secresponse.htm
January
21, 2010
United
States Securities and Exchange Commission
Division
of Corporation Finance
Washington,
D.C. 20549-7010
Attention:
Gary Todd, Accounting Reviewer
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Re:
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Franklin
Electric Co., Inc.
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Form
10-K for the fiscal year ended January 3,
2009
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Form
10-Q for the quarterly period ended October 3,
2009
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Dear Mr.
Todd:
We are in
receipt of your comment letter dated December 28, 2009 to Franklin Electric Co.,
Inc. (the “Company”). On behalf of the Company, we have addressed
your comment letter by reproducing each comment below in bold text and providing the
Company’s response immediately following. We have also provided
supplemental information as requested or where we believe appropriate to the
response.
Form 10-K for the fiscal
year ended January 3, 2009
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations, page 14
Restructuring Expenses, page
15
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1.
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Regarding
the restructuring plans implemented during 2008 and 2009, in future
filings please provide quantified disclosure of the expected cost savings
from the exit plans and identify the period when you expect to first
realize those benefits. For guidance on MD&A disclosures
about exit plans, please refer to SAB Topic
5-P.
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Company
Response
For
example purposes we have provided the following proposed future filing MD&A
restructuring language to quantify the estimated cost savings and provide
guidance for when the benefits will be realized.
Restructuring
Expenses
There
were $X.X million of nonrecurring restructuring expenses in 2009 compared to
$2.2 million in 2008.
In
December 2008, the Company announced Phase 3 of its Global Manufacturing
Realignment Program for its manufacturing facilities in North America and
Brazil. Under Phase 3 in North America the Company is continuing the
rationalization of manufacturing capacity between the manufacturing complex in
Linares, Mexico and its other North American plants. Initially, Phase 3 of the
realignment plan included the phased move of approximately 500,000 man hours of
manufacturing activity to Linares, approximately 80 percent of which was from
Siloam Springs, Arkansas. The transfer was largely complete as of June, 2009 and
reduced manufacturing labor and overhead costs. The cost savings related to
lower manufacturing labor and overhead costs (i.e., cost of sales), based on
2008 volumes and other operating variables in 2008, were estimated to be about
$x.x million annually. These cost savings reduce inventory
costs. They are realized when the lower cost inventory is shipped
(usually 1 to 2 quarters after production) and are impacted by sales and
production volumes. The Company began to realize cost savings in the third
quarter of 2009. The Company’s expected cost savings for Phase 3 are
as estimated above.
The
Company incurred pretax charges for Phase 3 restructuring expenses of $X.X
million ($2.2 million in 2008 and $X.X million in 2009) including severance
expenses, pension charges, asset write-offs, and equipment relocation
costs. Approximately two thirds of these charges were non-cash. The
Linares facility is projected to have available capacity to absorb additional
manufacturing activity and the Company is in the process of developing plans to
further rationalize manufacturing operations in 2010.
Item 9A. Controls
and Procedures, page 59
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2.
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We
note that you refer to “disclosure controls and procedures” as defined in
the Exchange Act but that your officers only concluded that disclosure
controls and procedures were effective “in bringing to their attention on
a timely basis material information relating to the Company to be included
in the Company’s periodic filings under the Exchange Act.” The
language that is currently included after the word “effective” in your
disclosure appears to be superfluous, since the meaning of “disclosure
controls and procedures” is established by Rule 13a-15(e) of the Exchange
Act. However, if you do not wish to eliminate this language,
please revise future filings so that the language that appears after the
word “effective” is substantially similar in all material respects to the
language that appears in the entire two-sentence definition of “disclosure
controls and procedures” set forth in Rule 13a-15(e). This
comment also applies to effectiveness conclusions in your quarterly
reports.
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Company
Response
The
Company will eliminate the language after the word “effective” in future
filings. Below is an example of the language for future
filings.
ITEM 9A. CONTROLS AND
PROCEDURES
As of the
end of the period covered by this report (the “Evaluation Date”), the Company
carried out an evaluation, under the supervision and with the participation of
the Company’s management, including the Company’s Chief Executive Officer and
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 Rule 13a-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.
Exhibits 31.1 and
31.2
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3.
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The
certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002
are representations made by the CEO and CFO of the registrant in an
individual capacity and not as members of management or officers of the
Company. Please revise the certifications in future filings to
remove the title from the first sentence of the
certifications. Refer to Item 601 of Regulation
S-K.
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Company
Response
The
Company will remove the title from the first sentence of the certifications in
future filings. Below is an example of the language for future
filings.
EXHIBIT
31.1
CERTIFICATIONS
CERTIFICATION OF CHIEF
EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, R.
Scott Trumbull, certify that:
EXHIBIT
31.2
CERTIFICATION OF CHIEF
FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, John
J. Haines, certify that:
Form 10-Q for the quarterly
period ended October 3, 2009
Note
2. Accounting Pronouncements, page 8
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4.
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We
note the redeemable non-controlling interest recorded as mezzanine equity
on the balance sheet and the disclosure on page 8 that the redeemable
non-controlling interest relates to an acquisition-related put
option. Please address the following comments regarding the
redeemable non-controlling interest in your response and in future
filings:
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Describe
the nature and terms of the put option. Also, identify the
entity involved.
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Describe
the accounting for the put option and the rationale in GAAP for that
accounting.
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Clarify
why the put option is classified in the mezzanine of balance
sheet.
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Company
Response
Below is
an example of the future disclosure for the Company’s redeemable non-controlling
interest. The Company will create a new note specific to the
appropriate disclosure requirement in future filings. The accounting
for the put option was found in the following literature: ASC 805, formerly FAS
141(R); ASC 480-10-S99-3A, formerly EITF Topic D-098; ASC Topic 810,
Consolidations.
NOTE
X: REDEEMABLE NONCONTROLLING INTERESTS
On
January 16, 2009, the Company completed the acquisition of 75 percent of
Vertical S.p.A. The 25 percent noncontrolling interest was recorded
at fair value as of the acquisition date. The noncontrolling
interest holders have the option, which is embedded in the noncontrolling
interest, to require the Company to redeem their ownership interests between
November 17, 2013 and January 16, 2014. The cash payment upon
redemption will be derived using a specified formula based on an earnings
multiple adjusted by the net debt position of Vertical, subject to a redemption
floor value. The combination of a noncontrolling interest and a
redemption feature resulted in a redeemable noncontrolling
interest. The put option is not separated from the noncontrolling
interest as an embedded derivative, because the noncontrolling interest is not
readily convertible to cash.
The
noncontrolling interest is redeemable at other than fair value as the redemption
value is determined based on a specified formula, as described
above. The noncontrolling interest becomes redeemable
after the passage of time, and therefore the Company records the carrying amount
of the noncontrolling interest at the greater of 1) the initial carrying amount,
increased or decreased for the noncontrolling interest’s share of net income or
loss and its share of other comprehensive income or loss and dividends
(“carrying amount”) or 2) the redemption value which is determined based on the
greater of the redemption floor value or the then-current specified earnings
multiple. According to FASB ASC 810, Consolidation, the redeemable
noncontrolling interest is classified outside of permanent equity, as a
mezzanine item, in the balance sheet.
According
to the authoritative accounting guidance for redeemable noncontrolling interests
issued in the form of common securities, to the extent that the noncontrolling
interest holder has a contractual right to receive an amount upon share
redemption that is other than the fair value of such shares, then the
noncontrolling interest holder has, in substance, received a dividend
distribution that is different from other common shareholders. Therefore,
adjustments to the noncontrolling interest to reflect the redemption amount
should be reflected in the computation of earnings per share using the two-class
method. Under the two-class method, the Company has elected to treat as a
dividend only the portion of the periodic redemption value adjustment (if any)
that reflects a redemption value in excess of fair value. No
adjustment to the carrying amount of the noncontrolling interest was necessary
in 2009, and therefore, no adjustment to the earnings per share computation was
necessary.
The
redeemable noncontrolling interest is currently recorded as the carrying amount
under ASC 810 as it exceeds the redemption value. Since no redemption
value adjustments were necessary in 2009, there were no incremental adjustments
in the earnings per share computation.
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As
requested by the Commission staff’s letter, the Company hereby acknowledges
that:
1) The
Company is responsible for the adequacy and accuracy of the disclosures in the
filing;
2) Staff
comments or changes to disclosure in response to staff comments do not foreclose
theCommission from taking any
action with respect to the filing; and
3) The
Company may not assert staff comments as a defense in any proceeding initiated
by theCommission or any person
under the federal securities laws of the United States.
Please
contact Ron Ryninger, Corporate Controller, at (260) 827-5417 or me at (260)
827-5442 should you have any questions regarding our responses or any related
matters.
Sincerely,
Franklin
Electric Co., Inc.
By: /s/
John J. Haines
Vice President and Chief Financial
Officer