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 29, 2007
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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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 | None | ||
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Indicate
by check mark if the registrant is well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
T
No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
£
No
T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
T
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
T
Accelerated
filer
£
Non-accelerated
filer Smaller reporting
company
£
(Do not
check if a smaller reporting company)
Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
£
No
T
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2007 was approximately $1.5 billion.
On
February 22, 2008, the registrant had outstanding 31,348,333 shares of common
stock, $.01 par value, which is registrant’s only class of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information contained in the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 2008 is incorporated by reference into Part
III, hereof.
REG
AL BELOIT CORPORATION
ANNUAL
REPORT ON FORM 10-K
FOR
YEAR ENDED DECEMBER 29, 2007
TABLE
OF CONTENTS
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Page
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PA
RT I
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Business
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3
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Item 1A
-
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Risk
Factors
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9
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Unresolved
Staff Comments
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13
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Properties
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13
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Legal
Proceedings
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14
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Submission
of Matters to a Vote of Security Holders
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14
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PART
II
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Market
for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
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15
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Selected
Financial Data
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17
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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17
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Quantitative
and Qualitative Disclosures About Market Risk
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23
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Financial
Statements and Supplementary Data
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24
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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50
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Controls
and Procedures
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50
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Other
Information
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51
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PART
III
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Directors, Executive
Officers and Corporate Governance of the Registrant
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51
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Executive
Compensation
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51
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| Item 12 - |
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
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51
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Certain
Relationships and Related Transactions and Director
Independence
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51
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Principal
Accountant Fees and Services
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51
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PART
IV
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Exhibits,
Financial Statement Schedule
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52
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CAUTIONARY
STATEMENT
This Annual Report contains
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995.
Forward-looking statements represent our
management’s judgment regarding future events. In many cases, you can
identify forward-looking statements by terminology such as “may,”
“will,” “plan,” “expect,” “anticipate,” “estimate,” “believe,” or
“continue” or the negative of these terms or other similar
words. Actual results and events could differ materially and
adversely from those contained in the forward-looking statements due to a number
of factors, including:
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·
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economic
changes in global markets where we do business, such as currency exchange
rates, inflation rates, interest rates, recession, foreign government
policies and other external factors that we cannot
control;
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·
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unanticipated
fluctuations in commodity prices and raw material
costs;
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·
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cyclical
downturns affecting the global market for capital
goods;
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·
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unexpected
issues and costs arising from the integration of acquired companies and
businesses;
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·
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marketplace
acceptance of new and existing products including the loss of, or a
decline in business from, any significant
customers;
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·
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the
impact of capital market transactions that we may
effect;
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·
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the
availability and effectiveness of our information technology
systems;
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·
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unanticipated
costs associated with litigation
matters;
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·
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actions
taken by our competitors;
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·
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difficulties
in staffing and managing foreign operations;
and
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·
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other
risks and uncertainties including but not limited to those described in
Item 1A-Risk Factors
of this Form 10-K and from time to time in our reports filed with
U.S. Securities and Exchange
Commission.
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All
subsequent written and oral forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their entirety by the
applicable cautionary statements. The forward-looking statements
included in this Form 10-K are made only as of their respective dates, and we
undertake no obligation to update these statements to reflect subsequent events
or circumstances. See also
Item 1A - Risk
Factors
.
PART
I
Unless
the context requires otherwise, references in this Annual Report to “we,” “us,”
“our” or the “Company” refer collectively to Regal Beloit Corporation and its
subsidiaries.
References
in an Item of this Annual Report on Form 10-K to information contained in our
Proxy Statement for the Annual Meeting of Shareholders of the Company to be held
on April 28, 2008 (the “2008 Proxy Statement”) or to information contained in
specific sections of the Proxy Statement, incorporate the information into that
Item by reference.
ITEM
1 -
BUSINESS
OUR
COMPANY
We are
one of the largest global manufacturers of commercial, industrial, and 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 and manual valve actuators. 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 combination 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,
Australia, Thailand and Europe.
Our
growth strategy includes driving organic growth through innovative new products,
new customers, new opportunities at existing customers and participating in fast
growth geographic markets. Additionally, we seek to grow through
strategic, value creating acquisitions. We consider our acquisition
process, including identification, due diligence, and integration, to be a core
competency of the Company.
Our
business initiatives include:
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·
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Innovation:
fueling our growth by delivering new products that address customer needs
such as energy efficiency, system cost reduction and improved
reliability;
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·
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Globalization:
expanding our global presence to participate in high growth markets,
“catch” our customers as they expand globally and remain cost
competitive;
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·
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Customer
Centricity: making continuous improvements in all of the operations that
touch our customers so that our customers feel an improved
experience;
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·
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Digitization:
employing IT tools to improve the efficiency and productivity of our
business and our customers’ businesses;
and
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·
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Lean
Six Sigma: utilizing Lean Six Sigma to drive continuous improvements in
all of our manufacturing and back office operations as well as in the
quality of our products.
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OPERATING
SEGMENTS
We have
two operating segments: Electrical and
Mechanical. Financial information on our operating segments for the
three years ending December 29, 2007 is contained in Note 12 of Notes to the
Consolidated Financial Statements.
ELECTRICAL
SEGMENT
We
believe our motor products are uniquely positioned to help our customers and end
consumers achieve greater energy efficiency, resulting in significant cost
savings for the consumer and preservation of natural resources and our
environment. We estimated that approximately 60% of all electricity generated in
the U.S. is consumed by electric motors. Our increasingly efficient
motor designs allow current motor products to be significantly more energy
efficient than previous models. Our Electrical segment includes a full line of
AC and DC commercial and industrial electric motors, HVAC motors, electric
generators and controls, capacitors and electrical connecting
devices. Our Electrical segment developed in the mid 1990’s with a
new strategic focus to establish our Company as a significant manufacturer of
industrial electric motors, complementing our mechanical products businesses
which serve similar markets and whose products were often used in combination
with a motor. Beginning with our 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 largest producers of industrial electric motors
serving the North American market. In 2004, we separately acquired
two electric motor businesses from General Electric Company (“GE”) which were
natural extensions to our core electric motor product lines. 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 (“HVAC”) applications, as well as 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.
During
2007, the Company completed acquisitions of four additional Electrical segment
businesses.
On August
31, 2007, the Company completed the acquisition of certain assets comprising the
commercial and industrial division of the Fasco Motor business (“Fasco”) from
Tecumseh Products, Inc. and certain of its affiliates. On August 31,
2007, the Company also separately acquired the stock of Jakel Incorporated
(“Jakel”). Both of the acquired businesses manufacture and market
motors and blower systems for a variety of air moving applications including
alternative fuel systems, water heaters, HVAC systems and other commercial
products. In January 2008, the Company announced that it is
consolidating the Fasco and Jakel businesses under the Fasco brand
name. The acquisition provides expanded system solutions for our
customers, and expands our geographic manufacturing and commercial footprints
into Thailand and Australia.
On
October 12, 2007, the Company acquired Morrill Motors. The acquired
business is a leading designer and manufacturer of fractional horsepower motors
and components for the commercial refrigeration and freezer
markets. Included in the motor offering are technology based variable
speed products. The acquisition expands our standard and high
efficiency system solution for the commercial refrigerator and freezer end
markets.
On
October 29, 2007, the Company acquired the Alstom motors and fans business in
India. The business is located in Kolkata, India and manufactures and
markets a full range of low and medium voltage industrial motors and fans for
the industrial and process markets in India. Alstom is noted for high
quality process duty motors with a full range from 1 to 3500 hp. The
acquisition expands our commercial and manufacturing presence in India, making
us one of the largest motor manufacturers in India. The acquired
Alstom business has been re-branded as Marathon Electric Motors (India)
Ltd.
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 3500 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
motors are vital components of an HVAC system and are used to move air into and
away from furnaces, heat pumps, air conditioners, ventilators, fan filter boxes
and humidifiers. We believe that a majority of our HVAC motors are used in
applications that replace existing equipment, with the remainder used in new
equipment applications. The business enjoys a large installed base of equipment
and long-term relationships with its major customers.
Our power generation business, which includes
electric generators and power generation components and controls, represents a
growing portion of our Electrical segment’s net sales. The market for
electric power generation components and controls has grown in recent years as a
result of a desire on the part of end users to reduce losses due to power
disturbances and the increased need for prime power in certain
applications. Our generators are used in industrial, agricultural,
marine, military, transportation and other applications.
We
leverage efficiencies across our motor and power generation
operations. We centralize the manufacturing, purchasing, engineering,
accounting, information technology and quality control activities of our
Electrical segment. Furthermore, we specifically foster the sharing
of best practices across each of the Electrical segment businesses and create
focused centers of excellence in each of our manufacturing
functions.
SEGMENT
BUSINESSES
The
following is a description of our major Electrical product businesses and the
primary products that they manufacture and market:
Fasco
Motors.
Manufactures motors and blower systems for air moving
applications including alternative fuel systems, water heaters and HVAC
systems. The acquired Jakel, Inc. business was consolidated with
Fasco in January 2008 under the Fasco brand name.
GE Commercial Motors by REGAL
BELOIT
. Manufactures a full line of motors for pump, compressor,
commercial and residential HVAC applications. Also, 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 Electric Motors (India)
Ltd. (Alstom acquired business).
The acquired Alstom business
has been re-branded as Marathon Electric Motors (India)
Ltd. Manufactures a full range (from 1 to 3500 horsepower) of low and
medium voltage industrial motors and fans for the industrial and process markets
in India.
Marathon
Generators
. Manufactures AC generators from five kilowatts to
four megawatts that primarily serve the standby power, prime power,
refrigeration, industrial and irrigation markets.
Marathon Special Products
.
Manufactures fuse holders, terminal blocks, and power blocks primarily for the
HVAC, telecommunications, electric control panel, utilities and transportation
markets.
Morrill
Motors
. Manufactures fractional horsepower motors and
components for the commercial refrigeration and freezer markets.
Thomson Technology
.
Manufactures automatic transfer switches, paralleling switchgear and controls,
and systems controls primarily for the electric power generation
market.
MECHANICAL
SEGMENT
Our
Mechanical segment includes a broad array of mechanical motion control products
including: standard and custom worm gear, bevel gear, helical gear
and concentric shaft gearboxes; marine transmissions; high-performance
after-market automotive transmissions and ring and pinions; custom gearing;
gearmotors; and manual valve actuators. Our gear and transmission related
products primarily control motion by transmitting power from a source, such as a
motor or engine, to an end use, such as a conveyor belt, usually reducing speed
and increasing torque in the process. Our valve actuators are used primarily in
oil and gas, water distribution and treatment and chemical processing
applications. Mechanical products are sold to original equipment manufacturers,
distributors and end users across many industry segments.
SEGMENT
BUSINESSES
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 worm and bevel gear valve actuators
primarily for the oil, gas, wastewater and water distribution
markets.
Durst
.
Manufactures
standard and specialized industrial transmissions, hydraulic pump drives and
gears for turbines used in power generation primarily for the construction,
agriculture, energy, material handling, forestry, lawn and garden and railroad
maintenance markets.
5
Grove Gear/Electra-Gear . Manufactures standard and custom industrial gear reducers and specialized aluminum gear reducers and gearmotors primarily for the material handling, food processing, robotics, healthcare, power transmission, medical equipment and packaging markets.
Hub City/Foote-Jones
.
Manufactures gear drives, sub-fractional horsepower gearmotors, mounted
bearings, large-scale parallel shaft and right-angle gear drives and accessories
primarily for the packaging, construction, material handling, healthcare, food
processing markets, mining, oil, pulp and paper, forestry, aggregate,
construction and steel markets.
Mastergear
. Manufactures
manual valve actuators for liquid and gas flow control primarily for the
petrochemical processing, fire protection and wastewater markets.
Opperman Mastergear, Ltd
.
Manufactures valve actuators and industrial gear drives primarily for the
material handling, agriculture, mining and liquid and gas flow control
markets.
Richmond Gear/Velvet Drive
Transmissions
. Manufactures ring and pinions and transmissions primarily
for the high-performance automotive aftermarket, and marine and industrial
transmissions primarily for the pleasure boat, off-road vehicle and forestry
markets.
THE
BUILDING OF OUR BUSINESS
Our
growth from our founding as a producer of high-speed cutting tools in 1955 to
our current size and status has largely been the result of the acquisition and
integration of businesses to build a strong multi-product offering. Our senior
management has substantial experience in the acquisition and integration of
businesses, aggressive cost management, and efficient manufacturing techniques,
all of which represent activities that are critical to our long-term growth
strategy. In the preceeding ten years we have acquired and developed
our Electrical segment businesses into one of the largest producers of electric
motors serving the North America market. We consider the
identification of acquisition candidates, the purchase and integration of
targets to be a core competency for the Company. The following table summarizes
select Electrical segment acquisitions since 1997.
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Product
Line
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Year
Acquired
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Annual
Revenues
at
Acquisition
(in
millions)
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Product Listing at
Acquisition
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Electrical
Products
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|||||
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Fasco
Motors
|
2007
|
$
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299
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Motor
and blower systems for air moving applications
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Jakel,
Inc.
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2007
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86
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Motor
and blower systems for air moving applications
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Morrill
Motors
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2007
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40
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Fractional
horsepower motors for commercial refrigeration and freezer
markets
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Alstom
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2007
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67
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Full
line of low and medium voltage industrial motors for Indian domestic
markets
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Sinya
Motors
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2006
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39
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Fractional
and sub-fractional HVAC motors
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GE
Commercial AC Motors
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2004
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144
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AC
motors for pump, compressor, equipment and commercial
HVAC
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GE
HVAC Motors and Capacitors
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2004
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442
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Full
line of motors and capacitors for residential and commercial HVAC
systems
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LEESON
Electric Corporation
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2000
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175
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AC
motors (to 350 horsepower) gear reducers, gearmotors and
drives
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Thomson
Technology, Inc.
|
2000
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14
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Automatic
transfer switches, paralleling switchgear and controls and controls
systems
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Lincoln
Motors
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1999
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50
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AC
motors (1/4 to 800 horsepower)
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Marathon
Electric Manufacturing Corporation
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1997
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245
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AC
motors (to 500 horsepower), AC generators (5 kilowatt to 2.5 megawatt),
fuse holders, terminal blocks and power
blocks
|
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SALES,
MARKETING AND DISTRIBUTION
We sell
our products directly to original equipment manufacturers (“OEMs”), distributors
and end-users across many markets. We have multiple business units,
with each unit typically having its own branded product offering and sales
organization. These sales organizations consist of varying combinations of our
own internal direct sales people as well as exclusive and non-exclusive
manufacturers’ representative organizations.
MARKETS
AND COMPETITORS
The
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 billion segment of the overall domestic market. We believe approximately 60%
of all electricity generated in the U.S. runs through electric
motors. We believe we are among the largest producers of commercial
and industrial motors and HVAC motors. In addition, we believe
that we are the largest electric generator manufacturer in the United States
that is not affiliated with a diesel engine manufacturer. Major domestic
competitors for our electrical products include Baldor Electric, U.S. Electric
Motors (a division of Emerson Electric Co.), A. O. Smith Corporation, General
Electric Company and Newage (a division of Cummins, Inc). Major
foreign competitors include Siemens AG, Toshiba Corporation, Weg S.A.,
Leroy-Somer, Inc. and ABB Ltd.
We serve
various mechanical product markets and compete with a number of different
companies depending on the particular product offering. We believe that we are a
leading manufacturer of several mechanical products and that we are the leading
manufacturer in the United States of worm gear drives and bevel gear drives. Our
competitors in these markets include Boston Gear (a division of Altra Industrial
Motion, Inc.), Dodge (a division of Baldor Electric), Emerson Electric Co. and
Winsmith (a division of Peerless-Winsmith, Inc.). Major foreign competitors
include SEW Eurodrive GmbH & Co., Flender GmbH, Nord, Sumitomo Corporation
and Zahnrad Fabrik GmbH Co.
During
the past several years, niche product market opportunities have become more
prevalent due to changing market conditions. Manufacturers, who
historically may have made component products for inclusion in their finished
goods, have chosen to outsource their requirements to specialized manufacturers
like us because we can make these products more cost effectively. In addition,
we have capitalized on this competitive climate by making acquisitions and
increasing our manufacturing efficiencies. Some of these acquisitions have
created new opportunities by allowing us to enter new markets in which we had
not been involved. In practice, our operating units have sought out specific
niche markets concentrating on a wide range of customers and applications. We
believe that we compete primarily on the basis of quality, price, service and
our promptness of delivery. We had one customer that accounted for
more than 10% of our consolidated net sales in each of the three fiscal years
ending December 29, 2007.
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 ECM motor
technology. An ECM motor is a brushless DC electric motor with
integrated speed control made possible through sophisticated electronic and
sensing technology. ECM motors operate at variable speeds with attractive
performance characteristics versus competitive variable speed solutions in
comfort, energy efficiency, motor life and noise. GE developed the
first generation ECM motors over 15 years ago. ECM technology is
protected by over 125 patents, and we acquired from GE intellectual property and
usage rights relating to ECM technology. ECM motors offer
significantly greater temperature and air quality control as well as increased
energy efficiency.
While we
believe that our brands and innovation are important to our continued growth and
strong financial results, we do not consider any individual brand or patent,
except for the ECM related patents, to be material.
MANUFACTURING
AND OPERATIONS
We have
developed and acquired global operations in lower cost locations such as Mexico,
India, Thailand, and China that complement our flexible, rapid response
operations in the United States, Canada and Europe. Our vertically
integrated manufacturing operations, including our own aluminum die casting and
steel stamping operations are an important element of our rapid response
capabilities. In addition, we have an extensive internal logistics
operation and a network of distribution facilities with the capability to modify
stock products to quickly meet specific custom requirements in many
instances. This gives us a competitive advantage as we are able to
deliver a customer’s unique product when and where they want
it.
We
manufacture a majority of the products that we sell, but also strategically
outsource components and finished goods to an established global network of
suppliers. Although we have aggressively pursued global sourcing to
reduce our overall costs, we generally maintain a dual sourcing
capability in our existing domestic facilities to ensure a reliable supply
source for our customers. We regularly invest in machinery and
equipment and other improvements to, and maintenance of, our facilities.
Additionally, we have typically obtained significant amounts of quality capital
equipment as part of our acquisitions, often increasing overall capacity and
capability. Base materials for our products consist primarily of:
steel in various types and sizes, including bearings and weldments; copper
magnet wire; and ferrous and non-ferrous castings. We purchase our
raw materials from many suppliers and, with few exceptions, do not rely on any
single supplier for any of our base materials.
We have
also continued to upgrade our manufacturing equipment and processes, including
increasing our use of computer aided manufacturing systems, developing our own
testing systems, and the implementation of Lean Six Sigma. We have
trained over 700 people in Six Sigma in the last two years. Every
facility has been introduced to Lean Six Sigma, resulting in approximately $20
million in cost savings since the program began in 2005. 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, India, China, Australia, Thailand and
Europe. Our Electrical segment currently includes 68 manufacturing,
service and distribution facilities, of which 32 are principal manufacturing
facilities. The Electrical segment’s present operating facilities
contain a total of approximately 6.0 million square feet of space of which
approximately 2.1 million square feet are leased. Our Mechanical
segment currently includes 13 manufacturing, service and distribution
facilities, of which 5 are principal manufacturing facilities. The
Mechanical segment’s present operating facilities contain a total of
approximately 1.1 million square feet of space of which approximately 4% is
leased. Our principal executive offices are located in Beloit,
Wisconsin in an owned approximately 54,000 square foot office
building. We believe our equipment and facilities are well maintained
and adequate for our present needs.
BACKLOG
Our
business units have historically shipped the majority of their products in the
month the order is received. 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 29, 2007, our backlog was $255.7
million, as compared to $174.6 million on December 30, 2006. We
believe that virtually all of our backlog is shippable in 2008.
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 29, 2007, the Company employed approximately
17,900 worldwide employees. We consider our employee relations to be
very good.
ENVIRONMENTAL
MATTERS
We are
currently involved with environmental proceedings related to certain of our
facilities (see also
Item 3 –
Legal Proceedings
). Based on available information, we believe
that the outcome of these proceedings and future known environmental compliance
costs will not have a material adverse effect on our financial position or
results of operations.
EXECUTIVE
OFFICERS OF THE COMPANY
The
names, ages, and positions of the executive officers of the Company as February
15, 2008, are listed below along with their business experience during the past
five years. Officers are elected annually by the Board of Directors
at the Meeting of Directors immediately following the Annual Meeting of
Shareholders in April. There are no family relationships among these
officers, nor any arrangements of understanding between any officer and any
other persons pursuant to which the officer was selected.
|
Name
|
Age
|
Position
|
Business Experience
and Principal Occupation
|
|
Henry
W. Knueppel
|
59
|
Chairman
and
Chief
Executive Officer
|
Elected
Chairman in April 2006; elected Chief Executive Officer April 2005; served
as President from April 2002 to December 2005 and Chief Operating Officer
from April 2002 to April 2005; served as Executive Vice President from
1987 to April 2002; joined the Company in 1979.
|
|
Mark
J. Gliebe
|
47
|
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
|
45
|
Vice
President and
Chief
Financial Officer
|
Joined
the Company in June 2004 and was elected Vice President, Chief Financial
Officer in July 2004. Prior to joining the Company, Mr. Barta
served in several financial management positions for Newell Rubbermaid
Inc. from 1995 to June 2004, serving most recently as Chief Financial
Officer Levolor/Kirsch Division. His prior positions during
this time included Vice President – Group Controller Corporate Key
Accounts, Vice President – Group Controller Rubbermaid Group and Vice
President Investor Relations.
|
|
Paul
J. Jones
|
37
|
Vice
President, General Counsel
and
Secretary
|
Joined
the Company in September 2006 and was elected Vice President, General
Counsel and Secretary in September 2006. Prior to joining the
Company, Mr. Jones was a partner with the law firm of Foley & Lardner
LLP where he worked since 1998.
|
|
Terry
R. Colvin
|
52
|
Vice
President
Corporate
Human Resources
|
Joined
the Company in September 2006 and was elected Vice President Corporate
Human Resources in January 2007. Prior to joining the Company,
Mr. Colvin was Vice President of Human Resources for Stereotaxis
Corporation from 2005 to 2006. From 2003 to 2005, Mr. Colvin
was a Plant Operations consultant. In 2003 and prior, Mr.
Colvin served in several human resources positions for Sigma-Aldrich
Corporation, serving most recently as Vice President of Human Resources
from 1995 to 2003.
|
WEBSITE
DISCLOSURE
The
Company’s Internet address is www.regalbeloit.com. We make available
free of charge (other than an investor’s own Internet access charges) through
our Internet website our Annual Report on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, and amendments to those reports, as soon
as reasonably practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange Commission. We
are not including the information contained on or available through our website
as a part of, or incorporating such information by reference into, this Annual
Report on Form 10-K.
ITEM
1A – RISK FACTORS
You
should carefully consider each of the risks described below, together with all
of the other information contained in this Annual Report on Form 10-K, before
making an investment decision with respect to our securities. If any
of the following risks develop into actual events, our business, financial
condition or results operations could be materially and adversely affected and
you may lose all or part of your investment.
We
operate in highly competitive electric motor, power generation and mechanical
motion control markets.
The
electric motor, power generation and mechanical motion control markets are
highly competitive. Some of our competitors are larger and have
greater financial and other resources than we do. There can be no
assurance that our products will be able to compete successfully with the
products of these other companies.
The
failure to obtain business with new products or to retain or increase business
with redesigned existing or customized products could also adversely affect our
business. It may be difficult in the short-term for us to obtain new
sales to replace any unexpected decline in the sale of existing or customized
products. We may incur significant expense in preparing to meet
anticipated customer requirements, which may not be recovered.
Cyclicality
adversely affects us.
Our
business is cyclical and dependent on industrial and consumer spending and is
therefore impacted by the strength of the economy generally, interest rates and
other factors. Economic factors adversely affecting OEM production
and consumer spending could adversely impact us. During periods of
expansion in OEM production, we generally have benefited from increased demand
for our products. Conversely, during recessionary periods, we have
been adversely affected by reduced demand for our products.
In
our HVAC motor business, we depend on revenues from several significant
customers, and any loss, cancellation or reduction of, or delay in, purchases by
these customers may have a material adverse effect on our business.
Several
significant customers of our HVAC motors business represent a significant
portion of our revenues. Our success will depend on our continued
ability to develop and manage relationships with these customers. We
expect that significant customer concentration will continue for the foreseeable
future in our HVAC motor business. Our dependence in the HVAC motor
business on sales from a relatively small number of customers makes our
relationship with each of these customers important to our
business. We cannot assure you that we will be able to retain
significant customers. Some of our customers may in the future shift
some or all of their purchases of products from us to our competitors or to
other sources. The loss of one or more of our largest customers, any
reduction or delay in sales to these customers, our inability to develop
relationships successfully with additional customers, or future price
concessions that we may make could have a material adverse effect on our
business.
Our
sales of products incorporated into HVAC systems are seasonal and affected by
the weather; mild or cooler weather could have an adverse effect on our
operating performance.
Many of
our motors are incorporated into HVAC systems that OEMs sell to end
users. The number of installations of new and replacement HVAC
systems or components is higher during the spring and summer seasons due to the
increased use of air conditioning during warmer months. Mild or
cooler weather conditions during the spring and summer season often result in
end users deferring the purchase of new or replacement HVAC systems or
components. As a result, prolonged periods of mild or cooler weather
conditions in the spring or summer season in broad geographical areas could have
a negative impact on the demand for our HVAC motors and, therefore, could have
an adverse effect on our operating performance. In addition, due to
variations in weather conditions from year to year, our operating performance in
any single year may not be indicative of our performance in any future
year.
Our
dependence on, and the price of, raw materials may adversely affect our
profits.
The
principal raw materials used to produce our products are copper, aluminum and
steel. We source raw materials on a global or regional basis, and the
prices of those raw materials are susceptible to significant price fluctuations
due to supply/demand trends, transportation costs, government regulations and
tariffs, changes in currency exchange rates, price controls, the economic
climate and other unforeseen circumstances. If we are unable to pass
on raw material price increases to our customers, our future profitability may
be materially adversely affected.
We
increasingly manufacture our products outside the United States, which may
present additional risks to our business.
As a
result of our recent acquisitions, a significant portion of our net sales are
attributable to products manufactured outside of the United States, principally
in Mexico, India, Thailand and China. Approximately 11,500 of our
over 17,900 total employees and 17 of our 37 principal manufacturing facilities
are located outside the United States. International operations
generally are subject to various risks, including political, societal and
economic instability, local labor market conditions, the imposition of foreign
tariffs and other trade restrictions, the impact of foreign government
regulations, and the effects of income and withholding taxes, governmental
expropriation and differences in business practices. We may incur
increased costs and experience delays or disruptions in product deliveries and
payments in connection with international manufacturing and sales that could
cause loss of revenue. Unfavorable changes in the political,
regulatory, and business climate in countries where we have operations could
have a material adverse effect on our financial condition, results of operations
and cash flows.
We
may be adversely impacted by an inability to identify and complete
acquisitions.
A
substantial portion of our growth has come through acquisitions, and an
important part of our growth strategy is based upon acquisitions. We
may not be able to identify and successfully negotiate suitable acquisitions,
obtain financing for future acquisitions on satisfactory terms or otherwise
complete acquisitions in the future. If we are unable to successfully
complete acquisitions, our ability to grow our company significantly will be
limited.
Goodwill
comprises a significant portion of our total assets, and if we determine that
goodwill has become impaired in the future, net income in such years may be
materially and adversely affected.
Goodwill
represents the excess of cost over the fair market value of net assets acquired
in business combinations. We review goodwill and other intangibles at
least annually for impairment and any excess in carrying value over the
estimated fair value is charged to the results of operations. A
reduction in net income resulting from the write down or impairment of goodwill
would affect financial results and could have a material and adverse impact upon
the market price of our common stock.
Our
leverage could adversely affect our financial health and make us vulnerable to
adverse economic and industry conditions.
We have
incurred indebtedness that is substantial relative to our shareholders’
investment. Our indebtedness has important
consequences. For example, it could:
|
·
|
make
it difficult for us to fulfill our obligations under our credit and other
debt agreements;
|
|
·
|
make
it more challenging for us to obtain additional financing to fund our
business strategy and acquisitions, debt service requirements, capital
expenditures and working capital;
|
|
·
|
increase
our vulnerability to interest rate changes and general adverse economic
and industry conditions;
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
service our indebtedness, thereby reducing the availability of our cash
flow to finance acquisitions and to fund working capital, capital
expenditures, research and development efforts and other general corporate
activities;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and our markets; and
|
|
·
|
place
us at a competitive disadvantage relative to our competitors that have
less debt.
|
In
addition, our credit facility and senior notes require us to maintain specified
financial ratios and satisfy certain financial condition tests, which may
require that we take action to reduce our debt or to act in a manner contrary to
our business objectives. If an event of default under the credit
facility or senior notes the lenders could elect to declare all amounts
outstanding under the applicable agreement, together with accrued interest, to
be immediately due and payable, and a cross default could occur under the terms
of our senior subordinated convertible notes allowing the trustee or the holders
of the notes to declare the principal amount of the notes, together with accrued
interest, to be immediately due and payable.
The
success of the Company is highly dependent on qualified and sufficient staffing.
Our failure to attract or retain qualified personnel could lead to a loss of
revenue or profitability.
Our
success depends, in part, on the efforts and abilities of our senior management
team and key employees. Their skills, experience and industry contacts
significantly benefit our operations and administration. The failure to attract
or retain members of our senior management team and key employees could have a
negative effect on our operating results.
The
Company’s operations are highly dependent on information technology
infrastructure and failures could significantly affect our
business.
We depend
heavily on our information technology infrastructure in order to achieve our
business objectives. If we experience a problem that impairs this
infrastructure, such as a computer virus, a problem with the functioning of an
important IT application, or an intentional disruption of our IT systems by a
third party, the resulting disruptions could impede our ability to record or
process orders, manufacture and ship in a timely manner, or otherwise carry on
our business in the ordinary course. Any such events could cause us to lose
customers or revenue and could require us to incur significant expense to
eliminate these problems and address related security concerns.
We are in
the process of introducing a global Enterprise Resource Planning
(ERP) system that will redesign and deploy a common information system over
a period of several years. As we implement the ERP system, the new system may
not perform as expected. This could have an adverse effect on our
business.
We
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.
We
may be adversely affected by environmental, health and safety laws and
regulations.
We are
subject to various laws and regulations relating to the protection of the
environment and human health and safety and have incurred and will continue to
incur capital and other expenditures to comply with these
regulations. Failure to comply with any environmental regulations
could subject us to future liabilities, fines or penalties or the suspension of
production. In addition, we are currently involved in some
remediation activities at certain sites. If unexpected obligations at
these or other sites or more stringent environmental laws are imposed in the
future, we could be adversely affected.
We
may suffer losses as a result of foreign currency fluctuations.
The net
assets, net earnings and cash flows from our foreign subsidiaries are based on
the U.S. dollar equivalent of such amounts measured in the applicable functional
currency. These foreign operations have the potential to impact our
financial position due to fluctuations in the local currency arising from the
process of re-measuring the local functional currency in the U.S.
dollar. Any increase in the value of the U.S. dollar in relation to
the value of the local currency will adversely affect our revenues from our
foreign operations when translated into U.S. dollars. Similarly, any
decrease in the value of the U.S. dollar in relation to the value of the local
currency will increase our development costs in foreign operations, to the
extent such costs are payable in foreign currency, when translated into U.S.
dollars.
The
operations and success of the Company can be impacted by natural disasters,
terrorism, acts of war, international conflict, political and governmental
actions which could harm our business.
Natural
disasters, acts or threats of war or terrorism, international conflicts, and the
actions taken by the United States and other governments in response to such
events could cause damage or disrupt our business operations, our suppliers, or
our customers, and could create political or economic instability, any of which
could have an adverse effect on our business. Although it is not possible to
predict such events or their consequences, these events could decrease demand
for our products, could make it difficult or impossible for us to deliver
products, or could disrupt our supply chain. The Company may also be
impacted by actions by foreign governments, including currency devaluation,
tariffs and nationalization, where our facilities are located which could
disrupt manufacturing and commercial operations.
The
Company is subject to 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.
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.
Our
stock may be subject to significant fluctuations and volatility.
The
market price of shares of our common stock may be volatile. Among the
factors that could affect our common stock price are those discussed above under
“Risks Factors”
as well
as:
|
·
|
quarterly
fluctuation in our operating income and earnings per share
results;
|
|
·
|
decline
in demand for our products;
|
|
·
|
significant
strategic actions by our competitors, including new product introductions
or technological advances;
|
|
·
|
fluctuations
in interest rates;
|
|
·
|
cost
increases in energy, raw materials or
labor;
|
|
·
|
changes
in revenue or earnings estimates or publication of research reports by
analysts; and
|
|
·
|
domestic
and international economic and political factors unrelated to our
performance.
|
In
addition, the stock markets have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the
trading price of our common stock.
ITEM
1B – UNRESOLVED STAFF COMMENTS
None.
ITEM
2 – PROPERTIES
We have
manufacturing, sales and service facilities throughout the United States and in
Canada, Mexico, India, China, Australia, Thailand and Europe.
Our
Electrical segment currently includes 68 manufacturing, service and distribution
facilities, of which 32 are principal manufacturing facilities. The
Electrical segment’s present operating facilities contain a total of
approximately 6.0 million square feet of space of which approximately 35% are
leased.
Our
Mechanical segment currently includes 13 manufacturing, service and distribution
facilities, of which 5 are principal manufacturing facilities. The
Mechanical segment’s present operating facilities contain a total of
approximately 1.1 million square feet of space of which approximately 4% are
leased.
At
December 29, 2007, the Mechanical segment had three buildings and the Electrical
segment had one building totaling approximately 0.5 million square feet that
were available for sale due to consolidation of manufacturing in other
locations.
Our
principal executive offices are located in Beloit, Wisconsin in an owned
approximately 54,000 square foot office building. We believe our
equipment and facilities are well maintained and adequate for our present
needs.
ITEM
3 - LEGAL PROCEEDINGS
On April
26, 2007, the Company received notice that the U.S. Environmental Protection
Agency (“U.S. EPA”) has filed an action against the Company in the United States
District Court for the Northern District of Illinois seeking reimbursement of
the U.S. EPA’s unreimbursed past and future remediation costs incurred in
cleaning up an environmental site located near a former manufacturing facility
of the Company in Illinois. In 1999, the Company and other parties
identified as potentially responsible parties (“PRPs”) reached an agreement with
the U.S. EPA to partially fund the costs of certain response actions taken with
respect to this site. In 2004, the Company received communications
from the U.S. EPA indicating that the Company was identified as one of three
PRPs regarding additional remedial actions to be taken by the U.S. EPA at this
site. In response, the Company provided to the U.S. EPA its
environmental expert’s assessment of the site in 2004. The Company
believes that it is not a PRP with respect to the site in question and intends
to defend vigorously the associated claim. As of December 29, 2007
amounts that have been recorded in the Company’s financial statements related to
this contingency are not material.
The
Company is, from time to time, party to other lawsuits arising from its normal
business operations. It is believed that the outcome of these
lawsuits will have no material effect on the Company’s financial position or its
results of operations.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
There
were no matters submitted to a vote of security holders during the quarter ended
December 29, 2007.
ITEM
5 - MARKET FOR THE REGISTRANT’S
COMMON EQUITY, RELATED SHAREHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s Common Stock, $.01 par value (“Common Stock”), is traded on the New
York Stock Exchange under the symbol “RBC.” The following table
sets forth the range of high and low closing sales prices for the Common Stock
for the period from January 1, 2006 through December 29, 2007. The
Company submitted its Section 303A.12(a) CEO Certification to the NYSE on
February 26, 2007.
|
2007
|
2006
|
|||||||||||||||||||||||
|
Price
Range
|
Price
Range
|
|||||||||||||||||||||||
|
High
|
Low
|
Dividends
Declared
|
High
|
Low
|
Dividends
Declared
|
|||||||||||||||||||
|
1st
Quarter
|
$ | 51.68 | $ | 43.51 | $ | .14 | $ | 42.87 | $ | 34.82 | $ | .13 | ||||||||||||
|
2nd
Quarter
|
49.94 | 43.76 | .15 | 53.99 | 40.39 | .14 | ||||||||||||||||||
|
3rd
Quarter
|
56.93 | 47.29 | .15 | 46.58 | 38.61 | .14 | ||||||||||||||||||
|
4th
Quarter
|
53.10 | 43.82 | .15 | 54.18 | 42.78 | .14 | ||||||||||||||||||
The
Company has paid 190 consecutive quarterly dividends through January
2008. The number of registered holders of Common Stock as of February
22, 2008 was 660.
The
following table contains detail related to the repurchase of common stock based
on the date of trade during the quarter ended December 29, 2007.
|
2007
Fiscal
Month
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid
per
Share
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
|
Maximum
Number
of
Shares that May
Be
Purchased
Under
the Plan or
Programs
|
|||||
|
September
30 to
November
3
|
-
|
$
|
-
|
-
|
1,225,900
|
||||
|
November
4 to
December
1
|
-
|
-
|
-
|
1,225,900
|
|||||
|
December
2 to
December
29
|
-
|
-
|
1,225,900
|
||||||
|
Total
|
-
|
-
|
The Board
of Directors approved, in 2000, a repurchase program of up to two million common
shares of Company stock. Management was authorized to effect purchases from time
to time in the open market or through privately negotiated transactions. The
Company has repurchased 774,100 shares at an average purchase price of $19.67
per share under this program as of December 29, 2007.
As
described in Note 7 of the Consolidated Financial Statements, subsequent to
December 29, 2007, at its regularly scheduled February 2, 2008 meeting, the
Company’s Board of Directors approved an additional one million share repurchase
authorization.
Item 12
of this Annual Report on Form 10-K contains certain information relating to the
Company's equity compensation plans.
Stock
Performance
The
following information in this Item 5 of this Annual Report on Form 10-K is not
deemed to be “soliciting material” or to be “filed” with the SEC or subject to
Regulation 14A or 14C under the Securities Exchange Act of 1934 (the “Exchange
Act”) or to the liabilities of Section 18 of the Exchange Act, and will not be
deemed to be incorporated by reference into any filing under the Securities Act
of 1933 or the Exchange Act, except to the extent we specifically incorporate it
by reference into such a filing.
The
following graph compares the hypothetical total shareholder return (including
reinvestment of dividends) on an investment in (1) the Common Stock of the
Company, (2) the Standard & Poor’s Small Cap 600 Index and (3) the Standard
& Poor’s 600 Electrical Components and Equipment Index for the period
December 31, 2002 through December 29, 2007. In each case, the graph
assumes the investment of $100.00 on December 31, 2002.
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
|
Regal-Beloit
Corporation
|
109.01
|
144.65
|
181.98
|
273.23
|
236.88
|
|
S&P
SmallCap 600 Index
|
138.79
|
170.22
|
183.30
|
211.01
|
210.38
|
|
S&P
600 Electrical Components & Equipment
|
126.12
|
152.18
|
169.07
|
228.83
|
253.33
|
ITEM
6 - SELECTED FINANCIAL DATA
The
selected statement of income data for the years ended December 29, 2007,
December 30, 2006 and December 31, 2005 and the balance sheet data at December
29, 2007 and December 30, 2006 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, 2004 and 2003 and the balance sheet data at
December 31, 2005, 2004 and 2003 are derived from audited financial statements
not included herein.
______________________
|
·
|
Total
shareholders’ equity of $749,975 at year-end 2006 includes an $5.8 million
reduction from the adoption of Statement of Financial Accounting Standards
(“SFAS”) No. 158,
“Employers’ Accounting for
Defined Benefit Pension and Postretirement Plans: an amendment of FASB
Statements No. 87, 88, 106, and 132(R).”
See Note 6 to
the Consolidated Financial Statements.
|
| · | The significant increase in sales and income from 2004 to 2005 was driven by the Company’s purchase of the Commercial AC motor and HVAC motor and capacitor businesses from General Electric Company in late 2004. |
ITEM
7 -
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATION
OVERVIEW
Regal
Beloit Corporation seeks to deliver strong, consistent business results and
superior shareholder returns by providing value added products to our
customers who serve the commercial, industrial, and residential
markets.
To this
end, we are focused on two product segments: Electrical and Mechanical. Within
these segments, we follow a 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,
technology or industry expansion. The investments needed to fund our growth
are developed through continuous, corporate-wide initiatives to lower costs and
increase effective asset utilization. We also prioritize investments toward
higher return on capital businesses. Our management team is
compensated based on a modified Economic Value Added (EVA) program which
reinforces our capital allocation disciplines which drives capital allocation to
increase shareholder value. Our key metrics include: total sales
growth, organic sales growth, operating margin percent, free cash flow as a
percent of net income and return on invested capital (ROIC).
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 acquisitions, new products 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
2007
versus 2006
Net
Sales
Worldwide
sales were $1.8 billion in 2007. Sales increased 11.3% from the $1.6 billion
reported for 2006. Net sales for 2007 included $129.7 million of sales related
to the four businesses acquired during 2007 (see Note 3 of the Consolidated
Financial Statements).
Sales in
the Electrical segment were $1.6 billion, up 12.6% from the $1.4 billion for
2006. Sales for the HVAC motor business were negatively impacted by
several factors including weak housing markets and strong 2006 comparables
impacted by the legislated SEER 13 efficiency requirement which was effective on
January 23, 2006. We saw strength in sales of commercial and
industrial motors that have benefited from overall economic strength. Net sales
in the Electrical segment for 2007 included $129.7 million of sales related to
the four businesses acquired during 2007 (see Note 3 to Notes to Consolidated
Financial Statements).
Sales in
the Mechanical segment were $205.3 million, up 2.1% from the $201.0 million for
2006. Sales for this segment in 2006
included approximately $7.1 million of sales related to the Company’s
cutting tools business. Substantially all of the assets of the
Company’s cutting tools business were sold in May
2006. Individual division results varied significantly with
several divisions benefiting from the continued strength of the industrial
economy.
Gross
Profit
Our gross
profit margin was 22.9% in 2007 as compared to 24.0% in 2006. The decrease in
gross profit margin during 2007 was driven by the lower margins on acquired
businesses (15.7%) and increases in material costs, particularly copper and
aluminum, partially offset by productivity and Lean Six Sigma
projects. The spot price of copper was particularly volatile in 2007,
ranging from around $2.40 to over $3.75 per pound. The increase in
material costs was offset by the benefits from productivity and Lean Six
Sigma projects. The gross profit margin for the Electrical segment
reflected these impacts and decreased to 22.3% from 23.7% in
2006. Mechanical segment gross profit margin increased to 27.8% from
26.4% in 2006 primarily as a result of productivity projects.
Operating
Expenses
Operating
expenses as a percentage of sales were 11.5% in 2007 as compared to 12.1% in
2006. The decrease in operating expense as a percent of sales
resulted from leveraging of fixed costs on the higher sales
levels. Electrical segment operating expenses were 11.2% of sales in
2007 and 11.6% of sales in 2006. Mechanical operating expenses as a
percent of sales decreased to 13.5% from 15.3% in 2006.
Income from Operations
(Operating Profit)
In 2007,
operating profit increased 6.2% to $206.1 million from the $194.0 million
reported in 2006. As a percent of sales, operating profit decreased
to 11.4% of sales for 2007 from 12.0% in 2006. The decrease is driven
by the lower profit margins on the 2007 acquired businesses and the impact of
higher material costs. Electrical segment income from operations
increased 2.9% in 2007 to $176.8 million from $171.8 million in 2006, and
operating income margin decreased to 11.1% in 2007 from 12.1% in
2006. Electrical segment operating profit was negatively impacted by
the acquired businesses, and increases in raw material costs, particularly
copper and aluminum. Mechanical segment income from operations
increased 31.7% to $29.3 million in 2007 from $22.2 million in
2006. The Mechanical segment operating income margin for 2007
improved to 14.3% from 11.1% in 2006. The results of the Mechanical
segment reflect the positive impacts of increased volume and price increases,
partially offset by increases in raw material costs.
Interest Expense,
Net
Interest
expense, net was $21.1 million in 2007 compared with $19.2 million in 2006. In
August 2007, we issued $250.0 million of senior notes which increased our
average outstanding debt levels. Higher average debt levels resulted in
increased interest expense in 2007.
Income
Taxes
The
effective income tax rate for 2007 was 34.4% compared with 35.5% in
2006. The lower 2007 effective rate is primarily driven by a change
in the mix of earnings, with more profits earned in lower taxed foreign
jurisdictions. (See also Note 8 of the Consolidated Financial
Statements.)
Net
Income
Net
income was $118.3 million in 2007 or $3.49 per share on a diluted basis compared
with $109.8 million in 2006 or $3.28 per share.
2006
versus 2005
Net
Sales
Worldwide
sales were $1.6 billion in 2006. Sales increased 13.4% from the $1.4 billion
reported for 2005. The 2006 acquisition of the Sinya Motor business (see
Footnote 3 of our Financial Statements) accounted for $36.5 million of the
increase. Also impacting sales was the May 2005 divestiture of the
Illinois Gear business and the May 2006 sale of substantially all of the assets
of the Company’s cutting tools business. The sale of these
businesses decreased sales by approximately $14.0 million for 2006.
Sales in
the Electrical segment were $1.4 billion, up 15.6% from the $1.2 billion for
2005. Sales for the HVAC motor business were positively impacted by
several factors including hotter than normal weather and the legislated SEER 13
efficiency requirement which was effective on January 23, 2006. We
also saw strength in sales of commercial and industrial motors that have
benefited from overall economic strength.
Sales in
the Mechanical segment were equal to 2005 sales at $201.0
million. 2006 sales in this segment were reduced approximately $14.0
million as a result of the sale of substantially all of the assets of the
Company’s cutting tools business in May 2006 and 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 24.0% in 2006 as compared to 21.8% in 2005. The increase in
gross profit margin during 2006 resulted primarily from productivity and Lean
Six Sigma projects, partially offset by increases in material costs,
particularly copper. The price of copper was particularly volatile in
2006, ranging from around $2.00 to over $4.00 per pound. The increase
in material costs was 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 increased to 23.7% from 21.4% in
2005. Mechanical segment gross profit margin increased to 26.4% from
23.7% in 2005 primarily as a result of productivity projects.
Operating
Expenses
Operating
expenses as a percentage of sales were 12.1% in 2006 as compared to 12.3% in
2005. 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. Operating expenses in 2006 also
include approximately $3.6 million of share-based compensation due to the
adoption of SFAS123(R), as compared to $0.5 million of share-based compensation
in 2005. Electrical segment operating expenses were 11.6% of sales in
2006 and 11.8% of sales in 2005. Mechanical operating expenses as a
percent of sales decreased to 15.3% from 15.6% in 2005.
Income from Operations
(Operating Profit)
In 2006,
operating profit increased 44.2% to $194.0 million from the $134.6 million
reported in 2005. As a percent of sales, operating profit increased
to 12.0% of sales for 2006 from 9.4% in 2005. Electrical segment
income from operations increased 45.0% in 2006 to $171.8 million from $118.5
million in 2005, and operating income margin increased to 12.1% in 2006 from
9.7% in 2005. 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 38.8%
to $22.2 million in 2006 from $16.0 million in 2005. The Mechanical
segment operating income margin for 2006 improved to 11.1% from 8.0% in
2005. The results of the Mechanical segment reflect the positive
impacts of increased volume and price increases, partially offset by increases
in raw material costs.
Interest Expense,
Net
Interest
expense, net was $19.2 million in 2006 compared with $21.6 million in 2005.
Lower average debt levels resulted in decreased interest expense in 2006. The
average balance outstanding under the Facility in 2006 was $238.8 million and in
2005 was $396.0 million. The average interest rate paid under the Company’s
revolving credit facility was 5.9% in 2006 and 4.7% in 2005.
Income
Taxes
The
effective income tax rate for 2006 was 35.5% compared with 35.3% in
2005. The 2006 effective rate reflected a benefit of approximately
.9% due to research and engineering tax credits, and a benefit of approximately
.6% due to the Domestic Production Activity Deduction that was incorporated in
the American Jobs Creation Act of 2004. The 2005 effective tax rate
reflected a benefit of approximately .5% attributable to the Domestic Production
Activities Deduction and a one-time benefit for a China tax holiday of
approximately 1.0%. (See also Note 8 to Notes to Consolidated
Financial Statements.)
Net
Income
Net
income was $109.8 million in 2006 or $3.28 per share on a diluted basis compared
with $69.6 million in 2005 or $2.25 per share.
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital was $416.6 million at December 29, 2007, an increase of 31.6%
from $316.6 million at year-end 2006. The 2007 acquisitions accounted
for $79.1 million of the $100.0 million working capital increase in
2007. At December 29, 2007 our current ratio, the ratio of our
current assets to current liabilities, was 2.3:1 versus 2.2:1 at the previous
year-end.
Cash flow
provided by operating activities (“operating cash flow”) was $200.6 million in
2007, a $107.1 million increase from 2006. The increase was
driven by a combined $87.7 million increase in cash provided from accounts
receivable, inventory and accounts payable. These working capital components
provided $39.6 million of operating cash in 2007 versus a combined $48.1 use of
cash in 2006. Cash flow used in investing activities was $373.6 million in 2007,
$330.3 million greater than in 2006 driven by the $337.6 million of acquisitions
in 2007. Capital spending decreased to $36.6 million in 2007 from $52.5 million
a year earlier. Our commitments for property, plant and equipment as
of December 29, 2007 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 2008.
Cash flow
provided from financing activities was $177.5 million in 2007 compared to $47.0
million used in 2006. Our total debt increased by $239.9 million in
2007 driven by the private placement of $250.0 of senior notes (the “Notes”)
used to complete acquisitions. We paid $18.1 million in dividends to
shareholders in 2007, with our quarterly dividend increasing from $.14 to $.15
per share starting with the second quarter dividend payment.
During
the third quarter of 2007, in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended, the Company issued and
sold $250.0 million of Notes. The Notes were sold pursuant to a Note
Purchase Agreement (the “Agreement”) by and among the Company and the purchasers
of the Notes. The Notes were issued and sold in two
series: $150.0 million in Floating Rate Series 2007A Senior Notes,
Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A
Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest
at a margin over the London Inter-Bank Offered Rate (“LIBOR”). These
interest rates also vary as LIBOR varies. The Agreement permits the Company to
issue and sell additional note series, subject to certain terms and conditions
described in the Agreement, up to a total of $600.0 million in combined
Notes.
On April
30, 2007, the Company amended its revolving credit facility (the
“Facility”). The committed amount of the Facility increased from
$475.0 million to $500.0 million. The conditional commitment, subject
to certain approvals and covenants, increased from $75.0 million to $200.0
million. The Facility permits the Company to borrow at interest rates
(5.3% at December 29, 2007) based upon a margin above LIBOR, which
margin varies with the ratio of senior funded debt (total debt excluding
convertible debt) to EBITDA, as defined in the Facility. These
interest rates also vary as LIBOR varies. We pay a commitment fee on
the unused amount of the Facility, which also varies with the ratio
of senior funded debt to EBITDA.
In August
2007, the Company entered into an interest rate swap agreement to manage
fluctuations in cash flows resulting from interest rate risk. (See
also Note 11 of the Consolidated Financial Statements).
The Notes
and the Facility require us to meet specified financial ratios and to satisfy
certain financial condition tests. We were in compliance with all
debt covenants as of December 29, 2007.
There
were no commercial paper borrowings outstanding at December 29,
2007. There was $49.0 million of commercial paper borrowings
outstanding at December 30, 2006, all of which had original maturity terms of 90
days or less, with a weighted interest rate of 5.5%. Total
commercial paper outstanding cannot exceed $50.0 million under the terms of the
Facility. The Facility provides the liquidity backstop for
outstanding commercial paper. Accordingly, the combined outstanding
balances of the Facility and commercial paper cannot exceed $500.0
million.
The
Company’s $115.0 million, 2.75% convertible senior subordinated debt is
convertible as the closing price of the Company’s common stock exceeded the
contingent conversion share price for the specified amount of
time. As a result, holders of the notes may surrender the notes for
conversion at any time until the maturing of the bonds in March
2024. Holders that exercise their right to convert the notes will
receive up to the principal amount of the notes in cash, with the balance of the
conversion obligation, if any, to be satisfied in shares of Company common stock
or cash, at the Company’s discretion. No notes have been converted
into cash or shares of common stock as of December 29, 2007.
As of
December 29, 2007, a foreign subsidiary of the Company had outstanding
borrowings of $5.0 million denominated in U.S. dollars. The
borrowings were made under a $15.0 million unsecured credit facility which
expires in December 2008. The notes are all short term and bear
interest at a margin over LIBOR.
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 29, 2007, net of interest rate swaps, we
had $373.8 million of fixed rate debt and $190.5 million of variable rate debt.
The variable rate debt is primarily under our 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 29, 2007 would result in a
change in net income of approximately $.7 million.
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 29, 2007 (in millions):
|
Payments
due by Period
|
Debt
Including
Estimated*
Interest
Payments
|
Operating
Leases
|
Purchase
and
Other
Obligations
|
Total
Contractual
Obligations
|
||||||||||||
|
Less
than 1 Year
|
$ | 32.5 | $ | 12.3 | $ | 107.1 | $ | 151.9 | ||||||||
|
1 -
3 Years
|
163.4 | 21.4 | 184.8 | |||||||||||||
|
3 -
5 Years
|
223.9 | 13.3 | 237.2 | |||||||||||||
|
More
than 5 Years
|
300.7 | 8.4 | 309.1 | |||||||||||||
|
Total
|
$ | 720.5 | $ | 55.4 | $ | 107.1 | $ | 883.0 | ||||||||
*Variable
rate debt based on December 29, 2007 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 29, 2007, the Company had outstanding standby letters of credit
totaling approximately $16.0 million. We had no other material commercial
commitments.
The
Company did not have any variable interest entities as of December 29, 2007 and
December 30, 2006. Other than disclosed in the table above and the
previous paragraph, the Company had no other material off-balance sheet
arrangements.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our consolidated financial statements in accordance with
accounting principles generally accepted in the United States, requires us to
make estimates and assumptions affecting the reported amounts of assets and
liabilities at the date of the consolidated financial statements and revenues
and expenses during the periods reported. Actual results could differ
from those estimates. We believe the following critical accounting
policies could have the most significant effect on our reported
results.
Revenue
Recognition
We
recognize revenue when all of the following have occurred: an
agreement of sale exists; pricing is determinable; collection is reasonably
assured; and product has been delivered and acceptance has occurred according to
contract terms.
We use
contracts and customer purchase orders to determine the existence of an
agreement of sale. We use shipping documents and customer acceptance,
when applicable, to verify delivery. We assess whether the sales
price is subject to refund or adjustment, and we assess collectibility based on
the creditworthiness of the customer as well as the customer’s payment
history.
Returns, Rebates and
Incentives
Our
primary incentive program provides distributors with cash rebates or account
credits based on agreed amounts that vary depending on the end user or original
equipment manufacturing (OEM) customer to whom our distributor ultimately sells
the product. We also offer various other incentive programs that
provide distributors and direct sale customers with cash rebates, account
credits or additional products and services based on meeting specified program
criteria. Certain distributors are offered a right to return product,
subject to contractual limitations.
We record
accruals for customer returns, rebates and incentives at the time of revenue
recognition based primarily on historical experience. Adjustments to
the accrual may be required if actual returns, rebates and incentives differ
from historical experience or if there are changes to other assumptions used to
estimate the accrual.
Impairment of Long-Lived
Assets or Goodwill and Other Intangibles
We
evaluate the recoverability of the carrying amount of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable through future cash flows. We evaluate
the recoverability of goodwill and other intangible assets annually or more
frequently if events or circumstances indicate that an asset might be
impaired. When applying the impairment rules we use estimates to
determine when an impairment is necessary. Factors that could trigger
an impairment review include significant underperformance relative to historical
or forecasted operating results, a significant decrease in the market value of
an asset or significant negative industry or economic trends. We
perform our annual impairment test in accordance with SFAS 142, “Goodwill and
Other Intangible Assets”, each fourth quarter.
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 8.25% and an average discount rate at approximately 6.5% for our
defined benefit plans as of December 29, 2007. (See also Note 6 of
the Consolidated Financial Statements).
Income
Taxes
We
operate in numerous taxing jurisdictions and are subject to regular examinations
by various U.S. Federal, state and foreign jurisdictions for various tax
periods. Our income tax positions are based on research and
interpretations of the income tax laws and rulings in each of the jurisdictions
in which we do business. Due to the subjectivity of interpretations
of laws and rulings in each jurisdiction, the differences and interplay in tax
laws between those jurisdictions as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, our estimates of
income tax liabilities may differ from actual payments or
assessments.
Additional
information regarding income taxes is contained in Note 8 of the Consolidated
Financial Statements.
Further
discussion of the Company’s accounting policies is contained in Note 2 of the
Consolidated Financial Statements.
New Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 141 (Revised 2007),
Business Combinations
SFAS
141R, effective prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. SFAS 141R establishes principles and
requirements on how an acquirer recognizes and measures in its financial
statements identifiable assets acquired, liabilities assumed, noncontrolling
interest in the acquiree, goodwill or gain from a bargain purchase and
accounting for transaction costs. Additionally, SFAS 141R determines
what information must be disclosed to enable users of the financial statements
to evaluate the nature and financial effects of the business
combination. The Company will adopt SFAS 141R upon its effective date
as appropriate for any future business combinations.
In
December 2007, the FASB also issued SFAS 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
(“SFAS
160”). SFAS 160 will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests (NCI) and classified
as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority interest
holders. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. We have not yet determined the impact, if any, of
SFAS 160 on our consolidated financial statements.
In
February 2007, the FASB issued SFAS 159,
The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No.
115
(“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items generally on an
instrument-by-instrument basis at fair value that are not currently required to
be measured at fair value. SFAS 159 is intended to provide entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for the Company in
fiscal
2008. We are evaluating the new standard to determine the effect on
our financial statements and related disclosures.
In
September 2006, the FASB issued SFAS 157,
Fair Value Measurements
(“SFAS” 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 will be effective beginning in fiscal
2008.
We are
evaluating the new standard to determine the effect on our financial statements
and related disclosures.
In June
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement No. 109,
Accounting for Income
Taxes
. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company
has adopted FIN 48 as of the beginning of fiscal 2007. See Note 8 of
the Consolidated Financial Statements.
ITEM 7A
- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We are
exposed to market risk relating to the Company’s operations due to changes in
interest rates, foreign currency exchange rates and commodity prices of
purchased raw materials. We manage the exposure to these risks
through a combination of normal operating and financing activities and
derivative financial instruments such as interest rate swaps, commodity cash
flow hedges and foreign currency forward exchange contracts.
The
Company is exposed to
interest rate risk on certain of its short-term and long-term debt obligations
used to finance our operations and acquisitions. At December 29,
2007, net of interest rate swaps, we had $373.8 million of fixed rate debt and
$190.5 million of variable rate debt. As a result, interest rate
changes impact future earnings and cash flow assuming other factors are
constant. The Company utilizes interest rate swaps to manage
fluctuations in cash flows resulting from exposure to interest rate risk on
forecasted variable rate interest payments. Details regarding the
instruments, as of December 29, 2007, are as follows:
|
Instrument
|
Notional
Amount
|
Maturity
|
Rate
Paid
|
Rate
Received
|
Fair
Value
Gain
(Loss)
|
|||||
|
Swap
|
$150.0
million
|
August 23,
2014
|
5.3%
|
LIBOR (3
month)
|
($8.0)
million
|
|||||
|
Swap
|
$100.0
million
|
August 23,
2017
|
5.4%
|
LIBOR (3
month)
|
($6.4)
million
|
A hypothetical 10% change in
our weighted average borrowing rate on outstanding variable rate debt at
December 29, 2007, would result in a change in after-tax annualized earnings of
approximately $.7
million.
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. 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 contracts to manage
our exposure on the transactions denominated in currencies other than the
applicable functional currency. Contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. It is our policy not to enter into derivative financial
instruments for speculative purposes. We do not hedge our exposure to
the translation of reported results of foreign subsidiaries from local currency
to United States dollars.
All
hedges are recorded on the balance sheet at fair value and are accounted for as
cash flow hedges, with changes in fair value recorded in other
comprehensive income 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 all periods included in this report.
Derivative
commodity liabilities of $6.1 million were recorded in other current liabilities
at December 29, 2007. Derivative commodity assets of $1.7 million
were recorded in other current assets as of December 30, 2006. The
unrealized (loss) gain on the effective portion of the contracts of ($3.8)
million net of tax and $1.0 million net of tax, as of December 29, 2007 and
December 30, 2006, was recorded in AOCI.
The Company uses a cash flow hedging strategy to protect against an increase in the cost of forecasted foreign currency denominated transactions. As of December 29, 2007, derivative currency assets of $3.4 million and $0.1 million are recorded in other current assets and other non-current liabilities, respectively. At December 30, 2006, derivative currency assets of $2.2 million and $1.0 million were recorded in other current assets and other non-current assets, respectively. The unrealized gain on the effective portion of the contracts of $2.1 million net of tax as of December 29, 2007, and $2.0 million net of the tax as of December 30, 2006 was recorded in Accumulated Other Comprehensive Income ("AOCI").
In the
third quarter of 2007, the Company entered into pay fixed/receive LIBOR-based
floating interest rate swaps to manage fluctuations in cash flows resulting from
interest rate risk. As of December 29, 2007, a interest rate swap liability of
($14.4) million was included in other non-current liabilities. The
unrealized loss on the effective portion of the contracts of ($8.9) million net
of tax as of December 29, 2007 was recorded in AOCI.
The net
AOCI balance of ($10.6) million at December 29, 2007 is comprised of ($1.6)
million of net current deferred losses expected to be realized in the next year,
and ($9.0) million of non-current deferred losses.
At
December 29, 2007, we had a ($10.6) million loss, net of tax, in AOCI related to
hedging activities. Of this amount, a $2.1 million gain related to
foreign currency hedges, a ($3.8) million loss related to commodity hedges and
the balance of ($8.9) million loss represented interest rate swap
hedges.
ITEM 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly
Financial Information (Unaudited)
|
(In
Thousands, Except Per Share Data)
|
||||||||||||||||||||||||||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|||||||||||||||||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||||||||||||||
|
Net
Sales
|
$ | 418,646 | $ | 398,326 | $ | 459,795 | $ | 435,269 | $ | 449,374 | $ | 419,301 | $ | 474,682 | $ | 366,649 | ||||||||||||||||
|
Gross
Profit
|
97,227 | 93,280 | 103,876 | 104,025 | 106,714 | 103,070 | 105,536 | 88,996 | ||||||||||||||||||||||||
|
Income
from
|
||||||||||||||||||||||||||||||||
|
Operations
|
47,331 | 43,618 | 60,055 | 57,866 | 53,375 | 53,049 | 45,299 | 39,484 | ||||||||||||||||||||||||
|
Net
Income
|
26,813 | 23,788 | 36,523 | 33,309 | 31,239 | 29,740 | 24,042 | 22,969 | ||||||||||||||||||||||||
|
Earnings
Per Share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
0.87 | 0.77 | 1.15 | 1.08 | 1.00 | 0.96 | 0.77 | 0.74 | ||||||||||||||||||||||||
|
Assuming
Dilution
|
0.80 | 0.72 | 1.06 | 0.99 | 0.92 | 0.89 | 0.71 | 0.68 | ||||||||||||||||||||||||
|
Average
Number of
|
||||||||||||||||||||||||||||||||
|
Shares
Outstanding:
|
||||||||||||||||||||||||||||||||
|
Basic
|
30,814 | 30,701 | 31,547 | 30,816 | 31,321 | 30,888 | 31,326 | 30,981 | ||||||||||||||||||||||||
|
Assuming
Dilution
|
33,548 | 30,957 | 34,178 | 33,645 | 34,104 | 33,440 | 33,840 | 33,973 | ||||||||||||||||||||||||
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Regal Beloit Corporation (the “Company”) is responsible for the
accuracy and internal consistency of the preparation of the consolidated
financial statements and footnotes contained in this annual report.
The
Company’s management is also responsible for establishing and maintaining
adequate internal control over financial reporting. Regal Beloit
Corporation operates under a system of internal accounting controls designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of published financial statements in accordance with
generally accepted accounting principles. The internal accounting
control system is evaluated for effectiveness by management and is tested,
monitored and revised as necessary. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 29, 2007. 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 29, 2007,
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.
February
27, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors of Regal Beloit Corporation
Beloit, Wisconsin
We have
audited the internal control over financial reporting of Regal Beloit
Corporation and subsidiaries (the “Company”) as of December 29, 2007, 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 the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 29, 2007, 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 and
financial statement schedule as of and for the year ended December 29,
2007, of the Company and our reports dated February 26, 2008, expressed an
unqualified opinion on those financial statements and financial statement
schedule, and included an explanatory paragraph relating to the Company’s
adoption of Financial Accounting Standards Board (FASB) Statement No. 123R
, Share-Based Payment
on
January 1, 2006; FASB Statement No. 158,
Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans
on December 30, 2006; and
FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
on December 31, 2006.
/s/
Deloitte & Touche LLP
Milwaukee,
Wisconsin
February
26, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors of Regal Beloit Corporation
Beloit, Wisconsin
We have
audited the accompanying consolidated balance sheets of Regal Beloit Corporation
and subsidiaries (the “Company”) as of December 29, 2007 and December 30,
2006, and the related consolidated statements of income, shareholders’
investment, comprehensive income, and cash flows for each of the three years in
the period ended December 29, 2007. 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 29, 2007 and December 30, 2006, and the results of their operations
and their cash flows for each of the three years in the period ended
December 29, 2007, in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 7 to the consolidated financial statements, on January 1,
2006, the Company adopted Financial Accounting Standards Board (FASB) Statement
No. 123R,
Share-Based Payment.
As discussed in Note 6 to the consolidated financial statements, as of
December 30, 2006, the Company adopted FASB Statement No. 158,
Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans.
As discussed in Note 8 to
the consolidated financial statements, as of December 31, 2006 (the
beginning of the Company’s 2007 fiscal year), the Company adopted FASB
Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 29, 2007, 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 February 26, 2008, expressed an
unqualified opinion on the Company’s internal control over financial
reporting.
/s/
Deloitte & Touche LLP
Milwaukee, Wisconsin
February
26, 2008
REGA
L BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands of Dollars, Except Shares Outstanding and Per Share Data)
|
For
the Year Ended
|
||||||||||||
|
December
29,
|
December
30,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
Sales
|
$ | 1,802,497 | $ | 1,619,545 | $ | 1,428,707 | ||||||
|
Cost
of Sales
|
1,389,144 | 1,230,174 | 1,117,943 | |||||||||
|
Gross
Profit
|
413,353 | 389,371 | 310,764 | |||||||||
|
Operating
Expenses
|
207,293 | 195,354 | 176,192 | |||||||||
|
Income
From Operations
|
206,060 | 194,017 | 134,572 | |||||||||
|
Interest
Expense
|
22,056 | 19,886 | 22,090 | |||||||||
|
Interest
Income
|
933 | 711 | 442 | |||||||||
|
Income
Before Taxes & Minority Interest
|
184,937 | 174,842 | 112,924 | |||||||||
|
Provision
For Income Taxes
|
63,683 | 62,051 | 39,829 | |||||||||
|
Income
Before Minority Interest
|
121,254 | 112,791 | 73,095 | |||||||||
|
Minority
Interest in Income, Net of Tax
|
2,907 | 2,985 | 3,538 | |||||||||
|
Net
Income
|
$ | 118,347 | $ | 109,806 | $ | 69,557 | ||||||
|
Earnings
Per Share of Common Stock:
|
||||||||||||
|
Basic
|
$ | 3.79 | $ | 3.56 | $ | 2.34 | ||||||
|
Assuming
Dilution
|
$ | 3.49 | $ | 3.28 | $ | 2.25 | ||||||
|
Weighted
Average Number of Shares Outstanding:
|
||||||||||||
|
Basic
|
31,252,145 | 30,846,854 | 29,675,206 | |||||||||
|
Assuming
Dilution
|
33,920,886 | 33,504,190 | 30,878,981 | |||||||||
See Accompanying Notes to Consolidated Financial Statements.
REG
AL BELOIT CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
Thousands of Dollars, Except Share and Per Share Data)
|
ASSETS
|
December
29,
|
December
30,
|
||
|
2007
|
2006
|
|||
|
Current
Assets:
|
||||
|
Cash
and Cash Equivalents
|
$ 42,574
|
$ 36,520
|
||
|
Receivables,
less Allowances for Doubtful Accounts
|
||||
|
of
$10,734 in 2007 and of $5,886 in 2006
|
297,569
|
218,036
|
||
|
Inventories
|
318,200
|
275,138
|
||
|
Prepaid
Expenses and Other Current Assets
|
35,626
|
22,557
|
||
|
Deferred Income
Tax Benefits
|
34,522
|
22,877
|
||
|
Total
Current Assets
|
728,491
|
575,128
|
||
|
Property,
Plant and Equipment:
|
||||
|
Land
and Improvements
|
31,766
|
18,400
|
||
|
Buildings
and Improvements
|
117,707
|
105,425
|
||
|
Machinery
and Equipment
|
435,792
|
360,674
|
||
|
Property,
Plant and Equipment, at Cost
|
585,265
|
484,499
|
||
|
Less
- Accumulated Depreciation
|
(245,922)
|
(215,619)
|
||
|
Net
Property, Plant and Equipment
|
339,343
|
268,880
|
||
|
Goodwill
|
654,261
|
546,152
|
||
|
Intangible
Assets, Net of Amortization
|
129,473
|
43,257
|
||
|
Other
Noncurrent Assets
|
10,679
|
10,102
|
||
|
Total
Assets
|
$ 1,862,247
|
$
1,443,519
|
||
|
LIABILITIES
AND SHAREHOLDERS' INVESTMENT
|
||||
|
Current
Liabilities:
|
||||
|
Accounts
Payable
|
$ 183,215
|
$ 108,050
|
||
|
Commercial
Paper Borrowings
|
-
|
49,000
|
||
|
Dividends
Payable
|
4,700
|
4,345
|
||
|
Accrued
Compensation and Employee Benefits
|
55,315
|
51,192
|
||
|
Other
Accrued Expenses
|
63,358
|
45,578
|
||
|
Current
Maturities of Long-Term Debt
|
5,332
|
376
|
||
|
Total
Current Liabilities
|
311,920
|
258,541
|
||
|
Long-Term
Debt
|
558,918
|
323,946
|
||
|
Deferred
Income Taxes
|
75,055
|
65,937
|
||
|
Other
Noncurrent Liabilities
|
27,041
|
12,302
|
||
|
Minority
Interest in Consolidated Subsidiaries
|
10,542
|
9,634
|
||
|
Pension
and other Post Retirement Benefits
|
20,742
|
23,184
|
||
|
Shareholders'
Investment:
|
||||
|
Common
Stock, $.01 par value, 100,000,000 shares authorized
|
||||
|
in
2007, 50,000,000 shares authorized in 2006,
|
||||
|
32,105,824
issued in 2007 and 31,812,043 issued in 2006
|
321
|
318
|
||
|
Additional
Paid-In Capital
|
335,452
|
329,142
|
||
|
Less-Treasury
Stock, at cost, 774,100 shares in 2007 and 2006
|
(15,228)
|
(15,228)
|
||
|
Retained
Earnings
|
535,304
|
435,971
|
||
|
Accumulated
Other Comprehensive Income (Loss)
|
2,180
|
(228)
|
||
|
Total
Shareholders' Investment
|
858,029
|
749,975
|
||
|
Total
Liabilities and Shareholders' Investment
|
$ 1,862,247
|
$
1,443,519
|
See accompanying Notes to Consolidated Financial Statements.
REG
AL BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ INVESTMENT
(In
Thousands of Dollars, Except Per Share Data)
|
Common
Stock $.01 Par Value
|
Additional
Paid-In Capital
|
Treasury
Stock
|
Retained
Earnings
|
Unearned
Compensation
|
Accumulated
Other Comprehensive Income (Loss)
|
Total
|
||||||||||||||||||||||
|
Balance, December
31, 2004
|
$ | 298 | $ | 263,790 | $ | (15,228 | ) | $ | 288,837 | $ | (224 | ) | $ | 706 | $ | 538,179 | ||||||||||||
|
Net
Income
|
$ | - | $ | - | $ | - | $ | 69,557 | $ | - | $ | - | $ | 69,557 | ||||||||||||||
|
Dividends
Declared ($.51 per share)
|
- | - | - | (15,233 | ) | - | - | (15,233 | ) | |||||||||||||||||||
|
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 | |||||||||||||||||||||
|
Stock
Options Exercised, including income
|
||||||||||||||||||||||||||||
|
tax
benefit
|
2 | 2,334 | - | - | - | - | 2,336 | |||||||||||||||||||||
|
Other
Comprehensive Income (see detail
|
||||||||||||||||||||||||||||
|
Comprehensive
Income Statement)
|
- | - | - | - | - | 3,273 | 3,273 | |||||||||||||||||||||
|
Balance,
December 31, 2005
|
$ | 315 | $ | 316,426 | $ | (15,228 | ) | $ | 343,161 | $ | (657 | ) | $ | 3,979 | $ | 647,996 | ||||||||||||
|
Net
Income
|
$ | - | $ | - | $ | - | $ | 109,806 | $ | - | $ | - | $ | 109,806 | ||||||||||||||
|
Dividends
Declared ($.55 per share)
|
- | - | - | (16,996 | ) | - | - | (16,996 | ) | |||||||||||||||||||
|
Reclassification
of Unearned
|
||||||||||||||||||||||||||||
|
Compensation
due to adoption of
|
||||||||||||||||||||||||||||
|
SFAS
123(R)
|
- | (657 | ) | - | - | 657 | - | - | ||||||||||||||||||||
|
Stock
Options Exercised, including income
|
||||||||||||||||||||||||||||
|
tax
benefit and share cancellations
|
3 | 13,373 | - | - | - | 13,376 | ||||||||||||||||||||||
|
Pension
and Post Retirement Benefit
|
||||||||||||||||||||||||||||
|
Adjustment,
net of tax
|
- | - | - | - | - | (5,838 | ) | (5,838 | ) | |||||||||||||||||||
|
Other
Comprehensive Income (see detail
|
||||||||||||||||||||||||||||
|
Comprehensive
Income Statement)
|
- | - | - | - | - | 1,631 | 1,631 | |||||||||||||||||||||
|
Balance,
December 30, 2006
|
$ | 318 | $ | 329,142 | $ | (15,228 | ) | $ | 435,971 | $ | - | $ | (228 | ) | $ | 749,975 | ||||||||||||
|
FIN
48 Cumulative effect
|
||||||||||||||||||||||||||||
|
adjustment
(Note 8)
|
- | - | - | (560 | ) | - | - | (560 | ) | |||||||||||||||||||
| Adjusted Balance at December 31, 2006 | $ | 318 | $ | 329,142 | $ | (15,228 | ) | $ | 435,411 | $ | - | $ | (228 | ) | $ | 749,415 | ||||||||||||
|
Net
Income
|
$ | - | $ | - | $ | - | $ | 118,347 | $ | - | $ | - | $ | 118,347 | ||||||||||||||
|
Dividends
Declared ($.59 per share)
|
- | - | - | (18,454 | ) | - | - | (18,454 | ) | |||||||||||||||||||
|
Reclassification
of tax benefits due to
|
||||||||||||||||||||||||||||
|
adoption
of FIN 48
|
- | - | - | (560 | ) | - | - | (560 | ) | |||||||||||||||||||
|
Stock
Options Exercised, including income
|
||||||||||||||||||||||||||||
|
tax
benefit and share cancellations
|
3 | 6,310 | - | - | - | - | 6,313 | |||||||||||||||||||||
|
Other
Comprehensive Income (see detail
|
||||||||||||||||||||||||||||
|
Comprehensive
Income Statement)
|
- | - | - | - | - | 2,408 | 2,408 | |||||||||||||||||||||
|
Balance,
December 29, 2007
|
$ | 321 | $ | 335,452 | $ | (15,228 | ) | $ | 535,304 | $ | - | $ | 2,180 | $ | 858,029 | |||||||||||||
See
Accompanying Notes to Consolidated Financial Statements.
REG
AL BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
Thousands of Dollars)
|
For
the Year Ended
|
||||||||||||
|
December
29,
2007
|
December
30,
2006
|
December
31, 2005
|
||||||||||
|
Net
Income
|
$ | 118,347 | $ | 109,806 | $ | 69,557 | ||||||
|
Other
Comprehensive Income:
|
||||||||||||
|
Pension
and postretirement benefits net of tax expense
(benefit) of $1,549,
$553 and ($209)
|
2,850 | 902 | (341 | ) | ||||||||
|
Currency
translation adjustments
|
13,135 | 2,488 | (629 | ) | ||||||||
|
Change
in fair value of hedging activities net of tax (benefit)
expense of ($5,924),
$351 and $5,899
|
(9,664 | ) | 572 | 9,625 | ||||||||
|
Hedging
Activities Reclassified into Earnings from Other
Comprehensive Income
net of tax benefit of ($2,398),
|
||||||||||||
|
($1,429)
and ($3,299)
|
(3,913 | ) | (2,331 | ) | (5,382 | ) | ||||||
|
Other
Comprehensive Income
|
2,408 | 1,631 | 3,273 | |||||||||
|
Comprehensive
Income
|
$ | 120,755 | $ | 111,437 | $ | 72,830 | ||||||
See
Accompanying Notes to Consolidated Financial Statements.
REGA
L BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands of Dollars)
|
For
the Year Ended
|
||||||||||||
|
December
29,
|
December
30,
|
December
31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
Income
|
$ | 118,347 | $ | 109,806 | $ | 69,557 | ||||||
|
Adjustments
to Reconcile Net Income to Net Cash
Provided
from Operating Activities:
|
||||||||||||
|
Depreciation
|
36,915 | 30,823 | 31,175 | |||||||||
|
Amortization
|
9,704 | 6,859 | 6,452 | |||||||||
|
Stock-based
Compensation
|
3,841 | 3,572 | - | |||||||||
|
Provision
for (Benefit of) Deferred Income Taxes
|
7,091 | 5,376 | (811 | ) | ||||||||
|
Minority
Interest in Earnings of Subsidiaries
|
2,907 | 2,985 | 3,538 | |||||||||
|
Excess
Tax Benefits from Stock-based Compensation
|
(6,712 | ) | (3,949 | ) | - | |||||||
|
Losses
(Gains) on Sales of Property, Plant and Equipment
|
564 | (1,889 | ) | (507 | ) | |||||||
|
Changes
in Assets and Liabilities, Net of Acquisitions:
|
||||||||||||
|
Receivables
|
1,246 | (17,935 | ) | (19,222 | ) | |||||||
|
Inventories
|
18,002 | (47,146 | ) | 28,355 | ||||||||
|
Accounts
Payable
|
20,316 | 16,969 | (23,467 | ) | ||||||||
|
Current
Liabilities and Other
|
(11,595 | ) | (11,923 | ) | 17,141 | |||||||
|
Net
Cash Provided from Operating Activities
|
200,626 | 93,548 | 112,211 | |||||||||
|
CASH
FLOW FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Additions
to Property, Plant and Equipment
|
(36,628 | ) | (52,545 | ) | (28,261 | ) | ||||||
|
Business
Acquisitions, Net of Cash Acquired
|
(337,643 | ) | (10,962 | ) | 6,561 | |||||||
|
Sale
of Property, Plant and Equipment
|
637 | 20,189 | 9,907 | |||||||||
|
Net
Cash Used in Investing Activities
|
(373,634 | ) | (43,318 | ) | (11,793 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Long-Term
Debt Proceeds
|
250,000 | 8,500 | - | |||||||||
|
Net
Proceeds from Short-Term Borrowings
|
5,000 | - | - | |||||||||
|
Proceeds
from Stock Offerings
|
- | - | 53,026 | |||||||||
|
Payments
of Long-Term Debt
|
(382 | ) | (1,294 | ) | (1,285 | ) | ||||||
|
Net
(Repayments) Proceeds from Commercial Paper Borrowings
|
(49,000 | ) | 24,000 | 25,000 | ||||||||
|
Net
Repayments Under Revolving Credit Facility
|
(14,500 | ) | (69,900 | ) | (159,400 | ) | ||||||
|
Proceeds
from the Exercise of Stock Options
|
2,190 | 6,942 | 1,956 | |||||||||
|
Excess
Tax Benefits from Stock-based Compensation
|
6,712 | 3,949 | - | |||||||||
|
Financing
Fees Paid
|
(1,706 | ) | - | (1,374 | ) | |||||||
|
Distributions
to Minority Partners
|
(2,741 | ) | (2,538 | ) | (1,315 | ) | ||||||
|
Dividends
Paid to Shareholders
|
(18,099 | ) | (16,627 | ) | (14,730 | ) | ||||||
|
Net
Cash Provided from (Used in) Financing Activities
|
177,474 | (46,968 | ) | (98,122 | ) | |||||||
|
EFFECT
OF EXCHANGE RATE ON CASH:
|
1,588 | 511 | (824 | ) | ||||||||
|
Net
Increase in Cash and Cash Equivalents
|
6,054 | 3,773 | 1,472 | |||||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
36,520 | 32,747 | 31,275 | |||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 42,574 | $ | 36,520 | $ | 32,747 | ||||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash
Paid During the Year for:
|
||||||||||||
|
Interest
|
$ | 20,789 | $ | 20,185 | $ | 21,378 | ||||||
|
Income
Taxes
|
50,186 | 72,694 | 36,670 | |||||||||
See
accompanying Notes to Consolidated Financial Statements.
NOTE
S TO CONSOLIDATED FINANCIAL STATEMENTS
For The
Three Years Ended December 29, 2007
|
(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.
The
Company operates on a 52/53 week fiscal year ending on the Saturday closest to
December 31. The 2007 and 2006 fiscal years contained 52
weeks.
|
(2)
|
ACCOUNTING
POLICIES
|
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned and majority owned subsidiaries. In addition, the
Company has a 50/50 joint venture in China that is consolidated as over half of
the joint venture sales are to Regal Beloit Corporation owned
entities. All significant intercompany accounts and transactions are
eliminated.
Use of
Estimates
Management’s
best estimates of certain amounts are required in preparation of the
consolidated financial statements in accordance with generally accepted
accounting principles, and actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue upon transfer of title, which generally occurs upon
shipment of the product to the customer. The pricing of products sold
is generally supported by customer purchase orders, and accounts receivable
collection is reasonably assured at the time of shipment. Estimated
discounts and rebates are recorded as a reduction of sales in the same period
revenue is recognized. Product returns and credits are estimated and recorded at
the time of shipment based upon historical experience. Shipping and
handling costs are recorded as revenue when billed to the
customers.
Research and
Development
The
Company performs research and development activities relating to new product
development and the improvement of current products. Research and
development costs are expensed as incurred.
Cash and Cash
Equivalents
Cash
equivalents consist of highly liquid investments which are readily convertible
to cash, present insignificant risk of changes in value due to interest rate
fluctuations and have original or purchased maturities of three months or
less.
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 at year
end is as follows:
|
2007
|
2006
|
|||||||
|
Raw
Material
|
21 | % | 11 | % | ||||
|
Work
in Process
|
14 | % | 21 | % | ||||
|
Finished
Goods and Purchased Parts
|
65 | % | 68 | % | ||||
Inventories
are stated at cost, which is not in excess of market. Cost for approximately 71%
of the Company's inventory at December 29, 2007 and 83% in 2006, 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 $47.1
million and $33.1 million as of December 29, 2007 and December 30, 2006,
respectively. Material, labor and factory overhead costs are included in the
inventories.
The
Company reviews it’s inventories for excess and obsolete products or
components. Based on an analysis of historical usage and management’s
evaluation of estimated future demand, market conditions and alternative uses
for possible excess or obsolete parts, reserves are recorded or
changed.
Property, Plant and
Equipment
Property,
Plant and Equipment are stated at cost. Depreciation of plant and
equipment is provided principally on a straight-line basis over the estimated
useful lives (3 to 40 years) of the depreciable assets. Accelerated
methods are used for income tax purposes. 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.
Goodwill and Other
Intangibles
Goodwill
and Other Intangibles result from the acquisition of existing businesses by the
Company. 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 of Other Intangibles with definite lives is
recorded over the estimated life of the asset.
Stock-based
Compensation
The
Company has adopted the fair value method of accounting for stock options as
required under SFAS123(R)
“Share-Based Payment”
,
effective January 1, 2006 (see Note 7 of the Consolidated Financial
Statements).
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. A
reconciliation of the Company’s net income and earnings per share to proforma
net income and proforma earnings per share for the year ended December 31, 2005
follows (in thousands, except per share data):
|
Net
Income:
|
||||
|
As
Reported
|
$ | 69,557 | ||
|
Add: Total
stock-based employee compensation
expense included in net income,
net of related tax effects
|
$ | 362 | ||
|
Deduct:
Total stock-based employee compensation
expense, net of related tax
effects
|
(1,690 | ) | ||
|
Pro
Forma
|
$ | 68,229 | ||
|
Earnings
Per Share:
|
||||
|
As
Reported
|
$ | 2.34 | ||
|
Pro
Forma
|
$ | 2.29 | ||
|
Earnings
Per Share - Assuming Dilution:
|
||||
|
As
Reported
|
$ | 2.25 | ||
|
Pro
Forma
|
$ | 2.22 | ||
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, risk-free interest rate of 4.0%; expected
dividend yield of 1.7%, expected option lives of 7.0 years and expected
volatility of 28%.
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 have been excluded from the calculation of
effect of dilutive securities shown below. The amount of these shares
was 177,500 for 2007, and -0- for both 2006 and 2005. The following
table reconciles the basic and diluted shares used in the per share calculations
for the three years ended December 29, 2007 (in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Denominator
for basic EPS
|
31,252 | 30,847 | 29,675 | |||||||||
|
Effect
on dilutive securities
|
2,669 | 2,657 | 1,204 | |||||||||
|
Denominator
for diluted EPS
|
33,921 | 33,504 | 30,879 | |||||||||
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
estimates.
Product Warranty
Reserves
The
Company maintains reserves for product warranty to cover the stated warranty
periods for its products. Such reserves are established based on an evaluation
of historical warranty experience and specific significant warranty matters when
they become known and can reasonably be estimated.
Accumulated Other
Comprehensive Income (Loss)
Foreign
currency translation adjustments, unrealized gains and losses on derivative
instruments and pension liability adjustments are included in shareholder’s
investment under accumulated other comprehensive income (loss). The
Company adopted SFAS No. 158, “
Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans”
, as of December 30,
2006. The components of the ending balances of Accumulated Other
Comprehensive Income (Loss) are as follows:
|
2007
|
2006
|
|||||||
|
Translation
adjustments
|
$ | 21,280 | $ | 8,145 | ||||
|
Hedging
activities, net of tax
|
(10,580 | ) | 2,997 | |||||
|
Pension
and post retirement benefits, net of tax
|
(8,520 | ) | (11,370 | ) | ||||
|
Total
|
$ | 2,180 | $ | (228 | ) | |||
Derivative Instruments
SFAS No.
133,
“Accounting for Derivative Instruments and
Hedging Activities”,
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
Other Comprehensive
Income.
The
Company uses derivative instruments to manage its exposure to fluctuations in
certain raw material commodity pricing, fluctuations in the cost of forecasted
foreign currency transactions, and variability in
interes
t
rate exposure
on floating rate borrowings. These derivative
instruments have been designated as cash flow hedges. (See Note
11 to the Consolidated Financial Statements).
Legal and Environmental
Claims
The
Company records expenses and liabilities when the Company believes that an
obligation of the Company on a specific matter is probable and there is a basis
to reasonably estimate the value of the obligation. This methodology is used for
environmental matters and legal claims that are filed against the Company from
time to time. The uncertainty that is associated with such matters frequently
requires adjustments to the liabilities previously recorded.
Life Insurance
Policies
The
Company maintains life insurance policies on certain officers and management
which name the Company as beneficiary. The total face value of these policies
was $10.6 million at December 29, 2007 and $10.9 million at December 30, 2006.
The cash surrender value, net of policy loans, was $2.3 million and $2.1 million
at December 29, 2007 and December 30, 2006, respectively, and is included as a
component of Other Noncurrent Assets.
Fair
Values
The fair
values of cash equivalents, receivables, inventories, accounts payable,
commercial paper borrowings and other accrued expenses approximate the carrying
values due to the short period of time to maturity. The fair value of
long-term debt is estimated using discounted cash flows based on the Company’s
current incremental borrowing rates, except for the senior subordinated notes
discussed in Note 5, and the fair value of derivative instruments is determined
based on quotes.
New Accounting
Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 141
(Revised 2007),
“Business
Combinations”
(SFAS 141R), effective prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. SFAS 141R establishes principles and requirements on how an
acquirer recognizes and measures in its financial statements identifiable assets
acquired, liabilities assumed, noncontrolling interest in the acquiree, goodwill
or gain from a bargain purchase and accounting for transaction
costs. Additionally, SFAS 141R determines what information must be
disclosed to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The Company will adopt
SFAS 141R upon its effective date as appropriate for any future business
combinations.
In
December 2007, the FASB also issued SFAS 160,
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51
(“SFAS
160”). SFAS 160 will change the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests (NCI) and classified
as a component of equity. This new consolidation method will
significantly change the accounting for transactions with minority interest
holders. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. We have not yet determined the impact, if any, of
SFAS 160 on our consolidated financial statements.
In
February 2007 the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including and Amendment of FASB Statement No.
115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items generally on an
instrument-by-instrument basis at fair value that are not currently required to
be measured at fair value. SFAS 159 is intended to provide entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS 159 is effective for the
Company beginning in fiscal 2008. We are evaluating the new standard to
determine the effect on our financial statements and related
disclosures.
In
September 2006, the FASB issued SFAS 157,
Fair Value Measurements
(“SFAS” 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 will be effective beginning in fiscal
2008. We are evaluating the new standard to determine the effect on
our financial statements and related disclosures.
In June
2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement No. 109,
Accounting for Income
Taxes
. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The Company
has adopted FIN 48 as of the beginning of fiscal 2007. See Note
8 to the Consolidated Financial Statements.
|
(3)
|
ACQUISITIONS
AND DIVESTITURES
|
On August
31, 2007, the Company completed the acquisition of certain assets comprising the
commercial and industrial division of the Fasco Motor business (“Fasco”) from
Tecumseh Products, Inc. and certain of its affiliates. On August 31,
2007, the Company also separately acquired the stock of Jakel Incorporated
(“Jakel”). Both of the acquired businesses manufacture and market
motors and blower systems for a variety of air moving applications including
alternative fuel systems, water heaters, heating ventilating and air
conditioning (HVAC) systems and other commercial products.
The
acquisitions of Fasco and Jakel extend our product offerings, strengthen our
management team, and provide opportunities for synergies and cost
savings. The results of operations of Fasco and Jakel are included in
our consolidated financial statements beginning on September 1, 2007 as part of
the Electrical segment.
On
October 12, 2007, the Company acquired Morrill Motors
(“Morrill”). The acquired business is a leading designer and
manufacturer of fractional horsepower motors and components for the commercial
refrigeration and freezer markets. Included in the motor offering are
technology based variable speed products. The purchase price was paid
in cash, subject to final working capital and other customary post close
adjustments. The results of operations for Morrill are included in
our consolidated financial statements beginning on October 13, 2007 as part of
the Electrical segment.
On
October 29, 2007, the Company acquired Alstom motors and fans business
(“Alstom”) in India. The business is located in Kolkata, India and
manufactures and markets a full range of low and medium voltage industrial
motors and fans for the industrial and process markets in
India. Alstom is noted for high quality process duty motors with a
full range from 1 to 3500 hp. The purchase price was paid in
cash. The results of operations of Alstom are included in our
consolidated financial statements beginning on October 30, 2007 as part of the
Electrical segment.
The
purchase price allocations for the Fasco, Jakel, Morrill and Alstom acquisitions
are preliminary, pending the finalization of working capital adjustments and
further analysis of contingencies. The combined purchase price, net
of cash acquired, was $335.2 million. The excess of the purchase price over the
estimated fair values of the net assets acquired was assigned to
goodwill. Adjustments to the estimated fair values may be recorded
during the allocation period, not to exceed one year from the date of
acquisition.
The
Company's summarized proforma results of operations as if the four 2007
acquisitions had been effective at the beginning of fiscal 2006 are as follows
(in thousands, except earnings per share):
|
(Unaudited)
|
||||||||
|
2007
|
2006
|
|||||||
|
Net
Sales
|
$ | 2,113,947 | $ | 2,109,008 | ||||
|
Income
Before Taxes
|
193,449 | 193,971 | ||||||
|
Net
Income
|
123,937 | 109,244 | ||||||
|
Earnings
Per Share of Common Stock-Assuming Dilution
|
$ | 3.65 | $ | 3.26 | ||||
The
following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed as a result of the 2007 acquisitions as of the
date of acquisition. The Company is in the process of finalizing the
valuation of tangible and intangible assets acquired. Accordingly,
the final allocation of the purchase price could differ materially from the
current estimates.
On May 8,
2006, the Company completed the sale of substantially all of the assets of the
Company’s Regal Cutting Tools business to YG-1 Co. Ltd for $7.7
million. The Company recorded a net gain of $.2 million which was
included as a reduction of operating expenses.
On May 1,
2006, the Company completed the acquisition of selected assets and liabilities
of Changzhou Sinya Electromotor Co. Ltd., Jiangsu Southern Sinya Electric Co.
Ltd. and Changzhou Xiesheng Plastic Co. Ltd. (collectively
“Sinya”). Sinya operations are located in Changzhou, China and
primarily produce electric motors for the HVAC industry.
|
(4)
|
GOODWILL
AND OTHER INTANGIBLES
|
Goodwill
SFAS No.
142,
“Goodwill and Other
Intangible Assets,”
establishes financial accounting and reporting for
acquired goodwill and other intangible assets. 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 and based upon reasonable assumptions of cash flows and cost of
capital, concluded that there continues to be no impairment of
goodwill.
As
described above in Note 3 of Notes to Consolidated Financial Statements, during
2007 the Company acquired four separate businesses. The purchase
price allocations are preliminary, pending the finalization of working capital
valuations and further analysis of contingencies. The excess of
purchase price over estimated fair value was assigned to
goodwill. Adjustments to the estimated fair value of the net assets
acquired may be recorded during the allocation period, not to exceed one year
from the date of acquisition. A preliminary allocation of $107.9
million was included in goodwill at December 29, 2007 related to the four 2007
acquisitions.
The
Company believes that substantially all of the goodwill is deductible for tax
purposes. The following information presents changes to goodwill during the
periods indicated (in thousands):
|
Electrical
Segment
|
Mechanical
Segment
|
Total
Company
|
||||||||||
|
Balance,
December 31, 2005
|
$ | 545,638 | $ | 530 | $ | 546,168 | ||||||
|
Translation
Adjustments
|
(16 | ) | - | (16 | ) | |||||||
|
Balance,
December 30, 2006
|
$ | 545,622 | $ | 530 | $ | 546,152 | ||||||
|
Acquisitions
|
107,945 | - | 107,945 | |||||||||
|
Translation
Adjustments
|
164 | - | 164 | |||||||||
|
Balance,
December 29, 2007
|
$ | 653,731 | $ | 530 | $ | 654,261 | ||||||
Intangible
Assets
The
preliminary amortizable intangible assets related to the four 2007 acquisitions
(see Note 3 to the Consolidated Financial Statements) are included
below.
Other
intangible assets consisted of the following (in thousands):
|
December
29, 2007
|
||||||||||||||||
|
Asset
Description
|
Useful
Life
(years)
|
Gross
Value
|
Accumulated
Amortization
|
Net
Book
Value
|
||||||||||||
|
Non-Compete
Agreements
|
3 -
5
|
$ | 5,588 | $ | 2,540 | $ | 3,048 | |||||||||
|
Trademarks
|
3 -
20
|
18,887 | 4,752 | 14,135 | ||||||||||||
|
Patents
|
9 -
10.5
|
15,410 | 4,648 | 10,762 | ||||||||||||
|
Engineering
Drawings
|
10
|
1,200 | 367 | 74,247 | ||||||||||||
|
Customer
Relationships
|
10
- 14
|
84,572 | 10,325 | 65,824 | ||||||||||||
|
Technology
|
6 -
10
|
27,474 | 1,026 | 26,448 | ||||||||||||
|
Total
|
$ | 153,131 | 23,658 | 129,473 | ||||||||||||
|
December
30, 2006
|
||||||||||||||||
|
Asset
Description
|
Useful
Life
(years)
|
Gross
Value
|
Accumulated
Amortization
|
Net
Book
Value
|
||||||||||||
|
Non-Compete
Agreements
|
3 -
5
|
$ | 5,470 | $ | 1,425 | $ | 4,045 | |||||||||
|
Trademarks
|
3 -
5
|
6,490 | 3,311 | 3,179 | ||||||||||||
|
Patents
|
9 -
10.5
|
15,410 | 3,107 | 12,303 | ||||||||||||
|
Engineering
Drawings
|
10
|
1,200 | 247 | 953 | ||||||||||||
|
Customer
Relationships
|
10
|
28,600 | 5,823 | 22,777 | ||||||||||||
|
Total
|
$ | 57,170 | $ | 13,913 | $ | 43,257 | ||||||||||
Estimated Amortization (in millions)
|
2008
|
2009
|
2010
|
2011
|
2012
|
|
$16.8
|
$16.2
|
$15.8
|
$
15.4
|
$15.1
|
(5)
DEBT AND BANK CREDIT FACILITIES
The
Company’s indebtedness, excluding commercial paper borrowings, as of December
29, 2007 and December 30, 2006 was as follows:
|
(In
Thousands)
|
||||||||
|
December
29,
|
December
30,
|
|||||||
|
2007
|
2006
|
|||||||
|
Senior
notes
|
$ | 250,000 | $ | - | ||||
|
Revolving
credit facility
|
182,700 | 197,200 | ||||||
|
Convertible
senior subordinated debt
|
115,000 | 115,000 | ||||||
|
Other
|
16,550 | 12,122 | ||||||
| 564,250 | 324,322 | |||||||
|
Less: Current
maturities
|
(5,332 | ) | (376 | ) | ||||
|
Non-current
portion
|
$ | 558,918 | $ | 323,946 | ||||
During
the third quarter of 2007, in a private placement exempt from the registration
requirements of the Securities Act of 1933, as amended, the Company issued and
sold $250.0 million of senior notes (the “Notes”). The Notes were
sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among the
Company and the purchasers of the Notes. The Notes were issued and
sold in two series: $150.0 million in Floating Rate Series 2007A
Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating
Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017. The
Notes bear interest at a margin over the London Inter-Bank Offered Rate
(“LIBOR”). These interest rates also vary as LIBOR
varies. The Agreement permits the Company to issue and sell
additional note series, subject to certain terms and conditions described in the
Agreement, up to a total of $600.0 million in combined Notes.
On April
30, 2007, the Company amended its revolving credit facility (the
“Facility”). The committed amount of the Facility increased from
$475.0 million to $500.0 million. The conditional commitment, subject
to certain approvals and covenants, increased from $75.0 million to $200.0
million. The Facility permits the Company to borrow at interest rates
(5.3% at December 29, 2007) based upon a margin above LIBOR, which margin varies
with the ratio of senior funded debt to EBITDA as defined in the
Facility. These interest rates also vary as LIBOR
varies. We pay a commitment fee on the unused amount of the Facility,
which also varies with the ratio of our senior funded debt to our
EBITDA.
The Notes
and the Facility require us to meet specified financial ratios and to satisfy
certain financial condition tests. We were in compliance with all
debt covenants as of December 29, 2007.
The
average balance outstanding under the Facility in 2007 was $182.0 million and in
2006 was $238.8 million. The average interest rate paid under the
Facility was 5.7% in 2007 and 5.9% in 2006. The Company also paid an
unused commitment fee under the Facility. The Company had $311.6
million of available borrowing capacity under the Facility at December 29,
2007.
The
Company, at December 29, 2007, also had $115.0 million 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. 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 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 $115.0 million 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.
The
fair value of these notes at December 29, 2007 was $204.1 million as compared to
the fair value at December 30, 2006 of $236.2
million.
As of
December 29, 2007, a foreign subsidiary of the Company had outstanding
borrowings of $5.0 million denominated in U.S. dollars. The
borrowings were made under a $15.0 million unsecured credit facility which
expires in December 2008. The notes are all short term and bear
interest at a margin over LIBOR.
During
2006 the Company borrowed $8.5 million secured by certain
equipment. The note bears interest at 6.3% and is payable in monthly
installments of principal and interest with a balloon payment of $6.5 million
due in ten years.
Maturities
of long-term debt are as follows:
|
Year
|
(In
Thousands)
|
|||
|
2008
|
$ | 5,332 | ||
|
2009
|
115,173 | |||
|
2010
|
145 | |||
|
2011
|
127 | |||
|
2012
|
182,964 | |||
|
Thereafter
|
260,509 | |||
|
Total
|
$ | 564,250 | ||
There were no commercial paper borrowings outstanding at December 29, 2007. There was $49.0 million of commercial paper borrowings outstanding at December 30, 2006, all of which had original maturity terms of 90 days or less, with a weighted interest rate of 5.5%. Total commercial paper outstanding cannot exceed $50.0 million under the terms of the Facility. The Facililty provides the liquidity backstop for outstanding commercial paper. Accordingly, the combined outstanding balances of the Facility and commercial paper cannot exceed $500.0 million.
(6)
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 pension plans. The
defined contribution plans provide for Company contributions based, depending on
the plan, upon one or more of participant contributions, service and profits.
Company contributions to defined contribution plans totaled $3.8 million, $3.3
million and $4.3 million in 2007, 2006 and 2005, respectively.
Benefits
provided under defined benefit pension plans are based, depending on the plan,
on employees’ average earnings and years of credited service, or a benefit
multiplier times years of service. Funding of these qualified defined benefit
pension plans is in accordance with federal laws and regulations. The
actuarial valuation measurement date for pension plans is as of fiscal year end
for all periods.
The
Company’s defined benefit pension assets are invested in equity securities and
fixed income investments based on the Company’s overall strategic investment
direction as follows:
|
Target
|
||||||||
|
Allocation
|
Return
|
|||||||
|
Equity
investments
|
70 | % | 9-10 | % | ||||
|
Fixed
income
|
30 | % | 5.5-6.5 | % | ||||
|
Total
|
100 | % | 8.25 | % | ||||
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 allow the plans to reach fully funded status. Accordingly, allocation
targets have been established to fit this strategy, with a heavier long-term
weighting of investments in equity securities. The long-term rate of return
assumptions consider historic returns and volatilities adjusted for changes in
overall economic conditions that may affect future returns and a weighting of
each investment class.
The defined benefit pension plan assets
were invested as follows
:
|
2007
|
2006
|
|||||||
|
Equity
investments
|
76 | % | 76 | % | ||||
|
Fixed
income
|
24 | % | 24 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
As of December 30, 2006 the Company adopted SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans.”
The
following table presents a reconciliation of the funded status of the defined
benefit plans:
|
(In
Thousands of Dollars)
|
||||||||
|
2007
|
2006
|
|||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Obligation
at beginning of period
|
$ | 86,268 | $ | 76,026 | ||||
|
Service
cost
|
4,019 | 9,043 | ||||||
|
Interest
cost
|
5,877 | 4,425 | ||||||
|
Actuarial
gain
|
(4,520 | ) | (712 | ) | ||||
|
Plan
amendments
|
1,313 | - | ||||||
|
Benefits
paid
|
(3,993 | ) | (2,514 | ) | ||||
|
Foreign
currency translation
|
105 | - | ||||||
|
Other
- transfer of foreign plan
|
11,136 | - | ||||||
|
Obligation
at end of period
|
$ | 100,205 | $ | 86,268 | ||||
|
Change
in fair value of plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of period
|
$ | 61,901 | $ | 55,698 | ||||
|
Actual
return on plan assets
|
5,898 | 5,710 | ||||||
|
Employer
contributions
|
3,343 | 3,007 | ||||||
|
Benefits
paid
|
(3,993 | ) | (2,514 | ) | ||||
|
Other
- transfer of foreign plan
|
11,136 | - | ||||||
|
Fair
value of plan assets at end of period
|
$ | 78,285 | $ | 61,901 | ||||
|
Funded
status
|
$ | (21,920 | ) | $ | (24,367 | ) | ||
In
accordance with SFAS No. 158, the Company recognized the funded status of its
defined benefit plans on the balance sheet as follows:
|
2007
|
2006
|
|||||||
|
Other
Accrued Expenses
|
$ | (1,178 | ) | $ | (1,183 | ) | ||
|
Pension
and Other Postretirement Benefits
|
(20,742 | ) | (23,184 | ) | ||||
| $ | (21,920 | ) | $ | (24,367 | ) | |||
|
Amounts
Recognized in Accumulated
|
||||||||
|
Other
Comprehensive Income
|
||||||||
|
Net
actuarial loss
|
$ | 11,651 | $ | 17,149 | ||||
|
Prior
service cost
|
2,132 | 1,033 | ||||||
| $ | 13,783 | $ | 18,182 | |||||
The
adjustment for SFAS No. 158 affected our December 30, 2006 Consolidated Balance
Sheet as follows:
|
Before
Application of Statement SFAS No. 158
|
||||
|
Prepaid
benefit cost
|
$ | 6,421 | ||
|
Intangible
asset (pension)
|
1,530 | |||
|
Liability
for pension benefits
|
(16,485 | ) | ||
|
Accumulated
other comprehensive loss, net
|
5,532 | |||
|
Adjustments
for SFAS No. 158
|
||||
|
Prepaid
benefit cost
|
(6,421 | ) | ||
|
Intangible
asset (pension)
|
(1,530 | ) | ||
|
Liability
for pension benefits
|
(7,882 | ) | ||
|
Accumulated
other comprehensive loss, net
|
5,838 | |||
|
After
Application of SFAS No. 158
|
||||
|
Prepaid
benefit cost
|
- | |||
|
Intangible
asset (pension)
|
- | |||
|
Liability
for pension benefits
|
(24,367 | ) | ||
|
Accumulated
other comprehensive loss, net
|
11,370 | |||
The 2006 after tax adjustment for additional minimum pension liability resulted in other comprehensive income of $.9 million.
The
accumulated benefit obligation for all defined benefit pension plans was $90.0
million and $80.0 million at December 29, 2007 and December 30, 2006,
respectively.
The
following table presents information for defined benefit pension plans with
accumulated benefit obligations in excess of plan assets:
|
(In
Thousands)
|
||||||||
|
2007
|
2006
|
|||||||
| Projected benefit obligation | $ | 32,257 | $ | 43,738 | ||||
|
Accumulated
benefit obligation
|
$ | 27,092 | $ | 42,341 | ||||
|
Fair
value of plan assets
|
$ | 11,147 | $ | 23,219 | ||||
The following weighted-average assumptions were used to determine the projected benefit obligation at year end.
|
2007
|
2006
|
|||||||
|
Discount
rate
|
6.36%
|
to
|
6.68%
|
5.89%
|
to
|
8.97%
|
||
|
Expected
long-term rate of return of assets
|
8.25%
|
8.50%
|
||||||
Certain
of our defined benefit pension plan obligations are based on years of service
rather than on projected compensation percentage increases. For those
plans that use compensation increases in the calculation of benefit obligations,
the Company used an assumed rate of compensation increase of 3.0% for the years
ended December 29, 2007 and December 30, 2006.
Net
periodic pension benefit costs for the defined benefit pension plans were as
follows:
|
(In
Thousands of Dollars)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Service
cost
|
$ | 4,019 | $ | 9,043 | $ | 3,617 | ||||||
|
Interest
cost
|
5,877 | 4,425 | 4,020 | |||||||||
|
Expected
return on plan assets
|
(5,802 | ) | (4,903 | ) | (4,530 | ) | ||||||
|
Amortization
of net actuarial loss
|
954 | 1,108 | 995 | |||||||||
|
Amortization
of prior service cost
|
214 | 128 | 128 | |||||||||
|
Net
periodic benefit cost
|
$ | 5,262 | $ | 9,801 | $ | 4,230 | ||||||
For the
year ended December 29, 2007, the net actuarial loss and prior service cost for
the defined benefit pension plans that was amortized into periodic pension
benefit cost was $1.0 million and $.2 million, respectively. A $4.4
million actuarial gain net of the reversal of the $1.2 million amortization) was
recognized in other comprehensive income for the year ended December 29,
2007.
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2008 fiscal year are $.5 million and $.2 million , respectively.
As
permitted under Paragraph 26 of SFAS No. 87, the amortization of any prior
service cost is determined using a straight-line amortization of the cost over
the average remaining service period of employees expected to receive benefits
under the Plan.
The
following assumptions were used to determine net periodic pension cost for the
years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.
|
2007
|
2006
|
2005
|
|||||
|
Discount
rate
|
5.89%
|
to
|
6.00%
|
5.75%
|
5.75%
|
||
|
Expected
long-term rate of return on assets
|
8.5%
|
8.75%
|
8.75%
|
||||
Certain of our defined benefit pension plan obligations are based on years of service rather than on projected compensation percentage increases. For those plans that use compensation increases in the calculation of net periodic pension cost, the Company used an assumed rate of compensation increase of 3.0%, 3.0% and 2.8% for the years ended December 29, 2007, December 30, 2006 and December 31, 2005, respectively.
The
Company estimates that, in 2008, it will make contributions in the amount of
$1.1 million to fund its defined benefit pension plans.
The
following pension benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
(In
Millions)
|
|
|
Year
|
Expected
Payments
|
|
2008
|
$ 4.7
|
|
2009
|
4.9
|
|
2010
|
5.3
|
|
2011
|
5.8
|
|
2012
|
6.2
|
|
2013-2017
|
$41.5
|
(7)
SHAREHOLDERS’ INVESTMENT
Effective
January 1, 2006 the Company adopted Statement of Financial Accounting Standards
(SFAS) 123(R),
Share-Based
Payment
(“SFAS 123(R)”), using the modified prospective application
transition method. Before the adoption of SFAS 123(R), the Company
accounted for share-based compensation in accordance with Accounting Principles
Board Opinion No. 25 (“APB 25”),
Accounting for Stock Issued to
Employees
. Under APB No. 25, restricted stock expense was $.5
million for the year ended December 31, 2005.
Under APB
25, the value of the restricted stock grants was reflected as a separate
component reducing Shareholders’ Investment with an offsetting increase to
Paid-in Capital. Accordingly, as of December 31, 2005, the
unamortized value of restricted stock grants amounting to $.7 million was
reflected as a separate component of Shareholder’s Investment. As a
result of the adoption of SFAS 123(R), effective January 1, 2006, the
unamortized value of restricted stock grants has been reclassified to Paid-in
Capital.
The Company is authorized to make equity-based awards under various plans approved by the Company’s shareholders. The Company has not enacted any changes in the quantity or type of instruments used in share-based payment programs as a result of SFAS 123(R). Additionally, the Company did not modify any outstanding options prior to the adoption of SFAS 123(R). The Company has elected to use the Black-Scholes modified prospective method of valuing equity compensation awards, consistent with the Company’s approach under APB 25. For option grants prior to 2006, the Company utilizes the assumptions noted in the Accounting for Stock Options section of Accounting Policies (Note 2 of Notes to the Consolidated Financial Statements).
SFAS
123(R) requires the reporting of the tax benefit from the tax deduction that is
in excess of recognized compensation costs (excess tax benefits), if any, as a
financing cash flow rather than as an operating cash flow.
Under
SFAS 123(R), the Company recognized approximately $3.8 million and $3.6 million
in share-based compensation expense 2007 and 2006, respectively. The
Company recognizes compensation expense on grants of share-based compensation
awards on a straight-line basis over the vesting period of each
award. As of December 29, 2007, total unrecognized compensation cost
related to share-based compensation awards was approximately $9.6 million, net
of estimated forfeitures, which the Company expects to recognize over a weighted
average period of approximately 2.9 years. The total income tax
benefit recognized relating to share-based compensation for the year ended
December 29, 2007 was approximately $6.7 million.
On April
20, 2007, shareholders approved the 2007 Regal Beloit Corporation 2007 Equity
Incentive Plan (“2007 Plan”), which authorized an additional 2.5 million shares
for issuance under the 2007 Plan. Under the 2007 Plan and the
Company’s 2003 and 1998 stock plans, the Company was authorized as of December
29, 2007 to deliver up to 5.0 million shares of common stock upon exercise of
non-qualified stock options or incentive stock options, or upon grant or in
payment of stock appreciation rights, and restricted
stock. Approximately 2.8 million shares were available for future
grant or payment under the various plans at December 29, 2007.
On April
20, 2007, the Company’s shareholders approved an amendment to the Company’s
Articles of Incorporation that increased the number of shares of common stock
that the Company is authorized to issue from 50.0 million shares to 100.0
million shares. Each authorized share is accompanied by one Common
Stock Purchase Right.
Share-based Incentive
Awards
The
Company uses several forms of share-based incentive awards including
non-qualified stock options, incentive stock options and stock appreciation
rights (SAR’s). All grants are made at prices equal to the fair
market value of the stock on the grant dates, and expire ten years from the
grant date. The exercise price for certain shared-based incentive
awards may be paid in cash, shares of common stock or a combination of cash and
shares.
The per
share weighted average fair value of share-based incentive awards granted
(options and SAR’s) was $17.13 and $13.33 for the years ended December 29,
2007 and December 30, 2006, respectively. The fair value of the
awards for the years ended December 29, 2007 and December 30, 2006
were estimated on the date of grant using the Black-Scholes pricing model
and the following weighted assumptions, expected life of seven years, risk-free
interest rate of 4.6% and 4.9%, expected dividend yield of 1.2% and 1.4% and
expected volatility of 31.9% and 31.2%.
The
average risk-free interest rate is based on U.S. Treasury security rates in
effect as of the grant date. The expected dividend yield is based on
the projected annual dividend as a percentage of the estimated market value of
our common stock as of the grant date. The Company estimated the
expected volatility using a weighted average of daily historical volatility of
our stock price over the expected term of the award. The Company
estimated the expected term using historical data adjusted for the estimated
exercise dates of unexercised awards.
Following
is a summary of share-based incentive plan grant activity (options and SAR’s)
for the three fiscal years ended 2007, 2006 and 2005:
|
Shares
|
Wtd.
Avg.
Exercise
Price
|
Wtd.
Avg.
Remaining
Contractual
Term
(years)
|
Aggregate
Intrinsic
Value
(in
millions)
|
|||||||||||||
|
Number
of shares under option:
|
||||||||||||||||
|
Outstanding
at December 31, 2004
|
1,555,584 | $ | 21.53 | |||||||||||||
|
Granted
|
372,000 | 29.88 | ||||||||||||||
|
Exercised
|
(98,667 | ) | 20.11 | |||||||||||||
|
Forfeited
|
(30,600 | ) | 24.45 | |||||||||||||
|
Outstanding
at December 31, 2005
|
1,798,317 | 23.27 | 5.7 | $ | 20.9 | |||||||||||
|
Exercisable
at December 31, 2005
|
1,138,717 | 22.07 | 4.4 | 15.2 | ||||||||||||
|
Outstanding
at December 31, 2005
|
1,798,317 | $ | 23.27 | |||||||||||||
|
Granted
|
287,750 | 38.17 | ||||||||||||||
|
Exercised
|
(453,142 | ) | 20.70 | |||||||||||||
|
Forfeited
|
(29,450 | ) | 24.75 | |||||||||||||
|
Outstanding
at December 30, 2006
|
1,602,725 | 26.64 | 5.2 | $ | 35.2 | |||||||||||
|
Exercisable
at December 30, 2006
|
956,016 | 23.16 | 3.3 | 28.1 | ||||||||||||
|
Outstanding
at December 30, 2006
|
1,602,725 | $ | 26.64 | |||||||||||||
|
Granted
|
315,750 | 46.24 | ||||||||||||||
|
Exercised
|
(424,850 | ) | 24.20 | |||||||||||||
|
Forfeited
|
(8,850 | ) | 47.01 | |||||||||||||
|
Outstanding
at December 29, 2007
|
1,484,775 | 31.40 | 5.9 | $ | 20.6 | |||||||||||
|
Exercisable
at December 29, 2007
|
741,108 | 24.03 | 4.6 | 15.5 | ||||||||||||
The table
below presents share-based compensation activity for the three fiscal years
ended 2007, 2006 and 2005:
The
Company also granted restricted stock awards to certain
employees. The Company restrictions lapse two to three years after
the date of the grant. The Company values restricted stock awards at
the closing market value of our common stock on the date of grant.
A summary
of restricted stock activity for the three fiscal years ended 2007, 2006 and
2005:
|
Shares
|
Wtd.
Avg.
Share
Fair
Value
|
Aggregate
Intrinsic
Value
(in
thousands)
|
||||||||||
|
Restricted
stock balance at December 31, 2004:
|
14,175 | $ | 20.30 | $ | 0.3 | |||||||
|
Granted
|
30,000 | 29.75 | 0.9 | |||||||||
|
Restricted
stock balance at December 31, 2005:
|
44,175 | $ | 26.72 | $ | 1.2 | |||||||
|
Granted
|
49,500 | 37.31 | 4.2 | |||||||||
|
Restricted
stock balance at December 30, 2006:
|
93,675 | $ | 32.31 | $ | 5.4 | |||||||
|
Granted
|
35,750 | 42.03 | 1.7 | |||||||||
|
Vested
|
(33,975 | ) | 25.76 | (3.3 | ) | |||||||
|
Restricted
stock balance at December 29, 2007:
|
95,450 | $ | 38.27 | $ | 3.8 | |||||||
Shareholders’ Rights
Plan
On
January 28, 2000, the Board of Directors approved a Shareholders’ Rights Plan
(the “Plan”). Pursuant to this Plan, one common share purchase right is included
with each outstanding share of common stock. In the event the rights become
exercisable, each right will initially entitle its holder to buy one-half of one
share of the Company’s common stock at a price of $60 per share (equivalent to
$30 per one-half share), subject to adjustment. The rights will become
exercisable if a person or group acquires, or announces an offer for, 15% or
more of the Company’s common stock. In this event, each right will
thereafter entitle the holder to purchase, at the right’s then-current exercise
price, common stock of the Company or, depending on the circumstances, common
stock of the acquiring corporation having a market value of twice the full share
exercise price. The rights may be redeemed by the Company at a price of
one-tenth of one cent per right at any time prior to the time a person or group
acquires 15% or more, of the Company’s common stock. The rights
expire on January 28, 2010 unless otherwise extended.
Treasury
Stock
The Board
of Directors approved in 2000 a repurchase program of up to 2,000,000 common
shares of Company stock. Management is authorized to effect purchases from time
to time in the open market or through privately negotiated transactions. Through
December 29, 2007, the Company has repurchased 774,100 shares at an average
purchase price of $19.67 per share.
Subsequent
to year end, the Company’s Board of Directors expanded the repurchase
authorization by an additional one million shares at its’ regularly scheduled
meeting on February 2, 2008.
(8)
INCOME TAXES
Income
before income taxes and minority interest consisted of the
following:
|
(In
Thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
United
States
|
$ | 153,140 | $ | 152,244 | $ | 88,714 | ||||||
|
Foreign
|
31,797 | 22,598 | 24,210 | |||||||||
|
Total
|
$ | 184,937 | $ | 174,842 | $ | 112,924 | ||||||
The provision for (benefit of) income taxes is summarized as follows:
|
(In
Thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 44,666 | $ | 45,756 | $ | 32,560 | ||||||
|
State
|
5,255 | 5,844 | 4,332 | |||||||||
|
Foreign
|
6,671 | 5,075 | 3,748 | |||||||||
| 56,592 | 56,675 | 40,640 | ||||||||||
|
Deferred
|
7,091 | 5,376 | (811 | ) | ||||||||
|
Total
|
$ | 63,683 | $ | 62,051 | $ | 39,829 | ||||||
A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in the statements of income follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Federal
statutory tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State
income taxes, net of federal benefit
|
2.0 | 2.2 | 2.4 | |||||||||
|
Domestic
production activities deduction
|
(1.0 | ) | (0.6 | ) | (0.5 | ) | ||||||
|
Other,
net
|
(1.6 | ) | (1.1 | ) | (1.6 | ) | ||||||
|
Effective
tax rate
|
34.4 | % | 35.5 | % | 35.3 | % | ||||||
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 29, 2007 of $40.5 million is classified on the consolidated balance
sheet as a net current deferred income tax benefit of $34.5 million and a
net non-current deferred income tax liability of $75.1
million. The components of this net deferred tax liability are as
follows:
|
(In
Thousands)
|
||||||||
|
December
29,
2007
|
December
29,
2006
|
|||||||
|
Accrued
employee benefits
|
$ | 19,108 | $ | 19,142 | ||||
|
Bad
debt reserve
|
1,931 | 1,531 | ||||||
|
Warranty
reserve
|
2,844 | 2,260 | ||||||
|
Inventory
|
3,044 | - | ||||||
|
Derivative
instruments
|
6,484 | - | ||||||
|
Other
|
9,158 | 8,931 | ||||||
|
Deferred
tax assets
|
42,569 | 31,864 | ||||||
|
Property
related
|
(26,239 | ) | (23,817 | ) | ||||
|
Intangible
items
|
(46,054 | ) | (38,453 | ) | ||||
|
Convertible
debt interest
|
(10,644 | ) | (7,445 | ) | ||||
|
Inventory
|
- | (2,715 | ) | |||||
|
Derivative
instruments
|
- | (1,837 | ) | |||||
|
Other
|
(165 | ) | (657 | ) | ||||
|
Deferred
tax liabilities
|
(83,102 | ) | (74,924 | ) | ||||
|
Net
deferred tax liability
|
$ | (40,533 | ) | $ | (43,060 | ) | ||
The
Company adopted FIN No. 48,
“Accounting for Uncertainty in
Income Taxes,”
on December 31, 2006, the beginning of the Company’s 2007
fiscal year. The Company had unrecognized tax benefits of $6.3 million and
cumulative interest of $.6 million on such unrecognized tax benefits, as of the
date of adoption, including a cumulative effect adjustment of $.6 million to
retained earnings. Also, as a result of the adoption of FIN 48, certain tax
liabilities as of December 30, 2006 were reclassified in the comparative
consolidated balance sheet. Income tax liabilities of $6.3 million
were reclassified from current liabilities to non-current liabilities, and $5.9
million of prepaid taxes were reclassified from current liabilities to current
assets in the December 30, 2006 consolidated balance sheet. As of December 29,
2007, the Company had unrecognized tax benefits of $6.8 million.
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
|
Unrecognized
tax benefits as of December 31, 2006
|
$6.3
|
|
|
Gross
increases – tax positions in prior periods
|
.2
|
|
|
Gross
decreases – tax positions in prior periods
|
-
|
|
|
Gross
increases – tax positions in the current period
|
.3
|
|
|
Settlements
with taxing authorities
|
-
|
|
|
Lapsing
of statutes of limitations
|
-
|
|
|
Unrecognized
tax benefits as of December 29, 2007
|
$6.8
|
Of the
$6.8 million of unrecognized tax benefits at the end of 2007, approximately $3.2
million would impact the effective income tax rate if recognized.
Potential
interest and penalties related to unrecognized tax benefits are recorded in
income tax expense. During the years ended December 29, 2007,
December 30, 2006 and December 31, 2005, the Company recognized approximately
$.3, $.6 and -0- million in net interest expense, respectively. The
Company had approximately $.9, $.6 and -0- million of accrued interest included
in the tax contingency reserve as of December 29, 2007, December 30, 2006 and
December 31, 2005, respectively.
During
the next 12 months, the Company does not anticipate any significant changes to
the total amount of unrecognized tax benefits, other than the accrual of
additional interest expense in an amount similar to the prior year’s
expense.
With few
exceptions, the Company is no longer subject to U.S. federal and state/local
income tax examinations by tax authorities for years prior to 2003, and the
Company is no longer subject to non-U.S. income tax examinations by tax
authorities for years prior to 2001.
At
December 29, 2007 and December 30, 2006, the estimated amount of total
unremitted non-U.S. subsidiary earnings was $51.6 million and $26.2 million,
respectively. No U.S. deferred taxes have been provided on the
undistributed non-U.S. subsidiary earnings because they are considered to be
permanently invested.
(9)
CONTINGENCIES AND COMMITMENTS
On April
26, 2007, the Company received notice that the U.S. Environmental Protection
Agency (“U.S. EPA”) has filed an action against the Company in the United States
District Court for the Northern District of Illinois seeking reimbursement of
the U.S. EPA’s unreimbursed past and future remediation costs incurred in
cleaning up an environmental site located near a former manufacturing facility
of the Company in Illinois. In 1999, the Company and other parties
identified as potentially responsible parties (“PRPs”) reached an agreement with
the U.S. EPA to partially fund the costs of certain response actions taken with
respect to this site. In 2004, the Company received communications
from the U.S. EPA indicating that the Company was identified as one of three
PRPs regarding additional remedial actions to be taken by the U.S. EPA at this
site. In response, the Company provided to the U.S. EPA its
environmental expert’s assessment of the site in 2004. The Company
believes that it is not a PRP with respect to the site in question and intends
to defend vigorously the associated claim. As of December 29, 2007,
amounts that have been recorded in the Company’s financial statements related to
this contingency are not material.
The
Company is, from time to time, party to other lawsuits arising from its normal
business operations. It is believed that the outcome of these
lawsuits will have no material effect on the Company’s financial position or its
results of operations.
The
Company recognizes the cost associated with its standard warranty on its
products at the time of sale. The amount recognized is based on historical
experience. The following is a reconciliation of the changes in accrued warranty
costs for 2007 and 2006:
|
(In
Thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance,
beginning of year
|
$ | 6,300 | $ | 5,679 | ||||
|
Acquisitions
|
4,089 | - | ||||||
|
Payments
|
(6,583 | ) | (6,485 | ) | ||||
|
Provision
|
6,066 | 7,106 | ||||||
|
Balance,
end of year
|
$ | 9,872 | $ | 6,300 | ||||
(10)
LEASES AND RENTAL COMMITMENTS
Rental
expenses charged to operations amounted to $13.3 million in 2007, $7.5 million
in 2006 and $8.1 million in 2005. The Company has future minimum rental
commitments under operating leases as shown in the following table:
|
Year
|
(In
Millions)
|
|||
|
2008
|
$ | 12.3 | ||
|
2009
|
11.4 | |||
|
2010
|
10.0 | |||
|
2011
|
7.2 | |||
|
2012
|
6.1 | |||
|
Thereafter
|
8.4 | |||
(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. Derivative commodity liabilities of $6.1 million are
recorded in other current liabilities at December 29,
2007. Derivative commodity assets of $1.7 million are recorded in
current assets as of December 30, 2006. The unrealized (loss) gain on
the effective portion of the contracts of ($3.8) million net of tax and $1.0
million net of tax, as of December 29, 2007 and December 30, 2006, was recorded
in Accumulated Other Comprehensive Income (“AOCI”).
The
Company uses a cash hedging strategy to protect against an increase in the cost
of forecasted foreign currency denominated transactions. As of December 29,
2007, derivative currency assets of $3.4 million and $0.1 million (notional
value of $213.3 million) are recorded in other current assets and other
non-current liabilities, respectively. At December 30, 2006,
derivative currency assets of $2.2 million and $1.0 million were recorded in
other current assets and other non-current assets, respectively. The
value of the effective portion of the contracts of $2.1 million net of tax and
$2.0 million net of tax, as of December 29, 2007 and December 30, 2006, was
recorded in AOCI.
The
Company has LIBOR-based floating rate borrowings, which expose the Company to
variability in interest payments due to changes in interest
rates. During the third quarter of 2007, the Company entered into pay
fixed/receive LIBOR-based floating interest rate swaps to manage fluctuations in
cash flows resulting from interest rate risk. These interest rate
swaps have been designated as cash flow hedges against forecasted LIBOR-based
interest payments. As of December 29, 2007, an interest rate swap
liability of $14.4 million was included in other non-current
liabilities. The unrealized loss on the effective portion of the
contracts of ($8.9) million net of tax as of December 29, 2007 was recorded in
AOCI.
The net
AOCI balance of ($10.6) million loss at December 29, 2007 is comprised of ($1.6)
million of net current deferred losses expected to be realized in the next year,
and ($9.0) million of non-current deferred losses. The impact of
hedge ineffectiveness was immaterial for all periods included in this
report.
(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 from external
customers. The Company’s products manufactured and sold outside the
United States were approximately 17%, 9% and 10% of net sales in 2007, 2006 and
2005, respectively. Export sales from U.S. operations were approximately 5%, 7%
and 5% in 2007, 2006 and 2005, respectively.
We had
one customer that accounted for more than 10% of our consolidated net sales in
each of the three fiscal years ending December 29, 2007.
Pertinent
data for reportable segments for the three years ended December 29, 2007 is as
follows:
|
(In
Thousands)
|
||||||||||||||||||||
|
Net
Sales
|
Income
From
Operations
|
Identifiable
Assets
|
Capital
Expenditures
|
Depreciation
and
Amortization
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Electrical
|
$ | 1,597,216 | $ | 176,776 | $ | 1,756,215 | $ | 31,988 | $ | 41,076 | ||||||||||
|
Mechanical
|
205,281 | 29,284 | 106,032 | 4,640 | 5,543 | |||||||||||||||
|
Total
|
$ | 1,802,497 | $ | 206,060 | $ | 1,862,247 | $ | 36,628 | $ | 46,619 | ||||||||||
|
2006
|
||||||||||||||||||||
|
Electrical
|
$ | 1,418,541 | $ | 171,787 | $ | 1,319,404 | $ | 46,267 | $ | 33,194 | ||||||||||
|
Mechanical
|
201,004 | 22,230 | 118,155 | 6,278 | 4,488 | |||||||||||||||
|
Total
|
$ | 1,619,545 | $ | 194,017 | $ | 1,437,559 | $ | 52,545 | $ | 37,682 | ||||||||||
|
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
|
$ | 1,428,707 | $ | 134,572 | $ | 1,342,554 | $ | 28,261 | $ | 37,627 | ||||||||||
(13) RELATED PARTY TRANSACTIONS
There
were no related party transactions in 2007 and 2006. During part of
the year ended December 31, 2005, General Electric Company (“GE”) was a related
party.
As part
of the consideration paid for the acquisition of the HVAC Motors and Capacitors
business on December 31, 2004, the Company issued to GE 4,559,048 shares of
common stock (approximately 15% of the Company’s then outstanding common
stock). In connection with the GE acquisitions, the Company and GE
entered into various supply, transition services, and sales
agreements. On August 11, 2005 GE sold all of the shares of the
Company’s stock received in the HVAC Motors and Capacitors transaction, and,
therefore, was no longer considered a “related party” of the
Company. The amount paid to GE from January 1, 2005 through August
10, 2005 for trade payables, transition services and other payables of the
businesses acquired from GE in 2004 was $102.4 million.
ITEM 9
–
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
–
CONTROLS AND PROCEDURES
In
accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”), our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of the end of the year ended December
29, 2007. Based upon their evaluation of these disclosure controls
and procedures, our Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were effective as of
December 29, 2007 to ensure that (a) information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission, and (b) information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management’s Report on Internal
Control over Financial Reporting
. The report of management
required under this Item 9A is contained in Item 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.”
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 29, 2007 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, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See the
information in the sections
Election
of Directors,
Board
of Directors
and
Section
16(a) Beneficial Ownership Reporting Compliance
in the 2008 Proxy
Statement. Information with respect to the executive officers of the
Company appears in Part I of this Annual Report on Form 10-K.
The
Company has adopted a code of business conduct and ethics that
applies to all our directors, officers and employees. The code is
available on our website, along with our current Corporate Governance
Guidelines, at www.regal-beloit.com. The code of business conduct and
ethics and our Corporate Governance Guidelines are also available in
print to any shareholder who requests a copy in writing from the Secretary of
Regal Beloit Corporation. We intend to disclose through our website
any amendments to, or waivers from, the provisions of these codes.
ITEM 11 –
EXECUTIVE
COMPENSATION
See the
information in the sections
Compensation
Discussion and Analysis,
Executive
Compensation,
and
Director
Compensation
sections of the 2008 Proxy Statement.
ITEM 12 –
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the
information in the section
Stock
Ownership
in the 2008 Proxy.
Equity Compensation Plan
Information
The
following table provides information about our equity compensation plans as of
December 29, 2007.
|
Plan
category
|
Number
of securities to be issued upon the exercise of outstanding options,
warrants and rights (1)
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in the first column)
(2)
|
|
Equity
compensation plans approved by security holders
|
1,484,775
|
$31.40
|
2,757,135
|
|
Equity
compensation plans not approved by security holders
|
--
|
--
|
--
|
|
Total
|
1,484,775
|
$31.40
|
2,757,135
|
|
(1)
|
Represents
options to purchase our common stock and stock-settled stock appreciation
rights granted under our 1991 Flexible Stock Incentive Plan, 1998 Stock
Option Plan, 2003 Equity Incentive Plan and 2007 Equity Incentive
Plan.
|
|
(2)
|
Excludes
96,450 shares of restricted common stock previously issued under our 2003
Equity Incentive Plan for which the restrictions have not
lapsed.
|
ITEM
13 –
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
See the
information in
the Board of
Directors
section of our 2008 Proxy.
ITEM 14
–
PRINCIPAL ACCOUNTANT FEES AND SERVICES
See the
information in
Proposal
2: Ratification of Deloitte & Touche LLP as the Company’s
Independent Auditors for 2008
section
of our 2008 Proxy.
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
59 -
61.
(c) See
(a) 2. above
SIG
NATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
REGAL
BELOIT CORPORATION
|
||
|
By:
|
/s/
DAVID A. BARTA
|
|
|
David
A. Barta
|
||
|
Vice
President, Chief Financial Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
/s/
HENRY W. KNUEPPEL
|
Chief
Executive Officer and Director
|
February
27, 2008
|
|
Henry
W. Knueppel
|
(Principal
Executive Officer)
|
|
|
/s/
MARK J. GLIEBE
|
Chief
Operating Officer and Director
|
February
27, 2008
|
|
Mark
J. Gliebe
|
(Principal
Operating Officer)
|
|
|
/s/
DAVID A. BARTA
|
Vice
President, Chief Financial Officer
|
February
27, 2008
|
|
David
A. Barta
|
(Principal
Accounting & Financial Officer)
|
|
|
/s/
CHRISTOPHER L. DOERR
|
Director
|
February
27, 2008
|
|
Christopher
L. Doerr
|
||
|
/s/
THOMAS J. FISCHER
|
Director
|
February
27, 2008
|
|
Thomas
J. Fischer
|
||
|
/s/
DEAN A. FOATE
|
Director
|
February
27, 2008
|
|
Dean
A. Foate
|
||
|
/s/
G. FREDERICK KASTEN, JR.
|
Director
|
February
27, 2008
|
|
G.
Frederick Kasten, Jr.
|
||
|
/s/
RAKESH SACHDEV
|
Director
|
February
27, 2008
|
|
Rakesh
Sachdev
|
||
|
/s/
CAROL N. SKORNICKA
|
Director
|
February
27, 2008
|
|
Carol
N. Skornicka
|
||
|
/s/
CURTIS W. STOELTING
|
Director
|
February
27, 2008
|
|
Curtis
W. Stoelting
|
REGAL
BELOIT CORPORATION
Index
to Financial Statements
And
Financial Statement Schedule
|
Page(s)
In
|
||||
|
Form
10-K
|
||||
|
(1)
|
Financial
Statements:
|
|||
|
27
|
||||
|
December
29, 2007, December 30, 2006 and December 31, 2005
|
28
|
|||
|
29
|
||||
|
December
29, 2007, December 30, 2006 and December 31,
2005
|
30
|
|||
| Consolidated Statements of Comprehensive Income for the fiscal years ended | ||||
|
December
29, 2007, December 30, 2006 and December 31, 2005
|
31
|
|||
|
December
29, 2007, December 30, 2006 and December 31, 2005
|
32
|
|||
|
33
|
||||
|
Page(s)
In
|
||||
|
Form
10-K
|
||||
|
(2)
|
Financial
Statement Schedule:
|
|||
|
55
|
||||
|
56
|
All other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors of Regal Beloit Corporation
Beloit, Wisconsin
We have
audited the consolidated financial statements of Regal Beloit Corporation and
subsidiaries (the “Company”) as of December 29, 2007 and December 30, 2006,
and for each of the three years in the period ended December 29, 2007, and
have issued our report thereon dated February 26, 2008 (which report
expressed an unqualified opinion and included an explanatory paragraph relating
to the Company’s adoption of Financial Accounting Standards Board (FASB)
Statement No. 123R,
Share-Based Payment
on
January 1, 2006;
FASB Statement
No. 158
, Employer’s
Accounting for Defined Benefit Pension and Other Postretirement Plans
on
December 30, 2006; and FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes
on December 31, 2006), and the Company’s internal control over
financial reporting as of December 29, 2007, and have issued our report
thereon dated February 26, 2008; such consolidated financial statements and
reports are included elsewhere in this Form 10-K. Our audit also included the
consolidated financial statement schedule of the Company listed in 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
audit. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
whole, presents fairly, in all material respects, the information set forth
therein.
/s/
Deloitte & Touche LLP
Milwaukee,
Wisconsin
February
26, 2008
SCHE
DULE II
REGAL
BELOIT CORPORATION
VALUATION
AND QUALIFYING ACCOUNTS
|
(In
Thousands of Dollars)
|
||||||||||||||||||||
|
Balance
Beginning
of
Year
|
Charged
to
Expenses
|
Deductions
(a)
|
Adjustments
(b)
|
Balance
End
of
Year
|
||||||||||||||||
|
Allowance
for doubtful accounts:
|
||||||||||||||||||||
|
Year
ended December 29, 2007
|
$ | 5,886 | $ | 1,304 | $ | (437 | ) | $ | 3,981 | $ | 10,734 | |||||||||
|
Year
ended December 30, 2006
|
$ | 2,653 | $ | 2,983 | $ | (667 | ) | $ | 917 | $ | 5,886 | |||||||||
|
Year
ended December 31, 2005
|
$ | 2,376 | $ | 890 | $ | (418 | ) | $ | (195 | ) | $ | 2,653 | ||||||||
|
Allowance
for Product Warranty reserves:
|
||||||||||||||||||||
|
Year
ended December 29, 2007
|
$ | 6,300 | $ | 6,066 | $ | (6,583 | ) | $ | 4,089 | $ | 9,872 | |||||||||
|
Year
ended December 30, 2006
|
$ | 5,679 | $ | 7,106 | $ | (6,485 | ) | $ | - | $ | 6,300 | |||||||||
|
Year
ended December 31, 2005
|
$ | 5,007 | $ | 6,597 | $ | (5,925 | ) | $ | - | $ | 5,679 | |||||||||
_________________________
(a)
Deductions consist of write offs charged against the allowance for doubtful
accounts and warranty claim costs.
(b)
Adjustments related to acquisitions and divestitures.
EXHIBITS
INDEX
|
Exhibit
Number
|
Exhibit
Description
|
|
|
2.1
|
Agreement
and Plan of Merger among the Registrant, REGAL-BELOIT Acquisition Corp.,
and Marathon Electric Manufacturing Corporation dated as of February 26,
1997, as amended and restated March 17, 1997 and March 26, 1997.
[Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s
Current Report on Form 8-K dated April 10, 1997 (File No.
001-07283)]
|
|
|
2.2
|
Stock
Purchase Agreement, dated as of August 7, 2000, as amended by First
Amendment to Stock Purchase Agreement, dated as of September 29, 2000,
among Regal Beloit Corporation, LEC Acquisition Corp., LEESON Electric
Corporation (“LEESON”) and LEESON’S Shareholders. [Incorporated by
reference to Exhibit 2 to Regal Beloit Corporation’s Current Report on
Form 8-K dated October 13, 2000 (File No. 001-07283)]
|
|
|
2.3
|
Purchase
Agreement, dated as of August 10, 2004, between Regal Beloit Corporation
and General Electric Company. [Incorporated by reference to Exhibit 2.1 to
Regal Beloit Corporation’s Current Report on Form 8-K dated August 30,
2004 (File No. 001-07283)]
|
|
|
2.4
|
Amendment
to Purchase Agreement, dated as of August 30, 2004, between Regal Beloit
Corporation and General Electric Company. [Incorporated by reference to
Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K dated
August 30, 2004 (File No. 001-07283)]
|
|
|
2.5
|
Purchase
Agreement, dated as of November 14, 2004, between Regal Beloit Corporation
and General Electric Company. [Incorporated by reference to Exhibit 2.1 to
Regal Beloit Corporation’s Current Report on Form 8-K dated December 31,
2004 (File No. 001-07283)]
|
|
|
2.6
|
Amendment
to Purchase Agreement, dated as of December 31, 2004, between Regal Beloit
Corporation and General Electric Company. [Incorporated by reference to
Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K dated
December 31, 2004 (File No. 001-07283)]
|
|
|
2.7
|
Purchase
Agreement, dated as of July 3, 2007, by and among Regal Beloit
Corporation, Tecumseh Products Company, Fasco Industries, Inc. and Motores
Fasco de Mexico, S. de R.L. de C.V. [Incorporated by reference to Exhibit
2.1 to Regal Beloit Corporation’s Current Report on Form 8-K filed on
September 7, 2007]
|
|
|
3.1
|
Articles
of Incorporation of Regal Beloit Corporation, as amended through April 20,
2007. [Incorporated by reference to Exhibit 3.1 to Regal Beloit
Corporation’s Current Report on Form 8-K filed on April 25, 2007 (File No.
001-07283)]
|
|
|
3.2
|
Amended
and Restated Bylaws of Regal Beloit Corporation. [Incorporated by
reference to Exhibit 3.2 to Regal Beloit Corporation’s Current Report on
Form 8-K filed on April 25, 2007 (File No. 001-07283)]
|
|
|
4.1
|
Articles
of Incorporation, as amended, and Amended and Restated Bylaws of Regal
Beloit Corporation [Incorporated by reference to Exhibits 3.1 and 3.2
hereto]
|
|
|
4.2
|
Indenture,
dated April 5, 2004, between Regal Beloit Corporation and U.S. Bank
National Association, as Trustee. [Incorporated by reference to Exhibit
4.3 to Regal Beloit Corporation’s Registration Statement on Form S-3 filed
on June 21, 2004 (Reg. No. 333-116706)]
|
|
|
4.3
|
First
Supplemental Indenture, dated December 9, 2004, between Regal Beloit
Corporation and U.S. Bank National Association, as Trustee. [Incorporated
by reference to Exhibit 4 to Regal Beloit Corporation’s Current Report on
Form 8-K filed on December 14, 2004 (File No.
001-07283)]
|
|
|
4.4
|
Form
of 2.75% Convertible Senior Subordinated Note due 2024 (included in
Exhibit 4.2).
|
|
|
4.5
|
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 (Reg. 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 (Reg. No. 1-7283)
filed January 31, 2000]
|
|
Exhibit
Number
|
Exhibit
Description
|
|
|
4.7
|
Amendment
to Rights Agreement, effective as of June 11, 2002, between Regal Beloit
Corporation and BankBoston, N.A. [Incorporated by reference to Exhibit 4.6
to Regal Beloit Corporation’s Current Report on Form 8-K dated
January 31, 2000]
|
|
|
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 Registration
Statement 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 Registration
Statement on Form 8-A/A filed on January 6, 2005 (File No.
001-07283)]
|
|
|
4.10
|
Second
Amended and Restated Credit Agreement, dated as of April 30, 2007, among
Regal Beloit Corporation, the financial institutions party thereto and
Bank of America, N.A., as administrative agent. [Incorporated by reference
to Exhibit 4.1 to Regal Beloit Corporation's Current Report on Form 8-K
dated April 30, 2007 (File No. 001-07283)]
|
|
|
4.11
|
First
Amendment, dated as of August 23, 2007, to the Second Amended and Restated
Credit Agreement, dated as of April 30, 2007, by and among Regal Beloit
Corporation, various financial institutions and Bank of America, N.A., as
Administrative Agent. [Incorporated by reference to Exhibit 4.3 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on August 24, 2007
(File No. 001-07283)]
|
|
|
4.12
|
Note
Purchase Agreement, dated as of August 23, 2007, by and among Regal Beloit
Corporation and Purchasers listed in Schedule A attached thereto.
[Incorporated by reference to Exhibit 4.1 to Regal Beloit Corporation’s
Current Report on Form 8-K filed on August 24, 2007 (File No.
001-07283)]
|
|
|
4.13
|
Subsidiary
Guaranty Agreement, dated as of August 23, 2007, from certain subsidiaries
of Regal Beloit Corporation. [Incorporated by reference to Exhibit 4.2 to
Regal Beloit Corporation’s Current Report on Form 8-K filed on August 24,
2007] (File No. 001-07283)]
|
|
|
10.1*
|
Regal
Beloit Corporation Stock Option Deferral Policies and Procedures.
[Incorporated by reference to Exhibit 10.1 to Regal Beloit Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2004 (File No.
001-07283)]
|
|
|
10.2*
|
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)]
|
|
|
10.3*
|
1998
Stock Option Plan, as amended [Incorporated by reference to Exhibit 99 to
Regal Beloit Corporation’s Registration Statement on Form S-8 (Reg. No.
333-84779)]
|
|
|
10.4*
|
2003
Equity Incentive Plan [Incorporated by reference to Exhibit B to Regal
Beloit Corporation’s Definitive Proxy Statement on Schedule 14A for the
2003 Annual Meeting of Shareholders (File No.
001-07283)]
|
|
|
10.5*
|
Regal
Beloit Corporation 2007 Equity Incentive Plan (incorporated by reference
to Appendix B to Regal Beloit Corporation's definitive proxy statement on
Schedule 14A for the Regal Beloit Corporation 2007 annual meeting of
shareholders held April 20, 2007 (File No. 1-07283))
|
|
|
10.6*
|
Form
of Key Executive Employment and Severance Agreement between Regal Beloit
Corporation and each of Henry W. Knueppel, Mark J. Gliebe and David A.
Barta.
|
|
|
10.7*
|
Form
of Key Executive Employment and Severance Agreement between Regal Beloit
Corporation and each of Paul J. Jones and Terry R.
Colvin.
|
|
|
10.8*
|
Form
of Agreement for Stock Option Grant. [Incorporated by reference to Exhibit
10.9 to Regal Beloit Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2005. (File No.
001-07283)]
|
|
|
10.9*
|
Form
of Restricted Stock Agreement. [Incorporated by reference to
Exhibit 10.10 to Regal Beloit Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2005. (File No.
001-07283)]
|
|
Exhibit
Number
|
Exhibit
Description
|
|
|
10.10*
|
Form
of Restricted Stock Unit Award Agreement under the Regal Beloit
Corporation 2003 Equity Incentive Plan.
|
|
|
10.11*
|
Form
of Stock Option Award Agreement under the Regal Beloit Corporation 2007
Equity Incentive Plan. [Incorporated by reference to Exhibit 10.2 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on April 25, 2007
(File No. 001-07283)]
|
|
|
10.12*
|
Form
of Restricted Stock Award Agreement under the Regal Beloit Corporation
2007 Equity Incentive Plan. [Incorporated by reference to Exhibit 10.3 to
Regal Beloit Corporation’s Current Report on Form 8-K filed on April 25,
2007 (File No. 001-07283)]
|
|
|
10.13*
|
Form
of Restricted Stock Unit Award Agreement under the Regal Beloit
Corporation 2007 Equity Incentive Plan. [Incorporated by reference to
Exhibit 10.4 to Regal Beloit Corporation’s Current Report on Form 8-K
filed on April 25, 2007 (File No. 001-07283)]
|
|
|
10.14*
|
Form
of Stock Appreciation Right Award Agreement under the Regal Beloit
Corporation 2007 Equity Incentive Plan. [Incorporated by reference to
Exhibit 10.5 to Regal Beloit Corporation’s Current Report on Form 8-K
filed on April 25, 2007 (File No. 001-07283)]
|
|
|
10.15*
|
Target
Supplemental Retirement Plan for designated Officers and Key Employees, as
amended. [Incorporated by reference to Exhibit 10.1 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on October 26,
2007 (File No. 001-07283)]
|
|
|
10.16*
|
Form
of Participation Agreement for Target Supplemental Retirement
Plan. [Incorporated by reference to Exhibit 10.12 to Regal
Beloit Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2005. (File No. 001-07283)]
|
|
|
21
|
Subsidiaries
of Regal Beloit Corporation.
|
|
|
23
|
Consent
of Independent Auditors.
|
|
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
32
|
Section
1350 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
99.2
|
Proxy
Statement of Regal Beloit Corporation for the 2008 Annual Meeting of
Shareholders
|
|
|
[The
Proxy Statement for the 2008 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 2008 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.
|