ACQUISITIONS

During the second quarter of 2017, the Company redeemed 10 percent of the noncontrolling interest of Impo, a Turkish subsidiary, increasing the Company’s ownership to 100 percent for approximately TRY 17.0 million, $5.0 million at the then current exchange rate. The 10 percent redemption value was calculated using a specified formula and resulted in a reduction to the carrying value of TRY 0.6 million ($0.2 million). Due to the immaterial nature of the redemption, the Company has not included full year proforma statements of income for the acquisition year or previous year.

During the second quarter of 2017, the Company acquired controlling interests in three distributors (2M Company, Inc. (“2M”), Drillers Service, Inc. (“DSI”), and Western Hydro, LLC (“Western Hydro”), collectively referred to below as the “Headwater acquisitions”) in the U.S. professional groundwater market for a combined purchase price of approximately $57.4 million, subject to certain terms and conditions. The Company had previously prepaid a $3.0 million portion of the purchase price at the time of original investment. The Company funded the Headwater acquisitions with cash on hand and short-term borrowings from the Company’s Revolver (see Note 10 - Debt). The Headwater acquisitions will be reported within a new “Distribution” segment (see Note 14 - Segment Information). The Headwater acquisitions provide the Company with a robust groundwater distribution channel throughout the United States.

The Company previously held equity interests in these entities, each of which was less than 50 percent, and accounted for by the equity method of accounting. The Company’s total interest in each of the entities is now 100 percent and the entities are included in the Company’s consolidated results effective from the date of acquisition. The original equity interests in the acquired entities were remeasured to their fair values as of the acquisition date (which aggregated was $20.6 million) based on the income approach, which utilized management estimates and consultation with an independent third-party valuation firm. Inputs included an analysis of the enterprise value based on financial projections and ownership percentages. As a result, the Company has recognized an aggregate gain on the acquisitions of $5.2 million. These gains are included in the “Other income, net” line of the Company’s condensed consolidated statements of income.

The preliminary identifiable intangible assets recognized due to the Headwater acquisitions were $5.7 million and consist of customer relationships, which will be amortized utilizing the straight-line method over 15 years.

The preliminary goodwill of $34.0 million resulting from the Headwater acquisitions consists primarily of the benefits of forward channel integration opportunities and broadened product offerings. All of the goodwill was recorded as part of the Distribution segment, and only a portion ($12.0 million) is expected to be deductible for tax purposes.

The preliminary purchase price assigned to the major identifiable assets and liabilities for the Headwater acquisitions on an aggregated basis is as follows:



(In millions)
Cash	$	2.7
Receivables	32.6
Inventory	56.0
Other current assets	4.9
Total current assets	96.2
Property, plant, and equipment	9.8
Intangible assets	5.7
Goodwill	34.0
Other assets	0.2
Total assets	145.9
Accounts payable	(22.8		)
Accrued liabilities and other current liabilities	(10.8		)
Current maturities of long-term debt	(31.6		)
Total current liabilities	(65.2		)
Long-term debt	(2.0		)
Other long-term liabilities	(0.7		)
Total liabilities	(67.9		)
Total	78.0
Less: Fair value of original equity interest	(20.6		)
Total purchase price	$	57.4

The fair values of the assets acquired and liabilities assumed related to the Headwater acquisitions are provisional amounts as of September 30, 2017, pending final valuations and purchase accounting adjustments. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation process.

The following unaudited proforma financial information for the third quarter and nine months ended September 30, 2017 and October 1, 2016 gives effect to the Headwater acquisitions by the Company as if the acquisitions had occurred as of January 3, 2016. These unaudited proforma condensed consolidated financial statements are prepared for informational purposes only and are not necessarily indicative of actual results or financial position that would have been achieved had the acquisitions been consummated on the dates indicated and are not necessarily indicative of future operating results or financial position of the consolidated companies. The unaudited proforma condensed consolidated financial statements do not give effect to any cost savings or incremental costs that may result from the integration of the Headwater acquisitions with the Company.



FRANKLIN ELECTRIC CO., INC.
PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Third Quarter Ended				Nine Months Ended
(in millions, except per share amounts)	September 30, 2017		October 1, 2016		September 30, 2017		October 1, 2016

Revenue:
As reported	$	311.1	$	239.8	$	836.7	$	710.3
Proforma	311.1		294.8		896.6		865.8
Net income:
As reported	$	24.5	$	23.7	$	70.1	$	61.1
Proforma	24.5		26.4		71.3		67.0
Basic earnings per share:
As reported	$	0.52	$	0.51	$	1.50	$	1.29
Proforma	0.52		0.56		1.52		1.42
Diluted earnings per share:
As reported	$	0.52	$	0.50	$	1.48	$	1.28
Proforma	0.52		0.56		1.51		1.40

The Headwater entities contributed a total of $127.2 million of revenue and $2.8 million of net income to the Company's condensed consolidated statements of income from their acquisition dates through September 30, 2017.

Transaction costs were expensed as incurred under the guidance of FASB Accounting Standards Codification Topic 805, Business Combinations. There were zero and $0.3 million of transaction costs included in the "Selling, general, and administrative expenses" line of the Company's condensed consolidated statements of income for the third quarter and nine months ended September 30, 2017, respectively. There were no transaction costs incurred in the third quarter or nine months ended October 1, 2016.