REGAL REXNORD CORP - Annual Report: 2010 (Form 10-K)
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
FORM
10-K
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended January 2, 2010
Commission
file number 1-7283
Regal
Beloit Corporation
|
(Exact
Name of Registrant as Specified in Its
Charter)
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Wisconsin
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39-0875718
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(State
of Incorporation)
|
(IRS
Employer Identification No.)
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200 State Street,
Beloit, Wisconsin 53511
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(Address
of principal executive offices)
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(608)
364-8800
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(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12 (b) of the Act:
Name
of Each Exchange on
|
|
Title
of Each Class
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Which
Registered
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Common
Stock ($.01 Par Value)
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New
York Stock Exchange
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Securities
registered pursuant to
Section
12 (g) of the Act
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None
(Title
of Class)
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Indicate
by check mark if the registrant is well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £
No T
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 T 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. T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer T Accelerated
filer £ Non-accelerated
filer £ Smaller
reporting company £
(Do not check if a smaller reporting company)
Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No
T
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 27, 2009 was approximately $1.5 billion.
On
February 22, 2010, the registrant had outstanding 37,467,554 shares of common
stock, $.01 par value, which is registrant’s only class of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information contained in the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 26, 2010 is incorporated by reference into Part
III, hereof.
1
REGAL
BELOIT CORPORATION
ANNUAL
REPORT ON FORM 10-K
FOR
YEAR ENDED JANUARY 2, 2010
TABLE
OF CONTENTS
Page
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Item
1
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Business
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3 |
Item
1A
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Risk
Factors
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8 |
Item
1B
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Unresolved
Staff Comments
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12 |
Item
2
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Properties
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12 |
Item
3
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Legal
Proceedings
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13 |
Item
4
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Submission
of Matters to a Vote of Security Holders
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14 |
PART
II
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||
Item
5
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Market
for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
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14 |
Item
6
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Selected
Financial Data
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16 |
Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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16 |
Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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24 |
Item
8
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Financial
Statements and Supplementary Data
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25 |
Item
9
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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51 |
Item
9A
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Controls
and Procedures
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51 |
Item
9B
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Other
Information
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52 |
PART
III
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Item
10
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Director,
Executive Officers and Corporate Governance of the
Registrant
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52 |
Item
11
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Executive
Compensation
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52 |
Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
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52 |
Item
13
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Certain
Relationships and Related Transactions and Director
Independence
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52 |
Item
14
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Principal
Accountant Fees and Services
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52 |
PART
IV
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Item
15
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Exhibits,
Financial Statement Schedule
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52 |
SIGNATURES
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53 |
CAUTIONARY
STATEMENT
This Annual Report contains
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements represent our
management’s judgment regarding future events. In many cases, you can
identify forward-looking statements by terminology such as “may,”
“will,” “plan,” “expect,” “anticipate,” “estimate,” “believe,” or
“continue” or the negative of these terms or other similar
words. Actual results and events could differ materially and
adversely from those contained in the forward-looking statements due to a number
of factors, including:
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·
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economic
changes in global markets where we do business, such as reduced demand for
the products we sell, currency exchange rates, inflation rates, interest
rates, recession, foreign government policies and other external factors
that we cannot control;
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·
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unanticipated
fluctuations in commodity prices and raw material
costs;
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·
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cyclical
downturns affecting the global market for capital
goods;
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·
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unexpected
issues and costs arising from the integration of acquired companies and
businesses;
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·
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marketplace
acceptance of new and existing products including the loss of, or a
decline in business from, any significant
customers;
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·
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the
impact of capital market transactions that we may
effect;
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·
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the
availability and effectiveness of our information technology
systems;
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·
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unanticipated
costs associated with litigation
matters;
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·
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actions
taken by our competitors;
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·
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difficulties
in staffing and managing foreign operations;
and
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·
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other
risks and uncertainties including but not limited to those described in
Item 1A-Risk Factors
of this
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2
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Form
10-K and from time to time in our reports filed with U.S. Securities and
Exchange Commission.
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All
subsequent written and oral forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their entirety by the
applicable cautionary statements. The forward-looking statements
included in this Form 10-K are made only as of their respective dates, and we
undertake no obligation to update these statements to reflect subsequent events
or circumstances. See also Item 1A - Risk
Factors.
PART
I
Unless
the context requires otherwise, references in this Annual Report to “we,” “us,”
“our” or the “Company” refer collectively to Regal Beloit Corporation and its
subsidiaries.
References
in an Item of this Annual Report on Form 10-K to information contained in our
Proxy Statement for the Annual Meeting of Shareholders of the Company to be held
on April 26, 2010 (the “2010 Proxy Statement”) or to information contained in
specific sections of the Proxy Statement, incorporate the information into that
Item by reference.
ITEM
1 - BUSINESS
OUR
COMPANY
We are
one of the largest global manufacturers of commercial, industrial, and heating,
ventilation, and air conditioning (HVAC) electric motors, electric generators
and controls, and mechanical motion control products. Many of our
products hold leading product positions in a variety of essential commercial,
industrial and residential applications, and we believe we have one of the most
comprehensive product lines in the markets we serve. We sell our
products to a diverse global customer base using more than 20 recognized brand
names through a multi-channel distribution model to leading original equipment
manufacturers (“OEMs”), distributors and end users across many
markets. We believe this strategy, coupled with a high level of
customer service, provides us with a competitive selling advantage and allows us
to more fully serve our target markets.
We
manufacture and market electrical and mechanical products. Our
electrical products include HVAC motors, a full line of AC and DC commercial and
industrial electric motors, electric generators and controls, and capacitors.
Our mechanical products include gears and gearboxes, marine transmissions,
high-performance automotive transmissions and ring and pinions, manual valve
actuators, and electrical connectivity devices. OEMs and end users in
a variety of motion control and other industrial applications increasingly
combine the types of electrical and mechanical products we offer. We
seek to take advantage of this trend and to enhance our product penetration by
leveraging cross-marketing and product line combination opportunities between
our electrical and mechanical products.
We market
our products through multiple brands, with each typically having its own product
offering and sales organization. These sales organizations consist of
varying combinations of our own internal direct sales people as well as
exclusive and non-exclusive manufacturers’ representative organizations. We
manufacture the vast majority of the products that we sell, and we have
manufacturing, sales, engineering and distribution facilities throughout the
United States and Canada as well as in Mexico, India, China, Australia, Thailand
and Europe.
Our
growth strategy includes driving organic growth through innovative new products,
new customers, new opportunities at existing customers and participating in fast
growth geographic markets. Additionally, we seek to grow through
strategic, value creating acquisitions. We consider our acquisition
process, including identification, due diligence, and integration, to be a core
competency of the Company.
Our
business initiatives include:
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·
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Innovation:
fueling our growth by delivering new products that address customer needs
such as energy efficiency, system cost reduction and improved
reliability;
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·
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Globalization:
expanding our global presence to participate in high growth markets,
“catch” our customers as they expand globally and remain cost
competitive;
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·
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Customer
Centricity: making continuous improvements in all of the operations that
touch our customers so that our customers feel an improved
experience;
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·
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Digitization:
employing Information Technology (IT) tools to improve the efficiency and
productivity of our business and our customers’ businesses;
and
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·
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Lean
Six Sigma: utilizing Lean Six Sigma to drive continuous improvements in
all of our manufacturing and back office operations as well as in the
quality of our products.
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OPERATING
SEGMENTS
We have
two operating segments: Electrical and
Mechanical. Financial information on our operating segments for the
three years ending January 2, 2010 is contained in Note 16 of the Consolidated
Financial Statements.
3
ELECTRICAL
SEGMENT
We
believe our motor products are uniquely positioned to help our customers and end
consumers achieve greater energy efficiency, resulting in significant cost
savings for the consumer and preservation of natural resources and our
environment. We estimate that approximately 40-50% of all electricity generated
in the U.S. is consumed by electric motors. Our increasingly
efficient motor designs allow current motor products to be significantly more
energy efficient than previous models. Our Electrical segment includes a full
line of AC and DC commercial and industrial electric motors, HVAC motors,
electric generators and controls and capacitors. Our Electrical
segment was developed in the mid 1990’s with a new strategic focus to establish
our Company as a significant manufacturer of industrial electric motors,
complementing our mechanical products businesses which serve similar markets and
whose products were often used in combination with a motor. Beginning
with our acquisition of Marathon Electric Manufacturing Corporation in 1997 our
Electrical segment has grown to over $1.6 billion in revenue.
During
2008, the Company completed acquisitions of two additional Electrical segment
businesses:
On April
25, 2008 the Company acquired Joyce Court Holdings Ltd. and Grand Delight
Investments Ltd., sole shareholders of Wuxi Hwada Motor Co. and Wuxi New Hwada
Motor Co. (collectively “Hwada”) located in Wuxi, China. Hwada is a
leading designer and manufacturer of Integral IEC and NEMA electric motors,
which are used in various industrial applications such as compressor, pump,
paper and steel processing and power plants. Approximately 50% of
Hwada’s product sales are in the China industrial markets. The
business is reported as part of the Company’s Electrical segment. The
acquisition provides an industrial motor production capability to our China
motor businesses.
On
September 30, 2008, the Company acquired Dutchi Motors
B.V. (“Dutchi”) located in Arnhem, The Netherlands. Dutchi
is a leading distributor of industrial motors in Western and Eastern Europe,
South Africa, Russia and the Middle East. Dutchi is one of the
largest distributors of the Company’s Hwada motor products, which was purchased
in April, 2008. The Dutchi business is also reported as part of the
Company’s Electrical segment. The acquisition expands our distribution network
further into Europe and includes new markets for our product lines.
We
manufacture and market AC and DC commercial, industrial and HVAC electric motors
ranging in size from sub-fractional to small integral horsepowers to larger
commercial and industrial motors from 50 through 6500 horsepower. We offer
thousands of stock models of electric motors in addition to the motors we
produce to specific customer specifications. We also produce and market
precision servo motors, electric generators ranging in size from five kilowatts
through four megawatts, automatic transfer switches and paralleling switchgear
to interconnect and control electric power generation equipment. Additionally,
our Electrical segment markets a line of AC and DC adjustable speed
drives. We manufacture capacitors for use in HVAC systems, high
intensity lighting and other applications. We sell our Electrical
segment’s products to distributors, original equipment manufacturers and end
users across many markets.
Our
motors are vital components of an HVAC system and are used to move air into and
away from furnaces, heat pumps, air conditioners, ventilators, fan filter boxes
and humidifiers. We believe that a majority of our HVAC motors are used in
applications that replace existing equipment, with the remainder used in new
equipment applications. The business enjoys a large installed base of equipment
and long-term relationships with its major customers.
Our power
generation business, which includes electric generators and power generation
components and controls, represents a growing portion of our Electrical
segment’s net sales. The market for electric power generation
components and controls has grown in recent years as a result of a desire on the
part of end users to reduce losses due to power disturbances and the increased
need for prime power in certain applications. Our generators are used
in industrial, agricultural, marine, military, transportation and other
applications.
We
leverage efficiencies across our motor and power generation
operations. We centralize the manufacturing, purchasing, engineering,
accounting, information technology and quality control activities of our
Electrical segment. Furthermore, we specifically foster the sharing
of best practices across each of the Electrical segment businesses and create
focused centers of excellence in each of our manufacturing
functions.
The
following is a description of our major Electrical product brands and the
primary products that they manufacture and market:
Dutchi
Motors. Distributor of IEC and NEMA electric motors for
industrial applications in Western and Eastern Europe, South Africa, Russia and
the Middle East.
Fasco
Motors. Manufactures motors and blower systems for air moving
applications including alternative fuel systems, water heaters and HVAC
systems.
Hwada
Motors. Manufactures Integrated IEC and NEMA motors for
various industrial applications such as compressor, pump, paper and steel
processing and power plants.
LEESON Electric. Manufactures
AC motors up to 800 horsepower and DC motors up to five horsepower, gear
reducers, gearmotors and drives primarily for the power transmission, pump, food
processing, fitness equipment and industrial machinery markets.
Lincoln Motors. Manufactures
AC motors from 1/4 horsepower to 800 horsepower primarily for industrial and
commercial pumps, compressors, elevators, machine tools, and specialty
products.
Marathon Electric.
Manufactures AC motors up to 800 horsepower primarily for HVAC, pumps, power
transmissions, fans and blowers, compressors, agriculture products, processing
and industrial manufacturing equipment.
Marathon Electric Motors (India)
Ltd. Manufactures a full range (from 1 to 3500 horsepower) of
low and medium voltage industrial motors and fans for the industrial and process
markets in India.
Marathon
Generators. Manufactures AC generators from five kilowatts to
four megawatts that primarily serve the standby power, prime power,
refrigeration, industrial and irrigation markets.
Morrill
Motors. Manufactures fractional horsepower motors and
components for the commercial refrigeration and freezer markets.
Thomson Technology.
Manufactures automatic transfer switches, paralleling switchgear and controls,
and systems controls primarily for the electric power generation
market.
4
MECHANICAL
SEGMENT
Our
Mechanical segment includes a broad array of mechanical motion control products
including: standard and custom worm gear, bevel gear, helical gear
and concentric shaft gearboxes; marine transmissions; high-performance
after-market automotive transmissions and ring and pinions; custom gearing;
gearmotors; manual valve actuators, and electrical connecting devices. Our gear
and transmission related products primarily control motion by transmitting power
from a source, such as a motor or engine, to an end use, such as a conveyor
belt, usually reducing speed and increasing torque in the process. Our valve
actuators are used primarily in oil and gas, water distribution and treatment
and chemical processing applications. Mechanical products are sold to original
equipment manufacturers, distributors and end users across many industry
segments.
The
following is a description of our major Mechanical segment brands and the
primary products they manufacture and market:
CML (Costruzioni Meccaniche
Legananesi S.r.L.). Manufactures worm and bevel gear valve actuators
primarily for the oil, gas, wastewater and water distribution
markets.
Durst. Manufactures standard
and specialized industrial transmissions, hydraulic pump drives and gears for
turbines used in power generation primarily for the construction, agriculture,
energy, material handling, forestry, lawn and garden and railroad maintenance
markets.
Grove Gear/Electra-Gear.
Manufactures standard and custom industrial gear reducers and specialized
aluminum gear reducers and gearmotors primarily for the material handling, food
processing, robotics, healthcare, power transmission, medical equipment and
packaging markets.
Hub City/Foote-Jones.
Manufactures gear drives, sub-fractional horsepower gearmotors, mounted
bearings, large-scale parallel shaft and right-angle gear drives and accessories
primarily for the packaging, construction, material handling, healthcare, food
processing markets, mining, oil, pulp and paper, forestry, aggregate,
construction and steel markets.
Marathon Special Products.
Manufactures fuse holders, terminal blocks, and power blocks primarily for the
HVAC, telecommunications, electric control panel, utilities and transportation
markets.
Mastergear. Manufactures
manual valve actuators for liquid and gas flow control primarily for the
petrochemical processing, fire protection and wastewater markets.
Opperman Mastergear, Ltd.
Manufactures valve actuators and industrial gear drives primarily for the
material handling, agriculture, mining and liquid and gas flow control
markets.
Richmond Gear/Velvet Drive
Transmissions. Manufactures ring and pinions and transmissions primarily
for the high-performance automotive aftermarket, and marine and industrial
transmissions primarily for the pleasure boat, off-road vehicle and forestry
markets.
THE
BUILDING OF OUR BUSINESS
Our
growth from our founding as a producer of high-speed cutting tools in 1955 to
our current size and status has largely been the result of the acquisition and
integration of businesses to build a strong multi-product offering. Our senior
management has substantial experience in the acquisition and integration of
businesses, aggressive cost management, and efficient manufacturing techniques,
all of which represent activities that are critical to our long-term growth
strategy. Since 1997 we have acquired and developed our Electrical
segment businesses into approximately a $1.6 billion producer of electric motors
serving primarily the North America market. We consider the
identification of acquisition candidates and the purchase and integration of
targets to be a core competency for the Company. The following table summarizes
select Electrical segment acquisitions since 2004.
Year
Acquired
|
Annual
Revenues at Acquisition
(in
millions)
|
Product
Listing at Acquisition
|
||||
Dutchi
Motors
|
2008
|
$56
|
Distributor
of IEC and NEMA electric motors for industrial applications in Western and
Eastern Europe, South Africa, Russia and the Middle
East
|
|||
Hwada
Motors
|
2008
|
105
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Integral
IEC and NEMA electric motors for industrial
applications
|
|||
Fasco
Motors
|
2007
|
299
|
Motor
and blower systems for air moving applications
|
|||
Jakel,
Inc.
|
2007
|
86
|
Motor
and blower systems for air moving applications
|
|||
Morrill
Motors
|
2007
|
40
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Fractional
horsepower motors for commercial refrigeration and freezer
markets
|
|||
Alstom
|
2007
|
67
|
Full
line of low and medium voltage industrial motors for Indian domestic
markets
|
|||
Sinya
Motors
|
2006
|
39
|
Fractional
and sub-fractional HVAC motors
|
|||
GE
Commercial AC Motors
|
2004
|
144
|
AC
motors for pump, compressor, equipment and commercial
HVAC
|
|||
GE
HVAC Motors and Capacitors
|
2004
|
442
|
Full
line of motors and capacitors for residential and commercial HVAC
systems
|
5
SALES,
MARKETING AND DISTRIBUTION
We sell
our products directly to original equipment manufacturers (“OEMs”), distributors
and end-users across many markets. We have multiple business units,
with each unit typically having its own branded product offering and sales
organization. These sales organizations consist of varying combinations of our
own internal direct sales people as well as exclusive and non-exclusive
manufacturers’ representative organizations.
MARKETS
AND COMPETITORS
The 2009
worldwide market for electric motors is estimated to be in excess of $29
billion. The overall domestic market for electric motors is estimated at $10
billion annually, although we estimate the sectors in which we primarily
compete, commercial and industrial electric motors and HVAC/refrigeration
motors, to be approximately a $3.4 billion segment of the overall domestic
market. We believe approximately 40-50% of all electricity generated in the U.S.
runs through electric motors. We believe we are among the largest
producers of commercial and industrial motors and HVAC motors. In
addition, we believe that we are the largest electric generator manufacturer in
the United States that is not affiliated with a diesel engine manufacturer.
Major domestic competitors for our electrical products include Baldor Electric,
U.S. Electric Motors (a division of Emerson Electric Co.), A. O. Smith
Corporation, General Electric Company and Newage (a division of Cummins,
Inc). Major foreign competitors include Siemens AG, Toshiba
Corporation, Weg S.A., Leroy-Somer, Inc. and ABB Ltd.
We serve
various mechanical product markets and compete with a number of different
companies depending on the particular product offering. We believe that we are a
leading manufacturer of several mechanical products and that we are the leading
manufacturer in the United States of worm gear drives and bevel gear drives. Our
competitors in these markets include Boston Gear (a division of Altra Industrial
Motion, Inc.), Dodge (a division of Baldor Electric), Emerson Electric Co. and
Winsmith (a division of Peerless-Winsmith, Inc.). Major foreign competitors
include SEW Eurodrive GmbH & Co., Flender GmbH, Nord, Sumitomo Corporation
and Zahnrad Fabrik GmbH Co.
During
the past several years, niche product market opportunities have become more
prevalent due to changing market conditions. Manufacturers, who
historically may have made component products for inclusion in
their finished goods, have chosen to outsource their requirements to
specialized manufacturers like us because we can make these products more cost
effectively. In addition, we have capitalized on this competitive climate by
making acquisitions and increasing our manufacturing efficiencies. Some of these
acquisitions have created new opportunities by allowing us to enter new markets
in which we had not been involved. In practice, our operating units have sought
out specific niche markets concentrating on a wide range of customers and
applications. We believe that we compete primarily on the basis of quality,
price, service, technology, and our promptness of delivery. We had
one customer that accounted for between 10% and 15% of our consolidated net
sales for the years ended January 2, 2010 and December 29,
2007. We had no customers that accounted for more than 10% of
our consolidated sales for the year ended December 27, 2008.
PRODUCT
DEVELOPMENT AND ENGINEERING
Each of
our business segments has its own product development and design teams that
continuously enhance our existing products and develop new products for our
growing base of customers that require custom and standard
solutions. We believe we have the electric motor industry’s most
sophisticated product development and testing laboratories. We believe these
capabilities provide a significant competitive advantage in the development of
high quality motors and electric generators incorporating leading design
characteristics such as low vibration, low noise, improved safety, reliability
and enhanced energy efficiency.
We are
continuing to expand our business by developing new, differentiated products in
each of our business segments. We work closely with our customers to develop new
products or enhancements to existing products that improve performance and meet
their needs.
As part
of our 2004 HVAC motors and capacitors acquisition, we acquired ECM motor
technology. An ECM motor is a brushless DC electric motor with
integrated speed control made possible through sophisticated electronic and
sensing technology. ECM motors operate at variable speeds with attractive
performance characteristics versus competitive variable speed solutions in
comfort, energy efficiency, motor life and noise. GE developed the
first generation ECM motors over 15 years ago. ECM technology is
protected by over 125 patents, and we acquired from GE intellectual property and
usage rights relating to ECM technology. ECM motors offer
significantly greater temperature and air quality control as well as increased
energy efficiency.
While we
believe that our brands and innovation are important to our continued growth and
strong financial results, we do not consider any individual brand or patent,
except for the ECM related patents, to be material.
MANUFACTURING
AND OPERATIONS
We have
developed and acquired global operations in lower cost locations such as Mexico,
India, Thailand, and China that complement our flexible, rapid response
operations in the United States, Canada and Europe. Our vertically
integrated manufacturing operations, including our own aluminum die casting and
steel stamping operations are an important element of our rapid response
capabilities. In addition, we have an extensive internal logistics
operation and a network of distribution facilities with the capability to modify
stock products to quickly meet specific custom requirements in many
instances. This gives us a competitive advantage as we are able to
deliver a customer’s unique product when and where they want it.
We
manufacture a majority of the products that we sell, but also strategically
outsource components and finished goods from an established global network of
suppliers. Although we have aggressively pursued global sourcing to
reduce our overall costs, we generally maintain a dual sourcing capability in
our existing domestic facilities to ensure a reliable supply source for our
customers. We regularly invest in machinery and equipment and other
improvements to, and maintenance of, our facilities. Additionally, we have
typically obtained significant amounts of quality capital equipment as part of
our acquisitions, often increasing overall capacity and
capability. Base materials for our products consist primarily of:
steel in various types and sizes, including bearings and weldments; copper
magnet wire; and ferrous and non-ferrous castings. We purchase our
raw materials from many suppliers and, with few exceptions, do not rely on any
single supplier for any of our base materials.
We have
also continued to upgrade our manufacturing equipment and processes, including
increasing our use of computer aided manufacturing systems, developing our own
testing systems, and the implementation of Lean Six Sigma. We have
trained over 1,100 people in Lean Six Sigma, resulting in significant cost
savings since the program began in 2005. Our goal is to be a low cost producer
in our core product areas.
6
FACILITIES
We have
manufacturing, sales and service facilities throughout the United States and
Canada and in Mexico, India, China, Australia, Thailand and
Europe. Our Electrical segment currently includes 50 manufacturing,
service and distribution facilities, of which 32 are principal manufacturing
facilities. The Electrical segment’s present operating facilities
contain a total of approximately 6.6 million square feet of space of which
approximately 2.3 million square feet are leased. Our Mechanical
segment currently includes 12 manufacturing, service and distribution
facilities, of which 6 are principal manufacturing facilities. The
Mechanical segment’s present operating facilities contain a total of
approximately 1.1 million square feet of space of which approximately 36,000
square feet are leased. Our principal
executive offices are located in Beloit, Wisconsin in an owned approximately
54,000 square foot office building. We believe our equipment and
facilities are well maintained and adequate for our present needs.
BACKLOG
Our
business units have historically shipped the majority of their products in the
month the order is received. As of January 2, 2010, our backlog was
$264.7 million, as compared to $322.8 million on December 27,
2008. We believe that virtually all of our backlog will be shipped in
2010.
PATENTS,
TRADEMARKS AND LICENSES
We own a
number of United States patents and foreign patents relating to our
businesses. While we believe that our patents provide certain
competitive advantages, we do not consider any one patent or group of patents
essential to our business other than our ECM patents which relate to a material
portion of our sales. We also use various registered and unregistered
trademarks, and we believe these trademarks are significant in the marketing of
most of our products. However, we believe the successful manufacture
and sale of our products generally depends more upon our technological,
manufacturing and marketing skills.
EMPLOYEES
As of the
close of business on January 2, 2010, the Company employed approximately 15,300
worldwide employees. We consider our employee relations to be very
good.
ENVIRONMENTAL
MATTERS
We are
currently involved with environmental proceedings related to certain of our
facilities (see also Item 3 –
Legal Proceedings). Based on available information, we believe
that the outcome of these proceedings and future known environmental compliance
costs will not have a material adverse effect on our financial position or
results of operations.
EXECUTIVE
OFFICERS OF THE COMPANY
The
names, ages, and positions of the executive officers of the Company as February
15, 2010, are listed below along with their business experience during the past
five years. Officers are elected annually by the Board of Directors
at the Meeting of Directors immediately following the Annual Meeting of
Shareholders in April. There are no family relationships among these
officers, nor any arrangements of understanding between any officer and any
other persons pursuant to which the officer was selected.
Name
|
Age
|
Position
|
Business Experience and Principal
Occupation
|
Henry
W. Knueppel
|
61
|
Chairman
and Chief Executive Officer
|
Elected
Chairman in April 2006; elected Chief Executive Officer April 2005; served
as President from April 2002 to December 2005 and Chief Operating Officer
from April 2002 to April 2005; joined the Company in
1979.
|
Mark
J. Gliebe
|
49
|
President
and Chief Operating Officer
|
Elected
President and Chief Operating Officer in December 2005. Joined
the Company in January 2005 as Vice President and President – Electric
Motors Group, following our acquisition of the HVAC motors and capacitors
businesses from GE; previously employed by GE as the General Manager of GE
Motors & Controls in the GE Consumer & Industrial business unit
from June 2000 to December 2004.
|
David
A. Barta
|
47
|
Vice
President and Chief Financial Officer
|
Joined
the Company in June 2004 and was elected Vice President, Chief Financial
Officer in July 2004. Prior to joining the Company, Mr. Barta
served in several financial management positions for Newell Rubbermaid
Inc. from 1995 to June 2004, serving most recently as Chief Financial
Officer Levolor/Kirsch Division. His prior positions during
this time included Vice President – Group Controller Corporate Key
Accounts, Vice President – Group Controller Rubbermaid Group and Vice
President Investor Relations.
|
Paul
J. Jones
|
39
|
Vice
President, General Counsel and Secretary
|
Joined
the Company in September 2006 and was elected Vice President, General
Counsel and Secretary in September 2006. Prior to joining the
Company, Mr. Jones was a partner with the law firm of Foley & Lardner
LLP where he worked since 1998.
|
Terry
R. Colvin
|
54
|
Vice
President
Corporate
Human Resources
|
Joined
the Company in September 2006 and was elected Vice President Corporate
Human Resources in January 2007. Prior to joining the Company,
Mr. Colvin was Vice President of Human Resources for Stereotaxis
Corporation from 2005 to 2006. From 2003 to 2005, Mr. Colvin
was a Plant Operations consultant.
|
7
WEBSITE
DISCLOSURE
The
Company’s Internet address is www.regalbeloit.com. We make available
free of charge (other than an investor’s own Internet access charges) through
our Internet website our Annual Report on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, and amendments to those reports, as soon
as reasonably practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange Commission. We
are not including the information contained on or available through our website
as a part of, or incorporating such information by reference into, this Annual
Report on Form 10-K.
ITEM
1A -
|
RISK
FACTORS
|
You
should carefully consider each of the risks described below, together with all
of the other information contained in this Annual Report on Form 10-K, before
making an investment decision with respect to our securities. If any
of the following risks develop into actual events, our business, financial
condition or results operations could be materially and adversely affected and
you may lose all or part of your investment.
We
operate in highly competitive electric motor, power generation and mechanical
motion control markets.
The
electric motor, power generation and mechanical motion control markets are
highly competitive. Some of our competitors are larger and have
greater financial and other resources than we do. There can be no
assurance that our products will be able to compete successfully with the
products of these other companies.
The
failure to obtain business with new products or to retain or increase business
with redesigned existing or customized products could also adversely affect our
business. It may be difficult in the short-term for us to obtain new
sales to replace any unexpected decline in the sale of existing or customized
products. We may incur significant expense in preparing to meet
anticipated customer requirements, which may not be recovered.
Current
worldwide economic conditions may adversely affect our industry, business and
results of operations.
In 2009,
general worldwide economic conditions experienced a downturn due to the
sequential effects of the subprime lending crisis, general credit market crisis,
collateral effects on the finance and banking industries, increased energy
costs, concerns about inflation, slower economic activity, decreased consumer
confidence, reduced corporate profits and capital spending, adverse business
conditions and liquidity concerns. These conditions make it difficult for our
customers, our vendors and us to accurately forecast and plan future business
activities, and the economic conditions are causing U.S. and foreign businesses
to slow spending on our products, which would delay and lengthen sales cycles.
We cannot predict the timing or duration of any economic slowdown or the timing
or strength of a subsequent economic recovery, worldwide, or in the specific end
markets we serve. If the commercial and industrial, residential HVAC, power
generation and mechanical power transmission markets significantly deteriorate
due to these economic effects, our business, financial condition and results of
operations will likely be materially and adversely affected. Additionally, our
stock price could decrease if investors have concerns that our business,
financial condition and results of operations will be negatively impacted by a
worldwide economic downturn.
Changes
in global commodity prices, interest rates and currency may adversely impact our
financial performance as a result of our commodity, currency and interest rate
hedging activities.
Although
it is impossible to hedge against all currency, commodity or interest risk, we
use derivative financial instruments in order to reduce the substantial effects
of currency and commodity fluctuations and interest rate exposure on our cash
flow and financial condition. These instruments may include foreign currency and
commodity forward contracts, currency swap agreements and currency option
contracts, as well as interest rate swap agreements. We have entered into, and
expect to continue to enter into, such hedging arrangements. As with
all hedging instruments, there are risks associated with the use of such
instruments. While limiting to some degree our risk fluctuations in currency
exchange, commodity price and interest rates by utilizing such hedging
instruments, we potentially forgo benefits that might result from other
fluctuations in currency exchange, commodity and interest rates. We
also are exposed to the risk that its counterparties to hedging contracts will
default on their obligations. We manage exposure to counterparty credit risk by
limiting the counterparties to major international banks and financial
institutions meeting established credit guidelines. However, any default by such
counterparties might have an
adverse effect on us.
8
We
are increasingly reliant on the protection and preservation of our intellectual
property.
We own or
otherwise have rights in a number of patents and trademarks relating to the
products we manufacture, which have been obtained over a period of years. These
patents and trademarks have been of value in the growth of our business and may
continue to be of value in the future. With the exception of the ECM patents, we
do not regard any of our businesses as being dependent upon any single patent or
related group of patents. However, an inability to protect this intellectual
property generally, or the illegal breach of some or a large group of our
intellectual property rights, would have an adverse effect on our
business.
Goodwill
comprises a significant portion of our total assets, and if we determine that
goodwill has become impaired in the future, net income in such years may be
materially and adversely affected.
Goodwill
represents the excess of cost over the fair market value of net assets acquired
in business combinations. We review goodwill and other intangibles at
least annually for impairment and any excess in carrying value over the
estimated fair value is charged to the results of operations. A
reduction in net income resulting from the write down or impairment of goodwill
would affect financial results and could have a material and adverse impact upon
the market price of our common stock. If the current worldwide economic downturn
continues, it could result in circumstances, such as a sustained decline in our
stock price and market capitalization or a decrease in our forecasted cash flows
such that they are insufficient, indicating that the carrying value of our
goodwill may be impaired. If we are required to record a significant
change to earnings in our consolidated financial statements because an
impairment of goodwill is determined, our results of operations will be
adversely affected.
Our
leverage could adversely affect our financial health and make us vulnerable to
adverse economic and industry conditions.
We have
incurred indebtedness that is substantial relative to our shareholders’
investment. Our indebtedness has important
consequences. For example, it could:
|
·
|
make
it difficult for us to fulfill our obligations under our credit and other
debt agreements;
|
|
·
|
make
it more challenging for us to obtain additional financing to fund our
business strategy and acquisitions, debt service requirements, capital
expenditures and working capital;
|
|
·
|
increase
our vulnerability to interest rate changes and general adverse economic
and industry conditions;
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
service our indebtedness, thereby reducing the availability of our cash
flow to finance acquisitions and to fund working capital, capital
expenditures, research and development efforts and other general corporate
activities;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and our markets; and
|
|
·
|
place
us at a competitive disadvantage relative to our competitors that have
less debt.
|
In
addition, our credit facility and senior notes require us to maintain specified
financial ratios and satisfy certain financial condition tests, which may
require that we take action to reduce our debt or to act in a manner contrary to
our business objectives. If an event of default under the credit
facility or senior notes the lenders could elect to declare all amounts
outstanding under the applicable agreement, together with accrued interest, to
be immediately due and payable, and a cross default could occur under the terms
of our senior subordinated convertible notes allowing the trustee or the holders
of the declare the principal amount of the notes, together with accrued
interest, to be immediately due and payable.
We
are subject to litigation, including product liability and warranty claims that
may adversely affect our business and results of operations.
We are,
from time to time, a party to litigation that arises in the normal course of our
business operations, including product warranty and liability claims, contract
disputes and environmental, asbestos, employment and other litigation
matters. We face an inherent business risk of exposure to product
liability and warranty claims in the event that the use of our products is
alleged to have resulted in injury or other damage. While we
currently maintain general liability and product liability insurance coverage in
amounts that we believe are adequate, we cannot assure you that we will be able
to maintain this insurance on acceptable terms or that this insurance will
provide sufficient coverage against potential liabilities that may
arise. Any claims brought against us, with or without merit, may have
an adverse effect on our business and results of operations as a result of
potential adverse outcomes, the expenses associated with defending such claims,
the diversion of our management’s resources and time and the potential adverse
effect to our business reputation.
The
Company has several pension plans and future legislation or regulations intended
to reform the funding and reporting of pension benefit plans could adversely
affect our operating results and cash flows, as could changes in market
conditions that impact the assumptions we use to measure our liabilities under
these plans.
Legislators
and agencies of the U.S. government have proposed legislation and
regulations to amend, restrict or eliminate various features of, and mandate
additional funding of, pension benefit plans. If legislation or new regulations
are adopted, we may be required to contribute additional cash to these plans, in
excess of our current estimates.
9
Market
volatility in interest rates, investment returns and other factors could also
adversely affect the funded status of our pension plans and require that we
contribute additional cash to these plans. Moreover, future changes to the
accounting and reporting standards related to pension plans could create
significant volatility in our operating results.
Cyclicality
adversely affects us.
Our
business is cyclical and dependent on industrial and consumer spending and is
therefore impacted by the strength of the economy generally, interest rates and
other factors. Economic factors adversely affecting OEM production
and consumer spending could adversely impact us. During periods of
expansion in OEM production, we generally have benefited from increased demand
for our products. Conversely, during recessionary periods, we have
been adversely affected by reduced demand for our products.
In
our HVAC motor business, we depend on revenues from several significant
customers, and any loss, cancellation or reduction of, or delay in, purchases by
these customers may have a material adverse effect on our business.
Several
significant customers of our HVAC motors business represent a significant
portion of our revenues. Our success will depend on our continued
ability to develop and manage relationships with these customers. We
expect that significant customer concentration will continue for the foreseeable
future in our HVAC motor business. Our dependence in the HVAC motor
business on sales from a relatively small number of customers makes our
relationship with each of these customers important to our
business. We cannot assure you that we will be able to retain
significant customers. Some of our customers may in the future shift
some or all of their purchases of products from us to our competitors or to
other sources. The loss of one or more of our largest customers, any
reduction or delay in sales to these customers, our inability to develop
relationships successfully with additional customers, or future price
concessions that we may make could have a material adverse effect on our
business.
Our
sales of products incorporated into HVAC systems are seasonal and affected by
the weather; mild or cooler weather could have an adverse effect on our
operating performance.
Many of
our motors are incorporated into HVAC systems that OEMs sell to end
users. The number of installations of new and replacement HVAC
systems or components is higher during the spring and summer seasons due to the
increased use of air conditioning during warmer months. Mild or
cooler weather conditions during the spring and summer season often result in
end users deferring the purchase of new or replacement HVAC systems or
components. As a result, prolonged periods of mild or cooler weather
conditions in the spring or summer season in broad geographical areas could have
a negative impact on the demand for our HVAC motors and, therefore, could have
an adverse effect on our operating performance. In addition, due to
variations in weather conditions from year to year, our operating performance in
any single year may not be indicative of our performance in any future
year.
Our
dependence on, and the price of, raw materials may adversely affect our
profits.
The
principal raw materials used to produce our products are copper, aluminum and
steel. We source raw materials on a global or regional basis, and the
prices of those raw materials are susceptible to significant price fluctuations
due to supply/demand trends, transportation costs, government regulations and
tariffs, changes in currency exchange rates, price controls, the economic
climate and other unforeseen circumstances. If we are unable to pass
on raw material price increases to our customers, our future profitability may
be materially adversely affected.
We
increasingly manufacture our products outside the United States, which may
present additional risks to our business.
As a
result of our recent acquisitions, a significant portion of our net sales are
attributable to products manufactured outside of the United States, principally
in Mexico, India, Thailand and China. Approximately 11,100 of our
approximate 15,300 total employees and 18 of our 38 principal manufacturing
facilities are located outside the United States. International
operations generally are subject to various risks, including political, societal
and economic instability, local labor market conditions, the imposition of
foreign tariffs and other trade restrictions, the impact of foreign government
regulations, and the effects of income and withholding taxes, governmental
expropriation and differences in business practices. We may incur
increased costs and experience delays or disruptions in product deliveries and
payments in connection with international manufacturing and sales that could
cause loss of revenue. Unfavorable changes in the political,
regulatory, and business climate in countries where we have operations could
have a material adverse effect on our financial condition, results of operations
and cash flows.
We
may be adversely impacted by an inability to identify and complete
acquisitions.
A
substantial portion of our growth has come through acquisitions, and an
important part of our growth strategy is based upon acquisitions. We
may not be able to identify and successfully negotiate suitable acquisitions,
obtain financing for future acquisitions on satisfactory terms or otherwise
complete acquisitions in the future. If we are unable to successfully
complete acquisitions, our ability to grow our company significantly may be
limited.
10
The
success of the Company is highly dependent on qualified and sufficient staffing.
Our failure to attract or retain qualified personnel could lead to a loss of
revenue or profitability.
Our
success depends, in part, on the efforts and abilities of our senior management
team and key employees. Their skills, experience and industry contacts
significantly benefit our operations and administration. The failure to attract
or retain members of our senior management team and key employees could have a
negative effect on our operating results.
The
Company’s operations are highly dependent on information technology
infrastructure and failures could significantly affect our
business.
We depend
heavily on our information technology infrastructure in order to achieve our
business objectives. If we experience a problem that impairs this
infrastructure, such as a computer virus, a problem with the functioning of an
important IT application, or an intentional disruption of our IT systems by a
third party, the resulting disruptions could impede our ability to record or
process orders, manufacture and ship in a timely manner, or otherwise carry on
our business in the ordinary course. Any such events could cause us to lose
customers or revenue and could require us to incur significant expense to
eliminate these problems and address related security concerns.
We are in
the process of introducing a global Enterprise Resource Planning
(ERP) system that will redesign and deploy a common information system over
a period of several years. As we implement the ERP system, the new system may
not perform as expected. This could have an adverse effect on our
business.
We
may be adversely affected by environmental, health and safety laws and
regulations.
We are
subject to various laws and regulations relating to the protection of the
environment and human health and safety and have incurred and will continue to
incur capital and other expenditures to comply with these
regulations. Failure to comply with any environmental regulations
could subject us to future liabilities, fines or penalties or the suspension of
production. In addition, we are currently involved in some
remediation activities at certain sites. If unexpected obligations at
these or other sites or more stringent environmental laws are imposed in the
future, we could be adversely affected.
We
may suffer losses as a result of foreign currency fluctuations.
The net
assets, net earnings and cash flows from our foreign subsidiaries are based on
the U.S. dollar equivalent of such amounts measured in the applicable functional
currency. These foreign operations have the potential to impact our
financial position due to fluctuations in the local currency arising from the
process of re-measuring the local functional currency in the U.S.
dollar. Any increase in the value of the U.S. dollar in relation to
the value of the local currency will adversely affect our revenues from our
foreign operations when translated into U.S. dollars. Similarly, any
decrease in the value of the U.S. dollar in relation to the value of the local
currency will increase our development costs in foreign operations, to the
extent such costs are payable in foreign currency, when translated into U.S.
dollars.
The
operations and success of the Company can be impacted by natural disasters,
terrorism, acts of war, international conflict, political and governmental
actions which could harm our business.
Natural
disasters, acts or threats of war or terrorism, international conflicts, and the
actions taken by the United States and other governments in response to such
events could cause damage or disrupt our business operations, our suppliers, or
our customers, and could create political or economic instability, any of which
could have an adverse effect on our business. Although it is not possible to
predict such events or their consequences, these events could decrease demand
for our products, could make it difficult or impossible for us to deliver
products, or could disrupt our supply chain. The Company may also be
impacted by actions by foreign governments, including currency devaluation,
tariffs and nationalization, where our facilities are located which could
disrupt manufacturing and commercial operations.
The
Company is subject to changes in legislative, regulatory and legal developments
involving income taxes.
The
Company is subject to U.S. federal, state, and international income, payroll,
property, sales and use, fuel, and other types of taxes. Changes in
tax rates, enactment of new tax laws, revisions of tax regulations, and claims
or litigation with taxing authorities could result in substantially higher taxes
and, therefore, could have a significant adverse effect on the Company’s results
or operations, financial conditions and liquidity. Currently, a
significant amount of the Company’s revenue is generated from customers located
outside of the United States, and a portion of the Company’s assets and
employees are located outside of the United States. U.S. income tax
and foreign withholding taxes have not been provided on undistributed earnings
for certain non-U.S. subsidiaries, because such earnings are intended to be
indefinitely reinvested in the operations of those subsidiaries.
Several
U.S. legislation proposals have been announced that would substantially reduce
(or have the effect of substantially reducing) the Company’s ability to defer
U.S. taxes on profit permanently reinvested outside the United
States. Proposals to date could have a negative impact on the
Company’s financial position and operating results. Additionally,
they could have a negative impact on the Company’s ability to compete in the
global
11
marketplace. The
probability of any of the se proposals being enacted cannot be predicted with
any certainty. The Company continues to monitor legislation to be in
position to structure operations in a manner that will reduce the impact of
enacted changes.
The
Company is subject to tax laws and regulations in many jurisdictions and the
inability to successfully defend claims from taxing authorities related to our
current and/or acquired businesses could adversely affect our operating results
and financial position.
We
conduct business in many countries, which requires us to interpret the income
tax laws and rulings in each of those taxing jurisdictions. Due to the
subjectivity of tax laws between those jurisdictions as well as the subjectivity
of factual interpretations, our estimates of income tax liabilities may differ
from actual payments or assessments. Claims from taxing authorities related to
these differences could have an adverse impact on our operating results and
financial position.
Our
stock may be subject to significant fluctuations and volatility.
The
market price of shares of our common stock may be volatile. Among the
factors that could affect our common stock price are those discussed above under
“Risks Factors” as well
as:
|
·
|
quarterly
fluctuation in our operating income and earnings per share
results;
|
|
·
|
decline
in demand for our products;
|
|
·
|
significant
strategic actions by our competitors, including new product introductions
or technological advances;
|
|
·
|
fluctuations
in interest rates;
|
|
·
|
cost
increases in energy, raw materials or
labor;
|
|
·
|
changes
in revenue or earnings estimates or publication of research reports by
analysts; and
|
|
·
|
domestic
and international economic and political factors unrelated to our
performance.
|
In
addition, the stock markets have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the
trading price of our common stock.
ITEM
1B - UNRESOLVED STAFF
COMMENTS
None.
ITEM
2 -
PROPERTIES
We have
manufacturing, sales and service facilities throughout the United States and in
Canada, Mexico, India, China, Australia, Thailand and Europe.
Our
Electrical segment currently includes 50 manufacturing, service and distribution
facilities, of which 32 are principal manufacturing facilities. The
Electrical segment’s present operating facilities contain a total of
approximately 6.6 million square feet of space of which approximately 34% are
leased.
Our
Mechanical segment currently includes 12 manufacturing, service and distribution
facilities, of which six are principal manufacturing facilities. The
Mechanical segment’s present operating facilities contain a total of
approximately 1.1 million square feet of space of which approximately 3% are
leased.
12
At
January 2, 2010, the Mechanical segment had two buildings and the Electrical
segment had two buildings totaling approximately 0.5 million square feet that
were available for sale due to consolidation of manufacturing in other
locations.
Our
principal executive offices are located in Beloit, Wisconsin in an owned
approximately 54,000 square foot office building. We believe our
equipment and facilities are well maintained and adequate for our present
needs.
ELECTRICAL SEGMENT
|
|||
Location
|
Sq Footage
|
Status
|
Use
|
Wuxi,
China
|
623,268
|
Owned
|
Manufacturing
|
Kolkata,
India
|
563,298
|
Owned
|
Manufacturing
|
Wausau,
WI
|
498,329
|
Owned
|
Manufacturing
|
Juarez,
Mexico (2)
|
416,631
|
Owned
|
Manufacturing
|
Reynosa,
Mexico
|
346,293
|
Owned
|
Manufacturing
|
Springfield,
MO
|
325,355
|
Owned
|
Manufacturing
|
Shanghai,
China (2)
|
311,000
|
Leased
|
Manufacturing
|
Eldon,
MO (2)
|
276,180
|
Owned
|
Manufacturing
& Warehouse
|
Changzhou,
China (2)
|
270,890
|
Owned
& Leased
|
Manufacturing
|
Arnhem,
The Netherlands (4)
|
252,144
|
Leased
|
Warehouse
|
Piedras
Negras, Mexico (3)
|
244,048
|
Leased
|
Manufacturing
& Warehouse
|
Cassville,
MO
|
238,838
|
Owned
|
Manufacturing
|
Monterrey,
Mexico (2)
|
235,624
|
Leased
|
Manufacturing
|
Indianapolis,
IN
|
220,832
|
Leased
|
Warehouse
|
Faridabad,
India
|
220,000
|
Leased
|
Manufacturing
|
Lebanon,
MO (2)
|
194,400
|
Owned
|
Manufacturing
|
Bangkok,
Thailand (2)
|
169,747
|
Owned
|
Manufacturing
& Warehouse
|
West
Plains, MO (2)
|
139,000
|
Owned
|
Manufacturing
|
Pharr,
TX
|
125,000
|
Leased
|
Warehouse
|
Lincoln,
MO
|
120,000
|
Owned
|
Manufacturing
|
Blytheville,
AR
|
107,000
|
Leased
|
Manufacturing
|
Black
River Falls, WI
|
103,000
|
Owned
|
Manufacturing
|
All
Other (15)
|
591,655
|
(1)
|
(1)
|
MECHANICAL SEGMENT
|
|||
Location
|
Sq Footage
|
Status
|
Use
|
Liberty,
SC
|
173,516
|
Owned
|
Manufacturing
|
Aberdeen,
SD
|
164,960
|
Owned
|
Manufacturing
|
Shopiere,
WI
|
132,000
|
Owned
|
Manufacturing
|
Union
Grove, WI
|
122,000
|
Owned
|
Manufacturing
|
All
Other (8)
|
533,176
|
(2)
|
(2)
|
(1)
|
Less
significant manufacturing, service and distribution and engineering
facilities located in the United States, Canada, Europe, and Asia:
Electrical leased square footage
2,267,186
|
(2)
|
Mechanical
leased square footage 36,492.
|
ITEM
3
- LEGAL
PROCEEDINGS
On July
30, 2009, we filed a response and counterclaims to an action filed by Nordyne,
Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri
in which action Nordyne is seeking a judgment declaring that neither Nordyne’s
G7 furnace systems nor its iQ Drive 23-seer air conditioning systems infringe on
our ECM (electronically commutated motor) systems patents (U.S. Patent No.
5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is
invalid. In our response and counterclaims against Nordyne we are
seeking a judgment that the ‘058 Patent is valid and that Nordyne has, in fact,
infringed and continues to infringe the ‘058 Patent by making, using, offering
for sale and selling it’s G7 furnace systems and iQ Drive 23-seer air
conditioning systems. We have also requested the U.S. District Court
to enjoin Nordyne and all persons working in concert with Nordyne from further
infringement of the ‘058 Patent and to award us compensatory and other damages
caused by such infringement. We intend to defend our intellectual
property vigorously against the claims asserted by Nordyne and against any
infringement by Nordyne or any other person. We do not currently
believe that the litigation will have a material effect on the Company’s
financial position or its results of operations.
13
The
Company is, from time to time, party to litigation that arises in the normal
course of our business operations, including product warranty and liability
claims, contract disputes and environmental, asbestos, employment and other
litigation matters. The Company’s products are used in a variety of
industrial, commercial and residential applications that subject us to claims
that the use of our products is alleged to have resulted in injury or other
damage. The Company accrues for anticipated costs in defending
against such lawsuits in amounts that we believe are adequate, and the Company
does not believe that the outcome of any such lawsuit will have a material
effect on the Company’s financial position or its results of
operations.
ITEM
4
- SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the quarter ended
January 2, 2010.
PART
II
ITEM
5 -
|
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY
SECURITIES
|
The
Company’s Common Stock, $.01 par value (“Common Stock”), is traded on the New
York Stock Exchange under the symbol “RBC.” The following table
sets forth the range of high and low closing sales prices for the Common Stock
for the period from December 29, 2007 through January 2, 2010. The
Company submitted its Section 303A.12(a) CEO Certification to the NYSE on April
29, 2009.
2009
|
2008
|
|||||||||||||||||||||||
Price
Range
|
Price
Range
|
|||||||||||||||||||||||
High
|
Low
|
Dividends
Declared
|
High
|
Low
|
Dividends
Declared
|
|||||||||||||||||||
1st
Quarter
|
$ | 38.83 | $ | 25.81 | $ | 0.16 | $ | 44.95 | $ | 33.94 | $ | 0.15 | ||||||||||||
2nd
Quarter
|
42.65 | 29.99 | 0.16 | 47.54 | 35.82 | 0.16 | ||||||||||||||||||
3rd
Quarter
|
49.26 | 38.76 | 0.16 | 49.37 | 39.95 | 0.16 | ||||||||||||||||||
4th
Quarter
|
53.76 | 43.43 | 0.16 | 42.52 | 26.07 | 0.16 |
The
Company has paid 198 consecutive quarterly dividends through January
2010. The number of registered holders of Common Stock as of February
22, 2010 was 576.
The
following table contains detail related to the repurchase of common stock based
on the date of trade during the quarter ended January 2, 2010.
2009
Fiscal Month
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May be Purchased Under the Plan or
Programs
|
||||||||||||
September
27 to October
31
|
- | $ | - | - | 2,115,900 | |||||||||||
November
1 to November
28
|
362 | $ | 51.56 | - | 2,115,900 | |||||||||||
November
29 to January
2, 2010
|
354 | $ | 51.88 | - | 2,115,900 | |||||||||||
Total
|
716 | - |
Under the
Company’s equity incentive plans, participants may pay the exercise price or
satisfy all or a portion of the federal, state and local withholding tax
obligations arising in connection with plan awards by electing to a) have the
Company withhold shares of common stock otherwise issuable under the award, b)
tender back shares received in connection with such award or c) deliver
previously owned shares of common stock, in each case having a value equal to
the exercise price or the amount to be withheld.
The Board
of Directors has approved repurchase programs of up to three million common
shares of Company stock. Management is authorized to effect purchases from time
to time in the open market or through privately negotiated transactions. As of
December 27, 2008, the Company had repurchased 884,100 shares at an average
purchase price of $21.96 per share under this program. A total of
110,000 of these shares were repurchased in the fiscal year ended December 27,
2008 for a total cost of $4.2 million. During 2009 the Company issued
approximately 1.4 million shares, including all 884,100 treasury shares, in
connection with the redemption of certain Convertible notes. (See
Note 8 of the Consolidated Financial Statements.)
Item 12
of this Annual Report on Form 10-K contains certain information relating to the
Company's equity compensation plans.
14
Stock
Performance
The
following information in this Item 5 of this Annual Report on Form 10-K is not
deemed to be “soliciting material” or to be “filed” with the SEC or subject to
Regulation 14A or 14C under the Securities Exchange Act of 1934 (the “Exchange
Act”) or to the liabilities of Section 18 of the Exchange Act, and will not be
deemed to be incorporated by reference into any filing under the Securities Act
of 1933 or the Exchange Act, except to the extent we specifically incorporate it
by reference into such a filing.
The
following graph compares the hypothetical total shareholder return (including
reinvestment of dividends) on an investment in (1) the Common Stock of the
Company, (2) the Standard & Poor’s Mid Cap 400 Index, (3) the Standard &
Poor’s 400 Electrical Components and Equipment Index, (4) the Standard &
Poor’s Small Cap 600 Index, and (5) the Standard & Poor’s 600 Electrical
Components and Equipment Index for the period December 31, 2004 through January
2, 2010. In each case, the graph assumes the investment of $100.00 on
December 31, 2004.
![](https://www.sec.gov/Archives/edgar/data/0000082811/000008281110000009/linechart.jpg)
2005
|
2006
|
2007
|
2008
|
2009
|
|||||
Regal-Beloit
Corporation
|
125.81
|
188.89
|
163.76
|
125.74
|
195.27
|
||||
S&P
MidCap 400 Index
|
112.56
|
124.17
|
134.08
|
81.78
|
117.45
|
||||
S&P
400 Electrical Components & Equipment
|
110.25
|
123.90
|
155.51
|
94.84
|
130.58
|
||||
S&P
SmallCap 600 Index
|
107.68
|
123.96
|
123.59
|
81.25
|
106.96
|
||||
S&P
600 Electrical Components & Equipment
|
111.10
|
150.37
|
166.47
|
103.97
|
141.48
|
15
ITEM
6
- SELECTED
FINANCIAL DATA
The
selected statement of income data for the years ended January 2, 2010, December
27, 2008, and December 29, 2007 and the balance sheet data at January 2, 2010,
and December 27, 2008 are derived from, and are qualified by reference to, the
audited financial statements of the Company included elsewhere in this Annual
Report on Form 10-K. The selected statement of income data for the
year ended December 30, 2006 and December 31, 2005 and the balance sheet data at
December 29, 2007, December 30, 2006 and December 31, 2005 are derived from
audited financial statements not included herein (1).
(In
Thousands, Except Per Share Data)
|
||||||||||||||||||||
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
Year
Ended
|
||||||||||||||||
January
2, 2010
|
December
27, 2008
(1)
|
December
29, 2007 (1)
|
December
30, 2006 (1)
|
December
31, 2005
(1)
|
||||||||||||||||
Net
Sales
|
$ | 1,826,277 | $ | 2,246,249 | $ | 1,802,497 | $ | 1,619,545 | $ | 1,428,707 | ||||||||||
Income from
Operations
|
159,520 | 230,431 | 206,060 | 194,017 | 134,572 | |||||||||||||||
Net
Income Attributable to Regal Beloit
|
95,048 | 125,525 | 115,499 | 107,156 | 67,091 | |||||||||||||||
Total
Assets
|
2,112,237 | 2,023,496 | 1,862,247 | 1,437,559 | 1,342,554 | |||||||||||||||
Long-Term
Debt
|
468,065 | 560,127 | 552,917 | 313,351 | 371,463 | |||||||||||||||
Regal
Beloit Shareholders' Equity
|
1,167,824 | 825,987 | 861,750 | 755,984 | 657,215 | |||||||||||||||
Earnings
Per Share of Common Stock:
|
||||||||||||||||||||
Basic
|
2.76 | 4.00 | 3.70 | 3.47 | 2.26 | |||||||||||||||
Assuming
Dilution
|
2.63 | 3.78 | 3.40 | 3.20 | 2.17 | |||||||||||||||
Cash
Dividends Declared
|
0.64 | 0.63 | 0.59 | 0.55 | 0.51 | |||||||||||||||
Shareholders'
Equity
|
33.85 | 26.35 | 27.57 | 24.51 | 22.15 | |||||||||||||||
Weighted
Average Shares Outstanding (in 000's):
|
||||||||||||||||||||
Basic
|
34,499 | 31,343 | 31,252 | 30,847 | 29,675 | |||||||||||||||
Assuming
Dilution
|
36,132 | 33,251 | 33,921 | 33,504 | 30,879 |
(1)
|
Adjusted
for the 2009 adoption of new accounting guidance related to Convertible
Debt and Noncontrolling Interests (See also Note 2 of the Consolidated
Financial Statements).
|
ITEM
7
- MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
OVERVIEW
Regal
Beloit Corporation seeks to deliver strong, consistent business results and
superior shareholder returns by providing value added products to our customers
who serve the commercial, industrial, and residential
markets.
To this
end, we are focused on two product segments: Electrical and Mechanical. Within
these segments, we follow a well defined business strategy to develop and
increase market leadership positions in key product categories and improve
financial performance. On an ongoing basis, we focus on a
variety of key indicators to monitor business performance. These indicators
include organic and total sales growth (including volume and price components),
market share, gross profit margin, operating profit, net income and earnings per
share, and measures to optimize the management of working capital, capital
expenditures, cash flow and return on capital. The monitoring of these
indicators, as well as our corporate governance practices (including the
Company’s Code of Conduct), are used to ensure that business health and strong
internal controls are maintained.
To
achieve our financial objectives, we are focused on initiatives to drive and
fund growth. We seek to capture significant opportunities for growth by
identifying and meeting customer needs within our core product categories and
identifying category expansion opportunities. These product needs are met
through extensive product research and development efforts as well as through a
disciplined acquisition strategy. Growth opportunities are emphasized that offer
stronger market growth potential as a result of geographic based expansion,
technology or industry expansion. The investments needed to fund our growth are
developed through continuous, corporate-wide initiatives to lower costs and
increase effective asset utilization. We also prioritize investments toward
higher return on capital businesses. Our management team is
compensated based on a modified Economic Value Added (EVA) program which
reinforces our capital allocation disciplines which drives capital allocation to
increase shareholder value. Our key metrics include: total sales
growth, organic sales growth, operating margin percent, operating cash flow as a
percent of net income and return on invested capital (ROIC).
Given the
global economic slowdown, continued competitive marketplace and highly
fluctuating raw material and energy costs, we anticipate that the near-term
operating environment will remain challenging. However, we anticipate that our
strong balance sheet and liquidity combined with productivity efforts, new
products and the impact of our Lean Six Sigma program will provide additional
funds for investment in support of key initiatives and new product
development.
As of the
beginning of fiscal 2009, the Company adopted new accounting guidance related to
convertible debt and noncontrolling interests (see Note 2 of the Consolidated
Financial Statements), which requires us to adjust previously disclosed
consolidated financial statements to conform to the current period
presentation.
16
RESULTS
OF OPERATIONS
NET SALES
|
(In
millions)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
Sales
|
$ | 1,826.3 | $ | 2,246.2 | $ | 1,802.5 | ||||||
Sales
growth rate
|
(18.7 | %) | 24.6 | % | 11.3 | % | ||||||
Net Sales by Segment:
|
||||||||||||
Electrical
segment
|
$ | 1,637.7 | $ | 1,998.6 | $ | 1,559.0 | ||||||
Sales
growth rate
|
(18.1 | %) | 28.2 | % | 11.9 | % | ||||||
Mechanical
segment
|
$ | 188.6 | $ | 247.6 | $ | 243.5 | ||||||
Sales
growth rate
|
(23.8 | %) | 1.7 | % | 7.3 | % |
2009 versus
2008
Worldwide
sales for year ended January 2, 2010 were $1.826 billion, an 18.7% decrease over
the $2.246 billion reported for the year ended for December 27,
2008. Full year 2009 sales included $57.8 million of incremental
sales related to the 2008 acquired businesses and the CPT acquisition completed
on January 2, 2009 (see Note 5 of the Consolidated Financial
Statements).
In the
Electrical segment, sales decreased 18.1% including the impact of the
acquisitions noted above. Exclusive of the acquired businesses,
Electrical segment sales decreased 21.0%. Sales for the residential
HVAC motor business continued to be negatively impacted by the weak housing
markets; however, economic stimulus related spending, higher efficiency product
mix, and low prior year comparables resulted in a 6.8% decrease during 2009 for
the HVAC residential market.
Driven by
weak end markets, commercial and industrial motor sales in North America for the
year ended January 2, 2010 decreased 25.5% over sales for the year ended
December 27, 2008. Global generator sales decreased 42.6% for the
year ended January 2, 2010 as compared to the prior year.
Sales in
the Mechanical segment decreased 23.8% from the prior year
period. Weakness in end markets for all Mechanical segment businesses
was experienced in 2009 as a result of weak industrial markets.
From a
geographic perspective, Asia-based sales decreased 23.5% as compared to
2008. In total, sales to regions outside of the United States were
26.9% of total sales for the year ended January 2, 2010 as compared to 27.1% in
2008. The negative impact of foreign currency exchange rates
decreased total sales by 0.3% for the year ended January 2, 2010 as compared to
the prior year period.
2008 versus
2007
Worldwide
sales for year ended December 27, 2008 were $2.246 billion, a 24.6% increase
over the $1.802 billion reported for the year ended for December 29,
2007. Full year 2008 sales included $404.5 million of incremental
sales from the businesses acquired in 2007 and 2008 (see Note 5 of the
Consolidated Financial Statements).
In the
Electrical segment, sales increased 28.2% including the impact of the
acquisitions noted above. Exclusive of the acquired businesses,
Electrical segment sales were up 2.2%. Sales for the residential HVAC motor
business were negatively impacted by the weak housing markets, including new
home construction and sales of existing homes. Also, we believe that
the replacement nature of our HVAC motors was negatively impacted by the lack of
credit availability for homeowners who may have elected to repair HVAC systems
rather than a full replacement. Sales for the full year 2008 for the HVAC
business decreased 1.1%. We saw strength in sales of commercial and industrial
motors and our power generation products throughout the majority of 2008, with
global weakness in demand developing in the third and fourth
quarters. Sales of commercial and industrial motors increased
approximately 2.8% for the full year 2008. Sales of power generation
products increased 21.9% for the same period.
Sales in
the Mechanical segment increased 1.7% from the prior year period. Individual
business results varied significantly depending on the strength of their end
markets. Sales in the commercial and industrial product lines remained
relatively strong throughout the year. This strength was largely
offset by weak sales in our Richmond Gear operation, which are dependent on
consumer spending on discretionary auto and marine products.
From a
geographic perspective, Asia-based sales increased 62.6% as compared to
2007. In total, sales to regions outside of the United States were
27.1% of total sales for 2008 in comparison to 21.7% for 2007.
17
GROSS PROFIT
|
(In
thousands)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Gross
Profit
|
$ | 424,224 | $ | 500,680 | $ | 413,353 | ||||||
Gross
profit percentage
|
23.2 | % | 22.3 | % | 22.9 | % | ||||||
Gross Profit by Segment:
|
||||||||||||
Electrical
segment
|
$ | 379,017 | $ | 428,778 | $ | 343,445 | ||||||
Gross
profit percentage
|
23.1 | % | 21.5 | % | 22.0 | % | ||||||
Mechanical
segment
|
$ | 45,207 | $ | 71,902 | $ | 69,908 | ||||||
Gross
profit percentage
|
24.0 | % | 29.0 | % | 28.7 | % |
2009 versus
2008
The gross
profit margin for the year ended January 2, 2010 was 23.2% as compared to 22.3%
reported for 2008. The gross profit margin for the Electrical segment
was 23.1% for the year ended January 2, 2010 versus 21.5% in the prior
year. Electrical segment margins improved due to cost reduction
efforts, including the benefit from recent plant consolidations, a mix change
toward higher efficiency products in 2009, and short term net material cost
savings. Negative fixed cost absorption in our plants due to lower
sales and production levels partially offset these gains. The
Mechanical segment gross margin was 24.0% for the year ended January 2, 2010
versus 29.0% in the prior year. The Mechanical segment gross margin
decreases were driven by negative fixed cost absorption impacts of lower
production volumes. Overall, high efficiency product sales across our
business represented 17.2% of net sales in 2009 versus 12.8% for
2008.
2008 versus
2007
The gross
profit margin for the year ended December 27, 2008 was 22.3% as compared to the
22.9% reported for 2007. Higher material costs had a significant impact on 2008
partially offset by the contribution from new products, productivity efforts,
pricing actions, and product mix. The raw material cost increases
resulted primarily from increases in the cost of copper and
steel. The gross profit margin for the Electrical segment reflected
these impacts and decreased to 21.5% from 22.0% in 2007. Mechanical segment
gross profit margin increased to 29.0% in 2008 from 28.7% in the prior
year.
OPERATING EXPENSES
|
(In
thousands)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
Expenses
|
$ | 264,704 | $ | 270,249 | $ | 207,293 | ||||||
As
a percentage of net sales
|
14.5 | % | 12.0 | % | 11.5 | % | ||||||
Operating Expenses by
Segment:
|
||||||||||||
Electrical
segment
|
$ | 234,117 | $ | 237,246 | $ | 173,756 | ||||||
As
a percentage of net sales
|
14.3 | % | 11.9 | % | 11.1 | % | ||||||
Mechanical
segment
|
$ | 30,587 | $ | 33,003 | $ | 33,537 | ||||||
As
a percentage of net sales
|
16.2 | % | 13.3 | % | 13.8 | % |
2009 versus
2008
Operating
expenses were $264.7 million (14.5% of net sales) in the year ended January 2,
2010 versus $270.2 million (12.0% of net sales) in 2008. Operating
expenses included an incremental amount of approximately $13.8 million related
to the acquired Hwada, Dutchi and CPT businesses. Significant
operating cost reductions were made in 2009 as sales volumes decreased due to
the economic slowdown. Electrical segment operating expenses were
14.3% of net sales for the year ended January 2, 2010 versus 11.9% in the prior
year. Mechanical segment operating expenses were 16.2% of net
sales in 2009 and 13.3% in 2008.
2008 versus
2007
Operating
expenses were $270.2 million (12.0% of net sales) in the year ended December 27,
2008 versus $207.3 million (11.5% of sales) in 2007. The $62.9 million increase
is driven by the full year impact of 2007 acquisitions and the 2008
acquisitions. Electrical segment operating expenses were 11.9% of sales in 2008
and 11.1% of sales in 2007. Mechanical operating expenses as a
percent of sales decreased to 13.3% from 13.8% in 2007.
INCOME FROM OPERATIONS
|
(In
thousands)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
from Operations
|
$ | 159,520 | $ | 230,431 | $ | 206,060 | ||||||
As
a percentage of net sales
|
8.7 | % | 10.3 | % | 11.4 | % | ||||||
Income from Operations by
Segment:
|
||||||||||||
Electrical
segment
|
$ | 144,901 | $ | 191,532 | $ | 169,689 | ||||||
As
a percentage of net sales
|
8.8 | % | 9.6 | % | 10.9 | % | ||||||
Mechanical
segment
|
$ | 14,619 | $ | 38,899 | $ | 36,371 | ||||||
As
a percentage of net sales
|
7.8 | % | 15.7 | % | 14.9 | % |
18
2009 versus
2008
Income
from operations was $159.5 million for the year ended January 2, 2010 and $230.4
million in the prior year. As a percentage of sales, income from
operations was 8.7% in 2009 versus 10.3% in 2008. Income from
operations declined, but was partially offset by cost reduction efforts,
including the benefit from recent plant consolidations, a mix toward higher
efficiency products in 2009, and short term net material cost savings.
Offsetting these factors were negative impacts from lower fixed cost
absorption. Electrical segment income from operations was 8.8% of net
sales in 2009 versus 9.6% in 2008. Driven by negative fixed cost
absorption impacts of lower production volumes, the Mechanical segment income
from operations was 7.8% of net sales for 2009 versus 15.7% of net sales in
2008.
2008 versus
2007
Income
from operations was $230.4 million versus $206.1 million in the comparable
period of 2007. As a percent of sales, income from operations was
10.3% for the year ended December 27, 2008 versus 11.4% in the comparable period
of 2007. Electrical segment income from operations increased 12.9% to
$191.5 million from $169.7 million in 2007 driven by the acquired businesses. As
a percent of sales, Electrical segment operating income decreased to 9.6% in
2008 from 10.9% in 2007. This decrease reflected lower operating profit margins
from the acquired businesses, and significantly increased raw material costs
partially offset by contributions from new products, pricing actions, and
productivity. Mechanical segment income from operations increased 7.0% to $38.9
million in 2008 from $36.4 million in 2007. As a percent of sales, Mechanical
segment operating income increased to 15.7% in 2008 from 14.9% in 2007.
Individual business results varied significantly based on the strength of their
end markets.
INTEREST EXPENSE, NET
|
(In
thousands)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Interest
Expense, Net
|
$ | 21,565 | $ | 31,168 | $ | 25,717 | ||||||
Year
End Weighted Average Interest Rate
|
3.6 | % | 4.1 | % | 4.9 | % |
2009 versus
2008
Net
interest expense for the year ended January 2, 2010 was $21.6 million versus
$31.2 million for the year ended December 27, 2008. During 2009, the
Company’s interest expense decreased driven by the redemption of $75.8 million
of Convertible Notes (see Note 8 of the Consolidated Financial
Statements). Interest income increased in 2009 due to higher cash
balances as a result of our strong operating cash flow and the May 2009
secondary stock offering. (See also Liquidity and Capital Resources
discussion following.)
2008 versus
2007
Net
interest expense was $31.2 million versus $25.7 million in the comparable period
of 2007. The increase is driven by higher levels of average debt
outstanding driven by the acquisitions completed since August 2007.
PROVISION FOR INCOME TAXES
|
(In thousands)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
Taxes
|
$ | 39,276 | $ | 70,349 | $ | 61,937 | ||||||
Effective
Tax Rate
|
28.5 | % | 35.3 | % | 34.3 | % |
2009 versus
2008
The
effective tax rate for the year ended January 2, 2010 was 28.5% compared to
35.3% in the prior year period. The decrease in the effective tax
rate is driven by changes in the global distribution of income, as well as
adjustments to tax reserves due to a statutory expiration. (See Note
11 of the Consolidated Financial Statements.)
2008 versus
2007
The
effective tax rate for the year ended December 27, 2008 was 35.3% versus 34.3%
in the prior year period. The increase in the effective tax rate
results from the global distribution of income and increases in certain
statutory tax rates in Mexico and China.
NET INCOME ATTRIBUTABLE TO REGAL BELOIT
CORPORATION AND EARNINGS PER SHARE
|
||||||||||||
(In
millions, except per share data)
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
Income Attributable to Regal Beloit Corporation
|
$ | 95.0 | $ | 125.5 | $ | 115.5 | ||||||
Fully
Diluted Earnings per Share
|
$ | 2.63 | $ | 3.78 | $ | 3.40 | ||||||
Average
Number of Diluted Shares
|
36.1 | 33.3 | 33.9 |
2009 versus
2008
Net
Income Attributable to Regal Beloit Corporation for the year ended January 2,
2010 was $95.0 million, a decrease of 24.3% versus the $125.5 million reported
in 2008. Fully diluted earnings per share was $2.63 as compared to
$3.78 reported for the year ended December 27, 2008. The average
number of diluted shares was 36,131,607 during the year ended January 2, 2010 as
compared to 33,250,689 during the year ended December 27, 2008.
19
2008 versus
2007
Net
Income Attributable to Regal Beloit Corporation for the year ended December 27,
2008 was $125.5 million, an increase of 8.7% versus the $115.5 million reported
in the comparable period of 2007. Fully diluted earnings per share
was $3.78 as compared to $3.40 per share reported in 2007. The
average number of diluted shares was 33,250,689 during the year ended December
27, 2008 as compared to 33,920,886 during the comparable period of
2007.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal source of liquidity is operating cash flow which we target to equal or
exceed our net income. In addition to operating income, other
significant factors affecting our liquidity management
include: working capital levels, capital expenditures, dividends,
acquisitions, availability of debt financing and the ability to attract long
term capital at acceptable terms.
Recent
distress and volatility in financial markets has created increased levels of
uncertainty regarding available debt and equity capital. We have
assessed our liquidity and continue to monitor the impact of the broader
volatility on our business including vendors and customers. We have
determined that there has not been a significant impact on our financial
position, results of operations, or liquidity during 2009.
Our
working capital was $670.3 million at January 2, 2010, an increase of 55.8% from
$430.3 million at year-end 2008. At January 2, 2010 our current
ratio, the ratio of our current assets to current liabilities, was 3.2:1 versus
2.0:1 at the previous year-end.
Cash flow
provided by operating activities (“operating cash flow”) was $314.9 million in
2009, a $160.7 million increase from 2008. The increase was
driven by a combined $95.2 million increase in net cash provided from
Receivables, Inventory and Accounts Payable. These working capital components
provided $96.2 million of operating cash in 2009 versus a combined $1.0 million
provided in 2008. The $85.5 million increase in net cash flow used in Current
Liabilities and Other is driven by a $52.4 million net change in deferred tax
assets related to derivative instruments.
Cash flow
used in investing activities was $151.6 million in 2009, $51.9 million more than
in 2008 driven by the net purchase of investment securities of $117.6 million
partially offset by lower acquisitions and lower capital expenditures in 2009.
Capital spending decreased to $33.6 million in 2009 from $52.2 million a year
earlier. Our commitments for property, plant and equipment as of
January 2, 2010 were approximately $5.2 million. We believe that our
present facilities, augmented by planned capital expenditures, are sufficient to
provide adequate capacity for our operations in 2010.
Cash flow
provided by financing activities was $32.9 million in 2009 compared to cash flow
used of $31.4 million in 2008. On May 22, 2009, the Company completed
a public offering of 4,312,500 shares of Common Stock at a price of $36.25 per
share, resulting in $150.4 million of net proceeds. We paid $21.6
million in dividends to shareholders in 2009.
At
January 2, 2010, the Company had $250.0 million of Senior notes (“the Notes”)
outstanding. The Notes were sold pursuant to a Note Purchase
Agreement (the “Agreement”) by and among the Company and the purchasers of the
Notes. The Notes were issued and sold in two
series: $150.0 million in Floating Rate Series 2007A Senior Notes,
Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A
Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest
at a margin over the London Inter-Bank Offered Rate (“LIBOR”), which margin
varies with the ratio of the Company’s consolidated debt to consolidated
earnings before interest, taxes, deprecation, and amortization (“EBITDA”) as
defined in the Agreement. These interest rates also vary as LIBOR
varies. The Agreement permits the Company to issue and sell additional note
series, subject to certain terms and conditions described in the Agreement, up
to a total of $600.0 million in combined Notes.
The
Company’s $500.0 million revolving credit facility, (“the
Facility”) permits the Company to borrow at interest rates (0.9% at
January 2, 2010) based upon a margin above LIBOR, which margin varies
with the ratio of senior funded debt (total debt excluding convertible debt) to
EBITDA, as defined in the Facility. These interest rates also vary as
LIBOR varies. We pay a commitment fee on the unused amount of the
Facility, which also varies with the ratio of senior funded debt to
EBITDA.
On June
16, 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with
certain financial institutions, whereby the Company borrowed an aggregate
principal amount of $165.0 million. The Term Loan matures in June 2013, and
borrowings under the Term Loan generally bear interest at a variable rate equal
to (i) a margin over the LIBOR, which margin varies depending on whether certain
criteria are satisfied, or (ii) the alternate base rate as defined in the
agreement. At January 2, 2010, the interest rate of 1.2% was based on
a margin over LIBOR.
The
Notes, the Term Loan and the Facility require us to meet specified financial
ratios and to satisfy certain financial condition tests. We were in
compliance with all debt covenants as of January 2, 2010.
20
The
Company has interest rate swap agreements to manage fluctuations in cash flows
resulting from interest rate risk. (See also Note 14 of the Consolidated
Financial Statements.)
The
Company also had $39.2 million and $113.9 million of convertible senior
subordinated notes outstanding at January 2, 2010 and December 27, 2008
respectively. As of January 2, 2010 the notes are convertible as the
closing price of the Company’s common stock exceeded the contingent conversion
price for the specified amount of time. The notes, which are
unsecured and due in 2024, bear interest at a fixed rate of 2.75% for five
years, and may increase thereafter at .25% of the average trading price of a
note if certain conditions are met. The Company must pay cash for the
par value, but retained the option to either pay cash, issue its stock or a
combination thereof, for value above par. During the year ended
January 2, 2010, a total of $75.8 million face value of bonds was converted by
the holders. The Company paid cash to redeem the par value of the
debt and paid the conversion premium through issuance of approximately 1.4
million shares. The fair value of these notes at January 2, 2010 was
approximately $82.8 million as compared to the fair value at December 27, 2008
of $154.0 million. The Company has sufficient long-term liquidity in
its Facility ($485.0 million at January 2, 2010) to repay any notes converted by
their holders.
As part
of the 2008 acquisition of Hwada (see Note 5 of the Consolidated Financial
Statements), the Company assumed $21.6 million of short-term notes payable to
banks. As of January 2, 2010, these notes have been paid, at December 27, 2008
the balance of Hwada notes payable was approximately $11.0 million.
At
January 2, 2010 a foreign subsidiary of the Company had outstanding short-term
borrowings of $8.2 million, denominated in local currency with a weighted
average interest rate of 1.9%. As of December 27, 2008, this
subsidiary had outstanding borrowings of $4.1 million denominated in local
currency with a weighted average interest rate of 3.4%.
At
January 2, 2010, additional short-term notes payable of approximately $11.2
million were outstanding with a weighted average interest rate of
4.8%.
The
Company is exposed to interest rate risk on certain of its short-term and
long-term debt obligations used to finance our operations and
acquisitions. At January 2, 2010, net of interest rate swaps, we had
$305.8 million of fixed rate debt and $170.6 million of variable rate debt. The
variable rate debt is primarily under our Term Loan with an interest rate based
on a margin above LIBOR. As a result, interest rate changes impact
future earnings and cash flow assuming other factors are constant. A
hypothetical 10% change in our weighted average borrowing rate on outstanding
variable rate debt at January 2, 2010 would result in a change in net income of
approximately $0.2 million.
Predominately,
all of our expenses are paid in cash, often with payment term provisions that
include early payment discounts and time elements. We believe that
our ability to generate positive cash flow, coupled with our available revolver
balance will be sufficient to fund our operations for the foreseeable
future. We continue to act to reduce our investment in working
capital through improved and enforced payment terms and operational
efficiencies. Additionally, we believe that our capital expenditures
for maintenance of equipment and facilities will be consistent with prior levels
and not present a funding challenge.
We are in
compliance with all of our debt covenants at the end of 2009. We
believe that we will continue to be in compliance with these covenants for the
foreseeable future as we believe that we will continue to reduce outstanding
debt balances during fiscal year 2010 and maintain an appropriate level of
EBITDA. However, our EBITDA performance is dependent on our financial
performance in these uncertain and challenging market conditions which developed
in 2008 and have continued through 2009.
The
primary financial covenants on our senior notes, term loan, and the facility
include ratios of debt to EBITDA (as defined in each agreement) and minimum
interest coverage ratios of EBITDA to interest expense. The debt to
EBITDA covenant ratio requires us to be less than 3.75:1, and our ratio at
January 2, 2010 was approximately 2.1:1. The minimum interest
coverage ratio requires us to be greater than 3.0:1, and our ratio at January 2,
2010 was approximately 9.9:1.
We will,
from time to time, maintain positive cash balances which may be used to fund
operations, repay outstanding debt and will be available for other investments
which may include acquisitions of businesses or product lines, dividends,
investments in new product development programs and the repurchase of our
commons shares.
Our
projections are based on all information known to the Company, which may change
based on global economic events, our financial performance, actions by our
customers and competitors and other factors discussed in Item 1A, Risk
Factors.
21
OFF-BALANCE
SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMERCIAL
COMMITMENTS
The
following is a summary of the Company’s contractual obligations and payments due
by period as of January 2, 2010 (in millions):
Payments
due by Period
|
Debt
Including
Estimated*
Interest
Payments
|
Operating
Leases
|
Pension
Obligations
|
Purchase
and
Other
Obligations
|
Total
Contractual
Obligations
|
|||||||||||||||
Less
than 1 Year
|
$ | 25.4 | $ | 16.3 | $ | 1.5 | $ | 182.3 | $ | 225.5 | ||||||||||
1 -
3 Years
|
75.9 | 21.9 | - | - | 97.8 | |||||||||||||||
3 -
5 Years
|
341.6 | 9.5 | - | - | 351.1 | |||||||||||||||
More
than 5 Years
|
110.8 | 6.7 | - | - | 117.5 | |||||||||||||||
Total
|
$ | 553.7 | $ | 54.4 | $ | 1.5 | $ | 182.3 | $ | 791.9 |
NOTE:
|
The
timing and future spot prices affect the settlement values of the
Company’s hedge obligations related to commodities, currency and interest
rate swap agreements. Accordingly, these obligations are not
included above in the table of contractual obligations. The timing of
settlement of the Company’s tax contingent liabilities cannot be
reasonably determined and they are not included above in the table of
contractual obligations. Future pension obligation payments
after 2010 are subject to revaluation based on changes in the benefit
population and/or changes in the value of pension assets based on market
conditions that are not determinable as of January 2,
2010.
|
* Variable
rate debt based on January 2, 2010 rates.
We
utilize blanket purchase orders (“blankets”) to communicate expected annual
requirements to many of our suppliers. Requirements under blankets generally do
not become “firm” until a varying number of weeks before our scheduled
production. The purchase obligations shown in the above table represent the
value we consider “firm”.
At
January 2, 2010, the Company had outstanding standby letters of credit totaling
approximately $12.2 million. We had no other material commercial
commitments.
The
Company did not have any material variable interest entities as of January 2,
2010 and December 27, 2008. Other than disclosed in the table above
and the previous paragraph, the Company had no other material off-balance sheet
arrangements.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States, requires us to
make estimates and assumptions affecting the reported amounts of assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the periods reported. Actual results could differ
from those estimates. We believe the following critical
accounting policies could have the most significant effect on our
reported results.
Impairment of Long-Lived
Assets or Goodwill and Other Intangibles
We
evaluate the recoverability of the carrying amount of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable through future cash flows. We evaluate
the recoverability of goodwill and other intangible assets annually or more
frequently if events or circumstances indicate that an asset might be
impaired. When applying the accounting guidance we use estimates to
determine when an impairment is necessary. Factors that could trigger
an impairment review include significant underperformance relative to historical
or forecasted operating results, a significant decrease in the market value of
an asset or significant negative industry or economic trends. We
perform our required annual impairment test as of the end of the October fiscal
month each year.
The key
assumptions used in the discounted cash flow valuation model include discount
rates, growth rates, cash flow projections and terminal value
rates. Discount rates, growth rates and cash flow projections are the
most sensitive and susceptible to change as they require significant management
judgment. Discount rates are determined by using a weighted average
cost of capital (“WACC”). The WACC considers market and industry data
as well as Company-specific risk factors for each reporting unit in determining
the appropriate discount rate to be used. The discount rate utilized
for each reporting unit is indicative of the return an investor would expect to
receive for investing in such a business. Terminal value rate
determination follows common methodology of capturing the present value of
perpetual cash flow estimates beyond the last projected period assuming a
constant WACC and long term growth rates. The calculated fair values
for our 2009 impairment testing exceed the carrying values of the reporting
units.
As a
result of our 2009 annual impairment review, we recorded a $0.5 million
impairment for our Mechanical reporting unit, primarily related to auto and
marine products that are dependent on consumer discretionary spending that have
not met their performance plans.
Derivatives
The
Company periodically enters into commodity hedging transactions to reduce the
impact of changing prices for certain commodities such as copper and aluminum
based upon forecasted purchases of such commodities. The Company also
uses a cash hedging strategy to protect against an increase in the cost of
forecasted foreign currency denominated transactions. Finally, we also have
certain LIBOR-based floating rate borrowings that expose the Company to
variability in interest rates that have been swapped into a pay fixed/receive
LIBOR based interest rate swap agreement.
The fair
value of derivatives is recorded on the consolidated balance sheet and the value
is determined based on level 2 inputs. (See Note 14 of the Consolidated
Financial Statements.)
22
Income
Taxes
We
operate in numerous taxing jurisdictions and are subject to regular examinations
by various U.S. Federal, state and foreign jurisdictions for various tax
periods. Our income tax positions are based on research and
interpretations of the income tax laws and rulings in each of the jurisdictions
in which we do business. Due to the subjectivity of interpretations
of laws and rulings in each jurisdiction, the differences and interplay in tax
laws between those jurisdictions as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, our estimates of
income tax liabilities may differ from actual payments or
assessments.
Additional
information regarding income taxes is contained in Note 11 of the Consolidated
Financial Statements.
New Accounting
Pronouncements
Recent
accounting guidance will change the consolidation rules as they relate to
variable interest entities (VIE’s). The guidance changes the model
related to consolidating a VIE, and defines the assessment methodology for
determining VIE status. The guidance is effective beginning on the
first day of fiscal year 2010. The adoption of this guidance will not
have a material effect on the Company’s consolidated financial
statements.
Recent
accounting guidance requires disclosures about the fair value of financial
instruments in interim reporting periods of publicly traded companies as well as
in annual financial statements. The guidance amends only the
Company’s disclosure requirements. (See Note 15 of the Consolidated
Financial Statements for information regarding the fair value of financial
instruments at January 2, 2010.)
In the
first quarter of 2009, the Company adopted new accounting guidance which requires convertible
debt securities that may be settled on conversion by the issuer fully or
partially in cash, be split into a debt and equity component. The
guidance is effective for fiscal years (and interim periods) beginning after
December 15, 2008 and must be applied retroactively to all past periods
presented. The Company adopted the guidance on its effective
date. (See Note 4 of the Consolidated Financial
Statements.)
Also in
2009, the Company adopted updated accounting guidance which requires expanded
disclosures about derivative instruments and hedging activities. The
guidance is effective for fiscal years and interim periods beginning after
November 15, 2008, with earlier adoption permitted. The Company
adopted the new guidance in our financial statements and related disclosures
beginning in the first quarter of 2009. (See Note 14 of the
Consolidated Financial Statements.)
In 2009,
the Company adopted new guidance which establishes general standards and
requirements for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. The Company has evaluated subsequent events as required under
the guidance. (See also Note 17 of Notes to Consolidated Financial
Statements.)
In 2009,
the Company adopted new guidance which requires disclosures about the fair value
of financial instruments in interim reporting periods of publicly traded
companies as well as in annual financial statements. The provisions
are effective for the Company’s interim period ending on or after June 27,
2009. The guidance amends only the Company’s disclosure
requirements. (See also Note 15 of Notes to Consolidated Financial
Statements)
In 2009,
the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting
Standards Codification (the “Codification”) to become the single official source
of authoritative, nongovernmental U.S. Generally Accepted Accounting
Principles (“GAAP”), except for rules and interpretive releases of the SEC,
which are also sources of authoritative GAAP for SEC registrants. The
Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Codification did not
change GAAP but reorganizes the literature using a consistent structure
organized by topic, subtopic, section and paragraph, each of which is identified
by a numerical designation. As the Codification was not intended to
change or alter existing GAAP, it did not impact the consolidated financial
statements.
New
accounting guidance issued after the effective date of the Codification will be
issued in the form of Accounting Standards Updates (“ASUs”). ASUs
will not be considered authoritative in their own right, but instead will serve
to update the Codification.
Recent
accounting guidance has changed the accounting and reporting for minority
interests, which are recharacterized as noncontrolling interests and classified
as a component of equity. This new consolidation method significantly
changed the accounting for transactions with minority interest
holders. As required, the Company has adopted the new guidance for
presentation and disclosure requirements in our financial statements which was
applied retroactively to all periods presented.
23
There is
also new accounting guidance which affects business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The new guidance
established principles and requirements on how an acquirer recognizes and
measures in its financial statements identifiable assets acquired, liabilities
assumed, noncontrolling interest in the acquiree, goodwill or gain from a
bargain purchase and accounting for transaction costs. Additionally,
the guidance determines what information must be disclosed to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The Company adopted the guidance upon its
effective date.
Further
discussion of the Company’s accounting policies is contained in Note 3 of the
Consolidated Financial Statements.
ITEM
7A
- QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are
exposed to market risk relating to the Company’s operations due to changes in
interest rates, foreign currency exchange rates and commodity prices of
purchased raw materials. We manage the exposure to these risks
through a combination of normal operating and financing activities and
derivative financial instruments such as interest rate swaps, commodity cash
flow hedges and foreign currency forward exchange contracts.
The Company is exposed to
interest rate risk on certain of its short-term and long-term debt obligations
used to finance our operations and acquisitions. At January 2, 2010,
net of interest rate swaps, we had $305.8 million of fixed rate debt and $170.6
million of variable rate debt. As a result, interest rate changes
impact future earnings and cash flow assuming other factors are
constant. The Company utilizes interest rate swaps to manage
fluctuations in cash flows resulting from exposure to interest rate risk on
forecasted variable rate interest payments. Details regarding the
instruments, as of January 2, 2010, are as follows:
Instrument
|
Notional
Amount
|
Maturity
|
Rate
Paid
|
Rate
Received
|
Fair
Value
(Loss)
|
|
Swap
|
$150.0
million
|
August 23,
2014
|
5.3 | % |
LIBOR (3
month)
|
($17.7)
million
|
Swap
|
$100.0
million
|
August 23,
2017
|
5.4 | % |
LIBOR (3
month)
|
($13.5)
million
|
A hypothetical 10% change in
our weighted average borrowing rate on outstanding variable rate debt at January
2, 2010, would result in a change in after-tax annualized earnings of
approximately $0.2 million.
We are
also exposed to foreign currency risks that arise from normal business
operations. These risks include the translation of local currency
balances of foreign subsidiaries, intercompany loans with foreign subsidiaries
and transactions denominated in foreign currencies. Our objective is
to minimize our exposure to these risks through a combination of normal
operating activities and the utilization of foreign currency contracts to manage
our exposure on the transactions denominated in currencies other than the
applicable functional currency. Contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. It is our policy not to enter into derivative financial
instruments for speculative purposes. We do not hedge our exposure to
the translation of reported results of foreign subsidiaries from local currency
to United States dollars.
All
hedges are recorded on the balance sheet at fair value and are accounted for as
cash flow hedges, with changes in fair value recorded in accumulated other
comprehensive income (loss) (“AOCI”) in each accounting period. An
ineffective portion of the hedges change in fair value, if any, is recorded in
earnings in the period of change.
The
Company periodically enters into commodity hedging transactions to reduce the
impact of changing prices for certain commodities such as copper and aluminum
based upon forecasted purchases of such commodities. These
transactions are designated as cash flow hedges and the contract terms of
commodity hedge instruments generally mirror those of the hedged item, providing
a high degree of risk reduction and correlation. Derivative commodity
assets of $4.4 million are recorded in Prepaid Expenses at January 2,
2010. Derivative commodity liabilities of ($62.2) million are
recorded in Hedging Obligations at December 27, 2008. The
unrealized gain/(loss) on the effective portion of the contracts
of $2.2 million net of tax and ($32.9) million net of tax, as of
January 2, 2010 and December 27, 2008, respectively, was recorded in
AOCI. At January 2, 2010, the Company had an additional $2.1 million,
net of tax, of derivative commodity gains on closed hedge instruments in AOCI
that were realized in earnings when the hedged items impacted
earnings. At December 27, 2008, the Company had an additional ($13.6)
million, net of tax, of derivative commodity losses on closed hedge instruments
in AOCI that were realized in earnings when the hedged items impacted
earnings.
The
Company uses a cash hedging strategy to protect against an increase in the cost
of forecasted foreign currency denominated transactions. As of
January 2, 2010, derivative currency assets (liabilities) of $0.2 million, $1.1
million, and ($5.5) million are recorded in Prepaid Expenses, Other Noncurrent
Assets, and Hedging Obligations, respectively. At December 27, 2008 derivative
currency liabilities of ($30.8) million were recorded in Hedging
Obligations. The unrealized loss on the effective portion of the
contracts of ($2.7) million net of tax, and ($20.1) million net of tax, as of
January 2, 2010 and December 27, 2008, was recorded in AOCI. At January 2, 2010,
the Company had an additional ($0.6) million, net of tax of derivative currency
losses on closed hedge instruments in AOCI that will be realized in earnings
when the hedged items impact earnings. At December 27, 2008, the
Company had an additional ($1.6) million, net of tax, of derivative currency
losses on closed hedge instruments in AOCI that were realized in earnings when
the hedged items impacted earnings.
24
The
Company has LIBOR-based floating rate borrowings, which expose the Company to
variability in interest payments due to changes in interest
rates. The Company has entered into pay fixed/receive LIBOR-based
floating interest rate swaps to manage fluctuations in cash flows resulting from
interest rate risk. These interest rate swaps have been designated as
cash flow hedges against forecasted LIBOR-based interest payments. As
of January 2, 2010 and December 27, 2008, an interest rate swap liability of
($31.2) million and ($49.6) million was included in Hedging Obligations,
respectively. The unrealized loss on the effective portion of the
contracts of ($19.3) million and ($30.7) million, net of tax as of January 2,
2010 and December 27, 2008 respectively, was recorded in AOCI.
The net
AOCI balance of ($18.4) million loss at January 2, 2010 includes ($7.2) million
of net current deferred losses expected to be realized in the next twelve
months.
ITEM
8
- FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Quarterly
Financial Information
(Unaudited)
(In
Thousands, Except Per Share Data)
|
||||||||||||||||||||||||||||||||
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||
Net
Sales
|
$ | 443,274 | $ | 536,343 | $ | 454,550 | $ | 606,316 | $ | 465,192 | $ | 620,607 | $ | 463,261 | $ | 482,983 | ||||||||||||||||
Gross
Profit
|
90,570 | 122,099 | 94,622 | 131,177 | 113,869 | 132,797 | 125,163 | 114,607 | ||||||||||||||||||||||||
Income
from
|
||||||||||||||||||||||||||||||||
Operations
|
28,192 | 57,612 | 29,467 | 67,494 | 48,318 | 65,734 | 53,543 | 39,591 | ||||||||||||||||||||||||
Net
Income,
Attributable
to
Regal
Beloit Corporation (1)
|
12,787 | 31,427 | 16,452 | 37,313 | 31,150 | 36,139 | 34,659 | 20,646 | ||||||||||||||||||||||||
Earnings
Per Share (1)
(2):
|
||||||||||||||||||||||||||||||||
Basic
|
0.41 | 1.00 | 0.49 | 1.19 | 0.86 | 1.15 | 0.94 | 0.66 | ||||||||||||||||||||||||
Assuming
Dilution
|
0.39 | 0.95 | 0.47 | 1.11 | 0.82 | 1.07 | 0.90 | 0.63 | ||||||||||||||||||||||||
Weighted
Average Number of
|
||||||||||||||||||||||||||||||||
Shares
Outstanding:
|
||||||||||||||||||||||||||||||||
Basic
|
31,457 | 31,317 | 33,256 | 31,306 | 36,056 | 31,357 | 37,031 | 31,393 | ||||||||||||||||||||||||
Assuming
Dilution
|
32,595 | 33,117 | 35,105 | 33,526 | 38,183 | 33,716 | 38,410 | 32,623 | ||||||||||||||||||||||||
Net
Sales
|
||||||||||||||||||||||||||||||||
Electrical
|
$ | 391,362 | $ | 473,793 | $ | 407,244 | $ | 541,055 | $ | 422,006 | $ | 556,529 | $ | 417,056 | $ | 427,265 | ||||||||||||||||
Mechanical
|
51,912 | 62,550 | 47,306 | 65,261 | 43,186 | 64,078 | 46,205 | 55,718 | ||||||||||||||||||||||||
Income
from Operations
|
||||||||||||||||||||||||||||||||
Electrical
|
21,906 | 47,565 | 25,339 | 57,894 | 45,796 | 56,597 | 51,860 | 29,476 | ||||||||||||||||||||||||
Mechanical
|
6,286 | 10,047 | 4,128 | 9,600 | 2,522 | 9,137 | 1,683 | 10,115 |
(1)
|
Adjusted
for the 2009 adoption of new accounting guidance related to Convertible
Debt and Noncontrolling Interests (see also Note 2 of the Consolidated
Financial Statement).
|
(2)
|
Due
to the weighting of both the Company’s earnings and the weighted average
number of shares outstanding, the sum of the quarterly earnings may not
equal the annual earnings per
share.
|
25
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Regal Beloit Corporation (the “Company”) is responsible for the
accuracy and internal consistency of the preparation of the consolidated
financial statements and footnotes contained in this annual report.
The
Company’s management is also responsible for establishing and maintaining
adequate internal control over financial reporting. Regal Beloit
Corporation operates under a system of internal accounting controls designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of published financial statements in accordance with
generally accepted accounting principles. The internal accounting
control system is evaluated for effectiveness by management and is tested,
monitored and revised as necessary. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of January 2, 2010. In making its
assessment, the Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework. Based on the results of its
evaluation, the Company’s management concluded that, as of January 2, 2010, the
Company’s internal control over financial reporting is effective at the
reasonable assurance level based on those criteria.
Our
internal control over financial reporting as of January 2, 2010 has been audited
by Deloitte & Touche LLP, an independent registered public accounting firm,
as stated in their report which is included herein.
March 1,
2010
26
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
To the
Board of Directors and Shareholders of
Regal
Beloit Corporation
Beloit,
Wisconsin
We have
audited the accompanying consolidated balance sheets of Regal Beloit Corporation
and subsidiaries (the “Company”) as of January 2, 2010 and
December 27, 2008, and the related consolidated statements of income,
equity, comprehensive income (loss), and cash flows for each of the three years
in the period ended January 2, 2010. Our audits also included the
consolidated financial statement schedule listed in the Index as Item 15.
We also have audited the Company’s internal control over financial reporting as
of January 2, 2010, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule and an opinion on the Company’s internal control
over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis, Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
January 2, 2010 and December 27, 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein. Also, in our opinion,
the Company maintained, in all material respects, effective internal control
over financial reporting as of January 2, 2010, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As
discussed in Note 2 to the consolidated financial statements, the Company
adopted new accounting guidance in 2009 related to the accounting for
convertible debt instruments and noncontrolling interests.
/s/
DELOITTE & TOUCHE LLP
Milwaukee,
Wisconsin
March 1,
2010
27
REGAL
BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands of Dollars, Except Shares Outstanding and Per Share Data)
For
the Year Ended
|
||||||||||||
January
2,
2010
|
(As
adjusted,
see
Note 2)
December
27, 2008
|
(As
adjusted, see Note 2)
December
29, 2007
|
||||||||||
Net
Sales
|
$ | 1,826,277 | $ | 2,246,249 | $ | 1,802,497 | ||||||
Cost
of Sales
|
1,402,053 | 1,745,569 | 1,389,144 | |||||||||
Gross
Profit
|
424,224 | 500,680 | 413,353 | |||||||||
Operating
Expenses
|
264,704 | 270,249 | 207,293 | |||||||||
Income
From Operations
|
159,520 | 230,431 | 206,060 | |||||||||
Interest
Expense
|
23,284 | 32,647 | 26,650 | |||||||||
Interest
Income
|
1,719 | 1,479 | 933 | |||||||||
Income
Before Taxes & Noncontrolling Interests
|
137,955 | 199,263 | 180,343 | |||||||||
Provision
For Income Taxes
|
39,276 | 70,349 | 61,937 | |||||||||
Net
Income
|
98,679 | 128,914 | 118,406 | |||||||||
Less: Net
Income Attributable to Noncontrolling
Interests,
net of tax
|
3,631 | 3,389 | 2,907 | |||||||||
Net
Income Attributable to Regal Beloit Corporation
|
$ | 95,048 | $ | 125,525 | $ | 115,499 | ||||||
Earnings
Per Share of Common Stock:
|
||||||||||||
Basic
|
$ | 2.76 | $ | 4.00 | $ | 3.70 | ||||||
Assuming
Dilution
|
$ | 2.63 | $ | 3.78 | $ | 3.40 | ||||||
Weighted
Average Number of Shares Outstanding:
|
||||||||||||
Basic
|
34,498,674 | 31,343,330 | 31,252,145 | |||||||||
Assuming
Dilution
|
36,131,607 | 33,250,689 | 33,920,886 |
See
accompanying Notes to the Consolidated Financial Statements.
28
REGAL
BELOIT CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
Thousands of Dollars, Except Share and Per Share Data)
ASSETS
|
January
2, 2010
|
(As
adjusted, see Note 2)
December
27, 2008
|
||||||
Current
Assets:
|
||||||||
Cash
and Cash Equivalents
|
$ | 262,422 | $ | 65,250 | ||||
Investments
- Trading Securities
|
117,553 | - | ||||||
Trade
Receivables, less Allowances
of
$12,666 in 2009 and of $11,145 in 2008
|
240,721 | 294,326 | ||||||
Inventories
|
268,839 | 359,918 | ||||||
Prepaid
Expenses and Other Current Assets
|
59,168 | 66,594 | ||||||
Deferred
Income Tax Benefits
|
30,673 | 75,174 | ||||||
Total
Current Assets
|
979,376 | 861,262 | ||||||
Property,
Plant and Equipment:
|
||||||||
Land
and Improvements
|
42,034 | 39,982 | ||||||
Buildings
and Improvements
|
127,468 | 127,018 | ||||||
Machinery
and Equipment
|
484,274 | 457,063 | ||||||
Property,
Plant and Equipment, at Cost
|
653,776 | 624,063 | ||||||
Less
- Accumulated Depreciation
|
(310,705 | ) | (265,691 | ) | ||||
Net
Property, Plant and Equipment
|
343,071 | 358,372 | ||||||
Goodwill
|
663,920 | 672,475 | ||||||
Intangible
Assets, Net of Amortization
|
116,426 | 120,784 | ||||||
Other
Noncurrent Assets
|
9,444 | 10,603 | ||||||
Total
Assets
|
$ | 2,112,237 | $ | 2,023,496 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$ | 161,902 | $ | 202,456 | ||||
Dividends
Payable
|
5,981 | 5,024 | ||||||
Accrued
Compensation and Employee Benefits
|
50,722 | 64,207 | ||||||
Other
Accrued Expenses
|
76,612 | 63,457 | ||||||
Hedging
Obligations
|
5,464 | 80,578 | ||||||
Current
Maturities of Debt
|
8,385 | 15,280 | ||||||
Total
Current Liabilities
|
309,066 | 431,002 | ||||||
Long-Term
Debt
|
468,065 | 560,127 | ||||||
Deferred
Income Taxes
|
72,418 | 72,119 | ||||||
Hedging
Obligations
|
31,232 | 61,958 | ||||||
Pension
and other Post Retirement Benefits
|
39,306 | 43,768 | ||||||
Other
Noncurrent Liabilities
|
12,082 | 16,881 | ||||||
Commitments
and Contingencies (see Note 12)
|
||||||||
Equity:
|
||||||||
Regal
Beloit Corporation Shareholders' Equity:
|
||||||||
Common
Stock, $.01 par value, 100,000,000 shares authorized,
37,399,353
issued in 2009, and 32,282,395 shares issued in 2008
|
374 | 323 | ||||||
Additional
Paid-In Capital
|
512,282 | 356,231 | ||||||
Less
- Treasury Stock, at cost, 884,100 shares in 2008
|
- | (19,419 | ) | |||||
Retained
Earnings
|
703,765 | 631,281 | ||||||
Accumulated
Other Comprehensive Loss
|
(48,597 | ) | (142,429 | ) | ||||
Total
Regal Beloit Corporation Shareholders' Equity
|
1,167,824 | 825,987 | ||||||
Noncontrolling
Interests
|
12,244 | 11,654 | ||||||
Total
Equity
|
1,180,068 | 837,641 | ||||||
Total
Liabilities and Equity
|
$ | 2,112,237 | $ | 2,023,496 |
See
accompanying Notes to the Consolidated Financial Statements.
29
REGAL
BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF EQUITY
(In
Thousands of Dollars, Except Per Share Data)
Regal
Beloit Corporation Shareholders' Equity
|
||||||||||||||||||||||
Common
Stock $.01 Par Value
|
Additional
Paid-In Capital
|
Treasury
Stock
|
Retained
Earnings
|
Accumulated
Other Comprehensive Income (Loss)
|
Noncontrolling
Interests
|
Total
Equity
|
||||||||||||||||
Balance
as of December 30, 2006
|
$ | 318 | $ | 342,661 | $ | (15,228 | ) | $ | 428,461 | $ | (228 | ) | $ | 9,634 | $ | 765,618 | ||||||
(As
Adjusted, See Note 2)
|
||||||||||||||||||||||
Net
Income
|
$ | - | $ | - | $ | - | $ | 115,499 | $ | - | $ | 2,907 | $ | 118,406 | ||||||||
Dividends
Declared ($.59 per share)
|
- | - | - | (18,454 | ) | - | - | $ | (18,454 | ) | ||||||||||||
Stock
Options
Exercised
including income tax benefit
and share cancellations
|
3 | 2,469 | - | - | - | - | $ | 2,472 | ||||||||||||||
Stock-based
Compensation
|
- | 3,841 | - | - | - | - | $ | 3,841 | ||||||||||||||
Distribution
to Noncontrolling
Interests
|
- | - | - | - | - | (2,741 | ) | $ | (2,741 | ) | ||||||||||||
Other
Comprehensive Income
(see
detail Comprehensive Income
Statement)
|
- | - | - | - | 2,408 | 742 | $ | 3,150 | ||||||||||||||
Balance
as of December 29, 2007
(As
adjusted, see Note 2)
|
$ | 321 | $ | 348,971 | $ | (15,228 | ) | $ | 525,506 | $ | 2,180 | $ | 10,542 | $ | 872,292 | |||||||
Net
Income
|
$ | - | $ | - | $ | - | $ | 125,525 | $ | - | $ | 3,389 | $ | 128,914 | ||||||||
Dividends
Declared ($.63 per share)
|
- | - | - | (19,750 | ) | - | - | $ | (19,750 | ) | ||||||||||||
Purchase
of 110,000
shares
of Treasury Stock
|
- | - | (4,191 | ) | - | - | - | $ | (4,191 | ) | ||||||||||||
Stock
Options
Exercised
including income tax benefit
and share cancellations
|
2 | 2,680 | - | - | - | - | $ | 2,682 | ||||||||||||||
Stock-based
Compensation
|
- | 4,580 | - | - | - | - | $ | 4,580 | ||||||||||||||
Distribution
to Noncontrolling
Interests
|
- | - | - | - | - | (3,044 | ) | $ | (3,044 | ) | ||||||||||||
Other
Comprehensive Income (Loss)
(see
detail Comprehensive Income
Statement)
|
- | - | - | - | (144,609 | ) | 767 | $ | (143,842 | ) | ||||||||||||
Balance
as of December 27, 2008
(As
adjusted, see Note 2)
|
$ | 323 | $ | 356,231 | $ | (19,419 | ) | $ | 631,281 | $ | (142,429 | ) | $ | 11,654 | $ | 837,641 | ||||||
Net
Income
|
$ | - | $ | - | $ | - | $ | 95,048 | $ | - | $ | 3,631 | $ | 98,679 | ||||||||
Dividends
Declared ($.64 per share)
|
- | - | - | (22,564 | ) | - | - | $ | (22,564 | ) | ||||||||||||
Issuance
of 4,312,500 shares of
Common
Stock
|
43 | 150,327 | - | - | - | $ | 150,370 | |||||||||||||||
Stock
Options
Exercised
including income tax benefit
and share cancellations
|
3 | 5,817 | - | - | - | - | $ | 5,820 | ||||||||||||||
Stock-based
Compensation
|
- | 4,752 | - | - | - | - | $ | 4,752 | ||||||||||||||
Issuance
of Treasury and Common
Stock
for conversion premium on
Convertible Debt redemption
|
5 | (19,424 | ) | 19,419 | - | - | - | $ | - | |||||||||||||
Reversal
of unrecognized tax
benefits
|
- | 3,600 | - | - | - | - | $ | 3,600 | ||||||||||||||
Reversal
of tax benefits related to
Convertible
Debt
|
- | 10,979 | - | - | - | - | $ | 10,979 | ||||||||||||||
Distribution
to Noncontrolling
Interests
|
- | - | - | - | - | (4,468 | ) | $ | (4,468 | ) | ||||||||||||
Other
Comprehensive
Income
(See detail Comprehensive Income
Statement)
|
- | - | - | - | 93,832 | 1,427 | $ | 95,259 | ||||||||||||||
Balance
as of January 2, 2010
|
$ | 374 | $ | 512,282 | $ | - | $ | 703,765 | $ | (48,597 | ) | $ | 12,244 | $ | 1,180,068 |
See
accompanying Notes to the Consolidated Financial Statements.
30
REGAL
BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
Thousands of Dollars)
For
the Year Ended
|
||||||||||||
January
2, 2010
|
(As
adjusted, see Note 2)
December
27,
2008
|
(As
adjusted, see Note 2) December 29,
2007
|
||||||||||
Net
Income
|
$ | 98,679 | $ | 128,914 | $ | 118,406 | ||||||
Other
Comprehensive Income (Loss) net of tax:
|
||||||||||||
Pension
and Post Retirement benefits
|
(2,802 | ) | (13,773 | ) | 2,850 | |||||||
Currency
translation adjustments
|
17,531 | (41,717 | ) | 13,877 | ||||||||
Change
in fair value of hedging activities
|
30,738 | (89,547 | ) | (9,664 | ) | |||||||
Hedging
Activities Reclassified into Earnings from
Other
Comprehensive Income (Loss)
|
49,792 | 1,195 | (3,913 | ) | ||||||||
Total
Other Comprehensive Income (Loss)
|
95,259 | (143,842 | ) | 3,150 | ||||||||
Comprehensive
Income (Loss)
|
193,938 | (14,928 | ) | 121,556 | ||||||||
Less: Comprehensive
Income Attributable to
Noncontrolling
Interests
|
5,058 | 4,156 | 3,649 | |||||||||
Comprehensive
Income (Loss)Attributable to
Regal
Beloit Corporation
|
$ | 188,880 | $ | (19,084 | ) | $ | 117,907 |
See
accompanying Notes to the Consolidated Financial Statements.
31
REGAL
BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands of Dollars)
For
the Year Ended
|
||||||||||||
January
2, 2010
|
(As
adjusted, see Note 2)
December
27, 2008
|
(As
adjusted, see Note 2)
December
29, 2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
Income
|
$ | 98,679 | $ | 128,914 | $ | 118,406 | ||||||
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||||||
Provided
from Operating Activities:
|
||||||||||||
Depreciation
|
49,730 | 45,963 | 36,915 | |||||||||
Amortization
|
19,414 | 15,638 | 9,704 | |||||||||
Stock-based
Compensation
|
4,752 | 4,580 | 3,841 | |||||||||
Provision
for Deferred Income Taxes
|
7,718 | 6,027 | 5,345 | |||||||||
Excess
Tax Benefits from Stock-based Compensation
|
(2,808 | ) | (2,463 | ) | (6,712 | ) | ||||||
Losses
on Property, Plant and Equipment
|
5,172 | 124 | 564 | |||||||||
Non-Cash
Convertible Debt Deferred Financing Costs
|
1,063 | 4,938 | 4,594 | |||||||||
Changes
in Assets and Liabilities, Net of Acquisitions:
|
||||||||||||
Receivables
|
48,905 | 32,420 | 5,621 | |||||||||
Inventories
|
86,593 | (8,882 | ) | 18,002 | ||||||||
Accounts
Payable
|
(39,327 | ) | (22,553 | ) | 20,316 | |||||||
Current
Liabilities and Other
|
35,028 | (50,507 | ) | (15,970 | ) | |||||||
Net
Cash Provided from Operating Activities
|
314,919 | 154,199 | 200,626 | |||||||||
CASH
FLOW FROM INVESTING ACTIVITIES:
|
||||||||||||
Additions
to Property, Plant and Equipment
|
(33,604 | ) | (52,209 | ) | (36,628 | ) | ||||||
Purchases
of Investment Securities
|
(117,553 | ) | - | - | ||||||||
Business
Acquisitions, Net of Cash Acquired
|
(1,500 | ) | (49,702 | ) | (337,643 | ) | ||||||
Sale
of Property, Plant and Equipment
|
1,033 | 2,238 | 637 | |||||||||
Net
Cash Used in Investing Activities
|
(151,624 | ) | (99,673 | ) | (373,634 | ) | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Long-Term
Debt Proceeds
|
- | 165,200 | 250,000 | |||||||||
Net
Proceeds from the Sale of Common Stock
|
150,370 | - | - | |||||||||
Net
(Payments) Proceeds from Short-Term Borrowings
|
(6,866 | ) | (11,820 | ) | 5,000 | |||||||
Payments
of Long-Term Debt
|
(215 | ) | (324 | ) | (382 | ) | ||||||
Net
Repayments of Commercial Paper Borrowings
|
- | - | (49,000 | ) | ||||||||
Net
Repayments Under Revolving Credit Facility
|
(17,066 | ) | (162,700 | ) | (14,500 | ) | ||||||
Proceeds
from the Exercise of Stock Options
|
5,767 | 2,880 | 2,190 | |||||||||
Repayments
of Convertible Debt
|
(75,802 | ) | - | - | ||||||||
Excess
Tax Benefits from Stock-based Compensation
|
2,808 | 2,463 | 6,712 | |||||||||
Financing
Fees Paid
|
- | (454 | ) | (1,706 | ) | |||||||
Distribution
to Noncontrolling Interests
|
(4,468 | ) | (3,044 | ) | (2,741 | ) | ||||||
Purchases
of Treasury Stock
|
- | (4,191 | ) | - | ||||||||
Dividends
Paid to Shareholders
|
(21,607 | ) | (19,426 | ) | (18,099 | ) | ||||||
Net
Cash Provided from (Used in) Financing Activities
|
32,921 | (31,416 | ) | 177,474 | ||||||||
EFFECT
OF EXCHANGE RATES ON CASH:
|
956 | (434 | ) | 1,588 | ||||||||
Net
Increase in Cash and Cash Equivalents
|
197,172 | 22,676 | 6,054 | |||||||||
Cash
and Cash Equivalents at Beginning of Year
|
65,250 | 42,574 | 36,520 | |||||||||
Cash
and Cash Equivalents at End of Year
|
$ | 262,422 | $ | 65,250 | $ | 42,574 | ||||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
Cash
Paid During the Year for:
|
||||||||||||
Interest
|
$ | 24,105 | $ | 26,877 | $ | 20,789 | ||||||
Income
Taxes
|
22,153 | 68,653 | 50,186 |
See
accompanying Notes to the Consolidated Financial Statements.
32
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For The
Three Years Ended January 2, 2010
(1) NATURE
OF OPERATIONS
Regal
Beloit Corporation (the “Company”) is a United States-based multinational
corporation. The Company reports in two segments, the Electrical segment, with
its principal line of business in electric motors and power generation products
and the Mechanical segment, with its principal line of business in mechanical
products which control motion and torque. The principal markets for the
Company’s products and technologies are within the United States.
(2) BASIS
OF PRESENTATION
As of the
beginning of fiscal 2009, the Company adopted new accounting guidance related to
convertible debt (see also Note 4 of the Consolidated Financial Statements),
which requires us to adjust previously disclosed consolidated financial
statements. As such, certain prior period amounts have been adjusted
in the consolidated financial statements to conform to the current period
presentation.
The
Company also adopted guidance which amends the accounting and reporting for
noncontrolling interests in a consolidated subsidiary and the deconsolidation of
a subsidiary. The Company now reports noncontrolling interests in
subsidiaries as a separate component of equity in the consolidated financial
statements and shows both net income attributable to the noncontrolling interest
and net income attributable to the controlling interest on the face of
the consolidated income statement. The new guidance
applies prospectively, except for presentation and disclosure requirements,
which are applied retrospectively.
Certain
non-trade receivables at December 27, 2008 have been reclassified from
Receivables to Prepaid Expenses and Other Current Assets to conform to the 2009
presentation. Trade receivables less allowances on the consolidated
balance sheet is now comprised of trade receivables net of estimated
allowances.
The
Company operates on a 52/53 week fiscal year ending on the Saturday closest to
December 31. The fiscal year ended January 2, 2010 was 53 weeks as
compared to the fiscal year ended December 27, 2008 which was 52
weeks.
(3) ACCOUNTING
POLICIES
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned and majority owned subsidiaries. In addition, the
Company has a 50/50 joint venture in China that is consolidated as over half of
the joint venture sales are to Regal Beloit Corporation owned
entities. All significant intercompany accounts and transactions are
eliminated.
Use of
Estimates
Management’s
best estimates of certain amounts are required in preparation of the
consolidated financial statements in accordance with generally accepted
accounting principles, and actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue upon transfer of title, which generally occurs upon
shipment of the product to the customer. The pricing of products sold
is generally supported by customer purchase orders, and accounts receivable
collection is reasonably assured at the time of shipment. Estimated
discounts and rebates are recorded as a reduction of sales in the same period
revenue is recognized. Product returns and credits are estimated and recorded at
the time of shipment based upon historical experience. Shipping and
handling costs are recorded as revenue when billed to the
customers.
Research and
Development
The
Company performs research and development activities relating to new product
development and the improvement of current products. Research and
development costs are expensed as incurred.
Cash and Cash
Equivalents
Cash
equivalents consist of highly liquid investments which are readily convertible
to cash, present insignificant risk of changes in value due to interest rate
fluctuations and have original or purchased maturities of three months or
less. The Company has a material amount of cash held on deposit at
two financial institutions as of January 2, 2010. While this
constitutes a concentration of credit risk, we believe these institutions to be
financially stable.
Investments
Investments
consist of marketable debt and equity securities with original maturities of
greater than three months and remaining maturities of less than one
year. Investments with maturities greater than one year may be
classified as short term based on their highly liquid nature and their
availability to fund future investing activities.
33
Trade
Receivables
Trade
receivables are stated at estimated net realizable value. Trade
receivables are comprised of balances due from customers, net of estimated
allowances. In determining collectability, historical trends are
evaluated and specific customer issues are reviewed to arrive at appropriate
allowances.
Inventories
The
approximate percentage distribution between major classes of inventory at year
end is as follows:
2009
|
2008
|
|||
Raw
Material and Work in Process
|
34%
|
29%
|
||
Finished
Goods and Purchased Parts
|
66%
|
71%
|
Inventories
are stated at cost, which is not in excess of market. Cost for approximately 56%
of the Company's inventory at January 2, 2010 and 63% at December 27, 2008, was
determined using the last-in, first-out (LIFO) method. If all inventories were
valued on the first-in, first-out (FIFO) method, they would have increased by
$35.8 million and $75.4 million as of January 2, 2010 and December 27, 2008,
respectively. Material, labor and factory overhead costs are included in the
inventories.
The
Company reviews inventories for excess and 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.
Property, Plant and
Equipment
Property,
Plant and Equipment are stated at cost. Depreciation of plant and
equipment is provided principally on a straight-line basis over the estimated
useful lives (3 to 40 years) of the depreciable assets. Accelerated
methods are used for income tax purposes.
Expenditures
for repairs and maintenance are charged to expense when
incurred. Expenditures which extend the useful lives of existing
equipment are capitalized and depreciated.
Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized. Leasehold improvements are capitalized and
amortized over the lesser of the life of the lease or the estimated useful life
of the asset.
Commitments
for property, plant, and equipment purchases were $5.2 million at January 2,
2010.
Goodwill and Other
Intangibles
Goodwill
and Other Intangibles result from the acquisition of existing businesses by the
Company. Goodwill is not amortized; however it is tested for
impairment annually at the fiscal October month end with any resulting
adjustment charged to the results of operations. Amortization of
Other Intangibles with definite lives is recorded over the estimated life of the
asset.
Earnings per Share
(EPS)
Diluted
earnings per share is computed based upon earnings applicable to common shares
divided by the weighted-average number of common shares outstanding during the
period adjusted for the effect of other dilutive securities. Options
for common shares where the exercise price was above the market price have been
excluded from the calculation of effect of dilutive securities shown
below. The amount of these shares were zero in 2009, 0.9 million for
2008 and 0.2 million for 2007. The following table reconciles the
basic and diluted shares used in the per share calculations for the three years
ended January 2, 2010 (in millions):
2009
|
2008
|
2007
|
||||||||||
Denominator
for basic EPS
|
34.5 | 31.3 | 31.3 | |||||||||
Effect
of dilutive securities
|
1.6 | 1.9 | 2.6 | |||||||||
Denominator
for diluted EPS
|
36.1 | 33.2 | 33.9 |
The “Effect of dilutive
securities” represents the dilution impact of equity awards and the Convertible
Notes (see Note 10 of the Consolidated Financial Statements). The
dilutive effect of the Convertible Notes was approximately 1.3 million shares,
1.5 million shares and 2.1 million for the years ended January 2, 2010, December
27, 2008, and December 29, 2007, respectively.
34
Retirement
Plans
Approximately
half of our domestic employees are covered by defined benefit pension plans with
the remaining employees covered by defined contribution plans. The
defined benefit pension plans covering a majority of our domestic employees were
frozen to new employees as of January 1, 2009. Most of our foreign
employees are covered by government sponsored plans in the countries in which
they are employed. Our obligations under our defined benefit pension
plans are determined with the assistance of actuarial firms. The
actuaries make certain assumptions regarding such factors as withdrawal rates
and mortality rates. The actuaries also provide us with information
and recommendations from which management makes further assumptions on such
factors as the long-term expected rate of return on plan assets, the discount
rate on benefit obligations and where applicable, the rate of annual
compensation increases.
Based
upon the assumptions made, the investments made by the plans, overall conditions
and movement in financial markets, particularly the stock market and how actual
withdrawal rates, life-spans of benefit recipients and other factors differ from
assumptions, annual expenses and recorded assets or liabilities of these defined
benefit plans may change significantly from year to year. Based on
our annual review of actuarial assumptions as well as historical rates of return
on plan assets and existing long-term bond rates, we set the long-term rate of
return on plan assets at 8.25% and used a discount rate ranging from 5.7% to
6.3% for our defined benefit pension plans as of January 2,
2010. (See also Note 9 of the Consolidated Financial
Statements).
Income
Taxes
We
operate in numerous taxing jurisdictions and are subject to regular examinations
by various U.S. Federal, state and foreign jurisdictions for various tax
periods. Our income tax positions are based on research and
interpretations of the income tax laws and rulings in each of the jurisdictions
in which we do business. Due to the subjectivity of interpretations
of laws and rulings in each jurisdiction, the differences and interplay in tax
laws between those jurisdictions as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, our estimates of
income tax liabilities may differ from actual payments or
assessments.
Foreign Currency
Translation
For those
operations using a functional currency other than the U.S. dollar, assets and
liabilities are translated into U.S. dollars at year-end exchange rates, and
revenues and expenses are translated at weighted-average exchange
rates. The resulting translation adjustments are recorded as a
separate component of shareholders’ equity.
Impairment of Long-Lived
Assets and Amortizable Intangible Assets
Property,
Plant and Equipment and intangible assets subject to amortization are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The Company assesses these
assets for impairment when the undiscounted expected future cash flows derived
from an asset are less than its carrying value. If we determine an
asset is impaired, we measure the impairment as the amount by which the carrying
value exceeds fair value. Such analyses necessarily involve
significant estimates.
Product Warranty
Reserves
The
Company maintains reserves for product warranty to cover the stated warranty
periods for its products. Such reserves are established based on an evaluation
of historical warranty experience and specific significant warranty matters when
they become known and can reasonably be estimated.
Accumulated Other
Comprehensive Loss
Foreign
currency translation adjustments, unrealized gains and losses on derivative
instruments and pension liability adjustments are included in shareholder’s
equity under accumulated other comprehensive loss. The components of
the ending balances of Accumulated Other Comprehensive Loss are as follows (in
thousands):
2009
|
2008
|
|||||||
Translation
adjustments
|
$ | (5,100 | ) | $ | (21,204 | ) | ||
Hedging
activities, net of tax
|
(18,402 | ) | (98,932 | ) | ||||
Pension
and post retirement benefits, net of tax
|
(25,095 | ) | (22,293 | ) | ||||
Total
|
$ | (48,597 | ) | $ | (142,429 | ) |
Derivative
Instruments
Derivative
instruments are recorded on the consolidated balance sheet at fair value as
determined under accounting guidance that establishes criteria for designation
and effectiveness of the hedging relationships. Any fair value
changes are recorded in net earnings or Accumulated Other Comprehensive Income
(Loss).
35
The
Company uses derivative instruments to manage its exposure to fluctuations in
certain raw material commodity pricing, fluctuations in the cost of forecasted
foreign currency transactions, and variability in interest rate exposure on
floating rate borrowings. These derivative instruments have been designated as
cash flow hedges. (See Note 14 to the Consolidated Financial
Statements.)
Legal and Environmental
Claims
The
Company records expenses and liabilities when the Company believes that an
obligation of the Company on a specific matter is probable and there is a basis
to reasonably estimate the value of the obligation. This methodology is used for
environmental matters and legal claims that are filed against the Company from
time to time. The uncertainty that is associated with such matters frequently
requires adjustments to the liabilities previously recorded.
Life Insurance
Policies
The
Company maintains life insurance policies on certain officers and management
which name the Company as beneficiary. The total face value of these policies
was $11.0 million at January 2, 2010 and $10.7 million at December 27, 2008. The
cash surrender value, net of policy loans, was $3.2 million and $2.9 million at
January 2, 2010 and December 27, 2008, respectively, and is included as a
component of Other Noncurrent Assets.
Fair
Values
The fair
values of cash equivalents, receivables, inventories, prepaid expenses, accounts
payable, and accrued expenses approximate the carrying values due to the short
period of time to maturity. The fair value of long-term debt is
estimated using discounted cash flows based on the Company’s current incremental
borrowing rates, except for the convertible senior subordinated debt discussed
in Note 8, and the fair value of investments and derivative instruments is
determined based on inputs as defined in Note 15 of the Consolidated Financial
Statements.
New Accounting
Pronouncements
Recent
accounting guidance will change the consolidation rules as they relate to
variable interest entities (VIE’s). The guidance changes the model
related to consolidating a VIE, and defines the assessment methodology for
determining VIE status. The guidance is effective beginning on the
first day of fiscal year 2010. The adoption of this guidance will not
have a material effect on the Company’s consolidated financial
statements.
Recent
accounting guidance requires disclosures about the fair value of financial
instruments in interim reporting periods of publicly traded companies as well as
in annual financial statements. The provisions are effective for the
Company’s interim period ending on or after June 27, 2009. The
guidance amends only the Company’s disclosure requirements. (See Note
15 of the Consolidated Financial Statements for information regarding the fair
value of financial instruments at January 2, 2010.)
In the
first quarter of 2009, the Company adopted new accounting guidance which requires convertible
debt securities that may be settled on conversion by the issuer fully or
partially in cash, be split into a debt and equity component. The
guidance is effective for fiscal years (and interim periods) beginning after
December 15, 2008 and must be applied retroactively to all past periods
presented. The Company adopted the guidance on its effective
date. (See Note 4 of the Consolidated Financial
Statements.)
Also in
2009, the Company adopted updated accounting guidance which requires expanded
disclosures about derivative instruments and hedging activities. The
guidance is effective for fiscal years and interim periods beginning after
November 15, 2008, with earlier adoption permitted. The Company
adopted the new guidance in our financial statements and related disclosures
beginning in the first quarter of 2009. (See Note 14 of the
Consolidated Financial Statements.)
In 2009,
the Company adopted new guidance which establishes general standards and
requirements for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued. The Company has evaluated subsequent events as required under
the guidance. (See also Note 17 of Notes to Consolidated Financial
Statements.)
In 2009,
the Company adopted new guidance which requires disclosures about the fair value
of financial instruments in interim reporting periods of publicly traded
companies as well as in annual financial statements. The provisions
are effective for the Company’s interim period ending on or after June 27,
2009. The guidance amends only the Company’s disclosure
requirements. (See also Note 15 of Notes to Consolidated Financial
Statements.)
In 2009,
the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting
Standards Codification (the “Codification”) to become the single official source
of authoritative, nongovernmental U.S. Generally Accepted Accounting
Principles (“GAAP”), except for rules and interpretive releases of the SEC,
which are also sources of authoritative GAAP for SEC registrants. The
Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Codification did not
change GAAP but reorganizes the literature using a consistent structure
organized by topic, subtopic, section and paragraph, each of which is identified
by a numerical designation. As the Codification was not intended to
change or alter existing GAAP, it did not impact the consolidated financial
statements.
36
Recent
accounting guidance has changed the accounting and reporting for minority
interests, which are recharacterized as noncontrolling interests and classified
as a component of equity. This new consolidation method significantly
changed the accounting for transactions with minority interest
holders. As required, the Company adopted the new guidance for
presentation and disclosure requirements in our financial statements which was
applied retroactively to all periods presented.
There is
also new accounting guidance which affects business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The new guidance
established principles and requirements on how an acquirer recognizes and
measures in its financial statements identifiable assets acquired, liabilities
assumed, noncontrolling interest in the acquiree, goodwill or gain from a
bargain purchase and accounting for transaction costs. Additionally,
the guidance determines what information must be disclosed to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. The Company adopted the guidance upon its
effective date as appropriate for any future business combinations.
(4) ADJUSTMENT
FOR CONVERTIBLE DEBT
As of the
beginning of fiscal 2009, the Company adopted new accounting guidance, which
requires an adjustment of convertible debt, equity, and interest
expense. The new guidance requires that a fair value be assigned to
the equity conversion option of the Company’s $115.0 million original par value
and then outstanding, 2.75% convertible senior subordinated notes (the
“Convertible Notes”) as of April 5, 2004, the date of issuance of the
Convertible Notes. This change results in a corresponding decrease in
the value assigned to the debt portion of the instrument.
The value
assigned to the debt portion of the Convertible Notes was determined based on
market interest rates for similar debt instruments without the conversion
feature as of April 5, 2004, the issuance date of the Convertible
Notes. The difference in this interest rate versus the coupon rate on
the Convertible Notes is then amortized into interest expense over the expected
term of the Convertible Notes. For purposes of the valuation, the
Company used an expected term of five years, which represents the first
anniversary date at which holders of the Convertible Notes may put their
Convertible Notes back to the Company.
In 2009,
bondholders exercised their conversion right for a total of $75.8 million face
value of bonds. The Company paid cash to redeem the par value and the
conversion premium was paid through issuance of approximately 1.4 million shares
of stock. (See Note 8 of the Consolidated Financial
Statements.)
The
adjustment affected our December 27, 2008 balance sheet as follows (in
thousands):
As
Adjusted
|
As
Reported
|
|||||||
Long-Term
Debt
|
$ | 560,127 | $ | 561,190 | ||||
Deferred
Income Taxes
|
72,119 | 71,715 | ||||||
Additional
Paid-in Capital
|
356,231 | 342,712 | ||||||
Retained
Earnings
|
631,281 | 644,141 |
The
adjustment of our income statement for the years ended December 27, 2008 and
December 29, 2007 was as follows (in thousands, except per share
data):
Year
Ended
|
Year
Ended
|
|||||||||||||||
December
27, 2008
|
December
29, 2007
|
|||||||||||||||
As
Adjusted
|
As
Reported
|
As
Adjusted
|
As
Reported
|
|||||||||||||
Interest
Expense
|
$ | 32,647 | $ | 27,709 | $ | 26,650 | $ | 22,056 | ||||||||
Income
Before Taxes and Noncontrolling Interests
|
199,263 | 204,201 | 180,343 | 184,937 | ||||||||||||
Provision
for Income Taxes
|
70,349 | 72,225 | 61,937 | 63,683 | ||||||||||||
Net
Income
|
128,914 | 131,976 | 118,406 | 121,254 | ||||||||||||
Net
Income Attributable to Regal Beloit Corporation
|
125,525 | 128,587 | 115,499 | 118,347 | ||||||||||||
Earnings
per Share of Common Stock
|
||||||||||||||||
Basic
|
$ | 4.00 | $ | 4.10 | $ | 3.70 | $ | 3.79 | ||||||||
Assuming
Dilution
|
3.78 | 3.87 | 3.40 | 3.49 |
37
(5) ACQUISITIONS
The
results of operations for acquired businesses are included in the Consolidated
Financial Statements from the dates of acquisition. In January, 2009,
the Company acquired Custom Power Technologies (“CPT”), a custom power
electronics business located in Menomonee Falls, Wisconsin. The
purchase price and impact on our Consolidated Financial Statements was not
material. The following acquisitions in 2008 were not considered to
be material business combinations.
2008
Acquisitions
On April
25, 2008 the Company acquired Joyce Court Holdings Ltd. and Grand Delight
Investments Ltd., sole shareholders of Wuxi Hwada Motor Co. and Wuxi New Hwada
Motor Co. (collectively “Hwada”) located in Wuxi, China. Hwada is a
leading designer and manufacturer of Integral IEC and NEMA electric motors,
which are used in various industrial applications such as compressor, pump,
paper and steel processing and power plants. Approximately 50% of
Hwada’s product sales are in the China industrial markets. The
business is reported as part of the Company’s Electrical segment.
On
September 30, 2008, the Company acquired Dutchi Motors
B.V. (“Dutchi”) located in Arnhem, The Netherlands. Dutchi
is a leading distributor of industrial motors in Western and Eastern Europe,
South Africa, Russia and the Middle East. Dutchi is one of the
largest distributors of the Company’s Hwada motor products, which was purchased
in April, 2008. The Dutchi business is reported as part of the
Company’s Electrical segment.
The
purchase price allocations for the Hwada and Dutchi acquisitions, which were
finalized in 2009, totaled $54.0 million, net of cash acquired.
Additionally, under the terms of the Hwada acquisition, the Company will pay to
the seller up to $8.5 million received in the future upon the sale of certain
real property rights owned by Hwada. The excess of the purchase price
over the estimated fair values of the net assets acquired was assigned to
goodwill.
(6) INVESTMENTS
During
2009, the Company raised capital through a common stock offering (see Note 10 of
the Consolidated Financial Statements). A portion of this cash was
invested in trading securities as of January 2, 2010. These
securities are generally short term in duration and are classified as trading
securities, which are reported at fair value with gains and losses, which were
insignificant in 2009, included in earnings. As of January 2, 2010,
the Company had $117.6 million of trading securities recorded at fair value (see
Note 15 of the Consolidated Financial Statements for description of the fair
value hierarchy).
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
Commercial
Paper
|
$ | 37,473 | $ | - | $ | 37,473 | $ | - | ||||||||
U.S.
Government Securities
|
4,202 | - | 4,202 | - | ||||||||||||
Municipal
Debt Securities
|
48,294 | - | 48,294 | - | ||||||||||||
Asset
Backed Securities
|
5,773 | - | 5,773 | - | ||||||||||||
Corporate
Debt Securities
|
21,811 | - | 21,811 | - | ||||||||||||
Total
|
$ | 117,553 | $ | - | $ | 117,553 | $ | - |
(7) GOODWILL
AND INTANGIBLE ASSETS
Goodwill
As
required, we perform an annual impairment test of goodwill during the fourth
quarter or more frequently if events or circumstances change that would more
likely than not reduce the fair value of our reporting units below their
carrying value.
Because
of the on-going unfavorable impact of the credit crisis and the global economic
environment, we completed an assessment of impairment indicators during the
second quarter of 2009. We considered a number of factors, including, among
other things, recent operational, revenue, profitability and cash flow trends.
We also considered the effect of the volatility in our stock price and trends in
the discount rate used in our goodwill fair value estimate.
As a
result of reviewing these impairment indicators, we noted that our consolidated
revenues declined 25.0% during the second quarter of 2009 as compared to the
second quarter of 2008, with similar declines in most of our reporting units,
which was a larger decline than we estimated in our annual 2008 goodwill
impairment assessment.
As a
result of this impairment indicator, during the second quarter of 2009, we
performed an interim goodwill impairment test for two of our goodwill reporting
units. Based on our assessments, we concluded it was more likely than
not that the fair value of our reporting units continued to exceed their
carrying value at June 27, 2009, supporting our conclusion that our recorded
goodwill was not impaired.
As a
result of our annual goodwill impairment review process, the Company has
determined that a $0.5 million impairment for our Mechanical reporting unit,
primarily related to auto and marine products that are dependent on consumer
discretionary spending that have not met their performance plans.
As
described above in Note 5 of the Consolidated Financial Statements, the Company
acquired one business in 2009 and two businesses in 2008. The excess
of purchase price over estimated fair value was assigned to
goodwill.
38
During
2009, the Company finalized the goodwill related to the two 2008 acquisitions
and the CPT acquisition in January, 2009. Adjustments during the
preliminary period included final valuations of property, plant and equipment,
intangible assets and other contingencies.
The
Company believes that substantially all of the goodwill is deductible for tax
purposes. The following information presents changes to goodwill during the
periods indicated (in thousands):
Electrical
Segment
|
Mechanical
Segment
|
Total
Company
|
||||||||||
Balance,
December 29, 2007
|
$ | 653,731 | $ | 530 | $ | 654,261 | ||||||
Net
Acquisitions and Fair Value Adjustments
|
21,201 | - | 21,201 | |||||||||
Translation
Adjustments
|
(2,987 | ) | - | (2,987 | ) | |||||||
Balance,
December 27, 2008
|
$ | 671,945 | $ | 530 | $ | 672,475 | ||||||
Net
Acquisitions and Fair Value Adjustments
|
$ | (7,243 | ) | $ | - | $ | (7,243 | ) | ||||
Impairment
|
- | (530 | ) | (530 | ) | |||||||
Translation
Adjustments
|
(782 | ) | - | (782 | ) | |||||||
Balance,
January 2, 2010
|
$ | 663,920 | $ | - | $ | 663,920 |
Intangible
Assets
During
2009, the Company finalized the valuation of intangible assets related to the
two 2008 acquisitions and the CPT acquisition in January, 2009.
Intangible
Assets consisted of the following (in thousands):
Gross Intangibles
|
||||||||||||||||||||
Asset
Description
|
Useful
Life
(years)
|
December
27, 2008
|
Net
Acquisitions
and
Fair Value
Adjustments
|
Translation
Adjustments
|
January
2, 2010
|
|||||||||||||||
Non-Compete
Agreements
|
5 | $ | 5,767 | $ | 575 | $ | 6 | $ | 6,348 | |||||||||||
Trademarks
|
3 - 21 | 19,490 | 1,310 | 400 | 21,200 | |||||||||||||||
Patents
|
10 | 15,410 | - | - | 15,410 | |||||||||||||||
Engineering
Drawings
|
10 | 1,200 | - | - | 1,200 | |||||||||||||||
Customer
Relationships
|
9 - 15 | 92,633 | 4,789 | 642 | 98,064 | |||||||||||||||
Technology
|
6 - 11 | 25,439 | 6,844 | 900 | 33,183 | |||||||||||||||
Total
Gross Intangibles
|
$ | 159,939 | $ | 13,518 | $ | 1,948 | $ | 175,405 | ||||||||||||
Accumulated Amortization
|
||||||||||||||||||||
Asset
Description
|
Useful
Life
(years)
|
December
27, 2008
|
Amortization
|
Translation
Adjustments
|
January
2, 2010
|
|||||||||||||||
Non-Compete
Agreements
|
5 | $ | (3,755 | ) | $ | (1,239 | ) | $ | (3 | ) | $ | (4,997 | ) | |||||||
Trademarks
|
3 - 21 | (6,026 | ) | (1,587 | ) | (45 | ) | (7,658 | ) | |||||||||||
Patents
|
10 | (6,190 | ) | (1,542 | ) | - | (7,732 | ) | ||||||||||||
Engineering
Drawings
|
10 | (487 | ) | (120 | ) | - | (607 | ) | ||||||||||||
Customer
Relationships
|
9 - 15 | (18,625 | ) | (10,518 | ) | (182 | ) | (29,325 | ) | |||||||||||
Technology
|
6 - 11 | (4,072 | ) | (4,409 | ) | (179 | ) | (8,660 | ) | |||||||||||
Total
Accumulated Amortization
|
$ | (39,155 | ) | $ | (19,415 | ) | $ | (409 | ) | $ | (58,979 | ) | ||||||||
Intangible
Assets, Net of Amortization
|
$ | 120,784 | $ | 116,426 |
Estimated
Amortization (in millions)
2010
|
2011
|
2012
|
2013
|
2014
|
|||||
$15.3
|
$14.9
|
$14.7
|
$14.6
|
$13.8
|
39
(8) DEBT
AND BANK CREDIT FACILITIES
The
Company’s indebtedness as of January 2, 2010 and December 27, 2008 was as
follows (in thousands):
January
2, 2010
|
December
27, 2008
|
|||||||
Senior
notes
|
$ | 250,000 | $ | 250,000 | ||||
Term
Loan
|
165,000 | 165,000 | ||||||
Revolving
credit facility
|
2,863 | 20,000 | ||||||
Convertible
senior subordinated debt
|
39,198 | 113,937 | ||||||
Other
|
19,389 | 26,470 | ||||||
476,450 | 575,407 | |||||||
Less: Current
maturities
|
(8,385 | ) | (15,280 | ) | ||||
Non-current
portion
|
$ | 468,065 | $ | 560,127 |
At
January 2, 2010, the Company has $250.0 million of senior notes (the “Notes”)
outstanding. The Notes were sold pursuant to a Note Purchase
Agreement (the “Agreement”) by and among the Company and the purchasers of the
Notes. The Notes were issued and sold in two
series: $150.0 million in Floating Rate Series 2007A Senior Notes,
Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A
Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest
at a margin over the London Inter-Bank Offered Rate (“LIBOR”), which margin
varies with the ratio of the Company’s consolidated debt to consolidated
earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as
defined in the Agreement. These interest rates also vary as LIBOR
varies. The Agreement permits the Company to issue and sell
additional note series, subject to certain terms and conditions described in the
Agreement, up to a total of $600.0 million in combined Notes.
On June
16, 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with
certain financial institutions, whereby the Company borrowed an aggregate
principal amount of $165.0 million. The Term Loan matures in June 2013, and
borrowings generally bear interest at a variable rate equal to (i) a margin over
LIBOR, which margin varies depending on whether certain criteria are satisfied,
or (ii) the alternate base rate as defined in the agreement. At
January 2, 2010, the interest rate of 1.2% was based on a margin over
LIBOR.
The
Company’s $500.0 million revolving credit facility (“the Facility”) permits the
Company to borrow at interest rates (0.9% at January 2, 2010) based upon a
margin above LIBOR, which margin varies with the ratio of senior funded debt to
EBITDA as defined in the Facility. These interest rates also vary as
LIBOR varies. We pay a commitment fee on the unused amount of the
Facility, which also varies with the ratio of our senior funded debt to our
EBITDA.
The
average balance outstanding under the Facility in 2009 was $11.4 million and in
2008 was $83.4 million. The average interest rate paid under the
Facility was 1.3% in 2009 and 2.9% in 2008. The Company had $485.0
million of available borrowing capacity under the Facility at January 2,
2010.
The
Notes, the Term Loan and the Facility require us to meet specified financial
ratios and to satisfy certain financial condition tests. We were in
compliance with all debt covenants as of January 2, 2010.
The
Company has interest rate swap agreements to manage fluctuations in cash flows
resulting from interest rate risk. (See also Note 14 to the
Consolidated Financial Statements).
As of
January 2, 2010, the Company’s Convertible Notes are convertible as the closing
price of the Company’s common stock exceeded the contingent conversion share
price for the specified amount of time. As a result, bondholders that
exercise their right to convert the notes will receive up to the principal
amount of the notes in cash, with the balance of the conversion obligation, if
any, to be satisfied in shares of the Company’s common stock or cash, at the
Company’s discretion. Effective on April 17, 2009, the conversion
rate of the Company’s Convertible Notes was adjusted pursuant to the terms of
the indenture. The adjustment is required as the cumulative dividends
paid to shareholders since the Convertible Notes were issued reached the
threshold defined in the indenture. The conversion rate as of April
17, 2009 is 39.5107 shares of common stock for each $1,000 principal amount of
Convertible Notes. During 2009, several bondholders have exercised
their conversion right for a total of $75.8 million of Convertible
Notes. The par value of the Convertible Notes was paid in cash and
the conversion premium was paid through issuance of approximately 1.4 million
shares of stock.
The
Company also had $39.2 million and $113.9 million of convertible senior
subordinated notes outstanding at January 2, 2010 and December 27, 2008,
respectively. The notes, which are unsecured and due in 2024, bear
interest at a fixed rate of 2.75% for five years, and may increase thereafter at
.25% of the average trading price of a note if certain conditions are
met. The Company may now call the notes while the note holders may
only put the notes back to the Company at approximately the 10th and
15th year
anniversaries of the issuance of the notes. The Company must pay cash
for the par value, but retained the option to either pay cash, issue its stock
or a combination thereof, for value above par. The fair value of
these notes at January 2, 2010 and December 27, 2008 was approximately $82.8
million and $154.0 million, respectively. In the table below, the
maturity of these convertible notes is shown in 2012 as they may be converted
based on a formula related to our stock price, but are not considered current as
our Facility provides sufficient long-term liquidity to repay any notes put back
to the Company by their holders.
40
As part
of the 2008 acquisition of Hwada (see Note 5 to the Consolidated Financial
Statements), the Company assumed $21.6 million of short-term notes payable to
banks. As of January 2, 2010 these notes have been repaid, at December 27, 2008,
the balance of Hwada notes payable was approximately $11.0 million, and the
weighted average interest rate was 6.2%.
At
January 2, 2010 a foreign subsidiary of the Company had outstanding short-term
borrowings of $8.2 million, denominated in local currency with a weighted
average interest rate of 1.9%. At December 27, 2008, this foreign subsidiary of
the Company had outstanding borrowings of $4.1 million denominated in local
currency with a weighted average interest rate of 3.4%.
At
January 2, 2010, additional short-term notes payable of approximately $11.2
million were outstanding with a weighted average interest rate of
4.8%
Maturities
of long-term debt are as follows (in thousands):
Year
|
|||
2010
|
$ | 8,385 | |
2011
|
166 | ||
2012
|
42,365 | ||
2013
|
165,315 | ||
2014
|
150,299 | ||
Thereafter
|
109,920 | ||
Total
|
$ | 476,450 |
(9) RETIREMENT
PLANS
The
Company has a number of retirement plans that cover most of its domestic
employees. The defined benefit pension plans covering a majority of
our domestic employees were frozen to new employees as of January 1, 2009. Most
foreign employees are covered by government sponsored plans in the countries in
which they are employed. The domestic employee plans include defined
contribution plans and defined benefit pension plans. The defined contribution
plans provide for Company contributions based, depending on the plan, upon one
or more of participant contributions, service and profits. Company contributions
to defined contribution plans totaled $4.9 million, $4.8 million, and $3.8
million in 2009, 2008, and 2007, respectively.
Benefits
provided under defined benefit pension plans are based, depending on the plan,
on employees’ average earnings and years of credited service, or a benefit
multiplier times years of service. Funding of these qualified defined benefit
pension plans is in accordance with federal laws and regulations. The
actuarial valuation measurement date for pension plans is as of fiscal year end
for all periods.
The
Company’s defined benefit pension assets are invested in equity securities and
fixed income investments based on the Company’s overall strategic investment
direction as follows:
Target
|
||||
Allocation
|
Return
|
|||
Equity
investments
|
75%
|
9-10%
|
||
Fixed
income
|
25%
|
5.5-6.5%
|
||
Total
|
100%
|
8.25%
|
The
Company’s investment strategy for its defined benefit pension plans is to
achieve moderately aggressive growth, earning a long-term rate of return
sufficient to allow the plans to reach fully funded status. Accordingly,
allocation targets have been established to fit this strategy, with a heavier
long-term weighting of investments in equity securities. The long-term rate of
return assumptions consider historic returns and volatilities adjusted for
changes in overall economic conditions that may affect future returns and a
weighting of each investment class.
41
The
following table presents a reconciliation of the funded status of the defined
benefit pension plans (in thousands):
2009
|
2008
|
|||||||
Change
in projected benefit obligation:
|
||||||||
Obligation
at beginning of period
|
$ | 103,039 | $ | 100,205 | ||||
Service
cost
|
2,262 | 4,051 | ||||||
Interest
cost
|
6,956 | 5,831 | ||||||
Actuarial
loss
|
9,938 | 184 | ||||||
Plan
amendments
|
- | (2,844 | ) | |||||
Benefits
paid
|
(4,788 | ) | (4,306 | ) | ||||
Foreign
currency translation
|
973 | (2,927 | ) | |||||
Other
|
(1,547 | ) | 2,845 | |||||
Obligation
at end of period
|
$ | 116,833 | $ | 103,039 | ||||
Change
in fair value of plan assets:
|
||||||||
Fair
value of plan assets at beginning of period
|
$ | 58,063 | $ | 78,285 | ||||
Actual
return on plan assets
|
14,001 | (20,822 | ) | |||||
Employer
contributions
|
10,110 | 4,793 | ||||||
Benefits
paid
|
(4,788 | ) | (4,306 | ) | ||||
Foreign
currency translation
|
549 | (2,634 | ) | |||||
Other
|
(1,475 | ) | 2,747 | |||||
Fair
value of plan assets at end of period
|
$ | 76,460 | $ | 58,063 | ||||
Funded
status
|
$ | (40,373 | ) | $ | (44,976 | ) |
The fair
value of plan assets is based on inputs used to measure fair value as described
in Note 15 of the Consolidated Financial Statements:
January
2, 2010 (in thousands)
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||
Cash
|
$ | 1,169 | $ | 1,169 | $ | - | $ | - | |||||||
Money
Market Funds
|
1,220 | 1,220 | - | - | |||||||||||
Common
Stocks
|
27,798 | 25,286 | 2,512 | - | |||||||||||
Common
Collective Trust Funds
|
38,281 | - | 38,281 | - | |||||||||||
Mutual
Funds
|
7,992 | - | 7,992 | - | |||||||||||
Total
|
$ | 76,460 | $ | 27,675 | $ | 48,785 | $ | - | |||||||
December
27, 2008 (in thousands)
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||
Cash
|
$ | 995 | $ | 995 | $ | - | $ | - | |||||||
Money
Market Funds
|
4,713 | 4,713 | - | - | |||||||||||
Common
Stocks
|
16,722 | 15,481 | 1,241 | - | |||||||||||
Common
Collective Trust Funds
|
30,722 | - | 30,722 | - | |||||||||||
Mutual
Funds
|
4,911 | - | 4,911 | - | |||||||||||
Total
|
$ | 58,063 | $ | 21,189 | $ | 36,874 | $ | - |
The
Company recognized the funded status of its defined benefit pension plans on the
balance sheet as follows (in thousands):
2009
|
2008
|
|||||||
Other
Accrued Expenses
|
$ | (1,067 | ) | $ | (1,208 | ) | ||
Pension
and Other Post Retirement Benefits
|
(39,306 | ) | (43,768 | ) | ||||
$ | (40,373 | ) | $ | (44,976 | ) | |||
Amounts
Recognized in Accumulated Other Comprehensive Income
|
||||||||
Net
actuarial loss
|
$ | 37,497 | $ | 34,240 | ||||
Prior
service cost
|
1,531 | 1,719 | ||||||
$ | 39,028 | $ | 35,959 |
The
accumulated benefit obligation for all defined benefit pension plans was $96.6
million and $98.2 million at January 2, 2010 and December 27, 2008,
respectively.
42
The
following table presents information for defined benefit pension plans with
accumulated benefit obligations in excess of plan assets (in
thousands):
(In
Thousands)
|
||||||||
2009
|
2008
|
|||||||
Projected
benefit obligation
|
$ | 116,833 | $ | 103,039 | ||||
Accumulated
benefit obligation
|
$ | 96,625 | $ | 98,172 | ||||
Fair
value of plan assets
|
$ | 76,460 | $ | 58,063 |
The
following weighted-average assumptions were used to determine the projected
benefit obligation at year end:
2009
|
2008
|
|||||||
Discount
rate
|
5.67%
|
to
|
6.27%
|
6.86%
|
to
|
6.95%
|
||
Expected
long-term rate of return of assets
|
8.25%
|
8.25%
|
Certain
of our defined benefit pension plan obligations are based on years of service
rather than on projected compensation percentage increases. For those
plans that use compensation increases in the calculation of benefit obligations
and net periodic pension cost, the Company used an assumed rate of compensation
increase of 3.0% for the years ended January 2, 2010 and December 27,
2008.
Net
periodic pension benefit costs for the defined benefit pension plans were as
follows (in thousands):
2009
|
2008
|
2007
|
||||||||||
Service
cost
|
$ | 2,420 | $ | 4,051 | $ | 4,019 | ||||||
Interest
cost
|
5,778 | 5,831 | 5,877 | |||||||||
Expected
return on plan assets
|
(5,068 | ) | (5,482 | ) | (5,802 | ) | ||||||
Amortization
of net actuarial loss
|
759 | 716 | 954 | |||||||||
Amortization
of prior service cost
|
189 | 199 | 214 | |||||||||
Net
periodic benefit cost
|
$ | 4,078 | $ | 5,315 | $ | 5,262 |
For the
year ended January 2, 2010, the net actuarial loss and prior service cost for
the defined benefit pension plans that was amortized into periodic pension
benefit cost was $0.8 million and $0.2 million, respectively.
The
estimated net actuarial loss and prior service cost for the defined benefit
pension plans that will be amortized from AOCI into net periodic benefit cost
during the 2010 fiscal year are $2.2 million and $0.2 million,
respectively.
As
permitted under relevant accounting guidance, the amortization of any prior
service cost is determined using a straight-line amortization of the cost over
the average remaining service period of employees expected to receive benefits
under the plans.
The
following assumptions were used to determine net periodic pension cost for the
years ended January 2, 2010, December 27, 2008, and December 29, 2007,
respectively.
2009
|
2008
|
2007
|
|||||||||
Discount
rate
|
6.85%
|
to
|
6.95%
|
6.36%
|
to
|
6.68%
|
5.89%
|
to
|
6.00%
|
||
Expected
long-term rate of return on assets
|
8.25%
|
8.25%
|
8.5%
|
The
Company estimates that in 2010, it will make contributions in the amount of $1.5
million to fund its defined benefit pension plans.
The
following pension benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in millions):
Year
|
Expected
Payments
|
|
2010
|
$5.4
|
|
2011
|
5.8
|
|
2012
|
6.2
|
|
2013
|
7.7
|
|
2014
|
8.1
|
|
2015-2019
|
46.6
|
43
(10) SHAREHOLDERS’
EQUITY
The
Company recognized approximately $4.8 million, $4.6 million, and $3.8 million in
share-based compensation expense in 2009, 2008 and 2007,
respectively. The Company recognizes compensation expense on grants
of share-based compensation awards on a straight-line basis over the vesting
period of each award. As of January 2, 2010, total unrecognized
compensation cost related to share-based compensation awards was approximately
$13.7 million, net of estimated forfeitures, which the Company expects to
recognize over a weighted average period of approximately 3.0
years. The total income tax benefit recognized relating to
share-based compensation for the year ended January 2, 2010 was approximately
$2.8 million.
On April
20, 2007, shareholders approved the 2007 Regal Beloit Corporation 2007 Equity
Incentive Plan (“2007 Plan”), which authorized an additional 2.5 million shares
for issuance under the 2007 Plan. Under the 2007 Plan and the
Company’s 2003 and 1998 stock plans, the Company was authorized as of January 2,
2010 to deliver up to 5.0 million shares of common stock upon exercise of
non-qualified stock options or incentive stock options, or upon grant or in
payment of stock appreciation rights, and restricted
stock. Approximately 1.9 million shares were available for future
grant or payment under the various plans at January 2, 2010.
On May
22, 2009, the Company completed the sale of 4,312,500 shares of common stock to
the public at a price of $36.25 per share. Net proceeds of $150.4
million were received by the Company.
During
the year ended January 2, 2010, the Company issued approximately 1.4 million
shares, including all 884,100 shares of treasury stock, to former Convertible
Note holders in settlement of the conversion premium of their
redemption. (See Note 8 of the Consolidated Financial
Statements.)
During
the year ended December 27, 2008, the Company repurchased 110,000 shares at a
total cost of $4.2 million. There were no shares repurchased in
2009.
Share-based Incentive
Awards
The
Company uses several forms of share-based incentive awards including
non-qualified stock options, incentive stock options and stock appreciation
rights (SAR’s). All grants are made at prices equal to the fair
market value of the stock on the grant dates, and expire ten years from the
grant date.
The per
share weighted average fair value of share-based incentive awards granted
(options and SAR’s) was $15.28 and $14.68 for the years ended January 2, 2010
and December 27, 2008, respectively. The fair value of the awards for
the years ended January 2, 2010 and December 27, 2008 were estimated on the date
of grant using the Black-Scholes pricing model and the following weighted
average assumptions; expected life of seven years; risk-free interest rate of
2.6% and 3.7%; expected dividend yield of 1.5% and 1.4%; and expected volatility
of 36.8% and 32.0%, respectively.
The
average risk-free interest rate is based on U.S. Treasury security rates in
effect as of the grant date. The expected dividend yield is based on
the projected annual dividend as a percentage of the estimated market value of
our common stock as of the grant date. The Company estimated the
expected volatility using a weighted average of daily historical volatility of
our stock price over the expected term of the award. The Company
estimated the expected term using historical data adjusted for the estimated
exercise dates of unexercised awards.
44
Following
is a summary of share-based incentive plan grant activity (options and SAR’s)
for the three fiscal years ended 2009, 2008 and 2007:
Shares
|
Wtd.
Avg.
Exercise
Price
|
Wtd.
Avg. Remaining
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value
(in
millions)
|
|||||||||||||
Number
of shares under option:
|
||||||||||||||||
Outstanding
at December 20, 2006
|
1,602,725 | $ | 26.64 | |||||||||||||
Granted
|
315,750 | 46.24 | ||||||||||||||
Exercised
|
(424,850 | ) | 24.20 | |||||||||||||
Forfeited
|
(8,850 | ) | 47.01 | |||||||||||||
Outstanding
at December 29, 2007
|
1,484,775 | 31.40 | 5.9 | $ | 20.6 | |||||||||||
Exercisable
at December 29, 2007
|
741,108 | 24.03 | 4.6 | 15.5 | ||||||||||||
Outstanding
at December 29, 2007
|
1,484,775 | $ | 31.40 | |||||||||||||
Granted
|
306,000 | 42.30 | ||||||||||||||
Exercised
|
(329,000 | ) | 23.77 | |||||||||||||
Forfeited
|
(18,150 | ) | 35.35 | |||||||||||||
Outstanding
at December 27, 2008
|
1,443,625 | 35.46 | 7.1 | $ | 5.3 | |||||||||||
Exercisable
at December 27, 2008
|
660,792 | 27.82 | 5.6 | 4.9 | ||||||||||||
Outstanding
at December 27, 2008
|
1,443,625 | $ | 35.46 | |||||||||||||
Granted
|
373,500 | 42.66 | ||||||||||||||
Exercised
|
(225,450 | ) | 22.74 | |||||||||||||
Forfeited
|
(15,750 | ) | 42.25 | |||||||||||||
Outstanding
at January 2, 2010
|
1,575,925 | 38.86 | 7.2 | $ | 20.4 | |||||||||||
Exercisable
at January 2, 2010
|
585,025 | 33.34 | 5.5 | 10.9 |
The
amount of options expected to vest is materially consistent with those
outstanding and not yet exercisable.
The table
below presents share-based compensation activity for the three fiscal years
ended 2009, 2008 and 2007 (in millions):
2009
|
2008
|
2007
|
||||||||||
Total
intrinsic value of stock options exercised
|
$ | 5.7 | $ | 6.3 | $ | 9.6 | ||||||
Cash
received from stock option exercises
|
5.8 | 2.9 | 2.2 | |||||||||
Income
tax benefit from the exercise of stock options
|
2.8 | 2.5 | 6.7 | |||||||||
Total
fair value of stock options vested
|
3.5 | 6.5 | 6.8 |
Restricted
Stock
The
Company also granted restricted stock awards to certain
employees. The Company restrictions lapse two to three years after
the date of the grant. The Company values restricted stock awards at
the closing market value of our common stock on the date of grant.
A summary
of restricted stock activity for the three fiscal years ended 2009, 2008 and
2007:
Shares
|
Wtd.
Avg. Share
Fair
Value
|
Aggregate
Intrinsic Value (in millions)
|
||||||||||
Restricted
stock balance at December 30, 2006:
|
93,675 | $ | 32.31 | $ | 5.4 | |||||||
Granted
|
35,750 | 42.03 | 1.7 | |||||||||
Vested
|
(33,975 | ) | 25.76 | (3.3 | ) | |||||||
Restricted
stock balance at December 29, 2007:
|
95,450 | $ | 38.27 | $ | 3.8 | |||||||
Granted
|
32,850 | 42.28 | 1.4 | |||||||||
Vested
|
(10,200 | ) | 29.75 | (0.3 | ) | |||||||
Restricted
stock balance at December 27, 2008:
|
118,100 | $ | 41.72 | $ | 4.9 | |||||||
Granted
|
53,550 | 42.65 | 2.3 | |||||||||
Vested
|
(50,700 | ) | 37.55 | (1.9 | ) | |||||||
Restricted
stock balance at January 2, 2010:
|
120,950 | $ | 43.88 | $ | 5.3 |
45
Shareholders’ Rights
Plan
On
January 28, 2000, the Board of Directors approved a Shareholders’ Rights Plan
(the “Plan”). Pursuant to this Plan, one common share purchase right is included
with each outstanding share of common stock. In the event the rights become
exercisable, each right will initially entitle its holder to buy one-half of one
share of the Company’s common stock at a price of $60 per share (equivalent to
$30 per one-half share), subject to adjustment. The rights will become
exercisable if a person or group acquires, or announces an offer for, 15% or
more of the Company’s common stock. In this event, each right will
thereafter entitle the holder to purchase, at the right’s then-current exercise
price, common stock of the Company or, depending on the circumstances, common
stock of the acquiring corporation having a market value of twice the full share
exercise price. The rights may be redeemed by the Company at a price of
one-tenth of one cent per right at any time prior to the time a person or group
acquires 15% or more, of the Company’s common stock. The rights
expired subsequent to year end on January 28, 2010.
Treasury
Stock
The Board
of Directors has approved repurchase programs of up to 3,000,000 common shares
of Company stock. Management is authorized to effect purchases from time to time
in the open market or through privately negotiated transactions. Through
December 27, 2008, the Company has repurchased 884,100 shares at an average
purchase price of $21.96 per share. During the fiscal year ended
December 27, 2008 the Company repurchased 110,000 shares for a total cost of
$4.2 million. During 2009, approximately 1.4 million shares,
including all 884,100 treasury shares, were issued in settlement of the
conversion premium for Convertible Notes. (See also Note 8 of the
Consolidated Financial Statements.)
(11) INCOME
TAXES
Income
before income taxes and minority interest consisted of the following (in
thousands):
2009
|
2008
|
2007
|
||||||||||
United
States
|
$ | 103,929 | $ | 165,137 | $ | 148,546 | ||||||
Foreign
|
34,026 | 34,126 | 31,797 | |||||||||
Total
|
$ | 137,955 | $ | 199,263 | $ | 180,343 |
The
provision for income taxes is summarized as follows (in thousands):
2009
|
2008
|
2007
|
||||||||||
Current
|
||||||||||||
Federal
|
$ | 16,583 | $ | 45,187 | $ | 44,666 | ||||||
State
|
2,387 | 7,795 | 5,255 | |||||||||
Foreign
|
12,588 | 11,340 | 6,671 | |||||||||
31,558 | 64,322 | 56,592 | ||||||||||
Deferred
|
7,718 | 6,027 | 5,345 | |||||||||
Total
|
$ | 39,276 | $ | 70,349 | $ | 61,937 |
A
reconciliation of the statutory Federal income tax rate and the effective tax
rate reflected in the consolidated statements of income follows:
2009
|
2008
|
2007
|
||||||||||
Federal
statutory tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State
income taxes, net of federal benefit
|
2.3 | 2.6 | 1.9 | |||||||||
Domestic
production activities deduction
|
(0.7 | ) | (0.9 | ) | (1.0 | ) | ||||||
Foreign
rate differential
|
(4.2 | ) | 0.3 | (2.3 | ) | |||||||
Adjustments
to tax accruals and reserves
|
(1.7 | ) | 0.2 | 0.4 | ||||||||
Other,
net
|
(2.2 | ) | (1.9 | ) | 0.3 | |||||||
Effective
tax rate
|
28.5 | % | 35.3 | % | 34.3 | % |
Deferred
taxes arise primarily from differences in amounts reported for tax and financial
statement purposes. The Company’s net deferred tax liabilities as of
January 2, 2010 of $41.7 million is classified on the consolidated balance sheet
as a net current deferred income tax benefit of $30.7 million and a net
non-current deferred income tax liability of $72.4 million. The
components of this net deferred tax assets (liability) are as follows (in
thousands):
46
January
2, 2010
|
December
27, 2008
|
|||||||
Accrued
employee benefits
|
$ | 28,017 | $ | 29,697 | ||||
Bad
debt reserve
|
3,623 | 3,078 | ||||||
Warranty
reserve
|
4,446 | 3,085 | ||||||
Inventory
|
4,625 | 6,506 | ||||||
Derivative
instruments
|
10,941 | 63,347 | ||||||
Other
|
17,360 | 12,080 | ||||||
Deferred
tax assets
|
69,012 | 117,793 | ||||||
Property
related
|
(38,498 | ) | (39,155 | ) | ||||
Intangible
items
|
(66,420 | ) | (61,022 | ) | ||||
Convertible
debt interest
|
(5,839 | ) | (13,753 | ) | ||||
Deferred
tax liabilities
|
(110,757 | ) | (113,930 | ) | ||||
Net
deferred tax asset (liability)
|
$ | (41,745 | ) | $ | 3,863 |
Following
is a reconciliation of the beginning and ending amount of unrecognized tax
benefits (in millions):
January
2, 2010
|
December
27,
2008
|
December
29,
2007
|
||||||||||
Unrecognized
tax benefits - beginning of year
|
$ | 7.1 | $ | 6.8 | $ | 6.3 | ||||||
Gross
increases - tax positions in prior periods
|
4.1 | - | 0.2 | |||||||||
Gross
increases - tax positions in the current period
|
0.4 | 0.3 | 0.3 | |||||||||
Settlements
with taxing authorities
|
(0.4 | ) | - | - | ||||||||
Lapse
of statute of limitations
|
(4.6 | ) | - | - | ||||||||
Unrecognized
tax benefits end of year
|
$ | 6.6 | $ | 7.1 | $ | 6.8 |
Unrecognized
tax benefits as of January 2, 2010 amount to $6.6 million, all of
which would impact the effective income tax rate if
recognized.
Potential
interest and penalties related to unrecognized tax benefits are recorded in
income tax expense. During the years ended January 2, 2010, December
27, 2008, and December 29, 2007, the Company recognized approximately $0.7
million, $0.2 million, and $0.3 million in net interest expense,
respectively. The Company had approximately $1.0 million, $1.1
million, and $0.9 million of accrued interest included in the tax contingency
reserve as of January 2, 2010, December 27, 2008 and December 29, 2007,
respectively.
Due to
statute expirations, approximately $2.5 million of the unrecognized tax
benefits, including accrued interest, could reasonably change in the coming
year.
With few
exceptions, the Company is no longer subject to U.S. federal and state/local
income tax examinations by tax authorities for years prior to 2005, and the
Company is no longer subject to non-U.S. income tax examinations by tax
authorities for years prior to 2004.
The
Company has approximately $4.4 million of Net Operating Losses in various
jurisdictions which expire over a period up to 15 years.
At
January 2, 2010 the estimated amount of total unremitted non-U.S. subsidiary
earnings was $87.0 million. No U.S. deferred taxes have been provided
on the undistributed non-U.S. subsidiary earnings because they are considered to
be permanently invested given our acquisition and growth
initiatives.
(12) CONTINGENCIES
AND COMMITMENTS
On July
30, 2009, we filed a response and counterclaims to an action filed by Nordyne,
Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri
in which action Nordyne is seeking a judgment declaring that neither Nordyne’s
G7 furnace systems nor its iQ Drive 23-seer air conditioning systems infringe on
our ECM (electronically commutated motor) systems patents (U.S. Patent No.
5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is
invalid. In our response and counterclaims against Nordyne we are
seeking a judgment that the ‘058 Patent is valid and that Nordyne has, in fact,
infringed and continues to infringe the ‘058 Patent by making, using, offering
for sale and selling it’s G7 furnace systems and iQ Drive 23-seer air
conditioning systems. We have also requested the U.S. District Court
to enjoin Nordyne and all persons working in concert with Nordyne from further
infringement of the ‘058 Patent and to award us compensatory and other damages
caused by such infringement. We intend to defend our intellectual
property vigorously against the claims asserted by Nordyne and against any
infringement by Nordyne or any other person. We do not currently
believe that the litigation will have a material effect on the Company’s
financial position or its results of operations.
47
The
Company is, from time to time, party to litigation that arises in the normal
course of our business operations, including product warranty and liability
claims, contract disputes and environmental, asbestos, employment and other
litigation matters. The Company’s products are used in a variety of
industrial, commercial and residential applications that subject us to claims
that the use of our products is alleged to have resulted in injury or other
damage. The Company accrues for anticipated costs in defending against such
lawsuits in amounts that we believe are adequate, and the Company does not
believe that the outcome of any such lawsuit will have a material effect on the
Company’s financial position or its results of operations.
The
Company recognizes the cost associated with its standard warranty on its
products at the time of sale. The amount recognized is based on
historical experience. The following is a reconciliation of the
changes in accrued warranty costs for 2009 and 2008 (in thousands):
2009
|
2008
|
|||||||
Balance
beginning of year
|
$ | 11,022 | $ | 9,872 | ||||
Acquisitions
|
- | 316 | ||||||
Payments
|
(12,102 | ) | (7,431 | ) | ||||
Provision
|
14,465 | 8,268 | ||||||
Translation
|
(87 | ) | (3 | ) | ||||
Balance,
end of year
|
$ | 13,298 | $ | 11,022 |
(13) LEASES
AND RENTAL COMMITMENTS
Rental
expenses charged to operations amounted to $18.9 million in 2009, $16.3 million
in 2008 and $13.3 million in 2007. The Company has future minimum rental
commitments under operating leases as shown in the following table:
Year
|
(In
Millions)
|
|
2010
|
$16.3
|
|
2011
|
12.3
|
|
2012
|
9.6
|
|
2013
|
6.3
|
|
2014
|
3.2
|
|
Thereafter
|
6.7
|
(14) DERIVATIVE
FINANCIAL INSTRUMENTS
The
Company is exposed to certain risks relating to its ongoing business
operations. The primary risks managed using derivative instruments
are commodity price risk, currency exchange, and interest rate
risk. Forward contracts on certain commodities are entered into to
manage the price risk associated with forecasted purchases of materials used in
the Company’s manufacturing process. Forward contracts on certain
currencies are entered into to manage forecasted cash flows in certain foreign
currencies. Interest rate swaps are entered into to manage interest
rate risk associated with the Company’s floating rate borrowings.
The
Company recognizes all derivative instruments as either assets or liabilities at
fair value in the statement of financial position. Accordingly, the
Company designates commodity forward contracts as cash flow hedges of forecasted
purchases of commodities, currency forward contracts as cash flow hedges of
forecasted foreign currency cash flows and interest rate swaps as cash flow
hedges of forecasted LIBOR-based interest payments. There were no
significant collateral deposits on derivative financial instruments as of
January 2, 2010.
Cash flow
hedges
For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative is reported as a
component of accumulated other comprehensive income (loss) and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. Gains and losses on the derivative representing
either hedge ineffectiveness or changes in market value of derivatives not
designated as hedges are recognized in current earnings. At January
2, 2010, the Company had an additional $1.5 million, net of tax, of derivative
gains on closed hedge instruments in AOCI that will be realized in earnings when
the hedged items impact earnings. At December 27, 2008, the Company
had an additional ($15.2) million, net of tax, of derivative losses on closed
hedge instruments in AOCI that was realized in earnings when the hedged items
impacted earnings.
48
As of
January 2, 2010, the Company had outstanding the following commodity forward
contracts (with maturities extending through February 2011) to hedge forecasted
purchases of commodities (in millions):
Notional
Amount
|
||
Copper
|
$12.3
|
|
Aluminum
|
0.7
|
|
Zinc
|
0.1
|
|
Natural
Gas
|
0.6
|
As of
January 2, 2010, the Company had outstanding the following currency forward
contracts (with maturities extending through December 2011) to hedge forecasted
foreign currency cash flows (in millions):
Notional
Amount
|
||
Mexican
Peso
|
$74.6
|
|
Indian
Rupee
|
34.8
|
|
Thai
Baht
|
4.6
|
|
Chinese
Renminbi
|
4.8
|
|
Australian
Dollar
|
3.5
|
As of
January 2, 2010, the total notional amount of the Company’s
receive-variable/pay-fixed interest rate swaps was $250.0 million (with
maturities extending to August 2017).
Fair
values of derivative instruments were (in millions):
January
2, 2010
|
December
27, 2008
|
|||||||||||||||||||||||
Prepaid
|
Other
Noncurrent
|
Hedging
Obligations
|
Hedging
Obligations
|
|||||||||||||||||||||
Expenses
|
Assets
|
Current
|
Noncurrent
|
Current
|
Noncurrent
|
|||||||||||||||||||
Designated
as hedging instruments:
|
||||||||||||||||||||||||
Interest
rate swap contracts
|
$ | - | $ | - | $ | - | $ | 31.2 | $ | - | $ | 49.6 | ||||||||||||
Foreign
exchange contracts
|
- | 1.1 | 5.5 | - | 18.8 | 12.0 | ||||||||||||||||||
Commodity
contracts
|
3.5 | - | - | - | 53.3 | 0.4 | ||||||||||||||||||
Not
designated as hedging instruments:
|
||||||||||||||||||||||||
Foreign
exchange contracts
|
0.2 | - | - | - | - | - | ||||||||||||||||||
Commodity
contracts
|
0.9 | - | - | - | 8.5 | - | ||||||||||||||||||
Total
Derivatives:
|
$ | 4.6 | $ | 1.1 | $ | 5.5 | $ | 31.2 | $ | 80.6 | $ | 62.0 |
The
Company’s fair value for derivative instruments is classified on the
consolidated balance sheet as a current asset of $4.6 million, a noncurrent
asset of $1.1 million, a current liability of $5.5 million, and a noncurrent
liability of $31.2 million.
The
effect of derivative instruments on the consolidated statements of equity and
earnings for the year ended January 2, 2010 was (in millions):
Derivatives
Designated as Cash Flow Hedging Instruments
|
||||||||||||||||
Commodity
Forwards
|
Currency
Forwards
|
Interest Rate
Swaps
|
Total
|
|||||||||||||
Gain
(loss) recognized in Other Comprehensive Income (Loss)
|
$ | 30.6 | $ | 12.1 | $ | 6.9 | $ | 49.6 | ||||||||
Amounts
reclassified from other comprehensive income (loss) were:
|
||||||||||||||||
Loss
recognized in Net Sales
|
$ | - | $ | (3.3 | ) | $ | - | $ | (3.3 | ) | ||||||
Loss
recognized in Cost of Sales
|
$ | (51.4 | ) | $ | (14.1 | ) | $ | - | $ | (65.5 | ) | |||||
Loss
recognized in Interest Expense
|
$ | - | $ | - | $ | (11.5 | ) | $ | (11.5 | ) |
Derivatives
Not Designated as Cash Flow Hedging Instruments
|
||||||
Commodity
Forwards
|
Currency
Forwards
|
Total
|
||||
Gain
(loss) recognized in Cost of Sales
|
$9.4
|
$(1.4)
|
$8.0
|
The
ineffective portion of hedging instruments recognized was immaterial for all
periods presented.
The net
AOCI balance related to hedging activities of ($18.4) million loss at January 2,
2010 includes ($7.2) million of net current deferred losses expected to be
realized in the next twelve months.
49
(15) FAIR
VALUE
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date (exit price). The inputs used to measure fair
value are classified into the following hierarchy:
Level
1
|
Unadjusted
quoted prices in active markets for identical assets or
liabilities
|
Level
2
|
Unadjusted
quoted prices in active markets for similar assets or liabilities,
or
|
Unadjusted
quoted prices for identical or similar assets or liabilities in markets
that are not active, or
|
|
Inputs
other than quoted prices that are observable for the asset or
liability
|
|
Level
3
|
Unobservable
inputs for the asset or liability
|
The
Company uses the best available information in measuring fair
value. Financial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the fair
value measurement. The following table sets forth the Company’s
financial assets and liabilities that were accounted for at fair value on a
recurring basis as of January 2, 2010 (in millions):
Assets:
|
2009
|
2008
|
|||||||
Investments
|
$ | 117.6 | $ | - |
(Level
2)
|
||||
Prepaid
Expenses and Other Current Assets:
|
|||||||||
Derivative
Currency Contracts
|
$ | 0.2 | - |
(Level
2)
|
|||||
Derivative
Commodity Contracts
|
$ | 4.4 | - |
(Level
2)
|
|||||
Other
Noncurrent Assets:
|
|||||||||
Derivative
Currency Contracts
|
$ | 1.1 | - |
(Level
2)
|
|||||
Liabilities:
|
|||||||||
Hedging
Obligations – Current
|
|||||||||
Derivative
Currency Contracts
|
$ | 5.5 | 18.8 |
(Level
2)
|
|||||
Derivative
Commodity Contracts
|
- | 61.8 |
(Level
2)
|
||||||
Hedging
Obligations – Long Term
|
|||||||||
Derivative
Commodity Contracts
|
- | 0.4 |
(Level
2)
|
||||||
Interest
Rate Swap
|
$ | 31.2 | 49.6 |
(Level
2)
|
|||||
Derivative
Currency Contracts
|
- | 12.0 |
(Level
2)
|
(16) INDUSTRY
SEGMENT INFORMATION
The
following sets forth certain financial information attributable to our business
segments for the fiscal years ended 2009, 2008 and 2007, respectively (in
thousands):
Net
Sales
|
Income
From
Operations
|
Identifiable
Assets
|
Capital
Expenditures
|
Depreciation
and
Amortization
|
||||||||||||||||
2009
|
||||||||||||||||||||
Electrical
|
$ | 1,637,668 | $ | 144,901 | $ | 1,990,686 | $ | 29,503 | $ | 63,749 | ||||||||||
Mechanical
|
188,609 | 14,619 | 121,551 | 4,101 | 5,395 | |||||||||||||||
Total
|
$ | 1,826,277 | $ | 159,520 | $ | 2,112,237 | $ | 33,604 | $ | 69,144 | ||||||||||
2008
|
||||||||||||||||||||
Electrical
|
$ | 1,998,642 | $ | 191,532 | $ | 1,896,959 | $ | 45,186 | $ | 56,337 | ||||||||||
Mechanical
|
247,607 | 38,899 | 126,537 | 7,023 | 5,264 | |||||||||||||||
Total
|
$ | 2,246,249 | $ | 230,431 | $ | 2,023,496 | $ | 52,209 | $ | 61,601 | ||||||||||
2007
|
||||||||||||||||||||
Electrical
|
$ | 1,558,963 | $ | 169,689 | $ | 1,747,213 | $ | 31,675 | $ | 41,604 | ||||||||||
Mechanical
|
243,534 | 36,371 | 115,034 | 4,953 | 5,015 | |||||||||||||||
Total
|
$ | 1,802,497 | $ | 206,060 | $ | 1,862,247 | $ | 36,628 | $ | 46,619 |
50
Our
Electrical segment manufactures and markets AC and DC commercial, industrial and
HVAC electric motors ranging in size from sub-fractional to small integral
horsepowers to larger commercial and industrial motors from 50 through 6500
horsepower. We offer thousands of stock models of electric motors in
addition to the motors we produce to specific customer specifications. We also
produce and market precision servo motors, electric generators ranging in size
from five kilowatts through four megawatts, automatic transfers switches and
paralleling switchgear to interconnect and control electric power generation
equipment. Additionally, our Electrical segment markets a line of AC and DC
adjustable speed drives. We manufacture capacitors for use in HVAC systems, high
intensity lighting and other applications. We sell our Electrical segment’s
products to distributors, original equipment manufacturers and end users across
many markets.
Our
Mechanical segment includes a broad array of mechanical motion control products
including: standard and custom worm gear, bevel gear, helical gear and
concentric shaft gearboxes; marine transmissions; high-performance after-market
automotive transmissions and ring and pinions; custom gearing; gearmotors;
manual valve actuators, and electrical connecting devices. Our gear and
transmission related products primarily control motion by transmitting power
from a source, such as a motor or engine, to an end use, such as a conveyor
belt, usually reducing speed and increasing torque in the process. Our valve
actuators are used primarily in oil and gas, water distribution and treatment
and chemical processing applications. Mechanical products are sold to original
equipment manufacturers, distributors and end users across many industry
segments.
The
Company evaluates performance based on the segment’s income from operations.
Corporate costs have been allocated to each segment based primarily on the net
sales of each segment. The reported net sales of each segment are from external
customers. The Company’s products manufactured and sold outside the
United States were approximately 26%, 24%, and 17% of net sales in 2009, 2008
and 2007, respectively.
We had
one customer that accounted for between 10% and 15% of our consolidated net
sales for the years ended January 2, 2010 and December 29,
2007. We had no customers that accounted for more than 10% of
our consolidated sales for the year ended December 27, 2008.
In the
fourth quarter of 2008, an Electrical segment business was moved to the
Mechanical segment due to a management reporting change, and prior period
segment information has been restated. The impact of the change was
not material.
(17)
SUBSEQUENT EVENTS
The
Company has evaluated events subsequent to January 2, 2010 for recording and
disclosure in the financial statements for the year ended January 2,
2010.
The
Company’s Shareholders’ Rights Plan as described in Note 10 of the Consolidated
Financial Statements, expired subsequent to year end on January 28,
2010.
ITEM 9
– CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
ITEM 9A – CONTROLS AND
PROCEDURES
In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of the end of the year ended January
2, 2010. Based upon their evaluation of these disclosure controls and
procedures, our Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective as of January 2, 2010
to ensure that (a) information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and (b) information required to be disclosed
by us in the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Management’s Report on Internal
Control over Financial Reporting. The report of management
required under this Item 9A is contained in Item 8 of Part II of this Annual
Report on Form 10-K under the heading “Management’s Annual Report on Internal
Control over Financial Reporting.”
Report of Independent Registered
Public Accounting Firm. The attestation report required under this Item
9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under
the heading “Report of Independent Registered Public Accounting
Firm.”
Changes in Internal Controls.
There were no changes in the Company’s internal control over financial reporting
that occurred during the quarter ended January 2, 2010 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
51
ITEM 9B – OTHER
INFORMATION
None.
PART
III
ITEM 10 – DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See the
information in the sections Election
of Directors, Board
of Directors and Section
16(a) Beneficial Ownership Reporting Compliance in the 2010 Proxy
Statement. Information with respect to the executive officers of the
Company appears in Part I of this Annual Report on Form 10-K.
The
Company has adopted a code of business conduct and ethics that applies to all
our directors, officers and employees. The code is available on our
website, along with our current Corporate Governance Guidelines, at
www.regalbeloit.com. The code of business conduct and ethics and our
Corporate Governance Guidelines are also available in print to any shareholder
who requests a copy in writing from the Secretary of Regal Beloit
Corporation. We intend to disclose through our website any amendments
to, or waivers from, the provisions of these codes.
ITEM 11 – EXECUTIVE
COMPENSATION
See the
information in the sections Compensation
Discussion and Analysis, Executive
Compensation, and Director
Compensation sections of the 2010 Proxy Statement.
ITEM 12 – SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the
information in the section Stock
Ownership in the 2010 Proxy.
Equity Compensation Plan
Information
The
following table provides information about our equity compensation plans as of
January 2, 2010.
Plan
category
|
Number
of securities to be issued upon the exercise of outstanding options,
warrants and rights (1)
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in the first
column) (2)
|
|||
Equity
compensation plans approved by security holders
|
1,575,925
|
$38.86
|
1,915,632
|
|||
Equity
compensation plans not approved by security holders
|
||||||
Total
|
1,575,925
|
$38.86
|
1,915,632
|
(1)
|
Represents
options to purchase our common stock and stock-settled stock appreciation
rights granted under our 1998 Stock Option Plan, 2003 Equity Incentive
Plan and 2007 Equity Incentive
Plan.
|
(2)
|
Excludes
120,950 shares of restricted common stock previously issued under our 2003
Equity Incentive Plan and 2007 Equity Incentive Plan for which the
restrictions have not lapsed.
|
ITEM
13 –
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
See the
information in The Board of
Directors section of our 2010 Proxy.
ITEM 14 – PRINCIPAL
ACCOUNTANT FEES AND SERVICES
See the
information in Proposal
2: Ratification of Deloitte & Touche LLP as the Company’s
Independent Auditors for 2010 section
of our 2010 Proxy.
PART
IV
ITEM 15 – EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
|
1.
|
Financial
statements - The financial statements listed in the accompanying index to
financial statements and financial statement schedule are filed as part of
this Annual Report on Form 10-K.
|
|
2.
Financial statement schedule - The financial statement schedule listed in
the accompanying index to financial statements and financial statement
schedule are filed as part of this Annual Report on Form
10-K.
|
3.
Exhibits - The exhibits listed in the accompanying index to exhibits are
filed as part of this Annual Report
on
|
|
Form
10-K.
|
(b) Exhibits-
see the Index to Exhibits on Pages 54 - 56.
(c)
See (a) 2. above
52
SIGNATURES
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
REGAL
BELOIT CORPORATION
|
||
By:
|
/s/
DAVID A. BARTA
|
|
David
A. Barta
|
||
Vice
President, Chief Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/
HENRY W. KNUEPPEL
|
Chief
Executive Officer and Director
|
March
2, 2010
|
Henry
W. Knueppel
|
(Principal
Executive Officer)
|
|
/s/
MARK J. GLIEBE
|
Chief
Operating Officer and Director
|
March
2, 2010
|
Mark
J. Gliebe
|
(Principal
Operating Officer)
|
|
/s/
DAVID A. BARTA
|
Vice
President, Chief Financial Officer
|
March
2, 2010
|
David
A. Barta
|
(Principal
Accounting & Financial Officer)
|
|
/s/
CHRISTOPHER L. DOERR
|
Director
|
March
2, 2010
|
Christopher
L. Doerr
|
||
/s/
THOMAS J. FISCHER
|
Director
|
March
2, 2010
|
Thomas
J. Fischer
|
||
/s/
DEAN A. FOATE
|
Director
|
March
2, 2010
|
Dean
A. Foate
|
||
/s/
G. FREDERICK KASTEN, JR.
|
Director
|
March
2, 2010
|
G.
Frederick Kasten, Jr.
|
||
/s/
RAKESH SACHDEV
|
Director
|
March
2, 2010
|
Rakesh
Sachdev
|
||
/s/
CAROL N. SKORNICKA
|
Director
|
March
2, 2010
|
Carol
N. Skornicka
|
||
/s/
CURTIS W.
STOELTING
|
Director
|
March
2, 2010
|
Curtis
W. Stoelting
|
53
REGAL
BELOIT CORPORATION
Index
to Financial Statements
And
Financial Statement Schedule
Page(s)
In
|
|||
Form
10-K
|
|||
(1)
|
Financial
Statements:
|
||
Report
of Independent Registered Public Accounting Firm
|
27
|
||
Consolidated
Statements of Income for the fiscal years ended
|
|||
January
2, 2010, December 27, 2008 and December 29, 2007
|
28
|
||
Consolidated
Balance Sheets at January 2, 2010 and December 27, 2008
|
29
|
||
Consolidated
Statements of Shareholders’ Equity for the fiscal years
ended
|
|||
January
2, 2010, December 27, 2008 and December 29, 2007
|
30
|
||
Consolidated
Statements of Comprehensive Income (Loss) for the fiscal years
ended
|
|||
January
2, 2010, December 27, 2008 and December 29, 2007
|
31
|
||
Consolidated
Statements of Cash Flows for the fiscal years ended
|
|||
January
2, 2010, December 27, 2008 and December 29, 2007
|
32
|
||
Notes
to the Consolidated Financial Statements
|
33
|
||
Page(s)
In
|
|||
Form
10-K
|
|||
(2)
|
Financial
Statement Schedule:
|
||
For
the fiscal years ended January 2, 2010, December 27, 2008 and December 29,
2007 Schedule II –Valuation and Qualifying Accounts
|
55
|
All other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
54
SCHEDULE
II
REGAL
BELOIT CORPORATION
VALUATION
AND QUALIFYING ACCOUNTS
(In
Thousands of Dollars)
|
||||||||||||||||||||
Balance
Beginning
of
Year
|
Charged
to
Expenses
|
Deductions(a)
|
Adjustments(b)
|
Balance
End
of
Year
|
||||||||||||||||
Allowance
for receivables:
|
||||||||||||||||||||
Year
ended January 2, 2010
|
$ | 11,145 | $ | 2,487 | $ | (1,875 | ) | $ | 909 | $ | 12,666 | |||||||||
Year
ended December 27, 2008
|
$ | 10,734 | $ | 4,260 | $ | (3,365 | ) | $ | (484 | ) | $ | 11,145 | ||||||||
Year
ended December 29, 2007
|
$ | 5,886 | $ | 1,304 | $ | (437 | ) | $ | 3,981 | $ | 10,734 | |||||||||
Allowance
for product warranty reserves:
|
||||||||||||||||||||
Year
ended January 2, 2010
|
$ | 11,022 | $ | 14,465 | $ | (12,102 | ) | $ | (87 | ) | $ | 13,298 | ||||||||
Year
ended December 27, 2008
|
$ | 9,872 | $ | 8,268 | $ | (7,431 | ) | $ | 313 | $ | 11,022 | |||||||||
Year
ended December 29, 2007
|
$ | 6,300 | $ | 6,066 | $ | (6,583 | ) | $ | 4,089 | $ | 9,872 |
________________________________
(a)
Deductions consist of write offs charged against the allowance for doubtful
accounts and warranty claim costs.
(b)
Adjustments related to acquisitions and divestitures and
translation.
55
EXHIBITS
INDEX
Exhibit
Number
|
Exhibit
Description
|
2.1
|
Agreement
and Plan of Merger among the Registrant, REGAL-BELOIT Acquisition Corp.,
and Marathon Electric Manufacturing Corporation dated as of February 26,
1997, as amended and restated March 17, 1997 and March 26, 1997.
[Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s
Current Report on Form 8-K dated April 10, 1997 (File No.
001-07283)]
|
2.2
|
Stock
Purchase Agreement, dated as of August 7, 2000, as amended by First
Amendment to Stock Purchase Agreement, dated as of September 29, 2000,
among Regal Beloit Corporation, LEC Acquisition Corp., LEESON Electric
Corporation (“LEESON”) and LEESON’S Shareholders. [Incorporated by
reference to Exhibit 2 to Regal Beloit Corporation’s Current Report on
Form 8-K dated October 13, 2000 (File No. 001-07283)]
|
2.3
|
Purchase
Agreement, dated as of August 10, 2004, between Regal Beloit Corporation
and General Electric Company. [Incorporated by reference to Exhibit 2.1 to
Regal Beloit Corporation’s Current Report on Form 8-K dated August 30,
2004 (File No. 001-07283)]
|
2.4
|
Amendment
to Purchase Agreement, dated as of August 30, 2004, between Regal Beloit
Corporation and General Electric Company. [Incorporated by reference to
Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K dated
August 30, 2004 (File No. 001-07283)]
|
2.5
|
Purchase
Agreement, dated as of November 14, 2004, between Regal Beloit Corporation
and General Electric Company. [Incorporated by reference to Exhibit 2.1 to
Regal Beloit Corporation’s Current Report on Form 8-K dated December 31,
2004 (File No. 001-07283)]
|
2.6
|
Amendment
to Purchase Agreement, dated as of December 31, 2004, between Regal Beloit
Corporation and General Electric Company. [Incorporated by reference to
Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K dated
December 31, 2004 (File No. 001-07283)]
|
2.7
|
Purchase
Agreement, dated as of July 3, 2007, by and among Regal Beloit
Corporation, Tecumseh Products Company, Fasco Industries, Inc. and Motores
Fasco de Mexico, S. de R.L. de C.V. [Incorporated by reference to Exhibit
2.1 to Regal Beloit Corporation’s Current Report on Form 8-K filed on
September 7, 2007]
|
3.1
|
Articles
of Incorporation of Regal Beloit Corporation, as amended through April 20,
2007. [Incorporated by reference to Exhibit 3.1 to Regal Beloit
Corporation’s Current Report on Form 8-K filed on April 25, 2007 (File No.
001-07283)]
|
3.2
|
Amended
and Restated Bylaws of Regal Beloit Corporation. [Incorporated by
reference to Exhibit 3.2 to Regal Beloit Corporation’s Current Report on
Form 8-K filed on April 25, 2007 (File No. 001-07283)]
|
4.1
|
Articles
of Incorporation, as amended, and Amended and Restated Bylaws of Regal
Beloit Corporation [Incorporated by reference to Exhibits 3.1 and 3.2
hereto]
|
4.2
|
Indenture,
dated April 5, 2004, between Regal Beloit Corporation and U.S. Bank
National Association, as Trustee. [Incorporated by reference to Exhibit
4.3 to Regal Beloit Corporation’s Registration Statement on Form S-3 filed
on June 21, 2004 (Reg. No. 333-116706)]
|
4.3
|
First
Supplemental Indenture, dated December 9, 2004, between Regal Beloit
Corporation and U.S. Bank National Association, as Trustee. [Incorporated
by reference to Exhibit 4 to Regal Beloit Corporation’s Current Report on
Form 8-K filed on December 14, 2004 (File No.
001-07283)]
|
4.4
|
Form
of 2.75% Convertible Senior Subordinated Note due 2024 (included in
Exhibit 4.2).
|
4.5
|
Second
Amended and Restated Credit Agreement, dated as of April 30, 2007, among
Regal Beloit Corporation, the financial institutions party thereto and
Bank of America, N.A., as administrative agent. [Incorporated by reference
to Exhibit 4.1 to Regal Beloit Corporation's Current Report on Form 8-K
dated April 30, 2007 (File No. 001-07283)]
|
4.6
|
First
Amendment, dated as of August 23, 2007, to the Second Amended and Restated
Credit Agreement, dated as of April 30, 2007, by and among Regal Beloit
Corporation, various financial institutions and Bank of America, N.A., as
Administrative Agent. [Incorporated by reference to Exhibit 4.3 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on August 24, 2007
(File No. 001-07283)]
|
4.7
|
Note
Purchase Agreement, dated as of August 23, 2007, by and among Regal Beloit
Corporation and Purchasers listed in Schedule A attached thereto.
[Incorporated by reference to Exhibit 4.1 to Regal Beloit Corporation’s
Current Report on Form 8-K filed on August 24, 2007 (File No.
001-07283)]
|
4.8
|
Subsidiary
Guaranty Agreement, dated as of August 23, 2007, from certain subsidiaries
of Regal Beloit Corporation. [Incorporated by reference to Exhibit 4.2 to
Regal Beloit Corporation’s Current Report on Form 8-K filed on August 24,
2007] (File No. 001-07283)]
|
4.9
|
Term
Loan Agreement, dated as of June 16, 2008, between Regal Beloit
Corporation, various Financial Institutions, US Bank, National
Association, Wells Fargo Bank, N.A., Bank of America, N.A., JP Morgan
Chase Bank, N.A., JP Morgan Securities Inc. and Banc of America Securities
LLC. [Incorporated by referenced to Exhibit 4.1 to Regal Beloit’s
Corporation’s Current Report on Form 8-K filed on June 16, 2008 (File No.
001-2783)]
|
10.1*
|
1991
Flexible Stock Incentive Plan [Incorporated by reference to Exhibit 10.4
to Regal Beloit Corporation’s Annual Report on Form 10-K for the year
ended December 31, 1992 (File No. 001-07283)]
|
10.2*
|
1998
Stock Option Plan, as amended [Incorporated by reference to Exhibit 99 to
Regal Beloit Corporation’s Registration Statement on Form S-8 (Reg. No.
333-84779)]
|
10.3*
|
2003
Equity Incentive Plan [Incorporated by reference to Exhibit B to Regal
Beloit Corporation’s Definitive Proxy Statement on Schedule 14A for the
2003 Annual Meeting of Shareholders (File No.
001-07283)]
|
10.4*
|
Regal
Beloit Corporation 2007 Equity Incentive Plan (incorporated by reference
to Appendix B to Regal Beloit Corporation's definitive proxy statement on
Schedule 14A for the Regal Beloit Corporation 2007 annual meeting of
shareholders held April 20, 2007 (File No. 1-07283))
|
10.5*
|
Form
of Key Executive Employment and Severance Agreement between Regal Beloit
Corporation and each of Henry W. Knueppel, Mark J. Gliebe and David A.
Barta. [Incorporated by reference to Exhibit 10.6 to Regal Beloit
Corporation’s Annual Report on Form 10-K for the year ended December 29,
2007. (File No. 001-07283)]
|
10.6*
|
Form
of Key Executive Employment and Severance Agreement between Regal Beloit
Corporation and each of Paul J. Jones and Terry R. Colvin. [Incorporated
by reference to Exhibit 10.7 to Regal Beloit Corporation’s Annual Report
on Form 10-K for the year ended December 29, 2007. (File No.
001-07283)]
|
10.7*
|
Form
of Agreement for Stock Option Grant. [Incorporated by reference to Exhibit
10.9 to Regal Beloit Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2005. (File No.
001-07283)]
|
10.8*
|
Form
of Restricted Stock Agreement. [Incorporated by reference to
Exhibit 10.10 to Regal Beloit Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2005. (File No.
001-07283)]
|
10.9*
|
Form
of Restricted Stock Unit Award Agreement under the Regal Beloit
Corporation 2003 Equity Incentive Plan. [Incorporated by reference to
Exhibit 10.10 to Regal Beloit Corporation’s Annual Report on Form 10-K for
the year ended December 29, 2007. (File No. 001-07283)]
|
10.10*
|
Form
of Stock Option Award Agreement under the Regal Beloit Corporation 2007
Equity Incentive Plan. [Incorporated by reference to Exhibit 10.2 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on April 25, 2007
(File No. 001-07283)]
|
10.11*
|
Form
of Restricted Stock Award Agreement under the Regal Beloit Corporation
2007 Equity Incentive Plan. [Incorporated by reference to Exhibit 10.3 to
Regal Beloit Corporation’s Current Report on Form 8-K filed on April 25,
2007 (File No. 001-07283)]
|
10.12*
|
Form
of Restricted Stock Unit Award Agreement under the Regal Beloit
Corporation 2007 Equity Incentive Plan. [Incorporated by reference to
Exhibit 10.4 to Regal Beloit Corporation’s Current Report on Form 8-K
filed on April 25, 2007 (File No. 001-07283)]
|
10.13*
|
Form
of Stock Appreciation Right Award Agreement under the Regal Beloit
Corporation 2007 Equity Incentive Plan. [Incorporated by reference to
Exhibit 10.5 to Regal Beloit Corporation’s Current Report on Form 8-K
filed on April 25, 2007 (File No. 001-07283)]
|
10.14*
|
Target
Supplemental Retirement Plan for designated Officers and Key Employees, as
amended and restated.
|
10.15*
|
Form
of Participation Agreement for Target Supplemental Retirement
Plan. [Incorporated by reference to Exhibit 10.12 to Regal
Beloit Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2005. (File No. 001-07283)]
|
12
|
Computation
of Ratio of Earnings to Fixed Charges.
|
21
|
Subsidiaries
of Regal Beloit Corporation.
|
23
|
Consent
of Independent Auditors.
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32
|
Section
1350 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
99.2
|
Proxy
Statement of Regal Beloit Corporation for the 2010 Annual Meeting of
Shareholders
|
[The
Proxy Statement for the 2010 Annual Meeting of Shareholders will be filed
with the Securities and Exchange Commission under Regulation 14A within
120 days after the end of the Company’s fiscal year. Except to
the extent specifically incorporated by reference, the Proxy Statement for
the 2009 Annual Meeting of Shareholders shall not be deemed to be filed
with the Securities and Exchange Commission as part of this Annual Report
on Form 10-K.]
|
________________________
* A
management contract or compensatory plan or arrangement.
56