FRANKLIN ELECTRIC CO INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
--------------------

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 2004

OR

[ ] 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 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

400 EAST SPRING STREET 46714-3798
BLUFFTON, INDIANA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(260) 824-2900
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE NONE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
(TITLE OF EACH CLASS)

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
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)

YES X NO
----- -----
The aggregate market value of the registrant's common stock held by non-
affiliates of the registrant at June 28, 2003 (the last business day of the
registrant's most recently completed second quarter) was $608,480,304. The
stock price used in this computation was the last sales price on that date.

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 13, 2004:

10,988,572 SHARES
-----------------

Page 1 of 102

2

DOCUMENTS INCORPORATED BY REFERENCE

A portion of the Proxy Statement for the Annual Meeting of Shareholders to be
held on May 5, 2004 (Part III).

The exhibits filed with this Form 10-K are listed in the exhibit index located
on pages 47-48.

3

TABLE OF CONTENTS

Page
----
Part I

Item 1. Business........................................ 4-6
Item 2. Properties...................................... 6-7
Item 3. Legal Proceedings............................... 7
Item 4. Submission of Matters to a Vote of
Security Holders................................ 7
Supplemental Item - Executive
Officers of the Registrant...................... 7-8
Part II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................. 8
Item 6. Selected Financial Data......................... 9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations...................................... 10-16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .................................... 16
Item 8. Financial Statements and Supplementary Data..... 17-41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 42
Item 9A. Controls and Procedures......................... 42

Part III

Item 10. Directors and Executive Officers
of the Registrant............................... 42
Item 11. Executive Compensation.......................... 43
Item 12. Security Ownership of Certain
Beneficial Owners and Management,
and Related Stockholder Matters................. 43
Item 13. Certain Relationships and Related
Transactions.................................... 43
Item 14. Principal Accountant Fees and Services.......... 43

Part IV

Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K......................... 44-45

Signatures ............................................... 46

Exhibit Index ............................................... 47-48

4

PART I
------

ITEM 1. BUSINESS
- ----------------

Franklin Electric Co., Inc. is an Indiana corporation founded in 1944 and
incorporated in 1946 that, together with its subsidiaries, conducts business
in a single reportable segment: the design, manufacture and distribution of
electric motors, electronic controls and related parts and equipment. Except
where the content otherwise requires, "Franklin Electric" or the "Company"
shall refer to Franklin Electric Co., Inc. and its consolidated subsidiaries.

Description of Business
- -----------------------

Franklin Electric, a technical leader in electric motors, drives and controls,
is the world's largest manufacturer of submersible water and fueling systems
motors, a manufacturer of underground fueling systems hardware and flexible
piping systems and a leader in engineered industrial motor products.

Franklin Electric's motors are used principally in submersible motor
applications for pumping fresh water, fuel, wastewater and other liquids in a
variety of applications including residential, industrial, agriculture,
fueling, off-shore drilling, and mining. The Company also manufactures other
industrial electric motors which are used in a wide variety of applications
including gasoline dispensers, paint handling equipment, electric hoists,
explosion-proof vapor exhaust fans, vacuum pumping systems, food preparation
equipment, as well as commercial and industrial water, fuel and other liquid
pumping systems. Franklin Electric also manufactures electronic controls for
the motors which control functionality and provide protection from various
hazards, such as electric surges, over-heating or dry wells and tanks. Along
with the fueling motor applications, the Company supplies a variety of
products to the petroleum equipment industry included with the submersible
pumping systems, such as flexible piping, electronic tank monitoring
equipment, fittings, and vapor recovery systems.

The Company's products are sold principally in the United States, Europe,
South Africa, Australia, Mexico, Japan, China and other world markets. The
Company's products are also sold through independent distributors and repair
shops.

The market for the Company's products is highly competitive and includes both
large and small suppliers. The Company's submersible water, fueling and
industrial motor products and related equipment are sold to original equipment
manufacturers of pumps, compressors, fans, swimming pool equipment, medical
furniture and business machines as well as industrial equipment distributors,
major oil and utility companies.

ITT Industries, Inc., and its various subsidiaries and affiliates, accounted
for 18.0 percent, 18.2 percent and 18.7 percent of the Company's consolidated
sales in 2003, 2002, and 2001, respectively. Sta-Rite Industries, Inc., a
subsidiary of Wisconsin Energy Corporation, accounted for 13.6 percent and
11.5 percent of the Company's consolidated sales in 2003 and 2002,
respectively.

The Company offers normal and customary trade terms to its customers, no
significant part of which is of an extended nature. Special inventory

5

requirements are not necessary, and customer merchandise return rights do not
extend beyond normal warranty provisions.

The principal raw materials used in the manufacture of the Company's products
are steel in coils and bars, stainless steel, copper wire, and aluminum ingot.
Major components are capacitors, motor protectors, forgings, gray iron
castings and bearings. Most of these raw materials are available from many
sources in the United States and in many world markets. In the opinion of
management, no single source of supply is critical to the Company's business.
Availability of fuel and energy is adequate to satisfy current and projected
overall operations unless interrupted by government direction or allocation.

During 2002, the Company paid $30.3 million for acquisitions, net of cash
acquired, of which $24.3 million was recorded as goodwill based on the
estimated fair values of the net assets acquired. Included in the acquisitions
were Coverco, a manufacturer of submersible and industrial electric motors and
controls in Italy, and Intelligent Controls, Inc. (INCON), a producer of
fueling systems electronic leak detection and inventory management systems
controls in Maine. See also Footnote 2.

The Company employed approximately 2,500 persons at the end of 2003.

Segment and Geographic Information
- ----------------------------------

Segment and geographic information is included within this Form 10-K on pages
39.

Research and Development
- ------------------------

The Company spent approximately $6.0 million in 2003, $6.0 million in 2002,
and $5.2 million in 2001 on activities related to the development of new
products, on improvements of existing products and manufacturing methods, and
on other applied research and development.

In 2003, the Company continued development of a more corrosion resistant 4"
submersible motor, expanded the line of variable speed constant pressure motor
systems for residential applications, and developed an integrated fuel
management system for the petroleum equipment industry. The Company developed
a HydroDuty(tm) motor based on its submersible electric motor technology for
use in industrial applications where electric motors must withstand repeated
wash-downs for sanitation and other reasons. Research continued on new
materials and processes designed to achieve higher quality and more cost-
effective construction of the Company's high volume products.

The Company owns a number of patents, trademarks and licenses. In aggregate,
these patents are of material importance in the operation of the business;
however, the Company believes that its operations are not dependent on any
single patent or group of patents.

Backlog
- -------

The dollar amount of backlog at the end of 2003 and 2002 was as follows:

6

(In thousands)
2003 2002
---- ----

Backlog....................... $14,104 $18,890

The backlog is composed of written orders at prices adjustable on a price-at-
the-time-of-shipment basis for products, primarily standard catalog items. All
backlog orders are expected to be filled in fiscal 2004. The Company's sales
in the first quarter are generally less than the sales of other quarters due
to generally lower construction activity during that period in the northern
hemisphere. Beyond that there is no seasonal pattern to the backlog and the
backlog has not proven to be a significant indicator of future sales.

Environmental Matters
- ---------------------

The Company believes that it is in compliance with all applicable federal,
state and local laws concerning the discharge of material into the
environment, or otherwise relating to the protection of the environment. The
Company has not experienced any material costs in connection with
environmental compliance, and does not believe that such compliance will have
any material adverse effect upon the financial position, capital expenditures,
earnings or competitive position of the Company.

Available Information
- ---------------------

The Company's website address is http://www.franklin-electric.com. The Company
makes available free of charge on or through its website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and
Exchange Commission.

ITEM 2. PROPERTIES
- ------------------

The Company maintains its principal executive offices in Bluffton, Indiana;
manufacturing plants are located in the United States and abroad. Location and
approximate square footage for the Company's principal facilities are
described below. All principal properties are owned or held under operating
leases.

The Company's principal properties are as follows:
Acres Approximate
Location of Land Square Feet
-------- ------- -----------
Bluffton, Indiana 35.8 406,000
Siloam Springs, Arkansas 32.6 240,000
Wilburton, Oklahoma 30.0 327,000
Jonesboro, Indiana (1) - 35,000
Grant County, Indiana 9.0 24,000
Muskegon, Michigan 10.8 114,000
Saco, Maine (1) - 17,000
McFarland, Wisconsin (1) - 23,000
Suzhou, China 4.9 51,000
Wittlich, Rhineland, Germany 6.9 77,000
7

Brno, Czech Republic 2.3 51,000
Berzo Demo, Italy (1) - 23,000
Motta di Livenza, Italy 5.0 39,000
Linares, Mexico 10.0 150,000
Nine facilities, each with less
than 25,000 square feet(2) 1.7 87,000
----- ---------
Total 149.0 1,664,000
===== =========

In the Company's opinion, its facilities are suitable for their intended use,
adequate for the Company's business needs and in good condition.

(1) Leased facility.
(2) Eight of the facilities are leased and in the aggregate have
approximately 67,000 square feet.

ITEM 3. LEGAL PROCEEDINGS
- -------------------------

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------

None.

EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------

The names, ages and all positions and offices held by the executive officers
of the Company are:
In this
Name Age Positions and Offices office since
---- --- --------------------- ------------

R. Scott Trumbull 55 Chairman of the Board and 2003
Chief Executive Officer
Jess B. Ford 52 Senior Vice President 1999
Peter C. Maske 53 Senior Vice President and 1999
President of Europa
Gregg C. Sengstack 45 Senior Vice President, 1999
Chief Financial Officer,
and Secretary
Donald R. Hobbs 62 Vice President, Submersible 1996
Motor Marketing
Thomas A. Miller 54 Vice President, Electronic 1998
Technology
Kirk M. Nevins 60 Vice President, Sales 1995
Robert J. Stone 39 Vice President, Submersible 2003
Engineering, Technology
and Procurement
8

Dan Crose 55 Vice President, North American 2003
Operations

All executive officers are elected annually by the Board of Directors at the
Board meeting held in conjunction with the annual statutory meeting of
shareowners. Thereafter they are elected for one-year terms or until their
successors have been elected. All executive officers have been executives or
in a management position of Franklin Electric Co., Inc. for the last five
years with the exception of R. Scott Trumbull and Dan Crose. R Scott Trumbull
has been a Director of Franklin for the last five years and was Executive Vice
President and Chief Financial Officer of Owens-Illinois, Inc. prior to joining
Franklin Electric Co., Inc. in 2003. Dan Crose was Senior Vice President of
Operations at Hamilton Beach/Proctor Silex, Inc. prior to joining Franklin
Electric Co., Inc. in 2001.

PART II
- -------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------

The number of shareowners of record as of February 13,2004 was 1,088. The
Company's stock is traded on Nasdaq National Market: Symbol FELE.

All share and per share data included in this Form 10-K reflect the Company's
two-for-one stock split effected in the form of a 100 percent stock
distribution made on March 22, 2002. Dividends paid and the price range per
common share as quoted by the Nasdaq National Market for 2003 and 2002 were as
follows:

DIVIDENDS PER SHARE PRICE PER SHARE
2003 2002 2003 2002
Low High Low High
1st Quarter... $.13 $.12 $47.000 $58.140 $40.600 $53.900
2nd Quarter... $.14 $.13 $45.990 $59.950 $43.520 $60.528
3rd Quarter... $.14 $.13 $51.430 $64.000 $39.900 $52.640
4th Quarter... $.14 $.13 $55.340 $65.600 $41.151 $51.000

9

ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------

The following selected financial data should be read in conjunction with our consolidated financial
statements. The information set forth below is not necessarily indicative of future operations.

FIVE YEAR FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------
FRANKLIN ELECTRIC CO., INC.
(In thousands, except per share amounts)
2003 2002 2001 2000 1999

- ------------------------------------------------------------------------------------------------------------

Operations:
Net sales............................. $359,502 $354,872 $322,908 $325,731 $293,236
Gross profit.......................... 110,996 104,935 92,871 85,186 84,171
Interest expense...................... 1,107 1,317 1,193 1,111 1,317
Income taxes ......................... 16,847 18,273 16,235 13,683 15,591
Net income............................ 34,480 32,204 27,150 22,226 26,805
Depreciation and amortization......... 13,748 12,878 12,660 10,839 7,460
Capital expenditures.................. 15,261 15,568 6,709 14,108 13,691
Balance sheet:
Working capital .................. 82,640 62,762 69,158 54,897 56,886
Property, plant and equipment, net.... 83,916 76,033 58,839 64,604 57,047
Total assets.......................... 281,971 258,583 195,643 197,179 176,101
Long-term debt........................ 14,960 25,946 14,465 15,874 17,057
Shareowners' equity................... $192,938 $153,138 $123,269 $115,998 $ 96,293
Other data:
% Net income to sales................. 9.6% 9.1% 8.4% 6.8% 9.1%
% Net income to total average assets.. 12.8% 14.2% 13.8% 11.9% 15.6%
Current ratio .................... 2.8 2.2 2.7 2.2 2.2
Number of common shares outstanding... 10,914 10,824 10,668 11,008 10,826
Per share:
Market price range
High.................................. $ 65.60 $ 60.53 $ 42.64 $ 36.50 $ 37.438
Low................................... 45.99 39.90 32.00 26.125 29.50
Net income per weighted-average
common share...................... 3.19 2.98 2.49 2.04 2.44
Net income per weighted-average
common share, assuming dilution..... 3.05 2.83 2.39 1.96 2.30
Book value ....................... 17.05 13.47 10.84 10.21 8.27
Cash dividends on common stock........ $ 0.55 $ 0.51 $ 0.47 $ 0.43 $ 0.39
- ------------------------------------------------------------------------------------------------------------

Includes the results of operations of its wholly-owned subsidiaries Coverco S.r.l. and Intelligent
Controls, Inc., since their acquisition on January 7, 2002 and July 16, 2002, respectively.
Includes the results of operations of its wholly-owned subsidiaries EBW, Inc. and Advanced Polymer
Technology, Inc., since their acquisition on August 31, 2000.
Working capital = Current assets minus Current liabilities
Current ratio = Current assets divided by Current liabilities
Book value = Shareowners equity divided by Weighted average common shares assuming full dilution

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------

OVERVIEW
- --------
Sales and earnings for 2003 were up from 2002. The increase in sales is
attributable to the impact of foreign exchange rate changes and the full year
impact of a 2002 acquisition. Sales improvements also occurred in fueling
systems motors and related products, large submersible motors and
international product sales. These improvements were partially offset by
decline in North American and European small submersible motor sales. Prior
year sales of small submersible motors were exceptionally strong due to
weather conditions and an announced price increase effective in 2003. Earnings
improved in 2003 as the Company's focus on productivity yielded improvements.
Warranty costs were lower year over year and tax planning activities reduced
the effective tax rate.

RESULTS OF OPERATIONS
- ---------------------
Net sales for 2003 were $359.5 million, a 1 percent increase from 2002 net
sales of $354.9 million. Foreign currencies, particularly the euro and the
Rand, strengthened relative to the U.S. dollar during 2003. The impact of the
changes in exchange rates was a $15.9 million increase in the Company's
reported 2003 sales. Net sales also increased due to full year sales related
to the INCON acquisition in mid 2002, an increase of $4.7 million. Excluding
the impact of changes in foreign currencies and the full year impact of the
2002 acquisition, net sales decreased $16.0 million or 5%. The sales decrease
of $16.0 million relates primarily to decreased demand for submersible water
products to North American customers of about $8.5 million and lower demand by
European customers of about $8.8 million (when comparing both years at the
current year exchange rate). Last year sales were unusually strong in the
North American residential water well market as drought conditions prevailed
over much of the East Coast and due to a 2003 price increase announced prior
to the 2002 year end. This year residential water sales have fallen back to
historical levels. Lower demand in Europe is attributed to generally wetter
conditions and also to the impact of the conflict in the Middle East. Net
sales for 2002 were $354.9 million, a 9.9 percent increase from 2001 net sales
of $322.9 million. The increased sales were primarily the result of strong
North American residential submersible electric motor sales, as well as the
inclusion of Coverco, a January 2002 acquisition, and INCON, a July 2002
acquisition. Sales from these acquisitions represented 5.2 percent of sales
for the year. These increases were partially offset by lower demand from the
petroleum equipment industry.

Cost of sales as a percent of net sales for 2003, 2002 and 2001 was 69.1
percent, 70.4 percent and 71.2 percent, respectively. Cost of sales as a
percent of net sales decreased in 2003 from 2002 primarily as a result of
improved productivity which lowered labor and overhead costs by about 0.7
percent of net sales, changes in product mix from small residential motors to
larger motors and fueling systems products which decreased labor and overhead
costs by about 0.5 percent and quality improvements which reduced warranty
costs by about 0.4 percent of net sales. Cost of sales as a percent of net
sales decreased in 2002 from 2001 primarily as a result of productivity
improvements and lower costs in key commodities. The Company has achieved
these results by continually focusing on improving its productivity and
quality as well as identifying alternative sources for certain materials.

11

Selling and administrative ("SG&A") expense as a percent of net sales for
2003, 2002 and 2001 was 16.4 percent, 15.4 percent and 14.7 percent,
respectively. The increase of SG&A expenses in 2003 over 2002 was primarily
due to the effect of changes in the foreign exchange rate, $1.4 million, and
costs incurred for tax planning activities, $1.2 million. The Company also
recognized full year SG&A costs related to the INCON acquisition, a $1.1
million year over year increase, and has incurred additional SG&A costs for
its new plant in Mexico and the launch of new electronic products related to
submersible motors.

Interest expense for 2003, 2002 and 2001 was $1.1 million, $1.3 million and
$1.2 million, respectively.

Included in other income for 2003, 2002 and 2001 was interest income of $0.4
million, $0.5 million and $0.6 million, respectively, primarily derived from
the investment of cash balances in short-term U.S. treasury and agency
securities.

Foreign currency-based transactions produced a gain for 2003 of $0.3 million.
The foreign currency-based transaction gain was due primarily to the
strengthening euro relative to the U.S. dollar during most of 2003.

The provision for income taxes in 2003, 2002 and 2001 was $16.8 million, $18.3
million and $16.2 million, respectively. The effective tax rate in 2003 of
32.8 percent is lower than the 2002 rate of 36.2 percent as a result of tax
credits realized in 2003. The tax credits, some of them from prior years,
resulted from tax planning activities performed in 2002 and 2003 in the areas
of foreign income exclusion which reduced the rate by 4.0 percent and R&D
which reduced the rate by 1.2 percent. The effective tax rate differs from the
United States statutory rate of 35 percent, due to the foreign income
exclusion and R&D credits and to the effects of state and foreign income
taxes, net of federal tax benefits.

Net income for 2003 was $34.5 million, or $3.05 per diluted share, compared to
2002 net income of $32.2 million, or $2.83 per diluted share. Net income for
2001 was $27.2 million, or $2.39 per diluted share. All share and per share
data reflects the Company's two-for-one stock split effected in the form of a
100 percent stock distribution made on March 22, 2002.

CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
Cash flows from operations provide the principal source of current liquidity.
Net cash flows provided by operating activities were $47.0 million, $54.6
million and $39.9 million in 2003, 2002 and 2001, respectively. The primary
source of cash from operations for 2003 was earnings. The operating cash flow
decrease in 2003 is related to an increase in inventory, $2.1 million and
payments to employee benefit plans, $4.0 million. Inventories increased $2.1
million, primarily in finished goods, as sales were lower than anticipated for
the year. The impact of the strengthening euro and Rand increased inventory
values by $4.1 million in Europe and South Africa. The 2002 operating cash
flow increase was related to increased earnings and decreases in inventories
and accounts receivable. Inventories decreased due to increased sales during
2002 because of the near drought conditions in the East as discussed in
Results of Operations above.

Net cash flows used in investing activities were $15.5 million, $57.2 million
and $10.2 million in 2003, 2002 and 2001, respectively. The primary uses of
cash in 2003 were additions to property plant and equipment. The primary uses
of cash in 2002 were for the acquisitions of Coverco and INCON. The Company
12

paid an aggregate of $30.3 million for these two acquisitions, net of cash
acquired. During the third quarter of 2002, the Company paid $10.5 million in
cash as contingent consideration in accordance with the terms of an agreement
entered into in 1998 in which the Company purchased certain operating and
intangible assets from a motor manufacturer.

Net cash flows used in financing activities were $24.0 million and $19.0
million in 2003 and 2001, respectively. Financing activities in 2002 generated
$0.5 million cash flow. The primary use of cash in 2003 was the repayment of
long term debt, $19.9 million. Another principal use of cash during 2003, 2002
and 2001 was purchases of Company common stock under the Company's repurchase
program and the payment of dividends. During 2003, 2002 and 2001, the Company
repurchased, or received as consideration for stock options exercised,
283,563, 223,499 and 408,200 shares of its common stock for $14.8 million,
$10.5 million and $14.2 million, respectively. The Company paid $5.9 million,
$5.5 million and $5.1 million in dividends on the Company's common stock in
2003, 2002 and 2001, respectively. The Company has authority under its Board-
approved stock repurchase program to purchase an additional 465,106 shares of
its common stock after January 3, 2004.

Cash and cash equivalents at the end of 2003 were $30.0 million compared to
$20.1 million at the end of 2002. Working capital increased $19.8 million in
2003 and the current ratio of the Company was 2.8 and 2.2 at the end of 2003
and 2002, respectively.

Principal payments of $1.0 million per year on the Company's $20.0 million of
unsecured long-term debt began in 1998 and will continue until 2008 when a
balloon payment of $10.0 million will fully retire the debt. In November 2001,
the Company entered into an unsecured, 38-month $60.0 million revolving credit
agreement (the "Agreement"). The Agreement includes a facility fee of one-
eighth of one percent on the committed amount. The Company's borrowings under
the Agreement totaled $0.0 million and $10.1 at January 3, 2004 and December
28, 2002, respectively. The Company is subject to certain financial covenants
with respect to borrowings, interest coverage, working capital, net worth,
loans or advances, and investments. The Company was in compliance with all
debt covenants at all times in 2003 and 2002. See Note 6.

At January 3, 2004, the Company had $4.5 million of commitments for the
construction of a building in Linares, Mexico, and the purchase of machinery
and equipment.

Management believes that internally generated funds and existing credit
arrangements provide sufficient liquidity to meet current commitments.

AGGREGATE CONTRACTUAL OBLIGATIONS
- ---------------------------------
Most of the Company's contractual obligations to make payments to third
parties are debt obligations. In addition, the Company has certain contractual
obligations for future lease payments, as well as, purchase obligations. The
payment schedule for these contractual obligations is as follows:

13

(In thousands)
- ------------------------------------------------------------------------------
Less More
than than
Total 1 Year 2-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------

Debt ............... $14,141 $1,000 $2,050 $11,091 $-
Capital leases...... 2,211 392 913 697 209
Operating leases ... 4,288 2,236 1,665 382 5
Purchase Obligations 4,503 4,503 - - -
------- ------ ------ ------- ----
$25,143 $8,131 $4,628 $12,170 $214
======= ====== ====== ======= ====

Note: The Company also has pension and other post-retirement benefit
obligations not included in the above table which will result in future
payments.

ACCOUNTING PRONOUNCEMENTS
- -------------------------
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity". Statement 150
affects an entity's accounting for freestanding financial instruments:
mandatorily redeemable shares, put options, forward purchase contracts, and
debt obligations. Most of the provisions are consistent with the existing FASB
Concepts Statement No. 6, "Elements of Financial Statements". The remaining
portion of Statement 150 encompasses certain obligations that an entity can or
must settle by issuing equity shares, pending the relationship between the
holder and issuer. The adoption of this pronouncement does not have a material
impact on the Company's results of operations or financial position.

In December 2003, the FASB issued FASB Staff Position (FSP) FAS 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" (the "Act"). The Act expands
Medicare, primarily by adding a prescription drug benefit for Medicare-
eligibles starting in 2006. The Act provides employers currently sponsoring
prescription drug programs for Medicare-eligibles with a range of options for
coordinating with the new government-sponsored program to potentially reduce
program cost. The FSP concludes that companies will be permitted to recognize
that amount for year-end 2003 financial statements pursuant to FAS 106 or to
delay having to report the effects of the Act until remaining questions are
resolved. Pursuant to guidance from the FASB under FSP FAS 106-1, the Company
has chosen to defer recognition of the potential effects of the Act for 2003
disclosures. The impact of the Act on the Company's accumulated pension
benefit obligation and net periodic postretirement benefit cost has not been
determined. When issued, the authoritative guidance on the accounting for the
subsidy will address transition.

In December 2003, FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". The revision
requires that companies provide more detail concerning plan assets, benefit
obligations, cash flows, benefit costs, and other relevant information. Plan
assets should be broken down by category, whereby describing investment
policies, strategies, and target ranges. The Statement is effective for
financial statements with fiscal years ending after December 15, 2003.
However, disclosure of estimated future benefit payments is effective for
fiscal years ending after June 15, 2004. In compliance with Statement 132, the

14

Company has expanded detail regarding plan assets, benefit obligations,
benefit costs, and other pertinent information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. On an on-going basis,
management evaluates its estimates, including those related to allowance for
doubtful accounts, inventories, recoverability of long-lived assets,
intangible assets, income taxes, warranty obligations, pensions and other
employee benefit plan obligations, and contingencies. Management bases its
estimates on historical experience and on other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Revenue Recognition:
Products are shipped utilizing common carriers direct to customers or, for
consignment products, to customer specified warehouse locations. Sales are
recognized when the Company's products are shipped direct or transferred from
a warehouse location to the customer, at which time transfer of ownership and
risk of loss pass to the customer. The Company reduces sales revenues for
discounts based on past experience. Differences may result in the amount of
discounts if actual experience differs significantly from management
estimates; such differences have not historically been material.

Accounts Receivable:
Accounts receivable is comprised of balances due from customers net of
estimated allowances for uncollectible accounts. In determining allowances,
historical trends are evaluated and economic conditions and specific customer
issues are reviewed to arrive at appropriate allowances. Allowance levels
change as customer-specific circumstances and the other analysis areas noted
above change. Differences may result in the amount for allowances if actual
experience differs significantly from management estimates; such differences
have not historically been material.

Inventory Valuation:
The Company uses certain estimates and judgments to value inventory. Inventory
is recorded at the lower of cost or market. The Company reviews its
inventories for excess or obsolete products or components. Based on an
analysis of historical usage and management's evaluation of estimated future
demand, market conditions and alternative uses for possible excess or obsolete
parts, reserves are recorded or changed. Significant fluctuations in demand or
changes in market conditions could impact management's estimates of necessary
reserves. Excess and obsolete inventory is periodically disposed through sale
to third parties, scrapping or other means, and the reserves are appropriately
reduced. Differences may result in the amount for reserves if actual
experience differs significantly from management estimates; such differences
have not historically been material.

Goodwill and other intangible assets:
Under the requirements of SFAS no. 142, "Goodwill and other Intangible
Assets", goodwill is no longer amortized; however it is tested for impairment
15

annually or more frequently whenever events or change in circumstances
indicate that the asset may be impaired. The Company performs impairment
reviews for its reporting unit using future cash flows based on management's
judgments and assumptions. An asset's value is impaired if our estimate of the
aggregate future cash flows, undiscounted and without interest charges, to be
generated are less than the carrying amount of the reporting unit including
goodwill. Such cash flows consider factors such as expected future operating
income and historical trends, as well as the effects of demand and
competition. To the extent impairment has occurred, the loss will be measured
as the excess of the carrying amount of the reporting unit including goodwill
over the fair value. Such estimates require the use of judgment and numerous
subjective assumptions, which, if actual experience varies, could result in
material differences in the requirements for impairment charges.

Income taxes:
Under the requirements of SFAS No. 109, "Accounting for Income Taxes", we
record deferred tax assets and liabilities for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Management judgment is required in
determining the Company's provision for income taxes, deferred tax assets and
liabilities, which, if actual experience varies, could result in material
adjustments to deferred tax assets and liabilities.

Warranty obligations:
Warranty terms are generally two years from date of manufacture or one year
from date of installation. Warranty liability is recorded when revenue is
recognized and is based on actual historical return rates from the most recent
warranty periods. While the Company's warranty costs have historically been
within its calculated estimates, it is possible that future warranty costs
could exceed those estimates.

Pension and employee benefit obligations:
With the assistance of actuaries and investment advisors the Company selects
the discount rate to be used to determine pension and post-retirement plan
liabilities based on a review of Moody's Aa bond ratings and U.S Treasury
rates. A change in the discount rate selected by the Company of 25 basis
points would result in a change of about $0.1 million of employee benefit
expense. The Company consults with actuaries, asset allocation consultants
and investment advisors to determine the expected long term rate of return on
plan assets based on historical and projected rates of return on the types of
assets in which the plans have invested. A change in the long term rate of
return selected by the Company of 25 basis points would result in a change of
about $0.3 million of employee benefit expense. See Note 3.

FACTORS THAT MAY AFFECT FUTURE RESULTS
- --------------------------------------
Any forward-looking statements contained herein involve risks and
uncertainties, including, but not limited to, general economic and currency
conditions, various conditions specific to the Company's business and
industry, market demand, competitive factors, supply constraints, technology
factors, government and regulatory actions, the Company's accounting policies,
future trends, and other risks, all as described in Exhibit 99.1 of this Form
10-K. These risks and uncertainties may cause actual results to differ
materially from those indicated by the forward-looking statements. Any
forward-looking statements included in this Form 10-K are based upon

16

information presently available. The Company does not assume any obligation to
update any forward-looking information.

ITEM 7A. 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 intercompany 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. Additional information regarding the use of an interest rate swap is
included in Note Seven to the consolidated financial statements.

17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
2003 2002 2001
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------

Net sales............................. $359,502 $354,872 $322,908
Cost of sales (including research
and development expenses of $5,995,
$6,035 and $5,232, respectively).... 248,506 249,937 230,037
-------- -------- --------

Gross profit.......................... 110,996 104,935 92,871

Selling and administrative expenses... 59,106 54,637 47,522
-------- -------- --------

Operating income...................... 51,890 50,298 45,349

Interest expense...................... (1,107) (1,317) (1,193)
Other income (expense),net............ 278 130 (239)
Foreign exchange income (loss)........ 266 1,366 (532)
-------- -------- --------

Income before income taxes............ 51,327 50,477 43,385

Income taxes (Note 5)................. 16,847 18,273 16,235
-------- -------- --------

Net income............................ $ 34,480 $ 32,204 $ 27,150
======== ======== ========

Per share data (Note 9):

Net income per common share......... $ 3.19 $ 2.98 $ 2.49
======== ======== ========

Net income per common share,
assuming dilution................. $ 3.05 $ 2.83 $ 2.39
======== ======== ========

Dividends per common share.......... $ .55 $ .51 $ .47
======== ======== ========

See Notes to Consolidated Financial Statements.

18

CONSOLIDATED BALANCE SHEETS

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
ASSETS
2003 2002
(In thousands)
- ------------------------------------------------------------------------------

Current assets:
Cash and equivalents........................ $ 29,962 $ 20,133
Receivables (less allowances of $1,949
and $1,907, respectively)................. 29,194 31,711
Inventories:
Raw materials............................. 17,733 16,115
Work-in-process........................... 6,636 7,481
Finished goods............................ 40,686 33,905
LIFO reserve.............................. (10,402) (9,233)
-------- --------
54,653 48,268
Other current assets (including deferred
income taxes of $9,672 and $8,615,
respectively, Note 5)..................... 14,232 12,897
-------- --------
Total current assets.................... 128,041 113,009

Property, plant and equipment, at cost:
Land and buildings.......................... 44,577 34,126
Machinery and equipment..................... 147,368 141,347
-------- --------
191,945 175,473
Less allowance for depreciation........... 108,029 99,440
-------- --------
83,916 76,033
Deferred and other assets (including deferred
income taxes of $0 and $1,391,
respectively, Note 5)...................... 13,828 16,504
Goodwill...................................... 56,186 53,037
-------- --------

Total Assets.................................. $281,971 $258,583
======== ========

See Notes to Consolidated Financial Statements.

19

- ------------------------------------------------------------------------------
LIABILITIES AND SHAREOWNERS' EQUITY
2003 2002
(In thousands)
- ------------------------------------------------------------------------------

Current liabilities:
Current maturities of long-term debt and
short-term borrowings (Note 6)............ $ 1,392 $ 1,467
Accounts payable............................ 15,958 18,584
Accrued expenses (Note 4)................... 28,051 28,484
Income taxes (Note 5)....................... - 1,712
-------- --------
Total current liabilities................. 45,401 50,247

Long-term debt (Note 6)....................... 14,960 25,946
Deferred Income Taxes......................... 4,354 -

Employee benefit plan obligations (Note 3).... 18,697 23,988

Other long-term liabilities................... 5,621 5,264

Shareowners' equity (Note 7):
Common shares outstanding
(10,914 and 10,824, respectively)......... 1,091 1,082
Additional capital.......................... 46,917 34,079
Retained earnings........................... 139,057 125,308
Loan to ESOP Trust (Note 3)................. (897) (1,130)
Accumulated other comprehensive
income (loss)............................. 6,770 (6,201)
-------- --------
Total shareowners' equity................. 192,938 153,138
-------- --------

Total Liabilities and Shareowners' Equity..... $281,971 $258,583
======== ========

See Notes to Consolidated Financial Statements.

20

CONSOLIDATED STATEMENTS OF CASH FLOWS

FRANKLIN ELECTRIC CO., INC. AND CONSOLIDATED SUBSIDIARIES
- ------------------------------------------------------------------------------
2003 2002 2001
(In thousands)
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................. $34,480 $32,204 $27,150
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization............ 13,748 12,878 12,660
Deferred income taxes.................... 3,117 664 2,916
Loss on disposals of plant
and equipment.......................... 489 428 1,980
Changes in assets and liabilities,
excluding the effects of acquisitions:
Receivables............................ 4,875 3,125 2,963
Inventories............................ (2,140) 7,434 (697)
Accounts payable and other
accrued expenses..................... (4,439) (315) (8,028)
Employee benefit plan obligations...... (2,584) 1,128 (718)
Other, net............................. (582) (2,923) 1,697
------- ------- -------
Net cash flows from operating activities..... 46,964 54,623 39,923
------- ------- -------
Cash flows from investing activities:
Additions to plant and equipment........... (15,261) (15,568) (6,709)
Proceeds from sale of plant and equipment.. 241 20 354
Additions to deferred assets............... (434) (14,312) (802)
Purchases of marketable securities......... - - (2,999)
Cash paid for acquisitions, net of cash
acquired (Note 2)........................ - (30,344) -
Proceeds from maturities of marketable
securities............................... - 2,999 -
------- ------- -------
Net cash flows from investing activities..... (15,454) (57,205) (10,156)
------- ------- -------
Cash flows from financing activities:
Borrowing of long-term debt................ 6,648 8,575 -
Repayment of long-term debt (Note 6)....... (19,853) (1,408) (1,016)
Borrowing on line of credit and short-term
borrowings............................... 11,000 3,000 11,055
Repayment of line of credit and short-term
borrowings................................... (11,024) (3,017) (11,073)
Proceeds from issuance of common stock..... 4,750 2,320 1,059
Purchases of common stock (Note 7)......... (9,782) (3,662) (14,157)
Reduction of loan to ESOP Trust............ 233 232 232
Dividends paid............................. (5,946) (5,505) (5,122)
------- ------- -------
Net cash flows from financing activities..... (23,974) 535 (19,022)
------- ------- -------
Effect of exchange rate changes on cash...... 2,293 1,430 374
------- ------- -------
Net change in cash and equivalents........... 9,829 (617) 11,119
Cash and equivalents at beginning of year.... 20,133 20,750 9,631
------- ------- ------
Cash and equivalents at end of year.......... $29,962 $20,133 $20,750
======= ======= =======

21

Cash paid during 2003, 2002, and 2001 for interest was $1.2 million, $1.3
million and $1.1 million, respectively. Also, cash paid during 2003, 2002 and
2001 for income taxes was $13.8 million, $16.6 million and $13.1 million,
respectively.

See Notes to Consolidated Financial Statements.

22