10-Q 1 firstqtr2010.htm FIRST QUARTER FORM 10Q firstqtr2010.htm
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 April 3, 2010

OR

o 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 incorporation or organization)
  
(I.R.S. Employer 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x
NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
YES o
NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o


 
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o
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
  
April 3, 2010
$.10 par value
  
23,258,752 shares

 
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FRANKLIN ELECTRIC CO., INC.

TABLE OF CONTENTS

     
Page
PART I.
FINANCIAL INFORMATION
  
Number
       
Item 1.
Financial Statements
    
       
   
4
       
   
5-6
       
   
7
       
   
8-15
       
Item 2.
  
16-19
       
Item 4.
  
19
       
PART II.
OTHER INFORMATION
    
       
Item 1.
  
20
       
Item 1A.
  
20
       
Item 2.
  
20
       
Item 4.
Reserved
    
       
Item 6.
  
20
       
   
21
       
   
22
       
Exhibits
    
23-26

 
- 3 -
 

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FRANKLIN ELECTRIC CO., INC.
(Unaudited)


   
First Quarter Ended
  
   
April 3, 201010 10
    
April 4, 2009
  
             
(In thousands, except per share amounts)
            
             
Net sales
   $ 159,992     $ 149,797  
Cost of sales
     109,556       106,601  
Gross profit
     50,436       43,196  
Selling, general and administrative expenses
     35,885       34,449  
Restructuring expenses
     2,166       891  
Operating income
     12,385       7,856  
Interest expense
     (2,213 )     (2,373 )
Other income/(expense)
     (2,231 )     260  
Foreign exchange gain
     198       108  
Income before income taxes
     8,139       5,851  
Income taxes
     702       1,800  
Net income
     7,437       4,051  
Less: Net income attributable to noncontrolling interests
     (224 )     (204 )
Net income attributable to Franklin Electric Co., Inc.
   $ 7,213     $ 3,847  
                 
Per share data:
                
Basic earnings
   $ 0.31     $ 0.17  
                 
Diluted earnings
   $ 0.31     $ 0.17  
                 
Dividends per common share
   $ 0.125     $ 0.125  
                 
                 

See Notes to Condensed Consolidated Financial Statements.


 
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FRANKLIN ELECTRIC CO., INC.
(Unaudited)
(In thousands, except per share amounts)
            
   
April 3, 2010
    
January 2, 2010
  
ASSETS
            
Current assets:
            
Cash and equivalents
   $ 69,700     $ 86,875  
Receivables, less allowances of $2,362 and $2,464, respectively
     91,056       62,847  
Inventories:
                
  Raw materials
     57,464       53,889  
  Work-in-process
     14,152       12,555  
  Finished goods
     84,189       82,288  
  LIFO reserve
     (14,496 )     (14,328 )
      141,309       134,404  
Deferred income taxes
     15,190       15,577  
    Other current assets
     12,037       11,890  
Total current assets
     329,292       311,593  
                 
Property, plant and equipment, at cost:
                
  Land and buildings
     83,492       83,917  
  Machinery and equipment
     186,028       188,543  
  Furniture and fixtures
     19,221       18,772  
  Other
     3,914       3,533  
      292,655       294,765  
   Allowance for depreciation
     (149,813 )     (147,594 )
      142,842       147,171  
                 
                 
Intangible assets
     86,695       88,912  
Goodwill
     160,359       161,761  
Other assets
     9,141       8,861  
Total assets
   $ 728,329     $ 718,298  

See Notes to Condensed Consolidated Financial Statements.


 
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(In thousands, except per share amounts)
            
   
April 3, 2010
    
January 2, 2010
  
LIABILITIES AND EQUITY
            
Current liabilities:
            
Accounts payable
   $ 42,386     $ 31,699  
Accrued liabilities
     49,984       44,261  
Income taxes, net
     3,734       6,448  
Current maturities of long-term debt and short-term borrowings
     681       735  
Total current liabilities
     96,785       83,143  
                 
Long-term debt
     151,111       151,242  
Deferred income taxes
     4,489       3,266  
Employee benefit plan obligations
     67,675       74,179  
Other long-term liabilities
     8,616       8,865  
                 
Commitments and contingencies
     -       -  
                 
Redeemable noncontrolling interest
     7,067       7,393  
                 
Shareowners’ equity:
                
Common shares (65,000 shares authorized, $.10 par value)
                
outstanding (23,259 and 23,128, respectively)
     2,326       2,313  
Additional capital
     121,314       119,133  
Retained earnings
     289,583       285,467  
Accumulated other comprehensive loss
     (22,685 )     (18,740 )
Total shareowners’ equity
     390,538       388,173  
Noncontrolling interest
     2,048       2,037  
Total Equity
     392,586       390,210  
Total liabilities and equity
   $ 728,329     $ 718,298  
See Notes to Condensed Consolidated Financial Statements.



 
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FRANKLIN ELECTRIC CO., INC.
(Unaudited)
(In thousands)
  
First Quarter Ended
  
             
   
April 3, 201010 010
    
April 4, 2009
  
Cash flows from operating activities:
            
Net income
   $ 7,437     $ 4,051  
Adjustments to reconcile net income to net cash flows from operating activities:
                
Depreciation and amortization
     6,379       6,149  
Share-based compensation
     1,139       2,155  
Deferred income taxes
     1,610       (311 )
(Gain)/Loss on disposals of plant and equipment
     (1,204 )     14  
Excess tax from share-based compensation arrangements
     (226 )     -  
Changes in assets and liabilities:
                
Receivables
     (29,119 )     (14,678 )
Inventories
     (7,852 )     3,719  
Accounts payable and other accrued  liabilities
     17,178       (2,490 )
Income taxes, net
     (2,385 )     963  
Employee benefit plan obligations
     (5,597 )     543  
Other, net
     7       (1,104 )
Net cash flows from operating activities
     (12,633 )     (989 )
                 
Cash flows from investing activities:
                
Additions to property, plant and equipment
     (1,746 )     (3,108 )
Proceeds from sale of property, plant and equipment
     1,338       -  
Cash paid for acquisitions, net of cash acquired
     -       (16,767 )
Net cash flows from investing activities
     (408 )     (19,875 )
                 
Cash flows from financing activities:
                
Proceeds from short-term debt
     -       23,000  
Repayment of long-term debt
     (96 )     (251 )
Proceeds from issuance of common stock
     214       -  
Excess tax from share-based compensation arrangements
     226       -  
Dividends paid
     (2,892 )     (2,877 )
Net cash flows from financing activities
     (2,548 )     19,872  
Effect of exchange rate changes on cash
     (1,586 )     (741 )
Net change in cash and equivalents
     (17,175 )     (1,733 )
Cash and equivalents at beginning of period
     86,875       46,934  
Cash and equivalents at end of period
   $ 69,700     $ 45,201  
                 
Cash paid for income taxes
   $ 2,939     $ 2,713  
Cash paid for interest
   $ 2,261     $ 2,391  
                 
Non-cash items:
                
Additions to property, plant, and equipment, not yet paid
   $ 1,965     $ 82  
Payable to seller of Healy Systems, Inc.
   $ 179     $ 784  
Payable to seller of Western Pumps, LLC
   $ 49     $ 28  
Stock issued in connection with stock option exercises, forfeitures, or stock retirements
   $ 420     $ -  


See Notes to Condensed Consolidated Financial Statements.

 
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FRANKLIN ELECTRIC CO., INC.
(Unaudited)

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated balance sheet as of January 2, 2010, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of April 3, 2010 and for the first quarters ended April 3, 2010 and April 4, 2009, 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. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all accounting entries and adjustments (including 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. Operating results for the first quarter ended April 3, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2011. For further information, including a description of Franklin Electric's critical accounting policies, refer to the consolidated financial statements and notes thereto included in Franklin Electric Co., Inc.'s Annual Report on Form 10-K for the year ended January 2, 2010.

2.  FAIR VALUE MEASUREMENTS

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, provides a framework for measuring fair value under generally accepted accounting principles.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Disclosures about instruments measured at fair value were expanded and a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value was established.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices for identical assets and liabilities in active markets;

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

The Company designates cash equivalents as Level 1, as they are Money Market accounts backed by Treasury Bills.  As of April 3, 2010, and January 2, 2010, assets measured at fair value on a recurring basis were as follows:

 
 
 
(In millions)
  
 
 
 
April 3, 2010
    
Quoted prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
    
Significant Unobservable
 Inputs
(Level 3)
  
Cash Equivalents
   $ 10.3     $ 10.3     $ -     $ -  

   
 
 
 
January 2, 2010
    
Quoted prices in Active Markets for Identical Assets
(Level 1)
    
Significant Other Observable Inputs
(Level 2)
    
Significant Unobservable
 Inputs
(Level 3)
  
Cash Equivalents
   $ 11.1     $ 11.1     $ -     $ -  


 
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3. EQUITY INVESTMENTS

The Company holds a 35 percent equity interest in Pioneer Pump, Inc., which is accounted for using the equity method and included in “Other assets” on the face of the balance sheet. The carrying amount of the investment is adjusted for the Company’s proportionate share of earnings, losses and dividends. The carrying value of the investment was $8.0 million and $7.7 million as of April 3, 2010, and January 2, 2010, respectively.  The Company’s proportionate share of Pioneer Pump, Inc. earnings, included in “Other income /(expense)” in the Company’s statements of income, was $0.2 million and zero for the first quarter ended April 3, 2010 and April 4, 2009, respectively.

4. INTANGIBLE ASSETS AND GOODWILL

The carrying amounts of the Company’s intangible assets are as follows:

(In millions)
  
April 3, 2010
    
January 2, 2010
  
   
Gross Carrying Amount
    
Accumulated Amortization
    
Gross Carrying Amount
    
Accumulated Amortization
  
Amortized intangibles:
                        
Patents
   $ 7.9     $ (4.5 )   $ 8.0     $ (4.3 )
Supply agreements
     7.2       (6.3 )     7.2       (6.2 )
Technology
     7.2       (1.8 )     7.2       (1.7 )
Customer relationships
     67.4       (10.3 )     68.2       (9.5 )
Other
     2.0       (1.8 )     2.1       (2.0 )
Total amortized intangibles
   $ 91.7     $ (24.7 )   $ 92.7     $ (23.7 )
                                 
Unamortized intangibles:
                                
  Trade names
     19.7       -       19.9       -  
Total intangibles
   $ 111.4     $ (24.7 )   $ 112.6     $ (23.7 )

Amortization expense related to intangible assets for the first quarter ended April 3, 2010 and April 4, 2009 was $1.3 million and $1.1 million, respectively.

Amortization expense is projected as follows:

(In millions)
  
2010
    
2011
    
2012
    
2013
    
2014
  
    $ 5.1     $ 5.0     $ 4.5     $ 4.3     $ 4.2  


The changes in the carrying amount of goodwill by reporting segment for the first quarter ended April 3, 2010, are as follows:

(In millions)
  
Water
    
Fueling
        
   
Systems
    
Systems
    
Consolidated
  
Balance as of January 2, 2010
   $ 108.4     $ 53.4     $ 161.8  
Adjustments to prior year acquisitions
     -       0.3       0.3  
Foreign currency translation
     (1.7 )     -       (1.7 )
Balance as of April 3, 2010
   $ 106.7     $ 53.7     $ 160.4  


 
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5. EMPLOYEE BENEFIT PLANS

Defined Benefit Plans – As of April 3, 2010, the Company maintained three domestic pension plans and one German pension plan.  The Company uses a December 31 measurement date for its plans.

The following table sets forth aggregated net periodic benefit cost and other benefit cost for the first quarter ended April 3, 2010 and April 4, 2009:

(In millions)
  
Pension Benefits
    
Other Benefits
  
   
First Quarter Ended
    
First Quarter Ended
  
   
April 3, 2010
    
April 4, 2009
    
April 3, 2010
    
April 4, 2009
  
                         
Service cost
   $ 0.8     $ 0.8     $ -     $ -  
Interest cost
     2.3       2.4       0.2       0.2  
Expected return on assets
     (2.6 )     (2.7 )     -       -  
Loss
     0.5       0.1       -       -  
Prior service cost
     0.1       0.1       -       -  
Settlement cost
     0.4       -       -       0.1  
Curtailment cost
     0.9       -       0.2       -  
Total net periodic benefit cost
   $ 2.4     $ 0.7     $ 0.4     $ 0.3  
                                 


Through April 3, 2010, the Company made contributions to the plans of $8.7 million.  The amount of contributions to be made to the Plans during calendar year 2009 will be finalized on September 15, 2010 based upon the Plan’s year end valuation at December 31, 2009 and the desired funding level to be achieved as of December 31, 2010. 
 
 
6. INCOME TAXES

The effective tax rate on income before income taxes in 2010 and 2009 varies from the United States statutory rate of 35 percent primarily due to the effects of state and foreign income taxes net of federal tax benefits, as well as, changes to the reserve for uncertain tax positions.

7. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

As of the beginning of fiscal year 2010, the Company had gross unrecognized tax benefits of $6.8 million, excluding accrued interest and penalties.  The unrecognized tax benefits were reduced by $0.2 million for state income tax liabilities and $2.7 million for federal tax liabilities related to the uncertain tax position reversed in the first quarter of 2010 as the statutory limit for the audit of the tax return expired.  The Company had gross unrecognized tax benefits, excluding accrued tax and penalties, of $4.2 million as of April 3, 2010.  If recognized, the effective tax rate would be affected by the net unrecognized tax benefits of $3.2 million.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense.  The Company’s reserve for interest and penalties as of April 3, 2010 and as of January 2, 2010 was approximately $0.4 million and $0.7 million, respectively.  Interest and penalties recorded during the first quarter of 2010 were not considered significant.

The Company is subject to periodic audits by domestic and foreign tax authorities. Currently, the Company is undergoing routine periodic audits in both domestic and foreign tax jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of the audits.

For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2006.

 
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8. DEBT

Debt consisted of the following:

(In millions)
            
   
April 3, 2010
    
January 2, 2010
  
Prudential Agreement - - 5.79 percent
   $ 150.0     $ 150.0  
Capital leases
     1.1       1.2  
Other Debt
     0.7       0.7  
      151.8       151.9  
Less current maturities
     (0.7 )     (0.7 )
Long-term debt:
   $ 151.1     $ 151.2  
                 

The estimated fair value of long term debt was $154.7 million and $153.4 million at April 3, 2010 and January 2, 2010, respectively.  In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value.  Estimates are not necessarily indicative of the amounts the Company could realize in a current market transaction.  In determining the fair value of its long term debt, the Company uses estimates based on rates currently available to the Company for debt with similar terms and remaining maturities.

The following debt payments are expected to be paid in accordance with the following schedule:

(In millions)
                                          
                                           
   
Total
    
Year 1
    
Year 2
    
Year 3
    
Year 4
    
Year 5
    
More than 5 years
  
Debt
   $ 150.7     $ 0.2     $ 0.3     $ 0.2     $ -     $ -     $ 150.0  
Capital leases
     1.1       0.5       0.4       0.2       -       -       -  
    $ 151.8     $ 0.7     $ 0.7     $ 0.4     $ -     $ -     $ 150.0  

9. EARNINGS PER SHARE

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

(In millions, except per share amounts)
  
First Quarter Ended
  
   
April 3, 2010
    
April 4, 2009
  
Numerator:
            
  Net income attributable to Franklin Electric Co., Inc.
   $ 7.2     $ 3.8  
                 
Denominator:
                
  Basic
                
       Weighted average common shares
     23.1       23.0  
                 
  Diluted
                
Effect of dilutive securities:
                
       Employee and director incentive stock options and awards
     0.3       0.1  
Adjusted weighted average common shares
     23.4       23.1  
                 
Basic earnings per share
   $ 0.31     $ 0.17  
Diluted earnings per share
   $ 0.31     $ 0.17  
                 
Anti-dilutive stock options
     1.0       1.7  
Anti-dilutive stock options price range – low
   $ 28.82     $ 24.08  
Anti-dilutive stock options price range – high
   $ 48.87     $ 48.87  


 
- 11 -
 


10. EQUITY ROLL FORWARD

The schedule below sets forth equity changes in the three months ended April 3, 2010:

(In thousands)
Description
  
Common
    
Additional Paid In Capital
    
Retained Earnings
    
Minimum Pension
Liability
    
Cumulative Translation Adjustment
    
Non-
controlling
Interest
    
Total Equity
    
Redeemable Non-
controlling
Interest
  
Balance- 01/02/10
   $ 2,313     $ 119,133     $ 285,467     $ (36,796 )   $ 18,056     $ 2,037     $ 390,210     $ 7,393  
Net income
                     7,213                       128       7,341       95  
Dividends on common stock
                     (2,892 )                             (2,892 )        
Common stock issued
     5       825                                       830          
Common stock repurchased or received for stock options exercised
     (1 )             (205 )                             (206 )        
Share-based compensation
     9       1,130                                       1,139          
Tax benefit of
stock options
exercised
             226                                       226          
Currency translation adjustment
                                     (4,321 )     (117 )     (4,438 )     (421 )
Pension liability, net of taxes
                             376                       376          
Balance – 04/03/10
   $ 2,326     $ 121,314     $ 289,583     $ (36,420 )   $ 13,735     $ 2,048     $ 392,586     $ 7,067  


11. OTHER COMPREHENSIVE INCOME

Comprehensive income is as follows:

(In millions)
  
First Quarter Ended
  
   
April 3, 2010
    
April 4, 2009
  
             
Net income
   $ 7.4     $ 4.1  
Other comprehensive income:
                
Foreign currency translation adjustments
     (4.3 )     (2.1 )
Pension liability adjustment, net of tax
     0.4       0.3  
Total comprehensive income
     3.5       2.3  
Less: Comprehensive income attributable to noncontrolling interest
     (0.2 )     (0.1 )
Comprehensive income attributable to Franklin Electric Co., Inc., net of tax
   $ 3.3     $ 2.2  


 
- 12 -
 

12.  SEGMENT INFORMATION

Financial information by reportable business segment is included in the following summary:

(In millions)
   
First Quarter Ended
  
   
April 3, 2010
    
April 4, 2009
  
   
Net sales to external customers
  
Water Systems
   $ 133.6     $ 114.4  
Fueling Systems
     26.4       35.4  
Other
     -       -  
Consolidated
   $ 160.0     $ 149.8  
                 
   
First Quarter Ended
  
   
April 3, 2010
    
April 4, 2009
  
   
Operating income (loss)
  
Water Systems
   $ 17.3     $ 9.7  
Fueling Systems
     4.3       7.0  
Other
     (9.2 )     (8.8 )
Consolidated
   $ 12.4     $ 7.9  
                 
   
April 3, 2010
    
January 2, 2010
  
   
Total assets
  
Water Systems
   $ 463.1     $ 431.9  
Fueling Systems
     199.0       195.1  
Other
     66.2       91.3  
Consolidated
   $ 728.3     $ 718.3  

Cash is the major asset group in “Other” of total assets.  Prior year presentation has been reclassified to conform to current year segment presentation.

13.  CONTINGENCIES AND COMMITMENTS

At April 3, 2010, the Company had $1.9 million of commitments primarily for the purchase of machinery and equipment and building expansions.

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.  In 2007, the Company began offering an extended warranty program to certain Water Systems customers which will provide warranty coverage for up to five years from the date of manufacture.  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.

The changes in the carrying amount of the warranty accrual, as recorded in “Accrued liabilities” in the Company’s balance sheet for the three months ended April 3, 2010, are as follows:

 (In millions)
      
Balance as of  January 2, 2010
   $ 8.8  
Accruals related to product warranties
     2.8  
Reductions for payments made
     (1.9 )
Balance as of April 3, 2010
   $ 9.7  


 
- 13 -
 

14. SHARE-BASED COMPENSATION

On April 24, 2009, the Amended and Restated Franklin Electric Co., Inc. Stock Plan (the “Stock Plan”) was approved by the Company’s shareholders.  The Board of Directors of the Company had approved the Stock Plan on March 9, 2009, subject to shareholder approval.  Under the Stock Plan, employees and non-employee directors may be granted stock options or awards. The Stock Plan amended and restated a prior stock plan to, among other things, increase the number of shares available for issuance under the Stock Plan from 1,300,000 to 2,200,000 shares as follows:

   
Authorized Shares
  
Options
     1,600,000  
Awards
     600,000  

The Company currently issues new shares from its common stock balance to satisfy share option exercises and stock awards.

Stock Option Grants
The fair value of each option award for options granted or vesting is estimated on the date of grant using the Black-Scholes option valuation model with a single approach and amortized using a straight-line attribution method over the option’s vesting period.

The assumptions used for the Black-Scholes model to determine the fair value of options granted during the first three months ended April 3, 2010 and April 4, 2009 are as follows:

   
April 3, 2010
    
April 4, 2009
  
Risk-free interest rate
     1.61 – 3.20 %     0.70 - 3.55 %
Dividend yield
     0.65 – 1.72 %     1.32 – 2.04 %
Weighted-average dividend yield
     0.950 %     1.670 %
Volatility factor
     0.355 – 0.398       0.377 – 0.548  
Weighted-average volatility
     0.396       0.398  
Expected term
  
    6.3 years
    
5.6 years
  
Forfeiture rate
     2.698 %     2.580 %

A summary of the Company’s stock option plans activity and related information for the three months ended April 3, 2010 and April 4, 2009 follows:

(Shares in thousands)
   
April 3, 2010
    
April 4, 2009
  
 
Stock Options
  
Shares
    
Weighted-Average
Exercise Price
    
Shares
    
Weighted-Average
Exercise Price
  
Outstanding beginning of period
     1,979     $ 26.80       1,439     $ 31.17  
Granted
     155       29.03       561       17.34  
Exercised
     (52 )     16.39       -       -  
Forfeited
     (9 )     42.30       (5 )     39.54  
Outstanding end of period
     2,073     $ 27.14       1,995     $ 27.26  
Expected to vest after applying forfeiture rate
     2,034     $ 27.23       1,954     $ 27.35  
                                 
Vested and exercisable end of period
     1,291     $ 29.41       1,094     $ 29.46  

 
- 14 -
 

A summary of the weighted average remaining contractual term and aggregate intrinsic value for the three months ended April 3, 2010 is as follows:

 
 
Stock Options
  
Weighted-Average
Remaining
Contractual Term
    
Aggregate
Intrinsic Value
(000’s)
  
Outstanding end of period
     6.21     $ 13,191  
Expected to vest after applying forfeiture rate
     6.16     $ 12,859  
                 
Vested and exercisable end of period
     4.70     $ 6,731  

There were 128,565 options granted during the first quarter 2010. The total intrinsic value of options exercised during the first quarter ended April 3, 2010 and April 4, 2009 was $0.6 million and zero, respectively.  There were no share-based liabilities paid during the first quarter 2010.

As of April 3, 2010, there was $5.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.58 years.

Stock Awards
A summary of the Company’s stock award activity and related information, for the three months ended April 3, 2010 and April 4, 2009 follows:

(Shares in thousands)
   
April 3, 2010
    
April 4, 2009
  
 
Nonvested Stock Awards
  
 Shares
    
Weighted-Average Grant
 Date Fair Value
    
 
 
Shares
    
Weighted-Average Grant
 Date Fair Value
  
Nonvested at beginning of period
     72     $ 40.12       63     $ 44.06  
Awarded
     88       29.44       58       17.34  
Vested
     (25 )     42.59       (58 )     17.34  
Forfeited
     -       -       -       -  
Nonvested at end of period
     135     $ 32.88       63     $ 44.06  

As of April 3, 2010, there was $3.1 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.96 years.

15.  RESTRUCTURING

As a follow up to Phase 3 of the Global Manufacturing Realignment Program, the Company announced its plan to close its Siloam Springs, Arkansas manufacturing facility.  The Company has estimated that this final step will include pre-tax restructuring costs of $4.0 million to $4.8 million to be incurred over the first three quarters of 2010.  These costs will include severance expenses, pension charges, asset write-offs, and equipment relocation costs.

Costs incurred in the first quarter ended April 3, 2010, included in the Restructuring expense line of the income statement are as follows:
 
 
(In millions)
  
First Quarter Ended
  
   
April 3, 2010
  
       
Severance and other employee assistance costs
   $ 1.1  
Equipment relocations
     0.1  
Pension curtailment
     1.0  
Total
   $ 2.2  

As of April 3, 2010 and April 4, 2009, there were $0.3 million and $0.4 million, respectively, in restructuring reserves primarily for severance.

 
- 15 -
 


OVERVIEW

Sales and earnings for the first quarter of 2010 were up from the same quarter last year. The most significant factor contributing to the improvement was Water Systems revenue growth of about 17 percent versus the first quarter of 2009 which included broad based volume improvements across the global business units and favorable foreign currency translations. The revenue increases further led to a 78 percent improvement in the Water Systems operating income in the first quarter 2010 versus 2009.  Water Systems operating income margin increased to 12.9 percent or 440 basis points in the first quarter 2010. Gross profit also increased about 17 percent but, more importantly as a percent of net sales, increased to 31.5 percent for the first quarter of 2010 from 28.8 percent for the first quarter of 2009, due primarily to operating leverage from Water Systems sales volume and lower material costs.

RESULTS OF OPERATIONS

Net Sales

     
Q1 2010
      
Q1 2009
      
2010 v 2009
  
   
Net Sales
  
Water Systems
  
$
133.6
    
$
114.4
    
$
       19.2
  
Fueling Systems
  
$
26.4
    
$
35.4
    
$
   (9.0)
  
Other
  
$
-
    
$
-
    
$
-
  
Consolidated
  
$
160.0
    
$
149.8
    
$
        10.2
  

Net sales for the first quarter of 2010 were $160.0 million, an increase of $10.2 million or 7 percent compared to 2009 first quarter sales of $149.8 million. Consolidated sales improved from the prior year due to Water Systems revenue growth which included broad based volume improvements in both the U.S. and international Water Systems businesses offset by reduced Fueling Systems sales in California.  During the first quarter last year the Company experienced surging sales of Fueling Systems equipment in California due to an environmental mandate.  The California sales surge started to abate in the 2nd quarter last year, so going forward year-on-year sales comparisons will exclude the sales surge.  Additionally, first quarter 2010 sales were higher by $10.3 million versus the first quarter 2009 due to foreign currency translations as a result of a stronger U.S. dollar.

Net Sales-Water Systems
Water Systems sales worldwide were $133.6 million, up $19.2 million or 17 percent for the first quarter of 2010 compared to the same period for 2009.   Excluding foreign currency translation, sales increased $9.2 million or about 8 percent.  Water Systems revenues represented about 83 percent of the Company’s total sales. Water Systems sales in the U.S. and Canada benefitted from slowly improving market conditions and less price discounting in the first quarter 2010 versus the first quarter of 2009.  International Water Systems sales volume increased in most of the Company’s key markets with the most year-over-year improvement coming in Brazil and the Asia/Pacific region.  International Water Systems business units accounted for about half of the Company’s total Water Systems sales during the quarter and grew by about 25 percent overall and by 10 percent without the impact of foreign exchange.  Water Systems sales in Latin America, Asia Pacific and Southern Africa represented about 35 percent of the Company’s total Water Systems sales and grew by 34 percent overall and 15 percent before the impact of foreign exchange. 
 
 
Sales price increases on Water Systems products in the U.S., which the Company estimates will average about 2.5 percent across product lines, also contributed to an increase in sales revenues from the prior year.  About half of Water Systems first quarter sales were in the U.S. and Canada—and these sales grew by about 9 percent overall and 6 percent excluding the impact of foreign exchange.   Organic growth in the U.S. and Canada can be attributed to two factors:

■  
First, while distributors reduced inventories during the first quarter last year, the Company believes they increased inventories modestly this year.
■  
Second, sales of the electronic water pressure control product line are growing rapidly due to the very successful launch of the new SubDrive 2W product line.  The Subdrive 2W product uses proprietary Franklin technology to provide well owners with a low cost, easy to install method of retrofitting their water well system to provide constant pressure even during peak demand periods.

 
- 16 -
 


Net Sales-Fueling Systems
Fueling Systems sales worldwide were $26.4 million, down $9.0 million or 25 percent for the first quarter of 2010 compared to the same period for 2009.   Fueling Systems revenues represented about 17 percent of the Company’s total revenues.  This decline was due entirely to a decline of vapor recovery equipment sales in California.  First quarter 2010 Fueling Systems sales outside of California grew by about 19 percent, with international Fueling Systems sales increasing by 57 percent.  While sales in all international regions were up, shipments of vapor control equipment to China were particularly strong.  Fueling Systems increased product prices on a global basis by about 3 percent during the quarter.

Cost of Sales
Cost of sales as a percent of net sales for the first quarter of 2010 and 2009 was 68.5 percent and 71.2 percent, respectively. Correspondingly, the gross profit margin increased to 31.5 percent from 28.8 percent. The Company’s consolidated gross profit was $50.4 million for the first quarter of 2010, up $7.2 million from the first quarter of 2009. The gross profit margin improvement was primarily due to sales volume leverage on fixed manufacturing costs and lower material costs.

Restructuring Expenses
Restructuring expenses for the first quarter of 2010 were $2.2 million and reduced diluted earnings per share by approximately $0.06. Restructuring expenses include pension charges, severance expenses and manufacturing equipment relocation costs and primarily relate to the closure of the Siloam Springs, Arkansas manufacturing facility that had been previously announced.  Approximately $1.0 million of these expenses were non-cash. The Company estimates that additional pre-tax closing costs of $1.8 million to $2.6 million will be incurred mostly in the second quarter of 2010 for the closure of the Siloam Springs facility.

Selling, General and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses increased by $1.4 million or about 4 percent in the first quarter of 2010 compared to the first quarter last year, primarily as a result of compensation related charges, commissions, and professional fees.  SG&A expenditures were reduced in the first quarter 2010 by $1.2 million for a gain on the sale of land and building.

Operating Income
Operating income was $12.4 million in the first quarter of 2010, up $4.5 million from $7.9 million for the first quarter 2009.

     
Q1 2010
      
Q1 2009
      
2010 v 20098
  
   
Operating income (loss)
  
Water Systems
  
$
17.3
    
$
9.7
    
$
7.6
  
Fueling Systems
  
$
4.3
    
$
7.0
    
$
(2.7
) 
Other
  
$
(9.2
)
  
$
(8.8
)
  
$
(0.4
)
Consolidated
  
$
12.4
    
$
7.9
    
$
4.5
  


Operating Income-Water Systems
Water Systems operating income was $17.3 million in the first quarter 2010, an increase of 78 percent versus the first quarter 2009.  Operating margins for Water Systems increased to 12.9 percent of sales versus 8.5 percent in the first quarter 2009, primarily as a result of higher revenues and leverage on flat year-over-year fixed costs.  The Water Systems operating income in the first quarter 2010 includes a $1.2 million gain on the sale of land and building in South Africa.  This gain was partially offset by increased costs for slow moving inventory versus the first quarter of 2009.

Operating Income-Fueling Systems
Fueling Systems operating income was $4.3 million compared to $7.0 million in the first quarter 2009; and operating margins were 16.3 percent of sales in the first quarter 2010 compared to 19.8 percent of sales in the first quarter 2009. The decline is primarily attributable to lost operating leverage on lower sales volume.

 
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Operating Income-Other
Operating income other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses were higher due primarily to compensation related expenses and professional fees.

Interest Expense
Interest expense for the first quarter of 2010 was $2.2 million, a decrease of $0.2 million, compared to 2009 first quarter interest expense of $2.4 million.

Other Income or Expense
Other income or expense was a loss of $2.2 million of the first quarter in 2010 and a gain of $0.3 million in the first quarter 2009.  Included in other income for the first quarter of 2010 and 2009 was interest income of $0.3 million, primarily derived from the investment of cash balances in short-term U.S. treasury and agency securities.  Also included in other income for the first quarter of 2010 was income from equity investments of $0.2 million.  Other income or expense in the first quarter 2010 also included the impact of the reversal of an indemnification receivable related to an uncertain tax position for $2.7 million related to an acquisition in a prior year.  The adjustment for the reversal of the uncertain tax position did not have an impact on net income.  The uncertain tax position was originally recorded as a receivable from the sellers per the terms of the purchase agreement.  The receivable and the tax liability related to the uncertain tax position were reversed in the first quarter of 2010 as the statutory limit for audit of the tax return expired.  Excluding the reversal of the uncertain tax position, “other income or expense” in the first quarter income statement would have resulted in about $0.5 million of income.

Foreign Exchange
Foreign currency-based transactions produced a gain for the first quarter of 2010 and 2009 of $0.2 million and $0.1 million, respectively, primarily due to euro rate changes relative to the U.S. dollar. 

Income Taxes
The provision for income taxes in the first quarter of 2010 and 2009 was $0.7 million and $1.8 million, respectively. The effective tax rate for the first quarter of 2010 was 31.5 percent excluding the impact of the reversal of an uncertain tax position.   The “Other income/(expense)” and “Income tax” lines on the income statement as reported include the impact of the reversal of a pre-acquisition uncertain tax position for $2.7 million related to an acquisition in a prior year.  Excluding the reversal of the uncertain tax position, “Other income/(expense)” would have resulted in about $0.5 million of income, and “Income taxes” would have resulted in about $3.4 million of expense.  The Company projects its full year effective tax rate, excluding discrete events, to be about 32.5 percent. The effective tax rate differs from the United States statutory rate of 35 percent, generally due to foreign income exclusion and due to the effects of state and foreign income taxes, net of federal tax benefits.

Net Income
Net income for the first quarter of 2010 was $7.4 million compared to 2009 first quarter net income of $4.1 million.  Net income attributable to Franklin Electric Co., Inc. for the first quarter of 2010 was $7.2 million, or $0.31 per diluted share, compared to 2009 first quarter net income attributable to Franklin Electric Co., Inc. of $3.8 million or $0.17 per diluted share.

CAPITAL RESOURCES AND LIQUIDITY
 
The Company’s primary sources of liquidity are cash flows from operations and funds available under its committed, unsecured, revolving credit agreement maturing 2011 (the “Agreement”) and its amended and restated uncommitted note purchase and private shelf agreement (the “Prudential Agreement”).  The Company has no scheduled principal payments on the Prudential Agreement until 2015.  As of April 3, 2010 the Company had no amounts outstanding and $117.8 million of borrowing capacity under the Agreement and $25 million of borrowing capacity under the Prudential Agreement.  Amounts available under the Agreement have been reduced by outstanding standby letters of credit.  The recent volatility in the financial and credit markets has not impacted the liquidity of the Company and the Company expects that ongoing requirements for operations, capital expenditures, dividends, and debt service will be adequately funded from its cash flows from operations and existing credit agreements.  The Agreement and the Prudential Agreement do not contain any material adverse change or similar provisions that would accelerate the maturity of amounts drawn under either agreement. The Agreement and Prudential Agreement contain various customary conditions and covenants, which limit, among other things, borrowings, interest coverage, loans or advances and investments.  As of April 3, 2010, the Company was in compliance with all covenants.

 
- 18 -
 


Net cash outflows from operating activities were $12.6 million in the three months ended April 3, 2010 compared to cash outflows of $1.0 million in the three months ended April 4, 2009.  Receivables and inventory were a $37.0 million net use of cash in the first three months of 2010.

Net cash used in investing activities was $0.4 million in the three months ended April 3, 2010 compared to $19.9 million for the three months ended April 4, 2009.  The 2009 activities were primarily related to $16.8 million, net of cash acquired, used to acquire Vertical S.p.A on January 16, 2009.  The acquisition was funded solely with cash.

Net cash used by financing activities of $2.5 million in the three months ended April 3, 2010 was primarily related to the payment of $2.9 million in dividends to the Company’s common shareholders.  Net cash provided by financing activities of $19.9 million in the three months ended April 4, 2009 was primarily related to proceeds from new debt incurred.

FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward-looking information, such as statements about the Company’s financial goals, acquisition strategies, financial expectations including anticipated revenue or expense levels, business prospects, market positioning, product development, manufacturing re-alignment, capital expenditures, tax benefits and expenses, and the effect of contingencies or changes in accounting policies.  Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “project,” “estimate,” “may increase,” “may fluctuate,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”  While the Company believes that the assumptions underlying such forward-looking statements are reasonable based on present conditions, forward-looking statements made by the Company involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those forward-looking statements as a result of various factors, including general economic and currency conditions, various conditions specific to the Company’s business and industry, new housing starts, weather conditions, 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, all as described in the Company’s Securities and Exchange Commission filings, included in Part 1, Item 1A of the Company’s Annual Report on Form 10K for the fiscal year ended January 2, 2010, and in Exhibit 99.1 thereto.  Any forward-looking statements included in this Form 10-Q are based upon information currently available.  The Company does not assume any obligation to update any forward-looking information.

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 the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a–15 under the Exchange Act during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 
- 19 -
 

PART II.  OTHER INFORMATION


In September 2006, the Company acquired Healy Systems, Inc.  During the first half of 2008, the Company completed a retrofit program in which it replaced a third-party-supplied component part in its Healy 900 Series nozzle, which is part of the Company’s Enhanced Vapor Recovery Systems installed in California gasoline filling stations.  In October 2008, the California Air Resources Board (“CARB”) issued a Notice of Violation (“NOV”) to the Company alleging that the circumstances leading to the retrofit program violated California statutes and regulations.  The Company is engaged in discussions with CARB in an attempt to resolve this matter and any related proceedings involving local regulatory agencies.  Resolution of the matter is not expected to adversely affect the Company’s sale of Enhanced Vapor Recovery Systems in California.  Depending upon the amount of any penalty paid by the Company in any agreed resolution or resulting from a proceeding if discussions do not result in agreement, resolution of the matter could have a material effect on the Company’s results of operations.  The Company has retained a portion of the purchase price and the earn-out payments otherwise due to James Healy (the principal former owner of Healy Systems) to satisfy the Company’s claims that Mr. Healy’s breaches of the purchase agreement led to the retrofit and the NOV.  In December 2008, Mr. Healy initiated litigation seeking recovery of the amounts retained by the Company.  The Company intends to defend vigorously its rights to retain these amounts.  In addition, Franklin Fueling Systems, Inc. has filed a complaint against Mr. Healy for breach of a separate consulting agreement that was executed in connection with the acquisition.  That complaint has been consolidated with the original complaint, and Mr. Healy has denied liability.  The parties are in the process of conducting discovery.
 
 
There were no material changes to the risk factors set forth in Part 1, Item 1A, in the Company’s annual report on Form 10-K for the fiscal year ended January 2, 2010.  Additional risks and uncertainties, not presently known to the Company or currently deemed immaterial, could negatively impact the Company’s results of operations or financial condition in the future.


(c)  
Issuer Repurchases of Equity Securities

In April 2007, the Company’s Board of Directors unanimously approved a resolution to increase the number of shares remaining for repurchase from 628,692 to 2,300,000 shares. There is no expiration date for the plan. During the first quarter of 2010, the Company did not repurchase shares under this plan. The maximum number of shares that may still be purchased under the Company plan is 1,877,400.



See the Exhibit Index located on page 22.

 
- 20 -
 





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.



     
FRANKLIN ELECTRIC CO., INC.
     
Registrant
       
       
       
       
Date: May 7, 2010
  
By
/s/ R. Scott Trumbull
     
R. Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive Officer)
       
       
       
Date: May 7, 2010
  
By
/s/ John J. Haines
     
John J. Haines, Vice President and Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)


 
 
 
- 21 -
 


FRANKLIN ELECTRIC CO., INC.
FOR THE FIRST QUARTER ENDED APRIL 3, 2010

   
Number
Description
   
10.1
Second Amendment to Employment Agreement of R. Scott Trumbull (attached herein)
   
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
   
99.1
Franklin Electric Co., Inc. Management Incentive Plan (incorporated by reference to Exhibit A to the Company’s  2010 Proxy Statement for the Annual Meeting held on April 30, 2010)


 
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