Business Context and Reporting Period
Company: Franklin Electric Co., Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 1, 2005 (52 weeks)
Business Overview: Franklin Electric is a global leader in the design, manufacture, and distribution of groundwater and fuel pumping systems, submersible motors, electronic controls, and related equipment. The company operates in a single reportable segment. In 2004, the company acquired certain assets of JBD, Inc. (the former Jacuzzi brand pump company) and continued a global manufacturing realignment program.
Key Financial Metrics
| Metric (in millions, except per share) | 2004 | 2003 | 2002 |
|---|---|---|---|
| Net Sales | $404.3 | $359.5 | $354.9 |
| Gross Profit | $130.2 | $111.0 | $104.5 |
| Gross Margin | 32.2% | 30.9% | 29.5% |
| Operating Income | $59.8 | $51.6 | $49.9 |
| Net Income | $38.1 | $34.5 | $32.2 |
| Diluted EPS | $1.65 | $1.52 | $1.42 |
| Operating Cash Flow | $57.5 | $47.0 | $54.6 |
| Capital Expenditures | $21.1 | $15.3 | $15.6 |
| Long-Term Debt | $13.8 | $15.0 | $25.9 |
| Cash and Equivalents | $50.6 | $30.0 | $20.1 |
| Working Capital | $111.7 | $82.6 | $62.8 |
| Current Ratio | 3.1 | 2.8 | 2.2 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12% to $404.3 million in 2004. Drivers included a 3% increase from foreign exchange rates (stronger Euro), a 3% increase from price hikes (offsetting higher steel and copper costs), volume increases in North American water systems, and $5.7 million in sales from the JBD, Inc. acquisition.
- Profitability: Net income rose 10% to $38.1 million. Gross margin improved to 32.2% due to volume leverage and price increases, partially offset by $9.3 million in higher commodity costs and $5.5 million in pre-tax restructuring expenses.
- Liquidity: Cash and equivalents increased significantly to $50.6 million, driven by strong operating cash flows ($57.5 million). Working capital grew by $29.1 million.
- Debt: Long-term debt decreased to $13.8 million. The company entered a new $80.0 million revolving credit agreement in September 2004 but had no outstanding borrowings under it at year-end.
Guidance, Outlook, Risks, and Unusual Items
- Restructuring: The company incurred $5.5 million in restructuring expenses in 2004 related to a global manufacturing realignment program. Total program costs are estimated at $10.0 million, with completion expected by the end of 2005. Additional expenses are anticipated in 2005.
- Legal Proceedings: A lawsuit filed by ITT Water Technology, Inc. regarding pricing and distribution changes was settled in December 2004. Under the settlement, Franklin agreed to continue supplying 4-inch submersible motors to ITT through December 31, 2006. The suit was dismissed with prejudice.
- Customer Concentration: Sales to ITT Industries accounted for 19.2% of consolidated sales in 2004. Pentair Corporation accounted for 20.7% of sales in 2004 (including acquired Sta-Rite Industries).
- Market Risks: The company faces risks related to foreign currency exchange rates and interest rates. It mitigates currency risk through local production and invoicing in local currencies. Interest rate exposure is limited to variable rate borrowings and an interest rate swap.
- Accounting Changes: The company will adopt SFAS No. 151 (Inventory Costs) and SFAS No. 123(R) (Share-Based Payment) in fiscal 2005. Management does not expect SFAS 151 to have a significant impact. The impact of SFAS 123(R) is expected to be similar to pro-forma results disclosed in the filing.
Key Facts for Investor Verification
- Customer Dependency: Verify the stability of relationships with top customers (ITT and Pentair), which collectively represent nearly 40% of sales.
- Commodity Exposure: Monitor the impact of steel and copper price fluctuations on gross margins, as the company recently implemented price increases to offset these costs.
- Restructuring Progress: Track the execution of the global manufacturing realignment program and the realization of expected cost savings versus the remaining $4.5 million in estimated costs.
- Acquisition Integration: Assess the performance contribution of the JBD, Inc. assets acquired in late 2004.
- Stock-Based Compensation: Note that the company currently uses the intrinsic value method for stock options; adoption of SFAS 123(R) in 2005 will require expensing fair value, potentially reducing reported net income.