ITEM 1. BUSINESS - -----------------
Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and incorporated in 1946, and together with its subsidiaries (hereinafter referred to as the "Company" unless the context requires otherwise), conducts business in a single business segment: the design, manufacture and distribution of electric motors, electronic controls and related equipment.
Products and Markets Served - ---------------------------
The Company manufactures and distributes electric motors, electronic controls and related equipment. These motors are sold principally by a single company sales force in the United States, Canada, Europe, Australia, South Africa, Mexico and other world markets.
The market for electric motors is highly competitive and includes both large and small suppliers. The Company's motor sales are to original equipment manufacturers of pumps, petroleum pumping equipment, compressors, fans, heating and air conditioning equipment, swimming pool equipment, medical furniture and business machines. Motors are also sold in the replacement market through independent distributors and repair shops.
Goulds Pumps, Inc., a customer of the Company, accounted for 12.5 percent, 12.9 percent and 14.1 percent of the Company's consolidated sales in 1996, 1995 and 1994, respectively.
The Company offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. Special inventory requirements are not necessary, and customer merchandise return rights do not extend beyond normal warranty provisions.
The principal raw materials used in the manufacture of the Company's products are steel in coils and bars, copper wire, and aluminum ingot. Major components are capacitors, motor protectors, forgings, gray iron castings and bearings. Most materials are available from many sources in the United States and in many world markets. In the opinion of management, no single source of supply is critical to the Company's business. Availability of fuel and energy is adequate to satisfy current and projected overall operations unless interrupted by government direction or allocation.
The Company employed 2,601 persons at the end of 1996.
Financial Information by Geographic Area - ----------------------------------------
Financial information by geographic area is included within this Form 10-K.
Research and Development - ------------------------
The Company spent approximately $4.8 million in 1996, $4.7 million in 1995 and $4.2 million in 1994 on activities related to the development of new products, on improvements of existing products and manufacturing methods, and on other applied research and development.
In 1996, work continued on the development of submersible wet winding motors, a new line of "severe duty" motors, and a new line of surface mount motor protection systems. Research continued on new materials and processes which wil1 result in more cost effective manufacture of high volume products.
The Company owns several patents. In the aggregate, these patents are of material importance to the business; however, the Company believes that its operations are not dependent on any single patent or group of patents.
Backlog - -------
The dollar amount of backlog at the end of 1996 and 1995 was as follows:
(In thousands) Fiscal Year Ending --------------------- 1996 1995 ---- ----
Backlog....................... $21,324 $22,331
The backlog is composed of written orders at prices adjustable on a price-at- the-time-of-shipment basis for products, some of which are specifically designed for the customer, but most of which are standard catalog items. Both add-ons and cancellations of catalog items are made without charge to the customer, but charges are generally made on any cancellation of a specifically designed product. All backlog orders are expected to be filled in fiscal 1997.
The Company's sales and earnings are not substantially seasonal in nature. There is no seasonal pattern to the backlog and the backlog has not proven to be a significant indicator of future sales.
Environmental Matters - ---------------------
Compliance with federal, state and local provisions regulating the discharge of material into the environment, or otherwise relating to the protection of the environment, is not expected to have any material adverse effect upon the financial position, capital expenditures, earnings or competitive position of the Company. Refer to Item 3 of this Form 10-K for additional information regarding legal proceedings related to environmental matters.
ITEM 2.
ITEM 2. PROPERTIES - -------------------
The Company maintains its principal executive offices in Bluffton, Indiana; manufacturing plants are located in the United States and abroad. Location and approximate square footage for the Company's principal facilities are described below. All principal properties are owned or held under operating lease.
The Company's principal properties are as follows:
Acres Approximate Location of Land Square Feet -------- ------- ----------- Bluffton, Indiana 35.8 405,660 Siloam Springs, Arkansas 32.6 240,400 Wilburton, Oklahoma 40.0 321,350 Tulsa, Oklahoma 10.3 154,193 Jonesboro, Indiana (1) - 34,570 Wittlich, Rhineland, Germany 6.8 76,365 Fourteen facilities with less than 30,000 square feet each (2) 5.3 162,338 ----- ---------
Total 130.8 1,394,876 ===== ==========
In the Company's opinion, its facilities are suitable for their intended use and are in good condition.
(1) Leased facility, which expires on April 30, 1998.
(2) Twelve of the facilities are leased with approximately 119,000 square feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - --------------------------
The Company is defending various claims and legal actions which have arisen in the ordinary course of business. The Company has attempted, where possible, to assess the likelihood of an unfavorable outcome as a result of these actions. Legal counsel has been retained to assist the Company in making these determinations, and costs are accrued when an unfavorable outcome is determined to be probable and a reasonable estimate can be made. As a result, the Company has an accrual balance of approximately $1.6 million and $1.4 million at December 28, 1996 and December 30, 1995, respectively, to provide for such actions.
Included in such matters are two pending governmental actions associated with hazardous waste sites falling under the Comprehensive Environmental Response Compensation and Liability Act in which the Company has been designated, in conjunction with other parties, as a "potentially responsible party" (PRP). The range of the Company's potential liability for the first site is unknown as the total cost for the site remediation and allocation among the PRPs has not been determined; however, the Company believes such matters are substantially covered by the Company's insurance. The current estimate for remediation at the second site is $15.0 million, for which the Company has agreed under consent decree to pay 1.341 percent (approximately $201,000) over the next five to fifteen years. The Company has paid approximately $103,000 of this amount through December 28, 1996.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------
The names, ages and all positions and offices held by the executive officers of the Company are:
In this Name Age Positions and Offices office since ---- --- --------------------- ------------
William H. Lawson 60 Chairman of the Board and Chief Executive Officer 1985 John B. Lindsay (1) 54 President 1995 Jess B. Ford (2) 45 Vice President and Chief Financial Officer 1995 William J. Foreman(3) 60 Vice President 1995 Kirk M. Nevins(4) 53 Vice President, Sales 1995 Donald R. Hobbs (5) 55 Vice President, Submersible Motor Marketing 1996
The term of office of each officer is one year and until his successor shall have been elected and qualified at the meeting of the Board of Directors following the Annual Meeting of Shareholders.
(1) In 1995, Mr. Lindsay was elected President of the Company. Mr. Lindsay served as Vice President from 1986 until 1993 and as Executive Vice President from 1993 until 1995.
(2) Prior to joining the Company in October 1995, Mr. Ford was employed by Tokheim Corporation (a manufacturer of petroleum dispensing marketing systems) from 1992 until 1995 as Vice President-Finance, Secretary and Chief Financial Officer and prior to 1992 as Vice President-Corporate Finance and Corporate Controller.
(3) For the five-year period preceding July 1995, Mr. Foreman was Plant Manager for certain divisions of the Company.
(4) For the five-year period preceding July 1995, Mr. Nevins was North American Sales Manager of the Company.
(5) For the five-year period preceding April 1996, Mr. Hobbs was Marketing Manager for the submersible motor division of the Company.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - -------------------------------------------------------------------------- MATTERS - -------
The number of stockholders of record as of February 14, 1997 was 1,240. The Company's stock is traded on NASDAQ National Market: Symbol FELE.
Dividends paid and the price range per common share as quoted in The Wall Street Journal for 1996 and 1995 were as follows:
DIVIDENDS PER SHARE PRICE PER SHARE 1996 1995 1996 1995 ---- ---- ---- ---- Low High Low High --- ---- --- ---- 1st Quarter... $.10 $.08 $31 1/4 $38 1/4 $31 $34 1/2 2nd Quarter... $.12 $.10 $35 $37 $30 $34 1/2 3rd Quarter... $.12 $.10 $30 3/4 $35 5/8 $29 1/2 $32 1/2 4th Quarter... $.12 $.10 $33 3/4 $45 1/4 $28 1/4 $33 1/4
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - --------------------------------
FIVE YEAR FINANCIAL SUMMARY - ----------------------------
FRANKLIN ELECTRIC CO., INC. (In thousands, except per share amounts)
1996 1995 1994 1993 1992 (c) OPERATIONS: Net Sales................. $300,689 $276,440 $241,440 $206,406 $198,618 Gross Profit.............. 79,053 65,371 63,134 53,131 50,260 Income before extraordinary credit and change in accounting principle............... 21,510 15,502 18,709 16,103 13,665 Interest Expense.......... 1,308 2,128 2,172 2,949 2,595 Income Taxes (a).......... 11,827 8,777 11,504 5,796 8,882 Net Income................ 21,510 15,502 18,709 17,096 13,811 Net Income Available to Common Shares........... 21,510 15,502 18,556 16,485 12,218 Depreciation and Amortization............ 8,389 8,890 6,961 6,185 4,525 Capital Expenditures...... 6,235 6,111 7,612 6,359 5,833 BALANCE SHEET: Working Capital........... 88,224 68,024 50,092 44,819 26,943 Property, Plant and Equipment, Net.......... 40,097 41,670 41,896 25,591 24,003 Total Assets.............. 173,459 153,357 151,581 122,703 99,868 Long-term Debt............ 20,276 20,171 20,000 30,016 22,819 Shareowners' Equity....... $ 99,823 $ 80,557 $ 64,865 $ 50,127 $ 39,667 OTHER DATA: % Net Income to Sales..... 7.2% 5.6% 7.8% 8.3% 7.0% % Net Income to Total Average Assets.......... 13.2% 10.2% 13.6% 15.4% 13.7% Current Ratio............. 3.0 2.6 1.9 2.3 1.9 PER SHARE: Market Price Range High...................... $ 45.25 $ 34.50 $ 36.50 $ 37.25 $ 25.00 Low....................... 30.75 28.25 24.50 22.00 17.50 Income before extraordinary credit and change in accounting principle............... 3.22 2.35 2.84 2.37 1.85 Net Income per Weighted Average Common Share(b). 3.22 2.35 2.84 2.52 1.88 Book Value................ 14.95 12.21 9.92 7.65 5.20 Cash Dividends on Common Stock................... $ 0.46 $ 0.38 $ 0.29 $ 0.15 $ -
(a) Includes credit for cumulative effect of change in accounting principle- SFAS No. 109 "Accounting for Income Taxes" of $993 in 1993; extraordinary credit for tax benefit of loss carryforward of $156 in 1992.
(b) Fully diluted earnings per share for each year presented was as follows: 1996, $3.18; 1995, $2.34; 1994, $2.83; 1993, $2.50; 1992, $1.88.
(c) Includes only one month of results of operations of Oil Dynamics, Inc., but total assets and liabilities of Oil Dynamics, Inc. at December 31, 1994. If the effect of including Oil Dynamics, Inc. on a fully consolidated basis beginning November 29, 1994 was excluded, net income as a percent of total average assets would have been 15.8 percent and the current ratio would have been 2.3. Previously, the Company maintained an investment in affiliate account approximately equal to 50 percent of the net assets of Oil Dynamics, Inc.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - -------------------------------------------------------------------- AND RESULTS OF OPERATIONS - -------------------------
RESULTS OF OPERATIONS - --------------------- Net sales for 1996 were $300.7 million, a 9 percent increase over 1995 net sales of $276.4 million. This increase is primarily due to higher unit volume at the Company's wholly owned subsidiaries, Oil Dynamics, Inc. (ODI) and FE Petro, Inc., and due to higher average selling prices throughout the Company. In 1994, net sales were $241.4 million. The increase in 1995 net sales over 1994 was principally due to the inclusion of ODI on a fully consolidated basis for 1995 and, to a lesser degree, increases in selling prices and unit volume.
Net income for 1996 was $21.5 million, or $3.22 per share, compared to 1995 net income of $15.5 million, or $2.35 per share. This increase was primarily due to higher net sales and improvements in the operations of ODI and in the Company's European operations. Net income for 1994 was $18.6 million, or $2.84 per share. The decrease from 1994 to 1995 was principally due to an increase in cost of sales as a percent of net sales primarily attributable to ODI and the Company's German subsidiary, a decrease in North American residential submersible motor unit shipment volume, and foreign currency transaction losses.
Cost of sales as a percent of net sales for 1996, 1995 and 1994 was 73.7 percent, 76.4 percent and 73.9 percent, respectively. The decrease in 1996 was primarily due to increased sales and decreases in both fixed and variable manufacturing costs at ODI and the Company's European operations. The 1995 increase was due to increases in fixed manufacturing expenses as a percent of net sales resulting from the full year inclusion of ODI on a consolidated basis which was impacted by a decline in unit volume contributing to lower overhead absorption, as well as increases in expenses supporting the Company's international operations.
Selling and administration expenses as a percent of net sales for 1996, 1995 and 1994 was 15.3 percent, 14.7 percent and 13.8 percent, respectively. The increase in 1996 was primarily due to sales commissions on ODI's sales to Russian oil companies, performance incentives and expenses associated with employee stock awards and stock appreciation rights granted prior to 1996. The 1995 increase was due to the full year inclusion of ODI on a consolidated basis and due to investments in systems and personnel in support of the Company's international operations.
Included in other income, net for 1996, 1995 and 1994 was interest income of $2.1 million, $1.9 million and $1.7 million, respectively, primarily derived from the investment of cash balances in short-term U.S. treasury bills. Interest expense for 1996, 1995 and 1994 was $1.3 million, $2.1 million and $2.2 million, respectively.
Foreign currency based transactions produced a $0.3 million loss in 1996, a $0.7 million loss in 1995, and a $0.4 million gain in 1994. The foreign currency transaction loss in 1996 was primarily due to unfavorable movements in the South African rand and German mark relative to the U.S. dollar. This loss was partially offset by the movement of the Italian lira relative to the German mark. The foreign currency transaction loss in 1995 was primarily due to the movement of the Italian lira relative to the German mark and the movement of the U.S. dollar relative to the Australian dollar and Mexican peso. The currency transaction gain in 1994 was primarily due to the movement of the U.S. dollar relative to the German mark and the Australian dollar.
The provision for income taxes in 1996, 1995 and 1994 was $11.8 million, $8.8 million and $11.5 million, respectively. The effective tax rate for each year differs from the United States statutory rate of 35 percent principally due to the effects of state and foreign income taxes, net of federal tax benefits.
Equity in the earnings of affiliate was $0.2 million in 1994. Previously a 50 percent owned joint venture, ODI became a 97 percent owned, fully consolidated subsidiary effective November 29, 1994, with the payment by ODI of a cash dividend to the Company's investment partner and a stock dividend to the Company. ODI changed its year-end in 1994 to conform to the Company's year- end. The change did not materially affect the Company's results of operations. In April 1996, the Company purchased the remaining 3 percent of ODI.
Inflation has not had a significant effect on the Company's operations or financial condition.
CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- Cash flows from operations provide the principal source of current liquidity. Net cash flows provided by operating activities were $30.9 million, $15.5 million and $28.3 million in 1996, 1995 and 1994, respectively. The 1996 increase was due primarily to the increase in net income and decrease in inventories. The decrease in cash flows provided by operating activities in 1995 was due primarily to the decrease in net income, the increase in inventories and the decrease in accrued expenses relative to 1994.
Net cash flows used in investing activities of $38.1 million during 1996 primarily consisted of purchases of short-term marketable securities which were partially offset by proceeds from the maturity of these securities. During 1996, the Company changed its excess cash investment practice to take advantage of higher yields on treasury bills with maturities extending beyond three months. Cash flows used in investing activities in 1996 also included $6.2 million of additions to plant and equipment. Net cash flows used in investing activities of $6.6 million and $6.3 million in 1995 and 1994, respectively, primarily consisted of additions to plant and equipment.
Net cash flows used in financing activities were $2.5 million, $15.5 million and $21.3 million in 1996, 1995 and 1994, respectively. The primary use of cash for financing activities in 1996 was for the payment of dividends on the Company's common stock. In 1995, the Company borrowed $3.5 million on a short-term basis to finance current working capital requirements, of which $3.1 million was repaid by year-end. The Company also repaid $15.2 million of short-term borrowings originating in 1994. During 1994, the Company paid off a $10.0 million note to the estate of Edward J. Schaefer, redeemed all outstanding shares of Class C preferred stock for $5.8 million and purchased 109,979 shares of common stock for $3.8 million. Of the 109,979 shares repurchased, 17,310 shares were issued to Company-sponsored benefit plans to satisfy the Company's obligation to these plans and the remaining shares were retired.
Cash and cash equivalents at the end of 1996 were $23.0 million compared to $32.1 million at the end of 1995. The decrease was due to the investment of excess cash in short-term marketable securities. Working capital increased $20.2 million in 1996 and the current ratio of the Company was 3.0 and 2.6 at the end of 1996 and 1995, respectively.
As further described in Note 12 to the Company's Financial Statements, in January 1997, the Company completed the repurchase of 500,000 shares of its common stock at an aggregate purchase price of $24.0 million. The shares were subsequently retired.
Principal payments on the Company's $20 million of unsecured long-term debt begin in 1998 and continue until 2008 when a balloon payment of $10.0 million will fully retire the debt. In January 1996, the Company entered into an unsecured, five-year $40 million revolving credit agreement (the "Agreement"). The Agreement provides for various borrowing rate options and includes a facility fee on the committed amount. Both of the Company's loan agreements contain certain financial covenants with respect to borrowings, fixed charge coverage, working capital, loans or advances, and investments. The Company was in compliance with all debt covenants in 1996 and 1995.
At December 28, 1996, the Company had $3.7 million of commitments for the purchase of machinery and equipment. During 1997, the Company intends to continue to seek acquisition candidates that are both compatible with and can leverage growth off of existing businesses.
Management believes that internally generated funds and existing credit arrangements provide sufficient liquidity to meet current and future commitments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ----------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - ---------------------------------------------------------------------
1996 1995 1994 (In thousands, except per share amounts) - --------------------------------------------------------------------- Net sales............................. $300,689 $276,440 $241,440 Cost of sales (including research and development expenses of $4,846, $4,742 and $4,244, respectively)....................... 221,636 211,069 178,306 -------- -------- -------- Gross profit.......................... 79,053 65,371 63,134 Selling and administrative expenses... 45,854 40,688 33,313 -------- -------- -------- Operating income...................... 33,199 24,683 29,821 Interest expense...................... (1,308) (2,128) (2,172) Other income, net..................... 1,698 2,441 1,955 Foreign exchange gain (loss).......... (252) (717) 392 Equity in earnings of affiliate....... - - 217 -------- -------- -------- Income before income taxes............ 33,337 24,279 30,213 Income taxes (Note 5)................. 11,827 8,777 11,504 -------- -------- --------
Net income............................ 21,510 15,502 18,709 Dividends on preferred stock.......... - - 153 -------- -------- -------- Net income available to common shares. $ 21,510 $ 15,502 $ 18,556 ======== ======== ========
Per share data:
Weighted average common shares........ 6,676 6,598 6,537 ======== ======== ========
Net income available per common share. $ 3.22 $ 2.35 $ 2.84 ======== ======== ========
Dividends per common share............ $ .46 $ .38 $ .29 Dividends per preferred share Class C............................. $ - $ - $ 2.63
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - ---------------------------------------------------------------------
ASSETS 1996 1995 (In thousands) - ---------------------------------------------------------------------
Current assets: Cash and equivalents........................ $ 22,968 $ 32,077 Marketable securities....................... 31,624 - Receivables (less allowances of $1,435 and $1,351, respectively)................. 25,134 22,526 Inventories: Raw materials............................. 15,958 17,080 Work-in-process........................... 4,942 5,899 Finished goods............................ 32,528 34,614 LIFO reserve.............................. (11,123) (11,754) -------- -------- 42,305 45,839 Other current assets (including deferred income taxes of $7,755 and $7,823, respectively)............................. 9,485 8,879 -------- -------- Total current assets.................... 131,516 109,321
Property, plant and equipment, at cost: Land and buildings.......................... 28,335 29,173 Machinery and equipment..................... 95,457 92,523 -------- -------- 123,792 121,696 Less allowance for depreciation........... 83,695 80,026 -------- -------- 40,097 41,670
Deferred and other assets..................... 1,846 2,366 -------- --------
Total Assets $173,459 $153,357 ======== ========
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------- LIABILITIES AND SHAREOWNERS' EQUITY 1996 1995 (In thousands) - ---------------------------------------------------------------------
Current liabilities: Short-term borrowings (Note 6).............. $ 21 $ 461 Accounts payable............................ 14,049 15,882 Accrued expenses (Note 4)................... 24,883 23,228 Income taxes (Note 5)....................... 4,339 1,726 -------- -------- Total current liabilities................. 43,292 41,297
Long-term debt (Note 6)....................... 20,276 20,171
Employee benefit plan obligations (Note 3).... 5,741 6,069
Other long-term liabilities................... 4,144 4,956
Deferred income taxes (Note 5)................ 183 307
Shareowners' equity (Note 7): Common shares outstanding 6,371 and 6,254, respectively............. 638 626 Additional capital.......................... 7,613 5,683 Retained earnings........................... 95,961 77,363 Stock subscriptions......................... (997) (1,315) Cumulative translation adjustment........... (625) 600 Loan to ESOP Trust (Note 3)................. (2,524) (2,400) Minimum pension liability adjustment, net of taxes (Note 3)......... (243) - -------- -------- Total shareowners' equity................. 99,823 80,557 -------- --------
Total Liabilities and Shareowners' Equity $173,459 $153,357 ======== ========
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - --------------------------------------------------------------------------- 1996 1995 1994 (In thousands) - --------------------------------------------------------------------------- Cash flows from operating activities: Net income............................... $21,510 $15,502 $18,709 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization.......... 8,389 8,890 6,961 Equity in earnings of affiliate, less dividends....................... - - (217) Deferred income taxes.................. (56) (2,091) (311) Gain on disposals of plant and equipment........................ (20) (43) (132) Changes in assets and liabilities: Receivables.......................... (3,190) 29 (1,516) Inventories.......................... 2,164 (7,628) (2,355) Other assets......................... (291) 417 (572) Accounts payable and other accrued expenses................... 3,834 (679) 7,168 Employee benefit plan obligations.... (571) 1,166 2,122 Other long-term liabilities.......... (827) (69) (1,604) ------- ------- ------- Net cash flows from operating activities. 30,942 15,494 28,253 ------- ------- -------
Cash flows from investing activities: Additions to plant and equipment....... (6,235) (6,111) (7,612) Proceeds from sale of plant and equipment........................ 257 70 278 Acquired cash of subsidiary (Note 2)... - - 1,020 Additions to deferred assets........... (445) (630) - Purchases of marketable securities..... (52,866) - - Proceeds from maturities of marketable securities........................... 21,242 - - Other, net............................. (69) 78 - ------- ------- ------- Net cash flows from investing activities. (38,116) (6,593) (6,314) ------- ------- -------
Cash flows from financing activities: Borrowing on long-term debt............ 199 - - Repayment of long-term debt (Note 6)... (97) - (10,016) Borrowing on line of credit............ - 3,549 - Repayment of line of credit............ (393) (18,300) (68) Redemption of preferred stock (Note 7). - - (5,818) Proceeds from issuance of common stock. 811 530 130 Purchase of treasury stock (Note 7).... - - (3,757) Proceeds from stock subscriptions...... 25 866 - Loan to ESOP Trust..................... (324) - - Reduction of loan to ESOP Trust........ 200 200 200 Dividends paid......................... (2,912) (2,370) (1,942) ------- ------- ------- Net cash flows from financing activities. (2,491) (15,525) (21,271) ------- ------- -------
Effect of exchange rate changes on cash.. 556 (189) (865) ------- ------- -------
Net decrease in cash and equivalents..... (9,109) (6,813) (197) Cash and equivalents at beginning of year...................... 32,077 38,890 39,087 ------- ------- ------- Cash and equivalents at end of year...... $22,968 $32,077 $38,890 ======= ======= =======
Cash paid during 1996, 1995 and 1994 for interest was $1.3 million, $2.4 million and $2.1 million, respectively. Also, cash paid during 1996, 1995 and 1994 for income taxes was $9.3 million, $12.0 million and $10.0 million, respectively.
Non-cash transactions: - ---------------------- During the first quarter of 1995, the Company issued 20,000 common shares valued at $0.6 million under the 1988 Executive Stock Purchase Plan.
During the first quarter of 1994, the Company issued 17,310 common shares valued at $0.6 million to Company-sponsored benefit plans.
During the second quarter of 1994, the Company issued 48,000 common shares valued at $1.3 million under the 1988 Incentive Stock Award Plan.
During the fourth quarter of 1994, previously 50 percent owned joint venture, Oil Dynamics, Inc., became a 97 percent owned consolidated subsidiary (see Note 2).
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES - ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR--The Company's fiscal year ends on the Saturday nearest December 31. The financial statements and accompanying notes are as of and for the years ended December 28, 1996 (52 weeks), December 30, 1995 (52 weeks) and December 31, 1994 (52 weeks) and are referred to as 1996, 1995 and 1994, respectively.
PRINCIPLES OF CONSOLIDATION--The financial statements include the accounts of the Company and all majority-owned subsidiaries. The accounts of certain foreign subsidiaries are included in the financial statements on their fiscal years ended November 30. Beginning November 29, 1994, the results of operations of Oil Dynamics, Inc. were included on a fully consolidated basis (see Note 2).
CASH EQUIVALENTS--Cash equivalents consist of highly liquid investments which are readily convertible to cash, present insignificant risk of changes in value due to interest rate fluctuations and generally have original maturities of three months or less.
MARKETABLE SECURITIES--Marketable securities consist of short-term U.S. Treasury Bills with original maturities generally greater than three months. All securities are expected to be held to maturity and, as such, are stated at amortized cost. Due to the nature of these securities, the difference between the amortized cost and fair value is immaterial.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts for cash and equivalents, long-term debt and short-term debt approximate fair value. The fair value of long-term debt is estimated based on current borrowing rates for similar issues. The Company's off-balance sheet instruments are not significant.
INVENTORIES--Inventories are stated at the lower of cost or market. The majority of the cost of domestic inventories is determined using the last-in, first-out (LIFO) method; all remaining inventory costs are determined using the first-in, first-out (FIFO) method. Inventories stated on the LIFO method approximated 64 percent of total inventories in 1996 and 1995. In 1996, due to the liquidation of LIFO inventories, net income increased by $0.5 million.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided principally on a straight line basis over the estimated useful lives of 5 to 50 years for land improvements and buildings, 2 to 10 years for machinery, equipment, furniture, and fixtures and 3 to 5 years for automobiles and trucks. Accelerated methods are used for income tax purposes.
STOCK-BASED COMPENSATION--Management of the Company has elected to adopt the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Employee stock-based compensation will continue to be accounted for under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense is recognized in the financial statements as the exercise price of the Company's stock options equals the market price of the underlying stock on the dates of the grants.
EARNINGS PER COMMON SHARE--Primary and fully diluted earnings per common share are computed based upon earnings applicable to common shares, divided by the sum of the average number of common shares outstanding during the period plus dilutive common stock equivalents. Separate presentation of primary and fully diluted earnings per common share has not been made because the difference is immaterial.
TRANSLATION OF FOREIGN CURRENCIES--All assets and liabilities of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. All revenue and expense accounts are translated at average rates in effect during the period.
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to conform to the current year presentation.
2. INVESTMENT IN AFFILIATE
Summarized below is selected 1994 financial information for the Company's investment in its previously unconsolidated affiliate, Oil Dynamics, Inc.(ODI). Beginning November 29, 1994, ODI was included in the Company's financial statements on a fully consolidated basis.
(In thousands) - ------------------------------------------------------
Net sales................ $44,043 Gross profit............. 10,735 Net income............... 773
On November 29, 1994, control of the previously 50 percent owned ODI was effectively transferred to the Company. The change in control resulted from receipt of a stock dividend (in lieu of a cash dividend received by the investment partner) which increased the Company's ownership interest to approximately 97 percent. The change in control has been accounted for under the purchase method. On April 4, 1996, the Company purchased the remaining 3 percent.
Equity in the earnings of ODI is included in the results of operations using the equity method of accounting for the thirteen months ended November 28, 1994. Beginning November 29, 1994, the results of operations and financial position of ODI have been included on a fully consolidated basis. In 1994, the fiscal year end of ODI was changed to conform with the Company's fiscal year end. This change did not materially affect the Company's financial statements.
Summarized below are the unaudited pro forma consolidated results of operations of the Company and ODI as though control of ODI had been transferred to the Company as of the beginning of 1994. These results include certain pro forma adjustments, primarily increased interest expense, and are not necessarily indicative of the results that would have been obtained had the Company controlled ODI during the respective periods.
(In thousands, except per share amounts) - -------------------------------------------------------------------
Net sales............................... $285,483 Net income.............................. 18,967 Per share data: Net income.......................... $ 2.88
3. EMPLOYEE BENEFIT PLANS
PENSION PLANS--The Company's domestic operations maintain four separate pension plans covering substantially all of its U.S. employees. A non- contributory defined benefit pension plan covering substantially all U.S. employees provides benefits based upon years of credited service. A contributory defined benefit pension plan covering substantially all U.S. salaried employees provides benefits based upon the highest average thirty-six consecutive monthly earnings before retirement. A non-contributory defined benefit pension plan covering certain management employees provides benefits in excess of those provided under other plans. A non-contributory defined benefit pension plan covering substantially all other employees of the Company not covered under other plans provides benefits based upon a percentage of monthly earnings for each year of credited service. The Company's funding policy is to make the minimum annual contribution required by applicable regulations.
Net domestic pension cost for 1996, 1995 and 1994 was as follows:
(In thousands) - ---------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Service cost.................... $ 2,295 $ 1,846 $ 1,726 Interest on projected benefit obligation............ 5,291 4,952 4,310 Actual return on plan assets.... (16,769) (13,082) 1,356 Net amortization and deferral... 11,331 7,559 (6,367) ------- ------- ------- Net domestic pension cost....... $ 2,148 $ 1,275 $ 1,025 ======= ======= =======
The following table sets forth the funded status of the Company's domestic plans and accrued pension costs reflected in the Company's balance sheet at year end. The Company's international subsidiaries' pension liabilities have been excluded from the following presentation because the amounts are immaterial.
(In thousands) - ---------------------------------------------------------------------- ABO Exceeds Assets Assets Exceed ABO ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Actuarial present value of benefit obligations: Vested employees........... $ 1,120 $41,886 $66,271 $19,662 Nonvested employees........ 38 2,071 2,787 802 ------- ------- ------- ------- Accumulated benefit obligation (ABO)............. 1,158 43,957 69,058 20,464 Additional amount related to projected benefit or pay increases............. 307 386 5,624 4,853 ------- ------- ------- ------- Projected benefit obligation... 1,465 44,343 74,682 25,317 Fair value of plan assets, primarily common stocks and bonds, including $23,306 and $16,500 of the Company's common stock in 1996 and 1995, respectively........... - 41,013 86,030 29,871 ------- ------- ------- ------- Funded status.................. (1,465) (3,330) 11,348 4,554 Unrecognized net (gain) loss... 712 (4,037) (18,698) (4,000) Unrecognized net obligation (asset) at date of initial application of SFAS No. 87... - 273 (242) (558) Unrecognized prior service cost......................... 32 2,556 4,674 (221) Adjustment required to recognize minimum liability.. (437) (134) - - ------- ------- ------- ------- Accrued pension liability...... $(1,158) $(4,672) $(2,918) $ (225) ======= ======= ======= =======
Actuarial Assumptions: 1996 1995 1994 ---- ---- ---- Discount rate.................. 7.50% 7.50% 8.0-8.25% Rate of increase in future compensation................. 0-5.0% 0-5.0% 0-5.0% Expected long-term rate of return on plan assets........ 8.25-9.0% 8.25-9.0% 8.25-9.0%
Pursuant to the provisions of Statement of Financial Accounting Standards No. 87 "Employers' Accounting for Pensions," the Company recorded in other noncurrent liabilities an additional minimum pension liability adjustment of $437,000 as of December 28, 1996, to recognize the amount of the accumulated plan benefits which exceeds the fair value of the plan assets and the accrued pension liability. At December 28, 1996, the liability exceeded the unrecognized prior service cost resulting in a minimum pension liability, net of taxes, of $243,000 recorded as a reduction of the Company's equity.
401(k)PLAN--Prior to January 1, 1995, the Company maintained a 401(k) Directed Investment Salary Plan (DISP) covering substantially all employees and a Savings Plan (Savings Plan) covering substantially all hourly employees at its Bluffton facility. Effective January 1, 1995, the Company merged the Savings Plan into the DISP.
EMPLOYEE STOCK OWNERSHIP PLAN--The Company maintains an Employee Stock Ownership Plan (ESOP) for substantially all of the its domestic employees excluding hourly employees at its Bluffton and Jonesboro, Indiana; Siloam Springs, Arkansas; and McFarland, Wisconsin, locations.
In June 1996 and in July 1992, the ESOP Trustee acquired additional shares of Company common stock on the open market using the proceeds of a ten-year, $0.3 million loan and a fifteen-year, $3.0 million loan, respectively, from the Company. Under the terms of the variable rate loans (6.31 percent at December 28, 1996), principal plus interest is payable in equal annual installments. The shares of stock purchased with the loan proceeds are collateral for the loan and are considered outstanding for purposes of calculating earnings per share.
At December 28, 1996, 87,186 shares were allocated to the accounts of participants, 10,968 shares were committed to be released and allocated to the accounts of participants for service rendered during 1996, and 87,503 shares were held by the ESOP Trust in suspense.
The Company contributes a portion of its 401(k) matching contribution as well as an additional annual contribution, both subject to the Company's annual financial results, to the ESOP Trust. The ESOP Trustee uses a portion of the Company's contributions to make principal and interest payments on the loan. As loan payments are made, shares of common stock are released as collateral and are allocated to participants' accounts. The balance of the Company's contributions in cash or common stock is made to the 401(k) and ESOP Trusts, and allocated to participants' accounts to satisfy the balance of the Company's 401(k) matching contribution.
The following table sets forth the interest expense and Company contributions to the ESOP and 401(k) Plan (dividends on the Company's common stock held by the ESOP are not used for debt service):
(In thousands) - -------------------------------------------------------------------- 1996 1995 1994 ---- ---- ----
Interest expense incurred by the Plan on ESOP debt............................. $ 153 $ 155 $167 Company contributions to ESOP and 401(k)... 1,217 1,292 992
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS--The Company's postretirement plan covers domestic employees hired prior to 1992. The Company effectively capped its cost for such benefits through plan amendments made in 1992 freezing Company contributions for health and life insurance benefits at 1991 levels for current and future beneficiaries with actuarially reduced benefits for employees who retire before age 65.
Net postretirement benefit cost for 1996, 1995 and 1994 was as follows:
(In thousands) - -------------------------------------------------------------------- 1996 1995 1994 ---- ---- ----
Service cost............................... $ 244 $ 219 $ 246 Interest cost.............................. 803 837 806 Amortization of transition obligation...... 489 489 489 Net amortization and deferral.............. 59 7 83 ------ ------ ------
Net postretirement benefit cost............ $1,595 $1,552 $1,624 ====== ====== ======
The following table sets forth the funded status of the Company's postretirement benefit plans and accrued postretirement benefit cost reflected in the Company's balance sheet at year end:
(In thousands) - ------------------------------------------------------------------- 1996 1995 ---- ----
Accumulated postretirement benefit obligation Retirees................................ $(7,640) $(7,939) Active employees........................ (3,562) (3,318) ------- ------- (11,202) (11,257) Unrecognized net obligation at date of adoption of SFAS No. 106........... 7,823 8,312 Unrecognized net loss................... 1,714 1,773 ------- ------- Accrued postretirement benefit cost..... $(1,665) $(1,172) ======= =======
The discount rate used in determining the accumulated postretirement benefit obligation was 7.50, 7.50 and 8.25 percent in 1996, 1995 and 1994, respectively.
4. ACCRUED EXPENSES
Accrued expenses consisted of:
(In thousands) - ------------------------------------------------------------------ 1996 1995 ---- ----
Salaries, wages and commissions....... $ 7,178 $ 6,100 Product warranty costs................ 4,719 4,745 Insurance............................. 4,896 4,843 Employee benefits..................... 2,818 2,971 Other................................. 5,272 4,569 ------- ------- $24,883 $23,228 ======= =======
5. INCOME TAXES
Income before income taxes consisted of:
(In thousands) - ------------------------------------------------------------------- 1996 1995 1994 ---- ---- ----
Domestic.................... $27,664 $23,647 $28,202 Foreign..................... 5,673 632 2,011 ------- ------- ------- $33,337 $24,279 $30,213 ======= ======= =======
The income tax provision consisted of: (In thousands) - ------------------------------------------------------------------- 1996 1995 1994 ---- ---- ----
Currently payable: Federal................... $ 8,110 $8,714 $ 7,966 Foreign................... 1,611 113 1,277 State..................... 2,162 2,041 2,572 Deferred: Federal................... (44) (2,293) 169 Foreign................... 50 343 (408) State..................... (62) (141) (72) ------- ------ ------- $11,827 $8,777 $11,504 ======= ====== =======
Significant components of the Company's deferred tax assets and liabilities were as follows: (In thousands) - ------------------------------------------------------------------- 1996 1995 ---- ---- Deferred tax assets: Accrued expenses and reserves.............. $ 6,835 $ 6,033 Compensation and employee benefits......... 4,380 4,516 Foreign tax credits........................ - 385 Other items................................ 670 744 ------- ------- Total deferred tax assets................ 11,885 11,678 ------- -------
Deferred tax liabilities: Accelerated depreciation on fixed assets... 4,132 4,055 Other items................................ 181 107 ------- ------- Total deferred tax liabilities........... 4,313 4,162 ------- -------
Net deferred tax assets...................... $ 7,572 $ 7,516 ======= =======
The portions of current and non-current deferred tax assets and liabilities were as follows:
(In thousands) - ----------------------------------------------------------------- 1996 1995 --------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities ------ ----------- ------ -----------
Current........ $ 7,840 $ 85 $ 7,908 $ 85 Non-current.... 4,045 4,228 3,770 4,077 ------- ------ ------- ------ Total.......... $11,885 $4,313 $11,678 $4,162 ======= ====== ======= ======
There was no valuation allowance for deferred tax assets required in 1996 or 1995.
The differences between the statutory and effective tax rates were as follows:
- ------------------------------------------------------------------ 1996 1995 1994 ---- ---- ----
U.S. Federal statutory rate...... 35.0% 35.0% 35.0% State income taxes, net of federal benefit................ 4.1 5.1 5.4 Effect of higher foreign tax rates...................... (.5) 1.0 .5 Earnings of foreign sales corporation ................... (3.1) (.4) (.3) Utilization of foreign tax credits.................... - (5.2) (3.9) Other items...................... - .7 1.7 ----- ----- ----- 35.5% 36.2% 38.4% ===== ===== =====
Accumulated undistributed earnings of foreign subsidiaries expected to be permanently invested approximated $5.2 million at December 28, 1996. The Company does not anticipate incurring any tax should these earnings be repatriated in the future.
6. DEBT
Short-term debt consisted of: (In thousands) - --------------------------------------------------------------- 1996 1995 ---- ----
Bank--other............................. $ - $452 ==== ====
Long-term debt consisted of: (In thousands) - --------------------------------------------------------------- 1996 1995 ---- ----
Insurance Company--6.31%, principal payments of $1.0 million due in annual installments, starting in 1998 with a balloon payment of $10,000 in 2008....................... $20,000 $20,000 Bank--other............................. 297 180 ------- ------- 20,297 20,180 Less current maturities................. 21 9 ------- ------- $20,276 $20,171 ======= =======
Both the Company's short-term borrowings and long-term debt are unsecured. The Company's long-term debt agreement provides for certain financial covenants relative to working capital, additional borrowings, loans or advances, and investments. The Company was in compliance with all financial covenants in 1996 and 1995.
On January 5, 1996, the Company entered into an unsecured, five-year $40 million revolving credit agreement (the "Agreement"). The Agreement, which includes a facility fee of one-tenth of one percent on the committed amount, provides for various borrowing rate options including interest rates based on the London Interbank Offered Rates (LIBOR) plus interest spreads keyed to the Company's ratio of debt to consolidated tangible net worth. The Agreement contains certain financial covenants with respect to borrowings, fixed charge coverage, working capital, loans or advances, and investments.
7. SHAREOWNERS' EQUITY
The Company had 6,371,029 shares of common stock (10,000,000 shares authorized, $.10 par value) outstanding at the end of 1996. On January 26, 1994, the Company purchased 109,979 common shares for $3.8 million under the terms of a stock redemption agreement entered into in 1988 with Edward J. Schaefer, co-founder of the Company. Under the terms of the agreement, the Company had the right, but not the obligation, to purchase any and all shares that the estate elected to sell. Of the 109,979 shares repurchased, 17,310 were re-issued to Company-sponsored employee benefit plans and the remaining shares were retired.
Stock subscriptions are principally deferred costs recognized in connection with the issuance of common stock under the 1988 Incentive Award Plan and loans to officers under the 1988 Purchase Plan.
During the first quarter of 1994, the Company redeemed all outstanding shares of Class C Cumulative Preferred Stock for its stated value of $5.8 million.
8. STOCK BASED COMPENSATION
At December 28, 1996, the Company had seven stock-based compensation plans which are described as follows.
FIXED STOCK OPTION PLANS--The Company has authorized the grant of options to purchase common stock of the Company to employees and non-employee directors of the Company and its subsidiaries under five fixed stock option plans. The plans and the number of authorized shares available for grants are as follows:
Shares ------ 1981 Incentive Stock Option Plan (1981 Plan) 555,000 1986 Non-Qualified Stock Option Plan (1986 Plan) 555,000 1996 Employee Stock Option Plan (1996 Plan) 600,000 1990 Non-Employee Director Stock Option Plan (1990 Director Plan) 60,000 1996 Non-Employee Director Stock Option Plan (1996 Director Plan) 90,000
Under each of the above plans, the exercise price of each option equals the market price of the Company's common stock on the date of grant and the options expire ten years after the date of the grant. Generally, options granted under the 1981 Plan, the 1986 Plan, and the 1996 Plan vest 20 percent a year and become fully vested and exercisable after five years. Options granted under the 1990 and 1996 Director Plans vest 33 percent a year and become fully vested and exercisable after three years.
A summary of the Company's fixed stock option plans activity and related information for 1996, 1995 and 1994 follows:
The following summarizes information about fixed stock options outstanding at December 28, 1996:
For pro forma information regarding net income and earnings per share, the fair value for the options awarded in 1996 and 1995 for all fixed stock option plans was estimated as of the date of the grant using a Black-Scholes option valuation model with the following weighted average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.18 percent and 6.42 percent; dividend yields of 1.4 percent; volatility factors of the expected market price of the Company's common stock of .257 and .260; and a weighted-average expected life of the option of six years.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period. Therefore, in the year of adoption and subsequently affected years, the effects of applying SFAS No. 123 for providing pro forma net income and earnings per share are not likely to be representative of the effects on reported income in future years. The Company's pro forma information follows:
(In thousands, except per share amounts) - ---------------------------------------------------------------------- 1996 1995 ---- ---- Reported net income $21,510 $15,502 Pro forma net income $21,245 $15,362
Reported net income available per common share $3.22 $2.35 Pro forma net income available per common share $3.18 $2.33
The Black-Scholes option valuation model used by the Company was developed for use in estimating the fair value of fully tradable options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. It is management's opinion that the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.
ADDITIONAL AWARD PLANS--The Company has authorized the grant of up to 888,000 restricted shares of its common stock to employees of the Company and its subsidiaries under the 1988 Stock Incentive Award Plan (1988 Award Plan). Vesting of shares awarded under the 1988 Award Plan is contingent upon increases in the Company's actual Return on Equity (ROE) during the restriction period relative to an established threshold ROE. No shares were awarded under the 1988 Award Plan during 1996 or 1995. At December 28, 1996, 671,936 shares were reserved for future awards.
The Company has allocated 888,000 shares of its common stock for the 1988 Executive Stock Purchase Plan (1988 Purchase Plan). Under this plan executives of the Company and its subsidiaries are awarded the right to purchase shares of its common stock through a Company loan. The purchase price per share is the closing price of a share on the day prior to the date of purchase. During 1995, 20,000 shares were awarded under the 1988 Purchase Plan. No shares were awarded in 1996. At December 28, 1996, 512,800 shares were reserved for future awards.
9. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's single business segment is the design, manufacture and sale of electric motors, electronic controls and related equipment. These products are sold to original equipment manufacturers in the United States, Canada, Europe, Australia, South Africa, Mexico and other world markets.
Manufacturing plants are located in the United States, Germany, Czech Republic, Italy and South Africa.
GEOGRAPHICAL AREAS (In thousands) - --------------------------------------------------------------------- 1996 1995 1994 ---- ---- ----
NET SALES North America.............. $252,007 $225,958 $200,216 Foreign.................... 48,682 50,482 41,224 -------- -------- -------- $300,689 $276,440 $241,440 ======== ======== ========
OPERATING MARGIN North America.............. $44,011 $38,885 $43,030 Foreign.................... 7,425 2,148 3,342 Equity in earnings of affiliate................ - - 217 Interest expense........... (1,308) (2,128) (2,172) Interest income............ 2,052 1,866 1,678 Corporate expenses......... (18,843) (16,492) (15,882) ------- ------- ------- Income before taxes........ $33,337 $24,279 $30,213 ======= ======= =======
IDENTIFIABLE ASSETS North America.............. $ 81,570 $ 84,013 $ 82,247 Foreign.................... 29,966 29,697 24,188 Corporate ................. 61,923 39,647 45,146 -------- -------- -------- $173,459 $153,357 $151,581 ======== ======== ========
The Company has no single geographic area within its foreign operations whose revenues or assets exceed 10 percent of such amounts on a consolidated basis. The Company had $49.4 million, $32.7 million and $23.2 million of export sales (from domestic sources) in 1996, 1995 and 1994, respectively, to various geographic areas, of which no single geographic area was significant.
One customer accounted for 12.5 percent, 12.9 percent and 14.1 percent of the consolidated sales in 1996, 1995 and 1994, respectively.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial information for the years 1996 and 1995 is as follows: (In thousands, except per share amounts) - -------------------------------------------------------------------- Net Income Per Weighted Net Gross Net Average Sales Profit Income Common Share - -------------------------------------------------------------------- 1st Quarter $ 62,754 $14,910 $ 3,008 $ .45 2nd Quarter 73,107 19,212 5,081 .76 3rd Quarter 79,380 20,000 5,612 .84 4th Quarter 85,448 24,931 7,809 1.17 -------- ------- ------- ----- $300,689 $79,053 $21,510 $3.22 ======== ======= ======= =====
- -------------------------------------------------------------------- 1st Quarter $ 59,788 $13,297 $ 1,644 $ .25 2nd Quarter 76,442 17,573 4,542 .69 3rd Quarter 66,188 14,954 3,301 .50 4th Quarter 74,022 19,547 6,015 .91 -------- ------- ------- ----- $276,440 $65,371 $15,502 $2.35 ======== ======= ======= =====
11. CONTINGENT LIABILITIES AND COMMITMENTS
The Company is defending various claims and legal actions which have arisen in the ordinary course of business. The Company has attempted, where possible, to assess the likelihood of an unfavorable outcome as a result of these actions. Legal counsel has been retained to assist the Company in making these determinations, and costs are accrued when an unfavorable outcome is determined to be probable and a reasonable estimate can be made. As a result, the Company has an accrual balance of approximately $1.6 million and $1.4 million at December 28, 1996 and December 30, 1995, respectively, to provide for such actions.
Included in such matters are two pending governmental actions associated with hazardous waste sites falling under the Comprehensive Environmental Response Compensation and Liability Act in which the Company has been designated, in conjunction with other parties, as a "potentially responsible party" (PRP). The range of the Company's potential liability for the first site is unknown as the total cost for the site remediation and allocation among the PRPs has not been determined; however, the Company believes such matters are substantially covered by the Company's insurance. The current estimate for remediation at the second site is $15.0 million, for which the Company has agreed under consent decree to pay 1.341 percent (approximately $201,000) over the next five to fifteen years. The Company has paid approximately $103,000 of this amount through December 28, 1996.
Total rent expense charged to operations for operating leases including contingent rentals was $2.4 million, $2.0 million and $1.3 million for 1996, 1995 and 1994, respectively. The future minimum rental payments for noncancellable operating leases as of December 28, 1996, are as follows: 1997, $.7 million; 1998, $.3 million and 1999, $.2 million. Rental commitments subsequent to 1999 are not material.
12. SUBSEQUENT EVENTS
In January 1997, pursuant to the stock repurchase plan authorized by the Company's Board of Directors in October 1996, the Company completed three separate, privately negotiated transactions to repurchase 500,000 shares of the Company's common stock for a total purchase price of $24.0 million. Of these shares, 175,000 were repurchased from a director of the Company. The shares were subsequently retired.
INDEPENDENT AUDITORS' REPORT - ----------------------------
To the Shareowners and Directors, Franklin Electric Co., Inc.
We have audited the accompanying consolidated balance sheets of Franklin Electric Co., Inc. and consolidated subsidiaries as of December 28, 1996 and December 30, 1995 and the related consolidated statements of income, shareowners' equity and cash flows for each of the three years in the period ended December 28, 1996. Our audits also included the financial statement schedule listed in the index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Franklin Electric Co., Inc. and consolidated subsidiaries as of December 28, 1996 and December 30, 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP Chicago, Illinois January 30, 1997
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE - --------------------
None.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------
The information concerning directors required by this Item 10 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 11, 1997, under the headings of "ELECTION OF DIRECTORS" and "INFORMATION CONCERNING NOMINEES AND DIRECTORS," and is incorporated herein by reference.
The information concerning executive officers required by this Item 10 is contained in Part I of this Form 10-K under the heading of "EXECUTIVE OFFICERS OF THE REGISTRANT."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - --------------------------------
The information required by Item 11 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 11, 1997, under the headings of "INFORMATION ABOUT THE BOARD AND ITS COMMITTEES," "SUMMARY COMPENSATION TABLE," "OPTION GRANTS IN 1996 FISCAL YEAR" AND "1996 FISCAL YEAR-END OPTION VALUES," "COMPENSATION PURSUANT TO PLANS" and "AGREEMENTS," and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------
The information required by Item 12 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 11, 1997, under the heading of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - --------------------------------------------------------
The information required by Item 13 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 11, 1997, under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "AGREEMENTS," and is incorporated herein by reference.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------
Form 10-K Annual Report (page) ------------- (a) 1. Financial Statements - Franklin Electric ----------------------------------------
Independent Auditors' Report Consolidated Statements of Income for the three years ended December 28, 1996 Consolidated Balance Sheets, as of December 28, 1996 and December 30, 1995 Consolidated Statements of Cash Flows for the three years ended December 28, 1996 Consolidated Statements of Shareowners' Equity for the three years ended December 28, 1996 Notes to Consolidated Financial Statements (including quarterly financial data)
2. Financial Statement Schedules - Franklin Electric -------------------------------------------------
II Valuation and Qualifying Accounts
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes.
3. Exhibits --------
See the Exhibit Index. Management Contract or Compensatory Plan or Arrangement is denoted by an asterisk (*).
(b) Reports on Form 8-K filed during the fourth quarter ended December 28, 1996: None.
(c) See the Exhibit Index.
(d) Individual financial statements and all other schedules of the Registrant are omitted as they are not required.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Franklin Electric Co., Inc.
WILLIAM H. LAWSON --------------------------- William H. Lawson Chairman of the Board Chief Executive Officer (Date) February 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
WILLIAM H. LAWSON Chairman of the Board - -------------------------------------- Chief Executive Officer William H. Lawson February 14, 1997 (Principal Executive Officer)
JOHN B. LINDSAY - -------------------------------------- John B. Lindsay February 14, 1997 President and Director
JESS B. FORD Vice President and Chief - -------------------------------------- Financial Officer (Principal Jess B. Ford February 14, 1997 Financial and Accounting Officer)
ROBERT H. LITTLE - -------------------------------------- Robert H. Little February 14, 1997 Director
PATRICIA SCHAEFER - -------------------------------------- Patricia Schaefer February 14, 1997 Director
DONALD J. SCHNEIDER - -------------------------------------- Donald J. Schneider February 14, 1997 Director
GERARD E. VENEMAN - -------------------------------------- Gerard E. Veneman February 14, 1997 Director
JURIS VIKMANIS - -------------------------------------- Juris Vikmanis February 14, 1997 Director
HOWARD B. WITT - -------------------------------------- Howard B. Witt February 14, 1997 Director
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the years 1996, 1995 and 1994 (In thousands) --------------
Additions Balance at charged to Balance beginning costs and at end Description of period expenses Deductions of period ----------- --------- -------- ---------- --------- (A)
Allowance for doubtful accounts:
1996 $1,351 $227 $143 $1,435 ====== ==== ==== ======
1995 $1,271 $190 $110 $1,351 ====== ==== ==== ======
1994 $1,269 $201 $199 $1,271 ====== ==== ==== ======
NOTES: - ------
(A) Uncollectible accounts written off, net of recoveries
FRANKLIN ELECTRIC CO., INC. EXHIBIT INDEX FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996 Sequentially Numbered Item Description Pages ---- ----------- -----
3(i) Restated Articles of Incorporation of Franklin Electric Co., Inc. (incorporated herein by reference to Exhibit 3 of the Company's Form 10-K for the fiscal year ended December 30, 1989)
Articles of Amendment of the Restated Articles of Incorporation of Franklin Electric Co., Inc. effective February 26, 1991 (incorporated herein by reference to the Company's current report on Form 8-K dated February 26, 1991)
3(ii) By-Laws of Franklin Electric Co., Inc. as amended, effective July 15, 1994 (incorporated herein by reference to the Company's Form 10-K for the fiscal year ended December 31, 1994)
4 Rights Agreement dated as of February 11, 1991 between Franklin Electric Co., Inc. and Lincoln National Bank & Trust Co. of Fort Wayne (incorporated herein by reference to the Company's registration statement on Form 8-A dated February 26, 1991)
10.1 Stock Redemption Agreement dated October 28, 1988, as amended on December 12, 1988, between the Company and Edward J. Schaefer (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-K for the fiscal year ended December 31, 1988)
10.2 1988 Executive Stock Purchase Plan (incorporated herein by reference to the Company's 1988 Proxy Statement for the Annual Meeting held on April 15, 1988, and included as Exhibit E to the Proxy Statement)*
10.3 1988 Stock Incentive Award Plan (incorporated herein by reference to the Company's 1988 Proxy Statement for the Annual Meeting held on April 15, 1988, and included as Exhibit D to the Proxy Statement)*
10.4 Amended 1981 Incentive Stock Option Plan (incorporated herein by reference to the Company's 1988 Proxy Statement for the Annual Meeting held on April 15, 1988, and included as Exhibit B to the Proxy Statement)*
10.5 Amended 1986 Stock Option Plan (incorporated herein by reference to the Company's 1988 Proxy Statement for the Annual Meeting held on April 15, 1988, and included as Exhibit C to the Proxy Statement)*
10.6 Franklin Electric Nonemployee Director Stock Option Plan (incorporated herein by reference to the Company's 1991 Proxy Statement for the Annual Meeting on April 19, 1991)*
10.7 Employment Agreement dated October 23, 1995 between the Company and Jess B. Ford (incorporated herein by reference to Exhibit 10.7 of the Company's form 10-K for the fiscal year ended December 30, 1995)
10.8 Employment Agreement dated December 5, 1986 between the Company and William H. Lawson (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-K for the fiscal year ended December 28, 1991)*
10.9 Credit Agreement dated as of January 5, 1996 between the Company and various commercial banks(incorporated herein by reference to Exhibit 10.9 of the Company's Form 10-K for the fiscal year ended December 30, 1995)
10.10 1996 Franklin Electric Co., Inc., Employee Stock Option Plan (incorporated herein by reference to the Company's 1996 Proxy Statement for the Annual Meeting held on April 12, 1996, and included as Exhibit A to the Proxy Statement)*
10.11 1996 Franklin Electric Co., Inc., Non-Employee Director Stock Option Plan (incorporated herein by reference to the Company's 1996 Proxy Statement for the Annual Meeting held on April 12, 1996, and included as Exhibit B to the Proxy Statement)*
11 Primary Earnings per Share and Fully Diluted Earnings per Share 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 27 Financial Data Schedule
* Management contract or compensatory plan or arrangement
EXHIBIT 11 ----------
FRANKLIN ELECTRIC CO., INC.
PRIMARY EARNINGS PER SHARE AND FULLY DILUTED EARNINGS PER SHARE ------------
(In thousands, except per share amounts) Year Ended ------------------------------------- December 28, December 30, December 31, 1996 1995 1994 --------- --------- --------
Net income available to common shares and common share equivalents..... $21,510 $15,502 $18,556 ======= ======= =======
Shares outstanding, beginning of period.......... 6,254 6,199 6,231
Weighted average of options issued during the period..... - - 19
Dilutive effect of options outstanding during the period....................... 349 364 337
Weighted average of common shares issued during the period................... 73 35 53
Weighted average common shares repurchased during the period................... - - (103) ------- ------- -------
Weighted average primary shares outstanding during the period................... 6,676 6,598 6,537
Additional dilutive effect of options outstanding during the period............ 87 16 27 ------- ------- -------
Weighted average fully diluted shares outstanding during the period............ 6,763 6,614 6,564 ======= ======= =======
Earnings per share Primary...................... $ 3.22 $ 2.35 $ 2.84 ======= ======= =======
Fully diluted................ $ 3.18 $ 2.34 $ 2.83 ======= ======= =======
EXHIBIT 21 ----------
FRANKLIN ELECTRIC CO., INC.
SUBSIDIARIES OF THE REGISTRANT ------------
Percent of State or country voting of incorporation stock owned ---------------- ----------- Subsidiaries consolidated:
FE Petro, Inc. Indiana 100
Oil Dynamics, Inc. Oklahoma 100
Franklin Electric Subsidiaries, Inc. [inactive] Indiana 100
Franklin Electric International, Inc. Delaware 100
Franklin Electric AG Switzerland 100
Franklin Electric B.V. Netherlands 100
Franklin Electric Europa, GmbH Germany 100
Franklin Electric spol s.r.o. Czech Republic 100
Franklin Electric S.r.l. Italy 100
Franklin Electric (Australia) Pty. Ltd. Australia 100
Franklin Electric (South Africa) Pty. Limited South Africa 100
Franklin Electric of Canada, Limited [inactive] Canada 100
Franklin Electric Foreign Sales Corporation U.S. Virgin Islands 100
Motores Franklin S.A. de C.V. Mexico 100
EXHIBIT 23 ----------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of Franklin Electric Co., Inc. on Form S-8 (file numbers 33-35958, 33-35960, 33- 35962 and 33-38200) of our report dated January 30, 1997 appearing in the Annual Report on Form 10-K of Franklin Electric Co., Inc. for the year ended December 28, 1996.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP Chicago, Illinois February 20, 1997