Franklin Electric - 10-Q quarterly report FY

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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FRANKLIN ELECTRIC CO., INC.

Index

PART I. FINANCIAL INFORMATION

FRANKLIN ELECTRIC CO., INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN ELECTRIC CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN ELECTRIC CO., INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See Notes to Condensed Consolidated Financial Statements.

FRANKLIN ELECTRIC CO., INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all accounting entries and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and the results of operation for the interim period have been made. Prior year amounts are reclassified when necessary to conform to current year presentation. Operating results for the second quarter ended July 2, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005. For further information, including a description of Franklin Electric's critical accounting policies, refer to the consolidated financial statements and footnotes thereto included in Franklin Electric Co., Inc.'s annual report on Form 10-K for the year ended January 1, 2005.

Inventories consist of the following:

Property, plant and equipment, at cost, consists of the following:

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, the Company tests goodwill and intangible assets for impairment on an annual basis, or more frequently if circumstances warrant. During the fourth quarter of 2004, the Company performed its annual impairment testing and it was determined that no impairment exists.

The carrying amount of the Company’s intangible assets, which is included in deferred and other assets, and goodwill include:

In the second quarter, the Company recorded $1.0 million as an intangible asset when it entered into an agreement to purchase certain pump designs and intellectual property from a third party.

Other changes in the carrying amount of intangibles and goodwill reflect foreign currency fluctuations.

Amortization expense related to intangible assets for the six months ended July 2, 2005 and July 3, 2004, was $0.7 and $1.1 million respectively.

During the second fiscal quarter, there has been no material change in the projected amortization expense for each of the five succeeding years, as reported in the Company’s annual report on Form 10-K for the year ended January 1, 2005.

The following table sets forth aggregated net periodic benefit cost:

As of July 2, 2005 the Company has made contributions to the plans of $2.3 million and expects to make additional contributions of $0.9 million in 2005.

The effective tax rate on income before income taxes in 2005 and 2004 varies from the United States statutory rate of 35 percent primarily due to the foreign income exclusion and R & D credits and to the effects of state and foreign income taxes net of federal tax benefits.

The Company had 21,999,972 shares of common stock (45,000,000 shares authorized, $.10 par value) outstanding as of July 2, 2005.

During the second quarter, pursuant to the stock repurchase program authorized by the Company's Board of Directors, the Company has repurchased a total of 276,200 shares for $10.2 million. During the six months ended, the Company repurchased 330,600 shares for $12.3 million. All repurchased shares were retired.

Following is the computation of basic and diluted earnings per share:

Comprehensive income is as follows:

Accumulated other comprehensive income consists of the following:

The Company provides warranties on most of its products. The warranty terms vary but are generally two years from date of manufacture or one year from date of installation. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The Company actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. The Company believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.

Below is a table that shows the activity in the warranty accrual accounts:

The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." No stock-based employee compensation cost is reflected in net income (loss), as all options granted under those plans had an exercise price equal to the market value of the stock at date of grant. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123," the Company follows the disclosure requirements only of SFAS No. 123. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

On December 16, 2004, the FASB issued SFAS No. 123(R) “Share-Based Payment”, that requires compensation costs related to share-based payment transactions be recognized in the financial statements. With minor exceptions, the amount of compensation costs will be measured based on the grant-date fair value of the equity or liability instruments issued, over the period that the employee provides service in exchange for the award. In addition liability awards will be re-measured each reporting period. This pronouncement is effective as of the beginning of the first fiscal year beginning after June 15, 2005. The impact on the Company’s results of operations or financial position as of the adoption of this pronouncement is not expected to be materially different from the pro-forma results.

The Company incurred $0.5 million of expenses during the second quarter of 2005 (included as "Restructuring expense" on the income statement) related to its Global Manufacturing Realignment Program. The costs in the second quarter were primarily equipment transfers, travel, and severance related to the consolidation of the Company's Motta di Livenza, Italy factory into other European factories and to the ramp-up of production at the Linares, Mexico four inch motor manufacturing plant.

The components and use of the restructuring reserve is summarized below:

Sales and earnings for the second quarter of 2005 were up from the same quarter of 2004. The increase in sales is primarily attributable to the impact of customer discount program changes, price increases and the pump acquisition in the fourth quarter of 2004. Earnings improved in the second quarter of 2005 primarily due to the increased sales. Increased earnings were partially offset by increased commodity prices and expenses associated with the Company’s two major strategic initiatives: the Water Systems Distribution Channel Strategy designed to sell certain water systems products direct to distributors (including pump products) and the Global Manufacturing Realignment Program designed primarily to move manufacturing operations to low cost countries. Certain expenses incurred as a result of the Realignment Program are identified quarterly during the implementation period and reflected as “Restructuring expense” in our income statement. Included in the results for the second quarter of 2005 and 2004 are restructuring expenses of $0.5 and $1.4 million pre-tax, respectively.

Net sales for the second quarter of 2005 were $123.5 million, an increase of $17.4 million or 16 percent from the 2004 second quarter net sales of $106.1 million. Foreign currencies, particularly the euro and the Rand, strengthened relative to the U.S. dollar compared to the second quarter of 2004. The impact of the changes in exchange rates was a $1.1 million increase in the Company’s reported second quarter 2005 sales. Excluding the impact of changes in foreign currencies, net sales increased $16.3 million or 15 percent. The impact of previously announced price increases and changes in the customer discount programs which were necessary due to significant increased costs for certain commodities used in the manufacture of the electric motors, primarily steel and copper, resulted in a sales increase of approximately 9 percent for the second quarter of 2005. Unit sales of submersible motor products were generally flat worldwide with North America benefiting from improving weather conditions and product promotions. As a result of our Channel Strategy, we decreased sales to two major pump OEMs from about 40 percent of worldwide sales for full year 2004 to about 25 percent of worldwide sales for the first half of 2005. Sales of pumps related to the acquisition of certain assets of JBD, Inc. resulted in a year over year increase of about 5 percent for the second quarter of 2005. Fueling systems product sales were comparable to the second quarter of 2004. For the first half of 2005, sales were $206.0 million, an increase of $19.6 million or 11 percent compared to 2004 sales of $186.4 million for the same period. The sales increase for the first half of 2005 was partially attributable to foreign currency changes which accounted for $2.5 million due primarily to the stronger euro and Rand. Excluding the impact of the change in exchange rates, the Company’s first half sales were up about 9 percent, again, primarily due to pricing changes and acquisition related sales and reduced by lower fueling system product sales in the first quarter.

Cost of sales as a percent of net sales was 66.5 percent and 67.5 percent for the second quarter of 2005 and 2004, respectively. Cost of sales as a percent of net sales continues to decrease primarily as a result of increased sales. The decrease in cost of sales as a percent of net sales during the second quarter of 2005 and 2004 was partially offset by increased costs for certain commodities used in the manufacture of the electric motors, primarily steel and copper. Cost of sales as a percent of net sales year to date was 67.5 percent and 68.8 percent for 2005 and 2004, respectively. Cost of sales as a percent of net sales continues to decrease primarily as a result of the increased sales noted above. The decrease in cost of sales as a percent of net sales during the first half of 2005 was partially offset by increased costs for certain commodities used in the manufacture of the electric motors.

Selling and administrative (“SG&A”) expenses at $20.0 million for the second quarter of 2005 were up $4.0 million or 25 percent from the second quarter of 2004 of $16.0 million. The increase of SG&A expenses in the second quarter of 2005 from the same period for 2004 was due primarily to additional costs related to the acquired pump manufacturer, about $0.8 million, and the Channel Strategy, about $0.8 million. The Company also incurred increased commission costs related to the increased sales for the second quarter of 2005. SG&A expense for the first half of 2005 was $36.2 million compared to $31.0 million for the first half of 2004. The increase of SG&A expense of $5.2 million in the first half of 2005 from the same period for 2004 was primarily due to additional costs related to the acquired pump manufacturer, about $1.7 million and the Channel Strategy, about $1.3 million.

The Company’s previously announced Realignment Program, primarily consists of the ramp up of production at a four inch motor manufacturing plant in Mexico, a new six inch motor manufacturing facility in the Czech Republic and the consolidation of certain manufacturing operations. The Company projected it would incur approximately $10 million of pre-tax restructuring expense as the Program began in the first quarter of 2004 and is expected to be complete in the fourth quarter of 2005. Restructuring expense primarily includes: severance, relocation, and the cost of transferring equipment. These expenses continue to be identified quarterly and are reflected as “Restructuring expense” in our income statement. The Company has incurred approximately $6.2 million of pre-tax expense for the Program to date, including $0.5 million for the second quarter of 2005. The Company expects to incur the remaining costs during the balance of 2005 when the Program will be substantially complete. This Program will result in the transfer of a significant amount of production to lower cost regions of the world as well as a consolidation of certain manufacturing operations.

Interest expense for the second quarter of 2005 was $0.2 million and for the first half was $0.4 million. Both periods for 2005 were higher than the respective prior year periods due to higher interest rates.

Foreign currency-based transactions resulted in a slight loss for the second quarter 2005 compared to a loss for the second quarter of 2004 of $0.2 million. Foreign currency-based transactional gains and losses are caused primarily by fluctuations of the euro and the Rand relative to the U.S. dollar during the respective periods noted above.

The provision for income taxes for the second quarter of 2005 was $7.4 million and for the first half of 2005 was $10.5 million. The effective tax rate for 2005 is projected at 35.3 percent, about the same as the 2004 full year rate of 35.5 percent. The effective tax rate differs from the United States statutory rate of 35 percent, due to the foreign income exclusion and R&D credits and to the effects of state and foreign income taxes, net of federal tax benefits.

Net income for the second quarter of 2005 was $13.5 million, or $0.59 per diluted share, a 25 percent increase compared to the second quarter of 2004 net income of $10.9 million, or $0.48 per diluted share. First half 2005 net income was $19.4 million, or $0.84 per diluted share, an increase of 21 percent compared to the first half of 2004 net income of $16.0 million, or $.70 per diluted share.

Operating activities generated approximately $8.9 million of cash during the first half of 2005 compared to cash generated during the first half of 2004 of $12.4 million. The cash generated during the first half of 2005 and 2004 is primarily from earnings and increased accounts payable and other accrued expenses. Uses of operating cash flow during the first half of 2005 and 2004 are primarily related to increases in inventory, about $16.9 million and $12.9 million, respectively. Inventory increased primarily in finished goods as the Company carries higher inventory during the summer months to meet demand and due to the acquisition of the pump company. The Company is further stocking more water systems products in 2005 related to its Channel Strategy change. Cash was also used as accounts receivable increased during the first half of 2005 and 2004, $9.2 million and $8.2 million, respectively, consistent with sales levels for the periods.

The primary sources and uses of cash for investing activities for the first half of 2005 were for the buying and selling of short term investment securities (See notes for further discussion of these securities). The Company also purchased about $5.6 million of primarily manufacturing equipment during the first half of 2005 and purchased certain pump product technology for $1.0 million. The Company intends to expand its pump product offerings through the on-going acquisition of pump technologies and product lines. The Company is further actively searching for potential acquisitions of Fueling system related products and businesses on an on-going basis. The primary uses of cash for the first half of 2004 were additions to property, plant and equipment of $10.1 million. Additions during the first half of 2004 were primarily related to the building additions and equipment included in the Realignment Program.

Net cash consumed in financing activities during the first half of 2005 and 2004 was $11.8 million and $3.5 million, respectively. The principal uses of cash during 2005 and 2004 were for purchases of Company common stock under the Company’s repurchase program and the payment of dividends. The principal source of cash from financing activities during 2005 and 2004 was from the issuance of common stock related to the exercise of stock options.

Cash and equivalents at the end of the first half of 2005 and 2004 were $25.5 million and $28.8 million, respectively. The Company also had $15.5 million of short term investment securities as of the end of the first half of 2005.

In September 2004, the Company entered into an unsecured, 60 month $80.0 million revolving credit agreement (the “Agreement”). The Agreement includes a facility fee of one-tenth of one percent on the committed amount. As of July 2, 2005, the Company had no outstanding borrowings under the Agreement.

As of July 2, 2005, the Company’s current commitments approximate $5 million.

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, accounts receivable, inventories, recoverability of long-lived assets, intangible assets, income taxes, warranty obligations, pensions and other employee benefit plan obligations, and contingencies. Management bases its estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Certain liabilities have also been adjusted based on the announced change in distribution channels. Actual results may differ from these estimates under different assumptions or conditions.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995

Any forward-looking statements contained herein involve risks and uncertainties, including, but not limited to, general economic and currency conditions, various conditions specific to the Company's business and industry, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies, future trends, and other risks which are described in detail in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2005. These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements.

The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. Foreign currency exchange rate risk is mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system and limited use of foreign currency denominated debt. Interest rate exposure is limited to variable rate interest borrowings under the Company's revolving credit agreement and an interest rate swap.

During the second fiscal quarter there have been no changes in the Company's internal control over financial reporting that have materially affected or that are reasonably likely to materially affect the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

(c) Issuer Repurchases of Equity Securities

On February 16, 2001, the Company’s Board of Directors unanimously approved a resolution to repurchase 2,000,000 shares.  The plan was announced in the Company’s 10-Q for the third quarter ending September 29, 2001.  There is no expiration date for the plan.

On February 11, 2005, the Company’s Board of Directors unanimously approved a resolution to increase the number of shares remaining for repurchase from 827,412 to 1,000,000 shares.

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.

EXHIBIT INDEX TO THE QUARTERLY REPORT ON FORM 10-Q

FOR THE SECOND QUARTER ENDED JULY 2, 2005