Business Context and Reporting Period
Company: Franklin Electric Co., Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 28, 2002
Business Overview: Franklin Electric is the world's largest manufacturer of submersible water and fueling systems motors. It operates in a single reportable segment, designing, manufacturing, and distributing motors, electronic controls, and related equipment. Principal applications include water well pumping, underground fueling systems, and industrial motor products.
Key Financial Metrics
| Metric (in thousands) | 2002 | 2001 | 2000 |
|---|---|---|---|
| Net Sales | $354,872 | $322,908 | $325,731 |
| Gross Profit | $104,935 | $92,871 | $85,186 |
| Operating Income | $50,298 | $45,349 | $40,219 |
| Net Income | $32,204 | $27,150 | $22,226 |
| Diluted EPS | $2.83 | $2.39 | $1.96 |
| Cash Flow from Operations | $57,853 | $39,923 | $18,748 |
| Long-Term Debt | $25,946 | $14,465 | $15,874 |
| Working Capital | $62,762 | $69,158 | $54,897 |
| Current Ratio | 2.2 | 2.7 | 2.2 |
Margins: Gross margin improved to 29.6% in 2002 (from 28.8% in 2001). Net income margin was 9.1% in 2002.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.9% to $354.9 million, driven by strong residential submersible motor sales in North America and the inclusion of two 2002 acquisitions (Coverco and Intelligent Controls, Inc.), which contributed 5.2% of total sales. This offset lower demand from the petroleum equipment industry.
- Profitability: Net income rose 18.6% to $32.2 million. Gross profit margin expanded due to productivity improvements, cost reductions, and lower commodity costs.
- Acquisitions: The company paid $30.3 million for acquisitions in 2002, recording $24.3 million as goodwill. Additionally, a $10.5 million contingent payment was made in Q3 2002 related to a 1998 asset purchase.
- Debt: Long-term debt increased significantly to $25.9 million (from $14.5 million) due to borrowings under a new $60 million revolving credit agreement ($10.1 million outstanding at year-end) and existing unsecured debt.
- Foreign Exchange: A $1.4 million gain was recorded in 2002 due to the strengthening euro, contrasting with losses in prior years.
Guidance, Outlook, and Risks
Outlook: Management intends to continue seeking acquisition candidates compatible with existing product lines. The company believes internally generated funds and existing credit arrangements provide sufficient liquidity for current commitments.
Risks and Contingencies:
- Customer Concentration: ITT Industries, Inc. accounted for 18.2% of sales in 2002, and Sta-Rite Industries, Inc. accounted for 11.5%. A decline in sales from these customers could materially impact results.
- Market Risks: Exposure to foreign currency exchange rates and interest rates. The company mitigates currency risk through local production and invoicing in local currencies.
- Legal: The company is defending various claims and legal actions, including environmental matters, though management does not expect a material adverse effect.
- Commodities: Principal raw materials include steel, copper, and aluminum. While sources are diverse, price fluctuations could impact margins.
Investor Verification Checklist
- Customer Concentration: Verify the stability of relationships with ITT Industries (18.2% of sales) and Sta-Rite Industries (11.5% of sales).
- Acquisition Integration: Assess the performance and integration of Coverco (Italy) and Intelligent Controls (Maine) acquired in 2002.
- Debt Covenants: Confirm continued compliance with financial covenants under the $60 million revolving credit agreement.
- Pension Obligations: Review the funded status of domestic pension plans, which showed a net liability of $17.8 million in 2002.
- Backlog: Note that backlog ($18.9 million) is not considered a significant indicator of future sales by management.