Franklin Electric
Annual Report 2016

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________ FORM 10-K _________ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-362 FRANKLIN ELECTRIC CO., INC. (Exact name of registrant as specified in its charter) Indiana (State or other jurisdiction of incorporation or organization) 9255 Coverdale Road Fort Wayne, Indiana (Address of principal executive offices) 35-0827455 (I.R.S. Employer Identification No.) 46809 (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 (Title of each class) NASDAQ Global Select Market (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None (Title of each class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO 1 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO 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 NO 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 NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act. Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller Reporting Company 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 July 1, 2016 (the last business day of the registrant’s most recently completed second quarter) was $1,527,181,567. The stock price used in this computation was the last sales price on that date, as reported by NASDAQ Global Select Market. For purposes of this calculation, the registrant has excluded shares held by executive officers and directors of the registrant, including restricted shares and except for shares owned by the executive officers through the registrant's 401(k) Plan. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose. Number of shares of common stock outstanding at February 15, 2017: 46,382,586 shares DOCUMENTS INCORPORATED BY REFERENCE A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017 (Part III). 2  FRANKLIN ELECTRIC CO., INC. TABLE OF CONTENTS Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental Item - Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors, Executive Officers, and Corporate Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART I. 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. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page Number 4 7 10 10 11 12 14 16 31 32 67 67 69 70 70 70 70 70 71 73 75 3 PART I ITEM 1. BUSINESS Description of the Business Franklin Electric Co., Inc. (“Franklin Electric” or the “Company”) is an Indiana corporation founded in 1944 and incorporated in 1946. Named after America’s pioneer electrical engineer, Benjamin Franklin, Franklin Electric manufactured the first water- lubricated submersible motor for water systems, and the first submersible motor for fueling systems. With 2016 revenue of $949.9 million and approximately 5,200 employees, today the Company designs, manufactures and distributes water and fuel pumping systems, composed primarily of submersible motors, pumps, electronic controls and related parts and equipment. The Company’s water pumping systems move fresh and waste water for the housing, agriculture, and other industrial end markets. With a growing global footprint, the Company has also evolved into being a top supplier of submersible fueling systems at gas stations, making pumps, pipes, electronic controls, and monitoring devices. Fuel pumping systems account for the balance of the Company’s revenues. The Company's products are sold worldwide by its employee sales force and independent manufacturing representatives. The Company offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. Special inventory requirements are not necessary, and customer merchandise return rights do not extend beyond normal warranty provisions. Franklin Electric’s Key Factors for Success While maintaining a culture of safety and lean principals, Franklin Electric promises to deliver quality, availability, service, innovation, and value in every encounter the Company has with stakeholders, including direct or indirect customers, employees, shareholders, and suppliers. These key factors for success are a roadmap to ensure the Company consistently offers the best value to its customer. Markets and Applications The Company's business consists of two reporting segments based on the principal end market served: the Water Systems segment and the Fueling Systems segment. The Company includes unallocated corporate expenses in an “Other” segment that, together with the Water Systems and Fueling Systems segments, represent the Company. Segment and geographic information appears in Note 16, “Segment and Geographic Information” to the consolidated financial statements. The market for the Company's products is highly competitive and includes diversified accounts by size and type. The Company's Water Systems and Fueling Systems products and related equipment are sold to specialty distributors and some original equipment manufacturers (“OEMs”), as well as industrial and petroleum equipment distributors and major oil and utility companies. Water Systems Segment Water Systems is a global leader in the production and marketing of water pumping systems and is a technical leader in submersible motors, pumps, drives, electronic controls, and monitoring devices. The Water Systems segment designs, manufactures and sells motors, pumps, electronic controls and related parts and equipment primarily for use in groundwater, wastewater, and fuel transfer applications. Water Systems motors and pumps are used principally for pumping clean water and wastewater in a variety of residential, agricultural, and industrial applications. Water Systems also manufactures electronic drives and controls for the motors which control functionality and provide protection from various hazards, such as electric surges, over-heating, or dry wells or tanks. The Water Systems business has grown from a domestic submersible motor manufacturer to a global manufacturer of systems and components for the movement of water and automotive fuels. Founded in the 1940s, the Company made submersible motors for pumps for much of its history. About 10 years ago, it entered the pump business, and has since grown through acquisitions. Highlights of the Water Systems business transformation, from its origins to the present, are as follows: • • • • • 1950s - Domestic submersible motor manufacturer 1990s - Global manufacturer of submersible motors, electronic drives and controls selling to pump OEMs 2004 - Began to change the business model to include pumps and sell directly to wholesale distributors 2006 - Added adjacent pumping systems, acquired Little Giant Pump Company, United States 2007 - Expanded globally, acquired Pump Brands (Pty) Limited, South Africa 4 • • • • • • 2008 - Continued global expansion, acquired Industrias Schneider SA, Brazil 2009 - International acquisition, Vertical, S.p.A., Italy 2011 - International acquisition, Impo Motor Pompa Sanayi ve Ticaret A.S., Turkey 2012 - Acquired majority interest, 70.5%, in mobile pumping systems company, Pioneer Pump Holdings, Inc. ("PPH"), a United States company with subsidiaries in the United Kingdom and South Africa 2014 - International acquisitions, Bombas Leao S.A., Brazil and majority interest, 70%, of Pluga Pumps and Motors Private Limited, India 2015 - Acquired remaining 29.5% noncontrolling interest of PPH Water Systems products are sold in highly competitive markets. Water-pumping systems contribute about 75 to 80 percent of revenue. Significant portions of segment revenue come from selling groundwater and surface pumps to residential and commercial buildings, as well as agricultural sales which are more seasonal and subject to commodity price changes. The Water segment generates 40 percent of its revenue in developing markets, which often lack municipal water systems. As those countries bring systems up to date, the Company views those markets as an opportunity. The Company has had 15 to 20 percent compounded annual sales growth in those regions in recent years. Water Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company's principal competitors in the specialty water products industry are Grundfos Management A/S, Pentair, Inc., and Xylem, Inc. 2016 Water Systems research and development expenditures were primarily related to the following activities: • Electronic drives and controls for submersible pumping, above-ground pumping, and HVAC applications • • • Gray water pumping equipment, including the redesigned PowerSewer™ Systems and the IGPDS series dual seal Solar pumping technology, including new models and new accessories for the Fhoton™ Solar Pumping Systems Submersible and surface pumps for agricultural and municipal applications grinder pumps • Condensate removal pumps, including the VCC-20-P designed for use in plenum applications • • Artificial Lift systems for gas well dewatering and oil pumping, including new pump shrouds, abrasion resistant pump Submersible motor technology and motor protection, including ultra-efficient permanent magnet motors geometries, pumps for improved oil handling, and drives for deeper set pumps Fueling Systems Segment Fueling Systems is a global leader in the production and marketing of fuel pumping systems, fuel containment systems, and monitoring and control systems. The Fueling Systems segment designs, manufactures and sells pumps, pipe, sumps, fittings, vapor recovery components, electronic controls, monitoring devices and related parts and equipment primarily for use in submersible fueling system applications. Fueling Systems has expanded its product offerings through internal development and acquisitions. Highlights of the Fueling Systems history are as follows: • • • • • • 1990s - Domestic manufacturer of submersible turbine pumping systems 2000 - Acquired Advanced Polymer Technology, Inc., a manufacturer of underground pipe for fueling applications, and EBW, Inc., a manufacturer and distributor of fueling hardware components 2006 - Acquired Healy Systems, Inc., a manufacturer of fueling nozzles and vapor recovery systems 2010 - Acquired PetroTechnik Limited, a United Kingdom distributor that designs and sources flexible and lightweight underground pipe 2012 - Acquired Flexing, Inc., a manufacturer of fueling equipment including stainless steel flexible hose connectors 2014 - Acquired majority interest, 65%, in Wadcorpp India Private Limited, India, a distributor of fueling equipment Fueling Systems products are sold in highly competitive markets. Rising car use is leading to more investment in gas stations which, in turn, leads to increased demand for the Company’s Fueling Systems products. The Company believes there is growth opportunity in developing markets and, accordingly, acquired an investment in India in 2014. Fueling Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company's principal competitors in the petroleum equipment industry are Danaher Corporation and Dover Corporation. 2016 Fueling Systems research and development expenditures were primarily related to the following activities: • Development of a new automatic tank gauge platform • Development of a pumping system for alternative fuels 5 • Development of new fuel dispensing nozzles • Software enhancements to automatic tank gauges Information Regarding All Reportable Segments Research and Development The Company incurred research and development expense as follows: (In millions) Research and development expense 2016 2015 2014 $ 21.5 $ 18.4 $ 19.3 Expenses incurred were for activities related to the development of new products, improvement of existing products and manufacturing methods, and other applied research and development. The Company owns a number of patents, trademarks, and licenses. In the aggregate, these patents are of material importance to the operation of the business; however, the Company believes that its operations are not dependent on any single patent or group of patents. Raw Materials The principal raw materials used in the manufacture of the Company’s products are coil and bar steel, stainless steel, copper wire, and aluminum ingot. Major components are electric motors, capacitors, motor protectors, forgings, gray iron castings, plastic resins, and bearings. Most of these raw materials are available from multiple sources in the United States and world markets. Generally, the Company believes that adequate alternative sources are available for the majority of its key raw material and purchased component needs; however, the Company is dependent on a single or limited number of suppliers for certain materials or components. Availability of fuel and energy is adequate to satisfy current and projected overall operations unless interrupted by government direction or allocation. Major Customers No single customer accounted for over 10 percent of net sales in 2016, 2015, or 2014. No single customer accounted for over 10 percent of gross accounts receivable in 2016 and 2015. Backlog The dollar amount of backlog by segment was as follows: (In millions) Water Systems Fueling Systems Consolidated February 15, 2017 February 17, 2016 $ $ 39.4 25.2 64.6 $ $ 44.4 15.0 59.4 The backlog is composed of written orders at prices adjustable on a price-at-the-time-of-shipment basis for products, primarily standard catalog items. All backlog orders are expected to be filled in fiscal 2017. The Company’s sales in the first quarter are generally less than its sales in other quarters due to generally less water well drilling and overall product sales during the winter months in the Northern hemisphere. Beyond that, there is no seasonal pattern to the backlog and the backlog has not proven to be a significant indicator of future sales. Environmental Matters The Company believes that it is in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment, or otherwise relating to the protection of the environment. The Company has not experienced any material costs in connection with environmental compliance, and does not believe that such compliance will have any material effect upon the financial position, results of operations, cash flows, or competitive position of the Company. Available Information The Company’s website address is www.franklin-electric.com. The Company makes available free of charge on or through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and 6 Exchange Commission. Additionally, the Company’s website includes the Company’s corporate governance guidelines, its Board committee charters, and the Company’s code of business conduct and ethics. Information contained on the Company’s website is not part of this annual report on Form 10-K. ITEM 1A. RISK FACTORS The following describes the principal risks affecting the Company and its business. Additional risks and uncertainties, not presently known to the Company, could negatively impact the Company’s results of operations or financial condition in the future. Risks Related to the Industry Reduced housing starts adversely affect demand for the Company’s products, thereby reducing revenues and earnings. Demand for certain Company products is affected by housing starts. Variation in housing starts due to economic volatility both within the United States and globally could adversely impact gross margins and operating results. The Company's results may be adversely affected by global macroeconomic supply and demand conditions related to the energy and mining industries. The energy and mining industries are users of the Company's products, including the coal, iron ore, gold, copper, oil, and natural gas industries. Decisions to purchase the Company's products are dependent upon the performance of the industries in which our customers operate. If demand or output in these industries increases, the demand for our products will generally increase. Likewise, if demand or output in these industries declines, the demand for our products will generally decrease. The energy and mining industries' demand and output are impacted by the prices of commodities in these industries which are frequently volatile and change in response to general economic conditions, economic growth, commodity inventories, and any disruptions in production or distribution. Changes in these conditions could adversely impact sales, gross margin, and operating results. Risks Related to the Business The Company is exposed to political, economic and other risks that arise from operating a multinational business. The Company has significant operations outside the United States, including Europe, South Africa, Brazil, Mexico, India, China, and Turkey. Further, the Company obtains raw materials and finished goods from foreign suppliers. Accordingly, the Company’s business is subject to political, economic, and other risks that are inherent in operating a multinational business. These risks include, but are not limited to, the following: 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 enforcing agreements and collecting receivables through foreign legal systems • Trade protection measures and import or export licensing requirements • • • Difficulty in staffing and managing widespread operations and the application of foreign labor regulations • Compliance with foreign laws and regulations • Changes in general economic and political conditions in countries where the Company operates Additionally, the Company’s operations outside the United States could be negatively impacted by changes in treaties, agreements, policies, and laws implemented by the United States. If the Company does not anticipate and effectively manage these risks, these factors may have a material adverse impact on its international operations or on the business as a whole. The Company’s acquisition strategy entails expense, integration risks, and other risks that could affect the Company’s earnings and financial condition. One of the Company’s continuing strategies is to increase revenues and expand market share through acquisitions that will provide complementary Water and Fueling Systems products, add to the Company's global reach, or both. The Company spends significant time and effort expanding existing businesses through identifying, pursuing, completing, and integrating acquisitions, which generate expense whether or not the acquisitions are actually completed. Competition for acquisition candidates may limit the number of opportunities and may result in higher acquisition prices. There is uncertainty related to successfully acquiring, integrating and profitably managing additional businesses without substantial costs, delays or other problems. There can also be no assurance that acquired companies will achieve revenues, profitability or cash flows that justify the investment in them. Failure to manage or mitigate these risks could adversely affect the Company’s results of operations and financial condition. 7 The Company’s products are sold in highly competitive markets, by numerous competitors whose actions could negatively impact sales volume, pricing and profitability. The Company is a global leader in the production and marketing of groundwater and fuel pumping systems. End user demand, distribution relationships, industry consolidation, new product capabilities of the Company’s competitors or new competitors, and many other factors contribute to a highly competitive environment. Additionally, some of the Company’s competitors have substantially greater financial resources than the Company. Although the Company believes that consistency of product quality, timeliness of delivery, service, and continued product innovation, as well as price, are principal factors considered by customers in selecting suppliers, competitive factors previously described may lead to declines in sales or in the prices of the Company’s products which could have an adverse impact on its results of operations and financial condition. The Company's products are sold to numerous distribution outlets based on market performance. The Company may, from time to time, change distribution outlets in certain markets based on market share and growth. These changes could adversely impact sales and operating results. Increases in the prices of raw materials, components, finished goods and other commodities could adversely affect operations. The Company purchases most of the raw materials for its products on the open market and relies on third parties for the sourcing of certain finished goods. Accordingly, the cost of its products may be affected by changes in the market price of raw materials, sourced components, or finished goods. The Company and its suppliers also use natural gas and electricity in manufacturing products and natural gas and electricity prices have historically been volatile. The Company does not generally engage in commodity hedging for raw materials and energy. Significant increases in the prices of commodities, sourced components, finished goods, energy or other commodities could cause product prices to increase, which may reduce demand for products or make the Company more susceptible to competition. Furthermore, in the event the Company is unable to pass along increases in operating costs to its customers, margins and profitability may be adversely affected. Transferring operations of the Company to lower cost regions may not result in the intended cost benefits. The Company is continuing its rationalization of manufacturing capacity between all existing manufacturing facilities and the manufacturing complexes in lower cost regions. To implement this strategy, the Company must complete the transfer of assets and intellectual property between operations. Each of these transfers involves the risk of disruption to the Company’s manufacturing capability, supply chain, and, ultimately, to the Company’s ability to service customers and generate revenues and profits and may include significant severance amounts. The Company has significant investments in foreign entities and has significant sales and purchases in foreign denominated currencies creating exposure to foreign currency exchange rate fluctuations. The Company has significant investments outside the United States, including Europe, South Africa, Brazil, Mexico, India, China, and Turkey. Further, the Company has sales and makes purchases of raw materials and finished goods in foreign denominated currencies. Accordingly, the Company has exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. Foreign currency exchange rate risk is partially mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances, limited use of foreign currency denominated debt, and application of derivative instruments when appropriate. To the extent that these mitigating strategies are not successful, foreign currency rate fluctuations can have a material adverse impact on the Company's international operations or on the business as a whole. Delays in introducing new products or the inability to achieve or maintain market acceptance with existing or new products may cause the Company’s revenues to decrease. The industries to which the Company belongs are characterized by intense competition, changes in end-user requirements, and evolving product offerings and introductions. The Company believes future success will depend, in part, on the ability to anticipate and adapt to these factors and offer, on a timely basis, products that meet customer demands. Failure to successfully develop new and innovative products or to enhance existing products could result in the loss of existing customers to competitors or the inability to attract new business, either of which may adversely affect the Company’s revenues. Certain Company products are subject to regulation and government performance requirements in addition to the warranties provided by the Company. The Company’s product lines have expanded significantly and certain products are subject to government regulations and standards for manufacture, assembly, and performance in addition to the warranties provided by the Company. The Company’s failure to meet all such standards or perform in accordance with warranties could result in significant warranty or repair costs, lost sales and profits, damage to the Company’s reputation, fines or penalties from governmental organizations, and increased litigation exposure. Changes to these regulations or standards may require the Company to modify its business objectives and incur additional costs to comply, and any liabilities or penalties actually incurred could have a material adverse effect on the Company's earnings and operating results. 8 The growth of municipal water systems and increased government restrictions on groundwater pumping could reduce demand for private water wells and the Company’s products, thereby reducing revenues and earnings. Demand for certain Company products is affected by rural communities shifting from private and individual water well systems to city or municipal water systems. Many economic and other factors outside the Company’s control, including Federal and State regulations on water quality, and tax credits and incentives, could adversely impact the demand for private and individual water wells. A decline in private and individual water well systems in the United States or other economies in the international markets the Company serves could reduce demand for the Company’s products and adversely impact sales, gross margins, and operating results. Demand for Fueling Systems products is impacted by environmental legislation which may cause significant fluctuations in costs and revenues after meeting compliance requirements. Environmental legislation related to air quality and fueling containment may create demand for certain Fueling Systems products which must be supplied in a relatively short time frame to meet the governmental mandate. During periods of increased demand the Company’s revenues and profitability could increase significantly, although the Company can also be at risk of not having capacity to meet demand or cost overruns due to inefficiencies during ramp up to the higher production levels. After the Company’s customers have met the compliance requirements, the Company’s revenues and profitability may decrease significantly as the demand for certain products declines substantially. The risk of not reducing production costs in relation to the decreased demand and reduced revenues could have a material adverse impact on gross margins and the Company's results of operations. Changes in tax legislation regarding the Company's foreign earnings could materially affect future results. Since the Company operates in different countries and is subject to taxation in different jurisdictions, the Company’s future effective tax rates could be impacted by changes in such countries’ tax laws or their interpretations. Both domestic and international tax laws are subject to change as a result of changes in fiscal policy, legislation, evolution of regulation and court rulings. The application of these tax laws and related regulations is subject to legal and factual interpretation, judgment, and uncertainty. Changes to the U.S. international tax laws could limit U.S. deductions for expenses related to un-repatriated foreign-source income and modify the U.S. foreign tax credit and “check-the-box” rules. The Company cannot predict whether any proposed changes in U.S. tax laws will be enacted into law or what, if any, changes may be made to any such proposals prior to their being enacted into law. If the U.S. tax laws change in a manner that increases the Company’s tax obligation, it could have a material adverse impact on the Company’s results of operations and financial condition. The Company has significant goodwill and intangible assets and future impairment of the value of these assets may adversely affect operating results and financial condition. The Company's total assets reflect substantial intangible assets, primarily goodwill. Goodwill results from the Company's acquisitions, representing the excess of the purchase price paid over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or as warranted by triggering events. If future operating performance at one or more of the Company's operating segments were to decline significantly below current levels, the Company could incur a non-cash charge to operating earnings for an impairment. Any future determination requiring the recognition of an impairment of a significant portion of the Company's goodwill or intangible assets could have a material adverse impact on the Company's results of operations and financial condition. The Company's business may be adversely affected by the seasonality of sales and weather conditions. The Company experiences seasonal demand in a number of markets within the Water Systems segment. End-user demand in primary markets follows warm weather trends and is at seasonal highs from April to August in the Northern Hemisphere. Demand for residential and agricultural water systems are also affected by weather-related disasters including heavy flooding and drought. Changes in these patterns could reduce demand for the Company's products and adversely impact sales, gross margins, and operating results. The Company depends on certain key suppliers, and any loss of those suppliers or their failure to meet commitments may adversely affect business and results of operations. The Company is dependent on a single or limited number of suppliers for some materials or components required in the manufacture of its products. If any of those suppliers fail to meet their commitments to the Company in terms of delivery or quality, the Company may experience supply shortages that could result in its inability to meet customer requirements, or could otherwise experience an interruption in operations that could negatively impact the Company's business and results of operations. The Company's operations are dependent on information technology infrastructure and failures could significantly affect its business. The Company depends on information technology infrastructure in order to achieve business objectives. If the Company experiences a problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application, or an intentional disruption of IT systems by a third party, the resulting disruptions could impede the 9 Company's ability to record or process orders, manufacture and ship products in a timely manner, or otherwise carry on business in the ordinary course. Any such events could cause the loss of customers or revenue and could cause significant expense to be incurred to eliminate these problems and address related security concerns. The Company is also in the process of updating its global Enterprise Resource Planning ("ERP") system that will redesign and deploy a common information system over a period of several years. The process of implementation can be costly and can divert the attention of management from the day-to-day operations of the business. As the Company implements the ERP system, the new system may not perform as expected, which could have an adverse effect on the Company's business. Additional Risks to the Company. The Company is subject to various risks in the normal course of business. Exhibit 99.1 sets forth risks and other factors that may affect future results, including those identified above, and is incorporated herein by reference. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Franklin Electric serves customers worldwide with over 125 manufacturing and distribution facilities located in over 20 countries. The Global Headquarters is located in Fort Wayne, Indiana, United States and houses sales, marketing, and administrative offices along with a state of the art research and engineering facility. Besides the owned corporate facility, the Company considers the following to be principal properties: Location / Segment Purpose Own/Lease Santa Catarina, Brazil / Both Sao Paulo, Brazil / Both Jiangsu Province, China / Both Brno, Czech Republic / Water Dueville, Italy / Water Nuevo Leon, Mexico / Both Edenvale, South Africa / Water Manufacturing/Distribution/Sales Manufacturing/Distribution/Sales Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Izmir, Turkey / Water Manufacturing/Distribution/Sales/R&D Indiana, United States / Both Manufacturing/Distribution/Sales/R&D Oklahoma, United States / Water Manufacturing Own Own Own Own Own Own Own Own Own Own Wisconsin, United States / Fueling Manufacturing/Distribution/Sales/R&D Lease The Company also owns and leases other small facilities which serve as manufacturing locations and distribution warehouses. The Company does not consider these facilities to be principal to the business or operations. In the Company’s opinion, its facilities are suitable for their intended use, adequate for the Company’s business needs, all currently utilized, and in good condition. 10 EXECUTIVE OFFICERS OF THE REGISTRANT Current executive officers of the Company, their ages, current position, and business experience during at least the past five years as of December 31, 2016, are as follows: Name Age Position Held Gregg C. Sengstack 58 Chairman of the Board and Chief Executive Officer President and Chief Executive Officer President and Chief Operating Officer Period Holding Position 2015 - present 2014 - 2015 2011 - 2014 Robert J. Stone 52 Senior Vice President and President, International Water Systems 2012 - present Senior Vice President and President, Americas Water Systems Group 2007 - 2012 Daniel J. Crose 69 Vice President, Global Water Product Supply DeLancey W. Davis 51 Vice President and President, North America Water Systems Donald P. Kenney 56 Vice President and President, Energy Systems President, Energy Systems President, Fueling Systems John J. Haines Julie S. Freigang 53 Vice President, Chief Financial Officer 49 Vice President, Chief Information Officer Steven W. Aikman 57 Vice President, Global Water Systems Engineering Chief Information Officer Vice President, Information Technologies - Eaton Corporation Jonathan M. Grandon 41 Vice President, Chief Administrative Officer, General Counsel and Secretary Vice President, Integration - Zimmer Biomet Senior Vice President and General Counsel - Biomet Vice President and Division General Counsel, Associate General Counsel, Corporate - Biomet Partner - Ropes & Gray LLP 2011 - present 2012 - present 2014 - present 2013 - 2014 1991 - 2013 2008 - present 2015 - present 2014 - 2015 2011 - 2014 2010 - present 2016 - present 2015 - 2016 2014 - 2015 2013 - 2014 2008 - 2013 All executive officers are elected annually by the Board of Directors at the Board meeting held in conjunction with the annual meeting of shareholders. All executive officers hold office until their successors are duly elected or until their death, resignation, or removal by the Board. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES The number of shareholders of record as of February 15, 2017 was 762. The Company's stock is traded on the NASDAQ Global Select Market under the symbol FELE. Dividends paid and the price range per common share as quoted by the NASDAQ Global Select Market for 2016 and 2015 were as follows: Dividends per Share 2016 2015 Price per Share 2016 2015 Low High Low High 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter $ .0975 $ .0900 $ 23.93 $ 32.71 $ 33.45 $ .1000 .1000 .1000 .0975 .0975 .0975 30.58 32.65 34.90 35.37 40.71 44.50 32.13 26.75 26.91 39.12 39.56 31.67 35.11 The Company has increased dividend payments on an annual basis for 24 consecutive periods. The payment of dividends in the future will be determined by the Board of Directors and will depend on business conditions, earnings, and other factors. Issuer Purchases of Equity Securities In April 2007, the Company’s Board of Directors unanimously approved a plan to increase the number of shares remaining for repurchase from 628,692 to 2,300,000 shares. There is no expiration date for this plan. On August 3, 2015, the Company's Board of Directors approved a plan to increase the number of shares remaining for repurchase by an additional 3,000,000 shares. The authorization was in addition to the 535,107 shares that remained available for repurchase as of July 31, 2015. The Company did not repurchase any shares under this plan during the fourth quarter of 2016. The maximum number of shares that may still be purchased under this plan as of December 31, 2016 is 2,156,362. 12 Stock Performance Graph The following graph compares the Company's cumulative total shareholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Guggenheim S&P Global Water Index and the Russell 2000 Index. Hypothetical $100 invested on December 31, 2011 (fiscal year-end 2011) in Franklin Electric common stock (FELE), Guggenheim S&P Global Water Index, and Russell 2000 Index, assuming reinvestment of dividends: YE 2011 2012 2013 2014 2015 2016 FELE Guggenheim S&P Global Water Russell 2000 $ $ 100 100 100 $ 142 119 116 $ 205 148 162 $ 172 152 169 $ 124 150 162 179 161 196 13 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company’s consolidated financial statements. The information set forth below is not necessarily indicative of future operations. Five Year Financial Summary (In thousands, except per share amounts and ratios) 2016 2015 2014 (c) 2013 2012 (d) Operations: Net sales Gross profit Interest expense Income tax expense Net income attributable to Franklin Electric Co., Inc. Depreciation and amortization Capital expenditures Balance sheet: Working capital (a)(b)(e) Property, plant, and equipment, net Total assets (a) Long-term debt (a) Shareholders’ equity Other data: Net income attributable to Franklin Electric Co., Inc., to sales Net income attributable to Franklin Electric Co., Inc., to average total assets Current ratio (b)(f) $ 949,856 $ 924,923 $ 1,047,777 $ 965,462 $ 891,345 331,406 8,732 24,798 78,745 35,534 37,624 326,058 196,137 1,039,905 156,544 613,445 297,608 10,039 12,625 72,945 35,476 25,933 293,450 190,039 996,111 187,806 557,700 344,410 10,735 18,851 69,806 37,210 42,396 268,434 209,786 331,514 10,597 28,851 81,958 31,356 67,206 333,880 208,596 1,075,797 1,051,770 143,605 596,840 174,063 595,707 301,664 10,208 32,250 82,864 28,335 42,062 283,278 171,975 976,283 150,633 514,406 8.3% 7.7% 3.1 7.9% 7.0% 3.0 6.7% 6.6% 2.3 8.5% 8.1% 3.4 9.3% 9.2% 2.9 Number of common shares outstanding 46,376 46,219 47,594 47,715 47,132 Per share: Market price range High Low $ $ Net income attributable to Franklin Electric Co., Inc., per weighted average common share $ 44.50 23.93 1.67 Net income attributable to Franklin Electric Co., Inc., per weighted average common share, assuming dilution Book value (g) Dividends per common share $ $ $ 1.65 13.12 0.3975 $ $ $ $ $ $ 39.56 26.75 1.52 1.50 11.73 0.3825 $ $ $ $ $ $ 45.42 33.93 1.43 1.41 12.38 0.3475 $ $ $ $ $ $ 45.62 29.95 1.70 1.68 12.38 0.3050 $ $ $ $ $ $ 30.98 22.77 1.76 1.73 10.78 0.2850 (a) In 2016, the Company adopted Financial Accounting Standard Board ("FASB") Accounting Standard Update ("ASU") 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU required retrospective adoption; therefore, years 2015, 2014, 2013, and 2012 were restated above to reflect the adoption of the ASU. See Note 2 for additional information regarding this ASU. (b) Balances as of year-end 2014, 2013, 2012, and 2011 were not retrospectively adjusted for the adoption of ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which related to the presentation of deferred taxes. 14 (c) Includes the results of operations of the Company's 100% wholly owned subsidiary, Bombas Leao S.A., since its acquisition in the second quarter of 2014, and 90% of the Company's owned subsidiary, Impo Motor Pompa Sanayi ve Ticaret A.S., since the Company's acquisition of an additional 10% in the second quarter of 2014. (d) Includes the results of operations of the Company's 70.5% owned subsidiary, Pioneer Pump Holdings, Inc., since the Company's acquisition of an additional 39.5% in the first quarter of 2012, 100% of the wholly owned subsidiary, Cerus Industrial Corporation, since its acquisition in the third quarter of 2012, and 100% of the wholly owned subsidiary, Flexing, Incorporated, since the Company's acquisition in the fourth quarter of 2012. (e) Working capital = Current assets minus current liabilities. (f) Current ratio = Current assets divided by current liabilities. (g) Book value = Shareholders’ equity divided by weighted average common shares, assuming full dilution. 15 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2016 vs. 2015 OVERVIEW Sales in 2016 increased from the prior year. Net sales in 2016 were $949.9 million, an increase of about 3 percent compared to 2015 sales of $924.9 million. The sales increase was attributable to both volume and price increases partially offset by the impact of foreign currency translation as the US dollar strengthened against certain foreign currencies. The Company's consolidated gross profit was $331.4 million for 2016, an increase of $33.8 million or about 11 percent from 2015. The gross profit as a percent of net sales increased 270 basis points to 34.9 percent in 2016 from 32.2 percent in 2015. The gross profit margin change was due primarily to favorable pricing, lower direct material costs and lower fixed cost on higher sales. For 2016, diluted earnings per share were $1.65, an increase of 10 percent compared to 2015 diluted earnings per share of $1.50. Adjusted earnings per share were $1.66, an increase of 13 percent versus the $1.47 adjusted earnings per share in 2015 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS). RESULTS OF OPERATIONS Net Sales Net sales in 2016 were $949.9 million, an increase of $25.0 million or about 3 percent compared to 2015 sales of $924.9 million. The incremental impact of sales from acquired businesses was $0.7 million. Sales revenue decreased by $23.2 million or about 2 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $47.5 million or about 5 percent. (In millions) Water Systems Fueling Systems Consolidated Net Sales 2016 2015 2016 v 2015 $ $ 723.2 226.7 949.9 $ $ 707.6 217.3 924.9 $ $ 15.6 9.4 25.0 Net Sales-Water Systems Water Systems sales were $723.2 million in 2016, an increase of $15.6 million or 2 percent versus 2015. The incremental impact of sales from acquired businesses was $0.7 million. Foreign currency translation rate changes decreased sales $21.4 million, or about 3 percent, compared to sales in 2015. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $36.3 million or about 5 percent. Water Systems sales in the U.S. and Canada were 36 percent of consolidated sales and increased by about 5 percent in 2016 compared to the prior year. Sales revenue decreased by $2.1 million or less than 1 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $16.4 million or about 5 percent. In 2016, sales of groundwater pumping equipment increased by about 9 percent. The growth in groundwater equipment sales was led by a 12 percent increase in sales of products for both residential and agricultural applications. Sales of Pioneer branded mobile dewatering equipment declined by about 12 percent. The decline in mobile dewatering equipment is primarily attributed to reduced demand in the oil and gas end markets. Water Systems sales in Europe, Middle East and Africa were about 17 percent of consolidated sales and declined by about 4 percent compared to 2015. Water Systems in Europe, the Middle East and Africa were reduced by $10.5 million or about 6 percent due to foreign currency translation. Excluding the impact of foreign currency translation, sales were up in 2016 by about 2 percent compared to 2015. The growth was driven by strong sales of groundwater pumping equipment in Turkey. In local currency sales in Turkey grew; however, this growth was offset by sales declines in other parts of the region due to political and economic turmoil and the lower price of oil which reduced investment by the public sector, particularly in Saudi Arabia. Water Systems sales in Latin America were about 14 percent of consolidated sales for 2016 and declined by about 1 percent compared to 2015. Sales revenue decreased by $8.5 million or about 7 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding foreign currency translation, was an increase of $7.4 million or about 6 percent. The growth in sales was led by increased sales in Mexico and Brazil, in local currency. This sales growth is a result of increasing demand for 16 Franklin submersible pumps and motors, customer acceptance of the many product line upgrades that have been implemented over the past two years, and general market conditions. Water Systems sales in the Asia Pacific region were 9 percent of consolidated sales and grew by about 12 percent compared to the prior year. Foreign currency translation rate changes decreased sales in 2016 in the Asia Pacific region by less than a percent. The Asia Pacific region experienced strong year over year growth in Southeast Asia and Australia. Net Sales-Fueling Systems Fueling Systems sales which represented 24 percent of consolidated sales were $226.7 million in 2016, an increase of $9.4 million or about 4 percent versus 2015. Foreign currency translation rate changes decreased sales $1.8 million or about 1 percent compared to sales in 2015. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $11.2 million or about 5 percent. Fueling Systems sales in the U.S. and Canada grew by about 8 percent in 2016 compared to the prior year with sales growth coming from most product lines, most significantly our pumping and fuel management systems. Fueling Systems sales in the rest of the world were down about 2 percent year over year. In 2016, Fueling Systems revenues increased in the Asia Pacific regions by about 14 percent, driven by higher sales in India. This growth in Asia was more than offset by a sales decline in Europe principally due to a 42 percent decline in the sale of storage tanks that support North Sea oil production. Cost of Sales Cost of sales as a percent of net sales for 2016 and 2015 was 65.1 percent and 67.8 percent, respectively. Correspondingly, the gross profit margin increased to 34.9 percent from 32.2 percent, a 270 basis point improvement. The gross profit margin increase was primarily due to lower raw material costs and lower fixed costs. Direct materials as a percentage of sales was 44.8 percent down 210 basis points compared to 46.9 percent last year. This decrease in direct materials was primarily due to favorable pricing and lower direct material costs. The Company's consolidated gross profit was $331.4 million for 2016, up $33.8 million or 11 percent from 2015. Selling, General and Administrative (“SG&A”) Selling, general, and administrative (SG&A) expenses were $221.2 million in 2016 and increased by $16.9 million or about 8 percent in 2016 compared to last year. In 2016, increases in SG&A attributable to higher variable compensation expenses were about $12 million or about 6 percent. Additional year over year changes in SG&A costs were primarily in Marketing and Selling related expenses which increased about $2.5 million to support sales growth and, also, Research, Development & Engineering expense which increased by $2.3 million in the year. Restructuring (Income)/Expense Restructuring expenses for 2016 netted to a gain of $(0.6) million and increased diluted earnings per share about $0.01. Restructuring expenses for 2016 included a gain of $(2.0) million from the sale of land and building in Brazil and $1.4 million in expenses related to severance and pension costs, equipment relocation expenses, asset write-downs and other costs related to the transfer of production activities and other restructuring costs from continued manufacturing realignments. Restructuring expenses for 2015 were $3.0 million and decreased diluted earnings per share about $0.04. Restructuring expenses in 2015 included severance and pension costs, equipment relocation expenses, and asset write-downs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil. Operating Income Operating income was $110.8 million in 2016, up $20.4 million from $90.4 million in 2015. (In millions) Water Systems Fueling Systems Other Consolidated Operating income (loss) 2016 2015 2016 v 2015 $ $ 108.2 $ 86.7 $ 56.3 (53.7) 110.8 $ 51.5 (47.8) 90.4 $ 21.5 4.8 (5.9) 20.4 There were specific items in 2016 and 2015 that impacted operating income. 17 In 2016 they were as follows: • • • $(0.6) million of net restructuring charges. Restructuring (income)/expenses in 2016 included a gain of $(2.0) million from the sale of land and building in Brazil, $0.4 million in asset write-offs, $0.2 million in severance and pension cost, $0.2 million expenses related to equipment transfers and freight costs and $0.6 million in other relocation costs primarily related to other manufacturing realignment activities. $1.2 million related to executive transition. $0.1 million in other miscellaneous costs related to closed acquisitions. In 2015 they were as follows: • There were $3.0 million of restructuring charges. Restructuring expenses in 2015 were $0.6 million in severance cost, $0.6 million in pension cost, $0.6 million expenses related to equipment transfers and freight costs, $0.1 million in asset write-offs and $1.1 million in other relocation costs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil. • • • $1.2 million related to executive transition. $0.7 million related to business realignment cost, primarily severance, in targeted fixed cost reduction actions. $0.2 million in other miscellaneous costs related to closed acquisitions. The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of operating income after non-GAAP adjustments and percent operating income to net sales after non-GAAP adjustments to net sales (operating income margin after non-GAAP adjustments). The Company believes this information helps investors and management understand underlying trends in the Company's business more easily and by presenting these matters in this way, gives our investors and management a more accurate picture of the actual operational performance of the Company. The non- GAAP adjustments are for restructuring expenses, reported separately on the income statement, as well as certain legal matters and acquisition related items which are included in SG&A on the income statement. The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables: 18 Operating Income and Margins Before and After Non-GAAP Adjustments (in millions) Reported Operating Income/(Loss) % Operating Income To Net Sales Non-GAAP Adjustments: Restructuring Non-GAAP Operating Income/(Loss) after Non-GAAP Adjustments % Operating Income to Net Sales after Non-GAAP adjustments (Operating Income Margin after Non-GAAP Adjustments) Reported Operating Income/(Loss) % Operating Income To Net Sales Non-GAAP Adjustments: Restructuring Non-GAAP Operating Income/(Loss) after Non-GAAP Adjustments % Operating Income to Net Sales after Non-GAAP adjustments (Operating Income Margin after Non-GAAP Adjustments) $ $ $ $ $ $ $ $ For the Full Year of 2016 Water Fueling Other $ 108.2 15.0% $ 56.3 24.8% (53.7) $ Consolidated 110.8 11.7% (1.2) $ $ 0.1 $ 107.1 0.6 $ — $ $ 56.9 — $ 1.2 $ (52.5) $ 14.8% 25.1% (0.6) 1.3 111.5 11.7% For the Full Year of 2015 Water Fueling Other Consolidated 86.7 $ 12.3% 51.5 $ 23.7% (47.8) $ 2.7 0.7 90.1 $ $ $ 0.3 0.2 52.0 $ $ $ — $ 1.2 $ (46.6) $ 12.7% 23.9% 90.4 9.8% 3.0 2.1 95.5 10.3% Operating Income-Water Systems Water Systems operating income was $108.2 million in 2016, up $21.5 million or 25 percent versus the 2015 as reported and up $17.0 million or 19 percent versus the 2015 after non-GAAP adjustments. The 2016 operating income margin was 15.0 percent, up 270 basis points from 12.3 percent in 2015. The 2016 operating income margin after non-GAAP adjustments was 14.8 percent, an increase of 210 basis points from the 12.7 percent of net sales in 2015 after non-GAAP adjustments. The increase in basis points was primarily due to improved margins from lower variable costs. Operating Income-Fueling Systems Fueling Systems operating income was $56.3 million in 2016, up $4.8 million or about 9 percent compared to $51.5 million in 2015 as reported, and up $4.9 million or 9 percent compared to $52.0 million after non-GAAP adjustments in 2015. The 2016 operating income margin was 24.8 percent, an increase of 110 basis points from the as reported 23.7 percent of net sales in 2015. The 2016 operating income margin after non-GAAP adjustments was 25.1 percent, an increase of 120 basis points from the 23.9 percent of net sales in 2015 after non-GAAP adjustments. The increase in basis points was primarily due to improved margins from lower variable costs. Operating Income-Other Operating income-other is composed primarily of unallocated general and administrative expenses. General and administrative expenses after non-GAAP adjustments were higher by about 13 percent, primarily due to higher variable compensation expenses. Interest Expense Interest expense for 2016 and 2015 was $8.7 million and $10.0 million, respectively. Other Income or Expense Other income or expense was a gain of $1.0 million in 2016. Included in other income or expense in 2016 was minority income of $1.7 million and interest income of $1.0 million, primarily derived from the investment of cash balances in short-term securities. In 2016, other expenses also included the reversal of an indemnification receivable related to a contingent tax liability for $1.9 million recorded at the time of a foreign acquisition. The contingent tax liability was for the same amount and 19 was also reversed in 2016 and the benefit was recorded in the income tax provision. Other income or expense was income of $6.9 million in 2015. Included in other income or expense in 2016 was minority income of $2.8 million and interest income of $1.3 million, primarily derived from the investment of cash balances in short-term securities. The Company also realized a gain on the settlement of the redeemable non-controlling interest liability in the first quarter of 2015 of about $2.7 million. Foreign Exchange Foreign currency-based transactions produced a gain for 2016 of $1.1 million, primarily due to the Turkish lira relative to the U.S. dollar and euro. Foreign currency-based transactions produced a loss for 2015 of $0.9 million, primarily due to the South African rand, Colombian peso and Australian dollar relative to the U.S. dollar, none of which individually were significant. Income Taxes The provision for income taxes in 2016 and 2015 was $24.8 million and $12.6 million, respectively. The tax rate for 2016 was 23.8 percent and 2015 was 14.6 percent. Discrete adjustments in 2016 were primarily due to the favorable impact from equity compensation share based payments and the reversal of a contingent tax liability offset by adjustments to the Company’s valuation allowance against certain state deferred tax assets that are not likely to be realized. Discrete adjustments during 2015 were the reversal of a deferred tax liability of about $4.8 million created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer. This purchase transaction also resulted in other tax benefits of about $3.5 million. The tax rate before discrete adjustments for 2016 was about 26 percent and 2015 was about 27 percent. The tax rate is lower than the statutory rate of 35 percent primarily due to the indefinite reinvestment of foreign earnings and reduced taxes on foreign and repatriated earnings. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations, current cash on hand and available credit. Net Income Net income for 2016 was $79.3 million compared to 2015 net income of $73.7 million. Net income attributable to Franklin Electric Co., Inc. for 2016 was $78.7 million, or $1.65 per diluted share, compared to 2015 net income attributable to Franklin Electric Co., Inc. of $72.9 million or $1.50 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non- GAAP adjustments for 2016 was $77.4 million, or $1.66 per diluted share, compared to 2015 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $69.7 million or $1.47 per diluted share. There were specific items in 2016 and 2015 that impacted net income attributable to Franklin Electric Co., Inc. The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of net income attributable to Franklin Electric Co., Inc. and adjusted EPS. The Company believes this information helps investors understand underlying trends in the Company's business more easily. The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables: Earnings Before and After Non-GAAP Adjustments For the Full Year (in millions) Net Income attributable to Franklin Electric Co., Inc. Reported Allocated Undistributed Earnings Earnings for EPS Calculations Non-GAAP adjustments (before tax): Restructuring Non-GAAP items Pioneer tax benefits on equity gain Non-GAAP adjustments, net of tax: Restructuring Non-GAAP items Pioneer tax benefits on equity gain Earnings after Non-GAAP Adjustments $ $ $ $ $ $ $ $ $ $ 20 2016 2015 Change 78.7 $ (1.7) $ 77.0 $ (0.6) $ 1.3 $ — $ (0.4) $ 0.8 $ — $ 77.4 $ 72.9 (1.5) 71.4 3.0 2.1 (4.8) 1.8 1.3 (4.8) 69.7 8% 8% 11% Earnings Per Share Before and After Non-GAAP Adjustments For the Full Year (in millions except per-share data) Average Fully Diluted Shares Outstanding Fully Diluted Earnings Per Share ("EPS") Reported Restructuring Per Share, net of tax Non-GAAP items, net of tax Pioneer tax benefits on equity gain Fully Diluted EPS after Non-GAAP Adjustments (Adjusted EPS) 2016 2015 Change (2)% 10 % 46.7 1.65 (0.01) 0.02 $ $ $ $ — $ 47.6 1.50 0.04 0.03 (0.10) 1.66 $ 1.47 13 % $ $ $ $ $ $ 2015 vs. 2014 OVERVIEW Sales in 2015 decreased from the prior year. Net sales in 2015 were $924.9 million, a decrease of about 12 percent compared to 2014 sales of $1,047.8 million. The sales decrease was primarily the impact of foreign currency translation as the US dollar strengthened against certain foreign currencies and lower sales volume, partially offset by sales price increases, as well as the Company's acquisitions. The Company's consolidated gross profit was $297.6 million for 2015, a decrease of $46.8 million or about 14 percent from 2014. The gross profit as a percent of net sales decreased 70 basis points to 32.2 percent in 2015 from 32.9 percent in 2014. The gross profit margin change was due primarily to lost leverage on fixed cost due to lower sales. For 2015, diluted earnings per share were $1.50, an increase of 6 percent compared to 2014 diluted earnings per share of $1.41. Adjusted earnings per share were $1.47, a decrease of 16 percent versus the $1.76 adjusted earnings per share in 2014 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS). RESULTS OF OPERATIONS Net Sales Net sales in 2015 were $924.9 million, a decrease of $122.9 million or about 12 percent compared to 2014 sales of $1,047.8 million. The incremental impact of sales from acquired businesses was $21.3 million or about 2 percent. Sales revenue decreased by $89.3 million or about 9 percent in 2015 due to foreign currency translation. The sales change in 2015, excluding acquisitions and foreign currency translation, was a decrease of $54.9 million or about 5 percent. (In millions) Water Systems Fueling Systems Consolidated Net Sales 2015 2014 2015 v 2014 $ $ 707.6 217.3 924.9 $ $ 824.6 223.2 1,047.8 $ $ (117.0) (5.9) (122.9) Net Sales-Water Systems Water Systems sales were $707.6 million in 2015, a decrease of $117.0 million or 14 percent versus 2014. The incremental impact of sales from acquired businesses was $20.8 million or about 2 percent. Foreign currency translation rate changes decreased sales $78.3 million, or about 9 percent, compared to sales in 2014. The sales change in 2015, excluding acquisitions and foreign currency translation, was a decrease of $59.5 million or about 7 percent. Water Systems sales in the U.S. and Canada were 36 percent of consolidated sales and declined by about 20 percent in 2015 compared to the prior year. Sales revenue decreased by $5.9 million or about 1 percent in 2015 due to foreign currency translation. In 2015, U.S. and Canada sales of Pioneer branded mobile dewatering equipment declined by about 55 percent. The decline in mobile dewatering equipment is primarily attributed to reduced demand in the oil and gas end markets. Sales of 21 groundwater pumping equipment declined by about 14 percent, and sales of surface water pumping equipment declined by about 6 percent versus 2014. The decline in groundwater equipment sales is attributable primarily to weaker demand in the agriculture sector as a result of less favorable weather and to a lesser extent, distributor changes the Company made in its primary groundwater distribution channel. Sales of surface water pumping equipment also declined due to lower condensate pump sales as cooler temperatures delayed the start to the HVAC season. Water Systems sales in Latin America were about 14 percent of consolidated sales for 2015 and declined by about 9 percent compared to the prior year. Acquisition related sales during 2015 were $10.4 million or about 7 percent. Foreign currency translation rate changes decreased sales $34.7 million, or about 24 percent, compared to sales in 2014. Excluding acquisition and foreign currency translation, sales in Latin America grew by about 8 percent during 2015. The growth in sales was led by increased sales in Mexico and Brazil, in local currency. This sales growth is a result of increasing demand for Franklin submersible pumps and motors, customer acceptance of the many product line upgrades that have been implemented over the past two years, and general market conditions. Water Systems sales in the Middle East and Africa were about 11 percent of consolidated sales and decreased by about 10 percent compared to 2014. Water Systems sales in the Middle East and Africa were reduced by $16.5 million or about 14 percent in the year due to foreign currency translation. Excluding the impact of foreign currency translation, sales were up about 4 percent compared to 2014. The growth was driven by strong sales of groundwater pumping equipment in Turkey. Water Systems sales in the Asia Pacific region were 8 percent of consolidated sales and grew by about 7 percent compared to the prior year. Acquisition related sales during 2015 increased sales by about 9 percent in Asia Pacific. Foreign currency translation rate changes decreased sales in 2015 in the Asia Pacific region by about 5 percent. Excluding acquisitions and foreign currency translation sales grew by about 3 percent during 2015. The Asia Pacific region experienced strong year over year growth in Southeast Asia and Korea. These sales increases were partially offset by smaller declines in sales in Australia, Japan and China. Water Systems sales in Europe were about 7 percent of consolidated sales and decreased by about 20 percent compared to the prior year. Foreign currency translation rate changes decreased sales by about 21 percent compared to sales in 2014. Excluding foreign currency translation, European sales grew by about 1 percent during 2015. Net Sales-Fueling Systems Fueling Systems sales which represented 23 percent of consolidated sales were $217.3 million in 2015, a decrease of $5.9 million or about 3 percent versus 2014. The incremental impact of sales from acquired businesses was $0.5 million. Foreign currency translation rate changes decreased sales $11.0 million or about 5 percent compared to sales in 2014. The sales change in 2015, excluding acquisitions and foreign currency translation, was an increase of $4.6 million or about 2 percent. Fueling Systems sales in the U.S. and Canada grew by about 6 percent in 2015 compared to the prior year with sales growth coming from most product lines, especially in piping. Fueling Systems revenues declined in India and China due to the timing of tender awards made in India and the ongoing reduction in State owned oil company procurements in China. Sales also declined in Europe principally due to a 42 percent decline in the sale of storage tanks that support North Sea oil production. Cost of Sales Cost of sales as a percent of net sales for 2015 and 2014 was 67.8 percent and 67.1 percent, respectively. Correspondingly, the gross profit margin decreased to 32.2 percent from 32.9 percent, a 70 basis point decline. The gross profit margin decrease was primarily due to fixed costs deleverage on lower sales and higher raw material costs. Direct materials as a percentage of sales was 46.9 percent up 50 basis points compared to 46.4 percent last year. This increase in direct materials was partially offset by lower labor and burden costs. The Company's consolidated gross profit was $297.6 million for 2015, down $46.8 million or 14 percent from 2014. Selling, General and Administrative (“SG&A”) Selling, general, and administrative (SG&A) expenses were $204.3 million in 2015 and decreased by $23.4 million or about 10 percent in 2015 compared to last year. In 2015, increases in SG&A attributable to acquisitions were about $6 million or about 3 percent. Additional year over year changes in SG&A costs were decreases in the year primarily due to lower marketing and selling related expenses, as well as lower costs for incentive compensation. Approximately half of the lower SG&A expenses was related to foreign exchange. 22 Restructuring Expenses Restructuring expenses for 2015 were $3.0 million and reduced diluted earnings per share by approximately $0.04. Restructuring expenses in 2015 included severance and pension costs, equipment relocation expenses, asset write-downs and primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil. There were $16.6 million of restructuring expenses in 2014 and reduced diluted earnings per share by approximately $0.24. Restructuring expenses in 2014 included severance costs, equipment relocation expenses, and asset write-downs primarily related to the closure of the Wittlich, Germany facility and other European manufacturing realignment activities. Operating Income Operating income was $90.4 million in 2015, down $9.7 million from $100.1 million in 2014. (In millions) Water Systems Fueling Systems Other Consolidated Operating income (loss) 2015 2014 2015 v 2014 $ $ 86.7 $ 103.9 $ 51.5 (47.8) 90.4 $ 49.7 (53.5) 100.1 $ (17.2) 1.8 5.7 (9.7) There were specific items in 2015 and 2014 that impacted operating income. In 2015 they were as follows: • There were $3.0 million of restructuring charges. Restructuring expenses in 2015 were $0.6 million in severance cost, $0.6 million in pension cost, $0.6 million expenses related to equipment transfers and freight costs, $0.1 million in asset write-offs and $1.1 million in other relocation costs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil. • • • $1.2 million related to executive transition. $0.7 million related to business realignment cost, primarily severance, in targeted fixed cost reduction actions. $0.2 million in other miscellaneous costs related to closed acquisitions. In 2014 they were as follows: • There were $16.6 million of restructuring charges. Restructuring expenses in 2014 were $14.7 million in severance cost, $1.7 million expenses related to equipment transfers, freight and other relocation costs and $0.2 million in asset write-offs primarily related to the transfer of production activities from Germany to the Czech Republic and other continued manufacturing realignments. • • • $3.2 million in other miscellaneous costs related to closed and pending acquisitions and $0.2 million in legal fees incurred by Franklin Fueling Systems. $2.5 million related to executive transition. $1.8 million of software write-offs. The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of operating income after non-GAAP adjustments and percent operating income to net sales after non-GAAP adjustments to net sales (operating income margin after non-GAAP adjustments). The Company believes this information helps investors and management understand underlying trends in the Company's business more easily and by presenting these matters in this way, gives our investors and management a more accurate picture of the actual operational performance of the Company. The non- GAAP adjustments are for restructuring expenses, reported separately on the income statement, as well as certain legal matters and acquisition related items which are included in SG&A on the income statement. The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables: 23 Operating Income and Margins Before and After Non-GAAP Adjustments (in millions) Reported Operating Income/(Loss) % Operating Income To Net Sales Non-GAAP Adjustments: Restructuring Non-GAAP Operating Income after Non-GAAP Adjustments % Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments) Reported Operating Income/(Loss) % Operating Income To Net Sales Non-GAAP Adjustments: Restructuring Non-GAAP Operating Income after Non-GAAP Adjustments % Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments) $ $ $ $ $ $ $ $ Water For the Full Year of 2015 Fueling Other $ 86.7 12.3% $ 51.5 23.7% (47.8) $ Consolidated 90.4 9.8% 2.7 0.7 90.1 $ $ $ 0.3 0.2 52.0 $ $ $ — $ $ 1.2 (46.6) $ 12.7% 23.9% 3.0 2.1 95.5 10.3% For the Full Year of 2014 Water Fueling Other Consolidated 103.9 $ 12.6% 49.7 $ 22.3% (53.5) $ 100.1 9.6% 16.1 3.7 123.7 $ $ $ 0.5 1.5 51.7 $ $ $ — $ 2.5 $ (51.0) $ 16.6 7.7 124.4 15.0% 23.2% 11.9% Operating Income-Water Systems Water Systems operating income, after non-GAAP adjustments, was $90.1 million in 2015, a decrease of 27 percent versus 2014. The 2015 operating income margin after non-GAAP adjustments was 12.7 percent and decreased by 230 basis points compared to the 15.0 percent of net sales in 2014. Operating income margin after non-GAAP adjustments decreased in Water Systems primarily due to loss of operating leverage. Operating Income-Fueling Systems Fueling Systems operating income after non-GAAP adjustments was $52.0 million in 2015 compared to $51.7 million after non-GAAP adjustments in 2014. The 2015 operating income margin after non-GAAP adjustments was 23.9 percent and increased by 70 basis points compared to the 23.2 percent of net sales in 2014. This increased profitability was primarily due to lower fixed costs. Operating Income-Other Operating income-other is composed primarily of unallocated general and administrative expenses. General and administrative expenses after non-GAAP adjustments were down about 9 percent compared to last year primarily due to lower incentive compensation due to lower overall operating results. Interest Expense Interest expense for 2015 and 2014 was $10.0 million and $10.7 million, respectively. Other Income or Expense Other income or expense was a gain of $6.9 million in 2015. Included in other income or expense in 2015 was minority income of $2.8 million and interest income of $1.3 million, primarily derived from the investment of cash balances in short-term securities. The Company also realized a gain on the settlement of the redeemable non-controlling interest liability in the first quarter of this year of about $2.7 million. Other income or expense was a gain of $1.3 million in 2014 and included in other 24 income or expense in 2014 was interest income of $2.0 million, primarily derived from the investment of cash balances in short-term securities. Foreign Exchange Foreign currency-based transactions produced a loss for 2015 of $0.9 million, primarily due to the South African rand, Colombian Peso and Australian dollar relative to the U.S. dollar, none of which individually were significant. Foreign currency-based transactions produced a loss for 2014 of $1.0 million, primarily due to the Canadian dollar, Australian dollar, Turkish lira, and South African rand relative to the U.S. dollar, none of which individually were significant. Income Taxes The provision for income taxes in 2015 and 2014 was $12.6 million and $18.9 million, respectively. The tax rate for 2015 was 14.6 percent and 2014 was 21.0 percent. Discrete adjustments during 2015 were the reversal of a deferred tax liability created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer. This tax benefit of about $4.8 million was treated as a non-GAAP adjustment. Because in 2012, the gain was treated as a non-GAAP adjustment, the Company is now consistently treating the reversal of the tax liability related to that gain as a non-GAAP adjustment and reducing reported Earnings per Share in 2015 by $0.10 cents. The Company also realized a gain on the redeemable non-controlling interest liability in the year of about $2.7 million which is included in ‘Other income’. This purchase transaction also resulted in other tax benefits of about $2.5 million, which were expensed through the Company’s earnings in prior years as well as a benefit of about $1.0 million related to the 2015 gain. The tax rate before discrete adjustments for 2015 was about 27 percent and 2014 was about 26 percent. The tax rate is lower than the statutory rate of 35 percent primarily due to the indefinite reinvestment of foreign earnings and reduced taxes on foreign and repatriated earnings. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations, current cash on hand and available credit. Net Income Net income for 2015 was $73.7 million compared to 2014 net income of $70.9 million. Net income attributable to Franklin Electric Co., Inc. for 2015 was $72.9 million, or $1.50 per diluted share, compared to 2014 net income attributable to Franklin Electric Co., Inc. of $69.8 million or $1.41 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non- GAAP adjustments for 2015 was $69.7 million, or $1.47 per diluted share, compared to 2014 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $84.3 million or $1.76 per diluted share. There were specific items in 2015 and 2014 that impacted net income attributable to Franklin Electric Co., Inc. The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of net income attributable to Franklin Electric Co., Inc. and adjusted EPS. The Company believes this information helps investors understand underlying trends in the Company's business more easily. The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables: 25 Earnings Before and After Non-GAAP Adjustments For the Full Year (in millions) 2015 2014 Change Net Income attributable to Franklin Electric Co., Inc. Reported Allocated Undistributed Earnings Earnings for EPS Calculations Non-GAAP adjustments (before tax): Restructuring Non-GAAP items Pioneer tax benefits on equity gain Non-GAAP adjustments, net of tax: Restructuring Non-GAAP items Pioneer tax benefits on equity gain Earnings after Non-GAAP Adjustments $ $ $ $ $ $ $ $ $ $ 72.9 $ (1.5) $ 71.4 $ 3.0 $ $ 2.1 (4.8) $ 1.8 1.3 $ $ (4.8) $ 69.7 $ 69.8 (1.6) 68.2 16.6 7.7 — 11.4 4.7 — 84.3 4 % 5 % (17)% Earnings Per Share Before and After Non-GAAP Adjustments For the Full Year (in millions except per-share data) Average Fully Diluted Shares Outstanding Fully Diluted Earnings Per Share ("EPS") Reported Restructuring Per Share, net of tax Non-GAAP items, net of tax Pioneer tax benefits on equity gain Fully Diluted EPS after Non-GAAP Adjustments (Adjusted EPS) CAPITAL RESOURCES AND LIQUIDITY 2015 2014 Change $ $ $ $ $ $ 47.6 1.50 0.04 $ $ $ 0.03 $ (0.10) $ 1.47 $ 48.2 1.41 0.24 0.11 — 1.76 (1)% 6 % (16)% Sources of Liquidity The Company's primary sources of liquidity are cash on hand, cash flows from operations, revolving credit agreements, and long-term debt funds available. The Company believes its capital resources and liquidity position at December 31, 2016 is adequate to meet projected needs. The Company expects that ongoing requirements for operations, capital expenditures, pension obligations, dividends, and debt service will be adequately funded from cash on hand, operations, and existing credit agreements. As of December 31, 2016, the Company had a $300.0 million revolving credit facility. The facility is scheduled to mature on October 28, 2021. As of December 31, 2016, the Company had $294.1 million borrowing capacity under the Credit Agreement as $5.9 million in letters of commercial and standby letters of credit were outstanding and undrawn and no revolver borrowing was drawn and outstanding as of the end of the quarter. The Company also has other long-term debt borrowings outstanding as of December 31, 2016. See Footnote 11 for additional specifics regarding these obligations and future maturities. 26 At December 31, 2016, the Company had $74.5 million of cash and cash equivalents held in foreign jurisdictions, which will be used to fund foreign operations. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions. If the Company chose to repatriate historical earnings held in foreign jurisdictions, the intention to do so would only be in a tax-efficient manner. Cash Flows The following table summarizes significant sources and uses of cash and cash equivalents: (in thousands) Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities Impact of exchange rates on cash and cash equivalents Change in cash and cash equivalents 2016 2015 2014 $ $ 115.4 (33.8) (51.7) (7.1) 22.8 $ $ 99.6 (29.6) (41.1) (6.5) 22.4 $ $ 47.3 (77.7) (44.3) (0.7) (75.4) Cash Flows Provided by Operating Activities 2016 vs. 2015 Net cash provided by operating activities was $115.4 million for 2016 compared to $99.6 million for 2015. An increase in cash provided by operations in 2016 was partially attributable to large cash outflows in 2015 related to restructuring costs previously accrued at year-end 2014. The increase in cash provided was partially offset by increased cash used during 2016 for higher receivables and inventory balances compared to year-end 2015, driven by higher sales volumes in 2016. Finally, during 2015 the mandatory share purchase liability of $22.9 million for Pioneer was settled, resulting in a non-cash gain and reversal of certain deferred tax liabilities, also non-cash, both of which were adjustments to net income. 2015 vs. 2014 Net cash provided by operating activities was $99.6 million for 2015 compared to $47.3 million for 2014. The increase in cash provided from operations in 2015 compared to 2014 was primarily due to lower uses of cash for trade receivables and inventory in conjunction with reduced sales in 2015. This increase in cash provided from operations was partially offset by a reduction in outstanding accounts payable balances at year-end 2015 compared to 2014. This reduction was also primarily due to lower year-end inventory levels. Cash Flows Used in Investing Activities 2016 vs. 2015 Net cash used in investing activities was $33.8 million in 2016 compared to $29.6 million in 2015. During 2016, the Company had increased capital expenditures compared to 2015, primarily attributable to the purchase of a building in the first quarter. Cash expended on this purchase was partially offset with proceeds realized from the sale of an idle building in Brazil which completed during the third quarter of 2016. 2015 vs. 2014 Net cash used in investing activities was $29.6 million in 2015 compared to $77.7 million in 2014. During 2015, the Company used less cash for acquisitions and equity investment purchases compared to 2014. In addition, cash used for capital expenditures during 2015 was less than the previous year as 2014 saw the completion of a new manufacturing facility in Brazil. During 2014, the Company completed the acquisitions of Bombas Leao S.A. (“Bombas Leao”), with cash on hand and short- term borrowings repaid within the year, and two entities in India, with cash on hand. Cash Flows Used in Financing Activities 2016 vs. 2015 Net cash flows from financing activities were uses of cash of $51.7 million in 2016 compared to $41.1 million in 2015. During 2016, the Company had net repayments of debt of about $30.4 million compared to net borrowings during 2015 of about $43.6 million, resulting in a greater use of cash. The Company paid dividends of $19.1 million in 2016, which was up slightly from $18.9 million in 2015. In addition, in 2015 the Company made a payment of $20.2 million for the Pioneer mandatory share purchase liability and repurchased a significant amount of the Company's common stock, which were both large uses of cash that did not repeat in 2016. 27 2015 vs. 2014 Net cash flows from financing activities were uses of cash of $41.1 million in 2015 compared to $44.3 million in 2014. During 2015, the Company made a payment of $20.2 million for the Pioneer mandatory share purchase liability. In addition, the Company used cash of $46.3 million to complete the repurchase of about 1.6 million shares of the Company’s common stock pursuant to the Company’s stock repurchase program. Dividends in the amount of $18.9 million were paid to shareholders. The Company also had increased debt borrowings and repayments during 2015 primarily due to the issuance of $75.0 million of debt under the New York Life Agreement, first scheduled Prudential Agreement payment of $30.0 million, and increased Revolver borrowing and repayments. AGGREGATE CONTRACTUAL OBLIGATIONS The majority of the Company’s contractual obligations to third parties relate to debt obligations. In addition, the Company has certain contractual obligations for future lease payments and purchase obligations. The payment schedule for these contractual obligations is as follows: (In millions) Debt Debt interest Capital leases Operating leases Purchase obligations Total 2017 $ $ 190.4 29.3 0.1 21.4 10.8 252.0 $ $ 33.7 7.5 — 7.4 10.8 59.4 2018-2019 62.5 $ 8.1 0.1 9.2 — 79.9 $ 2020-2021 2.4 $ 4.5 — 4.1 — 11.0 $ More than 5 years $ $ 91.8 9.2 — 0.7 — 101.7 The Company has pension and other post-retirement benefit obligations not included in the table above which will result in estimated future payments of approximately $6 million in 2017. The Company also has unrecognized tax benefits, none of which are included in the table above. The unrecognized tax benefits of approximately $1.3 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $1.1 million. ACCOUNTING PRONOUNCEMENTS Accounting Standards Issued But Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases found in Accounting Standards Codification ("ASC") Topic 840. This ASU requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company has begun the evaluation process for the adoption of the ASU, and anticipates that the majority of the Company’s outstanding operating leases would be recognized as right-of-use assets and lease liabilities upon adoption, resulting in a significant impact to the Company’s Consolidated Balance Sheets. The impact of this ASU is non-cash in nature and will not affect the Company’s cash position. The impact to the Company’s results of operations is still being evaluated. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs are effective for interim and annual reporting periods beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt these standards. The Company will adopt ASU 2014-09 beginning in the first quarter of 2018 using the modified retrospective approach. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. 28 CRITICAL ACCOUNTING ESTIMATES Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management evaluates its estimates on an ongoing basis. Estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no material changes to estimates or methodologies used to develop those estimates in 2016. The Company’s critical accounting estimates are identified below: Inventory Valuation The Company uses certain estimates and judgments to value inventory. Inventory is recorded at the lower of cost or market. The Company reviews its inventories for excess or obsolete products or components. Based on an analysis of historical usage, management’s evaluation of estimated future demand, market conditions, and alternative uses for possible excess or obsolete parts, carrying values are adjusted. The carrying value is reduced regularly to reflect the age and current anticipated product demand. If actual demand differs from the estimates, additional reductions would be necessary in the period such determination is made. Excess and obsolete inventory is periodically disposed of through sale to third parties, scrapping, or other means. Trade Names and Goodwill According to FASB ASC Topic 350, Intangibles - Goodwill and Other, intangible assets with indefinite lives must be tested for impairment at least annually or more frequently as warranted by triggering events that indicate potential impairment. The Company uses a variety of methodologies in conducting impairment assessments including income and market approaches. For indefinite-lived assets apart from goodwill, primarily trade names for the Company, if the fair value is less than the carrying amount, an impairment charge is recognized in an amount equal to that excess. The Company has not made any material changes to the method of evaluating impairments during the last three years. In compliance with FASB ASC Topic 350, goodwill is not amortized. Goodwill is tested at the reporting unit level for impairment annually or more frequently as warranted by triggering events that indicate potential impairment. Reporting units are operating segments or one level below, known as components, which can be aggregated for testing purposes. The Company’s goodwill is allocated to the North America Water Systems, International Water, and Fueling Systems units, as components within the North America Water Systems and International Water reporting units can be aggregated. As the Company’s business model evolves, management will continue to evaluate its reporting units and review the aggregation criteria. In assessing the recoverability of goodwill, the Company determines the fair value of its reporting units by utilizing a combination of both the market value and income approaches. The market value approach compares the reporting units' current and projected financial results to entities of similar size and industry to determine the market value of the reporting unit. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends, as well as the effects of demand and competition. The Company may be required to record an impairment if these assumptions and estimates change whereby the fair value of the reporting units is below their associated carrying values. Goodwill included on the balance sheet as of the fiscal year ended 2016 was $199.6 million. During the fourth quarter of 2016, the Company completed its annual impairment test of goodwill and tradenames and determined the fair value of all intangibles were substantially in excess of the respective carrying values. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse changes in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. A 10 percent decrease in the fair value estimates used in the impairment test would not have changed this determination. The sensitivity analysis required the use of numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. Further, an extended downturn in the economy may impact certain components of the operating segments more significantly and could result in changes to the aggregation assumptions and impairment determination. Income Taxes Under the requirements of FASB ASC Topic 740, Income Taxes, the Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and 29 liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company analyzes the deferred tax assets and liabilities for their future realization based on the estimated existence of sufficient taxable income. This analysis considers the following sources of taxable income: prior year taxable income, future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and tax planning strategies that would generate taxable income in the relevant period. If sufficient taxable income is not projected then the Company will record a valuation allowance against the relevant deferred tax assets. The Company's operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. These jurisdictions have different tax rates, and the Company determines the allocation of income to each of these jurisdictions based upon various estimates and assumptions. In the normal course of business, the Company will undergo tax audits by various tax jurisdictions. Such audits often require an extended period of time to complete and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in the various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. Although the Company has recorded all income tax uncertainties in accordance with FASB ASC Topic 740, these accruals represent estimates that are subject to the inherent uncertainties associated with the tax audit process, and therefore include uncertainties. Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, which, if actual experience varies, could result in material adjustments to tax expense and/or deferred tax assets and liabilities. Pension and Employee Benefit Obligations The Company consults with its actuaries to assist with the calculation of discount rates used in its pension and post retirement plans. Beginning in 2016, the discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. The change compared to the previous method resulted in different service and interest components of net periodic benefit cost in the 2016 fiscal year. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. Market conditions have caused the weighted-average discount rate to move from 4.37 percent last year to 4.13 percent this year for the domestic pension plans and from 4.09 percent last year to 3.89 percent this year for the postretirement health and life insurance plan. A change in the discount rate selected by the Company of 25 basis points would result in a change of about $0.1 million to employee benefit expense and a change of about $4.1 million of liability. The Company consults with actuaries and investment advisors in making its determination of the expected long-term rate of return on plan assets. Using input from these consultations such as long-term investment sector expected returns, the correlations and standard deviations thereof, and the plan asset allocation, the Company has assumed an expected long-term rate of return on plan assets of 6.25 percent as of the fiscal year ended 2016. A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.4 million of employee benefit expense. According to FASB ASC 715, Compensation - Retirement Benefits, settlement accounting is triggered when lump sum payouts from a defined benefit plan exceed the sum of service cost and interest cost for the year. During 2016, one of the Company’s domestic pension plans required settlement accounting as a payout to a participant exceeded these criteria. FACTORS THAT MAY AFFECT FUTURE RESULTS This annual report on Form 10-K contains certain forward-looking information, such as statements about the Company’s financial goals, acquisition strategies, financial expectations including anticipated revenue or expense levels, business prospects, market positioning, product development, manufacturing re-alignment, capital expenditures, tax benefits and expenses, and the effect of contingencies or changes in accounting policies. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” While the Company believes that the assumptions underlying such forward-looking statements are reasonable based on present conditions, forward-looking statements made by the Company involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those forward-looking statements as a result of various factors, including general economic and currency conditions, various conditions specific to the Company’s business and industry, new housing starts, weather conditions, market demand, competitive factors, changes in distribution channels, supply constraints, effect of price increases, raw material costs, technology factors, integration of acquisitions, litigation, government and regulatory actions, the Company’s accounting policies, and other risks, all as described in Item 1A and Exhibit 99.1 of this Form 10-K. Any forward-looking statements included in this Form 10-K are based upon information 30 presently available. The Company does not assume any obligation to update any forward-looking information, except as required by law. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk associated with changes in foreign currency exchange rates, interest rates, and commodity prices. These exposures are actively monitored by management. Exposure to foreign exchange rate risk is due to certain costs, revenue and borrowings being denominated in currencies other than one of our subsidiaries functional currency. Similarly, the Company is exposed to market risk as the result of changes in interest rates which may affect the cost of financing. Foreign Currency Exchange Rate Risk Foreign currency exchange rate risk is mitigated through several means including maintenance of local production facilities in the markets served, invoicing of customers in the currency which the Company is billed for production inputs, prompt settlement of third party and inter-company balances, limited use of foreign currency denominated debt, maintaining minimal foreign currency denominated cash balances, and application of derivative instruments when appropriate. Based on the 2016 mix of foreign currencies, the Company estimates that a hypothetical strengthening of the US Dollar by about 5 percent would have reduced the Company’s 2016 sales by about 2 percent. Interest Rate Expense The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s revolving credit agreement (the “Credit Agreement”) and the New York Life Agreement, where interest rates are tied to the prime rate or London Interbank Offered Rates (LIBOR). The Company had no borrowings at year-end 2016 under the Credit Agreement and had $75.0 million outstanding under the New York Life Agreement. The Company estimates that a hypothetical increase of 100 basis points in LIBOR rates would have increased interest expense by $1.0 million during 2016. The Company also has exposure to changes in interest rates in the form of the fair value of outstanding fixed rate debt fluctuating in response to changing interest rates. The Company does not, as a matter of policy, enter into derivative contracts for speculative purposes. Commodity Price Exposures Portions of the Company's business are exposed to volatility in the prices of certain commodities, such as copper, nickel and aluminum, among others. The primary exposure to this volatility resides with the use of these materials in purchased component parts. We generally maintain long-term fixed price contracts on raw materials and component parts; however, the Company is prone to exposure as these contracts expire. Based on the 2016 use of commodities, the Company estimates that a hypothetical 10 percent adverse movement in prices for raw metal commodities would result in about a 100 basis point decrease of gross margin as a percent of sales. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) 2016 2015 2014 Net sales Cost of sales Gross profit Selling, general, and administrative expenses Restructuring (income)/expense Operating income Interest expense Other income, net Foreign exchange income/(expense) Income before income taxes Income tax expense Net income Less: Net income attributable to noncontrolling interests Net income attributable to Franklin Electric Co., Inc. Income per share: Basic Diluted Dividends per common share $ 949,856 $ 924,923 $ 1,047,777 618,450 331,406 221,209 (598) 110,795 (8,732) 993 1,057 104,113 24,798 79,315 (570) 78,745 1.67 1.65 0.3975 $ $ $ $ $ 627,315 297,608 204,250 2,997 90,361 (10,039) 6,863 (869) 86,316 12,625 73,691 (746) 72,945 1.52 1.50 0.3825 $ $ $ $ $ 703,367 344,410 227,711 16,611 100,088 (10,735) 1,349 (999) 89,703 18,851 70,852 (1,046) 69,806 1.43 1.41 0.3475 $ $ $ $ $ See Notes to Consolidated Financial Statements. 32 FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income Other comprehensive income/(loss), before tax: Foreign currency translation adjustments Employee benefit plan activity: Net gain/(loss) arising during period Amortization arising during period Other comprehensive loss Income tax (expense)/benefit related to items of other comprehensive income/(loss) Other comprehensive loss, net of tax Comprehensive income Less: Comprehensive income attributable to noncontrolling interests Comprehensive income attributable to Franklin Electric Co., Inc. $ 2016 2015 2014 $ 79,315 $ 73,691 $ 70,852 (8,459) (58,886) (36,243) (3,809) 4,298 (7,970) (499) (8,469) 70,846 345 70,501 $ 1,278 5,759 (51,849) (2,471) (54,320) 19,371 121 19,250 $ (30,395) 4,385 (62,253) 8,593 (53,660) 17,192 570 16,622 See Notes to Consolidated Financial Statements. 33 FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 2016 2015 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 104,331 $ 145,999 80,052 18,735 104,684 203,471 30,018 483,819 121,364 242,170 47,523 19,089 430,146 (234,009) 196,137 — 4,621 134,667 199,609 21,052 81,561 127,251 82,223 18,384 93,987 194,594 34,715 438,121 117,753 233,834 39,639 19,845 411,071 (221,032) 190,039 1,613 3,461 141,357 199,847 21,673 $ 1,039,905 $ 996,111 Receivables, less allowances of $3,601 and $3,801, respectively Inventories: Raw material Work-in-process Finished goods Total inventories Other current assets Total current assets Property, plant, and equipment, at cost: Land and buildings Machinery and equipment Furniture and fixtures Other Property, plant, and equipment, gross Less: Allowance for depreciation Property, plant, and equipment, net Asset held for sale Deferred income taxes Intangible assets, net Goodwill Other assets Total assets 34 LIABILITIES AND EQUITY Current liabilities: Accounts payable Accrued expenses and other current liabilities Income taxes Current maturities of long-term debt and short-term borrowings Total current liabilities Long-term debt Deferred income taxes Employee benefit plans Other long-term liabilities Commitments and contingencies (see Note 17) Redeemable noncontrolling interest Shareholders' equity: Common stock (65,000 shares authorized, $.10 par value) outstanding (46,376 and 46,219, respectively) Additional capital Retained earnings Accumulated other comprehensive loss Total shareholders' equity Noncontrolling interest Total equity Total liabilities and equity See Notes to Consolidated Financial Statements. 2016 2015 $ 63,927 $ 56,845 3,274 33,715 157,761 156,544 40,460 45,307 17,093 57,822 52,109 1,794 32,946 144,671 187,806 33,404 47,398 16,511 — — 7,652 6,856 4,638 228,564 550,095 (169,852) 613,445 1,643 615,088 $ 1,039,905 $ 4,622 216,472 498,214 (161,608) 557,700 1,765 559,465 996,111 35 FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income 2016 2015 2014 $ 79,315 $ 73,691 $ 70,852 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization Share-based compensation Deferred income taxes Loss on disposals of plant and equipment Realized gain on share purchase liability Foreign exchange (income)/expense Excess tax from share-based payment arrangements Changes in assets and liabilities, net of acquisitions: Receivables Inventory Accounts payable and accrued expenses Income taxes Employee benefit plans Other, net Net cash flows from operating activities Cash flows from investing activities: Additions to property, plant, and equipment Proceeds from sale of property, plant, and equipment Cash paid for acquisitions, net of cash acquired Additional consideration for prior acquisition Cash paid for minority equity investments Other, net Net cash flows from investing activities Cash flows from financing activities: Proceeds from issuance of debt Repayment of debt Proceeds from issuance of common stock Excess tax from share-based payment arrangements Purchases of common stock Dividends paid Purchase of redeemable noncontrolling shares Share purchase liability payment Net cash flows from financing activities Effect of exchange rate changes on cash Net change in cash and equivalents Cash and equivalents at beginning of period 36 35,534 6,889 2,978 751 — (1,057) — (21,334) (7,636) 11,782 4,709 (1,049) 4,492 115,374 (39,136) 6,028 (1,007) — — 346 (33,769) 64,681 (95,066) 5,243 — (7,422) (19,137) — — (51,701) (7,134) 22,770 81,561 35,476 5,626 (6,802) 1,542 (2,723) 869 (932) 3,444 9,350 (19,744) 5,575 (2,455) (3,314) 99,603 (26,171) 202 (3,761) (127) — 274 (29,583) 233,486 (189,910) 2,050 932 (48,579) (18,926) — (20,200) (41,147) (6,453) 22,420 59,141 37,210 7,471 (2,415) 1,351 — 999 (2,463) (29,064) (32,782) 22,852 (14,135) (6,834) (5,693) 47,349 (35,525) 1,608 (35,599) — (6,716) (1,490) (77,722) 98,394 (117,217) 2,929 2,463 (10,610) (17,421) (2,875) — (44,337) (702) (75,412) 134,553 (In thousands) Cash and equivalents at end of period Cash paid for income taxes, net of refunds Cash paid for interest, net of capitalized interest of $0, $0, and $392, respectively Non-cash items: Payable to seller of Bombas Leao, S.A Additions to property, plant, and equipment, not yet paid 2016 2015 2014 $ $ $ $ $ 104,331 22,296 8,965 24 366 $ $ $ $ $ 81,561 14,264 10,211 24 960 $ $ $ $ $ 59,141 29,066 10,850 267 1,030 See Notes to Consolidated Financial Statements. 37 FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF EQUITY Total Shareholders' Equity (In thousands) Common Shares Outstanding Common Stock Additional Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss) Noncontrolling Interest Redeemable Noncontrolling Interest Balance as of year end 2013 47,715 $ 4,771 $ 194,810 $ 450,855 $ (54,729) $ 2,509 $ Net income Currency translation adjustment Minimum pension liability adjustment, net of tax benefit of $8,593 Adjustments to Impo redemption value Dividends on common stock ($0.3475/share) Noncontrolling dividend Acquisitions Common stock issued Purchase of redeemable noncontrolling shares Share-based compensation Common stock repurchased Tax benefit of stock options exercised (35,767) (17,417) 69,806 (910) (16,621) 654 (220) (800) 172 17 2,912 (9) (284) (1) (28) 7,472 2,252 (10,582) Balance as of year end 2014 47,594 $ 4,759 $ 207,446 $ 492,548 $ (107,913) $ 2,143 $ Net income Currency translation adjustment Minimum pension liability adjustment, net of tax expense of $2,471 Adjustments to Impo redemption value Dividends on common stock ($0.3825/share) Noncontrolling dividend Common stock issued Share-based compensation 108 151 11 15 Common stock repurchased (1,634) (163) Tax benefit of stock options exercised (58,261) 4,566 591 (146) (823) 72,945 (760) (18,103) (48,416) 2,039 5,611 1,376 5,171 392 (256) 910 3,078 (2,875) 6,420 155 (479) 760 Balance as of year end 2015 46,219 $ 4,622 $ 216,472 $ 498,214 $ (161,608) $ 1,765 $ 6,856 Net income Currency translation adjustment Minimum pension liability adjustment, net of tax expense of $499 Adjustments to Impo redemption value Dividends on common stock ($0.3975/share) Noncontrolling dividend Common stock issued 274 27 5,216 38 (8,234) (10) 78,745 (1,002) (18,464) (7) (199) 1,002 577 (26) (673) (In thousands) Common Shares Outstanding Common Stock Additional Capital Retained Earnings Accumulated Other Comprehensive Income/(Loss) Noncontrolling Interest Redeemable Noncontrolling Interest Total Shareholders' Equity Share-based compensation Common stock repurchased 125 (242) 13 (24) 6,876 (7,398) Balance as of year end 2016 46,376 $ 4,638 $ 228,564 $ 550,095 $ (169,852) $ 1,643 $ 7,652 See Notes to Consolidated Financial Statements. 39 FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Note 17. Note 18. Note 19. Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and Other Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Expense and Other Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Other Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-Based Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment and Geographic Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and Contingencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Quarterly Financial Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page Number 41 44 45 46 47 47 47 48 53 54 57 58 59 60 60 62 64 64 65 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company--“Franklin Electric” or the “Company” shall refer to Franklin Electric Co., Inc. and its consolidated subsidiaries. Fiscal Year--In December 2016, the Company's Board of Directors approved a change in reporting periods from fiscal periods to a calendar year. This change is effective beginning January 1, 2017. For fiscal years 2016 and prior, the Company's fiscal year ends on the Saturday nearest December 31. The financial statements and accompanying notes are as of and for the years ended December 31, 2016 (52 weeks), January 2, 2016 (52 weeks), and January 3, 2015 (53 weeks), and referred to as 2016, 2015, and 2014, respectively. Principles of Consolidation--The consolidated financial statements include the accounts of Franklin Electric Co., Inc. and its consolidated subsidiaries. All intercompany transactions have been eliminated. Business Combinations--The Company allocates the purchase price of its acquisitions to the assets acquired, liabilities assumed, and noncontrolling interests acquired based upon their respective fair values at the acquisition date. The Company utilizes management estimates and inputs from an independent third-party valuation firm to assist in determining these fair values. The excess of the acquisition price over these estimated fair values is recorded as goodwill. Goodwill is adjusted for any changes to acquisition date fair value amounts made within the measurement period. Acquisition-related transaction costs are recognized separately from the business combination and expensed as incurred. Revenue Recognition--Revenue is recognized when pervasive evidence of an arrangement exists, collectability is reasonably assured, the price is fixed or determinable, and shipment or delivery has occurred. For product sales, the Company recognizes revenue once the transfer of ownership and risk of loss pass to the customer, which is generally when the products are shipped. Generally, the only post-shipment obligation on the Company’s products include routine warranty obligations. In the event that significant post-shipment obligations were to exist for the Company’s products, revenue recognition would be deferred until substantially all obligations were satisfied. 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. Shipping and Handling Costs--Shipping and handling costs are recorded as a component of cost of sales. Research and Development Expense--The Company’s research and development activities are charged to expense in the period incurred. The Company incurred expenses of approximately $21.5 million in 2016, $18.4 million in 2015, and $19.3 million in 2014 related to research and development. Cash and Cash Equivalents--The Company considers cash on hand, demand deposits, and highly liquid investments with an original maturity date of three months or less to be cash and cash equivalents. Fair Value of Financial Instruments--Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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. 41 Accounts Receivable, Earned Discounts, and Allowance for Uncollectible Accounts--Accounts receivable are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers, net of earned discounts and estimated allowances for uncollectible accounts. Earned discounts are based on specific customer agreement terms. In determining allowances for uncollectible accounts, historical collection experience, current trends, aging of accounts receivable, and periodic credit evaluations of customers’ financial condition are reviewed. Inventories-- Inventories are stated at the lower of cost or market. The majority of the cost of domestic and foreign inventories is determined using the FIFO method with a portion of inventory costs determined using the average cost method. The Company reviews its inventories for excess or obsolete products or components based on an analysis of historical usage and management's evaluation of estimated future demand, market conditions, and alternative uses for possible excess or obsolete parts. Property, Plant, and Equipment--Property, plant, and equipment are stated at historical cost. The Company capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use, which are included in property, plant, and equipment. Depreciation of plant and equipment is calculated on a straight line basis over the following estimated useful lives: Land improvement and buildings Machinery and equipment Software Furniture and fixtures 10-40 years 5-10 years 3-7 years 3-7 years Maintenance, repairs, and renewals of a minor nature are expensed as incurred. Betterments and major renewals which extend the useful lives or add to the productive capacity of buildings, improvements, and equipment are capitalized. The Company reviews its property, plant, and equipment for impairment at the asset group level whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If an indicator is present, the Company compares carrying values to undiscounted future cash flows; if the undiscounted future cash flows are less than the carrying value, an impairment would be recognized for the difference between the fair value and the carrying value. The Company’s depreciation expense was $27.1 million, $26.8 million, and $28.1 million in 2016, 2015, and 2014, respectively. Goodwill and Other Intangible Assets--Goodwill is tested at the reporting unit level, which the Company has determined to be the North America Water Systems, International Water, and Fueling Systems units. In compliance with FASB ASC Topic 350, Intangibles - Goodwill and Other, the Company has evaluated the aggregation criteria and determined that the individual components within the North America Water Systems and International Water reporting units, respectively, can be aggregated in 2016. In assessing the recoverability of goodwill, the Company determines the fair value of its reporting units by utilizing a combination of both the income and market valuation approaches. The income approach estimates fair value based upon future revenue, expenses, and cash flows discounted to present value. The market valuation approach estimates fair value using market multipliers of various financial measures compared to a set of comparable public companies. The fair value calculated for each reporting unit is considered a Level 3 measurement within the fair value hierarchy. An indication of impairment exists if the carrying value of the reporting unit is higher than its fair value, as determined by the above approach. The second step of testing as outlined in FASB ASC Topic 350 must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of the reporting unit's goodwill to its carrying value in the same manner as if the reporting units were being acquired in a business combination. The Company would allocate the fair value to all of the reporting unit's assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. The Company would record an impairment charge for the difference between the implied fair value of goodwill and the recorded goodwill. The Company currently tests goodwill for impairment on an annual basis using balances as of period 8, or more frequently as warranted by triggering events that indicate potential impairment. Beginning in 2017, the Company will complete its annual goodwill impairment test during the fourth quarter, using balances as of October 1. The change in goodwill impairment testing date is deemed a change in accounting principle which management determined to be preferable. The change was made to 42 better align with the timing of the Company's annual and long-term planning processes, which are significant elements of the testing. In connection with the change in date of the annual goodwill impairment test, the Company performed a qualitative assessment of goodwill as of October 1, 2016 to ensure that a period of greater than 12 months did not elapse between test dates. The Company did not recognize a goodwill impairment as a result of the qualitative assessment. The change in annual goodwill impairment testing dates did not delay, accelerate, or avoid a goodwill impairment charge. The Company also tests indefinite lived intangible assets, primarily trade names, for impairment on an annual basis during the fourth quarter of each year, or more frequently as warranted by triggering events that indicate potential impairment. In assessing the recoverability of the trade names, the Company determines the fair value using an income approach. The income approach estimates fair value based upon future revenue and estimated royalty rates. The fair value calculated for indefinite lived intangible assets is considered a Level 3 measurement within the fair value hierarchy. An indication of impairment exists if the carrying value of the trade names is higher than the fair value. The Company would record an impairment charge for the difference. Amortization is recorded and calculated for other definite lived intangible assets on a basis that reflects cash flows over the estimated useful lives. The weighted average number of years over which each intangible class is amortized is as follows: Patents Technology Customer relationships Other 17 years 15 years 13-20 years 5-8 years Warranty Obligations--The Company provides warranties on most of its products. The warranty terms vary but are generally two to five years from date of manufacture or one to five years from date of installation. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The Company actively studies trends of warranty claims and takes actions to improve product quality and minimize warranty claims. The Company believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Income Taxes--Income taxes are accounted for in accordance with FASB ASC Topic 740, Income Taxes. Under this guidance, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities and net operating loss and credit carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company records a liability for uncertain tax positions by establishing a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. Defined Benefit Plans--The Company makes its determination for pension, post retirement, and post employment benefit plans liabilities based on management estimates and consultation with actuaries, incorporating estimates and assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. Earnings Per Common Share--Basic and diluted earnings per share are computed and disclosed in accordance with FASB ASC Topic 260, Earnings Per Share. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent dividend distributions, in substance, to the noncontrolling interest holder as the holders have contractual rights to receive an amount upon redemption other than the fair value of the applicable shares. As a result, earnings are adjusted to reflect this in substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings 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 non-forfeitable 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 allocated 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 allocable to common shares by the weighted-average number 43 of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards. Translation of Foreign Currency Financial Statements--All assets and liabilities of foreign subsidiaries in functional currency other than the U.S. dollar are translated at year end exchange rates. All revenue and expense accounts are translated at average rates in effect during the respective period. Adjustments for translating longer term foreign currency assets and liabilities in U.S. dollars are included as a component of other comprehensive income. Transaction gains and losses that arise from shorter term exchange rate fluctuations are included in the “Foreign exchange income/(expense)" line within the Company's consolidated statements of income, as incurred. Significant Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions by management affect inventory valuation, warranty, trade names and goodwill, income taxes, and pension and employee benefit obligations. Although the Company regularly assesses these estimates, actual results could materially differ. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. 2. ACCOUNTING PRONOUNCEMENTS Adoption of New Accounting Standards In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard simplifies several aspects of the accounting for employee share-based payment transactions including the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification, and the classification of those taxes paid on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2016 with early adoption permitted. The Company early adopted ASU 2016-09 during the second quarter ended July 2, 2016. The primary impact of adoption was the recognition of excess tax benefits or deficiencies in the provision for income taxes rather than paid-in capital for all periods in fiscal year 2016. Early adoption of the standard required adjustments as of January 3, 2016, the beginning of the annual period that includes the interim period of adoption. The Company has elected to continue its current policy of estimating forfeitures rather than recognizing forfeitures when they occur Under ASU 2016-09, excess income tax benefits from stock-based compensation arrangements are classified as cash flows from operations, rather than as cash flows from financing activities. The Company elected to apply the cash flow presentation requirements prospectively. The standard also clarifies that cash flows related to employee taxes paid by withheld shares should be classified as a financing activity. This provision had no impact to the Company, because these cash flows have historically been presented as financing activities. In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability instead of a deferred asset. The standard does not change the amortization of debt issuance costs, which will continue to follow the existing accounting guidance. The Company adopted ASU 2015-03 during the first quarter ended April 2, 2016. The retrospective adoption of this ASU required a total of approximately $0.3 million of unamortized debt issuance costs as of year-end 2015 to be reclassified from "Other assets" and "Other current assets" to a direct deduction from "Long-term debt" in the Company's consolidated balance sheet as of January 2, 2016. In addition, there were no impacts to the Company's results of operations, retained earnings, or cash flows in the current or previous interim and annual reporting periods. Accounting Standards Issued But Not Yet Adopted In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases found in 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 44 beginning after December 15, 2018 with early adoption permitted. The Company has begun the evaluation process for the adoption of the ASU, and anticipates that the majority of the Company’s outstanding operating leases would be recognized as right-of-use assets and lease liabilities upon adoption, resulting in a significant impact to the Company’s consolidated balance sheets. The impact of this ASU is non-cash in nature and will not affect the Company’s cash position. The impact to the Company’s results of operations is still being evaluated. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs are effective for interim and annual reporting periods beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt these standards. The Company will adopt ASU 2014-09 beginning in the first quarter of 2018 using the modified retrospective approach. The Company does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. 3. ACQUISITIONS In 2012, the Company acquired a controlling interest in Pioneer Pump Holdings, Inc. ("PPH"). Pursuant to the terms of the 2012 stock purchase agreement, the remaining 29.5 percent noncontrolling interest was recorded at $22.9 million and accounted for as a share purchase liability. During the first quarter of 2015, the Company purchased the remaining 29.5 percent of outstanding shares of PPH for $20.2 million, increasing the Company's ownership in PPH to 100 percent. The purchase was considered the settlement of a financing obligation, and the resulting $2.7 million gain was recorded in the Company's consolidated statements of income in the "Other income, net" line during the first quarter of 2015. During the third quarter of 2014, the Company acquired controlling interests in two entities in India in separate unrelated transactions. Neither of the acquisitions was individually material, and the combined purchase price paid was approximately $6.6 million. The results of the two businesses from their respective dates of acquisition through January 3, 2015 were not material. In an agreement dated June 6, 2014, between the Company and Bombas Leao S.A. ("Bombas Leao"), the Company acquired rights to 100 percent of the outstanding shares of Bombas Leao for a cash purchase price of approximately BRL 69.6 million, $31.0 million at the then current exchange rate, subject to certain terms and conditions. The Company also acquired debt and certain liabilities of Bombas Leao. The Company funded the acquisition with cash on hand and short-term borrowings from the Company's revolving credit agreement. Bombas Leao, based in Monte Azul Paulista, State of Sao Paulo, Brazil, designs, manufactures, and distributes submersible groundwater pumping equipment through manufacturing and distribution facilities. The Bombas Leao intangible assets of $23.5 million consist primarily of customer relationships, which will be amortized utilizing the straight line method over 20 years, and trade names, which are classified as indefinite lived assets and will not be amortized. The goodwill amount of $3.4 million resulting from the Bombas Leao acquisition consists primarily of broadened product offerings and expanded customer base. All of the goodwill was recorded as part of the Water Systems segment and is not expected to be deductible for tax purposes. Preliminary goodwill increased by $0.3 million and current assets decreased by $0.3 million during 2015 due to working capital adjustments. In addition, the Company paid an additional $0.3 million to the sellers of Bombas Leao during 2015 to satisfy amounts previously accrued per the original purchase agreement. The final purchase price assigned to the major identifiable assets and liabilities for the Bombas Leao acquisition is as follows: 45 (In millions) Assets: Cash acquired Current assets Property, plant, and equipment Intangible assets Goodwill Other assets Total assets Liabilities Total consideration paid $ $ 1.1 13.4 6.5 23.5 3.4 3.1 51.0 (20.0) 31.0 The fair values of the identifiable assets, property, plant, and equipment, and liabilities were final as of the second quarter of 2015. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation. The results of operations of Bombas Leao were included in the Company's consolidated statements of income from the acquisition date through the year ended January 3, 2015. The difference between actual sales for the Company and proforma sales including Bombas Leao as if it was acquired at the beginning of the year was not material as a component of the Company's consolidated sales for the year ended January 3, 2015. Due to the immaterial nature of the acquisition, the Company has not included full year proforma statements of income for the acquisition year. Transaction costs for all acquisition related activity were expensed as incurred under the guidance of FASB ASC Topic 805, Business Combinations. Transaction costs included in selling, general, and administrative expense in the Company’s consolidated statements of income were $0.1 million, $0.2 million, and $2.4 million for the fiscal years ended 2016, 2015, and 2014, respectively. 4. FAIR VALUE MEASUREMENTS As of December 31, 2016 and January 2, 2016, the assets measured at fair value on a recurring basis were as set forth in the table below: (In millions) December 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash equivalents $ 3.6 $ 3.6 $ — $ — Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) January 2, 2016 Cash equivalents $ 3.9 $ 3.9 $ — $ — 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 $190.2 million at December 31, 2016 and $220.7 million at January 2, 2016. The estimated fair value of all debt was $195 million and $225 million at December 31, 2016 and January 2, 2016, 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 46 Company for debt with similar terms and remaining maturities. Accordingly, the fair value of debt is classified as Level 2 within the valuation hierarchy. As of December 31, 2016, the Company had no assets held for sale. As of January 2, 2016, $1.6 million of assets were held for sale, recorded at carrying value in the Water Systems segment relating to an idle facility in Brazil. The sale of the facility in Brazil was completed during 2016. 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 these 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 December 31, 2016, the swap has a notional value based on 205,000 shares. For the years ended December 31, 2016, January 2, 2016, and January 3, 2015, the swap resulted in a gain of $2.2 million, and losses of $2.0 million and $0.8 million, respectively. Gains/losses resulting from the swap were primarily offset by losses/gains 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 consolidated statements of income within the “Selling, general, and administrative expenses” line. 6. OTHER ASSETS The Company has equity interests in various companies for strategic purposes. The investments are accounted for under the equity method and are included in “Other assets” on the Company’s consolidated balance sheet. The carrying amount of the investments is adjusted for the Company's proportionate share of earnings, losses, and dividends. The investments are not considered material to the Company’s financial position, neither individually nor in the aggregate. The Company’s proportionate share of earnings from its equity interests, included in the "Other income, net" line of the Company's consolidated statements of income, were immaterial for the years ended December 31, 2016, January 2, 2016, and January 3, 2015. 7. GOODWILL AND OTHER INTANGIBLE ASSETS The carrying amounts of the Company’s intangible assets are as follows: (In millions) 2016 2015 Amortized intangibles: Patents Technology Customer relationships Other Total Unamortized intangibles: Trade names Total intangibles Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ $ $ 7.4 7.5 133.4 2.7 151.0 $ $ 47.1 198.1 $ (6.4) $ (5.3) (49.6) (2.1) (63.4) $ — (63.4) $ 7.4 7.5 132.6 3.5 151.0 $ $ 46.4 197.4 $ (6.2) (4.8) (42.3) (2.7) (56.0) — (56.0) Amortization expense related to intangible assets for fiscal years 2016, 2015, and 2014, was $8.4 million, $8.6 million, and $9.1 million, respectively. Amortization expense for each of the five succeeding years is projected as follows: (In millions) 2017 2018 2019 2020 2021 $ 8.4 $ 8.3 $ 8.2 $ 8.1 $ 7.7 47 The change in the carrying amount of goodwill by reporting segment for 2016 and 2015, is as follows: (In millions) Balance as of January 3, 2015 Adjustments to prior year acquisitions Foreign currency translation Balance as of January 2, 2016 Acquisitions Foreign currency translation Balance as of December 31, 2016 Water Systems 145.3 (0.9) (7.6) $ Fueling Systems 63.5 (0.2) (0.3) $ Consolidated 208.8 (1.1) (7.9) 136.8 $ 63.0 $ 199.8 — (0.5) 136.3 $ 0.8 (0.5) 63.3 $ 0.8 (1.0) 199.6 $ $ $ 8. EMPLOYEE BENEFIT PLANS Defined Benefit Plans - As of December 31, 2016, the Company maintained two domestic pension plans and three German pension plans. The Company used a December 31, 2016 measurement date for these plans. One of the Company’s domestic pension plans covers two management employees (one active employee and one former employee), while the other domestic plan covers all other 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 also maintains a postretirement benefit plan to provide health and life insurance benefits to employees hired prior to 1992. The Company effectively capped its cost for those benefits through plan amendments made in 1992, freezing Company contributions for insurance benefits at 1991 levels for current and future beneficiaries with actuarially reduced benefits for employees who retire before age 65. The disclosures surrounding this plan are reflected in the "Other Benefits" caption. The following table sets forth aggregated information related to the Company’s pension benefits and other postretirement benefits, including changes in the benefit obligations, changes in plan assets, funded status, amounts recognized in the balance sheet, amounts recognized in accumulated other comprehensive income, and actuarial assumptions that the Company considered in its determination of benefit obligations and plan costs. Benefit obligation balances presented below reflect the projected benefit obligation (PBO) for the Company's pension plans, and accumulated postretirement benefit obligations (APBO) for the Company's other benefit plans. 48 (In millions) Accumulated benefit obligation, end of year Change in benefit obligation: Benefit obligation, beginning of year Service cost Interest cost Actuarial (gain)/loss Settlements paid Benefits paid Curtailment Foreign currency exchange Benefit obligation, end of year Change in plan assets: Fair value of assets, beginning of year Actual return on plan assets Company contributions Settlements paid Benefits paid Foreign currency exchange Plan assets, end of year Funded status Amounts recognized in balance sheet: Current liabilities Noncurrent liabilities Net liability, end of year Amount recognized in accumulated other comprehensive income/(loss): Prior service cost Net actuarial loss Settlement Total recognized in accumulated other comprehensive income/(loss) Pension Benefits Other Benefits 2016 2015 2016 2015 177.0 $ 182.8 $ 10.5 $ 11.3 186.9 $ 209.5 $ 11.3 $ 0.9 6.0 4.1 (0.6) (15.7) — (0.5) 181.1 $ 147.4 $ 9.5 5.5 (0.5) (15.7) (0.1) 146.1 $ 1.4 7.5 (12.3) (0.4) (14.4) (1.9) (2.5) 186.9 160.0 (4.0) 6.9 (0.4) (14.4) (0.7) 147.4 $ $ $ 0.1 0.3 — — (1.2) — — 10.5 $ — $ — 1.2 — (1.2) — — $ 13.0 0.1 0.5 (1.0) — (1.3) — — 11.3 — — 1.3 — (1.3) — — (35.0) $ (39.5) $ (10.5) $ (11.3) (0.3) $ (34.7) (35.0) $ (3.4) $ (36.0) (39.4) $ (1.1) $ (9.4) (10.5) $ (1.2) (10.1) (11.3) — $ — $ 48.9 1.5 48.0 2.1 $ 0.2 0.9 — 50.4 $ 50.1 $ 1.1 $ 0.5 0.9 — 1.4 $ $ $ $ $ $ $ $ $ $ 49 The following table sets forth other changes in plan assets and benefit obligation recognized in other comprehensive income for 2016 and 2015: (In millions) Net actuarial (gain)/loss Amortization of: Net actuarial gain Prior service credit Settlement recognition Deferred tax asset Foreign currency exchange Pension Benefits Other Benefits 2016 2015 2016 2015 $ 3.8 $ (0.3) $ — $ (2.3) — (1.4) 0.3 (0.1) 0.3 $ (2.8) — (2.1) 1.9 (0.3) (3.6) $ (0.1) (0.4) — 0.2 — (0.3) $ (1.0) (0.2) (0.4) — 0.6 — (1.0) Total recognized in other comprehensive income $ Weighted-average assumptions used to determine domestic benefit obligations: Discount rate Rate of increase in future compensation Pension Benefits Other Benefits 2016 2015 2016 2015 4.13% * —% 4.37% 3.89% 4.09% * —% 3.00 - 8.00% (Graded) 3.00 - 8.00% (Graded) *No rate of increases in future compensation used within assumptions for 2016 and 2015, as the cash balance component of the domestic Pension Plan was frozen and the other domestic Pension Plan components do not base benefits on compensation. Assumptions used to determine domestic periodic benefit cost: Pension Benefits Other Benefits 2016 2015 2014 2016 2015 2014 Discount rate 4.40% 4.00% 4.75% 4.09% 3.75% 4.50% Rate of increase in future compensation Expected long-term rate of return on plan assets * —% * —% * —% 3.00 - 8.00% (Graded) 3.00 - 8.00% (Graded) 3.00 - 12.00% (Graded) 6.50% 7.00% 7.70% —% —% —% *No rate of increases in future compensation used within assumptions for 2016, 2015, and 2014, as the cash balance component of the domestic Pension Plan was frozen and the other domestic Pension Plan components do not base benefits on compensation. For the fiscal year ended December 31, 2016, the Company used the RP-2014 aggregate table adjusted to back out estimated mortality improvements from 2006 to the measurement date using Scale MP-2014, and then projected forward using Scale MP-2016 released by the Society of Actuaries during 2016 to estimate future mortality rates based upon current data. For the fiscal year ended January 2, 2016, the Company used the RP-2014 aggregate table adjusted to back out estimated mortality improvements from 2006 to the measurement date using Scale MP-2014, and then projected forward using Scale MP-2015 released by the Society of Actuaries during 2015 to estimate future mortality rates. 50 The following table sets forth the aggregated net periodic benefit cost for all defined benefit plans for 2016, 2015, and 2014: (In millions) Service cost Interest cost Expected return on assets Amortization of: Transition obligation Settlement cost Prior service cost Actuarial loss Settlement cost Net periodic benefit cost Pension Benefits Other Benefits 2016 2015 2014 2016 2015 2014 $ $ 0.9 6.0 (9.2) — 0.1 — 2.5 1.2 1.5 $ 1.4 $ 1.2 $ 7.5 (9.9) 8.2 (10.6) — — — 3.4 1.2 3.6 $ — — — 2.5 1.0 2.3 $ $ 0.1 0.3 — — — 0.3 0.1 — 0.8 $ $ 0.1 0.5 — — — 0.4 0.2 — 1.2 $ $ 0.1 0.5 — — — 0.4 0.1 — 1.1 The estimated net actuarial (gain)/loss and prior service cost/(credit) that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2017 fiscal year are $2.6 million and $0.0 million, respectively, for the pension plans and $0.1 million and $0.3 million, respectively, for all other benefits. The Company consults with a third party investment manager for the assets of the funded domestic defined benefit plan. The plan assets are currently invested primarily in pooled funds, where each fund in turn is composed of mutual funds that have at least daily net asset valuations. Thus, the Company’s funded domestic defined benefit plan assets are invested in a “fund of funds” approach. The Company’s Board has delegated oversight and guidance to an appointed Employee Benefits Committee. The Committee has the tasks of reviewing plan performance and asset allocation, ensuring plan compliance with applicable laws, establishing plan policies, procedures, and controls, monitoring expenses, and other related activities. The plan's investment policies and strategies focus on the ability to fund benefit obligations as they come due. Considerations include the plan's current funded level, plan design, benefit payment assumptions, funding regulations, impact of potentially volatile business results on the Company’s ability to make certain levels of contributions, and interest rate and asset return volatility among other considerations. The Company currently attempts to maintain plan funded status at approximately 80 percent or greater pursuant to the Pension Protection Act of 2007. Given the plan’s current funded status, the Company’s cash on hand, cash historically generated from business operations, and cash available under committed credit facilities, the Company sees ample liquidity to achieve this goal. Risk management and continuous monitoring requirements are met through monthly investment portfolio reports, quarterly Employee Benefits Committee meetings, annual valuations, asset/liability studies, and the annual assumption process focusing primarily on the return on asset assumption and the discount rate assumption. As of December 31, 2016 and January 2, 2016, funds were invested in equity, fixed income, and other investments as follows: Asset Category Equity securities Fixed income securities Other Total Target Percentage at Year-End 2016 Plan Asset Allocation at Year-End 2016 2015 31% 65% 4% 100% 31% 65% 4% 100% 34% 62% 4% 100% The Company does not see any particular concentration of risk within the plans, nor any plan assets that pose difficulties for fair value assessment. The Company currently has no allocation to potentially illiquid or potentially difficult to value assets such as hedge funds, venture capital, private equity, and real estate. 51 The Company works with actuaries and consultants in making its determination of the asset rate of return assumption and also the discount rate assumption. Asset class assumptions are set using a combination of empirical and forward-looking analysis for long-term rate of return on plan assets. A variety of models are applied for filtering historical data and isolating the fundamental characteristics of asset classes. These models provide empirical return estimates for each asset class, which are then reviewed and combined with a qualitative assessment of long-term relationships between asset classes before a return estimate is finalized. This provides an additional means for correcting for the effect of unrealistic or unsustainable short-term valuations or trends, opting instead for return levels and behavior that are more likely to prevail over long periods. With that, the Company has assumed an expected long-term rate of return on plan assets of 6.25 percent for the 2017 net periodic benefit cost, down from 6.50 percent in the prior year. This decrease in the assumed long-term rate of return is primarily due to a higher percentage of assets in fixed income securities. The Company uses the Aon Hewitt AA Above Median curve to determine the discount rate. All cash flow obligations under the plan are matched to bonds in the Aon Hewitt universe of liquid, high-quality, non-callable / non-putable corporate bonds with outliers removed. From that matching exercise, a discount rate is determined. At January 2, 2016, the Company changed the method used to calculate the service and interest components of net periodic benefit cost for the domestic pension plans and other postretirement benefit plan. This change compared to the previous method resulted in different service and interest components of net periodic benefit cost in the 2016 fiscal year. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. The Company elected to utilize a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. The Company made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. This change does not affect the measurement of the Company's domestic pension and postretirement benefit obligations and is accounted for as a change in accounting estimate applied prospectively. The Company’s German pension plans are funded by insurance contract policies whereby the insurance company guarantees a fixed minimum return. Due to tax legislation, individual pension benefits can only be financed using direct insurance policies up to certain maximums. These maximum amounts in respect of each member are paid into such an arrangement on a yearly basis. The Company designated all equity and most domestic fixed income plan assets as Level 1, as they are mutual funds with prices that are readily available. The U.S. Treasury securities and German plan assets are designated as Level 2 inputs. The fair value of the German plan assets are measured by the reserve that is supervised by the German Federal Financial Supervisory Authority. The U.S. Treasury securities are administered by the United States government. The fair values of the Company’s pension plan assets for 2016 and 2015 by asset category are as follows: (In millions) Equity Domestic equity mutual funds International equity mutual funds Fixed income U.S. treasury and government agency securities Fixed income mutual funds Other Insurance contracts Cash and equivalents Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 2016 $ $ $ 27.8 17.5 16.4 79.1 4.5 0.8 146.1 $ 52 $ 27.8 17.5 — 79.1 — 0.8 125.2 $ — $ — 16.4 — 4.5 — 20.9 $ — — — — — — — (In millions) Equity Domestic equity mutual funds International equity mutual funds Fixed income U.S. treasury and government agency securities Fixed income mutual funds Other Insurance contracts Cash and equivalents Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 2015 $ $ 31.0 19.6 $ 31.0 19.6 — $ — 15.8 75.3 4.9 0.8 — 75.3 — 0.8 15.8 — 4.9 — $ 147.4 $ 126.7 $ 20.7 $ — — — — — — — The Company estimates total contributions to the plans of $6 million in 2017. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in accordance with the following schedule: (In millions) 2017 2018 2019 2020 2021 Years 2022 through 2026 Pension Benefits Other Benefits $ $ 11.6 11.7 11.3 11.3 11.2 59.3 1.1 1.0 1.0 0.9 0.8 3.5 Defined Contribution Plans - The Company maintained two defined contribution plans during 2016, 2015, and 2014. The Company's cash contributions are allocated to participant's accounts based on investment elections. The following table sets forth Company contributions to the defined contribution plans: (In millions) 2016 2015 2014 Company contributions to the plans $ 5.9 $ 5.9 $ 5.6 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of: (In millions) Salaries, wages, and commissions Product warranty costs Insurance Employee benefits Other 2016 2015 28.4 $ 8.2 2.0 7.9 10.3 56.8 $ 20.5 9.3 2.7 11.0 8.6 52.1 $ $ 53 10. INCOME TAXES Income before income taxes consisted of the following: (In millions) Domestic Foreign 2016 2015 2014 $ $ 45.4 58.7 104.1 $ $ 23.6 62.7 86.3 $ $ The income tax provision/(benefit) from continuing operations consisted of the following: (In millions) Current: Federal Foreign State Total current Deferred: Federal Foreign State Total deferred 2016 2015 2014 9.6 $ 1.2 $ 11.4 0.8 21.8 2.9 (1.0) 1.1 3.0 24.8 $ $ 17.4 0.8 19.4 (1.8) (4.0) (1.0) (6.8) $ $ 12.6 $ $ $ 42.2 47.5 89.7 7.4 12.2 1.7 21.3 3.3 (3.8) (1.9) (2.4) 18.9 A reconciliation of the tax provision for continuing operations at the U.S. statutory rate to the effective income tax expense rate as reported is as follows: U.S. Federal statutory rate State income taxes, net of federal benefit Foreign operations R&D tax credits Uncertain tax position adjustments Deferred tax adjustments - restructuring and rate adjustments Valuation allowance on state and foreign deferred tax Purchase of noncontrolling interest Share-based compensation Other items Effective tax rate 2016 2015 2014 35.0% (0.3) (8.4) (0.6) (2.5) 0.3 2.4 — (1.1) (1.0) 23.8% 35.0% (0.3) (13.1) (1.0) (1.5) 1.1 4.1 (9.4) — (0.3) 14.6% 35.0% 1.0 (9.2) (0.6) (1.6) (3.9) (0.3) — — 0.6 21.0% 54 Significant components of the Company's deferred tax assets and liabilities were as follows: (In millions) Deferred tax assets: Accrued expenses and reserves Compensation and employee benefits Other items Valuation allowance on state and foreign deferred tax Total deferred tax assets Deferred tax liabilities: Accelerated depreciation on fixed assets Amortization of intangibles Other items Total deferred tax liabilities Net deferred tax liabilities 2016 2015 $ 10.0 24.2 10.9 (9.8) 35.3 13.8 56.5 0.9 71.2 (35.9) $ 12.8 25.7 9.6 (7.2) 40.9 14.0 56.6 0.2 70.8 (29.9) $ $ The effective tax rate continues to be lower than the statutory rate primarily due to the indefinite reinvestment of foreign earnings taxed at rates below the U.S. statutory rate as well as recognition of foreign tax credits. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations as well as cash on hand and available credit. In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard simplifies several aspects of the accounting for employee share-based payment transactions including the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification, and the classification of those taxes paid on the statement of cash flows. This ASU is effective for annual and interim periods beginning after December 15, 2016 with early adoption permitted. The Company early adopted ASU 2016-09 during the second quarter ended July 2, 2016. The Company settled the liability for the noncontrolling interest of a subsidiary during the first quarter of 2015. This transaction created additional accretive benefits for the Company from the reversal of a deferred tax liability created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer. The Company also realized a gain on the mandatorily redeemable noncontrolling interest liability during the first quarter of 2015. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This ASU requires an entity to classify deferred tax assets and liabilities as noncurrent within a classified balance sheet. The ASU is effective for interim and annual periods beginning after December 15, 2016, and early adoption is permitted. Entities can elect either prospective or retrospective adoption of the standard. The Company adopted the new standard on a prospective basis as of the fiscal year-ended January 2, 2016. Accordingly, classification of prior period deferred tax amounts were not retrospectively adjusted. The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss for certain state and foreign income tax purposes incurred over the three-year period ended December 31, 2016. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $9.8 million has been recorded to recognize only the portion of the deferred tax assets that are more likely than not to be realized. The Company has foreign income tax net operating loss ("NOL") carryforwards of $4.7 million and state income tax NOL and credit carryforwards of $6.1 million, which will expire on various dates as follows: 55 (In millions) 2017-2019 2020-2024 2025-2029 2030-2034 2035-2039 Unlimited $ $ 0.7 2.4 0.6 2.1 0.7 4.3 10.8 The Company believes that it is more likely than not that the benefit from certain foreign NOL carryforwards as well as certain state NOL and state credit carryforwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $3.8 million on the deferred tax assets related to these foreign NOL carryforwards and a valuation allowance of $6.0 million on the deferred tax assets related to these state NOL and credit carryforwards. The Company considers undistributed earnings from its foreign subsidiaries to be indefinitely reinvested with respect to the U.S. It is the Company’s policy to reinvest earnings as needed for operations, capital and acquisition spending. The Company does not provide for deferred taxes on the excess of the financial reporting over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. That excess totaled approximately $440.0 million as of December 31, 2016. The determination of the additional deferred taxes that have not been provided is not practicable. As of the beginning of fiscal year 2016, the Company had gross unrecognized tax benefits of $2.4 million, excluding accrued interest and penalties. The unrecognized tax benefits decreased $1.1 million for federal tax liabilities and remained the same for state income tax liabilities based on evaluations made during 2016 primarily due to statute expirations and offset by uncertain tax positions identified in the current year. The Company had gross unrecognized tax benefits, excluding accrued interest and penalties, of $1.3 million as of December 31, 2016. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2016, 2015, and 2014 (excluding interest and penalties) is as follows: (In millions) Beginning balance Additions for tax positions of the current year Additions for tax positions of prior years Reductions for tax positions of prior years Statute expirations Settlements Ending balance 2016 2015 2014 $ 2.4 0.1 0.1 (0.2) (1.1) — $ 4.4 0.2 0.2 (0.8) (1.6) — 1.3 $ 2.4 $ 5.1 0.1 1.7 (1.1) (1.4) — 4.4 $ $ If recognized, each annual effective tax rate would be affected by the net unrecognized tax benefits of $1.3 million, $2.3 million, and $4.3 million as of year-end 2016, 2015, and 2014, respectively. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. In 2016, interest and penalties decreased $1.2 million, for prior year tax positions. The Company has accrued interest and penalties as of December 31, 2016, January 2, 2016, and January 3, 2015 of approximately $1.1 million, $2.3 million, and $2.5 million, respectively. The Company is subject to taxation in the United States and various state and foreign jurisdictions. With few exceptions, as of December 31, 2016, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2013 and is no longer subject to foreign or state income tax examinations by tax authorities for years before 2011. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months as a result of an audit or due to the expiration of a statute of limitation. Based on the current audits in process and pending statute expirations, the payment of taxes as a result could be up to $0.9 million. 56 11. DEBT Debt consisted of the following: (In millions) New York Life Prudential Agreement Tax increment financing debt Capital leases Foreign subsidiary debt Less: unamortized debt issuance costs Less current maturities Long-term debt 2016 2015 75.0 90.0 21.8 0.1 3.6 (0.3) 190.2 (33.7) 156.5 $ $ 75.0 120.0 22.8 0.1 3.1 (0.3) 220.7 (32.9) 187.8 $ $ Debt outstanding at December 31, 2016, excluding unamortized debt issuance costs, matures as follows: (In millions) Total 2017 2018 2019 2020 2021 Thereafter Debt Capital leases $ $ 190.4 0.1 190.5 $ $ 33.7 — 33.7 $ $ 31.2 0.1 31.3 $ $ 31.3 — 31.3 $ $ 1.2 — 1.2 $ $ 1.2 — 1.2 $ $ 91.8 — 91.8 New York Life On May 27, 2015, the Company entered into an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life (the "New York Life Agreement") for $150.0 million maximum aggregate principal borrowing capacity and the Company authorized the 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 (0.76 percent as of December 31, 2016) plus a spread of 1.35 percent with interest-only payments due on a monthly basis. On October 28, 2016, the Company entered into the First Amendment to Note Purchase and Private Shelf Agreement. The Amendment was intended to make the covenants within the New York Life Agreement consistent with the covenants that were modified in the Third Amended and Restated Credit Agreement (the "Credit Agreement"). As of December 31, 2016, there was $75.0 million remaining borrowing capacity under the New York Life Agreement. Project Bonds On December 31, 2012, the Company, Allen County, Indiana and certain institutional investors entered into a Bond Purchase and Loan Agreement. Under the agreement, Allen County, Indiana issued a series of Project Bonds entitled “Taxable Economic Development Bonds, Series 2012 (Franklin Electric Co., Inc. Project)." The aggregate principal amount of the Project Bonds that were issued, authenticated, and are now outstanding thereunder was limited to $25.0 million. The Company then borrowed the proceeds under the Project Bonds through the issuance of Project Notes to finance the cost of acquisition, construction, installation and equipping of the new Global Corporate Headquarters and Engineering Center. 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. The use of the proceeds from the Project Notes was limited to assist the financing of the new Global Corporate Headquarters and Engineering Center. On May 5, 2015, the Company entered into Amendment No. 1 to the Bond Purchase and Loan Agreement. This amendment provided for debt repayment guarantees from certain Company subsidiaries and waived certain non-financial covenants related to subsidiary guarantees. Prudential Agreement On April 9, 2007, the Company entered into the Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement") in the amount of $175.0 million. Under the Prudential Agreement, the Company issued notes in an aggregate principal amount of $110.0 million on April 30, 2007 (the “B-1 Notes”) and $40.0 million on September 7, 2007 (the “B-2 Notes”). The B-1 Notes and B-2 Notes bear a coupon of 5.79 percent and had at issuance an average life of 10 years with a final maturity in 2019. On July 22, 2010, the Company entered into Amendment No. 3 to the Prudential Agreement to increase its borrowing capacity by $25.0 million. On December 14, 2011, the Company entered into Amendment No. 4 to the 57 Second Amended and Restated Note Purchase and Private Shelf Agreement to redefine the debt to EBITDA ratio covenant in order to be equivalent to that under the Agreement. On December 31, 2012, the Company and Prudential Insurance Company of America entered into an amendment to the Second Amended and Restated Note Purchase and Private Shelf Agreement to extend the effective date to December 31, 2015. On May 5, 2015, the Company entered into Amendment No. 6 to the Second Amended and Restated Note Purchase and Private Shelf Agreement. This amendment provided for debt repayment guarantees from certain Company subsidiaries and waived certain non-financial covenants related to subsidiary guarantees. On May 28, 2015, the Company entered into a Third Amended and Restated Note Purchase and Private Shelf Agreement with Prudential to increase the total borrowing capacity from $200.0 million to $250.0 million. On October 28, 2016, the Company entered into Amendment No. 1 to the Third Amended and Restated Note Purchase and Private Shelf Agreement. This amendment was intended to make the covenants within the Prudential Agreement consistent with the covenants that were modified in the Credit Agreement (below). As of December 31, 2016, the Company has $100.0 million borrowing capacity available under the Prudential Agreement. Principal installments of $30.0 million are payable annually commencing on April 30, 2015 and continuing to and including April 30, 2019, with any unpaid balance due at maturity. Credit Agreement On October 28, 2016, the Company entered into the Third Amended and Restated Credit Agreement (the "Credit Agreement”). The Credit Agreement extended the maturity date of the Company’s previous credit agreement to October 28, 2021 and increased the commitment amount from $150.0 million to $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) subject to the conditions contained therein. All of the Company's present and future material domestic subsidiaries unconditionally guaranty all of the Borrowers' obligations under and in connection with the Credit Agreement. Additionally, the Company unconditionally guaranties all of the obligations of Franklin B.V. under the Credit Agreement. 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 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 December 31, 2016, the Company had no outstanding borrowings, $5.9 million in letters of credit outstanding, and $294.1 million of available capacity under the Credit Agreement. As of January 2, 2016, the Company had no outstanding borrowings, $5.2 million in letters of credit outstanding, and $144.8 million of available capacity under the Credit Agreement. Covenants The New York Life Agreement, the Project Bonds, the Prudential Agreement, and the Credit Agreement contain customary affirmative and negative covenants. The affirmative covenants relate to financial statements, notices of material events, conduct of business, inspection of property, maintenance of insurance, compliance with laws and most favored lender obligations. The negative covenants include limitations on loans, advances and investments, and the granting of liens by the Company or its subsidiaries, as well as prohibitions on certain consolidations, mergers, sales and transfers of assets. The covenants also include financial requirements including a maximum leverage ratio of 3.50 to 1.00 (using net debt in the measure of leverage ratio, whereas the previous credit agreement used gross debt) and a minimum interest coverage ratio of 3.00 to 1.00 (using EBITDA in the measure, whereas the previous credit agreement used EBIT). Cross default is applicable with the Credit Agreement, the Prudential Agreement, the Project Bonds, and the New York Life 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 December 31, 2016. 12. SHAREHOLDERS' EQUITY Authorized Shares The Company has the authority to issue 65,000,000, $.10 par value shares. Share Repurchases During 2016, 2015, and 2014, pursuant to a stock repurchase program authorized by the Company’s Board of Directors, the Company repurchased and retired the following amounts and number of shares: (In millions, except share amounts) 2016 2015 2014 Repurchases Shares 3.8 $ 46.3 $ 144,600 1,568,731 9.0 243,020 $ 58 In 2016, the Company retired 96,929 shares that were received from employees as payment for the exercise price of their stock options and taxes owed upon the exercise of their stock options and release of their restricted awards. The Company also retired 16,391 shares that had been previously granted as stock awards to employees, but were forfeited upon not meeting the required restriction criteria or termination. In 2015, the Company retired 65,209 shares that were received from employees as payment for the exercise price of their stock options and taxes owed upon the exercise of their stock options and release of their restricted awards. The Company also retired 958 shares that had been previously granted as a stock award to employees, but were forfeited upon not meeting the required restriction criteria or termination. In 2014, the Company retired 40,679 shares that were received from employees as payment for the exercise price of their stock options and taxes owned upon the exercise of their stock options and release of their restricted awards. The Company also retired 68,675 shares that had been previously granted as stock awards to employees, but were forfeited upon not meeting the required restriction criteria or termination. In 2015 and 2014, the Company recorded $1.4 million and $2.3 million, respectively, as a reduction in tax liability and an increase to shareholders' equity as a result of stock option exercises and award vests. In 2016, the Company early adopted ASU 2016-09 (refer to Note 2 for additional information); therefore, no amounts were recorded to equity as a result of stock option exercises and award vests. 13. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS) Changes in accumulated other comprehensive income/(loss), net of tax, by component are summarized below: (In millions) Balance, December 28, 2013 Other comprehensive income/(loss) before reclassifications Amounts reclassified from accumulated other comprehensive income/(loss) (1) Net other comprehensive income/(loss) (35.8) — (35.8) Pension and Post- Retirement Plan Benefit Adjustments (2) Total Foreign Currency Translation Adjustments $ (16.0) $ (38.7) $ (54.7) — (17.4) (17.4) (35.8) (17.4) (53.2) Balance, January 3, 2015 $ (51.8) $ (56.1) $ (107.9) Other comprehensive income/(loss) before reclassifications Amounts reclassified from accumulated other comprehensive income/(loss) (1) Net other comprehensive income/(loss) (58.3) — (58.3) — 4.6 4.6 (58.3) 4.6 (53.7) Balance, January 2, 2016 $ (110.1) $ (51.5) $ (161.6) Other comprehensive income/(loss) before reclassifications Amounts reclassified from accumulated other comprehensive income/(loss) (1) Net other comprehensive income/(loss) (8.3) — (8.3) — — — (8.3) — (8.3) Balance, December 31, 2016 $ (118.4) $ (51.5) $ (169.9) (1) This accumulated other comprehensive income/(loss) component is included in the computation of net periodic pension cost (refer to Note 8 for additional details) and is included in the "Selling, general, and administrative expenses" line of the Company's consolidated statements of income. (2) Net of tax (benefit)/expense of $0.5 million, $2.5 million and $(8.6) million for 2016, 2015, and 2014, respectively. Amounts related to noncontrolling interests were not material. 59 14. 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: (In millions, except per share amounts) 2016 2015 2014 Numerator: Net income attributable to Franklin Electric Co., Inc. Less: Undistributed earnings allocated to participating securities Less: Undistributed earnings allocated to redeemable noncontrolling interest Net income available to common shareholders Denominator: Basic weighted average common shares outstanding Effect of dilutive securities: Non-participating employee stock options and performance awards Diluted weighted average common shares outstanding Basic earnings per share Diluted earnings per share $ $ $ $ 78.7 $ 72.9 $ 0.7 1.0 0.7 0.8 77.0 $ 71.4 $ 46.2 0.5 46.7 1.67 1.65 $ $ 47.1 0.5 47.6 1.52 1.50 $ $ 69.8 0.7 0.9 68.2 47.7 0.5 48.2 1.43 1.41 There were 0.4 million, 0.3 million, and 0.1 million stock options outstanding as of 2016, 2015, and 2014, respectively, that were excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive. 15. SHARE-BASED COMPENSATION The Company maintains the Franklin Electric Co., Inc. 2012 Stock Plan (the "2012 Stock Plan"), which is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards and stock unit awards to key employees and non-employee directors. The 2012 Stock Plan authorizes 2,400,000 shares for issuance as follows: 2012 Stock Plan Authorized Shares Stock Options Stock/Stock Unit Awards 1,680,000 720,000 The Company also maintains the Amended and Restated Franklin Electric Co., Inc. Stock Plan (the "2009 Stock Plan") which, as amended in 2009, provided for discretionary grants of stock options and stock awards. The 2009 Stock Plan authorized 4,400,000 shares for issuance as follows: 2009 Stock Plan Authorized Shares Stock Options Stock Awards 3,200,000 1,200,000 60 All options in the 2009 Stock Plan have been awarded. The Company currently issues new shares from its common stock balance to satisfy option exercises and the settlement of stock awards and stock unit awards made under the 2009 Stock Plan and/or the 2012 Stock Plan. The total share-based compensation expense recognized in 2016, 2015, and 2014 was $6.9 million, $5.6 million, and $7.5 million, respectively. Stock Options: Under the above plans, the exercise price of each option equals the market price of the Company’s common stock on the date of grant, and the options expire 10 years after the date of the grant. Options granted to employees vest at 25 percent a year and become fully vested and fully exercisable after 4 years (vesting is accelerated upon retirement, death, or disability). Subject to the terms of the plans, in general, the aggregate option exercise price and any applicable tax withholdings may be satisfied in cash or its equivalent, by the plan participant’s delivery of shares of the Company’s common stock having a fair market value at the time of exercise equal to the aggregate option exercise price and/or the applicable tax withholdings or by having shares otherwise subject to the award withheld by the Company or via cashless exercise through a broker-dealer. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model with a single approach and amortized using a straight-line attribution method over the option’s vesting period. Options granted to retirement eligible employees are immediately expensed. The Company uses historical data to estimate the expected volatility of its stock, the weighted average expected life, the period of time options granted are expected to be outstanding, and its dividend yield. The risk-free rates for periods within the contractual life of the option are based on the U.S. Treasury yield curve in effect at the time of the grant. The table below provides the weighted average grant-date fair values and key assumptions used for the Black-Scholes model to determine the fair value of options granted during 2016, 2015, and 2014: 2016 2015 2014 Risk-free interest rate Dividend yield Volatility factor Expected term 1.21% 1.32% 37.70% 1.59% 0.95% 37.90% 5.5 years 5.5 years Weighted average grant-date fair value of options $ 9.18 $ 12.34 $ A summary of the Company’s outstanding stock option activity and related information is as follows: 1.68% 0.70% 38.70% 5.6 years 15.09 (Shares in thousands) Stock Options Outstanding at beginning of 2016 Granted Exercised Forfeited Expired Outstanding at end of 2016 Expected to vest after applying forfeiture rate Vested and exercisable at end of period Weighted- Average Exercise Price Shares Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value (000’s) 23.26 29.08 19.18 33.68 43.27 25.02 24.92 21.15 1,472 $ 265 (273) (8) (1) 1,455 1,433 977 $ $ $ 61 5.50 years 5.45 years 4.05 years $ $ $ 20,592 20,433 17,548 (In millions) Intrinsic value of options exercised Cash received from the exercise of options Fair value of shares vested Tax benefit of options exercised $ 2016 2015 2014 $ 5.2 5.2 1.7 1.9 $ 1.7 2.0 1.4 0.7 3.8 2.9 2.8 1.5 As of December 31, 2016, there was $1.7 million of total unrecognized compensation cost related to non-vested stock options granted under the 2012 Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.15 years. Stock/Stock Unit Awards: Under the 2009 Stock Plan, non-employee directors and employees may be granted stock awards. Under the 2012 Stock Plan, non-employee directors and employees may be granted stock awards and stock units. Stock awards to non-employee directors are generally fully vested when made. Stock/stock unit awards to employees cliff vest over 3 or 4 years (subject to accelerated vesting of a pro rata portion in the case of retirement, death or disability) and may be contingent on the attainment of certain performance goals. Dividends are paid to the recipient prior to vesting, except that dividends on performance-based stock awards under the 2012 Stock Plan will be paid only to the extent the performance goals are met. Stock/stock unit awards granted to retirement eligible employees are expensed over the vesting period. Compensation cost for the performance stock/stock unit awards is accrued based on the probable outcome of specified performance conditions. A summary of the Company’s restricted stock/stock unit award activity and related information is as follows: (Shares in thousands) Restricted Stock/Stock Unit Awards Non-vested at beginning of 2016 Awarded Vested Forfeited Non-vested at end of 2016 Shares Weighted-Average Grant- Date Fair Value 510 $ 172 (175) (34) 473 $ 34.43 29.45 28.35 34.16 34.89 The weighted-average grant date fair value of restricted stock/stock unit awards granted in 2016, 2015, and 2014, is $29.45, $36.27, and $42.39, respectively. As of December 31, 2016, there was $8.1 million of total unrecognized compensation cost related to non-vested stock/stock unit awards granted under the 2012 Stock Plan and the 2009 Stock Plan. That cost is expected to be recognized over a weighted-average period of 2.21 years. 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company’s business consists of the Water Systems and Fueling Systems reportable segments, based on the principal end market served. Within the Water Systems segment, North America Water Systems and International Water Systems have been identified as operating segments. For reporting segment purposes, the Company aggregates North America Water Systems and International Water Systems into the Water Systems segment, as they meet the aggregation criteria in FASB ASC 280. The Company includes unallocated corporate expenses and inter-company eliminations in an “Other” segment that together with the Water Systems and Fueling Systems segments, represent the Company. The Water Systems segment designs, manufactures and sells motors, pumps, electronic controls and related parts and equipment primarily for use in submersible water and other fluid system applications. The Fueling Systems segment designs, manufactures and sells pumps, electronic controls and related parts and equipment primarily for use in submersible fueling system applications. The Fueling Systems segment integrates and sells motors and electronic controls produced by the Water Systems segment. 62 The accounting policies of the Company's reportable segments are the same as those described in Note 1 (Summary of Significant Accounting Policies). Performance is evaluated based on the sales and operating income of the segments and a variety of ratios to measure performance. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. Financial information by reportable business segment is included in the following summary: (In millions) Water Systems Fueling Systems Other Consolidated Water Systems Fueling Systems Other Consolidated Water Systems Fueling Systems Other Consolidated Net sales to external customers Operating income (loss) 2016 2015 2014 2016 2015 2014 723.2 $ 707.6 $ 824.6 $ 108.2 $ 86.7 $ 226.7 — 217.3 — 223.2 — 949.9 $ 924.9 $ 1,047.8 $ 56.3 (53.7) 110.8 $ 51.5 (47.8) 90.4 $ 103.9 49.7 (53.5) 100.1 Total assets Depreciation 2016 2015 2014 2016 2015 2014 671.5 $ 677.6 $ 757.5 $ 19.5 $ 19.5 $ 251.1 117.3 248.5 70.0 252.7 65.6 2.3 5.3 2.5 4.8 1,039.9 $ 996.1 $ 1,075.8 $ 27.1 $ 26.8 $ Amortization Capital expenditures 2016 2015 2014 2016 2015 2014 6.4 1.9 0.1 8.4 $ $ 6.6 1.9 0.1 8.6 $ $ 7.1 1.8 0.2 9.1 $ $ 31.8 $ 19.5 $ 2.1 3.7 1.4 5.0 37.6 $ 25.9 $ 19.9 2.4 5.8 28.1 33.8 3.9 4.7 42.4 $ $ $ $ $ $ Cash is the major asset group in "Other" of total assets at December 31, 2016. Property, plant and equipment is the major asset group in "Other" of total assets at January 2, 2016. Financial information by geographic region is as follows: (In millions) United States Foreign Consolidated 2016 Net sales 2015 2014 2016 Long-lived assets 2015 2014 $ $ 446.9 503.0 949.9 $ $ 418.5 506.4 924.9 $ $ 485.5 562.3 1,047.8 $ $ 349.2 202.3 551.5 $ $ 404.1 150.7 554.8 $ $ 418.0 184.4 602.4 Net sales are attributed to geographic regions based upon the ship to location of the customer. Long-lived assets are attributed to geographic regions based upon the country of domicile. The Company offers a large array of products and systems to multiple markets and customers. Product sales information is tracked regionally and products are categorized differently between regions based on local needs and reporting requirements. However, net sales by segment are representative of the Company's sales by major product category. The Company sells its products through various distribution channels including wholesale and retail distributors, specialty distributors, industrial and petroleum equipment distributors, as well as major oil and utility companies and original equipment manufacturers. No single customer accounted for more than 10 percent of the Company’s consolidated sales in 2016, 2015, or 2014. No single customer accounted for more than 10 percent of the Company's gross accounts receivable in 2016 or 2015. 63 17. COMMITMENTS AND CONTINGENCIES The Company is defending various claims and legal actions which have arisen in the ordinary course of business. In the opinion of management, based on current knowledge of the facts and after discussion with counsel, these claims and legal actions can be defended or resolved without a material effect on the Company’s financial position, results of operations, and net cash flows. Total rent expense charged to operations for operating leases including contingent rentals was $11.7 million, $11.9 million, and $12.6 million in 2016, 2015, and 2014, respectively. The future minimum rental payments for non-cancelable operating leases as of December 31, 2016, are as follows: (In millions) Future minimum rental payments 2017 2018 2019 2020 2021 Thereafter $ 7.4 $ 5.2 $ 4.0 $ 2.4 $ 1.7 $ 0.7 At December 31, 2016, the Company had $10.8 million of commitments primarily for capital expenditures and the purchase of raw materials to be used in production. The changes in the carrying amount of the warranty accrual, as recorded in the "Accrued expenses and other current liabilities" line of the Company's consolidated balance sheets for 2016 and 2015, are as follows: (In millions) Beginning balance Accruals related to product warranties Reductions for payments made Ending balance 2016 2015 9.3 $ 5.9 (7.0) 8.2 $ 9.4 7.6 (7.7) 9.3 $ $ 18. RESTRUCTURING On July 1, 2014, the Company announced a plan to close its Wittlich, Germany manufacturing facility and to complete other European based business units and facilities realignments. The realignments as of the end of 2016 are considered to be substantially completed. In total, the Company had previously estimated the cost for these European realignments to be approximately $19.4 million. The Company actually incurred expenses of $17.5 million. Charges for the realignment included severance expenses, professional service fees, asset write-offs and manufacturing equipment relocation costs. Costs incurred in the twelve months ended December 31, 2016, included in the “Restructuring (income)/expense” line of the Company's consolidated statements of income, are as follows: (In millions) Employee severance Equipment relocation Asset write-off, net of gain on disposal Other Total Water Systems Fueling Systems Other Consolidated $ $ 0.2 $ — (2.0) 0.6 (1.2) $ — $ — $ 0.2 0.4 — 0.6 — — — $ — $ 0.2 0.2 (1.6) 0.6 (0.6) Restructuring expenses of $3.0 million and $16.6 million were incurred in 2015 and 2014, respectively, primarily for the Water Systems realignment. As of December 31, 2016 and January 2, 2016, there were no material restructuring reserves. 64 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Unaudited quarterly financial information for 2016 and 2015, is as follows: (In millions, except per share amounts) Net Sales Gross Profit Net Income Net Income Attributable to Franklin Electric Co., Inc. Basic Earnings Per Share Diluted Earnings Per Share $ $ $ 218.4 $ 252.1 239.8 239.6 $ 74.2 90.7 85.5 81.0 949.9 $ 331.4 $ 225.7 $ 247.4 232.5 219.3 $ 71.5 80.2 76.8 69.1 $ 924.9 $ 297.6 $ 13.6 24.2 23.7 17.8 79.3 20.0 16.4 21.0 16.3 73.7 $ $ $ $ 13.5 24.0 23.7 17.5 78.7 19.8 16.1 20.8 16.2 72.9 $ $ $ $ 0.28 0.51 0.51 0.37 1.67 0.41 0.33 0.44 0.34 1.52 $ $ $ $ 0.28 0.50 0.50 0.37 1.65 0.41 0.33 0.43 0.33 1.50 2016 1st quarter 2nd quarter 3rd quarter 4th quarter 2015 1st quarter 2nd quarter 3rd quarter 4th quarter Basic and diluted earnings per share amounts are computed independently for each of the quarters presented. As a result, the sum of the quarterly earnings per share amounts may not equal the annual earnings per share amount. 65 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Franklin Electric Co., Inc. Fort Wayne, Indiana We have audited the accompanying consolidated balance sheets of Franklin Electric Co., Inc. and subsidiaries (the "Company") as of December 31, 2016 and January 2, 2016, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Franklin Electric Co., Inc. and subsidiaries as of December 31, 2016 and January 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2017, expressed an unqualified opinion on the Company's internal control over financial reporting. /s/DELOITTE & TOUCHE LLP Chicago, Illinois March 1, 2017 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective. In the third quarter of 2016, the Company began the process of a multi-year implementation of a global enterprise resource planning (“ERP”) system. The new ERP system was designed to better support the Company's business needs in response to the changing operating environment. The implementation of a worldwide ERP system will likely affect the processes that constitute the Company's internal control over financial reporting and will require testing for effectiveness as the implementation progresses. The Company expects that the new ERP system will enhance the overall system of internal controls over financial reporting through further automation and integration of business processes, although it is not being implemented in response to any identified deficiency in the Company’s internal controls over financial reporting. Other than the ERP implementation, there have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 under the Exchange Act during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2016. Our independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. This report appears on page 68. 67 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Franklin Electric Co., Inc. Fort Wayne, Indiana We have audited the internal control over financial reporting of Franklin Electric Co., Inc. and subsidiaries (the "Company") as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the three years ended December 31, 2016 of the Company and our report dated March 1, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule. /s/DELOITTE & TOUCHE LLP Chicago, Illinois March 1, 2017 68 ITEM 9B. OTHER INFORMATION None. 69 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information concerning directors and director nominees required by this Item 10 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017, under the headings of "ELECTION OF DIRECTORS" and "INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS," and is incorporated herein by reference. The information concerning executive officers required by this Item 10 is contained in Part I of this Form 10-K under the heading of "EXECUTIVE OFFICERS OF THE REGISTRANT," and is incorporated herein by reference. The information concerning Regulation S-K, Item 405 disclosures of delinquent Form 3, 4, or 5 filers required by this Item 10 is set forth in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017, under the heading of “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” and is incorporated herein by reference. The information concerning the procedures for shareholders to recommend nominees to the Company’s board of directors, the Audit Committee of the board of directors, and the Company’s code of conduct and ethics required by this Item 10 is set forth in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017 under the heading “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017, under the headings of “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” “MANAGEMENT ORGANIZATION AND COMPENSATION COMMITTEE REPORT,” “COMPENSATION, DISCUSSION AND ANALYSIS,” “SUMMARY COMPENSATION TABLE,” “GRANT OF PLAN BASED AWARDS TABLE,” “OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE,” “OPTION EXCERCISES AND STOCK VESTED TABLE,” “PENSION BENEFITS TABLE,” “NON-QUALIFIED DEFERRED COMPENSATION,” “POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL OF THE COMPANY,” and “DIRECTOR COMPENSATION,” and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017, under the headings of "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,” “SECURITY OWNERSHIP OF MANAGEMENT" and “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS,” and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017, under the heading “INFORMATION ABOUT THE BOARD AND ITS COMMITTEES,” and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by Item 14 is set forth in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2017, under the heading “PROPOSAL 3: RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2017 FISCAL YEAR,” and is incorporated herein by reference. 70 ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES PART IV Documents filed as part of this report: 1. Financial Statements - Franklin Electric Co., Inc. Consolidated Statements of Income for the three years ended December 31, 2016 Consolidated Statements of Comprehensive Income for the three years ended December 31, 2016 Consolidated Balance Sheets as of December 31, 2016 and January 2, 2016 Consolidated Statements of Cash Flows for the three years ended December 31, 2016 Consolidated Statements of Equity for the three years ended December 31, 2016 Notes to Consolidated Financial Statements 2. Financial Statement Schedule - Franklin Electric Co., Inc. Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is disclosed elsewhere in the financial statements and related notes. 3. Exhibits Exhibits are set forth in the attached Exhibit Index. Management Contract, Compensatory Plan, or Arrangement is denoted by an asterisk (*). Form 10-K Annual Report (page) 32 33 34 36 38 40 72 75 71 FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In millions) 2016 Allowance for doubtful accounts $ Allowance for deferred taxes 2015 Allowance for doubtful accounts $ Allowance for deferred taxes 2014 Allowance for doubtful accounts $ Allowance for deferred taxes Balance at Beginning of Period Additions Charged to Costs and Expenses Deductions (a) Other Balance at End of Period $ $ $ 3.8 7.2 3.2 3.9 3.0 3.5 $ $ $ 0.1 2.9 1.1 3.5 0.2 1.3 $ $ 0.3 0.3 0.5 0.2 — $ 0.9 — $ — — $ — — $ — 3.6 9.8 3.8 7.2 3.2 3.9 (a) Charges for which allowances were created. 72 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES Date: March 1, 2017 By /s/ Gregg C. Sengstack Gregg C. Sengstack, Chairman and Chief Executive Officer FRANKLIN ELECTRIC CO., INC. Registrant 73 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 1, 2017. By /s/ Gregg C. Sengstack Gregg C. Sengstack Chairman and Chief Executive Officer (Principal Executive Officer) /s/ John J. Haines John J. Haines Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ David T. Brown David T. Brown Director /s/ Renee J. Peterson Renee J. Peterson Director /s/ David A. Roberts David A. Roberts Director /s/ Jennifer L. Sherman Jennifer L. Sherman Director /s/ Thomas R. VerHage Thomas R. VerHage Director /s/ David M. Wathen David M. Wathen Director 74 FRANKLIN ELECTRIC CO., INC. EXHIBIT INDEX TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016 Number Description 3.1 Amended and Restated Articles of Incorporation of Franklin Electric Co., Inc. (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on May 3, 2007) 3.2 Amended and Restated Bylaws of Franklin Electric Co., Inc., as amended December 16, 2016 (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on December 21, 2016) 10.1 Franklin Electric Co., Inc. Stock Plan (incorporated by reference to Exhibit A of the Company’s Proxy Statement for the Annual Meeting held on April 29, 2005)* 10.2 Franklin Electric Co., Inc. Amended and Restated Stock Plan (incorporated by reference to Exhibit A of the Company’s Proxy Statement for the Annual Meeting held on April 24, 2009)* 10.3 Franklin Electric Co., Inc. 2012 Stock Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement for the Annual Meeting held on May 4, 2012)* 10.4 Franklin Electric Co., Inc. Non-employee Directors' Deferred Compensation Plan, as amended and restated (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the fiscal quarter ended on April 1, 2006)* 10.5 First Amendment to the Franklin Electric Co., Inc. Nonemployee Directors’ Deferred Compensation Plan dated February 19, 2010 (incorporated by reference to Exhibit 10.5 of the Company's Form 10-K for the fiscal year ended January 1, 2011)* 10.6 Second Amendment to the Franklin Electric Co., Inc. Nonemployee Directors' Deferred Compensation Plan dated May 6, 2011 (incorporated by reference to Exhibit 10.6 of the Company's Form 10-K for the fiscal year ended December 31, 2011)* 10.7 Amended and Restated Franklin Electric Co., Inc. Pension Restoration Plan (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-K filed for the fiscal year ended January 3, 2009)* 10.8 First Amendment to the Franklin Electric Co., Inc. Pension Restoration Plan dated December 20, 2012 (incorporated by reference to Exhibit 10.8 of the Company's Form 10-K for the fiscal year ended December 29, 2012)* 10.9 Second Amendment to the Franklin Electric Co., Inc. Pension Restoration Plan (incorporated by reference to Exhibit 10.10 of the Company's Form 10-K for the fiscal year ended January 3, 2015)* 10.10 Franklin Electric Co., Inc. Supplemental Retirement and Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q for the fiscal quarter ended September 29, 2012)* 10.11 First Amendment to the Franklin Electric Co., Inc. Supplemental Retirement and Deferred Compensation Plan dated December 20, 2012 (incorporated by reference to Exhibit 10.10 of the Company's Form 10-K for the fiscal year ended December 29, 2012)* 10.12 Second Amendment to the Franklin Electric Co., Inc. Supplemental Retirement and Deferred Compensation Plan (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the fiscal year ended January 3, 2015)* 10.13 Third Amendment to the Franklin Electric Co., Inc. Supplemental Retirement and Deferred Compensation Plan (incorporated by reference to Exhibit 10.14 of the Company's Form 10-K for the fiscal year ended January 3, 2015)* 10.14 Retirement and Consulting Agreement between the Company and R. Scott Trumbull (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on May 6, 2014)* 10.15 Employment Agreement between the Company and Gregg C. Sengstack (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the fiscal year ended December 29, 2012)* 10.16 Employment Agreement between the Company and John J. Haines (incorporated by reference to Exhibit 10.14 of the Company's Form 10-K for the fiscal year ended December 29, 2012)* 10.17 Form of Confidentiality and Non-Compete Agreement between the Company and Gregg C. Sengstack, John J. Haines, Steven W. Aikman, Daniel J. Crose, DeLancey W. Davis, Julie S. Freigang, Donald P. Kenney, Robert J. Stone, Jonathan M. Grandon, Thomas J. Strupp, and R. Scott Trumbull (incorporated by reference to Exhibit 10.15 of the Company’s Form 10-K for the fiscal year ended January 1, 2005)* 75 10.18 Form of Employment Security Agreement between the Company and Steven W. Aikman, Daniel J. Crose, DeLancey W. Davis, Julie S. Freigang, Donald P. Kenney, Robert J. Stone and Thomas J. Strupp (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 7, 2013)* 10.19 Form of Employment Security Agreement between the Company and Jonathan M. Grandon (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q filed on November 1, 2016)* 10.20 Description of the Executive Officer Annual Incentive Cash Bonus Program (incorporated by reference to Exhibit 10.19 of the Company's Form 10-K for the fiscal year ended January 2, 2016)* 10.21 Franklin Electric Co., Inc. Management Incentive Plan (incorporated by reference to Exhibit A of the Company’s Proxy Statement for the Annual Meeting of Shareholders held May 8, 2015)* 10.22 Form of Non-Qualified Stock Option Agreement for Non-Director Employees (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 12, 2013)* 10.23 Form of Non-Qualified Stock Option Agreement for Director Employees (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K filed on March 12, 2013)* 10.24 Form of Restricted Stock Unit Agreement for Non-Director Employees (incorporated by reference to Exhibit 10.5 of the Company's Form 8-K filed on March 12, 2013)* 10.25 Form of Restricted Stock Unit Agreement for Director Employees (incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed on March 12, 2013)* 10.26 Form of Restricted Stock Agreement for Non-Director Employees (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed on March 12, 2013)* 10.27 Form of Restricted Stock Award Agreement for Director Employees (incorporated by reference to the Company's Form 8-K filed on May 4, 2012)* 10.28 Form of Performance Stock Unit Award Agreement for Non-Director Employees (incorporated by reference to Exhibit 10.6 of the Company's Form 8-K filed on March 12, 2013)* 10.29 Form of Performance Stock Unit Award Agreement for Director Employees (incorporated by reference to Exhibit 10.7 of the Company's Form 8-K filed on March 12, 2013)* 10.30 Third Amended and Restated Note Purchase and Private Shelf Agreement by and among the Company, Prudential Investment Management, Inc., and the purchasers named therein (incorporated by reference to Exhibit 4.2 of the Company's Form 8-K filed on June 2, 2015) 10.31 Amendment No. 1 to Third Amended and Restated Note Purchase and Private Shelf Agreement, dated October 28, 2016, by and among the Company, Prudential Investment Management, Inc., and the purchasers named therein (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q filed on November 1, 2016) 10.32 Bond Purchase and Loan Agreement, dated December 31, 2012, among the Company, The Board of Commissions of the County of Allen, Indiana, and the Bondholders referred to therein (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on January 2, 2013) 10.33 Amendment No. 1 to Bond Purchase and Loan Agreement and Waiver, dated May 5, 2015, among the Company, The Board of Commissioners of the County of Allen, and the Bondholders referred to therein (incorporated by reference to the Company's Form 10-Q filed on May 6, 2015) 10.34 Third Amended and Restated Credit Agreement, dated October 28, 2016, by and among Franklin Electric Co., Inc., Franklin Electric B.V., JP Morgan Chase, N.A., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and the lenders identified therein (incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q filed on November 1, 2016) 10.35 Note Purchase and Private Shelf Agreement by and among the Company, NYL Investors LLC, and the purchasers named therein (incorporated by reference to Exhibit 4.1 of the Company's Form 8-K filed on June 2, 2015) 10.36 First Amendment to Note Purchase and Private Shelf Agreement, dated October 28, 2016, by and among the Company, NYL Investors LLC, and the purchasers named therein (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q filed on November 1, 2016) 10.37 Stock Redemption Agreement, dated April 15, 2015, between the Company and Ms. Patricia Schaefer and Ms. Diane Humphrey (incorporated by reference to Exhibit 99.1 of the Company's Form 8-K filed on April 20, 2015) 18.1 Franklin Electric Co., Inc. and Subsidiaries Preferability Letter from Independent Registered Public Accounting Firm (incorporated by reference to Exhibit 18.1 of the Company's Form 10-Q for the fiscal quarter ended April 2, 2011) 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 76 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Forward-Looking Statements 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase * Management Contract, Compensatory Plan or Arrangement 77 FRANKLIN ELECTRIC CO., INC. SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiary Bombas Leao SA Cookson & Zinn (PTL) Limited Coverco S.r.l. FE Latin America B.V. FELE C.V. Franklin Control Systems, Inc. Franklin Electric (Australia) Pty. Ltd. Franklin Electric (Chile) Ltda Franklin Electric (SEA) Pty. Ltd. Franklin Electric (South Africa) Pty. Ltd. Franklin Electric (Suzhou) Co., Ltd. Franklin Electric (Zambia) Ltd. Franklin Electric B.V. Franklin Electric Botswana Pty. Ltd. Franklin Electric Canada, Inc. Franklin Electric Colombia SAS Franklin Electric Europa GmbH Franklin Electric Germany Holding GmbH Franklin Electric Holding B.V. Franklin Electric India Private Ltd. Franklin Electric Industria de Motobombas SA Franklin Electric International, Inc. Franklin Electric NL BV Franklin Electric spol s.r.o. Franklin Electric Subsidiaries, LLC Franklin Electric Trading (Shanghai) Co., Ltd. Franklin Fueling Sistemas de Combustiveis Ltda Franklin Fueling Systems (Beijing) Company Ltd. Franklin Fueling Systems Australia Pty. Ltd. Franklin Fueling Systems France SARL Franklin Fueling Systems India Private Ltd. Franklin Fueling Systems Ltd. Franklin Fueling Systems GmbH Franklin Fueling Systems, Inc. Impo Motor Pompa Sanayi ve Ticaret A.S. Intelligent Controls, LLC Motores Electricos Sumergibles de Mexico S. de R.L de C.V. Motores Franklin S.A. de C.V. Motori Sommersi Riavvolgibili S.r.l. Pioneer Pump Holdings Pty. State or Country of Organization Percent of Voting Stock Owned Brazil United Kingdom Italy Netherlands Netherlands Oregon Australia Chile Singapore South Africa China Zambia Netherlands Botswana Canada Colombia Germany Germany Netherlands India Brazil Delaware Netherlands Czech Republic Indiana China Brazil China Australia France India United Kingdom Germany Indiana Turkey Maine Mexico Mexico Italy Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 90 100 100 100 75 100 Pioneer Pump Ltd. Pioneer Pump Pty. Ltd. Pioneer Pump Solutions Ltd. Pioneer Pump, Inc. Pluga Pumps and Motors Private Limited Servicios de MESMEX S de SRL de CV Franklin Electric S.r.l Franklin Wadcorpp India Private Limited United Kingdom South Africa United Kingdom Texas India Mexico Italy India 100 100 100 100 70 100 100 65 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements (file numbers 333-01959, 333-59771, 333-34994, 333-34996, 333-111370, 333-124845, 333-158771, 333-166268, and 333-181138) on Form S-8 of our reports dated March 1, 2017, relating to the consolidated financial statements and financial statement schedule of Franklin Electric Co., Inc. and subsidiaries, and the effectiveness of Franklin Electric Co., Inc. and subsidiaries' internal control over financial reporting, appearing in this Annual Report on Form 10-K of Franklin Electric Co., Inc. and subsidiaries for the year ended December 31, 2016. EXHIBIT 23.1 /s/DELOITTE & TOUCHE LLP Chicago, Illinois March 1, 2017 CERTIFICATIONS CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.1 I, Gregg C. Sengstack, certify that: 1. I have reviewed this Annual Report on Form 10-K of Franklin Electric Co., Inc., for the year ending December 31, 2016; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Franklin Electric Co., Inc. as of, and for, the periods presented in this report; 4. Franklin Electric Co., Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Franklin Electric Co., Inc. and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Franklin Electric Co., Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of Franklin Electric Co., Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this report based on such evaluation; and d. Disclosed in this report any changes in Franklin Electric Co., Inc.'s internal control over financial reporting that occurred during Franklin Electric Co., Inc.'s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. Franklin Electric Co., Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Franklin Electric Co., Inc.'s auditors and the audit committee of Franklin Electric Co., Inc.'s board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Franklin Electric Co., Inc.'s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in Franklin Electric Co., Inc.'s internal control over financial reporting. Date: March 1, 2017 /s/ Gregg C. Sengstack Gregg C. Sengstack Chairman and Chief Executive Officer Franklin Electric Co., Inc. CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.2 I, John J. Haines, certify that: 1. I have reviewed this Annual Report on Form 10-K of Franklin Electric Co., Inc., for the year ending December 31, 2016; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of Franklin Electric Co., Inc. as of, and for, the periods presented in this report; 4. Franklin Electric Co., Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for Franklin Electric Co., Inc. and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to Franklin Electric Co., Inc., including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of Franklin Electric Co., Inc.'s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in Franklin Electric Co., Inc.'s internal control over financial reporting that occurred during Franklin Electric Co., Inc.'s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, Franklin Electric Co., Inc.'s internal control over financial reporting; and 5. Franklin Electric Co., Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to Franklin Electric Co., Inc.'s auditors and the audit committee of Franklin Electric Co., Inc.'s board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect Franklin Electric Co., Inc.'s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in Franklin Electric Co., Inc.'s internal control over financial reporting. Date: March 1, 2017 /s/ John J. Haines John J. Haines Vice President and Chief Financial Officer Franklin Electric Co., Inc. EXHIBIT 32.1 CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Franklin Electric Co., Inc. (the “Company”) on Form 10-K for the year ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregg C. Sengstack, Chairman and Chief Executive Officer of the Company, certify to my knowledge, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2017 /s/ Gregg C. Sengstack Gregg C. Sengstack Chairman and Chief Executive Officer Franklin Electric Co., Inc. EXHIBIT 32.2 CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Franklin Electric Co., Inc. (the “Company”) on Form 10-K for the year ending December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John J. Haines, Vice President and Chief Financial Officer of the Company, certify to my knowledge, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2017 /s/ John J. Haines John J. Haines Vice President and Chief Financial Officer Franklin Electric Co., Inc. ADDITIONAL EXHIBITS EXHIBIT 99.1 Forward-Looking Statements Written and oral statements provided by the Company from time to time, including in the Company's annual report to shareholders and its annual report on Form 10-K and other filings under the Securities Exchange Act of 1934, may contain 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 in the Company's written or oral forward-looking statements as a result of various factors, including, but not limited to, the following: • • • • • • • • • • • • • The Company's success in its ongoing evaluation and implementation of its business strategies, especially its success in managing the expense and integration, valuation and other risks of its acquisition strategy and divestitures. Continued or increased competitive pressures that affect sales volume, pricing and profitability. Increased competition due to industry consolidation or new entrants into the Company's existing markets. The strength of the recovery and future health of the U.S. and international economies and other economic factors that directly or indirectly affect the demand for the Company's products, including the effect of economic conditions on housing starts in the United States and on the availability and terms of financing. Increases in the cost of raw material, components, other materials, transportation or other services which the Company is unable to pass on to customers or which impact demand for the Company's products. The effects of and changes in, trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies and similar organizations across the many countries and regions where the Company manufacturers or sells its products, including trade restrictions, inflation, currency fluctuations, import and other charges or taxes, nationalizations and unstable governments. The Company's success in implementing its strategy of concentrating production in low cost locations. The Company's ability to anticipate changing customer requirements, fund and accomplish product innovation, improve processes, and attract and retain capable staff in order to deal with increasing volume and complexity in its products. Difficulties or delays in the development, production, testing and marketing of products, including a failure to ship new products when anticipated, failure of customers to accept these products when planned, any defects in products or a failure of manufacturing economies to develop when planned. The costs and other effects of administrative, civil or criminal proceedings, settlements and investigations, claims, developments or assertions by or against the Company, including those relating to intellectual property rights and licenses, alleged defects in products and non-compliance with governmental regulations. The introduction of alternative products or governmental and regulatory actions that favor alternative methods of serving the same function as the Company's products, such as the extension of municipal water systems. The effect of environmental legislation and regulation on the Company's products and sales. The Company's success in reducing or controlling growth in selling, general and administrative expenses. • • • • • The Company's ability to manage the life cycle of its products, reduce product costs and other costs and increase productivity. Events such as fires, floods, or other natural disasters and weather conditions impacting the Company's ability to produce products or the demand for its products. A prolonged disruption of scheduled deliveries from suppliers when alternative sources of raw material and components are not available. Labor strikes or work stoppages by employees of the Company, its customers, suppliers, or freight contractors or other providers. The adoption of new, or changes in, accounting policies and practices. Some of these and other risks and uncertainties that may affect future results are discussed in more detail in “Item 1A - Risk Factors,” “Item 7A - Quantitative and Qualitative Disclosures About Market Risk,” and Note 17, “Commitments and Contingencies” included in Item 8 of this Annual Report on Form 10-K. All forward-looking statements included herein are based upon information presently available. The Company does not assume any obligation to update any forward-looking information, except as required by law. 

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