2012.6.30. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________

FORM 10-Q
_________

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012

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 (or for such shorter period that the registrant was required to file such reports), 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 YES x
NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company o

1



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
 
July 31, 2012
$.10 par value
 
23,377,808 shares








2


FRANKLIN ELECTRIC CO., INC.
TABLE OF CONTENTS

 
 
 
Page
PART I.
 
Number
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II.
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 4.
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits
 
 
 



 


3


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

(In thousands, except per share amounts)
Second Quarter Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
 
 
 
 
 
 
 
 
Net sales
$
246,696

 
$
224,119

 
$
448,619

 
$
409,449

Cost of sales
162,358

 
146,904

 
298,006

 
271,708

Gross profit
84,338

 
77,215

 
150,613

 
137,741

Selling, general, and administrative expenses
46,769

 
43,931

 
92,121

 
88,077

Restructuring (income)/expense
59

 
501

 
(14
)
 
919

Operating income
37,510

 
32,783

 
58,506

 
48,745

Interest expense
(2,362
)
 
(2,406
)
 
(4,951
)
 
(4,612
)
Other income/(expense)
452

 
949

 
13,987

 
2,568

Foreign exchange income/(expense)
(357
)
 
(938
)
 
(655
)
 
(1,358
)
Income before income taxes
35,243

 
30,388

 
66,887

 
45,343

Income taxes
10,001

 
8,381

 
18,486

 
12,433

Net income
$
25,242

 
$
22,007

 
$
48,401

 
$
32,910

Less: Net income attributable to noncontrolling interests
(435
)
 
(357
)
 
(550
)
 
(580
)
Net income attributable to Franklin Electric Co., Inc.
$
24,807

 
$
21,650

 
$
47,851

 
$
32,330

Income per share:
 

 
 

 
 
 
 

Basic
$
1.06

 
$
0.92

 
$
2.05

 
$
1.38

Diluted
$
1.04

 
$
0.91

 
$
2.00

 
$
1.35

Dividends per common share
$
0.15

 
$
0.14

 
$
0.28

 
$
0.27


See Notes to Condensed Consolidated Financial Statements.

4


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

(In thousands)
Second Quarter Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
 
 
 
 
 
 
 
 
Net income
$
25,242

 
$
22,007

 
$
48,401

 
$
32,910

Other comprehensive income/(loss), before tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(20,729
)
 
3,658

 
(9,515
)
 
14,185

Employee benefit plan activity
587

 
908

 
1,174

 
1,817

Other comprehensive income/(loss)
$
(20,142
)
 
$
4,566

 
$
(8,341
)
 
$
16,002

Income tax related to items of other comprehensive income
(230
)
 
(356
)
 
(460
)
 
(712
)
Other comprehensive income/(loss), net of tax
$
(20,372
)
 
$
4,210

 
$
(8,801
)
 
$
15,290

Comprehensive income
$
4,870

 
$
26,217

 
$
39,600

 
$
48,200

Comprehensive (income)/loss attributable to noncontrolling interest
(137
)
 
(347
)
 
26

 
(1,440
)
Comprehensive income attributable to Franklin Electric Co., Inc.
$
4,733

 
$
25,870

 
$
39,626

 
$
46,760


See Notes to Condensed Consolidated Financial Statements.


5


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

(In thousands)
June 30, 2012
 
December 31, 2011
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
86,250

 
$
153,337

Receivables, less allowances of $2,921 and $2,964, respectively
127,092

 
78,435

Inventories:
 
 
 

Raw material
73,074

 
49,615

Work-in-process
18,686

 
16,047

Finished goods
102,140

 
76,031

 
193,900

 
141,693

Deferred income taxes
12,401

 
11,853

Other current assets
17,842

 
15,165

Total current assets
437,485

 
400,483

 
 
 
 
Property, plant and equipment, at cost:
 

 
 

Land and buildings
85,010

 
85,623

Machinery and equipment
191,847

 
186,525

Furniture and fixtures
25,196

 
24,332

Other
17,198

 
13,059

 
319,251

 
309,539

Less: Allowance for depreciation
(170,247
)
 
(163,130
)
 
149,004

 
146,409

Asset held for sale
1,100

 
1,300

Intangible assets
133,659

 
94,538

Goodwill
193,282

 
168,846

Other assets
7,224

 
17,954

Total assets
$
921,754

 
$
829,530



6


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

 
June 30, 2012
 
December 31, 2011
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
59,578

 
$
45,481

Accrued expenses
54,200

 
58,692

Income taxes
2,455

 
5,946

Current maturities of long-term debt and short-term borrowings
21,181

 
13,978

Total current liabilities
137,414

 
124,097

Long-term debt
150,827

 
150,000

Deferred income taxes
40,269

 
15,348

Employee benefit plans
64,767

 
68,746

Other long-term liabilities
39,034

 
15,494

 
 
 
 
Commitments and contingencies (see Note 14)

 

 
 
 
 
Redeemable noncontrolling interest
5,045

 
5,407

 
 
 
 
Shareowners' equity:
 
 
 

Common stock (65,000 shares authorized, $.10 par value) outstanding (23,360 and 23,339, respectively)
2,336

 
2,333

Additional capital
153,822

 
144,609

Retained earnings
383,090

 
350,457

Accumulated other comprehensive loss
(57,489
)
 
(49,264
)
Total shareowners' equity
481,759

 
448,135

Noncontrolling interest
2,639

 
2,303

Total equity
484,398

 
450,438

Total liabilities and equity
$
921,754

 
$
829,530



See Notes to Condensed Consolidated Financial Statements.



7


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

(In thousands)
Six Months Ended
 
June 30, 2012
 
July 2, 2011
Cash flows from operating activities:
 
 
 
Net income
$
48,401

 
$
32,910

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 

Depreciation and amortization
12,885

 
12,729

Share-based compensation
3,056

 
2,216

Deferred income taxes
6,538

 
(909
)
(Gain)/loss on disposals of plant and equipment
(408
)
 
1,021

Gain on equity investment
(12,212
)
 

Asset impairment
420

 

Foreign exchange expense
655

 
1,358

Excess tax from share-based payment arrangements
(1,645
)
 
(659
)
Changes in assets and liabilities, net of acquisitions:
 
 
 

Receivables
(40,269
)
 
(35,294
)
Inventory
(30,155
)
 
(11,282
)
Accounts payable and accrued expenses
(1,160
)
 
3,913

Income taxes
(1,842
)
 
6,721

Employee benefit plans
(2,487
)
 
(9,138
)
Other
(958
)
 
2,280

Net cash flows from operating activities
(19,181
)
 
5,866

Cash flows from investing activities:
 

 
 

Additions to property, plant, and equipment
(11,456
)
 
(8,213
)
Proceeds from sale of property, plant, and equipment
1,149

 
307

Cash paid for acquisitions, net of cash acquired
(29,564
)
 
(24,869
)
Additional consideration for prior acquisition

 
(6,623
)
Loan to customer

 
(3,340
)
Proceeds from loan to customer
219

 

Net cash flows from investing activities
(39,652
)
 
(42,738
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of debt
21,742

 

Repayment of debt
(18,182
)
 
(52
)
Proceeds from issuance of common stock
4,582

 
3,423

Excess tax from share-based payment arrangements
1,645

 
659

Purchases of common stock
(8,687
)
 
(10,629
)
Dividends paid
(6,549
)
 
(6,167
)
Net cash flows from financing activities
(5,449
)
 
(12,766
)
Effect of exchange rate changes on cash
(2,805
)
 
3,741

Net change in cash and equivalents
(67,087
)
 
(45,897
)
Cash and equivalents at beginning of period
153,337

 
140,070

Cash and equivalents at end of period
$
86,250

 
$
94,173

 

8


Cash paid for income taxes
$
12,920

 
$
2,744

Cash paid for interest, net of capitalized interest of $68 and $0, respectively
$
4,539

 
$
4,614

 
 
 
 
Non-cash items:
 
 
 

Pioneer Pump Holdings, Inc. liability for mandatory share purchase
$
22,924

 
$

Payable to seller of Impo Motor Pompa Sanayi ve Ticaret A.S.
$
290

 
$
5,232

Payable to seller of Healy Systems, Inc.
$

 
$
516

Additions to property, plant, and equipment, not yet paid
$
87

 
$
943



See Notes to Condensed Consolidated Financial Statements.

 

9


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

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements as of June 30, 2012, and for the second quarter and six months ended June 30, 2012 and July 2, 2011, 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. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations.  In the opinion of management, all accounting entries and adjustments (including normal, recurring adjustments) considered necessary for a fair presentation of the financial position and the results of operation for the interim period have been made. Operating results for the second quarter and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2012. For further information, including a description of the Company’s critical accounting policies, refer to the consolidated financial statements and notes thereto included in Franklin Electric Co., Inc.'s Annual Report on Form 10-K for the year ended December 31, 2011.

2. ACCOUNTING PRONOUNCEMENTS
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-12 Comprehensive Income. The new guidance indefinitely defers certain provisions of ASU 2011-5 Statement of Comprehensive Income that required companies to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and the statement in which other comprehensive income is presented. The deferral does not change the primary provisions of ASU 2011-5, as described below. The Company adopted ASU 2011-12 on a retrospective basis, effective January 1, 2012. As the ASU addressed only disclosure requirements, adoption of ASU 2011-12 did not have a material impact on the Company's results of operations, financial position, or cash flows.

In September 2011, the FASB issued ASU 2011-8 Testing Goodwill for Impairment. The new guidance gives companies the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If the results of the qualitative assessment conclude that the fair value of the reporting unit is more likely than not less than the applicable carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be required. ASU 2011-8 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company will consider adoption of the ASU during its annual impairment testing conducted in the fourth quarter. As the ASU addresses only the assessment of impairment, adoption of ASU 2011-8 is not expected to impact the Company's results of operations, financial position, or cash flows.

In June 2011, the FASB issued ASU 2011-5 Statement of Comprehensive Income. The new guidance requires companies to present net income and comprehensive income in one continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted ASU 2011-5 on a retrospective basis, effective January 1, 2012, presenting comprehensive income in a separate statement following the statement of income. As the ASU addressed only disclosure requirements, adoption of ASU 2011-5 did not have a material impact on the Company's results of operations, financial position, or cash flows.

In May 2011, the FASB issued ASU 2011-4 Fair Value Measurement and Disclosure. The new guidance requires additional disclosures for Level 3 measurements including quantitative information about the significant unobservable inputs used in estimating fair value, a discussion of the sensitivity of the measurement to these inputs, and a description of the Company's valuation process. The Company adopted ASU 2011-4 on a prospective basis, effective January 1, 2012. As the ASU addressed only disclosure requirements, adoption of ASU 2011-4 did not have a material impact on the Company's results of operations, financial position, or cash flows.

3. ACQUISITIONS
In an agreement dated March 7, 2012, between the Company and Pioneer Pump Holdings, Inc. ("PPH"), the Company acquired an additional 39.5 percent of the outstanding shares of PPH, net of debt acquired, for approximately $30.3 million, subject to certain terms and conditions. The Company funded the acquisition with approximately $30.3 million in cash. The Company previously held a 31.0 percent equity interest in PPH (see Note 6). As a result of the additional acquisition, the Company's total equity interest in PPH increased to 70.5 percent, resulting in the consolidation of PPH in the Company's financial statements. Accordingly, the original equity interest in PPH was remeasured to its fair value of $23.9 million as of March 7, 2012, based on the income approach which utilized management estimates and consultation with an independent third-party valuation firm. Inputs included an analysis of the enterprise value based on financial projections and ownership percentages. As a result, the

10


Company recognized a one-time gain of $12.2 million in the "Other income/(expense)" line of the Company's condensed consolidated statement of income for the first quarter ended March 31, 2012.

PPH is the holding company for two wholly-owned subsidiaries, Pioneer Pump, Inc. ("PPI") located in Canby, Oregon, and Pioneer Pump, Ltd. ("PPL") located in Rattlesden, United Kingdom, which holds an additional subsidiary in Wadeville, Germiston, South Africa. PPH is a leader in the manufacture of large, engine-driven centrifugal pumps used for dewatering in oil and gas, municipal, construction, and mining applications.

The Company also entered into a further stock purchase agreement with the noncontrolling interest holders to purchase the remaining shares of PPH on or about, but no later than, March 31, 2015, for a purchase price based on a multiple of PPH's adjusted average earnings for 2013 and 2014 less net indebtedness. Accordingly, a resulting liability of $22.9 million was recorded in the "Other long-term liabilities" line of the Company's condensed consolidated balance sheet. Any required adjustments to the liability will be recorded in the "Interest expense" line of the Company's condensed consolidated statement of income. The mandatory share purchase liability remained recorded at the initial carrying amount as of June 30, 2012. As a result, no adjustments were necessary for the second quarter and six months ended June 30, 2012.

The intangible assets of $43.9 million consist primarily of customer relationships, which will be amortized utilizing the straight line method over 17 to 19 years, and trademarks, which are classified as indefinite lived assets and will not be amortized.

The preliminary goodwill of $26.3 million consists primarily of expanding sales of packaged systems products and the recording of deferred taxes related to acquired assets. PPH's presence in the oil and gas market will also complement the Company's initiative to introduce submersible pumping systems in this market. All of the goodwill was recorded as part of the Water Systems segment and is not expected to be deductible for tax purposes. Preliminary goodwill increased by $1.3 million during the second quarter ended June 30, 2012, due to purchase accounting adjustments to intangible assets resulting from additional information provided for the provisional valuation.

The preliminary purchase price assigned to each major identifiable asset and liability was as follows:
(In millions)
 
Assets:
 
Cash acquired
$
0.8

Current assets
38.2

Property, plant, and equipment
3.6

Intangible assets
43.9

Goodwill
26.3

Other assets
0.1

Total assets
112.9

Liabilities
(58.7
)
Total
54.2

Less: Fair value of original equity interest
(23.9
)
Total purchase price
$
30.3


The fair values of the identifiable intangible assets and property, plant, and equipment are provisional amounts pending final valuations and purchase accounting adjustments. The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation. Transaction costs were expensed as incurred under the guidance of FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations.  Transaction costs included in the "Selling, general, and administrative expenses" line of the Company’s condensed consolidated statement of income were $0.1 million for the six months ended June 30, 2012.

The results of operations of PPH were included in the Company's condensed consolidated statement of income, from the date of the latest acquisition by the Company of a controlling share in PPH through the second quarter ended June 30, 2012. The difference between actual sales for the Company and proforma sales including PPH as if it were acquired at the beginning of each period was not material as a component of the Company's consolidated sales for the six months ended June 30, 2012 and July 2, 2011, respectively. Due to the immaterial nature of the acquisition, the Company has not included full year proforma

11


statements of income for the acquisition year and previous year.

The fair values of the identifiable intangible assets and property, plant, and equipment for the 2011 Impo Motor Pompa Sanayi ve Ticaret A.S. (“Impo”) acquisition were final as of the first quarter ended March 31, 2012.  The Company utilized management estimates and consultation with an independent third-party valuation firm to assist in the valuation.  No adjustments were required as a result of the final valuation to the preliminary amounts previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

4. REDEEMABLE NONCONTROLLING INTERESTS
On May 2, 2011, the Company completed the acquisition of 80 percent of Impo. The noncontrolling interest holders have the option, which is embedded in the noncontrolling interest, to require the Company to redeem their ownership interests by May 2, 2014, three years after the original agreement was signed. The combination of a noncontrolling interest and a redemption feature resulted in a redeemable noncontrolling interest.

The 20 percent noncontrolling interest in Impo is redeemable at other than fair value as the redemption value is determined based on a specified formula.  The noncontrolling interest becomes redeemable after the passage of time, and therefore the Company records the carrying amount of the noncontrolling interest at the greater of (1) the initial carrying amount, increased or decreased for the noncontrolling interest's share of net income or loss and its share of other comprehensive income or loss and dividends (“carrying amount”) or (2) the redemption value which is determined based on the greater of the redemption floor value or the then-current specified earnings multiple.  As of June 30, 2012, the Impo redeemable noncontrolling interest was recorded at the carrying amount.
 
According to FASB ASC Topic 810, Consolidation and Emerging Issues Task Force ("EITF") Topic No. D-98, Classification and Measurement of Redeemable Securities, redeemable noncontrolling interests issued in the form of common securities, to the extent that the noncontrolling interest holder has a contractual right to receive an amount upon share redemption that is other than the fair value of such shares, then the noncontrolling interest holder has, in substance, received a dividend distribution that is different from other common shareholders. Therefore, adjustments to the noncontrolling interest to reflect the redemption amount should be reflected in the computation of earnings per share using the two-class method. Under the two-class method, the Company has elected to treat as a dividend only the portion of the periodic redemption value adjustment (if any) that reflects a redemption value in excess of fair value.  As the redeemable noncontrolling interest for Impo is recorded at the carrying amount, no adjustments were necessary for the second quarter and six months ended June 30, 2012. Adjustments totaling $0.2 million and $0.3 million resulting from the Company's previously held redeemable noncontrolling interest in Vertical S.p.A. ("Vertical") were necessary for the second quarter and six months ended July 2, 2011, respectively, and were included in the related earnings per share computations (see Note 11). The noncontrolling interest in Vertical was redeemed by the Company in the fourth quarter of 2011.

5. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820, Fair Value Measurements and Disclosures, provides guidance for defining, measuring, and disclosing fair value within an established framework and hierarchy. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard established a fair value hierarchy which requires an entity to maximize the use of observable inputs and to minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value within the hierarchy are as follows:

Level 1 – Quoted prices for identical assets and liabilities in active markets;

Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

12



As of June 30, 2012 and December 31, 2011, the assets and liabilities measured at fair value on a recurring basis were as set forth in the table below. The "Recognized Loss" amounts in the table are accumulated totals since inception.

 
 
 
(In millions)
 
June 30, 2012
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Recognized Loss
Cash equivalents
 
$
11.9

 
$
11.9

 
$

 
$

 
$

Derivative assets
 

 

 

 

 

Impo contingent consideration
 
5.3

 

 

 
5.3

 
0.7

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Recognized Loss
Cash equivalents
 
$
17.1

 
$
17.1

 
$

 
$

 
$

Derivative assets
 
0.1

 

 
0.1

 

 

Impo contingent consideration
 
5.0

 

 

 
5.0

 
0.7


The Company's Level 1 assets consist of cash equivalents which are comprised of domestic money market funds generally backed by treasury bills with fund prices readily observable and international high quality, highly liquid, bank guaranteed deposit accounts.

The Company's Level 2 assets consist of derivatives in the form of foreign currency forward contracts. The values were based on observable market inputs including forward and spot exchange rates for currencies. The contracts were marked-to-market with the resulting adjustments included in the "Other current assets" line on the condensed consolidated balance sheets and the "Foreign exchange income/(expense)" line of the condensed consolidated statements of income. The contracts were initiated to reduce exchange rate volatility associated with both future required payments and possible contingency payments.

The Company's Level 3 liabilities consist of an acquisition-related contingent consideration. During the second quarter of 2011, the Company recorded $5.5 million (TL 8.5 million) of contingent consideration related to the second quarter 2011 acquisition of Impo. The fair value of $5.3 million (TL 9.7 million) as of June 30, 2012, was based on the income approach which involved analyzing future earnings projections, the probability of Impo achieving specified financial targets, and a discount factor of 15.0 percent. The Company recognized the additional accretion charge in the "Interest expense" line of the condensed consolidated statement of income. An additional impact of $0.9 million was attributed to foreign exchange translation. The contingent consideration is included in the "Other long-term liabilities" line of the Company's condensed consolidated balance sheet.

13



As of June 30, 2012 and December 31, 2011, the assets measured at fair value on a nonrecurring basis were as set forth in the table below. The "Recognized Loss" amounts included in the table are accumulated totals since inception.

(In millions)
 
June 30, 2012
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs (Level 3)
 
 
 
 
Recognized Loss
Asset held for sale
 
$
1.1

 
$

 
$

 
$
1.1

 
$
3.6

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Recognized Loss
Asset held for sale
 
$
1.3

 
$

 
$

 
$
1.3

 
$
3.4


The Company's Level 3 assets consist of held for sale assets. The Company classified its former Siloam Springs manufacturing facility as held for sale and recorded the impairment as a restructuring expense on property, plant, and equipment during the second quarter of 2010. The current fair value reflects the sale price, less expected closing costs, at which the asset is currently under a letter of intent for sale that is expected to close during the second half of 2012. The valuation process utilized to generate the original listing price on the asset involved an appraisal, broker market commentary, and observation of recent comparable sales and current comparable listings. A listing price was selected that placed the property near the median of such values based on price per square foot. Accordingly, no unobservable inputs were a significant factor in the list price. Subsequent to this original valuation process, as a result of the passage of time, the price was reduced sequentially for price discovery in order for the transaction to clear at the highest price possible. The Company is unaware of alternative uses for the property that would be in excess of the sale price in the letter of intent.

6. OTHER ASSETS
In 2005, the Company acquired a 35.0 percent equity interest in PPI, which was accounted for using the equity method. During the first quarter of 2012, the shareholders of PPI and PPL contributed shares to form a new holding company, PPH, in exchange for equivalent value and control in PPH. As a result of this contribution, the Company's equity interest decreased to 31.0 percent of PPH. On March 7, 2012, the Company acquired a controlling interest in PPH, resulting in the consolidation of PPH in the Company's financial statements (see Note 3). The carrying amount of the equity investment prior to the acquisition of the controlling interest was $11.7 million as of March 6, 2012 and $11.0 million as of December 31, 2011.  The Company’s proportionate share of earnings, included in the “Other income/(expense)” line of the Company’s condensed consolidated statements of income, was $0.4 million through March 6, 2012 and $0.6 million and $1.1 million for the second quarter and six months ended July 2, 2011, respectively.

During the second quarter of 2011, the Company entered into a loan agreement with the parent of a customer.  The current maturity portion is included in the "Receivables" line while the long-term portion is included in the "Other assets" line of the Company's condensed consolidated balance sheets. The agreement provides for interest on the loan at a variable market interest rate with the customer to repay the loan plus interest in semi-annual installments throughout the seven-year term.  The Company has a long-term relationship with the customer and considers the loan fully collectible.

14



7. INTANGIBLE ASSETS AND GOODWILL
The carrying amounts of the Company's intangible assets are as follows:

(In millions)
 
June 30, 2012
 
December 31, 2011
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Amortized intangibles:
 
 

 
 

 
 

 
 

Patents
 
$
7.7

 
$
(5.5
)
 
$
7.8

 
$
(5.4
)
Supply agreements
 
4.4

 
(4.4
)
 
4.4

 
(4.4
)
Technology
 
7.5

 
(2.9
)
 
7.5

 
(2.7
)
Customer relationships
 
106.8

 
(19.6
)
 
78.7

 
(17.1
)
Software
 
1.0

 
(0.1
)
 
1.2

 

Other
 
1.1

 
(1.1
)
 
1.2

 
(1.1
)
Total
 
$
128.5

 
$
(33.6
)
 
$
100.8

 
$
(30.7
)
Unamortized intangibles:
 
 
 
 
 
 
 
 
Trade names
 
38.8

 

 
24.4

 

Total intangibles
 
$
167.3

 
$
(33.6
)
 
$
125.2

 
$
(30.7
)

Amortization expense related to intangible assets was $1.9 million and $1.7 million for the second quarters ended June 30, 2012 and July 2, 2011, respectively, and $3.4 million and $2.9 million for the six months ended June 30, 2012 and July 2, 2011, respectively.

Amortization expense is projected as follows:

(In millions)
 
2012
 
2013
 
2014
 
2015
 
2016
 
 
$
6.8

 
$
7.0

 
$
7.0

 
$
7.0

 
$
7.0


The change in the carrying amount of goodwill by reporting segment for the six months ended June 30, 2012, is as follows:

(In millions)
 
Water Systems
 
Fueling Systems
 
Consolidated
Balance as of December 31, 2011
 
$
109.9

 
$
58.9

 
$
168.8

Acquisitions
 
26.3

 

 
26.3

Adjustments to prior year acquisitions
 

 

 

Foreign currency translation
 
(1.8
)
 

 
(1.8
)
Balance as of June 30, 2012
 
$
134.4

 
$
58.9

 
$
193.3


The acquired goodwill in the Water Systems segment for the six months ended June 30, 2012, related to the Company's acquisition of PPH.

15



8. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans - As of June 30, 2012, the Company maintained two domestic pension plans and three German pension plans. The Company uses a December 31 measurement date for these plans.

Other Benefits - The Company's other postretirement benefit plan provides health and life insurance benefits to domestic employees hired prior to 1992.
 
Effective for 2012, the Company redesigned certain U.S. retirement plan offerings. The redesign was completed in order to increase standardization of retirement plans among U.S. salaried employees and to reduce the expected cash funding volatility of retirement plans, while at the same time keeping in place a competitive retirement plan offering to attract and retain talent. The Company achieved this by freezing benefit accruals under both the Basic Pension Plan and the Cash Balance Plan as of December 31, 2011, with the exception of a limited number of Basic Pension Plan participants who will still accrue benefits over a five-year sunset period. Also effective December 31, 2011, the Cash Balance Plan was closed to new participants (the Basic Retirement Plan was previously closed to new participants in 2006). The Basic Retirement Plan and Cash Balance Plan were merged effective December 31, 2011. As of January 1, 2012, the Company instituted a new service-based contribution, supplemental to the existing Company match for employees, into the defined contribution retirement plan offerings.

The following table sets forth the aggregated net periodic benefit cost for all pension plans for the second quarter and six months ended June 30, 2012 and July 2, 2011, respectively:

(In millions)
Pension Benefits
 
Second Quarter Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
Service cost
$
0.4

 
$
0.9

 
$
0.8

 
$
1.9

Interest cost
2.1

 
2.6

 
4.2

 
5.2

Expected return on assets
(2.6
)
 
(3.2
)
 
(5.2
)
 
(6.5
)
Amortization of transition obligation

 

 

 

Prior service cost

 

 

 
0.1

Loss
0.5

 
1.0

 
1.0

 
1.9

Total net periodic benefit cost
$
0.4

 
$
1.3

 
$
0.8

 
$
2.6



(In millions)
Other Benefits
 
Second Quarter Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
Service cost
$

 
$

 
$

 
$

Interest cost
0.2

 
0.1

 
0.3

 
0.3

Expected return on assets

 

 

 

Amortization of transition obligation
0.1

 

 
0.1

 
0.1

Prior service cost
0.1

 

 
0.2

 

Loss

 

 

 

Total net periodic benefit cost
$
0.4

 
$
0.1

 
$
0.6

 
$
0.4


In the six months ended June 30, 2012, the Company made contributions to the funded plans of $2.9 million. The amount of contributions to be made to the plans during calendar year 2012 will be finalized September 15, 2012, based upon the plans' year-end valuation at December 31, 2011, and the funding level required for the plan year ended December 31, 2011.

16



9. INCOME TAXES
The effective tax rate continues to be lower than the United States statutory rate of 35 percent primarily due to the indefinite reinvestment of foreign earnings taxed at rates below the U.S. statutory rate as well as recognition of foreign tax credits.  The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations as well as cash on hand and available credit.

As of the beginning of fiscal year 2012, the Company had gross unrecognized tax benefits of $5.6 million, excluding accrued interest and penalties.  The unrecognized tax benefits decreased by $0.5 million for state income tax liabilities and $0.3 million for federal income tax liabilities based on state audits settled and evaluations made during the first half of 2012.  The Company had gross unrecognized tax benefits, excluding accrued interest and penalties, of $4.8 million as of June 30, 2012.

If recognized, the annual effective tax rate would be affected by the net unrecognized tax benefits of $4.6 million as of June 30, 2012.

Of the unrecognized tax benefits at June 30, 2012, $2.8 million are related to acquisitions for which indemnification was provided for in the respective purchase agreements.  The stock purchase agreements related to these acquisitions provide the Company with rights to recover tax liabilities related to pre-acquisition tax years from the sellers.  Other amounts are associated with domestic state tax issues, such as nexus, as well as other federal and state uncertain tax positions.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense, the impact of which is immaterial.  The Company has accrued interest and penalties as of June 30, 2012 and December 31, 2011, of approximately $0.4 million and $0.5 million, respectively.

The Company is subject to taxation in the United States and various state and foreign jurisdictions. With few exceptions, as of June 30, 2012, the Company is no longer subject to U.S. federal, state, or foreign income tax examinations by tax authorities for years before 2008.

It is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months as a result of an audit or due to the future expiration of a statute of limitation. Based on the current audits in process and pending statute expirations, the payment of taxes as a result could be up to $0.9 million.

10. DEBT
Debt consisted of the following:

(In millions)
 
June 30, 2012
 
December 31, 2011
Prudential Agreement - 5.79 percent
 
$
150.0

 
$
150.0

Capital leases
 
1.1

 
0.3

Subsidiary debt
 
20.9

 
13.7

 
 
172.0

 
164.0

Less current maturities
 
(21.2
)
 
(14.0
)
Long-term debt
 
$
150.8

 
$
150.0


During the first quarter, the Company assumed $4.1 million of debt with the PPH acquisition. PPH has a short-term line of credit which expires in September 2012. Maximum borrowings available on the line of credit are $8.0 million. As of June 30, 2012, the outstanding balance on the line of credit was approximately $4.2 million. The line of credit is secured by all assets of PPH with an interest rate of the one month London Interbank Offered Rate ("LIBOR") plus 2.0 percent. PPH also has a term loan of $0.1 million with an interest rate of 6.97 percent payable in monthly installments. The debt at second quarter end was included in the "Subsidiary debt" line of the above table.

During the second quarter, the Company's prior year acquisition, Impo, incurred additional borrowings on previously available credit. As of June 30, 2012, Impo had short-term debt outstanding of approximately $16.5 million. The debt at second quarter end was included in the “Subsidiary debt” line of the above table.

17



The total estimated fair value of debt was $187.7 million and $179.2 million at June 30, 2012 and December 31, 2011, respectively.  The fair value assumed floating rate debt was valued at par. In the absence of quoted prices in active markets considerable judgment is required in developing estimates of fair value.  Estimates are not necessarily indicative of the amounts the Company could realize in a current market transaction.  In determining the estimated fair value of its long-term debt, the Company uses various inputs including estimated borrowing rates currently available to the Company that reflect debt with similar terms, conditions, and remaining maturities as well as the current credit quality of the Company. Accordingly, the fair value of debt is classified as a Level 2 within the valuation hierarchy.

The following debt payments are expected to be paid in accordance with the following schedule:

(In millions) 
 
Total
 
Year 1
 
Year 2
 
Year 3
 
Year 4
 
Year 5
 
More than 5 years
Debt
 
$
170.9

 
$
20.9

 
$

 
$

 
$
30.0

 
$
30.0

 
$
90.0

Capital leases
 
1.1

 
0.3

 
0.2

 
0.2

 
0.2

 
0.2

 

 
 
$
172.0

 
$
21.2

 
$
0.2

 
$
0.2

 
$
30.2

 
$
30.2

 
$
90.0


11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:

(In millions, except per share amounts)
 
Second Quarter Ended
 
Six Months Ended
 
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to Franklin Electric Co., Inc.
 
$
24.8

 
$
21.7

 
$
47.9

 
$
32.3

Less: Undistributed earnings allocated to redeemable noncontrolling interest
 

 
0.2

 

 
0.3

 
 
$
24.8

 
$
21.5

 
$
47.9

 
$
32.0

Denominator:
 
 

 
 

 
 
 
 
Basic
 
 

 
 

 
 
 
 
Weighted average common shares
 
23.4

 
23.2

 
23.4

 
23.2

Diluted
 
 

 
 

 
 
 
 
Effect of dilutive securities:
 
 

 
 

 
 
 
 
Employee and director incentive stock options and stock/stock unit awards
 
0.5

 
0.5

 
0.5

 
0.5

Adjusted weighted average common shares
 
23.9

 
23.7

 
23.9

 
23.7

Basic earnings per share
 
$
1.06

 
$
0.92

 
$
2.05

 
$
1.38

Diluted earnings per share
 
$
1.04

 
$
0.91

 
$
2.00

 
$
1.35

Anti-dilutive stock options
 
0.1

 
0.3

 
0.1

 
0.3


18



12. EQUITY ROLL FORWARD
The schedule below sets forth equity changes for the six months ended June 30, 2012:

(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Description
 
Common
 
Additional Paid in Capital
 
Retained Earnings
 
Minimum Pension Liability
 
Cumulative Translation Adjustment
 
Non
controlling Interest
 
Total Equity
 
Redeemable Non
controlling Interest
Balance as of December 31, 2011
 
$
2,333

 
$
144,609

 
$
350,457

 
$
(47,219
)
 
$
(2,045
)
 
$
2,303

 
$
450,438

 
$
5,407

Net income
 
 

 
 

 
47,851

 
 

 
 

 
214

 
48,065

 
336

Dividends on common stock
 
 
 
 
 
(6,549
)
 
 

 
 

 
 

 
(6,549
)
 
 

Common stock issued
 
18

 
4,564

 
 

 
 

 
 

 
 

 
4,582

 
 

Common stock repurchased or received for stock options exercised
 
(18
)
 
 

 
(8,669
)
 
 

 
 

 
 

 
(8,687
)
 
 

Share-based compensation
 
3

 
3,053

 
 

 
 

 
 

 
 

 
3,056

 
 

Tax benefit of stock options exercised
 
 
 
1,596

 
 

 
 

 
 

 
 

 
1,596

 
 

Currency translation adjustment
 
 
 
 
 
 
 
 

 
(8,939
)
 
122

 
(8,817
)
 
(698
)
Pension liability, net of taxes
 
 
 
 
 
 

 
714

 
 

 
 

 
714

 
 

Balance as of
June 30, 2012
 
$
2,336

 
$
153,822

 
$
383,090

 
$
(46,505
)
 
$
(10,984
)
 
$
2,639

 
$
484,398

 
$
5,045


19



13. SEGMENT INFORMATION
Financial information by reportable business segment is included in the following summary:

 
Second Quarter Ended
 
Six Months Ended
(In millions)
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
 
Net sales to external customers
Water Systems
$
202.8

 
$
183.5

 
$
367.8

 
$
330.7

Fueling Systems
43.9

 
40.6

 
80.8

 
78.7

Other

 

 

 

Consolidated
$
246.7

 
$
224.1

 
$
448.6

 
$
409.4

 
 
 
 
 
 
 
 
 
Second Quarter Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
 
Operating income (loss)
Water Systems
$
40.1

 
$
36.3

 
$
66.8

 
$
57.7

Fueling Systems
9.0

 
7.3

 
14.6

 
12.6

Other
(11.6
)
 
(10.8
)
 
(22.9
)
 
(21.6
)
Consolidated
$
37.5

 
$
32.8

 
$
58.5

 
$
48.7

 
 
 
 
 
 
 
 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
 
Total assets
 
 
 
 
Water Systems
$
671.2

 
$
535.3

 
 
 
 
Fueling Systems
228.9

 
222.2

 
 
 
 
Other
21.7

 
72.0

 
 
 
 
Consolidated
$
921.8

 
$
829.5

 
 
 
 

Cash is the major asset group in “Other” of total assets.

14. CONTINGENCIES AND COMMITMENTS
In August 2010, the California Air Resources Board (“CARB”) filed a civil complaint in the Los Angeles Superior Court against the Company and Franklin Fueling Systems, Inc. (a wholly-owned subsidiary of the Company).  The complaint relates to a third-party-supplied component part of the Company's Healy 900 Series nozzle, which is part of the Company's Enhanced Vapor Recovery (“EVR”) Systems installed in California gasoline filling stations.  This part, a diaphragm, was the subject of a retrofit during the first half of 2008.  As the Company previously reported, in October 2008 CARB issued a Notice of Violation to the Company alleging that the circumstances leading to the retrofit program violated California statutes and regulations.  The Company and CARB worked to resolve the diaphragm matter without court action, but were unable to reach agreement.

The claims in the complaint mirror those that CARB presented to the Company in the Notice of Violation, and include claims that the Company negligently and intentionally sold nozzles with a modified diaphragm without required CARB certification.  The Company believes that, throughout the period to which the complaint relates, it acted in full cooperation with CARB and in the best interests of CARB's vapor emissions control program.  Although the complaint seeks penalties of at least $25.0 million, it is the Company's position that there is no reasonable basis for penalties of this amount.
 
In addition, as the Company has previously reported, the Sacramento Metropolitan Air Quality Management District (“SMAQMD”) issued a Notice of Violation to the Company concerning the diaphragm matter in March 2008.  Discussions with that agency about the circumstances leading to the retrofit in its jurisdiction and the resolution of the agency's concerns did not result in agreement, and in November 2010 SMAQMD filed a civil complaint in the Sacramento Superior Court, mirroring the claims brought by CARB with respect to the diaphragm issue and also alleging violation of SMAQMD rules.  SMAQMD's suit asks for at least $5.0 million in penalties for the violations claimed in its jurisdiction.

20



In July 2010, the Company entered into a tolling agreement with the South Coast Air Quality Management District (“SCAQMD”) and began discussions with that agency about the circumstances leading to the retrofit in its jurisdiction and the resolution of the agency's concerns.  Those discussions did not result in agreement and in December 2010, SCAQMD filed a civil complaint against the Company in Los Angeles Superior Court.  The complaint alleges violations of California statutes and regulations, similar to the complaint filed by CARB, as well as violation of SCAQMD rules, and seeks penalties of at least $12.5 million.  The SCAQMD complaint does not allege an intentional violation of any statute, rule, or regulation. This case has now been consolidated with the CARB case in Los Angeles Superior Court.
 
The Company believes that there is no reasonable basis for the amount of penalties claimed in the SMAQMD and SCAQMD suits.  The Company has answered the SMAQMD and SCAQMD complaints, as well as the CARB complaint, denying liability and asserting affirmative defenses. Discovery in all these cases commenced but has been stayed until October 31, 2012, and the consolidated CARB and SCAQMD cases are set for trial on December 17, 2012.

Neither CARB's filing of its suit nor the air district suits have any effect on CARB's certification of the Company's EVR System or any other products of the Company or its subsidiaries, and so do not interfere with continuing sales.  CARB has never decertified the Company's EVR System and does not propose to do so now.
 
The Company remains willing to discuss these matters and work toward resolving them.  The Company cannot predict the ultimate outcome of discussions to resolve these matters or any proceedings with respect to them.  Penalties awarded in the CARB or any air district proceedings or payments resulting from a settlement of these matters, depending on the amount, could have a material effect on the Company's results of operations, financial position, and net cash flows.
 
On July 31, 2009, Sta-Rite Industries, LLC and Pentair, Inc. filed an action against the Company in the U.S. District Court for the Northern District of Ohio, alleging breach of the parties' 2004 Settlement Agreement and tortious interference with contract based on the Company's pricing of submersible electric products and seeking damages in excess of $10.0 million for each claimant.  The Company has denied liability, is defending the case vigorously, and has filed a counterclaim alleging Sta-Rite and Pentair's breach of the same Settlement Agreement.  Both the Company and Sta-Rite/Pentair filed Motions for Summary Judgment. The judge granted the Company's motion and dismissed Sta-Rite/Pentair's claims against it in September 2011. The judge also granted Sta-Rite/Pentair's motion for summary judgment and dismissed the Company's counterclaim. Sta-Rite/Pentair is appealing the dismissal of its claims.  The Company cannot predict the ultimate outcome of this litigation, and any settlement or adjudication of this matter, depending on the amount, could have a material effect on the Company's results of operations, financial position, and net cash flows.

The Company is defending various other claims and legal actions, including environmental matters, which have arisen in the ordinary course of business. In the opinion of management, based on current knowledge of the facts and after discussion with counsel, these claims and legal actions can be successfully defended or resolved without a material adverse effect on the Company’s results of operations, financial position, and net cash flows.

As of June 30, 2012, the Company had $33.7 million of commitments primarily for the purchase of machinery and equipment as well as conditional agreements related to building expansions.

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. In 2007, the Company began offering an extended warranty program to certain Water Systems customers which provides warranty coverage up to five years from the date of manufacture. 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 the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.

21



The changes in the carrying amount of the warranty accrual, as recorded in the "Accrued expenses" line of the Company's condensed consolidated balance sheet for the six months ended June 30, 2012, are as follows:
 
(In millions)
 
 
Beginning balance
 
$
9.9

Accruals related to product warranties
 
3.0

Additions related to acquisitions
 
0.3

Reductions for payments made
 
(3.5
)
Ending balance
 
$
9.7


15. SHARE-BASED COMPENSATION
On May 4, 2012, the Franklin Electric Co., Inc. 2012 Stock Plan (the “2012 Stock Plan”) was approved by the Company’s shareholders.  The Board of Directors of the Company had approved the 2012 Stock Plan on February 24, 2012. The 2012 Stock Plan is a stock-based compensation plan that provides for discretionary grants of stock options, stock awards, and stock unit awards to key employees and non-employee directors.  The 2012 Stock Plan authorizes 1,200,000 shares for issuance as follows:

2012 Stock Plan
 
Authorized Shares
Stock Options
 
840,000
Stock/Stock Unit Awards
 
360,000

The Company also maintains the Amended and Restated Franklin Electric Co., Inc. Stock Plan (the "Stock Plan") which, as amended in 2009, provided for discretionary grants of stock options and stock awards. The Stock Plan authorized 2,200,000 shares for issuance as follows:

Stock Plan
 
Authorized Shares
Stock Options
 
1,600,000
Stock Awards
 
600,000

All options remaining for grant under the Stock Plan were awarded during the first six months of 2012. The Company currently issues new shares from its common stock balance to satisfy option exercises and stock and stock unit awards under the 2012 Stock Plan and the Stock Plan.

Stock Options:
The fair value of each option award 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.

The assumptions used for the Black-Scholes model to determine the fair value of options granted during the six months ended June 30, 2012 and July 2, 2011, are as follows:

 
 
June 30, 2012
 
July 2, 2011
Risk-free interest rate
 
1.01
%
 
2.49
%
Dividend yield
 
1.12
%
 
1.23
%
Volatility factor
 
0.388

 
0.431

Expected term
 
6.0 years

 
6.3 years

Forfeiture rate
 
3.99
%
 
3.59
%

There were 124,487 stock options granted during the second quarter ended June 30, 2012.

22



A summary of the Company’s outstanding stock option activity and related information for the six months ended June 30, 2012 and July 2, 2011, is as follows:

(Shares in thousands)
 
June 30, 2012
 
July 2, 2011
 
 
Stock Options
 
Shares
 
Weighted-Average Exercise Price
 
Shares
 
Weighted-Average Exercise Price
Outstanding at beginning of period
 
1,569

 
$
29.66

 
1,817

 
$
27.95

Granted
 
125

 
48.19

 
113

 
43.43

Exercised
 
(169
)
 
25.59

 
(117
)
 
26.45

Forfeited
 
(33
)
 
29.05

 
(9
)
 
36.81

Outstanding at end of period
 
1,492

 
$
31.72

 
1,804

 
$
28.97

Expected to vest after applying forfeiture rate
 
1,478

 
$
31.65

 
1,780

 
$
28.99

Vested and exercisable at end of period
 
1,092

 
$
30.84

 
1,255

 
$
30.05


A summary of the weighted average remaining contractual term and aggregate intrinsic value for the six months ended June 30, 2012, is as follows:

 
 
Stock Options
 
Weighted-Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
(000’s)
Outstanding end of period
 
5.71 years
 
$
28,971

Expected to vest after applying forfeiture rate
 
5.68 years
 
$
28,777

Vested and exercisable end of period
 
4.79 years
 
$
22,159


The total intrinsic value of options exercised during the second quarters ended June 30, 2012 and July 2, 2011, was $4.2 million and $1.4 million, respectively.

As of June 30, 2012, there was $3.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans related to stock options.  That cost is expected to be recognized over a weighted-average period of 2.06 years.

Stock/Stock Unit Awards:
A summary of the Company’s outstanding restricted stock/stock unit award activity and related information for the six months ended June 30, 2012 and July 2, 2011, is as follows:

(Shares in thousands)
 
June 30, 2012
 
July 2, 2011
Stock/Stock Unit Awards
 
 
Shares
 
Weighted-Average Grant-
Date Fair Value
 
 
Shares
 
Weighted-Average Grant-
Date Fair Value
Non-vested at beginning of period
 
172

 
$
34.47

 
128

 
$
31.86

Awarded
 
88

 
48.56

 
68

 
43.40

Vested
 
(36
)
 
31.74

 
(3
)
 
39.12

Forfeited
 
(9
)
 
36.95

 
(20
)
 
47.41

Non-vested at end of period
 
215

 
$
40.63

 
173

 
$
34.44


As of June 30, 2012, there was $5.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans related to stock/stock unit awards.  That cost is expected to be recognized over a weighted-average period of 3.04 years.

23



16. RESTRUCTURING
In June 2011, the Company announced Phase IV of the Global Manufacturing Realignment Program. The Company transferred approximately 260,000 annual man hours of manufacturing activity from the Oklahoma City, Oklahoma facility primarily to the Linares, Mexico facility with a small portion transferred to another Oklahoma City based facility. Transfers related to the Oklahoma City facility were substantially complete at the end of the first quarter 2012. The Company also expects to incur miscellaneous expenses associated with realignments and movements of manufacturing and distribution facilities in a variety of international locations, including the relocation to a new manufacturing facility in Joinville, Brazil.
 
The Company has estimated the pretax charge for Phase IV to be between $2.6 million and $5.2 million, of which $1.2 million to $3.5 million is for closing the Oklahoma City manufacturing facility. Charges related to Phase IV began in the second quarter of 2011 and will substantially end in the fourth quarter 2012 and include severance, pension curtailments, asset write-offs, and equipment relocation. The Company expects approximately 50.0 to 60.0 percent of the charges will be non-cash.

Costs incurred in the second quarter and six months ended June 30, 2012, included in the “Restructuring (income)/expense” line of the Company's condensed consolidated statements of income, are as follows:

(In millions)
 
Second Quarter Ended
 
 
June 30, 2012
 
 
Water Systems
 
Fueling Systems
 
Other
 
Consolidated
Equipment relocation
 
$

 
$

 
$

 
$

Asset write-off
 

 

 

 

Asset sale
 

 

 

 

Other
 
0.1

 

 

 
0.1

Total
 
$
0.1

 
$

 
$

 
$
0.1


(In millions)
 
Six Months Ended
 
 
June 30, 2012
 
 
Water Systems
 
Fueling Systems
 
Other
 
Consolidated
Equipment relocation
 
$
0.1

 
$

 
$

 
$
0.1

Asset write-off
 
0.2

 

 

 
0.2

Asset sale
 
(0.4
)
 

 

 
(0.4
)
Other
 
0.1

 

 

 
0.1

Total
 
$

 
$

 
$

 
$


Restructuring expenses of $0.5 million and $0.9 million were incurred in the second quarter and six months ended July 2, 2011, respectively, primarily for the Water Systems realignment.

As of June 30, 2012, there were no restructuring reserves. As of July 2, 2011, there was $0.1 million in restructuring reserves primarily for severance.


24


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Second Quarter 2012 vs. Second Quarter 2011

OVERVIEW

Sales and earnings for the second quarter of 2012 were up from the same quarter last year.  The sales increase was primarily related to the Company's acquisitions, PPH and Impo, as well as sales volume and price increases. The Company's consolidated gross profit was $84.3 million for the second quarter of 2012, an increase of $7.1 million or about 9 percent from the second quarter of 2011.

RESULTS OF OPERATIONS

Net Sales
Net sales for the second quarter of 2012 were $246.7 million, an increase of $22.6 million or 10 percent compared to 2011 second quarter sales of $224.1 million.  The incremental impact of sales from businesses acquired since the first quarter of 2011 was $20.7 million or about 9 percent.  Sales revenue decreased by $12.0 million or about 5 percent in the second quarter of 2012 due to foreign currency translation. The sales change for the second quarter of 2012, excluding acquisitions and foreign currency translation, was an increase of $13.9 million or about 6 percent.

(In millions)
Q2 2012
 
Q2 2011
 
2012 v 2011
 
Net Sales
Water Systems
$
202.8

 
$
183.5

 
$
19.3

Fueling Systems
43.9

 
40.6

 
3.3

Consolidated
$
246.7

 
$
224.1

 
$
22.6


Net Sales-Water Systems
Water Systems revenues were $202.8 million in the second quarter 2012, an increase of $19.3 million or about 11 percent versus the second quarter 2011. Sales from businesses acquired since the first quarter of 2011 were $20.7 million or 11 percent. Water Systems sales were reduced by $10.5 million in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was 5 percent.

Water Systems sales in the U.S. and Canada were 39 percent of consolidated sales and grew by about 5 percent compared to the second quarter of the prior year. Leading the Company's growth in the U.S. and Canada were sales of pumping systems for industrial and irrigation applications, which increased by about 18 percent during the second quarter compared to the second quarter of the prior year. Favorable planting conditions in the early spring, combined with hot and dry conditions in much of the U.S. and Canada since then, have resulted in strong demand for agricultural irrigation products. Sales of electronic drives increased by about 28 percent in the second quarter as more end users purchase these devices to control water pressure, reduce energy costs, and increase pumping system life. Sales of pumping systems for residential and light commercial groundwater increased by about 14 percent compared to the second quarter of the prior year due primarily to ongoing market share gains. Wastewater pump sales in the U.S. and Canada continued to be lower as drier weather reduced demand for residential sump, sewage, and effluent pumps compared to the prior year.

Water Systems sales in Latin America were about 11 percent of consolidated sales for the quarter and were flat compared to the second quarter of the prior year, but the organic sales increase was about 9 percent in local currencies offset by foreign currency translation impacts. Organic sales growth in Brazil was particularly strong, driven in part by the launch of several product lines including submersible pumps and motors and a new line of energy efficient residential booster pumps. The Company's newly opened distribution center in Chile also contributed to the organic sales growth during the quarter. Sales in Argentina benefited as distributors stocked up on Franklin motors in anticipation of possible future import restrictions.

Water Systems sales in the Asia Pacific region were 5 percent of consolidated sales and declined by about 8 percent compared to the second quarter prior year after increasing by 20 percent in the first quarter of 2012 compared to the first quarter of 2011. The Asia Pacific sales decline was at least partially the result of sales pulled forward in the first quarter to avoid price increases that took place during the second quarter.

25



Water Systems sales in EMENA, which is Europe, the Middle East, and North Africa, were 16 percent of consolidated sales and grew by 1 percent compared to the second quarter 2011. EMENA's organic sales growth rate was about 5 percent. Organic sales growth in the Middle East, North Africa, and Eastern Europe was more than enough to offset organic sales declines in Western Europe.

Water Systems sales in Southern Africa represented 4 percent of consolidated sales during the second quarter and were down about 7 percent compared to the same quarter of the prior year. The sales reduction was caused by foreign currency translation as the second quarter organic sales growth rate in Southern Africa was 11 percent. In recent quarters the Company has invested in equipment to improve the quality and availability of progressive cavity pumps in South Africa and sales of these products grew sharply during the second quarter.

Net Sales-Fueling Systems
Fueling Systems sales were $43.9 million or 18 percent of consolidated sales in the second quarter 2012 and increased about 8 percent from the second quarter 2011. Fueling Systems sales were reduced by $1.5 million in the quarter due to foreign currency translation. Fueling Systems sales growth, excluding foreign currency translation, was about 12 percent. This growth was driven primarily by strong shipments of fuel pumping systems in the Asia Pacific region where the Company was awarded a large supply contract with a state owned oil company, continued mid-single digit sales growth in the U.S. and Canada, and strong customer demand for a number of new products including the Colibri® and TS 550 evo® fuel management systems and the new Gemini® fuel containment system.

Last quarter, the Company commented about a shortage in a critical resin material called Nylon 12 used in underground fueling pipe and containment systems.  Since then, the Company has re-established inventory levels and has strengthened the supply chain to meet expected demand through 2012. The Company also believes that the Evonik Industries plant that was originally damaged and caused the shortage will resume production sometime in the fourth quarter, restoring the supplier's capacity of Nylon 12.  As a result, the Company does not believe Fueling Systems sales in the back half of 2012 will be impacted negatively by a lack of supply of Nylon 12.

Cost of Sales
Cost of sales as a percent of net sales for the second quarter of 2012 and 2011 was 65.8 percent and 65.5 percent, respectively. Correspondingly, the gross profit margin decreased to 34.2 percent from 34.5 percent, a 30 basis point decline. The gross profit margin decline in percentage terms was due to the acquisition of PPH which has a slightly lower gross profit margin. The Company's consolidated gross profit was $84.3 million for the second quarter of 2012, up $7.1 million from the gross profit of $77.2 million in the second quarter of 2011.

Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative expenses were $46.8 million in the second quarter of 2012 compared to $43.9 million from the second quarter of 2011, an increase of $2.9 million or about 7 percent. The increase can be attributed to businesses acquired since the first quarter of 2011.

Restructuring Expenses
Restructuring expenses for the second quarter of 2012 were $0.1 million and had no impact on diluted earnings per share. Restructuring expenses in the second quarter of 2012 were related to the Siloam Springs, Arkansas, facility. Restructuring expenses for the second quarter of 2011 were $0.5 million and reduced diluted earnings per share by approximately $0.01. Restructuring expenses in the second quarter of 2011 included asset write-down and severance cost.

Operating Income
Operating income was $37.5 million in the second quarter of 2012, up $4.7 million or 14 percent from $32.8 million for the second quarter 2011.

(In millions)
 
Q2 2012
 
Q2 2011
 
2012 v 2011
 
 
Operating income (loss)
Water Systems
 
$
40.1

 
$
36.3

 
$
3.8

Fueling Systems
 
9.0

 
7.3

 
1.7

Other
 
(11.6
)
 
(10.8
)
 
(0.8
)
Consolidated
 
$
37.5

 
$
32.8

 
$
4.7


26



There were a number of specific items in the second quarter of 2012 and 2011 that impacted operating income that were not operational in nature.  In 2012 they were as follows:

In the second quarter of 2012, there was $0.8 million in additional cost of sales recognized on sold acquired inventory that was increased to fair value as required by GAAP related to the PPH transaction that was considered non-operational.
The second quarter of 2012 included $0.1 million in restructuring charges.
 
In 2011 they were as follows:

The second quarter of 2011 included $0.5 million of restructuring charges.

The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of operating income after non-GAAP adjustments and percent operating income after non-GAAP adjustments to net sales.  The Company believes this information helps investors understand underlying trends in the Company's business more easily.  The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables:

Operating Income and Margins
 
 
 
 
Before and After Non-GAAP Adjustments
 
 
 
 
(in millions)
For the Second Quarter 2012
 
Water
Fueling
Corporate
Consolidated
Reported Operating Income
$
40.1

$
9.0

$
(11.6
)
$
37.5

% Operating Income to Net Sales
19.8
%
20.5
%
 
15.2
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
0.1

$

$

$
0.1

Acquisition related items
$
0.8

$

$

$
0.8

Operating Income after Non-GAAP Adjustments
$
41.0

$
9.0

$
(11.6
)
$
38.4

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
20.2
%
20.5
%
 
15.6
%
 
 
 
 
 
 
For the Second Quarter 2011
 
Water
Fueling
Corporate
Consolidated
Reported Operating Income
$
36.3

$
7.3

$
(10.8
)
$
32.8

% Operating Income to Net Sales
19.8
%
18.0
%
 
14.6
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$
0.5

$

$

$
0.5

Acquisition related items
$

$

$

$

Operating Income after Non-GAAP Adjustments
$
36.8

$
7.3

$
(10.8
)
$
33.3

% Operating Income to Net Sales after Non-GAAP Adjustments (Operating Income Margin after Non-GAAP Adjustments)
20.1
%
18.0
%
 
14.9
%

Operating Income-Water Systems
Water Systems operating income after non-GAAP adjustments was $41.0 million in the second quarter 2012, an increase of 11 percent versus the second quarter 2011. The second quarter operating income margin after non-GAAP adjustments was 20.2 percent and was up modestly compared to the second quarter of 2011.

27



Operating Income-Fueling Systems
Fueling Systems operating income after non-GAAP adjustments was $9.0 million in the second quarter of 2012 compared to $7.3 million after non-GAAP adjustments in the second quarter of 2011, an increase of 23 percent. The second quarter operating income margin after non-GAAP adjustments was 20.5 percent and increased by 250 basis points compared to the 18.0 percent of net sales in the second quarter 2011. This profit improvement can be attributed to a combination of solid sales growth, expense control, and effective first quarter pricing actions.

Operating Income-Other
Operating income-other is composed primarily of unallocated general and administrative expenses.  General and administrative expenses increased due to higher systems expenses and increases due to higher performance based and stock based compensation expenses.

Interest Expense
Interest expense for both the second quarter of 2012 and 2011 was $2.4 million.

Other Income or Expense
Other income or expense was a gain of $0.5 million in the second quarter of 2012 and a gain of $0.9 million in the second quarter of 2011.  Included in other income for the second quarter of 2012 was interest income of $0.7 million, primarily derived from the investment of cash balances in short-term securities. Included in other income for the second quarter of 2011 was income from equity investments of $0.6 million and interest income of $0.6 million, primarily derived from the investment of cash balances in short-term securities.

Foreign Exchange
Foreign currency-based transactions produced a loss for the second quarter of 2012 of $0.4 million. The loss was primarily due to rate changes in the Mexican peso relative to the U.S. dollar.  Foreign currency-based transactions produced a loss for the second quarter of 2011 of $0.9 million, primarily due to euro and Canadian dollar rate changes relative to the U.S. dollar.  

Income Taxes
The provision for income taxes in the second quarter of 2012 and 2011 was $10.0 million and $8.4 million, respectively. The effective tax rate for the second quarter 2012 was about 28.5 percent, which the Company believes is also a reasonable estimate for full year 2012. The projected tax rate is higher than the first quarter 2012 tax rate of about 27.3 percent due to the stronger U.S. dollar which in effect reduces foreign earnings when translated to U.S. dollars and has increased the percentage of U.S. based earnings on a consolidated basis. The tax rate continues to be lower than the statutory rate of 35 percent primarily due to the indefinite reinvestment of certain foreign earnings and reduced taxes on foreign and repatriated earnings after the restructuring of certain foreign entities. The Company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations, current cash on hand, and available credit.

Net Income
Net income for the second quarter of 2012 was $25.2 million compared to 2011 second quarter net income of $22.0 million.  Net income attributable to Franklin Electric Co., Inc. for the second quarter of 2012 was $24.8 million, or $1.04 per diluted share, compared to 2011 second quarter net income attributable to Franklin Electric Co., Inc. of $21.7 million or $0.91 per diluted share.

First Half of 2012 vs. First Half of 2011

OVERVIEW

Sales and earnings in the first half of 2012 were up from the same period last year.  The sales increase was related to the Company's acquisitions, as well as, sales volume and price increases, partially offset by the impact of foreign currency translation. The Company's consolidated gross profit was $150.6 million for the first half of 2012, an increase of $12.9 million or about 9 percent from the first half of 2011.

28



The Company's first half of 2012 earnings include a gain on the previously held equity investment in PPH as indicated in the announcement made on March 7, 2012, regarding the acquisition of a controlling interest in PPH. This gain, included in "Other income/(expense)" in the Company's statement of income, represents about $12 million of pre-tax earnings or $0.37 earnings per share. Consistent with the terms of the stock purchase agreement between the Company and the minority shareholders and current GAAP guidance, the Company has included the liability to purchase the remaining shares, representing about 30 percent of the outstanding PPH stock, in "Other long-term liabilities".

RESULTS OF OPERATIONS

Net Sales
Net sales in the first half of 2012 were $448.6 million, an increase of $39.2 million or about 10 percent compared to 2011 first half sales of $409.4 million.  The incremental impact of sales from acquired businesses was $33.8 million or about 8 percent.  Sales revenue decreased by $16.2 million or about 4 percent in the first half of 2012 due to foreign currency translation. The sales change in the first half of 2012, excluding acquisitions and foreign currency translation, was an increase of $21.6 million or about 5 percent.

(In millions)
YTD
June 30, 2012
 
YTD
July 2, 2011
 
2012 v 2011
 
Net Sales
Water Systems
$
367.8

 
$
330.7

 
$
37.1

Fueling Systems
80.8

 
78.7

 
2.1

Consolidated
$
448.6

 
$
409.4

 
$
39.2


Net Sales-Water Systems
Water Systems sales were $367.8 million in the first half 2012, an increase of $37.1 million or about 11 percent versus the first half 2011. The incremental impact of sales from acquired businesses was $33.8 million or about 10 percent. Foreign currency translation rate changes decreased sales $14.4 million, or about 4 percent, compared to sales in the first half of 2011. The Water Systems sales change in the first half of 2012, excluding acquisitions and foreign currency translation, was an increase of $17.7 million or about 5 percent.

Water Systems sales in the U.S. and Canada were 38 percent of consolidated sales and grew by 5 percent compared to the first half of 2011. Leading the Company's growth in the U.S. and Canada were sales of pumping systems for industrial and irrigation applications, which increased by about 26 percent during the first half of 2012. The combination of high crop prices, which have led to more discretionary capital for farmers, along with dry conditions in portions of the Southwest and Midwest, has resulted in strong demand for agricultural irrigation products. Sales of pumping systems for residential and light commercial clean water applications in the U.S. and Canada grew by about 17 percent compared to the first half of the prior year as the Company continued to gain share in this market. Wastewater pump sales in the U.S. and Canada continued to be lower as drier weather reduced demand for residential sump, sewage, and effluent pumps compared to the prior year.

Water Systems sales in EMENA, which is Europe, the Middle East, and North Africa, were 15 percent of consolidated sales and grew by 7 percent compared to the first half prior year. Excluding acquisitions and foreign currency translation, EMENA sales were flat during the first half.

Water Systems sales in Latin America were about 13 percent of consolidated sales for the first half and grew by 3 percent compared to the prior year first half. Latin American sales were reduced by $4.0 million in the first half of 2012 due to foreign currency translation. Water Systems sales growth in Latin America, excluding foreign currency translation, was 10 percent. Sales in Mexico continued to grow in local currency, with sales up about 13 percent in the first half of 2012. The first half year-on-year sales increase in Brazil, in local currency, was 15 percent.

Water Systems sales in the Asia Pacific region were 6 percent of consolidated sales and grew by 6 percent compared to the first half of the prior year. The first half year-on-year sales increase in most of the Asia Pacific region was in excess of 10 percent, with sales in the first half in Australia flat due to weather and sales in China off about 25 percent.

29



Water Systems sales in Southern Africa represented 5 percent of consolidated sales during the first half and declined by 8 percent compared to the prior year first half. Southern Africa sales were reduced by $3.1 million in the first half of 2012 due to foreign currency translation. Water Systems sales growth in Southern Africa, excluding foreign currency translation, was 5 percent.

Net Sales-Fueling Systems
Fueling Systems sales were $80.8 million or about 18 percent of consolidated sales in the first half of 2012 and increased $2.1 million or about 3 percent from the first half of 2011. Foreign currency translation rate changes decreased sales $1.8 million, or about 2 percent, compared to sales in the first half of 2011. The Fueling Systems sales change in the first half of 2012, excluding foreign currency translation, was an increase of $3.9 million or about 5 percent.

This growth was driven primarily by strong shipments of fuel pumping systems in the Asia Pacific region where the Company was awarded a large supply contract with a state owned oil company, continued mid-single digit sales growth in the U.S. and Canada, and strong customer demand for a number of new products including the Colibri® and TS 550 evo® fuel management systems and the new Gemini® fuel containment system.

Cost of Sales
Cost of sales as a percent of net sales for both the first half of 2012 and 2011 was 66.4 percent. Correspondingly, the gross profit margin was 33.6 percent for both first halves. The Company's consolidated gross profit was $150.6 million for the first half of 2012, up $12.9 million from the gross profit of $137.7 million in the first half of 2011.

Selling, General, and Administrative (“SG&A”)
Selling, general, and administrative expenses were $92.1 million in the first half of 2012 and increased by $4.0 million or about 5 percent in the first half of 2012 compared to the first half of last year. The increase was primarily due to SG&A expenses of businesses acquired since the first quarter of 2011. In the first half 2012, increases in SG&A expenses attributable to acquisitions were $4.2 million.

Restructuring Expenses
There were no restructuring expenses for the first half of 2012. Restructuring expenses for the first half of 2011 were $0.9 million and reduced diluted earnings per share by approximately $0.02. Restructuring expenses in the first half of 2011 included asset write-down and severance costs.  

Operating Income
Operating income was $58.5 million in the first half of 2012, up $9.8 million from $48.7 million in the first half of 2011.

(In millions)
 
YTD
June 30, 2012
 
YTD
July 2, 2011
 
2012 v 2011
 
 
Operating income (loss)
Water Systems
 
$
66.8

 
$
57.7

 
$
9.1

Fueling Systems
 
14.6

 
12.6

 
2.0

Other
 
(22.9
)
 
(21.6
)
 
(1.3
)
Consolidated
 
$
58.5

 
$
48.7

 
$
9.8


There were specific items in the first half of 2012 and 2011 that impacted operating income that were not operational in nature.  In the first half of 2012, there were two items related to the PPH transaction considered non-operational. The first is approximately $0.1 million in costs to complete the transaction and the second is approximately $1.1 million in the amortization of increased inventory value as required by GAAP.

The first half of 2011 included $0.9 million of restructuring charges and $0.7 million for certain legal matters.

30



The Company refers to these items as “non-GAAP adjustments” for purposes of presenting the non-GAAP financial measures of operating income after non-GAAP adjustments and percent operating income after non-GAAP adjustments to net sales.  The Company believes this information helps investors understand underlying trends in the Company's business more easily.  The differences between these non-GAAP financial measures and the most comparable GAAP measures are reconciled in the following tables:

Operating Income and Margins
 
 
 
 
Before and After Non-GAAP Adjustments
 
 
 
 
(in millions)
For the First Half 2012
 
Water
Fueling
Corporate
Consolidated
Reported Operating Income
$
66.8

$
14.6

$
(22.9
)
$
58.5

% Operating Income to Net Sales
18.2
%
18.1
%
 
13.0
%
 
 
 
 
 
Non-GAAP Adjustments:
 
 
 
 
Restructuring
$

$

$

$

Legal matters
$

$

$

$

Acquisition related items
$
1.2

$

$