:
A significant decline in sales with the Company's largest two customers,
each of whom represents over 10% of consolidated sales, or other significant
customers.
Continued or increased competitive pressure to reduce selling prices of
products or increase financial incentives to customers.
A prolonged disruption of scheduled deliveries from suppliers when
alternative sources of supply are not available to satisfy the Company's
requirements for raw material and components.
Delays in the Company's ability to pass along significant increases in
the cost of raw material, components, other materials and/or services.
The amount of and rate of growth in selling, general and administrative
expenses, and occurrences which could affect the Company's ability to reduce
or limit the increase in such expenses.
The costs and other effects of legal and administrative cases and
proceedings (whether civil or criminal), settlements and investigations,
claims, developments or assertions by or against the Company relating to
intellectual property rights and licenses.
The adoption of new, or changes in, accounting policies and practices.
Difficulties or delays in the development, production, testing and
marketing of products, including, but not limited to, a failure to ship new
products when anticipated, failure of customers to accept these products when
planned, any defects in products or a failure of manufacturing economies to
develop when planned.
Circumstances impacting the Company's ability to fund and accomplish
technological innovation, improve processes, and attract and retain capable
staff in order to deal with increasing volume and complexity in its products.
51
Occurrences affecting the slope or speed of decline of the life cycle of
the Company's products, or affecting the Company's ability to reduce product
costs and other costs or to increase productivity.
The impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, acquisitions or divestitures, asset
valuations and organizational structures.
The effects of and changes in, trade, monetary and fiscal policies, laws
and regulations and other activities of governments, agencies and similar
organizations, including, but not limited to, trade restrictions or
prohibitions, inflation, monetary fluctuations, import and other charges or
taxes, foreign exchange rates, nationalizations and unstable governments.
The future health of the U.S. and international economies and other
economic factors that directly or indirectly affect the demand for the
Company's products.
Labor strikes or work stoppages by employees of the Company, its
customers, suppliers, or freight contractors or other providers.
Environmental factors such as fires, floods, or other natural disasters
and weather conditions which could impact the Company's ability to produce
products or the demand for its products.
Increased competition due to industry consolidation or new entrants into
the Company's existing markets.
The introduction of alternative products or governmental and regulatory
activities that favor alternative methods of serving the same function as the
Company's products.
All forward-looking statements included herein are based upon information
presently available, and the Company assumes no obligation to update any
forward-looking statements.
1