Company Quick10K Filing
Franklin Electric
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 47 $2,134
10-K 2020-02-25 Annual: 2019-12-31
10-Q 2019-11-05 Quarter: 2019-09-30
10-Q 2019-07-30 Quarter: 2019-06-30
10-Q 2019-04-30 Quarter: 2019-03-31
10-K 2019-02-28 Annual: 2018-12-31
10-Q 2018-11-02 Quarter: 2018-09-30
10-Q 2018-07-31 Quarter: 2018-06-30
10-Q 2018-05-08 Quarter: 2018-03-31
10-K 2018-02-27 Annual: 2017-12-31
10-Q 2017-10-31 Quarter: 2017-09-30
10-Q 2017-08-01 Quarter: 2017-06-30
10-Q 2017-05-02 Quarter: 2017-03-31
10-K 2017-03-01 Annual: 2016-12-31
10-Q 2016-11-01 Quarter: 2016-10-01
10-Q 2016-08-02 Quarter: 2016-07-02
10-Q 2016-05-10 Quarter: 2016-04-02
10-K 2016-03-02 Annual: 2016-01-02
10-Q 2015-11-03 Quarter: 2015-10-03
10-Q 2015-08-04 Quarter: 2015-07-04
10-Q 2015-05-06 Quarter: 2015-04-04
10-K 2015-03-04 Annual: 2015-01-03
10-Q 2014-11-06 Quarter: 2014-09-27
10-Q 2014-08-07 Quarter: 2014-06-28
10-Q 2014-05-08 Quarter: 2014-03-29
10-K 2014-02-26 Annual: 2013-12-28
10-Q 2013-11-07 Quarter: 2013-09-28
10-Q 2013-08-08 Quarter: 2013-06-29
10-Q 2013-05-09 Quarter: 2013-03-30
10-K 2013-02-27 Annual: 2012-12-29
10-Q 2012-11-08 Quarter: 2012-09-29
10-Q 2012-08-08 Quarter: 2012-06-30
10-Q 2012-05-10 Quarter: 2012-03-31
10-K 2012-02-29 Annual: 2011-12-31
10-Q 2011-11-08 Quarter: 2011-10-01
10-Q 2011-08-09 Quarter: 2011-07-02
10-Q 2011-05-12 Quarter: 2011-04-02
10-K 2011-03-02 Annual: 2011-01-01
10-Q 2010-11-08 Quarter: 2010-10-02
10-Q 2010-08-09 Quarter: 2010-07-03
10-Q 2010-05-07 Quarter: 2010-04-03
10-K 2010-03-03 Annual: 2010-03-03
8-K 2020-02-18 Earnings, Exhibits
8-K 2020-01-27 Officers, Amend Bylaw, Exhibits
8-K 2019-11-04 Regulation FD, Exhibits
8-K 2019-10-29 Earnings, Exhibits
8-K 2019-08-01 Regulation FD, Exhibits
8-K 2019-07-23 Earnings, Exhibits
8-K 2019-05-07 Amend Bylaw, Exhibits
8-K 2019-05-03 Regulation FD, Exhibits
8-K 2019-05-03 Shareholder Vote
8-K 2019-04-23 Earnings, Exhibits
8-K 2019-02-19 Earnings, Exhibits
8-K 2019-01-07 Officers
8-K 2019-01-02 Regulation FD, Exhibits
8-K 2018-11-06 Regulation FD, Exhibits
8-K 2018-10-26 Earnings, Exhibits
8-K 2018-10-01 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-07-03 Regulation FD, Exhibits
8-K 2018-07-02 Regulation FD, Exhibits
8-K 2018-05-07 Shareholder Vote
8-K 2018-05-04 Regulation FD, Exhibits
8-K 2018-05-01 Earnings, Exhibits
8-K 2018-04-03 Regulation FD, Exhibits
8-K 2018-02-20 Earnings, Exhibits
8-K 2018-01-03 Regulation FD, Exhibits
FELE 2019-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statements Schedules
EX-10.4 a20191231ex104.htm
EX-10.18 a20191231ex1018.htm
EX-21 a20191231ex21.htm
EX-23.1 a20191231ex231.htm
EX-31.1 a20191231ex311.htm
EX-31.2 a20191231ex312.htm
EX-32.1 a20191231ex321.htm
EX-32.2 a20191231ex322.htm
EX-99.1 a20191231ex991.htm

Franklin Electric Earnings 2019-12-31

FELE 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
GTLS 2,676 1,984 785 1,161 306 86 155 2,835 26% 18.3 4%
HSC 2,223 2,535 2,186 1,681 0 114 291 3,457 0% 11.9 4%
FELE 2,134 1,270 510 1,305 426 96 165 2,316 33% 14.1 8%
MDR 1,651 9,998 9,204 8,710 512 -2,925 -2,492 3,101 6% -1.2 -29%
MLI 1,632 1,417 813 2,483 367 94 195 2,017 15% 10.4 7%
DRQ 1,585 1,202 105 389 111 -90 -73 1,162 29% -15.9 -7%
DNOW 1,583 1,849 585 3,147 636 68 113 1,565 20% 13.8 4%
KALU 1,570 1,422 676 1,555 296 99 188 1,804 19% 9.6 7%
MWA 1,527 1,293 726 955 318 49 116 1,839 33% 15.9 4%
SNHY 1,431 1,060 502 565 217 62 131 1,764 38% 13.4 6%

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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, 2019

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
fele-20191231_g1.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 FELENASDAQGlobal Select Market
(Title of each class) (Trading symbol)(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.

YesNo


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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.

YesNo
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.

YesNo
  
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).

YesNo

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 FilerAccelerated FilerNon-Accelerated FilerSmaller Reporting Company
Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

YES
NO

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant at June 30, 2019 (the last business day of the registrant’s most recently completed second quarter) was $2,175,331,613. 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 11, 2020:
46,393,240 shares

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2020 (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 2019 revenue of about $1.3 billion and approximately 5,400 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 wastewater for the residential, agricultural, and other industrial end markets. The Company also sells various groundwater equipment products to well installation contractors, including water pumping systems, through its distribution branches located in the U.S. With a growing global footprint, the Company has also evolved into a top supplier of submersible fueling systems at gas stations, making pumps, pipes, electronic controls, and monitoring devices.

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 principles, Franklin Electric promises to deliver quality, availability, service, innovation, and cost 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 for the Company's growth as a global provider of water and fuel systems, through geographic expansion and product line extensions, leveraging its global platform and competency in system design, all while consistently offering the best value to its customer.

Markets and Applications
The Company’s business consists of three reportable segments based on the principal end market served: Water Systems, Fueling Systems, and Distribution segments. The Company includes unallocated corporate expenses in an “Intersegment Eliminations/Other” segment that, together with the Water Systems, Fueling Systems, and Distribution segments, represent the Company. Segment and geographic information appears in Note 15 - 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. The Company’s Distribution segment sells products primarily to water well contractors.

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, drives, electronic controls, monitoring devices, and related parts and equipment primarily for use in groundwater, water transfer and wastewater.

Water Systems motors, pumps and controls are used principally for pumping clean water and wastewater in a variety of residential, agricultural, municipal 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 electrical surges, over-heating and dry wells or dry 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. Founded in the 1940s, the Company began as a manufacturer of submersible motors for pumps. In 2004, it entered the pump business, and has since grown through internal product development and acquisitions. Highlights of the Water Systems business transformation, from its origins to the present, are as follows:
1950s - Domestic submersible motor manufacturer
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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
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
2017 - Acquired remaining 10% noncontrolling interest of Impo
2018 - International acquisition, Industrias Rotor Pump S.A., Argentina
2019 - Added water treatment system products, through the acquisition of First Sales, LLC, United States, acquired remaining ownership of Pluga Pumps and Motors Private Limited, India

Water Systems products are sold in highly competitive markets. Water Systems contributes about 60 percent of the Company’s total revenue. Significant portions of segment revenue come from selling groundwater and surface pumps, motors, and controls for residential and commercial buildings, as well as agricultural sales which are more seasonal and subject to commodity price changes. The Water Systems segment generates approximately 40 percent of its revenue in developing markets, which often lack municipal water systems. As those countries install water systems, the Company views those markets as an opportunity. The Company has had 6 to 9 percent compounded annual sales growth in developing 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.

2019 Water Systems research and development expenditures were primarily related to the following activities:

Electronic drives and controls for Pump and HVAC applications, including SubDrive Connect Plus, MonoDrive Utility, and Cerus X-Drive
Greywater pumping equipment, including the new High Temperature Condensate Pump Series and expanded FPS Non-Clog products up to 25 horsepower
Submersible and surface pumps for residential, commercial, municipal, and agricultural applications including the development of higher efficient systems to meet the DOE requirements
Submersible motor technology and motor protection, including expanded scope of the MagForce™ HES (High Efficiency Systems) from 1-335HP

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 fueling system applications.

Fueling Systems offers a complete array of components between the tank and the dispenser, including submersible pumps, station hardware, piping, sumps, vapor recovery and electronic controls. The Fueling Systems segment growth has been sustained by a commitment to protecting human health and the environment while delivering the lowest total cost of ownership. Fueling Systems takes steps to ensure its products are installed and maintained properly through robust global certification tools for their third-party contractors. The segment serves other energy markets such as power reliability systems and includes intelligent electronic devices that are designed for online monitoring for the power utility, hydroelectric, and telecommunication and data center infrastructure.

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
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2010 - Acquired PetroTechnik Limited, a United Kingdom distributor that designs and sources flexible and lightweight underground pipe
2012 - Acquired Flex-ing, Inc., a manufacturer of fueling equipment including stainless steel flexible hose connectors
2016 - Acquired GridSense, Inc., a manufacturer of remote monitoring equipment for distribution transformers and distribution lines
2018 - Acquired the assets of the Stationary Power Division (SPD) of Midtronics, Inc., a manufacturer of battery testing and monitoring equipment
Fueling Systems products are sold in highly competitive markets. Rising vehicle use is leading to more investment in fueling 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. 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 Fortive Corporation and Dover Corporation.

2019 Fueling Systems research and development expenditures were primarily related to the following activities:

Developed and launched a Corrosion Control System to reduce corrosion in diesel tanks
Developed and launched a Pressure/Vacuum Vent for controlling pressure to reduce emissions in an underground storage tank
Developed products to monitor retail fueling sites, including soda dispensing, tank corrosion, and vapor recovery systems

Distribution Segment
The Distribution Segment is operated as a collection of wholly owned leading groundwater distributors known as the Headwater Companies. Headwater Companies deliver quality products and leading brands to the industry, providing contractors with the availability and service they demand to meet their application challenges. The Distribution segment operates within the U.S. professional groundwater market. Highlights of the Distribution Segment are as follows:

2017 - Acquired controlling interests in three distributors in the U.S. professional groundwater market, creating the new Distribution Segment
2018 - Acquired Valley Farms Supply, Inc., a professional groundwater distributor operating in the mid-west
2019 - Acquired Milan Supply Company, a professional groundwater distributor operating in the mid-west

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

(In millions)201920182017
Research and development expense$20.8  $22.1  $20.8  

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. The Company believes that availability of fuel and energy is adequate to satisfy current and projected overall operations unless interrupted by government direction, allocation or other disruption.

Major Customers
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No single customer accounted for over 10 percent of net sales in 2019, 2018, or 2017. No single customer accounted for over 10 percent of gross accounts receivable in 2019 and 2018.

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

(In millions)February 11,
2020
February 12,
2019
Water Systems$53.2  $66.2  
Fueling Systems16.6  18.2  
Distribution4.7  5.9  
Consolidated$74.5  $90.3  

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 2020.  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 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.

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
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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 both of which have historically been volatile.  The Company does not generally engage in commodity hedging for raw materials and energy.  Significant increases in the prices of commodities, sourced components, finished goods, energy or other commodities could cause product prices to increase, which may reduce demand for products or make the Company more susceptible to competition.  Furthermore, in the event the Company is unable to pass along increases in operating costs to its customers, margins and profitability may be adversely affected.

The 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 governmental 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.  Environmental legislation related to air quality and fuel 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 U.S. or 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.  The Company cannot predict whether any proposed changes in 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 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.

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, Turkey and Argentina.  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.

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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.  Failure to manage or mitigate these risks could adversely affect the Company’s results of operations and financial condition.
 
The Company’s products are sold in highly competitive markets, by numerous competitors whose actions could negatively impact sales volume, pricing and profitability.  The Company is a global leader in the production and marketing of groundwater and fuel pumping systems.  End user demand, distribution relationships, industry consolidation, new product capabilities of the Company’s competitors or new competitors, and many other factors contribute to a highly competitive environment.  Additionally, some of the Company’s competitors have substantially greater financial resources than the Company.  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.
 
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, Turkey and Argentina. 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. 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 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 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 subject to certain U.S. and international data protection and cybersecurity regulations. Complying with these laws may subject the Company to additional costs or require changes to the Company’s business practices. Any inability to adequately address privacy and security concerns or comply with applicable privacy and data security laws, rules and regulations could expose the Company to potentially significant liabilities.
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.

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ITEM 2. PROPERTIES

Franklin Electric serves customers worldwide with over 175 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 / SegmentPurposeOwn/Lease
Santa Catarina, Brazil / Water & FuelingManufacturing/Distribution/SalesOwn
Sao Paulo, Brazil / Water & FuelingManufacturing/Distribution/SalesOwn
Jiangsu Province, China / Water & FuelingManufacturingOwn
Brno, Czech Republic / WaterManufacturingOwn
Vicenza, Italy / WaterManufacturingOwn
Nuevo Leon, Mexico / Water & FuelingManufacturingOwn
Edenvale, South Africa / WaterManufacturingOwn
Izmir, Turkey / WaterManufacturing/Distribution/Sales/R&DOwn
Oregon, United States / WaterManufacturing/Distribution/Sales/R&DLease
Montana, United States / DistributionDistributionOwn
North Carolina, United States / DistributionDistributionOwn
Oklahoma, United States / WaterManufacturingOwn
Wisconsin, United States / FuelingManufacturing/Distribution/Sales/R&DOwn

The Company also owns and leases other smaller 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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INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Current executive officers of the Company, their ages, current position, and business experience during at least the past five years as of December 31, 2019, are as follows:

 
Name
 
Age
 
Position Held
Period Holding Position
Gregg C. Sengstack61Chairman of the Board and Chief Executive Officer2015 - present
President and Chief Executive Officer2014 - 2015
President and Chief Operating Officer2011 - 2014
DeLancey W. Davis54Vice President and President, Headwater Companies2017 - present
Vice President and President, North America Water Systems2012 - 2017
Donald P. Kenney59Vice President and President, Global Water2019 - present
Vice President and President, North America Water Systems2017 - 2019
Vice President and President, Energy Systems2014 - 2017
President, Energy Systems2013 - 2014
President, Fueling Systems1991 - 2013
John J. Haines56Vice President, Chief Financial Officer2008 - present
Julie S. Freigang52Vice President, Chief Information Officer2015 - present
Chief Information Officer2014 - 2015
Vice President, Information Technologies - Eaton Corporation2011 - 2014
Steven W. Aikman60Vice President, Global Water Systems Engineering2010 - present
Dr. Paul N. Chhabra46Vice President, Global Product Supply2018 - present
Vice President, Global Supply Chain - Applied Materials2016 - 2018
Managing Director, Manufacturing Operations - Applied Materials2014 - 2016
Senior Director, Supply Chain - SunPower Corporation2014 - 2014
Senior Director, Manufacturing Operations - Applied Materials2010 - 2013
Jonathan M. Grandon44Vice President, Chief Administrative Officer, General Counsel and Secretary2016 - present
Vice President, Integration - Zimmer Biomet2015 - 2016
Senior Vice President and General Counsel - Biomet2014 - 2015
Vice President and Division General Counsel, Associate General Counsel, Corporate - Biomet2013 - 2014
Partner - Ropes & Gray LLP2008 - 2013
Jay J. Walsh50Vice President and President, Fueling Systems2019 - present
President, Fueling Systems2017 - 2019
Executive Vice President, Fueling Systems2013 - 2017
Vice President, Business Development, Fueling Systems2002 - 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 11, 2020 was 682. The Company’s stock is traded on the NASDAQ Global Select Market under the symbol FELE.

Dividends paid per common share as quoted by the NASDAQ Global Select Market for 2019 and 2018 were as follows:

Dividends per Share
 20192018
   
1st Quarter$.1450  $.1075  
2nd Quarter.1450  .1200  
3rd Quarter.1450  .1200  
4th Quarter.1450  .1200  

The Company has increased dividend payments on an annual basis for 27 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 2019. The maximum number of shares that may still be purchased under this plan as of December 31, 2019 is 1,255,970.

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.
fele-20191231_g2.jpg

Hypothetical $100 invested on January 3, 2015 (fiscal year-end 2014) in Franklin Electric common stock (FELE), Guggenheim S&P Global Water Index, and Russell 2000 Index, assuming reinvestment of dividends:
 
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YE 201420152016201720182019
FELE$100  $72  $104  $122  $114  $153  
Guggenheim S&P Global Water100  98  106  147  132  174  
Russell 2000100  96  116  131  117  144  

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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)20192018201720162015
(e)(d)(c)
Operations:
Net sales$1,314,578  $1,298,129  $1,124,909  $949,856  $924,923  
Gross profit428,103  432,366  376,982  331,406  297,608  
Interest expense8,245  9,839  10,322  8,732  10,039  
Income tax expense20,836  14,890  25,994  24,798  12,625  
Net income attributable to Franklin Electric Co., Inc.95,483  105,877  78,180  78,745  72,945  
Depreciation and amortization36,977  38,604  38,506  35,534  35,476  
Capital expenditures22,112  23,417  33,379  37,624  25,933  
Balance sheet:
Working capital (a)(f)381,680  324,022  343,230  326,058  293,450  
Property, plant, and equipment, net201,328  207,064  215,694  196,137  190,039  
Total assets (a) (b)1,194,743  1,182,365  1,185,353  1,039,905  996,111  
Long-term debt (a)93,141  94,379  125,596  156,544  187,806  
Shareholders’ equity796,545  733,872  700,657  613,445  557,700  
Other data:
Net income attributable to Franklin Electric Co., Inc., to sales7.3 %8.2 %7.0 %8.3 %7.9 %
Net income attributable to Franklin Electric Co., Inc., to average total assets (b)8.0 %8.9 %7.0 %7.7 %7.0 %
Current ratio (g)3.1  2.3  2.4  3.1  3.0  
Number of common shares outstanding46,391  46,326  46,630  46,376  46,219  
Per share:
Market price range
High$57.06  $51.05  $47.10  $44.50  $39.56  
Low$42.05  $39.15  $36.55  $23.93  $26.75  
Net income attributable to Franklin Electric Co., Inc., per weighted average common share$2.04  $2.25  $1.67  $1.67  $1.52  
Net income attributable to Franklin Electric Co., Inc., per weighted average common share, assuming dilution$2.03  $2.23  $1.65  $1.65  $1.50  
Book value (h)$17.04  $15.64  $14.89  $13.12  $11.73  
Dividends per common share$0.5800  $0.4675  $0.4225  $0.3975  $0.3825  

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, year 2015 was restated above to reflect the adoption of the ASU.
b.In 2019, the Company adopted FASB ASU 2016-02, Leases (Topic 842), ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842): Targeted Improvements, which requires lessees to present right-of-use assets and lease liabilities on the balance sheet. Balances prior to 2019 were not retrospectively adjusted.
c.Includes the results of operations of the Company’s 100% wholly owned subsidiaries since its acquisition of three groundwater distribution companies (2M Company, Inc. (“2M”), Drillers Service, Inc. (“DSI”), and Western Hydro, LLC
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(“Western Hydro”)) in the second quarter of 2017, and 100% 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 2017.
d.Includes the results of operations of the Company’s 100% wholly owned subsidiaries Industrias Rotor Pump S.A. and Valley Farms Supply, Inc. acquired during the quarters ended September 30, 2018 and March 31, 2018, respectively. In addition, includes substantially all of the assets of the Stationary Power Division (“SPD”) of Midtronics, Inc. which were acquired during the quarter ended September 30, 2018.
e.Includes the results of operations of the Company’s 100% wholly owned subsidiaries Milan Supply Company and First Sales, LLC acquired during the quarters ended March 31, 2019 and September 30, 2019, respectively, and 100% of the Company’s owned subsidiary, Pluga Pumps and Motors Private Limited since the Company’s acquisition of the remaining ownership in the second quarter of 2019.
f.Working capital = Current assets minus current liabilities.
g.Current ratio = Current assets divided by current liabilities.
h.Book value = Shareholders’ equity divided by weighted average common shares, assuming full dilution.



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

2019 vs. 2018

OVERVIEW

Sales in 2019 increased by 1 percent from the prior year. The sales increase was led by acquisition related sales, as well as volume and price increases of about 1 percent. The impact of foreign currency translation decreased sales by about 3 percent. The Company's consolidated gross profit was $428.1 million for 2019, a decrease of $4.3 million or about 1 percent from 2018. The gross profit as a percent of net sales decreased 70 basis points to 32.6 percent in 2019 from 33.3 percent in 2018. For 2019, diluted earnings per share were $2.03, down from 2018 diluted earnings per share of $2.23.

RESULTS OF OPERATIONS

Net Sales
Net sales in 2019 were $1,314.6 million, an increase of $16.5 million or about 1 percent compared to 2018 sales of $1,298.1 million. The incremental impact of sales from acquired businesses was $38.1 million. Sales revenue decreased by $34.8 million or about 3 percent in 2019 due to foreign currency translation. The sales change in 2019, excluding acquisitions and foreign currency translation, was an increase of $13.2 million or about 1 percent.

Net Sales
(In millions)201920182019 v 2018
Water Systems$781.5  $800.1  $(18.6) 
Fueling Systems293.6  284.6  9.0  
Distribution291.8  269.6  22.2  
Eliminations/Other(52.3) (56.2) 3.9  
Consolidated$1,314.6  $1,298.1  $16.5  

Net Sales-Water Systems
Water Systems sales were $781.5 million in 2019, a decrease of $18.6 million or about 2 percent versus 2018. The incremental impact of sales from acquired businesses was $13 million. Foreign currency translation changes decreased sales $30.5 million, or about 4 percent, compared to sales in 2018. The Water Systems organic sales change in 2019 was a decrease of $1.1 million.

Water Systems sales in the U.S. and Canada decreased by about 2 percent compared to 2018. The incremental impact of sales from acquired businesses was $5.4 million. Sales revenue decreased by $2.5 million or about 1 percent in 2019 due to foreign currency translation. In 2019, sales of dewatering equipment decreased by about 9 percent when compared to the prior year due to lower sales in rental channels and higher sales in 2018 driven by regulatory demand. Sales of groundwater pumping equipment decreased by about 4 percent on lower residential and agricultural system sales primarily to the Headwater companies, versus 2018. Sales of other surface pumping equipment were flat to prior year.

Water Systems sales in markets outside the U.S. and Canada decreased by about 3 percent compared to 2018. Sales revenue decreased by $28.0 million or about 8 percent in 2019 due to foreign currency translation. The incremental impact of sales from acquired businesses was $7.6 million. International Water Systems sales change in 2019, excluding acquisitions and foreign currency translation, was an increase of about 3 percent. International Water Systems sales grew in all three major international markets, Latin American, Asia Pacific and the European, Middle East and African markets.

Net Sales-Fueling Systems
Fueling Systems sales were $293.6 million in 2019, an increase of $9.0 million or about 3 percent from 2018. The incremental impact of sales from acquired businesses was $3.2 million. Foreign currency translation changes decreased sales $4.3 million or about 2 percent compared to sales in 2018. The Fueling Systems organic sales change in 2019 was an increase of $10.1 million or about 4 percent.




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Fueling Systems sales in the U.S. and Canada grew by about 11 percent during 2019 with most of the sales growth coming from fuel management and pumping systems, piping and service station hardware product lines. Internationally, Fueling Systems revenues declined by about 5 percent due to lower sales in China and Africa partially offset by higher sales in India and other regions. China sales were about $45 million in 2019 compared to 2018 sales of about $52 million.

Net Sales-Distribution
Distribution sales were $291.8 million in 2019, versus 2018 sales of $269.6 million. The incremental impact of sales from acquired businesses was $21.9 million. Distribution segment organic sales change was an increase of $0.3 million compared to 2018.

Cost of Sales
Cost of sales as a percent of net sales for 2019 and 2018 was 67.4 percent and 66.7 percent, respectively. Correspondingly, the gross profit margin was 32.6 percent and 33.3 percent for both years. The Company’s consolidated gross profit was $428.1 million for 2019, down $4.3 million from the gross profit of $432.4 million in 2018. The gross profit decline was primarily due to lower sales volumes and subsequent lower gross profit from the Water Systems segment which more than offset higher Fueling Systems and Distribution sales.

Selling, General and Administrative (“SG&A”)
Selling, general, and administrative expenses were $298.5 million in 2019 and decreased by $0.2 million compared to $298.7 million last year. The increase in SG&A expenses from acquired businesses were $9.1 million. Excluding the acquired entities, the Company’s SG&A expenses in 2019 were $289.4 million and decreased by $9.3 million or about 3 percent in 2019 compared to last year, partially due to the effect of foreign currency translation (primarily a stronger U.S. dollar relative to foreign currencies) in 2019 reducing SG&A expenses versus the prior year.

Restructuring Expenses
Restructuring expenses for 2019 were $2.5 million. Restructuring expenses were $1.7 million in the Water Systems segment and $0.8 million in the Distribution segment. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities and distribution branch closings and consolidations. Restructuring expenses for 2018 were $1.7 million. Restructuring expenses for 2018 were $0.6 million in the Water Systems segment, $0.3 million in the Fueling Systems segment and $0.8 million in the Distribution segment. Restructuring expenses for 2018 were primarily from continued miscellaneous manufacturing realignment activities and distribution branch closings and consolidations.

Operating Income
Operating income was $127.1 million in 2019, down $4.9 million or 4 percent from $132.0 million in 2018.

Operating income (loss)
(In millions)201920182019 v 2018
Water Systems$103.0  $112.7  $(9.7) 
Fueling Systems75.8  70.6  5.2  
Distribution3.6  3.4  0.2  
Eliminations/Other(55.3) (54.7) (0.6) 
Consolidated$127.1  $132.0  $(4.9) 

Operating Income-Water Systems
Water Systems operating income was $103.0 million in 2019 compared to $112.7 million in 2018, a decrease of 9 percent. Operating income margin for 2019 was 13.2 percent compared to 2018 operating income margin of 14.1 percent. Operating income decreased in Water Systems primarily from lower sales.

Operating Income-Fueling Systems
Fueling Systems operating income was $75.8 million in 2019 compared to $70.6 million in 2018. The operating income margin was 25.8 percent compared to 2018 operating income margin of 24.8 percent. The increase in operating income was primarily due to higher sales.

Operating Income-Distribution
Distribution operating income was $3.6 million in 2019 and operating income margin was 1.2 percent. Distribution operating income was $3.4 million in 2018 and operating income margin was 1.3 percent.

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Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of inter-segment sales and profit eliminations and unallocated general and administrative expenses. The inter-segment profit elimination impact in 2019 compared to 2018 reduced operating income about $1.3 million. The inter-segment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until the transferred product is sold from the Distribution segment to its customer. Unallocated general and administrative expenses were lower by $0.7 million or about 1 percent.

Interest Expense
Interest expense for 2019 and 2018 was $8.2 million and $9.8 million, respectively.

Other Income or Expense
Other income or expense was a loss of $0.4 million and $1.0 million, respectively in 2019 and 2018.

Foreign Exchange
Foreign currency-based transactions for 2019 was a loss of $1.6 million due primarily to the Argentinian Peso weakening relative to the U.S. dollar. Foreign currency-based transactions for 2018 was a loss of $0.7 million due to movements in several currencies relative to the U.S. dollar, with the Turkish Lira, South African Rand, Argentinian Peso and Mexican Peso being the most significant.

Income Taxes
The provision for income taxes in 2019 and 2018 was $20.8 million and $14.9 million, respectively. The effective tax rate for 2019 was about 18 percent and before the impact of discrete events was about 20 percent. The effective tax rate for 2018 was about 12 percent and before the impact of discrete events was about 19 percent. The tax rate was lower than the statutory rate of 21 percent primarily due to foreign earnings taxed at lower statutory rates, as well as recognition of the U.S. deduction for Foreign Derived Intangible Income, and certain incentives and discrete events. Discrete events in 2018 include a net benefit related to the release of valuation allowances on deferred taxes in multiple jurisdictions. In 2020, the Company estimates its effective tax rate will be about 18 to 20 percent.

Net Income
Net income for 2019 was $96.0 million compared to 2018 net income of $105.5 million. Net income attributable to Franklin Electric Co., Inc. for 2019 was $95.5 million, or $2.03 per diluted share, compared to 2018 net income attributable to Franklin Electric Co., Inc. of $105.9 million or $2.23 per diluted share.

2018 vs. 2017
Discussion of fiscal year 2017 items and the year-over-year comparison of changes in the Company's financial condition and results of operation as of and for the fiscal years ended December 31, 2018 and December 31, 2017 can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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 for at least the next twelve months. The Company believes its capital resources and liquidity position at December 31, 2019 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, 2019, the Company had a $300.0 million revolving credit facility. The facility is scheduled to mature on October 28, 2021. As of December 31, 2019, the Company had $276.5 million borrowing capacity under the Credit Agreement as $4.5 million in letters of commercial and standby letters of credit were outstanding and undrawn and $19.0 million revolver borrowing was drawn and outstanding as of the end of the year.
The Company also has other long-term debt borrowings outstanding as of December 31, 2019. See Note 10 - Debt for additional specifics regarding these obligations and future maturities.
At December 31, 2019, the Company had $40 million of cash and cash equivalents held in foreign jurisdictions, which the company intends to use to fund foreign operations. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions.
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Cash Flows
The following table summarizes significant sources and uses of cash and cash equivalents:

(in thousands)201920182017
Net cash provided by operating activities$177.7  $128.4  $66.8  
Net cash used in investing activities(41.8) (66.3) (84.7) 
Net cash used in financing activities(126.7) (66.8) (22.6) 
Impact of exchange rates on cash and cash equivalents(4.0) (3.4) 3.4  
Change in cash and cash equivalents$5.2  $(8.1) $(37.1) 

Cash Flows Provided by Operating Activities
2019 vs. 2018
Net cash provided by operating activities was $177.7 million for 2019 compared to $128.4 million for 2018. The increase in cash provided by operating activities was primarily due to a decrease of $36.4 million in working capital requirements related to a reduction in inventory and more favorable payment terms with vendors. The company also experienced lower income tax payments in the current year. Increases in cash provided by operating activities were partially offset by the decrease in net income from the prior year.

2018 vs. 2017
Discussion of fiscal year 2017 items and the year-over-year comparison of changes in our financial condition and results of operation as of and for the fiscal years ended December 31, 2018 and December 31, 2017 can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Cash Flows Used in Investing Activities
2019 vs. 2018
Net cash used in investing activities was $41.8 million in 2019 compared to $66.3 million in 2018. The decrease is primarily attributable to decreased acquisition activity.

2018 vs. 2017
Discussion of fiscal year 2017 items and the year-over-year comparison of changes in our financial condition and results of operation as of and for the fiscal years ended December 31, 2018 and December 31, 2017 can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Cash Flows Used in Financing Activities
2019 vs. 2018
Net cash used in financing activities was $126.7 million in 2019 compared to $66.8 million in 2018. The increase in cash used in financing activities was primarily attributable to an increase in debt repayments, up approximately $72 million in the current year consistent with reduced acquisition activity. Other uses of cash in financing activities include dividend payments, which increased by $5.1 million in the current year compared to dividends paid in the prior year, and proceeds from common stock issuance, which decreased $5.8 million compared to prior year. These were offset by a decrease in common stock repurchases of $23.4 million.

2018 vs. 2017
Discussion of fiscal year 2017 items and the year-over-year comparison of changes in our financial condition and results of operation as of and for the fiscal years ended December 31, 2018 and December 31, 2017 can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

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:

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(In millions)   More than
 Total20202021-20222023-20245 years
Debt$115.0  $21.8  $2.5  $2.7  $88.0  
Debt interest24.1  4.5  7.3  7.1  5.2  
Financing leases0.1  0.1  —  —  —  
Operating leases30.2  10.8  12.2  4.5  2.7  
Purchase obligations6.1  6.1  —  —  —  
Income Taxes-U.S. Tax Cuts and Jobs Act transition tax
$16.3  $1.6  $3.1  $6.8  $4.8  
 $191.8  $44.9  $25.1  $21.1  $100.7  

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 $1 million in 2020. The Company also has unrecognized tax benefits, none of which are included in the table above. The unrecognized tax benefits of approximately $0.4 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $0.1 million.

ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements, refer to Note 2 - Accounting Pronouncements, in the Notes to Consolidated Financial Statements in the sections entitled ""Adoption of New Accounting Standards" and "Accounting Standards Issued But Not Yet Adopted", included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

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 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 2019.

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

Trade Names and Goodwill
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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.  In 2017, as a result of the Headwater acquisition, the Company added a Distribution reporting unit. The Distribution reporting unit was subject to qualitative testing in the year of acquisition. In 2018 and 2019, all reporting units were tested using the quantitative valuation approaches listed below. 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 2019 was $256.1 million.

During the fourth quarter of 2019, the Company completed its annual impairment test of goodwill and trade names 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 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.

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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. The discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. Market conditions have caused the weighted-average discount rate to move from 4.28 percent last year to 3.12 percent this year for the domestic pension plans and from 4.18 percent last year to 2.98 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 $3.7 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 4.90 percent as of the fiscal year ended 2019.  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.

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 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 the Company’s 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 2019 mix of foreign currencies, the Company estimates that a hypothetical strengthening of the US Dollar by about 2 percent would have reduced the Company’s 2019 sales by about 1 percent.

Interest Rate Risk

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”). Borrowings under the Credit Agreement may be made either at (i) a Eurocurrency rate based on LIBOR plus an applicable margin or (ii) an alternative base rate as defined in the Credit Agreement. The Company had $19.0 million borrowings at year-end 2019 under the Credit Agreement.  The Company estimates that a hypothetical increase of 100 basis points in the LIBOR rate would have increased interest expense by $1 million during 2019. 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.

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Additionally, LIBOR, the index administered by the Intercontinental Exchange, will be phased out after 2021. The United States, using the analysis performed by the ARRC (Alternative Reference Rates Committee), elected the Secured Overnight Financing Rate (“SOFR”) as a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury Securities. The New York Fed commenced publishing the SOFR rate daily beginning April 3, 2018. The Company is still analyzing the potential impacts from changing from LIBOR to SOFR based rates.

Commodity Price Exposures

Portions of the Company’s business are exposed to volatility in the prices of certain commodities, such as copper, steel 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 2019 use of commodities, the Company estimates that a hypothetical 10 percent adverse movement in prices for raw metal commodities would result in about a 1 percent decrease of gross margin as a percent of sales.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

(In thousands, except per share amounts)201920182017
Net sales$1,314,578  $1,298,129  $1,124,909  
Cost of sales886,475  865,763  747,927  
Gross profit428,103  432,366  376,982  
Selling, general, and administrative expenses298,451  298,706  265,447  
Restructuring expense2,519  1,666  4,307  
Operating income127,133  131,994  107,228  
Interest expense(8,245) (9,839) (10,322) 
Other income/(expense), net(412) (1,042) 6,656  
Foreign exchange income/(expense)(1,641) (706) 1,025  
Income before income taxes116,835  120,407  104,587  
Income tax expense20,836  14,890  25,994  
Net income$95,999  $105,517  $78,593  
Less: Net loss/(income) attributable to noncontrolling interests(516) 360  (413) 
Net income attributable to Franklin Electric Co., Inc.$95,483  $105,877  $78,180  
Income per share:
Basic$2.04  $2.25  $1.67  
Diluted$2.03  $2.23  $1.65  

See Notes to Consolidated Financial Statements.
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FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)201920182017
Net income$95,999  $105,517  $78,593  
Other comprehensive income/(loss), before tax:
     Foreign currency translation adjustments(5,659) (34,723) 17,937  
     Employee benefit plan activity:
        Net loss arising during period(5,006) (2,241) (274) 
       Amortization arising during period2,913  3,327  3,012  
Other comprehensive income/(loss)(7,752) (33,637) 20,675  
Income tax (expense)/benefit related to items of other comprehensive loss589  (307) (534) 
Other comprehensive income/(loss), net of tax(7,163) (33,944) 20,141  
Comprehensive income88,836  71,573  98,734  
Less: Comprehensive income/(loss) attributable to noncontrolling interests544  (332) (251) 
Comprehensive income attributable to Franklin Electric Co., Inc.$88,292  $71,905  $98,985  


See Notes to Consolidated Financial Statements.

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FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)20192018
ASSETS  
Current assets:  
Cash and cash equivalents$64,405  $59,173  
Receivables, less allowances of $3,705 and $4,394, respectively
173,327  172,899  
Inventories:
Raw material98,286  98,858  
Work-in-process18,392  18,649  
Finished goods183,568  196,542  
Total inventories300,246  314,049  
Other current assets29,466  33,758  
Total current assets567,444  579,879  
Property, plant, and equipment, at cost:
Land and buildings142,189  144,299  
Machinery and equipment276,541  269,484  
Furniture and fixtures43,631  49,426  
Other29,293  22,795  
Property, plant, and equipment, gross491,654  486,004  
Less: Allowance for depreciation(290,326) (278,940) 
Property, plant, and equipment, net201,328  207,064  
Right-of-Use Asset, net27,621    
Deferred income taxes9,171  8,694  
Intangible assets, net131,127  135,052  
Goodwill256,059  248,748  
Other assets1,993  2,928  
Total assets$1,194,743  $1,182,365  

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20192018
LIABILITIES AND EQUITY  
Current liabilities:  
Accounts payable$82,593  $76,652  
Accrued expenses and other current liabilities68,444  64,811  
Current lease liability9,838    
Income taxes3,010  2,419  
Current maturities of long-term debt and short-term borrowings21,879  111,975  
Total current liabilities