Regal Beloit Corporation Form 10-Q For the Period Ended 03/31/07
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
for
the quarterly period ended
March
31, 2007
or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
file number
001-07283
REGAL-BELOIT
CORPORATION
(Exact
name of registrant as specified in its charter)
Wisconsin
|
39-0875718
|
(State
of other jurisdiction of incorporation)
|
(IRS
Employer Identification No.)
|
200
State Street, Beloit, Wisconsin 53511
(Address
of principal executive office)
(608)
364-8800
Registrant’s
telephone number, including area code
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 ý
NO
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
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 ý Accelerated
Filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨
NO
ý
31,957,525
Shares, Common Stock, $.01 Par Value (as of April 30,
2007)
INDEX
|
Page
|
|
|
Item
1 -
|
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
Item
2 -
|
|
|
|
|
12
|
Item
3 -
|
|
15
|
Item
4 -
|
|
16
|
|
|
|
|
|
|
|
|
Item
1 -
|
|
16
|
Item
1A -
|
|
17
|
Item
2 -
|
|
18
|
Item
4 -
|
|
18
|
Item
6 -
|
|
19
|
|
19
|
|
20
|
CAUTIONARY
STATEMENT
This
Quarterly 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;
|
· |
unanticipated
fluctuations in commodity prices and raw material costs;
|
· |
cyclical
downturns affecting the global market for capital
goods;
|
· |
unexpected
issues and costs arising from the integration of acquired companies
and
businesses;
|
· |
marketplace
acceptance of new and existing products including the loss of, or
a
decline in business from, any significant
customers;
|
· |
the
impact of capital market transactions that we may
effect;
|
· |
the
availability and effectiveness of our information technology
systems;
|
· |
unanticipated
costs associated with litigation
matters;
|
· |
actions
taken by our competitors;
|
· |
difficulties
in staffing and managing foreign
operations;
|
· |
other
risks and uncertainties including but not limited to those described
in
Item
1A-Risk Factors of
the Company’s Annual Report on Form 10-K filed on February 28, 2007 and
from time to time in our reports filed with U.S. Securities and Exchange
Commission.
|
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-Q 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 in
the
Company’s Annual Report on Form 10-K filed on February 28, 2007.
PART
I - FINANCIAL INFORMATION
REGAL
BELOIT CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(In
Thousands of Dollars, Except Per Share Data)
ITEM
I. FINANCIAL STATEMENTS
|
|
(Unaudited)
|
|
|
|
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
418,646
|
|
$
|
398,326
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
321,419
|
|
|
305,046
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
97,227
|
|
|
93,280
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
49,896
|
|
|
49,662
|
|
|
|
|
|
|
|
|
|
Income
From Operations
|
|
|
47,331
|
|
|
43,618
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
5,066
|
|
|
4,795
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
89
|
|
|
120
|
|
|
|
|
|
|
|
|
|
Income
Before Taxes & Minority Interest
|
|
|
42,354
|
|
|
38,943
|
|
|
|
|
|
|
|
|
|
Provision
For Income Taxes
|
|
|
14,690
|
|
|
14,342
|
|
|
|
|
|
|
|
|
|
Income
Before Minority Interest
|
|
|
27,664
|
|
|
24,601
|
|
|
|
|
|
|
|
|
|
Minority
Interest in Income, Net of Tax
|
|
|
851
|
|
|
813
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
26,813
|
|
$
|
23,788
|
|
|
|
|
|
|
|
|
|
Per
Share of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic
|
|
$
|
.87
|
|
$
|
.77
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Assuming Dilution
|
|
$
|
.80
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Declared
|
|
$
|
.14
|
|
$
|
.13
|
|
|
|
|
|
|
|
|
|
Average
Number of Shares Outstanding - Basic
|
|
|
30,814,312
|
|
|
30,700,533
|
|
Average
Number of Shares Outstanding - Assuming
Dilution
|
|
|
33,547,519
|
|
|
32,957,209
|
|
See
accompanying notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
Thousands of Dollars)
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS |
|
|
March
31, 2007
|
|
|
December
30, 2006
|
|
Current
Assets: |
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
43,086
|
|
$
|
36,520
|
|
Receivables,
less Allowances for Doubtful Accounts of
|
|
|
|
|
|
|
|
$6,989
in 2007 and $5,886 in 2006
|
|
|
261,322
|
|
|
218,036
|
|
Inventories
|
|
|
269,488
|
|
|
275,138
|
|
Prepaid
Expenses and Other Current Assets
|
|
|
17,043
|
|
|
22,557
|
|
Future
Income Tax Benefits
|
|
|
24,783
|
|
|
22,877
|
|
Total
Current Assets
|
|
|
615,722
|
|
|
575,128
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment:
|
|
|
|
|
|
|
|
Land
and Improvements
|
|
|
18,232
|
|
|
18,400
|
|
Buildings
and Improvements
|
|
|
105,546
|
|
|
105,425
|
|
Machinery
and Equipment
|
|
|
371,749
|
|
|
360,674
|
|
Property,
Plant and Equipment, at Cost
|
|
|
495,527
|
|
|
484,499
|
|
Less
- Accumulated Depreciation
|
|
|
(222,503
|
)
|
|
(215,619
|
)
|
Net
Property, Plant and Equipment
|
|
|
273,024
|
|
|
268,880
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
546,187
|
|
|
546,152
|
|
Intangible
Assets, net of Amortization
|
|
|
41,803
|
|
|
43,257
|
|
Other
Noncurrent Assets
|
|
|
9,107
|
|
|
10,102
|
|
Total
Assets
|
|
$
|
1,485,843
|
|
$
|
1,443,519
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ INVESTMENT
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
120,377
|
|
$
|
108,050
|
|
Commercial
Paper Borrowings
|
|
|
49,125
|
|
|
49,000
|
|
Dividends
Payable
|
|
|
4,365
|
|
|
4,345
|
|
Accrued
Compensation and Employee Benefits
|
|
|
53,179
|
|
|
51,192
|
|
Other
Accrued Expenses
|
|
|
38,369
|
|
|
45,578
|
|
Current
Maturities of Debt
|
|
|
9,557
|
|
|
376
|
|
Total
Current Liabilities
|
|
|
274,972
|
|
|
258,541
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
323,542
|
|
|
323,946
|
|
Deferred
Income Taxes
|
|
|
66,732
|
|
|
65,937
|
|
Other
Noncurrent Liabilities
|
|
|
10,959
|
|
|
12,302
|
|
Minority
Interest in Consolidated Subsidiaries
|
|
|
10,517
|
|
|
9,634
|
|
Pension
and other Postretirement Benefits
|
|
|
24,291
|
|
|
23,184
|
|
|
|
|
|
|
|
|
|
Shareholders’
Investment:
|
|
|
|
|
|
|
|
Common
Stock, $.01 par value, 50,000,000 shares authorized,
|
|
|
|
|
|
|
|
31,949,275
issued in 2007 and 31,812,043 issued in 2006
|
|
|
319
|
|
|
318
|
|
Additional
Paid-In Capital
|
|
|
331,140
|
|
|
329,142
|
|
Less-Treasury
Stock, at cost, 774,100 shares in 2007 and 2006
|
|
|
(15,228
|
)
|
|
(15,228
|
)
|
Retained
Earnings
|
|
|
457,860
|
|
|
435,971
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
739
|
|
|
(228
|
)
|
Total
Shareholders’ Investment
|
|
|
774,830
|
|
|
749,975
|
|
Total
Liabilities and Shareholders’ Investment
|
|
$
|
1,485,843
|
|
$
|
1,443,519
|
|
See
accompanying notes to Condensed Consolidated Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
Thousands of Dollars)
|
|
(Unaudited)
Three
Months Ended
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
26,813
|
|
$
|
23,788
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
by
operating activities; net of effect of acquisitions
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,883
|
|
|
8,115
|
|
Minority
interest
|
|
|
851
|
|
|
813
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(3,310
|
)
|
|
(450
|
)
|
Loss
(gain) on sale of assets
|
|
|
8
|
|
|
(8
|
)
|
Stock-based
compensation expense
|
|
|
865
|
|
|
867
|
|
Change
in assets and liabilities, net
|
|
|
(24,703
|
)
|
|
(35,377
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
10,407
|
|
|
(2,252
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(12,163
|
)
|
|
(7,257
|
)
|
Purchases
of short-term investments
|
|
|
-
|
|
|
(4,225
|
)
|
Business
acquisitions, net of cash acquired
|
|
|
(565
|
)
|
|
(565
|
)
|
Sale
of property, plant and equipment
|
|
|
-
|
|
|
5,207
|
|
Net
cash (used) in investing activities
|
|
|
(12,728
|
)
|
|
(6,840
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from short-term borrowing
|
|
|
9,200
|
|
|
-
|
|
Payments
of long-term debt
|
|
|
(225
|
)
|
|
(197
|
)
|
Net
(repayments) borrowings under revolving credit facility
|
|
|
(200
|
)
|
|
3,500
|
|
Proceeds
from commercial paper borrowings, net
|
|
|
125
|
|
|
5,000
|
|
Dividends
paid to shareholders
|
|
|
(4,345
|
)
|
|
(3,985
|
)
|
Proceeds
from the exercise of stock options
|
|
|
747
|
|
|
1,363
|
|
Excess
tax benefits from stock-based compensation
|
|
|
3,310
|
|
|
450
|
|
Net
cash provided by financing activities
|
|
|
8,612
|
|
|
6,131
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE ON CASH
|
|
|
275
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
6,566
|
|
|
(3,027
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
36,520
|
|
|
32,747
|
|
Cash
and cash equivalents at end of period
|
|
$
|
43,086
|
|
$
|
29,720
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,933
|
|
$
|
5,436
|
|
Income
taxes
|
|
$
|
9,343
|
|
$
|
19,898
|
|
See
accompanying notes to Condensed Consolidated Financial
Statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
(Unaudited)
1.
BASIS
OF PRESENTATION
The
accompanying (a) condensed balance sheet as of December 30, 2006, which has
been
derived from audited financial statements, and (b) unaudited interim condensed
financial statements as of March 31, 2007 have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States has been condensed or omitted pursuant to those rules
and
regulations, although the Company believes that the disclosures made are
adequate to make the information not misleading.
It
is
suggested that these condensed financial statements be read in conjunction
with
the financial statements and the notes thereto included in the Company’s Annual
Report on Form 10-K filed on February 28, 2007.
In
the
opinion of management, all adjustments considered necessary for a fair
presentation of financial results have been made. Except as otherwise discussed,
such adjustments consist of only those of a normal recurring nature. Operating
results for the three months ended March 31, 2007 are not necessarily indicative
of the results that may be expected for the entire fiscal year ending December
29, 2007.
2.
SHORT-TERM
INVESTMENTS
Short-term
marketable investments include investments with maturities of greater than
three
months and less than one year. Such marketable investments were classified
as
available-for-sale and are reported at fair market value and classified within
Prepaid Expenses and Other Current Assets. Mark-to-market gains on such
investments are not material.
3.
INVENTORIES
Cost
for
approximately 83% of the Company’s inventory is determined using the last-in,
first-out (LIFO) inventory valuation method. The approximate percentage
distribution between major classes of inventories was as follows:
|
March
31, 2007
|
December
30, 2006
|
Raw
Material
|
11%
|
11%
|
Work-in
Process
|
20%
|
21%
|
Finished
Goods and Purchased Parts
|
69%
|
68%
|
4.
COMPREHENSIVE
INCOME
The
Company's comprehensive income for the first quarter of 2007 and 2006 was as
follows:
|
|
(In
Thousands of Dollars)
|
|
|
|
First
Quarter Ending
|
|
|
|
March
31, 2007
|
|
|
April
1, 2006
|
|
Net
income as reported
|
|
$
|
26,813
|
|
$
|
23,788
|
|
Comprehensive
income (loss) from:
|
|
|
|
|
|
|
|
Additional
Pension Liability, net of tax
|
|
|
-
|
|
|
(13
|
)
|
Cumulative
translation adjustments
|
|
|
802
|
|
|
216
|
|
Changes
in fair value of hedging activities, net
of tax
|
|
|
(944
|
)
|
|
1,987
|
|
Hedging
activities reclassified into earnings from accumulated other
comprehensive
income
(“AOCI”), net of tax
|
|
|
942
|
|
|
(3,395
|
)
|
Amortization
of net prior service costs and actuarial losses
|
|
|
167
|
|
|
-
|
|
Comprehensive
income
|
|
$
|
27,780
|
|
$
|
22,583
|
|
5.
WARRANTY
COSTS
The
Company recognizes the cost associated with its standard warranty on its
products at the time of sale. The amount recognized is based on historical
experience. The following is a reconciliation of the changes in accrued warranty
costs for the first quarter of 2007 and 2006 (in thousands):
|
|
March
31, 2007
|
|
April
1, 2006
|
|
Beginning
balance
|
|
$
|
6,300
|
|
$
|
5,679
|
|
Deduct:
Payments
|
|
|
(1,614
|
)
|
|
(1,359
|
)
|
Add:
Provision
|
|
|
759
|
|
|
1,332
|
|
Ending
balance
|
|
|
5,445
|
|
$
|
5,652
|
|
6.
BUSINESS
SEGMENTS
The
Company operates two strategic businesses that are reportable segments,
Mechanical and Electrical (in thousands):
|
|
(Unaudited)
|
|
|
|
Mechanical
Segment
|
|
Electrical
Segment
|
|
|
|
Three
Months Ended
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
April
1,
|
|
March
31,
|
|
April
1,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
Sales
|
|
$
|
51,846
|
|
$
|
52,961
|
|
$
|
366,800
|
|
$
|
345,365
|
|
Income
from Operations
|
|
|
6,326
|
|
$
|
3,707
|
|
|
41,005
|
|
$
|
39,911
|
|
%
of Net Sales
|
|
|
12.2
|
%
|
|
7.0
|
%
|
|
11.2
|
%
|
|
11.6
|
%
|
Goodwill
at end of period
|
|
$
|
530
|
|
$
|
530
|
|
$
|
545,657
|
|
$
|
545,638
|
|
7.
GOODWILL
AND OTHER INTANGIBLES
Changes
in the carrying amount of goodwill for the three months ending March 31, 2007
were as follows (in thousands):
|
|
Electrical
Segment
|
|
Mechanical
Segment
|
|
Total
|
|
Balance
as of December 30, 2006
|
|
$
|
545,622
|
|
$
|
530
|
|
$
|
546,152
|
|
Translation
|
|
|
35
|
|
|
-
|
|
|
35
|
|
Balance
as of March 31, 2007
|
|
$
|
545,657
|
|
$
|
530
|
|
$
|
546,187
|
|
Other
intangible assets consisted of the following (in thousands):
Summary
of Intangible Assets with Definite Lives
|
|
|
|
March
31, 2007
|
|
Asset
Description
|
|
Useful
Life
(years)
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net
Book Value
|
|
Non-Compete
Agreements
|
|
|
3
- 5
|
|
$
|
5,408
|
|
$
|
1,683
|
|
$
|
3,725
|
|
Trademarks
|
|
|
3
- 5
|
|
|
6,652
|
|
|
3,477
|
|
|
3,175
|
|
Patents
|
|
|
9
- 10.5
|
|
|
15,410
|
|
|
3,492
|
|
|
11,918
|
|
Engineering
Drawings
|
|
|
10
|
|
|
1,200
|
|
|
277
|
|
|
923
|
|
Customer
Relationships
|
|
|
10
|
|
|
28,600
|
|
|
6,538
|
|
|
22,062
|
|
Total
|
|
|
|
|
$
|
57,270
|
|
$
|
15,467
|
|
$
|
41,803
|
|
|
|
|
|
|
December
30, 2006
|
Asset
Description
|
|
|
Useful
Life
(years)
|
|
|
Gross
Value
|
|
|
Accumulated
Amortization
|
|
Net
BookValue |
|
Non-Compete
Agreements
|
|
|
3
- 5
|
|
$
|
5,470
|
|
$
|
1,425
|
|
$
|
4,045
|
|
Trademarks
|
|
|
3
- 5
|
|
|
6,490
|
|
|
3,311
|
|
|
3,179
|
|
Patents
|
|
|
9
- 10.5
|
|
|
15,410
|
|
|
3,107
|
|
|
12,303
|
|
Engineering
Drawings
|
|
|
10
|
|
|
1,200
|
|
|
247
|
|
|
953
|
|
Customer
Relationships
|
|
|
10
|
|
|
28,600
|
|
|
5,823
|
|
|
22,777
|
|
Total
|
|
|
|
|
$
|
57,170
|
|
$
|
13,913
|
|
$
|
43,257
|
|
Estimated
Amortization (in thousands)
2007
|
2008
|
2009
|
2010
|
2011
|
$
7.1
|
$
6.3
|
$
5.9
|
$
5.5
|
$
4.7
|
Amortization
expense recorded for the three months ended March 31, 2007 was $1.7 million.
The
Company performs an annual evaluation of goodwill and intangible assets in
the
fourth quarter of each fiscal year for impairment as required by SFAS 142,
“Goodwill and Other Intangible Assets”.
8.
DEBT
AND BANK CREDIT FACILITIES
The
Company’s indebtedness, excluding commercial paper borrowings, as of March 31,
2007, and December 30, 2006 was as follows (in thousands):
|
|
|
March
31, 2007
|
|
|
December
30, 2006
|
|
Revolving
credit facility
|
|
$
|
197,000
|
|
$
|
197,200
|
|
Convertible
senior subordinated debt
|
|
|
115,000
|
|
|
115,000
|
|
Other
|
|
|
21,099
|
|
|
12,122
|
|
|
|
|
333,099
|
|
|
324,322
|
|
Less:
Current maturities
|
|
|
9,557
|
|
|
376
|
|
Non-current
portion
|
|
$
|
323,542
|
|
$
|
323,946
|
|
At
March
31, 2007, the Company maintained a $475.0 million revolving credit facility
(“Facility”). Borrowings under the Facility bear interest at 30-day LIBOR plus a
borrowing spread of .75%. All Facility borrowings are subject to a pricing
grid,
which can result in increases or decreases to the borrowing spread on a
quarterly basis, depending on the Company’s leverage ratios. In addition, a
non-use fee is payable quarterly on the average unused credit line under the
Facility. At March 31 2007, the non-use fee was 0.15%. The Facility contains
customary limits and restrictions concerning investments, sales of assets,
liens
on assets, interest coverage ratios, maximum leverage, and minimum net worth.
As
of March 31, 2007, the Company was in compliance with all debt covenants under
the Facility.
There
was
$49.1 million of commercial paper borrowings outstanding at March 31, 2007,
all
of which had original maturity terms of 90 days or less, and had a weighted
interest rate of 5.45%. Total commercial paper outstanding cannot exceed $50.0
million under the terms of the Facility. The Facility provides the liquidity
backstop for outstanding commercial paper. Accordingly, the combined outstanding
balances of the Facility and commercial paper cannot exceed $475.0 million.
The
Company’s $115.0 million, 2.75% convertible senior subordinated debt are
convertible as the closing price of the Company’s common stock exceeded the
contingent conversion share price of $33.23 for the specified amount of time.
As
a result, holders of the notes may surrender the notes for conversion at any
time until the maturing of the bonds in March 2024. Holders that exercise their
right to convert the notes will receive up to the principal amount in cash,
with
the balance of the conversion obligation, if any, to be satisfied in shares
of
Company common stock or cash, at the Company’s discretion. No notes have been
converted into cash or shares of common stock as of March 31, 2007.
During
the quarter ended March 31, 2007, a foreign subsidiary of the Company borrowed
a
total of $9.2 million denominated in U.S. dollars. The borrowings were made
under a $15.0 million unsecured credit facility which expires in December,
2008.
The notes are all short term and bear interest at a margin over
LIBOR.
9.
PENSION
PLANS
As
of
December 30, 2006, the Company adopted SFAS No. 158, “Employer’s
Accounting for Defined Benefit Pension and Other Postretirement
Plans.”
The
Company’s net periodic pension cost is comprised of the following
components:
|
|
(In
Thousands)
First
Quarter Ending
|
|
|
|
March
31, 2007
|
|
April
1, 2006
|
|
Service
cost
|
|
$
|
1,207
|
|
$
|
940
|
|
Interest
cost
|
|
|
1,267
|
|
|
1,140
|
|
Expected
return on plan assets
|
|
|
(1,283
|
)
|
|
(1,225
|
)
|
Amortization
of prior service cost
|
|
|
32
|
|
|
123
|
|
Amortization
of net actuarial loss
|
|
|
239
|
|
|
2,302
|
|
Net
periodic benefit expense
|
|
$
|
1,462
|
|
$
|
3,279
|
|
The
estimated net actuarial loss and prior service cost for defined benefit pension
plans that will be amortized from accumulated other comprehensive income into
net periodic benefit cost during the 2007 fiscal year are $1.0 million and
$0.1
million, respectively.
In
both
the first quarter of 2007 and 2006, the Company contributed $0.1 million to
defined benefit pension plans. The Company expects to contribute an additional
$1.1 million, for total contributions of $1.2 million in 2007. The Company
contributed a total of $3.0 million in 2006. The assumptions used in the
valuation of the Company’s pension plans and in the target investment allocation
have remained the same as those disclosed in the Company’s Annual Report on Form
10-K filed on February 28, 2007.
10.
SHAREHOLDERS’
INVESTMENT
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
SFAS 123(R), Share-Based
Payment,
using
the modified prospective application transition method.
During
the three months ended March 31, 2007 and April 1, 2006, the Company recognized
approximately $0.9 million in share-based compensation expense. The total income
tax benefit recognized relating to share-based compensation for the three months
ended March 31, 2007 and April 1, 2006 was approximately $3.3 and $0.4 million,
respectively. The Company recognizes compensation expense on grants of
share-based compensation awards on a straight-line basis over the vesting period
of each award recipient. As of March 31, 2007, total unrecognized compensation
cost related to share-based compensation awards was approximately $9.1 million,
net of estimated forfeitures, which the Company expects to recognize over a
weighted average period of approximately 2.7 years.
Under
the
Company’s 1998 and 2003 stock plans, the Company was authorized as of March 31,
2007 to deliver up to 2.5 million shares of common stock upon exercise of
non-qualified stock options or incentive stock options, or upon grant or in
payment of stock appreciation rights, performance shares, performance units
and
restricted stock. Approximately 0.4 million shares were available for future
grant or payment under the various plans at March 31, 2007.
Share-based
Incentive Awards
The
Company uses several forms of share-based incentive awards, including
non-qualified stock options, incentive stock options and stock appreciation
rights (SAR’s). All grants are made at prices equal to the fair market value of
the stock on the grant dates, and expire ten years from the grant
date.
The
per
share weighted average fair value of stock options granted during the three
months ended March 31, 2007 and April 1, 2006 was $18.11 and $12.60,
respectively. The Company estimated the fair value of each stock option on
the
date of grant using the Black-Scholes pricing model and the following
assumptions:
|
|
Three
Months Ended
|
|
|
March
31, 2007
|
|
April
1, 2006
|
Average
risk-free interest rate
|
|
4.6
|
%
|
|
4.5
|
%
|
Expected
dividend yield
|
|
1.2
|
%
|
|
1.4
|
%
|
Expected
volatility
|
|
32.0
|
%
|
|
27.0
|
%
|
Average
expected term (years)
|
|
|
|
|
|
|
Options
|
|
NA
|
|
|
8.0
|
|
SAR’s
|
|
7.0
|
|
|
5.0
|
|
The
average risk-free interest rate is based on U.S. Treasury security rates in
effect as of the grant date. The expected dividend yield is based on the
projected annual dividend as a percentage of the estimated market value of
the
Company’s common stock as of the grant date. The Company determined expected
volatility using a weighted average of daily historical volatility of the
Company’s stock price over the expected term of the award. The Company
determined the expected term of the stock options using historical data adjusted
for the estimated exercise dates of unexercised options.
A
summary
of stock option activity (options and SAR’s) during the three months ended March
31, 2007 is as follows:
|
|
Shares
|
|
Wtd.
Avg.
Exercise
Price
|
|
Wtd.
Avg.
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
|
Number
of shares under option:
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
|
|
1,602,725
|
|
$
|
26.64
|
|
|
|
|
|
|
|
Granted
|
|
|
140,000
|
|
|
48.05
|
|
|
|
|
|
|
|
Exercised
|
|
|
(31,050
|
)
|
|
24.07
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,250
|
)
|
|
33.35
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
|
|
1,709,425
|
|
|
28.44
|
|
|
5.0
|
|
$
|
32.1
|
|
Exercisable
at end of period
|
|
|
1,085,466
|
|
$
|
24.16
|
|
|
3.8
|
|
$
|
24.1
|
|
The
table
below presents share-based compensation activity for the quarters ended March
31, 2007 and April 1, 2006:
|
|
(In
Thousands)
First
Quarter Ending
|
|
|
|
|
March
31, 2007
|
|
|
April
1, 2006
|
|
Total
intrinsic value of stock options exercised
|
|
$
|
730
|
|
$
|
1,225
|
|
Cash
received from stock option exercises
|
|
|
747
|
|
|
1,363
|
|
Income
tax benefit from the exercise of stock options
|
|
|
3,310
|
|
|
450
|
|
Total
fair value of stock options vested
|
|
|
8,955
|
|
|
8,768
|
|
Restricted
Stock
The
Company also granted restricted stock awards to certain employees during the
three months ended March 31, 2007. The Company recorded pretax compensation
expense associated with the stock grants amounting to $0.3 million and $0.2
million for the three months ending March 31, 2007 and April 1, 2006,
respectively. Restrictions generally lapse two to three years after the date
of
grant. The Company values restricted stock awards at the closing market value
of
its common stock on the date of grant.
A
summary
of restricted stock activity for the three months ended March 31, 2007 is as
follows:
|
|
|
Shares
|
|
|
Wtd.
Avg.
Fair
Value
|
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
|
Restricted
stock balance at December 30, 2006
|
|
|
93,675
|
|
$
|
32.31
|
|
|
|
|
Granted
|
|
|
22,000
|
|
|
48.05
|
|
|
|
|
Restrictions
lapsed
|
|
|
(23,000
|
)
|
|
27.63
|
|
|
|
|
Restricted
stock balance at March 31, 2007
|
|
|
92,675
|
|
$
|
37.20
|
|
$
|
3.4
|
|
11.
INCOME
TAXES
The
Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
(FIN 48)
as of the beginning of fiscal 2007, December 31, 2006. FIN 48 clarifies the
accounting for uncertainty in income taxes by defining criteria that a tax
position on an individual matter basis must meet before that position is
recognized in the financial statements. Additionally, FIN 48 provides guidance
on measurement, derecognition, classification, interest and penalties, interim
period accounting, disclosures and transition. As a result of adopting FIN
48,
the Company determined that approximately $560 (including approximately $392
in
estimated interest payments) of tax benefits previously recognized were
considered uncertain tax positions; as such these deductions may not be
sustained upon examination by taxing authorities. This adjustment was reflected
as a reduction of retained earnings. In addition, consistent with the provisions
of FIN 48, the Company reclassified $6.9 million of income tax liabilities
from
current to non-current liabilities because payment of cash is not anticipated
within one year of the balance sheet date. As a result of the adoption of FIN
48, certain tax liabilities as of December 30, 2006 were reclassified in the
condensed consolidated balance sheet. Income tax liabilities of $6.3 million
were reclassified from current liabilities to non-current liabilities. In
addition, $5.9 million of prepaid taxes were reclassified from current
liabilities to current assets in the December 30, 2006 comparative condensed
consolidated balance sheet.
As
of the
adoption date at the beginning of the quarter and at March 31, 2007, the Company
had approximately $6.9 million of unrecognized tax benefits, $3.3 million of
which would affect its effective tax rate if recognized. The Company recognizes
interest and penalties related to uncertain tax positions in income tax
expense.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. Federal tax returns
from 2003 through 2006 and various state tax returns from 2001 through 2006
remain subject to income tax examinations by tax authorities. The Company
estimates that the unrecognized tax benefits will not change significantly
within the next year.
12.
EARNINGS
PER SHARE (EPS)
The
numerator for the calculation of basic and diluted earnings per share is net
income. The denominator is computed as follows (in thousands):
|
First
Quarter Ending
|
|
March
31, 2007
|
|
April
1, 2006
|
Denominator
for basic EPS - weighted average shares
|
30,814
|
|
30,701
|
Effect
of dilutive securities
|
2,734
|
|
2,256
|
Denominator
for diluted EPS
|
33,548
|
|
32,957
|
Options
for common shares where the exercise price was above the market price at March
31, 2007, totaling 106,000 shares, have been excluded from the calculation
of
the effect of dilutive securities as the effect of such options is
anti-dilutive.
There
were no such anti-dilutive option shares outstanding at April 1,
2006.
13. CONTINGENCIES
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 March
31,
2007, amounts that have been recorded in the Company’s financial statements
related to this contingency are immaterial.
On
April
26, 2007, the Company received notice that the U.S. Environmental Protection
Agency (“U.S. EPA”) has filed an action against the Company in the United States
District Court for the Northern District of Illinois seeking reimbursement
of
the U.S. EPA’s unreimbursed past and future remediation costs incurred in
cleaning up an environmental site located near a former manufacturing facility
of the Company in Illinois. In 1999, the Company and other parties identified
as
potentially responsible parties (“PRPs”) reached an agreement with the U.S. EPA
to partially fund the costs of certain response actions taken with respect
to
this site. In 2004, the Company received communications from the U.S. EPA
indicating that the Company was identified as one of three PRPs regarding
additional remedial actions to be taken by the U.S. EPA at this site. In
response, the Company provided to the U.S. EPA its environmental expert’s
assessment of the site in 2004. The Company believes that it is not a PRP with
respect to the site in question and intends to defend vigorously the associated
claim. As of March 31, 2007 amounts that have been recorded in the Company’s
financial statements related to this contingency are immaterial.
The
Company is, from time to time, party to other lawsuits arising from its normal
business operations. It is believed that the outcome of these lawsuits will
have
no material effect on the Company’s financial position or its results of
operations.
14.
DERIVATIVE
INSTRUMENTS
The
Company periodically enters into commodity futures and options hedging
transactions to reduce the impact of changing prices for certain commodities
such as copper and aluminum based upon certain firm commitments to purchase
such
commodities. These transactions are designated as cash flow hedges and the
contract terms of commodity hedge instruments generally mirror those of the
hedged item, providing a high degree of risk reduction and correlation.
Derivative commodity assets of $3.1 million and $1.7 million are recorded in
current assets as of March 31, 2007 and December 30, 2006, respectively. The
value of the effective portion of the contracts of $1.8 million net of tax
and
$1.0 million net of tax, as of March 31, 2007 and December 30, 2006, was
recorded in accumulated other comprehensive income (“AOCI”).
The
Company uses a cash hedging strategy to protect against an increase in the
cost
of forecasted foreign currency denominated transactions. As of March 31, 2007,
derivative currency assets of $1.4 million and $0.6 million are recorded in
other current assets and other non-current assets, respectively. At December
30,
2006, derivative currency assets of $2.2 million and $1.0 million were recorded
in other current assets and other non-current assets, respectively. The value
of
the effective portion of the contracts of $1.2 million net of tax and $2.0
million net of tax, as of March 31, 2007 and December 30, 2006, respectively,
was recorded in AOCI.
Of
the
net unrealized gain of $3.0 million in AOCI at March 31, 2007, $2.7 million
is
expected to be realized in the next year. The impact of hedge ineffectiveness
was immaterial for all periods.
15.
SUBSEQUENT
EVENTS
On
April
20, 2007, the Company’s shareholders approved an amendment to the Company’s
Articles of Incorporation that increased the number of shares of common stock
that the Company is authorized to issue from 50 million shares to 100 million
shares. The Company also authorized the issuance of up to 2.5 million shares
to
be used under the Regal Beloit Corporation 2007 Equity Incentive Plan approved
by the Company’s shareholders on April 20, 2007. Each authorized share is
accompanied by one Common Stock Purchase Right as described in our Annual Report
on Form 10-K filed on February 28, 2007.
On
April
30, 2007, the Company amended its revolving credit facility. The committed
amount of the revolving credit facility increased from $475.0 million to $500.0
million. The conditional commitment, subject to certain approvals and covenants,
increased from $75.0 million to $200.0 million under the new facility. The
facility still bears interest based on a margin over LIBOR and contains revised
covenants.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS
Unless
the context requires otherwise, references in this Item 2 to “we”, “us”, “our”
or the “Company” refer collectively to Regal Beloit Corporation and its
subsidiaries.
OVERVIEW
End
markets for the Company’s products continued to show strength during the first
quarter of 2007. Net sales increased 5.1% to $418.6 million from $398.3 million
in the first quarter of 2006.
Net
income increased 12.7% to $26.8 million in the first quarter of 2007 as compared
to $23.8 million in the comparable period last year. Diluted earnings per share
increased 11.1% to $0.80 as compared to $0.72 for the first quarter of 2006.
RESULTS
OF OPERATIONS
Sales
for
the quarter were $418.6 million, a 5.1% increase over the $398.3 million
reported for the first quarter of 2006. First quarter 2007 sales included $17.9
million of sales related to the Sinya motor business that was purchased in
May
2006. First quarter 2006 sales included $4.7 million of sales related to the
Company’s cutting tools business. Substantially all of the assets of the
Company’s cutting tools business were sold in May 2006.
In
the
Electrical segment, sales increased 6.2%. The soft housing market and a
comparison to a strong 2006 that was favorably impacted by the SEER 13
legislation impacted sales in the HVAC business, which decreased 14.2%. The
sales for the remainder of the motor businesses increased 20.5%, including
$17.9
million of sales attributable to the Sinya motor business acquired in the second
quarter of 2006. Sales for the power generation businesses increased 24.3%.
Sales in the Mechanical segment were down 2.1%, however, the sale of
substantially all of the assets of the Company’s cutting tools business in May
2006 reduced
segment sales by approximately $4.7 million
for the quarter.
Gross
margins for the quarter were 23.2%, compared to 23.4% in the first quarter
of
2006. Material costs, specifically copper and aluminum, continued to increase
and have a significant impact on our gross margins during the quarter, partially
offset by new products, productivity, pricing actions and positive product
mix
across our entire business resulting in the 0.2% decrease.
Operating
expenses were $49.9 million (11.9% of sales) in the first quarter of 2007 versus
$49.7 million (12.5% of sales) in first quarter of 2006. Included in operating
expenses for the first quarter of 2006 was $2.0 million of expense related
to
the Regal Beloit Supplemental Executive Retirement Plan resulting from a change
in assumptions associated with retirement benefits for certain key executives.
Income from operations was $47.3 million versus $43.6 million in the first
quarter of 2006, an increase of 8.5%. As a percent of sales, income from
operations was 11.3% in the first quarter of 2007 versus 11.0% for the first
quarter of 2006. This increase reflected contributions from new products,
pricing actions, productivity, and the leveraging of fixed costs.
Net
interest expense was $5.0 million versus $4.7 million in the first quarter
of
2006. The increase was due to higher interest rates we paid on debt outstanding,
which was partially offset by lower average borrowings.
The
tax
rate for the quarter was 34.7% versus 36.8% in the prior year period. The tax
rate for the first quarter of 2007 was impacted by the distribution of income,
which was weighted more to lower tax rate countries than during the comparable
period of 2006.
Net
income for the first quarter of 2007 was $26.8 million, an increase of 12.7%
versus the $23.8 million reported in same period of 2006. Fully diluted earnings
per share was $0.80 as compared to $0.72 per share reported in the first quarter
of 2006. The average number of diluted shares was 33,547,519 during the first
quarter of 2007 as compared to 32,957,209 during the comparable period last
year. The increase reflects the dilutive impact of the Company’s convertible
senior subordinated debt which was greater in the first quarter of 2007
resulting from the increase in the price of our stock during the comparable
period of 2007 and 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital was $340.8 million at March 31, 2007, a 7.6% increase from
$316.6 million at year-end 2006. The $24.2 million increase was due primarily
to
a $43.3 million accounts receivable increase resulting primarily from increased
sales in the first quarter of 2007, partially offset by a $12.3 million increase
in accounts payable and a $5.7 million decrease in inventories. The ratio of
our
current assets to our current liabilities (“current ratio) of 2.2:1 at March 31,
2007 was unchanged from year-end 2006.
Net
cash
provided by operating activities was $10.4 million in the first quarter of
2007
as compared to $2.3 million cash used in the first quarter of 2006. During
the
first quarter of 2007, decreases in our inventories provided $13.0 million
more
as compared to the prior year’s quarter. Net cash used in investing activities
was $12.7 million in the first quarter of 2007, above the $6.8 million used
in
last year’s first quarter, due primarily to the $5.2 million sale of our
Grafton, Wisconsin facility in 2006. Additions to property, plant and equipment
of $12.2 million in the first quarter of 2007 were $4.9 million above the $7.3
million in the comparable period of 2006. Our cash flow provided by financing
activities was $8.6 million during the first quarter of 2007 versus $6.1 million
in the first quarter of 2006.
Our
outstanding long-term debt decreased from $323.9 million at December 30, 2006
to
$323.5 million at March 31, 2007. Of our total long-term debt, $197.0 million
was outstanding under our $475.0 million unsecured revolving credit facility
that expires on May 5, 2009 (the “Facility”). The Facility permits the Company
to borrow at interest rates based upon a margin above the London Inter-Bank
Offered Rate (“LIBOR”), which margin varies with the ratio of total funded debt
to earnings before interest, taxes, depreciation and amortization (“EBITDA”).
These interest rates also vary as LIBOR varies. We pay a commitment fee on
the
unused amount of the Facility, which also varies with the ratio of our total
debt to our EBITDA. At March 31, 2007, the Company’s margin above LIBOR was .75%
and our commitment fee rate was .15%. The Facility requires us to meet specified
financial ratios and to satisfy certain financial condition tests. We were
in
compliance with all of these tests as of March 31, 2007. The Facility was
amended subsequent to the end of the quarter. See Note 15 to the condensed
consolidated financial statements.
In
addition to the Facility, at March 31, 2007, we also had $115.0 million of
convertible senior subordinated debt outstanding at a fixed interest rate of
2.75%, $49.1 million of short-term commercial paper borrowings and $21.1 million
of other debt. At March 31, 2007, our borrowing availability under the Facility
was $223.2 million based on the Facility’s credit limit.
During
the quarter ended March 31, 2007, a foreign subsidiary of the Company borrowed
a
total of $9.2 million denominated in U.S. dollars. The borrowings were made
under a $15.0 million unsecured credit facility which expires in December 2008.
The notes are all short term and bear interest at a margin over
LIBOR.
CRITICAL
ACCOUNTING POLICIES
Revenue
Recognition
We
recognized 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 sale 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.
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.
Use
of Estimates and Assumptions
The
preparation of our condensed 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
February 2007, Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, Including
an
Amendment of FASB Statement No. 115
(“SFAS
159”). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items generally on an instrument-by-instrument basis at fair
value that are not currently required to be measured at fair value. SFAS 159
is
intended to provide entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS 159 is
effective for the Company on January 1, 2008, although early adoption is
permitted. If the Company elects to adopt SFAS 159 early, it would need to
concurrently early adopt the provisions of Statement of Financial Accounting
Standard No. 157, Fair
Value Measurements
(“SFAS
157”), which is described below. The Corporation is evaluating the provisions of
SFAS 159.
In
September 2006, the FASB issued SFAS 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans
(“SFAS
158”). SFAS 158 requires that public companies prospectively recognize through
Accumulated Other Comprehensive Income the over funded or under funded status
of
their defined benefit plans as an asset or liability beginning in their 2006
year-end balance sheet. The Company adopted SFAS 158 as of December 30,
2006.
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements
(“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS 157 will
be
effective beginning in fiscal 2008. We are evaluating the new standard to
determine the effect on our financial statements and related
disclosures.
In
June
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, Accounting
for Income Taxes.
FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company has adopted FIN 48 in the first quarter
of 2007. See Note 11 to the condensed consolidated financial
statements.
ITEM
3. 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 March 31, 2007,
we had $123.9 million of fixed rate debt and $258.3 million of variable rate
debt, the latter subject to interest rate risk. The variable rate debt is
primarily under the Facility with an interest rate based on a margin above
LIBOR. As a result, interest rate changes impact future earnings and cash flow
assuming other factors are constant. A hypothetical 10% change in our weighted
average borrowing rate on outstanding variable rate debt at March 31, 2007,
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 copper, aluminum and natural
gas
commodity prices. Contract terms of commodity hedge instruments generally mirror
those of the hedged item, providing a high degree of risk reduction and
correlation.
We
are
also exposed to foreign currency risks that arise from normal business
operations. These risks include the translation of local currency balances
of
foreign subsidiaries, intercompany loans with foreign subsidiaries and
transactions denominated in foreign currencies. Our objective is to minimize
our
exposure to these risks through a combination of normal operating activities
and
the utilization of foreign currency contracts to manage our exposure on the
transactions denominated in currencies other than the applicable functional
currency. Contracts are executed with creditworthy banks and are denominated
in
currencies of major industrial countries. It is our policy not to enter into
derivative financial instruments for speculative purposes. We do not hedge
our
exposure to the translation of reported results of foreign subsidiaries from
local currency to United States dollars.
All
hedges are recorded on the balance sheet at fair value and are accounted for
as
cash flow hedges, with changes in fair value recorded in accumulated other
comprehensive income (“AOCI”) in each accounting period. An ineffective portion
of the hedge’s change in fair value, if any, is recorded in earnings in the
period of change. The impact due to ineffectiveness was immaterial for all
periods included in this report.
Derivative
commodity assets of $3.1 million and $1.7 million are recorded in current assets
as of March 31, 2007, and December 30, 2006, respectively. The value of the
effective portion of the contracts of $1.8 million net of tax and $1.0 million
net of tax, as of March 31, 2007 and December 30, 2006, was recorded in
accumulated other comprehensive income.
The
Company uses a cash hedging strategy to protect against an increase in the
cost
of forecasted foreign currency denominated transactions. As of March 31, 2007,
derivative currency assets of $1.4 million and $0.6 million are recorded in
other current assets and other non-current assets, respectively. At December
30,
2006, derivative currency assets of $2.2 million and $1.0 million were recorded
in other current assets and other non-current assets, respectively. The value
of
the effective portion of the contracts of $1.2 million net of tax and $2.0
million net of tax, as of March 31, 2007, and December 30, 2006 respectively,
was recorded in AOCI.
Of
the
net unrealized gain of $3.0 million in AOCI at March 31, 2007, $2.7 million
is
expected to be realized in the next year. The impact of hedge ineffectiveness
was immaterial for all periods included in this report.
Disclosure
Controls and Procedures. The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company’s disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of
1934, as amended (the “Exchange Act”)) as of the end of the period covered by
this report. Based on such evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period,
the
Company’s disclosure controls and procedures were effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under
the
Exchange Act.
Internal
Control Over Financial Reporting. There were no changes in the Company’s
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to
which this report relates that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
Items
2
and 3 are inapplicable and have been omitted.
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 March
31,
2007, amounts that have been recorded in the Company’s financial statements
related to this contingency are immaterial.
On
April 26, 2007, the Company received notice that the U.S. Environmental
Protection Agency (“U.S. EPA”) has filed an action against the Company in the
United States District Court for the Northern District of Illinois seeking
reimbursement of the U.S. EPA’s unreimbursed past and future remediation costs
incurred in cleaning up an environmental site located near a former
manufacturing facility of the Company in Illinois. In 1999, the Company and
other parties identified as potentially responsible parties (“PRPs”) reached an
agreement with the U.S. EPA to partially fund the costs of certain response
actions taken with respect to this site. In 2004, the Company received
communications from the U.S. EPA indicating that the Company was identified
as
one of three PRPs regarding additional remedial actions to be taken by the
U.S.
EPA at this site. In response, the Company provided to the U.S. EPA its
environmental expert’s assessment of the site in 2004. The Company believes that
it is not a PRP with respect to the site in question and intends to defend
vigorously the associated claim. As of March 31, 2007 amounts that have been
recorded in the Company’s financial statements related to this contingency are
immaterial.
The
Company is, from time to time, party to other lawsuits arising from its normal
business operations. It is believed that the outcome of these other lawsuits
will have no material effect on the Company’s financial position or its results
of operations.
The
business and financial results of the Company are subject to numerous risks
and
uncertainties. The risks and uncertainties have not changed materially from
those reported in the 2006 Annual Report on Form 10-K.
The
following table contains detail related to the repurchase of common stock based
on the date of trade during the quarter ended March 31, 2007.
2007
Fiscal
Month
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
|
|
Maximum
Number
of
Shares that May
Be
Purchased
Under
the Plan or
Programs
|
|
December
31, 2006 to February 3, 2007
|
|
|
48,896
|
|
$ |
51.25
|
|
|
-
|
|
|
1,225,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
4 to March 3, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,225,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
4 to March 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
1,225,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
48,896
|
|
|
|
|
|
-
|
|
|
|
|
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 first quarter of
2007, the Company acquired 48,896 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.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the quarter
ended
March 31, 2007.
Exhibit
Number
|
|
Exhibit
Description
|
4.1
|
|
Second
Amended and Restated Credit Agreement, dated as of April 30, 2007,
among
Regal Beloit Corporation, the financial institutions party thereto
and
Bank of America, N.A., as administrative agent. [Incorporated by reference
to Exhibit 4.1 to Regal Beloit Corporation's Current Report on Form
8-K
dated April 30, 2007 (File No. 001-07283)] |
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
32.1
|
|
Certifications
of the Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
REGAL
BELOIT CORPORATION (Registrant) |
|
|
|
Date: May
4, 2007 |
By: |
/s/ David
A. Barta |
|
David
A. Barta |
|
Vice
President and Chief Financial Officer
(Principal
Accounting and Financial Officer)
|
Exhibit
Number
|
|
Exhibit
Description
|
4.1
|
|
Second
Amended and Restated Credit Agreement, dated as of April 30, 2007,
among
Regal Beloit Corporation, the financial institutions party thereto
and
Bank of America, N.A., as administrative agent. [Incorporated by reference
to Exhibit 4.1 to Regal Beloit Corporation's Current Report on Form
8-K
dated April 30, 2007 (File No. 001-07283)] |
|
|
|
31.1
|
|
|
|
|
|
31.2
|
|
|
|
|
|
32.1
|
|
|