10-K/A 1 a2013122810-k4.htm 10-K/A 2013.12.28 10-K (4)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________

FORM 10-K/A
_________

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission file number 0-362
 
FRANKLIN ELECTRIC CO., INC.
(Exact name of registrant as specified in its charter)

Indiana
 
35-0827455
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
9255 Coverdale Road
 
 
Fort Wayne, Indiana
 
46809
(Address of principal executive offices)
 
(Zip Code)

(260) 824-2900
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $0.10 par value
 
NASDAQ Global Select Market
(Title of each class)
 
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES  o
NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES o
NO x

1



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

 YES x
NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

YES  o
NO x

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant at June 29, 2013 (the last business day of the registrant’s most recently completed second quarter) was $1,561,811,852.  The stock price used in this computation was the last sales price on that date, as reported by NASDAQ Global Select Market. For purposes of this calculation, the registrant has excluded shares held by executive officers and directors of the registrant, including restricted shares and except for shares owned by the executive officers through the registrant's 401(k) Plan. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.

Number of shares of common stock outstanding at February 13, 2014:
47,687,521 shares

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 2, 2014 (Part III).

__________________________________________________________________________________________________________
EXPLANATORY NOTE

The sole purpose of this Amendment No. 1 to Franklin Electric Co., Inc.'s Annual Report on Form 10-K (the “Form 10-K”) for the fiscal year ended December 28, 2013, as filed with the Securities and Exchange Commission on February 26, 2014, is to file all of the exhibits that were inadvertently omitted from the original Form 10-K filing. Except as described in this Explanatory Note, this Amendment No. 1 does not amend any other information set forth in the Form 10-K.


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FRANKLIN ELECTRIC CO., INC.
TABLE OF CONTENTS

 
 
 
Page
PART I.
 
 
Number
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
PART II.
 
 
 
 
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7A.
 
Item 8.
 
Item 9.
 
Item 9A.
 
Item 9B.
 
 
 
 
 
PART III.
 
 
 
 
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
PART IV.
 
 
 
 
 
 
 
Item 15.
 
 
 
 
 
 
 
 
 
 
 
 
 



 


3


PART I

ITEM 1. BUSINESS
 
General
Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and incorporated in 1946. Except where the context otherwise requires, “Franklin Electric” or the “Company,” shall refer to Franklin Electric Co., Inc. and its consolidated subsidiaries.

The Company designs, manufactures and distributes water and fuel pumping systems, composed primarily of submersible motors, pumps, electronic controls and related parts and equipment. The Company's business consists of two reporting segments based on the principal end market served: the Water Systems segment and the Fueling Systems segment. The Company includes unallocated corporate expenses in an “Other” segment that, together with the Water Systems and Fueling Systems segments, represent the Company.

The Company entered the artificial lift market over the past two years leveraging their knowledge of customer needs and technical solutions for pumping groundwater and hydrocarbon liquids out of oil and gas wells.  Innovation and superior quality provided the means to successfully install test units in North America, Australia, and Africa in 2013.  The initial results are providing opportunities with those companies as well as others including entering the China market with sustained business in 2014.   

The Company's products are sold worldwide. The Company's products are sold by its employee sales force and independent manufacturing representatives. 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 market for the Company's products is highly competitive and includes diversified accounts by size and type. The Company's Water Systems and Fueling Systems products and related equipment are sold to specialty distributors and some original equipment manufacturers (“OEMs”), as well as industrial and petroleum equipment distributors and major oil and utility companies.

Business Segments and Products
Segment and geographic information appears in Note 17, “Segment and Geographic Information,” to the consolidated financial statements.

Water Systems Segment
Water Systems is a global leader in the production and marketing of water pumping systems and is a technical leader in submersible motors, pumps, drives, electronic controls, and monitoring devices. The Water Systems segment designs, manufactures and sells motors, pumps, electronic controls and related parts and equipment primarily for use in groundwater, wastewater, and fuel transfer applications.

Water Systems motors and pumps are used principally for pumping fresh water and wastewater in a variety of residential, agricultural, and industrial applications. Water Systems also manufactures electronic drives and controls for the motors which control functionality and provide protection from various hazards, such as electric surges, over-heating, or dry wells or tanks.

The Water Systems business has grown from a domestic submersible motor manufacturer to a global manufacturer of systems and components for the movement of water and automotive fuels. Highlights of the Water Systems business transformation, from its origins to the present, are as follows:
1950s - Domestic submersible motor manufacturer
1990s - Global manufacturer of submersible motors, electronic drives and controls selling to pump OEMs
2004 - Began to change the business model to include pumps and sell directly to wholesale distributors
2006 - Added adjacent pumping systems, acquired Little Giant Pump Company
2007 - Expanded globally, acquired Pump Brands (Pty) Limited, South Africa
2008 - Continued global expansion, acquired Industrias Schneider SA, Brazil
2009 - International acquisition, Vertical, S.p.A., Italy
2011 - International acquisition, Impo Motor Pompa Sanayi ve Ticaret A.S.
2012 - Additional purchase of Pioneer Pump Holdings, Inc. ("PPH"), bringing total ownership to 70.5%


4


Water Systems products are sold in highly competitive markets. Water Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company's principal competitors in the specialty water products industry are Grundfos Management A/S, Pentair, Inc., and Xylem, Inc.

2013 Water Systems research and development expenditures were primarily related to the following activities:

Development of electric drives and controls for water systems
Artificial Lift drive and control system
Centrifugal pumps for agricultural applications
Pumping system energy efficient improvements
Submersible motor technology
New world-class Engineering Laboratory to provide expanded capability for product development

Fueling Systems Segment
Fueling Systems is a global leader in the production and marketing of fuel pumping systems, fuel containment systems, and monitoring and control systems. The Fueling Systems segment designs, manufactures and sells pumps, pipe, sumps, fittings, vapor recovery components, electronic controls, monitoring devices and related parts and equipment primarily for use in submersible fueling system applications.

Fueling Systems has expanded its product offerings through internal development and acquisitions. Highlights of the Fueling Systems history are as follows:

1990s - Domestic manufacturer of submersible turbine pumping systems
2000 - Acquired Advanced Polymer Technology, Inc., a manufacturer of underground pipe for fueling applications, and EBW, Inc., a manufacturer and distributor of fueling hardware components
2006 - Acquired Healy Systems, Inc., a manufacturer of fueling nozzles and vapor recovery systems
2010 - Acquired PetroTechnik Limited, a United Kingdom distributor that designs and sources flexible and lightweight underground pipe
 
Fueling Systems products are sold in highly competitive markets. Fueling Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company's principal competitors in the petroleum equipment industry are Danaher Corporation and Dover Corporation.

2013 Fueling Systems research and development expenditures were primarily related to the following activities:

Overfill prevention valve to monitor filling of underground tanks
New probes and sensors for fuel management monitoring
Software enhancements to automatic tank gauges
New and improved containment sumps and accessories to ensure water tight operation

Research and Development
The Company incurred research and development expense as follows:

(In millions)
2013
 
2012
 
2011
Research and development expense
$
16.8

 
$
9.9

 
$
8.2


Expenses incurred were for activities related to the development of new products, improvement of existing products and manufacturing methods, and other applied research and development.

The Company owns a number of patents, trademarks and licenses.  In the aggregate, these patents are of material importance to the operation of the business; however, the Company believes that its operations are not dependent on any single patent or group of patents.

Raw Materials
The principal raw materials used in the manufacture of the Company’s products are coil and bar steel, stainless steel, copper wire, and aluminum ingot. Major components are electric motors, capacitors, motor protectors, forgings, gray iron castings, and bearings. Most of these raw materials are available from multiple sources in the United States and world markets.

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Generally, the Company believes that adequate alternative sources are available for the majority of its key raw material and purchased component needs; however, the Company is dependent on a single or limited number of suppliers for certain materials or components. Availability of fuel and energy is adequate to satisfy current and projected overall operations unless interrupted by government direction or allocation.

Employees
The Company employed approximately 4,400 persons at the end of 2013.

Major Customers
No single customer accounted for over 10 percent of net sales in 2013, 2012, or 2011. No single customer accounted for over 10 percent of gross accounts receivable in 2013 or 2012.

Backlog
The dollar amount of backlog by segment was as follows:

(In millions)
February 13,
2014
 
February 12,
2013
Water Systems
$
66.8

 
$
49.9

Fueling Systems
21.3

 
14.7

Consolidated
$
88.1

 
$
64.6


The backlog is composed of written orders at prices adjustable on a price-at-the-time-of-shipment basis for products, primarily standard catalog items. All backlog orders are expected to be filled in fiscal 2014.  The Company’s sales in the first quarter are generally less than its sales in other quarters due to generally less water well drilling and overall product sales during the winter months in the northern hemisphere. Beyond that, there is no seasonal pattern to the backlog and the backlog has not proven to be a significant indicator of future sales.

Environmental Matters
The Company believes that it is in compliance with all applicable federal, state and local laws concerning the discharge of material into the environment, or otherwise relating to the protection of the environment. The Company has not experienced any material costs in connection with environmental compliance, and, subject to the disclosure in Item 3 - Legal Proceedings, does not believe that such compliance will have any material effect upon the financial position, results of operations, cash flows, or competitive position of the Company.

Available Information
The Company’s website address is www.franklin-electric.com. The Company makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Additionally, the Company’s website includes the Company’s corporate governance guidelines, its Board committee charters, and the Company’s code of business conduct and ethics. Information contained on the Company’s website is not part of this annual report on Form 10-K.

ITEM 1A. RISK FACTORS

The following describes the principal risks affecting the Company and its business.  Additional risks and uncertainties, not presently known to the Company or currently deemed immaterial, could negatively impact the Company’s results of operations or financial condition in the future.

The Company’s acquisition strategy entails expense, integration risks, and other risks that could affect the Company’s earnings and financial condition.  One of the Company’s continuing strategies is to increase revenues and expand market share through acquisitions that will provide complementary Water and Fueling Systems products, add to the Company's global reach, or both.  The Company spends significant time and effort expanding existing businesses through identifying, pursuing, completing, and integrating acquisitions, which generate expense whether or not the acquisitions are actually completed. Competition for acquisition candidates may limit the number of opportunities and may result in higher acquisition prices.  There is uncertainty related to successfully acquiring, integrating and profitably managing additional businesses without substantial costs, delays or other problems.  There can also be no assurance that acquired companies will achieve

6


revenues, profitability or cash flows that justify the investment in them.  Failure to manage or mitigate these risks could adversely affect the Company’s results of operations and financial condition.
 
The Company’s products are sold in highly competitive markets, by numerous competitors whose actions could negatively impact sales volume, pricing and profitability.  The Company is a global leader in the production and marketing of groundwater and fuel pumping systems.  End user demand, distribution relationships, industry consolidation, new product capabilities of the Company’s competitors or new competitors, and many other factors contribute to a highly competitive environment.  Additionally, some of the Company’s competitors have substantially greater financial resources than the Company.  Although the Company believes that consistency of product quality, timeliness of delivery, service, and continued product innovation, as well as price, are principal factors considered by customers in selecting suppliers, competitive factors previously described may lead to declines in sales or in the prices of the Company’s products which could have an adverse impact on its results of operations and financial condition.
 
Reduced housing starts adversely affect demand for the Company’s products, thereby reducing revenues and earnings.  Demand for certain Company products is affected by housing starts. Variation in housing starts due to economic volatility both within the United States and globally could adversely impact gross margins and operating results.
 
Increases in the prices of raw materials, components, finished goods and other commodities could adversely affect operations.  The Company purchases most of the raw materials for its products on the open market and relies on third parties for the sourcing of certain finished goods.  Accordingly, the cost of its products may be affected by changes in the market price of raw materials, sourced components, or finished goods.  The Company and its suppliers also use natural gas and electricity in manufacturing products and natural gas and electricity prices have historically been volatile.  The Company does not generally engage in commodity hedging for raw materials and energy.  Significant increases in the prices of commodities, sourced components, finished goods, energy or other commodities could cause product prices to increase, which may reduce demand for products or make the Company more susceptible to competition.  Furthermore, in the event the Company is unable to pass along increases in operating costs to its customers, margins and profitability may be adversely affected.
 
The Company is exposed to political, economic and other risks that arise from operating a multinational business.  The Company has significant operations outside the United States, including Europe, South Africa, Brazil, Mexico, China, and Turkey.  Further, the Company obtains raw materials and finished goods from foreign suppliers.  Accordingly, the Company’s business is subject to political, economic, and other risks that are inherent in operating a multinational business.  These risks include, but are not limited to, the following:
 
Difficulty in enforcing agreements and collecting receivables through foreign legal systems
Trade protection measures and import or export licensing requirements
Inability to obtain raw materials and finished goods in a timely manner from foreign suppliers
Imposition of tariffs, exchange controls or other restrictions
Difficulty in staffing and managing widespread operations and the application of foreign labor regulations
Compliance with foreign laws and regulations
Changes in general economic and political conditions in countries where the Company operates
 
Additionally, the Company’s operations outside the United States could be negatively impacted by changes in treaties, agreements, policies and laws implemented by the United States.
 
If the Company does not anticipate and effectively manage these risks, these factors may have a material adverse impact on its international operations or on the business as a whole.
 
Transferring operations of the Company to lower cost regions may not result in the intended cost benefits.  The Company is continuing its rationalization of manufacturing capacity between all existing manufacturing facilities and the manufacturing complexes in lower cost regions such as Mexico, the Czech Republic and China.  To implement this strategy, the Company must complete the transfer of assets and intellectual property between operations.  Each of these transfers involves the risk of disruption to the Company’s manufacturing capability, supply chain and, ultimately, to the Company’s ability to service customers and generate revenues and profits.

The Company has significant investments in foreign entities and has significant sales and purchases in foreign denominated currencies creating exposure to foreign currency exchange rate fluctuations. The Company has significant investments outside the United States, including Europe, South Africa, Brazil, Mexico, China, and Turkey.  Further, the Company has sales and makes purchases of raw materials and finished goods in foreign denominated currencies.  Accordingly, the Company has exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar.  Foreign currency

7


exchange rate risk is mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system and limited use of foreign currency denominated debt. To the extent that these mitigating strategies are not successful, foreign currency rate fluctuations can have a material adverse impact on its international operations or on the business as a whole.
 
Delays in introducing new products or the inability to achieve or maintain market acceptance with existing or new products may cause the Company’s revenues to decrease.  The industries to which the Company belongs are characterized by intense competition, changes in end-user requirements, and evolving product offerings and introductions.  The Company believes future success will depend, in part, on the ability to anticipate and adapt to these factors and offer, on a timely basis, products that meet customer demands.  Failure to successfully develop new and innovative products or to enhance existing products could result in the loss of existing customers to competitors or the inability to attract new business, either of which may adversely affect the Company’s revenues.
 
Certain Company products are subject to regulation and government performance requirements in addition to the warranties provided by the Company.  The Company’s product lines have expanded significantly and certain products are subject to government regulations and standards for manufacture, assembly, and performance in addition to the warranties provided by the Company.  The Company’s failure to meet all such standards or perform in accordance with warranties could result in significant warranty or repair costs, lost sales and profits, damage to the Company’s reputation, fines or penalties from governmental organizations, and increased litigation exposure.  The claims made by the California Air Resources Board and certain local air districts in California, described in Item 3-Legal Proceedings, are examples of the issues and litigation that can arise under these laws and regulations.  Changes to these regulations or standards may require the Company to modify its business objectives and incur additional costs to comply, and any liabilities or penalties actually incurred could have a material adverse effect on the Company's earnings and operating results.
 
The growth of municipal water systems and increased government restrictions on groundwater pumping could reduce demand for private water wells and the Company’s products, thereby reducing revenues and earnings.  Demand for certain Company products is affected by rural communities shifting from private and individual water well systems to city or municipal water systems. Many economic and other factors outside the Company’s control, including Federal and State regulations on water quality, tax credits and incentives, could adversely impact the demand for private and individual water wells. A decline in private and individual water well systems in the United States or other economies in the international markets the Company serves could reduce demand for the Company’s products and adversely impact sales, gross margins and operating results.
 
Demand for Fueling Systems products is impacted by environmental legislation which may cause significant fluctuations in costs and revenues after meeting compliance requirements.  Environmental legislation related to air quality and fueling containment may create demand for certain Fueling Systems products which must be supplied in a relatively short time frame to meet the governmental mandate, as occurred in California in the 2007 - 2009 time period.  During periods of increased demand the Company’s revenues and profitability could increase significantly, although the Company can also be at risk of not having capacity to meet demand or cost overruns due to inefficiencies during ramp up to the higher production levels.  After the Company’s customers have met the compliance requirements, the Company’s revenues and profitability may decrease significantly as the demand for certain products declines substantially.  The risk of not reducing production costs in relation to the decreased demand and reduced revenues could have a material adverse impact on gross margins and the Company's results of operations.
 
Changes in tax legislation regarding our foreign earnings could materially affect our future results. Since the Company operates in different countries and is subject to taxation in different jurisdictions, the Company’s future effective tax rates could be impacted by changes in such countries’ tax laws or their interpretations.  Both domestic and international tax laws are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulation and court rulings.  The application of these tax laws and related regulations is subject to legal and factual interpretation, judgment and uncertainty.  Changes to the U.S. international tax laws could limit U.S. deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit and “check-the-box” rules.  The Company cannot predict whether any proposed changes in U.S. tax laws will be enacted into law or what, if any, changes may be made to any such proposals prior to their being enacted into law.  If the U.S. tax laws change in a manner that increases the Company’s tax obligation, it could have a material adverse impact on the Company’s results of operations and financial condition.

The Company has significant goodwill and intangible assets and future impairment of the value of these assets may adversely affect operating results and financial condition. The Company's total assets reflect substantial intangible assets, primarily goodwill. Goodwill results from the Company's acquisitions, representing the excess of the purchase price paid over

8


the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or as warranted by triggering events. If future operating performance at one or more of the Company's operating segments were to decline significantly below current levels, the Company could incur a non-cash charge to operating earnings for an impairment. Any future determination requiring the recognition of an impairment of a significant portion of the Company's goodwill or intangible assets could have a material adverse impact on the Company's results of operations and financial condition.
The Company's business may be adversely affected by the seasonality of sales and weather conditions. The Company experiences seasonal demand in a number of markets within the Water Systems segment. End-user demand in primary markets follows warm weather trends and is at seasonal highs from April to August in the Northern Hemisphere. Demand for residential and agricultural water systems are also affected by weather-related disasters including heavy flooding and drought. Changes in these patterns could reduce demand for the Company's products and adversely impact sales, gross margins, and operating results.
The Company's results may be adversely affected by global macroeconomic supply and demand conditions related to the energy and mining industries.  The energy and mining industries are users of the Company's products, including the coal, iron ore, gold, copper, oil and natural gas industries. Decisions to purchase the Company's products are dependent upon the performance of the industries in which our customers operate. If demand or output in these industries increases, the demand for our products will generally increase. Likewise, if demand or output in these industries declines, the demand for our products will generally decrease. The energy and mining industries' demand and output are impacted by the prices of commodities in these industries which are frequently volatile and change in response to general economic conditions, economic growth, commodity inventories and any disruptions in production or distribution. Changes in these conditions could adversely impact sales, gross margin and operating results.
The Company depends on certain key suppliers, and any loss of those suppliers or their failure to meet commitments may adversely affect business and results of operations. The Company is dependent on a single or limited number of suppliers for some materials or components required in the manufacture of its products. If any of those suppliers fail to meet their commitments to the Company in terms of delivery or quality, the Company may experience supply shortages that could result in its inability to meet customer requirements, or could otherwise experience an interruption in operations that could negatively impact the Company's business and results of operations.
 
Additional Risks to the Company. The Company is subject to various risks in the normal course of business. Exhibit 99.1 sets forth risks and other factors that may affect future results, including those identified above, and is incorporated herein by reference.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company maintains its principal executive offices in Fort Wayne, Indiana (owned).

Manufacturing plants or primary distribution centers in the Water Systems segment are located in Australia (leased), Brazil (owned), Canada (leased), China (leased), the Czech Republic (owned), Germany (owned), Italy (leased), Japan (leased), Mexico (owned), Republic of Botswana (leased), South Africa (owned), Turkey (owned), and the United States (primarily owned).  Within the United States, significant manufacturing and primary distribution facilities are located in Little Rock, Arkansas (leased); Oklahoma City, Oklahoma (owned); Canby, Oregon (leased); and Wilburton, Oklahoma (owned).

Manufacturing plants or primary distribution centers in the Fueling Systems segment are located in China (leased), Germany (leased), and the United States.  Within the United States, significant manufacturing facilities are located in Madison, Wisconsin (leased) and Saco, Maine (owned).

The Company also maintains leased warehouse facilities in Fresno, California; Sanford, Florida; Laredo, Texas; Winnipeg, Manitoba, Canada; and Bolton, Ontario, Canada.

In the Company’s opinion, its facilities are suitable for their intended use, adequate for the Company’s business needs, and in good condition.


9


ITEM 3. LEGAL PROCEEDINGS
In August 2010, the California Air Resources Board (“CARB”) and South Coast Air Quality Management District (“SCAQMD”) filed civil complaints in the Los Angeles Superior Court against the Company and Franklin Fueling Systems, Inc.  The complaints related to a third-party-supplied component part of the Company's Healy 900 Series nozzle, which is part of the Company's Enhanced Vapor Recovery (“EVR”) Systems installed in California gasoline filling stations.  This part, a diaphragm, was the subject of a retrofit during the first half of 2008.  As the Company previously reported, in October 2008 CARB issued a Notice of Violation to the Company alleging that the circumstances leading to the retrofit program violated California statutes and regulations.

The claims in the complaints mirrored those that CARB presented to the Company in the Notice of Violation, and included claims that the Company negligently and intentionally sold nozzles with a modified diaphragm without required CARB certification. Those complaints were consolidated into one case in the Superior Court of California, County of Los Angeles (People of the State of California vs. Franklin Fueling Systems, Inc. et al.)  which was tried in the later part of December 2012 and early part of January 2013 (“CARB Case”).

On July 25, 2013, the Court issued a Final Statement of Decision (“Decision”) in the CARB Case.  In its Decision, the Court found on behalf of the Company and issued a complete defense verdict.  Judgment was entered on August 27, 2013.  CARB has noticed an appeal from that judgment. 

An Amended Judgment, awarding the Company $71,000 in costs was entered on January 22, 2014.

Neither of these suits have had any effect on CARB's certification of the Company's EVR System or any other products of the Company or its subsidiaries, and did not interfere with continuing sales.  CARB has never decertified the Company's EVR System and has never proposed to do so.

ITEM 4. MINE SAFETY DISCLOSURES

None.


10


EXECUTIVE OFFICERS OF THE REGISTRANT

Current executive officers of the Company, their ages, current position, and business experience during at least the past five years as of December 28, 2013, are as follows:

 
Name
 
Age
 
Position Held
Period Holding Position
R. Scott Trumbull
65
Chairman of the Board of Directors and Chief Executive Officer
2003 - present
Gregg C. Sengstack
55
President and Chief Operating Officer
2011 - present
 
 
Senior Vice President and President, Fueling and International Water Group
2005 - 2011
Robert J. Stone
49
Senior Vice President and President, International Water Systems
2012 - present
 
 
Senior Vice President and President, Americas Water Systems Group
2007 - 2012
Daniel J. Crose
65
Vice President, Global Water Product Supply
2011 - present
 
 
Vice President, Water Supply
2010 - 2011
 
 
Vice President and Director, North American Operations
2003 - 2010
DeLancey W. Davis
48
Vice President and President, North America Water Systems
2012 - present
 
 
Vice President and President, US/Canada Business Unit
2011 - 2012
 
 
Vice President and President, US/Canada Commercial Business Unit
2010 - 2011
 
 
Vice President and Director of Americas Water Systems
2008 - 2010
John J. Haines
50
Vice President, Chief Financial Officer, and Secretary
2008 - present
Thomas J. Strupp
60
Vice President, Global Human Resources
2010 - present
 
 
Vice President and President, Consumer and Specialty Markets Business Unit
2009 - 2010
 
 
Vice President and President, Water Transfer Systems
2008 - 2009
Steven W. Aikman
54
Vice President, Global Water Systems Engineering
2010 - present
 
 
Chief Engineer – Fuel Handling Products, Delphi Corporation, a global supplier for the automotive, computing, communications, energy, and consumer accessories markets
2003 - 2010

All executive officers are elected annually by the Board of Directors at the Board meeting held in conjunction with the annual meeting of shareowners. All executive officers hold office until their successors are duly elected or until their death, resignation, or removal by the Board.

11



PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

The number of shareowners of record as of February 13, 2014 was 927. The Company's stock is traded on the NASDAQ Global Select Market under the symbol FELE.

Dividends paid and the price range per common share as quoted by the NASDAQ Global Select Market for 2013 and 2012 were as follows:

 
Dividends per Share
 
Price per Share
 
2013
 
2012
 
2013
 
2012
 
 

 
 

 
Low
 
High
 
Low
 
High
1st Quarter
$
.0725

 
$
.0675

 
$
31.02

 
$
34.14

 
$
22.77

 
$
26.88

2nd Quarter
.0775

 
.0725

 
29.95

 
35.48

 
23.22

 
25.85

3rd Quarter
.0775

 
.0725

 
34.83

 
39.46

 
24.98

 
30.93

4th Quarter
.0775

 
.0725

 
37.21

 
45.62

 
27.38

 
30.98


Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 18, 2013.

Issuer Purchases of Equity Securities
The Company did not purchase, under the Company's stock repurchase program, any shares of its common stock during the three months ended December 28, 2013.

Stock Performance Graph
The following graph compares the Company's cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Guggenheim S&P Global Water Index and the Russell 2000 Index. The Company chose to start using the Guggenheim S&P Global Water Index in 2013 as the previously used Palisades U.S. Water Index was decommissioned in early 2013.


Hypothetical $100 invested on January 2, 2009 (fiscal year-end 2008) in Franklin Electric common stock, Guggenheim S&P Global Water Index, and Russell 2000 Index, assuming reinvestment of dividends.
 

12


 
 
YE 2008
 
2009
 
2010
 
2011
 
2012
 
2013
FELE
 
$
100

 
$
103

 
$
140

 
$
159

 
$
226

 
$
326

Guggenheim S&P Global Water
 
100

 
130

 
147

 
132

 
157

 
195

Russell 2000
 
100

 
127

 
161

 
155

 
180

 
250


ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Company’s consolidated financial statements. The information set forth below is not necessarily indicative of future operations.

Five Year Financial Summary
(In thousands, except per share amounts and ratios)
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
(a)
 
(b)
 
(c)
 
(d)
Operations:
 
 
 
 
 
 
 
 
 
Net sales
$
965,462

 
$
891,345

 
$
821,077

 
$
713,792

 
$
625,991

Gross profit
331,514

 
301,664

 
272,305

 
230,197

 
183,555

Interest expense
10,597

 
10,208

 
10,502

 
9,692

 
9,548

Income tax expense
28,851

 
32,250

 
23,412

 
15,057

 
10,625

Net income attributable to Franklin Electric Co., Inc.
81,958

 
82,864

 
63,099

 
38,914

 
23,245

Depreciation and amortization
31,356

 
28,335

 
25,295

 
24,040

 
25,385

Capital expenditures
67,206

 
42,062

 
21,144

 
12,776

 
13,889

Balance sheet:
 
 
 
 
 
 
 
 
 
Working capital (e)
$
333,880

 
$
283,278

 
$
276,386

 
$
269,793

 
$
237,149

Property, plant, and equipment, net
208,596

 
171,975

 
146,409

 
143,076

 
147,171

Total assets
1,051,873

 
976,379

 
829,530

 
788,559

 
726,997

Long-term debt
174,166

 
150,729

 
150,000

 
151,245

 
151,242

Shareowners’ equity
595,707

 
514,406

 
448,135

 
426,494

 
396,872

Other data:
 
 
 
 
 
 
 
 
 
Net income attributable to Franklin Electric Co., Inc., to sales
8.5
%
 
9.3
%
 
7.7
%
 
5.5
%
 
3.7
%
Net income attributable to Franklin Electric Co., Inc., to average total assets
8.1
%
 
9.2
%
 
7.8
%
 
5.1
%
 
3.2
%
Current ratio (f)
3.4

 
2.9

 
3.2

 
3.5

 
3.9

Number of common shares outstanding
47,715

 
47,132

 
46,677

 
46,514

 
46,256

Per share:
 
 
 
 
 
 
 
 
 
Market price range
 
 
 
 
 
 
 
 
 
High
$
45.62

 
$
30.98

 
$
26.09

 
$
20.90

 
$
17.25

Low
$
29.95

 
$
22.77

 
$
16.41

 
$
12.47

 
$
8.56

Net income attributable to Franklin Electric Co., Inc., per weighted average common share
$
1.70

 
$
1.76

 
$
1.36

 
$
0.84

 
$
0.50

Net income attributable to Franklin Electric Co., Inc., per weighted average common share, assuming dilution
$
1.68

 
$
1.73

 
$
1.33

 
$
0.83

 
$
0.50

Book value (g)
$
12.38

 
$
10.78

 
$
9.45

 
$
9.07

 
$
8.52

Dividends per common share
$
0.3050

 
$
0.2850

 
$
0.2675

 
$
0.2575

 
$
0.2500


(a)
Includes the results of operations of the Company's 70.5% owned subsidiary, Pioneer Pump Holdings, Inc., since the Company's acquisition of an additional 39.5% in the first quarter of 2012, 100% of the wholly owned subsidiary, Cerus Industrial Corporation., since its acquisition in the third quarter of 2012, and 100% of the wholly owned subsidiary, Flex-ing, Incorporated, since the Company's acquisition in the fourth quarter of 2012.

13


(b)
Includes the results of operations of the Company's 80% owned subsidiary, Impo Motor Pompa Sanayi ve Ticaret A.S., since its acquisition in the second quarter of 2011, and 100% of the wholly owned subsidiary, Vertical S.p.A., since the Company's acquisition of the remaining 25% in the fourth quarter of 2011.
(c)
Includes the results of operations of the Company’s wholly owned subsidiary, PetroTechnik Limited, since its acquisition in the third quarter of 2010.
(d)
Includes the results of operations of the Company’s 75% owned subsidiary, Vertical S.p.A., since its acquisition in the first quarter of 2009.
(e)
Working capital = Current assets minus current liabilities.
(f)
Current ratio = Current assets divided by current liabilities.
(g)
Book value = Shareowners’ equity divided by weighted average common shares, assuming full dilution.

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 18, 2013.


14


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2013 vs. 2012

OVERVIEW
Sales in 2013 increased from the prior year.  Net sales in 2013 were $965.5 million, an increase of about 8 percent compared to 2012 sales of $891.3 million. The sales increase was primarily from sales volume and price increases, as well the Company's acquisitions. Sales increases were partially offset by the negative impact of foreign currency translation. The Company's consolidated gross profit was $331.5 million for 2013, an increase of $29.8 million or about 10 percent from 2012. The gross profit as a percent of net sales increased 50 basis points to 34.3 percent in 2013 from 33.8 percent in 2012. The gross profit margin improvement was due to leveraging fixed costs on higher sales, lower labor and burden costs.  Direct materials as a percentage of sales was unchanged compared to last year. For 2013, diluted earnings per share were $1.68, a decrease of 3 percent compared to 2012 diluted earnings per share of $1.73. Adjusted earnings per share were $1.72, an increase of 10 percent versus the $1.57 adjusted earnings per share in 2012 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS). The Company completed a 2-for-1 stock split on March 18, 2013 and all EPS amounts are presented on a post-split basis.

RESULTS OF OPERATIONS

Net Sales
Net sales in 2013 were $965.5 million, an increase of $74.2 million or about 8 percent compared to 2012 sales of $891.3 million.  The incremental impact of sales from acquired businesses was $30.1 million or about 3 percent.  Sales revenue decreased by $14.7 million or about 2 percent in 2013 due to foreign currency translation. The sales change in 2013, excluding acquisitions and foreign currency translation, was an increase of $58.8 million or about 7 percent.

 
Net Sales
(In millions)
2013
 
2012
 
2013 v 2012
Water Systems
$
766.4

 
$
715.0

 
$
51.4

Fueling Systems
199.1

 
176.3

 
22.8

Consolidated
$
965.5

 
$
891.3

 
$
74.2


Net Sales-Water Systems
Water Systems sales were $766.4 million in 2013, an increase of $51.4 million or 7 percent versus 2012. The incremental impact of sales from acquired businesses was $19.0 million or about 3 percent.  Foreign currency translation rate changes decreased sales $16.0 million, or about 2 percent, compared to sales in 2012. The sales change in 2013, excluding acquisitions and foreign currency translation, was an increase of $48.4 million or about 7 percent.

Water Systems sales in the U.S. and Canada were 40 percent of consolidated sales and grew by about 11 percent compared to 2012. Acquisition related sales during 2013 were about $17.2 million. Foreign currency translation rate changes decreased sales $0.9 million compared to sales in 2012. The sales change in 2013, excluding acquisitions and foreign currency translation, was an increase of $22.3 million or about 6 percent. There were three primary drivers for the sales growth in the U.S. and Canada: dewatering equipment, groundwater pumps, and drives and controls, as demand for these three products increased in 2013.

Water Systems sales in Latin America were about 13 percent of consolidated sales for 2013 and grew by about 4 percent compared to the prior year. Foreign currency translation rate changes decreased sales $6.3 million, or about 5 percent, compared to sales in 2012. Excluding foreign currency translation, sales in Latin America grew by about 9 percent during 2013. Most of the sales growth in Latin America occurred in Brazil, and most of the growth in Brazil came from continued growth in demand for the line of 4 inch groundwater pumps and motors that the company launched in Brazil two years ago. In total, sales in Brazil grew organically by 21 percent excluding foreign exchange.

Water Systems sales in the Middle East and Africa were about 12 percent of consolidated sales and increased by about 3 percent compared to 2012. Water Systems sales in the Middle East and Africa were reduced by $7.2 million or about 6 percent in the year due to foreign currency translation. Excluding acquisitions and the impact of foreign currency translation, sales were up about 9 percent compared to 2012. Sales in the Gulf region increased by about 17 percent as the governments in both Saudi Arabia and the UAE are supporting investments in groundwater based irrigation projects. Sales in Turkey increased by about 10 percent as growing demand for the value line of Impo branded groundwater pumps and motors, produced in the Company’s

15


Turkish factory, accounted for much of the growth during 2013. Sales in local currency were up in South Africa and Zambia in 2013 offsetting lower sales in Botswana.

Water Systems sales in Europe were about 8 percent of consolidated sales and grew by about 6 percent compared to the prior year. Acquisition related sales during 2013 were about $1 million in Europe, or about 1 percent. Foreign currency translation rate changes had no impact on sales compared to sales in 2012. Excluding acquisitions and foreign currency translation, European sales grew by about 5 percent during 2013 led by growing demand for the Company's Pioneer branded mobile dewatering equipment.

Water Systems sales in the Asia Pacific region were 6 percent of consolidated sales and grew by about 2 percent compared to the prior year. Acquisition related sales during 2013 increased sales by about 1 percent in Asia. Foreign currency translation rate changes decreased sales in 2013 in the Asia Pacific region by about 3 percent. Excluding acquisitions and foreign currency translation, sales grew by about 4 percent during 2013. The year-on-year sales increased 22 percent in Southeast Asia and China, with strong sales in Singapore, Thailand, Philippines, and Indonesia. This growth more than offset a modest decline in sales in the more mature Asian markets including Japan, Korea, and Australia.

Net Sales-Fueling Systems
Fueling Systems sales which represented 21 percent of consolidated sales were $199.1 million in 2013, an increase of $22.8 million or about 13 percent versus 2012. The incremental impact of sales from acquired businesses was $11.1 million or about 6 percent.  Foreign currency translation rate changes increased sales $1.3 million, or about 1 percent, compared to sales in 2012. The sales change in 2013, excluding acquisitions and foreign currency translation, was an increase of $10.4 million or about 6 percent.

Fueling Systems revenue growth was primarily in developing regions where there is an ongoing need for investment in new filling station infrastructure to support the growing number of passenger vehicles on the road. Developing regions represented 30 percent of the Company’s Fueling Systems sales and grew by about 26 percent. Solid sales gains were achieved in fuel containment product lines across most developing regions and for fuel dispensing product lines in China. Fueling Systems sales in more developed markets, like the U.S., Canada, and Europe grew by about 8 percent driven primarily by the Flexing acquisition.

Cost of Sales
Cost of sales as a percent of net sales for 2013 and 2012 was 65.7 percent and 66.2 percent, respectively. Correspondingly, the gross profit margin increased to 34.3 percent from 33.8 percent, a 50 basis point improvement. The gross profit margin improvement was due to leveraging fixed costs on higher sales, lower labor and burden costs, partially offset by higher freight costs.  Direct materials as a percentage of sales was unchanged compared to last year.  The Company's consolidated gross profit was $331.5 million for 2013, up $29.8 million from 2012.

Selling, General and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $204.0 million in 2013 and increased by $15.5 million or about 8 percent in 2013 compared to last year. In 2013, increases in SG&A attributable to acquisitions were about $9 million. Additional year over year changes in SG&A costs were increases in marketing and selling-related expenses attributable to sales volume and higher research, development, and engineering expenses.

Restructuring Expenses
Restructuring expenses for 2013 were $3.7 million and reduced diluted earnings per share by approximately $0.05. Restructuring expenses in 2013 included asset write-downs, severance costs and expenses related to relocation to the new corporate headquarters and engineering center in Fort Wayne, Indiana. There were $0.2 million of restructuring expenses in 2012.

Operating Income
Operating income was $123.8 million in 2013, up $10.8 million from $113.0 million in 2012.



16


 
 
Operating income (loss)
(In millions)
 
2013
 
2012
 
2013 v 2012
Water Systems
 
$
131.3

 
$
124.1

 
$
7.2

Fueling Systems
 
42.6

 
36.6

 
6.0

Other
 
(50.1
)
 
(47.7
)
 
(2.4
)
Consolidated
 
$
123.8

 
$
113.0

 
$
10.8


There were specific items in 2013 and 2012 that impacted operating income that were not operational in nature.  In 2013 there were three such items: $3.7 million of restructuring charges, a $1.0 million net benefit from the reversal of a $1.6 million reserve for legal claims established in prior years offset by $0.6 million of legal fees related to the claim and $0.9 million of acquisition related expenses, primarily professional fees. 2012 included $1.3 million of acquisition related expenses, primarily professional fees, $0.4 million for certain legal matters and $0.2 million for restructuring expenses.

The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of operating income after non-GAAP adjustments and percent operating income to net sales after non-GAAP adjustments to net sales (operating income margin after non-GAAP adjustments).  The Company believes this information helps investors understand underlying trends in the Company's business more easily. The non-GAAP adjustments are for restructuring expenses, reported separately on the income statement, as well as certain legal matters and acquisition related items which are included in SG&A on the income statement.  The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables:

Operating Income and Margins
 
 
 
 
Before and After Non-GAAP Adjustments
 
 
 
 
(in millions)
For the Full Year of 2013
 
Water
Fueling
Other
Consolidated
Reported Operating Income
$
131.3

$
42.6

$
(50.1
)
$
123.8

% Operating Income To Net Sales
17.1
%
21.4
%
 
12.8
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
3.2

$
0.5

$

$
3.7

Legal matters
$

$
(1.0
)
$

$
(1.0
)
Acquisition related items
$
0.7

$
0.2

$

$
0.9

Operating Income after Non-GAAP Adjustments
$
135.2

$
42.3

$
(50.1
)
$
127.4

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
17.6
%
21.2
%
 
13.2
%
 
 
 
 
 
 
For the Full Year of 2012
 
Water
Fueling
Other
Consolidated
Reported Operating Income
$
124.1

$
36.6

$
(47.7
)
$
113.0

% Operating Income To Net Sales
17.4
%
20.8
%
 
12.7
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
0.2

$

$

$
0.2

Legal matters
$

$
0.4

$

$
0.4

Acquisition related items
$
1.3

$

$

$
1.3

Operating Income after Non-GAAP Adjustments
$
125.6

$
37.0

$
(47.7
)
$
114.9

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
17.6
%
21.0
%
 
12.9
%

Operating Income-Water Systems

17


Water Systems operating income, after non-GAAP adjustments, was $135.2 million in 2013, an increase of 8 percent versus 2012. The 2013 and 2012 operating income margin after non-GAAP adjustments was 17.6 percent. The change in profitability was primarily the result of lower direct labor and variable costs, offset by higher cost for key growth initiatives of the Company. These initiatives include the startup of a pump rental business in the United Kingdom, opening four new distribution centers in developing regions, sales and marketing costs for the new artificial lift product line and the rollout of the Franklin Control Systems high horsepower drive and control products through the U.S. Water Systems distribution channel.

Operating Income-Fueling Systems
Fueling Systems operating income after non-GAAP adjustments was $42.3 million in 2013 compared to $37.0 million after non-GAAP adjustments in 2012, an increase of 14 percent. The 2013 operating income margin after non-GAAP adjustments was 21.2 percent and increased by 20 basis points compared to the 21.0 percent of net sales in 2012. This increased profitability was the result of operating leverage.
 
Operating Income-Other
Operating income-other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses were higher due to increases related to information technology expenditures for software, telephone and other ERP integration costs as well as higher performance based and stock based compensation expenses.

Interest Expense
Interest expense for 2013 and 2012 was $10.6 million and $10.2 million, respectively.

Other Income or Expense
Other income or expense was a gain of $1.7 million in 2013 and a gain of $14.9 million in 2012. Included in other income or expense in 2013 was interest income of $1.8 million, primarily derived from the investment of cash balances in short-term securities.

Included in other income in 2012 was a one-time gain on the Pioneer transaction worth $12.2 million. The gain on the original investment the Company held in Pioneer arose as a the result of a new enterprise valuation of the Pioneer entity compared to the book value of Franklin Electric's equity investment in Pioneer. Also included in other income in 2012 was income from equity investments of $0.6 million and interest income of $2.3 million, primarily derived from the investment of cash balances in short-term securities.

Foreign Exchange
Foreign currency-based transactions produced a loss for 2013 of $3.3 million, primarily due to the Turkish lira, the euro, South African rand, Brazilian real and Canadian dollar relative to the U.S. dollar, none of which individually were significant.  Foreign currency-based transactions produced a loss for 2012 of $1.7 million, primarily due to the Mexican peso, the euro, South African rand, Brazilian real and Czech koruna relative to the U.S. dollar, none of which individually were significant.

Income Taxes
The provision for income taxes in 2013 and 2012 was $28.9 million and $32.2 million, respectively. The tax rate for 2013 was 25.9 percent and 2012 was 27.8 percent. The effective tax rate may differ from the statutory rate primarily due to the indefinite reinvestment of foreign earnings taxed at rates below the U.S. statutory rate as well as recognition of foreign tax credits. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations as well as cash on hand and available credit.

Net Income
Net income for 2013 was $82.7 million compared to 2012 net income of $83.7 million.  Net income attributable to Franklin Electric Co., Inc. for 2013 was $82.0 million, or $1.68 per diluted share, compared to 2012 net income attributable to Franklin Electric Co., Inc. of $82.9 million or $1.73 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments for 2013 was $82.9 million, or $1.72 per diluted share, compared to 2012 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $74.7 million or $1.57 per diluted share.

There were specific items in 2013 and 2012 that impacted net income attributable to Franklin Electric Co., Inc. that were not operational in nature. The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of net income attributable to Franklin Electric Co., Inc. and adjusted EPS.  The Company believes this information helps investors understand underlying trends in the Company's business more easily.  The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables:


18



Earnings Before and After Non-GAAP Adjustments
For the Full Year
(in millions)
2013
2012
Change
Net Income attributable to Franklin Electric Co., Inc. Reported
$
82.0

$
82.9

(1
)%
Allocated Undistributed Earnings
$
(1.2
)
$
(0.6
)
 
Adjusted Earnings for EPS Calculations
$
80.8

$
82.3

(2
)%
Non-GAAP adjustments (before tax):
 
 
 
Restructuring
$
3.7

$
0.2

 
Legal matters
$
(1.0
)
$
0.4

 
Acquisition related items
$
0.9

$
1.3

 
Gain on Pioneer Investment
$

$
(12.2
)
 
Non-GAAP adjustments, net of tax:
 
 
 
Restructuring
$
2.2

$
0.1

 
Legal matters
$
(0.6
)
$
0.3

 
Acquisition related items
$
0.5

$
0.9

 
Gain on Pioneer Investment
$

$
(8.9
)
 
Net Income attributable to Franklin Electric Co., Inc. after Non-GAAP Adjustments (Adjusted Net Income)
$
82.9

$
74.7

11
 %


Earnings Per Share Before and After Non-GAAP Adjustments
For the Full Year
(in millions except per-share data)
2013
 
2012
 
Change
Average Fully Diluted Shares Outstanding
48.1

 
$
47.7

 
1
 %
 
 
 
 
 
 
Fully Diluted Earnings Per Share ("EPS") Reported
$
1.68

 
$
1.73

 
(3
)%
 
 
 
 
 
 
Restructuring Per Share, net of tax
$
0.05

 
$

 
 
Legal matters Per Share, net of tax
$
(0.02
)
 
$
0.01

 
 
Acquisition related items Per Share, net of tax
$
0.01

 
$
0.02

 
 
Gain on Pioneer Investment Per Share, net of tax
$

 
$
(0.19
)
 
 
 
 
 
 
 
 
Fully Diluted EPS after Non-GAAP Adjustments (Adjusted EPS)
$
1.72

 
$
1.57

 
10
 %

2012 vs. 2011

OVERVIEW
Sales and earnings in 2012 increased from the prior year.  Net sales in 2012 were $891.3 million, an increase of about 9 percent compared to 2011 sales of $821.1 million. The sales increase was primarily from the Company's acquisitions, as well as sales volume and price increases. Sales increases were partially offset by the negative impact of foreign currency translation. The Company's consolidated gross profit was $301.7 million for 2012, an increase of $29.4 million or about 11 percent from 2011. The gross profit as a percent of net sales increased 60 basis points to 33.8 percent in 2012 from 33.2 percent in 2011. The gross profit margin improvement was attributable to leveraging of fixed costs on higher sales, reductions in inventory obsolescence costs, and lower labor and burden cost, partially offset by higher material costs. For 2012, diluted earnings per share were $1.73, an increase of 30 percent compared to 2011 diluted earnings per share of $1.33. Adjusted earnings per share were $1.57, an increase of 16 percent versus the $1.35 adjusted earnings per share in 2011 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS). For the full year 2012, adjusted net income of $74.7 million compared to $64.1 million and

19


adjusted earnings per share of $1.57 compared to $1.35 were records for any year in the Company's history. During the year, the Company completed the acquisition of a controlling interest of Pioneer Pump, and the acquisition of all of the outstanding stock of Cerus Industrial Corporation and Flex-ing, Incorporated.

RESULTS OF OPERATIONS

Net Sales
Net sales in 2012 were $891.3 million, an increase of $70.2 million or about 9 percent compared to 2011 sales of $821.1 million.  The incremental impact of sales from acquired businesses was $59.1 million or about 7 percent.  Sales revenue decreased by $33.0 million or about 4 percent in 2012 due to foreign currency translation. The sales change in 2012, excluding acquisitions and foreign currency translation, was an increase of $44.1 million or about 5 percent.

 
 
Net Sales
(In millions)
 
2012
 
2011
 
2012 v 2011
Water Systems
 
$
715.0

 
$
654.1

 
$
60.9

Fueling Systems
 
176.3

 
167.0

 
9.3

Consolidated
 
$
891.3

 
$
821.1

 
$
70.2


Net Sales-Water Systems
Water Systems sales were $715.0 million in 2012, an increase of $60.9 million or 9 percent versus 2011. The incremental impact of sales from acquired businesses was $57.9 million or about 9 percent.  Foreign currency translation rate changes decreased sales $29.2 million, or about 4 percent, compared to sales in 2011. The sales change in 2012, excluding acquisitions and foreign currency translation, was an increase of $32.2 million or about 5 percent.

Water Systems sales in the U.S. and Canada were 40 percent of consolidated sales and grew by about 14 percent compared to 2011. Acquisition related sales during 2012 were about $39 million. Foreign currency translation rate changes decreased sales $1 million compared to sales in 2011. The sales change in 2012, excluding acquisitions and foreign currency translation, was an increase of $6 million or about 2 percent. Sales of groundwater pumping equipment in the U.S. and Canada grew by about 7 percent compared to the prior year as the Company continued to gain share in this market. Wastewater pump sales in the U.S. and Canada were lower as drier weather reduced demand for residential sump, sewage, and effluent pumps compared to the prior year.

Water Systems sales in EMENA, which is Europe, the Middle East, and North Africa, were 15 percent of consolidated sales and grew by about 2 percent compared to the prior year. Acquisition related sales during 2012 were about $13 million in EMENA. Foreign currency translation rate changes decreased sales $12 million, or about 9 percent, compared to sales in 2011. Excluding acquisitions and foreign currency translation, EMENA sales grew by about 1 percent during 2012. EMENA sales have been impacted by the political and financial uncertainty throughout the region.

Water Systems sales in Latin America were about 13 percent of consolidated sales for 2012 and grew by about 6 percent compared to the prior year. Foreign currency translation rate changes decreased sales $11 million, or about 10 percent, compared to sales in 2011. Excluding foreign currency translation, sales in Latin America grew by about 16 percent during 2012. Sales continued to be strong in Brazil and Mexico with sales increases in these regions at about 20 percent. An important contributor to this growth was the launch of our groundwater pump and motor product line in Brazil. Sales gained in Mexico as ongoing dry weather increased the demand of irrigation pumping systems. In addition Latin America benefited from a new distribution center in Chile.

Water Systems sales in the Asia Pacific region were 7 percent of consolidated sales and grew by about 15 percent compared to the prior year. Acquisition related sales during 2012 were about $4 million in Asia. Foreign currency translation rate changes had little impact in 2012 compared to sales in 2011 in the Asia Pacific region. Excluding acquisitions and foreign currency translation sales grew by about 7 percent during 2012. The year-on-year sales increased 22 percent in the Southeast Asian region, with strong sales in Thailand, Philippines and Indonesia. Sales increased by about 10 percent in Australia due to sales growth in both agricultural and residential pumps and motors, one of the largest regions partially offset by lower sales in China from the prior year.

Water Systems sales in Southern Africa represented 5 percent of consolidated sales and declined by 3 percent compared to the prior year. Acquisition related sales during 2012 were about $2 million in Southern Africa. Foreign currency translation rate changes decreased sales $6 million, or about 13 percent, compared to sales in 2011. Excluding acquisitions and foreign

20


currency translation, Southern Africa sales grew by about 6 percent during 2012.

Net Sales-Fueling Systems
Fueling Systems sales which represented 20 percent of consolidated sales were $176.3 million in 2012, an increase of $9.3 million or about 6 percent versus 2011. The incremental impact of sales from businesses acquired during the fourth quarter of 2012 was $1.2 million or about 1 percent.  Foreign currency translation rate changes decreased sales $3.8 million, or about 2 percent, compared to sales in 2011. The sales change in 2012, excluding acquisitions and foreign currency translation, was an increase of $11.9 million or about 7 percent.

Fueling Systems achieved solid organic sales gains. Fueling Systems revenue growth was balanced across markets growing by about 5 percent in both the U.S. and Canadian market as well as in the rest of the world, with particular strength in India and the Asia Pacific region. Pumping systems sales grew by 15 percent during 2012 as station owners worldwide continue their conversion from suction to pressure pumping technology for dispensing gasoline.

Cost of Sales
Cost of sales as a percent of net sales for 2012 and 2011 was 66.2 percent and 66.8 percent, respectively. Correspondingly, the gross profit margin increased to 33.8 percent from 33.2 percent, a 60 basis point improvement. The gross profit margin improvement was due to leveraging fixed costs on higher sales, lower obsolescence, lower labor and burden costs, partially offset by higher material costs.  Direct materials as a percentage of sales increased by 90 basis points compared to last year.  The Company's consolidated gross profit was $301.7 million for 2012, up $29.4 million from 2011.

Selling, General and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $188.5 million in 2012 and increased by $11.2 million or about 6 percent in 2012 compared to last year. In 2012, increases in SG&A attributable to acquisitions were $8.9 million. Additional year over year changes in SG&A costs were increases in marketing and selling-related expenses and higher research, development, and engineering expenses.

Restructuring Expenses
Restructuring expenses for 2012 were $0.2 million and had less than $0.01 impact to diluted earnings per share. Restructuring expenses incurred in 2012 included $0.5 million of Phase III costs primarily related to the final site cleanup and sale of the Siloam Springs facility offset by $0.4 million in a gain on the sale of land the Company had previously held for development. There were also $0.1 million of restructuring costs related to Phase IV of the Global Manufacturing Realignment Program in 2012. Restructuring expenses in 2012 included asset write-downs and manufacturing equipment relocation costs.  
 
Restructuring expenses in 2011 were $1.6 million and reduced diluted earnings per share by approximately $0.02. Restructuring expenses incurred in 2011 were $1.1 million Phase III costs primarily related to the closing of the Siloam Springs facility and $0.5 million in costs related to Phase IV of the Global Manufacturing Realignment Program announced in the second quarter of 2011. Restructuring expenses in 2011 included asset write-downs, severance costs and manufacturing equipment relocation costs.  

In total, the Company had previously estimated the cost for Phase III to be between $10.0 million and $12.8 million. The Company actually incurred $13.0 million in Phase III expenses, from December 2008 through the end of 2012.  Approximately $9.1 million of the $13.0 million was for non-cash items. With the sale of the Siloam Springs facility Phase III is considered complete.

The Company has estimated the pretax charge for Phase IV to be between $2.6 million and $5.2 million, of which $1.2 million to $3.5 million is for closing the Oklahoma City manufacturing facility. The charges began in the second quarter of 2011 and were substantially completed by the end the first quarter of 2012, with the majority of the manufacturing moves completed. Phase IV will continue until the closing and disposition of the Oklahoma City manufacturing facility is complete. Phase IV costs include severance, pension curtailments, asset write-offs, and equipment relocation. The Company has to date incurred $0.6 million in Phase IV, none of which was related to non-cash items.

Additionally, the Company currently estimates that total non-GAAP adjustments to full year earnings in 2013 will be approximately $2.0 to $2.8 million resulting primarily from restructuring activities related to the Flexi-ing acquisition, the relocation of the Company’s headquarters and other miscellaneous manufacturing facility realignments in North America and certain international locations. The Company will continue to provide quarterly reconciliations and explanations of all non-GAAP related items.

Operating Income

21


Operating income was $113.0 million in 2012, up $19.6 million from $93.4 million in 2011.

 
 
Operating income (loss)
(In millions)
 
2012
 
2011
 
2012 v 2011
Water Systems
 
$
124.1

 
$
105.3

 
$
18.8

Fueling Systems
 
36.6

 
31.3

 
5.3

Other
 
(47.7
)
 
(43.2
)
 
(4.5
)
Consolidated
 
$
113.0

 
$
93.4

 
$
19.6


There were specific items in 2012 and 2011 that impacted operating income that were not operational in nature.  In 2012 there were three such items: $1.3 million of acquisition related expenses, primarily professional fees in SG&A, $0.4 million for certain legal matters and $0.2 million of restructuring charges. 2011 included $1.6 million of restructuring charges and $0.7 million for certain legal matters.

The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of operating income after non-GAAP adjustments and percent operating income to net sales after non-GAAP adjustments to net sales (operating income margin after non-GAAP adjustments).  The Company believes this information helps investors understand underlying trends in the Company's business more easily.  The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables:

Operating Income and Margins
 
 
 
 
Before and After Non-GAAP Adjustments
 
 
 
 
(in millions)
For the Full Year of 2012
 
Water
Fueling
Other
Consolidated
Reported Operating Income
$
124.1

$
36.6

$
(47.7
)
$
113

% Operating Income To Net Sales
17.4
%
20.8
%
 
12.7
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
0.2

$

$

$
0.2

Legal matters
$

$
0.4

$

$
0.4

Acquisition related items
$
1.3

$

$

$
1.3

Operating Income after Non-GAAP Adjustments
$
125.6

$
37.0

$
(47.7
)
$
114.9

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
17.6
%
21.0
%
 
12.9
%
 
 
 
 
 
 
For the Full Year of 2011
 
Water
Fueling
Other
Consolidated
Reported Operating Income
$
105.3

$
31.3

$
(43.2
)
$
93.4

% Operating Income To Net Sales
16.1
%
18.7
%
 
11.4
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
1.5

$
0.1

$

$
1.6

Legal matters
$

$
0.7

$

$
0.7

Acquisition related items
$

$

$

$

Operating Income after Non-GAAP Adjustments
$
106.8

$
32.1

$
(43.2
)
$
95.7

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
16.3
%
19.2
%
 
11.7
%

Operating Income-Water Systems

22


Water Systems operating income, after non-GAAP adjustments, was $125.6 million in 2012, an increase of 18 percent versus 2011. The 2012 operating income margin after non-GAAP adjustments was 17.6 percent and increased by 130 basis points compared to 2011. This increased profitability was the result of operating leverage, increases in pricing, and productivity improvements.

Operating Income-Fueling Systems
Fueling Systems operating income after non-GAAP adjustments was $37.0 million in 2012 compared to $32.1 million after non-GAAP adjustments in 2011, an increase of 15 percent. The 2012 operating income margin after non-GAAP adjustments was 21.0 percent and increased by 180 basis points compared to the 19.2 percent of net sales in 2011. This increased profitability was the result of operating leverage, increases in pricing, and productivity improvements.
 
Operating Income-Other
Operating income-other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses were higher due to increases related to information technology expenditures for software, telephone and other ERP integration costs as well as to higher performance based and stock based compensation expenses.

Interest Expense
Interest expense for 2012 and 2011 was $10.2 million and $10.5 million, respectively.

Other Income or Expense
Other income or expense was a gain of $14.9 million in 2012 and a gain of $5.7 million in 2011.  Included in other income in 2012 was a one-time gain on the Pioneer transaction worth $12.2 million. The gain on the original investment the Company held in Pioneer arose as a the result of a new enterprise valuation of the Pioneer entity compared to the book value of Franklin Electric's equity investment in Pioneer. Also included in other income in 2012 was income from equity investments of $0.6 million and interest income of $2.3 million, primarily derived from the investment of cash balances in short-term securities.

Included in other income or expense in 2011 was income from equity investments of $2.3 million and interest income of $2.6 million, primarily derived from the investment of cash balances in short-term securities. In conjunction with the Impo acquisition, the Company entered into a forward purchase contract for Turkish lira for a portion of the estimated acquisition price.  The contract was outstanding as of the end of the first quarter of 2011 and resulted in a pre-tax gain included in other income of approximately $0.6 million.  

Foreign Exchange
Foreign currency-based transactions produced a loss for 2012 of $1.7 million, primarily due to the Mexican peso, the euro, South African rand, Brazilian real and Czech koruna relative to the U.S. dollar, none of which individually were significant.  Foreign currency-based transactions produced a loss in 2011 of $1.4 million, primarily due to the Turkish lira.

Income Taxes
The provision for income taxes in 2012 and 2011 was $32.2 million and $23.4 million, respectively. The tax rate for 2012 was 27.8 percent and 2011 was 26.9 percent. The projected tax rate may differ from the statutory rate primarily due to the indefinite reinvestment of foreign earnings taxed at rates below the U.S. statutory rate as well as recognition of foreign tax credits. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations as well as cash on hand and available credit.

Net Income
Net income for 2012 was $83.7 million compared to 2011 net income of $63.7 million.  Net income attributable to Franklin Electric Co., Inc. for 2012 was $82.9 million, or $1.73 per diluted share, compared to 2011 net income attributable to Franklin Electric Co., Inc. of $62.9 million or $1.33 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments for 2012 was $74.7 million, or $1.57 per diluted share, compared to 2011 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $64.1 million or $1.35 per diluted share.

There were specific items in 2012 and 2011 that impacted net income attributable to Franklin Electric Co., Inc. that were not operational in nature. The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of net income attributable to Franklin Electric Co., Inc. and adjusted EPS.  The Company believes this information helps investors understand underlying trends in the Company's business more easily.  The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables:



23


Earnings Before and After Non-GAAP Adjustments
For the Full Year
(in millions)
2012
2011
Change
Net Income attributable to Franklin Electric Co., Inc. Reported
$
82.9

$
63.1

31
%
Allocated Undistributed Earnings
$
(0.6
)
$
(0.2
)
 
Adjusted Earnings for EPS Calculations
$
82.3

$
62.9

31
%
Non-GAAP adjustments (before tax):
 
 
 
Restructuring
$
0.2

$
1.6

 
Legal matters
$
0.4

$
0.7

 
Acquisition related items
$
1.3

$

 
FX gain on forward purchase contract
$

$
(0.6
)
 
Gain on Pioneer Investment
$
(12.2
)
$

 
Non-GAAP adjustments, net of tax:
 
 
 
Restructuring
$
0.1

$
1.2

 
Legal matters
$
0.3

$
0.5

 
Acquisition related items
$
0.9

$

 
FX gain on forward purchase contract
$

$
(0.5
)
 
Gain on Pioneer Investment
$
(8.9
)
$

 
Net Income attributable to Franklin Electric Co., Inc. after Non-GAAP Adjustments (Adjusted Net Income)
$
74.7

$
64.1

17
%

Earnings Per Share Before and After Non-GAAP Adjustments
For the Full Year
(in millions except per-share data)
2012
 
2011
 
Change
Fully Diluted Earnings Per Share ("EPS") Reported
$
1.73

 
$
1.33

 
30
%
 
 
 
 
 
 
Restructuring Per Share, net of tax
$

 
$
0.02

 
 
Legal matters Per Share, net of tax
$
0.01

 
$
0.01

 
 
Acquisition related items Per Share, net of tax
$
0.02

 
$

 
 
FX gain on forward contract Per Share, net of tax
$

 
$
(0.01
)
 
 
Gain on Pioneer Investment Per Share, net of tax
$
(0.19
)
 
$

 
 
 
 
 
 
 
 
Fully Diluted EPS after Non-GAAP Adjustments (Adjusted EPS)
$
1.57

 
$
1.35

 
16
%


CAPITAL RESOURCES AND LIQUIDITY
Overview
The Company's primary sources of liquidity are cash on hand, cash flows from operations and long-term debt funds available.

On December 31, 2012, the Company, Allen County, Indiana, and certain institutional investors entered into a Bond Purchase and Loan Agreement. Under the agreement, Allen County, Indiana issued a series of Project Bonds entitled “Taxable Economic Development Bonds, Series 2012 (Franklin Electric Co., Inc. Project).” The aggregate principal amount of the Project Bonds issued and authenticated was limited to $25.0 million. The Company then borrowed the proceeds under the Project Bonds through the issuance of Project Notes to partially finance the cost of acquisition, construction, installation and equipping of the new Global Corporate Headquarters and Engineering Center. The Project Notes (tax increment financing debt) bear interest at 3.6 percent per annum. Interest and principal balance of the Project Notes are due and payable by the Company directly to the institutional investors in aggregate semi-annual installments commencing on July 10, 2013, and concluding on January 10,

24


2033. The use of the proceeds from the Project Notes was limited to assist the financing of the new Global Corporate Headquarters and Engineering Center.
The Company also has an amended and restated uncommitted note purchase and private shelf agreement (the “Prudential Agreement”) in the amount of $200.0 million, with $150.0 million of notes issued thereunder beginning to mature in 2015. The Company has no scheduled principal payments under the Prudential Agreement until 2015 at which time it amortizes for 5 years at an amount of $30.0 million per year. As of December 28, 2013, the Company had $50.0 million borrowing capacity under the Prudential Agreement.
In addition, the Company has a committed, unsecured, revolving credit agreement maturing on December 14, 2016 (the “Agreement”) in the amount of $150.0 million. As of December 28, 2013, the Company had $145.6 million borrowing capacity under the Agreement as $4.4 million in letters of credit were outstanding and undrawn.
The Agreement, the Prudential Agreement, and the tax increment financing debt contain customary affirmative and negative covenants. The affirmative covenants relate to financial statements, notices of material events, conduct of business, inspection of property, maintenance of insurance, compliance with laws and most favored lender obligations. The negative covenants include limitations on loans, advances and investments, and the granting of liens by the Company or its subsidiaries, as well as prohibitions on certain consolidations, mergers, sales and transfers of assets. The covenants also include financial requirements including a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverage ratio of 3.00 to 1.00. Cross default is applicable with the Agreement, the Prudential Agreement, and the tax increment financing debt, but only if the Company is defaulting on an obligation exceeding $10.0 million. As of December 28, 2013, the Company was in compliance with all covenants. Volatility in the financial and credit markets due to global financial events within the past 5 years has generally not adversely impacted the liquidity of the Company. The Company expects that ongoing requirements for operations, capital expenditures, pension obligations, dividends, and debt service will be adequately funded from cash on hand, operations, and existing credit agreements.

At December 28, 2013, the Company had $134.6 million of cash on hand at various locations worldwide. Approximately 40 percent of the cash on hand was in the U.S. and readily accessible. Another approximately 32 percent was in Europe, and then another 28 percent was in Mexico, Brazil, and other locations combined. On a regular basis the Company reviews international cash balances and, if appropriate based on forecasted expenditures and considerations for the post-tax economic efficiency, will reposition cash among its global entities. Cash investments worldwide are invested according to a written policy and are generally in bank demand accounts and bank time deposits with the preservation of principal as the highest priority.
Operating Activities
Net cash provided by operating activities was $98.3 million for 2013 compared to $70.2 million in 2012 and $99.9 million in 2011. Cash from operations increased in 2013 compared to 2012, primarily due to the 2012 earnings excluding the one-time non-cash gain on the PPH equity investment in 2012 and a proportionally smaller increase in working capital. Cash from operations in 2012 was significantly less than 2011 primarily due to the changes in receivables and inventories, which were a use of cash of $33.3 million in 2012 compared to a source of cash of about $3.0 million in 2011. Inventory levels in 2012 increased by $23.7 million primarily as a result of the Company’s efforts to improve the availability of its products to customers. Operationally, the Company generally experiences a higher working capital investment in the second and third quarter of each year as a result of stronger seasonal activity in the building, agricultural, and other industries in the northern hemisphere. To the extent the Company potentially grows further in the southern hemisphere, this historical pattern may moderate.

Investing Activities
Net cash used in investing activities was $76.5 million in 2013 compared to $101.6 million in 2012 and $65.8 million in 2011. The use of cash in 2013 related to additions to property, plant and equipment which included the new 110,000 square foot Global Corporate Headquarters and Engineering Center and the new manufacturing facility in Brazil. During 2012 the Company completed the acquisitions of Flex-ing, Inc. ("Flex-ing"), with cash on hand, Cerus Industrial Corporation ("Cerus"), with cash on hand and short-term borrowings paid back within the period, and increased its ownership percentage in PPH, with cash on hand. Acquisition-related activity totaled approximately $64.3 million, net of cash acquired, compared to $3.6 million in 2013. Capital spending in 2012 increased approximately $17.5 million over 2011, $11.3 million of which was spent on the new Global Corporate Headquarters and Engineering Center project. In 2011, the Company purchased an 80 percent interest in Impo for $25.1 million, net of cash acquired. The acquisition was funded with cash on hand. The Company also purchased the remaining outstanding 25 percent interest of Vertical S.p.A. for $7.1 million. Additionally, $21.8 million was spent on property, plant and equipment including the purchase of land for the new Global Corporate Headquarters and Engineering Center and a new communications system. The Company's rationale and strategy for potential future acquisitions that impact cash from

25


investing includes an emphasis on increasing global distribution and complementary product lines that can be effectively marketed through existing global distribution.


Finance Activities
Net cash flows from financing activities were $11.1 million in 2013 compared to a use of cash of $19.3 million in 2012 and a use of cash of $15.5 million in 2011. During 2013 the Company received $25.0 million in proceeds from the Project Bonds and paid contingent consideration of $5.6 million to Impo. In addition to the Project Bonds, the Company refinanced the Impo debt for $14.2 million and borrowed from and repaid on the Revolver $17.0 million. In addition, the Company completed the repurchase of 88,200 shares of the Company's common stock for $2.8 million and received $9.6 from employees as payment for the exercise price of their stock options and taxes owed upon the exercise of their stock options and release of their restricted awards pursuant to the Company's stock repurchase program. Dividends in the amount of $15.3 million were paid to shareholders. During 2012 the Company completed the repurchase of 400,000 shares of the Company's common stock for $10.0 million pursuant to the Company's stock repurchase program. Dividends in the amount of $13.8 million were paid to shareholders. During 2011 the Company completed the repurchase of 500,000 shares of the Company's common stock for $10.6 million pursuant to the Company's stock repurchase program. Dividends in the amount of $12.9 million were paid to shareholders, of which $0.4 million were paid to minority shareholders. At least annually the dividend policy is reviewed, and the Company attempts to purchase shares annually to offset dilution of equity awards, but market conditions may prompt a perceived more efficient alternate use of cash. The Company in recent history has not looked to the public capital markets for financing, and under current circumstances the Company does not foresee a need to do so in the near future.

Effective beginning 2012, the Company redesigned certain retirement plan offerings. The redesign was completed in order to increase standardization of retirement plans among U.S. salaried employees and to reduce the expected cash funding volatility of retirement plans, while at the same time keeping in place a competitive retirement plan offering to attract and retain talent. The Company achieved this by freezing benefits under both the Basic Pension Plan and the Cash Balance Plan as of December 31, 2011, with the exception of a certain limited number of Basic Pension Plan participants who will still accrue benefits over a five-year sunset period. Also effective December 31, 2011, the Cash Balance Plan was closed to new participants (the Basic Pension Plan was previously closed) and the two plans were merged into a single plan. The portion of the non-qualified pension plan related to the Cash Balance Plan was also frozen. As of January 1, 2012, the Company instituted a new service-based contribution, supplemental to the existing Company match for employees, into the defined contribution retirement plan offering.

AGGREGATE CONTRACTUAL OBLIGATIONS
The majority of the Company’s contractual obligations to third parties relate to debt obligations. In addition, the Company has certain contractual obligations for future lease payments, contingency payments, and purchase obligations. The payment schedule for these contractual obligations is as follows:

(In millions)
 
 
Less than
 
 
 
 
 
More than
 
Total
 
1 Year
 
1 - 3 Years
 
3 - 5 Years
 
5 Years
Debt
$
188.8

 
$
15.1

 
$
61.9

 
$
62.0

 
$
49.8

Debt interest
41.0

 
10.3

 
15.6

 
8.5

 
6.6

Capital leases
0.8

 
0.3

 
0.3

 
0.2

 

Operating leases
17.9

 
8.6

 
5.6

 
2.3

 
1.4

Purchase obligations
11.7

 
11.0

 
0.7

 

 

 
$
260.2

 
$
45.3

 
$
84.1

 
$
73.0

 
$
57.8


The calculated interest was based on the fixed rate of 5.79 percent for the Company’s $150.0 million long-term insurance company debt, on the fixed rate of 3.60 percent for the Company's $25.0 million tax increment financing debt, and a six month Euro Interbank Offered Rate (“Euribor”), and $14.2 million of subsidiary debt (denominated in foreign currencies) with interest rates ranging from 3% to 12% with maturity dates ending in 2014.

Purchase obligations include commitments primarily for the purchase of machinery and equipment as well as conditional agreements related to building expansions.

The Company has pension and other post-retirement benefit obligations not included in the table above which will result in future payments of $13.7 million in 2014.  The Company also has unrecognized tax benefits, none of which are included in the

26


table above.  The unrecognized tax benefits of approximately $5.1 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled.  Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $0.2 million.

ACCOUNTING PRONOUNCEMENTS
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02
Comprehensive Income. This guidance requires companies to disclose additional information about items reclassified out of
accumulated other comprehensive income ("AOCI") either on the face of the income statement or as a separate footnote to the
financial statements. In addition, changes in AOCI balance by component are to be presented. ASU 2013-02 is effective for
both annual and interim periods for fiscal years beginning after December 15, 2012. The Company adopted ASU 2013-02 on a
prospective basis, effective December 30, 2012. Refer to Note 14 for disclosures made. As the ASU addressed only disclosure
requirements, adoption of ASU 2013-02 did not have a material impact on the Company's financial position, results of
operations, or cash flows.

CRITICAL ACCOUNTING ESTIMATES
Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  Management evaluates its estimates on an on-going basis.  Estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  There were no material changes to estimates in 2013.

The Company’s critical accounting estimates are identified below:

Allowance for Uncollectible Accounts
Accounts receivable is comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining allowances, historical collection experience, current trends, aging of accounts receivable, and periodic credit evaluations of customers’ financial condition are analyzed to arrive at appropriate allowances. Allowance levels change as customer-specific circumstances and the other analysis areas previously noted change.  Based on current knowledge, the Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the allowance.

Inventory Valuation
The Company uses certain estimates and judgments to value inventory. Inventory is recorded at the lower of cost or market. The Company reviews its inventories for excess or obsolete products or components. Based on an analysis of historical usage, management’s evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete parts, carrying values are adjusted.  The carrying value is reduced regularly to reflect the age and current anticipated product demand. If actual demand differs from the estimates, additional reductions would be necessary in the period such determination is made.  Excess and obsolete inventory is periodically disposed of through sale to third parties, scrapping, or other means.

Business Combinations
The Company follows the guidance under FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations. The acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values.  The Company shall report in its financial statements provisional amounts for the items for which accounting is incomplete.  Goodwill is adjusted for any changes to provisional amounts made within the measurement period.  The Company utilizes management estimates and an independent third-party valuation firm to assist in determining the fair values of assets acquired and liabilities assumed.  Such estimates and valuations require the Company to make significant assumptions, including projections of future events and operating performance.  The Company has not made any material changes to the method of valuing fair values of assets acquired and liabilities assumed during the last three years.

Redeemable Noncontrolling Interest
The Company held one redeemable noncontrolling interest during 2013. The noncontrolling interest was recorded at fair value as of the acquisition date. The noncontrolling interest holders have the option to require the Company to redeem their ownership interests in the future with cash. The redemption value will be derived using a specified formula based on an earnings multiple adjusted by the net debt position, subject to a redemption floor value at the time of redemption. An assessment to compare redemption value to carrying value is performed on a quarterly basis. In 2013, the redemption value

27


exceeded the carrying value; therefore, $0.2 million of redemption value adjustments were made. As a result, an adjustment to the earnings per share computation was necessary. No redemption value adjustments were necessary in 2012.

Mandatory Share Purchase
The Company entered into a stock purchase agreement with the non-controlling interest holders of Pioneer Pump Holdings, Inc. ("PPH") to purchase the remaining shares of PPH on or about, but no later than, March 31, 2015. The mandatory share purchase liability was recorded at fair value as of the acquisition date. The actual redemption value to be paid will be derived using a specified formula on a multiple of PPH's adjusted average earnings for 2013 and 2014 less net indebtedness. The mandatory share purchase liability remained at the initial carrying amount as of December 28, 2013. Redemption value assessments are performed on a quarterly basis and no adjustments were considered necessary during 2013.

Trade Names and Goodwill
According to FASB ASC Topic 350, Intangibles – Goodwill and Other, intangible assets with indefinite lives must be tested for impairment at least annually or more frequently as warranted by triggering events that indicate potential impairment.  The Company uses a variety of methodologies in conducting impairment assessments including income and market approaches that utilize discounted cash flow models, which the Company believes are consistent with hypothetical market data.  For indefinite-lived assets apart from goodwill, primarily trade names for the Company, if the fair value is less than the carrying amount, an impairment charge is recognized in an amount equal to that excess.  The Company has not made any material changes to the method of evaluating impairments during the last three years.  Based on current knowledge, the Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine impairment.

In compliance with FASB ASC Topic 350, goodwill is not amortized. Goodwill is tested at the reporting unit level for impairment annually or more frequently as warranted by triggering events that indicate potential impairment.  Reporting units are operating segments or one level below, known as components, which can be aggregated for testing purposes.  The Company’s goodwill is allocated to the North America Water Systems, International Water, and Fueling Systems units, as components within the North America Water Systems and International Water reporting units can be aggregated.  As the Company’s business model evolves management will continue to evaluate its reporting units and review the aggregation criteria.

In assessing the recoverability of goodwill, the Company determines the fair value of its reporting units by utilizing a combination of both the market value and income approaches. The market value approach compares the reporting units' current and projected financial results to entities of similar size and industry to determine the market value of the reporting unit. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends, as well as the effects of demand and competition. The Company may be required to record an impairment if these assumptions and estimates change whereby the fair value of the reporting units is below their associated carrying values. Goodwill included on the balance sheet as of the fiscal year ended 2013 was $207.2 million.

During the fourth quarter of 2013, the Company completed its annual impairment test of indefinite lived trade names and goodwill and determined the fair value of all reporting units were substantially in excess of the respective reporting unit’s carrying value.  Significant judgment is required to determine if an indication of impairment has taken place.  Factors to be considered include the following: adverse changes in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization.  A 10 percent decrease in the fair value estimates used in the impairment test would not have changed this determination.  The sensitivity analysis required the use of numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges.  Further, an extended downturn in the economy may impact certain components of the operating segments more significantly and could result in changes to the aggregation assumptions and impairment determination.

Income Taxes
Under the requirements of FASB ASC Topic 740, Income Taxes, the Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company analyzes the deferred tax assets and liabilities for their future realization based on the estimated existence of sufficient taxable income.  This analysis considers the following sources of taxable income: prior year taxable income, future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and tax planning strategies that would generate taxable income in the relevant period.  If sufficient taxable income is not projected then the Company will record a valuation allowance against the relevant deferred tax assets.  The Company operates in multiple tax

28


jurisdictions with different tax rates, and determines the allocation of income to each of these jurisdictions based upon various estimates and assumptions. In the normal course of business, the Company will undergo tax audits by various tax jurisdictions. Such audits often require an extended period of time to complete and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. Although the Company has recorded all probable income tax uncertainties in accordance with FASB ASC Topic 740, these accruals represent estimates that are subject to the inherent uncertainties associated with the tax audit process, and therefore include uncertainties.  Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, which, if actual experience varies, could result in material adjustments to deferred tax assets and liabilities. The Company’s operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions and resolution of disputes arising from federal, state, and international tax audits.

The Company has not made any material changes to the method of developing the income tax provision during the last three years.  Based on current knowledge, the Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to develop the income tax provision.

Pension and Employee Benefit Obligations
With the assistance of the Company’s actuaries, the discount rates used to determine pension and post-retirement plan liabilities are calculated using a yield-curve approach. The yield-curve approach discounts each expected cash flow of the liability stream at an interest rate based on high quality corporate bonds. The present value of the discounted cash flows is summed and an equivalent weighted-average discount rate is calculated. Market conditions have caused the discount rate to move from 4.00 percent last year to 4.75 percent this year for pension plans and from 3.50 percent last year to 4.50 percent this year for postretirement health and life insurance. A change in the discount rate selected by the Company of 25 basis points would result in no change to employee benefit expense and a change of about $4.1 million of liability. The Company consults with actuaries and investment advisors in making its determination of the expected long-term rate of return on plan assets. Using input from these consultations such as long-term investment sector expected returns, the correlations and standard deviations thereof, and the plan asset allocation, the Company has assumed an expected long-term rate of return on plan assets of 7.70 percent as of year-end 2013. This is the result of stochastic modeling showing the 50th percentile median return at least at or above 7.70 percent.  A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.3 million of employee benefit expense.

Share-Based Compensation
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with a single approach and amortized using a straight-line attribution method over the option’s vesting period. Options granted to retirement eligible employees are immediately expensed. Restricted awards and units granted to retirement eligible employees are expensed over the vesting period as the employee will receive a pro-rata number of shares upon their retirement. The Company uses historical data to estimate the expected volatility of its stock; the weighted average expected life; the period of time options granted are expected to be outstanding; and its dividend yield. The risk-free rates for periods within the contractual life of the option are based on the U.S. Treasury yield curve in effect at the time of the grant.  The Company has not made any material changes to the method of estimating fair values during the last three years.  Based on current knowledge, the Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to develop the fair value of stock based compensation.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K contains certain forward-looking information, such as statements about the Company’s financial goals, acquisition strategies, financial expectations including anticipated revenue or expense levels, business prospects, market positioning, product development, manufacturing re-alignment, capital expenditures, tax benefits and expenses, and the effect of contingencies or changes in accounting policies.  Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.”  While the Company believes that the assumptions underlying such forward-looking statements are reasonable based on present conditions, forward-looking statements made by the Company involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those forward-looking statements as a result of various factors, including general economic and currency conditions, various conditions specific to the Company’s business and industry, new housing starts, weather conditions, market demand, competitive factors, changes in distribution channels, supply constraints, effect of price increases, raw material costs, technology factors, integration of acquisitions, litigation, government and regulatory actions, the Company’s accounting policies, and other risks, all as described in Item 1A and Exhibit 99.1 of this Form 10-K.  Any forward-looking statements included in this Form 10-K are based upon information

29


presently available. The Company does not assume any obligation to update any forward-looking information, except as required by law.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates, and commodity prices. Foreign currency exchange rate risk is mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the currency which the Company is billed for production inputs, prompt settlement of third party and inter-company balances, limited use of foreign currency denominated debt, and maintaining minimal foreign currency denominated cash balances.

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s revolving credit agreement (the “Agreement”), where interest rates are tied to the prime rate or London Interbank Offered Rates (LIBOR). The Company had zero borrowings at year end 2013 under the Agreement.  The Company also has exposure to changes in interest rates in the form of the fair value of outstanding fixed rate debt fluctuating in response to changing interest rates. The Company does not, as a matter of policy, enter into derivative contracts for speculative purposes.

Portions of our business are exposed to volatility in the prices of certain commodities, such as copper, nickel and aluminum, among others. Our primary exposure to this volatility resides with the use of these materials in purchased component parts. We generally maintain long-term fixed price contracts on raw materials and component parts; however, we are prone to exposure as these contracts expire. We estimate that a hypothetical 10% adverse movement in prices for raw metal commodities would not be material to our financial position, results of operations or cash flows.


30



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)
2013
 
2012
 
2011
 
 
 
 
 
 
Net sales
$
965,462

 
$
891,345

 
$
821,077

Cost of sales
633,948

 
589,681

 
548,772

Gross profit
331,514

 
301,664

 
272,305

Selling, general, and administrative expenses
204,014

 
188,486

 
177,320

Restructuring (income)/expense
3,719

 
221

 
1,587

Operating income
123,781

 
112,957

 
93,398

Interest expense
(10,597
)
 
(10,208
)
 
(10,502
)
Other income/(expense)
1,696

 
14,901

 
5,661

Foreign exchange income/(expense)
(3,331
)
 
(1,662
)
 
(1,422
)
Income before income taxes
111,549

 
115,988

 
87,135

Income taxes
28,851

 
32,250

 
23,412

Net income
$
82,698

 
$
83,738

 
$
63,723

Less: Net income attributable to noncontrolling interests
(740
)
 
(874
)
 
(624
)
Net income attributable to Franklin Electric Co., Inc.
$
81,958

 
$
82,864

 
$
63,099

Income per share:
 

 
 

 
 

Basic
$
1.70

 
$
1.76

 
$
1.36

Diluted
$
1.68

 
$
1.73

 
$
1.33

Dividends per common share
$
0.3050

 
$
0.2850

 
$
0.2675

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 18, 2013.

See Notes to Consolidated Financial Statements.

31


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Net income
$
82,698

 
$
83,738

 
$
63,723

Other comprehensive income/(loss), before tax:

 

 


     Foreign currency translation adjustments
(15,987
)
 
1,835

 
(21,391
)
     Employee benefit plan activity:

 

 

        Prior service cost arising during period

 
(819
)
 
(1,179
)
        Net gain/(loss) arising during period
25,624

 
(17,665
)
 
(16,406
)
       Amortization arising during period
4,568

 
2,567

 
3,351

Other comprehensive income/(loss)
$
14,205

 
$
(14,082
)
 
$
(35,625
)
Income (tax)/benefit related to items of other comprehensive income
(12,113
)
 
6,200

 
5,500

Other comprehensive income/(loss), net of tax
$
2,092

 
$
(7,882
)
 
$
(30,125
)
Comprehensive income
$
84,790

 
$
75,856

 
$
33,598

Comprehensive income attributable to noncontrolling interest
415

 
874

 
624

Comprehensive income attributable to Franklin Electric Co., Inc.
$
84,375

 
$
74,982

 
$
32,974


Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 18, 2013.

See Notes to Consolidated Financial Statements.

32




FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
2013
 
2012
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
134,553

 
$
103,338

Receivables, less allowances of $3,015 and $3,148, respectively
115,127

 
102,918

Inventories:
 
 
 

Raw material
71,909

 
72,536

Work-in-process
17,978

 
18,295

Finished goods
101,674

 
101,017

 
191,561

 
191,848

Deferred income taxes
10,072

 
7,912

Other current assets
21,041

 
22,901

Total current assets
472,354

 
428,917

 
 
 
 
Property, plant and equipment, at cost:
 

 
 

Land and buildings
121,154

 
90,616

Machinery and equipment
227,521

 
204,408

Furniture and fixtures
32,104

 
26,887

Other
26,844

 
33,500

 
407,623

 
355,411

Less: Allowance for depreciation
(199,027
)
 
(183,436
)
 
208,596

 
171,975

Asset held for sale
1,750

 

Deferred income tax
2,969

 
2,540

Intangible assets, net
148,663

 
158,117

Goodwill
207,220

 
208,141

Other assets
10,321

 
6,689

Total assets
$
1,051,873

 
$
976,379



33


 
2013
 
2012
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
57,755

 
$
68,660

Deferred tax liability
1,227

 
1,173

Accrued expenses
62,081

 
60,415

Income taxes
2,048

 
215

Current maturities of long-term debt and short-term borrowings
15,363

 
15,176

Total current liabilities
138,474

 
145,639

Long-term debt
174,166

 
150,729

Deferred income taxes
54,618

 
40,136

Employee benefit plans
41,685

 
78,967

Other long-term liabilities
39,543

 
38,659

 
 
 
 
Commitments and contingencies (see Note 18)

 

 
 
 
 
Redeemable noncontrolling interest
5,171

 
5,263

 
 
 
 
Shareowners' equity:
 
 
 

Common stock (65,000 shares authorized, $.10 par value) outstanding (47,715 and 47,132, respectively)
4,771

 
4,712

Additional capital
194,810

 
170,890

Retained earnings
450,855

 
395,950

Accumulated other comprehensive loss
(54,729
)
 
(57,146
)
Total shareowners' equity
595,707

 
514,406

Noncontrolling interest
2,509

 
2,580

Total equity
598,216

 
516,986

Total liabilities and equity
$
1,051,873

 
$
976,379


Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 18, 2013.

See Notes to Consolidated Financial Statements.



34


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net income
$
82,698

 
$
83,738

 
$
63,723

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 

 
 

Depreciation and amortization
31,356

 
28,335

 
25,295

Share-based compensation
4,875

 
6,253

 
3,970

Deferred income taxes
1,707

 
8,571

 
3,867

(Gain)/loss on disposals of plant and equipment
288

 
(216
)
 
2,781

Gain on equity investment

 
(12,212
)
 

Asset impairment
1,251

 
583

 
200

Foreign exchange expense
3,331

 
1,662

 
1,422

Excess tax from share-based payment arrangements
(5,153
)
 
(5,246
)
 
(2,495
)
Changes in assets and liabilities, net of acquisitions:
 
 
 

 
 

Receivables
(16,729
)
 
(9,603
)
 
(926
)
Inventory
(7,612
)
 
(23,706
)
 
3,923

Accounts payable and accrued expenses
2,126

 
5,330

 
6,827

Income taxes
7,009

 
(1,077
)
 
3,309

Employee benefit plans
(7,586
)
 
(5,877
)
 
(10,769
)
Other
713

 
(6,344
)
 
(1,206
)
Net cash flows from operating activities
98,274

 
70,191

 
99,921

Cash flows from investing activities:
 

 
 

 
 

Additions to property, plant, and equipment
(67,557
)
 
(39,312
)
 
(21,846
)
Proceeds from sale of property, plant, and equipment
138

 
2,286

 
324

Additions to intangibles
(291
)
 
(744
)
 
(1,216
)
Cash paid for acquisitions, net of cash acquired
(3,609
)
 
(64,359
)
 
(25,143
)
Purchase of remaining redeemable noncontrolling shares

 

 
(7,056
)
Additional consideration for prior acquisition
96

 

 
(7,765
)
Cash paid for minority equity investment
(5,700
)
 

 

Loan to customer

 

 
(3,318
)
Proceeds from loan to customer
471

 
489

 
265

Net cash flows from investing activities
(76,452
)
 
(101,640
)
 
(65,755
)
Cash flows from financing activities:
 

 
 

 
 

Proceeds from issuance of debt
70,299

 
71,988

 
19,841

Repayment of debt
(45,254
)
 
(76,424
)
 
(19,917
)
Proceeds from issuance of common stock
14,068

 
15,432

 
8,910

Excess tax from share-based payment arrangements
5,153

 
5,246

 
2,495

Purchases of common stock
(12,364
)
 
(21,689
)
 
(13,910
)
Dividends paid
(15,294
)
 
(13,811
)
 
(12,890
)
Payment of contingent consideration liability
(5,555
)
 

 

Net cash flows from financing activities
11,053

 
(19,258
)
 
(15,471
)
Effect of exchange rate changes on cash
(1,660
)
 
708

 
(5,428
)
Net change in cash and equivalents
31,215

 
(49,999
)
 
13,267

Cash and equivalents at beginning of period
103,338

 
153,337

 
140,070


35


Cash and equivalents at end of period
$
134,553

 
$
103,338

 
$
153,337

 
 
 
 
 
 
Cash paid for income taxes
$
(19,062
)
 
$
22,635

 
$
13,841

Cash paid for interest, net of capitalized interest of $748, $286, and $0, respectively
$
10,159

 
$
11,491

 
$
10,504

 
 
 
 
 
 
Non-cash items:
 
 
 

 
 

Pioneer Pump Holdings, Inc. liability for mandatory share purchase
$

 
$
22,924

 
$

Payable to seller of Impo Motor Pompa Sanayi ve Ticaret A.S.
$

 
$
546

 
$
5,038

Payable to seller of Vertical S.p.A.
$

 
$

 
$
370

Additions to property, plant, and equipment, not yet paid
$
1,112

 
$
3,265

 
$
187

 
Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 18, 2013.

See Notes to Consolidated Financial Statements.

 

36


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
 
(In thousands)
Common Shares
Outstanding
 
Common Stock
 
Additional Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Noncontrolling
Interest
 
Redeemable Noncontrolling Interest
Balance as of year end 2010
46,512

 
$
4,652

 
$
129,705

 
$
311,579

 
$
(19,442
)
 
$
2,055

 
$
7,291

Net income
 
 
 
 
 
 
63,099

 
 
 
474

 
150

Currency translation adjustment
 
 
 
 
 
 
 
 
(21,391
)
 
223

 
(1,128
)
Minimum pension liability adjustment, net of tax $5,500
 
 
 
 
 
 
 
 
(8,734
)
 
 
 
 
Dividends on common stock ($0.2675/share)
 
 
 
 
 
 
(12,441
)
 
 
 
 
 
 
Noncontrolling dividend
 
 
 
 
 
 
 
 
 
 
(449
)
 
 
Common stock issued
706

 
68

 
8,875

 
(7
)
 
 
 
 
 
 
Share-based compensation
104

 
10

 
3,965

 
 
 
 
 
 
 
 
Common stock repurchased or received for stock options exercised
(646
)
 
(64
)
 
 
 
(13,878
)
 
 
 
 
 
 
Purchase of remaining redeemable noncontrolling interest
 
 
 
 
 
 
 
 
303

 
 
 
(7,655
)
Adjustment to Vertical redemption value
 
 
 
 
 
 
(228
)
 
 
 
 
 
228

Adjustment to acquired fair value
 
 
 
 
 
 
 
 
 
 
 
 
6,521

Tax benefit of stock options exercised
 
 
 
 
2,064

 
 
 
 
 
 
 
 
Balance as of year end 2011
46,676

 
$
4,666

 
$
144,609

 
$
348,124

 
$
(49,264
)
 
$
2,303

 
$
5,407

Net income
 
 
 
 
 
 
82,864

 
 
 
446

 
428

Currency translation adjustment
 
 
 
 
 
 
 
 
1,835

 
275

 
(572
)
Minimum pension liability adjustment, net of tax $6,200
 
 
 
 
 
 
 
 
(9,717
)
 
 
 
 
Dividends on common stock ($0.2850/share)
 
 
 
 
 
 
(13,367
)
 
 
 
 
 
 
Noncontrolling dividend