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

FORM 10-Q
_________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019March 31, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
fele-20200331_g1.jpg
Commission file number 0-362
 
FRANKLIN ELECTRIC CO., INC.
(Exact name of registrant as specified in its charter)

Indiana35-0827455
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
9255 Coverdale Road
Fort Wayne,Indiana46809
(Address of principal executive offices)(Zip Code)

(260) 824-2900
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par valueFELENASDAQGlobal Select Market
(Title of each class)(Trading symbol)(Name of each exchange on which registered)

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).


1

Yes☒
No
☐

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

Large Accelerated Filer☒Accelerated Filer☐Non-Accelerated Filer☐Smaller Reporting Company☐
Emerging Growth Company☐☐

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

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

Yes☐No☒

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

Outstanding at
Class of Common Stock Par ValueJuly 26, 2019May 1, 2020
$0.1046,337,64546,164,173 shares




2

FRANKLIN ELECTRIC CO., INC.
TABLE OF CONTENTS

Page
PART I.FINANCIAL INFORMATIONNumber
Page
PART I.FINANCIAL INFORMATIONNumber
Item 1.
4
4
5
6
8
10
Item 2.
2623
Item 3.
3327
Item 4.
3327
PART II.OTHER INFORMATION
Item 1A.
3428
Item 2.
3428
Item 6.
3428
3529
3630



 

3

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter Ended
(In thousands, except per share amounts)March 31, 2020March 31, 2019
Net sales$266,754  $290,715  
Cost of sales176,437  201,209  
Gross profit90,317  89,506  
Selling, general, and administrative expenses75,623  76,299  
Restructuring expense873  1,086  
Operating income13,821  12,121  
Interest (expense)(1,234) (2,342) 
Other income/(expense), net(202) 239  
Foreign exchange income962  589  
Income before income taxes13,347  10,607  
Income tax expense2,555  1,480  
Net income$10,792  $9,127  
Less: Net (income) attributable to noncontrolling interests(149) (71) 
Net income attributable to Franklin Electric Co., Inc.$10,643  $9,056  
Income per share:
Basic$0.23  $0.19  
Diluted$0.23  $0.19  
 Second Quarter Ended Six Months Ended
(In thousands, except per share amounts)June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
        
Net sales$355,340
 $343,970
 $646,055
 $639,600
Cost of sales235,622
 227,894
 436,831
 424,542
Gross profit119,718
 116,076
 209,224
 215,058
Selling, general, and administrative expenses75,782
 74,965
 152,081
 151,240
Restructuring expense245
 637
 1,331
 644
Operating income43,691
 40,474
 55,812
 63,174
Interest (expense)(2,295) (2,606) (4,637) (5,034)
Other income/(expense), net(292) 45
 (53) (159)
Foreign exchange income/(expense)(505) (999) 84
 (1,550)
Income before income taxes40,599
 36,914
 51,206
 56,431
Income tax expense7,787
 6,875
 9,267
 5,177
Net income$32,812
 $30,039
 $41,939
 $51,254
Less: Net (income)/loss attributable to noncontrolling interests(67) 458
 (138) 417
Net income attributable to Franklin Electric Co., Inc.$32,745
 $30,497
 $41,801
 $51,671
Income per share:       
Basic$0.70
 $0.65
 $0.89
 $1.10
Diluted$0.70
 $0.64
 $0.89
 $1.09

See Notes to Condensed Consolidated Financial Statements.
4

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Unaudited)
First Quarter Ended
(In thousands)March 31, 2020March 31, 2019
Net income$10,792  $9,127  
Other comprehensive income/(loss), before tax:
     Foreign currency translation adjustments(37,722) (2,810) 
     Employee benefit plan activity901  650  
Other comprehensive (loss)(36,821) (2,160) 
Income tax expense related to items of other comprehensive (loss)(185) (141) 
Other comprehensive (loss), net of tax(37,006) (2,301) 
Comprehensive income/(loss)(26,214) 6,826  
Less: Comprehensive income attributable to noncontrolling interests154  32  
Comprehensive income/(loss) attributable to Franklin Electric Co., Inc.$(26,368) $6,794  
 Second Quarter Ended Six Months Ended
(In thousands)June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
        
Net income$32,812
 $30,039
 $41,939
 $51,254
Other comprehensive income/(loss), before tax:       
     Foreign currency translation adjustments1,362
 (32,736) (1,448) (25,741)
     Employee benefit plan activity649
 774
 1,299
 1,552
Other comprehensive income/(loss)2,011
 (31,962) (149) (24,189)
Income tax expense related to items of other comprehensive income/(loss)(141) (176) (282) (353)
Other comprehensive income/(loss), net of tax1,870
 (32,138) (431) (24,542)
Comprehensive income/(loss)34,682
 (2,099) 41,508
 26,712
Less: Comprehensive income/(loss) attributable to noncontrolling interests126
 (469) 158
 (376)
Comprehensive income/(loss) attributable to Franklin Electric Co., Inc.$34,556
 $(1,630) $41,350
 $27,088



See Notes to Condensed Consolidated Financial Statements.


































5

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)March 31, 2020December 31, 2019
ASSETS 
Current assets: 
Cash and cash equivalents$39,987  $64,405  
Receivables, less allowances of $3,907 and $3,705, respectively167,590  173,327  
Inventories:
Raw material97,538  98,286  
Work-in-process21,452  18,392  
Finished goods191,016  183,568  
Total inventories310,006  300,246  
Other current assets25,472  29,466  
Total current assets543,055  567,444  
Property, plant, and equipment, at cost: 
Land and buildings134,041  142,189  
Machinery and equipment271,115  276,541  
Furniture and fixtures42,984  43,631  
Other26,824  29,293  
Property, plant, and equipment, gross474,964  491,654  
Less: Allowance for depreciation(286,318) (290,326) 
Property, plant, and equipment, net188,646  201,328  
Right-of-Use Asset, net26,583  27,621  
Deferred income taxes9,167  9,171  
Intangible assets, net124,503  131,127  
Goodwill255,772  256,059  
Other assets1,807  1,993  
Total assets$1,149,533  $1,194,743  




6

(In thousands)June 30, 2019 December 31, 2018
    
ASSETS   
Current assets:   
Cash and cash equivalents$40,991
 $59,173
Receivables, less allowances of $4,441 and $4,394, respectively220,815
 172,899
Inventories:   
Raw material118,091
 98,858
Work-in-process22,174
 18,649
Finished goods212,118
 196,542
Total inventories352,383
 314,049
Other current assets34,937
 33,758
Total current assets649,126
 579,879
    
Property, plant, and equipment, at cost:   
Land and buildings142,349
 144,299
Machinery and equipment271,379
 269,484
Furniture and fixtures42,834
 49,426
Other26,687
 22,795
Property, plant, and equipment, gross483,249
 486,004
Less: Allowance for depreciation(281,149) (278,940)
Property, plant, and equipment, net202,100
 207,064
Right-of-Use Asset, net25,708
 —
Deferred income taxes9,177
 8,694
Intangible assets, net130,724
 135,052
Goodwill250,168
 248,748
Other assets2,660
 2,928
Total assets$1,269,663
 $1,182,365
March 31, 2020December 31, 2019
LIABILITIES AND EQUITY 
Current liabilities: 
Accounts payable$88,388  $82,593  
Accrued expenses and other current liabilities48,921  68,444  
Current lease liability9,451  9,838  
Income taxes2,907  3,010  
Current maturities of long-term debt and short-term borrowings41,720  21,879  
Total current liabilities191,387  185,764  
Long-term debt92,563  93,141  
Long-term lease liability17,134  17,785  
Income taxes payable non-current11,964  11,965  
Deferred income taxes27,117  27,598  
Employee benefit plans37,057  38,288  
Other long-term liabilities19,090  21,769  
Commitments and contingencies (see Note 14)—  —  
Redeemable noncontrolling interest(245) (236) 
Shareholders' equity:
Common stock (65,000 shares authorized, $.10 par value) outstanding (46,144 and 46,391, respectively)4,614  4,639  
Additional capital274,869  269,656  
Retained earnings698,917  712,460  
Accumulated other comprehensive loss(227,221) (190,210) 
Total shareholders' equity751,179  796,545  
Noncontrolling interest2,287  2,124  
Total equity753,466  798,669  
Total liabilities and equity$1,149,533  $1,194,743  





 June 30, 2019 December 31, 2018
    
LIABILITIES AND EQUITY   
Current liabilities:   
Accounts payable$99,654
 $76,652
Accrued expenses and other current liabilities61,651
 64,811
Current lease liability8,605
 —
Income taxes2,109
 2,419
Current maturities of long-term debt and short-term borrowings129,337
 111,975
Total current liabilities301,356
 255,857
Long-term debt93,707
 94,379
Long-term lease liability17,105
 —
Income taxes payable non-current10,881
 10,881
Deferred income taxes29,815
 28,949
Employee benefit plans36,523
 38,020
Other long-term liabilities19,584
 17,934
    
Commitments and contingencies (see Note 14)—
 —
    
Redeemable noncontrolling interest(210) 518
    
Shareholders' equity:   
Common stock (65,000 shares authorized, $.10 par value) outstanding (46,323 and 46,326, respectively)4,632
 4,632
Additional capital264,533
 257,535
Retained earnings673,493
 654,724
Accumulated other comprehensive loss(183,470) (183,019)
Total shareholders' equity759,188
 733,872
Noncontrolling interest1,714
 1,955
Total equity760,902
 735,827
Total liabilities and equity$1,269,663
 $1,182,365

See Notes to Condensed Consolidated Financial Statements.


7

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
(In thousands)March 31, 2020March 31, 2019
Cash flows from operating activities:   
Net income$10,792  $9,127  
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization9,199  9,268  
Non-cash lease expense1,962  2,805  
Share-based compensation4,352  3,230  
Deferred income taxes(82) (37) 
Loss on disposals of plant and equipment106  530  
Foreign exchange income(962) (589) 
Changes in assets and liabilities, net of acquisitions:
Receivables(2,574) (6,517) 
Inventory(19,952) (20,986) 
Accounts payable and accrued expenses(4,223) 1,309  
Operating Leases(1,962) (2,804) 
Income taxes786  (509) 
Employee benefit plans(35) (31) 
Other, net(2,063) 2,269  
Net cash flows from operating activities(4,656) (2,935) 
Cash flows from investing activities:
Additions to property, plant, and equipment(5,535) (5,220) 
Proceeds from sale of property, plant, and equipment25  64  
Cash paid for acquisitions, net of cash acquired(5,626) (5,405) 
Other, net—  3  
Net cash flows from investing activities(11,136) (10,558) 
Cash flows from financing activities:
Proceeds from issuance of debt56,680  53,202  
Repayment of debt(37,010) (33,533) 
Proceeds from issuance of common stock871  1,251  
Purchases of common stock(16,981) (4,329) 
Dividends paid(7,240) (6,723) 
Net cash flows from financing activities(3,680) 9,868  
Effect of exchange rate changes on cash(4,946) (1,184) 
Net change in cash and equivalents(24,418) (4,809) 
Cash and equivalents at beginning of period64,405  59,173  
Cash and equivalents at end of period$39,987  $54,364  

8

 Six Months Ended
(In thousands)June 30, 2019 June 30, 2018
    
Cash flows from operating activities:   
Net income$41,939
 $51,254
Adjustments to reconcile net income to net cash flows from operating activities:   
Depreciation and amortization18,350
 19,595
Non-cash lease expense5,199
 —
Share-based compensation5,524
 4,769
Deferred income taxes501
 (4,760)
Loss on disposals of plant and equipment594
 127
Foreign exchange (income)/expense(84) 1,550
Changes in assets and liabilities, net of acquisitions:   
Receivables(46,371) (40,812)
Inventory(35,318) (20,614)
Accounts payable and accrued expenses18,637
 (1,072)
Operating Leases(5,195) —
Income taxes535
 (703)
Income taxes-U.S. Tax Cuts and Jobs Act—
 (4,600)
Employee benefit plans(50) (1,718)
Other, net(116) 2,153
Net cash flows from operating activities4,145
 5,169
Cash flows from investing activities:   
Additions to property, plant, and equipment(10,444) (11,446)
Proceeds from sale of property, plant, and equipment866
 306
Cash paid for acquisitions, net of cash acquired(6,728) (8,428)
Other, net8
 199
Net cash flows from investing activities(16,298) (19,369)
Cash flows from financing activities:   
Proceeds from issuance of debt129,985
 110,054
Repayment of debt(113,171) (72,721)
Proceeds from issuance of common stock1,495
 1,795
Purchases of common stock(9,543) (10,953)
Dividends paid(13,510) (10,658)
Purchase of redeemable noncontrolling shares(485) —
Net cash flows from financing activities(5,229) 17,517
Effect of exchange rate changes on cash(800) (506)
Net change in cash and equivalents(18,182) 2,811
Cash and equivalents at beginning of period59,173
 67,233
Cash and equivalents at end of period$40,991
 $70,044
Three Months Ended
(In thousands)March 31, 2020March 31, 2019
Cash paid for income taxes, net of refunds$3,126  $1,896  
Cash paid for interest$2,254  $3,113  
Non-cash items:   
Additions to property, plant, and equipment, not yet paid$314  $368  
Right-of-Use Assets obtained in exchange for new operating lease liabilities$1,888  $—  
Payable to sellers of acquired entities$650  $—  

 Six Months Ended
(In thousands)June 30, 2019 June 30, 2018
    
Cash paid for income taxes, net of refunds$8,578
 $15,829
Cash paid for interest$4,731
 $5,354
    
Non-cash items:   
Additions to property, plant, and equipment, not yet paid$307
 $—
Right-of-Use Assets obtained in exchange for new operating lease liabilities$1,772
 $—
Accrued dividends payable to noncontrolling interests$642
 $—
Payable to seller of Valley Farms Supply, Inc.$—
 $450

See Notes to Condensed Consolidated Financial Statements.
 
9

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

Page Number
Page Number
Note 1.
11
Note 2.
11
Note 3.
1311
Note 4.
1312
Note 5.
1413
Note 6.
1413
Note 7.
1513
Note 8.
1614
Note 9.
1615
Note 10.
1716
Note 11.
1917
Note 12.
2118
Note 13.
2118
Note 14.
2320
Note 15.
2421

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet as of December 31, 2018,2019, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of June 30, 2019,March 31, 2020, and for the secondfirst quarters ended March 31, 2020 and six months ended June 30,March 31, 2019 and June 30, 2018 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all accounting entries and adjustments (including normal, recurring adjustments) considered necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Operating results for the secondfirst quarter and six months ended June 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.2020. For further information, including a description of the critical accounting policies of Franklin Electric Co., Inc. (the "Company"), refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.2019.

2. ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In February 2018,January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02,2017-04, Reclassification of Certain Tax Effects from AccumulatedIntangibles - Goodwill and Other Comprehensive Income.(Topic 350): Simplifying the Test for Goodwill Impairment. This ASU was issued following the enactment of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act") and permits entities to elect a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting2017-04 removes step two from the Tax Act.goodwill impairment test and instead requires an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. The ASU is effective on a prospective basis for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The Company adopted the standard effective January 1, 2020. The standard did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses on certain financial instruments, including trade receivables. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2018,2019 with early adoption permitted, and maypermitted. Amendments should be applied either at the beginning of the period of adoption or retrospectively to each period inusing a modified retrospective approach except for debt securities, which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized.require a prospective transitions approach. The Company adopted the standard effective January 1, 2019 and did not reclassify tax effects stranded in accumulated other comprehensive loss. As such, there is no impact on the Company’s consolidated financial position, results of operations, and cash flows as a result of the adoption of the ASU.
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 (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-10 clarifies certain aspects of Topic 842, including the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. ASU 2018-11 allows entities adopting ASU 2016-02 to choose an additional (and optional) transition method of adoption, under which an entity initially applies the new lease2020. The standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, ASU 2018-11 allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The guidance is to be applied using either the transition method prescribed in ASU 2018-11 or a modified retrospective approach at the beginning of the earliest comparative period in the financial statements.
The Company adopted the standard effective January 1, 2019 utilizing the optional transition method prescribed in ASU 2018-11. The Company utilized the transition practical expedients, per ASC 842-10-65-11, that are permitted with the new standard when elected as a package. The Company will also utilize other available practical expedients, including the election not to separate non-lease components and the election to use hindsight when determining the lease terms. Finally, the Company has made an accounting policy election to not present leases with an initial term of 12 months or less (short-term leases) on the balance sheet.
The Company has recorded on the Balance Sheet ROU assets and lease liabilities. The initial ROU asset at the implementation of the standard was approximately $26.3 million with a corresponding lease liability of the same amount. The Company segregated the lease liabilities between short term and long term based on the related contractual maturities. The Company has recognized the cash paid for lease liabilities in the Statement of Cash Flows. The Company did not have an adjustment to retained earnings as a result of the adoption of this standard. Additional disclosures regarding the Company’s leases can be found in Footnote 14 - Commitments and Contingencies.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively ASU 2014-09).  Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“Topic 605”), and requires the recognition of revenue when promised goods or services are transferred to

customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. The Company made the accounting policy election allowed by ASC 606-10-32-2A to continue to present sales tax on a net basis, consistent with current guidance in ASC 605-45-15-2(e). The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method).  The Company adopted ASU 2014-09 during the first quarter ended March 31, 2018 utilizing the modified retrospective approach. The adoption of this ASU did not have a material impact toon the Company’s condensedCompany's consolidated financial position, results of operations, or cash flow; however, the adoption of this ASU requires the Company to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company completed its assessment of the additional disclosure requirements with the following results:flows.
Disaggregation of Revenue
The adoption of this ASU requires the Company to disaggregate revenue into categories to depict how the nature, timing, and uncertainty of revenue and cash flows are affected by economic factors. As evidenced in Footnote 13 Segment and Geographic Information, the Company’s business consists of the Water, Fueling, Distribution, and Other segments. The Other segment includes unallocated corporate expenses and intersegment eliminations. A reconciliation of disaggregated revenue to segment revenue as well as Water Segment revenue by geographical regions is provided in Footnote 13, consistent with how the Company evaluates financial performance.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. The Company typically sells its products to customers by purchase order, and does not have any additional performance obligations included in contracts to customers other than the shipment of products. The Company records net sales revenues after discounts at the time of sale based on specific discount programs in effect, related historical data, and experience. The Company typically ships products FOB shipping at which point control of the products passes to the customers. Any shipping and handling fees prior to shipment are considered activities required to fulfill the Company’s promise to transfer goods, and do not qualify as a separate performance obligation. Shipping and handling costs are recorded as a component of cost of sales. Additionally, the Company offers assurance-type warranties (vs. service warranties) which do not qualify as a separate performance obligation. Therefore, the Company allocates the transaction price based on a single performance obligation. The Company offers normal and customary trade terms to its customers, no significant part of which is of an extended nature. The Company considers the performance obligation satisfied and recognizes revenue at a point in time, the time of shipment. The Company does not generally allow for refunds or returns to customers and does not have outstanding performance obligations for contracts with original durations of greater than one year at the end of the reporting period.
Contract Costs
The Company does not have outstanding contracts with an original term greater than one year; therefore, the Company expenses costs to obtain a contract as incurred.

Accounting Standards Issued But Not Yet Adopted
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments remove disclosures that no longer are considered cost beneficial, including the estimated amounts in accumulated other comprehensive income expected to be recognized as components of net periodic expense over the next fiscal year. The amendments clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant, including the reasons for significant gains and losses related to change in the benefit obligation for the period. The ASU should be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2020. The Company is still determining the date of adoption for this ASU but does not anticipate the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

In August 2018,December 2019, the FASB issued ASU 2018-15,2019-12, Goodwill and Other - Internal-Use Software (Subtopic 350-40)Income Taxes (Topic 740): Customer’sSimplifying the Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. Income TaxesThis, which is expected to reduce cost and complexity related to accounting for income taxes. ASU aligns2019-12 eliminates the requirementsneed for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with

the requirements for capitalizing implementation costs incurredCompany to develop or obtain internal-use software (and hosting arrangements that include internal-use software license). Theanalyze whether certain exceptions apply and improves financial statement preparers' application of income tax-related guidance. ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption and2019-12 is effective for interim and annual periods beginning after December 15, 20192020 with early adoption permitted. Amendments related to franchise taxes that are partially based on income should be applied on either a retrospective or modified retrospective basis. All other amendments should be applied on a prospective basis. The Company is still determining the date of adoption forof this ASU but doesASU. Adoption is not anticipate the adoption to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 removes step two from the goodwill impairment test and instead requires an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. The ASU is effective on a prospective basis for interim and annual periods beginning after December 15, 2019 with early adoption permitted. The Company is still determining the date of adoption for this ASU but does not anticipate the adoptionexpected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

3. ACQUISITIONS
During the first quarter ended March 31, 2020, the Company acquired all of the assets of a company that manufactures line shaft turbines and other adjacent product lines for a purchase price of $6.3 million after working capital adjustments. The fair value of the assets acquired and liabilities assumed are preliminary as of March 31, 2020. In addition, the Company has not
11

presented separate results of operations since closing or combined pro forma financial information of the Company and the acquired interest since the beginning of 2020, as the results of operations for this acquisition is immaterial.

During the third quarter ended September 30, 2019, the Company acquired 100 percent of the ownership interests of First Sales, LLC for a purchase price of approximately $15.5 million after working capital adjustments. The acquisition was not material, and the fair value of the assets acquired and liabilities assumed are preliminary as of March 31, 2020.

During the second quarter ended June 30, 2019, the Company acquired the remaining interest in Pluga Pumps and Motors Private Limited, India, increasing the Company's ownership to 100 percent. The redemption of this interest was immaterial.
During the first quarter ended March 31, 2019, the Company acquired 100 percent of the ownership interests of Mt. Pleasant, Michigan-based Milan Supply Company ("Milan Supply"), for a purchase price of approximately $6.1 million after working capital adjustments. Milan Supply is a professional groundwater distributor operating six locations in the State of Michigan. Milan Supply is part of the Company’s Distribution Segment, which is a collection of professional groundwater equipment distributors. The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and the acquired interest since the beginning of 2019, as the results of operations for this acquisition is immaterial.. The fair value of the assets acquired and the liabilities assumed for the acquisition are preliminaryconsidered final as of June 30, 2019.

DuringMarch 31, 2020, and the third quarter ended September 30, 2018, the Company acquired, in separate transactions, substantially all of the assets of Stationary Power Division ("SPD") of Midtronics, Inc., and 100 percent of the ownership interest in Industrias Rotor Pump S.A. ("Industrias Rotor Pump") for a combinedfinal purchase price of approximately $37 million.was $6.1 million after working capital adjustments. The acquisitions wereCompany has not material individually or in the aggregate. Thepresented fair valuevalues of the assets acquired and the liabilities assumed as the values are preliminary as of June 30, 2019.not material.

Transaction costs were expensed as incurred under the guidance of FASB Accounting Standards Codification Topic 805, Business Combinations. There were $0.1 million and $0.1 million of transaction costs included in the "Selling, general, and administrative expenses" line of the Company's condensed consolidated statements of income for the second quarter and six months ended June 30, 2019 respectively. There were $0.1 million and $0.2 million of transaction costs incurred in the second quarter and six months ended June 30, 2018, respectively.

4. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures, provides guidance for defining, measuring, and disclosing fair value within an established framework and hierarchy. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs and to minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value within the hierarchy are as follows:

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

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

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

As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the assets measured at fair value on a recurring basis were as set forth in the table below:

 
 
 
(In millions)		March 31, 2020Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents$2.6  $2.6  $—  $—  
December 31, 2019Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Cash equivalents$4.0  $4.0  $—  $—  
 
 
 
(In millions)
June 30, 2019Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs (Level 3)
Cash equivalents$1.9
$1.9
$—
$—
     
 December 31, 2018Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)
Cash equivalents$2.5
$2.5
$—
$—


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 $222.9$134.3 million and $206.3$115.0 million and estimated fair values of $228$138.4 million and $205$121.0 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. In the absence of quoted prices in active markets, considerable judgment is required in developing estimates of fair value. Estimates are not necessarily
12

indicative of the amounts the Company could realize in a current market transaction. In determining the fair value of its debt, the Company uses estimates based on rates currently available to the Company for debt with similar terms and remaining maturities. Accordingly, the fair value of debt is classified as Level 2 within the valuation hierarchy.

5. FINANCIAL INSTRUMENTS
The Company’s deferred compensation stock program is subject to variable plan accounting and, accordingly, is adjusted for changes in the Company’s stock price at the end of each reporting period. The Company has entered into share swap transaction agreements (the "swap") to mitigate the Company’s exposure to the fluctuations in the Company's stock price. The swap has not been designated as a hedge for accounting purposes and is cancellable with 30 days' written notice by either party. As of June 30, 2019,March 31, 2020, the swap had a notional value based on 255,000260,000 shares. For the second quarterfirst quarters ended March 31, 2020 and six months ended June 30,March 31, 2019, the swap resulted in a loss of $0.9$2.7 million and a gain of $1.0 million, respectively. For the second quarter and six months ended June 30, 2018, the swap resulted in a gain of 0.8 million and a loss of 0.3$1.9 million, respectively. Gains and losses resulting from the the swap were primarily offset by gains and losses on the fair value of the deferred compensation stock liability. All gains or losses and expenses related to the swap are recorded in the Company's condensed consolidated statements of income within the “Selling, general, and administrative expenses” line.

6. GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amounts of the Company’s intangible assets are as follows:
(In millions) June 30, 2019 December 31, 2018
  Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Amortizing intangibles:  
  
  
  
Patents $7.5
 $(7.0) $7.5
 $(6.9)
Technology 7.5
 (6.6) 7.5
 (6.4)
Customer relationships 151.0
 (67.6) 151.0
 (63.8)
Other 2.8
 (2.7) 2.8
 (2.5)
Total $168.8
 $(83.9) $168.8
 $(79.6)
Unamortizing intangibles:        
Trade names 45.8
 —
 45.9
 —
Total intangibles $214.6
 $(83.9) $214.7
 $(79.6)

(In millions)March 31, 2020December 31, 2019
 Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Amortizing intangibles:    
Patents$7.4  $(7.0) $7.4  $(7.0) 
Technology7.5  (6.9) 7.5  (6.8) 
Customer relationships151.3  (71.8) 155.4  (71.4) 
Other3.7  (2.7) 3.8  (2.8) 
Total$169.9  $(88.4) $174.1  $(88.0) 
Unamortizing intangibles:    
Trade names43.0  —  45.0  —  
Total intangibles$212.9  $(88.4) $219.1  $(88.0) 
 
Amortization expense related to intangible assets for the secondfirst quarters ended June 30,March 31, 2020 and March 31, 2019 was $2.4 million and June 30, 2018 was $2.3 million, and $2.2 million, and for the six months ended June 30, 2019 and June 30, 2018, $4.6 million and $4.3 million respectively.


Amortization expense for each of the five succeeding years is projected as follows:
(In millions)20202021202220232024
$9.2  $8.8  $8.6  $8.5  $8.3  
(In millions) 2019 2020 2021 2022 2023
  $9.2
 $9.1
 $8.7
 $8.5
 $8.4


The change in the carrying amount of goodwill by reportable segment for the sixthree months ended June 30, 2019,March 31, 2020, is as follows:
(In millions)
Water SystemsFueling SystemsDistributionConsolidated
Balance as of December 31, 2019$151.0  $67.6  $37.5  $256.1  
Acquisitions2.7  —  —  2.7  
Foreign currency translation(2.8) (0.2) —  (3.0) 
Balance as of March 31, 2020$150.9  $67.4  $37.5  $255.8  
(In millions)  
  Water Systems Fueling Systems Distribution Consolidated
Balance as of December 31, 2018 $145.5
 $67.5
 $35.7
 $248.7
Acquisitions —
 —
 1.7
 1.7
Foreign currency translation (0.3) 0.1
 —
 (0.2)
Balance as of June 30, 2019 $145.2
 $67.6
 $37.4
 $250.2


7. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans - As of June 30, 2019,March 31, 2020, the Company maintained two2 domestic pension plans and three3 German pension plans. The Company used a December 31, 20182019 measurement date for these plans. One of the Company's domestic pension plans covers one active management employee, while the other domestic plan covers all eligible employees (plan was frozen as of December 31, 2011). The two2 domestic and three3 German plans collectively comprise the 'Pension Benefits' disclosure caption.
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Other Benefits - The Company's other post-retirement benefit plan provides health and life insurance to domestic employees hired prior to 1992.

The following table sets forth the aggregated net periodic benefit cost for all pension plans for the secondfirst quarters ended March 31, 2020 and six months ended June 30, 2019 and June 30, 2018:March 31, 2019:
(In millions)Pension BenefitsOther Benefits
First Quarter EndedFirst Quarter Ended
 March 31, 2020March 31, 2019March 31, 2020March 31, 2019
Service cost$0.1  $0.2  $—  $—  
Interest cost1.1  1.5  0.1  0.1  
Expected return on assets(1.7) (2.0) —  —  
Amortization of:
Prior service cost—  —  —  —  
Actuarial loss0.9  0.6  —  —  
Settlement cost—  —  —  —  
Net periodic benefit cost$0.4  $0.3  $0.1  $0.1  
(In millions)Pension Benefits
 Second Quarter Ended Six Months Ended
 June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Service cost$0.2
 $0.2
 $0.4
 $0.4
Interest cost1.5
 1.4
 3.0
 2.7
Expected return on assets(2.0) (2.2) (4.0) (4.3)
Amortization of:       
Prior service cost—
 —
 —
 —
Actuarial loss0.7
 0.8
 1.3
 1.5
Settlement cost—
 —
 —
 —
Net periodic benefit cost$0.4
 $0.2
 $0.7
 $0.3
        


In the six monthsfirst quarter ended June 30, 2019,March 31, 2020, the Company made contributions of $0.0$0.1 million to the funded plans. The amount of contributions to be made to the plans during the calendar year 20192020 will be finalized by September 15, 2019,2020, based upon the funding level requirements identified and year-end valuation performed at December 31, 2018.2019.

The following table sets forth the aggregated net periodic benefit cost for the other post-retirement benefit plan for the second quarters and six months ended June 30, 2019 and June 30, 2018:

(In millions)Other Benefits
 Second Quarter Ended Six Months Ended
 June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Service cost$—
 $—
 $—
 $—
Interest cost0.1
 0.1
 0.2
 0.2
Expected return on assets—
 —
 —
 —
Amortization of:       
Prior service cost—
 —
 —
 —
Actuarial loss—
 —
 —
 0.1
Settlement cost—
 —
 —
 —
Net periodic benefit cost$0.1
 $0.1
 $0.2
 $0.3
        



8. INCOME TAXES
The Company’s effective tax rate from continuing operations for the sixthree month period ended June 30, 2019March 31, 2020 was 18.119.1 percent as compared to 9.213.9 percent for the sixthree month period ended June 30, 2018.March 31, 2019. The effective tax rate is lower than the U.S. statutory rate of 21 percent primarily due to foreign earnings taxed at rates below the U.S. statutory rate, the recognition of the U.S. foreign-derived intangible income (FDII) provisions, and certain discrete events including excess tax benefits from share-based compensation. For the second quarter of 2019 the effective tax rate was 19.2 percent as compared to 18.6 percent for the second quarter of 2018.compensation partially offset by state taxes.

The increase in the effective tax rate for the sixthree months ended June 30, 2019,March 31, 2020, compared with the same period in 2018,2019, was primarily a result of unfavorable discrete events of $0.4 million.

On March 27, 2020, President Trump signed into U.S. federal law the release of a valuation allowance of $5.4 millionCARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to staterefundable payroll tax credits, deferment of the employer portion of social security payments, net operating lossesloss carryback periods, modifications to the net interest deduction limitations, and incentives duringtechnical corrections to tax depreciation methods for qualified improvement property. While the six month period ended June 30, 2018.Company is still assessing the impact of the legislation, the Company does not expect there to be a material impact to the consolidated financial statements at this time.
















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9. DEBT
Debt consisted of the following:
(In millions)March 31, 2020December 31, 2019
Tax increment financing debt18.2  18.7  
New York Life Agreement75.0  75.0  
Credit Agreement39.0  19.0  
Financing Leases—  0.1  
Foreign subsidiary debt2.2  2.3  
Less: unamortized debt issuance costs(0.1) (0.1) 
$134.3  $115.0  
Less: current maturities(41.7) (21.9) 
Long-term debt$92.6  $93.1  
(In millions) June 30, 2019 December 31, 2018
Prudential Agreement $—
 $30.0
Tax increment financing debt 19.3
 19.8
New York Life Agreement 75.0
 75.0
Credit Agreement 123.3
 76.3
Financing Leases 0.1
 0.1
Foreign subsidiary debt 5.5
 5.4
Less: unamortized debt issuance costs (0.2) (0.2)
  $223.0
 $206.4
Less: current maturities (129.3) (112.0)
Long-term debt $93.7
 $94.4


Debt outstanding, excluding unamortized debt issuance costs, at June 30, 2019March 31, 2020 matures as follows:
(In millions) TotalYear 1Year 2Year 3Year 4Year 5More Than 5 Years
Debt$134.4  $41.7  $1.3  $1.3  $1.3  $1.4  $87.4  
(In millions)  Total Year 1 Year 2 Year 3 Year 4 Year 5 More Than 5 Years
Debt $223.1
 $129.3
 $1.2
 $1.3
 $1.3
 $1.3
 $88.7
Financing Leases 0.1
 —
 0.1
 —
 —
 —
 —
  $223.2
 $129.3
 $1.3
 $1.3
 $1.3
 $1.3
 $88.7


Prudential Agreement

The Company maintains the Third Amended and Restated Note Purchase and Private Shelf Agreement (the "Prudential Agreement") with, which expires on July 30, 2021 and has an initial borrowing capacity of $250.0 million. The Company paid the remaining principal balance of the previously issued notes during the second quarter of 2019. As of June 30, 2019,March 31, 2020, the Company has $150.0 million borrowing capacity available under the Prudential Agreement. There is no additional borrowing capacity resulting from principal payments made by the Company.

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

New York Life Agreement
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 maximum aggregate borrowing capacity of $200.0 million. On September 26, 2018, the Company issued and sold $75.0 million of fixed rate senior notes due September 26, 2025. These senior notes bear an interest rate of 4.04 percent with interest-only payments due semi-annually. The proceeds from the issuance of the notes were used to pay off existing variable interest rate indebtedness. As of June 30, 2019,March 31, 2020, there was $125.0 million remaining borrowing capacity under the New York Life Agreement.

Credit Agreement
The Company maintains the Third Amended and Restated Credit Agreement (the "Credit Agreement”). The Credit Agreement has a maturity date of October 28, 2021 and commitment amount of $300.0 million. The Credit Agreement provides that the Borrowers may request an increase in the aggregate commitments by up to $150.0 million (not to exceed a total commitment of $450.0 million). Under the Credit Agreement, the Borrowers are required to pay certain fees, including a facility fee of 0.100% to 0.275% (depending on the Company's leverage ratio) of the aggregate commitment, which fee is payable quarterly in arrears. Loans may be made either at (i) a Eurocurrency rate based on LIBOR plus an applicable margin of 0.75% to 1.60% (depending on the Company's leverage ratio) or (ii) an alternative base rate as defined in the Credit Agreement.

As of June 30, 2019,March 31, 2020, the Company had $123.3$39.0 million in outstanding borrowings which were primarily used for working capital needs, and the payment of existing indebtedness $5.0and acquisitions, $4.2 million in letters of credit outstanding, and $171.7$256.8 million of available capacity under the Credit Agreement.

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Covenants
The Company’s credit agreements contain customary financial covenants. The Company’s most significant agreements and restrictive covenants are in the New York Life Agreement, the Project Bonds, the Prudential Agreement, and the Credit Agreement; each containing both affirmative and negative covenants. The affirmative covenants relate to financial statements, notices of material events, conduct of business, inspection of property, maintenance of insurance, compliance with laws and most favored lender obligations. The negative covenants include limitations on loans, advances and investments, and the granting of liens by the Company or its subsidiaries, as well as prohibitions on certain consolidations, mergers, sales and transfers of assets. The covenants also include financial requirements including a maximum leverage ratio of 1.00 to 3.50 and a minimum interest coverage ratio of 1.00 to 3.00. Cross default is applicable with the Prudential Agreement, the Project Bonds, the New York Life Agreement, and the Credit Agreement but only if the Company is defaulting on an obligation exceeding $10.0 million. The Company was in compliance with all financial covenants as of June 30, 2019.March 31, 2020.

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

Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated

by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.

The following table sets forth the computation of basic and diluted earnings per share:
First Quarter Ended
(In millions, except per share amounts)March 31, 2020March 31, 2019
Numerator:  
Net income attributable to Franklin Electric Co., Inc.$10.6  $9.1  
Less: Earnings allocated to participating securities—  0.1  
Net income available to common shareholders$10.6  $9.0  
Denominator:  
Basic weighted average common shares outstanding46.4  46.3  
Effect of dilutive securities:  
Non-participating employee stock options and performance awards0.4  0.4  
Diluted weighted average common shares outstanding46.8  46.7  
Basic earnings per share$0.23  $0.19  
Diluted earnings per share$0.23  $0.19  
 Second Quarter Ended Six Months Ended
(In millions, except per share amounts)June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Numerator:       
Net income attributable to Franklin Electric Co., Inc.$32.7
 $30.5
 $41.8
 $51.7
Less: Earnings allocated to participating securities0.2
 0.2
 0.3
 0.4
Net income available to common shareholders$32.5
 $30.3
 $41.5
 $51.3
Denominator: 
  
    
Basic weighted average common shares outstanding46.3
 46.5
 46.3
 46.5
Effect of dilutive securities: 
  
    
Non-participating employee stock options and performance awards0.4
 0.5
 0.4
 0.5
Diluted weighted average common shares outstanding46.7
 47.0
 46.7
 47.0
Basic earnings per share$0.70
 $0.65
 $0.89
 $1.10
Diluted earnings per share$0.70
 $0.64
 $0.89
 $1.09


There were 0.3 million and 0.20.1 million stock options outstanding for the secondfirst quarters ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, and 0.2 million and 0.2 million stock options outstanding for the six months ended June 30, 2019 and June 30, 2018 respectively, that were excluded from the computation of diluted earnings per share, as their inclusion would be anti-dilutive.

16


11. EQUITY ROLL FORWARD
The schedules below set forth equity changes in the secondfirst quarters ended June 30, 2019March 31, 2020 and June 30, 2018:March 31, 2019:
(In thousands)Common Stock Additional Paid in Capital Retained Earnings Minimum Pension Liability Cumulative Translation Adjustment Noncontrolling Interest Total Equity Redeemable Noncontrolling Interest
Balance as of March 31, 2019$4,637
 $262,002
 $652,737
 $(48,076) $(137,205) $2,097
 $736,192
 $408
Net income    32,745
     247
 32,992
 (180)
Dividends on common stock ($0.1450/share)    (6,787)       (6,787)  
Common stock issued1
 243
         244
  
Common stock repurchased(12)   (5,202)       (5,214)  
Share-based compensation6
 2,288
         2,294
  
Noncontrolling dividend          (642) (642)  
Purchase of redeemable noncontrolling shares            —
 (485)
Currency translation adjustment        1,303
 12
 1,315
 47
Pension liability, net of tax      508
     508
  
Balance as of June 30, 2019$4,632
 $264,533
 $673,493
 $(47,568) $(135,902) $1,714
 $760,902
 $(210)
(In thousands)Common StockAdditional Paid in CapitalRetained EarningsMinimum Pension LiabilityCumulative Translation AdjustmentNoncontrolling InterestTotal EquityRedeemable Noncontrolling Interest
Balance as of December 31, 2019$4,639  $269,656  $712,460  $(50,089) $(140,121) $2,124  $798,669  $(236) 
Net income10,643  187  10,830  (38) 
Dividends on common stock ($0.155/share)(7,240) (7,240) 
Common stock issued2  869  871  
Common stock repurchased(35) (16,946) (16,981) 
Share-based compensation8  4,344  4,352  
Currency translation adjustment(37,727) (24) (37,751) 29  
Pension liability, net of tax716  716  
Balance as of March 31, 2020$4,614  $274,869  $698,917  $(49,373) $(177,848) $2,287  $753,466  $(245) 

(In thousands)Common Stock Additional Paid in Capital Retained Earnings Minimum Pension Liability Cumulative Translation Adjustment Noncontrolling Interest Total Equity Redeemable Noncontrolling Interest
Balance as of March 31, 2018$4,652
 $244,095
 $613,113
 $(48,763) $(92,740) $2,199
 $722,556
 $1,360
Net income    30,497
     190
 30,687
 (648)
Dividends on common stock ($0.1200/share)    (5,621)       (5,621)  
Common stock issued6
 1,147
         1,153
  
Common stock repurchased(7)   (2,997)       (3,004)  
Share-based compensation3
 1,440
         1,443
  
Noncontrolling dividend          —
 —
  
Purchase of redeemable noncontrolling shares            —
 —
Currency translation adjustment        (32,725) (63) (32,788) 52
Pension liability, net of tax      598
     598
  
Balance as of June 30, 2018$4,654
 $246,682
 $634,992
 $(48,165) $(125,465) $2,326
 $715,024
 $764

The schedules below set forth equity changes in the six months ended June 30, 2019 and June 30, 2018:

(In thousands)Common Stock Additional Paid in Capital Retained Earnings Minimum Pension Liability Cumulative Translation Adjustment Noncontrolling Interest Total Equity Redeemable Noncontrolling Interest
Balance as of December 31, 2018$4,632
 $257,535
 $654,724
 $(48,585) $(134,434) $1,955
 $735,827
 $518
Net income    41,801
     421
 42,222
 (283)
Dividends on common stock ($0.2900/share)    (13,510)       (13,510)  
Common stock issued7
 1,488
         1,495
  
Common stock repurchased(21)   (9,522)       (9,543)  
Share-based compensation14
 5,510
         5,524
  
Noncontrolling dividend          (642) (642)  
Purchase of redeemable noncontrolling shares            —
 (485)
Currency translation adjustment        (1,468) (20) (1,488) 40
Pension liability, net of tax      1,017
     1,017
  
Balance as of June 30, 2019$4,632
 $264,533
 $673,493
 $(47,568) $(135,902) $1,714
 $760,902
 $(210)

(In thousands)Common Stock Additional Paid in Capital Retained Earnings Minimum Pension Liability Cumulative Translation Adjustment Noncontrolling Interest Total Equity Redeemable Noncontrolling Interest
Balance as of December 31, 2017$4,663
 $240,136
 $604,905
 $(49,364) $(99,683) $1,964
 $702,621
 $1,502
Net income    51,671
     385
 52,056
 (802)
Dividends on common stock ($0.2275/share)    (10,658)       (10,658)  
Common stock issued9
 1,786
         1,795
  
Common stock repurchased(27)   (10,926)       (10,953)  
Share-based compensation9
 4,760
         4,769
  
Noncontrolling dividend          —
 —
  
Purchase of redeemable noncontrolling shares            —
 —
Currency translation adjustment        (25,782) (23) (25,805) 64
Pension liability, net of tax      1,199
     1,199
  
Balance as of June 30, 2018$4,654
 $246,682
 $634,992
 $(48,165) $(125,465) $2,326
 $715,024
 $764


(In thousands)Common StockAdditional Paid in CapitalRetained EarningsMinimum Pension LiabilityCumulative Translation AdjustmentNoncontrolling InterestTotal EquityRedeemable Noncontrolling Interest
Balance as of December 31, 2018$4,632  $257,535  $654,724  $(48,585) $(134,434) $1,955  $735,827  $518  
Net income9,056  174  9,230  (103) 
Dividends on common stock ($0.145/share)(6,723) (6,723) 
Common stock issued6  1,245  1,251  
Common stock repurchased(9) (4,320) (4,329) 
Share-based compensation8  3,222  3,230  
Currency translation adjustment(2,771) (32) (2,803) (7) 
Pension liability, net of tax509  509  
Balance as of March 31, 2019$4,637  $262,002  $652,737  $(48,076) $(137,205) $2,097  $736,192  $408  

17

12. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
Changes in accumulated other comprehensive income/(loss) by component for the sixthree months ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, are summarized below:
(In millions)     (In millions)
For the six months ended June 30, 2019:Foreign Currency Translation Adjustments 
Pension and Post-Retirement Plan Benefit Adjustments (2)
 Total
For the three months ended March 31, 2020:For the three months ended March 31, 2020:Foreign Currency Translation Adjustments
Pension and Post-Retirement Plan Benefit Adjustments (2)
Total
Balance as of December 31, 2019Balance as of December 31, 2019$(140.2) $(50.0) $(190.2) 
Other comprehensive income/(loss) before reclassificationsOther comprehensive income/(loss) before reclassifications(37.7) —  (37.7) 
Amounts reclassified from accumulated other comprehensive income/(loss) (1)
Amounts reclassified from accumulated other comprehensive income/(loss) (1)
—  0.7  0.7  
Net other comprehensive income/(loss)Net other comprehensive income/(loss)(37.7) —  0.7  —  (37.0) 
Balance as of March 31, 2020Balance as of March 31, 2020$(177.9) $(49.3) $(227.2) 
For the three months ended March 31, 2019:For the three months ended March 31, 2019:
Balance as of December 31, 2018$(134.5) $(48.5) $(183.0)Balance as of December 31, 2018$(134.5) $(48.5) $(183.0) 
     
Other comprehensive income/(loss) before reclassifications(1.4) —
 (1.4)Other comprehensive income/(loss) before reclassifications(2.8) —  (2.8) 
Amounts reclassified from accumulated other comprehensive income/(loss) (1)
—
 0.9
 0.9
Amounts reclassified from accumulated other comprehensive income/(loss) (1)

—  0.5  0.5  
Net other comprehensive income/(loss)(1.4) 0.9
 (0.5)Net other comprehensive income/(loss)(2.8) —  0.5  —  (2.3) 
     
Balance as of June 30, 2019$(135.9) $(47.6) $(183.5)
     
For the six months ended June 30, 2018     
Balance as of December 31, 2017$(99.7) $(49.3) $(149.0)
     
Other comprehensive income/(loss) before reclassifications(25.8) —
 (25.8)
Amounts reclassified from accumulated other comprehensive income/(loss) (1)
—
 1.2
 1.2
Net other comprehensive income/(loss)(25.8) 1.2
 (24.6)
     
Balance as of June 30, 2018$(125.5) $(48.1) $(173.6)
Balance as of March 31, 2019Balance as of March 31, 2019$(137.3) —  $(48.0) $(185.3) 

(1) This accumulated other comprehensive income/(loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details) and is included in the "Other income/(expense), net" line of the Company's condensed consolidated statements of income.

(2) Net of tax expense of $0.3$0.2 million and $0.4$0.1 million for the sixthree months ended June 30,March 31, 2020 and March 31, 2019, and June 30, 2018, respectively.

Amounts related to noncontrolling interests were not material.



13. SEGMENT AND GEOGRAPHIC INFORMATION
The accounting policies of the operating segments are the same as those described in Note 1 of the Company's Form 10-K.  Revenue is recognized based on the invoice price at the point in time when the customer obtains control of the product, which is typically upon shipment to the customer. The Water and Fueling segments include manufacturing operations and supply certain components and finished goods, both between segments and to the Distribution segment.  The Company reports these product transfers between Water and Fueling as inventory transfers as a significant number of the Company's manufacturing facilities are shared across segments for scale and efficiency purposes.  The Company reports intersegment transfers from Water to Distribution as intersegment revenue at market prices to properly reflect the commercial arrangement of vendor to customer that exists between the Water and Distribution segments.

Segment operating income is a key financial performance measure. Operating income by segment is based on net sales less identifiable operating expenses and allocations and includes profits recorded on sales to other segments of the Company. During the first quarter of 2019, the Company changed management reporting for transfers of certain products between the Water and Fueling segments. This reclassification resulted in $1.0 million of sales and $0.1 million of operating income for the second quarter ended June 30, 2018 and $1.8 million of sales and $0.2 million of operating income for the six months ended June 30, 2018, being reclassified between the Fueling segment and the Water segment. Additionally, the changes to management reporting had an impact on how the Company reviews and summarizes sales of geographical components within a segment. The Company has updated the sales of geographical components of the Water Systems segment from prior year to


align with current management reporting. The changes resulted in sales reclassifications from Latin America, Asia Pacific, and Europe, Middle East, and Africa ("EMEA") to the U.S. and Canada for both the second quarter and six months ended June 30, 2018. This resulted in $3.5 million and $6.6 million of sales to be reclassified to the U.S. and Canada for the second quarter and six months ended June 30, 2018, respectively. There is no impact on the Company's previously reported consolidated financial position, results of operations, or cash flows. 



18

Financial information by reportable business segment is included in the following summary:
First Quarter Ended
(In millions)March 31, 2020March 31, 2019
Net sales
Water Systems
External sales
United States & Canada$70.9  $86.8  
Latin America28.2  30.5  
Europe, Middle East & Africa38.2  37.7  
Asia Pacific13.8  22.2  
Intersegment sales
United States & Canada13.0  11.2  
Total sales164.1  188.4  
Distribution
External sales
United States & Canada60.4  53.3  
Intersegment sales—  —  
Total sales60.4  53.3  
Fueling Systems
External sales
United States & Canada37.4  35.1  
All other17.9  25.1  
Intersegment sales—  —  
Total sales55.3  60.2  
Intersegment Eliminations/Other(13.0) (11.2) 
Consolidated$266.8  $290.7  
First Quarter Ended
March 31, 2020March 31, 2019
Operating income/(loss)
Water Systems$18.8  $19.2  
Distribution(2.2) (4.3) 
Fueling Systems12.1  12.3  
Intersegment Eliminations/Other(14.9) (15.1) 
Consolidated$13.8  $12.1  
 Second Quarter Ended Six Months Ended
(In millions)June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
 Net sales
Water Systems       
External sales       
United States & Canada$103.1
 $98.3
 $189.9
 $183.0
Latin America29.4
 28.9
 59.9
 58.0
Europe, Middle East & Africa39.0
 45.2
 76.7
 91.4
Asia Pacific18.7
 19.0
 40.9
 39.8
Intersegment sales       
United States & Canada14.8
 20.0
 26.0
 31.8
Total sales205.0
 211.4
 393.4
 404.0
Distribution       
External sales

 

 

 

United States & Canada87.1
 79.5
 140.4
 135.7
Intersegment sales—
 —
 —
 —
Total sales87.1
 79.5
 140.4
 135.7
Fueling Systems       
External sales       
United States & Canada45.9
 37.5
 81.1
 69.5
All other32.1
 35.6
 57.2
 62.2
Intersegment sales—
 —
 —
 —
Total sales78.0
 73.1
 138.3
 131.7
        
Intersegment Eliminations/Other(14.8) (20.0) (26.0) (31.8)
Consolidated$355.3
 $344.0
 $646.1
 $639.6
        
 Second Quarter Ended Six Months Ended
 June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
 Operating income/(loss)
Water Systems$30.9
 $32.2
 $50.1
 $57.3
Distribution4.5
 4.0
 0.2
 3.2
Fueling Systems21.7
 19.0
 34.0
 32.7
Intersegment Eliminations/Other(13.4) (14.7) (28.5) (30.0)
Consolidated$43.7
 $40.5
 $55.8
 $63.2


March 31, 2020December 31, 2019
Total assets
Water Systems$635.2  $658.3  
Distribution192.5  180.2  
Fueling Systems272.3  283.8  
Other49.5  72.4  
Consolidated$1,149.5  $1,194.7  
 June 30, 2019 December 31, 2018
 Total assets
Water Systems$707.5
 $679.7
Distribution204.9
 165.1
Fueling Systems299.6
 275.7
Other57.7
 61.9
Consolidated$1,269.7
 $1,182.4

19

Other Assets are generally Corporate assets that are not allocated to the segments and are comprised primarily of cash and property, plant and equipment.

14. 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.

At June 30, 2019,March 31, 2020, the Company had $9.2$5.2 million of commitments primarily for capital expenditures and purchase of raw materials to be used in production.

The Company provides warranties on most of its products. The warranty terms vary but are generally two years to five years from date of manufacture or one year 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.

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 condensed consolidated balance sheet for the six monthsfirst quarter ended June 30, 2019,March 31, 2020, are as follows:

(In millions)  
Balance as of December 31, 2018 $9.0
Accruals related to product warranties 5.1
Additions related to acquisitions 0.2
Reductions for payments made (5.4)
Balance as of June 30, 2019 $8.9

(In millions)
Balance as of December 31, 2019$9.1 
Accruals related to product warranties2.1 
Additions related to acquisitions— 
Reductions for payments made(2.5)
Balance as of March 31, 2020$8.7 

The Company maintains certain warehouses, distribution centers, office space, and equipment operating leases. The Company also has lease agreements that are classified as financing. These financing leases are immaterial to the Company.
The Company utilizes interest rates from lease agreements unless the lease agreement does not provide a readily determinable rate. In these instances, the Company utilizedutilizes its incremental borrowing rate based on the information available as of the adoption of ASU 2016-02 or at the inception of any new leases entered into thereafter when determining the present value of future lease payments.
Some of the Company’s leases include renewal options. The Company excludes these renewal options in the expected lease term unless the Company is reasonably certain that the option will be exercised.
The components of the Company’s operating lease portfolio for bothas of the secondfirst quarter and the six months ended June 30, 2019March 31, 2020 are as follows:

Lease Cost (in millions):
Operating lease cost$2.0 
Short-term lease cost0.1 
Other Information:
Weighted-average remaining lease term4 years
Weighted-average discount rate3.8 %
Lease Cost (in millions):Second Quarter Ended Sixth Months Ended
Operating lease cost$2.4
 $5.2
Short-term lease cost—
 0.1
    
Other Information:   
Weighted-average remaining lease term  6 years
Weighted-average discount rate  3.9%


The minimum rental payments for non-cancellable operating leases as of June 30, 2019,March 31, 2020, are as follows:

(In millions)20192020202120222023Thereafter
Future Minimum Rental Payments$4.8
$7.9
$5.4
$3.4
$2.3
$5.8

The minimum rental payments for non-cancellable operating leases as of December 31, 2018, were reported as follows:

(In millions)20192020202120222023Thereafter
Future Minimum Rental Payments$8.9
$5.9
$3.5
$2.0
$1.1
$5.7


(In millions)20202021202220232024Thereafter
Future Minimum Rental Payments$8.1  $8.6  $5.1  $3.3  $1.5  $2.5  
20



15. SHARE-BASED COMPENSATION
The Franklin Electric Co., Inc. 2017 Stock Plan (the "2017 Stock Plan") is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, stock unit awards, and stock appreciation rights ("SARs") to key employees and non-employee directors. The number of shares that may be issued under the Plan is 1,400,000. Stock options and SARs reduce the number of available shares by one1 share for each share subject to the option or SAR, and stock awards and stock unit awards settled in shares reduce the number of available shares by 1.5 shares for every one share delivered.

The Company also 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 authorized 2,400,000 shares for issuance as follows:

2012 Stock PlanAuthorized Shares
Stock Options1,680,000
Stock/Stock Unit Awards720,000

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 PlanAuthorized Shares
Stock Options3,200,000
Stock Awards1,200,000


All options in the 2009 Stock Plan have been awarded.awarded and no additional awards are granted out of the plan. However, there are still unvested awards and unexercised options under this plan.

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 outstanding stock plans.


Stock Options:
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.  

The assumptions used for the Black-Scholes model to determine the fair value of options granted during the six monthsfirst quarters ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018 are as follows:
March 31, 2020March 31, 2019
Risk-free interest rate1.39 %2.53 %
Dividend yield1.04 %1.05 %
Volatility factor29.45 %29.38 %
Expected term5.5 years5.5 years
  June 30, 2019 June 30, 2018
Risk-free interest rate 2.53% 2.69%
Dividend yield 1.05% 1.05%
Volatility factor 29.38% 28.71%
Expected term 5.5 years
 5.6 years











21

A summary of the Company’s outstanding stock option activity and related information for the six monthsfirst quarter ended June 30, 2019March 31, 2020 is as follows:
(Shares in thousands)March 31, 2020
 
 
Stock Options
SharesWeighted-Average Exercise Price
Outstanding at beginning of period1,262  $37.99  
Granted214  59.71  
Exercised(23) 36.86  
Forfeited—  —  
Outstanding at end of period1,453  $41.21  
Expected to vest after applying forfeiture rate1,450  $41.18  
Vested and exercisable at end of period960  $35.32  
(Shares in thousands) June 30, 2019
 
 
Stock Options
 Shares Weighted-Average Exercise Price
Outstanding at beginning of period 1,229
 $33.25
Granted 190
 55.16
Exercised (68) 21.99
Forfeited (2) 42.77
Outstanding at end of period 1,349
 $36.89
Expected to vest after applying forfeiture rate 1,342
 $36.84
Vested and exercisable at end of period 830
 $31.90


A summary of the weighted-average remaining contractual term and aggregate intrinsic value as of June 30, 2019March 31, 2020 is as follows:
Weighted-Average Remaining Contractual TermAggregate Intrinsic Value (000's)
Outstanding at end of period6.25 years$12,774 
Expected to vest after applying forfeiture rate6.25 years$12,770 
Vested and exercisable at end of period4.87 years$11,814 
  Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value (000's)
Outstanding at end of period 6.31 years $15,768
Expected to vest after applying forfeiture rate 6.30 years $15,731
Vested and exercisable at end of period 4.86 years $12,945


The total intrinsic value of options exercised during the six monthsfirst quarters ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018 was $2.1$0.5 million and $2.0 million, respectively.

As of June 30, 2019,March 31, 2020, there was $2.0$2.1 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 1.931.74 years.

Stock/Stock Unit Awards:
A summary of the Company’s restricted stock/stock unit award activity and related information for the six monthsfirst quarter ended June 30, 2019March 31, 2020 is as follows:


(Shares in thousands) June 30, 2019
Restricted Stock/Stock Unit Awards 
 
Shares
 
Weighted-Average Grant-
Date Fair Value
Non-vested at beginning of period 498
 $37.27
Awarded 136
 51.59
Vested (133) 33.64
Forfeited (9) 38.80
Non-vested at end of period 492
 $42.19

(Shares in thousands)March 31, 2020
Restricted Stock/Stock Unit Awards 
Shares		Weighted-Average Grant-
Date Fair Value
Non-vested at beginning of period463  $42.36  
Awarded114  59.66  
Vested(85) 29.39  
Forfeited(1) 46.71  
Non-vested at end of period491  $48.61  

As of June 30, 2019,March 31, 2020, there was $11.3$13.0 million of total unrecognized compensation cost related to non-vested restricted stock/stock unit awards granted under the 2012 Stock Plan and the 2009 Stock Plan.stock plans.  That cost is expected to be recognized over a weighted-average period of 1.731.79 years.






22

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SecondFirst Quarter 2020 vs. First Quarter 2019 vs. Second Quarter 2018

OVERVIEW
Sales in the secondfirst quarter of 2019 increased about 3 percent2020 decreased from the secondfirst quarter of last year. TheSales in the quarter declined by $24 million or about 8 percent primarily due to lower Water and Fueling Systems sales increase was led by acquisition related sales, as well as sales increases from pricevolumes and foreign currency exchange partially offset by lower volume. The impact of foreign currency translation on sales was unfavorable by about 3 percent.achieved price. The Company's consolidated gross profit was $119.7$90.3 million for the secondfirst quarter of 2019,2020, an increase of $3.6 million or about 3 percent from the prior year’s secondfirst quarter. Diluted earnings per shareThe gross profit as a percent of net sales was 33.9 percent in the secondfirst quarter of 2020 versus 30.8 percent during the first quarter 2019 were higher by 9 percentand improved primarily due to better price realization and product sales mix.

EFFECTS OF THE GLOBAL PANDEMIC
The top priority of the Company is the health and welfare of its employees and partners around the world. In response to the same period last year.health risks posed by the Global Pandemic, the Company implemented and has been following the recommended hygiene and social distancing practices promulgated by the United States Centers for Disease Control and the World Health Organization.

The Company’s products and services are generally viewed as essential in most jurisdictions in which the Company operates. Accordingly, the Company’s global manufacturing and distribution operations generally remain open subject to temporary government mandated closures which have occurred in China, Italy, South Africa, India and several countries in South America. These temporary closures have not had a material impact on the ability to supply products to the Company’s customers.

The Company has assessed the end markets it serves to determine changes in demand patterns and customer behaviors. From this assessment, the Company currently believes that the most significant risks to the previously provided financial outlook for 2020 are a reduction of large dewatering equipment sales in the Water Systems segment; Water Systems customers destocking their inventory, particularly in the U.S. and Canada plumbing channel; and, the deferral or cancellation of the construction of new filling stations in the Fueling Systems segment in the U.S and Canada. Additionally, the strengthening of the U.S. dollar versus most international currencies will result in lower translations of both net sales and earnings from many of the Company’s businesses outside the U.S. Beyond these specific end market considerations, the Company may experience other negative impacts to profitability from various government mandated closures and related customer behavior.

Additional adverse financial impacts from these risks include lost operational efficiencies, deleveraging of the manufacturing fixed costs base due to lower manufactured volumes, and the potential for higher bad debt expense. The Company has taken action to offset the negative impacts of these risks by implementing various reductions in all discretionary spending.

The Company ended the first quarter of 2020 with a cash balance of $40 million and had total incremental borrowing capacity of $478 million. The Company believes it has enough liquidity to meet its operating and cash flow requirements for the foreseeable future.

RESULTS OF OPERATIONS

Net Sales
Net sales in the secondfirst quarter of 20192020 were $355.3$266.8 million, an increasea decrease of $11.3$23.9 million or about 38 percent compared to 2018 second2019 first quarter sales of $344.0$290.7 million. AcquisitionThe sales increase from acquisition related sales were $12.0was $3.9 million. Sales revenue decreased by $10.3$8.1 million or about 3 percent in the secondfirst quarter of 20192020 due to foreign currency translation. OrganicExcluding acquisitions and the impact of foreign currency translation, the Company’s organic sales increasedgrowth was negative about 3 percent compared to the second quarter of 2018.7 percent.

Net Sales
(In millions)Q1 2020Q1 20192020 v 2019
Water Systems$164.1  $188.4  $(24.3) 
Fueling Systems55.3  60.2  $(4.9) 
Distribution60.4  53.3  $7.1  
Eliminations/Other(13.0) (11.2) $(1.8) 
Consolidated$266.8  $290.7  $(23.9) 


23
 Net Sales
(In millions)Q2 2019 Q2 2018 2019 v 2018
Water Systems$205.0
 $211.4
 $(6.4)
Fueling Systems78.0
 73.1
 $4.9
Distribution87.1
 79.5
 $7.6
Eliminations/Other(14.8) (20.0) $5.2
Consolidated$355.3
 $344.0
 $11.3


Net Sales-Water Systems
Water Systems salesrevenues were $205.0$164.1 million in the secondfirst quarter 2019,2020, a decrease of $6.4$24.3 million or about 313 percent versus the secondfirst quarter 20182019 sales of $211.4$188.4 million. Acquisition relatedIn the first quarter of 2020, sales from businesses acquired since the first quarter of 2019 were $3.3$3.9 million. Water Systems salesSales were reduceddecreased by $8.7$7.7 million or about 4 percent in the quarter due to foreign currency translation. ExcludingWater Systems sales were down about 11 percent, excluding acquisitions and foreign currency translation, Water Systems sales were down $1.0 million or less than 1 percent compared toin the secondfirst quarter 2018.of 2020 versus the first quarter of 2019.

Water Systems sales in the U.S. and Canada were flatdecreased by 14 percent overall compared to the secondfirst quarter 2018. The impact2019, primarily due to lower sales of foreign currency translationdewatering equipment. Sales of dewatering equipment decreased by nearly 54 percent due to lower sales in rental channels and substantial uncertainty in oil production end markets. Sales of groundwater pumping equipment increased by about 1 percent.2 percent versus the first quarter 2019, in part due to more normal weather conditions than a year ago. Sales of surface pumping equipment increaseddecreased by 914 percent on the strength of higherlower sales of both wastewater and dewatering equipment. Saleswater transfer systems as customers in this channel began to feel the impact of groundwater pumping equipment declined 12 percent versus the second quarter 2018. The decline in groundwater pumping systems was primarily due to adverse weather conditions in North AmericaGlobal Pandemic and reduced sales to the Company’s Headwater Distribution segment.lowered their own inventory levels.


Water Systems sales in markets outside the U.S. and Canada declineddecreased by 611 percent overall. The impact of foreignForeign currency translation decreased sales by about 89 percent. Excluding the impact of foreign currency translation, Water Systems sales in markets outsideOutside the U.S. and Canada, declined organically by about 2 percent. International Water Systems organic sales declineddecreased by 2 percent, primarily from lower salesdriven by the Asia Pacific markets as customers in Latin America markets outside of Brazil. In EMEA, sales declined primarily due to foreign currency translation.Korea, Japan and China were impacted by the Global Pandemic.

Net Sales-Fueling Systems
Fueling Systems sales were $78.0$55.3 million in the secondfirst quarter 2019, an increaseof 2020, a decrease of $4.9 million or about 78 percent versus the secondfirst quarter 20182019 sales of $73.1 million. Acquisition related sales were $1.7$60.2 million. Fueling Systems sales were decreased by $1.6$0.4 million or about 21 percent in the quarter due to foreign currency translation. Fueling Systems organic sales, increasedexcluding foreign currency translation, declined by about 7 percent compared to the second quarter of 2018.percent.

Fueling Systems sales in the U.S. and Canada increased by 15about 7 percent compared to the secondfirst quarter 2018.2019. The increase was principally in the piping, pumping and fuel pumpingmanagement systems underground piping and containment systems and service station hardware product lines. Outside the U.S. and Canada, Fueling Systems revenues declined by 2about 30 percent, due todriven by lower sales in Europe and Africa partially offset by higher sales in China and other regions.Asia Pacific, primarily China.

Net Sales-Distribution
Distribution sales were $87.1$60.4 million in the secondfirst quarter 2020, an increase of $7.1 million versus first quarter 2019 versus second quarter 2018 sales of $79.5 million. In the second quarter of 2019, sales from businesses acquired since the second quarter of 2018 were $7.0$53.3 million. The Distribution segment organic sales increased about 113 percent compared to the secondfirst quarter of 2018.2019. More favorable weather conditions versus the first quarter last year contributed to the revenue growth.

Cost of Sales
Cost of sales as a percentpercentage of net sales for both the second quarterfirst quarters of 2020 and 2019 was 66.1 percent and 2018 was 66.3 percent.69.2 percent, respectively. Correspondingly, the gross profit margin was unchanged for both second quarters at 33.7increased to 33.9 percent from 30.8 percent. The Company'sCompany’s consolidated gross profit was $119.7$90.3 million for the secondfirst quarter of 2020, an increase from the first quarter of 2019 up $3.6 million from the gross profit of $116.1 million in the second quarter of 2018.$89.5 million. The gross profit increase wasmargin improved primarily due to higher sales. In the second quarter, realized sellingbetter price increases offset inflation.realization and product sales mix shifts.

Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative (SG&A) expenses were $75.8$75.6 million in the secondfirst quarter of 20192020 compared to $75.0$76.3 million in the secondfirst quarter of 2018.2019. SG&A expenses from acquired businesses was $2.8were $0.8 million and excluding the acquired entities, the Company’s SG&A expenses in the secondfirst quarter of 2020 were $74.8 million, a decrease of about 2 percent from the first quarter 2019. SG&A expenses were lower in part because of foreign currency translation versus the prior year, lower variable compensation expenses, and company wide efforts to lower spending in response to the pending impacts of the Global Pandemic.

Restructuring Expenses
There were $0.9 million of restructuring expenses for the first quarter of 2020. Restructuring expenses for the first quarter of 2020 were $0.6 million in the Water and $0.2 million in Fueling segments and related to continued miscellaneous manufacturing realignment activities, as well as $0.1 million in the Distribution segment related to miscellaneous branch closings and consolidation.

There were $1.1 million of restructuring expenses for the first quarter of 2019. Restructuring expenses for the first quarter of 2019 were $73.0$0.6 million a decrease of 3 percent from the second quarter 2018, partially due to the effect of foreign currency translation in the second quarter of 2019 versus the prior year.
Restructuring Expenses
Distribution segment and related to miscellaneous branch closings and consolidation. Restructuring expenses for the secondfirst quarter of 2019 were $0.2 million and related to branch consolidations and other asset rationalizations in the Headwater distribution segment. Restructuring expenses for the second quarter of 2018 were $0.6 million, with $0.4$0.5 million in the Water segment and $0.2 in Fueling fromrelated to continued miscellaneous manufacturing realignment activities in North America and India.activities.

Operating Income
Operating income was $43.7$13.8 million in the secondfirst quarter of 2019,2020, up $3.2$1.7 million or about 814 percent from $40.5$12.1 million in the secondfirst quarter of 2018.2019.
24

  Operating income (loss)
(In millions) Q2 2019 Q2 2018 2019 v 2018
Water Systems $30.9
 $32.2
 $(1.3)
Fueling Systems 21.7
 19.0
 2.7
Distribution 4.5
 4.0
 0.5
Eliminations/Other (13.4) (14.7) 1.3
Consolidated $43.7
 $40.5
 $3.2

Operating income (loss)
(In millions)Q1 2020Q1 20192020 v 2019
Water Systems$18.8  $19.2  $(0.4) 
Fueling Systems12.1  12.3  (0.2) 
Distribution(2.2) (4.3) 2.1  
Eliminations/Other(14.9) (15.1) 0.2  
Consolidated$13.8  $12.1  $1.7  

Operating Income-Water Systems

Water Systems operating income was $30.9$18.8 million in the secondfirst quarter 2019,2020, down $1.3$0.4 million or 4 percent versus the secondfirst quarter 2018 and2019. Operating income decreased in Water Systems primarily due to lower sales volume. The first quarter operating income margin was 15.111.5 percent, compared to the 15.2up 130 basis points from 10.2 percent in the secondfirst quarter 2018of 2019. Operating income margin increased in Water Systems primarily due to better price realization and improved product and geographic sales mix shifts.mix.

Operating Income-Fueling Systems
Fueling Systems operating income was $21.7$12.1 million in the secondfirst quarter of 2019, up $2.7 million or about 14 percent2020 compared to $19.0$12.3 million in the secondfirst quarter of 2018 and the second2019. The decrease in operating income was primarily related to lower sales. The first quarter Fueling Systems operating income margin was 27.821.9 percent, an increase of 180150 basis points from the 26.020.4 percent of net sales in the secondfirst quarter of 2018. The increase in operating2019. Operating income margin improved due to a better geographic and product sales mix.

Operating Income-Distribution
The Distribution segment recorded an operating loss of $2.2 million in the first quarter of 2020 compared to a $4.3 million loss in the first quarter of 2019. The Distribution loss was primarily due to favorable sales mix shifts andlost leverage on fixed costcosts from higherlower sales.

Operating Income-Distribution The Distribution segment’s operations are seasonal and product sales are significantly slower during the fourth and first quarters, i.e., the winter months in North America.
Distribution operating income was $4.5 million in the second quarter of 2019 and the second quarter operating income margin was 5.2 percent. Distribution operating income was $4.0 million in the second quarter of 2018 and the second quarter
operating income margin was 5.0 percent. The increase in operating income is primarily related to acquisitions.

Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of intersegment sales and profit eliminations and unallocated general and administrative expenses and inter-segment sales and profit eliminations.expenses. The inter-segmentintersegment profit elimination impact in the secondfirst quarter of 2020 versus the first quarter of 2019 was $1.4income of $0.7 million. The intersegment elimination of operating income effectively defers the operating income on sales from Water Systems to Distribution in the consolidated financial results until such time as the transferred product is sold from the Distribution segment to its end third party customer. General and administrative expenses were higher by $0.1$0.5 million or less than 1 percent.about 4 percent to last year.

Interest Expense
Interest expense for the second quarterfirst quarters of 2020 and 2019 was $1.2 million and 2018 was $2.3 million, and $2.6 million, respectively. Interest expense was lower primarily due to lower debt.

Other Income or Expense
Other income or expense was a loss of $0.3 million and $0.0 in the secondfirst quarter of 2019 and 2018, respectively. Included in other income in the second quarter of 2019 and 2018 was interest income2020 of $0.2 million primarily derived fromand a gain of $0.2 million in the investmentfirst quarter of cash balances.2019.

Foreign Exchange
Foreign currency-based transactions produced a lossgain for the second quarterfirst quarters of 2020 and 2019 of $0.5 million, primarily due to the Turkish Lira relative to the U.S. dollar. Foreign currency-based transactions produced a loss for the second quarter of 2018 of $1.0 million primarily due to the Mexican Peso relative to the U.S. dollar.and $0.6 million, respectively.

Income Taxes
The provision for income taxes in the secondfirst quarter of 2020 and 2019 and 2018 was $7.8$2.6 million and $6.9$1.5 million, respectively. The effective tax rate for the secondfirst quarter of 2019 and 20182020 was about 19 percent for both and, before the impact of discrete events, was about 2120 percent. The effective tax rate for the first quarter of 2019 was about 14 percent for both.and, before the impact of discrete events, was about 20 percent. The increase in the effective tax rate was primarily the result of unfavorable discrete events of $0.4 million during the first quarter of 2020. The tax rate as a percentage of pre-tax earnings for the full year of 20192020 is projected to be about 2120 percent, compared to the full year 20182019 tax rate of about 1920 percent, both before discrete adjustments.
Net Income
Net income for the second quarter of 2019 was $32.8 million compared to the prior year second quarter net income of $30.0 million.  Net income attributable to Franklin Electric Co., Inc. for the second quarter of 2019 was $32.7 million, or $0.70 per diluted share, compared to the prior year second quarter net income attributable to Franklin Electric Co., Inc. of $30.5 million or $0.64 per diluted share.

First Half of 2019 vs. First Half of 2018

OVERVIEW
Sales in the first half of 2019 were up from the same period last year.  The sales increase was led by acquisition related sales, as well as price increases partially offset by lower volume. The impact of foreign currency translation decreased sales by about 4 percent. The Company's consolidated gross profit was $209.2 million for the first half of 2019, a decrease of $5.9 million or about 3 percent from the first half of 2018. Diluted earnings per share in the first half of 2019 were down from the same period last year.

RESULTS OF OPERATIONS

Net Sales

Net sales in the first half of 2019 were $646.1 million, an increase of $6.5 million or about 1 percent compared to 2018 first half sales of $639.6 million.  The incremental impact of sales from acquired businesses was $20.6 million. Sales revenue decreased by $23.2 million or about 4 percent in the first half of 2019 due to foreign currency translation.

25
 Net Sales
(In millions)YTD June 30, 2019 YTD June 30, 2018 2019 v 2018
Water Systems$393.4
 $404.0
 $(10.6)
Fueling Systems138.3
 131.7
 $6.6
Distribution140.4
 135.7
 $4.7
Eliminations/Other(26.0) (31.8) $5.8
Consolidated$646.1
 $639.6
 $6.5

Net Sales-Water Systems
Water Systems sales were $393.4 million in the first half 2019, a decrease of $10.6 million or about 3 percent versus the first half 2018. The incremental impact of sales from acquired businesses was $7.6 million. Foreign currency translation changes decreased sales $20.2 million, or about 5 percent, compared to sales in the first half of 2018. The Water Systems sales change in the first half of 2019, excluding acquisitions and foreign currency translation, was an increase of $2.0 million or less than 1 percent.

Water Systems sales in the U.S. and Canada increased by about 1 percent compared to the first half of 2018. Sales revenue decreased by $2.1 million or about 1 percent in the first half of 2019 due to foreign currency translation. In the first half of 2019, sales of Pioneer branded dewatering equipment increased by about 10 percent compared to the prior year due to strength in North American oil and gas markets and continued diversification of product sales channels and geographies. Sales of groundwater pumping equipment decreased by about 9 percent on lower residential and agricultural system sales primarily to the Headwater companies, versus the first half of 2018. Sales of other surface pumping equipment increased by 5 percent in part due to wet weather conditions in the upper Midwest and Canada.

Water Systems sales in markets outside the U.S. and Canada decreased by about 6 percent compared to the first half of 2018. The incremental impact of sales from acquired businesses was $7.6 million or about 4 percent. Sales revenue decreased by $18.1 million or about 10 percent in the first half of 2019 due to foreign currency translation. International Water Systems sales change in the first half of 2019, excluding acquisitions and foreign currency translation, was a decrease of less than 1 percent. International Water Systems sales growth in the Asia Pacific markets were offset by declines primarily from by lower sales in EMENA and in Latin America markets outside of Brazil.

Net Sales-Fueling Systems
Fueling Systems sales were $138.3 million in the first half 2019, an increase of $6.6 million or about 5 percent from the first half of 2018. The incremental impact of sales from acquired businesses was $3.2 million. Foreign currency translation changes decreased sales $3.0 million or about 2 percent compared to sales in the first half of 2018. The Fueling Systems sales change in the first half of 2019, excluding acquisitions and foreign currency translation, was an increase of about 5 percent.

Fueling Systems sales in the U.S. and Canada grew by about 13 percent during the first half with most of the sales growth coming from piping. Internationally, Fueling Systems revenues declined by about 4 percent due to lower sales in Europe and Africa partially offset by higher sales in India, China and other regions.
Net Sales-Distribution
Distribution sales were $140.4 million in the first half of 2019, versus the first half of 2018 sales of $135.7 million. The incremental impact of sales from acquired businesses was $9.8 million. Distribution segment organic sales decreased about 4 percent compared to the first half of 2018 primarily due to unfavorable weather conditions.

Cost of Sales
Cost of sales as a percent of net sales for the first half of 2019 and 2018 was 67.6 percent and 66.4 percent, respectively. Correspondingly, the gross profit margin was 32.4 percent and 33.6 percent, respectively. The Company's consolidated gross profit was $209.2 million for the first half of 2019, down $5.9 million from the gross profit of $215.1 million in the first half of 2018. The gross profit decrease was primarily due to lower sales. The decline in gross profit margin percentage is partially attributable to product and geographic sales mix shifts.


Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative expenses were $152.1 million in the first half of 2019 and increased by $0.9 million in the first half of 2019 compared to $151.2 million the first half of last year. The increase in SG&A expenses from acquired businesses were $5.8 million. Excluding the acquired entities, the Company’s SG&A expenses in the first half of 2019 decreased by $4.9 million or about 3 percent, partially due to the effect of foreign currency translation in the first half of 2019 versus the prior year.
Restructuring Expenses
Restructuring expenses for the first half of 2019 were $1.3 million. Restructuring expenses were $0.5 million in the Water segment from continued miscellaneous manufacturing realignment activities and $0.8 in distribution related to branch consolidations and other asset rationalizations in the Headwater distribution segment. Restructuring expenses for the first half of 2018 were $0.6 million. Restructuring expenses were $0.4 million in the Water segment and $0.2 in Fueling from continued miscellaneous manufacturing realignment activities.

Operating Income
Operating income was $55.8 million in the first half of 2019, down $7.4 million from $63.2 million in the first half
of 2018.
  Operating income (loss)
(In millions) YTD June 30, 2019 YTD June 30, 2018 2019 v 2018
Water Systems $50.1
 $57.3
 $(7.2)
Fueling Systems 34.0
 32.7
 1.3
Distribution 0.2
 3.2
 (3.0)
Eliminations/Other (28.5) (30.0) 1.5
Consolidated $55.8
 $63.2
 $(7.4)

Operating Income-Water Systems
Water Systems operating income was $50.1 million in the first half of 2019 compared to $57.3 million in the first half of 2018, a decrease of about 13 percent. The first half operating income margin was 12.7 percent and decreased by 150 basis points compared to the first half of 2018. Operating income margin decreased in Water Systems primarily due to lost leverage on fixed costs due to lower sales volumes, as well as product and geographic sales mix shifts.

Operating Income-Fueling Systems
Fueling Systems operating income was $34.0 million in the first half of 2019 compared to $32.7 million in the first half of 2018. The first half operating income margin was 24.6 percent compared to 24.8 percent of net sales in the first half of 2018, a decrease of 20 basis points.

Operating Income-Distribution
Distribution operating income was $0.2 million in the first half of 2019 and operating income margin was 0.1 percent. Distribution operating income was $3.2 million in the first half of 2018 and operating income margin was 2.4 percent. Operating income decreased in distribution due to lower sales volumes, partially offset by acquisitions.

Operating Income-Eliminations/Other
Operating income-Eliminations/Other is composed primarily of inter-segment sales and profit eliminations and unallocated general and administrative expenses.  The inter-segment profit elimination impact in the first half of 2019 was $0.8 million. General and administrative expenses were lower by $0.7 million or about 2 percent to last year in the first half.

Interest Expense
Interest expense for the first half of 2019 and 2018 was $4.6 million and $5.0 million, respectively.

Other Income or Expense
Other income or expense was a loss of $0.1 million in the first half of 2019. Included in other income in the first half of 2019 was interest income of $0.4 million, primarily derived from the investment of cash balances in short-term securities.Other income or expense was a loss of $0.2 million in the first half of 2018. Included in other income in the first half of 2018 was interest income of $0.3 million, primarily derived from the investment of cash balances in short-term securities.

Foreign Exchange

Foreign currency-based transactions for the first half of 2019 was a gain $0.1 million due to movements in several currencies relative to the U.S. dollar, none of which individually were significant. Foreign currency-based transactions for the first half of 2018 was a loss of $1.6 million due to movements in several currencies relative to the U.S. dollar, with the Mexican Peso and South African Rand being the most significant.

Income Taxes
The provision for income taxes in the first half of 2019 and 2018 was $9.3 million and $5.2 million, respectively. The effective tax rate for the first half of 2019 was about 18 percent and, before the impact of discrete events, was about 21 percent. The effective tax rate in the first half of 2018 was about 9 percent and, before the impact of discrete events, was about 20 percent. The Company estimates its effective tax rate for 2019 after discrete events will be about 20 percent, or about 8 points higher than the effective tax rate of 12 percent in 2018. The increase in the effective tax rate was primarily the result of the release of a valuation allowance of $5.4 million related to state net operating losses and incentives during the first quarter of 2018.

Net Income
Net income for the first halfquarter of 20192020 was $41.9$10.8 million compared to 2018the prior year first halfquarter net income of $51.3$9.1 million. Net income attributable to Franklin Electric Co., Inc. for the first halfquarter of 20192020 was $41.8$10.6 million, or $0.89$0.23 per diluted share, compared to 2018the prior year first halfquarter net income attributable to Franklin Electric Co., Inc. of $51.7$9.1 million or $1.09$0.19 per diluted share.

CAPITAL RESOURCES AND LIQUIDITY

Sources of Liquidity
The Company's primary sources of liquidity are cash on hand, cash flows from operations, revolving credit agreements, and long-term debt funds available. The Company believes its capital resources and liquidity position at June 30, 2019March 31, 2020 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.
As of June 30, 2019March 31, 2020 the Company had a $300.0 million revolving credit facility. The facility is scheduled to mature on October 28, 2021. As of June 30, 2019,March 31, 2020, the Company had $171.7$256.8 million borrowing capacity under the Credit Agreement as $5.0$4.2 million in letters of commercial and standby letters of credit were outstanding and undrawn and $123.3$39.0 million in revolver borrowings were drawn and outstanding which were primarily used for working capital needs, the payment of existing indebtedness, and acquisitions.
The Company also has other long-term debt borrowing outstanding as of June 30, 2019.March 31, 2020. See Note 9 - Debt for additional specifics regarding these obligations and future maturities.
At June 30, 2019,March 31, 2020, the Company had $38.5$34.0 million of cash and cash equivalents held in foreign jurisdictions, which is intended to be used to fund foreign operations. There is currently no need or intent to repatriate these funds in order to meet domestic funding obligations or scheduled cash distributions.
Cash Flows
The following table summarizes significant sources and uses of cash and cash equivalents for the first sixthree months of 20192020 and 2018.2019.

(in millions)20202019
Net cash flows from operating activities$(4.7) $(2.9) 
Net cash flows from investing activities(11.1) (10.6) 
Net cash flows from financing activities(3.7) 9.9  
Impact of exchange rates on cash and cash equivalents(4.9) (1.2) 
Change in cash and cash equivalents$(24.4) $(4.8) 
(in millions) 2019 2018
Net cash flows from operating activities $4.1
 $5.2
Net cash flows from investing activities (16.3) (19.4)
Net cash flows from financing activities (5.2) 17.5
Impact of exchange rates on cash and cash equivalents (0.8) (0.5)
Change in cash and cash equivalents $(18.2) $2.8

Cash Flows from Operating Activities
20192020 vs. 20182019
Net cash provided byused in operating activities was $4.1$4.7 million for the sixthree months ended June 30, 2019March 31, 2020 compared to $5.2$2.9 million provided byused in operating activities for the sixthree months ended June 30, 2018.March 31, 2019. The decreaseincrease in cash provided by operating activitiesused was due to decreased earningsa decrease of approximately $9.3$4.3 million in other operating activities, primarily in long-term liabilities, offset by lower tax payments of $1.3 million as well as an increase in the current year. Total working capital requirements for the first six months remained flat when compared to the prior year. The Company saw increases in

cash provided by accounts payables and accrued expenses due to better payment terms with vendors, which was offset by increased inventory mainly due to lower than expected sales.

net income of $1.7 million.
Cash Flows from Investing Activities
20192020 vs. 20182019
Net cash used in investing activities was $16.3$11.1 million for the sixthree months ended June 30, 2019March 31, 2020 compared to $19.4$10.6 million used in investing activities for the sixththree months ended June 30, 2018.March 31, 2019. The decreaseincrease in cash used in investing activities is primarily attributable to decreasedincreased acquisition activity and lower spending for property, plant and equipment during the current year.

expenditures.
Cash Flows from Financing Activities
20192020 vs. 20182019
Net cash used in financing activities was $5.2$3.7 million for the sixththree months ended June 30, 2019March 31, 2020 compared to $17.5$9.9 million provided by financing activities for the sixthree months ended June 30, 2018.March 31, 2019. The change in net cash from financing activities was primarily attributable to lower net debt borrowings, down approximately $20.5an increase of $12.7 million in the current year consistent with reduced acquisition activity as well as an increase in dividends paid of $2.8 million in the current year compared to dividends paid in the prior year. These were offset by a decrease in common stock repurchases of $1.5 million in the current year compared to common stock repurchases in the priorcurrent year.

26

FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q 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 regional or 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 and availability, technology factors, integration of acquisitions, litigation, government and regulatory actions, the Company’s accounting policies, and other risks, all as described in the Company's Securities and Exchange Commission filings, included in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, and in Exhibit 99.1 thereto. Any forward-looking statements included in this Form 10-Q 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in the Company's exposure to market risk during the secondfirst quarter ended June 30, 2019.March 31, 2020. For additional information, refer to Part II, Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.


ITEM 4. 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 and for many business units within the Company is an update to a legacy system product.  The implementation of a worldwide ERP system affects the processes that constitute the Company's internal control over financial reporting and requires 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. The Conversion will happen in two stages. The first stage involved converting the primary legacy ERP system. As ofsystem, and the quarter ended, all business units previously on the primary legacy system have converted to the new ERP system. The second stage will convertconverted those companies that remained on their local ERP system after the date of acquisition. TheAs of March 31, 2020, all material business units have been converted as part of the first and second stage is ongoing as of June 30, 2019.stage.
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.

27

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors as set forth in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018.2019 with the exception of the update to the following risk factor. Additional risks and uncertainties, not presently known to the Company or currently deemed immaterial, could negatively impact the Company’s results of operations or financial condition in the future.


Additional Risks to the Company. The Company is subject to various risks in the normal course of business as well as catastrophic events including severe weather events, earthquakes, fires, acts of war, terrorism, civil unrest, epidemics and pandemics and other unexpected events. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Repurchases of Equity Securities

In April 2007, the Company's Board of Directors 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 repurchased 92,985322,147 shares for approximately $4.1$15.2 million under the plan during the secondfirst quarter of 2019.2020. The maximum number of shares that may still be purchased under this plan as of June 30, 2019March 31, 2020 is 1,255,970.933,823.


PeriodTotal Number of Shares RepurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced PlanMaximum Number of Shares that may yet to be Repurchased
January 1 - January 31—  —  —  1,255,970  
February 1 - February 2942,900  51.68  42,900  1,213,070  
March 1 - March 31279,247  46.64  279,247  933,823  
Total322,147  47.31  322,147  933,823  


Period Total Number of Shares Repurchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plan Maximum Number of Shares that may yet to be Repurchased
April 1 - April 30 —
 $—
 —
 1,348,955
May 1 - May 31 46,800
 $43.79
 46,800
 1,302,155
June 1 - June 30 46,185
 $43.78
 46,185
 1,255,970
Total 92,985
 $43.78
 92,985
 1,255,970


ITEM 6. EXHIBITS
Exhibits are set forth in the Exhibit Index located on page 36.30.

28

SIGNATURES

Pursuant to the requirements 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.

FRANKLIN ELECTRIC CO., INC.
Registrant
Date: July 30, 2019May 5, 2020By/s/ Gregg C. Sengstack
Gregg C. Sengstack, Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: July 30, 2019May 5, 2020By/s/ John J. Haines
John J. Haines
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

29

FRANKLIN ELECTRIC CO., INC.
EXHIBIT INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE SECONDFIRST QUARTER ENDED JUNE 30, 2019
MARCH 31, 2020
Number
 
Description

3.1
3.2
31.110.1 


31.1 
31.2
32.1
32.2
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase

*Management Contract, Compensatory Plan or Arrangement


36
30