UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________

FORM 10-K

_________

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20202021

OR

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-362

 

FRANKLIN ELECTRIC CO., INC.

(Exact name of registrant as specified in its charter)

(260) 824-2900

(Registrant’s telephone number, including area code)

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

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.

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.

  

Indicate by check mark whether the registrant has submitted electronically 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).

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.

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

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant at June 30, 20202021 (the last business day of the registrant’s most recently completed second quarter) was $2,399,426,619.$3,727,659,914. 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.

46,232,56146,481,113 shares

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 20216, 2022 (Part III).

FRANKLIN ELECTRIC CO., INC.

TABLE OF CONTENTS

 

PART I

ITEM 1. 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 20202021 revenue of about $1.2$1.7 billion, the Company designs, manufactures and distributes water and fuel pumping systems, composed primarily of submersible motors, pumps, electronic controls, water treatment systems and related parts and equipment.

The Company’s water pumping systems move fresh and wastewater for the residential, agricultural, and other industrial end markets. The Company also sells various groundwater equipment products to well installation contractors, including water pumping systems, through its distribution branches located in the U.S. With a growing global footprint, the Company has also evolved into a top supplier of submersible fueling systems at gas stations, making pumps, pipes, electronic controls, and monitoring devices.

The Company’s products are sold worldwide by its employee sales force and independent manufacturing representatives. The Company offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. Special inventory requirements are not necessary, and customer merchandise return rights do not extend beyond normal warranty provisions.

While maintaining a culture of safety and lean principles, Franklin Electric promises to deliver quality, availability, service, innovation, and cost in every encounter the Company has with stakeholders, including direct or indirect customers, employees, shareholders, and suppliers. These key factors for success are a roadmap for the Company's growth as a global provider of water and fuel systems, through geographic expansion and product line extensions, leveraging its global platform and competency in system design, all while consistently offering the best value to its customer.

The Company’s business consists of three reportable segments based on the principal end market served: Water Systems, Fueling Systems, and Distribution segments. The Company includes unallocated corporate expenses in an “Intersegment Eliminations/Other” segment that, together with the Water Systems, Fueling Systems, and Distribution segments, represent the Company. Segment and geographic information appears in Note 15 - Segment and Geographic Information to the consolidated financial statements.

The market for the Company’s products is highly competitive and includes diversified accounts by size and type. The Company’s Water Systems and Fueling Systems products and related equipment are sold to specialty distributors and some original equipment manufacturers (“OEMs”), as well as industrial and petroleum equipment distributors and major oil and utility companies. The Company’s Distribution segment sells products primarily to water well contractors.

Water Systems 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, water treatment systems, and monitoring devices. The Water Systems segment designs, manufactures and sells motors, pumps, drives, electronic controls, monitoring devices, and related parts and equipment primarily for use in groundwater, water transfer and wastewater.

Water Systems motors, pumps and controls are used principally for pumping clean water and wastewater in a variety of residential, agricultural, municipal and industrial applications. Water Systems also manufactures electronic drives and controls for the motors which control functionality and provide protection from various hazards, such as electrical surges, over-heating and dry wells or dry tanks. In the last twothree years, the Company acquired First Sales, LLCLLC; Waterite, Inc.; Puronics, Inc.; New Aqua, LLC; and Waterite,B&R Industries, Inc., expanding its portfolio to include water treatment systems.systems and acquired Minetuff Dewatering Pumps Australia Pty Ltd expanding its industrial dewatering product line.

Water Systems products are sold in highly competitive markets. Water Systems contributes about 60 percent of the Company’s total revenue. Significant portions of segment revenue come from selling groundwater and surface pumps, motors, and controls for residential and commercial buildings, as well as agricultural sales which are more seasonal and subject to commodity price changes. The Water Systems segment generates approximately 3530 to 4035 percent of its revenue in developing markets, which often lack municipal water systems. As those countries install water systems, the Company views those markets as an

opportunity. The Company has had 6 to 9 percent compounded annual sales growth in developing regions in recent years. Water Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company’s principal competitors in the specialty water products industry are Grundfos Management A/S, Pentair, Inc., and Xylem, Inc.

20202021 Water Systems research and development expenditures were primarily related to the following activities:

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

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

Fueling Systems products are sold in highly competitive markets. Rising vehicle use is leading to more investment in fueling stations which, in turn, leads to increased demand for the Company’s Fueling Systems products. The Company believes there is growth opportunity in developing markets. Fueling Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and value. The Company’s principal competitors in the petroleum equipment industry are Vontier Corporation, formerly a part of Fortive Corporation, and Dover Corporation.

20202021 Fueling Systems research and development expenditures were primarily related to the following activities:

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

The Company incurred research and development expense as follows:

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.

The principal raw materials used in the manufacture of the Company’s products are coil and bar steel, stainless steel, copper wire, and aluminum ingot. Major components are electric motors, capacitors, motor protectors, forgings, gray iron castings, plastic resins, and bearings. Most of these raw materials are available from multiple sources in the United States and world markets. Generally, the Company believes that adequate alternative sources are available for the majority of its key raw material and purchased component needs; however, the Company is dependent on a single or limited number of suppliers for certain materials or components. The Company believes that availability of fuel and energy is adequate to satisfy current and projected overall operations unless interrupted by government direction, allocation or other disruption.

No single customer accounted for over 10 percent of net sales in 2021, 2020, 2019, or 2018.2019. No single customer accounted for over 10 percent of gross accounts receivable in 20202021 and 2019.2020.

The dollar amount of backlog by segment was as follows:

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 2021.year 2022. The Company’s sales in the first quarter are generally less than its sales in other quarters due to 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.

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.

report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Additionally, the Company’s website includes the Company’s corporate governance guidelines, its Board committee charters, Lead Independent Director charter, 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.

rates could be impacted by changes in such countries’ tax laws or their interpretations. Both domestic and international tax laws are subject to change as a result of changes in fiscal policy, legislation, evolution of regulation and court rulings. The application of these tax laws and related regulations is subject to legal and factual interpretation, judgment, and uncertainty. The Company cannot predict whether any proposed changes in tax laws will be enacted into law or what, if any, changes may be made to any such proposals prior to their being enacted into law. If the tax laws change in a manner that increases the Company’s tax obligation, it could have a material adverse impact on the Company’s results of operations and financial condition.

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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Franklin Electric serves customers worldwide with over 175225 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:

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

ITEM 3. LEGAL PROCEEDINGS

The Company is defending various claims and legal actions which have arisen in the ordinary course of business. For a description of the Company's material legal proceedings, refer to Note 16 - Commitments and Contingencies, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K, which is incorporated into this Item 3 by reference. In the opinion of management, based on current knowledge of the facts and after discussion with counsel, other 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.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Current executive officers of the Company, their ages, current position, and business experience during at least the past five years as of December 31, 2020,2021, are as follows:

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.

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 9, 202110, 2022 was 661.639. The Company’s stock is traded on the NASDAQ Global Select Market under the symbol FELE. Broadridge Corporate Issuer Solutions, Inc. 1155 Long Island Avenue, Edgewood, New York, 11717 serves as the registrar, record keeper, and stock transfer agent.

The Company has increased dividend payments on an annual basis for 2829 consecutive periods.years. 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.

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 anyrepurchased 959 shares for approximately $0.1 million under this plan during the fourth quarter of 2020.2021. The maximum number of shares that may still be purchased under this plan as of December 31, 20202021 is 933,823.741,314.

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.

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

Discussion of the year-over-year comparison of changes in the Company's financial condition and results of operation as of and for the fiscal years ended December 31, 20192020 and December 31, 20182019 can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020.

OVERVIEW

Sales in 20202021 were downup from the prior year. The sales decreaseincrease was primarilyled by increases from lower volumes, in part created by uncertaintyvolume, price, and general disruptions around the global pandemic relating to the transmission of COVID-19 and governmental and societal reactions thereto in the second quarter.acquisitions. The impact of foreign currency translation decreased sales by about 3less than 1 percent. The Company's consolidated gross profit was $433.1$576.1 million for 2020,2021, an increase of $5.0$143.0 million or about 133 percent from 2019.2020. The gross profit as a percent of net sales increased 210 basis points towas changed at 34.7 percent in 20202021 and 2020. For 2021, diluted earnings per share were $3.25, up from 32.6 percent in 2019. For 2020 diluted earnings per share were $2.14, up from 2019 diluted earnings per share of $2.03.

Net sales in 20202021 were $1,247.3$1,661.9 million, a decreasean increase of $67.3$414.6 million or about 533 percent compared to 20192020 sales of $1,314.6$1,247.3 million. The incremental impact of sales from acquired businesses was $12.8$149.8 million. Sales revenue decreased by $39.6$2.3 million or 3less than 1 percent in 20202021 due to foreign currency translation. The sales change in 2020,2021, excluding acquisitions and foreign currency translation, was a decreasean increase of about 321 percent. Revenue growth was from volume and price across all three segments.

Water Systems sales were $734.7$963.6 million in 2020, a decrease2021, an increase of $46.8$228.9 million or about 631 percent versus 2019.2020. The incremental impact of sales from acquired businesses was $12.8$96.7 million. Foreign currency translation changes decreased sales $40.0$4.5 million, or about 51 percent, compared to sales in 2019.2020. The Water Systems sales change in 2020,2021, excluding acquisitions and foreign currency translation, was a decreasean increase of $19.6$136.7 million or about 319 percent. Revenue growth was from volume and price driven by broad-based demand in all regions and product categories.

Water Systems sales in the U.S. and Canada decreasedincreased by about 741 percent compared to 2019.2020. The incremental impact of sales from acquired businesses was $12.8$94.3 million. Sales revenue decreasedincreased by $0.7$4.0 million or about 1 percent in 20202021 due to foreign currency translation. In 2020,2021, sales of dewatering equipment decreasedincreased by about 5447 percent due to lowerhigher sales in rental channels and

Water Systems sales in markets outside the U.S. and Canada decreasedincreased by about 420 percent compared to 2019.2020. The incremental impact of sales from acquired businesses was $2.4 million. Sales revenue decreased by $39.3$8.5 million or about 112 percent in 20202021 due to foreign currency translation. Sales change in 2020,2021, excluding acquisitions and foreign currency translation, was an increase of about 721 percent. Sales growth was in all geographic markets; Latin America, and EMENA were partially offset by lower sales in theand Asia Pacific markets.

Fueling Systems sales were $245.1$289.1 million in 2020, a decrease2021, an increase of $48.5$44.0 million or about 1718 percent from 2019.2020. Foreign currency translation changes increased sales $0.4$2.2 million or less thanabout 1 percent compared to sales in 2019.2020. The Fueling Systems sales change in 2020,2021, excluding foreign currency translation, was a decreasean increase of $48.9$41.8 million or about 17 percent. Revenue growth was from volume and price driven primarily by the U.S. and Canada regions.

Fueling Systems sales in the U.S. and Canada declinedincreased by about 925 percent during 2020.2021. The decreasegrowth was in allbroad base across most product lines and due to declininghigher demand for newfrom filling stations. Internationally, Fueling Systems revenues declinedoutside the U.S and Canada increased by about 282 percent, driven by higher sales in India, Latin America and most regions in Asia Pacific, partially offset by lower sales in Asia Pacific, primarily China and India.China. China sales were about $18$12 million in 20202021 compared to 20192020 Fueling Systems China sales of about $45$18 million.

Distribution sales were $497.6 million in 2021, versus 2020 sales of $328.4 million in 2020, versus 2019or about 52 percent from 2020. The incremental impact of sales of $291.8from acquired businesses was $53.1 million. Distribution segment organic sales increased $116.1 million or about 1335 percent compared to 2019. More favorable weather conditions2020. Revenue growth was from volume and price driven by broad-based demand in most of the United States versus the prior year contributed to the revenue growth.all regions and product categories.

Cost of sales as a percent of net sales for 20202021 and 20192020 was 65.3 percent and 67.4 percent, respectively.for both years. Correspondingly, the gross profit margin was 34.7 percent, and 32.6 percent, respectively. The Company's consolidated gross profit was $433.1$576.1 million for 2020,2021, up $5.0$143.0 million from the gross profit of $428.1$433.1 million in 2019.2020. The increase in gross profit and gross profit margin was primarily driven by price realization, favorable product and geographic sales mix shifts and cost management.management which were enough to offset inflation.

Selling, general, and administrative expenses were $300.1$386.3 million in 20202021 and increased by $1.6$86.2 million or less than one29 percent overall compared to $298.5$300.1 million last year. SG&A expenses from acquired businesses was $2.2were $37.0 million, and excluding the acquired entities, the Company’s SG&A expenses in 20202021 were $297.9$349.3 million, a decreasean increase of 16 percent from the prior year. SG&A expenses were lowerhigher versus the prior year due to companywide effortshigher variable performance-based compensation expenses and increased spending to lower spending in response to the impacts of the Global Pandemic and in part because of foreign currency translation.support sales growth.

Restructuring expenses for 2021 were $0.6 million. Restructuring expenses were $0.5 million in the Water segment and $0.1 million in Distribution segments. Restructuring expenses in Water segment were primarily from Water Treatment realignment activities, and branch closings and consolidations in the Distribution segment. Restructuring expenses for 2020 were $2.5 million. Restructuring expenses were $2.3 million in the Water segment and $0.1 million in each of the Fueling and Distribution segments. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities and branch closings and consolidations in the Distribution segment. Restructuring expenses for 2019 were $2.5 million. Restructuring expenses were $1.7 million in the Water segment and $0.8 million in the Distribution segment. Restructuring expenses were primarily from continued miscellaneous manufacturing realignment activities and branch closings and consolidations in the Distribution segment.

Operating income was $189.2 million in 2021, up $58.7 million or 45 percent from $130.5 million in 2020, up $3.4 million or 3 percent from $127.1 million in 2019.2020.

Water SystemsDistribution operating income was $114.4$35.9 million in 2020 compared to $103.0 million in 2019, an increase of 11 percent. The2021 and operating income margin was 15.6 percent compared to the 2019 operating income margin of 13.27.2 percent. Operating income margin increased in Water Systems primarily driven by price realization, product sales mix and cost management.

Operating income-Eliminations/Other is composed primarily of inter-segment sales and profit eliminations and unallocated general and administrative expenses. The inter-segment profit elimination impact in 2020 increased2021 on operating loss about $0.2income was $0 million. The inter-segment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until the transferred product is sold from the Distribution segment to its third-party customer. Unallocated general and administrative expenses were higher by $3.3$6.5 million or about 611 percent to last year, primarily due to higher variable performance-based compensation expenses.

Interest expense for 2021 and 2020 and 2019 was $4.6$5.2 million and $8.2$4.6 million, respectively, and decreasedincreased primarily as a result of lowerhigher debt levels.

Other income or expense was a gain of $8.0 million and a loss of $0.8 million in 2021 and $0.42020, respectively. Other income or expense in 2021 included a bargain purchase gain of $6.5 million respectively in 2020 and 2019.a gain of $2.5 million related to a settlement of an indirect tax dispute.

Foreign currency–based transactions produced a loss for 20202021 of $1.4$2.3 million, primarily due to changes in the value of the Argentinian Peso relative to the U.S. dollar. Foreign currency–based transactions produced a loss for 20192020 of $1.6$1.4 million, primarily due to changes in the value of the Argentinian Peso relative to the U.S. dollar.

The provision for income taxes in 2021 and 2020 and 2019 was $22.5$34.8 million and $20.8$22.5 million, respectively. The effective tax rate for both 2021 and 2020 was about 18 percent and before the impact of discrete events was about 21 percent. The effective tax rate for 2019 was about 18 percent and before the impact of discrete events was about 20 percent. The tax rate was lower than the statutory rate of 21 percent primarily due to foreign earnings taxed at lower statutory rates, as well asthe recognition of the U.S. deduction for Foreign Derived Intangible Income, and certain incentives and discrete events. Discrete events in 2021 include increased excess tax benefits from share-based compensation compared to 2020. Discrete events in 2020 include a benefit related to a realized foreign currency translation loss on the settlement of an intercompany loan.

Net income for 20202021 was $101.2$155.0 million compared to 20192020 net income of $96.0$101.2 million. Net income attributable to Franklin Electric Co., Inc. for 20202021 was $100.5$153.9 million, or $2.14$3.25 per diluted share, compared to 20192020 net income attributable to Franklin Electric Co., Inc. of $95.5$100.5 million or $2.03$2.14 per diluted share.

CAPITAL RESOURCES AND 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, 20202021 is adequate to meet projected needs for the foreseeable future. The Company expects that ongoing requirements for operations, capital expenditures, pension obligations, dividends, share repurchases, and debt service will be adequately funded from cash on hand, operations, and existing credit agreements.

In addition, the Company maintains an uncommitted and unsecured private shelf agreement with NYL Investors LLC, an affiliate of New York Life, and each of the undersigned holders of Notes (the "New York Life Agreement") with a remaining borrowing capacity of $125.0 million as of December 31, 2020.2021. The New York Life Agreement matures on September 26, 2025.July 30, 2024. The Company also has other long-term debt borrowings outstanding as of December 31, 2020.2021. See Note 10 - Debt for additional specifics regarding these obligations and future maturities.

At December 31, 2020,2021, the Company had $75$37.4 million of cash and cash equivalents held in foreign jurisdictions, which the Company intends to use to fund foreign operations. There is currently no need to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions.

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

Net cash used in investing activities was $264.8 million in 2021 compared to $78.8 million in 2020 compared to $41.8 million in 2019.2020. The increase was primarily attributable to increased acquisition activity.activity in 2021.

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:

The Company has pension and other post-retirement benefit obligations not included in the table above which will result in estimated future payments of approximately $1$0.9 million in 2021.2022. The Company also has unrecognized tax benefits, none of which are included in the table above. The unrecognized tax benefits of approximately $0.6$0.9 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled. Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $0.1 million.

ACCOUNTING PRONOUNCEMENTS

CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management evaluates estimates on an ongoing basis. Estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no material changes to estimates or methodologies used to develop those estimates in 2020.

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.

 

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 Global Water Systems, Fueling Systems and Distribution reporting units. 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 20202021 was $266.7$329.6 million.

During the fourth quarter of 2020,2021, the Company completed its annual impairment test of goodwill and trade names and determined the fair value of all intangibles were substantially in excess of the respective carrying values. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse changes in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. A 10 percent decrease in the fair value estimates used in the impairment test would not have changed this determination. The sensitivity analysis required the use of numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges. Further, an extended downturn in the economy may impact certain components of the operating segments more significantly and could result in changes to the aggregation assumptions and impairment determination.

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.

The Company consults with its actuaries to assist with the calculation of discount rates used in its pension and post retirement plans. The discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. Market conditions have caused the weighted-average discount rate to move from 3.122.31 percent last year to 2.312.68 percent this year for the domestic pension plans and from 2.982.12 percent last year to 2.122.57 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 $4.2$4.3 million of liability.

The Company consults with actuaries and investment advisors in making its determination of the expected long-term rate of return on plan assets. Using input from these consultations such as long-term investment sector expected returns, the correlations and standard deviations thereof, and the plan asset allocation, the Company has assumed an expected long-term rate of return on plan assets of 4.004.50 percent as of the fiscal year ended 2020.2021. Market conditions have caused the expected long-term rate of return to decreaseincrease from 4.904.00 percent as of the fiscal year ended 2019.2020. A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.4 million of employee benefit expense.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This annual report on Form 10-K contains certain forward-looking information, such as statements about the Company’s financial goals, acquisition strategies, financial expectations including anticipated revenue or expense levels, business prospects, market positioning, product development, manufacturing re-alignment, capital expenditures, tax benefits and expenses, and the effect of contingencies or changes in accounting policies. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” While the Company believes that the assumptions underlying such forward-looking statements are reasonable based on present conditions, forward-looking statements made by the Company involve risks and uncertainties and are not guarantees of future performance. Actual results may differ materially from those forward-looking statements as a result of various factors, including general economic and currency conditions, various conditions specific to the Company’s business and industry, new housing starts, weather conditions, epidemics and pandemics, market demand, competitive factors, changes in distribution channels, supply constraints, effect of price increases, raw material costs, technology factors, integration of acquisitions, litigation, government and regulatory actions, the Company’s accounting policies, and other risks, all as described in Item 1A and Exhibit 99.1 of this Form 10-K. Any forward-looking statements included in this Form 10-K are based upon information presently available. The Company does not assume any obligation to update any forward-looking information, except as required by law.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s revolving credit agreement (the “Credit Agreement”). Borrowings under the Credit Agreement may be made either at (i) a Eurocurrency rate based on LIBOR plus an applicable margin or (ii) an alternative base rate as defined in the Credit Agreement. The Company had no$96.6 borrowings at year-end 20202021 under the Credit Agreement. The Company estimates that a hypothetical increase of 100 basis points in the LIBOR rateinterest rates would have increased interest expense by $0.5 million during 2020.2021. 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.

Additionally,One-week and two-month USD LIBOR the index administeredtenors, were phased out by the Intercontinental Exchange will be phased outBenchmark Administration effective December 31, 2021. All other US LIBOR tenors are scheduled to cease after 2021.June 30, 2023. The United States, using the analysis performed by the ARRC (Alternative Reference Rates Committee), elected the Secured Overnight Financing Rate (“SOFR”) as a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury Securities. The New York Fed commenced publishing the SOFR rate daily beginning April 3, 2018. The Company is still analyzingcontinues to use active USD LIBOR tenors where applicable and will continue assessing SOFR for future draws on the potential impacts from changing from LIBOR to SOFR based rates.Credit Agreement.

Portions of the Company’s business are exposed to volatility in the prices of certain commodities, such as copper, steel and aluminum, among others. The primary exposure to this volatility resides with the use of these materials in purchased component parts. The Company 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 20202021 use of commodities, the Company estimates that a hypothetical 10 percent adverse movement in prices for raw metal commodities would result in about a 1 percent decrease of gross margin as a percent of sales.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

See Notes to Consolidated Financial Statements.

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES