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PART I
General
Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and incorporated in 1946 that, together with its subsidiaries, designs, manufactures and distributes groundwater and fuel pumping systems, composed primarily of submersible motors, pumps, electronic controls and related parts and equipment. The Company’s business consists of two reporting segments based on the principal end market served: the Water Systems segment and the Fueling Systems segment. The Company includes unallocated corporate expenses in an “Other” segment that together with Water and Fueling represent the Company. Except where the context otherwise requires, “Franklin Electric” or the “Company”, shall refer to Franklin Electric Co., Inc. and its consolidated subsidiaries.
The Company’s products are sold worldwide. The Company’s products are sold 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.
The market for the Company’s products is highly competitive and includes diversified accounts by size and type. The Company’s Water Systems and Fueling Systems products and related equipment are sold to specialty distributors and some original equipment manufacturers (“OEMs”), as well as industrial and petroleum equipment distributors and major oil and utility companies.
Business Segments and Products
Segment and geographic information set forth under Note 17, “Segment and Geographic Information,” to the consolidated financial statements is incorporated herein by reference.
Water Systems Segment
Water Systems is a global leader in the production and marketing of groundwater pumping systems and is a technical leader in submersible motors, pumps, drives, electronic controls, and monitoring devices. The Water Systems segment designs, manufactures and sells motors, pumps, electronic controls and related parts and equipment primarily for use in groundwater and wastewater applications and, through the Fueling Segment, for fuel transfer applications.
Water Systems motors and pumps are used principally for pumping fresh water and wastewater in a variety of residential, agricultural and industrial applications. Water Systems also manufactures electronic drives and controls for the motors which control functionality and provide protection from various hazards, such as electric surges, over-heating, or dry wells and tanks.
Beginning in 2004, the Company changed its North American business model to sell Water Systems products directly to wholesale distributors. Previously, the Company sold its Water Systems products primarily to pump OEMs (i.e., the Company was primarily a supplier of submersible motors and controls to the OEMs) who then re-sold the Water Systems products, usually combined with pumps and related products, to the wholesale distributors. To facilitate this transition, the Company acquired several pump manufacturers during and since 2004 (most significantly, JBD Pump Company in 2004 and Little Giant Pump Company in 2006). As of the end of fiscal year 2004, approximately 42 percent of the Company’s consolidated sales were attributable to two customers, both of which were pump OEMs. Customer sales
concentration declined from 2004 to 2006, and since 2007, no single customer accounted for more than 10 percent of the Company’s consolidated sales.
The Company further expanded its global market penetration by acquisitions in developing regions (Pump Brands (Pty) Limited in South Africa in 2007 and Industrias Schneider SA in Brazil in 2008). Sales in developing regions increased more than 400 percent in total from 2002 to 2010 and represent about 40 percent of Water Systems sales in 2010. About 60 percent of this growth was organic and about 40 percent was from acquisitions.
Water Systems products are sold in highly competitive markets. Water Systems competes in each of its targeted markets based on product design, quality of products and services, performance, availability, and price. The
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Company’s principal competitors in the specialty water products industry are Grundfos Management A/S, Pentair, Inc., and ITT Corporation.
2010 Water Systems research and development expenditures were primarily related to the following activities:
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SubDrive® InLine 1100 Booster Pump
Volt-X Motor – Dual Voltage motor configurable between 230V and 460V
MH Booster – Multi-Stage Horizontal Booster
Convertible VersaJet – Convertible jet pump with interchangeable faceplates for retrofit installations
STS 6” Sub Turbine – Sand resistant submersible turbine pump
SubDrive2W – Constant pressure controller for submersible 2-wire pumps
New aluminum engine driven pump product line
New pumping system for extracting natural gas from coal seams
New solar power groundwater pumping system
Fueling Systems Segment
Fueling Systems is a global leader in the production and marketing of fuel pumping systems, fuel containment systems, and monitoring and control systems. This 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.
The Company has expanded its product offerings through internal development and acquisitions. The most notable acquisition was Healy Systems, Inc. in 2006 whose products included fueling dispenser nozzles and complete vapor recovery systems. The vapor recovery systems and components enjoyed particular success in California from late 2007 to early 2009, due to California Air Resource Board certification requirements for conversion of fuel dispensing stations to certified dispensers such as those of Healy Systems. This conversion was largely completed in 2009. All products, including vapor recovery systems, are sold internationally.
During the third quarter of 2010, the Company acquired PetroTechnik Limited and its subsidiaries (“Petrotechnik”), a designer and supplier of underground flexible pipe systems and manufacturer of above and below ground fuel storage systems and pressure vessels in England. Petrotechnik’s systems provide the Company access to a worldwide customer base and growth territories. Petrotechnik’s sales were not material as a component of the Company’s consolidated sales for 2010.
Fueling Systems products are sold in highly competitive 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’s principal competitors in the petroleum equipment industry are Danaher Corporation and Dover Corporation.
2010 Fueling Systems research and development expenditures were primarily related to the following activities:
Several enhancements to the FMS T5 Series tank gauge controls including a new thermal printer, statistical line leak detection scheme and enhancements to the in-tank leak detection system
Ongoing work on a new line of conventional and vapor recovery nozzles and related equipment for use in international markets
Expansion of the product offering with products designed specifically for use with biofuels such as E85 and biodiesel
Development of a new fusion welded piping system