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 30, 2006
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
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None
(Title
of Class)
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Indicate
by check mark if the registrant is well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes T
No
£
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £
No
T
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes T
No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. T
Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer T
Accelerated filer £
Non-accelerated filer £
Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £
No
T
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 1, 2006 was approximately $1.3 billion.
On
February 26, 2007, the registrant had outstanding 31,164,732 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 20, 2007 is incorporated by reference into
Part
III, hereof.
ANNUAL
REPORT ON FORM 10-K
FOR
YEAR ENDED DECEMBER 30, 2006
TABLE
OF CONTENTS
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Page
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PART
I
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3
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9
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11
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12
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13
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13
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PART
II
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14
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15
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16
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22
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23
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47
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47
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47
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PART
III
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48
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48
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48
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48
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48
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PART
IV
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49
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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:
| · |
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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| · |
unanticipated
fluctuations in commodity prices and raw material costs;
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cyclical
downturns affecting the global market for capital
goods;
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unexpected
issues and costs arising from the integration of acquired companies
and
businesses;
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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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the
impact of capital market transactions that we may
effect;
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the
availability and effectiveness of our information technology
systems;
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unanticipated
costs associated with litigation
matters;
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actions
taken by our competitors;
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difficulties
in staffing and managing foreign
operations;
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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 20, 2007 (the “2007 Proxy Statement”) or to information contained in
specific sections of the Proxy Statement, incorporate the information into
that
Item by reference.
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 and
Europe.
We
believe our competitive strengths include:
| · |
management
experience and depth;
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| · |
strategic
product offering;
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| · |
leading
market positions;
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| · |
multi-channel/multi-brand
distribution;
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| · |
broad
and diverse customer base;
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| · |
differentiated
and innovative technology, and
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| · |
strategic
global and rapid response
operations.
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Our
business strategy includes:
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capitalizing
on new product opportunities;
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capitalizing
on our Asian manufacturing and commercial
base;
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leveraging
our global manufacturing and sourcing structures to achieve operating
margin improvements;
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leveraging
Lean Six Sigma;
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innovating
new products;
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people
and process excellence, and
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industry
consolidation through
acquisitions.
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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 30, 2006 is contained
in
Footnote 12 of the Financial Statements.
ELECTRICAL
SEGMENT
Our
Electrical segment includes a full line of AC and DC commercial and industrial
electric motors, HVAC motors, electric generators and controls, capacitors
and
electrical connecting devices. 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 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. The acquisitions of
these GE businesses complemented our existing electrical products businesses,
providing us with:
| · |
a
leading market position and brand name in the HVAC motor
market;
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diversification
of our served markets and a broad base of leading HVAC
customers;
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| · |
patented
electronically commutated motor (ECM)
technology;
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| · |
a
strong management team and infrastructure in place to support growth;
and
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| · |
significant
scale and low cost manufacturing capabilities in Mexico and
India.
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We
manufacture and market AC and DC commercial, industrial and HVAC electric motors
ranging in size from sub-fractional to small integral horsepowers to larger
commercial and industrial motors from 50 through 800 horsepower. We offer
thousands of stock models of electric motors in addition to the motors we
produce to specific customer specifications. We also produce and market
precision servo motors, electric generators ranging in size from five kilowatts
through four megawatts, automatic transfer switches and paralleling switchgear
to interconnect and control electric power generation equipment and electrical
connecting devices such as terminal blocks, fuse holders and power blocks.
Additionally, our Electrical segment markets a line of AC and DC adjustable
speed drives. We manufacture capacitors for use in HVAC systems, high intensity
lighting and other applications. We sell our Electrical segment’s products to
distributors, original equipment manufacturers and end users across many
markets.
Our
power
generation business, which includes electric generators and power generation
components and controls, represents a growing portion of our Electrical
segment’s net sales. The market for electric power generation components and
controls has grown in recent years as a result of a desire on the part of end
users to reduce losses due to power disturbances. Our generators are used in
industrial, agricultural, marine, military, transportation and other
applications.
We
leverage efficiencies across our motor operations. We centralize the
manufacturing, purchasing, engineering, accounting, information technology
and
quality control activities of our Electrical segment. Furthermore, we
specifically foster the sharing of best practices across each of the Electrical
segment and create focused centers of excellence in each of our manufacturing
functions. The following is a description of our major Electrical product
businesses and the primary products that they manufacture and
market:
GE
Commercial Motors by REGAL BELOIT.
Manufactures a full line of motors for pump, compressor, commercial and
residential HVAC applications. Manufactures capacitors for use in HVAC systems,
high intensity lighting and other applications.
LEESON
Electric.
Manufactures AC motors up to 800 horsepower and DC motors up to five horsepower,
gear reducers, gearmotors and drives primarily for the power transmission,
pump,
food processing, fitness equipment and industrial machinery
markets.
Lincoln
Motors.
Manufactures AC motors from 1/4 horsepower to 800 horsepower primarily for
industrial and commercial pumps, compressors, elevators, machine tools, and
specialty products.
Marathon
Electric.
Manufactures AC motors up to 800 horsepower primarily for HVAC, pumps, power
transmissions, fans and blowers, compressors, agriculture products, processing
and industrial manufacturing equipment.
Marathon
Generators.
Manufactures AC generators from five kilowatts to four megawatts that primarily
serve the standby power, prime power, refrigeration, industrial and irrigation
markets.
Marathon
Special Products.
Manufactures fuse holders, terminal blocks, and power blocks primarily for
the
HVAC, telecommunications, electric control panel, utilities and transportation
markets.
Thomson
Technology.
Manufactures automatic transfer switches, paralleling switchgear and controls,
and systems controls primarily for the electric power generation
market.
MECHANICAL
SEGMENT
Our
Mechanical segment includes a broad array of mechanical motion control products
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.
In
May
2006 we sold substantially all of the assets of our cutting tools
business.
The
following is a description of our major Mechanical segment businesses and the
primary products they manufacture and market:
CML
(Costruzioni Meccaniche Legananesi S.r.L.).
Manufactures bevel gear valve actuators primarily for the oil, gas, wastewater
and water distribution markets.
Durst.
Manufactures standard and specialized industrial transmissions and hydraulic
pump drives primarily for the construction, agriculture, energy, material
handling, forestry, lawn and garden and railroad maintenance
markets.
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. 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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Sinya
Motors
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2006
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$
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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.
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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.
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.
MARKETS
AND COMPETITORS
The
worldwide market for electric motors is estimated in excess of $25 billion.
The
overall domestic market for electric motors is estimated at $9 billion annually,
although we estimate the sectors in which we primarily compete, commercial
and
industrial electric motors and HVAC/refrigeration motors, to be approximately
a
$5.0 billion segment of the overall domestic market. We believe approximately
60% of all electricity generated in the U.S. runs through electric motors.
We
believe we are among the largest producers of commercial and industrial motors
and the largest producer of HVAC motors. In addition, we believe that we are
the
largest electric generator manufacturer in the United States that is not
affiliated with a diesel engine manufacturer. Major domestic competitors for
our
electrical products include Baldor Electric, U.S. Electric Motors (a division
of
Emerson Electric Co.), 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 diversity of customers and applications. We
believe that we compete primarily on the basis of quality, price, service and
our promptness of delivery. We had one customer that accounted for more than
10%
of our sales in 2006 and 2005. There were no customers that accounted for 10%
of
sales in 2004.
PRODUCT
DEVELOPMENT AND ENGINEERING
Each
of
our business segments has its own product development and design teams that
continuously enhance our existing products and develop new products for our
growing base of customers that require custom and standard solutions. We have
one of the electric motor industry’s most sophisticated product development and
testing laboratories. We believe these capabilities provide a significant
competitive advantage in the development of high quality motors and electric
generators incorporating leading design characteristics such as low vibration,
low noise, improved safety, reliability and enhanced energy efficiency.
We
are
continuing to expand our business by developing new, differentiated products
in
each of our business segments. We work closely with our customers to develop
new
products or enhancements to existing products that improve performance and
meet
their needs.
As
part
of our 2004 HVAC motors and capacitors acquisition, we acquired new ECM motor
technology. An ECM motor is a brushless DC electric motor with integrated speed
control made possible through sophisticated electronic and sensing technology.
ECM motors operate at variable speeds with attractive performance
characteristics versus competitive variable speed solutions in comfort, energy
efficiency, motor life and noise. GE developed the first generation ECM motors
over 15 years ago. ECM technology is protected by over 125 patents, and we
acquired from GE intellectual property and usage rights relating to ECM
technology. ECM motors offer significantly greater temperature and air quality
control as well as increased energy efficiency.
While
we
believe that our brands and innovation are important to our continued growth
and
strong financial results, we do not consider any individual brand or patent,
except for the ECM related patents, to be material.
MANUFACTURING
AND OPERATIONS
We
have
developed and acquired global operations in lower cost locations such as Mexico,
India, and China that complement our flexible, rapid response operations in
the
United States, Canada and Europe. Our vertically integrated manufacturing
operations, including our own aluminum die casting and steel stamping operations
are an important element of our rapid response capabilities. In addition, we
have an extensive internal logistics operation 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 still maintain a dual sourcing capability in our existing
domestic facilities to ensure a reliable supply source for our customers. We
regularly invest in machinery and equipment and other improvements to, and
maintenance of, our facilities. Additionally, we have typically obtained
significant amounts of quality capital equipment as part of our acquisitions,
often increasing overall capacity and capability. Base materials for our
products consist primarily of: steel in various types and sizes, including
bearings and weldments; copper magnet wire; and ferrous and non-ferrous
castings. We purchase our raw materials from many suppliers and, with few
exceptions, do not rely on any single supplier for any of our base
materials.
We
have
also continued to upgrade our manufacturing equipment and processes, including
increasing our use of computer aided manufacturing systems, developing our
own
testing systems, redesigning plant layout and redesigning products to take
full
advantage of our more productive equipment and to improve product flow. We
believe that our continued product redesign and efficient plant layout often
provide us with a competitive cost advantage in our manufacturing operation.
Our
goal is to be a low cost producer in our core product areas.
FACILITIES
We
have
manufacturing, sales and service facilities throughout the United States and
Canada and in Mexico, Europe, China and India. Our Electrical segment currently
includes 63 manufacturing, service and distribution facilities, of which 21
are
principal manufacturing facilities. The Electrical segment’s present operating
facilities contain a total of approximately 4,298,000 square feet of space
of
which approximately 1,281,000 square feet are leased. Our Mechanical segment
currently includes 15 manufacturing, service and distribution facilities, of
which 5 are principal manufacturing facilities. The Mechanical segment’s present
operating facilities contain a total of approximately 1,233,000 square feet
of
space of which approximately 56,000 square feet are leased. Our principal
executive offices are located in Beloit, Wisconsin in an owned approximately
54,000 square foot office building. We believe our equipment and facilities
are
well maintained and adequate for our present needs.
BACKLOG
Our
business units have historically shipped the majority of their products in
the
month the order is received. 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 30, 2006, our backlog was $174.6 million, as compared to
$140.4 million on December 31, 2005. We believe that virtually all of our
backlog is shippable in 2007.
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 30, 2006, the Company employed approximately
13,600 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, 2007, 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
|
58
|
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
Gliebe
|
46
|
President
and Chief Operating Officer
|
Elected
President and Chief Operating Officer in December 2005. Joined the
Company
in January 2005 as Vice President and President - Electric Motors
Group,
following our acquisition of the HVAC motors and capacitors businesses
from GE; previously employed by GE as the General Manager of GE Motors
& Controls in the GE Consumer & Industrial business unit from June
2000 to December 2004.
|
|
David
A. Barta
|
44
|
Vice
President and Chief Financial Officer
|
Joined
the Company in June 2004 and was elected Vice President, Chief Financial
Officer in July 2004. Prior to joining the Company, Mr. Barta served
in
several financial management positions for Newell Rubbermaid Inc.
from
1995 to June 2004, serving most recently as Chief Financial Officer
Levolor/Kirsch Division. His prior positions during this time included
Vice President - Group Controller Corporate Key Accounts, Vice President
-
Group Controller Rubbermaid Group and Vice President Investor
Relations.
|
|
David
L. Eisenreich
|
63
|
Vice
President and President, Industrial Power Transmission and Power
Generation
|
Elected
Vice President and President of Industrial Power Transmission and
Power
General in April 2006; Elected Vice President and President, Power
Generation and Mechanical Components in 2005. Served as Vice President
and
President of Motor Technologies Group from 2001 to 2005; Joined the
Company in 1997 with acquisition of Marathon Electric.
|
|
Paul
J. Jones
|
36
|
Vice
President General Counsel and Corporate 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 Foley & Lardner LLP where he worked since
1998.
|
|
Terry
R. Colvin
|
51
|
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.
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 and China. Approximately 8,700 of our over 13,600 total
employees and 13 of our 29 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 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 requires us to maintain specified financial ratios
and satisfy certain financial condition tests, which may require that we take
action to reduce our debt or to act in a manner contrary to our business
objectives. If an event of default under our credit facility occurs, then the
lenders could elect to declare all amounts outstanding under the credit
facility, together with accrued interest, to be immediately due and payable,
and
a cross default could occur under the terms of our senior subordinated
convertible notes allowing the trustee or the holders of the notes to declare
the principal amount of the notes, together with accrued interest, to be
immediately due and payable.
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.
None.
We
have
manufacturing, sales and service facilities throughout the United States and
Canada and in Mexico, Europe, China and India.
Our
Electrical segment currently includes 63 manufacturing, service and distribution
facilities, of which 21 are principal manufacturing facilities. The Electrical
segment’s present operating facilities contain a total of approximately 4.3
million square feet of space of which approximately 30% are leased.
Our
Mechanical segment currently includes 15 manufacturing, service and distribution
facilities, of which 8 are principal manufacturing facilities. The Mechanical
segment’s present operating facilities contain a total of approximately 1.2
million square feet of space of which approximately 5% are leased.
At
December 30, 2006, three Mechanical segment buildings totaling approximately
443,000 square feet 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.
|
Location
|
Square
Footage
|
Status
|
Description
of Use
|
|
Electrical
Segment
|
|||
|
Wausau,
WI
|
498,329
|
Owned
|
Manufacturing
|
|
Juarez,
Mexico
|
335,000
|
Owned
|
Manufacturing
|
|
Changzhou,
China
|
322,500
|
Leased
|
Manufacturing
|
|
Reynosa,
Mexico
|
320,000
|
Owned
|
Manufacturing
|
|
Springfield,
MO
|
290,000
|
Owned
|
Manufacturing
|
|
Shanghai,
China
|
226,000
|
Owned
|
Manufacturing
|
|
Indianapolis,
IN
|
220,832
|
Leased
|
Warehouse
|
|
Faridabad,
India
|
220,000
|
Owned
|
Manufacturing
|
|
Lebanon,
MO
|
186,900
|
Owned
|
Manufacturing
|
|
Lincoln,
MO
|
120,000
|
Owned
|
Manufacturing
|
|
Monterrey,
Mexico
|
108,103
|
Leased
|
Manufacturing
|
|
Lima,
OH
|
107,000
|
Owned
|
Manufacturing
|
|
Blytheville,
AR
|
107,000
|
Leased
|
Manufacturing
|
|
West
Plains, MO
|
106,000
|
Owned
|
Manufacturing
|
|
Black
River Falls, WI
|
103,000
|
Owned
|
Manufacturing
|
|
All
Other (36)
|
1,027,275
|
(1)
|
(1)
|
|
Mechanical
Segment
|
|||
|
Chicago,
IL
|
282,973
|
Owned
|
Manufacturing
|
|
Liberty,
SC
|
173,516
|
Owned
|
Manufacturing
|
|
Aberdeen,
SD
|
164,960
|
Owned
|
Manufacturing
|
|
Shopiere,
WI
|
132,000
|
Owned
|
Manufacturing
|
|
Union
Grove, WI
|
122,000
|
Owned
|
Manufacturing
|
|
All
Other (10)
|
357,164
|
(2)
|
(2)
|
|
(1)
Less significant manufacturing, service and distribution and engineering
facilities located in the United States, Canada, Europe, and Asia:
Electrical leased square footage 1,281,397.
(2)
Mechanical leased square footage
56,492.
|
|||
An
action
was filed on June 4, 2004, and amended in September 2004, against one of the
Company’s subsidiaries, Marathon Electric Manufacturing Corporation
(“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and
Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The
action was filed in the United States Bankruptcy Court for the Southern District
of New York where each of the Enron Wind entities has consolidated its Chapter
11 bankruptcy petition as part of the Enron Corporation bankruptcy proceedings.
In the action against Marathon, Enron Wind has asserted various claims relating
to the alleged failures and/or degradations of performance of about 564
generators sold by Marathon to Enron Wind from 1997 to 1999. In January 2001,
Enron Wind and Marathon entered into a “Generator Warranty and Settlement
Agreement and Release of All Claims” (“Warranty Agreement”). This Warranty
Agreement resolved various issues related to past performance of the generators,
provided a limited warranty related to the generators going forward, and
contained a release by all parties of any claims related to the generators
other
than those arising out of the obligations contained in the Warranty
Agreement.
Enron
Wind is seeking to recover the purchase price of the generators and
transportation costs totaling about $21 million. In addition, although the
Warranty Agreement contains a waiver of consequential, incidental, and punitive
damages, Enron Wind claims that this limitation is unenforceable and seeks
recovery of consequential, incidental and punitive damages incurred by it and
by
its customers, totaling an additional $100 million. Enron Wind has asserted
claims of breach of contract, breach of the implied covenant of good faith
and
fair dealing, promissory fraud, and intentional interference with contractual
relations. Marathon has filed a motion with the court seeking to have many
of
Enron Wind’s claims dismissed. Enron Wind recently has filed a motion with the
court seeking a declaration that Marathon had an obligation under the Warranty
Agreement to repair or replace the generators in the first instance regardless
of whether an actual breach of warranty had occurred. The court has held
hearings on both motions, but has not yet ruled.
The
Company believes that this action is without merit and that it has meritorious
defenses to the action. The Company intends to defend vigorously all of the
asserted claims. The litigation is in an early discovery phase and it is
difficult for the Company to predict the impact the litigation may ultimately
have on the Company’s results of operations or financial condition, including
the expenses the Company may incur to defend against the action. As of December
30, 2006, the Company continues to accrue for anticipated costs in defending
against this matter and such accumulated reserves as of December 30, 2006 are
immaterial.
During
the third quarter of 2006, the Company received notice that the U.S.
Environmental Protection Agency (“U.S. EPA”) was seeking reimbursement for
certain costs incurred in cleaning up an environmental site in Illinois. In
2004, the Company had previous communication from the U.S. EPA that it was
identified as one of three potentially responsible parties (“PRP’s”) regarding
this site. The Company had previously reached a settlement in 1999 with the
U.S.
EPA regarding this secure site. In 2004, management provided its expert’s
assessment of the site to the U.S. EPA, which had not proceeded with any
enforcement action. The Company believes that it is not a PRP and intends to
defend vigorously the associated claim. As of December 30, 2006 amounts that
have been recorded in the Company’s financial statements related to this
contingency are immaterial.
From
time
to time, the Company, in the normal course of business, is involved in various
claims and legal actions arising out of its operations. The Company does not
believe that the ultimate disposition of any currently pending claims or actions
would have a material adverse effect on the Company or its financial
condition.
There
were no matters submitted to a vote of security holders during the quarter
ended
December 30, 2006.
PART
II
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s Common Stock, $.01 par value (“Common Stock”), is traded on the New
York Stock Exchange under the symbol “RBC.” Prior to January 21, 2005, the
Company’s stock was traded on the American Stock Exchange under the symbol
“RBC.” The following table sets forth the range of high and low closing sales
prices for the Common Stock for the period from January 1, 2005 through December
30, 2006. The Company submitted its Section 303A.12(a) CEO Certification to
the
NYSE on February 26, 2007.
|
2006
|
2005
|
||||||||||||||||||
|
Price
Range
|
Price
Range
|
||||||||||||||||||
|
|
|
|
High
|
Low
|
Dividend
Declared
|
High |
Low
|
Dividend
Declared
|
|||||||||||
|
1st
Quarter
|
$
|
42.87
|
$
|
34.82
|
$
|
.13
|
$
|
32.08
|
$
|
27.69
|
$
|
.12
|
|||||||
|
2nd
Quarter
|
53.99
|
40.39
|
.14
|
29.41
|
25.25
|
.13
|
|||||||||||||
|
3rd
Quarter
|
46.58
|
38.61
|
.14
|
33.70
|
28.15
|
.13
|
|||||||||||||
|
4th
Quarter
|
54.18
|
42.78
|
.14
|
38.94
|
30.30
|
.13
|
|||||||||||||
The
Company has paid 186 consecutive quarterly dividends through January 2007.
The
number of registered holders of Common Stock as of February 26, 2007 was
711.
The
following table contains detail related to the repurchase of common stock based
on the date of trade during the quarter ended December 30, 2006.
|
2006
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
|
|||||||||
|
October
1 to November
4
|
-
|
-
|
-
|
1,225,900
|
|||||||||
|
November
5 to December
2
|
41,931
|
$
|
50.46
|
-
|
1,225,900
|
||||||||
|
December
3 to December
30
|
-
|
-
|
1,225,900
|
||||||||||
|
Total
|
41,931
|
-
|
|||||||||||
Under
the
Company's equity incentive plans, participants may pay the exercise price or
satisfy all or a portion of the federal, state and local withholding tax
obligations arising in connection with plan awards by electing to (a) have
the
Company withhold shares of common stock otherwise issuable under the award,
(b)
tender back shares received in connection with such award or (c) deliver other
previously owned shares of common stock, in each case having a value equal
to
the exercise price or the amount to be withheld. During the fourth quarter
of
2006, the Company acquired 41,931 shares of common stock that were presented
to
the Company by employees to pay the exercise price or to satisfy withholding
taxes in connection with the exercise and/or vesting of stock awards. These
shares were then cancelled by the Company.
The
Board
of Directors approved, in 2000, a repurchase program of up to 2,000,000 common
shares of Company stock. Management was authorized to effect purchases from
time
to time in the open market or through privately negotiated transactions. The
Company has repurchased 774,100 shares at an average purchase price of $19.67
per share under this program.
GE
sold
4,559,048 shares issued to it as part of the consideration for our December
2004
acquisition of the HVAC motor and capacitor business during the Company’s
secondary offering which closed August 10, 2005. Regal Beloit also issued
1,530,321 primary shares as part of the August 2005 offering.
Item
12
of this Annual Report on Form 10-K contains certain information relating to
the
Company's equity compensation plans.
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, 2001 through December 30, 2006. In each case, the graph assumes
the
investment of $100.00 on December 31, 2001.
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||
|
Regal
Beloit Corporation
|
97.10
|
105.85
|
140.46
|
176.71
|
265.31
|
|||||||||||
|
S&P
Small Cap 600 Index
|
85.37
|
118.48
|
145.32
|
156.48
|
180.14
|
|||||||||||
|
S&P
600 Electrical Components & Equipment
|
79.29
|
100.00
|
120.66
|
134.05
|
181.44
|
|||||||||||
ITEM
6 - SELECTED
FINANCIAL DATA
The
selected statement of income data for the years ended December 30, 2006 and
December 31, 2005 and 2004 and the balance sheet data at December 30, 2006
and
December 31, 2005 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, 2003 and 2002 and the balance sheet data at December 31, 2004,
2003
and 2002 are derived from audited financial statements not included
herein.
|
(In
Thousands, Except Per Share Data)
|
||||||||||||||||
|
Year
Ended
December
30
|
Year
Ended December
31
|
|||||||||||||||
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Net
Sales
|
$
|
1,619,545
|
$
|
1,428,707
|
$
|
756,557
|
$
|
619,098
|
$
|
605,292
|
||||||
|
Income
from Operations
|
194,017
|
134,572
|
55,162
|
47,226
|
47,227
|
|||||||||||
|
Net
Income
|
109,806
|
69,557
|
30,435
|
25,206
|
24,518
|
|||||||||||
|
Total
Assets
|
1,437,559
|
1,342,554
|
1,352,052
|
734,445
|
733,988
|
|||||||||||
|
Long-term
Debt
|
323,946
|
386,332
|
547,350
|
195,677
|
222,812
|
|||||||||||
|
Shareholders’
Investment
|
749,975
|
647,996
|
538,179
|
398,704
|
381,423
|
|||||||||||
|
Per
Share of Common Stock:
|
||||||||||||||||
|
Earnings
Per Share
|
3.56
|
2.34
|
1.24
|
1.01
|
1.01
|
|||||||||||
|
Earnings
Per Share - Assuming
|
||||||||||||||||
|
Dilution
|
3.28
|
2.25
|
1.22
|
1.00
|
1.01
|
|||||||||||
|
Cash
Dividends Declared
|
.55
|
.51
|
.48
|
.48
|
.48
|
|||||||||||
|
Shareholders’
Investment
|
24.31
|
21.84
|
21.87
|
15.93
|
15.24
|
|||||||||||
|
Basic
Average Shares Outstanding
|
30,847
|
29,675
|
24,603
|
25,030
|
24,187
|
|||||||||||
|
Diluted
Average Shares Outstanding
|
33,504
|
30,879
|
24,904
|
25,246
|
24,310
|
|||||||||||
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
or
industry expansion. The investments needed to fund our growth are developed
through continuous, corporate-wide initiatives to lower costs and increase
effective asset utilization. We also prioritize investments toward higher return
on capital businesses.
Net
Sales
in 2006 increased 13.4% to $1.620 billion. Net income rose 57.9% to $109.8
million.
Given
the
continued competitive marketplace and high raw material and energy costs, we
anticipate that the near-term operating environment will remain challenging.
However, we anticipate that the impact of new products 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
2006
versus 2005
Net
Sales
Worldwide
sales were $1.620 billion in 2006. Sales increased 13.4% from the $1.429 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 $1.419 billion, up 15.6% from the $1.228 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.
2005
versus 2004
Net
Sales
Worldwide
sales were $1.429 billion in 2005. Sales increased 89% from the $756.6 million
reported for 2004. The 2004 acquisitions of the Commercial AC motor and HVAC
motor and capacitor businesses from GE accounted for $615.0 million of the
increase. Also impacting sales was the divestiture of the Illinois Gear business
that was sold by the Company in May of 2005. The sale of this business decreased
sales by approximately $5.0 million for 2005.
Sales
in
the Electrical segment were $1.228 billion, up 120% from 2004, including the
$615.0 million from the businesses acquired from GE. Excluding the sales from
the acquired businesses, sales increased 10%. Sales for the HVAC motor business
were positively impacted by the convergence of several factors including hotter
than normal weather and the increase in HVAC system inventory levels in the
OEM
and distributor channels in anticipation of the government legislated SEER
13
efficiency requirement which was effective on January 23, 2006. We estimate
that
this industry-wide volume increase favorably impacted our sales by approximately
$30 million in the fourth quarter of 2005. We also saw strength in sales of
commercial and industrial motors that benefited from overall economic strength.
Sales
in
the Mechanical segment grew 1% to $201.0 million. Sales in this segment were
reduced approximately $5.0 million as a result of the sale of the Illinois
Gear
business in May of 2005. Individual division results varied significantly in
2005 with several divisions benefiting from the continued strength of the
industrial economy.
Gross
Profit
Our
gross
profit margin was 21.8% in 2005 as compared to 22.1% in 2004. The reduction
in
gross profit during 2005 resulted primarily from increases in raw material
costs, particularly copper. The price of copper increased from approximately
$1.40 per pound at the end of 2004 to over $2.00 per pound at the end of 2005.
The increase in material costs was only partially offset by price increases
implemented in all of our channels and the benefits from productivity and Lean
Six Sigma projects. The gross profit margin for the Electrical segment reflected
these impacts and decreased to 21.4% from 21.7% in 2004. Mechanical segment
gross profit margin increased from 23.2% in 2004 to 23.7% primarily as a result
of net benefits from plant consolidations and productivity
projects.
Operating
Expenses
Operating
expenses as a percentage of sales were 12.3% in 2005 as compared to 14.8% in
2004. The decrease in operating expense as a percent of sales resulted from
leveraging of fixed costs on the higher sales levels. Additionally, the HVAC
and
CAC businesses operate with a lower operating expense structure due, in part,
to
the concentration of sales with their large OEM customer base. Electrical
segment operating expenses decreased to 11.8% of sales in 2005 from 15.3% of
sales in 2004 as a result of these factors. Mechanical operating expenses as
a
percent of sales increased from 15.0% in 2004 to 15.6% in 2005.
Income
from Operations (Operating Profit)
In
2005,
operating profit increased 143.8% to $134.6 million from the $55.2 million
reported in 2004. As a percent of sales, operating profit increased to 9.4%
of
sales for 2005 from 7.3% in 2004. Electrical segment income from operations
increased 200.8% in 2005 to $118.5 million from $39.4 million in 2004, and
operating income margin increased to 9.7% in 2005 from 7.1% in 2004. The
contributions from the 2004 acquisitions of GE’s HVAC and CAC businesses, price
increases, favorable volume impacts, and the operating expense fixed cost
leveraging and productivity were the main drivers of the improved performance.
Electrical segment operating profit was negatively impacted by increases in
raw
material costs, particularly copper and aluminum. Mechanical segment income
from
operations increased 1.9% to $16.0 million in 2005 from $15.7 million in 2004.
The Mechanical segment operating income margin for 2005 improved to 8.0% from
7.9% in 2004. The results of the Mechanical segment reflect the positive impacts
of increased volume and price increases, partially offset by increases in raw
material costs and the non-repeat of the 2004 sale of property located in the
United Kingdom ($1.5 million pretax).
Interest
Expense, Net
Interest
expense, net was $21.6 million in 2005 compared with $6.6 million in 2004.
Higher interest rates and higher average debt levels, due primarily to debt
incurred as a result of the HVAC and CAC acquisitions, resulted in increased
interest expense in 2005. The average interest rate paid under the Company’s
revolving credit facility was 4.7% in 2005 and 2.7% in 2004. The average balance
outstanding under the Facility in 2005 was $396.0 million and in 2004 was $150.6
million.
Income
Taxes
The
effective income tax rate for 2005 was 35.3% compared with 32.4% in 2004. The
increase to the effective rate was primarily due to the one-time realization
of
benefits in 2004 for the resolution of tax audits. The 2005 effective rate
reflected a benefit of approximately .5% attributable to the Domestic Production
Activities Deduction that was incorporated in the American Jobs Creation Act
of
2004. (See also Note 8 to Notes to Consolidated Financial Statements.)
Net
Income
Net
income was $69.6 million in 2005 or $2.25 per share on a diluted basis compared
with $30.4 million in 2004 or $1.22 per share.
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital was $310.2 million at December 30, 2006, an increase of 15.5%
from $268.5 million at year-end 2005. The $41.7 million increase was driven
by a
$50.8 million rise in inventories and a $20.9 million increase in accounts
receivable during 2006, partially offset by a $25.5 million increase in accounts
payable. At December 30, 2006 our current ratio, the ratio of our current assets
to current liabilities, was unchanged at 2.2:1 from the previous
year-end.
Cash
flow
provided by operating activities (“operating cash flow”) was $93.5 million in
2006, a $18.7 million decrease from 2005. Increased net income of $40.2 million
was more than offset by a $47.1 million use of cash to increase inventory levels
in 2006. Cash flow used in investing activities was $43.3 million in 2006,
$31.5
million greater than in 2005. Capital spending increased to $52.5 million in
2006 from $28.3 million a year earlier due primarily to increased spending
for
productivity improvements and capacity increases. Our commitments for property,
plant and equipment as of December 30, 2006 were approximately $35.6 million.
We
believe that our present facilities, augmented by planned capital expenditures,
are sufficient to provide adequate capacity for our operations in
2007.
Cash
flow
used in financing activities was $47.0 million in 2006 compared to $98.1 million
used in 2005. Our total debt was reduced by $38.7 million in 2006 and by $135.6
during 2005. The higher level of debt reduction in 2005 was due primarily to
the
$53.0 million stock offering proceeds, $18.7 million of higher operating cash
flow and $24.3 million lower property, plant and equipment expenditures. We
paid
$16.6 million in dividends to shareholders in 2006, with our quarterly dividend
increasing from $.13 to $.14 per share starting with the second quarter dividend
payment. In 2006, we increased our $35.0 million unsecured, short-term
commercial paper facility with one of our banks to $50.0 million. At December
30, 2006, $49.0 million was outstanding under this commercial paper facility.
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 $6.5 million balloon payment in ten years.
Our
primary financing source is our $475.0 million long-term unsecured revolving
credit facility (the “Facility”) that terminates on May 5, 2009. The Company has
the option through May 5, 2008, to increase the Facility up to $550.0 million
subject to achievement of certain approvals and covenants. The Facility requires
us to maintain specified financial ratios and to satisfy certain financial
condition tests. We were in compliance with all of these ratios and tests as
of
December 30, 2006. The tests consist of a minimum interest coverage ratio of
3.75 to 1, a maximum funded debt to EBITDA (earnings before interest, taxes,
depreciation and amortization) ratio of 3.75 to 1 and a maximum senior funded
debt to EBITDA ratio of 2.75 to 1, and a minimum net worth consisting of the
sum
of $435.0 million plus 50% of net income for each quarter ending on or after
March 31, 2005 plus 75% of the net proceeds of all issuances of equity
securities by the Company. At year-end 2006, we had $223.1 million of available
borrowing capacity. We believe we will satisfy the Facility’s financial ratios
and tests for the foreseeable future. We further believe that the combination
of
our operating cash flow and borrowing availability under the Facility will
provide sufficient cash flow to finance our existing operations for the
foreseeable future. (See also Note 5 of Notes to Consolidated Financial
Statements.)
The
Company is exposed to interest rate risk on certain of its short-term and
long-term debt obligations used to finance our operations and acquisitions.
At
December 30, 2006, we had $124.1 million of fixed rate debt and $249.2 million
of variable rate debt, the latter subject to interest rate risk. The variable
rate debt is primarily under our credit facility with an interest rate based
on
a margin above LIBOR and our short-term commercial paper facility. 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 30, 2006 would
result in a change in after-tax annualized earnings of approximately $0.9
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 30, 2006 (in thousands):
|
Payments
due by Period
|
|
|
Debt
Including Estimated* Interest Payments
|
Operating
Leases
|
Purchase
and Other Obligations
|
Total
Contractual Obligations
|
|||||||
|
Less
than 1 Year
|
$
|
16,217
|
$
|
6,914
|
$
|
135,480
|
$
|
158,611
|
|||||
|
1
-
3 Years
|
333,954
|
7,803
|
-
|
341,757
|
|||||||||
|
3
-
5 Years
|
1,500
|
4,520
|
-
|
6,020
|
|||||||||
|
More
than 5 Years
|
13,770
|
3,186
|
-
|
16,956
|
|||||||||
|
Total
|
$
|
365,441
|
$
|
22,423
|
$
|
135,480
|
$
|
523,344
|
*Variable
rate debt based on December 30, 2006 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 30, 2006, the Company had outstanding standby letters of credit
totaling $12.5 million. We had no other material commercial
commitments.
The
Company did not have any variable interest entities as of December 30, 2006
and
December 31, 2005. Other than disclosed in the table above and the previous
paragraph, the Company had no other material off-balance sheet
arrangements.
CRITICAL
ACCOUNTING POLICIES
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
recongnize 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 with indefinite useful
lives annually or more frequently if events or circumstances indicate that
an
asset might be impaired. We use judgment when applying the impairment rules
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.”
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 8.5% and an average discount rate at 5.9% for our defined benefit
plans as of December 30, 2006. (See also Note 6 of Notes to 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 in the Financial
Statements.
Further
discussion of the Company’s accounting policies is contained in Note 2 of Notes
to Consolidated Financial Statements. The preparation of our consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires the use of estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the
related disclosure of contingent assets and liabilities. Management bases its
estimates on historical experience and on other assumptions that are believed
to
be reasonable under the circumstances, the results of which form the basis
for
making judgments about the carrying value of assets and liabilities that are
not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“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
September 2006, the FASB issued SFAS 158, Employers’
Accounting for Deferred Benefit Pension and Other Postretirement Plans
(“SFAS
158”). SFAS 158 requires that public companies prospectively recognize through
Accumulated Other Comprehensive Income the overfunded or underfunded status
of
their defined benefit plans as an asset or liability beginning in their 2006
year-end balance sheet. The Company has adopted SFAS 158 as of December 30,
2006. See Note 6 of Notes to Consolidated Financial Statements.
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. FIN 48 will be effective for us beginning in fiscal
2007. We are evaluating the requirements of FIN 48 and its impact on our
consolidated financial statements.
In
December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment (“SFAS
123(R)”)”, which requires companies to expense the value of employee stock
options and similar equity-based awards. This SFAS 123(R) is a revision of
FASB
Statement 123, “Accounting for Stock-Based Compensation”. SFAS 123(R) was
adopted by the Company on January 1, 2006. Prior to the adoption of SFAS 123(R)
the Company accounted for equity-based awards under APB No. 25and compensation
expense is included in a proforma footnote disclosure (see Note 2 of Notes
to
Consolidated Financial Statements). For the years ended December 30, 2006 and
December 31, 2005, operating income was reduced by $3.6 million and $0.5
million, respectively, for equity-based compensation.
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 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 30, 2006, we had $124.1 million of fixed rate debt and $249.2 million
of variable rate debt, the latter subject to interest rate risk. The variable
rate debt is primarily under our credit facility with an interest rate based
on
a margin above LIBOR and our short-term commercial paper facility. 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 30, 2006, would
result in a change in after-tax annualized earnings of approximately $0.9
million.
The
Company periodically enters into commodity futures and options hedging
transactions to reduce the impact of changing metal and natural gas commodity
prices. Contract terms of commodity hedge instruments generally mirror those
of
the hedged item, providing a high degree of risk reduction and
correlation.
We
are
also exposed to foreign currency risks that arise from normal business
operations. These risks include the translation of local currency balances
of
foreign subsidiaries, intercompany loans with foreign subsidiaries and
transactions denominated in foreign currencies. Our objective is to minimize
our
exposure to these risks through a combination of normal operating activities
and
the utilization of foreign currency hedging contracts to manage our exposure
on
the transactions denominated in currencies other than the applicable functional
currency. In the first half of 2005, we began to enter into contracts to hedge
foreign-currency denominated forecasted transactions. Contracts are executed
with creditworthy banks and are denominated in currencies of major industrial
countries. It is our policy not to enter into derivative financial instruments
for speculative purposes.
All
hedges are recorded on the balance sheet at fair value and are treated as
cash
flow hedges, with changes in fair value recorded in accumulated other
comprehensive income (“AOCI”) in each accounting period to the extent the hedges
are deemed effective.
At
December 30, 2006 we had a balance of $4.9 million in hedge assets, and $0.4
million in hedge liabilities, representing the fair value of commodity and
foreign currency hedges. Of the hedge assets and hedge liabilities at December
30, 2006, $1.7 million and $0.4 million, respectively, relate to commodity
hedges with the balance of $3.2 in hedge assets relating to foreign
currency.
At
December 30, 2006 we had a $3.0 million gain, net of tax, in AOCI related
to
hedging activities. Of this amount, $2.0 million related to foreign currency
hedges with the balance of $1.0 million representing commodity
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
|
|||||||||||||||||||||||||
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
|||||||||||||||||||||
|
Net
Sales
|
$
|
398,326
|
$
|
337,823
|
$
|
435,269
|
$
|
368,768
|
$
|
419,301
|
$
|
345,894
|
$
|
366,649
|
$
|
376,222
|
||||||||||||
|
Gross
Profit
|
93,280
|
68,444
|
104,025
|
79,800
|
103,070
|
76,598
|
88,996
|
85,922
|
||||||||||||||||||||
|
Income
from Operations
|
43,618
|
25,865
|
57,866
|
35,811
|
53,049
|
34,608
|
39,484
|
38,290
|
||||||||||||||||||||
|
Net
Income
|
23,788
|
12,286
|
33,309
|
18,445
|
29,740
|
18,517
|
22,969
|
20,309
|
||||||||||||||||||||
|
Earnings
Per Share
|
.77
|
.42
|
1.08
|
.63
|
.96
|
.62
|
.74
|
.66
|
||||||||||||||||||||
|
Earnings
Per Share - Assuming Dilution
|
.72
|
.41
|
.99
|
.62
|
.89
|
.59
|
.68
|
.63
|
||||||||||||||||||||
|
Average
Number of Shares Outstanding
|
30,701
|
29,034
|
30,816
|
29,065
|
30,888
|
29,913
|
30,981
|
30,644
|
||||||||||||||||||||
|
Average
Number of Shares - Assuming Dilution
|
30,957
|
30,244
|
33,645
|
29,720
|
33,440
|
31,234
|
33,973
|
32,317
|
||||||||||||||||||||
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 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 30, 2006. 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 30, 2006, the Company’s
internal control over financial reporting is effective based on those
criteria.
The
Company’s independent auditors, Deloitte & Touche LLP, have audited the
financial statements prepared by the management of Regal Beloit Corporation
and
management’s assessment of internal control over financial
reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Shareholders and Board of Directors of Regal Beloit Corporation:
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that Regal Beloit
Corporation and subsidiaries (the “Company”) maintained effective internal
control over financial reporting as of December 30, 2006, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and 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, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 30, 2006, is fairly stated,
in all material respects, based on the criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Also in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 30, 2006, based on
the criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as
of and
for the year ended December 30, 2006 of the Company and our report dated
February 28, 2007, expressed an unqualified opinion on those financial
statements and included explanatory paragraphs relating to the Company’s
adoption of Statement of Financial Accounting Standard No. 123R, Share
Based Payment, and No.
158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
DELOITTE
& TOUCHE LLP
Milwaukee,
Wisconsin
February
28, 2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Board of Directors of Regal Beloit Corporation:
We
have
audited the accompanying consolidated balance sheets of Regal Beloit Corporation
and subsidiaries (the “Company”) as of December 30, 2006 and December 31,
2005, 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 30, 2006. 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
for the above stated periods, and the results of their operations and their
cash
flows for each of the three years in the period ended December 30, 2006, 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 Statement of Financial Accounting Standard No.
123R,
Share
Based Payment.
As
discussed in Note 6 to the consolidated financial statements, as of December
30,
2006, the Company adopted Statement of Financial Accounting Standard No.
158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 30, 2006, 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 28, 2007 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
DELOITTE
& TOUCHE LLP
Milwaukee,
Wisconsin
February
28, 2007
CONSOLIDATED
STATEMENTS OF INCOME
(In
Thousands of Dollars, Except Shares Outstanding and Per Share Data)
|
For
the Year Ended
|
||||||||||
|
December
30,
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
Sales
|
$
|
1,619,545
|
$
|
1,428,707
|
$
|
756,557
|
||||
|
Cost
of Sales
|
1,230,174
|
1,117,943
|
589,497
|
|||||||
|
Gross
Profit
|
389,371
|
310,764
|
167,060
|
|||||||
|
Operating
Expenses
|
195,354
|
176,192
|
111,898
|
|||||||
|
Income
From Operations
|
194,017
|
134,572
|
55,162
|
|||||||
|
Interest
Expense
|
19,886
|
22,090
|
6,787
|
|||||||
|
Interest
Income
|
711
|
442
|
183
|
|||||||
|
Income
Before Taxes & Minority Interest
|
174,842
|
112,924
|
48,558
|
|||||||
|
Provision
For Income Taxes
|
62,051
|
39,829
|
15,728
|
|||||||
|
Income
Before Minority Interest
|
112,791
|
73,095
|
32,830
|
|||||||
|
Minority
Interest in Income, Net of Tax
|
2,985
|
3,538
|
2,395
|
|||||||
|
Net
Income
|
$
|
109,806
|
$
|
69,557
|
$
|
30,435
|
||||
|
Per
Share of Common Stock:
|
||||||||||
|
Earnings
Per Share - Basic
|
$
|
3.56
|
$
|
2.34
|
$
|
1.24
|
||||
|
Earnings
Per Share - Assuming Dilution
|
$
|
3.28
|
$
|
2.25
|
$
|
1.22
|
||||
|
Average
Number of Shares Outstanding-Basic
|
30,846,854
|
29,675,206
|
24,602,868
|
|||||||
|
Average
Number of Shares Outstanding - Assuming Dilution
|
33,504,190 | 30,878,981 | 24,904,287 | |||||||
See
Accompanying Notes to Consolidated Financial Statements.
REGAL
BELOIT CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
Thousands of Dollars)
| ASSETS |
December
30,
|
December
31,
|
|||||
|
2006
|
2005
|
||||||
|
Current
Assets:
|
|||||||
|
Cash
and Cash Equivalents
|
$
|
36,520
|
$
|
32,747
|
|||
|
Receivables,
less Allowances for Doubtful Accounts of $5,886 in 2006 and $2,653
in
2005
|
218,036
|
197,118
|
|||||
|
Inventories
|
275,138
|
224,316
|
|||||
|
Prepaid
Expenses and Other Current Assets
|
16,597
|
16,121
|
|||||
|
Future
Income Tax Benefits
|
22,877
|
16,978
|
|||||
|
Total
Current Assets
|
569,168
|
487,280
|
|||||
|
Property,
Plant and Equipment:
|
|||||||
|
Land
and Improvements
|
18,400
|
18,624
|
|||||
|
Buildings
and Improvements
|
105,425
|
100,036
|
|||||
|
Machinery
and Equipment
|
360,674
|
336,171
|
|||||
|
Property,
Plant and Equipment, at Cost
|
484,499
|
454,831
|
|||||
|
Less
- Accumulated Depreciation
|
(215,619
|
)
|
(210,502
|
)
|
|||
|
Net
Property, Plant and Equipment
|
268,880
|
244,329
|
|||||
|
Goodwill
|
546,152
|
546,168
|
|||||
|
Intangible
Assets, Net of Amortization
|
43,257
|
45,674
|
|||||
|
Other
Noncurrent Assets
|
10,102
|
19,103
|
|||||
|
Total
Assets
|
$
|
1,437,559
|
$
|
1,342,554
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ INVESTMENT
|
|||||||
|
Current
Liabilities:
|
|||||||
|
Accounts
Payable
|
$
|
108,050
|
$
|
82,513
|
|||
|
Commercial
Paper Borrowings
|
49,000
|
25,000
|
|||||
|
Dividends
Payable
|
4,345
|
3,985
|
|||||
|
Accrued
Compensation and Employee Benefits
|
51,192
|
41,127
|
|||||
|
Other
Accrued Expenses
|
45,578
|
46,559
|
|||||
|
Income
Taxes Payable
|
380
|
18,923
|
|||||
|
Current
Maturities of Long-Term Debt
|
376
|
684
|
|||||
|
Total
Current Liabilities
|
258,921
|
218,791
|
|||||
|
Long-Term
Debt
|
323,946
|
386,332
|
|||||
|
Deferred
Income Taxes
|
65,937
|
59,993
|
|||||
|
Other
Noncurrent Liabilities
|
5,962
|
18,394
|
|||||
|
Minority
Interest in Consolidated Subsidiaries
|
9,634
|
11,048
|
|||||
|
Pension
and other Post Retirement Benefits
|
23,184
|
-
|
|||||
|
Shareholders’
Investment:
|
|||||||
|
Common
Stock $.01 par value, 50,000,000 shares authorized 31,812,043 issued
in
2006 and
31,429,736
issued in 2005
|
318
|
315
|
|||||
|
Additional
Paid-In Capital
|
329,142
|
316,426
|
|||||
|
Less-Treasury
Stock, at cost, 774,100 shares in 2006 and 2005
|
(15,228
|
)
|
(15,228
|
)
|
|||
|
Retained
Earnings
|
435,971
|
343,161
|
|||||
|
Unearned
Compensation
|
-
|
(657
|
)
|
||||
|
Accumulated
Other Comprehensive Income
|
(228
|
)
|
3,979
|
||||
|
Total
Shareholders’ Investment
|
749,975
|
647,996
|
|||||
|
Total
Liabilities and Shareholders’ Investment
|
$
|
1,437,559
|
$
|
1,342,554
|
|||
See
accompanying Notes to Consolidated Financial Statements.
REGAL
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
Compre-
hensive
Income
(Loss)
|
Total
|
||||||||||||||||
|
Balance,
December 31, 2003
|
$
|
250
|
$
|
132,313
|
$
|
(2,727
|
)
|
$
|
270,760
|
$
|
--
|
$
|
(1,892
|
)
|
$
|
398,704
|
||||||
|
Net
Income
|
--
|
--
|
--
|
30,435
|
--
|
--
|
30,435
|
|||||||||||||||
|
Dividends
Declared ($.48 per share)
|
--
|
--
|
--
|
(12,358
|
)
|
--
|
--
|
(12,358
|
)
|
|||||||||||||
|
Unearned
Compensation, Net of Amortization
|
--
|
288
|
--
|
--
|
(224
|
)
|
--
|
64
|
||||||||||||||
|
Shares
Issued for Acquisition
|
46
|
130,343
|
--
|
--
|
--
|
--
|
130,389
|
|||||||||||||||
|
Common
Stock Repurchased
|
--
|
--
|
(12,501
|
)
|
--
|
--
|
--
|
(12,501
|
)
|
|||||||||||||
|
Stock
Options Exercised
|
2
|
846
|
--
|
--
|
--
|
--
|
848
|
|||||||||||||||
|
Other
Comprehensive Income (see detail
Comprehensive
Income Statement)
|
--
|
--
|
--
|
--
|
--
|
2,598
|
2,598
|
|||||||||||||||
|
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
|
||||||
See
Accompanying Notes to Consolidated Financial Statements.
REGAL
BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(In
Thousands of Dollars)
|
For
the Year Ended
|
||||||||||
|
December
30,
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Net
Income
|
$
|
109,806
|
$
|
69,557
|
$
|
30,435
|
||||
|
Other
Comprehensive Income:
|
||||||||||
|
Minimum
pension liability adjustments net of tax expense (benefit)
of $553,
($209)
and ($403)
|
902
|
(341
|
)
|
(658
|
)
|
|||||
|
Currency
translation adjustments
|
2,488
|
(629
|
)
|
2,903
|
||||||
|
Change
in fair value of hedging activities (net of tax expense
of $351,
$5,899
and $530)
|
572
|
9,625
|
864
|
|||||||
|
Hedging
Activities Reclassified into Earnings from Other Comprehensive
Income
net of tax (benefit) of ($1,429), ($3,299)
and ($313)
|
(2,331
|
)
|
(5,382
|
)
|
(511
|
)
|
||||
|
Other
Comprehensive Income
|
1,631
|
3,273
|
2,598
|
|||||||
|
Comprehensive
Income
|
$
|
111,437
|
$
|
72,830
|
$
|
33,033
|
||||
See
Accompanying Notes to Consolidated Financial Statements.
REGAL
BELOIT CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
Thousands of Dollars)
|
For
the Year Ended
|
||||||||||
|
December
30,
|
December
31,
|
|||||||||
|
2006
|
2005
|
2004
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
Income
|
$
|
109,806
|
$
|
69,557
|
$
|
30,435
|
||||
|
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||||
|
Provided
from Operating Activities:
|
||||||||||
|
Depreciation
|
30,823
|
31,175
|
21,061
|
|||||||
|
Amortization
|
6,859
|
6,452
|
552
|
|||||||
|
Stock-based
Compensation
|
3,572
|
-
|
-
|
|||||||
|
Provision
for (Benefit of) Deferred Income Taxes
|
5,376
|
(811
|
)
|
1,089
|
||||||
|
Minority
Interest in Earnings of Subsidiaries
|
2,985
|
3,538
|
2,395
|
|||||||
|
Excess
Tax Benefits from Stock-based Compensation
|
(3,949
|
)
|
-
|
-
|
||||||
|
Gain
on Sales of Property, Plant, and Equipment
|
(1,889
|
)
|
(507
|
)
|
(2,380
|
)
|
||||
|
Changes
in Assets and Liabilities, Net of Acquisitions:
|
||||||||||
|
Receivables
|
(17,935
|
)
|
(19,222
|
)
|
(28,813
|
)
|
||||
|
Inventories
|
(47,146
|
)
|
28,355
|
(16,481
|
)
|
|||||
|
Accounts
Payable
|
16,969
|
(23,467
|
)
|
14,483
|
||||||
|
Current
Liabilities and Other
|
(11,923
|
)
|
17,141
|
15,823
|
||||||
|
Net
Cash Provided from Operating Activities
|
93,548
|
112,211
|
38,164
|
|||||||
|
CASH
FLOW FROM INVESTING ACTIVITIES:
|
||||||||||
|
Additions
to Property, Plant and Equipment
|
(52,545
|
)
|
(28,261
|
)
|
(16,281
|
)
|
||||
|
Business
Acquisitions, Net of Cash Acquired
|
(10,962
|
)
|
6,561
|
(327,851
|
)
|
|||||
|
Sale
of Property, Plant and Equipment
|
20,189
|
9,907
|
5,929
|
|||||||
|
Other
|
-
|
(306
|
)
|
|||||||
|
Net
Cash Used in Investing Activities
|
(43,318
|
)
|
(11,793
|
)
|
(338,509
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Proceeds
from Stock Offerings
|
-
|
53,026
|
-
|
|||||||
|
Proceeds
from Long-Term Debt
|
8,500
|
-
|
116,319
|
|||||||
|
Payments
of Long-Term Debt
|
(1,294
|
)
|
(1,285
|
)
|
-
|
|||||
|
Net
Proceeds from Commercial Paper Borrowings
|
24,000
|
25,000
|
-
|
|||||||
|
Net
Borrowings (Repayments) Under Revolving Credit Facility
|
(69,900
|
)
|
(159,400
|
)
|
235,500
|
|||||
|
Proceeds
from the exercise of Stock Options
|
6,942
|
1,956
|
848
|
|||||||
|
Excess
tax benefits from stock-based compensation
|
3,949
|
-
|
||||||||
|
Repurchase
of Common Stock
|
-
|
-
|
(12,501
|
)
|
||||||
|
Financing
Fees Paid
|
-
|
(1,374
|
)
|
(5,851
|
)
|
|||||
|
Distributions
to Minority Partners
|
(2,538
|
)
|
(1,315
|
)
|
-
|
|||||
|
Dividends
Paid to Shareholders
|
(16,627
|
)
|
(14,730
|
)
|
(11,879
|
)
|
||||
|
Net
Cash (Used in) Provided from Financing Activities
|
(46,968
|
)
|
(98,122
|
)
|
322,436
|
|||||
|
EFFECT
OF EXCHANGE RATE ON CASH:
|
511
|
(824
|
)
|
84
|
||||||
|
Net
Increase in Cash and Cash Equivalents
|
3,773
|
1,472
|
22,175
|
|||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
32,747
|
31,275
|
9,100
|
|||||||
|
Cash
and Cash Equivalents at End of Year
|
$
|
36,520
|
$
|
32,747
|
$
|
31,275
|
||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||
|
Cash
Paid During the Year for:
|
||||||||||
|
Interest
|
$
|
20,185
|
$
|
21,378
|
$
|
5,981
|
||||
|
Income
Taxes
|
72,694
|
36,670
|
8,847
|
|||||||
|
Non-Cash
Investing: Issuance of Common Stock in Connection With
Acquisition
|
$
|
130,389 | ||||||||
See
accompanying Notes to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
The
Three Years Ended December 30, 2006
| (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.
| (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 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:
|
2006
|
2005
|
|
|
Raw
Material
|
11%
|
13%
|
|
Work
in Process
|
21%
|
25%
|
|
Finished
Goods and Purchased Parts
|
68%
|
62%
|
Inventories
are stated at cost, which is not in excess of market. Cost for approximately
83%
of the Company's inventory at December 30, 2006 and 86% in 2005, 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 $33.1
million and $24.0 million as of December 30, 2006 and December 31, 2005,
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 45 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.
The
Company had approximately $5.0 million of assets held for sale and classified
as
a component of prepaid expenses and other currents assets at December 31, 2005,
related to the Company’s Grafton, Wisconsin facility which was sold in January
2006. The gain on the sale was immaterial.
Goodwill
and Other Intangibles
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) effective January 1, 2006 (see footnote
8).
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 years ended December 31, 2005 and 2004
follows:
|
(In
Thousands, Except Per Share Data)
|
|||||||
|
2005
|
2004
|
||||||
|
Net
Income:
|
|||||||
|
As
Reported
|
$
|
69,557
|
$
|
30,435
|
|||
|
Add:
Total stock-based employee compensation expense included in net
income,
|
|||||||
|
net
of related tax effects
|
362
|
117
|
|||||
|
Deduct:
Total stock-based employee compensation expense, net of related
tax
effects
|
(1,690
|
)
|
(839
|
)
|
|||
|
Pro
Forma
|
$
|
68,229
|
$
|
29,713
|
|||
|
Earnings
Per Share:
|
|||||||
|
As
Reported
|
$
|
2.34
|
$
|
1.24
|
|||
|
Pro
Forma
|
$
|
2.29
|
$
|
1.21
|
|||
|
Earnings
Per Share - Assuming Dilution:
|
|||||||
|
As
Reported
|
$
|
2.25
|
$
|
1.22
|
|||
|
Pro
Forma
|
$
|
2.22
|
$
|
1.19
|
|||
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 and 2004, risk-free interest rate of 4.0%;
expected dividend yield of 1.7% and 2.25%; expected option lives of 7.0 years;
expected volatility of 28% and 35%.
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 -0-, -0- and 62,850
for
2006, 2005 and 2004, respectively. The following table reconciles the basic
and
diluted shares used in the per share calculations for the three years ended
December 30, 2006:
|
2006
|
2005
|
2004
|
|||
|
Denominator
for basic EPS
|
30,846,854
|
29,675,206
|
24,602,868
|
||
|
Effect
on dilutive securities
|
2,657,336
|
1,203,775
|
301,419
|
||
|
Denominator
for diluted EPS
|