FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-362 FRANKLIN ELECTRIC CO., INC. --------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INDIANA 35-0827455 ------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 400 EAST SPRING STREET BLUFFTON, INDIANA 46714 ----------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (260) 824-2900 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NOT APPLICABLE -------------- (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 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 May 7, 2002 --------------------- ------------ $.10 par value 10,842,046 shares Page 1 of 12
2 FRANKLIN ELECTRIC CO., INC. Index Page PART I. FINANCIAL INFORMATION Number - --------------------------------- ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 30, 2002 (Unaudited) and December 29, 2001 (Unaudited)............... 3 Condensed Consolidated Statements of Income for the Three Months Ended March 30, 2002 (Unaudited) and March 31, 2001 (Unaudited)...................... 4 Condensed Consolidated Statements Of Cash Flows for the Three Months Ended March 30, 2002 (Unaudited) and March 31, 2001 (Unaudited)...................... 5 Notes to Condensed Consolidated Financial Statements (Unaudited)................ 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 9-10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 10 PART II. OTHER INFORMATION - ----------------------------- Item 4. Submission of Matters to a Vote of Security Holders.............................. 11 Item 6. Exhibits and Reports on Form 8-K................ 11 Signatures.................................................. 12 - ----------
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- FRANKLIN ELECTRIC CO., INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) March 30, December 29, 2002 2001 ---- ---- ASSETS Current assets: Cash and equivalents.................... $ 5,070 $ 20,750 Marketable securities................... - 2,999 Receivables, less allowances of $1,986 and $1,658, respectively....... 35,225 27,486 Inventories (Note 2).................... 57,838 48,008 Other current assets (including deferred income taxes of $8,675 and $8,667, respectively)............. 10,673 10,340 -------- -------- Total current assets.................. 108,806 109,583 Property, plant and equipment, net (Note 3)............................ 66,697 58,839 Deferred and other assets (including deferred income taxes of $19 and $17, respectively).................. 14,978 12,710 Goodwill.................................. 24,892 14,511 -------- -------- Total assets.............................. $215,373 $195,643 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Current maturities of long-term debt and short-term borrowings........ $ 4,053 $ 1,058 Accounts payable........................ 17,701 11,683 Accrued expenses........................ 23,830 24,146 Income taxes............................ 2,323 3,538 -------- -------- Total current liabilities............. 47,907 40,425 Long-term debt............................ 22,882 14,465 Employee benefit plan obligations......... 13,291 13,199 Other long-term liabilities............... 4,314 4,285 Shareowners' equity: Common stock (Note 5)................... 1,073 533 Additional capital...................... 24,584 23,882 Retained earnings....................... 111,501 109,103 Loan to ESOP Trust...................... (1,130) (1,362) Accumulated other comprehensive loss (Note 7)......................... (9,049) (8,887) -------- -------- Total shareowners' equity............. 126,979 123,269 -------- -------- Total liabilities and shareowners' equity. $215,373 $195,643 ======== ======== See Notes to Condensed Consolidated Financial Statements.
4 FRANKLIN ELECTRIC CO., INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) Three Months Ended ------------------ March 30, March 31, 2002 2001 ---- ---- Net sales.............................. $68,069 $65,899 Costs and expenses: Cost of sales........................ 50,218 48,786 Selling and administrative expenses.. 11,661 11,341 Interest expense..................... 338 325 Other income, net.................... (226) (143) Foreign exchange loss................ 208 727 ------- ------- 62,199 61,036 Income before income taxes............. 5,870 4,863 Income taxes........................... 2,188 1,847 ------- ------- Net income............................. $ 3,682 $ 3,016 ======= ======= Per share data (Note 6): Net income per common share.......... $ .34 $ .27 ======= ======= Net income per common share, assuming dilution.................. $ .32 $ .26 ======= ======= Dividends per common share........... $ .12 $ .11 ======= ======= See Notes to Condensed Consolidated Financial Statements.
5 FRANKLIN ELECTRIC CO., INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended ------------------ March 30, March 31, 2002 2001 ---- ---- Cash flows from operating activities: Net income................................ $ 3,682 $ 3,016 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization........... 3,184 3,130 Loss on disposals of plant and equipment......................... - 66 Changes in assets and liabilities: Receivables........................... (4,409) (1,039) Inventories........................... (6,269) (17,813) Accounts payable and other accrued expenses............................ (5,111) (367) Employee benefit plan obligations..... 109 331 Other, net............................ (264) (548) ------- ------- Net cash flows from operating activities.............. (9,078) (13,224) ------- ------- Cash flows from investing activities: Additions to plant and equipment.......... (1,078) (1,109) Proceeds from sale of plant and equipment............................... - 18 Additions to deferred assets.............. (2,640) (46) Cash paid for acquisition................. (17,475) - Proceeds from maturities of marketable securities ............................. 2,999 - ------- ------- Net cash flows from investing activities.................. (18,194) (1,137) ------- ------- Cash flows from financing activities: Borrowing on long-term debt............... 8,350 - Borrowing on line of credit and short-term borrowings................... 3,000 10,000 Repayment of line of credit and short-term borrowings............... (5) (3) Proceeds from issuance of common stock.... 1,242 - Purchases of common stock................. - (1,001) Reduction of loan to ESOP Trust........... 232 232 Dividends paid............................ (1,284) (1,210) ------- ------- Net cash flows from financing activities.................. 11,535 8,018 ------- ------- Effect of exchange rate changes on cash..... 57 501 ------- ------- Net change in cash and equivalents.......... (15,680) (5,842) Cash and equivalents at beginning of period. 20,750 9,631 ------- ------- Cash and equivalents at end of period....... $ 5,070 $ 3,789 ======= ======= See Notes to Condensed Consolidated Financial Statements.
6 FRANKLIN ELECTRIC CO., INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Condensed Consolidated Financial Statements - ---------------------------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 28, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in Franklin Electric Co., Inc.'s annual report on Form 10-K for the year ended December 29, 2001. Note 2: Inventories - -------------------- Inventories consist of the following: (In thousands) March 30, December 29, 2002 2001 ---- ---- Raw Materials........................ $15,759 $16,447 Work in Process...................... 7,585 6,005 Finished Goods....................... 44,451 35,662 LIFO Reserve......................... (9,957) (10,106) ------- ------- Total Inventory...................... $57,838 $48,008 ======= ======= Note 3: Property, Plant and Equipment - -------------------------------------- Property, plant and equipment, at cost, consists of the following: (In thousands) March 30, December 29, 2002 2001 ---- ---- Land and Building.................... $ 32,354 $ 25,343 Machinery and Equipment.............. 124,980 121,791 -------- -------- 157,334 147,134 Allowance for Depreciation........... 90,637 88,295 -------- -------- $ 66,697 $ 58,839 ======== ========
7 Note 4: Tax Rates - ------------------ The effective tax rate on income before income taxes in 2002 and 2001 varies from the United States statutory rate of 35 percent principally due to the effect of state and foreign income taxes. Note 5: Shareowners' Equity - ---------------------------- The Company had 10,730,334 shares of common stock (25,000,000 shares authorized, $.10 par value) outstanding as of March 30, 2002. All share and per share data included in these financial statements reflect the Company's two-for-one stock split effected in the form of a 100 percent stock distribution made on March 22, 2002. Note 6: Earnings Per Share - --------------------------- Following is the computation of basic and diluted earnings per share: Three Months Ended (In thousands, except ------------------ per share amounts) March 30, March 31, 2002 2001 ---- ---- Numerator: Net Income..................... $ 3,682 $ 3,016 ======= ======= Denominator: Basic Weighted average common shares....................... 10,697 10,996 Diluted Effect of dilutive securities: Employee and director incentive stock options and awards................. 684 456 ------- ------- Adjusted weighted average common shares................ 11,381 11,452 ======= ======= Basic earnings per share......... $ .34 $ .27 ======= ======= Diluted earnings per share....... $ .32 $ .26 ======= =======
8 Note 7: Comprehensive Income - ----------------------------- Comprehensive income is as follows: Three Months Ended (In thousands) ------------------ March 30, March 31, 2002 2001 ---- ---- Net income.............................. $3,682 $3,016 Other comprehensive loss: Foreign currency translation adjustments.......................... (162) (1,316) ------ ------ Comprehensive income, net of tax........ $3,520 $1,700 ====== ====== Accumulated other comprehensive loss consists of the following: (In thousands) March 30, December 29, 2002 2001 ---- ---- Cumulative translation adjustment........... $(8,271) $(8,109) Minimum pension liability adjustment, net of tax................................ (778) (778) ------- ------- $(9,049) $(8,887) ======= ======= Note 8: Contingencies and Commitments - -------------------------------------- The Company is defending various claims and legal actions, including environmental matters, which have arisen in the ordinary course of business. In the opinion of management, after discussion with counsel, these claims and legal actions can be successfully defended or resolved without a material adverse effect on the Company's financial position or results of operations. Note 9: Goodwill and Other Intangible Assets - --------------------------------------------- Statement of Financial Accounting Standards (SFAS) No. 141 and 142, "Business Combinations" and "Goodwill and Other Intangible Assets", respectively, were published in June 2001. SFAS No. 141 requires the purchase method of accounting for business combinations, and SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. The Company adopted the provisions of SFAS Nos. 141 and 142 effective December 30, 2001, and accordingly, the Company's recorded goodwill is no longer being amortized. In addition, during the first quarter of 2002, the Company performed its initial impairment testing required by SFAS No. 142. No impairment loss or transition adjustments were required. The following sets forth a reconciliation of reported net income and earnings per share to the same amounts adjusted to exclude amortization expense recognized on goodwill in each respective period: (In thousands, except per share amounts) Three Months Ended March 30, March 31, 2002 2001 Reported net income..................... $3,682 $3,016 Add back: Goodwill amortization........ - 197 Adjusted net income..................... $3,682 $3,213 Basic earnings per share: Reported net income..................... $ .34 .27 Add back: Goodwill amortization........ - .02 Adjusted net income..................... $ .34 $ .29 Diluted earnings per share: Reported net income..................... $ .32 .26 Add back: Goodwill amortization........ - .02 Adjusted net income..................... $ .32 $ .28
9 Item 2. Management's Discussion And Analysis Of Financial Condition And - ------------------------------------------------------------------------- Results Of Operations - --------------------- Operations - ---------- Net sales for the first quarter of 2002 were $68.1 million, a 3.3 percent increase from 2001 first quarter net sales of $65.9 million. The increase in sales was principally due to the inclusion of Coverco, a January 2002 acquisition, and higher volume of submersible water systems motors. These increases were partially offset by lower sales of submersible fueling systems motors and industrial motor products. Cost of sales as a percentage of net sales for the first quarter of 2002 was 73.8 percent compared to 74.0 percent for the same period in 2001. The decrease is primarily the result of cost reduction, productivity improvement and other operations initiatives. Selling and administrative expenses as a percent of net sales for the first quarter of 2002 was 17.1 percent compared to 17.2 percent for the same period in 2001. Interest expense was $0.3 million for both the first quarter of 2002 and 2001. Included in other income, net, for the first quarter of 2002 was $0.1 million of interest income compared to $0.2 million interest income for the first quarter 2001. Interest income was attributable to amounts invested principally in short-term U.S. treasury and agency securities. The foreign currency based transactions for the first quarter of 2002 produced a loss of $0.2 million compared to a $0.7 million loss for the same period in 2001. The foreign currency transaction loss in 2002 and 2001 was primarily due to the strengthening U.S. dollar relative to the Euro. Net income for the first quarter of 2002 was $3.7 million, or $.32 per diluted share, compared to net income of $3.0 million, or $.26 per diluted share, for the same period a year ago. Capital Resources and Liquidity - ------------------------------- Cash, cash equivalents and marketable securities decreased $18.7 million during the first quarter of 2002. The principal use of cash for operating activities was the seasonal increase in inventories. Working capital decreased $8.3 million during the first quarter of 2002. The current ratio was 2.3 and 2.7 at March 30, 2002 and December 29, 2001, respectively. Net cash flows used in investing activities were $18.2 million and were principally used for the acquisition of Coverco.
10 "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 the Company's Securities and Exchange Commission filings. These risks and uncertainties may cause actual results to differ materially from those indicated by the forward- looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. Foreign currency exchange rate risk is mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of intercompany balances utilizing a global netting system and limited use of foreign currency denominated debt. Interest rate exposure is principally limited to any marketable U.S. treasury and agency securities owned by the Company and is mitigated by the short-term, generally less than 6 months, nature of these investments.
11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The 2002 Annual Meeting of Shareholders of the Company was held on April 19, 2002 for the following purposes: 1) To elect three directors for terms expiring at the 2005 Annual Meeting of Shareholders; and 2) To ratify the appointment of Deloitte & Touche LLP as independent auditors for the 2002 fiscal year. The results were: 1) Nominees for Director For Withhold Authority --------------------- --- ------------------ John B. Lindsay 4,826,335 45,109 Juris Vikmanis 4,828,143 43,301 Howard B. Witt 4,820,441 51,003 Delivered For Against Abstain not Voted --- ------- ------- --------- 2) Ratification of Deloitte & Touche LLP 4,437,913 3,389 425,824 4,318 Total shares represented at the Annual Meeting in person or by proxy were 4,871,444 of a total of 5,348,167 shares outstanding. This represented 91.0 percent of Company common stock and constituted a quorum. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits (Filed with this quarterly report) 3 (ii) Amended and Restated By-Laws of Franklin Electric Co., Inc. 10.1 Amended and Restated Note Purchase and Private Shelf Agreement dated March 1, 2002 between the Company and The Prudential Insurance Company of America. (b) Reports on Form 8-K A Current Report on Form 8-K was filed with the SEC by the Company on February 15, 2002 to report a two-for-one stock split.
12 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 May 7, 2002 By /s/ William H. Lawson ------------------- -------------------------------- William H. Lawson, Chairman and Chief Executive Officer (Principal Executive Officer) Date May 7, 2002 By /s/ Gregg C. Sengstack ------------------- -------------------------------- Gregg C. Sengstack, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 5