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

FORM 10-Q
_________

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018

OR

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

logoa04.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)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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


1


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

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

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  o
NO x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 
 
Outstanding at
Class of Common Stock Par Value
 
July 27, 2018
$0.10
 
46,715,822 shares





2


FRANKLIN ELECTRIC CO., INC.
TABLE OF CONTENTS

 
 
 
Page
PART I.
FINANCIAL INFORMATION
 
Number
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 


3


PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Second Quarter Ended
 
Six Months Ended
(In thousands, except per share amounts)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Net sales
$
343,970

 
$
305,349

 
$
639,600

 
$
525,601

Cost of sales
227,894

 
202,596

 
424,542

 
347,032

Gross profit
116,076

 
102,753

 
215,058

 
178,569

Selling, general, and administrative expenses
74,965

 
68,231

 
151,240

 
125,227

Restructuring expense
637

 
251

 
644

 
566

Operating income
40,474

 
34,271

 
63,174

 
52,776

Interest expense
(2,606
)
 
(2,244
)
 
(5,034
)
 
(5,758
)
Other income/(expense), net
45

 
5,506

 
(159
)
 
6,178

Foreign exchange income/(expense)
(999
)
 
(372
)
 
(1,550
)
 
103

Income before income taxes
36,914

 
37,161

 
56,431

 
53,299

Income tax expense
6,875

 
6,917

 
5,177

 
7,121

Net income
$
30,039

 
$
30,244

 
$
51,254

 
$
46,178

Less: Net (income)/loss attributable to noncontrolling interests
458

 
(335
)
 
417

 
(539
)
Net income attributable to Franklin Electric Co., Inc.
$
30,497

 
$
29,909

 
$
51,671

 
$
45,639

Income per share:
 
 
 
 
 
 
 
Basic
$
0.65

 
$
0.64

 
$
1.10

 
$
0.97

Diluted
$
0.64

 
$
0.64

 
$
1.09

 
$
0.97

Dividends per common share
$
0.1200

 
$
0.1075

 
$
0.2275

 
$
0.2075


See Notes to Condensed Consolidated Financial Statements.

4


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
 
Second Quarter Ended
 
Six Months Ended
(In thousands)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Net income
$
30,039

 
$
30,244

 
$
51,254

 
$
46,178

Other comprehensive income/(loss), before tax:
 
 
 
 
 
 
 
     Foreign currency translation adjustments
(32,736
)
 
6,101

 
(25,741
)
 
14,504

     Employee benefit plan activity
774

 
747

 
1,552

 
1,490

Other comprehensive income/(loss)
(31,962
)
 
6,848

 
(24,189
)
 
15,994

Income tax expense related to items of other comprehensive income
(176
)
 
(252
)
 
(353
)
 
(504
)
Other comprehensive income/(loss), net of tax
(32,138
)
 
6,596

 
(24,542
)
 
15,490

Comprehensive income/(loss)
(2,099
)
 
36,840

 
26,712

 
61,668

Less: Comprehensive loss attributable to noncontrolling interests
(469
)
 
(364
)
 
(376
)
 
(153
)
Comprehensive income/(loss) attributable to Franklin Electric Co., Inc.
$
(1,630
)
 
$
37,204

 
$
27,088

 
$
61,821



See Notes to Condensed Consolidated Financial Statements.

5



FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, 2018
 
December 31, 2017
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
70,044

 
$
67,233

Receivables, less allowances of $4,928 and $4,430, respectively
206,542

 
171,007

Inventories:
 
 
 
Raw material
112,061

 
109,590

Work-in-process
19,686

 
16,742

Finished goods
196,885

 
185,993

Total inventories
328,632

 
312,325

Other current assets
34,735

 
38,566

Total current assets
639,953

 
589,131

 
 
 
 
Property, plant, and equipment, at cost:
 
 
 

Land and buildings
140,225

 
142,088

Machinery and equipment
266,967

 
268,373

Furniture and fixtures
48,606

 
52,916

Other
23,179

 
22,810

Property, plant, and equipment, gross
478,977

 
486,187

Less: Allowance for depreciation
(273,880
)
 
(270,493
)
Property, plant, and equipment, net
205,097

 
215,694

Deferred income taxes
8,765

 
8,929

Intangible assets, net
123,497

 
131,471

Goodwill
235,408

 
236,810

Other assets
3,026

 
3,318

Total assets
$
1,215,746

 
$
1,185,353






6


 
June 30, 2018
 
December 31, 2017
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
82,123

 
$
79,348

Accrued expenses and other current liabilities
57,563

 
63,887

Income taxes
3,589

 
2,213

Current maturities of long-term debt and short-term borrowings
167,803

 
100,453

Total current liabilities
311,078

 
245,901

Long-term debt
94,920

 
125,596

Income taxes payable non-current
12,791

 
17,391

Deferred income taxes
25,397

 
30,913

Employee benefit plans
38,472

 
42,178

Other long-term liabilities
17,300

 
19,251

 
 
 
 
Commitments and contingencies (see Note 14)

 

 
 
 
 
Redeemable noncontrolling interest
764

 
1,502

 
 
 
 
Shareholders' equity:
 
 
 
Common stock (65,000 shares authorized, $.10 par value) outstanding (46,543 and 46,630, respectively)
4,654

 
4,663

Additional capital
246,682

 
240,136

Retained earnings
634,992

 
604,905

Accumulated other comprehensive loss
(173,630
)
 
(149,047
)
Total shareholders' equity
712,698

 
700,657

Noncontrolling interest
2,326

 
1,964

Total equity
715,024

 
702,621

Total liabilities and equity
$
1,215,746

 
$
1,185,353


See Notes to Condensed Consolidated Financial Statements.



7


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended
(In thousands)
June 30, 2018
 
June 30, 2017
 
 
 
 
Cash flows from operating activities:
 
 
 

Net income
$
51,254

 
$
46,178

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
19,595

 
18,412

Share-based compensation
4,769

 
4,546

Deferred income taxes
(4,760
)
 
(3,361
)
Loss on disposals of plant and equipment
127

 
178

Gain on equity investment

 
(4,788
)
Foreign exchange (income)/expense
1,550

 
(103
)
Changes in assets and liabilities, net of acquisitions
 
 
 
Receivables
(40,812
)
 
(9,289
)
Inventory
(20,614
)
 
(31,792
)
Accounts payable and accrued expenses
(1,072
)
 
(24,712
)
Income taxes
(703
)
 
(3,481
)
Income taxes-U.S. Tax Cuts and Jobs Act
(4,600
)
 

Employee benefit plans
(1,718
)
 
(2,431
)
Other, net
2,153

 
(1,862
)
Net cash flows from operating activities
5,169

 
(12,505
)
Cash flows from investing activities:
 
 
 
Additions to property, plant, and equipment
(11,446
)
 
(18,621
)
Proceeds from sale of property, plant, and equipment
306

 
109

Cash paid for acquisitions, net of cash acquired
(8,428
)
 
(52,255
)
Other, net
199

 
153

Net cash flows from investing activities
(19,369
)
 
(70,614
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
110,054

 
169,284

Repayment of debt
(72,721
)
 
(122,088
)
Proceeds from issuance of common stock
1,795

 
2,047

Purchases of common stock
(10,953
)
 
(2,374
)
Dividends paid
(10,658
)
 
(10,199
)
Purchase of redeemable noncontrolling shares

 
(5,047
)
Net cash flows from financing activities
17,517

 
31,623

Effect of exchange rate changes on cash
(506
)
 
2,260

Net change in cash and equivalents
2,811

 
(49,236
)
Cash and equivalents at beginning of period
67,233

 
104,331

Cash and equivalents at end of period
$
70,044

 
$
55,095


8


 
Six Months Ended
(In thousands)
June 30, 2018
 
June 30, 2017
 
 
 
 
Cash paid for income taxes, net of refunds
$
15,829

 
$
14,583

Cash paid for interest
$
5,354

 
$
4,712

 
 
 
 
Non-cash items:
 
 
 

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

 
$
474

Payable to seller of Bombas Leao
$

 
$
24

Payable to seller of Valley Farms Supply, Inc.
$
450

 
$


See Notes to Condensed Consolidated Financial Statements.
 

9


FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
 
Page Number
 
 
 
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10.
Note 11.
Note 12.
Note 13.
Note 14.
Note 15.
Note 16.


10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of June 30, 2018, and for the second quarters and six months ended June 30, 2018 and June 30, 2017 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all accounting entries and adjustments (including normal, recurring adjustments) considered necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Operating results for the second quarter and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. For further information, including a description of the critical accounting policies of Franklin Electric Co., Inc. (the "Company"), refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

2. ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires entities to present only the service cost component of net periodic benefit cost as an operating expense (consistent with the presentation of other employee compensation costs). The other components of net periodic benefit cost are to be presented as a non-operating expense. The Company adopted ASU 2017-07 during the first quarter ended March 31, 2018. The prior year non-service cost component of net periodic benefit costs as of June 30, 2017 was less than $0.1 million and is not considered significant. The Company has included current year non-service costs as non-operating expense. The adoption of this pronouncement did not have a material impact to the Company’s condensed consolidated financial position, results of operations, or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09).  Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“Topic 605”), and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. The Company made the accounting policy election allowed by ASC 606-10-32-2A to continue to present sales tax on a net basis, consistent with current guidance in ASC 605-45-15-2(e). The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).  The Company adopted ASU 2014-09 during the first quarter ended March 31, 2018 utilizing the modified retrospective approach. The adoption of this ASU did not have a material impact to the Company’s condensed consolidated financial position, results of operations, or cash flow; however, the adoption of this ASU requires the Company to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company completed its assessment of the additional disclosure requirements with the following results:
Disaggregation of Revenue
The adoption of this ASU requires the Company to disaggregate revenue into categories to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors. As evidenced in Footnote 14 Segment and Geographic Information, the Company’s business consists of the Water, Fueling, Distribution, and Other segments. The Other segment includes unallocated corporate expenses and intersegment eliminations. A reconciliation of disaggregated revenue to segment revenue as well as Water Segment revenue by geographical regions is provided in Footnote 14, consistent with how the Company evaluates financial performance.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. The Company typically sells its products to customers by purchase order, and does not have any additional performance obligations included in contracts to customers other than the shipment of products. The Company records net sales revenues after discounts at the time of sale based on specific discount programs in effect, related historical data, and experience. The Company typically ships products FOB shipping at

11


which point control of the products passes to the customers. Any shipping and handling fees prior to shipment are considered activities required to fulfill the Company’s promise to transfer goods, and do not qualify as a separate performance obligation. Shipping and handling costs are recorded as a component of cost of sales. Additionally, the Company offers assurance-type warranties (vs. service warranties) which do not qualify as a separate performance obligation. Therefore, the Company allocates the transaction price based on a single performance obligation. The Company offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. The Company considers the performance obligation satisfied and recognizes revenue at a point in time, the time of shipment. The Company does not generally allow for refunds or returns to customers and does not have outstanding performance obligations for contracts with original durations of greater than one year at the end of the reporting period.
Contract Costs
The Company does not have outstanding contracts with an original term greater than one year; therefore, the Company expenses costs to obtain a contract as incurred.

Accounting Standards Issued But Not Yet Adopted
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act") and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The ASU is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and may be applied either at the beginning of the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company is currently assessing the impact of the ASU on the Company’s consolidated financial position, results of operations, and cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step two from the goodwill impairment test and instead requires an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. The ASU is effective on a prospective basis for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The Company is still determining the date of adoption for this ASU but does not anticipate the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

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 Company is implementing a lease accounting software package for lease administration and compliance reporting and is in the process of entering its lease data into this package. 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.
3. ACQUISITIONS
During the first quarter ended March 31, 2018, the Company acquired 100 percent of the ownership interests of Lansing, Michigan-based Valley Farms Supply, Inc. ("Valley Farms"), for a purchase price of approximately $9.2 million. Valley Farms is a professional groundwater distributor operating four locations in the State of Michigan and one in the State of Indiana. Valley Farms was acquired to serve customers in this region of the United States as part of the Company’s Distribution Segment, which is a collection of professional groundwater equipment distributors. The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and the acquired interest since the beginning of 2018, as results of operations for this acquisition is immaterial.
During the second quarter of 2017, the Company redeemed 10 percent of the noncontrolling interest of Impo, a Turkish subsidiary, increasing the Company’s ownership to 100 percent for approximately TRY 17.0 million, $5.0 million at the then current exchange rate.  The 10 percent redemption value was calculated using a specified formula and resulted in a reduction to the carrying value of TRY 0.6 million ($0.2 million).  Due to the immaterial nature of the redemption, the Company has not included full year proforma statements of income for the periods presented.

12



During the second quarter of 2017, the Company acquired controlling interests in three distributors (2M Company, Inc. (“2M”), Drillers Service, Inc. (“DSI”), and Western Hydro, LLC (“Western Hydro”), collectively referred to below as the “Headwater acquisitions”) in the U.S. professional groundwater market for a combined purchase price of approximately $57.4 million, subject to certain terms and conditions. The Company had previously prepaid a $3.0 million portion of the purchase price at the time of original investment. The Company funded the Headwater acquisitions with cash on hand and short-term borrowings from the Company’s Revolver (see Note 9 - Debt). The Headwater acquisitions provide the Company with a professional groundwater distribution channel throughout the United States.
The Company previously held equity interests in these entities, each of which was less than 50 percent, and accounted for by the equity method of accounting. The Company’s total interest in each of the entities is now 100 percent and the entities are included in the Company’s consolidated results effective from the date of acquisition. The original equity interests in the acquired entities were remeasured to their fair values as of the acquisition date (which aggregated was $20.6 million) based on the income approach, which utilized management estimates and consultation with an independent third-party valuation firm. Inputs included an analysis of the enterprise value based on financial projections and ownership percentages.
Intangible assets recognized due to the Headwater acquisitions were $5.7 million and consist of customer relationships, which will be amortized utilizing the straight-line method over 15 years. The fair value of the identifiable intangible assets has been estimated using an income approach, a valuation method that values an intangible asset by discounting the future incremental earnings that may be achieved by the subject intangible asset.
The goodwill of $33.9 million resulting from the Headwater acquisitions consists primarily of the benefits of forward channel integration opportunities and broadened product offerings. All of the goodwill was recorded as part of the Distribution segment, and only a portion ($7.8 million) is expected to be deductible for tax purposes.
The final purchase price assigned to the major identifiable assets and liabilities for the Headwater acquisitions on an aggregated basis is as follows:
(In millions)
 
 
Cash
 
$
2.7

Receivables
 
29.9

Inventory
 
56.0

Other current assets
 
5.1

Total current assets
 
93.7

Property, plant, and equipment
 
9.8

Intangible assets
 
5.7

Goodwill
 
33.9

Other assets
 
0.2

Total assets
 
143.3

Accounts payable
 
(19.6
)
Accrued liabilities and other current liabilities
 
(11.4
)
Current maturities of long-term debt
 
(31.6
)
Total current liabilities
 
(62.6
)
Long-term debt
 
(2.0
)
Other long-term liabilities
 
(0.7
)
Total liabilities
 
(65.3
)
Total
 
78.0

Less: Fair value of original equity interest
 
(20.6
)
Total purchase price
 
$
57.4



The fair values of the assets acquired and liabilities assumed related to the Headwater acquisitions were final as of June 30, 2018. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.


13


The following unaudited proforma financial information for the second quarters and six months ended June 30, 2018 and June 30, 2017 gives effect to the Headwater acquisitions by the Company as if the acquisitions had occurred as of January 1, 2017. These unaudited proforma condensed consolidated financial statements are prepared for informational purposes only and are not necessarily indicative of actual results or financial position that would have been achieved had the acquisitions been consummated on the dates indicated and are not necessarily indicative of future operating results or financial position of the consolidated companies. The unaudited proforma condensed consolidated financial statements do not give effect to any cost savings or incremental costs that may result from the integration of the Headwater acquisitions with the Company.
FRANKLIN ELECTRIC CO., INC.
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
 
 
 
 
 
Second Quarter Ended
 
Six Months Ended
(in millions, except per share amounts)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
As reported
$
344.0

 
$
305.3

 
$
639.6

 
$
525.6

Proforma
344.0

 
315.2

 
639.6

 
585.5

Net income:
 
 
 
 
 
 

As reported
$
30.5

 
$
29.9

 
$
51.7

 
$
45.6

Proforma
30.5

 
30.3

 
51.7

 
46.9

Basic earnings per share:
 
 
 
 
 
 

As reported
$
0.65

 
$
0.64

 
$
1.10

 
$
0.97

Proforma
0.65

 
0.65

 
1.10

 
1.00

Diluted earnings per share:
 
 
 
 
 
 

As reported
$
0.64

 
$
0.64

 
$
1.09

 
$
0.97

Proforma
0.64

 
0.64

 
1.09

 
0.99


Transaction costs were expensed as incurred under the guidance of FASB Accounting Standards Codification Topic 805, Business Combinations. There were $0.1 million and $0.2 million of transaction costs included in the "Selling, general, and administrative expenses" line of the Company's condensed consolidated statements of income for the second quarter and six months ended June 30, 2018, respectively. There were $0.1 million and $0.3 million of transactions costs incurred in the second quarter and six months ended June 30, 2017, respectively.
4. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures, provides guidance for defining, measuring, and disclosing fair value within an established framework and hierarchy. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs and to minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value within the hierarchy are as follows:

Level 1 – Quoted prices for identical assets and liabilities in active markets;

Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

As of June 30, 2018 and December 31, 2017, the assets measured at fair value on a recurring basis were as set forth in the table below:

14


 
 
 
(In millions)
June 30, 2018
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs (Level 3)
Cash equivalents
$
3.0

$
3.0

$

$

 
 
 
 
 
 
December 31, 2017
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Cash equivalents
$
3.0

$
3.0

$

$



The Company's Level 1 assets consist of cash equivalents which are generally comprised of foreign bank guaranteed certificates of deposit.

The Company has no assets measured on a recurring basis classified as Level 2 or Level 3.

Total debt, including current maturities, have carrying amounts of $262.6 million and $226.0 million and estimated fair values of $264 million and $230 million as of June 30, 2018 and December 31, 2017, respectively. In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily indicative of the amounts the Company could realize in a current market transaction. In determining the fair value of its debt, the Company uses estimates based on rates currently available to the Company for debt with similar terms and remaining maturities. Accordingly, the fair value of debt is classified as Level 2 within the valuation hierarchy.

5. FINANCIAL INSTRUMENTS
The Company’s deferred compensation stock program is subject to variable plan accounting and, accordingly, is adjusted for changes in the Company’s stock price at the end of each reporting period. The Company has entered into share swap transaction agreements (the "swap") to mitigate the Company’s exposure to the fluctuations in the Company's stock price. The swap has not been designated as a hedge for accounting purposes and is cancellable with 30 days' written notice by either party. As of June 30, 2018, the swap had a notional value based on 235,000 shares. For the second quarter and six months ended June 30, 2018, the swap resulted in a gain of $0.8 million and a loss of $0.3 million, respectively. For the second quarter and six months ended June 30, 2017, the swap resulted in a loss of $0.4 million and a gain of $0.4 million, respectively. Gains and losses resulting from the the swap were primarily offset by gains and losses on the fair value of the deferred compensation stock liability. All gains or losses and expenses related to the swap are recorded in the Company's condensed consolidated statements of income within the “Selling, general, and administrative expenses” line.

6. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amounts of the Company’s intangible assets are as follows:
(In millions)
 
June 30, 2018
 
December 31, 2017
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Amortized intangibles:
 
 

 
 

 
 

 
 

Patents
 
$
7.5

 
$
(6.8
)
 
$
7.5

 
$
(6.7
)
Technology
 
7.5

 
(6.1
)
 
7.5

 
(5.8
)
Customer relationships
 
135.6

 
(60.2
)
 
138.9

 
(57.6
)
Other
 
2.9

 
(2.5
)
 
2.9

 
(2.4
)
Total
 
$
153.5

 
$
(75.6
)
 
$
156.8

 
$
(72.5
)
Unamortized intangibles:
 
 
 
 
 
 
 
 
Trade names
 
45.6

 

 
47.2

 

Total intangibles
 
$
199.1

 
$
(75.6
)
 
$
204.0

 
$
(72.5
)

 
Amortization expense related to intangible assets for the second quarters ended June 30, 2018 and June 30, 2017 was $2.2 million and 4.3 million for the six months ended June 30, 2018 and June 30, 2017.


15


Amortization expense for each of the five succeeding years is projected as follows:
(In millions)
 
2018
 
2019
 
2020
 
2021
 
2022
 
 
$
8.5

 
$
8.4

 
$
8.3

 
$
7.9

 
$
7.7



The change in the carrying amount of goodwill by reportable segment for the six months ended June 30, 2018, is as follows:
(In millions)
 
 
 
 
Water Systems
 
Fueling Systems
 
Distribution
 
Consolidated
Balance as of December 31, 2017
 
$
139.3

 
$
63.6

 
$
33.9

 
$
236.8

Acquisitions
 

 

 
1.5

 
1.5

Foreign currency translation
 
(2.8
)
 
(0.1
)
 

 
(2.9
)
Balance as of June 30, 2018
 
$
136.5

 
$
63.5

 
$
35.4

 
$
235.4



7. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans - As of June 30, 2018, the Company maintained two domestic pension plans and three German pension plans. The Company used a December 31, 2017 measurement date for these plans. One of the Company's domestic pension plans covers one active management employee, while the other domestic plan covers all eligible employees (plan was frozen as of December 31, 2011). The two domestic and three German plans collectively comprise the 'Pension Benefits' disclosure caption.

Other Benefits - The Company's other post-retirement benefit plan provides health and life insurance to domestic employees hired prior to 1992.

The following table sets forth the aggregated net periodic benefit cost for all pension plans for the second quarters and six months ended June 30, 2018 and June 30, 2017:
(In millions)
Pension Benefits
 
Second Quarter Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Service cost
$
0.2

 
$
0.2

 
$
0.4

 
$
0.3

Interest cost
1.4

 
1.5

 
2.7

 
2.9

Expected return on assets
(2.2
)
 
(2.3
)
 
(4.3
)
 
(4.5
)
Amortization of:
 
 
 
 
 
 
 
Prior service cost

 

 

 

Actuarial loss
0.8

 
0.7

 
1.5

 
1.3

Settlement cost

 

 

 

Net periodic benefit cost
$
0.2

 
$
0.1

 
$
0.3

 
$

 
 
 
 
 
 
 
 


In the six months ended June 30, 2018, the Company made contributions of $1.1 million to the funded plans. The amount of contributions to be made to the plans during the calendar year 2018 will be finalized by September 15, 2018, based upon the funding level requirements identified and year-end valuation performed at December 31, 2017.

The following table sets fort the aggregated net periodic benefit cost for the post-retirement benefit plan for the second quarters and six months ended June 30, 2018 and June 30, 2017.


16


(In millions)
Other Benefits
 
Second Quarter Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Service cost
$

 
$

 
$

 
$

Interest cost
0.1

 
0.1

 
0.2

 
0.2

Expected return on assets

 

 

 

Amortization of:
 
 
 
 
 
 
 
Prior service cost

 
0.1

 

 
0.2

Actuarial loss

 

 
0.1

 

Settlement cost

 

 

 

Net periodic benefit cost
$
0.1

 
$
0.2

 
$
0.3

 
$
0.4

 
 
 
 
 
 
 
 


The Company adopted ASU 2017-07 in the first quarter ended March 31, 2018.  The service cost component of net periodic benefit cost above is recorded in Selling, general, and administrative expenses within the Condensed Consolidated Statements of Income, while the remaining components are recorded to Other income/(expense), net.  The prior year amounts have been reclassified to provide comparable presentation in line with the guidance.

8. INCOME TAXES
The Company’s effective tax rate from continuing operations for the six month period ended June 30, 2018 was 9.2 percent as compared to 13.4 percent for the six month period ended June 30, 2017. The effective tax rate is lower than the U.S. statutory rate of 21 percent primarily due to the recognition of the foreign-derived intangible income (FDII) provisions in the U.S. Tax Cuts and Jobs Act (Tax Act) and certain discrete events. For the second quarters of both 2018 and 2017 the effective tax rate was 18.6 percent.

The decrease in the effective tax rate for the six months ended June 30, 2018, compared with the same period in 2017, was primarily affected by the Tax Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The Company also reflected an estimated tax benefit of $3 million associated with the FDII provisions of the Tax Act that were effective for the first time during 2018. In addition, during the three month period ended March 31, 2018, the Company released a valuation allowance of $5.4 million related to state NOLs and incentives as it is no longer in a three-year cumulative loss position for certain state income tax purposes.

During the second quarter 2018, the Company paid $1.6 million to the one time transition tax liability imposed by the Tax Act, and in accordance with the IRS regulations has applied an estimated $3.0 million of 2017 overpayments.

The Company’s accounting for certain aspects of the Tax Act remains provisional. As noted at year-end 2017, the Company was able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and the remeasurement of deferred taxes. The Company has not made any additional measurement-period adjustments related to these items during the quarter as the analysis requires significant data from foreign subsidiaries that is not yet final due to future statutory deadlines as well as pending guidance from state and local tax authorities in the U.S. However, the Company is continuing to gather additional information to complete our accounting for these items. The accounting for the tax effects of the Tax Act will be completed in 2018.







17



9. DEBT
Debt consisted of the following:
(In millions)
 
June 30, 2018
 
December 31, 2017
Prudential Agreement
 
$
30.0

 
$
60.0

Tax increment financing debt
 
20.3

 
20.8

New York Life
 
75.0

 
75.0

Credit Agreement
 
133.8

 
67.0

Capital leases
 
0.1

 
0.1

Foreign subsidiary debt
 
3.8

 
3.5

Less: unamortized debt issuance costs
 
(0.3
)
 
(0.3
)
 
 
$
262.7

 
$
226.1

Less: current maturities
 
(167.8
)
 
(100.5
)
Long-term debt
 
$
94.9

 
$
125.6



Debt outstanding, excluding unamortized debt issuance costs, at June 30, 2018 matures as follows:
(In millions) 
 
Total
 
Year 1
 
Year 2
 
Year 3
 
Year 4
 
Year 5
 
More Than 5 Years
Debt
 
$
262.9

 
$
167.8

 
$
1.3

 
$
1.2

 
$
1.3

 
$
1.3

 
$
90.0

Capital leases
 
0.1

 

 
0.1

 

 

 

 

 
 
$
263.0

 
$
167.8

 
$
1.4

 
$
1.2

 
$
1.3

 
$
1.3

 
$
90.0



Prudential Agreement
The Company maintains the Third Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement") with an initial borrowing capacity of $250.0 million. The Prudential Agreement bears a coupon of 5.79 percent with a final maturity in 2019.  Principal installments of $30.0 million are payable annually, including the date of maturity of April 30, 2019, with any unpaid balance due at that time. There is no additional borrowing capacity resulting from principal payments made by the Company. As of June 30, 2018, the Company has $100.0 million borrowing capacity available under the Prudential Agreement.

Project Bonds
The Company, Allen County, Indiana and certain institutional investors maintain a Bond Purchase and Loan Agreement. Under the agreement, Allen County, Indiana issued a series of Project Bonds entitled “Taxable Economic Development Bonds, Series 2012 (Franklin Electric Co., Inc. Project)." The aggregate principal amount of the Project Bonds that were issued, authenticated, and are now outstanding thereunder was limited to $25.0 million. These Project Notes ("Tax increment financing debt") bear interest at 3.6 percent per annum. Interest and principal balance of the Project Notes are due and payable by the Company directly to the institutional investors in aggregate semi-annual installments commencing on July 10, 2013, and concluding on January 10, 2033.

New York Life
The Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life (the "New York Life Agreement"), entered into on May 27, 2015 for $150.0 million maximum aggregate principal borrowing capacity and authorized issuance of $75.0 million of floating rate senior notes due May 27, 2025. These senior notes have a floating interest rate of one-month USD LIBOR (2.10 percent as of June 30, 2018) plus a spread of 1.35 percent with interest-only payments due on a monthly basis. As of June 30, 2018, there was $75.0 million remaining borrowing capacity under the New York Life Agreement.

Credit Agreement
The Company maintains the Third Amended and Restated Credit Agreement (the "Credit Agreement”). The Credit Agreement has a maturity date of October 28, 2021 and commitment amount of $300.0 million. The Credit Agreement provides that the Borrowers may request an increase in the aggregate commitments by up to $150.0 million (not to exceed a total commitment of $450.0 million). Under the Credit Agreement, the Borrowers are required to pay certain fees, including a facility fee of 0.100% to 0.275% (depending on the Company's leverage ratio) of the aggregate commitment, which fee is payable

18


quarterly in arrears. Loans may be made either at (i) a Eurocurrency rate based on LIBOR plus an applicable margin of 0.75% to 1.60% (depending on the Company's leverage ratio) or (ii) an alternative base rate as defined in the Credit Agreement.

As of June 30, 2018, the Company had $133.8 million in outstanding borrowings which were primarily used for acquisition and working capital needs, $5.6 million in letters of credit outstanding, and $160.6 million of available capacity under the Credit Agreement.

Covenants
The Company’s credit agreements contain customary financial covenants. The Company’s most significant agreements and restrictive covenants are in the New York Life Agreement, the Project Bonds, the Prudential Agreement, and the Credit Agreement; each containing both affirmative and negative covenants. The affirmative covenants relate to financial statements, notices of material events, conduct of business, inspection of property, maintenance of insurance, compliance with laws and most favored lender obligations. The negative covenants include limitations on loans, advances and investments, and the granting of liens by the Company or its subsidiaries, as well as prohibitions on certain consolidations, mergers, sales and transfers of assets. The covenants also include financial requirements including a maximum leverage ratio of 3.50 to 1.00 and a minimum interest coverage ratio of 3.00 to 1.00. Cross default is applicable with the Prudential Agreement, the Project Bonds, the New York Life Agreement, and the Credit Agreement but only if the Company is defaulting on an obligation exceeding $10.0 million. The Company was in compliance with all financial covenants as of June 30, 2018.

10. EARNINGS PER SHARE
The Company calculates basic and diluted earnings per common share using the two-class method. Under the two-class method, net earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company's participating securities consist of share-based payment awards that contain a nonforfeitable right to receive dividends and therefore are considered to participate in undistributed earnings with common shareholders.

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.

The following table sets forth the computation of basic and diluted earnings per share:
 
Second Quarter Ended
 
Six Months Ended
(In millions, except per share amounts)
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Numerator:
 
 
 
 
 
 
 
Net income attributable to Franklin Electric Co., Inc.
$
30.5

 
$
29.9

 
$
51.7

 
$
45.6

Less: Undistributed earnings allocated to participating securities
0.2

 
0.2

 
0.4

 
0.3

Less: Undistributed earnings allocated to redeemable noncontrolling interest

 
(0.2
)
 

 

Net income available to common shareholders
$
30.3

 
$
29.9

 
$
51.3

 
$
45.3

Denominator:
 

 
 

 
 
 
 
Basic weighted average common shares outstanding
46.5

 
46.5

 
46.5

 
46.4

Effect of dilutive securities:
 

 
 

 
 
 
 
Non-participating employee stock options and performance awards
0.5

 
0.5

 
0.5

 
0.6

Diluted weighted average common shares outstanding
47.0

 
47.0

 
47.0

 
47.0

Basic earnings per share
$
0.65

 
$
0.64

 
$
1.10

 
$
0.97

Diluted earnings per share
$
0.64

 
$
0.64

 
$
1.09

 
$
0.97



There were 0.2 million and 0.4 million stock options outstanding for the second quarters ended June 30, 2018 and June 30, 2017, and 0.2 million and 0.3 million stock options outstanding for the six months ended June 30, 2018 and June 30, 2017, that were excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive.


19



11. EQUITY ROLL FORWARD
The schedule below sets forth equity changes in the six months ended June 30, 2018:
(In thousands)
Common Stock
 
Additional Paid in Capital
 
Retained Earnings
 
Minimum Pension Liability
 
Cumulative Translation Adjustment
 
Noncontrolling Interest
 
Total Equity
 
Redeemable Noncontrolling Interest
Balance as of December 31, 2017
$
4,663

 
$
240,136

 
$
604,905

 
$
(49,364
)
 
$
(99,683
)
 
$
1,964

 
$
702,621

 
$
1,502

Net income
 
 
 
 
51,671

 
 
 
 
 
385

 
52,056

 
(802
)
Dividends on common stock
 
 
 
 
(10,658
)
 
 
 
 
 
 
 
(10,658
)
 
 
Common stock issued
9

 
1,786

 
 
 
 
 
 
 
 
 
1,795

 
 
Common stock repurchased
(27
)
 
 
 
(10,926
)
 
 
 
 
 
 
 
(10,953
)
 
 
Share-based compensation
9

 
4,760

 
 
 
 
 
 
 
 
 
4,769

 
 
Currency translation adjustment
 
 
 
 
 
 
 
 
(25,782
)
 
(23
)
 
(25,805
)
 
64

Pension liability, net of tax
 
 
 
 
 
 
1,199

 
 
 
 
 
1,199

 
 
Balance as of June 30, 2018
$
4,654

 
$
246,682

 
$
634,992

 
$
(48,165
)
 
$
(125,465
)
 
$
2,326

 
$
715,024

 
$
764




12. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Changes in accumulated other comprehensive income/(loss) by component for the six months ended June 30, 2018 and June 30, 2017, are summarized below:
(In millions)
 
 
 
 
 
For the six months ended June 30, 2018:
Foreign Currency Translation Adjustments
 
Pension and Post-Retirement Plan Benefit Adjustments (2)
 
Total
Balance as of December 31, 2017
$
(99.7
)
 
$
(49.3
)
 
$
(149.0
)
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassifications
(25.8
)
 

 
(25.8
)
Amounts reclassified from accumulated other comprehensive income/(loss) (1)

 
1.2

 
1.2

Net other comprehensive income/(loss)
(25.8
)