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 December 31, 2005
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)
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(IRS
Employer Identification No.)
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200
State Street, Beloit, Wisconsin 53511
(Address
of principal executive offices)
(608)
364-8800
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12 (b) of the Act:
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Name
of Each Exchange on
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|||
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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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Rights
to Purchase Common Stock
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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.
£
Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
T
Accelerated filer
£
Non-accelerated filer
£
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 30, 2005 was approximately $827,000,000.
On
March
7, 2006, the registrant had outstanding 30,727,004 shares of common stock,
$.01
par value, which is registrant’s only class of common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the Annual Meeting of Shareholders to be held on
April 26, 2006 are incorporated by reference into Part III.
CAUTIONARY
STATEMENT
The
following is a cautionary statement made under the Private Securities Litigation
Reform Act of 1995:
With the exception of historical facts, the
statements contained in this Annual Report on Form 10-K or incorporated by
reference may be forward looking statements. 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,”
“should,” “plan,” “expect,” “anticipate,” “estimate,” “believe,” “predict,”
“intend,” “potential” or “continue” or the negative of these terms or other
words of similar import, although some forward-looking statements are expressed
differently. We cannot guarantee the accuracy of the forward-looking statements,
and you should be aware that results and events could differ materially and
adversely from those contained in the forward-looking statements due to a number
of factors, including:
| · |
unanticipated
fluctuations in commodity prices and raw material costs and issues
affecting our ability to pass increased costs on to our customers;
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| · |
cyclical
downturns affecting the markets for capital
goods;
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| · |
unexpected
issues and costs arising from the integration of acquired companies
and
businesses, such as our acquisitions of the HVAC motors and capacitors
businesses and the Commercial AC motors business from General Electric
Company (“GE”) in 2004;
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| · |
marketplace
acceptance of acquisitions, including the loss
of, or a decline in business from, any significant
customers;
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| · |
substantial
increases in interest rates that impact the cost of our outstanding
debt;
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| · |
the
impact of capital market transactions that we may
effect;
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| · |
unanticipated
costs associated with litigation
matters;
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the
success of our management in increasing sales and
maintaining or improving the operating margins of our
businesses;
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| · |
actions
taken by our competitors;
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| · |
difficulties
in staffing and managing foreign
operations;
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| · |
our
ability to satisfy various covenant requirements under our credit
facility; and
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| · |
other
risks and uncertainties described in Item 1A “Risk Factors” of this Form
10-K and from time to time in our reports filed with U.S. Securities
and
Exchange Commission, which are incorporated by
reference.
|
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.
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.
ITEM
1 - BUSINESS
OUR
COMPANY
We
are
one of the largest global manufacturers of commercial, industrial, and
HVAC
electric motors, electric generators and controls, and mechanical motion
control
products. Many of our products hold leading market 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 penetrate 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, capacitors and electrical
connecting devices. Our mechanical products include gears and gearboxes,
marine
transmissions, high-performance automotive transmissions and ring and pinions,
manual valve actuators, and cutting tools. 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 market penetration by leveraging cross-marketing
and product line bundling opportunities between our electrical and mechanical
products.
We
market
our products through multiple business units, with each 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. 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 and
Europe.
We
believe our competitive strengths include:
| · |
management
experience and depth
|
| · |
strategic
product offering
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| · |
leading
market positions
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| · |
multi-channel/multi-brand
distribution
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| · |
broad
and diverse customer base
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| · |
differentiated
and innovative technology
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| · |
strategic
global and rapid response operations
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Our
business strategy includes:
| · |
capitalizing
on new product opportunities
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| · |
capitalizing
on our Asian manufacturing and commercial
base
|
| · |
leveraging
our global manufacturing and sourcing structures to achieve operating
margin improvements
|
| · |
leveraging
Lean Six Sigma
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| · |
innovating
new products
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| · |
people
and process excellence
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| · |
industry
consolidation through acquisitions
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ELECTRICAL
SEGMENT
Our
Electrical segment includes a full line of AC and DC commercial and industrial
electric motors, HVAC motors, electric generators and controls, capacitors
and
electrical connecting devices. Over the past eight years, we have focused
on
building our Electrical segment through a combination of strategic acquisitions
and internal growth initiatives. Our initial focus was to establish our
Company
as a significant manufacturer of industrial electric motors, since our
mechanical products businesses serve similar markets and their products
are
often used in combination with a motor. With our acquisitions of Marathon
Electric Manufacturing Corporation in 1997, the Lincoln Motors business
of
Lincoln Electric Holdings, Inc. in 1999 and
LEESON
Electric
Corporation in 2000, we believe we became one of the two largest producers
of
industrial electric motors serving the North American market and are able
to
offer our customers both electrical and mechanical products. Additionally,
these
acquisitions have brought products that are complementary to our core electric
motor lines in such areas as electric generators and generator controls,
motor
controls, and electrical connecting devices. The integration of these
acquisitions provides significant cost savings and synergies that further
strengthen the competitive position of our electrical products
businesses.
During
2004, we separately acquired two electric motor businesses from GE which
were
natural extensions to our core electric motor lines. In August 2004,
we acquired
GE’s commercial AC motors business, which manufactures a full line of
alternating current motors for pump, compressor and commercial heating,
ventilating and air conditioning applications. In December 2004, we acquired
GE’s HVAC motors and capacitors businesses, which produce a full line of
electric motors for use principally in residential HVAC systems, as well
as
capacitors for HVAC systems, high intensity lighting and other applications.
The
acquisitions of these businesses complement our existing electrical products
businesses, providing us with:
| · |
a
leading market position and brand name in the HVAC motor
market;
|
| · |
diversification
of our served markets and a broad base of leading HVAC
customers;
|
| · |
patented
electronically commutated motor (ECM)
technology;
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| · |
a
strong management team and infrastructure in place to support growth;
and
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| · |
significant
scale and low cost manufacturing capabilities in Mexico and
India.
|
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 800 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 and electrical
connecting devices such as terminal blocks, fuse holders and power blocks.
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
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. Our generators are used
in
industrial, agricultural, marine, military, transportation and other
applications.
We
leverage efficiencies across our motor 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 and create focused centers of excellence in each of our manufacturing
functions. The following is a description of our major Electrical product
businesses and the primary products that they manufacture and
market:
GE
Commercial Motors by REGAL-BELOIT
.
Manufactures a full line of motors for pump, compressor, commercial and
residential HVAC applications. Manufactures capacitors for use in HVAC
systems,
high intensity lighting and other applications.
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
Generators
.
Manufactures AC generators from five kilowatts to four megawatts that primarily
serve the standby power, prime power, refrigeration, industrial and irrigation
markets.
Marathon
Special Products
.
Manufactures fuse holders, terminal blocks, and power blocks primarily
for the
HVAC, telecommunications, electric control panel, utilities and transportation
markets.
Thomson
Technology
.
Manufactures automatic transfer switches, paralleling switchgear and controls,
and systems controls primarily for the electric power generation
market.
MECHANICAL
SEGMENT
Our
Mechanical segment includes a broad array of mechanical motion control
products
and cutting tools. Our products include: 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 cutting tools. 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. Our high-speed steel and carbide
rotary
perishable cutting tools are used in metalworking 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 businesses and the primary products they manufacture
and
market:
CML
(Costruzioni Meccaniche Legananesi S.r.L.)
.
Manufactures bevel gear valve actuators primarily for the oil, gas, wastewater
and water distribution markets.
Durst
.
Manufactures standard and specialized industrial transmissions and hydraulic
pump drives primarily for the construction, agriculture, energy, material
handling, forestry, lawn and garden and railroad maintenance
markets.
Electra-Gear
.
Manufactures specialized aluminum gear reducers and gearmotors primarily
for the
food processing, medical equipment, material handling and packaging
markets.
Grove
Gear
.
Manufactures standard and custom industrial gear reducers primarily for
the
material handling, food processing, robotics, healthcare and power transmission
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.
Mastergear
.
Manufactures manual valve actuators for liquid and gas flow control primarily
for the petrochemical processing, fire protection and wastewater
markets.
New
York Twist Drill
.
Manufactures a full line of industrial quality cutting tools in high speed
steel
and carbide primarily for the aerospace, automotive, railroad and general
manufacturing markets.
Ohio
Gear
.
Manufactures gear reducers and gearmotors primarily for the material handling,
lawn and garden vehicle and food processing 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.
Regal
Cutting Tools
.
Manufactures high-speed steel and carbide rotary cutting tools primarily
for the
aerospace, agriculture, automotive and general industrial markets.
Richmond
Gear
.
Manufactures ring and pinions and transmissions primarily for the
high-performance automotive aftermarket.
Velvet
Drive Transmissions
.
Manufactures 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 41 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 1979, our current management team has completed
and
successfully integrated 26 acquisitions. We have a proven track record
of
acquiring complementary businesses and product lines, integrating their
activities into our organization and aggressively managing their cost structures
to reduce waste and unnecessary expenditures. The following table summarizes
select acquisitions since 1990.
|
Product
Line
|
Year
Acquired
|
Annual
Revenues
at
Acquisition
(in
millions)
|
Product
Listing at Acquisition
|
||
|
Electrical
Products
|
|||||
|
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
|
||
|
LEESON
Electric Corporation
|
2000
|
175
|
AC
motors (to 350 horsepower) gear reducers, gearmotors and
drives
|
||
|
Thomson
Technology, Inc.
|
2000
|
14
|
Automatic
transfer switches, paralleling switchgear and controls and controls
systems
|
||
|
Lincoln
Motors
|
1999
|
50
|
AC
motors (1/4 to 800 horsepower)
|
||
|
Marathon
Electric Manufacturing Corporation
|
1997
|
245
|
AC
motors (to 500 horsepower), AC generators (5 kilowatt to 2.5
megawatt),
fuse holders, terminal blocks and power blocks
|
||
|
Mechanical
Products
|
|||||
|
Powertrax
assets of Vehicular Technologies
|
2002
|
3
|
Differential
locking devices for high performance automotive applications
|
||
|
Spiral
bevel gear product line of Philadelphia Gear
|
2001
|
4
|
Spiral
bevel gears
|
||
|
Velvet
Drive Transmissions
|
1995
|
27
|
Marine
and industrial transmissions
|
||
|
Hub
City, Inc.
|
1992
|
44
|
Gear
drives, sub-fractional horsepower gearmotors, mounted bearings
and
accessories
|
||
|
Opperman
Mastergear, Ltd. (U.K., U.S. and Germany)
|
1991
|
20
|
Manual
valves actuators and industrial gear
drives
|
||
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. In 2005, across all of our business units,
we sold
products to a very broad base of original equipment manufacturers and
distributors.
With
our
2004 electric motor acquisitions, we have added leading HVAC OEMs to our
customer base. These 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.
MARKETS
AND COMPETITORS
The
worldwide market for electric motors is estimated in excess of $25 billion.
The
overall domestic market for electric motors is estimated at $9 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
$5.0 billion segment of the overall domestic market. We believe approximately
60% of all electricity generated in the U.S. runs through electric motors.
With
the acquisitions of Marathon Electric in 1997, Lincoln Motors in 1999 and
L
EESON
Electric
in 2000, we believe we became one of the two largest producers of industrial
electric motors in the United States. With our 2004 acquisitions of GE’s
commercial AC and HVAC motors businesses, we believe we are among the largest
producers of commercial and industrial motors and the largest producer
of 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.),
Reliance Electric Company (a division of Rockwell International), 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 Rockwell International), 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 diversity of customers and applications.
We
believe that we compete primarily on the basis of quality, price, service
and
our promptness of delivery. We had one customer, United Technologies
Corporation, that accounted for more than 10% of our sales in 2005. There
were
no customers that accounted for more than 10% of sales in 2004.
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
have
one of 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 new 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, 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 that consists of 52 semi-tractors
and 100 customized semi-trailers 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 product when they want it, where they want it and
in the condition they want it.
We
manufacture a majority of the products that we sell, but also strategically
outsource components and finished goods to an established global network
of
suppliers. Although we have aggressively pursued global sourcing to reduce
our
overall costs, we still 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, redesigning plant layout and redesigning products to take
full
advantage of our more productive equipment and to improve product flow.
We
believe that our continued product redesign and efficient plant layout
often
provide us with a competitive cost advantage in our manufacturing operation.
Our
goal is to be a low cost producer in our core product areas.
FACILITIES
We
have
manufacturing, sales and service facilities throughout the United States
and
Canada and in Mexico, Europe, China and India. Our Electrical segment currently
operates 50 manufacturing and service and distribution facilities. The
Electrical segment’s present operating facilities contain a total of
approximately 3,990,310 square feet of space of which approximately 882,000
square feet are leased. Our Mechanical segment currently operates 19
manufacturing and service and distribution facilities. The Mechanical segment’s
present operating facilities contain a total of approximately 1,472,000
square
feet of space of which approximately 57,000 square feet are leased. Our
principal executive offices are located in Beloit, Wisconsin in an owned
approximately 24,000 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. Since total backlog is less than 10% of our
annual
sales, we believe that backlog is not a reliable indicator of our future
sales.
As of December 31, 2005, our backlog was $140.4 million, as compared to
$104.4 million on December 31, 2004. We believe that virtually all of our
backlog is shippable in 2006.
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 December 31, 2005, the Company employed approximately
11,000 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. 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
The
names, ages, and positions of the executive officers of the Company as
of March
1, 2006, 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
|
|
James
L. Packard
|
63
|
Executive
Chairman
|
Elected
Chairman in 1986; Chief Executive Officer 1984 to April 2005;
served as
President from 1980 to April 2002; joined the Company in 1979.
|
|
Henry
W. Knueppel
|
57
|
Chief
Executive Officer
|
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;
served as Executive Vice President from 1987 to April 2002; joined
the
Company in 1979.
|
|
Mark
Gliebe
|
45
|
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
|
44
|
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.
|
|
Kenneth
F. Kaplan
|
60
|
Vice
President, Treasurer and
Secretary
|
Joined
the Company in September 1996 and served as Vice President, Chief
Financial Officer and Secretary until July 2004; has served in
his current
position since July 2004.
|
|
David
L. Eisenreich
|
62
|
Vice
President and President, Power Generation and Mechanical
Components
|
Elected
Vice President and President of Motor Technologies Group in 2001;
Senior
Vice President of Operations at Marathon Electric from 1997 until
2001.
|
WEBSITE
DISCLOSURE
The
Company’s Internet address is www.regal-beloit.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.
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.
Our
future success depends on our ability to integrate effectively acquired
companies and manage our growth.
On
August
30, 2004, we completed the acquisition of GE’s commercial AC motors business. On
December 31, 2004, we completed the acquisition of the HVAC motors and
capacitors business of GE. With these two acquisitions, we have more
than
doubled the number of our employees to over 11,000 (with more than 3,600
new
employees in Mexico and 1,700 new employees in India, including temporary
workers), added five manufacturing operations in the United States, Mexico,
India and China, and significantly increased our revenue.
Realization
of the benefits of these GE acquisitions requires the integration of
some or all
of the sales and marketing, distribution, manufacturing, engineering,
finance
and administrative operations and information of the newly acquired businesses.
Combined, these GE acquisitions constitute the largest acquisitions we
have
completed to date and, although GE has agreed to provide various services
to us
during a transition period, the magnitude of these acquisitions may present
significant integration challenges and costs to us. The successful integration
of these businesses will require substantial attention from our senior
management and the management of the acquired businesses, which may decrease
the
time that they have to serve and attract customers. In addition, we continue
to
pursue new acquisitions, some of which could be material to our business
if
completed. We cannot assure you that we will be able to integrate successfully
our recent acquisitions or any future acquisitions, that these acquired
companies will operate profitably, or that we will realize the potential
benefits from these acquisitions. Our financial condition, results of
operations, and cash flows could be materially and adversely affected
if we do
not successfully integrate the new businesses.
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.
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.
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 and China. Approximately half of our over 11,000 total
employees and 10 of our 32 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.
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.
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.
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 requires 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 our credit facility occurs,
then the
lenders could elect to declare all amounts outstanding under the credit
facility, 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 notes to
declare
the principal amount of the notes, together with accrued interest, to
be
immediately due and payable.
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.
We
may be adversely impacted by an inability to identify and complete
acquisitions.
A
substantial portion of our growth in the past five years 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
will be
limited.
We
are subject to litigation 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, among other things, contract disputes,
product
warranty and liability claims, and environmental, asbestos, employment
and other
litigation matters. Litigation may have an adverse effect on us because
of
potential adverse outcomes, the costs associated with defending lawsuits,
the
diversion of our management’s resources and other factors.
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 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.
We
may suffer losses as a result of foreign currency
fluctuations.
The
net
assets, net earnings and cash flows from our wholly owned subsidiaries
in Mexico
and India 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.
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.
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.
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
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’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.
The
Company has numerous 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. Market volatility in interest rates,
investment
returns and other factors could also adversely affect the funded status
of our
pension plans. Moreover, future changes to the accounting and reporting
standards related to pension plans could create significant volatility
in our
operating results.
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.
None.
We
have
manufacturing, sales and service facilities throughout the United States
and
Canada and in Mexico, Europe, China and India. Our Electrical segment
currently
includes 50 manufacturing, service and distribution facilities, of which
14 are
principal manufacturing facilities. The Electrical segment’s present operating
facilities contain a total of approximately 3,990,310 square feet of
space of
which approximately 882,000 square feet are leased. Our Mechanical segment
currently includes 19 manufacturing, service and distribution facilities,
of
which 6 are principal manufacturing facilities. The Mechanical segment’s present
operating facilities contain a total of approximately 1,472,000 square
feet of
space of which approximately 57,000 square feet are leased. Our principal
executive offices are located in Beloit, Wisconsin in an owned approximately
24,000 square foot office building. We believe our equipment and facilities
are
well maintained and adequate for our present needs.
The
following table provides information regarding our principal
facilities.
|
Location
|
Square
Footage
|
Status
|
Description
of Use
|
|
Electrical
Segment
|
|||
|
Wausau,
WI
|
498,329
|
Owned
|
Manufacturing
|
|
Juarez,
Mexico
|
335,000
|
Owned
|
Manufacturing
|
|
Reynosa,
Mexico
|
320,000
|
Owned
|
Manufacturing
|
|
Springfield,
MO
|
290,000
|
Owned
|
Manufacturing
|
|
Grafton,
WI
(1)
|
230,000
|
Owned
|
Manufacturing
|
|
Shanghai
|
226,000
|
Owned
|
Manufacturing
|
|
Indianapolis,
IN
|
220,832
|
Leased
|
Warehouse
|
|
Faridabad,
India
|
220,000
|
Owned
|
Manufacturing
|
|
Lebanon,
MO
|
186,900
|
Owned
|
Manufacturing
|
|
Lincoln,
MO
|
120,000
|
Owned
|
Manufacturing
|
|
Lima,
OH
|
107,000
|
Owned
|
Manufacturing
|
|
Blytheville,
AR
|
107,000
|
Leased
|
Manufacturing
|
|
West
Plains, MO
|
106,000
|
Owned
|
Manufacturing
|
|
Black
River Falls, WI
|
103,000
|
Owned
|
Manufacturing
|
|
All
Other (36)
|
920,249
|
(2)
|
(2)
|
|
Mechanical
Segment
|
|||
|
Chicago,
IL
|
282,973
|
Owned
|
Manufacturing
|
|
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
|
|
New
Bedford, MA
|
116,200
|
Owned
|
Manufacturing
|
|
All
Other (13)
|
480,664
|
(3)
|
(3)
|
|
(1)
Sold
in January of 2006 to a third party. Company is leasing 65,450
square feet
for seven years at a lease rate of $350,000 per year.
(2)
Less
significant manufacturing, service and distribution and engineering
facilities located in the United States, Canada, Europe, and
Asia:
Electrical leased square footage 554,139.
(3)
Mechanical leased 56,692.
|
|||
An
action
was filed on June 4, 2004, and amended in September 2004, against one
of the
Company’s subsidiaries, Marathon Electric Manufacturing Corporation
(“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and
Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The
action was filed in the United States Bankruptcy Court for the Southern
District
of New York where each of the Enron Wind entities has consolidated its
Chapter
11 bankruptcy petition as part of the Enron Corporation bankruptcy proceedings.
In the action against Marathon, Enron Wind has asserted various claims
relating
to the alleged failures and/or degradations of performance of about 564
generators sold by Marathon to Enron Wind from 1997 to 1999. In January
2001,
Enron Wind and Marathon entered into a “Generator Warranty and Settlement
Agreement and Release of All Claims” (“Warranty Agreement”). This Warranty
Agreement resolved various issues related to past performance of the
generators,
provided a limited warranty related to the generators going forward,
and
contained a release by all parties of any claims related to the generators
other
than those arising out of the obligations contained in the Warranty
Agreement.
Enron
Wind is seeking to recover the purchase price of the generators and
transportation costs totaling about $21 million. In addition, although
the
Warranty Agreement contains a waiver of consequential, incidental, and
punitive
damages, Enron Wind claims that this limitation is unenforceable and
seeks
recovery of consequential, incidental and punitive damages incurred by
it and by
its customers, totaling an additional $100 million. Enron Wind has asserted
claims of breach of contract, breach of the implied covenant of good
faith and
fair dealing, promissory fraud, and intentional interference with contractual
relations. Marathon has filed a motion with the court seeking to have
many of
Enron Wind’s claims dismissed. Enron Wind recently has filed a motion with the
court seeking a declaration that Marathon had an obligation under the
Warranty
Agreement to repair or replace the generators in the first instance regardless
of whether an actual breach of warranty had occurred. The court has held
hearings on both motions, but has not yet ruled.
The
Company believes that this action is without merit and that it has meritorious
defenses to the action. The Company intends to defend vigorously all
of the
asserted claims. The litigation is in an early discovery phase and it
is
difficult for the Company to predict the impact the litigation may ultimately
have on the Company’s results of operations or financial condition, including
the expenses the Company may incur to defend against the action. As of
December
31, 2005, the Company continues to accrue for anticipated costs in defending
against this matter and such accumulated reserves as of December 31,
2005 are
immaterial.
From
time
to time, the Company, in the normal course of business, is involved in
various
claims and legal actions arising out of its operations. The Company does
not
believe that the ultimate disposition of any currently pending claims
or actions
would have a material adverse effect on the Company or its financial
condition.
There
were no matters submitted to a vote of security holders during the quarter
ended
December 31, 2005.
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.” Prior to January 21, 2005, the
Company’s stock was traded on the American 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 January 1, 2004 through
December
31, 2005. The Company submitted its Section 303A.12(a) CEO Certification
to the
NYSE on January 21, 2005.
|
2005
|
2004
|
||||||||||||||||
|
Price
Range
|
Price
Range
|
||||||||||||||||
|
High
|
Low
|
Dividends
Paid
|
High
|
Low
|
Dividends
Paid
|
||||||||||||
|
1
st
Quarter
|
$
|
32.08
|
$
|
27.69
|
$
|
.12
|
$
|
23.20
|
$
|
19.41
|
$
|
.12
|
|||||
|
2
nd
Quarter
|
29.41
|
25.25
|
.12
|
22.22
|
19.14
|
.12
|
|||||||||||
|
3
rd
Quarter
|
33.70
|
28.15
|
.13
|
24.33
|
20.40
|
.12
|
|||||||||||
|
4
th
Quarter
|
38.94
|
30.30
|
.13
|
29.38
|
23.13
|
.12
|
|||||||||||
The
Company has paid 182 consecutive quarterly dividends through January
2006. The
number of registered holders of Common Stock as of December 31, 2005
was
742.
The
Board
of Directors approved, in 2000, a repurchase program of up to 2,000,000
common
shares of Company stock. Management was authorized to effect purchases
from time
to time in the open market or through privately negotiated transactions.
In
April 2004, in association with the Company’s convertible subordinated debt
offering, the Company repurchased 614,200 shares of its stock at a price
of
$20.35. From April 2004 through December 31, 2005, the Company has repurchased
774,100 shares at an average purchase price of $19.67 per share under
this
program. There were no repurchases during the year ended December 31,
2005.
GE
sold
4,559,048 shares issued to it as part of the consideration for our December
2004
acquisition of the HVAC motor and capacitor business during the Company’s
secondary offering which closed August 10, 2005. REGAL-BELOIT also issued
1,530,321 primary shares as part of the August 2005 offering.
Item
12
of this Annual Report on Form 10-K contains certain information relating
to the
Company's equity compensation plans.
ITEM
6 - SELECTED FINANCIAL DATA
The
selected statement of income data for the years ended December 31, 2005,
2004
and 2003 and the balance sheet data at December 31, 2005 and 2004 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 years ended December 31, 2002 and 2001
and the
balance sheet data at December 31, 2003, 2002 and 2001 are derived from
audited
financial statements not included herein.
|
(In
Thousands, Except Per Share Data)
Year
Ended December 31
|
||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
||||||||||
|
Net
Sales
|
$
|
1,428,707
|
$
|
756,557
|
$
|
619,098
|
$
|
605,292
|
$
|
663,571
|
||||
|
Income
from Operations
|
134,572
|
55,162
|
47,226
|
47,227
|
56,060
|
|||||||||
|
Net
Income
|
69,557
|
30,435
|
25,206
|
24,518
|
19,590
|
|||||||||
|
Total
Assets
|
1,342,554
|
1,352,052
|
734,445
|
733,988
|
746,599
|
|||||||||
|
Long-term
Debt
|
386,332
|
547,350
|
195,677
|
222,812
|
345,667
|
|||||||||
|
Shareholders’
Investment
|
647,996
|
538,179
|
398,704
|
381,423
|
280,150
|
|||||||||
|
Per
Share of Common Stock:
|
||||||||||||||
|
Earnings
Per Share
|
2.34
|
1.24
|
1.01
|
1.01
|
.94
|
|||||||||
|
Earnings
Per Share - Assuming
|
||||||||||||||
|
Dilution
|
2.25
|
1.22
|
1.00
|
1.01
|
.93
|
|||||||||
|
Cash
Dividends Declared
|
.51
|
.48
|
.48
|
.48
|
.48
|
|||||||||
|
Shareholders’
Investment
|
21.84
|
21.87
|
15.93
|
15.24
|
13.42
|
|||||||||
|
Basic
Average Shares Outstanding
|
29,675
|
24,603
|
25,030
|
24,187
|
20,869
|
|||||||||
|
Diluted
Average Shares Outstanding
|
30,879
|
24,904
|
25,246
|
24,310
|
21,124
|
|||||||||
|
I
TEM 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 closely 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 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
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.
Net Sales in 2005 increased, including the impact of the GE Commercial AC and HVAC motor acquisitions in 2004, 89% to $1.429 billion. Net income rose 128.5% to $69.6 million.
Given
the
continued competitive marketplace and high raw material and energy costs,
we
anticipate that the near-term operating environment will remain challenging.
However, we anticipate that the impact of new products, favorable federal
energy
legislation, and the impact of our Lean Six Sigma program will provide
additional funds for investment in support of key categories and new
product
development while also supporting an increased level of profitability.
RESULTS
OF OPERATIONS
2005
versus 2004
Net
Sales
Worldwide
sales were $1.429 billion in 2005. Sales increased 89% from the $756.6
million
reported for 2004. The 2004 acquisitions of the Commercial AC motor and
HVAC
motor and capacitor businesses from General Electric Company (GE) accounted
for
$615.0 million of the increase. Also impacting sales was the divestiture
of the
Illinois Gear business that was sold by the Company in May of 2005. The
sale of
this business decreased sales by approximately $5.0 million for 2005.
Sales
in
the Electrical segment were $1.228 billion, up 120% from 2004, including
the
$615.0 million from the businesses acquired from GE. Excluding the sales
from
the acquired businesses, sales increased 10%. Sales for the HVAC motor
business
were positively impacted by the convergence of several factors including
hotter
than normal weather and the increase in HVAC system inventory levels
in the OEM
and distributor channels in anticipation of the government legislated
SEER 13
efficiency requirement which was effective on January 23, 2006. We estimate
that
this industry-wide volume increase favorably impacted our sales by approximately
$30 million in the fourth quarter of 2005. We also saw strength in sales
of
commercial and industrial motors that have benefited from overall economic
strength.
Sales
in
the Mechanical segment grew 1% to $201.0 million. Sales in this segment
were
reduced approximately $5.0 million as a result of the sale of the Illinois
Gear
business in May of 2005. Individual division results varied significantly
with
several divisions benefiting from the continued strength of the industrial
economy.
Gross Profit
Our
gross
profit margin was 21.8% in 2005 as compared to 22.1% in 2004. The reduction
in
gross profit during 2005 resulted primarily from increases in raw material
costs, particularly copper. The price of copper increased from approximately
$1.40 per pound at the end of 2004 to over $2.00 per pound at the end
of 2005.
The increase in material costs was only partially offset by price increases
implemented in all of our channels and the benefits from productivity
and Lean
Six Sigma projects. The gross profit margin for the Electrical segment
reflected
these impacts and decreased to 21.4% from 21.7% in 2004. Mechanical
segment
gross profit margin increased from 23.2% in 2004 to 23.7% primarily
as a result
of net benefits from plant consolidations and
productivity projects.
Operating
Expenses
Operating
expenses as a percentage of sales were 12.3% in 2005 as compared to
14.8% in
2004. The decrease in operating expense as a percent of sales results
from
leveraging of fixed costs on the higher sales levels. Additionally,
the HVAC and
CAC businesses operate with a lower operating expense structure due,
in part, to
the concentration of sales with their large OEM customer base. Electrical
segment operating expenses decreased to 11.8% of sales from 15.3% of
sales in
2004 as a result of these factors. Mechanical operating expenses as
a percent of
sales increased from 15.0% in 2004 to 15.6% in 2005.
Income
from Operations (Operating Profit)
In
2005,
operating profit increased 143.8% to $134.6 million from the $55.2 million
reported in 2004. As a percent of sales, operating profit increased to
9.4% of
sales for 2005 from 7.3% in 2004. Electrical segment income from operations
increased 200.8% in 2005 to $118.5 million from $39.4 million in 2004,
and
operating income margin increased to 9.7% in 2005 from 7.1% in 2004.
The
contributions from the 2004 acquisitions of GE’s HVAC and CAC businesses, price
increases, favorable volume impacts, and the operating expense fixed
cost
leveraging and productivity were the main drivers of the improved performance.
Electrical Segment operating profit was negatively impacted by increases
in raw
material costs, particularly copper and aluminum. Mechanical segment
income from
operations increased 1.9% to $16.0 million in 2005 from $15.7 million
in 2004.
The Mechanical segment operating income margin for 2005 improved to 8.0%
from
7.9% in 2004. The results of the Mechanical segment reflect the positive
impacts
of increased volume and price increases, partially offset by increases
in raw
material costs and the non-repeat of the 2004 sale of property located
in the
United Kingdom ($1.5 million pretax).
Interest
Expense, Net
Interest
expense, net was $21.6 million in 2005 compared with $6.6 million in
2004.
Higher interest rates and higher average debt levels, due primarily to
debt
incurred as a result of the HVAC and CAC acquisitions, have resulted
in
increased interest expense in 2005. The average interest rate paid under
the
Company’s revolving credit facility was 4.7% in 2005 and 2.7% in 2004. The
average balance outstanding under the Facility in 2005 was $395,969,000
and in
2004 was $150,596,000.
Income
Taxes
The
effective income tax rate for 2005 was 35.3% compared with 32.4% in 2004.
The
increase to the effective rate was primarily due to the one-time realization
of
benefits in 2004 for the resolution of tax audits. The 2005 effective
rate
reflected a benefit of approximately .5% attributable to the Domestic
Production
Activities Deduction that was incorporated in the American Jobs Creation
Act of
2004.
(See
also
Note
9 to
Notes to Consolidated Financial Statements.)
Net
Income
Net
income was $69.6 million in 2005 or $2.25 per share on a diluted basis
compared
with $30.4 million in 2004 or $1.22 per share.
2004
versus 2003
Net
Sales
Our
net
sales were $756.6 million in 2004, a 22.2% increase from $619.1 million
in 2003.
Excluding the sales impact from the acquisition of the CAC business,
sales
increased 13.5%. The increase in sales was driven by strong demand in
the
majority of our markets. Sales in the Electrical segment increased 27.1%
to
$557.0 million. Excluding the sales from the CAC business, sales in the
Electrical segment were $503.3 million, an increase of 14.8% over 2003.
Sales
for the joint ventures that the Company owned for the entire year, which
are
included in the Electrical segment, increased $10.7 million, or 53% over
2003.
Sales in our Mechanical segment were $199.6 million, which was an increase
of
10.4% over 2003. Sales in both segments were positively impacted by improved
consumer and business spending and the price increases implemented by
the
Company during 2004.
Gross
Profit
Our
gross
profit was $167.1 million, an increase of 13.8% over the $146.8 million
reported
in 2003. As a percent of sales, gross profit was 22.1% as compared to
23.7% in
2003. The increase in raw material costs drove this decrease, as price
increases
and our implemented productivity actions only partially offset the increased
costs.
Operating
Expenses
Our
operating expenses in 2004 were $111.9 million, 12.4% above $99.5 million
in
2003. The increase was primarily driven by the sales and distribution
costs
driven by the sales volume increase. Operating expenses as a percentage
of sales
decreased to 14.8% in 2004 from 16.1% in 2003, reflecting fixed cost
leverage
and productivity.
Income
from Operations (Operating Profit)
Income
from operations was $55.2 million, an increase of 16.8% over the $47.2
million
reported in 2003. Income from operations as a percentage of sales (“operating
income margin”) was 7.3% in 2004 versus 7.6% in 2003. Electrical segment income
from operations increased 16.4% in 2004 to $39.4 million from $33.9 million
in
2003, and operating income margin decreased to 7.1% in 2004 from 7.7%
in 2003.
The impact of the raw material cost increases coupled with an increase
in
healthcare costs for employees were the primary drivers of this decrease.
These
factors were partially offset by price increases, favorable volume impacts,
and
the operating expense fixed cost leveraging and productivity. Mechanical
segment
income from operations increased 17.8% to $15.7 million in 2004 from
$13.3
million in 2003. The Mechanical segment operating income margin for 2004
improved to 7.9% from 7.4% in 2003. The results of the Mechanical segment
reflect the positive impacts of increased volume, price increases, and
the
3
rd
quarter
gain on the sale of property located in the U.K. ($1.5 million pretax),
partially offset by raw material cost increases.
Interest
Expense, Net
Our
net
interest expense in 2004 was $6.6 million, which was an increase of 3.5%
over
the $6.4 million in 2003. This increase was due to a slightly increased
balance
of average debt outstanding. The average interest rate we paid on outstanding
debt in 2004 was 2.7% which was unchanged from the 2.7% average in 2003.
Income
Taxes
Our
effective tax rate on income before taxes decreased to 32.4% in 2004
from 36.2%
in 2003, including tax effects of the minority interest. This decrease
was due
primarily to the impact of the favorable resolution of several tax matters
recorded in the fourth quarter ($1.4 million) and the favorable tax treatment
of
the third quarter gain on the sale of property located in the U.K ($.5
million).
Net
Income
Our
2004
net income of $30.4 million improved 20.7% from the $25.2 million in
2003. Net
income as a percentage of sales was 4.0% versus 4.1% in 2003. Basic earnings
per
share was $1.24 in 2004, a 22.8% increase from $1.01 in 2003. Fully diluted
earnings per share was $1.22, a 22.0% increase from $1.00 in 2003.
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital was $268.5 million at December 31, 2005, a decrease of
4.0% from
$279.7 million at year-end 2004. The $11.2 million decrease was due primarily
to
a $28.4 million reduction in inventories and a $23.5 million reduction
in
accounts payable during 2005, partially offset by a $25.0 million increase
in
short-term commercial paper borrowings initiated in December 2005. The
inventory
decrease reflected improved turnover and shipments above expectations
in the
fourth quarter of 2005. The accounts payable reduction was due primarily
to
one-time payments to GE in 2005 of payables acquired as a part of the
2004
acquisitions and included in the December 31, 2004 accounts payable balance.
Additionally, theses accounts were impacted by the Final GE Purchase
Price
Settlement and Final Purchase Accounting Allocations. Our current ratio,
the
ratio of our current assets to current liabilities, at December 31, 2005
decreased to 2.2:1 from 2.4:1 from the previous year-end.
Cash
flow
provided by operating activities (“operating cash flow”) was $112.2 million in
2005, a 193.7% increase from 2004. Increased net income of $39.1 million
and a
$44.9 million increase in cash flow generated from inventory changes
(a $16.5
million use of cash in 2004 versus a $28.4 million of cash provided
in 2005)
were the major factors in the operating cash flow improvement in 2005.
Cash flow
used in investing activities was $11.8 million in 2005, a fraction
of the $338.5
million in 2004. The large decrease was due to the $327.9 million of
cash
invested in our 2004 acquisitions from GE, of which $12.0 million was
repaid to
the Company in 2005 as a result of the Final GE Purchase Price Settlement.
Capital spending increased to $28.3 million in 2005 from $16.3 million
a year
earlier. In 2005, we received $9.9 million from sales of surplus assets,
primarily vacant facilities. Such sales were up from $5.9 million in
2004. Our
commitments for property, plant and equipment as of December 31, 2005
were
approximately $9.8 million. We believe that our present facilities,
augmented by
planned capital expenditures, are sufficient to provide adequate capacity
for
our operations in 2006.
Cash
flow
used in financing activities was $98.1 million in 2005 following $322.4
million
provided from financing activities in 2004. Our strong operating cash
flow
coupled with net proceeds from our stock offering in August 2005 enabled
us to
reduce our total debt outstanding by 24.8% to $412.0 million at December
31,
2005 from $547.6 million at year-end 2004, a reduction of $135.6 million.
We
received $43.7 million of net proceeds from the sale of 1,530,321 primary
shares
of common stock issued by the Company. Additionally, we received $9.3
million
from GE’s net proceeds from the sale in the same August offering of all
4,559,048 shares GE received from us on December 31, 2004 as part of
the
acquisition purchase price of GE’s HVAC motors and capacitors business. The $9.3
million was paid by GE to us under a shareholder agreement between
GE and the
Company filed with our Current Report on Form 8-K dated January 6,
2005. We paid
$14.7 million in dividends to shareholders in 2005, with our quarterly
dividend
increasing from $.12 to $.13 per share starting with the July 2005
dividend
payment. In December 2005, we initiated short-term borrowings through
a $35.0
million unsecured commercial paper facility with one of our banks.
In December
2005, we commenced the short-term borrowings with $25.0 million of
commercial
paper, all of which was outstanding at December 31, 2005, and repaid
a like
amount of debt outstanding under the Facility described below. (See
also Note 5
of Notes to Consolidated Financial Statements.)
Our
primary financing source is our $475 million long-term unsecured revolving
credit facility (the “Facility”) that terminates on May 5, 2009. The Company has
the option to increase the Facility up to $550 million subject to achievement
of
certain approvals and covenants. The Facility requires us to maintain
specified
financial ratios and to satisfy certain financial condition tests.
We were in
compliance with all of these ratios and tests as of December 31, 2005.
The tests
consist of a minimum interest coverage ratio of 3.75 to 1, a maximum
funded debt
to EBITDA (earnings before interest, taxes, depreciation and amortization)
ratio
of 4.00 to 1 and a maximum senior funded debt to EBITDA ratio of 3.00
to 1, both
of which reduce to 3.75 to 1 and to 2.75 to 1, respectively, at December
31,
2006, and a minimum net worth consisting of the sum of $435 million
plus 50% of
net income for each quarter ending on or after March 31, 2005 plus
75% of the
net proceeds of all issuances of equity securities by the Company.
At year-end
2005, we had $175.8 million of available borrowing capacity. We believe
we will
satisfy the Facility’s financial ratios and tests for the foreseeable future. We
further believe that the combination of our operating cash flow and
borrowing
availability under the Facility will provide sufficient cash flow to
finance our
existing operations for the foreseeable future. (See also Note 5 of
Notes to
Consolidated Financial Statements.)
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
December 31, 2005, we had $141.5 million of fixed rate debt and $270.5
million
of variable rate debt, the latter subject to interest rate risk. The
variable
rate debt is primarily under a credit facility 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
December 31, 2005 would result in a change in after-tax annualized earnings
of
approximately $700,000.
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 December 31, 2005 (in thousands):
|
Payments
due by Period
|
Debt
Including
Estimated*
Interest
Payments
|
Operating
Leases
|
Purchase
and Other
Obligations
|
Total
Contractual
Obligations
|
|||||||||||
|
Less
than 1 Year
|
$
|
40,738
|
$
|
6,170
|
$
|
77,198
|
$
|
124,106
|
|||||||
|
1
-
3 Years
|
31,475
|
10,139
|
4,840
|
46,454
|
|||||||||||
|
3
-
5 Years
|
380,371
|
3,989
|
3,578
|
387,938
|
|||||||||||
|
More
than 5 Years
|
3,450
|
3,234
|
6,757
|
13,441
|
|||||||||||
|
Total
|
$
|
456,034
|
$
|
23,532
|
$
|
92,373
|
$
|
571,939
|
|||||||
*Variable
rate debt based on December 31, 2005 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
December 31, 2005, the Company had outstanding standby letters of credit
totaling $6,902,000, $52,000 of which expires in 2007; the balance expires
in
2006. We had no other material commercial commitments.
The
Company did not have any variable interest entities as of December 31,
2005.
Other than disclosed in the table above and the previous paragraph, the
Company
had no other material off-balance sheet arrangements.
CRITICAL
ACCOUNTING POLICIES
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.
Goodwill
and Other Intangibles
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
is not amortized; however it is tested for impairment at least annually
and with
any resulting adjustment charged to the results of operations. Amortization
is
recorded for intangible assets with definite lives. (See Note 3, “Goodwill and
Other Intangibles” of Notes to Consolidated Financial Statements.)
Retirement
Plans
Approximately
half of our domestic employees are covered by defined benefit pension
plans with
the remaining employees covered by defined contribution plans. Most
of our
foreign employees are covered by government sponsored plans in the
countries in
which they are employed. Our obligations under our domestic defined
benefit
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 8.75% and the discount rate at 5.75% for our defined
benefit
plans as of December 31, 2005. (See also Note 7 of Notes to Consolidated
Financial Statements).
Further
discussion of the Company’s accounting policies is contained in Note 2 of Notes
to Consolidated Financial Statements. The preparation of our consolidated
financial statements in conformity with accounting principles generally
accepted
in the United States requires the use of estimates and assumptions
that affect
the reported amounts of assets, liabilities, revenues and expenses,
and the
related disclosure of contingent assets and liabilities. Management
bases its
estimates on historical experience and on other assumptions that
are believed to
be reasonable under the circumstances, the results of which form
the basis for
making judgments about the carrying value of assets and liabilities
that are not
readily apparent from other sources. Actual results may differ from
these
estimates under different assumptions or conditions.
New
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires companies to expense the value of employee stock options and similar awards. This Statement is a revision of FASB Statement No. 123(R), “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. The incremental share-based compensation expense under SFAS 123(R) is estimated to be in the range of $.05 to $.10 per share in 2006, including options granted in January of 2006. The ultimate impact of adopting SFAS 123(R) on 2006’s results of operations and financial position will depend upon many factors including the level of stock-based compensation granted in 2006, the fair value of those options which will be determined at the date of grant, the related tax benefits recorded and the diluted shares outstanding. The Company has adopted the provisions of the new standard using the modified prospective method and using the Black-Scholes option pricing model effective January 1, 2006.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” an amendment of
ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify
that abnormal
amounts of idle facility expense, freight, handling costs and wasted
materials
(spoilage) should be recognized as current-period charges and require
the
allocation of fixed production overheads to inventory based on the
normal
capacity of the production facilities. The pronouncement is effective
for
inventory costs incurred during fiscal years beginning after June 15,
2005.
Earlier application is permitted for inventory costs incurred during
fiscal
years beginning after November 23, 2004. The adoption of this pronouncement
is
not expected to have a significant impact on the Company’s results of operations
or financial position.
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 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
December 31, 2005, we had $141.5 million of fixed rate debt and $270.5
million
of variable rate debt, the latter subject to interest rate risk. The
variable
rate debt is primarily under a credit facility 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
December 31, 2005, would result in a change in after-tax annualized
earnings of
approximately $700,000.
The
Company periodically enters into commodity futures and options hedging
transactions to reduce the impact of changing copper, aluminum and
natural gas
commodity prices. Contract terms of commodity hedge instruments generally
mirror
those of the hedged item, providing a high degree of risk reduction
and
correlation.
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 hedging contracts to manage our
exposure on
the transactions denominated in currencies other than the applicable
functional
currency. Due to our two acquisitions in August and December 2004,
in 2005 we
significantly increased our manufacturing operations outside the United
States.
In the first half of 2005, we began to enter into contracts to hedge
foreign-currency denominated forecasted transactions. 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.
All
hedges are recorded on the balance sheet at fair value and are
treated as cash
flow hedges, with changes in fair value recorded in accumulated
other
comprehensive income (“AOCI”) in each accounting period. An ineffective portion
of the hedge’s change in fair value, if any, is recorded in earnings in the
period of change. The impact due to ineffectiveness was immaterial
for the years
ended December 31, 2005, 2004 and 2003.
In
2005,
$4.2 million, of net increased hedge value was recorded in AOCI.
At December 31,
2005, we had a balance of $2.4 million in current assets related
to unamortized
cash flow hedges and a net after tax gain of $4.8 million in AOCI,
representing
the deferred gains on cash flow hedges. Of the total current assets
and AOCI
values, $1.4 and $1.1 million, respectively, related to currency
hedges, with
the balance of $1.0 million and $3.7 million, respectively, relating
to
commodity hedges.
Quarterly
Financial Information (Unaudited)
|
(In
Thousands, Except Per Share Data)
|
||||||||||||||||||||||||||||
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
|||||||||||||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
|||||||||||||||||||||
|
Net
Sales
|
$
|
337,823
|
$
|
163,084
|
$
|
368,768
|
$
|
177,652
|
$
|
345,894
|
$
|
193,888
|
$
|
376,222
|
$
|
221,933
|
||||||||||||
|
Gross
Profit
|
68,444
|
38,187
|
79,800
|
40,841
|
76,598
|
42,944
|
85,922
|
45,088
|
||||||||||||||||||||
|
Income
from
Operations
|
25,865
|
12,444
|
35,811
|
14,174
|
34,608
|
15,591
|
38,290
|
12,953
|
||||||||||||||||||||
|
Net
Income
|
12,286
|
6,860
|
18,445
|
7,629
|
18,517
|
8,927
|
20,309
|
7,019
|
||||||||||||||||||||
|
Earnings
Per Share
|
.42
|
.27
|
.63
|
.31
|
.62
|
.37
|
.66
|
.29
|
||||||||||||||||||||
|
Earnings
Per Share -
Assuming
Dilution
|
.41
|
.27
|
.62
|
.31
|
.59
|
.36
|
.63
|
.28
|
||||||||||||||||||||
|
Average
Number of
Shares
Outstanding
|
29,034
|
25,042
|
29,065
|
24,450
|
29,913
|
24,456
|
30,644
|
24,463
|
||||||||||||||||||||
|
Average
Number of
Shares
- Assuming
|
||||||||||||||||||||||||||||
|
Dilution
|
30,244
|
25,278
|
29,720
|
24,677
|
31,234
|
24,725
|
32,317
|
24,937
|
||||||||||||||||||||
The
management of REGAL-BELOIT CORPORATION (the “Company”) is responsible for the
accuracy and internal consistency of the preparation 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 December 31, 2005. 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 December 31, 2005, the Company’s
internal control over financial reporting is effective based on those
criteria.
The
Company’s independent auditors, Deloitte & Touche LLP, have audited the
financial statements prepared by the management of REGAL-BELOIT CORPORATION
and
management’s assessment of internal control over financial
reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Shareholders and Board of Directors of REGAL-BELOIT CORPORATION:
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that REGAL-BELOIT
CORPORATION and subsidiaries (the “Company”) maintained effective internal
control over financial reporting as of December 31, 2005, 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 maintaining effective internal control
over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit 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
effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We
believe
that our audit provides 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 disposition 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, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly
stated, in
all material respects, based on the criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Also in
our opinion, the Company maintained, in all material respects, effective
internal control as of December 31, 2005, based on the criteria established
in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the consolidated financial statements
as of and
for the year ended December 31, 2005 of the Company and our report
dated March
7, 2006 expressed an unqualified opinion on those financial
statements.
DELOITTE
& TOUCHE LLP
Milwaukee,
Wisconsin
March
7,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Board of Directors of REGAL-BELOIT CORPORATION:
We
have
audited the accompanying consolidated balance sheets of REGAL-BELOIT
CORPORATION
and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the
related consolidated statements of income, shareholders’ investment and cash
flows for each of the three years in the period ended December 31,
2005. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
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.
An audit
includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe
that our
audits provide a reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in
all material
respects, the financial position of REGAL-BELOIT CORPORATION and subsidiaries
as
of December 31, 2005 and 2004, and the results of their operations
and their
cash flows for each of the three years in the period ended December
31, 2005 in
conformity with accounting principles generally accepted in the United
States of
America.
We
have
also audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2005, based on the
criteria established in
Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
and our
report dated March 7, 2006 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
DELOITTE
& TOUCHE LLP
Milwaukee,
Wisconsin
March
7,
2006
REGAL
-BELOIT
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
Thousands of Dollars)
| ASSETS |
December
31
|
||||||
|
2005
|
2004
|
||||||
|
Current
Assets:
|
|||||||
|
Cash
and Cash Equivalents
|
$
|
32,747
|
$
|
31,275
|
|||
|
Receivables,
less Allowances for Doubtful Accounts
|
|||||||
|
of
$2,653 in 2005 and $2,376 in 2004
|
197,118
|
176,941
|
|||||
|
Inventories
|
224,316
|
246,816
|
|||||
|
Prepaid
Expenses and Other Current Assets
|
16,121
|
13,394
|
|||||
|
Future
Income Tax Benefits
|
16,978
|
6,493
|
|||||
|
Total
Current Assets
|
487,280
|
474,919
|
|||||
|
Property,
Plant and Equipment:
|
|||||||
|
Land
and Improvements
|
18,624
|
19,026
|
|||||
|
Buildings
and Improvements
|
100,036
|
104,460
|
|||||
|
Machinery
and Equipment
|
336,171
|
335,307
|
|||||
|
Property,
Plant and Equipment, at Cost
|
454,831
|
458,793
|
|||||
|
Less
- Accumulated Depreciation
|
(210,502
|
)
|
(205,120
|
)
|
|||
|
Net
Property, Plant and Equipment
|
244,329
|
253,673
|
|||||
|
Goodwill
|
546,168
|
544,440
|
|||||
|
Purchased
Intangible Assets, Net of Amortization
|
45,674
|
52,058
|
|||||
|
Other
Noncurrent Assets
|
19,103
|
26,962
|
|||||
|
Total
Assets
|
$
|
1,342,554
|
$
|
1,352,052
|
|||
| LIABILITIES AND SHAREHOLDERS' INVESTMENT | |||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
Payable
|
$
|
82,513
|
$
|
106,374
|
|||
|
Commercial
Paper Borrowings
|
25,000
|
--
|
|||||
|
Dividends
Payable
|
3,985
|
3,483
|
|||||
|
Accrued
Compensation and Employee Benefits
|
41,127
|
30,256
|
|||||
|
Other
Accrued Expenses
|
46,559
|
44,094
|
|||||
|
Income
Taxes Payable
|
18,923
|
10,731
|
|||||
|
Current
Maturities of Long-Term Debt
|
684
|
271
|
|||||
|
Total
Current Liabilities
|
218,791
|
195,209
|
|||||
|
Long-Term
Debt
|
386,332
|
547,350
|
|||||
|
Deferred
Income Taxes
|
59,993
|
48,663
|
|||||
|
Other
Noncurrent Liabilities
|
18,394
|
17,359
|
|||||
|
Minority
Interest in Consolidated Subsidiaries
|
11,048
|
5,292
|
|||||
|
Shareholders’
Investment:
|
|||||||
|
Common
Stock, $.01 par value, 50,000,000 shares authorized,
|
|||||||
|
31,429,736
issued in 2005 and 29,798,188 issued in 2004
|
315
|
298
|
|||||
|
Additional
Paid-In Capital
|
316,426
|
263,790
|
|||||
|
Less-Treasury
Stock, at cost, 774,100 shares in 2005 and 2004
|
(15,228
|
)
|
(15,228
|
)
|
|||
|
Retained
Earnings
|
343,161
|
288,837
|
|||||
|
Unearned
Compensation
|
(657
|
)
|
(224
|
)
|
|||
|
Accumulated
Other Comprehensive Income
|
3,979
|
706
|
|||||
|
Total
Shareholders’ Investment
|
647,996
|
538,179
|
|||||
|
Total
Liabilities and Shareholders’ Investment
|
$
|
1,342,554
|
$
|
1,352,052
|
|||
See
accompanying Notes to Consolidated Financial Statements.
REGA
L-BELOIT
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands of Dollars, Except Shares Outstanding and Per Share Data)
|
For
the Year Ended December 31
|
||||||||||
|
2005
|
|
|
2004
|
|
|
2003
|
||||
|
Net
Sales
|
$
|
1,428,707
|
$
|
756,557
|
$
|
619,098
|
||||
|
Cost
of Sales
|
1,117,943
|
589,497
|
472,343
|
|||||||
|
Gross
Profit
|
310,764
|
167,060
|
146,755
|
|||||||
|
Operating
Expenses
|
176,192
|
111,898
|
99,529
|
|||||||
|
Income
From Operations
|
134,572
|
55,162
|
47,226
|
|||||||
|
Interest
Expense
|
22,090
|
6,787
|
6,462
|
|||||||
|
Interest
Income
|
442
|
183
|
79
|
|||||||
|
Income
Before Taxes & Minority Interest
|
112,924
|
48,558
|
40,843
|
|||||||
|
Provision
For Income Taxes
|
39,829
|
15,728
|
14,792
|
|||||||
|
Income
Before Minority Interest
|
73,095
|
32,830
|
26,051
|
|||||||
|
Minority
Interest in Income, Net of Tax
|
3,538
|
2,395
|
845
|
|||||||
|
Net
Income
|
$
|
69,557
|
$
|
30,435
|
$
|
25,206
|
||||
|
Per
Share of Common Stock:
|
||||||||||
|
Earnings
Per Share - Basic
|
$
|
2.34
|
$
|
1.24
|
$
|
1.01
|
||||
|
Earnings
Per Share - Assuming Dilution
|
$
|
2.25
|
$
|
1.22
|
$
|
1.00
|
||||
|
Average
Number of Shares Outstanding-Basic
|
29,675,206
|
24,602,868
|
25,029,942
|
|||||||
| Average Number of Shares Outstanding - Assuming Dilution | 30,878,981 | 24,904,287 | 25,246,088 | |||||||
See
Accompanying Notes to Consolidated Financial Statements.
REGA
L-BELOIT
CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ INVESTMENT
(In
Thousands of Dollars, Except Per Share Data)
|
Compre-hensive
Income
|
|
Common
Stock
$.01
Par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Retained
Earnings
|
Unearned
Compen-
sation
|
Accumulated
Other
Compre-
hensive
Income
(Loss)
|
Total
|
|||||||||||||||||
|
Balance,
December 31, 2002
|
$ |
250
|
$ |
132,167
|
$ |
(2,727
|
)
|
$ |
257,570
|
$ |
--
|
$ |
(5,837
|
)
|
$ |
381,423
|
|||||||||
|
Net
Income
|
$
|
25,206
|
--
|
--
|
--
|
25,206
|
--
|
--
|
25,206
|
||||||||||||||||
|
Dividends
Declared ($.48 Per Share)
|
--
|
--
|
--
|
(12,016
|
)
|
--
|
--
|
(12,016
|
)
|
||||||||||||||||
|
Translation
Adjustments
|
4,111
|
--
|
--
|
--
|
--
|
--
|
4,111
|
4,111
|
|||||||||||||||||
|
Change
in Fair Value of Hedging
|
|||||||||||||||||||||||||
|
Activities,
Net of Tax
|
160
|
--
|
--
|
--
|
--
|
--
|
160
|
160
|
|||||||||||||||||
|
Hedging
Activities Reclassified into
|
|||||||||||||||||||||||||
|
Earnings
from Other Comprehensive
|
|||||||||||||||||||||||||
|
Income
|
---
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Additional
Pension Liability, Net of Tax
|
(326
|
)
|
--
|
--
|
--
|
--
|
--
|
(326
|
)
|
(326
|
)
|
||||||||||||||
|
Comprehensive
Income
|
$
|
29,151
|
|||||||||||||||||||||||
|
Stock
Options Exercised
|
--
|
146
|
--
|
--
|
--
|
--
|
146
|
||||||||||||||||||
|
Balance,
December 31, 2003
|
250
|
132,313
|
(2,727
|
)
|
270,760
|
--
|
(1,892
|
)
|
398,704
|
||||||||||||||||
|
Net
Income
|
$
|
30,435
|
--
|
--
|
--
|
30,435
|
--
|
--
|
30,435
|
||||||||||||||||
|
Dividends
Declared ($.48 Per Share)
|
--
|
--
|
--
|
(12,358
|
)
|
--
|
--
|
(12,358
|
)
|
||||||||||||||||
|
Translation
Adjustments
|
2,903
|
--
|
--
|
--
|
--
|
--
|
2,903
|
2,903
|
|||||||||||||||||
|
Change
in Fair Value of Hedging
|
|||||||||||||||||||||||||
|
Activities,
Net of Tax
|
864
|
--
|
--
|
--
|
--
|
--
|
864
|
864
|
|||||||||||||||||
|
Hedging
Activities Reclassified into
|
|||||||||||||||||||||||||
|
Earnings
from Other Comprehensive
|
|||||||||||||||||||||||||
|
Income
|
(511
|
)
|
--
|
--
|
--
|
--
|
--
|
(511
|
)
|
(511
|
)
|
||||||||||||||
|
Additional
Pension Liability, Net of Tax
|
(658
|
)
|
--
|
--
|
--
|
--
|
--
|
(658
|
)
|
(658
|
)
|
||||||||||||||
|
Comprehensive
Income
|
$
|
33,033
|
|||||||||||||||||||||||
|
Unearned
Compensation, Net of
|
|||||||||||||||||||||||||
|
Amortization
|
--
|
288
|
--
|
--
|
(224
|
)
|
--
|
64
|
|||||||||||||||||
|
Stock
Issued for
Acquisition
|
46
|
130,343
|
--
|
--
|
--
|
--
|
130,389
|
||||||||||||||||||
|
Common
Stock
Repurchased
|
--
|
--
|
(12,501
|
)
|
--
|
--
|
--
|
(12,501
|
)
|
||||||||||||||||
|
Stock
Options Exercised
|
2
|
846
|
--
|
--
|
--
|
--
|
848
|
||||||||||||||||||
|
Balance,
December 31, 2004
|
298
|
263,790
|
(15,228
|
)
|
288,837
|
(224
|
)
|
706
|
538,179
|
||||||||||||||||
|
Net
Income
|
$
|
69,557
|
--
|
--
|
--
|
69,557
|
--
|
--
|
69,557
|
||||||||||||||||
|
Dividends
Declared
($.51 Per Share)
|
--
|
--
|
--
|
(15,233
|
)
|
--
|
--
|
(15,233
|
)
|
||||||||||||||||
|
Translation
Adjustments
|
(629
|
)
|
--
|
--
|
--
|
--
|
--
|
(629
|
)
|
(629
|
)
|
||||||||||||||
|
Change
in Fair Value
Hedging
Activities,
|
|||||||||||||||||||||||||
|
Net
of
Tax
|
9,625
|
--
|
--
|
--
|
--
|
--
|
9,625
|
9,625
|
|||||||||||||||||
|
Hedging
Activities
Reclassified
into
|
|||||||||||||||||||||||||
|
Earnings
from
Other
Comprehensive
|
|||||||||||||||||||||||||
|
Income
|
(5,382
|
)
|
--
|
--
|
--
|
--
|
--
|
(5,382
|
)
|
(5,382
|
)
|
||||||||||||||
|
Additional
Pension
Liability, Net of Tax
|
(341
|
)
|
--
|
--
|
--
|
--
|
--
|
(341
|
)
|
(341
|
)
|
||||||||||||||
|
Comprehensive
Income
|
$
|
72,830
|
0
|
||||||||||||||||||||||
|
Stock
Options Exercised, Including
|
|||||||||||||||||||||||||
|
Income
T
ax
Benefit
|
2
|
2,334
|
--
|
--
|
--
|
--
|
2,334
|
||||||||||||||||||
|
Unearned
Compensation,
Net
of
|
|||||||||||||||||||||||||
|
Amortization
|
--
|
891
|
--
|
--
|
(433
|
)
|
--
|
458
|
|||||||||||||||||
|
Stock
Proceeds
from
Shares Sold
by
GE
|
|||||||||||||||||||||||||
|
in
Stock
Offering,
Net of
Tax
|
--
|
5,887
|
--
|
--
|
--
|
--
|
5,887
|
||||||||||||||||||
|
Shares
issued in Stock Offering
|
15
|
43,524
|
--
|
--
|
--
|
--
|
43,539
|
||||||||||||||||||
| Balance, December 31, 2005 | $ |
315
|
$ |
316,426
|
(15,228 | ) | $ | 343,161 | $ | (657 | ) | $ | 3,979 | $ | 647,996 | ||||||||||
See
Accompanying Notes to Consolidated Financial Statements.
REGAL
-BELOIT
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands of Dollars)
|
For
the Year Ended December 31
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income
|
$
|
69,557
|
$
|
30,435
|
$
|
25,206
|
||||
|
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||||
|
Provided
from Operating Activities:
|
||||||||||
|
Depreciation
|
31,175
|
21,061
|
21,014
|
|||||||
|
Amortization
|
6,452
|
552
|
--
|
|||||||
|
(Benefit
of) Provision for Deferred Income Taxes
|
(811
|
)
|
1,089
|
2,377
|
||||||
|
Minority
Interest in Earnings of Subsidiaries
|
3,538
|
2,395
|
845
|
|||||||
|
Gain
on Sales of Property, Plant, and Equipment
|
(507
|
)
|
(2,380
|
)
|
--
|
|||||
|
Changes
in Assets and Liabilities, Net of Acquisitions:
|
||||||||||
|
Receivables
|
(19,222
|
)
|
(28,813
|
)
|
(4,582
|
)
|
||||
|
Inventories
|
28,355
|
(16,481
|
)
|
6,483
|
||||||
|
Accounts
Payable
|
(23,467
|
)
|
14,483
|
2,915
|
||||||
|
Current
Liabilities and Other
|
17,141
|
15,823
|
4,707
|
|||||||
|
Net
Cash Provided from Operating Activities
|
112,211
|
38,164
|
58,965
|
|||||||
|
CASH
FLOW FROM INVESTING ACTIVITIES:
|
||||||||||
|
Additions
to Property, Plant and Equipment
|
(28,261
|
)
|
(16,281
|
)
|
(17,965
|
)
|
||||
|
Business
Acquisitions, Net of Cash Acquired
|
6,561
|
(327,851
|
)
|
(717
|
)
|
|||||
|
Sale
of Property, Plant and Equipment
|
9,907
|
5,929
|
259
|
|||||||
|
Other
|
-
|
(306
|
)
|
1,833
|
||||||
|
Net
Cash Used in Investing Activities
|
(11,793
|
)
|
(338,509
|
)
|
(16,590
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Proceeds
from Stock Offerings
|
53,026
|
--
|
--
|
|||||||
|
Proceeds
from Long-Term Debt
|
-
|
116,319
|
--
|
|||||||
|
Payments
of Long-Term Debt
|
(1,285
|
)
|
-
|
(165
|
)
|
|||||
|
Proceeds
from Commercial Paper Borrowings
|
25,000
|
--
|
--
|
|||||||
| Net Borrowings (Repayments) Under Revolving Credit Facility |
(159,400
|
)
|
235,500
|
(27,000
|
)
|
|||||
|
Repurchase
of Common Stock
|
-
|
(12,501
|
)
|
--
|
||||||
|
Stock
Issued Under Option Plans
|
1,956
|
848
|
146
|
|||||||
|
Financing
Fees Paid
|
(1,374
|
)
|
(5,851
|
)
|
--
|
|||||
|
Distributions
to Minority Partners
|
(1,315
|
)
|
-
|
-
|
||||||
|
Dividends
Paid to Shareholders
|
(14,730
|
)
|
(11,879
|
)
|
(12,014
|
)
|
||||
|
Net
Cash (Used in) Provided from Financing Activities
|
(98,122
|
)
|
322,436
|
(39,033
|
)
|
|||||
|
EFFECT
OF EXCHANGE RATE ON CASH:
|
(824
|
)
|
84
|
167
|
||||||
|
Net
Increase in Cash and Cash Equivalents
|
1,472
|
22,175
|
3,509
|
|||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
31,275
|
9,100
|
5,591
|
|||||||
|
Cash
and Cash Equivalents at End of Year
|
$
|
32,747
|
$
|
31,275
|
$
|
9,100
|
||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||
|
Cash
Paid During the Year for:
|
||||||||||
|
Interest
|
$
|
21,378
|
$
|
5,981
|
$
|
6,355
|
||||
|
Income
Taxes
|
36,670
|
8,847
|
3,585
|
|||||||
|
Non-Cash
Investing: Issuance of Common Stock in Connection
|
||||||||||
|
With
Acquisition
|
-
|
$
|
130,389
|
--
|
||||||
See
accompanying Notes to Consolidated Financial Statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
For
The
Three Years Ended December 31, 2005
| (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) |
ACCOUNTING
POLICIES
|
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company
and its
subsidiaries where the Company owns at least 50% of the subsidiary’s equity. 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.
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.
Receivables
Receivables
are stated at estimated net realizable value. Receivables are comprised
of
balances due from customers and other non-trade receivables such
as value added
tax, employee advances, deposits with vendors and other receivables,
net of
estimated allowances for uncollectible accounts. In determining collectibility,
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
is as
follows:
|
December
31,
|
||
|
2005
|
2004
|
|
|
Raw
Material
|
13%
|
13%
|
|
Work
in Process
|
25%
|
25%
|
|
Finished
Goods and Purchased Parts
|
62%
|
62%
|
Inventories
are stated at cost, which is not in excess of market. Cost for approximately
86%
of the Company's inventory at December 31, 2005 and 87% in 2004, 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
$23,995,000
and $17,971,000 as of December 31, 2005 and 2004, respectively. Material,
labor
and factory overhead costs are included in the inventories.
The
Company reviews it 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.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” an amendment of
ARB No. 43. The amendments made by SFAS No. 151 clarify that abnormal
amounts of
idle facility expense, freight, handling costs and wasted materials
(spoilage)
should be recognized as current-period charges and require the allocation
of
fixed production overheads to inventory based on the normal capacity
of the
production facilities. The pronouncement is effective for inventory
costs
incurred during fiscal years beginning after June 15, 2005. Earlier
application
is permitted for inventory costs incurred during fiscal years beginning
after
November 23, 2004. The adoption of this pronouncement is not expected
to have a
significant impact on the Company’s results of operations or financial position.
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 of
10 to 45 years for buildings and improvements, and 3 to 15 years
for machinery
and equipment. Accelerated methods are used for income tax purposes.
The Company
reviews its property, plant and equipment for impairment whenever
events or
changes in circumstances indicate that the carrying amount of such
assets may
not be recoverable.
The
Company had approximately $5.0 of assets held for sale and classified
as a
component of prepaid expenses and other currents assets at December
31, 2005
related to the Company’s Grafton, Wisconsin facility which was sold in January
2006. The gain on the sale was immaterial.
Goodwill
and Other Intangibles
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill
is not amortized; however it is tested for impairment at least annually
with any
resulting adjustment charged to the results of operations. Amortization
is
recorded for intangible assets with definite lives.
Stock-Based
Compensation
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123 (revised 2004)
(“SFAS
123(R)”), “Share-Based Payment.” SFAS 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized
in
the financial statements based on their fair values (i.e., pro forma
disclosure
is no longer an alternative to financial statement recognition).
The Company has
adopted the provisions of the new standard using the modified prospective
method
and using the Black-Scholes option pricing model effective January
1, 2006. The
incremental share-based compensation expense under SFAS 123(R) is
estimated to
be in the range of $.05 to $.10 per share in 2006, including the
impact of
options granted in January of 2006. The ultimate impact of adopting
SFAS 123(R)
on 2006’s results of operations and financial position will depend upon many
factors including the level of stock-based compensation granted in
2006, the
fair value of those options which will be determined at the date
of grant, the
related tax benefits recorded and the diluted shares
outstanding.
Prior
to
2006, the Company followed the accounting provisions of APB No. 25
in accounting
for its stock option plans. The Company granted stock options at a
price equal
to the fair value of the Company’s common stock at the date of grant and,
accordingly, no compensation cost was recognized. The following table
is a
reconciliation of the Company’s net income and earnings per share to proforma
net income and proforma earnings per share for the years ended December
31.
|
(In
Thousands,
Except Per Share Data)
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
Income:
|
||||||||||
|
As
Reported
|
$
|
69,557
|
$
|
30,435
|
$
|
25,206
|
||||
|
Add:
Total stock-based employee compensation expense
|
||||||||||
|
included
in net income, net of related tax effects
|
362 |
117
|
69
|
|||||||
|
Deduct:
Total stock-based employee compensation expense,
|
||||||||||
|
net
of related tax effects
|
(1,690
|
)
|
(839
|
)
|
(497
|
)
|
||||
|
Pro
Forma
|
$
|
68,229
|
$
|
29,713
|
$
|
24,778
|
||||
|
Earnings
Per Share:
|
||||||||||
|
As
Reported
|
$
|
2.34
|
$
|
1.24
|
$
|
1.01
|
||||
|
Pro
Forma
|
$
|
2.29
|
$
|
1.21
|
$
|
.99
|
||||
|
Earnings
Per Share - Assuming Dilution:
|
||||||||||
|
As
Reported
|
$
|
2.25
|
$
|
1.22
|
$
|
1.00
|
||||
|
Pro
Forma
|
$
|
2.22
|
$
|
1.19
|
$
|
.98
|
||||
The
fair
value of each option grant is estimated on the date of grant using
the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2005, 2004 and 2003, respectively: risk-free
interest rates of 4.0%, 4.0% and 3.5%; expected dividend yield of 1.7%,
2.25%
and 2.5%; expected option lives of 7.0 for all years; expected volatility
of
28%, 35% and 37%.
Under
the
2003 Equity Incentive Plan, the Company may issue grants of restricted
stock.
The value of the grant is amortized as compensation expense over
the vesting
period on a straight-line basis. The unamortized balance is reflected
as a
component of shareholder’s investment.
Earnings
per Share (EPS)
Basic
and
diluted earnings per share are computed and disclosed under SFAS No.
128,
“Earnings Per Share”. 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 at December 31 have been excluded from the calculation
of effect of
dilutive securities shown below. The amount of these shares was -0-,
62,850 and
714,650 for 2005, 2004 and 2003, respectively. The following table
reconciles
the basic and diluted shares used in the per share calculations:
|
December
31
|
|||||
|
2005
|
2004
|
2003
|
|||
|
Denominator
for basic EPS
|
29,675,206
|
24,602,868
|
25,029,942
|
||
|
Effect
on dilutive securities
|
1,203,775
|
301,419
|
216,146
|
||
|
Denominator
for diluted EPS
|
30,878,981
|
24,904,287
|
25,246,088
|
||
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’ investment. Gains and losses from foreign currency transactions
are included in net earnings, which were immaterial in all years.
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 based on estimated future cash flows from these assets.
Such analyses
necessarily involve significant judgment.
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 Income (Loss)
Foreign
currency translation adjustments, unrealized gains and losses on derivative
instruments and minimum pension liability adjustments are included
in
shareholder’s investment under accumulated other comprehensive income (loss).
The components of the ending balances of accumulated other comprehensive
income
(loss) are as follows:
|
2005
|
2004
|
||||||
|
Additional
pension liability, net of tax
|
$
|
(6,434
|
)
|
$
|
(6,093
|
)
|
|
|
Translation
adjustments
|
5,657
|
6,286
|
|||||
|
Hedging
activities, net of tax
|
4,756
|
513
|
|||||
|
Total
|
$
|
3,979
|
$
|
706
|
Derivative
Instruments
SFAS
No.
133, as amended, requires that all derivative instruments be recorded
on the
balance sheet at fair value and 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).
The
Company has entered into certain commodity forward contracts in connection
with
the management of its exposure to fluctuations in certain raw material
commodity
pricing. These derivative instruments have been designated as cash
flow hedges.
The entire value of these hedges at December 31, 2005, which is shown
above in
Accumulated Other Comprehensive Income ("AOCI"), is expected to be
realized in
2006.
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 $12,065,000 at December 31, 2005 and $11,008,000 at December 31,
2004. The
cash surrender value, net of policy loans, is $1,605,000 and $3,315,000
at
December 31, 2005 and 2004, respectively, and is included as a component
of
Other Noncurrent Assets.
Reclassifications
Certain
amounts reported in prior periods have been reclassified to conform
to the 2005
presentation. The reclassifications did not impact the Company’s net income or
net income per share.
Fair
Values
The
fair
values of cash equivalents, receivables, inventories, accounts payable,
commercial paper borrowings 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 or dealer quotes and the fair value of derivative instruments
is
determined based on dealer quotes.
(3)
GOODWILL
AND OTHER INTANGIBLES
SFAS
No.
142, “Goodwill and Other Intangible Assets,” establishes financial accounting
and reporting for acquired goodwill and other intangible assets. The
Company
reports in two segments, the Electrical segment and the Mechanical
segment. The
Company has elected to perform its annual test for impairment during
the fourth
quarter. The Company utilizes a discounted cash flow model to estimate
the fair
value of the reporting units. The Company performed its most recent
analysis as
of November 30, 2005, and based upon reasonable assumptions of cash
flows and
cost of capital, concluded that there continues to be no impairment
of goodwill.
The Company believes that all of the Goodwill recorded as a result
of the 2004
and 2005 acquisitions is deductible for tax purposes. The following
information
presents changes to goodwill during the periods indicated:
|
Electrical
Segment
|
Mechanical
Segment
|
Total
Company
|
|||||||||
|
Balance,
December 31, 2003
|
$
|
310,686
|
$
|
530
|
$
|
311,216
|
|||||
|
Acquisitions
|
233,224
|
--
|
233,224
|
||||||||
|
Balance,
December 31, 2004
|
543,910
|
530
|
544,440
|
||||||||
|
CMT
Acquisition
|
855
|
--
|
855
|
||||||||
|
Final
GE Purchase Price Settlement
|
(12,032
|
)
|
--
|
(12,032
|
)
|
||||||
|
Final
Purchase Accounting Allocations
|
12,905
|
--
|
12,905
|
||||||||
|
Balance,
December 31, 2005
|
$
|
545,638
|
$
|
530
|
$
|
546,168
|
|||||
The
“Final GE Purchase Price Settlement” represents cash received in 2005 related to
working capital and other contractual adjustments agreed to by the
parties to
adjust the purchase price for the differential between the preliminary
net asset
statement and the final net asset statement.
The
“Final Purchase Accounting Allocation” represents the Company’s final valuation
adjustments related to acquired assets. These adjustments related
primarily to
the valuation of inventories.
The
following intangible assets were recorded as a result of the 2004 acquisitions
described in Note 10. The amounts allocated to intangible assets were
determined
by independent appraisals. Also see Note 10 for the useful lives of
the
intangible assets shown below.
Summary
of Intangible Assets with Definite Lives
($
thousands)
|
December
31, 2005
|
||||||
|
Asset
Description
|
Gross
Value
|
Accumulated
Amortization
|
Net
|
|||
|
Non-Compete
Agreements
|
$
|
2,440
|
$
|
520
|
$
|
1,920
|
|
Trademarks
|
4,960
|
1,760
|
3,200
|
|||
|
Patents
|
15,410
|
1,565
|
13,845
|
|||
|
Engineering
Drawings
|
1,200
|
127
|
1,073
|
|||
|
Customer
Relationships
|
28,600
|
2,964
|
25,636
|
|||
|
Total
|
$
|
52,610
|
$
|
6,936
|
$
|
45,674
|
|
December
31, 2004
|
||||||
|
Asset
Description
|
Gross
Value
|
Accumulated
Amortization
|
Net
|
|||
|
Non-Compete
Agreements
|
$
|
2,440
|
$
|
33
|
$
|
2,407
|
|
Trademarks
|
4,960
|
386
|
4,574
|
|||
|
Patents
|
15,410
|
23
|
15,387
|
|||
|
Engineering
Drawings
|
1,200
|
7
|
1,193
|
|||
|
Customer
Relationships
|
28,600
|
103
|
28,497
|
|||
|
Total
|
$
|
52,610
|
$
|
552
|
$
|
52,058
|
Estimated
Future Amortization
|
2006
|
2007
|
2008
|
2009
|
2010
|
Thereafter
|
|
$
6,384,000
|
$
6,380,000
|
$
5,238,000
|
$
5,205,000
|
$
4,522,000
|
$
17,945,000
|
(4)
LEASES
AND RENTAL COMMITMENTS
Rental
expenses charged to operations amounted to $8,114,000 in 2005, $6,568,000
in
2004 and $7,097,000 in 2003. The Company has future minimum rental
commitments
under operating leases as shown in the following table:
|
Year
|
(In
Thousands
of
Dollars)
|
|||
|
2006
|
$
|
6,170
|
||
|
2007
|
5,454
|
|||
|
2008
|
4,685
|
|||
|
2009
|
2,297
|
|||
|
2010
|
1,692
|
|||
|
Thereafter
|
4,041
|
|||
(5)
DEBT
AND BANK CREDIT FACILITIES
Long-term
debt consists of the following:
|
(In
Thousands of Dollars)
December
31
|
|||||
|
2005
|
2004 | ||||
|
Revolving
Credit Facility
|
$
|
267,100
|
$
|
426,500
|
|
|
Convertible
Senior Subordinated Debt
|
115,000
|
115,000
|
|||
|
Other
|
4,916
|
6,121
|
|||
|
387,016
|
547,621
|
||||
|
Less:
Current maturities
|
684
|
271
|
|||
|
Non-current
portion
|
$
|
386,332
|
$
|
547,350
|
|
The
Company maintained at December 31, 2005, a $475,000,000 unsecured
revolving
credit facility which terminates May 5, 2009 (the “Facility”). The Company has
the right to increase the facility up to $550 million, subject to
achievement of
certain approvals and covenants. The Facility permits the Company
to borrow at
interest rates based upon a margin above LIBOR, which margin varies
with the
ratio of debt to earnings before interest, taxes, depreciation and
amortization
(“EBITDA”). These interest rates also vary with LIBOR. The Company also pays
a
commitment fee on the unused amount of the $475,000,000 maximum credit
limit,
which fee rate also varies with the debt to EBITDA ratio. The Facility
includes
various financial covenants regarding minimum net worth, permitted
debt levels
and minimum interest coverage. Those tests consist of a minimum interest
coverage ratio of 3.75 to 1, a maximum funded debt to EBITDA ratio
of 4.00 to 1
decreasing to 3.75:1 at December 31, 2006, a maximum senior funded
debt to
EBITDA ratio of 3.00 to 1 decreasing to 2.75:1 at December 31, 2006,
and a
minimum net worth consisting of the sum of $435.0 million plus 50%
of net income
for each quarter ending on or after March 31, 2005 plus 75% of the
net proceeds
of all issuances of equity securities by the Company. The Company
was in
compliance with all financial covenants as of December 31, 2005.
The
average balance outstanding under the Facility in 2005 was $395,969,000
and in
2004 was $150,596,000. The average interest rate paid under the Facility
was
4.7% in 2005 and 2.7% in 2004. At December 31, 2005, the interest
rate paid on
the outstanding balance of the Facility was 5.2%. The Company also
paid an
unused commitment fee under the facility which was .20% of the unused
balance of
$211,448,000 at December 31, 2005. The Company had $175,799,000 of
available
borrowing capacity under the Facility at December 31, 2005.
The
Company, at December 31, 2005, also had $115,000,000 of convertible
senior
subordinated notes outstanding, which were issued on April 5, 2004.
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 after five years. The Company
may not call
the notes for five years, and the note holders may only put the notes
back to
the Company at approximately the 5
th
, 10
th
and
15
th
year anniversaries of the issuance of the notes. In
the table
below the maturity of these convertible notes is shown in 2009, when
the first
put and call dates occur, reflecting the likelihood, in the opinion
of the
Company, when the notes will mature. In October 2004, the Company
amended the
indenture to eliminate its option to issue stock upon a conversion
request, and
require the Company to pay only cash, up to the $115,000,000 par
value of the
notes. The Company retained the option to either pay cash, issue
its stock or a
combination thereof, for value above par, which is above the $25.56
stock
conversion price. With the change to the indenture, the Company qualified
for
the Treasury Stock method of accounting for this convertible debt
in accordance
with EITF 04-8, “The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share”.
Based
on
the borrowing rates currently available to the Company for bank
loans and for
convertible senior subordinated debt, the fair market value of
the long-term
debt is not materially different from the carrying value.
Maturities
of long-term debt are as follows:
|
Year
|
(In
Thousands
of
Dollars)
|
|||
|
2006
|
$
|
684
|
||
|
2007
|
894
|
|||
|
2008
|
228
|
|||
|
2009
|
382,172
|
|||
|
2010
|
38
|
|||
|
Thereafter
|
3,000
|
|||
|
Total
|
$
|
387,016
|
||
In
addition to the long-term debt shown above, the Company had $25,000,000
of
unrated commercial paper outstanding through a $35,000,000 facility
(the “CP
Facility”) established in December 2005 with one of its banks. The CP Facility
is unsecured and may be withdrawn by the bank at any time. The Company
is
required by the bank to maintain unused capacity in its long-term revolving
credit facility at least equal to the amount of outstanding commercial
paper.
The CP Facility permits sales of paper for periods up to 180 days.
At December
31, 2005, the weighted average term for the outstanding commercial
paper was 53
days and the weighted average interest rate was 4.5%.
(6)
CONTINGENCIES
AND COMMITMENTS
An
action
was filed on June 4, 2004, and amended in September 2004, against one
of the
Company’s subsidiaries, Marathon Electric Manufacturing Corporation
(“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and
Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The
action was filed in the United States Bankruptcy Court for the Southern
District
of New York where each of the Enron Wind entities has consolidated
its Chapter
11 bankruptcy petition as part of the Enron Corporation bankruptcy
proceedings.
In the action against Marathon, Enron Wind has asserted various claims
relating
to the alleged failures and/or degradations of performance of 564 generators
sold by Marathon to Enron Wind from 1997 to 1999. In January 2001,
Enron Wind
and Marathon entered into a “Generator Warranty and Settlement Agreement and
Release of All Claims” (“Warranty Agreement”). This Warranty Agreement resolved
various issues related to past performance of the generators, provided
a limited
warranty related to the generators going forward, and contained a release
by all
parties of any claims related to the generators other than those arising
out of
the obligations contained in the Warranty Agreement.
Enron
Wind is seeking to recover the purchase price of the generators and
transportation costs totaling about $21 million. In addition, although
the
Warranty Agreement contains a waiver of consequential, incidental,
and punitive
damages, Enron Wind claims that this limitation is unenforceable and
seeks
recovery of consequential, incidental and punitive damages incurred
by it and by
its customers, totaling an additional $100 million. Enron Wind has
asserted
claims of breach of contract, breach of the implied covenant of good
faith and
fair dealing, promissory fraud, and intentional interference with contractual
relations. Marathon has filed a motion with the court seeking to have
many of
Enron Wind’s claims dismissed. Enron Wind recently has filed a motion with the
court seeking a declaration that Marathon had an obligation under the
Warranty
Agreement to repair or replace the generators in the first instance
regardless
of whether an actual breach of warranty had occurred. The court has
held
hearings on both motions, but has not yet ruled.
The
Company believes that this action is without merit and that it has
meritorious
defenses to the action. The Company intends to defend vigorously all
of the
asserted claims. The litigation is in an early discovery phase and
it is
difficult for the Company to predict the impact the litigation may
ultimately
have on the Company’s results of operations or financial condition, including
the expenses the Company may incur to defend against the action. As
of December
31, 2005, the Company has accrued for anticipated costs in defending
against
this matter and such accumulated reserves as of December 31, 2005 are
immaterial.
From
time
to time, the Company, in the normal course of business, is involved
in various
claims and legal actions arising out of its operations. The Company
does not
believe that the ultimate disposition of any currently pending claims
or actions
would have a material adverse effect on the Company or its financial
condition.
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 2005 and 2004:
| (In Thousands of Dollars) | |||||||
|
2005
|
2004
|
||||||
|
Balance,
beginning of year
|
$
|
(5,007
|
)
|
$
|
(2,953
|
)
|
|
|
Payments
|
5,925
|
5,325
|
|||||
|
Provision
|
(6,597
|
)
|
(5,545
|
)
|
|||
|
Additions
from acquisitions
|
--
|
(1,834
|
)
|
||||
|
Non-current
portion
|
$
|
(5,679
|
)
|
$
|
(5,007
|
)
|
|
Provision
for virtually all warranties is made in the year of issuance.
(7)
RETIREMENT
PLANS
The
Company has a number of retirement plans that cover most of its domestic
employees. 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 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 $4,329,000, $4,455,000, and $2,283,000
in
2005, 2004 and 2003, respectively.
Benefits
provided under defined benefit 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
plans is in accordance with federal laws and regulations.
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
|
70
|
%
|
9-10
|
%
|
|
|
Fixed
income
|
30
|
%
|
5.5
- 6.5
|
%
|
|
|
Total
|
100
|
%
|
8.75
|
%
|
|
The
Company’s investment strategy for its defined benefit plans is to achieve
moderately aggressive growth, earning a long-term rate of return sufficient
to
at least maintain the plans in a 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 considers historic returns and volatilities adjusted for
changes in
overall economic conditions that may affect future returns and a weighting
of
each investment class.
The
defined benefit pension plan assets were invested as follows as of
December 31
of each year:
|
2005
|
2004
|
||||
|
Equity
investments
|
75
|
%
|
73
|
%
|
|
|
Fixed
income
|
25
|
%
|
27
|
%
|
|
|
Total
|
100
|
%
|
100
|
%
|
|
In
2003,
the Company changed for financial reporting purposes the actuarial
valuation
measurement date for its pension plans from September 30 to December
31.
Management believes that a measurement date of December 31 is preferable
because
it better reflects the actual balances of the plans as of the Company’s balance
sheet date. This change did not have a significant effect on 2003 pension
expense.
The
actuarial computations utilized the following assumptions:
| Benefit Obligation |
2005
|
2004
|
||||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
||||||
|
Rates
of increase in compensation level
|
0-2.75
|
%
|
0-2.75
|
%
|
||||||
| Net Periodic Pension Cost |
2005
|
2004
|
2003
|
|||||||
|
Discount
rate
|
5.75
|
%
|
6.25
|
%
|
7.0
|
%
|
||||
|
Expected
long-term rate of return on assets
|
8.75
|
%
|
8.75
|
%
|
8.75
|
%
|
||||
|
Rates
of increase in compensation levels
|
0-2.75
|
%
|
0-2.5
|
%
|
0-3.0
|
%
|
||||
Net periodic pension benefit costs for the defined benefit plans were as follows:
|
(In
Thousands of Dollars)
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Service
cost
|
$
|
3,617
|
$
|
3,552
|
$
|
1,389
|
||||
|
Interest
cost
|
4,020
|
4,009
|
3,346
|
|||||||
|
Expected
return on plan assets
|
(4,530
|
)
|
(4,335
|
)
|
(4,717
|
)
|
||||
|
Net
amortization and deferral
|
1,123
|
1,083
|
172
|
|||||||
|
Net
periodic expense
|
$
|
4,230
|
$
|
4,309
|
$
|
190
|
||||
The
following table presents a reconciliation of the funded status of the
defined
benefit plans:
|
(In
Thousands of Dollars)
|
|||||||
|
2005
|
2004
|
||||||
|
Change
in projected benefit obligation:
|
|||||||
|
Obligation
at beginning of period
|
$
|
66,816
|
$
|
60,372
|
|||
|
Service
cost
|
3,617
|
3,552
|
|||||
|
Interest
cost
|
4,020
|
4,009
|
|||||
|
Actuarial
loss
|
3,767
|
680
|
|||||
|
Plan
amendments
|
10
|
310
|
|||||
|
Benefits
paid
|
(2,204
|
)
|
(2,107
|
)
|
|||
|
Obligation
at end of period
|
$
|
76,026
|
$
|
66,816
|
|||
|
Change
in fair value of plan assets:
|
|||||||
|
Fair
value of plan assets at beginning of period
|
54,007
|
49,935
|
|||||
|
Actual
return on plan assets
|
3,170
|
4,844
|
|||||
|
Employer
contributions
|
725
|
1,335
|
|||||
|
Benefits
paid
|
(2,204
|
)
|
(2,107
|
)
|
|||
|
Fair
value of plan assets at end of period
|
$
|
55,698
|
$
|
54,007
|
|||
|
Funded
status
|
(20,328
|
)
|
(12,809
|
)
|
|||
|
Unrecognized
net actuarial
loss
|
20,879
|
16,780
|
|||||
|
Unrecognized
prior service costs
|
1,301
|
1,408
|
|||||
|
Net
amount recognized
|
$
|
1,852
|
$
|
5,379
|
|||
|
Amounts
recognized in balance sheets
|
|||||||
|
Prepaid
benefit cost
|
6,421
|
8,399
|
|||||
|
Accrued
benefit liability
|
(16,485
|
)
|
(14,344
|
)
|
|||
|
Intangible
asset
|
1,530
|
1,654
|
|||||
|
Accumulated
other comprehensive loss
|
10,386
|
9,670
|
|||||
|
Net
amount recognized
|
$
|
1,852
|
$
|
5,379
|
|||
The
projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the defined benefit plans with
accumulated
benefit obligations in excess of plan assets were $36,971,000,
$35,926,000 and
$19,844,000 respectively, as of December 31, 2005, and $33,511,000,
$33,319,000 and $19,339,000, respectively, as of December 31, 2004.
Total
accumulated benefit obligations for all defined benefit plans totaled
$70,790,000, and $62,851,000 at December 31, 2005 and 2004, respectively.
The
Company estimates that, in 2006, it will make contributions in
the amount of
$1,671,000 to fund its defined benefit plans.
|
|
Expected
Payments
|
|
2006
|
$
2,430
|
|
2007
|
3,029
|
|
2008
|
3,342
|
|
2009
|
3,621
|
|
2010
|
3,937
|
|
2011-2015
|
$
24,577
|
(8)
SHAREHOLDERS’
INVESTMENT
The
Company has two stock option plans available for new grants to officers,
directors and key employees, the 2003 Equity Incentive Plan and the
1998 Stock
Option Plan, as amended. Additionally, the Company’s 1991 Flexible Stock
Incentive Plan and the 1987 Stock Option Plan, which have expired as
to new
grants, have shares previously granted remaining outstanding. Options
under all
the plans were granted at prices that equaled the market value on the
date of
the grant and with a maximum term of 10 years from the date of grant.
Options
vest over various periods up to 10 years.
Grants
of
restricted stock, which vest three years from the grant date given
continuous
employment over the three years is attained, have been awarded to certain
officers and key employees under the 2003 Equity Incentive Plan. There
were
44,175 shares of restricted stock outstanding at December 31, 2005
as compared
to 14,175 shares at December 31, 2004. Unamortized deferred compensation
expense
with respect to the restricted stock grants amounted to $657,000 at
December 31,
2005 and is being amortized over a three year vesting period. This
compares to
$224,000 at December 31, 2004. Deferred compensation expense aggregated
$458,000
in 2005 versus $64,000 in 2004.
A
summary
of restricted stock granted for the years 2005 and 2004 is as
follows:
|
2005
|
2004
|
|
|
Shares
Granted
|
30,000
|
14,175
|
|
Weighted-Average
Fair Value of Restricted Shares granted during year
|
$29.75
|
$20.30
|
A
summary
of the Company’s stock option plans follows:
|
At
December 31, 2005
|
|||||||
|
1987
Plan
|
1991
Plan
|
1998
Plan
|
2003
Plan
|
||||
|
Total
Plan shares
|
450,000
|
1,000,000
|
1,000,000
|
1,500,000
|
|||
|
Options
granted
|
449,850
|
762,882
|
1,118,900
|
621,500
|
|||
|
Restricted
stock granted
|
--
|
--
|
--
|
44,175
|
|||
| Options outstanding | 2,000 | 269,017 | 950,550 | 573,250 | |||
| Restricted stock outstanding | -- | -- | -- | 44,175 | |||
|
Options
available for grant
|
--
|
-- |
500
|
874,575
|
|||
A
summary
of the status of the Company’s stock option plans as of December 31, 2005, 2004
and 2003, and changes during the years then ended is presented
below:
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
||||||||||||||
|
Outstanding
at beginning of year
|
1,555,584
|
$
|
21.53
|
1,282,618
|
$
|
21.22
|
1,125,754
|
$
|
21.98
|
||||||||||
|
Granted
|
372,000
|
29.88
|
382,500
|
20.77
|
233,750
|
17.70
|
|||||||||||||
|
Exercised
|
(98,667
|
)
|
20.11
|
(51,034
|
)
|
16.56
|
(11,586
|
)
|
12.59
|
||||||||||
|
Forfeited
|
(30,600
|
)
|
24.45
|
(58,500
|
)
|
20.03
|
(65,300
|
)
|
19.58
|
||||||||||
|
Outstanding
at end of year
|
1,798,317
|
23.27
|
1,555,584
|
$
|
21.53
|
1,282,618
|
$
|
21.22
|
|||||||||||
|
Options
exercisable at year-end
|
1,138,717
|
919,534
|
823,168
|
||||||||||||||||
|
Weighted-average
fair value of
|
|||||||||||||||||||
|
Options
granted during the year
|
$ | 10.41 | $ | 6.96 | $ | 5.55 | |||||||||||||
The
following table provides information on the three Plans at various
exercise
price ranges:
|
Range
of Exercise Prices
|
|||||||||
|
$15.75-$20.74
|
$20.75-$25.74
|
$25.75-$30.74
|
$30.75-$35.84
|
Total
|
|||||
|
Options
outstanding at 12/31/05
|
620,867
|
724,000
|
396,600
|
56,850
|
1,798,317
|
||||
|
Weighted-average
remaining contractual life (years)
|
6.6
|
3.7
|
7.5
|
8.7
|
5.7
|
||||
|
Weighted-average
exercise price
|
$18.94
|
$23.05
|
$28.56
|
$33.25
|
$23.17
|
||||
|
Options
Exercisable at 12/31/05
|
443,267
|
547,250
|
136,100
|
12,100
|
1,138,717
|
||||
|
Weighted-average
exercise price
|
$18.44
|
$23.10
|
$28.76
|
$32.64
|
$22.07
|
||||
On
January 28, 2000, the Board of Directors approved a Shareholder 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 expire on January 28, 2010,
unless otherwise extended.
The
Board
of Directors approved in 2000 a repurchase program of up to 2,000,000
common
shares of Company stock. Management was authorized to effect purchases
from time
to time in the open market or through privately negotiated transactions.
In
April 2004, in association with the Company’s convertible subordinated debt
offering, the Company repurchased 614,200 shares of its stock at a
price of
$20.35. Through December 31, 2005, the Company has repurchased 774,100
shares at
an average purchase price of $19.67 per share.
In
August
2005 the Company completed an offering of its’ common stock. The Company
issued 1,530,321 primary shares of common stock and received net
proceeds of
$43.7 million, which proceeds were used to repay a like amount of
long-term
debt. Additionally, the Company received $9.3 million from General
Electric’s
(“GE”) net proceeds from the sale in the same August offering of all 4,559,048
shares GE received from the Company on December 31, 2004 as part
of the
Company’s acquisition price of GE’s HVAC motors and capacitors business. The
$9.3 million was paid by GE to the Company under a shareholder agreement
between
GE and the Company filed with the Company’s Current Report on Form 8-K dated
January 6, 2005.
(9)
INCOME
TAXES
Income
before income taxes and minority interest consisted of the
following:
|
(In
Thousands of Dollars)
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
United
States
|
$
|
88,714
|
$
|
36,689
|
$
|
36,076
|
||||
|
Foreign
|
24,210
|
11,869
|
4,767
|
|||||||
|
Total
|
$
|
112,924
|
$
|
48,558
|
$
|
40,843
|
||||
The
provision for (benefit of) income taxes is summarized as follows:
| (In Thousands of Dollars) | ||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Current
|
||||||||||
|
Federal
|
$
|
32,560
|
$
|
9,565
|
$
|
9,990
|
||||
|
State
|
4,332
|
1,181
|
1,009
|
|||||||
|
Foreign
|
3,748
|
3,893
|
1,416
|
|||||||
|
40,640
|
14,639
|
12,415
|
||||||||
|
Deferred
|
(811
|
)
|
1,089
|
2,377
|
||||||
|
Total
|
$
|
39,829
|
$
|
15,728
|
$
|
14,792
|
||||
A
reconciliation of the statutory Federal income tax rate and the effective
tax
rate reflected in the statements of income follows:
|
2005
|
2004
|
2003
|
||||||||
|
Federal
statutory tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
income taxes, net of federal benefit
|
2.4
|
|
1.4
|
1.6
|
||||||
|
Domestic
production activities deduction
|
(.5
|
)
|
||||||||
|
Resolution
of tax matters
|
—
|
(4.3
|
)
|
—
|
||||||
|
Impact
of UK property sale
|
—
|
(1.0
|
)
|
—
|
||||||
|
Other,
net
|
(1.6
|
)
|
1.3
|
(0.4
|
)
|
|||||
|
Effective
tax rate
|
35.3
|
%
|
32.4
|
%
|
36.2
|
%
|
||||
In
2005,
the Company recognized a favorable income tax impact from the Domestic
Production Activities Deduction as a result of the American Jobs Creation
Act of
2004. In 2004, the Company realized a favorable income tax impact primarily
from
the resolution of federal and state tax audits.
Deferred
taxes arise primarily from differences in amounts reported for tax
and financial
statement purposes. The Company's net deferred tax liability as of
December 31,
2005 of $43,015,000 is classified on the consolidated balance sheet
as a current
income tax benefit of $16,978,000 and a long-term deferred income tax
liability
of $59,993,000. The December 31, 2004 net deferred tax liability was
$42,170,000, consisting of a current income tax benefit of $6,493,000
and a
long-term deferred income tax liability of $48,663,000. The components
of this
net deferred tax liability are as follows:
|
(In
Thousands of Dollars)
|
|||||||
|
December
31
|
|||||||
|
|
|
|
2005
|
|
2004
|
||
|
Accrued
employee benefits
|
$
|
9,781
|
$
|
6,850
|
|||
|
Bad
debt reserve
|
748
|
380
|
|||||
|
Warranty
reserve
|
1,871
|
810
|
|||||
|
Other
|
5,490
|
4,475
|
|||||
|
Deferred
tax assets
|
17,890
|
12,515
|
|||||
|
Property
related
|
(25,553
|
)
|
(26,464
|
)
|
|||
|
Intangible
items
|
(28,089
|
)
|
(19,655
|
)
|
|||
|
Inventory
|
(1,263
|
)
|
(4,720
|
)
|
|||
|
Derivative
instruments
|
(2,247
|
)
|
(314
|
)
|
|||
|
Other
|
(3,753
|
)
|
(3,532
|
)
|
|||
|
Deferred
tax liabilities
|
(60,905
|
)
|
(54,685
|
)
|
|||
|
Net
deferred tax liability
|
$
|
(43,015
|
)
|
$
|
(42,170
|
)
|
|
No
valuation allowances were recorded at December 31, 2005 and 2004.
No
U.S.
deferred taxes have been provided on the undistributed non-U.S. subsidiary
earnings that are considered to be permanently invested. At December
31, 2005
and 2004, the estimated amount of total unremitted non-U.S. subsidiary
earnings
was $16.7 million and $16.8 million, respectively.
(10)
ACQUISITIONS
On
February 7, 2005, the Company acquired 95% ownership of Changzhou Modern
Technologies Co., Ltd. (“CMT”). CMT is located in Changzhou, P.R. of China and
produces fractional electric motors. The purchase price was $3.23 million
and is
being paid over a three year period.
On
August
30, 2004, the Company acquired the Commercial AC motors (“CAC”) business from
the General Electric Company. This acquisition expanded the Company’s product
offering through extensions of existing product lines and new product
applications into existing and new market segments. The CAC business
customer
base also expanded the Company’s OEM and distributor relationships. In addition
to the acquisition of the CAC business, the Company also assumed certain
liabilities, including but not limited to accounts payable, certain
accrued
compensation and benefits and certain other accrued expenses. The purchase
price
paid for the CAC business was approximately $72.3 million in cash.
The
CAC
business is a leading manufacturer and marketer of a full line of fractional
and
subfractional AC electric motors for pump, compressor, equipment and
commercial
HVAC applications. Included in the acquisition were motor manufacturing
facilities in Juarez, Mexico and technology resources in Hyderabad,
India. CAC
financial results in the Electrical segment since the date of acquisition.
At
11:59
p.m. on December 31, 2004, the Company acquired the HVAC motors and
capacitors
businesses from General Electric Company. This acquisition provided
the Company
a leading market position in electric motors used in central heating
and air
conditioning and expansion of the Company’s customer base to include major HVAC
original equipment manufacturers. The purchase price paid for the HVAC
business
was $387.0 million. The purchase price consisted of approximately $257.0
million
in cash and 4,559,048 shares of common stock of the Company which was
valued at
approximately $130.0 million as of the closing date.
The
HVAC
motor business produces a full line of electric motors for use in residential
and commercial HVAC systems. The capacitors business produces a line
of
capacitors used in HVAC applications, high intensity lighting and other
applications. Results for the HVAC business are included in the Electrical
segment since the date of acquisition. Included in the acquisition
were motor
manufacturing facilities in Faridabad, India; Reynosa, Mexico; and
Springfield,
Missouri; and a capacitor manufacturing facility in Juarez, Mexico. The
acquired CAC and HVAC also maintain technology development, administrative
and
sales support teams in Fort Wayne, Indiana and electric motor engineering
resources located in Hyderabad, India.
In
connection with the GE acquisitions, the Company and GE entered into
various
supply, transition services, and sales agreements. These agreements
are related
to transition support in areas such as warehousing, computer systems,
and
accounting services. The duration of the various agreements ranges
from six
months to three years, depending on the specific agreement. On August
11, 2005,
GE sold all of the shares of the Company’s common stock owned by it, ceasing to
be a related party to the Company. The amount paid to GE through August
10,
2005, for trade payables, transition services and other payables of
the
businesses acquired from GE in 2004, was $102.4 million. This compares
to $38.4
million for the four months for which we owned the CAC business in
2004. The
amount expensed in this same period for transition services was $10.8
million,
which was recorded in operating expenses. This compares to $1.6 million
for the
four months for which we owned the CAC business in 2004.
The
Company recorded $234.1 million of Goodwill as a result of the acquisitions,
all
of which is believed to be deductible for tax purposes.
Acquired
Balance Sheet Summary
($
thousands)
|
At
August
30,
2004
CAC
|
At
December
31,
2004
HVAC
|
||||||
|
Cash
|
$
|
214
|
$
|
14,735
|
|||
|
Accounts
Receivable
|
20,723
|
45,518
|
|||||
|
Inventory
|
22,228
|
62,196
|
|||||
|
Prepaid
and Other Current Assets
|
1,254
|
621
|
|||||
|
Total
Current Assets
|
44,419
|
123,070
|
|||||
|
Net
Property, Plant, & Equipment
|
22,975
|
76,077
|
|||||
|
Goodwill
|
19,333
|
214,735
|
|||||
|
Purchased
Intangible Assets
|
8,300
|
44,310
|
|||||
|
Other
Non-Current Assets
|
--
|
4,101
|
|||||
|
Total
Assets
|
$
|
95,027
|
$
|
462,293
|
|||
|
Accounts
Payable
|
$
|
10,219
|
$
|
33,734
|
|||
|
Other
Liabilities
|
12,508
|
41,539
|
|||||
|
Shareholders
Equity
|
72,300
|
387,020
|
|||||
|
Total
Liabilities & Equity
|
$
|
95,027
|
$
|
462,293
|
|||
Summary
of Intangible Assets with Definite Lives
($
millions)
| Asset Description |
CAC
|
HVAC
|
Total
|
Useful
Life
|
|||||||||
|
Non-Compete
Agreements
|
$
|
0.6
|
$
|
2.0
|
$
|
2.4
|
5
Years
|
||||||
|
Trademarks
|
3.7
|
1.1
|
5.0
|
3
- 5 Years
|
|||||||||
|
Patents
|
0.7
|
14.7
|
15.4
|
9-10.5
Years
|
|||||||||
|
Engineering
Drawings
|
0.2
|
1.0
|
1.2
|
10
Years
|
|||||||||
|
Customer
Relationships
|
3.1
|
25.5
|
28.6
|
10
Years
|
|||||||||
|
Total
|
$
|
8.3
|
$
|
44.3
|
$
|
52.6
|
In
November 2002, the Company entered into an agreement to form a joint
venture
effective January 1, 2003, with Shanghai Jinling Co., Ltd. The Company
acquired,
for a combination of cash and investment of machinery and technology,
a 50%
ownership in Shanghai Micro Motor, Shanghai Jinling’s sub-fractional and
fractional motor company, which was already a supplier to the Company.
The
purchased assets are not material to the financial position of the
Company.
(11)
DERIVATIVE FINANCIAL INSTRUMENTS
The
Company periodically enters into commodity futures and options hedging
transactions to reduce the impact of changing prices for certain commodities
such as copper and aluminum based upon certain firm commitments to
purchase 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.
At
December 31, 2005, the Company did not have any open copper contracts.
At
December 31, 2005, the Company had aluminum swap contracts providing
for 6.9
million pounds of aluminum with a market value of $1.0 million.
The
Company uses a cash hedging strategy to protect against an increase
in the cost
of forecasted foreign currency denominated transactions, specifically
related to
the Mexican Peso and Indian Rupee. The Company hedges a portion of
its
forecasted Peso and Rupee transactions with forward contracts. When
the U.S.
dollar weakens against the Peso or Rupee, increased foreign currency
payments
are offset by gains in the value of the forward contracts. Conversely,
when the
U.S. dollar strengthens against the Peso or Rupee, reduced foreign
currency
payments are offset by losses in the value of the forward contracts.
At December
31, 2005, the Rupee forward contract notional value was $3.7 million
and fair
market value was $38,000 net of tax. Peso contracts at December 31,
2005 have an
after-tax fair market value of $838,000 with a notional value of $28,800,000.
At
December 31, 2005, the effective portion of the change in the fair
value of cash
flow derivatives is recorded in AOCI. The fair market value of the
contracts with gains has been recognized in “Prepaid and Other Current Assets”
and the contract with losses has been recognized in “Other Current Liabilities.”
When hedged items impact the income statement, the gain or loss included
in AOCI
is reported in the same line in the Consolidated Statements of Income
as the
hedged item. The entire net unrealized gain of $4,756,000 in AOCI at
December
31, 2005 is expected to be realized in 2006.
The
impact of commodity hedging contacts in 2004 was immaterial. The impact
of hedge
ineffectiveness for the years ended December 31, 2005, 2004 and 2003
was also
immaterial.
(12)
INDUSTRY SEGMENT INFORMATION
The
Company’s reportable segments are strategic businesses that offer different
products and services. The Company has two such reportable segments:
Electrical
and Mechanical. The Electrical segment principally produces electric
motors and
power generation equipment for sale to original equipment manufacturers
and
distributors. The Mechanical segment principally produces mechanical
products
that control motion and torque for sale to original equipment manufacturers
and
distributors.
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 solely
from
external customers. The Company’s products manufactured and sold outside the
United States were approximately 10%, 14% and 12% of net sales in 2005,
2004 and
2003, respectively. Export sales from U.S. operations were approximately
5%, 7%
and 5%
in
2005,
2004 and 2003, respectively.
Pertinent
data for each reportable segment in which the Company operated for
the three
years ended December 31, 2005 is as follows:
|
(In
Thousands of Dollars)
|
||||||||||||||||
|
Net
|
Income
From
|
Identifiable
|
Capital
|
Depreciation
and
|
||||||||||||
|
Sales
|
Operations
|
Assets
|
Expenditures
|
Amortization
|
||||||||||||
|
2005
|
||||||||||||||||
|
Electrical
|
$
|
1,227,696
|
$
|
118,528
|
$
|
1,215,953
|
$
|
23,491
|
$
|
30,676
|
||||||
|
Mechanical
|
201,011
|
16,044
|
126,601
|
4,770
|
6,951
|
|||||||||||
|
Total
REGAL-BELOIT
|
$
|
1,428,707
|
$
|
134,572
|
$
|
1,342,554
|
$
|
28,261
|
$
|
37,627
|
||||||
|
2004
|
||||||||||||||||
|
Electrical
|
$
|
556,967
|
$
|
39,442
|
$
|
1,211,889
|
$
|
8,873
|
$
|
13,823
|
||||||
|
Mechanical
|
199,590
|
15,720
|
140,163
|
7,408
|
7,790
|
|||||||||||
|
Total
REGAL
-
BELOIT
|
$
|
756,557
|
$
|
55,162
|
$
|
1,352,052
|
$
|
16,281
|
$
|
21,613
|
||||||
|
2003
|
||||||||||||||||
|
Electrical
|
$
|
438,357
|
$
|
33,877
|
$
|
612,469
|
$
|
11,736
|
$
|
13,641
|
||||||
|
Mechanical
|
180,741
|
13,349
|
121,976
|
6,229
|
7,373
|
|||||||||||
|
Total
REGAL
-
BELOIT
|
$
|
619,098
|
$
|
47,226
|
$
|
734,445
|
$
|
17,965
|
$
|
21,014
|
||||||
|
|
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
December
31, 2005. Based upon their evaluation of these disclosure controls
and
procedures, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures were effective
as of
December 31, 2005 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) material information
relating
to us, including our consolidated subsidiaries, was made known to them
by others
within those entities, particularly during the period in which this
Annual
Report on Form 10-K was being prepared.
Management’s
Report on Internal Control over Financial Reporting
.
The
report of management required under this Item 9A is contained in Item
7 of Part
II of this Annual Report on Form 10-K under the heading “Management’s Annual
Report on Internal Control over Financial Reporting.”
Attestation
Report of Independent Registered Public Accounting Firm.
The
attestation report required under this Item 9A is contained in Item
7 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 December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM
9B
-
OTHER
INFORMATION
None.
ITEM
10 -
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information
required by Item 401 of Regulation S-K is included under the captions
“Election
of Directors,” “2005 Committees of the Board” and “Section 16(a) Beneficial
Ownership Reporting Compliance”, of the Company’s definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 26, 2006 and
such
information is incorporated herein by reference. 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 ethics and a code of conduct that apply
to all our
directors, officers and employees. These codes are available on our
website,
along with our current Corporate Governance Guidelines, at www.regal-beloit.com.
The code of ethics and code of conduct 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
Information
required by Item 402 of Regulation S-K is included in the Company’s definitive
proxy statement for the Annual Meeting of Shareholders to be held
on
April 26, 2006 and such information is incorporated herein by reference;
provided, however, that the subsection entitled “Report of Compensation and
Human Resources Committee on Annual Compensation” shall not be deemed to be
incorporated herein by reference.
ITEM
12
-
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information
required pursuant to Item 403 of Regulation S-K is included under
the caption
“Security Ownership of Certain Beneficial Owners and Management” of the
Company’s definitive proxy statement for the Annual Meeting of Shareholders
to
be held on April 26, 2006 and such information is incorporated herein by
reference.
Equity
Compensation Plan Information
|
Number
of securities to be issued upon exercise of outstanding
options, warrants
and rights
|
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 column
(a))
|
||||||||
|
Plan
Category
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans approved
by
security holders
|
1,798,317
|
|
23.27
|
875,075
|
||||||
|
Equity
compensation plans not
approved
by security holders
|
---
|
---
|
---
|
|||||||
|
Total
|
1,798,317
|
$
|
23.27
|
875,075
|
||||||
ITEM
13
-
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Information
required pursuant to Item 404 of Regulation S-K is included under
the caption
“Other Information About the Board - Certain Relationships and Related
Transactions” of the Company’s definitive proxy statement for the Annual Meeting
of Shareholders to be held on April 26, 2006 and such information is
incorporated herein by reference.
ITEM
14
-
PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by this item is hereby incorporated by reference
from the
caption “Audit Committee Report” of the Company’s definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 26, 2006 and such
information is incorporated herein by reference.
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 60-62.
(c)
See
(a)
2. above
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/
D
AVID
A.
B
ARTA
|
|
|
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/
H
ENRY
W.
K
NUEPPEL
|
Chief
Executive Officer and Director
|
March
13, 2006
|
|
Henry
W. Knueppel
|
(Principal
Executive Officer)
|
|
|
/s/
D
AVID
A.
B
ARTA
|
Vice
President, Chief Financial Officer
|
March
13, 2006
|
|
David
A. Barta
|
(Principal
Accounting & Financial Officer)
|
|
|
/s/
J. R
EED
C
OLEMAN
|
Director
|
March
13, 2006
|
|
J.
Reed Coleman
|
||
|
/s/
T
HOMAS
J.
F
ISCHER
|
Director
|
March
13, 2006
|
|
Thomas
J. Fischer
|
||
|
/s/
S
TEPHEN
N.
G
RAFF
|
Director
|
March
13, 2006
|
|
Stephen
N. Graff
|
||
|
/s/
C
URTIS
W.
S
TOELTING
|
Director
|
March
13, 2006
|
|
Curtis
W. Stoelting
|
REGAL-BELOIT
CORPORATION
Index
to Financial Statements
And
Financial Statement Schedule
|
Page(s)
In
|
||||
|
Form
10-K
|
||||
|
(1)
|
Financial
Statements:
|
|||
|
31
|
||||
|
33
|
||||
|
34
|
||||
|
35
|
||||
|
36
|
||||
|
37
|
||||
|
Page(s)
In
|
||||
|
Form
10-K
|
||||
|
(2)
|
Financial
Statement Schedule:
|
|||
|
|
58
|
|||
|
|
59
|
All
other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.
To
the
Board of Directors and Shareholders of REGAL-BELOIT CORPORATION:
We
have
audited the consolidated financial statements of REGAL-BELOIT CORPORATION
and
subsidiaries (the “Company”) as of December 31, 2005 and 2004, and for each of
the three years in the period ended December 31, 2005, management’s assessment
of the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2005, and the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2005, and have issued
our reports
thereon dated March 7, 2006. Our audits also included the consolidated
financial
statement schedule of the Company listed in the accompanying index
at Item 15.
This consolidated financial statement schedule is the responsibility
of the
Company’s management. Our responsibility is to express an opinion based on
our
audits. 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.
DELOITTE
& TOUCHE LLP
Milwaukee,
Wisconsin
March
7,
2006
SC
HEDULE
II
REGAL-BELOIT
CORPORATION
VALUATION
AND QUALIFYING ACCOUNTS
Allowance
for Doubtful Accounts:
|
(In
Thousands of Dollars)
|
||||||||||||||
|
Balance
Beginning
of
Year
|
Provision
For
Losses
|
Write-offs,
Net of
Recoveries
|
Adjustments
Related to
Acquisitions
|
Balance
End
of
Year
|
||||||||||
|
Year
Ended December 31, 2005
|
$
|
2,376
|
$
|
890
|
$
|
(418
|
)
|
$
|
(195
|
)
|
$
|
2,653
|
||
|
Year
Ended December 31, 2004
|
$
|
1,432
|
$
|
428
|
$
|
(641
|
)
|
$
|
1,157
|
$
|
2,376
|
|||
|
Year
Ended December 31, 2003
|
$
|
1,465
|
$
|
608
|
$
|
(641
|
)
|
$
|
-0-
|
$
|
1,432
|
|||
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 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
December 31, 2004 (File No. 001-07283)]
|
|
|
3.1
|
Articles
of Incorporation of the Registrant [Incorporated by reference
to Exhibit B
to REGAL-BELOIT CORPORATION’S Definitive Proxy Statement on Schedule 14A
for the 1994 Annual Meeting of Shareholders (File No.
001-07283)]
|
|
|
3.2
|
Bylaws
of the Registrant, as amended, filed on REGAL-BELOIT CORPORATION’S Current
Report on Form 8-K dated April 28, 2005, are hereby incorporated
by
reference.
|
|
|
4.1
|
Articles
of Incorporation and Bylaws of the Registrant [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 (File 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
|
Registration
Rights Agreement, dated April 5, 2004, among REGAL-BELOIT
CORPORATION,
Banc of America Securities LLC, Deutsche Bank Securities
Inc., Wachovia
Capital Markets, LLC and Robert W. Baird & Co. Incorporated.
[Incorporated by reference to Exhibit 4.5 to REGAL-BELOIT
CORPORATION’S
Registration Statement on Form S-3 filed on June 21, 2004
(File No.
333-116706)]
|
|
|
4.6
|
Rights
Agreement, dated as of January 28, 2000, between REGAL-BELOIT
CORPORATION
and BankBoston, N.A. [Incorporated by reference to Exhibit
4.1 to
REGAL-BELOIT CORPORATION’S Registration Statement on Form 8-A
(Registration No. 1-7283) filed January 31, 2000]
|
|
|
4.7
|
Amendment
effective as of June 11, 2002, to the Rights Agreement,
dated as of
January 28, 2000, between REGAL-BELOIT CORPORATION and
BankBoston, N.A.
originally filed as Exhibit 4.1 and incorporated on REGAL-BELOIT
CORPORATION’S Registration Statement on Form 8-A (File No. 001-07283)
and
on REGAL-BELOIT CORPORATION’S current report on Form 8-K dated
January 31, 2000. [Incorporated by reference to Exhibit 4.6 to
REGAL-BELOIT CORPORATION’S Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002]
|
|
4.8
|
Second
Amendment to Rights Agreement, dated as of November 12,
2004, between
REGAL-BELOIT CORPORATION and EquiServe Trust Company, N.A.
[Incorporated
by reference to Exhibit 4.3 to REGAL-BELOIT CORPORATION’S Report on Form
8-A/A filed on November 18, 2004 (File No. 001-07283)]
|
|
|
4.9
|
Third
Amendment to Rights Agreement, dated as of December 31,
2004, between
REGAL-BELOIT CORPORATION and EquiServe Trust Company, N.A.
[Incorporated
by reference to Exhibit 4.4 to REGAL-BELOIT CORPORATION’S Report on Form
8-A/A filed on January 6, 2005 (File No. 001-07283)]
|
|
|
4.10
|
Shareholder
Agreement, dated as of December 31, 2004, between REGAL-BELOIT
CORPORATION
and General Electric Company. [Incorporated by reference
to Exhibit 4 to
REGAL-BELOIT CORPORATION’S Current Report on Form 8-K filed on January 6,
2005 (File No. 001-07283)]
|
|
|
4.11
|
Letter
Agreement, dated as of May 31, 2005, between REGAL-BELOIT
CORPORATION and
General Electric Company. [Incorporated by reference to
Exhibit 4.1 to
REGAL-BELOIT CORPORATION’S Current Report on Form 8-K filed on June 6,
2005 (File No. 001-07283)]
|
|
|
4.12
|
Amended
and Restated Credit Agreement, dated as of May 5, 2004,
among REGAL-BELOIT
CORPORATION, various financial institutions, M&I Marshall & Ilsley
Bank as Administrative Agent and Swing Line Bank, and Bank
of America,
N.A. as Syndication Agent. [Incorporated by reference to
Exhibit 10.1 to
REGAL-BELOIT CORPORATION’S Quarterly Report on Form 10-Q for the quarter
ended June 29, 2004 (File No. 001-07283)]
|
|
|
4.13
|
First
Amendment, dated December 30, 2004, to the Amended and
Restated Credit
Agreement, dated as of May 5, 2004, among REGAL-BELOIT
CORPORATION,
various financial institutions, Bank of America, N.A.,
as Syndication
Agent, and M&I Marshall and Ilsley Bank, as Administrative Agent.
[Incorporated by reference to Exhibit 10.1 to REGAL-BELOIT
CORPORATION’S
Current Report on Form 8-K filed on January 5, 2005 (File
No.
001-07283)]
|
|
4.14
|
Second
Amendment, dated January 25, 2005, to the Amended and Restated
Credit
Agreement, dated as of May 5, 2004, among REGAL-BELOIT
CORPORATION,
various financial institutions, Bank of America, N.A.,
as Syndication
Agent, and M&I Marshall and Ilsley Bank, as Administrative Agent.
[Incorporated by reference to Exhibit 10.1 to REGAL-BELOIT
CORPORATION’S
Quarterly Report on Form 10-Q for the quarter ended March
31, 2005 (File
No. 001-07283)]
|
|
|
10.1*
|
REGAL-BELOIT
CORPORATION Stock Option Deferral Policies and Procedures
|
|
|
10.2*
|
1987
Stock Option Plan [Incorporated by reference to Exhibit
10.3 to
REGAL-BELOIT CORPORATION’S Registration Statement on Form S-1
(Registration No. 33-25363) dated November 4, 1988 (File
No.
001-07283)]
|
|
|
10.3*
|
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)]
|
|
|
10.4*
|
1998
Stock Option Plan, as amended [Incorporated by reference
to REGAL-BELOIT
CORPORATION’S Registration Statement on Form S-8 (File No.
333-84779)]
|
|
|
10.5*
|
REGAL-BELOIT
CORPORATION Retirement Plans specifically incorporating:
LEESON Electric
401(k) Plan [Incorporated by reference to REGAL-BELOIT
CORPORATION’S
Registration Statement on Form S-8 (File No. 333-108092)]
|
|
|
10.6*
|
2003
Equity Incentive Plan [Incorporated by reference to REGAL-BELOIT
CORPORATION’S Registration Statement on Form S-8 (File No.
333-110061)]
|
|
|
10.7*
|
Key
Executive Employment and Severance Agreement, dated as
of June 18, 2001,
between James L. Packard and REGAL-BELOIT CORPORATION [Incorporated
by
reference to Exhibit 10.9 to REGAL-BELOIT CORPORATION’S Annual Report on
Form 10-K for the year ended December 31, 2001 (File No.
001-07283)]
|
|
10.8*
|
Form
of Key Executive Employment and Severance Agreement between
REGAL-BELOIT
CORPORATION and each of Henry W. Knueppel and Kenneth F.
Kaplan.
[Incorporated by reference to Exhibit 10.5 to REGAL-BELOIT
CORPORATION’S
Annual Report on Form 10-K for the year ended December
31, 2002 (File No.
001-07283)]
|
|
|
10.9*
|
Form
of Agreement for Stock Option Grant is incorporated herein
by reference to
Exhibit 10.9 to RBC’S Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
|
|
|
10.10*
|
Form
of Restricted Stock Agreement is incorporated herein by
reference to
Exhibit 10.10 to REGAL-BELOIT CORPORATION’S Annual Report on Form 10-K for
the fiscal year ended December 31, 2005.
|
|
|
10.11*
|
Target
Supplemental Retirement Plan for designated Officers and
Key Employees is
incorporated herein by reference to Exhibit 10.11 to REGAL-BELOIT
CORPORATION’S Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
|
|
|
10.12*
|
Form
of Participation Agreement for Target Supplemental Retirement
Plan is
incorporated herein by reference to Exhibit 10.12 to REGAL-BELOIT
CORPORATION’S Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
|
|
|
21
|
Subsidiaries
of REGAL-BELOIT CORPORATION, filed herein.
|
|
|
23
|
Consent
of Independent Auditors, filed herein.
|
|
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002, filed herein.
|
|
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002, filed herein.
|
|
|
32
|
Section
1350 Certifications of the Chief Executive Officer and
Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, filed
herein.
|
|
|
99.2
|
Proxy
Statement of REGAL-BELOIT CORPORATION for the 2006 Annual
Meeting of
Shareholders
|
|
|
[The
Proxy Statement for the 2006 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 2006
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.