-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKJ5RTZVQOo0nQ96pU1HUe2/XywA9qiqADYejfgDXVCV6eqfH6B/sRAJSFJeLGP3 qM+7lKhjR0mI+1vvhjTDzA== 0000038725-05-000124.txt : 20051103 0000038725-05-000124.hdr.sgml : 20051103 20051103165053 ACCESSION NUMBER: 0000038725-05-000124 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051001 FILED AS OF DATE: 20051103 DATE AS OF CHANGE: 20051103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN ELECTRIC CO INC CENTRAL INDEX KEY: 0000038725 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 350827455 STATE OF INCORPORATION: IN FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00362 FILM NUMBER: 051177551 BUSINESS ADDRESS: STREET 1: 400 E SPRING ST CITY: BLUFFTON STATE: IN ZIP: 46714 BUSINESS PHONE: 2608242900 MAIL ADDRESS: STREET 1: 400 E SPRING STREET CITY: BLUFFTON STATE: IN ZIP: 46714 10-Q 1 r10q3qtr.txt THIRD QUARTER 2005 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q --------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 1, 2005 --------------- 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) YES X NO ----- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock October 1, 2005 --------------------- ---------------- $.10 par value 22,380,624 shares Page 1 of 34 2 FRANKLIN ELECTRIC CO., INC. Index Page PART I. FINANCIAL INFORMATION Number - --------------------------------- ------ Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of October 1, 2005 and January 1, 2005 .......................... 3 Condensed Consolidated Statements of Income for the Third Quarter and Nine Months Ended October 1, 2005 and October 2, 2004 .............................. 4 Condensed Consolidated Statements Of Cash Flows for the Nine Months Ended October 1, 2005 and October 2, 2004 .............................. 5 Notes to Condensed Consolidated Financial Statements ......................... 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................ 12-15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................ 15 Item 4. Controls and Procedures ...................... 15 PART II. OTHER INFORMATION - ----------------------------- Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .............................. 16 Item 5. Other Information ............................ 16 Item 6. Exhibits ..................................... 16 Signatures ............................................... 17 - ---------- Exhibits ................................................. 18-34 - -------- 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- FRANKLIN ELECTRIC CO., INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands) October 1, January 1, 2005 2005 ---- ---- ASSETS Current assets: Cash and equivalents.................... $ 35,396 $ 50,604 Investments............................. 22,016 - Receivables, less allowances of $2,195 and $2,281, respectively....... 41,647 39,312 Inventories............................. 72,205 62,442 Other current assets (including deferred income taxes of $10,579 and $10,391, respectively)............ 15,261 13,784 -------- -------- Total current assets.................. 186,525 166,142 Property, plant and equipment, net..................................... 92,032 95,924 Deferred and other assets (including deferred income taxes of $105 and $0, respectively)................... 20,322 14,010 Goodwill.................................. 57,846 57,397 -------- -------- Total assets.............................. $356,725 $333,473 ======== ======== LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Current maturities of long-term debt and short-term borrowings........ $ 1,296 $ 1,304 Accounts payable........................ 18,560 16,594 Accrued expenses........................ 32,595 33,354 Income taxes............................ 884 3,193 -------- -------- Total current liabilities............. 53,335 54,445 Long-term debt............................ 13,258 13,752 Deferred income taxes..................... 7,191 6,304 Employee benefit plan obligations......... 18,886 18,801 Other long-term liabilities............... 5,789 5,838 Shareowners' equity: Common shares (45,000 shares authorized, $.10 par value) outstanding (22,381 and 22,041, respectively)............. 2,238 2,204 Additional capital...................... 70,835 52,743 Retained earnings....................... 180,672 166,557 Loan to ESOP Trust...................... (432) (665) Accumulated other comprehensive loss.................................. 4,953 13,494 -------- -------- Total shareowners' equity............. 258,266 234,333 -------- -------- Total liabilities and shareowners' equity. $356,725 $333,473 ======== ======== See Notes to Condensed Consolidated Financial Statements. 4 FRANKLIN ELECTRIC CO., INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts) Third Qtr. Ended Nine Months Ended ---------------- ----------------- Oct 1, Oct 2, Oct 1, Oct 2, 2005 2004 2005 2004 ---- ---- ---- ---- Net sales............................. $119,043 $110,336 $325,014 $296,687 Cost of sales......................... 78,720 74,280 217,792 202,499 -------- -------- -------- -------- Gross profit.......................... 40,323 36,056 107,222 94,188 Selling and administrative expenses... 19,072 16,875 55,320 47,856 Restructuring expense................. 1,039 1,724 1,749 3,676 -------- -------- -------- -------- Operating income...................... 20,212 17,457 50,153 42,656 Interest expense...................... (198) (163) (553) (362) Other income, net.................... 204 70 545 98 Foreign exchange gain/(loss).......... 239 (109) 207 (333) -------- -------- -------- -------- Income before income taxes............ 20,457 17,255 50,352 42,059 Income taxes.......................... 7,211 6,125 17,750 14,930 -------- -------- -------- -------- Net income............................ $ 13,246 $ 11,130 $ 32,602 $ 27,129 ======== ======== ======== ======== Per share data: Basic Earnings per Share............ $ 0.59 $ 0.51 $ 1.47 $ 1.24 ======== ======== ======== ======== Diluted Earnings per Share.......... $ 0.57 $ 0.48 $ 1.41 $ 1.18 ======== ======== ======== ======== Dividends per common share.......... $ 0.10 $ 0.08 $ 0.28 $ 0.23 ======== ======== ======== ======== See Notes to Condensed Consolidated Financial Statements. 5 FRANKLIN ELECTRIC CO., INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended ----------------- Oct 1, Oct 2, 2005 2004 ---- ---- Cash flows from operating activities: Net income................................ $ 32,602 $ 27,129 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization........... 11,581 11,654 Deferred income taxes................... 616 - Loss on disposals of plant and equipment......................... 69 96 Changes in assets and liabilities: Receivables........................... (4,057) 3,313 Inventories........................... (10,387) (5,634) Accounts payable and other accrued expenses............................ 5,739 18,647 Employee benefit plan obligations..... 1,215 (3,494) Other, net............................ 671 (32) -------- -------- Net cash flows from operating activities.............. 38,049 51,679 -------- -------- Cash flows from investing activities: Additions to plant and equipment.......... (10,374) (15,724) Proceeds from sale of plant and equipment............................... 1,054 8 Additions to deferred and other assets.... (5,083) (9) Cash paid for securities.................. (150,489) - Proceeds from sale of securities.......... 128,473 - Cash paid for acquisitions, net of cash acquired................................ (8,509) - -------- -------- Net cash flows from investing activities.................. (44,928) (15,725) -------- -------- Cash flows from financing activities: Repayment of long-term debt............... (213) (478) Proceeds from issuance of common stock.... 11,739 3,739 Purchases of common stock................. (12,318) (3,091) Reduction of loan to ESOP Trust........... 233 232 Dividends paid............................ (6,203) (5,054) -------- -------- Net cash flows from financing activities.................. (6,762) (4,652) -------- -------- Effect of exchange rate changes on cash..... (1,567) 279 -------- -------- Net change in cash and equivalents.......... (15,208) 31,581 Cash and equivalents at beginning of period. 50,604 29,962 -------- -------- Cash and equivalents at end of period....... $ 35,396 $ 61,543 ======== ======== See Notes to Condensed Consolidated Financial Statements. 6 FRANKLIN ELECTRIC CO., INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Condensed Consolidated Financial Statements - ---------------------------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all accounting entries and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and the results of operation for the interim period have been made. Prior year amounts are reclassified when necessary to conform to current year presentation. Operating results for the third quarter ended October 1, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, including a description of Franklin Electric's critical accounting policies, refer to the consolidated financial statements and footnotes thereto included in Franklin Electric Co., Inc.'s annual report on Form 10-K for the year ended January 1, 2005. Note 2: Current Investments - ---------------------------- As of October 1, 2005 the Company held $22.0 million of current investments consisting primarily of auction rate municipal bonds classified as available- for-sale securities and titled "Investments" in the current balance sheet. Investments in these securities are recorded at cost, which approximates fair market value due to the variable interest rates, which typically reset every 7 to 35 days. While the underlying municipal bonds have stated contractual maturities which may be long-term, the Company has the ability to quickly liquidate these securities. As a result, there were no cumulative unrealized holding gains (losses) or realized gains (losses) from these current investments. All income generated from these current investments was recorded as other income, net. Cash paid for these securities and proceeds from the sale of these securities have been included under the "Cash flows from investing activities" section of the cash flow statement. Note 3: Inventories - -------------------- Inventories consist of the following: (In millions) Oct 1, Jan 1, 2005 2005 ---- ---- Raw Materials........................ $ 23.6 $ 25.3 Work in Process...................... 10.0 7.9 Finished Goods....................... 56.1 44.9 LIFO Reserve......................... (17.5) (15.7) ------ ------ Total Inventory...................... $ 72.2 $ 62.4 ====== ====== 7 Note 4: Property, Plant and Equipment - -------------------------------------- Property, plant and equipment, at cost, consists of the following: (In millions) Oct 1, Jan 1, 2005 2005 ---- ---- Land and Building.................... $ 49.6 $ 52.8 Machinery and Equipment.............. 162.7 164.0 ------ ------ 212.3 216.8 Allowance for Depreciation........... (120.6) (120.9) Other - Held for Sale................ 0.3 - ------ ------ Total............................ $ 92.0 $ 95.9 ====== ====== Note 5: Goodwill and Other Intangible Assets - --------------------------------------------- In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", the Company tests goodwill and intangible assets for impairment on an annual basis, or more frequently if circumstances warrant. During the fourth quarter of 2004, the Company performed its annual impairment testing and it was determined that no impairment exists. The carrying amount of the Company's intangible assets, which is included in deferred and other assets, and goodwill includes: (In millions) Oct 1, Jan 1, 2005 2005 ---- ---- Amortized intangibles Patents........................... $ 5.9 $ 3.5 Supply agreements................. 10.0 10.4 Other............................. 4.3 1.7 Accumulated amortization.......... (9.9) (9.3) ------ ------ Total........................... $ 10.3 $ 6.3 ====== ====== Goodwill............................ $ 57.8 $ 57.4 ====== ====== In the third quarter, the Company recorded $1.7 million as an intangible asset when it purchased certain unpatented technology to expand the Company's centrifugal pump line. Also in the third quarter, the Company acquired certain assets and the stock of Phil-Tite Enterprises, whereby $2.4 million was recorded as intangibles. Other changes in the carrying amount of intangibles reflect foreign currency fluctuations. Goodwill increased by $2.4 million with the acquisition of Phil-Tite Enterprises. The remaining difference in goodwill is attributable to foreign currency fluctuations. Amortization expense related to intangible assets for the nine months ended October 1, 2005 and October 2, 2004, was $1.1 and $1.7 million respectively. 8 Amortization expense for each of the five succeeding years is projected as $1.3 million, $1.2 million, $1.1 million, $1.1 million and $1.0 million for fiscal 2006, 2007, 2008, 2009, 2010, respectively. The 2005 acquisitions were accounted for using the purchase method of accounting. Accordingly, a portion of the aggregate purchase price was allocated to the net assets acquired based on preliminary estimates of fair value. When applicable, the excess of purchase price over the fair value of the net assets acquired has been recorded as goodwill. The acquisitions did not materially affect the Company's financial statements. The pro forma results of the Company's operations as if these acquisitions had occurred at the beginning of the year would not differ materially from the reported results. Note 6: Employee Benefits - -------------------------- The following table sets forth aggregated net periodic benefit cost: (In millions) Pension Benefits Pension Benefits Third Qtr. Ended Nine Months Ended ---------------- ----------------- Oct 1, Oct 2, Oct 1, Oct 2, 2005 2004 2005 2004 ---- ---- ---- ---- Service Cost................. $ 1.0 $ 0.9 $ 3.0 $ 2.8 Interest Cost................ 2.0 1.9 5.9 5.7 Expected return on assets.... (2.5) (2.8) (7.8) (8.1) Amortization of unrecognized: (Gain)/Loss................ - - 0.1 - Prior service costs........ 0.4 0.4 1.2 1.1 ------ ------ ------ ------ Net periodic benefit cost.... 0.9 0.4 2.4 1.5 Settlement cost.............. 0.1 0.1 0.2 0.2 ------ ------ ------ ------ Total benefit cost........... $ 1.0 $ 0.5 $ 2.6 $ 1.7 ====== ====== ====== ====== Other Benefits Other Benefits Third Qtr. Ended Nine Months Ended ---------------- ----------------- Oct 1, Oct 2, Oct 1, Oct 2, 2005 2004 2005 2004 ---- ---- ---- ---- Service Cost................. $ 0.1 $ 0.1 $ 0.3 $ 0.3 Interest Cost................ 0.2 0.3 0.6 0.7 Amortization of unrecognized: Obligation/(asset)......... 0.1 0.1 0.4 0.3 Prior service costs........ 0.1 - 0.2 0.1 (Gain)/Loss................ - - 0.1 0.1 ------ ------ ------ ------ Net periodic benefit cost.... 0.5 0.5 1.6 1.5 Total benefit cost........... $ 0.5 $ 0.5 $ 1.6 $ 1.5 ====== ====== ====== ====== 9 As of October 1, 2005, the Company has made contributions to the plans of $2.7 million and expects to make additional contributions of $0.5 million in 2005. Note 7: Tax Rates - ------------------ The effective tax rate on income before income taxes in 2005 and 2004 varies from the United States statutory rate of 35 percent primarily due to the foreign income exclusion and R & D credits and to the effects of state and foreign income taxes net of federal tax benefits. Note 8: Shareowners' Equity - ---------------------------- The Company had 22,380,624 shares of common stock (45,000,000 shares authorized, $.10 par value) outstanding as of October 1, 2005. During the nine months ended October 1, 2005 and October 2, 2004, the Company repurchased 330,600 and 102,800 shares for $12.3 million and $3.1 million, respectively. All repurchased shares were retired. Note 9: Earnings Per Share - --------------------------- Following is the computation of basic and diluted earnings per share: Third Qtr. Ended Nine Months Ended ---------------- ----------------- (In millions, except Oct 1, Oct 2, Oct 1, Oct 2, per share amounts) 2005 2004 2005 2004 ---- ---- ---- ---- Numerator: Net Income..................... $ 13.2 $ 11.1 $ 32.6 $ 27.1 ====== ====== ====== ====== Denominator: Basic ----- Weighted average common shares....................... 22.3 22.0 22.2 22.0 Diluted ------- Effect of dilutive securities: Employee and director incentive stock options and awards................. 0.9 1.1 1.0 1.0 ------ ------ ------ ------ Adjusted weighted average common shares................ 23.2 23.1 23.2 23.0 ====== ====== ====== ====== Basic earnings per share......... $ 0.59 $ 0.51 $ 1.47 $ 1.24 ====== ====== ====== ====== Diluted earnings per share....... $ 0.57 $ 0.48 $ 1.41 $ 1.18 ====== ====== ====== ====== 10 Note 10: Other Comprehensive Income - ------------------------------------ Comprehensive income is as follows: Third Qtr. Ended Nine Months Ended (In millions) ---------------- ----------------- Oct 1, Oct 2, Oct 1, Oct 2, 2005 2004 2005 2004 ---- ---- ---- ---- Net income......................... $ 13.2 $ 11.1 $ 32.6 $ 27.1 Other comprehensive income (loss): Foreign currency translation adjustments..................... 1.1 0.4 (8.5) (0.6) ------ ------ ------ ------ Comprehensive income............... $ 14.3 $ 11.5 $ 24.1 $ 26.5 ====== ====== ====== ====== Accumulated other comprehensive income consists of the following: (In millions) Oct 1, Jan 1, 2005 2005 ---- ---- Cumulative foreign currency translation adjustment................... $ 7.1 $ 15.7 Minimum pension liability adjustment, net of tax................................ (2.2) (2.2) ------ ------ Accumulated other comprehensive income...... $ 4.9 $ 13.5 ====== ====== Note 11: Warranty - ------------------ The Company provides warranties on most of its products. The warranty terms vary but are generally two years from date of manufacture or one year from date of installation. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The Company actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. The Company believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Below is a table that shows activity in the warranty accrual accounts: 11 Third Qtr. Ended Nine Months Ended (In millions) ---------------- ----------------- Oct 1, Oct 2, Oct 1, Oct 2, 2005 2004 2005 2004 ---- ---- ---- ---- Beginning Balance.................. $ 6.4 $ 5.8 $ 7.1 $ 5.4 Accruals related to product warranties....................... 1.4 1.2 3.4 3.6 Reductions for payments made....... (1.3) (1.0) (4.0) (3.0) ------ ------ ------ ------ Ending Balance..................... $ 6.5 $ 6.0 $ 6.5 $ 6.0 ====== ====== ====== ====== Note 12: Stock-Based Compensation - ---------------------------------- The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the stock at date of grant. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," and amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123," the Company follows the disclosure requirements only of SFAS No. 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123: Third Qtr. Ended Nine Months Ended ---------------- ----------------- (In millions, except Oct 1, Oct 2, Oct 1, Oct 2, per share amounts) 2005 2004 2005 2004 ---- ---- ---- ---- Net income........................ $ 13.2 $ 11.1 $ 32.6 $ 27.1 Deduct: Stock-based employee compensation cost, net of income tax...................... 0.3 0.4 1.2 1.1 ------ ------ ------ ------ Pro forma net income.............. $ 12.9 $ 10.7 $ 31.4 $ 26.0 ====== ====== ====== ====== Earnings per share: Basic - as reported.............. $ .59 $ .51 $ 1.47 $ 1.24 ====== ====== ====== ====== Basic - pro forma................ $ .58 $ .49 $ 1.41 $ 1.19 ====== ====== ====== ====== Diluted - as reported............ $ .57 $ .48 $ 1.41 $ 1.18 ====== ====== ====== ====== Diluted - pro forma.............. $ .56 $ .46 $ 1.36 $ 1.13 ====== ====== ====== ====== On December 16, 2004, the FASB issued SFAS No. 123(R) "Share-Based Payment", which requires compensation costs related to share-based payment transactions be recognized in the financial statements. With minor exceptions, the amount of compensation costs will be measured based on the grant-date fair value of the equity or liability instruments issued, over the period that the employee provides service in exchange for the award. In addition, liability awards will be re-measured each reporting period. This pronouncement is effective as of the beginning of the first fiscal year beginning after June 15, 2005. The impact on the Company's results of operations or financial position as of the adoption of this pronouncement is not expected to be materially different from the pro-forma results. Note 13: Restructuring - ----------------------- The Company incurred $1.0 million of expenses during the third quarter of 2005 (included as "Restructuring expense" on the income statement) related to its Global Manufacturing Realignment Program. The costs in the third quarter were primarily related to a write-down to fair value adjustment of $0.6 million, and close-out expenses for the Muskegon Michigan property that was idle after the consolidation of certain fueling facilities. Equipment relocation, travel, and redundant labor expense related to the consolidation of the Company's Motta di Livenza, Italy factory into other European factories accounted for the balance of third quarter restructuring expense. The Company estimates that its restructuring expense from inception through the end of 2005 will be approximately $8.0 million or $2.0 million less than its original estimate of $10.0 million, as expense related to personnel and equipment relocation is projected to be less than originally estimated. The components and use of the restructuring reserve is summarized below: (In millions) Severance Benefits Other -------- ----- Balance January 1, 2005............ $ 0.3 $ 0.0 Restructuring Expense.............. 0.1 1.6 Costs incurred..................... (0.4) (1.6) ------ ------ Balance October 1, 2005............ $ 0.0 $ 0.0 ====== ====== 12 Item 2. Management's Discussion And Analysis Of Financial Condition And - ------------------------------------------------------------------------ Results Of Operations - --------------------- Overview - -------- Sales and earnings for the third quarter of 2005 were up from the same quarter of 2004. The increase in sales was primarily attributable to the impact of customer discount program changes, price increases and the pump company acquisition in the fourth quarter of 2004. Earnings improved in the third quarter of 2005 primarily due to the increased sales. Increased earnings were partially offset by increased commodity prices and expenses associated with the Company's two major strategic initiatives: the Water Systems Distribution Channel Strategy (the "Channel Strategy"), designed to sell certain water systems products, including pump products, direct to distributors and the Global Manufacturing Realignment Program (the "Realignment Program"), designed to consolidate manufacturing facilities and reduce costs of manufacturing operations world-wide. Certain expenses incurred as a result of the Realignment Program are identified quarterly during the implementation period and reflected as "Restructuring expense" in the Company's income statement. Included in the results for the third quarter of 2005 and 2004, restructuring expense was $1.0 and $1.7 million pre-tax, respectively. During the third quarter of 2005 the Company purchased an equity interest in Pioneer Pump, Inc., a manufacturer of large centrifugal pumps for the water systems industry, and acquired all of the outstanding stock of Phil-Tite Enterprises, a fueling systems product manufacturer of fiberglass containment sumps and underground storage tank hardware. These acquisitions did not significantly impact third quarter 2005 sales or earnings. Results of Operations - --------------------- Net sales for the third quarter of 2005 were $119.0 million, an increase of $8.7 million or 8 percent from the 2004 third quarter net sales of $110.3 million. The impact of previously announced price increases and changes in the customer discount programs, which were necessary due to significant increased costs for certain commodities used in the manufacture of the electric motors, primarily steel and copper, resulted in a sales increase of approximately 9 percent for the third quarter of 2005. Unit sales of small submersible motors declined about 16 percent from the exceptionally strong third quarter of 2004. Third quarter 2004 sales were up about 17 percent from the third quarter of 2003 as original equipment manufacturer (OEM) customers purchased ahead of an announced price increase. As a result of the Company's Channel Strategy, sales to two major pump OEMs decreased from about 40 percent of worldwide sales for full year 2004 to about 25 percent of worldwide sales for the first nine months of 2005. Sales of pumps related to the 2004 pump acquisition resulted in an increase of about 6 percent for the third quarter of 2005. Fueling systems product sales were comparable to the third quarter of 2004. For the first nine months of 2005, the Company's sales were $325.0 million, an increase of $28.3 million or about 10 percent compared to the same period of 2004 sales of $296.7 million. The Company's sales increase for the first nine months of 2005 was partially attributable to foreign currency changes which accounted for $2.8 million of the increase due primarily to the stronger euro, Mexican Peso and South African Rand. Excluding the impact of the change in exchange rates, the Company's first nine months of sales were up about 9 percent, primarily due to pricing changes and acquisition-related sales. while reduced by lower fueling systems product sales in the first quarter. Sales of 13 pumps related to the 2004 pump acquisition resulted in an increase of about 5 percent for the first nine months of 2005. Cost of sales as a percent of net sales was 66.1 percent and 67.3 percent for the third quarter of 2005 and 2004 and was 67.0 percent and 68.3 percent for the first nine months of 2005 and 2004, respectively. Cost of sales as a percent of net sales continues to decrease primarily as a result of increased sales. The decrease in cost of sales as a percent of net sales during the third quarter and first nine months of 2005 was partially offset by increased costs for certain commodities used in the manufacture of the electric motors, primarily steel and copper. Selling and administrative ("SG&A") expenses at $19.1 million for the third quarter of 2005 were up $2.2 million or 13 percent from the third quarter of 2004 of $16.9 million. The increase of SG&A expenses in the third quarter of 2005 from the same period for 2004 was due primarily to additional costs related to the acquired pump manufacturer of about $1.1 million, and additional costs associated with the Channel Strategy of about $0.8 million. The Company also incurred increased commission costs related to the increased sales for the third quarter of 2005. SG&A expense for the first nine months of 2005 was $55.3 million compared to $47.9 million for the same period of 2004. The increase of SG&A expense of $7.5 million in the first nine months of 2005 from the same period for 2004 was also primarily due to additional costs related to the acquired pump manufacturer of about $2.7 million, and additional costs associated with the Channel Strategy of about $2.1 million. The Company's Realignment Program consists of the ramp-up of production at a four-inch motor manufacturing plant in Mexico, a new six-inch motor manufacturing facility in the Czech Republic and the consolidation of certain manufacturing operations. Restructuring expense includes: severance, relocation, equipment transfer costs, and property valuation. These expenses continue to be identified quarterly and are reflected as "Restructuring expense" in the Company's income statement. The Company has incurred approximately $7.2 million of pre-tax expense for the Realignment Program to date, including $1.0 million for the third quarter of 2005. The Company estimates that its restructuring expense from inception through its estimated completion at the end of 2005 will be approximately $8.0 million or $2.0 million less than its original estimate of $10.0 million, as expense related to personnel and equipment relocation are projected to be less than original estimates. This program will result in the transfer of a significant amount of production to lower cost regions of the world as well as a consolidation of certain manufacturing operations. Interest expense for the third quarter of 2005 was $0.2 million and for the first nine months of 2005 was $0.6 million. Both periods for 2005 were higher than the respective prior year periods due to higher interest rates. Foreign currency-based transactions resulted in a gain of $0.2 million for the third quarter 2005 compared to a loss for the third quarter of 2004 of $0.1 million. Foreign currency-based transactions for the first nine months of 2005 resulted in a gain of $0.2 million compared to a loss of $0.3 million for the same period of 2004. Foreign currency-based transactional gains and losses were caused primarily by fluctuations of the euro, Mexican Peso and the South African Rand relative to the U.S. dollar during the respective periods noted above. 14 The provision for income taxes for the third quarter of 2005 was $7.2 million and for the first nine months of 2005 was $17.7 million. The effective tax rate for 2005 is projected at 35.3 percent, about the same as the 2004 full year rate of 35.5 percent. The effective tax rate differs from the United States statutory rate of 35 percent, due to the foreign income exclusion and R&D credits and to the effects of state and foreign income taxes, net of federal tax benefits. Net income for the third quarter of 2005 was $13.2 million, or $0.57 per diluted share, a 19 percent increase compared to the third quarter of 2004 net income of $11.1 million, or $0.48 per diluted share. The first nine months of 2005 net income was $32.6 million, or $1.41 per diluted share, an increase of 20 percent compared to the first nine months of 2004 net income of $27.1 million, or $1.18 per diluted share. Capital Resources and Liquidity - ------------------------------- Operating activities generated approximately $38.0 million of cash during the first nine months of 2005 compared to cash generated during the first nine months of 2004 at $51.7 million. The cash generated during the first nine months of 2005 and 2004 was primarily from earnings of $32.6 and $27.1 million during the respective periods. Cash generated from accounts payable and other accrued expenses, declined to $5.7 million in 2005 from $18.6 million in 2004. The decrease from 2004 to 2005 was primarily due to timing of payments for income taxes and reduced accounts payable. Cash used in operations during the first nine months of 2005 and 2004 was primarily related to increases in inventory, about $10.4 million and $5.6 million, respectively. Finished goods inventory increased during 2005 primarily due to the acquisition of the pump company. The Company is further stocking more water systems products in 2005 related to its Channel Strategy change. The primary sources and uses of cash for investing activities for the first nine months of 2005 were for the buying and selling of short term investment securities (See notes for further discussion of these securities). The Company also purchased about $10.4 million of primarily manufacturing equipment during the first nine months of 2005 and paid cash for acquisitions, net of cash acquired, of $8.5 million. The Company intends to expand its pump product offerings through the on-going acquisition of pump technologies and product lines, as well as continued growth in fueling systems products. The primary uses of cash for the first nine months of 2004 were additions to property, plant and equipment of $15.7 million. Additions in 2004 were primarily related to building additions and equipment related to the Realignment Program. Net cash consumed in financing activities during the first nine months of 2005 and 2004 was $6.8 million and $4.7 million, respectively. The principal uses of cash during 2005 and 2004 were for purchases of Company common stock under the Company's repurchase program and the payment of dividends. The principal source of cash from financing activities during 2005 and 2004 was from the issuance of common stock related to the exercise of stock options. Cash and equivalents at the end of the third quarter of 2005 and 2004 were $35.4 million and $61.5 million, respectively. The Company also had $22.0 million of short-term investment securities as of the end of the third quarter of 2005. In September 2004, the Company entered into an unsecured, 60 month $80.0 million revolving credit agreement (the "Agreement"). The Agreement includes a 15 facility fee of one-tenth of one percent on the committed amount. As of October 1, 2005, the Company had no outstanding borrowings under the Agreement. As of October 1, 2005, the Company's current commitments approximate $6 million, primarily for the purchase of machinery and equipment. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. Foreign currency exchange rate risk is mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system and limited use of foreign currency denominated debt. Interest rate exposure is limited to variable rate interest borrowings under the Company's revolving credit agreement and an interest rate swap. Item 4. Controls and Procedures - -------------------------------- As of the end of the period covered by this report (the "Evaluation Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective. During the third fiscal quarter there have been no changes in the Company's internal control over financial reporting that have materially affected or that are reasonably likely to materially affect the Company's internal control over financial reporting. 16 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - -------------------------------------------------------------------- (c) Issuer Repurchases of Equity Securities On February 16, 2001, the Company's Board of Directors unanimously approved a resolution to repurchase 2,000,000 shares. The plan was announced in the Company's 10-Q for the third quarter ending September 29, 2001. There is no expiration date for the repurchase program. On February 11, 2005, the Company's Board of Directors unanimously approved a resolution to increase the number of shares remaining for repurchase from 827,412 to 1,000,000 shares. The Company did not repurchase any shares of its stock in the third quarter of 2005. The maximum number of shares that may still be purchased under the Company's repurchase programs is 669,400. Item 5. Other Information - -------------------------- Effective August 16, 2005 the Company amended Article IV of its Amended and Restated Articles of Incorporation to change its registered agent from Gregg C. Sengstack to Thomas J. Strupp. The Amended and Restated Articles of Incorporation are filed as Exhibit 3.1 hereto and incorporated herein by reference. Item 6. Exhibits - ----------------- See the Exhibit Index located on page 18. 17 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN ELECTRIC CO., INC. --------------------------- Registrant Date November 3, 2005 By /s/ R. Scott Trumbull ------------------- ------------------------------ R. Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive Officer) Date November 3, 2005 By /s/ Thomas J. Strupp ------------------- ------------------------------ Thomas J. Strupp, Vice President and Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 18 FRANKLIN ELECTRIC CO., INC. EXHIBIT INDEX TO THE QUARTERLY REPORT ON FORM 10-Q FOR THE THIRD QUARTER ENDED OCTOBER 1, 2005 Number Description - ------ ----------- 3.1 Amended Articles of Incorporation of Franklin Electric Co., Inc. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 5 EX-3.1 2 rex31.txt ARTICLES OF INCORPORATION 19 EXHIBIT 3.1 Sept, 2005 FRANKLIN ELECTRIC CO., INC. AMENDED AND RESTATED ARTICLES OF INCORPORATION ARTICLE I Name ---- The name of the Corporation is Franklin Electric Co., Inc. ARTICLE II Purposes and Powers ------------------- 2.01. PURPOSES. The purposes for which the Corporation is formed are (a) to engage in the general business of manufacturing production and selling products, and (b) without limitation, to engage in any and all lawful business or activity for which corporations may be incorporated under the Indiana Business Corporation Law, as may be amended from time to time (the "IBCL"). 2.02. POWERS. The Corporation shall have (a) the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, and (b) without limitation, all powers, rights and privileges granted to corporations by the IBCL. ARTICLE III Term of Existence ----------------- The period during which the Corporation shall continue is perpetual. ARTICLE IV Registered Office and Registered Agent -------------------------------------- The current street address of the Corporation's registered office is 400 East Spring Street, Bluffton, Indiana 46714, and the name of the Corporation's registered agent at that office is Thomas J. Strupp. ARTICLE V Amount of Capital Stock ----------------------- The total number of shares into which the authorized capital stock of the Corporation is divided is 50,100,000 shares, consisting of 5,100,000 shares without par value and 45,000,000 shares with par value of $.10 per share. 20 ARTICLE VI Terms of Capital Stock ---------------------- The shares of authorized capital stock are divided into classes as follows: 1. 100,000 shares of Preference Stock, without par value (hereinafter sometimes referred to as "Preference Stock"); 2. 5,000,000 shares of Preferred Stock, without par value (hereinafter sometimes referred to as "Preferred Stock"); and 3. 45,000,000 shares of Common Stock, par value $.10 per share (hereinafter sometimes referred to as "Common Stock"). The preferences, limitations and relative rights of each class are as follows: A. PREFERENCE STOCK. Shares of Preference Stock may be issued from time to time in one or more series, in such amounts and for such consideration as the Board of Directors may determine and with such preferences, limitations and relative rights as shall be determined and stated by the Board of Directors. Such preferences, limitations and relative rights shall be determined and stated for each such series of Preference Stock by resolution of the Board of Directors prior to the issuance of each of such series, which resolution shall authorize the issuance of such series and the authority for which is hereby granted to the Board of Directors of the Corporation. Without limiting the generality of the authority granted to the Board of Directors herein, the Board of Directors shall have the power, right and authority to determine the following preferences, limitations and relative rights: (1) Designation. The designation of each series, which designation shall be by distinguishing letter, number, title or combination thereof. (2) Number. The number of shares of any series to be issued. (3) Dividend Source, Rate and Dates. The source, rate and dates of any dividends payable with respect to shares of any series; provided, however, that no dividends shall be payable upon the shares of Preference Stock to the extent that (i) the Corporation would not be able to pay its debts as they become due in the usual course of business; or (ii) the Corporation's total assets would be less than the sum of its total liabilities plus (unless otherwise provided in these Articles of Incorporation) the amount that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the shareholders whose preferential rights are superior to those receiving the distribution. (4) Dividend Accumulations. Whether any dividends which may be payable with respect to shares of any series shall be cumulative; and, if they shall be cumulative, then the dates from which such dividends shall start to cumulate. (5) Dividend Preferences. The preference or preferences, if any, to be accorded dividends payable with respect to shares of any series. 21 (6) Redemption. The redemption rights and prices, if any, with respect to shares of any series. (7) Sinking Fund The terms and amount of any sinking fund provided for the redemption of shares of any series. (8) Rights of Purchase. The rights, if any, of the Corporation to purchase for retirement, other than by way of redemption, shares of any series, and the terms and conditions of any such purchase rights. (9) Conversion. Whether or not the shares of any series shall be convertible into Common Stock or into shares of stock of any other series or number of series or into any other security; and, if so, the conversion price or prices, any adjustments thereof and/or any other terms and conditions upon which such conversion may be effected. (10) Liquidation. The preference or preferences, if any, with respect to shares of any series entitled to receive the net assets of the Corporation upon liquidation, dissolution or winding up of the Corporation. (11) Voting. The voting rights, if any, to which the holders of the shares of Preference Stock may be entitled. B. SERIES I JUNIOR PARTICIPATING PREFERENCE STOCK. This Section B of this Article VI hereby creates a series of Preference Stock and hereby states the designation and number of shares, and fixes the relative powers, preferences and rights of such series. (1) Designation and Amount. The shares of such series shall be designated as "Series I Junior Participating Preference Stock" (the "Series I Preference Stock") and the number of shares constituting the Series I Preference Stock shall be 100,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of Series I Preference Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series I Preference Stock. (2) Dividend Rights. Subject to the rights of the holders of any shares of any series of Preference Stock (or any similar shares) ranking prior and superior to the Series I Preference Stock with respect to dividends, the holders of Series I Preference Stock, in preference to the holders of Common Stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the fifteenth day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series I Preference Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $16.00 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in Common Stock or a subdivision of the outstanding Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the 22 first issuance of any Series I Preference Stock or fraction of a Series I Preference Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of Series I Preference Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The Corporation shall declare a dividend or distribution on the Series I Preference Stock as provided in this paragraph 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $16.00 per share on the Series I Preference Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. Dividends shall begin to accrue and be cumulative on outstanding Series I Preference Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series I Preference Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series I Preference Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series I Preference Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. (3) Redemption. The Series I Preference Stock shall not be redeemable. (4) Conversion. The Series I Preference Stock shall not be convertible into Common Stock or shares of any other series of any other class of preferred stock of the Corporation ("Preferred Stock") or Preference Stock unless the terms of any such series provide otherwise. (5) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made, (i) to the holders of stock ranking junior (either as to dividends or upon liquidation) to the holders of Series I Preference Stock unless, prior thereto, the holders of Series I Preference Stock shall have received from the assets of the Corporation a preferential amount equal to $5,000 per share plus all accrued and unpaid dividends thereon, whether or not 23 declared, to the date of payment, provided that the holders of Series I Preference Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (ii) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series I Preference Stock, except distributions made ratably on the Series I Preference Stock and all such parity stock in proportion to the total amounts to which the holders of all such stock are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of Series I Preference Stock were entitled immediately prior to such event under the proviso in clause (i) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (6) Voting. Except as provided herein or as may be required by law, holders of Series I Preference Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. In addition to any other voting rights as a separate class or otherwise to which the holders of Series I Preference Stock may be entitled by law and subject to the provision for adjustment hereinafter set forth, each share of Series I Preference Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of Series I Preference Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Except as otherwise provided herein, in any other provisions of the Restated Articles of Incorporation of the Corporation creating a series of Preferred Stock or Preference Stock or any similar stock, or by law, the holders of Series I Preference Stock and the holders of Common stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. If at the time of any annual meeting of shareholders for the election of directors a "default in preference dividends," (as that term is hereinafter defined), on the Series I Preference Stock shall exist, the number of directors constituting the Board of Directors of the Company shall be increased by two (2), and the holders of the Series I Preference Stock and any 24 other series of Preference Stock (whether or not the holders of such stock would be entitled to vote for the election of directors if such default in preference dividends did not exist) shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two (2) directors of the Company to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Series I Preference Stock. Each director elected by the holders of Series I Preference Stock and any other series of Preference Stock (a "Preferred Director") shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding Series I Preference Stock and any other series of Preference Stock voting together as a single class without regard to series, at a meeting of the shareholders or of the holders of Series I Preference Stock and any other series of Preference Stock called for the purpose. So long as a default in any preference dividends on the Series I Preference Stock shall exist, (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Company and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding Series I Preference Stock and any other series of Preference Stock voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and a default in preference dividends shall no longer exist, the number of directors constituting the Board of Directors of the Company shall be reduced by two (2). For the purposes hereof, a "default in preference dividends" on the Series I Preference Stock shall be deemed to have occurred whenever the amount of accrued dividends upon any series of the Series I Preference Stock shall be equivalent to six (6) full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all Series I Preference Stock of each and every series then outstanding shall have been paid to the end of the last preceding quarterly dividend period. (7) Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series I Preference Stock as provided in paragraph 2 of this Section B are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series I Preference Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series I Preference Stock; (ii) declare or pay dividends, or make any other distributions, on any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series I Preference Stock, except dividends paid ratably on the Series I Preference Stock and all such parity stock on which dividends are payable or in 25 arrears in proportion to the total amounts to which the holders of all such stock are then entitled; (iii) redeem or purchase or otherwise acquire for consideration any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series I Preference Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for any shares of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series I Preference Stock; or (iv) redeem or purchase or otherwise acquire for consideration any Series I Preference Stock, or any stock ranking on a parity with the Series I Preference Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such stock upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any stock of the Corporation unless the Corporation could, under paragraph 7(a) of this Section B, purchase or otherwise acquire such stock at such time and in such manner. (8) Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Stock is exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series I Preference Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in Common Stock, or effect a subdivision or combination or consolidation of the outstanding Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series I Preference Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (9) Priorities. So long as any Series I Preference Stock remains outstanding, the Corporation shall not, without the affirmative vote or written consent of the holders of at least two-thirds of the outstanding Series I Preference Stock, voting together as a single class, amend, alter or repeal any of the provisions of these Restated Articles of Incorporation so as adversely to affect the preferences, limitations and relative rights of Series I Preference Stock. So long as any Series I Preference Stock remains outstanding, Series I Preference Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to any other series of any 26 other class of Preference Stock, unless the terms of any such series shall provide otherwise. (10) Status of Reacquired Shares. The Corporation shall retire and cancel any shares of Series I Preference Stock that it redeems, purchases or otherwise acquires. All such shares shall upon their cancellation become authorized but unissued shares of Preference Stock and may be reissued as part of a new series of Preference Stock subject to the conditions and restrictions on issuance set forth in the restated Articles of Incorporation creating a series of Preference Stock or as otherwise required by law. C. PREFERRED STOCK. Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors. Each series shall be distinctly designated. All shares of any one series of the Preferred Stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative. The powers, preferences and relative, participating, optional and other rights of each such series, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any other series at any time outstanding. Subject to the provisions of Section D of this ARTICLE VI, the Board of Directors is hereby expressly granted authority to fix by resolution or resolutions adopted prior to the issuance of any shares of each particular series of Preferred Stock, the designation, powers, preferences and relative, participating, optional and other rights, and the qualifications, limitations and restrictions thereof, if any, of such series, including, but without limiting the generality of the foregoing, the following: (a) the distinctive designation of, and the number of Preferred Stock which shall constitute the series, which number may be increased (except as otherwise fixed by the Board of Directors) or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (b) the rate and times at which, and the terms and conditions upon which, dividends, if any, on shares of the series shall be paid, the extent of preferences or relation, if any, of such dividends to the dividends payable on any other class or classes of shares of the Corporation, or on any series of Preferred Stock or of any other class or classes of shares of the Corporation and whether such dividends shall be cumulative or non-cumulative; (c) the right, if any, of the holders of shares of the series to convert the same into, or exchange the same for, shares of any other class or classes of shares of the Corporation, or of any series of Preferred Stock, and the terms and conditions of such conversion or exchange; (d) whether shares of the series shall be subject to a redemption price or prices including, without limitation, a redemption price or prices payable in Common Stock and the time or times at which, and the terms and conditions upon which shares of the series may be redeemed; (e) the rights, if any, of the holders of shares of the series upon voluntary or involuntary liquidation, merger, consolidation, distribution or sale of assets, dissolution or winding up of the Corporation; 27 (f) the terms of the sinking fund or redemption or purchase account, if any, to be provided for shares of the series; and (g) the voting powers, if any, of the holders of shares of the series which may, without limiting the generality of the foregoing, include (i) the right to more or less than one vote per share on any or all matters voted upon by the shareholders and (ii) the right to vote, as a series by itself or together with other series of Preferred Stock or together with all series of Preferred Stock as a class, upon such matters, under such circumstances and upon such conditions as the Board of Directors may fix, including, without limitation, the right, voting as a series by itself or together with other series of Preferred Stock or together with all series of Preferred Stock as a class, to elect one or more directors of this Corporation in the event there shall have been a default in the payment of dividends on any one or more series of Preferred Stock or under such other circumstances and upon such conditions as the Board of Directors may determine. No holder of any share of any series of Preferred Stock shall be entitled to vote for the election of directors or in respect of any other matter except as may be required by the Indiana Business Corporation Law, as amended, or as is permitted by the resolution or resolutions adopted by the Board of Directors authorizing the issue of such series of Preferred Stock. D. COMMON STOCK. (1) Dividend Rights. Subject to the rights of all stock of the Corporation ranking, as to dividends, senior to Common Stock, the holders of Common Stock shall be entitled to receive such dividends, if any, as may be declared by the Board of Directors of the Corporation from time to time and paid on Common Stock out of any assets of the Corporation at the time legally available for the payment of dividends. (2) Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the shares of the Common Stock shall be entitled to share ratably in the assets of the Corporation remaining after all distributions or payments shall have been made to the holders of any class of stock (or series thereof) of the Corporation ranking senior, as to liquidation rights, to Common Stock. The merger or share exchange of the Corporation with any other corporation, or a sale, lease or conveyance of all or substantially all of its assets, shall not be regarded as a liquidation, dissolution or winding up of the Corporation within the meaning of this section. (3) Voting. Except as provided herein or as may be required by law, all voting power shall vest exclusively in the holders of shares of Common Stock. Each share of Common Stock shall be entitled to one vote on each matter submitted to a vote of the shareholders of the Corporation. E. DISTRIBUTIONS TO SHAREHOLDERS. The Board of Directors may authorize and the Corporation may make distributions to its shareholders if, after giving the distribution effect, (a) the Corporation would be able to pay its debts as they become due in the usual course of business and, (b) the Corporation's total assets would be greater than its total liabilities, without regard to any amount that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of 28 shareholders whose preferential rights are superior to those receiving the distribution. ARTICLE VII Voting Rights of Common Stock ----------------------------- 7.01. COMMON STOCK. Every holder of shares of common stock shall have the right, at every shareholders' meeting, to one vote for each share of common stock standing in his name on the books of the Corporation, except as otherwise provided in the IBCL. ARTICLE VIII Directors --------- 8.01. NUMBER. The number of Directors shall be not less than three (3) nor more than eleven (11) and the exact number may from time to time be fixed by the By-Laws. If the By-Laws do not fix the number of Directors, then the number of Directors shall be five (5). 8.02. CLASSES OF DIRECTOR. The By-Laws may provide that the Directors shall be divided into two (2) or three (3) classes, with each class containing one-half (1/2) or one third (1/3) of the total, with an equal number of Directors or as near equal as may be, and whose terms of office shall expire at different times. If Directors are divided into classes, the terms of the Directors in the first class shall expire at the first annual shareholders' meeting after their election, the terms of the second class shall expire at the second annual shareholders' meeting after their election, and the terms of the third class, if any, shall expire at the third annual shareholders' meeting after their election. At each annual shareholders' meeting thereafter, Directors shall be chosen for a term of two (2) years or three (3) years, as the case may be, to succeed those whose term expire. If the By-Laws provide for a classified Board, then prior to the completion of their term of office, a Director may be removed, with or without cause, only at a meeting of the shareholders called and held for that purpose, by the affirmative vote of the holders of outstanding shares of not less than two-thirds (2/3) of the shares entitled to vote, by class, if applicable. Directors need not be shareholders. A majority of the Directors at any time shall be citizens of the United States. 8.03. VACANCIES. Vacancies occurring in the Board of Directors shall be filled in the manner provided in the By-Laws, or if the By-Laws do not provide for the filling of vacancies then in the manner provided by Indiana law. The By-Laws may also provide that in certain circumstances specified therein, vacancies occurring in the Board of Directors may be filled by vote of the shareholders at a special meeting called for that purpose or at the next annual meeting of shareholders. 8.04. REMOVAL OF DIRECTORS. Prior to the completion of their term of office, and subject to the provisions of Section 8.02, a Director may only be removed by the shareholders, and in the manner as provided under the IBCL. 29 ARTICLE IX Provisions for Regulation of Business And ----------------------------------------- Conduct of Affairs of Corporation --------------------------------- 9.01. SHAREHOLDER MEETINGS AND BOARD MEETINGS. Meetings of the shareholders may be held either at the principal office of the Corporation in the State of Indiana or at any other place, within or without the State of Indiana, as provided by the By-Laws of the Corporation and the notices of such meetings. Meetings of the Board of Directors may be held at such place, either within or without the State of Indiana, as may be authorized by the By-Laws. 9.02. POWERS OF BOARD. In addition to the powers and authorities hereinabove or by statute expressly conferred, the Board of Directors is hereby authorized to exercise all such powers and do all such acts and things as may be exercised or done by a corporation organized and existing under the provisions of the IBCL. The Board of Directors shall have the exclusive power to make, amend, repeal or waive By-Laws and the provisions thereof. 9.03. NONLIABILITY OF SHAREHOLDERS. Shareholders of the Corporation are not personally liable for the acts or debts of the Corporation, nor is private property of shareholders subject to the payment of corporate debt. 9.04. INTERESTS OF DIRECTORS. (a) A conflict of interest transaction is a transaction with the Corporation in which a Director of the Corporation has a direct or indirect interest. A conflict of interest transaction is not voidable by the Corporation solely because of the Director's interest in the transaction if any one (1) of the following is true: (1) The material facts of the transaction and the director's interest were disclosed or known to the Board of Directors or a Committee of the Board of Directors and the Board of Directors or committee authorized, approved, or ratified the transaction. (2) The material facts of the transaction and the Director's interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction. (3) The transaction was fair to the Corporation. (b) For purposes of this Section 9.04, a Director of the Corporation has an indirect interest in a transaction if: (1) another entity in which the Director has a material financial interest or in which the Director is a general partner is a party to the transaction, or (2) another entity of which the Director is a director, officer, or trustee is a party to the transaction and the transaction is, or is required to be, considered by the Board of Directors of the Corporation. (c) For purposes of Section 9.04(a)(1), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the Directors on the Board of 30 Directors (or on the committee) who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by a single Director. If a majority of the Directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum shall be deemed present for the purpose of taking action under this Section 9.04. The presence of, or a vote cast by, a Director with a direct or indirect interest in the transaction does not affect the validity of any action taken under Section 9.04(a)(l), if the transaction is otherwise authorized, approved, or ratified as provided in such subsection. (d) For purposes of Section 9.04(a)(2), shares owned by or voted under the control of a Director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in Section 9.04(b), may be counted in a vote of shareholders to determine whether to authorize, approve or ratify a conflict of interest transaction. (e) This Section 9.04 shall not be construed to require authorization, ratification, or approval by the shareholders of any transaction or to invalidate any transaction that would otherwise be valid under common or statutory law. ARTICLE X Amendment or Repeal ------------------- 10.01. AMENDMENT OR REPEAL: CERTAIN PROVISIONS. Any amendment or repeal of all or any part of this Article X and of Sections 8.01 and 8.02 of Article VIII, shall require the affirmative vote of the holders of outstanding shares of not less than two-thirds (2/3) of the shares entitled to vote, by class, if applicable. 10.02. AMENDMENT OR REPEAL: OTHER PROVISIONS. Except as is otherwise expressly provided in Section 10.01, all other provisions of the Articles of Incorporation, as amended, may be amended or repealed in the manner now or hereafter permitted by law, and all rights conferred upon shareholders by these Articles of Incorporation, as amended, are conferred subject to this reservation. 5 EX-31.1 3 rex311.txt CERTIFICATION OF CEO 31 EXHIBIT 31.1 CERTIFICATIONS -------------- CERTIFICATION OF CHIEF EXECUTIVE OFFICER ---------------------------------------- PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 --------------------------------------------------------- I, R. Scott Trumbull, Chairman and Chief Executive Officer of Franklin Electric Co., Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Electric Co., Inc., for the third quarter ending October 1, 2005; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing similar functions: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 3, 2005 ----------------------- /s/ R. Scott Trumbull ----------------------- R. Scott Trumbull Chairman and Chief Executive Officer Franklin Electric Co., Inc. 5 EX-31.2 4 rex312.txt CERTIFICATION OF CFO 32 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER ---------------------------------------- PURSUANT TO SECTION 203 OF THE SARBANES-OXLEY ACT OF 2002 --------------------------------------------------------- I, Thomas J. Strupp, Vice President and Chief Financial Officer and Secretary of Franklin Electric Co., Inc., certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Electric Co., Inc., for the third quarter ending October 1, 2005; 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Quarterly Report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors or persons performing similar functions: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 3, 2005 ----------------------- /s/ Thomas J. Strupp ----------------------- Thomas J. Strupp Vice President and Chief Financial Officer and Secretary Franklin Electric Co., Inc. 5 EX-32.1 5 rex321.txt CEO CERTIFICATION 33 EXHIBIT 32.1 CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. ----------------------------------------------------------- SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF - ---------------------------------------------------------------------------- 2002 ---- In connection with the Quarterly Report of Franklin Electric Co., Inc. (the "Company") on Form 10-Q for the third quarter ending October 1, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, R. Scott Trumbull, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 3, 2005 ----------------------- /s/ R. Scott Trumbull ----------------------- R. Scott Trumbull Chairman and Chief Executive Officer Franklin Electric Co., Inc. 5 EX-32.2 6 rex322.txt CFO CERTIFICATION 34 EXHIBIT 32.2 CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. ----------------------------------------------------------- SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF - ---------------------------------------------------------------------------- 2002 ---- In connection with the Quarterly Report of Franklin Electric Co., Inc. (the "Company") on Form 10-Q for the third quarter ending October 1, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas J. Strupp, Vice President and Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 3, 2005 ----------------------- /s/ Thomas J. Strupp ----------------------- Thomas J. Strupp Vice President and Chief Financial Officer and Secretary Franklin Electric Co., Inc. 5 -----END PRIVACY-ENHANCED MESSAGE-----