Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

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

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

The aggregate market value of the registrant'sregistrant’s common stock held by non-affiliates of the registrant at July 1, 2016June 30, 2017 (the last business day of the registrant’s most recently completed second quarter) was $1,527,181,567.$1,904,192,752.  The stock price used in this computation was the last sales price on that date, as reported by NASDAQ Global Select Market. For purposes of this calculation, the registrant has excluded shares held by executive officers and directors of the registrant, including restricted shares and except for shares owned by the executive officers through the registrant'sregistrant’s 401(k) Plan. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 20174, 2018 (Part III).

Franklin Electric Co., Inc. (“Franklin Electric” or the “Company”) is an Indiana corporation founded in 1944 and incorporated in 1946. Named after America’s pioneer electrical engineer, Benjamin Franklin, Franklin Electric manufactured the first water-lubricated submersible motor for water systems, and the first submersible motor for fueling systems. With 20162017 revenue of $949.9 millionover $1.1 billion and approximately 5,2005,600 employees, today the Company designs, manufactures and distributes water and fuel pumping systems, composed primarily of submersible motors, pumps, electronic controls and related parts and equipment.

The Company’s water pumping systems move fresh and waste water for the housing,residential, agriculture, and other industrial end markets. With a growing global footprint, the Company has also evolved into being a top supplier of submersible fueling systems at gas stations, making pumps, pipes, electronic controls, and monitoring devices. Fuel pumping systems account for the balance of the Company’s revenues.

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

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

The Company'sCompanys business consists of two reportingthree reportable segments based on the principal end market served: the Water Systems, segment and the Fueling Systems, segment.and Distribution segments. The Company includes unallocated corporate expenses in an “Other”“Intersegment Eliminations/Other” segment that, together with the Water Systems, and Fueling Systems, and Distribution segments, represent the Company. Segment and geographic information appears in Note 16, “Segment and Geographic Information” to the consolidated financial statements.

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

Water Systems is a global leader in the production and marketing of water pumping systems and is a technical leader in submersible motors, pumps, drives, electronic controls, and monitoring devices. The Water Systems segment designs, manufactures and sells motors, pumps, drives, electronic controls, monitoring devices, and related parts and equipment primarily for use in groundwater, wastewater, and fuel transfer applications.

Water Systems motors and pumps are used principally for pumping clean water and wastewater in a variety of residential, agricultural, and industrial applications. Water Systems also manufactures electronic drives and controls for the motors which control functionality and provide protection from various hazards, such as electricelectrical surges, over-heating, or dry wells or dry tanks.

Water Systems products are sold in highly competitive markets. Water-pumpingWater systems contribute about 7565 to 8070 percent of revenue. Significant portions of segment revenue come from selling groundwater and surface pumps to residential and commercial buildings, as well as agricultural sales which are more seasonal and subject to commodity price changes. The Water segment generates 40 percent of its revenue in developing markets, which often lack municipal water systems. As those countries bring systems up to date, the Company views those markets as an opportunity.opportunity and, accordingly, acquired investments in India in 2014. The Company has had 1510 to 2015 percent compounded annual sales growth in thosedeveloping regions in recent years. Water Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company'sCompany’s principal competitors in the specialty water products industry are Grundfos Management A/S, Pentair, Inc., and Xylem, Inc.

20162017 Water Systems research and development expenditures were primarily related to the following activities:

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

Fueling Systems has expanded its product offerings through internal development and acquisitions. Highlights of the Fueling Systems history are as follows:

Fueling Systems products are sold in highly competitive markets. Rising car use is leading to more investment in gas stations which, in turn, leads to increased demand for the Company’s Fueling Systems products. The Company believes there is growth opportunity in developing markets and, accordingly, acquired an investment in India in 2014.markets. Fueling Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The Company'sCompany’s principal competitors in the petroleum equipment industry are DanaherFortive Corporation and Dover Corporation.

20162017 Fueling Systems research and development expenditures were primarily related to the following activities:

Distribution Segment is operated as a collection of new fuel dispensing nozzles

The Company incurred research and development expense as follows:

Expenses incurred were for activities related to the development of new products, improvement of existing products and manufacturing methods, and other applied research and development.

The Company owns a number of patents, trademarks, and licenses.  In the aggregate, these patents are of material importance to the operation of the business; however, the Company believes that its operations are not dependent on any single patent or group of patents.

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

No single customer accounted for over 10 percent of net sales in 2017, 2016, 2015, or 2014.2015. No single customer accounted for over 10 percent of gross accounts receivable in 20162017 and 2015.2016.

The dollar amount of backlog by segment was as follows:

The backlog is composed of written orders at prices adjustable on a price-at-the-time-of-shipment basis for products, primarily standard catalog items. All backlog orders are expected to be filled in fiscal 2017.2018.  The Company’s sales in the first quarter are generally less than its sales in other quarters due to generally less water well drilling and overall product sales during the winter months in the Northern hemisphere. Beyond that, there is no seasonal pattern to the backlog and the backlog has not proven to be a significant indicator of future sales.

The Company believes that it is in compliance with all applicable federal, state, and local laws concerning the discharge of material into the environment, or otherwise relating to the protection of the environment. The Company has not experienced any material costs in connection with environmental compliance, and does not believe that such compliance will have any material effect upon the financial position, results of operations, cash flows, or competitive position of the Company.

The following describes the principal risks affecting the Company and its business.  Additional risks and uncertainties, not presently known to the Company, could negatively impact the Company’s results of operations or financial condition in the future.

Additionally, the Company’s operations outside the United States could be negatively impacted by changes in treaties, agreements, policies, and laws implemented by the United States.

If the Company does not anticipate and effectively manage these risks, these factors may have a material adverse impact on its international operations or on the business as a whole.

 

None.

Franklin Electric serves customers worldwide with over 125175 manufacturing and distribution facilities located in over 20 countries. The Global Headquarters is located in Fort Wayne, Indiana, United States and houses sales, marketing, and administrative offices along with a state of the art research and engineering facility. Besides the owned corporate facility, the Company considers the following to be principal properties:

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

Current executive officers of the Company, their ages, current position, and business experience during at least the past five years as of December 31, 2016,2017, are as follows:

All executive officers are elected annually by the Board of Directors at the Board meeting held in conjunction with the annual meeting of shareholders. All executive officers hold office until their successors are duly elected or until their death, resignation, or removal by the Board.

The number of shareholders of record as of February 15, 201713, 2018 was 762.730. The Company'sCompany’s stock is traded on the NASDAQ Global Select Market under the symbol FELE.

Dividends paid and the price range per common share as quoted by the NASDAQ Global Select Market for 20162017 and 20152016 were as follows:

In April 2007, the Company’s Board of Directors unanimously approved a plan to increase the number of shares remaining for

repurchase from 628,692 to 2,300,000 shares. There is no expiration date for this plan. On August 3, 2015, the Company'sCompany’s Board of Directors approved a plan to increase the number of shares remaining for repurchase by an additional 3,000,000 shares. The authorization was in addition to the 535,107 shares that remained available for repurchase as of July 31, 2015. The Company did not repurchase any shares under this plan during the fourth quarter of 2016.2017. The maximum number of shares that may still be purchased under this plan as of December 31, 20162017 is 2,156,362.

The following graph compares the Company'sCompany’s cumulative total shareholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Guggenheim S&P Global Water Index and the Russell 2000 Index.

 

The following selected financial data should be read in conjunction with the Company’s consolidated financial statements. The information set forth below is not necessarily indicative of future operations.

Sales in 2016 increased from the prior year.  Net sales in 2016 were $949.9 million, an increase of about 3 percent compared to 2015 sales of $924.9 million. The sales increase was attributable to both volume and price increases partially offset by the impact of foreign currency translation as the US dollar strengthened against certain foreign currencies. The Company'sCompany’s consolidated gross profit was $331.4 million for 2016, an increase of $33.8 million or about 11 percent from 2015. The gross profit as a percent of net sales increased 270 basis points to 34.9 percent in 2016 from 32.2 percent in 2015. The gross profit

margin change was due primarily to favorable pricing, lower direct material costs and lower fixed cost on higher sales. For 2016, diluted earnings per share were $1.65, an increase of 10 percent compared to 2015 diluted earnings per share of $1.50. Adjusted earnings per share were $1.66, an increase of 13 percent versus the $1.47 adjusted earnings per share in 2015 (see the table below for a reconciliation of the GAAP EPS to the adjusted EPS).

Net sales in 2016 were $949.9 million, an increase of $25.0 million or about 3 percent compared to 2015 sales of $924.9 million.  The incremental impact of sales from acquired businesses was $0.7 million.  Sales revenue decreased by $23.2 million or about 2 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $47.5 million or about 5 percent.

Water Systems sales were $723.2 million in 2016, an increase of $15.6 million or 2 percent versus 2015. The incremental impact of sales from acquired businesses was $0.7 million.  Foreign currency translation rate changes decreased sales $21.4 million, or about 3 percent, compared to sales in 2015. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $36.3 million or about 5 percent.

Water Systems sales in the U.S. and Canada were 36 percent of consolidated sales and increased by about 5 percent in 2016 compared to the prior year. Sales revenue decreased by $2.1 million or less than 1 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $16.4 million or about 5 percent. In 2016, sales of groundwater pumping equipment increased by about 9 percent. The growth in groundwater equipment sales was led by a 12 percent increase in sales of products for both residential and agricultural applications. Sales of Pioneer branded mobile dewatering equipment declined by about 12 percent. The decline in mobile dewatering equipment is primarily attributed to reduced demand in the oil and gas end markets.

Water Systems sales in Europe, Middle East and Africa were about 17 percent of consolidated sales and declined by about 4 percent compared to 2015. Water Systems in Europe, the Middle East and Africa were reduced by $10.5 million or about 6 percent due to foreign currency translation. Excluding the impact of foreign currency translation, sales were up in 2016 by about 2 percent compared to 2015. The growth was driven by strong sales of groundwater pumping equipment in Turkey.

In local currency sales in Turkey grew; however, this growth was offset by sales declines in other parts of the region due to political and economic turmoil and the lower price of oil which reduced investment by the public sector, particularly in Saudi Arabia.

Water Systems sales in Latin America were about 14 percent of consolidated sales for 2016 and declined by about 1 percent compared to 2015.  Sales revenue decreased by $8.5 million or about 7 percent in 2016 due to foreign currency translation. The sales change in 2016, excluding foreign currency translation, was an increase of $7.4 million or about 6 percent. The growth in sales was led by increased sales in Mexico and Brazil, in local currency. This sales growth is a result of increasing demand for

Water Systems sales in the Asia Pacific region were 9 percent of consolidated sales and grew by about 12 percent compared to the prior year. Foreign currency translation rate changes decreased sales in 2016 in the Asia Pacific region by less than a percent. The Asia Pacific region experienced strong year over year growth in Southeast Asia and Australia.

Fueling Systems sales which represented 24 percent of consolidated sales were $226.7 million in 2016, an increase of $9.4 million or about 4 percent versus 2015. Foreign currency translation rate changes decreased sales $1.8 million or about 1 percent compared to sales in 2015. The sales change in 2016, excluding acquisitions and foreign currency translation, was an increase of $11.2 million or about 5 percent.

Fueling Systems sales in the U.S. and Canada grew by about 8 percent in 2016 compared to the prior year with sales growth coming from most product lines, most significantly our pumping and fuel management systems. Fueling Systems sales in the

rest of the world were down about 2 percent year over year. In 2016, Fueling Systems revenues increased in the Asia Pacific regions by about 14 percent, driven by higher sales in India. This growth in Asia was more than offset by a sales decline in Europe principally due to a 42 percent decline in the sale of storage tanks that support North Sea oil production.

Cost of sales as a percent of net sales for 2016 and 2015 was 65.1 percent and 67.8 percent, respectively. Correspondingly, the gross profit margin increased to 34.9 percent from 32.2 percent, a 270 basis point improvement. The gross profit margin increase was primarily due to lower raw material costs and lower fixed costs. Direct materials as a percentage of sales was 44.8 percent down 210 basis points compared to 46.9 percent last year. This decrease in direct materials was primarily due to favorable pricing and lower direct material costs. The Company'sCompany’s consolidated gross profit was $331.4 million for 2016, up $33.8 million or 11 percent from 2015.

Selling, general, and administrative (SG&A) expenses were $221.2 million in 2016 and increased by $16.9 million or about 8 percent in 2016 compared to last year. In 2016, increases in SG&A attributable to higher variable compensation expenses were about $12 million or about 6 percent. Additional year over year changes in SG&A costs were primarily in Marketing and Selling related expenses which increased about $2.5 million to support sales growth and, also, Research, Development & Engineering expense which increased by $2.3 million in the year.

Restructuring expenses for 2016 netted to a gain of $(0.6) million and increased diluted earnings per share about $0.01. Restructuring expenses for 2016 included a gain of $(2.0) million from the sale of land and building in Brazil and $1.4 million in expenses related to severance and pension costs, equipment relocation expenses, asset write-downs and other costs related to the transfer of production activities and other restructuring costs from continued manufacturing realignments.

Restructuring expenses for 2015 were $3.0 million and decreased diluted earnings per share about $0.04. Restructuring expenses in 2015 included severance and pension costs, equipment relocation expenses, and asset write-downs primarily related to the closure of the Wittlich, Germany facility and other manufacturing realignment activities in Europe and Brazil.

Operating income was $110.8 million in 2016, up $20.4 million from $90.4 million in 2015.

Water Systems operating income was $108.2 million in 2016, up $21.5 million or 25 percent versus the 2015 as reported and up $17.0 million or 19 percent versus the 2015 after non-GAAP adjustments.2015. The 2016 operating income margin was 15.0 percent, up 270 basis points from 12.3 percent in 2015. The 2016 operating income margin after non-GAAP adjustments was 14.8 percent, an increase of 210 basis points from the 12.7 percent of net sales in 2015 after non-GAAP adjustments. The increase in basis points was primarily due to improved margins from lower variable costs.

Fueling Systems operating income was $56.3 million in 2016, up $4.8 million or about 9 percent compared to $51.5 million in 2015 as reported, and up $4.9 million or 9 percent compared to $52.0 million after non-GAAP adjustments in 2015. The 2016 operating income margin was 24.8 percent, an increase of 110 basis points from the as reported 23.7 percent of net sales in 2015. The 2016 operating income margin after non-GAAP adjustments was 25.1 percent, an increase of 120 basis points from the 23.9 percent of net sales in 2015 after non-GAAP adjustments. The increase in basis points was primarily due to improved margins from lower variable costs.

Operating income-other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses after non-GAAP adjustments were higher, by about 13 percent, primarily due to higher variable compensation expenses.

Foreign currency-based transactions produced a gain for 2016 of $1.1 million, primarily due to the Turkish lira relative to the U.S. dollar and euro.  Foreign currency-based transactions produced a loss for 2015 of $0.9 million, primarily due to the South African rand, Colombian peso and Australian dollar relative to the U.S. dollar, none of which individually were significant.  

The provision for income taxes in 2016 and 2015 was $24.8 million and $12.6 million, respectively. The tax rate for 2016 was 23.8 percent and 2015 was 14.6 percent. Discrete adjustments in 2016 were primarily due to the favorable impact from equity compensation share based payments and the reversal of a contingent tax liability offset by adjustments to the Company’s valuation allowance against certain state deferred tax assets that are not likely to be realized. Discrete adjustments during 2015 were the reversal of a deferred tax liability of about $4.8 million created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer. This purchase transaction also resulted in other tax benefits of about $3.5 million. The tax rate before discrete adjustments for 2016 was about 26 percent and 2015 was about 27 percent. The tax rate is lower than the statutory rate of 35 percent primarily due to the indefinite reinvestment of foreign earnings and reduced taxes on foreign and repatriated earnings. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations, current cash on hand and available credit.

Net income for 2016 was $79.3 million compared to 2015 net income of $73.7 million.  Net income attributable to Franklin Electric Co., Inc. for 2016 was $78.7 million, or $1.65 per diluted share, compared to 2015 net income attributable to Franklin Electric Co., Inc. of $72.9 million or $1.50 per diluted share. Net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments for 2016 was $77.4 million, or $1.66 per diluted share, compared to 2015 net income attributable to Franklin Electric Co., Inc. after Non-GAAP adjustments of $69.7 million or $1.47 per diluted share.

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

Net cash provided by operating activities was $115.4 million for 2016 compared to $99.6 million for 2015. An increase in cash provided by operations in 2016 was partially attributable to large cash outflows in 2015 related to restructuring costs previously accrued at year-end 2014. The increase in cash provided was partially offset by increased cash used during 2016 for higher receivables and inventory balances compared to year-end 2015, driven by higher sales volumes in 2016. Finally, during 2015 the mandatory share purchase liability of $22.9 million for Pioneer was settled, resulting in a non-cash gain and reversal of certain deferred tax liabilities, also non-cash, both of which were adjustments to net income.

Net cash used in investing activities was $33.8 million in 2016 compared to $29.6 million in 2015. During 2016, the Company had increased capital expenditures compared to 2015, primarily attributable to the purchase of a building in the first quarter. Cash expended on this purchase was partially offset with proceeds realized from the sale of an idle building in Brazil which completed during the third quarter of 2016.

Net cash flows from financing activities were uses of cash of $51.7 million in 2016 compared to $41.1 million in 2015. During 2016, the Company had net repayments of debt of about $30.4 million compared to net borrowings during 2015 of about $43.6 million, resulting in a greater use of cash. The Company paid dividends of $19.1 million in 2016, which was up slightly from $18.9 million in 2015. In addition, in 2015 the Company made a payment of $20.2 million for the Pioneer mandatory share purchase liability and repurchased a significant amount of the Company'sCompany’s common stock, which were both large uses of cash that did not repeat in 2016.

AGGREGATE CONTRACTUAL OBLIGATIONS

The majority of the Company’s contractual obligations to third parties relate to debt obligations. In addition, the Company has certain contractual obligations for future lease payments and purchase obligations. The payment schedule for these contractual obligations is as follows:

The Company has pension and other post-retirement benefit obligations not included in the table above which will result in estimated future payments of approximately $6$4 million in 2017.2018.  The Company also has unrecognized tax benefits, none of which are included in the table above.  The unrecognized tax benefits of approximately $1.3 million have been recorded as liabilities and the Company is uncertain as to if or when such amounts may be settled.  Related to the unrecognized tax benefits, the Company has also recorded a liability for potential penalties and interest of $1.1$0.6 million.

ACCOUNTING PRONOUNCEMENTS

begun the evaluation process for the adoption of the ASU, and anticipates that the majority of the Company’s outstanding operating leases would be recognized as right-of-use assets and lease liabilities upon adoption, resulting in a significantmaterial impact to the Company’s Consolidated Balance Sheets.consolidated balance sheets. The impact of this ASU is non-cash in nature and will not affect the Company’s cash position. The impact to the Company’s results of operations is still being evaluated.

CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.  Management evaluates its estimates on an ongoing basis.  Estimates are based on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.  There were no material changes to estimates or methodologies used to develop those estimates in 2016.2017.

The Company’s critical accounting estimates are identified below:

The Company uses certain estimates and judgments to value inventory. Inventory is recorded at the lower of cost or market. The Company reviews its inventories for excess or obsolete products or components. Based on an analysis of historical usage, management’s evaluation of estimated future demand, market conditions, and alternative uses for possible excess or obsolete parts, carrying values are adjusted.  The carrying value is reduced regularly to reflect the age and current anticipated product demand. If actual demand differs from the estimates, additional reductions would be necessary in the period such determination is made.  Excess and obsolete inventory is periodically disposed of through sale to third parties, scrapping, or other means.

In compliance with FASB ASC Topic 350, goodwill is not amortized. Goodwill is tested at the reporting unit level for impairment annually or more frequently as warranted by triggering events that indicate potential impairment.  Reporting units are operating segments or one level below, known as components, which can be aggregated for testing purposes.  The Company’s goodwill is allocated to the North America Water Systems, International Water, and Fueling Systems units, as components within the North America Water Systems and International Water reporting units can be aggregated.  In 2017, as a result of the Headwater acquisition, the Company added a Distribution reporting unit. The Distribution reporting unit was subject to qualitative testing in the year of acquisition. Starting in 2018 the Distribution reporting unit will be tested in conjunction with the other reporting units using quantitative assessments. As the Company’s business model evolves, management will continue to evaluate its reporting units and review the aggregation criteria.

In assessing the recoverability of goodwill, the Company determines the fair value of its reporting units by utilizing a combination of both the market value and income approaches. The market value approach compares the reporting units'units’ current and projected financial results to entities of similar size and industry to determine the market value of the reporting unit. The income approach utilizes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These cash flows consider factors regarding expected future operating income and historical trends, as well as the effects of demand and competition. The Company may be required to record an impairment if these assumptions and estimates change whereby the fair value of the reporting units is below their associated carrying values. Goodwill included on the balance sheet as of the fiscal year ended 20162017 was $199.6$236.8 million.

During the fourth quarter of 2016,2017, the Company completed its annual impairment test of goodwill and tradenames and determined the fair value of all intangibles were substantially in excess of the respective carrying values.  Significant judgment is required to determine if an indication of impairment has taken place.  Factors to be considered include the following: adverse changes in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization.  A 10 percent decrease in the fair value estimates used in the impairment test would not have changed this determination.  The sensitivity analysis required the use of numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges.  Further, an extended downturn in the economy may impact certain components of the operating segments more significantly and could result in changes to the aggregation assumptions and impairment determination.

The Company'sCompany’s operations involve dealing with uncertainties and judgments in the application of complex tax regulations in multiple jurisdictions. These jurisdictions have different tax rates, and the Company determines the allocation of income to each of these jurisdictions based upon various estimates and assumptions. In the normal course of business, the Company will undergo tax audits by various tax jurisdictions. Such audits often require an extended period of time to complete and may result in income tax adjustments if changes to the allocation are required between jurisdictions with different tax rates. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in the various jurisdictions and resolution of disputes arising from federal, state, and international tax audits. Although the Company has recorded all income tax uncertainties in accordance with FASB ASC Topic 740, these accruals represent estimates that are subject to the inherent uncertainties associated with the tax audit process, and therefore include uncertainties.  Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities, which, if actual experience varies, could result in material adjustments to tax expense and/or deferred tax assets and liabilities.

The Company consults with its actuaries to assist with the calculation of discount rates used in its pension and post retirement plans. Beginning in 2016, the discount rates used to determine domestic pension and post-retirement plan liabilities are calculated using a full yield curve approach. The change compared to the previous method resulted in different service and interest components of net periodic benefit cost in the 2016 fiscal year. Historically, the Company estimated these service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the

benefit obligation at the beginning of the period. The Company made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. Market conditions have caused the weighted-average discount rate to move from 4.374.13 percent last year to 4.133.61 percent this year for the domestic pension plans and from 4.093.89 percent last year to 3.893.51 percent this year for the postretirement health and life insurance plan. A change in the discount rate selected by the Company of 25 basis points would result in a change of about $0.1 million to employee benefit expense and a change of about $4.1$4.0 million of liability.

The Company consults with actuaries and investment advisors in making its determination of the expected long-term rate of return on plan assets. Using input from these consultations such as long-term investment sector expected returns, the correlations and standard deviations thereof, and the plan asset allocation, the Company has assumed an expected long-term rate of return on plan assets of 6.256 percent as of the fiscal year ended 2016.2017.  A change in the long-term rate of return selected by the Company of 25 basis points would result in a change of about $0.4 million of employee benefit expense.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

Foreign currency exchange rate risk is mitigated through several means including maintenance of local production facilities in the markets served, invoicing of customers in the currency which the Company is billed for production inputs, prompt settlement of third party and inter-company balances, limited use of foreign currency denominated debt, maintaining minimal foreign currency denominated cash balances, and application of derivative instruments when appropriate. Based on the 20162017 mix of foreign currencies, the Company estimates that a hypothetical strengthening of the US Dollar by about 51 percent would have reduced the Company’s 20162017 sales by about 21 percent.

The results of operations are exposed to changes in interest rates primarily with respect to borrowings under the Company’s revolving credit agreement (the “Credit Agreement”) and the New York Life Agreement, where interest rates are tied to the prime rate or London Interbank Offered Rates (LIBOR). The Company had no$67.0 million borrowings at year-end 20162017 under the Credit Agreement and had $75.0 million outstanding under the New York Life Agreement.  The Company estimates that a

hypothetical increase of 100 basis points in the prime rate and LIBOR rates would have increased interest expense by $1.0$1.2 million during 2016.2017. The Company also has exposure to changes in interest rates in the form of the fair value of outstanding fixed rate debt fluctuating in response to changing interest rates. The Company does not, as a matter of policy, enter into derivative contracts for speculative purposes.

Portions of the Company'sCompany’s business are exposed to volatility in the prices of certain commodities, such as copper, nickel and aluminum, among others. The primary exposure to this volatility resides with the use of these materials in purchased component parts. We generally maintain long-term fixed price contracts on raw materials and component parts; however, the Company is prone to exposure as these contracts expire. Based on the 20162017 use of commodities, the Company estimates that a hypothetical 10 percent adverse movement in prices for raw metal commodities would result in about a 100 basis point decrease of gross margin as a percent of sales.