-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MoovYam7p+4qNeouHjUwYMA5SmvEZ7h2OAJQrFnD5AreVLzV7IIxoyiWkWR1DKdD 32HK8DX+kud9DgTj0IHhhg== 0000038725-06-000045.txt : 20060508 0000038725-06-000045.hdr.sgml : 20060508 20060508161819 ACCESSION NUMBER: 0000038725-06-000045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060401 FILED AS OF DATE: 20060508 DATE AS OF CHANGE: 20060508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN ELECTRIC CO INC CENTRAL INDEX KEY: 0000038725 STANDARD INDUSTRIAL CLASSIFICATION: MOTORS & GENERATORS [3621] IRS NUMBER: 350827455 STATE OF INCORPORATION: IN FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00362 FILM NUMBER: 06817001 BUSINESS ADDRESS: STREET 1: 400 E SPRING ST CITY: BLUFFTON STATE: IN ZIP: 46714 BUSINESS PHONE: 2608242900 MAIL ADDRESS: STREET 1: 400 E SPRING STREET CITY: BLUFFTON STATE: IN ZIP: 46714 10-Q 1 form10_q.htm FRANKLIN ELECTRIC, CO., INC. FIRST QUARTER 2006 10-Q Franklin Electric, Co., Inc. First Quarter 2006 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10-Q
_________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission file number 0-362

FRANKLIN ELECTRIC CO., INC.
(Exact name of registrant as specified in its charter)

Indiana
 
35-0827455
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
400 East Spring Street
   
Bluffton, Indiana
 
46714
(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)

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, and (2) has been subject to such filing requirements for the past 90 days.

YES x
NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o

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

YES o
NO x

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
 
April 1, 2006
$.10 par value
 
22,646,412 shares


- 1 -



FRANKLIN ELECTRIC CO., INC.

Index

     
Page
PART I.
FINANCIAL INFORMATION
 
Number
       
Item 1.
Financial Statements (Unaudited)
   
       
 
Condensed Consolidated Balance Sheets as of April 1, 2006 and December 31, 2005
 
3
       
 
Condensed Consolidated Statements of Income for the First Quarter Ended April 1, 2006 and April 2, 2005
 
4
       
 
Condensed Consolidated Statements Of Cash Flows for the First Quarter Ended April 1, 2006 and April 2, 2005
 
5
       
 
Notes to Condensed Consolidated Financial Statements
 
6-12
       
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
13-14
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
14
       
Item 4.
Controls and Procedures
 
14
       
PART II.
OTHER INFORMATION
   
       
Item 1A.
Risk Factors
 
15
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
16
       
Item 4.
Submission of Matters to a Vote of Security Holders
 
16
       
Item 5.
Other Information
 
17
       
Item 6.
Exhibits
 
17
       
Signatures
   
18
       
Exhibit Index
   
19
       
Exhibits
   
20-35

- 2 -


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except per share amounts)
 
April 1,
 
December 31,
 
   
2006
 
2005
 
ASSETS
             
Current assets:
             
Cash and equivalents
 
$
69,378
 
$
52,136
 
Investments
   
-
   
35,988
 
Receivables, less allowances of $2,220 and $2,204, respectively
   
42,446
   
30,165
 
Inventories
   
80,929
   
70,381
 
Other current assets (including deferred income taxes of $10,887 and $10,744, respectively)
   
14,900
   
14,350
 
Total current assets
   
207,653
   
203,020
 
Property, plant and equipment, net
   
95,861
   
95,732
 
Deferred and other assets (including deferred income taxes of $335 and $0, respectively)
   
22,497
   
23,028
 
Goodwill
   
58,393
   
57,982
 
Total assets
 
$
384,404
 
$
379,762
 
               
LIABILITIES AND SHAREOWNERS' EQUITY
             
Current liabilities:
             
Current maturities of long-term debt and short-term borrowings
 
$
1,309
 
$
1,303
 
Accounts payable
   
20,508
   
26,409
 
Accrued expenses
   
28,601
   
34,223
 
Income taxes
   
3,433
   
2,087
 
Total current liabilities
   
53,851
   
64,022
 
               
Long-term debt
   
12,350
   
12,324
 
Deferred income taxes
   
4,369
   
4,296
 
Employee benefit plan obligations
   
25,899
   
25,830
 
Other long-term liabilities
   
5,630
   
5,728
 
               
Shareowners' equity:
             
Common shares (45,000 shares authorized, $.10 par value)
             
outstanding (22,646 and 22,485, respectively)
   
2,265
   
2,249
 
Additional capital
   
80,030
   
74,717
 
Retained earnings
   
197,625
   
190,381
 
Loan to ESOP Trust
   
(200
)
 
(432
)
Accumulated other comprehensive income
   
2,585
   
647
 
Total shareowners' equity
   
282,305
   
267,562
 
               
Total liabilities and shareowners' equity
 
$
384,404
 
$
379,762
 

See Notes to Condensed Consolidated Financial Statements.

- 3 -


FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

(In thousands, except per share amounts)

   
First Quarter Ended
 
   
April 1,
 
April 2,
 
   
2006
 
2005
 
           
Net sales
 
$
110,980
 
$
82,434
 
               
Cost of sales
   
74,388
   
56,955
 
               
Gross profit
   
36,592
   
25,479
 
               
Selling and administrative expenses
   
21,615
   
16,272
 
               
Restructuring expense
   
-
   
205
 
               
Operating income
   
14,977
   
9,002
 
               
Interest expense
   
(193
)
 
(172
)
Other income, net
   
445
   
151
 
Foreign exchange gain/(loss)
   
(45
)
 
11
 
               
Income before income taxes
   
15,184
   
8,992
 
               
Income taxes
   
5,485
   
3,181
 
               
Net income
 
$
9,699
 
$
5,811
 
               
Per share data:
             
               
Basic earnings per share
 
$
.43
 
$
.26
 
               
Diluted earnings per share
 
$
.42
 
$
.25
 
               
               
Dividends per share
 
$
.10
 
$
.08
 

See Notes to Condensed Consolidated Financial Statements.

- 4 -


FRANKLIN ELECTRIC CO., INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands)
 
First Quarter Ended
 
   
April 1,
 
April 2,
 
   
2006
 
2005
 
Cash flows from operating activities:
             
Net income
 
$
9,699
 
$
5,811
 
Adjustments to reconcile net income to net cash flows from operating activities:
             
Depreciation and amortization
   
4,075
   
3,944
 
Stock based compensation
   
894
   
-
 
Deferred income taxes
   
261
   
849
 
Loss/(gain) on disposals of plant and equipment
   
(5
)
 
28
 
Changes in assets and liabilities:
             
Receivables
   
(12,053
)
 
3,337
 
Inventories
   
(9,911
)
 
(18,297
)
Accounts payable and other accrued expenses
   
(9,330
)
 
(2,657
)
Excess tax from share-based payment arrangements
   
(1,176
)
 
-
 
Employee benefit plan obligations
   
(23
)
 
(324
)
Other, net
   
(668
)
 
(827
)
Net cash flows from operating activities
   
(18,237
)
 
(8,136
)
               
Cash flows from investing activities:
             
Additions to plant and equipment
   
(2,912
)
 
(2,145
)
Proceeds from sale of plant and equipment
   
45
   
1,023
 
Additions to deferred and other assets
   
(52
)
 
(3
)
Purchase of securities
   
(63,500
)
 
(60,000
)
Proceeds from sale of securities
   
99,488
   
41,989
 
Net cash flows from investing activities
   
(33,069
)
 
(19,136
)
               
Cash flows from financing activities:
             
Repayment of long-term debt
   
(70
)
 
(72
)
Proceeds from issuance of common stock
   
3,036
   
3,710
 
Excess tax from share-based payment arrangements
   
1,176
   
-
 
Purchases of common stock
   
(198
)
 
(2,110
)
Reduction of loan to ESOP Trust
   
232
   
233
 
Dividends paid
   
(2,258
)
 
(1,768
)
Net cash flows from financing activities
   
1,918
   
(7
)
               
Effect of exchange rate changes on cash
   
492
   
(261
)
Net change in cash and equivalents
   
17,242
   
(27,540
)
Cash and equivalents at beginning of period
   
52,136
   
50,604
 
Cash and equivalents at end of period
 
$
69,378
 
$
23,064
 
               

Cash paid during the first quarter 2006 and 2005 for interest was $0.2 million and $0.2 million, respectively.
Cash paid during the first quarter 2006 and 2005 for income taxes was $3.7 million and $3.6 million, respectively.

See Notes to Condensed Consolidated Financial Statements.

- 5 -


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

Note 1: Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements 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. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all accounting entries and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and the results of operation for the interim period have been made. Prior year amounts are reclassified when necessary to conform to current year presentation. Operating results for the first quarter ended April 1, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2006. For further information, including a description of Franklin Electric's critical accounting policies, refer to the consolidated financial statements and footnotes thereto included in Franklin Electric Co., Inc.'s annual report on Form 10-K for the year ended December 31, 2005.

Note 2: Investments

As of April 1, 2006, the Company held no investments in current assets. All income generated from investments held during the first quarter ended April 1, 2006 was recorded as other income, net. Cash paid for these securities and proceeds from the sale of these securities have been included as part of “Cash flows from investing activities” section of the cash flow statement.

The Company also holds a 35 percent equity interest, in Pioneer Pump, Inc. which is accounted for using the equity method and is included as part of “Deferred and other assets” in the balance sheet. The carrying amount of the investment is adjusted for the Company’s proportionate share of earnings, losses, and dividends. At April 1, 2006, the carrying value of the investment was $5.5 million.

Note 3: Inventories

Inventories consist of the following:

(In millions)
 
April 1,
 
December 31,
 
   
2006
 
2005
 
Raw Materials
 
$
25.9
 
$
25.3
 
Work in Process
   
10.7
   
10.6
 
Finished Goods
   
61.8
   
51.8
 
LIFO Reserve
   
(17.5
)
 
(17.3
)
Total Inventory
 
$
80.9
 
$
70.4
 

Note 4: Property, Plant and Equipment

Property, plant and equipment, at cost, consists of the following:

(In millions)
 
April 1,
 
December 31,
 
   
2006
 
2005
 
Land and Building
 
$
53.2
 
$
52.8
 
Machinery and Equipment
   
167.3
   
164.9
 
     
220.5
   
217.7
 
Allowance for Depreciation
   
(124.9
)
 
(122.3
)
               
Other - Held for Sale
   
0.3
   
0.3
 
               
   
$
95.9
 
$
95.7
 


- 6 -


Note 5: Goodwill and Other Intangible Assets

The carrying amount of the Company’s intangible assets, which is included in “Deferred and other assets” in the balance sheet, and goodwill include:

   
April 1,
 
December 31,
 
(In millions)
 
2006
 
2005
 
           
Amortized intangibles
             
Patents
 
$
5.9
 
$
5.9
 
Supply agreements
   
10.0
   
10.0
 
Other
   
4.3
   
4.2
 
Accumulated amortization
   
(10.6
)
 
(10.1
)
Total
 
$
9.6
 
$
10.0
 
               
Goodwill
 
$
58.4
 
$
58.0
 

Changes in the carrying amount of intangibles and goodwill reflect foreign currency fluctuations.

Amortization expense related to intangible assets for the first quarter ended April 1, 2006 and April 2, 2005, was $0.4 million.

During the first fiscal quarter, there has been no change in the projected amortization expense for each of the five succeeding years as reported in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

Note 6: Employee Benefits

The following table sets forth aggregated net periodic benefit cost:
       
(In millions)
 
Pension Benefits
 
   
First Quarter Ended
 
   
April 1,
 
April 2,
 
   
2006
 
2005
 
Service cost
 
$
1.1
 
$
1.1
 
Interest cost
   
2.2
   
1.8
 
Expected return on assets
   
(2.8
)
 
(2.5
)
Amortization of unrecognized:
             
(Gain)/Loss
   
0.1
   
-
 
Prior service cost
   
0.4
   
0.3
 
               
Net periodic benefit cost
   
1.0
   
0.7
 
Settlement cost
   
0.0
   
0.1
 
Total benefit cost
 
$
1.0
 
$
0.8
 

   
Other Benefits
 
   
First Quarter Ended
 
(In millions)
   
April 1,
 
 
April 2,
 
 
 
 
2006
 
 
2005
 
Service cost
 
$
0.1
 
$
0.1
 
Interest cost
   
0.2
   
0.2
 
Amortization of unrecognized:
             
obligation/(asset)
   
0.1
   
0.1
 
Prior service costs
   
0.1
   
0.1
 
               
Net periodic benefit cost
   
0.5
   
0.5
 
               
Total benefit cost
 
$
0.5
 
$
0.5
 
               

- 7 -



For the first quarter ended April 1, 2006, the Company made contributions to the plans of $0.5 million and expects to make additional contributions of $2.1 million in 2006.

Note 7: Tax Rates

The effective tax rate on income before income taxes in 2006 and 2005 varies from the United States statutory rate of 35 percent primarily due to the foreign income exclusion and R & D credits in 2005 and to the effects of state and foreign income taxes net of federal tax benefits.

Note 8: Shareowners' Equity

The Company had 22,646,412 shares of common stock (45,000,000 shares authorized, $.10 par value) outstanding as of April 1, 2006.

During the three months ended for 2006 and 2005, pursuant to a stock repurchase program authorized by the Company’s Board of Directors, the Company repurchased 5,000 shares for $0.2 million and 54,400 shares for $2.1 million, respectively. All repurchased shares were retired.

Note 9: Earnings Per Share

Following is the computation of basic and diluted earnings per share:

(In millions, except
 
First Quarter Ended
 
per share amounts)
 
April 1,
 
April 2,
 
   
2006
 
2005
 
Numerator:
             
Net Income
 
$
9.7
 
$
5.8
 
               
Denominator:
             
Basic
             
Weighted average common shares
   
22.6
   
22.1
 
               
Diluted
             
Effect of dilutive securities:
             
               
Employee and director incentive stock options and awards
   
0.5
   
1.1
 
               
Adjusted weighted average common shares
   
23.1
   
23.2
 
               
Basic earnings per share
 
$
.43
 
$
.26
 
Diluted earnings per share
 
$
.42
 
$
.25
 

Note 10: Other Comprehensive Income

Comprehensive income is as follows:

(In millions)
 
First Quarter Ended
 
   
April 1,
 
April 2,
 
   
2006
 
2005
 
Net income
 
$
9.7
 
$
5.8
 
Other comprehensive income (loss):
             
Foreign currency translation adjustments
   
2.0
   
(4.1
)
Comprehensive income, net of tax
 
$
11.7
 
$
1.7
 


- 8 -



Accumulated other comprehensive income consists of the following:

(In millions)
 
April 1,
 
December 31,
 
   
2006
 
2005
 
Cumulative foreign currency translation adjustment
 
$
8.2
 
$
6.2
 
Minimum pension liability adjustment, net of tax
   
(5.6
)
 
(5.6
)
Accumulated other comprehensive income
 
$
2.6
 
$
0.6
 

Note 11: Warranty

The Company provides warranties on most of its products. The warranty terms vary but are generally two years from date of manufacture or one year 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 action to improve product quality and minimize warranty claims. The Company believes that its warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.

Below is a table that shows the activity in the warranty accrual:

(In millions)
 
First Quarter Ended
 
   
April 1,
 
April 2,
 
   
2006
 
2005
 
Beginning Balance
 
$
7.0
 
$
7.1
 
Accruals related to product warranties
   
1.8
   
0.7
 
Reductions for payments made
   
(1.6
)
 
(1.5
)
Ending Balance
 
$
7.2
 
$
6.3
 

Note 12: Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment,” using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the first quarter ended April 1, 2006, are $0.9 million and $0.6 million lower, respectively, and basic and diluted earnings per share for the quarter ended April 1, 2006 would have been $0.45 and $0.44, respectively, if the Company had continued to account for share-based compensation under APB Opinion 25.

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The $1.2 million excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted Statement 123(R).

- 9 -



The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of Statement 123 to options granted under the Company’s stock option plans in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and amortized to expense over the options’ vesting periods.


(In millions, except per share amounts)
 
First Quarter Ended
 
   
April 2,
 
   
2005
 
Reported net income
 
$
5.8
 
Add: Stock-based employee compensation expense, net of tax
   
-
 
Deduct: Total fair value computed stock-based compensation, net of tax*
   
(0.4
)
Pro forma net income
 
$
5.4
 
Earnings per share:
       
Basic — as reported
 
$
.26
 
Basic — pro forma
 
$
.24
 
Diluted — as reported
 
$
.25
 
Diluted — pro forma
 
$
.23
 
*Includes expense related to restricted stock reported in net income.
       

The Company has authorized the grant of options to purchase common stock and award shares of common stock of the Company to employees and non-employee directors of the Company and its subsidiaries under two stock plans. The plans and the original number of authorized shares available for grants are as follows:

   
Authorized Shares
 
Franklin Electric Co., Inc. Stock Option Plan
   
3,600,000
 
Franklin Electric Co., Inc. Stock Plan - options
   
1,150,000
 
Franklin Electric Co., Inc. Stock Plan - awards
   
150,000
 

During 2005, all remaining authorized shares available for grant under the Franklin Electric Co., Inc. Stock Option Plan were awarded. On April 29, 2005, the Franklin Electric Co., Inc. Stock Plan (the “Stock Plan”) was approved by the Company’s shareholders. Under the Stock Plan, employees and non-employee directors may be granted stock options or stock awards. The Company currently issues new shares from its common stock outstanding balance to satisfy share option exercises and stock awards.

Stock Option Grants:
Under each of the above plans, the exercise price of each option equals the market price of the Company’s common stock on the date of grant and the options expire ten years after the date of the grant. Generally, options granted to nonemployee directors vest 33 percent a year and become fully vested and exercisable after three years. Options granted to employees vest at 20 or 25 percent a year and become fully vested and exercisable after five years or four years, respectively. Subject to the terms of the plans, in general, the aggregate option price and any applicable tax withholdings may be satisfied in cash or its equivalent, or by the plan participant’s delivery of shares of the Company’s common stock owned more than six months, having a fair market value at the time of exercise equal to the aggregate option price and/or the applicable tax withholdings.

The fair value of each option award, both before and after the adoption of FASB 123(R), 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. Options granted to retirement eligible employees were immediately expensed. In 2005, this amount was disclosed in the pro-forma exhibit while in 2006 it is recognized as an expense. The Company uses historical data to estimate the expected volatility of its stock; the weighted average expected life, the period of time options granted are expected to be outstanding; and its dividend yield. The risk-free rates for periods within the contractual life of the option are based on the U.S. Treasury yield curve in effect at the time of the grant.

- 10 -



The assumptions used for the Black-Scholes model to determine the fair value of options granted in the first quarter of 2006 is as follows:

Risk-free interest rate
   
4.54
%
Dividend yield
   
.70-.74
%
Weighted-average dividend yield
   
.707
%
Volatility factor
   
.3553-.3768
 
Weighted-average volatility
   
.359
 
Expected term
   
4-5 years
 

A summary of the Company’s stock option plans activity and related information, for the first quarter ended April 1, 2006 follows:

(shares in thousands)

 
 
 
 
Options
 
 
 
 
 
Shares
 
 
 
Weighted-Average Exercise Price
 
Weighted-Average
Remaining
Contractual Term
 
 
Aggregate
Intrinsic
Value
(000’s)
 
Outstanding at beginning of period
   
1,793
 
$
23.600
             
Granted
   
125
   
45.900
             
Exercised
   
(144
)
 
21.144
             
Forfeited
   
(11
)
 
25.215
             
Outstanding at end of period
   
1,763
 
$
25.376
   
6.33
 
$
51,616
 
Vested or expected to vest
at end of period
   
1,655
 
$
24.766
   
.51
 
$
49,467
 
Exercisable at April 1, 2006
   
1,066
 
$
21.244
   
5.39
 
$
35,597
 

The weighted-average grant-date fair value of options granted during the first quarter of 2006 was $16.43. The total intrinsic value of options exercised during the first quarter of 2006 was $0.8 million.

A summary of the Company’s nonvested shares activity and related information, for the first quarter ended April 1, 2006 follows:

(shares in thousands)

 
 
 
 
Nonvested Shares
 
 
 
 
 
Shares
 
 
Weighted-
Average
Grant-Date
Fair Value
 
Nonvested at beginning of period
   
736
 
$
7.033
 
Granted
   
126
   
16.429
 
Vested
   
(153
)
 
7.196
 
Forfeited
   
(11
)
 
5.844
 
Nonvested at end of period
   
698
 
$
8.711
 

As of April 1, 2006 there was $4.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.1 years.

- 11 -



Stock Awards:
Under the Stock Plan, employees and nonemployee directors may be granted stock awards or grants of restricted shares of the Company’s common stock, vesting subject to the employees’ performance of certain goals. The Stock Plan is an amendment and restatement of the Franklin Electric Co., Inc. Key Employee Performance Incentive Stock Plan (the “Incentive Plan”), established in 2000. Prior to April 29, 2005, 16,300 shares had been awarded under the Incentive Plan and an additional 150,000 shares were authorized for stock awards under the Stock Plan.

The stock awards and the restricted stock awards cliff vest over either 4 or 5 years and the attainment of certain performance goals. Dividends are paid to the recipient prior to vesting. Stock awards granted to retirement eligible employees were immediately expensed in 2006. There were no grants made to retirement eligible employees in 2005.

A summary of the Company’s restricted stock award activity and related information, for the first quarter ended April 1, 2006 follows:

(shares in thousands)

 
 
Nonvested Shares
 
 
 
Shares
 
 
Weighted-Average Grant Date Fair Value
 
Nonvested at beginning of period
   
21
 
$
40.824
 
Awarded
   
19
   
45.798
 
Vested
   
-
   
-
 
Forfeited
   
(1
)
 
40.720
 
Nonvested at end of period
   
39
 
$
43.199
 

As of April 1, 2006 there was $1.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of 3.4 years.

Note 13: Subsequent Events

Subsequent to April 1, 2006, the Company acquired the stock of Little Giant Pump Company for $121 million, subject to a purchase price adjustment based on closing date net working capital. Little Giant, formerly a wholly owned subsidiary of Tecumseh Products Company, is a leading worldwide provider of commercial and consumer water transfer solutions.

- 12 -



Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Overview

Sales and earnings for the first quarter of 2006 were up from the same quarter of 2005. The increase in first quarter 2006 sales was primarily attributable to increased demand for Water Systems products from domestic distributors and pump manufacturers. Prior year first quarter sales and earnings were up from the same quarter of 2004. The increase in first quarter 2005 sales was attributable to the impact of changes in the Company’s sales discount programs, price increases, improved mix of direct sales to distributors and foreign exchange rate changes. Earnings improved in the first quarter of 2006 and 2005 primarily due to the increased sales. Earnings for the first quarter of 2006 were partially offset by stock based compensation expense and commodity price increases. The Company adopted SFAS No. 123(R) “Share Based Payments” as of January 2006. Earnings for the first quarter of 2005 were partially offset by increased commodity prices and expenses associated with the Company’s Global Manufacturing Realignment Program, the first phase of which was considered substantially complete as of the end of 2005.

Results of Operations

Net sales for the first quarter of 2006 were $111.0 million, an increase of $28.5 million or 35 percent from 2005 first quarter net sales of $82.4 million. Foreign currencies, particularly the euro, weakened relative to the U.S. dollar compared to the first quarter of 2005. The impact of the changes in exchange rates was a $2.0 million decrease in the Company’s reported 2006 sales. Sales related to the third quarter 2005 acquisition of Phil-Tite Enterprises were $0.9 million for the first quarter of 2006. Selling price changes increased net sales by $2.6 million or about 3 percent. The volume increase in sales is primarily attributable to higher demand for Water Systems products from domestic distributors and pump manufacturers. Submersible motor sales increased across the entire product range.  A portion of the motor sales growth may have been attributable to submersible motor inventory increases by major pump manufacturers purchasing additional quantities as a hedge against future supply uncertainties. Water Systems pump sales increased with unit volumes up over 150 percent in 2006 versus the first quarter of 2005. Fueling Systems product sales were also up about 35 percent from the prior year first quarter. Most of the Fueling Systems sales growth was the result of increased demand for Franklin’s piping and fuel pumping product lines. Net sales for European operations increased 6 percent in the first quarter of 2006 after the effect of foreign currency exchange rate changes or 15 percent in local currency.

Cost of sales as a percent of net sales for the first quarter of 2006 was 67.0 percent, down from the first quarter of 2005 of 69.1 percent. Cost of sales as a percent of net sales decreased primarily as a result of the increased sales. The decrease in cost of sales as a percent of net sales during the first quarter of 2006 was partially offset by increased costs for certain commodities used in the manufacture of electric motors, primarily copper.

Selling and administrative (“SG&A”) expenses, at $21.6 million for the first quarter of 2006, were up $5.3 million from the first quarter of 2005. The increase in the first quarter of 2006 was partially due to additional marketing and selling expenses of $1.2 million domestically related to the Water Systems distribution channel initiative and higher commissions and other compensation expenses tied to revenues and earnings, both of which increased relative to the first quarter of 2005. The first quarter of 2006 included $0.9 million of expense related to stock based compensation in accordance with the adoption of SFAS No. 123 (R) “Share Based Payments”.
 
Interest expense for the first quarter of 2006 and 2005 was $0.2 million.

Foreign currency-based transactions resulted in a slight loss for the first quarter of 2006. Foreign currency-based transactions resulted in a slight gain for the first quarter 2005.

The provision for income taxes for the first quarter of 2006 is $5.5 million. The effective tax rate for 2006 is projected at 36.1 percent, up from the prior year rate of 35.3 percent, primarily because the R&D credit deduction has not been renewed by Congress. The effective tax rate differs from the United States statutory rate of 35 percent, due to the foreign income exclusion and the effects of state and foreign income taxes, net of federal tax benefits.

- 13 -



Net income for the first quarter of 2006 was $9.7 million, or $0.42 per diluted share, compared to the first quarter of 2005 net income of $5.8 million, or $0.25 per diluted share.

Capital Resources and Liquidity

Operating activities consumed approximately $18.2 million of cash during the first quarter of 2006 compared to cash consumed during the first quarter of 2005 of $8.1 million. The operating cash flows used in the first quarter of 2006 are primarily related to an increase in receivables due to the higher sales, about $12.1 million, and an increase in inventory, about $9.9 million. Inventories increased primarily in finished goods due to seasonal inventory buildup. The operating cash flow used in the first quarter of 2005 is primarily related to an increase in inventory, about $18.3 million. Inventories increased primarily in finished goods as the Company’s sales are generally lower during the first quarter of the year.

The primary sources and uses of cash for investing activities for the first quarter of 2006 and 2005 were for the buying and selling of short term investment securities.

Net cash flows from financing activities during the first quarters of 2006 and 2005 were $1.9 million and $0.0 million, respectively. The principal source of cash from financing activities during 2006 and 2005 was from the issuance of common stock related to the exercise of stock options. The principal uses of cash during 2005 were for purchases of Company common stock under the Company’s repurchase program and the payment of dividends.

Cash and equivalents at the end of the first quarters of 2006 and 2005 were $69.4 million and $23.1 million, respectively.

In September 2004, the Company entered into an unsecured, 60 month $80.0 million revolving credit agreement (the “Agreement”). The Agreement includes a facility fee of one-tenth of one percent on the committed amount. As of April 1, 2006, the Company had no outstanding borrowings under the agreement.

During the first fiscal quarter, there has been no significant change in the Company’s current commitments, as reported in its annual report on Form 10-K for the year ended January 1, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to market risk associated with changes in foreign currency exchange rates and interest rates. Foreign currency exchange rate risk is mitigated through several means: maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system and limited use of foreign currency denominated debt. Interest rate exposure is limited to variable rate interest borrowings under the Company's revolving credit agreement and an interest rate swap.

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 Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in bringing to their attention on a timely basis material information relating to the Company to be included in the Company’s periodic reporting under the Exchange Act.

During the first fiscal quarter there have been no changes in the Company's internal control over financial reporting that have materially affected or that are reasonably likely to materially affect the Company's internal control over financial reporting.

- 14 -


PART II. OTHER INFORMATION

Items 1A. Risk Factors

Item 1A., to the Company’s form 10-K, provides the principle risk factors affecting the Company and its business and is incorporated by reference herein. The following describes additional risk factors identified or arising subsequent to the year ended January 1, 2006. 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.

The Company’s costs of products sold are impacted by changes in costs of commodities used in raw materials and fuels used for heating and transportation.

The Company uses raw materials, primarily steel, stainless steel, copper and aluminum, which are significantly impacted by changes in the base metal commodity costs. Manufacturing facilities as well as certain manufacturing processes utilize natural gas for heating. Transportation costs of both raw material and finished goods are impacted by fluctuations in fuel oil prices. One way the Company mitigates the risks of increases in these and other costs is by increasing selling prices to its customers. If the increased competition in the markets the Company serves results in an inability to increase selling prices during a period of increasing commodity and fuel costs, earnings could be negatively impacted.

The Company must integrate a significant acquisition, which closed subsequent to the end of the first quarter of 2006.

As part of our on-going marketing strategy to expand our pump offerings and broaden our customer base the Company acquired Little Giant Pump Company, a manufacturer of pumps used primarily in wastewater applications as well as other commercial and consumer water transfer applications. The Company believes that successful integration of this acquisition will enhance the Company’s competitive position as a global supplier of pumping equipment for residential and commercial markets and result in increased sales and earnings; however, actual results may vary.

The Company must further upgrade its technological processes to support its growth and product expansion.

Technology based processes must be further upgraded to support the Company’s current growth and new product expansion. Changes to technologically based processes impact the Company’s resources and earnings. The Company believes that the successful upgrade of these processes will enhance its competitiveness and support future growth; however, actual results may vary.

Additional Risks to the Company

The Company is also subject to various risks occurring in the normal course of business. Exhibit 99.1, to the Company’s form 10-K, sets forth a list of risks, including those identified above, that may adversely affect the Company and its business and is incorporated herein by reference.


- 15 -



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Issuer Repurchases of Equity Securities
 
           
Total Number
 
Maximum Number
 
   
Total
     
of Shares
 
of Shares
 
   
Number
 
Average
 
Purchased as
 
that May Yet be
 
   
Of Shares
 
Price Paid
 
Part of Publicly
 
Purchased Under
 
   
Purchased
 
per Share
 
Announced Plan
 
the Plan
 
Period 
                 
Jan 1, 2006
                         
Feb 4, 2006
   
5,000
 
$
39.545
   
5,000
   
628,692
 
 
                         
Feb 5, 2006
                         
Mar 4, 2006
   
-
   
-
   
-
   
628,692
 
                           
Mar 5, 2006
                         
Apr 1, 2006
   
-
   
-
   
-
   
628,692
 
 
                         
Total
   
5,000
 
$
39.545
   
5,000
       
 
On February 16, 2001, the Company’s Board of Directors unanimously approved a resolution to repurchase 2,000,000 shares.  On February 11, 2005, the Company’s Board of Directors unanimously approved a resolution to increase the number of shares remaining for repurchase from 827,412 shares then remaining to 1,000,000 shares. There is no expiration date for the plan.


Item 4. Submission of Matters to a Vote of Security Holders

The 2006 Annual Meeting of Shareholders of the Company was held on April 28, 2006 to: 1) elect three directors for terms expiring at the 2009 Annual Meeting of Shareholders; and 2) ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for the 2006 fiscal year.

All of the matters submitted to a vote of shareholders were approved, as shown by the following voting results.

1) Nominees for Director
For
Withhold Authority
     
Jerome D. Brady
20,685,826
50,217
Diana S. Ferguson
20,682,098
53,945
David M. Wathen
20,685,746
50,297
 
2) Ratification of Deloitte & Touche LLP
 
For
Against
Abstain
20,625,687
84,737
25,619
 

Total shares represented at the Annual Meeting in person or by proxy were 20,736,043 of a total of 22,601,412 shares outstanding. This represented 91.8 percent of Company common stock and constituted a quorum. There were no broker non-votes on either matter approved by Shareholders.

- 16 -



Item 5. Other Information

On April 28, 2006, the Board of Directors of Franklin Electric Co., Inc. adopted the amended and restated Nonemployee Directors’ Deferred Compensation Plan (the “Plan”). The Plan permits each nonemployee director to make an annual election to defer receipt of all of the annual retainer fee, the fees paid for attending Board and Committee meetings, the fees, if any, paid for services as Chairman of a Board Committee, and all of the stock award that otherwise would be granted under the Company’s Stock Plan. The nonemployee director can direct that all of the deferred fees be either converted into stock units that are credited to the nonemployee director’s stock unit account or credited as a cash amount to the nonemployee director’s cash account. The deferred stock award is converted into stock units that are credited to the nonemployee director’s stock unit account. The cash account is credited with interest on a monthly basis. Additional credits are made to the stock unit account in amounts equal to the cash dividends that the nonemployee director would have paid had he or she been the owner on each record date of a number of shares of common stock equal to the number of stock units in his or her stock unit account on such date. Once amounts have been held in the stock unit account for three years, a nonemployee director can transfer such amounts to the cash account. No other transfers are permitted. Distribution of a nonemployee director’s accounts will be made the January 31 following his or her termination of service on the Board. Distribution of the stock account will be made in cash or shares of stock as elected by the nonemployee director and distribution of the cash account will be made in cash.

Prior to its amendment and restatement, the Plan permitted a nonemployee director to defer only the annual retainer fee, and the fee was converted into stock units. The stock unit account was distributable on the January 31 following termination of service on the Board, in shares of stock or cash as elected by the nonemployee director.

This description of the Plan is qualified in its entirety by the terms and conditions of the Plan, which is filed as Exhibit 10.1 hereto and is incorporated herein by reference.

Item 6. Exhibits

See the Exhibit Index located on page 19.


- 17 -


SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.



     
FRANKLIN ELECTRIC CO., INC.
     
Registrant
       
       
       
       
Date May 8, 2006
 
By
/s/ R. Scott Trumbull
     
R. Scott Trumbull, Chairman and Chief Executive Officer (Principal Executive Officer)
       
       
       
Date May 8, 2006
 
By
/s/ Thomas J. Strupp
     
Thomas J. Strupp, Vice President and Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)


- 18 -



FRANKLIN ELECTRIC CO., INC.
EXHIBIT INDEX TO THE QUARTERLY REPORT ON FORM 10-Q
FOR THE FIRST QUARTER ENDED APRIL 1, 2006

   
Number
Description
   
10.1
Franklin Electric Co., Inc. Nonemployee Directors’ Deferred Compensation Plan, as Amended and Restated
   
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
   

 
- 19 -

EX-10.1 2 exhibit10_1.htm EXHIBIT 10.1 - NONEMPLOYEE COMPENSATION PLAN Exhibit 10.1 - Nonemployee Compensation Plan
FRANKLIN ELECTRIC CO., INC.
 

 
NONEMPLOYEE DIRECTORS’ DEFERRED COMPENSATION PLAN
 

 
(As Amended and Restated April 28, 2006)
 

 


- 20 -



 
TABLE OF CONTENTS
 
 
   
PAGE
 
Article I -
 
Introduction
 
1
 
Article II -
 
Shares Subject to the Plan
 
1
 
Article III -
 
Director Compensation
 
1
 
Article IV -
 
Deferral Elections
 
2
 
Article V -
 
Participant Accounts
 
3
 
Article VI -
 
Distribution of Accounts
 
4
 
Article VII -
 
Administration of the Plan
 
5
 
Article VIII -
 
Amendment or Termination
 
6
 
Article IX -
 
General Provisions
 
7
 


     

- 21 -




FRANKLIN ELECTRIC CO., INC.
 
NONEMPLOYEE DIRECTORS’ DEFERRED COMPENSATION PLAN
 
Article I -  Introduction
 
Franklin Electric Co., Inc., an Indiana corporation (the “Company”), maintains the Nonemployee Directors’ Deferred Compensation Plan (the “Plan”) for members of its Board of Directors (the “Board”) who are not employees of the Company or an affiliate of the Company (the “Nonemployee Directors”). The Plan was initially effective as of February 11, 2000 and is hereby amended and restated as of April 28, 2006.
 
Article II -  Shares Subject to the Plan
 
2.1  Number of Shares. Subject to adjustment as provided in Section 2.2 herein, the total number of shares of common stock of the Company (“Common Stock”) available for issuance under the Plan shall be 25,000 shares. Such shares of Common Stock may be either authorized but unissued, reacquired or a combination thereof.
 
2.2  Adjustment. Any increase in the number of outstanding shares of Common Stock occurring through stock splits or stock dividends after the adoption of the Plan shall be reflected proportionately in an increase in the aggregate number of shares of Common Stock then available for issuance under the Plan. Any fractional shares of Common Stock resulting from such adjustments shall be eliminated. If changes in capitalization other than those considered above shall occur, the Board shall make such adjustment in the number and class of shares of Common Stock which may thereafter be issued, as the Board in its discretion may consider appropriate, and all such adjustments shall be conclusive upon all persons.
 
Article III -  Director Compensation
 
3.1  Director Compensation. The Plan permits each Nonemployee Director to make an election for each calendar year to defer all of (a) the retainer payable to the Nonemployee Director for his or her services as a member of the Board for the fiscal year that begins in such calendar year; (b) the fees paid to the Nonemployee Director for each Board and Committee meeting attended during such calendar year; (c) the fees paid to each Nonemployee Director, if any, for services during such calendar year as Chairman of a Board Committee; and (d) the Stock Award granted to the Nonemployee Director during each such calendar year under the Franklin Electric Co., Inc. Stock Plan (the “Stock Plan”) (collectively, the “Director Compensation”). The components of Director Compensation described in Subsections (a) - (c) shall be referred to herein as the “Cash Portion” and the component of Director Compensation described in Subsection (d) shall be referred to herein as the “Stock Portion”.
 
3.2  Participation. Each Nonemployee Director shall become a participant under the Plan (a “Participant”) by filing the written Election Form described in Article IV below with the Plan Administrator with respect to the deferral of the entire amount of Director Compensation payable to him or her during a calendar year.
 

- 22 -



 
Article IV -  Deferral Elections
 
4.1  Initial Election.
 
(a)  Each Nonemployee Director may elect, on an Election Form provided by the Plan Administrator, to defer receipt of his or her entire Director Compensation payable during a calendar year until the date on which his or her service on the Board terminates for any reason. In such case, the value of such Director Compensation will be credited to the Participant Account established for him or her under the Plan pursuant to the provisions of Section 5.1 below.
 
(b)  If a Nonemployee Director does not make an election pursuant to Subsection 4.1(a) above to defer Director Compensation payable during a calendar year, the Nonemployee Director shall receive (i) with respect to the retainer described in Subsection 3.1(a), at his or her option, either (A) a cash payment equal to such amount, or (B) a distribution of a number of full shares of Common Stock equal to the cash value of such amount divided by the Fair Market Value (as defined in Section 9.2) of a share of Common Stock on the date on which such amount is payable, and cash for any fractional shares; (ii) with respect to the fees described in Subsections 3.1(b) and (c), a cash payment equal to such amount; and (iii) with respect to the Stock Portion, the Stock Award that would otherwise be granted under the Stock Plan, in accordance with the terms of the Stock Plan. Any distribution of cash or Common Stock shall be made as soon as practicable after the date on which such Director Compensation is payable. Any distribution of Common Stock shall be evidenced by a certificate representing the applicable number of shares of Common Stock, registered in the name of the Nonemployee Director, and issued to the Nonemployee Director, provided that the Company may instead reflect the issuance of shares of Common Stock on a non-certificated basis, with the ownership of such shares by the Nonemployee Director evidenced solely by book entry in the records of the Company’s transfer agent.
 
4.2  Timing of Election.
 
(a)  An Election Form effective for a calendar year shall be delivered to the Plan Administrator prior to the first day of such calendar year. An Election Form shall remain in effect for subsequent calendar years until a written notice to revise the Election Form is delivered to the Plan Administrator on or before the first day of the calendar year in which the revision is to become effective. Except as provided in Subsection 4.2(b) below, an initial Election Form or a revised Election Form shall apply only to Director Compensation otherwise payable to a Nonemployee Director after the end of the calendar year in which such initial or revised Election Form is delivered to the Plan Administrator. Any Election Form delivered by a Nonemployee Director shall be irrevocable with respect to any Director Compensation covered by the elections set forth therein. If an Election Form is not in effect for a Nonemployee Director for a calendar year, he or she shall be deemed to have elected to receive the Cash Portion of his or her Director Compensation in cash as specified in Subsection 4.1(b)(i)(A).
 

- 23 -



 
(b)  Notwithstanding the provisions of Subsection 4.2(a), an election made by a Nonemployee Director in the calendar year in which he or she first becomes a Nonemployee Director may be made pursuant to an Election Form delivered to the Plan Administrator within thirty days after the date on which he or she initially becomes a Nonemployee Director, and such Election Form shall be effective with respect to Director Compensation earned from and after the date such Election Form is delivered to the Plan Administrator.
 
Article V -  Participant Accounts
 
5.1  Credits to Account.
 
(a)  A Participant’s Director Compensation deferred pursuant to Section 4.1 shall be credited to the Participant’s Account as of the date on which such payment would have been made (a “Payment Date”).
 
(b)  The Participant shall have indicated on the Election Form to have the Cash Portion of the deferred Director Compensation credited to his or her Account invested in one of the following ways:
 
(i)  Such dollar amount shall be held in the Cash Subaccount of the Participant’s Account and credited with interest as of the end of each calendar month at the rate in effect for such month as published by Wells Fargo for its Stable Return Fund, or a similar interest rate as determined by the Plan Administrator; or
 
(ii)  Such dollar amount shall be held in the Stock Subaccount of the Participant’s Account and converted into a number of phantom shares of Common Stock (“Stock Units”), determined by dividing such dollar amount by the Fair Market Value of a share of Common Stock on the Payment Date. The number of Stock Units for full shares of Common Stock shall be credited to the Stock Subaccount. Any cash remaining after such conversion, together with other subsequent credits of the Cash Portion of deferred Director Compensation, shall be converted into Stock Units on the next applicable Payment Date.
 
(c)  The Stock Portion of the deferred Director Compensation shall be held in the Stock Subaccount of the Participant’s Account and converted as of the applicable Payment Date into a number of Stock Units equal to the number of shares of Common Stock subject to the Stock Award. Any subsequent credits of the Stock Portion of deferred Director Compensation shall be converted into Stock Units on the next applicable Payment Date.
 

- 24 -



 
(d)  Additional credits shall be made to the Stock Subaccount of a Participant’s Account in amounts equal to the cash dividends (or the fair market value of dividends paid in property other than Common Stock) that the Participant would have received had he or she been the owner on each record date of a number of shares of Common Stock equal to the number of Stock Units in his or her Stock Subaccount on such date. In the case of a dividend in Common Stock or a Common Stock split, additional credits will be made to the Stock Subaccount of a Participant’s Account of a number of Stock Units equal to the number of full shares of Common Stock that the Participant would have received had he or she been the owner on each record date of a number of shares of Common Stock equal to the number of Stock Units in his or her Stock Subaccount on such date. All dividends will be converted into Stock Units as described above on the applicable dividend payment date.
 
5.2  Transfer Between Subaccounts.
 
(a)  Except as provided in Subsection (b) below, amounts credited to a Participant’s Cash Subaccount and/or Stock Subaccount pursuant to Section 5.1 shall remain in such Subaccount until distributions occur as described in Article VI, and no Participant shall be permitted to transfer any amounts between such Subaccounts.
 
(b)  Notwithstanding Subsection (a), a Participant may elect to transfer all or a portion of his or her Stock Subaccount to the Cash Subaccount. Such election may be made once the Stock Portion has been held in the Stock Subaccount for three full years, and in accordance with procedures established by the Plan Administrator. In such case, the Stock Subaccount will be reduced by the number of Stock Units to be transferred and the Cash Subaccount will be credited with an amount equal to the number of Stock Units transferred multiplied by the Fair Market Value of a share of Common Stock on the date of the transfer.
 
5.3  Accounts Maintained Until Payment. Each Participant Account shall be maintained on the books of the Company until full payment of the balance thereof has been made to the applicable Participant (or the beneficiaries of a deceased Participant). No funds shall be set aside or earmarked for any Participant Account, which shall be purely a bookkeeping device.
 
Article VI -  Distribution of Accounts
 
6.1  Distribution on Termination of Service. The entire balance of a Participant’s Account shall be paid to him or her (or to his or her beneficiaries in the event of his or her death) in a single lump sum as of the January 31 next following the date the Participant’s service on the Board terminates for any reason.
 

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6.2  Form of Distribution.
 
(a)  (i)The balance of the Stock Subaccount of the Participant’s Account shall be distributed in shares of Common Stock or in cash as designated by the Participant (or his or her beneficiaries in the event of his or her death) by written notice delivered to the Plan Administrator prior to the applicable January 31 distribution date. If a timely designation is not received by the Plan Administrator, distribution shall be made in cash or in Common Stock as the Company shall decide.
 
(ii)  The balance of the Cash Subaccount of the Participant’s Account shall be distributed in cash.
 
(b)  In the event of a distribution in Common Stock, a certificate representing a number of shares of Common Stock equal to the number of Stock Units in the Participant’s Account, registered in the name of the Participant (or his or her beneficiaries), and any remaining cash in the Stock Subaccount shall be distributed to the Participant (or his or her beneficiaries). Notwithstanding the foregoing, the Company, in lieu of issuing a stock certificate, may reflect the issuance of shares of Common Stock on a non-certificated basis, with the ownership of such shares by the Participant (or his or her beneficiaries) evidenced solely by book entry in the records of the Company’s transfer agent.
 
(c)  In the event of a cash distribution, the Participant (or his or her beneficiaries) shall receive an amount in cash equal to the aggregate of (i) the number of Stock Units in the Stock Subaccount multiplied by the Fair Market Value of a share of Common Stock on the applicable January 31, (ii) any cash in the Stock Subaccount, and (iii) any cash in the Cash Subaccount, including interest credited for the month of January.
 
6.3  Distribution Upon Death. If a Participant’s service on the Board terminates by reason of his or her death, or if he or she dies after becoming entitled to distribution hereunder, but prior to receipt of his or her entire distribution, all cash or Common Stock then distributable hereunder with respect to him or her shall be distributed to such beneficiary or beneficiaries as such Participant shall have designated by an instrument in writing last filed with the Committee prior to his or her death, or in the absence of such designation or of any living beneficiary, to his or her spouse, or if not then living, to his or her then living descendants, per stirpes, or if none is then living, to the personal representative of his or her estate, in the same manner as would have been distributed to the Participant had he or she continued to live.
 

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6.4  Unforeseeable Emergency. In the discretion of the Plan Administrator, and at the written request of a Participant, up to 100% of the balance in his or her Account, determined as of the last day of the calendar month prior to the date of distribution, may be distributed to the Participant in a lump sum in the case of an Unforeseeable Emergency, subject to the limitations set forth below. For purposes of this Section 6.4, an Unforeseeable Emergency is a severe financial hardship of the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a spouse or dependent (as defined in Section 152(a) of the Internal Revenue Code of 1986, as amended (the “Code”)) of the Participant, loss of the Participant’s property due to casualty or other similar, extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances constituting an Unforeseeable Emergency will depend upon the facts of each case, as determined by the Plan Administrator in its discretion, but in any case payment may not be made to the extent that such hardship is or may be relieved:
 
(a)  through reimbursement or compensation by insurance or otherwise;
 
(b)  by liquidation of the Participant’s assets to the extent the liquidation of such assets would not itself cause severe financial hardship; or
 
(c)  by cessation of deferrals under the Plan.
 
Distribution of amounts because of an Unforeseeable Emergency shall be permitted only to the extent reasonably needed to satisfy the Unforeseeable Emergency (which may include amounts necessary to pay any Federal, state or local taxes or penalties reasonably anticipated to result from the distribution).
 
6.5  Distribution Limitation for Key Employees. Notwithstanding the foregoing, if at the time of a Participant’s termination of service on the Board he or she is employed by the Company or any affiliate thereof, and is considered to be a Key Employee as defined in Code Section 409A, distribution of his or her Account shall not be made earlier than six months following the Participant’s termination of service on the Board, to the extent required by Code Section 409A.
 
Article VII -  Administration of the Plan
 
7.1  Plan Administration. The Corporate Governance Committee of the Board of Directors of the Company shall act as the Plan Administrator. The Plan Administrator shall be responsible for the general operation and administration of the Plan, and shall have such powers as are necessary to discharge its duties under the Plan, including, without limitation, the following:
 
(a)  To construe and interpret the Plan, to decide all questions of eligibility, to determine the amount, manner and time of payment of any benefits hereunder, to prescribe rules and procedures to be followed by Participants and their beneficiaries under the Plan, and to otherwise carry out the purposes of the Plan.
 

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(b)  To appoint or employ individuals to assist in the administration of the Plan and any other agents deemed advisable. The decisions of the Plan Administrator shall be binding and conclusive upon all Participants, beneficiaries and other persons.
 
7.2  Claims for Benefits. Any Participant claiming a benefit, requesting an interpretation or ruling, or requesting information, under the Plan, shall present the request in writing to the Plan Administrator, which shall respond in writing as soon as practicable. If the claim or request is denied, the written notice of denial shall state the following:
 
(a)  the reasons for denial, with specific reference to the Plan provisions upon which the denial is based;
 
(b)  a description of any additional material or information required and an explanation of why it is necessary; and
 
(c)  an explanation of the Plan’s review procedure.
 
The initial notice of denial shall normally be given within 90 days after receipt of the claim. If special circumstances require an extension of time, the claimant shall be so notified and the time limit shall be 180 days. Any person whose claim or request is denied, or who has not received a response within 30 days, may request review by notice in writing to the Plan Administrator. The original decision shall be reviewed, by the Plan Administrator, which may, but shall not be required to, grant the claimant a hearing. On review, whether or not there is a hearing, the claimant may have representation, examine pertinent documents and submit issues and comments in writing. The decision on review shall ordinarily be made within 60 days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be so notified and the time limit shall be extended to 120 days. The decision on review shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned.
 
Article VIII -  Amendment or Termination
 
8.1  Authority. The Company intends the Plan to be permanent but reserves the right to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board without further action on the part of the Company’s stockholders to the extent permitted by law, regulation or stock exchange requirements, and shall be effective as of the date of such resolution or such later date as the resolution may expressly state.
 

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8.2  Limits. No amendment or termination of the Plan shall (a) directly or indirectly deprive any current or former Participant or his or her beneficiaries of all or any portion of his or her Account as determined as of the effective date of such amendment or termination, or (b) directly or indirectly reduce the balance of any Account held hereunder as of the effective date of such amendment or termination. Upon termination of the Plan, distribution of balances in all Accounts shall continue to be made to Participants or their beneficiaries in the manner and at the time described in Article VI. No additional deferred Director Compensation shall be credited to the Accounts of Participants after termination of the Plan, but the Company shall continue to credit earnings, gains and losses to Accounts pursuant to Article VI until the balances of such Accounts have been fully distributed to Participants or their beneficiaries.
 
8.3  Stockholder Approval. No such amendment, modification or termination of the Plan may occur without the approval of the stockholders of the Company, if stockholder approval for such amendment, modification or termination is required by the federal securities laws, any national securities exchange or system on which the Shares are then listed or reported, or a regulatory body having jurisdiction with respect thereto.
 
Article IX -  General Provisions
 
9.1  Plan Unfunded. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. The right of a Participant or his or her beneficiary to receive a benefit hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor a beneficiary shall have any rights in or against any specific assets of the Company. All amounts credited to Accounts shall constitute general assets of the Company.
 
9.2  Fair Market Value. For all purposes of the Plan, the Fair Market Value of a share of Common Stock as of a given date shall be the closing sale price of a share of Common Stock on the principal securities exchange on which the shares of Common Stock are publicly traded, or if there is no such sale on the relevant date, then on the last previous day on which a sale was reported.
 
9.3  No Guaranty of Assets. Nothing contained in the Plan shall constitute a guaranty by the Company, the Corporate Governance Committee, the Plan Administrator, or any other person or entity, that the assets of the Company will be sufficient to pay any benefit hereunder. No Participant or beneficiary shall have any right to receive a distribution under the Plan except in accordance with the terms of the Plan.
 
9.4  No Guaranty of Service. Establishment of the Plan shall not be construed to give any Nonemployee Director the right to be retained as a member of the Board.
 

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9.5  No Assignment. No interest of any person or entity in, or right to receive a distribution under, the Plan, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings.
 
9.6  Governing Law. The Plan shall be construed and administered under the laws of the State of Indiana, except to the extent preempted by federal law.
 
9.7  Incapacity of Participant. If any person entitled to a payment under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution that is contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company, the Committee, the Plan Administrator and the Plan therefor.
 
9.8  Succession. The Plan shall be continued, following a transfer or sale of assets of the Company, or following the merger or consolidation of the Company into or with any other corporation or entity, by the transferee, purchaser or successor entity, unless the Plan has been terminated by the Company pursuant to the provisions of Article VIII prior to the effective date of such transaction.
 
9.9  Location of Participants. Each Participant or beneficiary shall keep the Plan Administrator informed of his or her current address. The Plan Administrator shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Plan Administrator within three years after the date on which payment of the Participant’s benefits under the Plan be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Plan Administrator is unable to locate any beneficiary of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant, or beneficiary or any other person and such benefit shall be forfeited. If such Participant, or his or her beneficiary or any other person, subsequently makes a valid claim for distribution of the amount forfeited, such amount, without gains or earnings thereon, shall be distributed to such Participant or his or her beneficiary or such other person pursuant to Article VI.
 
9.10  No Liability. Notwithstanding any of the preceding provisions of the Plan, none of the Company, any member of the Board, any Plan Administrator or any individual acting as an employee or agent of the Company, the Board, or the Plan Administrator, shall be liable to any Participant, former Participant, or any beneficiary or other person for any claim, loss, liability or expense incurred by such Participant, or beneficiary or other person in connection with the Plan.
 

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9.11  Savings Clause. Notwithstanding anything to the contrary contained in the Plan, if (a) the Internal Revenue Service prevails in a claim by it that amounts credited to a Participant’s Account, and/or earnings thereon, constitute taxable income to the Participant or his or her beneficiary for any taxable year of his, prior to the taxable year in which such credits and/or earnings are distributed to him or (b) legal counsel satisfactory to the Company, and the applicable Participant or his or her beneficiary, renders an opinion that the Internal Revenue Service would likely prevail in such a claim, the balance of such Participant’s Account shall be immediately distributed to the Participant or his or her beneficiary. For purposes of this paragraph, the Internal Revenue Service shall be deemed to have prevailed in a claim if such claim is upheld by a court of final jurisdiction, or if the Company, or a Participant or beneficiary, based upon an opinion of legal counsel satisfactory to the Company and the Participant or his or her beneficiary, fails to appeal a decision of the Internal Revenue Service, or a court of applicable jurisdiction, with respect to such claim, to an appropriate Internal Revenue Service appeals authority or to a court of higher jurisdiction, within the appropriate time period.
 
9.12  Notices. Any notice under the Plan shall be in writing, or by electronic means, and shall be received when actually delivered, or mailed postage paid as first class U.S. Mail. Notices shall be directed to the Company at its principal business office at 400 East Spring Street, Bluffton, Indiana 46714, to a Participant at the address stated in his or her Election Form, and to a beneficiary entitled to benefits at the address stated in the Participant’s beneficiary designation, or to such other addresses any party may specify by notice to the other parties.
 

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EX-31.1 3 exhibit31_1.htm EXHIBIT 31.1 - CERTIFICATIONS Exhibit 31.1 - Certifications
EXHIBIT 31.1

CERTIFICATIONS

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, R. Scott Trumbull, Chairman and Chief Executive Officer of Franklin Electric Co., Inc., certify that:

1.  
I have reviewed this Quarterly Report on Form 10-Q of Franklin Electric Co., Inc., for the first quarter ending April 1 2006;

2.  
Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this Quarterly Report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors or persons performing similar functions:

a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:
May 8, 2006
 
     
     
 
/s/ R. Scott Trumbull
 
 
R. Scott Trumbull
 
 
Chairman and Chief Executive Officer
 
 
Franklin Electric Co., Inc.
 
 
 
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EX-31.2 4 exhibit31_2.htm EXHIBIT 31.2 - CERTIFICATIONS
EXHIBIT 31.2


CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas J. Strupp, Vice President and Chief Financial Officer and Secretary of Franklin Electric Co., Inc., certify that:

1.  
I have reviewed this Quarterly Report on Form 10-Q of Franklin Electric Co., Inc., for the first quarter ending April 1, 2006;

2.  
Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly Report;

3.  
Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;

4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a.  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;

b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this Quarterly Report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors or persons performing similar functions:

a.  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date:
May 8, 2006
 
     
     
 
/s/ Thomas J. Strupp
 
 
Thomas J. Strupp
 
Vice President and Chief Financial Officer and Secretary
 
Franklin Electric Co., Inc.
 
 
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EX-32.1 5 exhibit32_1.htm EXHIBIT 32.1 - CERTIFICATIONS Exhibit 32.1 - Certifications
EXHIBIT 32.1


CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Franklin Electric Co., Inc. (the “Company”) on Form 10-Q for the first quarter ending April 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Scott Trumbull, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date:
May 8, 2006
 
     
     
 
/s/ R. Scott Trumbull
 
 
R. Scott Trumbull
 
Chairman and Chief Executive Officer
 
Franklin Electric Co., Inc.
 
 
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EX-32.2 6 exhibit32_2.htm EXHIBIT 32.2 - CERTIFICATIONS Exhibit 32.2 - Certifications
EXHIBIT 32.2

CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report of Franklin Electric Co., Inc. (the “Company”) on Form 10-Q for the first quarter ending April 1, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Strupp, Vice President and Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:
May 8, 2006
 
     
     
 
/s/ Thomas J. Strupp
 
 
Thomas J. Strupp
 
Vice President and Chief Financial Officer and Secretary
 
Franklin Electric Co., Inc.
 

 
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