SIGNIFICANT ACCOUNTING POLICIES

During the nine fiscal months ended October 1, 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 FASB 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 nine months ended October 2, 2010, and condensed consolidated statement of cash flows for the nine months ended October 2, 2010 were adjusted as presented below:



Condensed Consolidated Statements of Income	Third Quarter Ended October 2, 2010
(In thousands, except per share amounts)	As Originally						Effect of
	Reported			As Adjusted			Change
Cost of sales	$	129,138		$	128,970		$	(168	)
Operating income	19,433			19,601			168
Income taxes	4,960			5,015			55
Net income	12,472			12,585			113
Net income attributable to Franklin Electric Co., Inc.	12,219			12,332			113
Income per share:
Basic	$	0.53		$	0.53		$	—
Diluted	$	0.52		$	0.52		$	—

	Nine Months Ended October 2, 2010
	As Originally						Effect of
	Reported			As Adjusted			Change
Cost of sales	$	364,643		$	364,139		$	(504	)
Operating income	50,235			50,739			504
Income taxes	10,973			11,138			165
Net income	31,251			31,590			339
Net income attributable to Franklin Electric Co., Inc.	30,458			30,797			339
Income per share:
Basic	$	1.32		$	1.33		$	0.01
Diluted	$	1.30		$	1.31		$	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	Nine Months Ended October 2, 2010
(In thousands)	As Originally						Effect of
	Reported			As Adjusted			Change
Net income	$	31,251		$	31,590		$	339
Changes in assets and liabilities:
Inventory	(2,449		)	(2,953		)	(504		)
Income taxes	1,374			1,539			165

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 nine months ended October 1, 2011 would be an increase in cost of sales of $0.4 million and $1.2 million, respectively; a decrease in operating income of $0.4 million and $1.2 million, respectively; a decrease in income taxes of $0.1 million and $0.3 million, respectively; a decrease in net income of $0.3 million and $0.9 million, respectively; a decrease in net income attributable to Franklin Electric Co., Inc. of $0.3 million and $0.9 million, respectively; and a decrease in both basic and diluted income per share of $0.01 and $0.03, respectively.

The estimated impact of this change to the condensed consolidated balance sheet as computed under LIFO as of October 1, 2011, would be a decrease in inventories of $15.4 million, an increase in deferred income taxes of $5.9 million, and a decrease in retained earnings of $9.5 million.

The estimated impact to the condensed consolidated statement of cash flows for the nine months ended October 1, 2011 would be a reduction of cash provided by net income of $0.9 million offset by a $1.2 million source of cash from the reduction in inventory and a $0.3 million use of cash from the reduction in income taxes. There would be no impact to net cash flows from operating activities in the nine months ended October 1, 2011.