UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-362
FRANKLIN ELECTRIC CO., INC.
---------------------------
(Exact name of registrant as specified in its charter)
Indiana 35-0827455
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East Spring Street
Bluffton, Indiana 46714
----------------- -----
(Address of principal executive offices) (Zip Code)
(260) 824-2900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
YES X NO
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Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
YES NO X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 1, 2005
--------------------- ----------------
$.10 par value 22,380,624 shares
Page 1 of 34
2
FRANKLIN ELECTRIC CO., INC.
Index
Page
PART I. FINANCIAL INFORMATION Number
- --------------------------------- ------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of October 1, 2005
and January 1, 2005 .......................... 3
Condensed Consolidated Statements of
Income for the Third Quarter and Nine Months
Ended October 1, 2005 and
October 2, 2004 .............................. 4
Condensed Consolidated Statements
Of Cash Flows for the Nine Months
Ended October 1, 2005 and
October 2, 2004 .............................. 5
Notes to Condensed Consolidated
Financial Statements ......................... 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations ........................ 12-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................ 15
Item 4. Controls and Procedures ...................... 15
PART II. OTHER INFORMATION
- -----------------------------
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds .............................. 16
Item 5. Other Information ............................ 16
Item 6. Exhibits ..................................... 16
Signatures ............................................... 17
- ----------
Exhibits ................................................. 18-34
- --------
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands) October 1, January 1,
2005 2005
---- ----
ASSETS
Current assets:
Cash and equivalents.................... $ 35,396 $ 50,604
Investments............................. 22,016 -
Receivables, less allowances of
$2,195 and $2,281, respectively....... 41,647 39,312
Inventories............................. 72,205 62,442
Other current assets (including
deferred income taxes of $10,579
and $10,391, respectively)............ 15,261 13,784
-------- --------
Total current assets.................. 186,525 166,142
Property, plant and equipment,
net..................................... 92,032 95,924
Deferred and other assets (including
deferred income taxes of $105
and $0, respectively)................... 20,322 14,010
Goodwill.................................. 57,846 57,397
-------- --------
Total assets.............................. $356,725 $333,473
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Current maturities of long-term
debt and short-term borrowings........ $ 1,296 $ 1,304
Accounts payable........................ 18,560 16,594
Accrued expenses........................ 32,595 33,354
Income taxes............................ 884 3,193
-------- --------
Total current liabilities............. 53,335 54,445
Long-term debt............................ 13,258 13,752
Deferred income taxes..................... 7,191 6,304
Employee benefit plan obligations......... 18,886 18,801
Other long-term liabilities............... 5,789 5,838
Shareowners' equity:
Common shares (45,000 shares authorized,
$.10 par value) outstanding (22,381
and 22,041, respectively)............. 2,238 2,204
Additional capital...................... 70,835 52,743
Retained earnings....................... 180,672 166,557
Loan to ESOP Trust...................... (432) (665)
Accumulated other comprehensive
loss.................................. 4,953 13,494
-------- --------
Total shareowners' equity............. 258,266 234,333
-------- --------
Total liabilities and shareowners' equity. $356,725 $333,473
======== ========
See Notes to Condensed Consolidated Financial Statements.
4
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Third Qtr. Ended Nine Months Ended
---------------- -----------------
Oct 1, Oct 2, Oct 1, Oct 2,
2005 2004 2005 2004
---- ---- ---- ----
Net sales............................. $119,043 $110,336 $325,014 $296,687
Cost of sales......................... 78,720 74,280 217,792 202,499
-------- -------- -------- --------
Gross profit.......................... 40,323 36,056 107,222 94,188
Selling and administrative expenses... 19,072 16,875 55,320 47,856
Restructuring expense................. 1,039 1,724 1,749 3,676
-------- -------- -------- --------
Operating income...................... 20,212 17,457 50,153 42,656
Interest expense...................... (198) (163) (553) (362)
Other income, net.................... 204 70 545 98
Foreign exchange gain/(loss).......... 239 (109) 207 (333)
-------- -------- -------- --------
Income before income taxes............ 20,457 17,255 50,352 42,059
Income taxes.......................... 7,211 6,125 17,750 14,930
-------- -------- -------- --------
Net income............................ $ 13,246 $ 11,130 $ 32,602 $ 27,129
======== ======== ======== ========
Per share data:
Basic Earnings per Share............ $ 0.59 $ 0.51 $ 1.47 $ 1.24
======== ======== ======== ========
Diluted Earnings per Share.......... $ 0.57 $ 0.48 $ 1.41 $ 1.18
======== ======== ======== ========
Dividends per common share.......... $ 0.10 $ 0.08 $ 0.28 $ 0.23
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
5
FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands) Nine Months Ended
-----------------
Oct 1, Oct 2,
2005 2004
---- ----
Cash flows from operating activities:
Net income................................ $ 32,602 $ 27,129
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization........... 11,581 11,654
Deferred income taxes................... 616 -
Loss on disposals of plant
and equipment......................... 69 96
Changes in assets and liabilities:
Receivables........................... (4,057) 3,313
Inventories........................... (10,387) (5,634)
Accounts payable and other accrued
expenses............................ 5,739 18,647
Employee benefit plan obligations..... 1,215 (3,494)
Other, net............................ 671 (32)
-------- --------
Net cash flows from
operating activities.............. 38,049 51,679
-------- --------
Cash flows from investing activities:
Additions to plant and equipment.......... (10,374) (15,724)
Proceeds from sale of plant and
equipment............................... 1,054 8
Additions to deferred and other assets.... (5,083) (9)
Cash paid for securities.................. (150,489) -
Proceeds from sale of securities.......... 128,473 -
Cash paid for acquisitions, net of cash
acquired................................ (8,509) -
-------- --------
Net cash flows from
investing activities.................. (44,928) (15,725)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt............... (213) (478)
Proceeds from issuance of common stock.... 11,739 3,739
Purchases of common stock................. (12,318) (3,091)
Reduction of loan to ESOP Trust........... 233 232
Dividends paid............................ (6,203) (5,054)
-------- --------
Net cash flows from
financing activities.................. (6,762) (4,652)
-------- --------
Effect of exchange rate changes on cash..... (1,567) 279
-------- --------
Net change in cash and equivalents.......... (15,208) 31,581
Cash and equivalents at beginning of period. 50,604 29,962
-------- --------
Cash and equivalents at end of period....... $ 35,396 $ 61,543
======== ========
See Notes to Condensed Consolidated Financial Statements.
6
FRANKLIN ELECTRIC CO., INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Condensed Consolidated Financial Statements
- ----------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
accounting entries and adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position and the
results of operation for the interim period have been made. Prior year
amounts are reclassified when necessary to conform to current year
presentation. Operating results for the third quarter ended October 1, 2005
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. For further information, including a
description of Franklin Electric's critical accounting policies, refer to the
consolidated financial statements and footnotes thereto included in Franklin
Electric Co., Inc.'s annual report on Form 10-K for the year ended January 1,
2005.
Note 2: Current Investments
- ----------------------------
As of October 1, 2005 the Company held $22.0 million of current investments
consisting primarily of auction rate municipal bonds classified as available-
for-sale securities and titled "Investments" in the current balance sheet.
Investments in these securities are recorded at cost, which approximates fair
market value due to the variable interest rates, which typically reset every 7
to 35 days. While the underlying municipal bonds have stated contractual
maturities which may be long-term, the Company has the ability to quickly
liquidate these securities. As a result, there were no cumulative unrealized
holding gains (losses) or realized gains (losses) from these current
investments. All income generated from these current investments was recorded
as other income, net. Cash paid for these securities and proceeds from the
sale of these securities have been included under the "Cash flows from
investing activities" section of the cash flow statement.
Note 3: Inventories
- --------------------
Inventories consist of the following:
(In millions) Oct 1, Jan 1,
2005 2005
---- ----
Raw Materials........................ $ 23.6 $ 25.3
Work in Process...................... 10.0 7.9
Finished Goods....................... 56.1 44.9
LIFO Reserve......................... (17.5) (15.7)
------ ------
Total Inventory...................... $ 72.2 $ 62.4
====== ======
7
Note 4: Property, Plant and Equipment
- --------------------------------------
Property, plant and equipment, at cost, consists of the following:
(In millions) Oct 1, Jan 1,
2005 2005
---- ----
Land and Building.................... $ 49.6 $ 52.8
Machinery and Equipment.............. 162.7 164.0
------ ------
212.3 216.8
Allowance for Depreciation........... (120.6) (120.9)
Other - Held for Sale................ 0.3 -
------ ------
Total............................ $ 92.0 $ 95.9
====== ======
Note 5: Goodwill and Other Intangible Assets
- ---------------------------------------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", the Company tests goodwill and
intangible assets for impairment on an annual basis, or more frequently if
circumstances warrant. During the fourth quarter of 2004, the Company
performed its annual impairment testing and it was determined that no
impairment exists.
The carrying amount of the Company's intangible assets, which is included in
deferred and other assets, and goodwill includes:
(In millions) Oct 1, Jan 1,
2005 2005
---- ----
Amortized intangibles
Patents........................... $ 5.9 $ 3.5
Supply agreements................. 10.0 10.4
Other............................. 4.3 1.7
Accumulated amortization.......... (9.9) (9.3)
------ ------
Total........................... $ 10.3 $ 6.3
====== ======
Goodwill............................ $ 57.8 $ 57.4
====== ======
In the third quarter, the Company recorded $1.7 million as an intangible asset
when it purchased certain unpatented technology to expand the Company's
centrifugal pump line. Also in the third quarter, the Company acquired
certain assets and the stock of Phil-Tite Enterprises, whereby $2.4 million
was recorded as intangibles. Other changes in the carrying amount of
intangibles reflect foreign currency fluctuations.
Goodwill increased by $2.4 million with the acquisition of Phil-Tite
Enterprises. The remaining difference in goodwill is attributable to foreign
currency fluctuations.
Amortization expense related to intangible assets for the nine months ended
October 1, 2005 and October 2, 2004, was $1.1 and $1.7 million respectively.
8
Amortization expense for each of the five succeeding years is projected as
$1.3 million, $1.2 million, $1.1 million, $1.1 million and $1.0 million for
fiscal 2006, 2007, 2008, 2009, 2010, respectively.
The 2005 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 preliminary estimates of fair
value. When applicable, the excess of purchase price over the fair value of
the net assets acquired has been recorded as goodwill. The acquisitions did
not materially affect the Company's financial statements. The pro forma
results of the Company's operations as if these acquisitions had occurred at
the beginning of the year would not differ materially from the reported
results.
Note 6: Employee Benefits
- --------------------------
The following table sets forth aggregated net periodic benefit cost:
(In millions) Pension Benefits Pension Benefits
Third Qtr. Ended Nine Months Ended
---------------- -----------------
Oct 1, Oct 2, Oct 1, Oct 2,
2005 2004 2005 2004
---- ---- ---- ----
Service Cost................. $ 1.0 $ 0.9 $ 3.0 $ 2.8
Interest Cost................ 2.0 1.9 5.9 5.7
Expected return on assets.... (2.5) (2.8) (7.8) (8.1)
Amortization of unrecognized:
(Gain)/Loss................ - - 0.1 -
Prior service costs........ 0.4 0.4 1.2 1.1
------ ------ ------ ------
Net periodic benefit cost.... 0.9 0.4 2.4 1.5
Settlement cost.............. 0.1 0.1 0.2 0.2
------ ------ ------ ------
Total benefit cost........... $ 1.0 $ 0.5 $ 2.6 $ 1.7
====== ====== ====== ======
Other Benefits Other Benefits
Third Qtr. Ended Nine Months Ended
---------------- -----------------
Oct 1, Oct 2, Oct 1, Oct 2,
2005 2004 2005 2004
---- ---- ---- ----
Service Cost................. $ 0.1 $ 0.1 $ 0.3 $ 0.3
Interest Cost................ 0.2 0.3 0.6 0.7
Amortization of unrecognized:
Obligation/(asset)......... 0.1 0.1 0.4 0.3
Prior service costs........ 0.1 - 0.2 0.1
(Gain)/Loss................ - - 0.1 0.1
------ ------ ------ ------
Net periodic benefit cost.... 0.5 0.5 1.6 1.5
Total benefit cost........... $ 0.5 $ 0.5 $ 1.6 $ 1.5
====== ====== ====== ======
9
As of October 1, 2005, the Company has made contributions to the plans of $2.7
million and expects to make additional contributions of $0.5 million in 2005.
Note 7: Tax Rates
- ------------------
The effective tax rate on income before income taxes in 2005 and 2004 varies
from the United States statutory rate of 35 percent primarily due to the
foreign income exclusion and R & D credits and to the effects of state and
foreign income taxes net of federal tax benefits.
Note 8: Shareowners' Equity
- ----------------------------
The Company had 22,380,624 shares of common stock (45,000,000 shares
authorized, $.10 par value) outstanding as of October 1, 2005.
During the nine months ended October 1, 2005 and October 2, 2004, the Company
repurchased 330,600 and 102,800 shares for $12.3 million and $3.1 million,
respectively. All repurchased shares were retired.
Note 9: Earnings Per Share
- ---------------------------
Following is the computation of basic and diluted earnings per share:
Third Qtr. Ended Nine Months Ended
---------------- -----------------
(In millions, except Oct 1, Oct 2, Oct 1, Oct 2,
per share amounts) 2005 2004 2005 2004
---- ---- ---- ----
Numerator:
Net Income..................... $ 13.2 $ 11.1 $ 32.6 $ 27.1
====== ====== ====== ======
Denominator:
Basic
-----
Weighted average common
shares....................... 22.3 22.0 22.2 22.0
Diluted
-------
Effect of dilutive securities:
Employee and director
incentive stock options
and awards................. 0.9 1.1 1.0 1.0
------ ------ ------ ------
Adjusted weighted average
common shares................ 23.2 23.1 23.2 23.0
====== ====== ====== ======
Basic earnings per share......... $ 0.59 $ 0.51 $ 1.47 $ 1.24
====== ====== ====== ======
Diluted earnings per share....... $ 0.57 $ 0.48 $ 1.41 $ 1.18
====== ====== ====== ======
10
Note 10: Other Comprehensive Income
- ------------------------------------
Comprehensive income is as follows:
Third Qtr. Ended Nine Months Ended
(In millions) ---------------- -----------------
Oct 1, Oct 2, Oct 1, Oct 2,
2005 2004 2005 2004
---- ---- ---- ----
Net income......................... $ 13.2 $ 11.1 $ 32.6 $ 27.1
Other comprehensive income (loss):
Foreign currency translation
adjustments..................... 1.1 0.4 (8.5) (0.6)
------ ------ ------ ------
Comprehensive income............... $ 14.3 $ 11.5 $ 24.1 $ 26.5
====== ====== ====== ======
Accumulated other comprehensive income consists of the following:
(In millions) Oct 1, Jan 1,
2005 2005
---- ----
Cumulative foreign currency
translation adjustment................... $ 7.1 $ 15.7
Minimum pension liability adjustment,
net of tax................................ (2.2) (2.2)
------ ------
Accumulated other comprehensive income...... $ 4.9 $ 13.5
====== ======
Note 11: Warranty
- ------------------
The Company provides warranties on most of its products. The warranty terms
vary but are generally two years from date of manufacture or one year from
date of installation. Provisions for estimated expenses related to product
warranty are made at the time products are sold or when specific warranty
issues are identified. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims.
The Company actively studies trends of warranty claims and takes action to
improve product quality and minimize warranty claims. The Company believes
that the warranty reserve is appropriate; however, actual claims incurred
could differ from the original estimates, requiring adjustments to the
reserve.
Below is a table that shows activity in the warranty accrual accounts:
11
Third Qtr. Ended Nine Months Ended
(In millions) ---------------- -----------------
Oct 1, Oct 2, Oct 1, Oct 2,
2005 2004 2005 2004
---- ---- ---- ----
Beginning Balance.................. $ 6.4 $ 5.8 $ 7.1 $ 5.4
Accruals related to product
warranties....................... 1.4 1.2 3.4 3.6
Reductions for payments made....... (1.3) (1.0) (4.0) (3.0)
------ ------ ------ ------
Ending Balance..................... $ 6.5 $ 6.0 $ 6.5 $ 6.0
====== ====== ====== ======
Note 12: Stock-Based Compensation
- ----------------------------------
The Company accounts for stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." No stock-based employee 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 stock at date of grant. As
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," and
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123," the Company follows
the disclosure requirements only of SFAS No. 123. 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:
Third Qtr. Ended Nine Months Ended
---------------- -----------------
(In millions, except Oct 1, Oct 2, Oct 1, Oct 2,
per share amounts) 2005 2004 2005 2004
---- ---- ---- ----
Net income........................ $ 13.2 $ 11.1 $ 32.6 $ 27.1
Deduct: Stock-based employee
compensation cost, net of
income tax...................... 0.3 0.4 1.2 1.1
------ ------ ------ ------
Pro forma net income.............. $ 12.9 $ 10.7 $ 31.4 $ 26.0
====== ====== ====== ======
Earnings per share:
Basic - as reported.............. $ .59 $ .51 $ 1.47 $ 1.24
====== ====== ====== ======
Basic - pro forma................ $ .58 $ .49 $ 1.41 $ 1.19
====== ====== ====== ======
Diluted - as reported............ $ .57 $ .48 $ 1.41 $ 1.18
====== ====== ====== ======
Diluted - pro forma.............. $ .56 $ .46 $ 1.36 $ 1.13
====== ====== ====== ======
On December 16, 2004, the FASB issued SFAS No. 123(R) "Share-Based Payment",
which requires compensation costs related to share-based payment transactions
be recognized in the financial statements. With minor exceptions, the amount
of compensation costs will be measured based on the grant-date fair value of
the equity or liability instruments issued, over the period that the employee
provides service in exchange for the award. In addition, liability awards
will be re-measured each reporting period. This pronouncement is effective as
of the beginning of the first fiscal year beginning after June 15, 2005. The
impact on the Company's results of operations or financial position as of the
adoption of this pronouncement is not expected to be materially different from
the pro-forma results.
Note 13: Restructuring
- -----------------------
The Company incurred $1.0 million of expenses during the third quarter of 2005
(included as "Restructuring expense" on the income statement) related to its
Global Manufacturing Realignment Program. The costs in the third quarter were
primarily related to a write-down to fair value adjustment of $0.6 million,
and close-out expenses for the Muskegon Michigan property that was idle after
the consolidation of certain fueling facilities. Equipment relocation,
travel, and redundant labor expense related to the consolidation of the
Company's Motta di Livenza, Italy factory into other European factories
accounted for the balance of third quarter restructuring expense. The Company
estimates that its restructuring expense from inception through the end of
2005 will be approximately $8.0 million or $2.0 million less than its original
estimate of $10.0 million, as expense related to personnel and equipment
relocation is projected to be less than originally estimated.
The components and use of the restructuring reserve is summarized below:
(In millions) Severance
Benefits Other
-------- -----
Balance January 1, 2005............ $ 0.3 $ 0.0
Restructuring Expense.............. 0.1 1.6
Costs incurred..................... (0.4) (1.6)
------ ------
Balance October 1, 2005............ $ 0.0 $ 0.0
====== ======
12
Item 2. Management's Discussion And Analysis Of Financial Condition And
- ------------------------------------------------------------------------
Results Of Operations
- ---------------------
Overview
- --------
Sales and earnings for the third quarter of 2005 were up from the same quarter
of 2004. The increase in sales was primarily attributable to the impact of
customer discount program changes, price increases and the pump company
acquisition in the fourth quarter of 2004. Earnings improved in the third
quarter of 2005 primarily due to the increased sales. Increased earnings were
partially offset by increased commodity prices and expenses associated with
the Company's two major strategic initiatives: the Water Systems Distribution
Channel Strategy (the "Channel Strategy"), designed to sell certain water
systems products, including pump products, direct to distributors and the
Global Manufacturing Realignment Program (the "Realignment Program"), designed
to consolidate manufacturing facilities and reduce costs of manufacturing
operations world-wide. Certain expenses incurred as a result of the
Realignment Program are identified quarterly during the implementation period
and reflected as "Restructuring expense" in the Company's income statement.
Included in the results for the third quarter of 2005 and 2004, restructuring
expense was $1.0 and $1.7 million pre-tax, respectively. During the third
quarter of 2005 the Company purchased an equity interest in Pioneer Pump,
Inc., a manufacturer of large centrifugal pumps for the water systems
industry, and acquired all of the outstanding stock of Phil-Tite Enterprises,
a fueling systems product manufacturer of fiberglass containment sumps and
underground storage tank hardware. These acquisitions did not significantly
impact third quarter 2005 sales or earnings.
Results of Operations
- ---------------------
Net sales for the third quarter of 2005 were $119.0 million, an increase of
$8.7 million or 8 percent from the 2004 third quarter net sales of $110.3
million. The impact of previously announced price increases and changes in the
customer discount programs, which were necessary due to significant increased
costs for certain commodities used in the manufacture of the electric motors,
primarily steel and copper, resulted in a sales increase of approximately 9
percent for the third quarter of 2005. Unit sales of small submersible motors
declined about 16 percent from the exceptionally strong third quarter of 2004.
Third quarter 2004 sales were up about 17 percent from the third quarter of
2003 as original equipment manufacturer (OEM) customers purchased ahead of an
announced price increase. As a result of the Company's Channel Strategy,
sales to two major pump OEMs decreased from about 40 percent of worldwide
sales for full year 2004 to about 25 percent of worldwide sales for the first
nine months of 2005. Sales of pumps related to the 2004 pump acquisition
resulted in an increase of about 6 percent for the third quarter of 2005.
Fueling systems product sales were comparable to the third quarter of 2004.
For the first nine months of 2005, the Company's sales were $325.0 million, an
increase of $28.3 million or about 10 percent compared to the same period of
2004 sales of $296.7 million. The Company's sales increase for the first nine
months of 2005 was partially attributable to foreign currency changes which
accounted for $2.8 million of the increase due primarily to the stronger euro,
Mexican Peso and South African Rand. Excluding the impact of the change in
exchange rates, the Company's first nine months of sales were up about 9
percent, primarily due to pricing changes and acquisition-related sales. while
reduced by lower fueling systems product sales in the first quarter. Sales of
13
pumps related to the 2004 pump acquisition resulted in an increase of about 5
percent for the first nine months of 2005.
Cost of sales as a percent of net sales was 66.1 percent and 67.3 percent for
the third quarter of 2005 and 2004 and was 67.0 percent and 68.3 percent for
the first nine months of 2005 and 2004, respectively. Cost of sales as a
percent of net sales continues to decrease primarily as a result of increased
sales. The decrease in cost of sales as a percent of net sales during the
third quarter and first nine months of 2005 was partially offset by increased
costs for certain commodities used in the manufacture of the electric motors,
primarily steel and copper.
Selling and administrative ("SG&A") expenses at $19.1 million for the third
quarter of 2005 were up $2.2 million or 13 percent from the third quarter of
2004 of $16.9 million. The increase of SG&A expenses in the third quarter of
2005 from the same period for 2004 was due primarily to additional costs
related to the acquired pump manufacturer of about $1.1 million, and
additional costs associated with the Channel Strategy of about $0.8 million.
The Company also incurred increased commission costs related to the increased
sales for the third quarter of 2005. SG&A expense for the first nine months of
2005 was $55.3 million compared to $47.9 million for the same period of 2004.
The increase of SG&A expense of $7.5 million in the first nine months of 2005
from the same period for 2004 was also primarily due to additional costs
related to the acquired pump manufacturer of about $2.7 million, and
additional costs associated with the Channel Strategy of about $2.1 million.
The Company's Realignment Program consists of the ramp-up of production at a
four-inch motor manufacturing plant in Mexico, a new six-inch motor
manufacturing facility in the Czech Republic and the consolidation of certain
manufacturing operations. Restructuring expense includes: severance,
relocation, equipment transfer costs, and property valuation. These expenses
continue to be identified quarterly and are reflected as "Restructuring
expense" in the Company's income statement. The Company has incurred
approximately $7.2 million of pre-tax expense for the Realignment Program to
date, including $1.0 million for the third quarter of 2005. The Company
estimates that its restructuring expense from inception through its estimated
completion at the end of 2005 will be approximately $8.0 million or $2.0
million less than its original estimate of $10.0 million, as expense related
to personnel and equipment relocation are projected to be less than original
estimates. This program will result in the transfer of a significant amount
of production to lower cost regions of the world as well as a consolidation of
certain manufacturing operations.
Interest expense for the third quarter of 2005 was $0.2 million and for the
first nine months of 2005 was $0.6 million. Both periods for 2005 were higher
than the respective prior year periods due to higher interest rates.
Foreign currency-based transactions resulted in a gain of $0.2 million for the
third quarter 2005 compared to a loss for the third quarter of 2004 of $0.1
million. Foreign currency-based transactions for the first nine months of 2005
resulted in a gain of $0.2 million compared to a loss of $0.3 million for the
same period of 2004. Foreign currency-based transactional gains and losses
were caused primarily by fluctuations of the euro, Mexican Peso and the South
African Rand relative to the U.S. dollar during the respective periods noted
above.
14
The provision for income taxes for the third quarter of 2005 was $7.2 million
and for the first nine months of 2005 was $17.7 million. The effective tax
rate for 2005 is projected at 35.3 percent, about the same as the 2004 full
year rate of 35.5 percent. The effective tax rate differs from the United
States statutory rate of 35 percent, due to the foreign income exclusion and
R&D credits and to the effects of state and foreign income taxes, net of
federal tax benefits.
Net income for the third quarter of 2005 was $13.2 million, or $0.57 per
diluted share, a 19 percent increase compared to the third quarter of 2004 net
income of $11.1 million, or $0.48 per diluted share. The first nine months of
2005 net income was $32.6 million, or $1.41 per diluted share, an increase of
20 percent compared to the first nine months of 2004 net income of $27.1
million, or $1.18 per diluted share.
Capital Resources and Liquidity
- -------------------------------
Operating activities generated approximately $38.0 million of cash during the
first nine months of 2005 compared to cash generated during the first nine
months of 2004 at $51.7 million. The cash generated during the first nine
months of 2005 and 2004 was primarily from earnings of $32.6 and $27.1 million
during the respective periods. Cash generated from accounts payable and other
accrued expenses, declined to $5.7 million in 2005 from $18.6 million in 2004.
The decrease from 2004 to 2005 was primarily due to timing of payments for
income taxes and reduced accounts payable. Cash used in operations during the
first nine months of 2005 and 2004 was primarily related to increases in
inventory, about $10.4 million and $5.6 million, respectively. Finished goods
inventory increased during 2005 primarily due to the acquisition of the pump
company. The Company is further stocking more water systems products in 2005
related to its Channel Strategy change.
The primary sources and uses of cash for investing activities for the first
nine months of 2005 were for the buying and selling of short term investment
securities (See notes for further discussion of these securities). The Company
also purchased about $10.4 million of primarily manufacturing equipment during
the first nine months of 2005 and paid cash for acquisitions, net of cash
acquired, of $8.5 million. The Company intends to expand its pump product
offerings through the on-going acquisition of pump technologies and product
lines, as well as continued growth in fueling systems products. The primary
uses of cash for the first nine months of 2004 were additions to property,
plant and equipment of $15.7 million. Additions in 2004 were primarily related
to building additions and equipment related to the Realignment Program.
Net cash consumed in financing activities during the first nine months of 2005
and 2004 was $6.8 million and $4.7 million, respectively. The principal uses
of cash during 2005 and 2004 were for purchases of Company common stock under
the Company's repurchase program and the payment of dividends. The principal
source of cash from financing activities during 2005 and 2004 was from the
issuance of common stock related to the exercise of stock options.
Cash and equivalents at the end of the third quarter of 2005 and 2004 were
$35.4 million and $61.5 million, respectively. The Company also had $22.0
million of short-term investment securities as of the end of the third quarter
of 2005.
In September 2004, the Company entered into an unsecured, 60 month $80.0
million revolving credit agreement (the "Agreement"). The Agreement includes a
15
facility fee of one-tenth of one percent on the committed amount. As of
October 1, 2005, the Company had no outstanding borrowings under the
Agreement.
As of October 1, 2005, the Company's current commitments approximate $6
million, primarily for the purchase of machinery and equipment.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company is subject to market risk associated with changes in foreign
currency exchange rates and interest rates. Foreign currency exchange rate
risk is mitigated through several means: maintenance of local production
facilities in the markets served, invoicing of customers in the same currency
as the source of the products, prompt settlement of inter-company balances
utilizing a global netting system and limited use of foreign currency
denominated debt. Interest rate exposure is limited to variable rate interest
borrowings under the Company's revolving credit agreement and an interest rate
swap.
Item 4. Controls and Procedures
- --------------------------------
As of the end of the period covered by this report (the "Evaluation Date"),
the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective.
During the third fiscal quarter there have been no changes in the Company's
internal control over financial reporting that have materially affected or
that are reasonably likely to materially affect the Company's internal control
over financial reporting.
16
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
(c) Issuer Repurchases of Equity Securities
On February 16, 2001, the Company's Board of Directors unanimously approved a
resolution to repurchase 2,000,000 shares. The plan was announced in the
Company's 10-Q for the third quarter ending September 29, 2001. There is no
expiration date for the repurchase program.
On February 11, 2005, the Company's Board of Directors unanimously approved a
resolution to increase the number of shares remaining for repurchase from
827,412 to 1,000,000 shares.
The Company did not repurchase any shares of its stock in the third quarter of
2005. The maximum number of shares that may still be purchased under the
Company's repurchase programs is 669,400.
Item 5. Other Information
- --------------------------
Effective August 16, 2005 the Company amended Article IV of its Amended and
Restated Articles of Incorporation to change its registered agent from Gregg
C. Sengstack to Thomas J. Strupp. The Amended and Restated Articles of
Incorporation are filed as Exhibit 3.1 hereto and incorporated herein by
reference.
Item 6. Exhibits
- -----------------
See the Exhibit Index located on page 18.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned thereunto duly authorized.
FRANKLIN ELECTRIC CO., INC.
---------------------------
Registrant
Date November 3, 2005 By /s/ R. Scott Trumbull
------------------- ------------------------------
R. Scott Trumbull, Chairman
and Chief Executive Officer
(Principal Executive Officer)
Date November 3, 2005 By /s/ Thomas J. Strupp
------------------- ------------------------------
Thomas J. Strupp, Vice President
and Chief Financial Officer and
Secretary (Principal Financial
and Accounting Officer)
18
FRANKLIN ELECTRIC CO., INC.
EXHIBIT INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE THIRD QUARTER ENDED OCTOBER 1, 2005
Number Description
- ------ -----------
3.1 Amended Articles of Incorporation of Franklin Electric Co., Inc.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section
1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section
1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
5