10-K 1 a2016123110-k.htm 10-K Document

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

FORM 10-K
_________

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016

OR

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




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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
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 July 1, 2016 (the last business day of the registrant’s most recently completed second quarter) was $1,527,181,567.  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 15, 2017:
46,382,586 shares

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017 (Part III).



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FRANKLIN ELECTRIC CO., INC.
TABLE OF CONTENTS

 
 
 
Page
PART I.
 
 
Number
 
 
 
 
Item 1.
 
Item 1A.
 
Item 1B.
 
Item 2.
 
 
 
 
 
 
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 



 


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PART I

ITEM 1. BUSINESS
Description of the Business
Franklin Electric Co., Inc. (“Franklin Electric” or the “Company”) is an Indiana corporation founded in 1944 and incorporated in 1946. Named after America’s pioneer electrical engineer, Benjamin Franklin, Franklin Electric manufactured the first water-lubricated submersible motor for water systems, and the first submersible motor for fueling systems. With 2016 revenue of $949.9 million and approximately 5,200 employees, today 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 water pumping systems move fresh and waste water for the housing, agriculture, and other industrial end markets. With a growing global footprint, the Company has also evolved into being a top supplier of submersible fueling systems at gas stations, making pumps, pipes, electronic controls, and monitoring devices. Fuel pumping systems account for the balance of the Company’s revenues.

The Company's products are sold worldwide 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.

Franklin Electric’s Key Factors for Success
While maintaining a culture of safety and lean principals, Franklin Electric promises to deliver quality, availability, service, innovation, and value in every encounter the Company has with stakeholders, including direct or indirect customers, employees, shareholders, and suppliers. These key factors for success are a roadmap to ensure the Company consistently offers the best value to its customer.

Markets and Applications
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. Segment and geographic information appears in Note 16, “Segment and Geographic Information” to the consolidated financial statements.

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.

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 clean 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. Founded in the 1940s, the Company made submersible motors for pumps for much of its history. About 10 years ago, it entered the pump business, and has since grown through acquisitions. 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, United States
2007 - Expanded globally, acquired Pump Brands (Pty) Limited, South Africa

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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., Turkey
2012 - Acquired majority interest, 70.5%, in mobile pumping systems company, Pioneer Pump Holdings, Inc. ("PPH"), a United States company with subsidiaries in the United Kingdom and South Africa
2014 - International acquisitions, Bombas Leao S.A., Brazil and majority interest, 70%, of Pluga Pumps and Motors Private Limited, India
2015 - Acquired remaining 29.5% noncontrolling interest of PPH

Water Systems products are sold in highly competitive markets. Water-pumping systems contribute about 75 to 80 percent of revenue. Significant portions of segment revenue come from selling groundwater and surface pumps to residential and commercial buildings, as well as agricultural sales which are more seasonal and subject to commodity price changes. The Water segment generates 40 percent of its revenue in developing markets, which often lack municipal water systems. As those countries bring systems up to date, the Company views those markets as an opportunity. The Company has had 15 to 20 percent compounded annual sales growth in those regions in recent years. 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.

2016 Water Systems research and development expenditures were primarily related to the following activities:

Electronic drives and controls for submersible pumping, above-ground pumping, and HVAC applications
Solar pumping technology, including new models and new accessories for the Fhoton™ Solar Pumping Systems
Submersible and surface pumps for agricultural and municipal applications
Gray water pumping equipment, including the redesigned PowerSewer™ Systems and the IGPDS series dual seal grinder pumps
Condensate removal pumps, including the VCC-20-P designed for use in plenum applications
Submersible motor technology and motor protection, including ultra-efficient permanent magnet motors
Artificial Lift systems for gas well dewatering and oil pumping, including new pump shrouds, abrasion resistant pump geometries, pumps for improved oil handling, and drives for deeper set pumps

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
2012 - Acquired Flexing, Inc., a manufacturer of fueling equipment including stainless steel flexible hose connectors
2014 - Acquired majority interest, 65%, in Wadcorpp India Private Limited, India, a distributor of fueling equipment
 
Fueling Systems products are sold in highly competitive markets. Rising car use is leading to more investment in gas stations which, in turn, leads to increased demand for the Company’s Fueling Systems products. The Company believes there is growth opportunity in developing markets and, accordingly, acquired an investment in India in 2014. 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.

2016 Fueling Systems research and development expenditures were primarily related to the following activities:

Development of a new automatic tank gauge platform
Development of a pumping system for alternative fuels

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Development of new fuel dispensing nozzles
Software enhancements to automatic tank gauges

Information Regarding All Reportable Segments
Research and Development
The Company incurred research and development expense as follows:

(In millions)
2016
 
2015
 
2014
Research and development expense
$
21.5

 
$
18.4

 
$
19.3


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, plastic resins, and bearings. Most of these raw materials are available from multiple sources in the United States and world markets. 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.

Major Customers
No single customer accounted for over 10 percent of net sales in 2016, 2015, or 2014. No single customer accounted for over 10 percent of gross accounts receivable in 2016 and 2015.

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

(In millions)
February 15,
2017
 
February 17,
2016
Water Systems
$
39.4

 
$
44.4

Fueling Systems
25.2

 
15.0

Consolidated
$
64.6

 
$
59.4


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 2017.  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 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

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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, could negatively impact the Company’s results of operations or financial condition in the future.

Risks Related to the Industry

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.

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.

Risks Related to the Business

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, India, 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.

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 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.

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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.

The Company's products are sold to numerous distribution outlets based on market performance. The Company may, from time to time, change distribution outlets in certain markets based on market share and growth. These changes could adversely impact sales 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.
 
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.  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 and may include significant severance amounts.

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, India, 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 exchange rate risk is partially 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, limited use of foreign currency denominated debt, and application of derivative instruments when appropriate. To the extent that these mitigating strategies are not successful, foreign currency rate fluctuations can have a material adverse impact on the Company's 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. 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.

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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, and 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.  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 the Company's foreign earnings could materially affect 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, 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 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 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.
The Company's operations are dependent on information technology infrastructure and failures could significantly affect its business. The Company depends on information technology infrastructure in order to achieve business objectives. If the Company experiences a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of IT systems by a third party, the resulting disruptions could impede the

9


Company's ability to record or process orders, manufacture and ship products in a timely manner, or otherwise carry on business in the ordinary course. Any such events could cause the loss of customers or revenue and could cause significant expense to be incurred to eliminate these problems and address related security concerns. The Company is also in the process of updating its global Enterprise Resource Planning ("ERP") system that will redesign and deploy a common information system over a period of several years. The process of implementation can be costly and can divert the attention of management from the day-to-day operations of the business. As the Company implements the ERP system, the new system may not perform as expected, which could have an adverse effect on the Company's business.
 
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

Franklin Electric serves customers worldwide with over 125 manufacturing and distribution facilities located in over 20 countries. The Global Headquarters is located in Fort Wayne, Indiana, United States and houses sales, marketing, and administrative offices along with a state of the art research and engineering facility. Besides the owned corporate facility, the Company considers the following to be principal properties:

Location / Segment
Purpose
Own/Lease
Santa Catarina, Brazil / Both
Manufacturing/Distribution/Sales
Own
Sao Paulo, Brazil / Both
Manufacturing/Distribution/Sales
Own
Jiangsu Province, China / Both
Manufacturing
Own
Brno, Czech Republic / Water
Manufacturing
Own
Dueville, Italy / Water
Manufacturing
Own
Nuevo Leon, Mexico / Both
Manufacturing
Own
Edenvale, South Africa / Water
Manufacturing
Own
Izmir, Turkey / Water
Manufacturing/Distribution/Sales/R&D
Own
Indiana, United States / Both
Manufacturing/Distribution/Sales/R&D
Own
Oklahoma, United States / Water
Manufacturing
Own
Wisconsin, United States / Fueling
Manufacturing/Distribution/Sales/R&D
Lease

The Company also owns and leases other small facilities which serve as manufacturing locations and distribution warehouses. The Company does not consider these facilities to be principal to the business or operations. In the Company’s opinion, its facilities are suitable for their intended use, adequate for the Company’s business needs, all currently utilized, and in good condition.


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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 31, 2016, are as follows:

 
Name
 
Age
 
Position Held
Period Holding Position
Gregg C. Sengstack
58
Chairman of the Board and Chief Executive Officer
2015 - present
 
 
President and Chief Executive Officer
2014 - 2015
 
 
President and Chief Operating Officer
2011 - 2014
Robert J. Stone
52
Senior Vice President and President, International Water Systems
2012 - present
 
 
Senior Vice President and President, Americas Water Systems Group
2007 - 2012
Daniel J. Crose
69
Vice President, Global Water Product Supply
2011 - present
DeLancey W. Davis
51
Vice President and President, North America Water Systems
2012 - present
Donald P. Kenney
56
Vice President and President, Energy Systems
2014 - present
 
 
President, Energy Systems
2013 - 2014
 
 
President, Fueling Systems
1991 - 2013
John J. Haines
53
Vice President, Chief Financial Officer
2008 - present
Julie S. Freigang
49
Vice President, Chief Information Officer
2015 - present
 
 
Chief Information Officer
2014 - 2015
 
 
Vice President, Information Technologies - Eaton Corporation
2011 - 2014
Steven W. Aikman
57
Vice President, Global Water Systems Engineering
2010 - present
Jonathan M. Grandon
41
Vice President, Chief Administrative Officer, General Counsel and Secretary
2016 - present
 
 
Vice President, Integration - Zimmer Biomet
2015 - 2016
 
 
Senior Vice President and General Counsel - Biomet
2014 - 2015
 
 
Vice President and Division General Counsel, Associate General Counsel, Corporate - Biomet
2013 - 2014
 
 
Partner - Ropes & Gray LLP
2008 - 2013

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

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PART II

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

The number of shareholders of record as of February 15, 2017 was 762. 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 2016 and 2015 were as follows:

 
Dividends per Share
 
Price per Share
 
2016
 
2015
 
2016
 
2015
 
 

 
 

 
Low
 
High
 
Low
 
High
1st Quarter
$
.0975

 
$
.0900

 
$
23.93

 
$
32.71

 
$
33.45

 
$
39.12

2nd Quarter
.1000

 
.0975

 
30.58

 
35.37

 
32.13

 
39.56

3rd Quarter
.1000

 
.0975

 
32.65

 
40.71

 
26.75

 
31.67

4th Quarter
.1000

 
.0975

 
34.90

 
44.50

 
26.91

 
35.11


The Company has increased dividend payments on an annual basis for 24 consecutive periods. The payment of dividends in the future will be determined by the Board of Directors and will depend on business conditions, earnings, and other factors.
Issuer Purchases of Equity Securities
In April 2007, the Company’s Board of Directors unanimously approved a plan to increase the number of shares remaining for
repurchase from 628,692 to 2,300,000 shares. There is no expiration date for this plan. On August 3, 2015, the Company's Board of Directors approved a plan to increase the number of shares remaining for repurchase by an additional 3,000,000 shares. The authorization was in addition to the 535,107 shares that remained available for repurchase as of July 31, 2015. The Company did not repurchase any shares under this plan during the fourth quarter of 2016. The maximum number of shares that may still be purchased under this plan as of December 31, 2016 is 2,156,362.



12


Stock Performance Graph
The following graph compares the Company's cumulative total shareholder 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.
stockgrapha04.jpg

Hypothetical $100 invested on December 31, 2011 (fiscal year-end 2011) in Franklin Electric common stock (FELE), Guggenheim S&P Global Water Index, and Russell 2000 Index, assuming reinvestment of dividends:
 
 
 
YE 2011
 
2012
 
2013
 
2014
 
2015
 
2016
FELE
 
$
100

 
$
142

 
$
205

 
$
172

 
$
124

 
$
179

Guggenheim S&P Global Water
 
100

 
119

 
148

 
152

 
150

 
161

Russell 2000
 
100

 
116

 
162

 
169

 
162

 
196



13


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)
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
(c)
 
 
 
(d)
Operations:
 
 
 
 
 
 
 
 
 
Net sales
$
949,856

 
$
924,923

 
$
1,047,777

 
$
965,462

 
$
891,345

Gross profit
331,406

 
297,608

 
344,410

 
331,514

 
301,664

Interest expense
8,732

 
10,039

 
10,735

 
10,597

 
10,208

Income tax expense
24,798

 
12,625

 
18,851

 
28,851

 
32,250

Net income attributable to Franklin Electric Co., Inc.
78,745

 
72,945

 
69,806

 
81,958

 
82,864

Depreciation and amortization
35,534

 
35,476

 
37,210

 
31,356

 
28,335

Capital expenditures
37,624

 
25,933

 
42,396

 
67,206

 
42,062

Balance sheet:
 
 
 
 
 
 
 
 
 
Working capital (a)(b)(e)
326,058

 
293,450

 
268,434

 
333,880

 
283,278

Property, plant, and equipment, net
196,137

 
190,039

 
209,786

 
208,596

 
171,975

Total assets (a)
1,039,905

 
996,111

 
1,075,797

 
1,051,770

 
976,283

Long-term debt (a)
156,544

 
187,806

 
143,605

 
174,063

 
150,633

Shareholders’ equity
613,445

 
557,700

 
596,840

 
595,707

 
514,406

Other data:
 
 
 
 
 
 
 
 
 
Net income attributable to Franklin Electric Co., Inc., to sales
8.3
%
 
7.9
%
 
6.7
%
 
8.5
%
 
9.3
%
Net income attributable to Franklin Electric Co., Inc., to average total assets
7.7
%
 
7.0
%
 
6.6
%
 
8.1
%
 
9.2
%
Current ratio (b)(f)
3.1

 
3.0

 
2.3

 
3.4

 
2.9

Number of common shares outstanding
46,376

 
46,219

 
47,594

 
47,715

 
47,132

Per share:
 
 
 
 
 
 
 
 
 
Market price range
 
 
 
 
 
 
 
 
 
High
$
44.50

 
$
39.56

 
$
45.42

 
$
45.62

 
$
30.98

Low
$
23.93

 
$
26.75

 
$
33.93

 
$
29.95

 
$
22.77

Net income attributable to Franklin Electric Co., Inc., per weighted average common share
$
1.67

 
$
1.52

 
$
1.43

 
$
1.70

 
$
1.76

Net income attributable to Franklin Electric Co., Inc., per weighted average common share, assuming dilution
$
1.65

 
$
1.50

 
$
1.41

 
$
1.68

 
$
1.73

Book value (g)
$
13.12

 
$
11.73

 
$
12.38

 
$
12.38

 
$
10.78

Dividends per common share
$
0.3975

 
$
0.3825

 
$
0.3475

 
$
0.3050

 
$
0.2850


(a)
In 2016, the Company adopted Financial Accounting Standard Board ("FASB") Accounting Standard Update ("ASU") 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU required retrospective adoption; therefore, years 2015, 2014, 2013, and 2012 were restated above to reflect the adoption of the ASU. See Note 2 for additional information regarding this ASU.
(b)
Balances as of year-end 2014, 2013, 2012, and 2011 were not retrospectively adjusted for the adoption of ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which related to the presentation of deferred taxes.

14


(c)
Includes the results of operations of the Company's 100% wholly owned subsidiary, Bombas Leao S.A., since its acquisition in the second quarter of 2014, and 90% of the Company's owned subsidiary, Impo Motor Pompa Sanayi ve Ticaret A.S., since the Company's acquisition of an additional 10% in the second quarter of 2014.
(d)
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, Flexing, Incorporated, since the Company's acquisition in the fourth quarter of 2012.
(e)
Working capital = Current assets minus current liabilities.
(f)
Current ratio = Current assets divided by current liabilities.
(g)
Book value = Shareholders’ equity divided by weighted average common shares, assuming full dilution.




15


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

2016 vs. 2015

OVERVIEW

Sales in 2016 increased from the prior year.  Net sales in 2016 were $949.9 million, an increase of about 3 percent compared to 2015 sales of $924.9 million. The sales increase was attributable to both volume and price increases partially offset by the impact of foreign currency translation as the US dollar strengthened against certain foreign currencies. The Company's consolidated gross profit was $331.4 million for 2016, an increase of $33.8 million or about 11 percent from 2015. The gross profit as a percent of net sales increased 270 basis points to 34.9 percent in 2016 from 32.2 percent in 2015. The gross profit margin change was due primarily to favorable pricing, lower direct material costs and lower fixed cost on higher sales. For 2016, diluted earnings per share were $1.65, an increase of 10 percent compared to 2015 diluted earnings per share of $1.50. Adjusted earnings per share were $1.66, an increase of 13 percent versus the $1.47 adjusted earnings per share in 2015 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS).

RESULTS OF OPERATIONS

Net Sales
Net sales in 2016 were $949.9 million, an increase of $25.0 million or about 3 percent compared to 2015 sales of $924.9 million.  The incremental impact of sales from acquired businesses was $0.7 million.  Sales revenue decreased by $23.2 million or about 2 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $47.5 million or about 5 percent.

 
Net Sales
(In millions)
2016
 
2015
 
2016 v 2015
Water Systems
$
723.2

 
$
707.6

 
$
15.6

Fueling Systems
226.7

 
217.3

 
9.4

Consolidated
$
949.9

 
$
924.9

 
$
25.0


Net Sales-Water Systems
Water Systems sales were $723.2 million in 2016, an increase of $15.6 million or 2 percent versus 2015. The incremental impact of sales from acquired businesses was $0.7 million.  Foreign currency translation rate changes decreased sales $21.4 million, or about 3 percent, compared to sales in 2015. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $36.3 million or about 5 percent.

Water Systems sales in the U.S. and Canada were 36 percent of consolidated sales and increased by about 5 percent in 2016 compared to the prior year. Sales revenue decreased by $2.1 million or less than 1 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $16.4 million or about 5 percent. In 2016, sales of groundwater pumping equipment increased by about 9 percent. The growth in groundwater equipment sales was led by a 12 percent increase in sales of products for both residential and agricultural applications. Sales of Pioneer branded mobile dewatering equipment declined by about 12 percent. The decline in mobile dewatering equipment is primarily attributed to reduced demand in the oil and gas end markets.

Water Systems sales in Europe, Middle East and Africa were about 17 percent of consolidated sales and declined by about 4 percent compared to 2015. Water Systems in Europe, the Middle East and Africa were reduced by $10.5 million or about 6 percent due to foreign currency translation. Excluding the impact of foreign currency translation, sales were up in 2016 by about 2 percent compared to 2015. The growth was driven by strong sales of groundwater pumping equipment in Turkey.
In local currency sales in Turkey grew; however, this growth was offset by sales declines in other parts of the region due to political and economic turmoil and the lower price of oil which reduced investment by the public sector, particularly in Saudi Arabia.

Water Systems sales in Latin America were about 14 percent of consolidated sales for 2016 and declined by about 1 percent compared to 2015.  Sales revenue decreased by $8.5 million or about 7 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding foreign currency translation, was an increase of $7.4 million or about 6 percent. The growth in sales was led by increased sales in Mexico and Brazil, in local currency. This sales growth is a result of increasing demand for

16


Franklin submersible pumps and motors, customer acceptance of the many product line upgrades that have been implemented over the past two years, and general market conditions.

Water Systems sales in the Asia Pacific region were 9 percent of consolidated sales and grew by about 12 percent compared to the prior year. Foreign currency translation rate changes decreased sales in 2016 in the Asia Pacific region by less than a percent. The Asia Pacific region experienced strong year over year growth in Southeast Asia and Australia.

Net Sales-Fueling Systems
Fueling Systems sales which represented 24 percent of consolidated sales were $226.7 million in 2016, an increase of $9.4 million or about 4 percent versus 2015. Foreign currency translation rate changes decreased sales $1.8 million or about 1 percent compared to sales in 2015. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $11.2 million or about 5 percent.

Fueling Systems sales in the U.S. and Canada grew by about 8 percent in 2016 compared to the prior year with sales growth coming from most product lines, most significantly our pumping and fuel management systems. Fueling Systems sales in the rest of the world were down about 2 percent year over year. In 2016, Fueling Systems revenues increased in the Asia Pacific regions by about 14 percent, driven by higher sales in India. This growth in Asia was more than offset by a sales decline in Europe principally due to a 42 percent decline in the sale of storage tanks that support North Sea oil production.

Cost of Sales
Cost of sales as a percent of net sales for 2016 and 2015 was 65.1 percent and 67.8 percent, respectively. Correspondingly, the gross profit margin increased to 34.9 percent from 32.2 percent, a 270 basis point improvement. The gross profit margin increase was primarily due to lower raw material costs and lower fixed costs. Direct materials as a percentage of sales was 44.8 percent down 210 basis points compared to 46.9 percent last year. This decrease in direct materials was primarily due to favorable pricing and lower direct material costs. The Company's consolidated gross profit was $331.4 million for 2016, up $33.8 million or 11 percent from 2015.

Selling, General and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $221.2 million in 2016 and increased by $16.9 million or about 8 percent in 2016 compared to last year. In 2016, increases in SG&A attributable to higher variable compensation expenses were about $12 million or about 6 percent. Additional year over year changes in SG&A costs were primarily in Marketing and Selling related expenses which increased about $2.5 million to support sales growth and, also, Research, Development & Engineering expense which increased by $2.3 million in the year.

Restructuring (Income)/Expense
Restructuring expenses for 2016 netted to a gain of $(0.6) million and increased diluted earnings per share about $0.01. Restructuring expenses for 2016 included a gain of $(2.0) million from the sale of land and building in Brazil and $1.4 million in expenses related to severance and pension costs, equipment relocation expenses, asset write-downs and other costs related to the transfer of production activities and other restructuring costs from continued manufacturing realignments.

Restructuring expenses for 2015 were $3.0 million and decreased diluted earnings per share about $0.04. Restructuring expenses in 2015 included severance and pension costs, equipment relocation expenses, and asset write-downs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil.

Operating Income
Operating income was $110.8 million in 2016, up $20.4 million from $90.4 million in 2015.

 
 
Operating income (loss)
(In millions)
 
2016
 
2015
 
2016 v 2015
Water Systems
 
$
108.2

 
$
86.7

 
$
21.5

Fueling Systems
 
56.3

 
51.5

 
4.8

Other
 
(53.7
)
 
(47.8
)
 
(5.9
)
Consolidated
 
$
110.8

 
$
90.4

 
$
20.4


There were specific items in 2016 and 2015 that impacted operating income.  


17


In 2016 they were as follows:
$(0.6) million of net restructuring charges. Restructuring (income)/expenses in 2016 included a gain of $(2.0) million from the sale of land and building in Brazil, $0.4 million in asset write-offs, $0.2 million in severance and pension cost, $0.2 million expenses related to equipment transfers and freight costs and $0.6 million in other relocation costs primarily related to other manufacturing realignment activities.

$1.2 million related to executive transition.

$0.1 million in other miscellaneous costs related to closed acquisitions.

In 2015 they were as follows:
There were $3.0 million of restructuring charges. Restructuring expenses in 2015 were $0.6 million in severance cost, $0.6 million in pension cost, $0.6 million expenses related to equipment transfers and freight costs, $0.1 million in asset write-offs and $1.1 million in other relocation costs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil.

$1.2 million related to executive transition.

$0.7 million related to business realignment cost, primarily severance, in targeted fixed cost reduction actions.

$0.2 million in other miscellaneous costs related to closed acquisitions.

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 and management understand underlying trends in the Company's business more easily and by presenting these matters in this way, gives our investors and management a more accurate picture of the actual operational performance of the Company. 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:



18


Operating Income and Margins
 
 
 
 
Before and After Non-GAAP Adjustments
 
 
 
 
(in millions)
For the Full Year of 2016
 
Water
Fueling
Other
Consolidated
Reported Operating Income/(Loss)
$
108.2

$
56.3

$
(53.7
)
$
110.8

% Operating Income To Net Sales
15.0
%
24.8
%
 
11.7
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
(1.2
)
$
0.6

$

$
(0.6
)
Non-GAAP
$
0.1

$

$
1.2

$
1.3

Operating Income/(Loss) after Non-GAAP Adjustments
$
107.1

$
56.9

$
(52.5
)
$
111.5

% Operating Income to Net Sales after Non-GAAP adjustments
(Operating Income Margin after Non-GAAP Adjustments)
14.8
%
25.1
%
 
11.7
%
 
 
 
 
 
 
For the Full Year of 2015
 
Water
Fueling
Other
Consolidated
Reported Operating Income/(Loss)
$
86.7

$
51.5

$
(47.8
)
$
90.4

% Operating Income To Net Sales
12.3
%
23.7
%
 
9.8
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
2.7

$
0.3

$

$
3.0

Non-GAAP
$
0.7

$
0.2

$
1.2

$
2.1

Operating Income/(Loss) after Non-GAAP Adjustments
$
90.1

$
52.0

$
(46.6
)
$
95.5

% Operating Income to Net Sales after Non-GAAP adjustments
(Operating Income Margin after Non-GAAP Adjustments)
12.7
%
23.9
%
 
10.3
%

Operating Income-Water Systems
Water Systems operating income was $108.2 million in 2016, up $21.5 million or 25 percent versus the 2015 as reported and up $17.0 million or 19 percent versus the 2015 after non-GAAP adjustments. The 2016 operating income margin was 15.0 percent, up 270 basis points from 12.3 percent in 2015. The 2016 operating income margin after non-GAAP adjustments was 14.8 percent, an increase of 210 basis points from the 12.7 percent of net sales in 2015 after non-GAAP adjustments. The increase in basis points was primarily due to improved margins from lower variable costs.

Operating Income-Fueling Systems
Fueling Systems operating income was $56.3 million in 2016, up $4.8 million or about 9 percent compared to $51.5 million in 2015 as reported, and up $4.9 million or 9 percent compared to $52.0 million after non-GAAP adjustments in 2015. The 2016 operating income margin was 24.8 percent, an increase of 110 basis points from the as reported 23.7 percent of net sales in 2015. The 2016 operating income margin after non-GAAP adjustments was 25.1 percent, an increase of 120 basis points from the 23.9 percent of net sales in 2015 after non-GAAP adjustments. The increase in basis points was primarily due to improved margins from lower variable costs.
 
Operating Income-Other
Operating income-other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses after non-GAAP adjustments were higher by about 13 percent, primarily due to higher variable compensation expenses.

Interest Expense
Interest expense for 2016 and 2015 was $8.7 million and $10.0 million, respectively.

Other Income or Expense
Other income or expense was a gain of $1.0 million in 2016. Included in other income or expense in 2016 was minority income of $1.7 million and interest income of $1.0 million, primarily derived from the investment of cash balances in short-term securities. In 2016, other expenses also included the reversal of an indemnification receivable related to a contingent tax liability for $1.9 million recorded at the time of a foreign acquisition.  The contingent tax liability was for the same amount and

19


was also reversed in 2016 and the benefit was recorded in the income tax provision. Other income or expense was income of $6.9 million in 2015. Included in other income or expense in 2016 was minority income of $2.8 million and interest income of $1.3 million, primarily derived from the investment of cash balances in short-term securities. The Company also realized a gain on the settlement of the redeemable non-controlling interest liability in the first quarter of 2015 of about $2.7 million.

Foreign Exchange
Foreign currency-based transactions produced a gain for 2016 of $1.1 million, primarily due to the Turkish lira relative to the U.S. dollar and euro.  Foreign currency-based transactions produced a loss for 2015 of $0.9 million, primarily due to the South African rand, Colombian peso and Australian dollar relative to the U.S. dollar, none of which individually were significant.  

Income Taxes
The provision for income taxes in 2016 and 2015 was $24.8 million and $12.6 million, respectively. The tax rate for 2016 was 23.8 percent and 2015 was 14.6 percent. Discrete adjustments in 2016 were primarily due to the favorable impact from equity compensation share based payments and the reversal of a contingent tax liability offset by adjustments to the Company’s valuation allowance against certain state deferred tax assets that are not likely to be realized. Discrete adjustments during 2015 were the reversal of a deferred tax liability of about $4.8 million created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer. This purchase transaction also resulted in other tax benefits of about $3.5 million. The tax rate before discrete adjustments for 2016 was about 26 percent and 2015 was about 27 percent. The tax rate is lower than the statutory rate of 35 percent primarily due to the indefinite reinvestment of foreign earnings and reduced taxes on foreign and repatriated earnings. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations, current cash on hand and available credit.

Net Income
Net income for 2016 was $79.3 million compared to 2015 net income of $73.7 million.  Net income attributable to Franklin Electric Co., Inc. for 2016 was $78.7 million, or $1.65 per diluted share, compared to 2015 net income attributable to Franklin Electric Co., Inc. of $72.9 million or $1.50 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments for 2016 was $77.4 million, or $1.66 per diluted share, compared to 2015 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $69.7 million or $1.47 per diluted share.

There were specific items in 2016 and 2015 that impacted net income attributable to Franklin Electric Co., Inc. 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:


Earnings Before and After Non-GAAP Adjustments
For the Full Year
(in millions)
2016
2015
Change
Net Income attributable to Franklin Electric Co., Inc. Reported
$
78.7

$
72.9

8
%
Allocated Undistributed Earnings
$
(1.7
)
$
(1.5
)
 
Earnings for EPS Calculations
$
77.0

$
71.4

8
%
Non-GAAP adjustments (before tax):
 
 
 
Restructuring
$
(0.6
)
$
3.0

 
Non-GAAP items
$
1.3

$
2.1

 
Pioneer tax benefits on equity gain
$

$
(4.8
)
 
Non-GAAP adjustments, net of tax:
 
 
 
Restructuring
$
(0.4
)
$
1.8

 
Non-GAAP items
$
0.8

$
1.3

 
Pioneer tax benefits on equity gain
$

$
(4.8
)
 
Earnings after Non-GAAP Adjustments
$
77.4

$
69.7

11
%

20




Earnings Per Share Before and After Non-GAAP Adjustments
For the Full Year
(in millions except per-share data)
2016
 
2015
 
Change
Average Fully Diluted Shares Outstanding
$
46.7

 
$
47.6

 
(2
)%
 
 
 
 
 
 
Fully Diluted Earnings Per Share ("EPS") Reported
$
1.65

 
$
1.50

 
10
 %
 
 
 
 
 
 
Restructuring Per Share, net of tax
$
(0.01
)
 
$
0.04

 
 
Non-GAAP items, net of tax
$
0.02

 
$
0.03

 
 
Pioneer tax benefits on equity gain
$

 
$
(0.10
)
 
 
 
 
 
 
 
 
Fully Diluted EPS after Non-GAAP Adjustments (Adjusted EPS)
$
1.66

 
$
1.47

 
13
 %

2015 vs. 2014

OVERVIEW

Sales in 2015 decreased from the prior year.  Net sales in 2015 were $924.9 million, a decrease of about 12 percent compared to 2014 sales of $1,047.8 million. The sales decrease was primarily the impact of foreign currency translation as the US dollar strengthened against certain foreign currencies and lower sales volume, partially offset by sales price increases, as well as the Company's acquisitions. The Company's consolidated gross profit was $297.6 million for 2015, a decrease of $46.8 million or about 14 percent from 2014. The gross profit as a percent of net sales decreased 70 basis points to 32.2 percent in 2015 from 32.9 percent in 2014. The gross profit margin change was due primarily to lost leverage on fixed cost due to lower sales. For 2015, diluted earnings per share were $1.50, an increase of 6 percent compared to 2014 diluted earnings per share of $1.41. Adjusted earnings per share were $1.47, a decrease of 16 percent versus the $1.76 adjusted earnings per share in 2014 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS).

RESULTS OF OPERATIONS

Net Sales
Net sales in 2015 were $924.9 million, a decrease of $122.9 million or about 12 percent compared to 2014 sales of $1,047.8 million.  The incremental impact of sales from acquired businesses was $21.3 million or about 2 percent.  Sales revenue decreased by $89.3 million or about 9 percent in 2015 due to foreign currency translation. The sales change in 2015, excluding acquisitions and foreign currency translation, was a decrease of $54.9 million or about 5 percent.

 
 
Net Sales
(In millions)
 
2015
 
2014
 
2015 v 2014
Water Systems
 
$
707.6

 
$
824.6

 
$
(117.0
)
Fueling Systems
 
217.3

 
223.2

 
(5.9
)
Consolidated
 
$
924.9

 
$
1,047.8

 
$
(122.9
)

Net Sales-Water Systems
Water Systems sales were $707.6 million in 2015, a decrease of $117.0 million or 14 percent versus 2014. The incremental impact of sales from acquired businesses was $20.8 million or about 2 percent.  Foreign currency translation rate changes decreased sales $78.3 million, or about 9 percent, compared to sales in 2014. The sales change in 2015, excluding acquisitions and foreign currency translation, was a decrease of $59.5 million or about 7 percent.

Water Systems sales in the U.S. and Canada were 36 percent of consolidated sales and declined by about 20 percent in 2015 compared to the prior year. Sales revenue decreased by $5.9 million or about 1 percent in 2015 due to foreign currency translation. In 2015, U.S. and Canada sales of Pioneer branded mobile dewatering equipment declined by about 55 percent. The decline in mobile dewatering equipment is primarily attributed to reduced demand in the oil and gas end markets. Sales of

21


groundwater pumping equipment declined by about 14 percent, and sales of surface water pumping equipment declined by about 6 percent versus 2014. The decline in groundwater equipment sales is attributable primarily to weaker demand in the agriculture sector as a result of less favorable weather and to a lesser extent, distributor changes the Company made in its primary groundwater distribution channel. Sales of surface water pumping equipment also declined due to lower condensate pump sales as cooler temperatures delayed the start to the HVAC season.

Water Systems sales in Latin America were about 14 percent of consolidated sales for 2015 and declined by about 9 percent compared to the prior year. Acquisition related sales during 2015 were $10.4 million or about 7 percent. Foreign currency translation rate changes decreased sales $34.7 million, or about 24 percent, compared to sales in 2014. Excluding acquisition and foreign currency translation, sales in Latin America grew by about 8 percent during 2015. The growth in sales was led by increased sales in Mexico and Brazil, in local currency. This sales growth is a result of increasing demand for Franklin submersible pumps and motors, customer acceptance of the many product line upgrades that have been implemented over the past two years, and general market conditions.

Water Systems sales in the Middle East and Africa were about 11 percent of consolidated sales and decreased by about 10 percent compared to 2014. Water Systems sales in the Middle East and Africa were reduced by $16.5 million or about 14 percent in the year due to foreign currency translation. Excluding the impact of foreign currency translation, sales were up about 4 percent compared to 2014. The growth was driven by strong sales of groundwater pumping equipment in Turkey.

Water Systems sales in the Asia Pacific region were 8 percent of consolidated sales and grew by about 7 percent compared to the prior year. Acquisition related sales during 2015 increased sales by about 9 percent in Asia Pacific. Foreign currency translation rate changes decreased sales in 2015 in the Asia Pacific region by about 5 percent. Excluding acquisitions and foreign currency translation sales grew by about 3 percent during 2015. The Asia Pacific region experienced strong year over year growth in Southeast Asia and Korea. These sales increases were partially offset by smaller declines in sales in Australia, Japan and China.

Water Systems sales in Europe were about 7 percent of consolidated sales and decreased by about 20 percent compared to the prior year. Foreign currency translation rate changes decreased sales by about 21 percent compared to sales in 2014. Excluding foreign currency translation, European sales grew by about 1 percent during 2015.

Net Sales-Fueling Systems
Fueling Systems sales which represented 23 percent of consolidated sales were $217.3 million in 2015, a decrease of $5.9 million or about 3 percent versus 2014. The incremental impact of sales from acquired businesses was $0.5 million.  Foreign currency translation rate changes decreased sales $11.0 million or about 5 percent compared to sales in 2014. The sales change in 2015, excluding acquisitions and foreign currency translation, was an increase of $4.6 million or about 2 percent.

Fueling Systems sales in the U.S. and Canada grew by about 6 percent in 2015 compared to the prior year with sales growth coming from most product lines, especially in piping. Fueling Systems revenues declined in India and China due to the timing of tender awards made in India and the ongoing reduction in State owned oil company procurements in China. Sales also declined in Europe principally due to a 42 percent decline in the sale of storage tanks that support North Sea oil production.

Cost of Sales
Cost of sales as a percent of net sales for 2015 and 2014 was 67.8 percent and 67.1 percent, respectively. Correspondingly, the gross profit margin decreased to 32.2 percent from 32.9 percent, a 70 basis point decline. The gross profit margin decrease was primarily due to fixed costs deleverage on lower sales and higher raw material costs. Direct materials as a percentage of sales was 46.9 percent up 50 basis points compared to 46.4 percent last year. This increase in direct materials was partially offset by lower labor and burden costs.  The Company's consolidated gross profit was $297.6 million for 2015, down $46.8 million or 14 percent from 2014.

Selling, General and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $204.3 million in 2015 and decreased by $23.4 million or about 10 percent in 2015 compared to last year. In 2015, increases in SG&A attributable to acquisitions were about $6 million or about 3 percent. Additional year over year changes in SG&A costs were decreases in the year primarily due to lower marketing and selling related expenses, as well as lower costs for incentive compensation. Approximately half of the lower SG&A expenses was related to foreign exchange.





22


Restructuring Expenses
Restructuring expenses for 2015 were $3.0 million and reduced diluted earnings per share by approximately $0.04. Restructuring expenses in 2015 included severance and pension costs, equipment relocation expenses, asset write-downs and primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil. There were $16.6 million of restructuring expenses in 2014 and reduced diluted earnings per share by approximately $0.24. Restructuring expenses in 2014 included severance costs, equipment relocation expenses, and asset write-downs primarily related to the closure of the Wittlich, Germany facility and other European manufacturing realignment activities.

Operating Income
Operating income was $90.4 million in 2015, down $9.7 million from $100.1 million in 2014.

 
 
Operating income (loss)
(In millions)
 
2015
 
2014
 
2015 v 2014
Water Systems
 
$
86.7

 
$
103.9

 
$
(17.2
)
Fueling Systems
 
51.5

 
49.7

 
1.8

Other
 
(47.8
)
 
(53.5
)
 
5.7

Consolidated
 
$
90.4

 
$
100.1

 
$
(9.7
)

There were specific items in 2015 and 2014 that impacted operating income.

In 2015 they were as follows:
There were $3.0 million of restructuring charges. Restructuring expenses in 2015 were $0.6 million in severance cost, $0.6 million in pension cost, $0.6 million expenses related to equipment transfers and freight costs, $0.1 million in asset write-offs and $1.1 million in other relocation costs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil.

$1.2 million related to executive transition.

$0.7 million related to business realignment cost, primarily severance, in targeted fixed cost reduction actions.

$0.2 million in other miscellaneous costs related to closed acquisitions.

In 2014 they were as follows:
There were $16.6 million of restructuring charges. Restructuring expenses in 2014 were $14.7 million in severance cost, $1.7 million expenses related to equipment transfers, freight and other relocation costs and $0.2 million in asset write-offs primarily related to the transfer of production activities from Germany to the Czech Republic and other continued manufacturing realignments.

$3.2 million in other miscellaneous costs related to closed and pending acquisitions and $0.2 million in legal fees incurred by Franklin Fueling Systems.

$2.5 million related to executive transition.

$1.8 million of software write-offs.

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 and management understand underlying trends in the Company's business more easily and by presenting these matters in this way, gives our investors and management a more accurate picture of the actual operational performance of the Company. 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:




23


Operating Income and Margins
 
 
 
 
Before and After Non-GAAP Adjustments
 
 
 
 
(in millions)
For the Full Year of 2015
 
Water
Fueling
Other
Consolidated
Reported Operating Income/(Loss)
$
86.7

$
51.5

$
(47.8
)
$
90.4

% Operating Income To Net Sales
12.3
%
23.7
%
 
9.8
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
2.7

$
0.3

$

$
3.0

Non-GAAP
$
0.7

$
0.2

$
1.2

$
2.1

Operating Income after Non-GAAP Adjustments
$
90.1

$
52.0

$
(46.6
)
$
95.5

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
12.7
%
23.9
%
 
10.3
%
 
 
 
 
 
 
For the Full Year of 2014
 
Water
Fueling
Other
Consolidated
Reported Operating Income/(Loss)
$
103.9

$
49.7

$
(53.5
)
$
100.1

% Operating Income To Net Sales
12.6
%
22.3
%
 
9.6
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
16.1

$
0.5

$

$
16.6

Non-GAAP
$
3.7

$
1.5

$
2.5

$
7.7

Operating Income after Non-GAAP Adjustments
$
123.7

$
51.7

$
(51.0
)
$
124.4

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
15.0
%
23.2
%
 
11.9
%

Operating Income-Water Systems
Water Systems operating income, after non-GAAP adjustments, was $90.1 million in 2015, a decrease of 27 percent versus 2014. The 2015 operating income margin after non-GAAP adjustments was 12.7 percent and decreased by 230 basis points compared to the 15.0 percent of net sales in 2014. Operating income margin after non-GAAP adjustments decreased in Water Systems primarily due to loss of operating leverage.

Operating Income-Fueling Systems
Fueling Systems operating income after non-GAAP adjustments was $52.0 million in 2015 compared to $51.7 million after non-GAAP adjustments in 2014. The 2015 operating income margin after non-GAAP adjustments was 23.9 percent and increased by 70 basis points compared to the 23.2 percent of net sales in 2014. This increased profitability was primarily due to lower fixed costs.
 
Operating Income-Other
Operating income-other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses after non-GAAP adjustments were down about 9 percent compared to last year primarily due to lower incentive compensation due to lower overall operating results.

Interest Expense
Interest expense for 2015 and 2014 was $10.0 million and $10.7 million, respectively.

Other Income or Expense
Other income or expense was a gain of $6.9 million in 2015. Included in other income or expense in 2015 was minority income of $2.8 million and interest income of $1.3 million, primarily derived from the investment of cash balances in short-term securities. The Company also realized a gain on the settlement of the redeemable non-controlling interest liability in the first quarter of this year of about $2.7 million. Other income or expense was a gain of $1.3 million in 2014 and included in other

24


income or expense in 2014 was interest income of $2.0 million, primarily derived from the investment of cash balances in short-term securities.

Foreign Exchange
Foreign currency-based transactions produced a loss for 2015 of $0.9 million, primarily due to the South African rand, Colombian Peso and Australian dollar relative to the U.S. dollar, none of which individually were significant.  Foreign currency-based transactions produced a loss for 2014 of $1.0 million, primarily due to the Canadian dollar, Australian dollar, Turkish lira, and South African rand relative to the U.S. dollar, none of which individually were significant.

Income Taxes
The provision for income taxes in 2015 and 2014 was $12.6 million and $18.9 million, respectively. The tax rate for 2015 was 14.6 percent and 2014 was 21.0 percent. Discrete adjustments during 2015 were the reversal of a deferred tax liability created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer. This tax benefit of about $4.8 million was treated as a non-GAAP adjustment. Because in 2012, the gain was treated as a non-GAAP adjustment, the Company is now consistently treating the reversal of the tax liability related to that gain as a non-GAAP adjustment and reducing reported Earnings per Share in 2015 by $0.10 cents. The Company also realized a gain on the redeemable non-controlling interest liability in the year of about $2.7 million which is included in ‘Other income’. This purchase transaction also resulted in other tax benefits of about $2.5 million, which were expensed through the Company’s earnings in prior years as well as a benefit of about $1.0 million related to the 2015 gain. The tax rate before discrete adjustments for 2015 was about 27 percent and 2014 was about 26 percent. The tax rate is lower than the statutory rate of 35 percent primarily due to the indefinite reinvestment of foreign earnings and reduced taxes on foreign and repatriated earnings. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations, current cash on hand and available credit.

Net Income
Net income for 2015 was $73.7 million compared to 2014 net income of $70.9 million.  Net income attributable to Franklin Electric Co., Inc. for 2015 was $72.9 million, or $1.50 per diluted share, compared to 2014 net income attributable to Franklin Electric Co., Inc. of $69.8 million or $1.41 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments for 2015 was $69.7 million, or $1.47 per diluted share, compared to 2014 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $84.3 million or $1.76 per diluted share.

There were specific items in 2015 and 2014 that impacted net income attributable to Franklin Electric Co., Inc. 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:



25


Earnings Before and After Non-GAAP Adjustments
For the Full Year
(in millions)
2015
 
2014
 
Change
Net Income attributable to Franklin Electric Co., Inc. Reported
$
72.9

 
$
69.8

 
4
 %
Allocated Undistributed Earnings
$
(1.5
)
 
$
(1.6
)
 
 
Earnings for EPS Calculations
$
71.4

 
$
68.2

 
5
 %
Non-GAAP adjustments (before tax):
 
 
 
 
 
Restructuring
$
3.0

 
$
16.6

 
 
Non-GAAP items
$
2.1

 
$
7.7

 
 
Pioneer tax benefits on equity gain
$
(4.8
)
 
$

 
 
Non-GAAP adjustments, net of tax:
 
 
 
 
 
Restructuring
$
1.8

 
$
11.4

 
 
Non-GAAP items
$
1.3

 
$
4.7

 
 
Pioneer tax benefits on equity gain
$
(4.8
)
 
$

 
 
Earnings after Non-GAAP Adjustments
$
69.7

 
$
84.3

 
(17
)%

Earnings Per Share Before and After Non-GAAP Adjustments
For the Full Year
(in millions except per-share data)
2015
 
2014
 
Change
Average Fully Diluted Shares Outstanding
$
47.6

 
$
48.2

 
(1
)%
 
 
 
 
 
 
Fully Diluted Earnings Per Share ("EPS") Reported
$
1.50

 
$
1.41

 
6
 %
 
 
 
 
 
 
Restructuring Per Share, net of tax
$
0.04

 
$
0.24

 
 
Non-GAAP items, net of tax
$
0.03

 
$
0.11

 
 
Pioneer tax benefits on equity gain
$
(0.10
)
 
$

 
 
 
 
 
 
 
 
Fully Diluted EPS after Non-GAAP Adjustments (Adjusted EPS)
$
1.47

 
$
1.76

 
(16
)%


CAPITAL RESOURCES AND LIQUIDITY

Sources of Liquidity
The Company's primary sources of liquidity are cash on hand, cash flows from operations, revolving credit agreements, and long-term debt funds available. The Company believes its capital resources and liquidity position at December 31, 2016 is adequate to meet projected needs. 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.

As of December 31, 2016, the Company had a $300.0 million revolving credit facility. The facility is scheduled to mature on October 28, 2021. As of December 31, 2016, the Company had $294.1 million borrowing capacity under the Credit Agreement as $5.9 million in letters of commercial and standby letters of credit were outstanding and undrawn and no revolver borrowing was drawn and outstanding as of the end of the quarter.

The Company also has other long-term debt borrowings outstanding as of December 31, 2016. See Footnote 11 for additional specifics regarding these obligations and future maturities.


26


At December 31, 2016, the Company had $74.5 million of cash and cash equivalents held in foreign jurisdictions, which will be used to fund foreign operations. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions. If the Company chose to repatriate historical earnings held in foreign jurisdictions, the intention to do so would only be in a tax-efficient manner.

Cash Flows
The following table summarizes significant sources and uses of cash and cash equivalents:

(in thousands)
2016
 
2015
 
2014
Net cash provided by operating activities
$
115.4

 
$
99.6

 
$
47.3

Net cash used in investing activities
(33.8
)
 
(29.6
)
 
(77.7
)
Net cash used in financing activities
(51.7
)
 
(41.1
)
 
(44.3
)
Impact of exchange rates on cash and cash equivalents
(7.1
)
 
(6.5
)
 
(0.7
)
Change in cash and cash equivalents
$
22.8

 
$
22.4

 
$
(75.4
)

Cash Flows Provided by Operating Activities
2016 vs. 2015
Net cash provided by operating activities was $115.4 million for 2016 compared to $99.6 million for 2015. An increase in cash provided by operations in 2016 was partially attributable to large cash outflows in 2015 related to restructuring costs previously accrued at year-end 2014. The increase in cash provided was partially offset by increased cash used during 2016 for higher receivables and inventory balances compared to year-end 2015, driven by higher sales volumes in 2016. Finally, during 2015 the mandatory share purchase liability of $22.9 million for Pioneer was settled, resulting in a non-cash gain and reversal of certain deferred tax liabilities, also non-cash, both of which were adjustments to net income.

2015 vs. 2014
Net cash provided by operating activities was $99.6 million for 2015 compared to $47.3 million for 2014. The increase in cash provided from operations in 2015 compared to 2014 was primarily due to lower uses of cash for trade receivables and inventory in conjunction with reduced sales in 2015. This increase in cash provided from operations was partially offset by a reduction in outstanding accounts payable balances at year-end 2015 compared to 2014. This reduction was also primarily due to lower year-end inventory levels.

Cash Flows Used in Investing Activities
2016 vs. 2015
Net cash used in investing activities was $33.8 million in 2016 compared to $29.6 million in 2015. During 2016, the Company had increased capital expenditures compared to 2015, primarily attributable to the purchase of a building in the first quarter. Cash expended on this purchase was partially offset with proceeds realized from the sale of an idle building in Brazil which completed during the third quarter of 2016.

2015 vs. 2014
Net cash used in investing activities was $29.6 million in 2015 compared to $77.7 million in 2014. During 2015, the Company used less cash for acquisitions and equity investment purchases compared to 2014. In addition, cash used for capital expenditures during 2015 was less than the previous year as 2014 saw the completion of a new manufacturing facility in Brazil. During 2014, the Company completed the acquisitions of Bombas Leao S.A. (“Bombas Leao”), with cash on hand and short-term borrowings repaid within the year, and two entities in India, with cash on hand.

Cash Flows Used in Financing Activities
2016 vs. 2015
Net cash flows from financing activities were uses of cash of $51.7 million in 2016 compared to $41.1 million in 2015. During 2016, the Company had net repayments of debt of about $30.4 million compared to net borrowings during 2015 of about $43.6 million, resulting in a greater use of cash. The Company paid dividends of $19.1 million in 2016, which was up slightly from $18.9 million in 2015. In addition, in 2015 the Company made a payment of $20.2 million for the Pioneer mandatory share purchase liability and repurchased a significant amount of the Company's common stock, which were both large uses of cash that did not repeat in 2016.




27


2015 vs. 2014
Net cash flows from financing activities were uses of cash of $41.1 million in 2015 compared to $44.3 million in 2014. During 2015, the Company made a payment of $20.2 million for the Pioneer mandatory share purchase liability. In addition, the Company used cash of $46.3 million to complete the repurchase of about 1.6 million shares of the Company’s common stock pursuant to the Company’s stock repurchase program. Dividends in the amount of $18.9 million were paid to shareholders. The Company also had increased debt borrowings and repayments during 2015 primarily due to the issuance of $75.0 million of debt under the New York Life Agreement, first scheduled Prudential Agreement payment of $30.0 million, and increased Revolver borrowing and repayments.

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 and purchase obligations. The payment schedule for these contractual obligations is as follows:

(In millions)
 
 
 
 
 
 
 
 
More than
 
Total
 
2017
 
2018-2019
 
2020-2021
 
5 years
Debt
$
190.4

 
$
33.7

 
$
62.5

 
$
2.4

 
$
91.8

Debt interest
29.3

 
7.5

 
8.1

 
4.5

 
9.2

Capital leases
0.1

 

 
0.1

 

 

Operating leases
21.4

 
7.4

 
9.2

 
4.1

 
0.7

Purchase obligations
10.8

 
10.8

 

 

 

 
$
252.0

 
$
59.4

 
$
79.9

 
$
11.0

 
$
101.7


The Company has pension and other post-retirement benefit obligations not included in the table above which will result in estimated future payments of approximately $6 million in 2017.  The Company also has unrecognized tax benefits, none of which are included in the table above.  The unrecognized tax benefits of approximately $1.3 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 $1.1 million.

ACCOUNTING PRONOUNCEMENTS

Accounting Standards Issued But Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases found in Accounting Standards Codification ("ASC") Topic 840. This ASU requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company has begun the evaluation process for the adoption of the ASU, and anticipates that the majority of the Company’s outstanding operating leases would be recognized as right-of-use assets and lease liabilities upon adoption, resulting in a significant impact to the Company’s Consolidated Balance Sheets. The impact of this ASU is non-cash in nature and will not affect the Company’s cash position. The impact to the Company’s results of operations is still being evaluated.   

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs are effective for interim and annual reporting periods beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt these standards. The Company will adopt ASU 2014-09 beginning in the first quarter of 2018 using the modified retrospective approach.  The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. 




28


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 ongoing 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 or methodologies used to develop those estimates in 2016.

The Company’s critical accounting estimates are identified below:

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.
 
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.  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.  

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 2016 was $199.6 million.

During the fourth quarter of 2016, the Company completed its annual impairment test of goodwill and tradenames and determined the fair value of all intangibles were substantially in excess of the respective carrying values.  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

29


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's operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. These jurisdictions have different tax rates, and the Company 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. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in the various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. Although the Company has recorded all 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 tax expense and/or deferred tax assets and liabilities.

Pension and Employee Benefit Obligations
The Company consults with its actuaries to assist with the calculation of discount rates used in its pension and post retirement plans. Beginning in 2016, the discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. The change compared to the previous method resulted in different service and interest components of net periodic benefit cost in the 2016 fiscal year. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. Market conditions have caused the weighted-average discount rate to move from 4.37 percent last year to 4.13 percent this year for the domestic pension plans and from 4.09 percent last year to 3.89 percent this year for the postretirement health and life insurance plan. A change in the discount rate selected by the Company of 25 basis points would result in a change of about $0.1 million 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 6.25 percent as of the fiscal year ended 2016.  A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.4 million of employee benefit expense.

According to FASB ASC 715, Compensation - Retirement Benefits, settlement accounting is triggered when lump sum payouts from a defined benefit plan exceed the sum of service cost and interest cost for the year. During 2016, one of the Company’s domestic pension plans required settlement accounting as a payout to a participant exceeded these criteria.

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

30


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. These exposures are actively monitored by management. Exposure to foreign exchange rate risk is due to certain costs, revenue and borrowings being denominated in currencies other than one of our subsidiaries functional currency. Similarly, the Company is exposed to market risk as the result of changes in interest rates which may affect the cost of financing.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is mitigated through several means including 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, maintaining minimal foreign currency denominated cash balances, and application of derivative instruments when appropriate. Based on the 2016 mix of foreign currencies, the Company estimates that a hypothetical strengthening of the US Dollar by about 5 percent would have reduced the Company’s 2016 sales by about 2 percent.

Interest Rate Expense

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s revolving credit agreement (the “Credit Agreement”) and the New York Life Agreement, where interest rates are tied to the prime rate or London Interbank Offered Rates (LIBOR). The Company had no borrowings at year-end 2016 under the Credit Agreement and had $75.0 million outstanding under the New York Life Agreement.  The Company estimates that a hypothetical increase of 100 basis points in LIBOR rates would have increased interest expense by $1.0 million during 2016. 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.

Commodity Price Exposures

Portions of the Company's business are exposed to volatility in the prices of certain commodities, such as copper, nickel and aluminum, among others. The 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, the Company is prone to exposure as these contracts expire. Based on the 2016 use of commodities, the Company estimates that a hypothetical 10 percent adverse movement in prices for raw metal commodities would result in about a 100 basis point decrease of gross margin as a percent of sales.


31



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

(In thousands, except per share amounts)
2016
 
2015
 
2014
 
 
 
 
 
 
Net sales
$
949,856

 
$
924,923

 
$
1,047,777

Cost of sales
618,450

 
627,315

 
703,367

Gross profit
331,406

 
297,608

 
344,410

Selling, general, and administrative expenses
221,209

 
204,250

 
227,711

Restructuring (income)/expense
(598
)
 
2,997

 
16,611

Operating income
110,795

 
90,361

 
100,088

Interest expense
(8,732
)
 
(10,039
)
 
(10,735
)
Other income, net
993

 
6,863

 
1,349

Foreign exchange income/(expense)
1,057

 
(869
)
 
(999
)
Income before income taxes
104,113

 
86,316

 
89,703

Income tax expense
24,798

 
12,625

 
18,851

Net income
$
79,315

 
$
73,691

 
$
70,852

Less: Net income attributable to noncontrolling interests
(570
)
 
(746
)
 
(1,046
)
Net income attributable to Franklin Electric Co., Inc.
$
78,745

 
$
72,945

 
$
69,806

Income per share:
 
 
 
 
 
Basic
$
1.67

 
$
1.52

 
$
1.43

Diluted
$
1.65

 
$
1.50

 
$
1.41

Dividends per common share
$
0.3975

 
$
0.3825

 
$
0.3475


See Notes to Consolidated Financial Statements.

32


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

(In thousands)
2016
 
2015
 
2014
 
 
 
 
 
 
Net income
$
79,315

 
$
73,691

 
$
70,852

Other comprehensive income/(loss), before tax:
 
 
 
 
 
     Foreign currency translation adjustments
(8,459
)
 
(58,886
)
 
(36,243
)
     Employee benefit plan activity:
 
 
 
 
 
        Net gain/(loss) arising during period
(3,809
)
 
1,278

 
(30,395
)
       Amortization arising during period
4,298

 
5,759

 
4,385

Other comprehensive loss
(7,970
)
 
(51,849
)
 
(62,253
)
Income tax (expense)/benefit related to items of other comprehensive income/(loss)
(499
)
 
(2,471
)
 
8,593

Other comprehensive loss, net of tax
(8,469
)
 
(54,320
)
 
(53,660
)
Comprehensive income
70,846

 
19,371

 
17,192

Less: Comprehensive income attributable to noncontrolling interests
345

 
121

 
570

Comprehensive income attributable to Franklin Electric Co., Inc.
$
70,501

 
$
19,250

 
$
16,622



See Notes to Consolidated Financial Statements.

33




FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
2016
 
2015
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
104,331

 
$
81,561

Receivables, less allowances of $3,601 and $3,801, respectively
145,999

 
127,251

Inventories:
 
 
 
Raw material
80,052

 
82,223

Work-in-process
18,735

 
18,384

Finished goods
104,684

 
93,987

Total inventories
203,471

 
194,594

Other current assets
30,018

 
34,715

Total current assets
483,819

 
438,121

 
 
 
 
Property, plant, and equipment, at cost:
 
 
 
Land and buildings
121,364

 
117,753

Machinery and equipment
242,170

 
233,834

Furniture and fixtures
47,523

 
39,639

Other
19,089

 
19,845

Property, plant, and equipment, gross
430,146

 
411,071

Less: Allowance for depreciation
(234,009
)
 
(221,032
)
Property, plant, and equipment, net
196,137

 
190,039

Asset held for sale

 
1,613

Deferred income taxes
4,621

 
3,461

Intangible assets, net
134,667

 
141,357

Goodwill
199,609

 
199,847

Other assets
21,052

 
21,673

Total assets
$
1,039,905

 
$
996,111



34


 
2016
 
2015
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
63,927

 
$
57,822

Accrued expenses and other current liabilities
56,845

 
52,109

Income taxes
3,274

 
1,794

Current maturities of long-term debt and short-term borrowings
33,715

 
32,946

Total current liabilities
157,761

 
144,671

Long-term debt
156,544

 
187,806

Deferred income taxes
40,460

 
33,404

Employee benefit plans
45,307

 
47,398

Other long-term liabilities
17,093

 
16,511

 
 
 
 
Commitments and contingencies (see Note 17)

 

 
 
 
 
Redeemable noncontrolling interest
7,652

 
6,856

 
 
 
 
Shareholders' equity:
 
 
 
Common stock (65,000 shares authorized, $.10 par value) outstanding (46,376 and 46,219, respectively)
4,638

 
4,622

Additional capital
228,564

 
216,472

Retained earnings
550,095

 
498,214

Accumulated other comprehensive loss
(169,852
)
 
(161,608
)
Total shareholders' equity
613,445

 
557,700

Noncontrolling interest
1,643

 
1,765

Total equity
615,088

 
559,465

Total liabilities and equity
$
1,039,905

 
$
996,111



See Notes to Consolidated Financial Statements.



35


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
2016
 
2015
 
2014
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net income
$
79,315

 
$
73,691

 
$
70,852

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
 
Depreciation and amortization
35,534

 
35,476

 
37,210

Share-based compensation
6,889

 
5,626

 
7,471

Deferred income taxes
2,978

 
(6,802
)
 
(2,415
)
Loss on disposals of plant and equipment
751

 
1,542

 
1,351

Realized gain on share purchase liability

 
(2,723
)
 

Foreign exchange (income)/expense
(1,057
)
 
869

 
999

Excess tax from share-based payment arrangements

 
(932
)
 
(2,463
)
Changes in assets and liabilities, net of acquisitions:
 
 
 
 
 
Receivables
(21,334
)
 
3,444

 
(29,064
)
Inventory
(7,636
)
 
9,350

 
(32,782
)
Accounts payable and accrued expenses
11,782

 
(19,744
)
 
22,852

Income taxes
4,709

 
5,575

 
(14,135
)
Employee benefit plans
(1,049
)
 
(2,455
)
 
(6,834
)
Other, net
4,492

 
(3,314
)
 
(5,693
)
Net cash flows from operating activities
115,374

 
99,603

 
47,349

Cash flows from investing activities:
 
 
 
 
 
Additions to property, plant, and equipment
(39,136
)
 
(26,171
)
 
(35,525
)
Proceeds from sale of property, plant, and equipment
6,028

 
202

 
1,608

Cash paid for acquisitions, net of cash acquired
(1,007
)
 
(3,761
)
 
(35,599
)
Additional consideration for prior acquisition

 
(127
)
 

Cash paid for minority equity investments

 

 
(6,716
)
Other, net
346

 
274

 
(1,490
)
Net cash flows from investing activities
(33,769
)
 
(29,583
)

(77,722
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from issuance of debt
64,681

 
233,486

 
98,394

Repayment of debt
(95,066
)
 
(189,910
)
 
(117,217
)
Proceeds from issuance of common stock
5,243

 
2,050

 
2,929

Excess tax from share-based payment arrangements

 
932

 
2,463

Purchases of common stock
(7,422
)
 
(48,579
)
 
(10,610
)
Dividends paid
(19,137
)
 
(18,926
)
 
(17,421
)
Purchase of redeemable noncontrolling shares

 

 
(2,875
)
Share purchase liability payment

 
(20,200
)
 

Net cash flows from financing activities
(51,701
)
 
(41,147
)
 
(44,337
)
Effect of exchange rate changes on cash
(7,134
)
 
(6,453
)
 
(702
)
Net change in cash and equivalents
22,770

 
22,420

 
(75,412
)
Cash and equivalents at beginning of period
81,561

 
59,141

 
134,553


36


(In thousands)
2016
 
2015
 
2014
 
 
 
 
 
 
Cash and equivalents at end of period
$
104,331

 
$
81,561

 
$
59,141

 
 
 
 
 
 
Cash paid for income taxes, net of refunds
$
22,296

 
$
14,264

 
$
29,066

Cash paid for interest, net of capitalized interest of $0, $0, and $392, respectively
$
8,965

 
$
10,211

 
$
10,850

 
 
 
 
 
 
Non-cash items:
 
 
 

 
 

Payable to seller of Bombas Leao, S.A
$
24

 
$
24

 
$
267

Additions to property, plant, and equipment, not yet paid
$
366

 
$
960

 
$
1,030



See Notes to Consolidated Financial Statements.

 

37


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
 
Total Shareholders' 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 2013
47,715

 
$
4,771

 
$
194,810

 
$
450,855

 
$
(54,729
)
 
$
2,509

 
$
5,171

Net income
 
 
 
 
 
 
69,806

 
 
 
654

 
392

Currency translation adjustment
 
 
 
 
 
 
 
 
(35,767
)
 
(220
)
 
(256
)
Minimum pension liability adjustment, net of tax benefit of $8,593
 
 
 
 
 
 
 
 
(17,417
)
 
 
 
 
Adjustments to Impo redemption value
 
 
 
 
 
 
(910
)
 
 
 
 
 
910

Dividends on common stock ($0.3475/share)
 
 
 
 
 
 
(16,621
)
 
 
 
 
 
 
Noncontrolling dividend
 
 
 
 
 
 
 
 
 
 
(800
)
 
 
Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
3,078

Common stock issued
172

 
17

 
2,912

 
 
 
 
 
 
 
 
Purchase of redeemable noncontrolling shares
 
 
 
 
 
 
 
 
 
 
 
 
(2,875
)
Share-based compensation
(9
)
 
(1
)
 
7,472

 
 
 
 
 
 
 
 
Common stock repurchased
(284
)
 
(28
)
 
 
 
(10,582
)
 
 
 
 
 
 
Tax benefit of stock options exercised
 
 
 
 
2,252

 
 
 
 
 
 
 
 
Balance as of year end 2014
47,594

 
$
4,759

 
$
207,446

 
$
492,548

 
$
(107,913
)
 
$
2,143

 
$
6,420

Net income
 
 
 
 
 
 
72,945

 
 
 
591

 
155

Currency translation adjustment
 
 
 
 
 
 
 
 
(58,261
)
 
(146
)
 
(479
)
Minimum pension liability adjustment, net of tax expense of $2,471
 
 
 
 
 
 
 
 
4,566

 
 
 
 
Adjustments to Impo redemption value