SIGNIFICANT ACCOUNTING POLICIES

During the six fiscal months ended July 2, 2011, the Company did not change any of its existing accounting policies with the exception of the following accounting principle, which was adopted and became effective with respect to the Company on January 2, 2011.

Effective January 2, 2011, the Company elected to change its accounting method of valuing all of its inventories that used the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. Inventories valued using the LIFO and FIFO methods represented approximately 11% and 85%, respectively, of total inventories as of January 1, 2011 with the remaining inventory recorded using the average cost method. The Company believes the change is preferable because it will (1) more closely reflect current acquisition cost and improve the matching of revenue and expense, (2) conform 96% of the Company’s method of inventory valuation to the FIFO method and (3) enhance comparability with industry peers. The Company applied this change in accounting principle retrospectively to all prior periods presented herein in accordance with Accounting Standards Codification ("ASC") Topic 250, Accounting Changes and Error Corrections. As a result of the accounting change, retained earnings as of January 2, 2010 increased from $285.5 million to $294.1 million. As of January 2, 2011, the Company converted all LIFO inventory balances in its accounting systems to FIFO inventory which effectively eliminated its LIFO pools prospectively.

As a result of the retrospective application of this change in accounting principle, certain financial statement line items in the Company’s condensed consolidated balance sheet as of January 1, 2011, its condensed consolidated statements of income for the three and six months ended July 3, 2010, and condensed consolidated statement of cash flows for the six months ended July 3, 2010 were adjusted as presented below:



Condensed Consolidated Statements of Income	Second Quarter Ended July 3, 2010
(In thousands, except per share amounts)	As Originally						Effect of
	Reported			As Adjusted			Change
Cost of sales	$	125,950		$	125,782		$	(168	)
Operating income	18,415			18,583			168
Income taxes	5,311			5,366			55
Net income	11,338			11,451			113
Net income attributable to Franklin Electric Co., Inc.	11,022			11,135			113
Income per share:
Basic	$	0.47		$	0.48		$	0.01
Diluted	$	0.47		$	0.47		$	—

	Six Months Ended July 3, 2010
	As Originally						Effect of
	Reported			As Adjusted			Change
Cost of sales	$	235,506		$	235,170		$	(336	)
Operating income	30,801			31,137			336
Income taxes	6,013			6,123			110
Net income	18,777			19,003			226
Net income attributable to Franklin Electric Co., Inc.	18,237			18,463			226
Income per share:
Basic	$	0.79		$	0.80		$	0.01
Diluted	$	0.78		$	0.79		$	0.01

Condensed Consolidated Balance Sheet	Year Ended January 1, 2011
(In thousands)	As Originally						Effect of
	Reported			As Adjusted			Change
Inventories	$	126,007		$	140,232		$	14,225
Deferred income taxes	18,762			13,182			(5,580		)
Retained earnings	305,260			313,905			8,645

Condensed Consolidated Statement of Cash Flows	Six Months Ended July 3, 2010
(In thousands)	As Originally						Effect of
	Reported			As Adjusted			Change
Net income	$	18,777		$	19,003		$	226
Changes in assets and liabilities:
Inventories	(4,699		)	(5,035		)	(336		)
Income taxes	(860		)	(750		)	110

As a result of the conversion described above it is necessary to estimate the effect of the change in accounting method on the current period. The estimated impact of this accounting change on the condensed consolidated statements of income as computed under LIFO for the three and six months ended July 2, 2011 would be an increase in cost of sales of $0.4 million and $0.8 million, respectively; a decrease in operating income of $0.4 million and $0.8 million, respectively; a decrease in income taxes of $0.1 million and $0.2 million, respectively; a decrease in net income of $0.3 million and $0.6 million, respectively; a decrease in net income attributable to Franklin Electric Co., Inc. of $0.3 million and $0.6 million, respectively; and a decrease in both basic and diluted income per share of $0.01 and $0.02, respectively.

The estimated impact of this change to the condensed consolidated balance sheet as computed under LIFO as of July 2, 2011, would be a decrease in inventories of $15.0 million, an increase in deferred income taxes of $5.8 million, and a decrease in retained earnings of $9.2 million.

The estimated impact to the condensed consolidated statement of cash flows for the six months ended July 2, 2011 would be a reduction of cash provided by net income of $0.6 million offset by a $0.8 million source of cash from the reduction in inventory and a $0.2 million use of cash from the reduction in income taxes. There would be no impact to net cash flows from operating activities in the six months ended July 2, 2011.