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 30, 2000 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) (219) 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] The aggregate market value of the voting stock held by non-affiliates of the registrant at February 23, 2001 was $316,729,117. The stock price used in the computation was the last sales price on that date. Number of shares of common stock outstanding at February 23, 2001: 5,497,967 shares ---------------- Page 1 of 43
2 DOCUMENTS INCORPORATED BY REFERENCE A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 20, 2001 (Part III). The exhibits filed with this Form 10-K are listed in the exhibit index located on pages 37-38.
3 TABLE OF CONTENTS Page Part I Item 1. Business........................................ 4-5 Item 2. Properties...................................... 6 Item 3. Legal Proceedings............................... 6 Item 4. Submission of Matters to a Vote of Security Holders................................ 6 Supplemental Item - Executive Officers of the Registrant...................... 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 7 Item 6. Selected Financial Data......................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9-11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................... 11 Item 8. Financial Statements and Supplementary Data..... 12-32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 33 Part III Item 10. Directors and Executive Officers of the Registrant............................... 33 Item 11. Executive Compensation.......................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management................ 33 Item 13. Certain Relationships and Related Transactions.................................... 33 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 34-35 Signatures ................................................ 36 Exhibit Index ................................................ 37-38
4 PART I ------ ITEM 1. BUSINESS - ----------------- Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and incorporated in 1946, and together with its subsidiaries (hereinafter referred to as the "Company" unless the context requires otherwise), engages in the design, manufacture and distribution of motors, electronic controls and related parts and equipment. Description of Business - ----------------------- The Company's products are sold principally by a single company sales force in the United States, Canada, Europe, Australia, South Africa, Mexico, Japan, China and other world markets. 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. The Company's products are also sold through independent distributors and repair shops. ITT Industries, Inc., a customer of the Company, accounted for 15.7 percent, 15.3 percent and 14.0 percent of the Company's consolidated sales in 2000, 1999, and 1998, respectively. The Company offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. Special inventory requirements are not necessary, and customer merchandise return rights do not extend beyond normal warranty provisions. The 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 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 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. During 1998, the Company purchased certain operating and intangible assets from a motor manufacturer. The Company employed 2,802 persons at the end of 2000. Segment and Geographic Information - ---------------------------------- Segment and geographic information is included within this Form 10-K at page 29-30.
5 Research and Development - ------------------------ The Company spent approximately $5.0 million in 2000, $5.3 million in 1999 and $4.7 million in 1998 on activities related to the development of new products, on improvements of existing products, manufacturing methods, and on other applied research and development. In 2000, the Company introduced a new line of industrial duty 6" submersible motors, started production of a new line of composite motors, expanded its capability in rewindable motors and developed a new motor design for coal bed methane wells. 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. Backlog - ------- The dollar amount of backlog at the end of 2000 and 1999 was as follows: (In thousands) Fiscal Year Ending ------------------ 2000 1999 ---- ---- Backlog....................... $15,488 $14,636 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 2001. 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.
6 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 Grant County, Indiana 9.0 24,100 Muskegon, Michigan 11.3 118,647 Wittlich, Rhineland, Germany 6.9 76,516 Brno, Czech Republic (1) 2.3 35,524 Berzo Demo, Italy (1) - 28,248 Eight facilities with less than 25,000 square feet each (2) 1.7 103,602 ----- --------- Total 129.6 1,394,402 ===== ========= In the Company's opinion, its facilities are suitable for their intended use and are in good condition. (1) Leased facility. (2) Seven of the facilities are leased and in the aggregate have approximately 82,600 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. The Company has attempted, where possible, to assess the likelihood of an unfavorable outcome to the Company as a result of these actions. Legal counsel has been retained to assist the Company in making these determinations, and costs are accrued, as required under applicable accounting rules, when an unfavorable outcome is determined to be probable and a reasonable estimate can be made. As a result, the Company had an accrual balance of approximately $1.1 million and $1.2 million at December 30, 2000 and January 1, 2000, respectively, to provide for such actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- None
7 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 64 Chairman of the Board and 1985 Chief Executive Officer Jess B. Ford 49 Senior Vice President 1999 Peter C. Maske 50 Senior Vice President, 1999 Operations William J. Foreman 64 Vice President 1995 Donald R. Hobbs 59 Vice President, Submersible 1996 Motor Marketing Thomas A. Miller 51 Vice President, Submersible 1998 Motor Engineering Kirk M. Nevins 57 Vice President, Sales 1995 Gregg C. Sengstack 42 Vice President and Chief Financial Officer 1999 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. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ The number of shareowners of record as of February 23, 2001 was 1,160. The Company's stock is traded on NASDAQ National Market: Symbol FELE. Dividends paid and the price range per common share as quoted in The Wall Street Journal for 2000 and 1999 were as follows: DIVIDENDS PER SHARE PRICE PER SHARE 2000 1999 2000 1999 ---- ---- ---- ---- Low High Low High --- ---- --- ---- 1st Quarter... $.20 $.17 $62 7/8 $72 3/4 $59 $70 3/4 2nd Quarter... $.22 $.20 $63 7/8 $72 15/16 $59 1/2 $67 3rd Quarter... $.22 $.20 $62 3/4 $70 1/4 $64 1/8 $74 7/8 4th Quarter... $.22 $.20 $52 1/4 $73 $65 3/8 $73 7/8
8 ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- <TABLE> <CAPTION> FIVE YEAR FINANCIAL SUMMARY - -------------------------------------------------------------------------------------------- FRANKLIN ELECTRIC CO., INC. (In thousands, except per share amounts) 2000 1999 1998 1997 1996 <F1> - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Operations: Net sales............................. $325,731 $293,236 $272,533 $303,298 $300,689 Gross profit.......................... 85,186 84,171 79,955 85,533 79,214 Gain on sale of subsidiary............ - - - 3,500 - Interest expense...................... 1,111 1,317 1,364 1,435 1,308 Income taxes ......................... 13,683 15,591 15,237 15,004 11,827 Net income............................ 22,226 26,805 24,784 25,505 21,510 Net income available to common shares. 22,226 26,805 24,784 25,505 21,510 Depreciation and amortization......... 10,839 7,460 6,687 7,628 8,389 Capital expenditures.................. 14,108 13,691 24,601 8,598 6,235 Balance sheet: Working capital....................... 54,897 56,886 61,878 87,973 89,471 Property, plant and equipment, net.... 64,604 57,047 51,461 32,357 40,097 Total assets.......................... 197,179 176,101 167,590 163,110 172,959 Long-term debt........................ 15,874 17,057 18,089 19,163 20,276 Shareowners' equity................... $115,998 $ 96,293 $ 91,597 $ 92,841 $ 99,823 Other data: % Net income to sales................. 6.8% 9.1% 9.1% 8.4% 7.2% % Net income to total average assets.. 11.9% 15.6% 15.0% 15.2% 13.2% Current ratio......................... 2.2 2.2 2.4 3.2 3.2 Number of common shares outstanding... 5,504 5,413 5,574 5,847 6,371 Per share: Market price range High.................................. $ 73.00 $ 74.875 $ 72.50 $ 64.25 $ 45.25 Low................................... 52.25 59.00 40.00 41.25 30.75 Net income per weighted-average common share........................ 4.08 4.87 4.32 4.33 3.43 Net income per weighted-average common share, assuming dilution..... 3.91 4.60 4.02 4.01 3.22 Book value............................ 20.41 16.54 14.84 14.58 14.95 Cash dividends on common stock........ $ 0.86 $ 0.77 $ 0.66 $ 0.57 $ 0.46 - -------------------------------------------------------------------------------------------- <FN> <F1> Includes ten months of the results of operations of Oil Dynamics, Inc. until its sale on October 24, 1997. </FN> </TABLE>
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS - --------------------- RESULTS OF OPERATIONS - --------------------- Net sales for 2000 were $325.7 million, an 11.1 percent increase from 1999 net sales of $293.2 million. The increased sales resulted primarily from a higher volume of sales of submersible water systems motors and industrial motor products. A portion of the growth is from supply agreements entered into in December 1998 and from the acquisition of EBW, Inc. ("EBW") and Advanced Polymer Technology, Inc. ("APT") on August 31, 2000. These increases were partially offset by lower sales of fueling systems products and the effects of the strengthening U.S. dollar relative to the euro and the South African rand. Net sales in 1999 compared to 1998 increased 7.6 percent. Net sales in 1999 increased due to a higher sales volume of submersible water systems motors. This increase was partially offset by lower sales of industrial motor and fueling systems products and the effects of the strengthening U.S. dollar relative to the South African rand. Cost of sales as a percent of net sales for 2000, 1999 and 1998 was 73.8 percent, 71.3 percent and 70.7 percent, respectively. Cost of sales as a percent of sales increased in 2000 primarily as a result of higher employee compensation, energy costs, material costs in key commodities, depreciation and other project costs. Cost of sales as a percent of sales increased in 1999 from 1998 primarily due to higher employee compensation, increased LIFO inventory quantities, and other project costs needed to support the increased sales volume. Selling and administrative expenses as a percent of net sales for 2000, 1999 and 1998 was 13.8 percent, 14.3 percent and 15.4 percent, respectively. The decrease in 2000 is primarily due to modest increases in fixed expenses while sales increased at a higher rate. The improvements in 1999 were primarily due to lower costs associated with employee stock awards and systems expenses. Interest expense for 2000, 1999 and 1998 was $1.1 million, $1.3 million and $1.4 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, net for 2000, 1999 and 1998 was interest income of $1.2 million, $1.9 million and $3.6 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 loss for 2000, 1999 and 1998 of $0.7 million, $0.7 million and $0.1 million, respectively. The foreign currency transaction loss in both 2000 and 1999 was primarily due to the strengthening U.S. dollar relative to the German mark and South African rand. The foreign currency transaction loss in 1998 was primarily due to the movement of the U.S. dollar relative to the Mexican peso. The provision for income taxes in 2000, 1999 and 1998 was $13.7 million, $15.6 million and $15.2 million, respectively. The effective tax rate for each year differs from the United States statutory rate of 35 percent,
10 principally due to the effects of state and foreign income taxes, net of federal tax benefits. Net income for 2000 was $22.2 million, or $3.91 per diluted share, compared to 1999 net income of $26.8 million, or $4.60 per diluted share. Net income for 1998 was $24.8 million, or $4.02 per diluted share. Inflation has not had a significant effect on the Company's operations or financial condition. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- Cash flows from operations provide the principal source of current liquidity. Net cash flows provided by operating activities were $18.8 million, $36.1 million and $31.0 million in 2000, 1999 and 1998, respectively. The decrease in 2000 was related to increases in accounts receivable and decreases in accounts payable. The increases in 1999 and 1998 were primarily related to increases in accounts payable and accrued employee benefit plan obligations. Net cash flows used in investing activities were $25.6 million, $0.1 million and $11.4 million in 2000, 1999 and 1998, respectively. The primary uses of cash in 2000 were for the acquisition of EBW and APT and additions to plant and equipment. The primary use of cash in 1999 was for additions to plant and equipment. The primary uses of cash in 1998 were for the purchase of certain operating and intangible assets from a motor manufacturer and additions to plant and equipment. Net cash flows used in financing activities were $12.3 million, $26.0 million and $26.1 million in 2000, 1999 and 1998, respectively. The primary uses of cash in each of the three years related to the repurchase of the Company's common stock and the payment of dividends. During 2000, 1999 and 1998, the Company repurchased 126,700, 288,000 and 406,008 shares of its common stock for $8.4 million, $20.1 million and $26.0 million, respectively. The Company paid $4.6 million, $4.2 million and $3.8 million in dividends on the Company's common stock in 2000, 1999 and 1998, respectively. The Company has authority under its Board-approved stock repurchase program to purchase an additional 74,300 shares of its common stock. Cash, cash equivalents and marketable securities at the end of 2000 were $9.6 million compared to $36.8 million at the end of 1999. Working capital decreased $2.0 million in 2000 and the current ratio of the Company was 2.2 at the end of 2000 and 1999. 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 January 1996, the Company entered into an unsecured, five-year $40.0 million revolving credit agreement (the "Agreement"). The Agreement, which was amended and restated on December 30, 1997, and extended for one year to 2002, provides for various borrowing rate options and includes a facility fee on the committed amount. Both the Company's long-term debt and note agreements contain certain financial covenants with respect to borrowings, fixed charge coverage, working capital, loans or advances, and investments. The Company was in compliance with all debt covenants at all times in 2000 and 1999. At December 30, 2000, the Company had $2.1 million of commitments for the purchase of machinery and equipment.
11 During 2001, 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. "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 which are detailed 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, and the Company assesses its 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 the marketable U.S. treasury and agency securities owned by the Company ($0 at December 30, 2000) and is mitigated by the short-term, generally less than 6 months, nature of these investments.
12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - ------------------------------------------------------------------------------ 2000 1999 1998 (In thousands, except per share amounts) - ------------------------------------------------------------------------------ Net sales............................. $325,731 $293,236 $272,533 Cost of sales (including research and development expenses of $4,978, $5,251 and $4,700, respectively).... 240,545 209,065 192,578 -------- -------- -------- Gross profit.......................... 85,186 84,171 79,955 Selling and administrative expenses... 44,967 41,898 42,027 -------- -------- -------- Operating income...................... 40,219 42,273 37,928 Interest expense...................... (1,111) (1,317) (1,364) Costs of unsuccessful acquisition..... (3,237) - - Other income, net..................... 764 2,185 3,572 Foreign exchange loss................. (726) (745) (115) -------- -------- -------- Income before income taxes............ 35,909 42,396 40,021 Income taxes (Note 5)................. 13,683 15,591 15,237 -------- -------- -------- Net income............................ $ 22,226 $ 26,805 $ 24,784 ======== ======== ======== Per share data (Note 8): Net income per common share......... $ 4.08 $ 4.87 $ 4.32 ======== ======== ======== Net income per common share, assuming dilution................. $ 3.91 $ 4.60 $ 4.02 ======== ======== ======== Dividends per common share.......... $ .86 $ .77 $ .66 ======== ======== ======== See Notes to Consolidated Financial Statements
13 CONSOLIDATED BALANCE SHEETS FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - ------------------------------------------------------------------------ ASSETS 2000 1999 (In thousands) - ------------------------------------------------------------------------ Current assets: Cash and equivalents........................ $ 9,631 $ 27,844 Marketable securities....................... - 8,968 Receivables (less allowances of $1,949 and $1,333, respectively)................. 31,568 17,995 Inventories: Raw materials............................. 19,950 15,749 Work-in-process........................... 12,744 6,101 Finished goods............................ 27,229 28,239 LIFO reserve.............................. (10,833) (10,372) 49,090 39,717 Other current assets (including deferred income taxes of $9,538 and $7,934, respectively, Note 5)..................... 11,672 9,719 -------- ------- Total current assets.................... 101,961 104,243 Property, plant and equipment, at cost: Land and buildings.......................... 25,301 22,145 Machinery and equipment..................... 122,191 113,452 -------- -------- 147,492 135,597 Less allowance for depreciation........... 82,888 78,550 -------- -------- 64,604 57,047 Goodwill...................................... 15,566 - Deferred and other assets (including deferred income taxes of $1,483 and $1,530, respectively, Note 5)...................... 15,048 14,811 -------- -------- Total Assets.................................. $197,179 $176,101 ======== ======== See Notes to Consolidated Financial Statements
14 - ------------------------------------------------------------------------- LIABILITIES AND SHAREOWNERS' EQUITY 2000 1999 (In thousands) - ------------------------------------------------------------------------- Current liabilities: Current maturities of long-term debt and short-term borrowings (Note 6)............ $ 1,076 $ 1,018 Accounts payable............................ 16,114 20,669 Accrued expenses (Note 4)................... 27,105 23,558 Income taxes (Note 5)....................... 2,769 2,112 -------- -------- Total current liabilities................. 47,064 47,357 Long-term debt (Note 6)....................... 15,874 17,057 Employee benefit plan obligations (Note 3).... 13,981 11,892 Other long-term liabilities................... 4,262 3,502 Shareowners' equity (Note 7): Common shares outstanding (5,504 and 5,413, respectively)........... 550 541 Additional capital.......................... 30,035 17,695 Retained earnings........................... 93,445 84,242 Loan to ESOP Trust (Note 3)................. (1,594) (1,827) Accumulated other comprehensive loss........ (6,438) (4,358) -------- -------- Total shareowners' equity................ 115,998 96,293 -------- -------- Total Liabilities and Shareowners' Equity..... $197,179 $176,101 ======== ======== See Notes to Consolidated Financial Statements
15 CONSOLIDATED STATEMENTS OF CASH FLOWS FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - --------------------------------------------------------------------------- 2000 1999 1998 (In thousands) - --------------------------------------------------------------------------- Cash flows from operating activities: Net income.................................$22,226 $26,805 $24,784 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization............ 10,839 7,460 6,687 Deferred income taxes.................... (34) 672 (1,645) (Gain)Loss on disposals of plant and equipment.......................... 275 110 (41) Changes in assets and liabilities: Receivables............................ (7,473) (2,560) 753 Inventories............................ (2,516) (6,137) (4,142) Other assets........................... (4,084) (648) (25) Accounts payable and other accrued expenses..................... (2,612) 7,689 2,216 Employee benefit plan obligations...... 2,156 2,506 2,176 Other long-term liabilities............ (29) 203 247 ------- ------- ------- Net cash flows from operating activities..... 18,748 36,100 31,010 ------- ------- ------- Cash flows from investing activities: Additions to plant and equipment...........(14,108) (13,691) (24,601) Proceeds from sale of plant and equipment.. 61 68 61 Additions to deferred assets............... (2,829) (5,412) (7,395) Purchases of marketable securities......... (2,915) (27,692) (48,608) Cash paid for acquisition (Note 2).........(17,687) - - Proceeds from maturities of marketable securities............................... 11,883 46,645 69,184 ------- ------- ------- Net cash flows from investing activities.....(25,595) (82) (11,359) ------- ------- ------- Cash flows from financing activities: Repayment of long-term debt (Note 6)....... (1,017) (1,019) (1,079) Borrowing on line of credit................ - 362 2,678 Repayment of line of credit and short-term borrowings............................... (41) (2,794) (271) Proceeds from issuance of common stock..... 1,541 1,899 1,778 Purchases of common stock (Note 7)......... (8,351) (20,124) (25,995) Proceeds(Reductions) from stock subscriptions............................ - (324) 352 Reduction of loan to ESOP Trust............ 233 232 233 Dividends paid............................. (4,685) (4,239) (3,811) ------- ------- ------- Net cash flows from financing activities.....(12,320) (26,007) (26,115) ------- ------- ------- Effect of exchange rate changes on cash...... 954 799 307 ------- ------- ------- Net change in cash and equivalents...........(18,213) 10,810 (6,157) Cash and equivalents at beginning of year.... 27,844 17,034 23,191 ------- ------- ------- Cash and equivalents at end of year..........$ 9,631 $27,844 $17,034 ======= ======= =======
16 Cash paid during 2000, 1999, and 1998 for interest was $1.1 million, $1.4 million and $1.4 million, respectively. Also, cash paid during 2000, 1999 and 1998 for income taxes was $14.6 million, $15.4 million and $18.8 million, respectively. See Notes to Consolidated Financial Statements.
17 <TABLE> <CAPTION> 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 Stock ESOP Comprehensive Comprehensive Outstanding Stock Capital Earnings Subscrip. Trust Income (Loss) Income ----------- ----- ------- -------- -------- ----- ------------- ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance year end 1997.............. 5,846,833 $585 $10,295 $87,508 $ (625) $(2,292) $(2,630) Net income......................... 24,784 $24,784 Currency translation adjustment... 180 180 Pension liability adjustment...... (428) (428) ------- Comprehensive income, net of tax. $24,536 ======= Dividends on common stock.......... (3,811) Common stock issued................ 132,895 13 2,420 (614) Common stock repurchased........... (406,008) (41) (25,995) Proceeds from stock subscriptions.. 352 Stock subscription amortization and adjustment................... 1,390 273 Loan payment from ESOP............. 233 --------- ---- ------- ------- ------- ------- ------- Balance year end 1998.............. 5,573,720 557 14,105 81,872 - (2,059) (2,878) --------- ---- ------- ------- ------- ------- ------- Net income......................... 26,805 $26,805 Currency translation adjustment... (1,849) (1,849) Pension liability adjustment...... 369 369 ------- Comprehensive income, net of tax. $25,325 ======= Dividends on common stock.......... (4,239) Common stock issued................ 129,200 13 1,886 Common stock repurchased........... (288,000) (29) (20,095) Retirement of incentive stock...... (1,500) (101) Stock subscription amortization and adjustment................... 1,704 Loan payment from ESOP............. 232 --------- ---- ------- ------- ------- ------- ------- Balance year end 1999.............. 5,413,420 541 17,695 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................ 217,647 22 11,519 Common stock repurchased........... (126,700) (13) (8,338) Stock subscription amortization and adjustment................... 821 Loan payment from ESOP............. 233 --------- ---- ------- ------- ------- ------- ------- Balance year end 2000.............. 5,504,367 $550 $30,035 $93,445 $ - $(1,594) $(6,438) ========= ==== ======= ======= ======= ======= ======= See Notes to Consolidated Financial Statements. </TABLE>
18 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 30, 2000 (52 weeks), January 1, 2000 (52 weeks) and January 2, 1999 (52 weeks) and are referred to as 2000, 1999 and 1998, 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. 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 3 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 immaterial. 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 are not significant. 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 55 percent and 57 percent of total inventories in 2000 and 1999, 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 equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. STOCK-BASED COMPENSATION--Management of the Company has elected to adopt the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". Employee stock- based compensation will continue to be accounted for under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no compensation expense is recognized in the financial statements
19 as the exercise price of the Company's stock options equals the market price of the underlying stock on the dates of the grants. EARNINGS PER COMMON SHARE--Basic and diluted earnings per share are computed and disclosed under 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. COMPREHENSIVE INCOME--The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in the first quarter of 1998 and has elected to display comprehensive income and its components in its consolidated statements of shareowners' equity. 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. PENDING ACCOUNTING PRONOUNCEMENTS--SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998 and, as amended by SFAS No. 137 and SFAS No. 138, will be effective in the first quarter of the Company's fiscal year ending December 29, 2001. SFAS No. 133 establishes a new model for accounting for derivatives on the balance sheet as either assets or liabilities, measures them at fair value, and requires that changes in fair value be recognized currently in income unless specific hedge accounting criteria are met. Certain disclosures concerning the designation and assessment of hedging relationships are also required. In January 2001, the Company adopted SFAS No 133. No transition adjustment was required.
20 2. BUSINESS ACQUISITIONS EBW, Inc. and Advanced Polymer Technology, Inc. - ----------------------------------------------- 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 (154,247 shares). 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. The acquisition was 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 fair value of the net assets acquired was estimated to be $12.1 million at the closing date, however, the fair value of the net assets acquired will continue to be evaluated by the Company over the next year. The excess of purchase price over the fair value of the net assets acquired ($15.8 million at the August 31, 2000 closing date) has been recorded as goodwill which is being amortized on a straight-line basis over 20 years. Any additional future payments made to the selling shareholders of EBW and APT upon the resolution of the earnings contingency will be recorded as additional goodwill and amortized over the remainder of the initial 20 year period. The operating results of EBW and APT have been included in the Company's consolidated financial statements from the date of acquisition. On the basis of an unaudited, pro forma consolidation of the results of operations as if the acquisition had taken place at the beginning of 1999, consolidated net sales would have been $ 356.5 million and $ 336.9 million for 2000 and 1999, respectively. Consolidated pro forma income and earnings per share information would not have been materially different from the reported amounts for 2000 and 1999. Such unaudited, pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of fiscal 1999. Other - ----- On August 30, 2000, the Federal District Court in Madison, Wisconsin issued an injunction prohibiting the Company's proposed acquisition of the fuel pumping systems business of the Marley Pump Company, a division of United Dominion Industries. The Court found that the proposed acquisition would violate the Federal antitrust laws. The Company recorded a one-time $3.2 million ($2.0 million after-tax) charge to earnings to recognize the costs of this unsuccessful acquisition effort. During 1998, the Company purchased certain operating and intangible assets from a motor manufacturer. The Company paid $17.5 million in cash at the acquisition date, and may pay additional contingent consideration according to terms that expire on December 31, 2002. The amount, if any, of this contingent consideration is not currently determinable.
21 3. EMPLOYEE BENEFIT PLANS DEFINED BENEFIT PLANS - As of December 30, 2000, the Company's domestic operations maintain three separate pension plans. The Company's other postretirement benefit plans provide health and life insurance benefits to domestic employees hired prior to 1992. The Company effectively capped its cost for those benefits through plan amendments made in 1992, freezing Company contributions for insurance benefits at 1991 levels for current and future beneficiaries with actuarially reduced benefits for employees who retire before age 65.
22 The following table sets forth aggregated information related to the Company's domestic pension benefits and other postretirement benefits, including changes in the benefit obligations, changes in plan assets, funded status, amounts recognized in the Consolidated Balance Sheets, and actuarial assumptions: (In thousands) - --------------------------------------------------------------------------- Pension Benefits Other Benefits 2000 1999 2000 1999 ---- ---- ---- ---- Change in benefit obligation: Benefit obligation, b/o/y......$ 91,199 $ 92,298 $ 11,863 $ 12,640 Service cost................... 3,100 3,003 289 335 Interest cost.................. 7,056 6,258 868 813 Plan amendments................ (217) 1,460 - - Actuarial (gain)/loss.......... 6,479 (7,281) 323 (742) Employee contributions......... 18 349 - - Benefits paid.................. (6,889) (4,888) (1,225) (1,183) -------- -------- -------- -------- Benefit obligation, e/o/y......$100,746 $ 91,199 $ 12,118 $ 11,863 ======== ======== ======== ======== Change in plan assets: Fair value of assets, b/o/y....$112,342 $110,218 $ - $ - Actual return on plan assets... 6,302 6,663 - - Company contributions.......... 89 - 1,225 1,183 Employee contributions......... 18 349 - - Benefits paid.................. (6,889) (4,888) (1,225) (1,183) -------- -------- -------- -------- Fair value of assets, e/o/y....$111,862 $112,342 $ - $ - ======== ======== ======== ======== Reconciliation of funded status: Funded status..................$ 11,116 $ 21,143 $(12,118) $(11,863) Unrecognized net (gain)/loss... (24,687) (34,712) 2,322 2,121 Unrecognized transition obligation/(asset)........... - (112) 5,867 6,356 Unrecognized prior service cost.......................... 5,700 6,736 - - -------- -------- -------- -------- Net amount recognized..........$ (7,871) $ (6,945) $ (3,929) $ (3,386) ======== ======== ======== ======== Amounts recognized in the Consolidated Balance Sheets: Accrued benefit liability......$ (9,005) $ (7,442) $ (3,929) $ (3,386) Intangible asset............... - 8 - - Deferred tax asset............. 452 194 - - Accumulated other comprehensive loss.......................... 682 295 - - -------- -------- -------- -------- Net amount recognized..........$ (7,871) $ (6,945) $ (3,929) $ (3,386) ======== ======== ======== ======== Actuarial assumptions: Discount rate.................. 7.50% 7.50% 7.50% 7.50% Rate of increase in future compensation................. 0-5.00% 0-5.00% 5.00% 5.00% Expected long-term rate of return on plan assets........ 9.25% 9.25% - - - ---------------------------------------------------------------------------
23 The following table sets forth aggregated net domestic periodic benefit cost for 2000, 1999 and 1998: (In thousands) - ---------------------------------------------------------------------------- Pension Benefits Other Benefits 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Service cost.... $3,100 $3,003 $2,509 $ 289 $ 335 $ 258 Interest cost... 7,056 6,258 5,868 868 813 840 Expected return on assets...... (9,171) (8,272) (7,224) - - - Amortization of unrecognized: obligation/ (asset)...... (112) (43) (43) 489 489 489 Prior service cost......... 819 896 769 - - - Loss/(Gain)... (677) 3 (118) 122 200 162 ------ ------ ------ ------ ------ ------ Net periodic benefit cost... $1,015 $1,845 $1,761 $1,768 $1,837 $1,749 ====== ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------- The plan assets of the pension plans consist primarily of common stocks and bonds, including $20,791 and $21,303 of the Company's common stock in 2000 and 1999, respectively. In 1999 the Company purchased 70,000 shares of its common stock from the pension plans for $5.0 million. 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 2000 and 1999. The plan's projected benefit obligation and accumulated benefit obligation were $4,304 and $3,337, respectively, at December 30, 2000, and $2,992 and $2,109, respectively, at January 1, 2000. 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 $1,057 at December 30, 2000 and $1,064 at January 1, 2000. The difference between calculating the pension liability under local requirements versus SFAS No. 87 requirements is immaterial. 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). 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 30, 2000), 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
24 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 401(k) and ESOP Trusts, and allocated to participants' accounts to satisfy the balance of the Company's 401(k) matching contribution. At December 30, 2000, 119,090 shares were allocated to the accounts of participants, 9,471 shares were committed to be released and allocated to the accounts of participants for service rendered during 2000, and 47,094 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) - --------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Interest expense incurred by the plan on ESOP debt............................. $ 104 $ 118 $ 133 Company contributions to integrated plan... $1,308 $1,004 $ 986 - --------------------------------------------------------------------------- 4. ACCRUED EXPENSES Accrued expenses consisted of: (In thousands) - --------------------------------------------------------------------------- 2000 1999 - ---- ---- Salaries, wages and commissions....... $ 8,191 $ 7,818 Product warranty costs................ 5,244 4,402 Insurance............................. 6,114 5,522 Employee benefits..................... 2,190 1,919 Other................................. 5,366 3,897 ------- ------- $27,105 $23,558 ======= ======= - --------------------------------------------------------------------------- 5. INCOME TAXES Income before income taxes consisted of: (In thousands) - --------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Domestic.................... $27,202 $35,104 $33,900 Foreign..................... 8,707 7,292 6,121 ------- ------- ------- $35,909 $42,396 $40,021 ======= ======= ======= - ---------------------------------------------------------------------------
25 The income tax provision consisted of: (In thousands) - -------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Currently payable: Federal................... $ 8,328 $10,198 $12,095 Foreign................... 3,412 2,954 2,432 State..................... 1,977 1,767 2,355 Deferred: Federal................... (188) 472 (1,512) Foreign................... 68 31 72 State..................... 86 169 (205) ------- ------- ------- $13,683 $15,591 $15,237 ======= ======= ======= - -------------------------------------------------------------------------- Significant components of the Company's deferred tax assets and liabilities were as follows: (In thousands) - -------------------------------------------------------------------------- 2000 1999 - ---- ---- Deferred tax assets: Accrued expenses and reserves.............. $ 6,424 $ 6,515 Compensation and employee benefits......... 7,032 6,221 Other items................................ 3,264 1,201 ------- ------- Total deferred tax assets................ 16,720 13,937 ------- ------- Deferred tax liabilities: Accelerated depreciation on fixed assets... 5,312 4,183 Other items................................ 387 290 ------- ------- Total deferred tax liabilities........... 5,699 4,473 ------- ------- Net deferred tax assets...................... $11,021 $ 9,464 ======= ======= - -------------------------------------------------------------------------- The portions of current and non-current deferred tax assets and liabilities were as follows: (In thousands) - -------------------------------------------------------------------------- 2000 1999 ---- ---- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Current........ $ 9,538 $ - $ 7,934 $ - Non-current.... 7,182 5,699 6,003 4,473 ------- ------- ------- ------- $16,720 $ 5,699 $13,937 $ 4,473 ======= ======= ======= ======= - ---------------------------------------------------------------------------
26 There was no valuation allowance for deferred tax assets required in 2000 or 1999. The differences between the statutory and effective tax rates were as follows: - ----------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- U.S. Federal statutory rate...... 35.0% 35.0% 35.0% State income taxes, net of federal benefit................ 3.4 3.3 3.8 Other items...................... (0.3) (1.5) (0.7) ----- ----- ----- 38.1% 36.8% 38.1% ===== ===== ===== - ----------------------------------------------------------------------------- 6. DEBT Long-term debt consisted of: (In thousands) - ----------------------------------------------------------------------------- 2000 1999 ---- ---- Insurance Company--6.31%, principal payments of $1.0 million due in annual installments, with a balloon payment of $10,000 in 2008 ($3,061 denominated in JPY at 12/30/00)....... $16,838 $18,000 Bank.................................... 53 75 ------- ------- 16,891 18,075 Less current maturities................. (1,017) (1,018) ------- ------- $15,874 $17,057 ======= ======= - ---------------------------------------------------------------------------- The Company's short-term borrowings were $59 at December 30, 2000. The Company's long-term debt with the insurance company is unsecured and the long- term debt agreement provides for certain financial covenants relative to working capital, additional borrowings, loans or advances and investments. The Company was in compliance with all debt covenants at all times in 2000 and 1999. On January 5, 1996, the Company entered into an unsecured, five-year $40.0 million revolving credit agreement (the "Agreement"). The Agreement, which includes a facility fee of one-tenth of one percent on the committed amount, was amended and restated (the "Amended Agreement") on December 30, 1997. The Amended 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 Amended Agreement contains certain financial covenants with respect to borrowings, fixed charge coverage, working capital, loans or advances, and investments.
27 7. SHAREOWNERS' EQUITY The Company had 5,504,000 shares of common stock (25,000,000 shares authorized, $.10 par value) outstanding at the end of 2000. During 2000 and 1999, pursuant to stock repurchase programs authorized by the Company's Board of Directors, the Company repurchased a total of 126,700 shares for $8.4 million and 288,000 shares for $20.1 million, respectively. Of these shares, 130,000 were repurchased from an officer of the Company in 1999. All repurchased shares were retired. During 2000 and 1998, under terms of a Company stock option plan, a participant remitted 10,000 and 9,851 shares of Company common stock, respectively, as consideration for stock issued upon the exercise of stock options. The total exercise price of the respective stock options was $0.7 and $0.6 million in 2000 and 1998, respectively, and the shares remitted to the Company were subsequently retired. Stock subscriptions are principally deferred costs recognized in connection with the issuance of loans to officers 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, and at December 30, 2000, 512,800 shares were available for future awards. 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: (In thousands, except per share amounts) - ---------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Numerator: Net Income.......................... $22,226 $26,805 $24,784 ======= ======= ======= Denominator: Basic ----- Weighted-average common shares..... 5,454 5,502 5,733 Diluted ------- Effect of dilutive securities: Employee and director incentive stock options and awards........ 230 321 437 ------- ------- ------- Adjusted weighted-average common shares.......................... 5,684 5,823 6,170 ======= ======= ======= Basic earnings per share.............. $ 4.08 $ 4.87 $ 4.32 ======= ======= ======= Diluted earnings per share............ $ 3.91 $ 4.60 $ 4.02 ======= ======= ======= - ----------------------------------------------------------------------------
28 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 five fixed stock option plans. The plans and the original number of authorized shares available for grants are as follows: - --------------------------------------------------------------------------- Shares ------ Employee Plans: 1981 Incentive Stock Option Plan 555,000 1986 Non-Qualified Stock Option Plan 555,000 1996 Employee Stock Option Plan 600,000 Non-Employee Director Plans: 1990 Non-Employee Director Stock Option Plan 60,000 Amended and Restated 1996 Non-Employee Director Stock Option Plan 300,000 - --------------------------------------------------------------------------- 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. At December 30, 2000, there were no remaining shares for future grants under the 1981 and 1986 Employee Plans and the 1990 Non-Employee Director Plan. A summary of the Company's fixed stock option plans activity and related information for 2000, 1999 and 1998 follows: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Weighted-Average Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------- ------------------------- ------------------------ ------------------------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 589,917 $38.79 642,617 $30.09 762,296 $25.73 Granted 184,333 65.01 84,000 70.31 43,500 66.27 Exercised (63,400) 24.30 (129,200) 14.70 (142,746) 16.50 Forfeited - - (7,500) 60.94 (20,433) 39.55 ------- ------- ------- Outstanding at end of year 710,850 $46.89 589,917 $38.79 642,617 $30.09 ======= ======= ======= - ---------------------------------------------------------------------------------------------------------- </TABLE> The following summarizes information about fixed stock options outstanding at December 30, 2000: <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------------------- ------------------------------ Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/30/00 Contractual Life Exercise Price at 12/30/00 Exercise Price - --------------- ----------- ---------------- ---------------- ----------- --------------- <S> <C> <C> <C> <C> <C> $15.00 to 32.50 302,600 3.83 years $28.47 302,600 $28.47 32.51 to 54.13 108,750 5.95 42.32 85,450 42.00 54.14 to 74.88 299,500 8.94 67.15 34,800 68.32 ------- ------- $15.00 to 74.88 710.850 6.30 $46.89 422,850 $34.48 ======= ======= - ----------------------------------------------------------------------------------------------------------- </TABLE>
29 For pro forma information regarding net income and earnings per share, the fair value for the options awarded in 2000, 1999 and 1998 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 2000, 1999 and 1998, respectively. - ---------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Risk-free interest rate............ 6.19% 5.76% 5.49% Dividend yield..................... 1.30% 1.20% 1.20% Volatility factor.................. .198 .223 .230 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 options' 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 Company's pro forma information follows: (In thousands, except per share amounts) - ---------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Reported net income................. $22,226 $26,805 $24,784 Pro forma net income................ $21,259 $26,156 $24,312 Reported net income available per common share.................. $4.08 $4.87 $4.32 Pro forma net income available per common share.................. $3.90 $4.75 $4.24 Reported net income available per common share, assuming dilution... $3.91 $4.60 $4.02 Pro forma net income available per common share, assuming dilution... $3.74 $4.49 $3.94 - ---------------------------------------------------------------------------- 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. 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 employees' attainment of certain goals. No shares were awarded under the Incentive Plan in 2000. At December 30, 2000, 100,000 shares were available for future awards.
30 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, Europe, Australia, South Africa, Mexico, Japan, China and other world markets. Net sales attributed to customers located in the United States were $224.4 million, $207.7 million and $192.8 million in 2000, 1999 and 1998, respectively. Net sales attributed to foreign customers were $101.3 million, $85.5 million and $79.7 million in 2000, 1999 and 1998, respectively, of which no single country was significant. Long-lived assets located in the United States totaled $53.0 million, $47.5 million and $43.4 million in 2000, 1999 and 1998, respectively. Long-lived assets in foreign countries totaled $11.6 million, $9.5 million and $8.1 million in 2000, 1999 and 1998, respectively, of which no single country was significant. One customer accounted for 15.7 percent, 15.3 percent, and 14.0 percent of the Company's consolidated sales in 2000, 1999 and 1998, respectively. 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited quarterly financial information for 2000 and 1999 is as follows: (In thousands, except per share amounts) - --------------------------------------------------------------------------- Basic Diluted Net Gross Net Earnings Earnings Sales Profit Income Per Share Per Share ----- ------ ------ --------- --------- 2000 - ---- 1st Quarter..... $ 66,051 $17,187 $ 3,903 $ .72 $ .69 2nd Quarter..... 84,875 23,592 7,785 1.44 1.38 3rd Quarter..... 85,173 20,918 3,442 .63 .61 4th Quarter..... 89,632 23,489 7,096 1.28 1.23 -------- ------- ------- $325,731 $85,186 $22,226 $4.08 $3.91 ======== ======= =======
31 1999 - ---- 1st Quarter..... $ 58,014 $15,438 $ 3,477 $ .63 $ .59 2nd Quarter..... 74,595 21,524 7,008 1.26 1.19 3rd Quarter..... 81,795 23,061 8,118 1.49 1.40 4th Quarter..... 78,832 24,148 8,202 1.51 1.44 -------- ------- ------- $293,236 $84,171 $26,805 $4.87 $4.60 ======== ======= ======= - --------------------------------------------------------------------------- 12. CONTINGENCIES AND COMMITMENTS The Company is defending various claims and legal actions which have arisen in the ordinary course of business. The Company has attempted, where possible, to assess the likelihood of an unfavorable outcome as a result of these actions. Legal counsel has been retained to assist the Company in making these determinations, and costs are accrued, as required under applicable accounting rules, when an unfavorable outcome is determined to be probable and a reasonable estimate can be made. As a result, the Company has an accrual balance of approximately $1.1 million and $1.2 million at December 30, 2000 and January 1, 2000, respectively, to provide for such actions. Total rent expense charged to operations for operating leases including contingent rentals was $2.2 million, $1.8 million and $1.9 million for 2000, 1999 and 1998, respectively. The future minimum rental payments for noncancellable operating leases as of December 30, 2000, are as follows: 2001, $1.3 million; 2002, $0.9 million and 2003, $0.4 million. Rental commitments subsequent to 2003 are not material.
32 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 30, 2000 and January 1, 2000 and the related consolidated statements of income, shareowners' equity and cash flows for each of the three years in the period ended December 30, 2000. Our audits also included the financial statement schedule listed in the index at Item 14. 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 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, 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 26, 2001
33 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 20, 2001, 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 20, 2001, 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 20, 2001, under the headings of "INFORMATION ABOUT THE BOARD AND ITS COMMITTEES," "COMPENSATION COMMITTEE REPORT," "SUMMARY COMPENSATION TABLE," "OPTION GRANTS IN 2000 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 - ------------------------------------------------------------------------ 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 20, 2001, under the heading of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," and is incorporated herein by reference. 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 20, 2001, under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "AGREEMENTS," and is incorporated herein by reference.
34 PART IV ------- ITEM 14. 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........................ 32 Consolidated Statements of Income for the three years ended December 30, 2000............... 12 Consolidated Balance Sheets, as of December 30, 2000 and January 1, 2000............. 13-14 Consolidated Statements of Cash Flows for the three years ended December 30, 2000....... 15-16 Consolidated Statements of Shareowners' Equity for the three years ended December 30, 2000....... 17 Notes to Consolidated Financial Statements (including quarterly financial data).............. 18-31 2. Financial Statement Schedules - Franklin Electric ------------------------------------------------- II Valuation and Qualifying Accounts................ 35 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 37-38. 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 30, 2000: None. (c) See the Exhibit Index located on pages 37-38. (d) Individual financial statements and all other schedules of the Registrant are omitted as they are not required.
35 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years 2000, 1999 and 1998 (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: 2000 $1,333 $673 $ 99 (A) $ 42 $1,949 ====== ==== ==== ==== ====== 1999 $1,107 $267 $ 41 (A) $ - $1,333 ====== ==== ==== ==== ====== 1998 $1,349 $271 $513 (A) $ - $1,107 ====== ==== ==== ==== ====== NOTES: - ------ (A) Uncollectible accounts written off, net of recoveries.
36 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 and (Date) February 16, 2001 Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ WILLIAM H. LAWSON Chairman of the Board and - ------------------------------------- Chief Executive Officer William H. Lawson February 16, 2001 (Principal Executive Officer) /s/ GREGG C. SENGSTACK Vice President and Chief - ------------------------------------- Financial Officer (Principal Gregg C. Sengstack February 16, 2001 Financial and Accounting Officer) /s/ JEROME D. BRADY - ------------------------------------- Jerome D. Brady February 16, 2001 Director /s/ JOHN B. LINDSAY - ------------------------------------- John B. Lindsay February 16, 2001 Director /s/ ROBERT H. LITTLE - ------------------------------------- Robert H. Little February 16, 2001 Director /s/ PATRICIA SCHAEFER - ------------------------------------- Patricia Schaefer February 16, 2001 Director /s/ DONALD J. SCHNEIDER - ------------------------------------- Donald J. Schneider February 16, 2001 Director /s/ R.SCOTT TRUMBULL - ------------------------------------- R. Scott Trumbull February 16, 2001 Director /s/ JURIS VIKMANIS - ------------------------------------- Juris Vikmanis February 16, 2001 Director /s/ HOWARD B. WITT - ------------------------------------- Howard B. Witt February 16, 2001 Director
37 FRANKLIN ELECTRIC CO., INC. EXHIBIT INDEX TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000 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, (incorporated herein by reference to the Company's Form 10-Q for the quarter ended April 3, 1999) 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 1981 Incentive 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 B to the Proxy Statement)* 10.4 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)* 10.5 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)* 10.6 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)*
38 10.7 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)* 10.8 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)* 10.9 Franklin Electric Co., Inc. Nonemployee Directors' Deferred Compensation Plan* 10.10 Employment Agreement dated December 5, 1986 between the Company and William H. Lawson (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-K for the fiscal year ended December 28, 1991)* 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 Employment Agreement dated December 7, 2000 between the Company and Gregg C. Sengstack* 10.13 Amended and Restated Credit Agreement dated as of December 30, 1997 between the Company and various commercial banks (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-K for the fiscal year ended January 3, 1998) 21 Subsidiaries of the Registrant............................ 39 23 Independent Auditors' Consent............................. 40 27 Financial Data Schedule................................... 41 99 Additional Exhibits....................................... 42-43 * Management contract or compensatory plan or arrangement