REGAL BELOIT CORP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2011
Commission File number 1-7283
Regal Beloit Corporation
(Exact Name of Registrant as Specified in Its Charter)
| Wisconsin | 39-0875718 | |
| (State of Incorporation) | (IRS Employer Identification No.) |
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive offices)
(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:
| Name of Each Exchange on | ||
| Title of Each Class | Which Registered | |
| Common Stock ($.01 Par Value) | New York Stock Exchange |
Securities registered pursuant to Section 12 (g) of the Act
None
(Title of Class)
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Yes
þ
No
o
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
o
No
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
þ
No
o
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.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes
o
No
þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July
3, 2010 was approximately $2.1 billion.
On February 22, 2011, the registrant had outstanding 38,627,709 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 May 2, 2011 is incorporated by reference into Part III, hereof.
REGAL BELOIT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 1, 2011
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 1, 2011
TABLE OF CONTENTS
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| Exhibit 10.17 | ||||||||
| Exhibit 12 | ||||||||
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| Exhibit 31.1 | ||||||||
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| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
Page 2
Table of Contents
CAUTIONARY STATEMENT
This Annual Report on
Form 10-K
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:
| • |
actions taken by our competitors and our ability to effectively compete in the
increasingly competitive global electric motor, power generation and mechanical motion
control industries;
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| • |
our ability to develop new products based on technological innovation and the
marketplace acceptance of new and existing products;
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| • |
fluctuations in commodity prices and raw material costs;
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| • |
our dependence on significant customers;
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| • |
issues and costs arising from the integration of acquired companies and businesses,
including the timing and impact of purchase accounting adjustments;
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our dependence on key suppliers and the potential effects of supply disruptions;
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| • |
infringement of our intellectual property by third parties, challenges to our
intellectual property, and claims of infringement by us of third party technologies;
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| • |
increases in our overall debt levels as a result of acquisitions or otherwise and our
ability to repay principal and interest on our outstanding debt;
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| • |
product liability and other litigation, or the failure of our products to perform as
anticipated, particularly in high volume applications;
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| • |
difficulties consummating the pending acquisition of the Electrical Products Company of
A.O. Smith Corporation that may have a negative impact on our results of operations;
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| • |
economic changes in global markets where we do business, such as reduced demand for the
products we sell, currency exchange rates, inflation rates, interest rates, recession,
foreign government policies and other external factors that we cannot control;
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unanticipated liabilities of acquired businesses;
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cyclical downturns affecting the global market for capital goods;
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difficulties associated with managing foreign operations; and
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| • |
other risks and uncertainties including but not limited to those described in “Risk
Factors” in this Annual Report on 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 Annual Report on 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 “Risk Factors.”
Page 3
Table of Contents
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 to be held on May 2, 2011 (the “2011 Proxy
Statement”) or to information contained in specific sections of the Proxy Statement, incorporate
the information into that Item by reference.
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to
the fiscal year ended January 1, 2011 as “fiscal 2010,” the fiscal year ended January 2, 2010 as
“fiscal 2009,” and the fiscal year ended December 27, 2008 as “fiscal 2008.”
| ITEM 1 — |
BUSINESS
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Our Company
We are a global manufacturer of
electric motors and controls, electric generators and controls, and
mechanical motion control products. Many of our products feature energy efficiency technology,
and electronics. Our energy efficiency product portfolio offers lower operating costs to
our customers and a significant marketing benefit to our original equipment manufacturer
(“OEM”)
customers. Our electrical products primarily include AC and DC commercial and industrial electric
motors and controls, motors used in heating, ventilation, and air conditioning (“HVAC”)
and
commercial refrigeration applications, electric generators and controls, and capacitors. Our
mechanical products include primarily gears and gearboxes, marine transmissions, high-performance
automotive transmissions, manual valve actuators, and electrical connectivity devices.
We believe we have one of the most comprehensive product lines in the industries we serve. We
market our products using over 30 recognized brand names, with most brands having their own product
offerings and sales organizations. These sales organizations consist of varying combinations of
our own internal direct sales people as well as exclusive and non-exclusive manufacturers’
representative organizations. Through this multi-channel distribution model, we sell our products
to a diverse global customer base consisting primarily of leading OEMs, distributors and end users.
We believe this strategy, coupled with a high level of customer service, provides us with a
competitive selling advantage and allows us to more fully serve our customers.
We manufacture the vast majority of the products that we sell, and we have manufacturing, sales,
engineering, and distribution facilities primarily in the United States, Mexico, China, India and
Australia, as well as a number of other locations throughout the world.
OEMs and end users in a variety of motion control and other industrial applications typically
combine the types of electrical and mechanical products we offer. We seek to take advantage of
this practice and to enhance our product penetration by leveraging cross-marketing and product line
combination opportunities between our electrical and mechanical products. Our growth strategy also
includes (i) driving organic growth through the introduction of innovative new products, (ii)
establishing and maintaining new customers, as well as developing new opportunities with existing
customers, (iii) participating in higher growth geographic markets, and (iv) identifying and
consummating strategic, value creating acquisitions. We consider our acquisition process,
including identification, due diligence, and integration, to be one of our core competencies.
Our business initiatives include:
| • |
Customer Care: Our future depends on the success of our customers. We will maintain
close relationships with our customers, actively listen to their feedback and respond with
a sense of urgency.
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| • |
Globalization: We want to be global for three reasons. First, we want to participate
in high growth markets around the world. Second, many of our customers are global and we
want to serve customers where they do business. Finally, we want to utilize our global
capabilities to seek out the best talent and to remain globally competitive.
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| • |
Innovation: We will build our future on products that are new and needed. While we
accept that with an innovation focus comes a certain degree of risk, we are committed to
investing in new products, technologies and processes that deliver value to our customers.
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| • |
Sustainability: The long term sustainability of our Company requires not only
continuous growth and profitability, but also that we take personal responsibility for the
impact we have on our planet, and for the fair and just treatment of the people we employ.
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| • |
Simplification: Complexity is a serious disadvantage in business. We aim to simplify
every aspect of our operations to eliminate complexities in order to increase our speed,
improve our flexibility and reduce our costs.
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Page 4
Table of Contents
Reporting Segments
We have two reporting segments: Electrical and Mechanical. Financial information on our reporting
segments for fiscal 2010, fiscal 2009, and fiscal 2008 is contained in Note 16 of the Notes to
Consolidated Financial Statements.
Electrical Segment
Our Electrical segment includes AC and DC commercial and industrial electric motors and controls,
HVAC and commercial refrigeration motors, electric generators and controls, and capacitors. We
believe our motor products are uniquely positioned to help our customers and end consumers achieve
greater energy efficiency, resulting in significant cost savings for the consumer and preservation
of natural resources and our environment. We estimate that approximately 40-50% of all electricity
generated in the U.S. is consumed by electric motors.
Our Electrical segment has continued to grow over time, primarily due to strategic acquisitions.
For example, during 2010, we completed six acquisitions. These acquisitions (each of which is
reported as part of the Electrical segment, except for CMG Engineering Group Pty, Ltd. (“CMG”),
which is reported as part of both the Electrical and Mechanical segments) included:
| • |
On December 23, 2010, we acquired Unico, Inc. (“Unico”), located in Franksville,
Wisconsin. Unico manufactures a full range of AC and DC drives, motor controllers and
other accessories for most industrial and commercial applications. Unico has developed
proprietary technology in the fields of oil and gas recovery technology, commercial HVAC
technology, test stand automation and other applications.
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| • |
On December 1, 2010, we acquired South Pacific Rewinders (“SPR”), located in Auckland,
New Zealand. SPR operates as a motor rewinder and distributor in the Pacific region.
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| • |
On November 1, 2010, we acquired 55% of Elco Group B.V. (“Elco”), located in Milan,
Italy. Elco manufactures and sells motors, fans and blowers and has manufacturing
facilities in Italy, China and Brazil.
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| • |
On September 1, 2010, we acquired Rotor B.V. (“Rotor”), located in Eibergen, the
Netherlands. Rotor sells standard and special electric motors to a variety of industries
including the marine industry, ship building and offshore oil and gas. In addition to the
Netherlands, Rotor also sells throughout Europe, the United Kingdom and Japan.
|
| • |
On May 4, 2010, we acquired Air-Con Technology (“Air-Con”), located in Mississauga,
Ontario, Canada. Air-Con is a distributor of HVACR electric motors.
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| • |
On April 6, 2010, we acquired CMG, located in Melbourne, Australia. CMG manufactures
and sells fractional horsepower industrial motors, blower systems, and industrial metal
products with operations in Australia, New Zealand, South Africa, Malaysia, Singapore, the
United Kingdom and the Middle East. CMG also distributes integral horsepower industrial
motors, mechanical power transmission products, material handling equipment, electrical
insulation materials, magnet wire and specialty conductors in Australia and New Zealand.
|
Our Electrical segment manufactures and markets AC and DC commercial, industrial, commercial
refrigeration, and HVAC electric motors and blowers. These products range in size from
sub-fractional to small integral horsepower motors to larger commercial and industrial motors from
50 through 6500 horsepower. We offer thousands of stock models of electric motors in addition to
the motors we produce to specific customer specifications. We also produce and market precision
servo motors, electric generators ranging in size from five kilowatts through four megawatts,
automatic transfer switches and paralleling switchgear to interconnect and control electric power
generation equipment. Additionally, our Electrical segment manufactures and markets a line of AC
and DC variable speed drives and controllers and other accessories for most industrial and
commercial applications. We manufacture capacitors for use in HVAC systems, high intensity
lighting and other applications. We sell our Electrical segment’s products to original equipment
manufacturers, distributors and end users across many markets.
Our HVAC electric motors and blowers 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, water
heaters, and humidifiers. We believe that a majority of our HVAC motors replace existing motors or
are part of a new HVAC system that replaces an existing HVAC system. The remainder of sales are
used in a HVAC system for new home construction. The business enjoys a large installed base of
equipment and long-term relationships with its major customers.
Our power generation business, which includes electric generators and power generation components
and controls, represents a portion of our Electrical segment’s net sales. The market for electric
power generation components and controls has grown in recent years as a result of a desire on the
part of end users to reduce losses due to power disturbances and the increased need for prime power
in certain applications. Our generators are used in industrial, commercial, agricultural, marine,
military, transportation, construction, and other applications.
We leverage material and manufacturing efficiencies across our motor and power generation
operations. We centralize the manufacturing, purchasing, engineering, accounting, information
technology and quality control
activities of our Electrical segment. Furthermore, we specifically foster the sharing of best
practices across each of the Electrical segment businesses and create focused centers of excellence
in each of our manufacturing functions. We focus on cost reduction and value added engineering
opportunities for our customers.
Page 5
Table of Contents
The following is a description of our major Electrical product brands and the primary products that
they manufacture and market:
| • |
CMG.
Manufactures fractional horsepower industrial motors and blower systems and
distributes integral horsepower motors, mechanical power transmission products, material
handling equipment, electrical insulation materials, magnet wire, and specialty conductors
under the brands CMG, OBA, Transmission Australia, and Torin.
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| • |
Dutchi Motors.
Distributor of International Electrotechnical Commission
(“IEC”) and National Electric Manufacturers Association (“NEMA”) electric motors for
industrial applications in Western and Eastern Europe, Russia and the Middle East.
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| • |
Elco.
Manufactures fractional horsepower motors and blower systems for the commercial
refrigeration markets.
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| • |
Fasco Motors.
Manufactures motors and blower systems for air moving applications
including alternative fuel systems, water heaters, appliances, pumps, and HVAC systems.
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| • |
Genteq.
Manufactures fractional AC, high efficiency brushless DC and ECM motors for
application in the HVAC market, mainly to OEMs.
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| • |
Hwada Motors.
Manufactures Integrated IEC and NEMA motors for various industrial
applications such as compressor, pump, paper and steel processing and power plants.
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| • |
LEESON Electric
. Manufactures and distributes 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.
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| • |
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.
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| • |
Marathon Electric
. Manufactures AC motors up to 800 horsepower primarily for pumps,
power transmissions, fans and blowers, compressors, HVAC, agriculture products, processing
and industrial manufacturing equipment.
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| • |
Marathon Electric Motors (India) Ltd.
Manufactures a full range (from 1 to 3500
horsepower) of low and medium voltage industrial motors and fans for the industrial and
process markets in India.
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| • |
Marathon Generators
. Manufactures AC generators from five kilowatts to four megawatts
that primarily serve the standby power, prime power, refrigeration, industrial and
irrigation markets.
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| • |
Morrill Motors
. Manufactures fractional horsepower motors, blowers and components for
the commercial refrigeration and freezer markets.
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| • |
Rotor.
Distributes standard and special electric motors to a variety of industries
including marine, ship building and offshore oil and gas.
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| • |
Thomson Technology
. Manufactures automatic transfer switches, paralleling switchgear and
controls, and systems controls primarily for the electric power generation market.
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| • |
Unico.
Manufactures a full range of AC and DC drives, motor controllers and other
accessories for most industrial and commercial applications. Unico has developed
proprietary technology in the field of oil and gas recovery, commercial HVAC and test stand
automation.
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Mechanical Segment
Our Mechanical segment manufactures and markets a broad array of mechanical motion control products
including standard and custom worm gears, bevel gears, helical gears and concentric shaft
gearboxes; marine transmissions; high-performance after-market automotive transmissions and ring
and pinions; custom gearing; gearmotors; manual valve actuators; and electrical connecting devices.
Our gear and transmission related products primarily control motion by transmitting power from a
source, such as an electric motor, 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.
Page 6
Table of Contents
The following is a description of our major Mechanical segment brands and the primary products they
manufacture and market:
| • |
Durst
. Manufactures standard and specialized industrial transmissions, hydraulic pump
drives and gears for turbines used in power generation primarily for the construction,
agriculture, energy, material handling, forestry, lawn and garden and railroad maintenance
markets.
|
| • |
Grove Gear/Electra-Gear
. Manufactures standard and custom industrial gear reducers and
specialized aluminum gear reducers and gearmotors primarily for the material handling, food
processing, robotics, 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, food processing mining, oil,
pulp and paper, forestry, aggregate, construction and steel markets.
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| • |
Marathon Special Products
. Manufactures fuse holders, terminal blocks, and power blocks
primarily for the HVAC, telecommunications, electric control panel, utilities and
transportation markets.
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| • |
Mastergear
. Manufactures manual valve actuators for liquid and gas flow control
primarily for the petrochemical processing, fire protection and wastewater markets.
Mastergear has locations in the United States and Europe.
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| • |
Richmond Gear.
Manufactures ring and pinions and transmissions primarily for the
high-performance automotive aftermarket.
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| • |
Sankey.
Manufactures electrical steel components, general metal product stampings,
products for building including expanded metal mesh products, and aluminum and zinc
die-cast products.
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| • |
Velvet Drive Transmissions
. Manufactures marine transmissions primarily for
the pleasure boat and yacht markets.
|
The Building of Our Business
Our growth from our founding in 1955 to our current size 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. Our organic and acquisition growth has rapidly moved
the Company into other regions of the world where market and growth fundamentals are more favorable
and aligned with our business strategy. We consider the identification of acquisition candidates
and the purchase and integration of businesses to be one of our core competencies. The following
table summarizes acquisitions from 2008 to 2010:
Page 7
Table of Contents
| Annual Revenues | ||||||||
| Year | at Acquisition | |||||||
| Acquired | (in millions) | Primary Products at Acquisition | ||||||
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Unico
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2010 | $ | 62 | Manufactures AC and DC drives, motor controllers used in oil and gas recovery, commercial HVAC technology, and test stand automation and development | ||||
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South Pacific Rewinders
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2010 | 1 | Rewinder and distributor of electric motors | |||||
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Elco
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2010 | 80 | Manufactures motors, fans and blowers used in HVAC and commercial refrigeration applications for markets in Europe, South America and Asia | |||||
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Rotor
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2010 | 32 | Distributes standard and special electric motors used in general industrial and marine applications in the Netherlands, Europe, United Kingdom and Japan | |||||
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Air-Con
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2010 | 1 | Distributor of HVAC electric motors in Canada | |||||
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CMG
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2010 | 120 | Manufactures and distributes fractional horsepower industrial motors and blower systems in Australia, New Zealand, South Africa, Malaysia, Singapore, United Kingdom and the Middle East. | |||||
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Custom Power Technology
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2009 | 2 | Manufactures customer power electronics in the U.S. | |||||
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Dutchi Motors
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2008 | 56 | Distributor of IEC and NEMA electric motors for industrial applications in Western and Eastern Europe, Russia and the Middle East | |||||
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Hwada Motors
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2008 | 105 | Integral IEC and NEMA electric motors for industrial applications | |||||
Sales, Marketing and Distribution
We sell our products directly to OEMs, distributors and end-users. We have multiple business
units, and each unit typically has 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 maintain a large distribution facility in Indianapolis, Indiana which serves as a hub for our
North American distribution and logistics operations. Products are shipped from this facility to
our customers utilizing our fleet of trucks and trailers as well as common carriers. We maintain
numerous warehouse and distribution facilities in our global markets to service the needs of our
customers. In addition, we have many manufacturer representatives’ warehouses located in specific
geographic areas to serve local customers.
We had no customers that accounted for more than 10% of our consolidated net sales in fiscal 2010,
fiscal 2009 or fiscal 2008.
Competition
General
During the past several years, certain product opportunities have become more prevalent due to
changing customer requirements. Our customers, which historically may have made component products
for inclusion in their finished goods, are increasingly choosing to outsource their requirements to
specialized manufacturers like us because we can make these products more cost effectively. In
order to better position us for growth in this competitive climate, we have focused on making
strategic acquisitions and improving our manufacturing efficiencies. Some of these acquisitions
have created new opportunities by allowing us to provide new and broader product offerings and
serve customers in a wider variety of applications.
We believe that
we compete primarily on the basis of quality, price, service, technology,
promptness of delivery, and the overall value of our products.
Page 8
Table of Contents
Electrical Segment
Electric motor manufacturing is a highly competitive global industry in which there is greater
emphasis on reducing costs, boosting efficiency and promoting energy savings. We compete with a
growing number of domestic and
international competitors due in part to the nature of the products we manufacture and the wide
variety of applications and customers we serve. Many manufacturers of electric motors operate
production facilities in many different countries, producing products for both the domestic and
export markets. Electric motor manufacturers from abroad, particularly those located in China,
India and elsewhere in Asia, provide increased competition as they expand their market penetration
around the world, especially in North America. Additionally, there is a recent trend toward global
industry consolidation. In 2010, Nidec Corporation (Kyoto, Japan) (“Nidec’) acquired a portion of
the motors and controls business of Emerson Electric Company, a leading manufacturer of electric
motors and process controls based in St. Louis, Missouri. In 2011, ABB Ltd. (Zurich, Switzerland)
(“ABB”) acquired Baldor Electric Company, a leading manufacturer of electric motors and drives
based in Fort Smith, Arkansas.
Our major foreign competitors for electrical products include Broad-Ocean Motor Co., Welling
Holding Limited, Kirloskar Brothers Limited, ebm-papst, Crompton Greaves, Johnson Electric,
Siemens AG, Toshiba Corporation, Panasonic Corporation, Leroy-Somer (a subsidiary of Emerson
Electric Company), Weg S.A., Nidec, TECO and ABB. Our major domestic competitors for electrical
products include Baldor Electric (a subsidiary of ABB), U.S. Electric (a subsidiary of Nidec),
Emerson Electric Company, A. O. Smith Corporation, General Electric Company, Bluffton Motor Works,
McMillan Electric Company and Newage (a division of Cummins, Inc). On balance, the demarcation
between domestic U.S. and foreign manufacturers is blurring as competition becomes more and more
global.
Mechanical Segment
We provide various mechanical product applications 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 major domestic competitors include Boston Gear (a division
of Altra Industrial Motion, Inc.), Dodge (a subsidiary of ABB), Emerson Electric Company and
Winsmith (a division of Peerless-Winsmith, Inc.). Our major foreign competitors include SEW
Eurodrive GmbH & Co., Flender GmbH, Nord, Sumitomo Corporation and Zahnrad Fabrik GmbH Co.
Product Development and Engineering
We believe that innovation is critical to our future growth and success. We are committed to
investing in new products, technologies and processes that deliver real value to our customers. We
believe the key driver of our innovation strategy is the development of products that include
energy efficiency, embedded intelligence, and variable speed technology solutions.
Each of our business units has its own product development and design team that continuously work
to enhance our existing products and develop new products for our growing base of customers that
require custom and standard solutions. We believe we have state of the art 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 units. We work closely with our customers to develop new products or enhancements to
existing products that improve performance and meet their needs.
Manufacturing and Operations
We have developed and acquired global operations in lower cost locations such as Mexico, India,
Thailand, and China to participate in regions with higher economic growth, to follow our
multinational customers, and to 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
customer requirements in many instances. This gives us a competitive advantage as we are able to
efficiently and promptly deliver a customer’s unique product to the desired location.
We manufacture a majority of the products that we sell, but also strategically outsource components
and finished goods from an established global network of suppliers. We aggressively pursue global
sourcing to reduce our overall costs. We generally maintain a dual sourcing capability in our
existing domestic facilities to ensure a reliable supply source for our customers, although we do
depend on a limited number of key suppliers for certain materials and components. 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, copper and aluminum. Additionally, significant components
consist of bearings, electronics, ferrous and non-ferrous castings, and weldments.
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We continually upgrade our manufacturing equipment and processes, including increasing our use of
computer aided
manufacturing systems and developing our own testing systems. To drive the continuous improvement
process, we have deployed Lean Six Sigma across our facilities worldwide in order to develop our
people and deploy our processes. The initiative has generated significant cost saving by
eliminating waste, improving safety, quality, delivery, and reducing cycle times. We have trained
over 1,700 people since the program began in 2005. Our goal is to be a low cost and high quality
producer in our core product areas.
Facilities
We have manufacturing, sales and service facilities primarily in the United States, Mexico, China,
India and Australia, as well as a number of other locations throughout the world. Our Electrical
segment currently includes 108 manufacturing, service and distribution facilities, of which 45 are
principal manufacturing facilities. The Electrical segment’s present operating facilities contain
a total of approximately 8.1 million square feet of space of which approximately 44.0% are leased.
Our Mechanical segment currently includes 11 manufacturing, service and distribution facilities, of
which 6 are principal manufacturing facilities. The Mechanical segment’s present operating
facilities contain a total of approximately 0.8 million square feet of space of which approximately
5.0% are leased. Our principal executive offices are located in Beloit, Wisconsin in an owned
approximately 54,000 square foot office building. We believe our equipment and facilities are well
maintained and adequate for our present needs.
Backlog
Our business units have historically shipped the majority of their products in the month the order
is received. As of January 1, 2011, our backlog was $340.2 million, as compared to $264.7 million
on January 2, 2010. We believe that virtually all of our backlog will be shipped in 2011.
Patents, Trademarks and Licenses
We own a number of United States patents and foreign patents relating to our businesses. While we
believe that our patents provide certain competitive advantages, we do not consider any one patent
or group of patents essential to our business other than our ECM patents which relate to a material
portion of our sales. We also use various registered and unregistered trademarks, and we believe
these trademarks are significant in the marketing of most of our products. However, we believe the
successful manufacture and sale of our products generally depends more upon our technological,
manufacturing and marketing skills.
Employees
As of the close of business on January 1, 2011, we employed approximately 18,500 employees
worldwide. We consider our employee relations to be very good.
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Executive Officers
The names, ages, and positions of our executive officers as February 15, 2011, 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. 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
|
62 |
Chairman and
Chief Executive Officer |
Elected Chairman in April 2006; elected Chief Executive Officer April 2005; served as President from April 2002 to December 2005 and Chief Operating Officer from April 2002 to April 2005; joined the Company in 1979. In December 2010, Mr. Knueppel announced his plan to retire as CEO, effective in May 2011. Mr. Knueppel will remain as Chairman of the Board through the end of 2011. | |||||
|
|
||||||||
|
Mark J. Gliebe
|
50 | 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. In December 2010, the Board of Directors named Mr. Gliebe as CEO, effective upon Mr. Knueppel’s retirement in May 2011. | |||||
|
|
||||||||
|
Charles A. Hinrichs
|
57 |
Vice President and
Chief Financial Officer |
Joined the Company and was elected Vice President, Chief Financial Officer in September 2010. Prior to joining the Company, Mr. Hinrichs was Senior Vice President and Chief Financial Officer at Smurfit-Stone Container Corporation, where he worked from 1995 to 2009. On January 26, 2009, Smurfit-Stone Container Corporation and its primary operating subsidiaries filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in Wilmington, Delaware, and emerged from bankruptcy in July 2010. | |||||
|
|
||||||||
|
Peter C. Underwood
|
41 | Vice President, General Counsel and Secretary | Joined the Company and was elected Vice President, General Counsel and Secretary in September 2010. Prior to joining the Company, Mr. Underwood was a partner with the law firm of Foley & Lardner LLP from 2005 to 2010 and an associate from 1996 to 2005. | |||||
|
|
||||||||
|
Terry R. Colvin
|
55 |
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. | |||||
|
|
||||||||
|
John M. Avampato
|
49 |
Vice President
Information Technology |
Joined the Company in April 2006 and was elected Vice President Information Technology in April 2010. Prior to joining the Company, Mr. Avampato was with Newell Rubbermaid from 1984 to 2006 where he was Vice President, Chief Information Officer from 1999 to 2006. | |||||
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Pending Acquisition of Electrical Products Company of A.O. Smith Corporation
On
December 12, 2010, we entered into an agreement with A.O. Smith Corporation (the “EPC Purchase
Agreement”) pursuant to which we will acquire 100% of the stock and assets of the Electrical
Products Company (“EPC”) of A.O. Smith Corporation (the “EPC Acquisition”). The total
consideration for the transaction is $875 million, including $700 million of cash and $175 million
in shares of our common stock.
EPC is based in Tipp City, Ohio and has operations in the United States, Mexico, China and the
United Kingdom. The transaction will expand our global manufacturing capabilities and allow us to
offer a more complete array of products and technologies to our customers. Targeted synergies from
the transaction are $30 to $40 million achieved over three to four years.
The closing of the transaction is subject to all customary regulatory approvals, which are still
pending as of the date of this filing. On February 4, 2011, we received a request for additional
information and documentary material, commonly referred to as a “second request,” from the United
States Department of Justice regarding the EPC Acquisition. The request is part of the regulatory
process under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”),
and will extend the waiting period under the HSR Act until 30 days after both companies have
substantially complied with the requests. We are in the process of gathering information to
respond to the request and are working cooperatively with the United States Department of Justice
as it reviews the proposed transaction. See “Risk Factors.”
Website Disclosure
Our 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.
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| ITEM 1A — |
RISK FACTORS
|
You should carefully consider each of the risks described below, together with all of the other
information contained in this Annual Report on Form 10-K, before making an investment decision with
respect to our securities. If any of the following risks develop into actual events, our business,
financial condition or results of operations could be materially and adversely affected and you may
lose all or part of your investment.
We operate in the highly competitive global electric motor, power generation and mechanical motion
control industries.
The global electric motor, power generation and mechanical motion control industries are highly
competitive. We encounter a wide variety of domestic and international competitors due in part to
the nature of the products we manufacture and the wide variety of applications and customers we
serve. In order to compete effectively, we must retain relationships with major customers and
establish relationships with new customers, including those in developing countries. Moreover, in
certain applications, customers exercise significant power over business terms. It may be
difficult in the short-term for us to obtain new sales to replace any decline in the sale of
existing products that may be lost to competitors. Our failure to compete effectively may reduce
our revenues, profitability and cash flow, and pricing pressures resulting from competition may
adversely impact our profitability.
In addition, some of our competitors are larger and have greater financial and other resources than
we do. For example, ABB and Nidec recently established or increased their presence in the electric
motor, power generation and mechanical motion control industries in North America through
acquisitions, and certain other global competitors have recently established facilities in the
United States. There can be no assurance that our products will be able to compete successfully
with the products of these other companies.
Our ability to establish, grow and maintain customer relationships depends in part on our ability
to develop new products and product enhancements based on technological innovation.
The electric motor industry in recent years has seen significant evolution and innovation,
particularly with respect to increasing energy efficiency and control enhancements related to motor
products. Our ability to effectively compete in the electric motor industry depends in part on our
ability to continue to develop new technologies and innovative products and product enhancements.
If we are unable to meet the needs of our customers for innovative products, or if our products
become technologically obsolete over time due to the development by our competitors of
technological breakthroughs or otherwise, our revenues and results of operations may be adversely
affected. In addition, we may incur significant costs and devote significant resources to the
development of products that ultimately are not accepted in the marketplace, do not provide
anticipated enhancements, or do not lead to significant revenue, which may adversely impact our
results of operations.
Our dependence on, and the price of, raw materials may adversely affect our gross margins.
Many of the products we produce contain key materials such as steel, copper, aluminum and rare
earth metals. Market prices for those materials can be volatile due to changes in supply and
demand, manufacturing and other costs, regulations and tariffs, economic conditions and other
circumstances, and those prices generally increased significantly in 2010. We may not be able to
offset the increase in commodity costs through pricing actions, productivity enhancements or other
means, and increasing commodity costs may have an adverse impact on our gross margins, which could
adversely affect our results of operations and financial condition.
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.
We derive a significant portion of the revenues of our HVAC motor business from several key OEM
customers. Our success will depend on our continued ability to develop and manage relationships
with these customers. We expect this significant customer concentration will continue for the
foreseeable future in our HVAC motor business. Our reliance 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 these key
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 results of operations and financial condition.
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We may encounter difficulties in integrating the operations of acquired businesses that may have a
material adverse impact on our future growth and operating performance.
Full realization of the expected benefits and synergies of acquisitions, such as the pending EPC
Acquisition, will require integration over time of certain aspects of the manufacturing,
engineering, administrative, sales and
marketing and distribution functions of the acquired businesses, as well as some integration of
information systems platforms and processes. Complete and successful integration of acquired
businesses, and realization of expected synergies, can be a long and difficult process and may
require substantial attention from our management team and involve substantial expenditures and
include additional operational expenses. Even if we are able to successfully integrate the
operations of acquired businesses, we may not be able to realize the expected benefits and
synergies of the acquisition, either in the amount of time or within the expected time frame, or at
all, and the costs of achieving these benefits may be higher than, and the timing may differ from,
what we initially expect. Our ability to realize anticipated benefits and synergies from the
acquisitions may be affected by a number of factors, including:
| • |
The use of more cash or other financial resources, and additional management
time, attention and distraction, on integration and implementation activities than
we expect, including restructuring and other exit costs;
|
| • |
increases in other expenses related to an acquisition, which may offset any
potential cost savings and other synergies from the acquisition;
|
| • |
our ability to realize anticipated levels of sales in emerging markets like
China and India;
|
| • |
our ability to avoid labor disruptions or disputes in connection with any
integration; and
|
| • |
the timing and impact of purchase accounting adjustments.
|
Any potential cost-saving opportunities may take at least several quarters following an acquisition
to implement, and any results of these actions may not be realized for at least several quarters
following implementation. We cannot assure you that we will be able to successfully integrate the
operations of our acquired businesses, that we will be able to realize any anticipated benefits and
synergies from acquisitions or that we will be able to operate acquired businesses as profitably as
anticipated.
We may encounter delays or
difficulties consummating the pending EPC Acquisition.
On December 12, 2010, we entered into the EPC Purchase Agreement. The closing of the EPC
Acquisition is subject to various conditions, including customary regulatory approvals, which are still pending.
On February 4, 2011, we received a request for additional information and documentary material, commonly
referred to as a “second request,” from the United States Department of Justice regarding the EPC
Acquisition. The request is part of the regulatory process under the
HSR Act. We are in the process of gathering information to
respond to the request and are working cooperatively with the United States Department of Justice
as it reviews the proposed transaction
There can be no assurance
that we will consummate the EPC Acquisition in a timely manner, or at all. Various events,
regulatory factors or other circumstances related to the EPC Acquisition could
delay or prevent the acquisition, or have a negative impact on our results of operations, including:
| • |
The inability to close the acquisition in a timely manner;
|
| • |
the inability or the failure to satisfy conditions to complete the acquisition,
including required regulatory approvals such as that required under the Hart-Scott
Rodino Antitrust Improvements Act of 1976, as amended;
|
| • |
disruption of our current business plans and operations;
|
| • |
diversion of management’s attention from ongoing business concerns;
|
| • |
the effect of the announcement of the acquisition on our business relationships,
operating results and business generally;
|
| • |
actions taken or conditions imposed by governmental or regulatory authorities
pursuant to a required regulatory approval or otherwise, including any requirement to divest
of any operations or assets of EPC;
|
| • |
the possibility that the acquisition may be more expensive to complete than
anticipated, including as a result of unexpected factors or events;
|
| • |
the occurrence of any event, change or other circumstance that could give rise
to the termination of the purchase agreement; or
|
| • |
the failure of the acquisition to close for any other reason.
|
We depend on certain key suppliers, and any loss of those suppliers or their failure to meet
commitments may adversely affect our business and results of operations.
We are dependent on a single or limited number of suppliers for some materials or components
required in the manufacture of our products. If any of those suppliers fail to meet their
commitments to us in terms of delivery or quality, we may experience supply shortages that could
result in our inability to meet our customers’ requirements, or could otherwise experience an
interruption in our operations that could negatively impact our business and results of operations.
Infringement of our intellectual property by third parties may harm our competitive position, and
we may incur significant costs associated with the protection and preservation of our intellectual
property.
We own or otherwise have rights in a number of patents and trademarks relating to the products we
manufacture, which have been obtained over a period of years, and we continue to actively pursue
patents in connection with new product development and to acquire additional patents and trademarks
through the acquisitions of other businesses. These patents and trademarks have been of value in
the growth of our business and may continue to be of value in the future. With the exception of the
ECM patents, we do not regard any of our patents essential to our businesses. However, an inability
to protect this intellectual property generally, or the illegal breach of some or a large group of
our intellectual property rights, would have an adverse effect on our business. In addition, there
can be no assurance that our intellectual property will not be challenged, invalidated,
circumvented or designed-around, particularly in countries where intellectual property rights are
not highly developed or protected. We have incurred in the past and may incur in the future
significant costs associated with defending challenges to our intellectual property or enforcing
our intellectual property rights, which could adversely impact our cash flow and results of
operations.
Third parties may claim that we are infringing their intellectual property rights and we could
incur significant costs and expenses or be prevented from selling certain products.
We may be subject to claims from third parties that our products or technologies infringe on their
intellectual property rights or that we have misappropriated intellectual property rights. If we
are involved in a dispute or litigation relating to infringement of third party intellectual
property rights, we could incur significant costs in defending against those claims. Our
intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a
license, in response to a claim of infringement or misappropriation. In addition, as a result of
such claims of infringement or misappropriation, we could lose our rights to technology that are
important to our business, or be required to pay damages or license fees with respect to the
infringed rights or be required to redesign our products at substantial cost, any of which could
adversely impact our cash flows and results of operations.
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As a result of the anticipated increase in our debt levels and debt service obligations in
connection with the pending EPC Acquisition, we may have less cash flow available for our business
operations, we could become increasingly vulnerable to general adverse economic and industry
conditions and interest rate trends, and our ability to obtain future financing may be limited.
As of January 1, 2011, we had $230.9 million in cash and investments and approximately $454.2
million in available borrowings under our current revolving credit facility. We will incur
substantially higher debt levels in order to fund a portion of the purchase price for the EPC
Acquisition. Our ability to make required payments of principal and interest on our increased debt
levels will depend on our future performance, which, to a certain extent, is subject to general
economic, financial, competitive and other factors that are beyond our control. We cannot assure
you that our business will generate sufficient cash flow from operations or that future borrowings
will be available under our current credit facilities in an amount sufficient to enable us to service
our indebtedness or to fund our other liquidity needs. In addition, our credit facilities contain
financial and restrictive covenants that could limit our ability to, among other things, borrow
additional funds or take advantage of business opportunities. Our failure to comply with such
covenants could result in an event of default that, if not cured or waived, could result in the
acceleration of all our indebtedness or otherwise have a material adverse effect on our business,
financial condition, results of operations and debt service capability. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.” Our anticipated increased indebtedness may have important consequences. For example,
it could:
| • |
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,
manufacturing capacity expansion, business integration, research and development
efforts and other general corporate activities;
|
| • |
limit our flexibility in planning for, or reacting to, changes in our business
and our markets; and
|
| • |
place us at a competitive disadvantage relative to our competitors that have
less debt.
|
In addition, our credit facility and senior notes require us to maintain specified financial ratios
and satisfy certain financial condition tests, which may require that we take action to reduce our
debt or to act in a manner contrary to our business strategies. If an event of default under our
credit facility or senior notes, the lenders could elect to declare all amounts outstanding under
the applicable agreement, together with accrued interest, to be immediately due and payable.
We are subject to litigation, including product liability and warranty claims that may adversely
affect our financial condition and results of operations.
We are, from time to time, a party to litigation that arises in the normal course of our business
operations, including product warranty and liability claims, contract disputes and environmental,
asbestos, employment and other litigation matters. We face an inherent business risk of exposure
to product liability and warranty claims in the event that the use of our products is alleged to
have resulted in injury or other damage. While we currently maintain general liability and product
liability insurance coverage in amounts that we believe are adequate, we cannot assure you that we
will be able to maintain this insurance on acceptable terms or that this insurance will provide
sufficient coverage against potential liabilities that may arise. Any claims brought against us,
with or without merit, may have an adverse effect on our business and results of operations as a
result of potential adverse outcomes, the expenses associated with defending such claims, the
diversion of our management’s resources and time and the potential adverse effect to our business
reputation.
We sell certain products for high volume applications, and any failure of those products to perform
as anticipated could result in significant liability that may adversely affect our business and
results of operations.
We manufacture and sell a number of products for high volume applications, including motors used in
pools and spas, residential and commercial heating, ventilation, air conditioning and refrigeration
equipment. Any failure of those products to perform as anticipated could result in significant
product liability, product recall or rework, or other costs. The costs of product recalls and
reworks are not generally covered by insurance. If we were to experience a product recall or
rework in connection with products of high volume applications, our financial condition or results
of operations could be materially adversely affected.
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Table of Contents
Commodity, currency and interest rate hedging activities may adversely impact our financial
performance as a result of changes in global commodity prices, interest rates and currency rates.
We use derivative financial instruments in order to reduce the substantial effects of currency and
commodity fluctuations and interest rate exposure on our cash flow and financial condition. These
instruments may include foreign currency and commodity forward contracts, currency swap agreements
and currency option contracts, as well as interest rate swap agreements. We have entered into, and
expect to continue to enter into, such hedging arrangements. While limiting to some degree our
risk fluctuations in currency exchange, commodity price and interest rates by utilizing such
hedging instruments, we potentially forgo benefits that might result from other fluctuations in
currency exchange, commodity and interest rates. We also are exposed to the risk that
counterparties to hedging contracts will default on their obligations. We manage exposure to
counterparty credit risk by limiting the counterparties to major international banks and financial
institutions meeting established credit guidelines. However, any default by such counterparties
might have an adverse effect on us.
Worldwide economic conditions may adversely affect our industry, business and results of
operations.
General economic conditions and conditions in the global financial markets can affect our results
of operations. Deterioration in the global economy could lead to higher unemployment, lower
consumer spending and reduced investment by businesses, and could lead our customers to slow
spending on our products or make it difficult for our customers, our vendors and us to accurately
forecast and plan future business activities. Worsening economic conditions could also affect the
financial viability of our suppliers, some of which we may consider key suppliers. If the
commercial and industrial, residential HVAC, power generation and mechanical power transmission
markets significantly deteriorate, our business, financial condition and results of operations will
likely be materially and adversely affected. Additionally, our stock price could decrease if
investors have concerns that our business, financial condition and results of operations will be
negatively impacted by a worldwide economic downturn.
Goodwill comprises a significant portion of our total assets, and if we determine that goodwill has
become impaired in the future, our results of operations and financial condition in such years may
be materially and adversely affected.
Goodwill represents the excess of cost over the fair market value of net assets acquired in
business combinations. We review goodwill and other intangibles at least annually for impairment
and any excess in carrying value over the estimated fair value is charged to the results of
operations. The Company’s estimates of fair value are based on assumptions about the future
operating cash flows, growth rates, discount rates applied to these cash flows and current market
estimates of value. A reduction in net income resulting from the write down or impairment of
goodwill would affect financial results and could have a material and adverse impact upon the
market price of our common stock. If we are required to record a significant charge to earnings in
our consolidated financial statements because an impairment of goodwill is determined, our results
of operations and financial condition could be materially and adversely affected.
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Table of Contents
Businesses that we have acquired or may acquire may have liabilities which are not known to us.
If we consummate the EPC Acquisition, pursuant to the terms of the EPC Purchase Agreement we will
assume the majority of EPC’s liabilities and risks after the closing, subject to certain
representations and warranties of, and indemnification rights against A.O. Smith Corporation.
Similarly, we have assumed liabilities of other acquired businesses, and may assume liabilities of
businesses that we acquire in the future. There may be liabilities or risks that we fail, or are
unable, to discover, or that we underestimate, in the course of performing our due diligence
investigations of EPC and other acquired businesses. Additionally, businesses that we have
acquired or may acquire in the future may have made previous acquisitions, and we will be subject
to certain liabilities and risks relating to these prior acquisitions as well. We cannot assure you
that our rights to indemnification contained in definitive acquisition agreements that we have
entered or may enter into will be sufficient in amount, scope or duration to fully offset the
possible liabilities associated with the business or property acquired. Any such liabilities,
individually or in the aggregate, could have a material adverse effect on our business, financial
condition or results of operations. As we begin to operate acquired businesses, we may learn
additional information about them that adversely affects us, such as unknown or contingent
liabilities, issues relating to compliance with applicable laws or issues related to ongoing
customer relationships or order demand.
We may incur costs or suffer reputational damage due to improper conduct of our employees, agents
or business partners.
We are subject to a variety of domestic and foreign laws, rules and regulations relating to
improper payments to government officials, bribery, anti-kickback and false claims rules,
competition, export and import compliance, money laundering and data privacy. If our employees,
agents or business partners engage in activities in violation of these laws, rules or regulations,
we may be subject to civil or criminal fines or penalties or other sanctions, may incur costs
associated with government investigations, or may suffer damage to our reputation.
Sales of products incorporated into HVAC systems are seasonal and affected by the weather; mild or
cooler weather could have an adverse effect on our operating performance.
Many of our motors are incorporated into HVAC systems that OEMs sell to end users. The number of
installations of new and replacement HVAC systems or components is higher during the spring and
summer seasons due to the increased use of air conditioning during warmer months. Mild or cooler
weather conditions during the spring and summer season often result in end users deferring the
purchase of new or replacement HVAC systems or components. As a result, prolonged periods of mild
or cooler weather conditions in the spring or summer season in broad geographical areas could have
a negative impact on the demand for our HVAC motors and, therefore, could have an adverse effect on
our operating performance. In addition, due to variations in weather conditions from year to year,
our operating performance in any single year may not be indicative of our performance in any future
year.
We increasingly manufacture our products outside the United States, which may present additional
risks to our business.
As a result of our recent acquisitions, a significant portion of our net sales are attributable to
products manufactured outside of the United States, principally in Mexico, India, Thailand and
China. Approximately 13,900 of our approximate 18,500 total employees and 30 of our 51 principal
manufacturing facilities are located outside the United States. In addition, if we consummate the
EPC Acquisition, the number of facilities located in foreign jurisdictions will increase,
particularly in China and Mexico, which will increase our exposure to risks specific to those
jurisdictions. 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 climates 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 our ability to execute future 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 may be limited.
Our success 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.
Page 17
Table of Contents
Our 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 implementing a global Enterprise Resource Planning (ERP) system that will
redesign and deploy a common information system over a period of several years. The process of
implementation can be costly and can divert the attention of management from the day-to-day
operations of the business. As we implement the ERP system, the new system may not perform as
expected. This could have an adverse effect on our business.
We may be adversely affected by environmental, health and safety laws and regulations.
We are subject to various laws and regulations relating to the protection of the environment and
human health and safety and have incurred and will continue to incur capital and other expenditures
to comply with these regulations. Failure to comply with any environmental regulations, including
more stringent environmental laws that may be imposed in the future, could subject us to future
liabilities, fines or penalties or the suspension of production.
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 operating costs in foreign operations, to the extent such costs are
payable in foreign currency, when translated into U.S. dollars.
Our operations can be negatively 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. We may also be negatively impacted by actions by foreign governments, including
currency devaluation, tariffs and nationalization, where our facilities are located which could
disrupt manufacturing and commercial operations.
We are subject to changes in legislative, regulatory and legal developments involving income taxes.
We are subject to U.S. federal, state, and international income, payroll, property, sales and use,
fuel, and other types of taxes. Changes in tax rates, enactment of new tax laws, revisions of tax
regulations, and claims or litigation with taxing authorities could result in substantially higher
taxes and, therefore, could have a significant adverse effect on our results or operations,
financial conditions and liquidity. Currently, a significant amount of our revenue is generated
from customers located outside of the United States, and an increasingly greater portion of our
assets and employees are located outside of the United States. U.S. income tax and foreign
withholding taxes have not been provided on undistributed earnings for certain non-U.S.
subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of
those subsidiaries.
Future legislation may substantially reduce (or have the effect of substantially reducing) our
ability to defer U.S. taxes on profit permanently reinvested outside the United States.
Additionally, they could have a negative impact on our ability to compete in the global
marketplace.
Page 18
Table of Contents
We are subject to tax laws and regulations in many jurisdictions and the inability to successfully
defend claims from taxing authorities related to our current and/or acquired businesses could
adversely affect our operating results and financial position.
We conduct business in many countries, which requires us to interpret the income tax laws and
rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those
jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax
liabilities may differ from actual payments or assessments.
Claims from taxing authorities related to these differences could have an adverse impact on our
operating results and financial position.
Our stock may be subject to significant fluctuations and volatility.
The market price of shares of our common stock may be volatile. Among the factors that could
affect our common stock price are those discussed above under
“Risks Factors”
as well as:
| • |
domestic and international economic and political factors unrelated to our
performance;
|
| • |
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, intermediate components or materials, or
labor; and
|
| • |
changes in revenue or earnings estimates or publication of research reports by
analysts.
|
In addition, stock markets may experience extreme volatility that may be unrelated to the operating
performance of particular companies. These broad market fluctuations may adversely affect the
trading price of our common stock.
| ITEM 1B — |
UNRESOLVED STAFF COMMENTS
|
None.
Page 19
Table of Contents
| ITEM 2 — |
PROPERTIES
|
We have manufacturing, sales and service facilities throughout the United States and in Canada,
Mexico, India, China, Australia, Thailand and Europe.
Our Electrical segment currently includes 108 manufacturing, service and distribution facilities,
of which 45 are principal manufacturing facilities. The Electrical segment’s present operating
facilities contain a total of approximately 8.1 million square feet of space of which approximately
44% are leased.
Our Mechanical segment currently includes 11 manufacturing, service and distribution facilities, of
which six are principal manufacturing facilities. The Mechanical segment’s present operating
facilities contain a total of approximately 0.8 million square feet of space of which approximately
5% are leased.
At January 1, 2011, the Mechanical segment had one building and the Electrical segment had four
buildings totaling approximately 0.5 million square feet that were available for sale due to
consolidation of manufacturing in other locations.
Our principal executive offices are located in Beloit, Wisconsin in an owned approximately 54,000
square foot office building. We believe our equipment and facilities are well maintained and
adequate for our present needs.
Electrical Segment
| Location | Sq Footage | Status | Use | |||||
|
Wuxi, China
|
623,268 | Owned | Manufacturing | |||||
|
Wausau, WI
|
498,329 | Owned | Manufacturing | |||||
|
Kolkata, India
|
472,708 | Owned | Manufacturing | |||||
|
Juarez, Mexico — 2
|
412,000 | Owned & Leased | Manufacturing | |||||
|
Shanghai, China — 3
|
321,472 | Owned & Leased | Manufacturing | |||||
|
Reynosa, Mexico
|
320,000 | Owned | Manufacturing | |||||
|
Hengli, China
|
292,757 | Leased | Manufacturing | |||||
|
Springfield, MO
|
290,000 | Owned | Manufacturing | |||||
|
Eldon, MO — 2
|
276,000 | Owned | Warehouse | |||||
|
Milan, Italy
|
244,091 | Leased | Manufacturing | |||||
|
Cassville, MO
|
238,838 | Owned & Leased | Manufacturing | |||||
|
Changzhou, China
|
235,755 | Owned | Manufacturing | |||||
|
Monterrey, Mexico — 2
|
235,624 | Leased | Manufacturing | |||||
|
Indianapolis, IN
|
220,832 | Leased | Warehouse | |||||
|
Faridabad, India
|
220,000 | Leased | Manufacturing | |||||
|
Piedras, Mexico — 2
|
210,155 | Leased | Manufacturing | |||||
|
Lebanon, MO
|
186,900 | Owned | Manufacturing | |||||
|
Bangkok, Thailand — 2
|
169,660 | Owned | Manufacturing & Warehouse | |||||
|
Rowville, Australia — 3
|
168,552 | Leased | Manufacturing & Warehouse | |||||
|
Dandenong, South Australia — 4
|
162,693 | Leased | Manufacturing & Warehouse | |||||
|
Eibergen, Netherlands
|
146,874 | Owned | Warehouse | |||||
|
Erwin, TN — 4
|
130,630 | Owned | Manufacturing | |||||
|
Auckland, New Zealand — 3
|
120,857 | Leased | Warehouse | |||||
|
Pharr, TX
|
120,000 | Leased | Warehouse | |||||
|
Lincoln, MO
|
120,000 | Owned | Manufacturing | |||||
|
McAllen, TX
|
116,288 | Owned | Manufacturing | |||||
|
Tomago, Australia
|
114,937 | Leased | Warehouse | |||||
|
Blytheville, AR
|
107,000 | Leased | Manufacturing | |||||
|
West Plains, MO
|
106,000 | Owned | Manufacturing | |||||
|
Black River Falls, WI
|
103,000 | Owned | Manufacturing | |||||
|
All Other — 61
|
1,116,314 | (1) | (1) | |||||
Page 20
Table of Contents
Mechanical Segment
| Location | Sq Footage | Status | Use | |||||
|
Liberty, SC
|
173,516 | Owned | Manufacturing | |||||
|
Aberdeen, SD
|
164,960 | Owned | Manufacturing | |||||
|
Shopiere, WI
|
132,000 | Owned | Manufacturing | |||||
|
Union Grove, WI
|
122,000 | Owned | Manufacturing | |||||
|
All Other — 7
|
255,180 | (2) | (2) | |||||
| (1) |
Less significant manufacturing, service and distribution and engineering
facilities located in North America, Europe, Asia, Australia, South America, and Africa:
Electrical leased square footage 3,534,491.
|
|
| (2) |
Mechanical leased square footage 45,680.
|
| ITEM 3 — |
LEGAL PROCEEDINGS
|
In July 2009, we filed a response and counterclaims in an action initiated by Nordyne, Inc.
(“Nordyne”) on February 4, 2009, in the U.S. District Court for the Eastern District of Missouri.
In the action, Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems
nor its iQ Drive 23-seer air conditioning systems infringe on our ECM (electronically commutated
motor) systems patent U.S. Patent No. 5,592,058 (“the ‘058 Patent”) and/or that the ‘058 Patent is
invalid. In our response and counterclaims against Nordyne, we deny that Nordyne is entitled to
relief and we seek a judgment that Nordyne has, in fact, infringed and continues to infringe the
‘058 Patent by making, using, offering for sale and selling it G7 furnace systems and iQ Drive
23-seer air conditioning systems. We also have requested the U.S. District Court to enjoin Nordyne
and all persons working in concert with Nordyne from further infringement of the ‘058 Patent and to
award us compensatory and other damages caused by such infringement. On February 2, 2011, the Court
issued a claim construction order in which it held that some of the claims in the ‘058 Patent
contain limitations that are indefinite and thus invalid. However, other claims of the ‘058 Patent
were not affected by this ruling and remain to be litigated in the action. We intend to defend our
intellectual property vigorously against the claims asserted by Nordyne and against any
infringement by Nordyne or any other person. We do not currently believe that the litigation will
have a material effect on the Company’s financial position or its results of operations.
One of our subsidiaries that we acquired in 2007 is subject to numerous claims filed in various
jurisdictions relating to certain sub-fractional motors that were primarily manufactured through
2004 and that were included as components of residential and commercial ventilation units marketed
by a third party. These claims generally allege that the ventilation units were the cause of
fires. Based on the current facts, we do not believe these claims, individually or in the
aggregate, will have a material adverse effect on our results of operations or financial condition.
However, we cannot predict the outcome of these claims, the nature or extent of remedial actions,
if any, we may need to undertake with respect to motors that remain in the field, or the costs we
may incur, some of which could be significant.
We are, from time to time, party to other litigation that arises in the normal course of our
business operations, including product warranty and liability claims, contract disputes and
environmental, asbestos, employment and other litigation matters. Our products are used in a
variety of industrial, commercial and residential applications that subject us to claims that the
use of our products is alleged to have resulted in injury or other damage. We accrue for
anticipated costs in defending against such lawsuits in amounts that we believe are adequate, and
we do not believe that the outcome of any such lawsuit will have a material effect on our results
of operations or financial position.
| ITEM 4 — |
REMOVED AND RESERVED
|
Page 21
Table of Contents
| ITEM 5 — |
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
General
Our common stock, $.01 par value per share, is traded on the New York Stock Exchange under the
symbol “RBC.” The following table sets forth the range of high and low closing sales prices for
our common stock for the period from December 28, 2008 through January 1, 2011.
| 2010 | 2009 | |||||||||||||||||||||||
| Price Range | Price Range | |||||||||||||||||||||||
| Dividends | Dividends | |||||||||||||||||||||||
| High | Low | Declared | High | Low | Declared | |||||||||||||||||||
|
1st Quarter
|
$ | 60.78 | $ | 47.40 | $ | 0.16 | $ | 38.83 | $ | 25.81 | $ | 0.16 | ||||||||||||
|
2nd Quarter
|
65.63 | 55.48 | 0.17 | 42.65 | 29.99 | 0.16 | ||||||||||||||||||
|
3rd Quarter
|
65.07 | 55.09 | 0.17 | 49.26 | 38.76 | 0.16 | ||||||||||||||||||
|
4th Quarter
|
69.54 | 55.27 | 0.17 | 53.76 | 43.43 | 0.16 | ||||||||||||||||||
We have paid 202 consecutive quarterly dividends through January 2011. The number of record
holders of common stock as of February 22, 2011 was 547.
The following table contains detail related to the repurchase of our common stock based on the date
of trade during the quarter ended January 1, 2011.
| Total | Total Number of Shares | Maximum Number of | ||||||||||||||
| Number of | Average | Purchased as Part of | Shares that May be | |||||||||||||
| 2010 Fiscal | Shares | Price Paid | Publicly Announced Plans | Purchased Under the | ||||||||||||
| Month | Purchased | per Share | or Programs | Plan or Programs | ||||||||||||
|
October 3 to November 6
|
1,728 | $ | 55.27 | — | 2,115,900 | |||||||||||
|
|
||||||||||||||||
|
November 7 to
December 4
|
$ | — | — | 2,115,900 | ||||||||||||
|
|
||||||||||||||||
|
December 5 to
January 1, 2011
|
$ | — | — | 2,115,900 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
1,728 | — | ||||||||||||||
|
|
||||||||||||||||
Under our 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 us withhold shares of common stock otherwise issuable under the
award, b) tender back shares received in connection with such award or c) deliver previously owned
shares of common stock, in each case having a value equal to the exercise price or the amount to be
withheld. The shares listed under “Total Number of Shares Purchased” relate to our repurchases
under these equity incentive plans.
Our Board of Directors has approved repurchase programs of up to 3,000,000 shares of common stock.
Management is authorized to effect purchases from time to time in the open market or through
privately negotiated transactions. Through January 1, 2011, we repurchased 884,100 shares at an
average purchase price of $21.96 per share under this program. (See Note 10 of Notes to the
Consolidated Financial Statements.)
Item 12 of this Annual Report on Form 10-K contains certain information relating to our equity
compensation plans.
Page 22
Table of Contents
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.
The following graph compares the hypothetical total shareholder return (including reinvestment of
dividends) on an investment in (1) our common stock, (2) the Standard & Poor’s Mid Cap 400 Index,
and (3) the Standard & Poor’s 400 Electrical Components and Equipment Index, for the period
December 31, 2005 through January 1, 2011. In each case, the graph assumes the investment of
$100.00 on December 31, 2005.
| 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
|
Regal Beloit Corporation
|
150.14 | 130.17 | 99.95 | 155.21 | 201.74 | |||||||||||||||
|
S&P MidCap 400 Index
|
110.32 | 119.12 | 72.66 | 104.35 | 132.15 | |||||||||||||||
|
S&P 400 Electrical Components & Equipment
|
112.38 | 141.06 | 86.03 | 118.45 | 171.31 | |||||||||||||||
Page 23
Table of Contents
| ITEM 6 — |
SELECTED FINANCIAL DATA
|
The selected statement of income data for fiscal 2010, 2009, and 2008, and the selected balance
sheet data at January 1, 2011 and January 2, 2010 are derived from, and are qualified by reference
to, the audited financial statements included elsewhere in this Annual Report on Form 10-K. The
selected statement of income data for fiscal 2007 and 2006 and the selected balance sheet data at
December 27, 2008, December 29, 2007 and December 30, 2006 are derived from audited financial
statements not included herein.
| (In Thousands, Except Per Share Data) | ||||||||||||||||||||
| Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | ||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Net Sales
|
$ | 2,237,978 | $ | 1,826,277 | $ | 2,246,249 | $ | 1,802,497 | $ | 1,619,545 | ||||||||||
|
Income from Operations
|
237,735 | 159,520 | 230,431 | 206,060 | 194,017 | |||||||||||||||
|
Net Income Attributable to Regal Beloit
|
149,379 | 95,048 | 125,525 | 115,499 | 107,156 | |||||||||||||||
|
Total Assets
|
2,449,136 | 2,112,237 | 2,023,496 | 1,862,247 | 1,437,559 | |||||||||||||||
|
Long-Term Debt
|
428,256 | 468,065 | 560,127 | 552,917 | 313,351 | |||||||||||||||
|
Regal Beloit Shareholders’ Equity
|
1,361,960 | 1,167,824 | 825,987 | 861,750 | 755,984 | |||||||||||||||
|
Per Share Data:
|
||||||||||||||||||||
|
Earnings — Basic
|
3.91 | 2.76 | 4.00 | 3.70 | 3.47 | |||||||||||||||
|
Earnings — Assuming Dilution
|
3.84 | 2.63 | 3.78 | 3.40 | 3.20 | |||||||||||||||
|
Cash Dividends Declared
|
0.67 | 0.64 | 0.63 | 0.59 | 0.55 | |||||||||||||||
|
Shareholders’ Equity
|
35.27 | 33.85 | 26.35 | 27.57 | 24.51 | |||||||||||||||
|
Weighted Average Shares
Outstanding (in 000’s):
|
||||||||||||||||||||
|
Basic
|
38,236 | 34,499 | 31,343 | 31,252 | 30,847 | |||||||||||||||
|
Assuming Dilution
|
38,922 | 36,132 | 33,251 | 33,921 | 33,504 | |||||||||||||||
Page 24
Table of Contents
| ITEM 7 — |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to
the fiscal year ended January 1, 2011 as “fiscal 2010,” the fiscal year ended January 2, 2010 as
“fiscal 2009,” and the fiscal year ended December 27, 2008 as “fiscal 2008.” Fiscal 2010 had 52
weeks, fiscal 2009 had 53 weeks, and fiscal 2008 had 52 weeks.
Overview
We are a global manufacturer of
electric motors and controls, electric generators and controls, and
mechanical motion control products. Many of our products feature energy efficient technology,
and electronics. Our energy efficiency products can offer lower operating costs to our
customers and promote sustainability. Our products are used in a variety of essential commercial,
industrial, commercial refrigeration and heating, ventilation, and air conditioning
(“HVAC”),
applications, and we believe we have one of the most comprehensive product lines in the industries
we serve. We sell our products to a diverse global customer base using more than 30 recognized
brand names through a multi-channel distribution model to leading original equipment manufacturers
(“OEMs”), distributors and end users for a wide variety of applications. We believe
this strategy,
coupled with a high level of customer service, provides us with a competitive selling advantage and
allows us to more fully serve our customers.
We have two reporting segments: Electrical and Mechanical. Our electrical products primarily
include HVAC motors, a full line of AC and DC commercial and industrial electric motors, electric
generators and controls, high-performance drives and controls, and capacitors. Our mechanical
products primarily include gears and gearboxes, marine transmissions, high-performance automotive
transmissions and ring and pinions, manual valve actuators, and electrical connectivity devices.
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), 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 Invested Capital
(ROIC). We monitor these indicators, as well as our corporate governance practices (including the
Company’s Code of Business Conduct and Ethics), to ensure that we maintain business health and
strong internal controls.
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 product
needs within our core product categories, developing new products, and identifying category
expansion opportunities. We meet these customer product needs through focused product research and
development efforts as well as through a disciplined acquisition strategy. Our acquisition
strategy emphasizes acquiring companies that offer market growth potential as a result of
geographic base, technology or industry expansion. The cash flow needed to fund our growth is
developed through continuous, corporate-wide initiatives to lower costs and increase effective
asset utilization.
We also prioritize investments that generate higher return on capital businesses. Our management
team is compensated based on a modified Economic Value Added (EVA) program which reinforces capital
allocation disciplines that drive increases in shareholder value. The key metrics in our program
include total sales growth, organic sales growth, operating margin percent, operating cash flow as
a percent of net income and ROIC.
Given the global economic uncertainty, we anticipate that the near-term operating environment will
remain challenging. Specifically, we are experiencing continued increases in the costs for
commodity inputs, including copper, steel and aluminum, which are the primary materials used in
manufacturing our products. We are unable to predict the future costs of these commodities, and
continued increases in these costs may adversely affect our operating margins if we are unable to
offset cost increases through price, productivity or other means.
Page 25
Table of Contents
Results of Operations
Net Sales
| (In millions) | ||||||||||||
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Net Sales
|
$ | 2,238.0 | $ | 1,826.3 | $ | 2,246.2 | ||||||
|
Sales growth rate
|
22.5 | % | (18.7 | %) | 24.6 | % | ||||||
|
|
||||||||||||
|
Net Sales by Segment:
|
||||||||||||
|
Electrical segment
|
$ | 2,002.0 | $ | 1,637.7 | $ | 1,998.6 | ||||||
|
Sales growth rate
|
22.3 | % | (18.1 | %) | 28.2 | % | ||||||
|
Mechanical segment
|
$ | 236.0 | $ | 188.6 | $ | 247.6 | ||||||
|
Sales growth rate
|
25.1 | % | (23.8 | %) | 1.7 | % | ||||||
Fiscal 2010 Compared to Fiscal 2009
Net sales for fiscal 2010 were $2.2 billion, a 22.5% increase over fiscal 2009 net sales of $1.8
billion. Net sales for fiscal 2010 included $119.5 million of incremental net sales related to the
acquisitions of CMG Engineering Group Pty, Ltd., Air-Con Technology, Rotor B.V., Elco Group B.V.,
South Pacific Rewinders and Unico, Inc. that occurred in fiscal 2010 (we refer to these businesses
as the “2010 acquired businesses”; see Note 5 of Notes to the Consolidated Financial Statements).
In the Electrical segment, net sales for fiscal 2010 were $2.0 billion, a 22.3% increase over
fiscal 2009 net sales of $1.6 billion. Fiscal 2010 net sales for the Electrical segment included
$92.6 million of incremental net sales related to the 2010 acquired businesses. The increase in
net sales in the Electrical segment was primarily due to volume increases, the effects of product
price increases we implemented in an effort to offset increasing raw material costs, and new
product introductions, resulting in (i) an 11.8% increase from fiscal 2009 in U.S. sales of
residential HVAC products for the replacement market benefitting from the effects of the economic
stimulus providing a tax credit to consumers for the purchase of certain energy-efficient products,
(ii) a 16.8% increase from fiscal 2009 in sales of commercial and industrial motors driven by
improving industrial demand in the U.S., and (iii) 14.1% increase from fiscal 2009 in generator
sales due primarily to generally improving economic conditions.
In the Mechanical segment, net sales for fiscal 2010 were $236.0 million, a 25.1% increase over
fiscal 2009 net sales of $188.6 million. The increase in net sales in the Mechanical segment was
primarily due to improved business conditions in the industrial markets. Fiscal 2010 net sales for
the Mechanical segment included $26.9 million of incremental net sales related to the 2010 acquired
businesses.
High efficiency product sales across our business represented 17.9% of net sales for fiscal 2010, a
$73.5 million increase from fiscal 2009. High efficiency product sales also represented 17.9% of
net sales for fiscal 2009.
From a geographic perspective, Asia-based net sales increased 55.3% for fiscal 2010 compared to
fiscal 2009. In total, net sales to regions outside of the United States were 31.6% of total net
sales for fiscal 2010 compared to 26.9% of total net sales for fiscal 2009. The positive impact of
foreign currency exchange rates increased total net sales by 0.4% for fiscal 2010 compared to
fiscal 2009.
Fiscal 2009 Compared to Fiscal 2008
Net sales for fiscal 2009 were $1.8 billion, an 18.7% decrease over fiscal 2008 net sales of $2.2
billion. Net sales for fiscal 2009 included $57.8 million of incremental net sales related to the
2008 acquired businesses and the CPT acquisition completed on January 2, 2009.
In the Electrical segment, sales decreased 18.1% including the impact of the acquisitions noted
above. Exclusive of the acquired businesses, Electrical segment sales decreased 21.0%. Sales for
the residential HVAC motor business were negatively impacted by weak housing markets; however,
economic stimulus related spending, higher efficiency product mix, and low prior year comparables
resulted in a 6.8% decrease during fiscal 2009 for the HVAC residential market.
Driven by weak end markets, commercial and industrial motor sales in North America for fiscal 2009
decreased 25.5% over sales for fiscal 2008. Global generator sales decreased 42.6% for fiscal 2009
compared to fiscal 2008.
Sales in the Mechanical segment decreased 23.8% from fiscal 2008. Weakness in end markets for all
Mechanical segment businesses was experienced in fiscal 2009 as a result of weak industrial
markets.
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High efficiency product sales represented 17.9% of net sales for fiscal 2009 compared to 12.8% for
fiscal 2008.
From a geographic perspective, Asia-based net sales decreased 23.5% for fiscal 2009 compared to
fiscal 2008. In total, net sales to regions outside of the United States were 26.9% of total net
sales for fiscal 2009 compared to 27.3% of total net sales for fiscal 2008. The negative impact of
foreign currency exchange rates decreased total net sales by 0.3% for
fiscal 2009 compared to
fiscal 2008.
Gross Profit
| (In thousands) | ||||||||||||
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Gross Profit
|
$ | 549,350 | $ | 424,224 | $ | 500,680 | ||||||
|
Gross profit percentage
|
24.5 | % | 23.2 | % | 22.3 | % | ||||||
|
|
||||||||||||
|
Gross Profit by Segment:
|
||||||||||||
|
Electrical segment
|
$ | 486,117 | $ | 379,017 | $ | 428,778 | ||||||
|
Gross profit percentage
|
24.3 | % | 23.1 | % | 21.5 | % | ||||||
|
Mechanical segment
|
$ | 63,233 | $ | 45,207 | $ | 71,902 | ||||||
|
Gross profit percentage
|
26.8 | % | 24.0 | % | 29.0 | % | ||||||
Fiscal 2010 Compared to Fiscal 2009
The gross profit margin for fiscal 2010 was 24.5% compared to 23.2% for fiscal 2009.
The gross profit margin for the Electrical segment was 24.3% for fiscal 2010 compared to 23.1% for
fiscal 2009. The increase in Electrical segment gross margins was primarily due to (i) volume
increases, (ii) the effects of product price increases implemented in an effort to offset
increasing raw material costs, (iii) cost reduction efforts, including the benefit from plant
consolidations, and (iv) a mix change toward higher efficiency products. The increase in
Electrical segment gross margins was partially offset by (i) higher costs for raw materials such as
copper, aluminum, energy, and other material inputs (in particular, the accelerating prices for
copper in 2010, which is a key commodity input in the production of electrical motors and
generators), (ii) incremental costs incurred in an effort to mitigate the impact to customers of
supply chain disruptions experienced in the second and third quarters, including incremental costs
associated with expedited transportation expenses, plant labor inefficiencies and costs to qualify
new vendors, and (iii) the impact of purchase accounting adjustments related to the 2010 acquired
businesses.
The gross profit margin for the Mechanical segment was 26.8% for fiscal 2010 compared to 24.0% for
fiscal 2009. The increase in Mechanical segment gross margins was primarily due to positive fixed
cost absorption impacts of higher production volumes.
Fiscal 2009 Compared to Fiscal 2008
The gross profit margin for fiscal 2009 was 23.2% compared to 22.3% for fiscal 2008.
The gross profit margin for the Electrical segment was 23.1% for fiscal 2009 compared to 21.5% for
fiscal 2008. The increase in Electrical segment gross margins was primarily due to (i) cost
reduction efforts, including the benefit from plant consolidations, (ii) a mix change toward higher
efficiency products, and (iii) short term net material cost savings. The increase in Electrical
segment gross margins was partially offset by negative fixed cost absorption due to lower sales and
production levels.
The gross profit margin for the Mechanical segment was 24.0% for fiscal 2009 compared to 29.0% for
fiscal 2008. The decrease in Mechanical segment gross margins was primarily due to negative fixed
cost absorption impacts of lower production volumes.
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Table of Contents
Operating Expenses
| (In thousands) | ||||||||||||
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Operating Expenses
|
$ | 311,615 | $ | 264,704 | $ | 270,249 | ||||||
|
As a percentage of net sales
|
13.9 | % | 14.5 | % | 12.0 | % | ||||||
|
|
||||||||||||
|
Operating Expenses by Segment:
|
||||||||||||
|
Electrical segment
|
$ | 275,886 | $ | 234,117 | $ | 237,246 | ||||||
|
As a percentage of Electrical segment net sales
|
13.8 | % | 14.3 | % | 11.9 | % | ||||||
|
Mechanical segment
|
$ | 35,729 | $ | 30,587 | $ | 33,003 | ||||||
|
As a percentage of Mechanical segment net sales
|
15.1 | % | 16.2 | % | 13.3 | % | ||||||
Fiscal 2010 Compared to Fiscal 2009
Operating expenses were $311.6 million, or 13.9% of net sales, for fiscal 2010 compared to $264.7
million, or 14.5% of net sales, for fiscal 2009. Operating expenses for the Electrical segment
were $275.9 million, or 13.8% of Electrical segment net sales, for fiscal 2010 compared to $234.1
million, or 14.3% of Electrical segment net sales, for fiscal 2009. Operating expenses for the
Mechanical segment were $35.7 million, or 15.1% of Mechanical segment net sales, for fiscal 2010
compared to $30.6 million, or 16.2% of Mechanical segment net sales, for fiscal 2009.
The increases in operating expenses for fiscal 2010 in both the Electrical segment and the
Mechanical segment were primarily due to higher variable compensation and other expenses related to
higher sales volume. Operating expenses for fiscal 2010 also included (i) an incremental $28.4
million related to the 2010 acquired businesses, and (ii) $6.6 million of acquisition and diligence
related expenses compared to $0.3 million for fiscal 2009.
Fiscal 2009 Compared to Fiscal 2008
Operating expenses were $264.7 million, or 14.5% of net sales, for fiscal 2009 compared to $270.2
million, or 12.0% of net sales, for fiscal 2008. Operating expenses for the Electrical segment
were $234.1 million, or 14.3% of Electrical segment net sales, for fiscal 2009 compared to $237.2
million, or 11.9% of Electrical segment net sales, for fiscal 2008. Operating expenses for the
Mechanical segment were $30.6 million, or 16.2% of Mechanical segment net sales, for fiscal 2009
compared to $33.0 million, or 13.3% of Mechanical segment net sales, for fiscal 2008.
The decreases in operating expenses for fiscal 2009 in both the Electrical segment and the
Mechanical segment were primarily due to significant operating cost reductions as sales volumes
decreased due to the economic slowdown.
Income from Operations
| (In thousands) | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Income from Operations
|
$ | 237,735 | $ | 159,520 | $ | 230,431 | ||||||
|
As a percentage of net sales
|
10.6 | % | 8.7 | % | 10.3 | % | ||||||
|
|
||||||||||||
|
Income from Operations by Segment:
|
||||||||||||
|
Electrical segment
|
$ | 210,231 | $ | 144,901 | $ | 191,532 | ||||||
|
As a percentage of net sales
|
10.5 | % | 8.8 | % | 9.6 | % | ||||||
|
Mechanical segment
|
$ | 27,504 | $ | 14,619 | $ | 38,899 | ||||||
|
As a percentage of net sales
|
11.7 | % | 7.8 | % | 15.7 | % | ||||||
Fiscal 2010 Compared to Fiscal 2009
Income from operations was $237.7 million, or 10.6% of net sales, for fiscal 2010 compared to
$159.5 million, or 8.7% of net sales, for fiscal 2009. Income from operations for the Electrical
segment was $210.2 million, or 10.5% of Electrical segment net sales, for fiscal 2010 compared to
$144.9 million, or 8.8% of Electrical segment net sales, for fiscal 2009. Income from operations
for the Mechanical segment was $27.5 million, or 11.7% of Mechanical segment net sales, for fiscal
2010 compared to $14.6 million, or 7.8% of Mechanical segment net sales for fiscal 2009.
The increases in income from operations for fiscal 2010 in both the Electrical segment and the
Mechanical segment were primarily due to volume and price increases, partially offset by higher
commodity input costs and higher
operating expenses from the 2010 acquired businesses.
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Table of Contents
Fiscal 2009 Compared to Fiscal 2008
Income from operations was $159.5 million, or 8.7% of net sales, for fiscal 2009 compared to $230.4
million, or 10.3% of net sales, for fiscal 2008. Income from operations for the Electrical segment
was $144.9 million, or 8.8% of Electrical segment net sales, for fiscal 2009 compared to $191.5
million, or 9.6% of Electrical segment net sales, for fiscal 2009. Income from operations for the
Mechanical segment was $14.6 million, or 7.8% of Mechanical segment net sales, for fiscal 2009
compared to $38.9 million, or 15.7% of Mechanical segment net sales, for fiscal 2008.
Income from operations declined, but was partially offset by cost reduction efforts, including the
benefit from plant consolidations, a mix toward higher efficiency products in fiscal 2009, and
short term net material cost savings. Offsetting these factors were negative impacts from lower
fixed cost absorption.
Interest Expense, Net
| (In thousands) | ||||||||||||
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Interest Expense, Net
|
$ | 17,006 | $ | 21,565 | $ | 31,168 | ||||||
|
Year End Weighted Average Interest Rate
|
4.1 | % | 3.6 | % | 4.1 | % | ||||||
Fiscal 2010 Compared to Fiscal 2009
Net interest expense for fiscal 2010 was $17.0 million compared to $21.6 million for fiscal 2009
due to lower debt levels in fiscal 2010. Interest income increased for fiscal 2010 due to higher
cash balances as a result of our operating cash flow (see “- Liquidity and Capital Resources”).
Fiscal 2009 Compared to Fiscal 2008
Net interest expense for fiscal 2009 was $21.6 million compared to $31.2 million for fiscal 2008.
During fiscal 2009, interest expense decreased driven by the redemption of $75.8 million of
convertible notes (see Note 8 of Notes to the Consolidated Financial Statements). Interest income
increased in fiscal 2009 due to higher cash balances as a result of operating cash flow and the
proceeds from the public offering of common stock in May 2009 (see “- Liquidity and Capital
Resources”).
Effective Tax Rate
| (In thousands) | ||||||||||||
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Income Taxes
|
$ | 66,045 | $ | 39,276 | $ | 70,349 | ||||||
|
Effective Tax Rate
|
29.9 | % | 28.5 | % | 35.3 | % | ||||||
Fiscal 2010 Compared to Fiscal 2009
The effective tax rate for fiscal 2010 was 29.9% compared to 28.5% for fiscal 2009. The increase
in the effective tax rate was primarily due to changes in the global distribution of income (see
Note 11 of Notes to the Consolidated Financial Statements).
Fiscal 2009 Compared to Fiscal 2008
The effective tax rate for fiscal 2009 was 28.5% compared to 35.3% for fiscal 2008. The decrease
in the effective tax rate was primarily due to changes in the global distribution of income, as
well as adjustments to tax reserves due to a statutory expiration (see Note 11 of Notes to the
Consolidated Financial Statements).
Net Income Attributable to Regal Beloit Corporation
| (In millions, except per share data) | ||||||||||||
| Fiscal 2010 | Fiscal 2009 | Fiscal 2008 | ||||||||||
|
Net Income Attributable to Regal
Beloit Corporation
|
$ | 149.4 | $ | 95.0 | $ | 125.5 | ||||||
|
Fully Diluted Earnings per Share
|
$ | 3.84 | $ | 2.63 | $ | 3.78 | ||||||
|
Average Number of Diluted Shares
|
38.9 | 36.1 | 33.3 | |||||||||
Page 29
Table of Contents
Fiscal 2010 Compared to Fiscal 2009
Net Income Attributable to Regal Beloit Corporation for fiscal 2010 was $149.4 million, an increase
of 57.2% compared to $95.0 million for fiscal 2009. Fully diluted earnings per share were $3.84
for fiscal 2010 compared to $2.63 for fiscal 2009. The average number of diluted shares was
38,921,699 during fiscal 2010 compared to 36,131,607 during fiscal 2009.
Fiscal 2009 Compared to Fiscal 2008
Net Income Attributable to Regal Beloit Corporation for fiscal 2009 was $95.0 million, a decrease
of 24.3% compared to $125.5 million for fiscal 2008. Fully diluted earnings per share were $2.63
for fiscal 2009 compared to $3.78 for fiscal 2008. The average number of diluted shares was
36,131,607 during fiscal 2009 compared to 33,250,689 during fiscal 2008.
Liquidity and Capital Resources
General
Our principal source of liquidity is operating cash flow which we target to equal or exceed our net
income. In addition to operating income, other significant factors affecting our liquidity
management include working capital levels, capital expenditures, dividends, acquisitions,
availability of debt financing and the ability to attract long term capital at acceptable terms.
Our working capital was $688.7 million at January 1, 2011, an increase of 2.7% from $670.3 million
at year-end 2009. At January 1, 2011, our current ratio (which is the ratio of our current assets
to current liabilities) was 2.7:1 compared to 3.2:1 at January 2, 2010.
Cash flow provided by operating activities (“operating cash flow”) was $175.4 million for fiscal
2010, a $139.5 million decrease from fiscal 2009. The decrease was driven by a combined $158.5
increase in the level of accounts receivable, inventory and accounts payable as a result of the
increased level of sales. These working capital components used $62.3 million of operating cash in
fiscal 2010 compared to providing $96.2 million in fiscal 2009.
Cash flow used in investing activities was $194.7 million for fiscal 2010, $43.1 million more than
in fiscal 2009, driven by $211.9 of acquisition costs and partially offset by the net sales of
investment securities of $60.7 million. In addition, capital spending increased to $45.0 million
for fiscal 2010 from $33.6 million for fiscal 2009. Our commitments for property, plant and
equipment as of January 1, 2011 were approximately $5.5 million. In fiscal 2011, we anticipate
capital spending will increase to approximately $90.0 million, as we fund (i) the purchase of our
factory in Faridabad, India, which is currently leased, and (ii) the construction and relocation of
two of our factories in China as required by the Chinese government. We believe that our present
manufacturing facilities, augmented by these planned capital expenditures in fiscal 2011, will be
sufficient to provide adequate capacity for our operations in 2011.
Cash flow used in financing activities was $70.3 million for fiscal 2010, compared to cash flow
provided of $32.9 million for fiscal 2009. On May 22, 2009, we completed a public offering of
4,312,500 shares of our common stock at a price of $36.25 per share, resulting in $150.4 million of
net proceeds. We paid $25.1 million in dividends to shareholders in fiscal 2010.
At January 1, 2011, we have $250.0 million of senior notes (the “Notes”) outstanding. The Notes
were sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among us and the
purchasers of the Notes. The Notes were issued and sold in two series: $150.0 million in Floating
Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating Rate
Series 2007A Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest at a margin
over the London Inter-Bank Offered Rate (“LIBOR”). These interest rates vary as LIBOR varies. The
Agreement permits us to issue and sell additional note series, subject to certain terms and
conditions described in the Agreement, up to a total of $600.0 million in combined Notes. At
January 1, 2011 the interest rate of 0.9% was based on a margin over LIBOR.
Our $500.0 million revolving credit facility (the “Facility”) permits us to borrow at interest
rates based upon a margin above LIBOR, which margin varies with the ratio of senior funded debt to
EBITDA as defined in the Facility. These interest rates also vary as LIBOR varies. We pay a
commitment fee on the unused amount of the Facility, which also varies with the ratio of our senior
funded debt to our EBITDA. As of January 1, 2011, we had approximately $45.8 million in standby
letters of credit issued under the Facility and $454.2 million in available borrowings under the
Facility. The average balance outstanding in direct borrowings under the Facility in fiscal 2010
was $1.4 million. The Facility matures in April 2012.
On June 16, 2008, we entered into a Term Loan Agreement (“Term Loan”) with certain financial
institutions, pursuant to which we borrowed an aggregate principal amount of $165.0 million. The
Term Loan matures in June 2013, and borrowings generally bear interest at a variable rate equal to
a margin over LIBOR which varies with the ratio of our consolidated debt to consolidated earnings
before interest, taxes, depreciation, and amortization (“EBITDA”) as defined in the Agreement.
These interest rates also vary as LIBOR varies. At January 1, 2011, the
interest rate of 1.0% was based on a margin over LIBOR. The Notes, the Term Loan and the Facility
require us to meet specified financial ratios and to satisfy certain financial condition tests. We
were in compliance with all debt covenants as of January 1, 2011.
Page 30
Table of Contents
We have interest rate swap agreements to manage fluctuations in cash flows resulting from interest
rate risk. (See also Note 14 to Notes to the Consolidated Financial Statements).
As of January 1, 2011, we have no convertible notes that remain outstanding. During fiscal 2010,
the final $39.2 million face value bonds were converted. We paid the par value in cash and issued
approximately 0.9 million shares for the conversion premium. During fiscal 2009, several
bondholders exercised their conversion right for a total of $75.8 million of convertible notes.
The par value of the convertible notes was paid in cash and the conversion premium was paid through
issuance of approximately 1.4 million shares of stock.
As part of the acquisitions made during fiscal 2010 (see note 5 of Notes to the Consolidated
Financial Statements), we assumed $11.1 million of short-term and long-term debt. At January 1,
2011, $1.5 million of the short-term acquired debt remains outstanding and $2.4 million of the
long-term acquired debt remains outstanding.
At January 1, 2011, one of
our foreign subsidiaries had outstanding short-term borrowings of $7.0
million denominated in local currency with a fixed interest rate of 5.6%. At January 2, 2010 one
of our foreign subsidiaries had outstanding short-term borrowings of $8.2 million, denominated in
local currency with a weighted average interest rate of 1.9%.
At January 1, 2011, additional notes payable of approximately $14.9 million were outstanding with a
weighted average interest rate of 4.7%.
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations
used to finance our operations and acquisitions. At January 1, 2011, net of interest rate swaps,
we had $266.4 million of fixed rate debt and $170.5 million of variable rate debt. The variable
rate debt is primarily under our Term Loan with an interest rate based on a margin above LIBOR. As
a result, interest rate changes impact future earnings and cash flow assuming other factors are
constant. A hypothetical 10% change in our weighted average borrowing rate on outstanding variable
rate debt at January 1, 2011 would result in a change in net income of approximately $0.1 million.
Predominately, all of our expenses are paid in cash, often with payment term provisions that
include early payment discounts and time elements. We believe that our ability to generate
positive cash flow, coupled with our available revolver balance will be sufficient to fund our
operations for the foreseeable future. We focus on optimizing our investment in working capital
through improved and enforced payment terms and operational efficiencies. Additionally, we believe
that our capital expenditures for maintenance of equipment and facilities will be consistent with
prior levels and not present a funding challenge.
We were in compliance with all of our financial covenants at the end of fiscal 2010. We believe
that we will continue to be in compliance with these covenants for the foreseeable future.
The primary financial covenants on our Notes, Term Loan, and the Facility include ratios of debt to
EBITDA (as defined in each agreement) and minimum interest coverage ratios of EBITDA to interest
expense. The debt to EBITDA covenant ratio requires us to be less than 3.75:1, and our ratio at
January 1, 2011 was approximately 1.4:1. The minimum interest coverage ratio requires us to be
greater than 3.0:1, and our ratio at January 1, 2011 was approximately 16.3:1.
We will, from time to time, maintain excess cash balances which may be used to fund operations,
repay outstanding debt and will be available for other investments which may include acquisitions
of businesses or product lines, dividends, investments in new product development programs and the
repurchase of our commons stock.
Our projections are based on all information known to us, which may change based on global economic
events, our financial performance, actions by our customers and competitors and other factors
discussed in “Risk Factors.”
EPC
Acquisition
We
plan to fund the $700 million cash consideration in the EPC
Acquisition with a combination of existing cash, borrowings under the
Facility, and additional debt.
Litigation
In July 2009, we filed a response and counterclaims in an action initiated by Nordyne, Inc.
(“Nordyne”) on February 4, 2009, in the U.S. District Court for the Eastern District of Missouri.
In the action, Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems
nor its iQ Drive 23-seer air conditioning systems infringe on our ECM (electronically commutated
motor) systems patent U.S. Patent No. 5,592,058 (“the ‘058 Patent”) and/or that the ‘058 Patent is
invalid. In our response and counterclaims against Nordyne, we deny that Nordyne is entitled to
relief and we seek a judgment that Nordyne has, in fact, infringed and continues to infringe the
‘058 Patent by making, using, offering for sale and selling it G7 furnace systems and iQ Drive
23-seer air conditioning systems. We also have requested the U.S. District Court to enjoin Nordyne
and all persons working in concert with Nordyne from further infringement of the ‘058 Patent and to
award us compensatory and other damages caused by such infringement. On February 2, 2011, the Court
issued a claim construction order in which it held that some of the claims in the ‘058 Patent
contain limitations that are indefinite and thus invalid. However, other claims of the ‘058
Patent were not affected by this ruling and remain to be litigated in the action. We intend to
defend our intellectual property vigorously against the claims asserted by Nordyne and against any
infringement by Nordyne or any other person. We do not currently believe that the litigation will
have a material effect on the Company’s financial position or its results of operations.
Page 31
Table of Contents
One of our subsidiaries that we acquired in 2007 is subject to numerous claims filed in various
jurisdictions relating to certain sub-fractional motors that were primarily manufactured through
2004 and that were included as components of residential and commercial ventilation units marketed
by a third party. These claims generally allege that the ventilation units were the cause of
fires. Based on the current facts, we do not believe these claims, individually or in the
aggregate, will have a material adverse effect on our results of operations or financial condition.
However, we cannot predict the outcome of these claims, the nature or extent of remedial actions,
if any, we may need to undertake with respect to motors that remain in the field, or the costs we
many incur, some of which could be significant.
We are, from time to time, party to other litigation that arises in the normal course of our
business operations, including product warranty and liability claims, contract disputes and
environmental, asbestos, employment and other litigation matters. Our products are used in a
variety of industrial, commercial and residential applications that subject us to claims that the
use of our products is alleged to have resulted in injury or other damage. We accrue for
anticipated costs in defending against such lawsuits in amounts that we believe are adequate, and
we do not believe that the outcome of any such lawsuit will have a material effect on our results
of operations or financial position.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
| Debt | ||||||||||||||||||||
| Including | Purchase | Total | ||||||||||||||||||
| Payments due by Period | Estimated | Operating | Pension | and Other | Contractual | |||||||||||||||
| (1) | Interest Payments (2) | Leases | Obligations | Obligations | Obligations | |||||||||||||||
|
Less than 1 Year
|
$ | 24.7 | $ | 22.4 | $ | 2.2 | $ | 273.0 | $ | 322.3 | ||||||||||
|
1 - 3 Years
|
197.0 | 30.9 | — | — | 227.9 | |||||||||||||||
|
3 - 5 Years
|
168.6 | 13.4 | — | — | 182.0 | |||||||||||||||
|
More than 5 Years
|
116.5 | 9.4 | — | — | 125.9 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 506.8 | $ | 76.1 | $ | 2.2 | $ | 273.0 | $ | 858.1 | ||||||||||
|
|
||||||||||||||||||||
The following is a summary of our contractual obligations and payments due by period as of January
1, 2011 (in millions):
| (1) |
The timing and future spot prices affect the settlement values of our
hedge obligations related to commodities, currency and interest rate swap agreements.
Accordingly, these obligations are not included above in the table of contractual
obligations. The timing of settlement of our tax contingent liabilities cannot be reasonably
determined and they are not included above in the table of contractual obligations. Future
pension obligation payments after 2010 are subject to revaluation based on changes in the
benefit population and/or changes in the value of pension assets based on market conditions
that are not determinable as of January 1, 2011.
|
|
| (2) |
Variable rate debt based on January 1, 2011 rates.
|
We utilize blanket purchase orders (“blankets”) to communicate expected annual requirements to
many of our suppliers. Requirements under blankets generally do not become “firm” until a varying
number of weeks before our scheduled production. The purchase obligations shown in the above table
represent the value we consider “firm.”
At January 1, 2011, we had outstanding standby letters of credit totaling approximately $45.8
million. We had no other material commercial commitments.
We did not have any material variable interest entities as of January 1, 2011 and January 2, 2010.
Other than disclosed in the table above and the previous paragraph, we 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.
Goodwill
We evaluate the carrying amount of goodwill annually or more frequently if events or circumstances
indicate that an asset might be impaired. When applying the accounting guidance, we use estimates
to determine when it might be necessary to take an impairment charge. Factors that could trigger
an impairment review include significant underperformance relative to historical or forecasted
operating results, a significant decrease in the market value of an asset or significant negative
industry or economic trends. We perform our required annual goodwill impairment test as of the end
of the October fiscal month each year.
The key assumptions used in the discounted cash flow valuation model used to estimate fair value
include discount rates, growth rates, cash flow projections and terminal value rates. Discount
rates, growth rates and cash flow projections are the most sensitive and susceptible to change as
they require significant management judgment. Discount rates are determined by using a weighted
average cost of capital (“WACC”). The WACC considers market and industry data as well as
company-specific risk factors for each reporting unit in determining the appropriate discount rate
to be used. The discount rate utilized for each reporting unit is indicative of the return an
investor would expect to receive for investing in such a business. Terminal value rate
determination follows common methodology of capturing the present value of perpetual cash flow
estimates beyond the last projected
period assuming a constant WACC and long term growth rates. The calculated fair values for our
2010 impairment testing exceed the carrying values of the reporting units. The two reporting units
that compromise approximately 82% of the total consolidated carrying value at January 1, 2011 had a
combined excess of approximately 90% estimated fair value over carrying value. We had two reporting units with a
total of $27.3 million of goodwill at January 1, 2011 that had an estimated fair value that was
less than 15% over carrying value.
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Table of Contents
Intangible Assets
We evaluate the recoverability of the carrying amount of intangible assets whenever events or
changes in circumstance indicate that the carrying amount of an asset may not be fully recoverable
through future cash flows. When applying the accounting guidance we use estimates to determine
when an impairment is necessary. Factors that could trigger an impairment review include a
significant decrease in the market value of an asset or significant negative or economic trends.
(See also Note 7 of Notes to the Consolidated Financial Statements).
Derivatives
We periodically enter into commodity hedging transactions to reduce the impact of changing prices
for certain commodities such as copper and aluminum based upon forecasted purchases of such
commodities. We also use a cash hedging strategy to protect against an increase in the cost of
forecasted foreign currency denominated transactions. Finally, we also have certain LIBOR-based
floating rate borrowings that expose us to variability in interest rates that have been swapped
into a pay fixed/receive LIBOR based interest rate swap agreement.
The fair value of derivatives is recorded on the consolidated balance sheet and the value is
determined based on level 2 inputs. (See Note 14 of Notes to the Consolidated Financial
Statements.)
Retirement Plans
Approximately half of our domestic employees are covered by defined benefit pension plans with the
remaining employees covered by defined contribution plans. The defined benefit pension plans
covering a majority of our domestic employees were frozen to new employees as of January 1, 2009.
Most of our foreign employees are covered by government sponsored plans in the countries in which
they are employed. Our obligations under our defined benefit pension plans are determined with the
assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as
withdrawal rates and mortality rates. The actuaries also provide 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 pension plans may change significantly from year to year. Based on
the annual review of actuarial assumptions as well as historical rates of return on plan assets and
existing long-term bond rates, we set the long-term rate of return on plan assets at 8.25% and used
a discount rate ranging from 5.2% to 5.9% for its defined benefit pension plans as of January 1,
2011. (See also Note 9 of the Consolidated Financial Statements).
Income Taxes
We operate in numerous taxing jurisdictions and are subject to regular examinations by various U.S.
Federal, state and foreign jurisdictions for various tax periods. Our income tax positions are
based on research and interpretations of the income tax laws and rulings in each of the
jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and
rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions
as well as the inherent uncertainty in estimating the final resolution of complex tax audit
matters, our estimates of income tax liabilities may differ from actual payments or assessments.
Additional information regarding income taxes is contained in Note 11 of Notes to the Consolidated
Financial Statements.
Further discussion of our accounting policies is contained in Note 3 of Notes to the Consolidated
Financial Statements.
Page 33
Table of Contents
| ITEM 7A — |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to market risk relating to our operations due to changes in interest rates, foreign
currency exchange rates and commodity prices of purchased raw materials. We manage the exposure to
these risks through a combination of normal operating and financing activities and derivative
financial instruments such as interest rate swaps, commodity cash flow hedges and foreign currency
forward exchange contracts. All hedging transactions are authorized and executed pursuant to
clearly defined polices and procedures, which strictly prohibit the use of financial instruments
for speculative purposes.
All hedges are recorded on the balance sheet at fair value and are accounted for as cash flow
hedges, with changes in fair value recorded in accumulated other comprehensive income (loss)
(“AOCI”) in each accounting period. An ineffective portion of the hedges change in fair value, if
any, is recorded in earnings in the period of change.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations
used to finance our operations and acquisitions. At January 1, 2011, net of interest rate swaps,
we had $266.4 million of fixed rate debt and $170.5 million of variable rate debt. As a result,
interest rate changes impact future earnings and cash flow assuming other factors are constant. We
utilize interest rate swaps to manage fluctuations in cash flows resulting from exposure to
interest rate risk on forecasted variable rate interest payments. We have LIBOR-based floating
rate borrowings, which expose us to variability in interest payments due to changes in interest
rates. A hypothetical 10% change in our weighted average borrowing rate on outstanding variable
rate debt at January 1, 2011, would result in a change in after-tax annualized earnings of
approximately $0.1 million. We have entered into pay fixed/receive LIBOR-based floating interest
rate swaps to manage fluctuations in cash flows resulting from interest rate risk. These interest
rate swaps have been designated as cash flow hedges against forecasted LIBOR-based interest
payments. Details regarding the instruments, as of January 1, 2011, are as follows:
| Notional | Rate | Fair Value | ||||||||||
| Instrument | Amount | Maturity | Paid | Rate Received | (Loss) | |||||||
|
Swap
|
$150.0 million | August 23, 2014 | 5.3 | % | LIBOR (3 month) | ($21.1) million | ||||||
|
Swap
|
$100.0 million | August 23, 2017 | 5.4 | % | LIBOR (3 month) | ($18.0) million | ||||||
As of January 1, 2011 and January 2, 2010, the interest rate swap liability of ($39.1) million and
($31.2) million was included in Hedging Obligations, respectively. The unrealized loss on the
effective portion of the contracts of ($24.2) million and ($19.3) million, net of tax as of January
1, 2011 and January 2, 2010, respectively, was recorded in AOCI.
Foreign Currency Risk
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 exchange 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. We do not
hedge our exposure to the translation of reported results of foreign subsidiaries from local
currency to United States dollars.
As of January 1, 2011, derivative currency assets (liabilities) of $7.3 million, $1.4 million,
($0.1) million, and ($0.1) million are recorded in Prepaid Expenses, Other Noncurrent Assets,
Accrued Expenses, and Hedging Obligations, respectively. As of January 2, 2010, derivative currency
assets (liabilities) of $0.2 million, $1.1 million, and ($5.5) million are recorded in Prepaid
Expenses, Other Noncurrent Assets, and Hedging Obligations, respectively. The unrealized gain
(loss) on the effective portion of the contracts of $5.1 million net of tax, and ($2.7) million net
of tax, as of January 1, 2011 and January 2, 2010, was recorded in AOCI. At January 1, 2011, we
had an additional immaterial amount of currency gains on closed hedge instruments in AOCI that will
be realized in earnings when the hedged items impact earnings. At January 2, 2010, we had an
additional ($0.6) million, net of tax, of derivative currency losses on closed hedge instruments in
AOCI that were realized in earnings when the hedged items impacted earnings.
Page 34
Table of Contents
The following table quantifies the outstanding foreign exchange contracts intended to hedge
non-U.S. dollar denominated receivables and payables and the corresponding impact on the value of
these instruments assuming a hypothetical 10% appreciation/depreciation of their counter currency
on January 1, 2011 (dollars in millions):
| Foreign Exchange | ||||||||||||||||
| Gain/(Loss) From: | ||||||||||||||||
| Notional | Fair | 10% Appreciation of | 10% Depreciation of | |||||||||||||
|
Currency
|
Amount | Value | Counter Currency | Counter Currency | ||||||||||||
|
Mexican Peso
|
$ | 86.3 | $ | 7.9 | $ | 8.6 | $ | (8.6 | ) | |||||||
|
Australian Dollar
|
2.4 | (0.1 | ) | 0.2 | (0.2 | ) | ||||||||||
|
Indian Rupee
|
36.4 | 0.5 | 3.6 | (3.6 | ) | |||||||||||
|
Chinese Renminbi
|
8.9 | 0.2 | 0.9 | (0.9 | ) | |||||||||||
It is important to note that gains and losses indicated in the sensitivity analysis would be offset
by gains and losses on the underlying receivables and payables.
Commodity Price Risk
We periodically enter into commodity hedging transactions to reduce the impact of changing prices
for certain commodities such as copper and aluminum based upon forecasted purchases of such
commodities. These transactions are designated as cash flow hedges and the contract terms of
commodity hedge instruments generally mirror those of the hedged item, providing a high degree of
risk reduction and correlation.
Derivative commodity assets (liabilities) of $24.9 million, $4.2 million, and ($0.1) are recorded
in Prepaid Expenses, Other Noncurrent Assets, and Accrued Expenses, respectively, at January 1,
2011. Derivative commodity assets of $4.4 million are recorded in Prepaid Expenses at January 2,
2010. The unrealized gain on the effective portion of the contracts of $17.8 million net of tax and
$2.2 million net of tax, as of January 1, 2011 and January 2, 2010, respectively, was recorded in
AOCI. At January 1, 2011, we had an additional $4.1 million, net of tax, of derivative commodity
gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items
impact earnings. At January 2, 2010, we had an additional $2.1 million, net of tax, of derivative
commodity gains on closed hedge instruments in AOCI that were realized in earnings when the hedged
items impacted earnings.
The following table quantifies the outstanding commodity contracts intended to hedge raw material
commodity prices and the corresponding impact on the value of these instruments assuming a
hypothetical 10% appreciation/depreciation of their prices on January 1, 2011 (dollars in
millions):
| Commodity Purchase Price | ||||||||||||||||
| Gain/(Loss) From: | ||||||||||||||||
| Notional | 10% Increase of | 10% Decrease of | ||||||||||||||
|
Commodity
|
Amount | Fair Value | Commodity Prices | Commodity Prices | ||||||||||||
|
Copper
|
$ | 106.3 | $ | 28.5 | $ | 10.6 | $ | (10.6 | ) | |||||||
|
Aluminum
|
4.2 | 0.6 | 0.4 | (0.4 | ) | |||||||||||
|
Zinc
|
0.2 | — | — | — | ||||||||||||
|
Natural Gas
|
0.7 | (0.1 | ) | — | — | |||||||||||
It is important to note that gains and losses indicated in the sensitivity analysis would be offset
by the actual prices of the commodities.
The net AOCI balance of $2.8 million gain at January 1, 2011 includes $13.0 million of net current
deferred gains expected to be realized in the next twelve months.
Page 35
Table of Contents
| ITEM 8 — |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Quarterly Financial Information
(Unaudited)
(Unaudited)
| (In Thousands, Except Per Share Data) | ||||||||||||||||||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
|
Net Sales
|
$ | 507,318 | $ | 443,274 | $ | 584,181 | $ | 454,550 | $ | 590,801 | $ | 465,192 | $ | 555,678 | $ | 463,261 | ||||||||||||||||
|
Gross Profit
|
130,915 | 90,570 | 143,504 | 94,622 | 144,664 | 113,869 | 130,267 | 125,163 | ||||||||||||||||||||||||
|
Income from
Operations
|
62,765 | 28,192 | 66,799 | 29,467 | 69,883 | 48,318 | 38,288 | 53,543 | ||||||||||||||||||||||||
|
Net Income
|
39,868 | 13,976 | 42,775 | 17,521 | 45,880 | 31,672 | 26,161 | 35,510 | ||||||||||||||||||||||||
|
Net Income
Attributable to
Regal Beloit Corporation
|
37,762 | 12,787 | 41,720 | 16,452 | 44,654 | 31,150 | 25,243 | 34,659 | ||||||||||||||||||||||||
|
Earnings Per Share
(1)
:
|
||||||||||||||||||||||||||||||||
|
Basic
|
1.10 | 0.41 | 1.09 | 0.49 | 1.16 | 0.86 | 0.65 | 0.94 | ||||||||||||||||||||||||
|
Assuming Dilution
|
0.98 | 0.39 | 1.07 | 0.47 | 1.14 | 0.82 | 0.65 | 0.90 | ||||||||||||||||||||||||
|
Weighted Average Number
of Shares Outstanding
|
||||||||||||||||||||||||||||||||
|
Basic
|
37,446 | 31,457 | 38,310 | 33,256 | 38,581 | 36,056 | 38,607 | 37,031 | ||||||||||||||||||||||||
|
Assuming Dilution
|
38,622 | 32,595 | 38,954 | 35,105 | 39,023 | 38,183 | 39,052 | 38,410 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net Sales
|
||||||||||||||||||||||||||||||||
|
Electrical
|
$ | 457,245 | $ | 391,362 | $ | 522,790 | $ | 407,244 | $ | 527,789 | $ | 422,006 | $ | 494,165 | $ | 417,056 | ||||||||||||||||
|
Mechanical
|
50,073 | 51,912 | 61,391 | 47,306 | 63,012 | 43,186 | 61,513 | 46,205 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Income from Operations
|
||||||||||||||||||||||||||||||||
|
Electrical
|
56,340 | 21,906 | 58,835 | 25,339 | 62,038 | 45,796 | 33,016 | 51,860 | ||||||||||||||||||||||||
|
Mechanical
|
6,425 | 6,286 | 7,964 | 4,128 | 7,845 | 2,522 | 5,272 | 1,683 | ||||||||||||||||||||||||
| (1) |
Due to the weighting of both earnings and the weighted average number of shares
outstanding, the sum of the quarterly earnings per share may not equal the annual earnings per share.
|
Page 36
Table of Contents
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Regal Beloit Corporation (the “Company”) is responsible for the accuracy and
internal consistency of the preparation of the consolidated financial statements and footnotes
contained in this annual report.
The Company’s management is also responsible for establishing and maintaining adequate internal
control over financial reporting. The Company operates under a system of internal accounting
controls designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of published financial statements in accordance with generally accepted
accounting principles. The internal accounting control system is evaluated for effectiveness by
management and is tested, monitored and revised as necessary. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of January 1, 2011. In making its assessment, the Company’s management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control—Integrated Framework. Based on the results of its evaluation, the
Company’s management concluded that, as of January 1, 2011, the Company’s internal control over
financial reporting is effective at the reasonable assurance level based on those criteria.
Our internal control over financial reporting as of January 1, 2011 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report which is
included herein.
March 2, 2011
Page 37
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Regal Beloit Corporation
Beloit, Wisconsin
Regal Beloit Corporation
Beloit, Wisconsin
We have audited the accompanying consolidated balance sheets of Regal Beloit Corporation and
subsidiaries (the “Company”) as of January 1, 2011 and January 2, 2010, and the related
consolidated statements of income, equity, comprehensive income (loss), and cash flows for each of
the three years in the period ended January 1, 2011. Our audits also included the consolidated
financial statement schedule listed in the Index as Item 15. We also have audited the Company’s
internal control over financial reporting as of January 1, 2011, based on criteria established in
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for these financial statements and
financial statement schedule, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule and an opinion on the Company’s internal control over financial reporting based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of January 1, 2011 and January 2, 2010,
and the results of their operations and their cash flows for each of the three years in the period
ended January 1, 2011, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of January 1, 2011, based on the criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/S/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 2, 2011
Milwaukee, Wisconsin
March 2, 2011
Page 38
Table of Contents
REGAL BELOIT CORPORATION
(Dollars in Thousands, Except Per Share Data)
| For the Year Ended | ||||||||||||
| January 1, | January 2, | December 27, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
|
Net Sales
|
$ | 2,237,978 | $ | 1,826,277 | $ | 2,246,249 | ||||||
|
|
||||||||||||
|
Cost of Sales
|
1,688,628 | 1,402,053 | 1,745,569 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Gross Profit
|
549,350 | 424,224 | 500,680 | |||||||||
|
|
||||||||||||
|
Operating Expenses
|
311,615 | 264,704 | 270,249 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income From Operations
|
237,735 | 159,520 | 230,431 | |||||||||
|
|
||||||||||||
|
Interest Expense
|
19,576 | 23,284 | 32,647 | |||||||||
|
|
||||||||||||
|
Interest Income
|
2,570 | 1,719 | 1,479 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Income Before Taxes & Noncontrolling Interests
|
220,729 | 137,955 | 199,263 | |||||||||
|
|
||||||||||||
|
Provision For Income Taxes
|
66,045 | 39,276 | 70,349 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income
|
154,684 | 98,679 | 128,914 | |||||||||
|
|
||||||||||||
|
Less: Net Income Attributable to Noncontrolling
Interests, net of tax
|
5,305 | 3,631 | 3,389 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Income Attributable to Regal Beloit Corporation
|
$ | 149,379 | $ | 95,048 | $ | 125,525 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Earnings Per Share of Common Stock:
|
||||||||||||
|
|
||||||||||||
|
Basic
|
$ | 3.91 | $ | 2.76 | $ | 4.00 | ||||||
|
|
||||||||||||
|
Assuming Dilution
|
$ | 3.84 | $ | 2.63 | $ | 3.78 | ||||||
|
|
||||||||||||
|
Weighted Average Number of Shares Outstanding:
|
||||||||||||
|
|
||||||||||||
|
Basic
|
38,236,168 | 34,498,674 | 31,343,330 | |||||||||
|
|
||||||||||||
|
Assuming Dilution
|
38,921,699 | 36,131,607 | 33,250,689 | |||||||||
See accompanying Notes to the Consolidated Financial Statements.
Page 39
Table of Contents
REGAL BELOIT CORPORATION
(Dollars in Thousands, Except Per Share Data)
| January 1, | January 2, | |||||||
| 2011 | 2010 | |||||||
|
ASSETS
|
||||||||
|
Current Assets:
|
||||||||
|
Cash and Cash Equivalents
|
$ | 174,531 | $ | 262,422 | ||||
|
Investments — Trading Securities
|
56,327 | 117,553 | ||||||
|
Trade Receivables, less Allowances
of $10,637 in 2010 and of $12,666 in 2009
|
331,017 | 240,721 | ||||||
|
Inventories
|
390,587 | 268,839 | ||||||
|
Prepaid Expenses and Other Current Assets
|
110,665 | 59,168 | ||||||
|
Deferred Income Tax Benefits
|
24,924 | 30,673 | ||||||
|
|
||||||||
|
Total Current Assets
|
1,088,051 | 979,376 | ||||||
|
Net Property, Plant and Equipment:
|
||||||||
|
Land and Improvements
|
45,909 | 42,034 | ||||||
|
Buildings and Improvements
|
141,128 | 127,468 | ||||||
|
Machinery and Equipment
|
550,816 | 484,274 | ||||||
|
|
||||||||
|
Property, Plant and Equipment, at Cost
|
737,853 | 653,776 | ||||||
|
Less — Accumulated Depreciation
|
(341,477 | ) | (310,705 | ) | ||||
|
|
||||||||
|
Net Property, Plant and Equipment
|
396,376 | 343,071 | ||||||
|
Goodwill
|
775,371 | 663,920 | ||||||
|
Intangible Assets, Net of Amortization
|
175,490 | 116,426 | ||||||
|
Other Noncurrent Assets
|
13,848 | 9,444 | ||||||
|
|
||||||||
|
Total Assets
|
$ | 2,449,136 | $ | 2,112,237 | ||||
|
|
||||||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts Payable
|
$ | 231,705 | $ | 161,902 | ||||
|
Dividends Payable
|
6,562 | 5,981 | ||||||
|
Accrued Compensation and Employee Benefits
|
63,842 | 50,722 | ||||||
|
Other Accrued Expenses
|
88,596 | 82,076 | ||||||
|
Current Maturities of Debt
|
8,637 | 8,385 | ||||||
|
|
||||||||
|
Total Current Liabilities
|
399,342 | 309,066 | ||||||
|
Long-Term Debt
|
428,256 | 468,065 | ||||||
|
Deferred Income Taxes
|
92,858 | 72,418 | ||||||
|
Hedging Obligations
|
39,174 | 31,232 | ||||||
|
Pension and other Post Retirement Benefits
|
51,127 | 39,306 | ||||||
|
Other Noncurrent Liabilities
|
41,217 | 12,082 | ||||||
|
Commitments and Contingencies (see Note 12)
|
||||||||
|
Equity:
|
||||||||
|
Regal Beloit Corporation Shareholders’ Equity:
|
||||||||
|
Common Stock, $.01 par value, 100,000,000 shares authorized, 38,615,547 issued in 2010, and 37,399,353 shares issued
in 2009
|
386 | 374 | ||||||
|
Additional Paid-In Capital
|
535,807 | 512,282 | ||||||
|
Retained Earnings
|
827,467 | 703,765 | ||||||
|
Accumulated Other Comprehensive Loss
|
(1,700 | ) | (48,597 | ) | ||||
|
|
||||||||
|
Total Regal Beloit Corporation Shareholders’ Equity
|
1,361,960 | 1,167,824 | ||||||
|
|
||||||||
|
Noncontrolling Interests
|
35,202 | 12,244 | ||||||
|
|
||||||||
|
Total Equity
|
1,397,162 | 1,180,068 | ||||||
|
|
||||||||
|
Total Liabilities and Equity
|
$ | 2,449,136 | $ | 2,112,237 | ||||
|
|
||||||||
See accompanying Notes to the Consolidated Financial Statements.
Page 40
Table of Contents
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Thousands, Except Per Share Data)
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Thousands, Except Per Share Data)
| Regal Beloit Corporation Shareholders’ Equity | ||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Common | Additional | Other | ||||||||||||||||||||||||||
| Stock $ .01 | Paid-In | Treasury | Retained | Comprehensive | Noncontrolling | Total | ||||||||||||||||||||||
| Par Value | Capital | Stock | Earnings | Income (Loss) | Interests | Equity | ||||||||||||||||||||||
|
Balance as of December 29, 2007
|
$ | 321 | $ | 348,971 | $ | (15,228 | ) | $ | 525,506 | $ | 2,180 | $ | 10,542 | $ | 872,292 | |||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net Income
|
$ | — | $ | — | $ | — | $ | 125,525 | $ | — | $ | 3,389 | $ | 128,914 | ||||||||||||||
|
Dividends Declared ($.63 per share)
|
— | — | — | (19,750 | ) | — | — | $ | (19,750 | ) | ||||||||||||||||||
|
Purchase of 110,000
shares of Treasury Stock
|
— | — | (4,191 | ) | — | — | — | $ | (4,191 | ) | ||||||||||||||||||
|
Stock Options Exercised including income tax
benefit and share cancellations
|
2 | 2,680 | — | — | — | — | $ | 2,682 | ||||||||||||||||||||
|
Stock-based Compensation
|
— | 4,580 | — | — | — | — | $ | 4,580 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Distribution of Noncontrolling Interests
|
— | — | — | — | — | (3,044 | ) | $ | (3,044 | ) | ||||||||||||||||||
|
Other Comprehensive Income (Loss)
(see detail Comprehensive Income
Statement)
|
— | — | — | — | (144,609 | ) | 767 | $ | (143,842 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance as of December 27, 2008
|
$ | 323 | $ | 356,231 | $ | (19,419 | ) | $ | 631,281 | $ | (142,429 | ) | $ | 11,654 | $ | 837,641 | ||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net Income
|
$ | — | $ | — | $ | — | $ | 95,048 | $ | — | $ | 3,631 | $ | 98,679 | ||||||||||||||
|
Dividends Declared ($.64 per share)
|
— | — | — | (22,564 | ) | — | — | $ | (22,564 | ) | ||||||||||||||||||
|
Issuance of 4,312,500 shares of
Common Stock
|
43 | 150,327 | — | — | — | $ | 150,370 | |||||||||||||||||||||
|
Stock Options Exercised including income tax
benefit and share cancellations
|
3 | 5,817 | — | — | — | — | $ | 5,820 | ||||||||||||||||||||
|
Stock-based Compensation
|
— | 4,752 | — | — | — | — | $ | 4,752 | ||||||||||||||||||||
|
Issuance of Treasury and Common
Stock for conversion premium
on Convertible Debt redemption
|
5 | (19,424 | ) | 19,419 | — | — | — | $ | — | |||||||||||||||||||
|
Reversal of unrecognized tax benefits
|
— | 3,600 | — | — | — | — | $ | 3,600 | ||||||||||||||||||||
|
Reversal of tax benefits related to
Convertible Debt
|
— | 10,979 | — | — | — | — | $ | 10,979 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Distribution to Noncontrolling Interests
|
— | — | — | — | — | (4,468 | ) | $ | (4,468 | ) | ||||||||||||||||||
|
Other Comprehensive Income (Loss)
(see detail Comprehensive Income
Statement)
|
— | — | — | — | 93,832 | 1,427 | $ | 95,259 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance as of January 2, 2010
|
$ | 374 | $ | 512,282 | $ | — | $ | 703,765 | $ | (48,597 | ) | $ | 12,244 | $ | 1,180,068 | |||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net Income
|
$ | — | $ | — | $ | — | $ | 149,379 | $ | — | $ | 5,305 | $ | 154,684 | ||||||||||||||
|
Dividends Declared ($.67 per share)
|
— | — | — | (25,677 | ) | — | — | $ | (25,677 | ) | ||||||||||||||||||
|
Issuance of 100,000 shares of
Common Stock for acquistion
|
1 | 6,106 | — | — | — | $ | 6,107 | |||||||||||||||||||||
|
Stock Options Exercised including income tax
benefit and share cancellations
|
2 | 4,127 | — | — | — | — | $ | 4,129 | ||||||||||||||||||||
|
Stock-based Compensation
|
— | 6,747 | — | — | — | — | $ | 6,747 | ||||||||||||||||||||
|
Issuance of Common Stock for
conversion premium on
Convertible Debt redemption
|
9 | (9 | ) | — | — | — | — | $ | — | |||||||||||||||||||
|
Reversal of tax benefits related to
Convertible Debt
|
— | 6,554 | — | — | — | — | $ | 6,554 | ||||||||||||||||||||
|
Additions to Noncontrolling
Interests from acquisitions
|
— | — | — | — | — | 16,560 | $ | 16,560 | ||||||||||||||||||||
|
Other Comprehensive Income (Loss)
(see detail Comprehensive Income
Statement)
|
— | — | — | — | 46,897 | 1,093 | $ | 47,990 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance as of January 1, 2011
|
$ | 386 | $ | 535,807 | $ | — | $ | 827,467 | $ | (1,700 | ) | $ | 35,202 | $ | 1,397,162 | |||||||||||||
|
|
||||||||||||||||||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
Page 41
Table of Contents
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
| For the Year Ended | ||||||||||||
| January 1, | January 2, | December 27, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
|
Net Income
|
$ | 154,684 | $ | 98,679 | $ | 128,914 | ||||||
|
Other Comprehensive Income (Loss) net of tax:
|
||||||||||||
|
Pension and Post Retirement benefits
|
(2,637 | ) | (2,802 | ) | (13,773 | ) | ||||||
|
Currency translation adjustments
|
29,383 | 17,531 | (41,717 | ) | ||||||||
|
Change in fair value of hedging activities
|
18,022 | 30,738 | (89,547 | ) | ||||||||
|
|
||||||||||||
|
Hedging Activities Reclassified into Earnings from
Other Comprehensive Income
|
3,222 | 49,792 | 1,195 | |||||||||
|
|
||||||||||||
|
Total Other Comprehensive Income (Loss)
|
47,990 | 95,259 | (143,842 | ) | ||||||||
|
|
||||||||||||
|
Comprehensive Income (Loss)
|
202,674 | 193,938 | (14,928 | ) | ||||||||
|
|
||||||||||||
|
Less: Comprehensive Income Attributable to Noncontrolling Interests
|
6,398 | 5,058 | 4,156 | |||||||||
|
|
||||||||||||
|
Comprehensive Income (Loss)Attributable to Regal Beloit Corporation
|
$ | 196,276 | $ | 188,880 | $ | (19,084 | ) | |||||
|
|
||||||||||||
See accompanying Notes to the Consolidated Financial Statements.
Page 42
Table of Contents
| For the Year Ended | ||||||||||||
| January 1, | January 2, | December 27, | ||||||||||
| 2011 | 2010 | 2008 | ||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net Income
|
$ | 154,684 | $ | 98,679 | $ | 128,914 | ||||||
|
Adjustments to Reconcile Net Income to Net Cash
|
||||||||||||
|
Provided from Operating Activities:
|
||||||||||||
|
Depreciation
|
52,918 | 49,730 | 45,963 | |||||||||
|
Amortization
|
19,951 | 19,414 | 15,638 | |||||||||
|
Stock-based Compensation
|
6,747 | 4,752 | 4,580 | |||||||||
|
Provision for Deferred Income Taxes
|
690 | 7,718 | 6,027 | |||||||||
|
Excess Tax Benefits from Stock-based Compensation
|
(1,735 | ) | (2,808 | ) | (2,463 | ) | ||||||
|
Losses on Property, Plant and Equipment
|
4,659 | 5,172 | 124 | |||||||||
|
Non-Cash Convertible Debt Deferred Financing Costs
|
— | 1,063 | 4,938 | |||||||||
|
Changes in Assets and Liabilities, Net of Acquisitions:
|
||||||||||||
|
Receivables
|
(30,398 | ) | 48,905 | 32,420 | ||||||||
|
Inventories
|
(56,369 | ) | 86,593 | (8,882 | ) | |||||||
|
Accounts Payable
|
24,457 | (39,327 | ) | (22,553 | ) | |||||||
|
Current Liabilities and Other
|
(216 | ) | 35,028 | (50,507 | ) | |||||||
|
|
||||||||||||
|
Net Cash Provided from Operating Activities
|
175,388 | 314,919 | 154,199 | |||||||||
|
CASH FLOW FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Additions to Property, Plant and Equipment
|
(44,994 | ) | (33,604 | ) | (52,209 | ) | ||||||
|
Purchases of Investment Securities
|
(416,797 | ) | (117,553 | ) | — | |||||||
|
Sales of Investment Securities
|
477,514 | — | — | |||||||||
|
Business Acquisitions, Net of Cash Acquired
|
(211,916 | ) | (1,500 | ) | (49,702 | ) | ||||||
|
Sale of Property, Plant and Equipment
|
1,496 | 1,033 | 2,238 | |||||||||
|
|
||||||||||||
|
Net Cash Used in Investing Activities
|
(194,697 | ) | (151,624 | ) | (99,673 | ) | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Long-Term Debt Proceeds
|
— | — | 165,200 | |||||||||
|
Net Proceeds from the Sale of Common Stock
|
— | 150,370 | — | |||||||||
|
Net Repayments of Short-Term Borrowings
|
(8,448 | ) | (6,866 | ) | (11,820 | ) | ||||||
|
Payments of Long-Term Debt
|
(184 | ) | (215 | ) | (324 | ) | ||||||
|
Net Repayments Under Revolving Credit Facility
|
(2,863 | ) | (17,066 | ) | (162,700 | ) | ||||||
|
Proceeds from the Exercise of Stock Options
|
3,759 | 5,767 | 2,880 | |||||||||
|
Repayments of Convertible Debt
|
(39,198 | ) | (75,802 | ) | — | |||||||
|
Excess Tax Benefits from Stock-based Compensation
|
1,735 | 2,808 | 2,463 | |||||||||
|
Financing Fees Paid
|
— | — | (454 | ) | ||||||||
|
Distribution to Noncontrolling Interests
|
— | (4,468 | ) | (3,044 | ) | |||||||
|
Purchases of Treasury Stock
|
— | — | (4,191 | ) | ||||||||
|
Dividends Paid to Shareholders
|
(25,096 | ) | (21,607 | ) | (19,426 | ) | ||||||
|
|
||||||||||||
|
Net Cash (Used in) Provided from Financing Activities
|
(70,295 | ) | 32,921 | (31,416 | ) | |||||||
|
EFFECT OF EXCHANGE RATES ON CASH:
|
1,713 | 956 | (434 | ) | ||||||||
|
Net (Decrease) Increase in Cash and Cash Equivalents
|
(87,891 | ) | 197,172 | 22,676 | ||||||||
|
Cash and Cash Equivalents at Beginning of Year
|
262,422 | 65,250 | 42,574 | |||||||||
|
|
||||||||||||
|
Cash and Cash Equivalents at End of Year
|
$ | 174,531 | $ | 262,422 | $ | 65,250 | ||||||
|
|
||||||||||||
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||||||
|
Cash Paid During the Year for:
|
||||||||||||
|
Interest
|
$ | 20,075 | $ | 24,105 | $ | 26,877 | ||||||
|
Income Taxes
|
74,533 | 22,153 | 68,653 | |||||||||
See accompanying Notes to the Consolidated Financial Statements.
Page 43
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For The Three Years Ended January 1, 2011
(1) Nature of Operations
Regal Beloit Corporation (the “Company”) is a United States-based multinational corporation. The
Company reports in two segments; the Electrical segment, with its principal line of business in
electric motors and power generation products, and the Mechanical segment, with its principal line
of business in mechanical products which control motion and torque. The principal markets for the
Company’s products and technologies are within the United States.
(2) Basis of Presentation
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
The fiscal year ended January 1, 2011 was 52 weeks as compared to the fiscal year ended January 2,
2010 which was 53 weeks.
(3) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and
majority owned subsidiaries. In addition, the Company has a 50/50 joint venture in China that is
consolidated as over half of the joint venture sales are to Regal Beloit Corporation owned
entities. All 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. The costs incurred from shipping and handling are recorded in Cost of Sales.
Research and Development
The Company performs research and development activities relating to new product development and
the improvement of current products. Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments which are readily convertible to cash,
present insignificant risk of changes in value due to interest rate fluctuations and have original
or purchased maturities of three months or less. The Company had a material amount of cash held on
deposit at two financial institutions as of January 1, 2011. While this constitutes a
concentration of credit risk, the Company believes these institutions to be financially stable.
Investments
Investments consist of marketable debt and equity securities with original maturities of greater
than three months and remaining maturities of less than one year. Investments with maturities
greater than one year may be classified as short term based on their highly liquid nature and their
availability to fund future investing activities.
Trade Receivables
Trade receivables are stated at estimated net realizable value. Trade receivables are comprised of
balances due from customers, net of estimated allowances. In determining collectability,
historical trends are evaluated and specific customer issues are reviewed to arrive at appropriate
allowances.
Page 44
Table of Contents
Inventories
The approximate percentage distribution between major classes of inventory at year end is as
follows:
| 2010 | 2009 | |||||||
|
Raw Material and Work in Process
|
36 | % | 34 | % | ||||
|
Finished Goods and Purchased Parts
|
64 | % | 66 | % | ||||
Inventories are stated at cost, which is not in excess of market. Cost for approximately 46% of the
Company’s inventory at January 1, 2011 and 56% at January 2, 2010 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 $58.3 million and $35.8 million as of January 1, 2011 and January 2,
2010, respectively. Material, labor and factory overhead costs are included in the inventories.
The Company reviews inventories for excess and obsolete products or components. Based on an
analysis of historical usage and management’s evaluation of estimated future demand, market
conditions and alternative uses for possible excess or obsolete parts, the Company records
inventories at net realizable value.
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost. Depreciation of plant and equipment is provided
principally on a straight-line basis over the estimated useful lives (3 to 40 years) of the
depreciable assets. Accelerated methods are used for income tax purposes.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures which
extend the useful lives of existing equipment are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is recognized. Leasehold
improvements are capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.
Commitments for property, plant, and equipment purchases were $5.5 million at January 1, 2011.
Goodwill and Intangible Assets
Goodwill and Intangibles Assets result from the acquisition of existing businesses by the Company.
Goodwill is not amortized; however; it is tested for impairment annually at the fiscal October
month end with any resulting adjustment charged to the results of operations. Amortization of
Intangible Assets with definite lives is recorded over the estimated life of the asset.
Earnings per Share (EPS)
Diluted earnings per share is computed based upon earnings applicable to common shares divided by
the weighted-average number of common shares outstanding during the period adjusted for the effect
of other dilutive securities. Options for common shares where the exercise price was above the
market price have been excluded from the calculation of effect of dilutive securities shown below;
the amount of these shares were 0.3 million in 2010, zero in 2009, and 0.9 million for 2008. The
following table reconciles the basic and diluted shares used in the per share calculations for the
three years ended January 1, 2011 (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Denominator for basic EPS
|
38.2 | 34.5 | 31.3 | |||||||||
|
Effect of dilutive securities
|
0.7 | 1.6 | 1.9 | |||||||||
|
|
||||||||||||
|
Denominator for diluted EPS
|
38.9 | 36.1 | 33.2 | |||||||||
|
|
||||||||||||
The “Effect of dilutive securities” represents the dilution impact of equity awards and the
convertible notes (see Note 10 of the Consolidated Financial Statements). The dilutive effect of
conversion of certain of the Company’s convertible notes into shares of common stock was
approximately, 0.3 million shares, 1.3 million shares, 1.5 million shares for fiscal years 2010,
2009 and 2008, respectively.
Retirement Plans
Approximately half of the Company’s domestic employees are covered by defined benefit pension plans
with the remaining employees covered by defined contribution plans. The defined benefit pension
plans covering a majority of the Company’s domestic employees were frozen to new employees as of
January 1, 2009. Most of the Company’s foreign employees are covered by government sponsored plans
in the countries in which they are employed. The Company’s obligations under its defined benefit
pension plans are determined with the assistance of actuarial firms. The actuaries make certain
assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also
provide 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.
Page 45
Table of Contents
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 pension plans may change significantly from year to year. Based on
the annual review of actuarial assumptions as well as historical rates of return on plan assets and
existing long-term bond rates, the Company sets the long-term rate of return on plan assets at
8.25% and used a discount rate ranging from 5.2% to 5.9% for its defined benefit pension plans as
of January 1, 2011. (See also Note 9 of the Consolidated Financial Statements).
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by
various U.S. Federal, state and foreign jurisdictions for various tax periods. Its income tax
positions are based on research and interpretations of the income tax laws and rulings in each of
the jurisdictions in which it does 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, estimates of income tax liabilities may differ from actual payments or assessments.
Foreign Currency Translation
For those operations using a functional currency other than the U.S. dollar, assets and liabilities
are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at weighted-average exchange rates. The resulting translation adjustments are recorded
as a separate component of shareholders’ equity.
Impairment of Long-Lived Assets and Amortizable Intangible Assets
Property, Plant and Equipment and Intangible Assets Net of Amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. The Company assesses these assets for impairment when the undiscounted expected
future cash flows derived from an asset are less than its carrying value. If the Company
determines that an asset is impaired, then it measures the impairment as the amount by which the
carrying value exceeds fair value. Such analyses necessarily involve significant estimates.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its
products. Such reserves are established based on an evaluation of historical warranty experience
and specific significant warranty matters when they become known and can reasonably be estimated.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and
pension liability adjustments are included in shareholders’ equity under accumulated other
comprehensive loss. The components of the ending balances of Accumulated Other Comprehensive Loss
are as follows (in thousands):
| 2010 | 2009 | |||||||
|
Translation adjustments
|
$ | 23,190 | $ | (5,100 | ) | |||
|
Hedging activities, net of tax
|
2,842 | (18,402 | ) | |||||
|
Pension and post retirement benefits, net of tax
|
(27,732 | ) | (25,095 | ) | ||||
|
|
||||||||
|
Total
|
$ | (1,700 | ) | $ | (48,597 | ) | ||
|
|
||||||||
Derivative Instruments
Derivative instruments are recorded on the consolidated balance sheet at fair value as determined
under accounting guidance that establishes criteria for designation and effectiveness of the
hedging relationships. Any fair value changes are recorded in net earnings or Accumulated Other
Comprehensive Income (Loss).
The Company uses derivative instruments to manage its exposure to fluctuations in certain raw
material commodity pricing, fluctuations in the cost of forecasted foreign currency transactions,
and variability in interest rate exposure on floating rate borrowings. These derivative instruments
have been designated as cash flow hedges. (See Note 14 to the Consolidated Financial Statements.)
Legal Claims
The Company records expenses and liabilities when the Company believes that an obligation of the
Company on a specific matter is probable and there is a basis to reasonably estimate the value of
the obligation. This methodology is used for legal claims that are filed against the Company from
time to time. The uncertainty that is associated with such matters frequently requires adjustments
to the liabilities previously recorded.
Page 46
Table of Contents
Fair Values
The fair values of cash equivalents, receivables, inventories, prepaid expenses, accounts payable,
and accrued expenses approximate the carrying values due to the short period of time to maturity.
The fair value of long-term debt is estimated using discounted cash flows based on the Company’s
current incremental borrowing rates, except for the convertible senior subordinated debt discussed
in Note 8, and the fair value of investments, pension assets, and derivative instruments is determined based on
inputs as defined in Note 15 of the Consolidated Financial Statements.
As of the beginning of fiscal 2009, the Company adopted accounting guidance, which requires an
adjustment of convertible debt, equity, and interest expense. The guidance requires that a fair
value be assigned to the equity conversion option of the Company’s $115.0 million original par
value and then outstanding, 2.75% convertible senior subordinated notes (the “Convertible Notes”)
as of April 5, 2004, the date of issuance of the Convertible Notes. This change results in a
corresponding decrease in the value assigned to the debt portion of the instrument.
The value assigned to the debt portion of the Convertible Notes was determined based on market
interest rates for similar debt instruments without the conversion feature as of April 5, 2004, the
issuance date of the Convertible Notes. The difference in this interest rate versus the coupon
rate on the Convertible Notes is then amortized into interest expense over the expected term of the
Convertible Notes. For purposes of the valuation, the Company used an expected term of five years,
which represents the first anniversary date at which holders of the Convertible Notes may put their
Convertible Notes back to the Company.
In 2009, bondholders exercised their conversion right for a total of $75.8 million face value of
bonds. The remaining $39.2 million face value of bonds were redeemed in fiscal 2010. The Company
paid cash to redeem the par value and the conversion premium was paid through issuance of
approximately 2.3 million shares of stock for the total redemption of $115.0 million. (See Note 8
of the Consolidated Financial Statements.)
(5) Acquisitions
The results of operations for acquired businesses are included in the Consolidated Financial
Statements from the dates of acquisition.
On December 23, 2010, the Company acquired Unico, Inc. (“Unico”), located in Franksville,
Wisconsin. Unico manufactures a full range of AC and DC drives, motor controllers and other
accessories for most industrial and commercial applications. Unico has developed proprietary
technology in the fields of oil and gas recovery technology, commercial HVAC technology, test stand
automation and other applications. The preliminary purchase price of $105.1 million was paid in
cash, net of acquired debt and cash. In addition to the cash paid, the Company agreed to pay an
additional amount should certain performance thresholds be met. At January 1, 2011, the Company
has recorded a liability of $11.0 million for this consideration. Unico is reported as part of the
Company’s Electrical segment.
On December 1, 2010, the Company acquired South Pacific Rewinders (“SPR”), located in Auckland, New
Zealand. SPR operates as a motor rewinder and distributor in the Pacific region.
On November 1, 2010, the Company acquired 55% of Elco Group B.V. (“Elco”), located in Milan, Italy.
Elco manufactures and sells motors, fans and blowers and has manufacturing facilities in Italy,
China and Brazil. The purchase price was $26.9 million, net of acquired debt and cash. The
purchase price includes $4.6 million in cash, net of acquired debt and cash, paid at closing and
$22.3 million which will be paid in four semi-annual payments. Elco is reported as part of the
Company’s Electrical segment.
On September 1, 2010, the Company acquired Rotor B.V. (“Rotor”), located in Eibergen, the
Netherlands. Rotor sells standard and special electric motors to a variety of industries including
the marine industry, ship building and offshore oil and gas. In addition to the Netherlands, Rotor
also sells throughout Europe, the United Kingdom and Japan. The purchase price of $36.4 million
was paid in cash, net of acquired debt and cash. Rotor is reported as part of the Company’s
Electrical segment.
On May 4, 2010, the Company acquired Air-Con Technology (“Air-Con”), located in Mississauga,
Ontario, Canada. Air-Con is a distributor of HVACR electric motors.
On April 6, 2010, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”), located in
Melbourne, Australia. CMG manufactures and sells fractional horsepower industrial motors, blower
systems, and industrial metal products with operations in Australia, New Zealand, South Africa,
Malaysia, Singapore, the United Kingdom and the Middle East. The business also distributes
integral horsepower industrial motors, mechanical power transmission products, material handling
equipment, electrical insulation materials, magnet wire and specialty conductors in Australia and
New Zealand. The purchase price was $82.6 million, net of acquired debt and cash. The purchase
price was paid $76.5 million in cash and $6.1 million in shares of Company common stock. CMG is
reported as part of our Electrical and Mechanical segments.
Page 47
Table of Contents
In January 2009, the Company acquired Custom Power Technologies (“CPT”), a custom power electronics
business located in Menomonee Falls, Wisconsin.
Pending Acquisition
On December 12, 2010, Regal Beloit Corporation and A.O. Smith Corporation (NYSE: AOS) entered into
an agreement where Regal Beloit Corporation will acquire 100% of the stock and assets of the
Electrical Products Company (“EPC”) of A.O. Smith Corporation. The total consideration for the
transaction is $875 million, including $700 million of cash and $175 million in shares of Regal
Beloit common stock. Closing on the transaction is subject to all customary regulatory approvals,
which are still pending as of the date of this filing.
(6) Investments
The Company has cash invested in trading securities as of January 1, 2011 and January 2, 2010.
These securities are generally short term in duration and are reported at fair value with gains and
losses, which were insignificant in 2010 and 2009, included in earnings. As of January 1, 2011 and
January 2, 2010, the Company had $56.3 and $117.6 million of trading securities recorded at fair
value (see Note 15 of the Consolidated Financial Statements for description of the fair value
hierarchy).
| January 1, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Municipal Debt Securities
|
29,844 | — | 29,844 | — | ||||||||||||
|
Asset Backed Securities
|
20,464 | — | 20,464 | — | ||||||||||||
|
Other Securities
|
6,019 | — | 6,019 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 56,327 | $ | — | $ | 56,327 | $ | — | ||||||||
|
|
||||||||||||||||
| January 2, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Commercial Paper
|
$ | 37,473 | $ | — | $ | 37,473 | $ | — | ||||||||
|
U.S. Government Securities
|
4,202 | — | 4,202 | — | ||||||||||||
|
Municipal Debt Securities
|
48,294 | — | 48,294 | — | ||||||||||||
|
Asset Backed Securities
|
5,773 | — | 5,773 | — | ||||||||||||
|
Corporate Debt Securities
|
21,811 | — | 21,811 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 117,553 | $ | — | $ | 117,553 | $ | — | ||||||||
|
|
||||||||||||||||
(7) Goodwill and Intangible Assets
Goodwill
As required, the Company performs an annual impairment test of goodwill during the fourth quarter
or more frequently if events or circumstances change that would more likely than not reduce the
fair value of its reporting units below their carrying value.
As a result of its 2009 annual
goodwill impairment review process, the Company recorded a $0.5
million impairment for its Mechanical reporting unit, primarily related to auto and marine products
that are dependent on consumer discretionary spending that did not
meet their performance plans.
As described in Note 5 of the Consolidated Financial Statements, the Company acquired six
businesses in 2010 and one business in 2009. The excess of purchase price over estimated fair
value was assigned to goodwill.
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The Company believes that substantially all of the goodwill is deductible for tax purposes. The
following information presents changes to goodwill during the periods indicated (in thousands):
| Electrical | Mechanical | Total | ||||||||||
| Segment | Segment | Company | ||||||||||
|
Balance, December 27, 2008
|
$ | 671,945 | $ | 530 | $ | 672,475 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net Acquistions and Fair Value Adjustments
|
$ | (7,243 | ) | $ | — | $ | (7,243 | ) | ||||
|
Impairment
|
— | (530 | ) | (530 | ) | |||||||
|
Translation Adjustments
|
(782 | ) | — | (782 | ) | |||||||
|
|
||||||||||||
|
Balance, January 2, 2010
|
$ | 663,920 | $ | — | $ | 663,920 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Acquisitions
|
90,875 | 11,040 | 101,915 | |||||||||
|
Translation Adjustments
|
8,340 | 1,196 | 9,536 | |||||||||
|
|
||||||||||||
|
Balance, January 1, 2011
|
$ | 763,135 | $ | 12,236 | $ | 775,371 | ||||||
|
|
||||||||||||
Intangible Assets
Intangible assets consists of the following (in thousands):
Gross Intangibles
| Useful Life | January 2, | Translation | January 1, | |||||||||||||||
| Asset Description | (years) | 2010 | Acquisitions | Adjustments | 2011 | |||||||||||||
|
Non-Compete Agreements
|
3 - 5 | $ | 6,348 | $ | 1,100 | $ | 102 | $ | 7,550 | |||||||||
|
Trademarks
|
3 - 20 | 21,200 | 9,213 | 566 | 30,979 | |||||||||||||
|
Patents
|
10 | 15,410 | — | — | 15,410 | |||||||||||||
|
Engineering Drawings
|
10 | 1,200 | — | — | 1,200 | |||||||||||||
|
Customer Relationships
|
3 - 17 | 98,064 | 39,385 | 1,899 | 139,348 | |||||||||||||
|
Technology
|
3 - 9 | 33,183 | 26,542 | 875 | 60,600 | |||||||||||||
|
|
||||||||||||||||||
|
Total Gross Intangibles
|
$ | 175,405 | $ | 76,240 | $ | 3,442 | $ | 255,087 | ||||||||||
|
|
||||||||||||||||||
Accumulated Amortization
| Useful Life | January 2, | Translation | January 1, | |||||||||||||||
| Asset Description | (years) | 2010 | Amortization | Adjustments | 2011 | |||||||||||||
|
Non-Compete Agreements
|
3 - 5 | $ | (4,997 | ) | $ | (789 | ) | $ | (93 | ) | $ | (5,879 | ) | |||||
|
Trademarks
|
3 - 20 | (7,658 | ) | (1,980 | ) | (121 | ) | (9,759 | ) | |||||||||
|
Patents
|
10 | (7,732 | ) | (1,542 | ) | — | (9,274 | ) | ||||||||||
|
Engineering Drawings
|
10 | (607 | ) | (120 | ) | — | (727 | ) | ||||||||||
|
Customer Relationships
|
3 - 17 | (29,325 | ) | (11,349 | ) | (167 | ) | (40,841 | ) | |||||||||
|
Technology
|
3 - 9 | (8,660 | ) | (4,171 | ) | (286 | ) | (13,117 | ) | |||||||||
|
|
||||||||||||||||||
|
Total Accumulated
Amortization
|
$ | (58,979 | ) | $ | (19,951 | ) | $ | (667 | ) | $ | (79,597 | ) | ||||||
|
|
||||||||||||||||||
|
|
||||||||||||||||||
|
Intangible Assets,
Net of Amortization
|
$ | 116,426 | $ | 175,490 | ||||||||||||||
|
|
||||||||||||||||||
Amortization expense was $20.0 million in fiscal 2010, $19.4 million in fiscal 2009, and $15.6
million in fiscal 2008.
Estimated Amortization (in millions)
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||
| $ | 26.8 | $ | 26.4 | $ | 26.1 | $ | 25.0 | $ | 17.6 | |||||||||
Page 49
Table of Contents
(8) Debt and Bank Credit Facilities
The Company’s indebtedness as of January 1, 2011 and January 2, 2010 was as follows (in thousands):
| January 1, | January 2, | |||||||
| 2011 | 2010 | |||||||
|
Senior notes
|
$ | 250,000 | $ | 250,000 | ||||
|
Term Loan
|
165,000 | 165,000 | ||||||
|
Revolving credit facility
|
— | 2,863 | ||||||
|
Convertible senior subordinated debt
|
— | 39,198 | ||||||
|
Other
|
21,893 | 19,389 | ||||||
|
|
||||||||
|
|
436,893 | 476,450 | ||||||
|
Less: Current maturities
|
(8,637 | ) | (8,385 | ) | ||||
|
|
||||||||
|
Non-current portion
|
$ | 428,256 | $ | 468,065 | ||||
|
|
||||||||
At January 1, 2011, the Company has $250.0 million of senior notes (the “Notes”) outstanding. The
Notes were sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among the Company
and the purchasers of the Notes. The Notes were issued and sold in two series: $150.0 million in
Floating Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in
Floating Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest
at a margin over the London Inter-Bank Offered Rate (“LIBOR”). These interest rates vary as LIBOR
varies. The Agreement permits the Company to issue and sell additional note series, subject to
certain terms and conditions described in the Agreement, up to a total of $600.0 million in
combined Notes. At January 1, 2011 the interest rate of 0.9% was based on a margin over LIBOR.
On June 16, 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain
financial institutions, whereby the Company borrowed an aggregate principal amount of $165.0
million. The Term Loan matures in June 2013, and borrowings generally bear interest at a variable
rate equal to a margin over LIBOR, this margin varies with the ratio of the Company’s consolidated
debt to consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as
defined in the Agreement. These interest rates also vary as LIBOR varies. At January 1, 2011, the
interest rate of 1.0% was based on a margin over LIBOR.
The Company’s $500.0 million revolving credit facility (the “Facility”) permits the Company to
borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of
senior funded debt to EBITDA as defined in the Facility. These interest rates also vary as LIBOR
varies. The Company pays a commitment fee on the unused amount of the Facility, which also varies
with the ratio of senior funded debt to EBITDA. The Facility matures in April 2012. The average
balance outstanding under the Facility in 2010 was $1.4 million and in 2009 was $11.4 million. The
average interest rate paid under the Facility was 1.2% in 2010 and 1.3% in 2009. The Company had
$454.2 million of available borrowing capacity under the Facility at January 1, 2011.
The Notes, the Term Loan and the Facility require us to meet specified financial ratios and to
satisfy certain financial condition tests. The Company was in compliance with all financial covenants as
of January 1, 2011.
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from
interest rate risk. (See also Note 14 to the Consolidated Financial Statements).
As of January 1, 2011, the Company has no Convertible Notes that remain outstanding. During the
year ended January 1, 2011, the final $39.2 million face value bonds were converted. The Company
paid the par value in cash and issued approximately 0.9 million shares for the conversion premium.
During 2009, bondholders exercised their conversion right for a total of $75.8 million of
Convertible Notes. The par value of those Convertible Notes were paid in cash and the conversion
premium was paid through issuance of approximately 1.4 million shares of stock.
The Company had $39.2 million of convertible senior subordinated notes outstanding at January 2,
2010. The fair value of these notes at January 2, 2010 was approximately $82.8 million.
At January 1, 2011, a foreign subsidiary of the Company had outstanding short-term borrowings of
$7.0 million, denominated in local currency with a fixed interest rate of 5.6%. At January 2,
2010, a foreign subsidiary of the Company had outstanding short-term borrowings of $8.2 million,
denominated in local currency with a weighted average interest rate of 1.9%.
At January 1, 2011, additional notes payable of approximately $14.9 million were outstanding with a
weighted average interest rate of 4.7%.
Page 50
Table of Contents
Maturities of long-term debt are as follows (in thousands):
| Year | ||||
|
2011
|
$ | 8,637 | ||
|
2012
|
508 | |||
|
2013
|
165,524 | |||
|
2014
|
150,514 | |||
|
2015
|
539 | |||
|
Thereafter
|
111,171 | |||
|
|
||||
|
Total
|
$ | 436,893 | ||
|
|
||||
(9) Retirement Plans
The Company has a number of retirement plans that cover most of its domestic employees. The
defined benefit pension plans covering a majority of the Company’s domestic employees were frozen
to new employees as of January 1, 2009. Most foreign employees are covered by government sponsored
plans in the countries in which they are employed. The domestic employee plans include defined
contribution plans and defined benefit pension plans. The defined contribution plans provide for
Company contributions based, depending on the plan, upon one or more of participant contributions,
service and profits. Company contributions to defined contribution plans totaled $4.3 million, $4.9
million, and $4.8 million in 2010, 2009, and 2008, respectively.
Benefits provided under defined benefit pension plans are based, depending on the plan, on
employees’ average earnings and years of credited service, or a benefit multiplier times years of
service. Funding of these qualified defined benefit pension plans is in accordance with federal
laws and regulations. The actuarial valuation measurement date for pension plans is as of fiscal
year end for all periods.
The Company’s defined benefit pension assets are invested in equity securities and fixed income
investments based on the Company’s overall strategic investment direction as follows:
| Target | ||||||||
| Allocation | Return | |||||||
|
Equity investments
|
75 | % | 9-10 | % | ||||
|
Fixed income
|
25 | % | 5.5-6.5 | % | ||||
|
|
||||||||
|
Total
|
100 | % | 8.25 | % | ||||
|
|
||||||||
The Company’s investment strategy for its defined benefit pension plans is to achieve moderately
aggressive growth, earning a long-term rate of return sufficient to allow the plans to reach fully
funded status. Accordingly, allocation targets have been established to fit this strategy, with a
heavier long-term weighting of investments in equity securities. The long-term rate of return
assumptions consider historic returns and volatilities adjusted for changes in overall economic
conditions that may affect future returns and a weighting of each investment class.
Page 51
Table of Contents
The following table presents a reconciliation of the funded status of the defined benefit pension
plans (in thousands):
| 2010 | 2009 | |||||||
|
Change in projected benefit obligation:
|
||||||||
|
Obligation at beginning of period
|
$ | 116,833 | $ | 103,039 | ||||
|
Service cost
|
2,164 | 2,262 | ||||||
|
Interest cost
|
6,899 | 6,956 | ||||||
|
Actuarial loss
|
8,527 | 9,938 | ||||||
|
Plan amendments
|
1,120 | — | ||||||
|
Benefits paid
|
(4,862 | ) | (4,788 | ) | ||||
|
Foreign currency translation
|
(38 | ) | 973 | |||||
|
Acquisitions/other
|
16,532 | (1,547 | ) | |||||
|
|
||||||||
|
Obligation at end of period
|
$ | 147,175 | $ | 116,833 | ||||
|
|
||||||||
|
|
||||||||
|
Change in fair value of plan assets:
|
||||||||
|
Fair value of plan assets at beginning of period
|
$ | 76,460 | $ | 58,063 | ||||
|
Actual return on plan assets
|
9,227 | 14,001 | ||||||
|
Employer contributions
|
4,052 | 10,110 | ||||||
|
Benefits paid
|
(4,862 | ) | (4,788 | ) | ||||
|
Foreign currency translation
|
(368 | ) | 549 | |||||
|
Acquisitions/other
|
9,975 | (1,475 | ) | |||||
|
|
||||||||
|
Fair value of plan assets at end of period
|
$ | 94,484 | $ | 76,460 | ||||
|
|
||||||||
|
|
||||||||
|
Funded status
|
$ | (52,691 | ) | $ | (40,373 | ) | ||
|
|
||||||||
Page 52
Table of Contents
The fair value of plan assets is based on inputs used to measure fair value as described in Note 15
of the Consolidated Financial Statements (in thousands):
| January 1, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Cash
|
$ | 1,431 | $ | 1,431 | $ | — | $ | — | ||||||||
|
Money Market Funds
|
3,881 | 3,881 | — | — | ||||||||||||
|
U.S. Government Obligations
|
1,794 | — | 1,794 | — | ||||||||||||
|
Common Stocks
|
||||||||||||||||
|
Domestic Equities
|
15,146 | 15,146 | — | — | ||||||||||||
|
International Equities
|
6,622 | — | 6,622 | — | ||||||||||||
|
Common Collective Trust Funds
|
||||||||||||||||
|
Fixed Income Funds
|
18,563 | — | 18,563 | — | ||||||||||||
|
U.S. Equity Funds
|
27,084 | — | 27,084 | — | ||||||||||||
|
International Equity Funds
|
7,494 | — | 7,494 | |||||||||||||
|
Mutual Funds
|
||||||||||||||||
|
Fixed Income Funds
|
659 | — | 659 | — | ||||||||||||
|
U.S. Equity Funds
|
2,072 | 2,072 | — | — | ||||||||||||
|
International Equity Funds
|
9,738 | 9,738 | — | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 94,484 | $ | 32,268 | $ | 62,216 | $ | — | ||||||||
|
|
||||||||||||||||
| January 2, 2010 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
|
Cash
|
$ | 1,169 | $ | 1,169 | $ | — | $ | — | ||||||||
|
Money Market Funds
|
1,220 | 1,220 | — | — | ||||||||||||
|
Common Stocks
|
||||||||||||||||
|
Domestic Equities
|
21,883 | 21,883 | — | — | ||||||||||||
|
International Equities
|
5,915 | 3,403 | 2,512 | — | ||||||||||||
|
Common Collective Trust Funds
|
||||||||||||||||
|
Fixed Income Funds
|
17,777 | — | 17,777 | — | ||||||||||||
|
U.S. Equity Funds
|
13,127 | — | 13,127 | — | ||||||||||||
|
International Equity Funds
|
7,377 | — | 7,377 | — | ||||||||||||
|
Mutual Funds
|
||||||||||||||||
|
International Equity Funds
|
7,992 | — | 7,992 | — | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 76,460 | $ | 27,675 | $ | 48,785 | $ | — | ||||||||
|
|
||||||||||||||||
The Company recognized the funded status of its defined benefit pension plans on the balance sheet
as follows (in thousands):
| 2010 | 2009 | |||||||
|
Other Accrued Expenses
|
$ | (1,564 | ) | $ | (1,067 | ) | ||
|
Pension and Other Post Retirement Benefits
|
(51,127 | ) | (39,306 | ) | ||||
|
|
||||||||
|
|
$ | (52,691 | ) | $ | (40,373 | ) | ||
|
|
||||||||
|
|
||||||||
|
Amounts Recognized in Accumulated
Other Comprehensive Income
|
||||||||
|
Net actuarial loss
|
$ | 36,600 | $ | 37,497 | ||||
|
Prior service cost
|
2,108 | 1,531 | ||||||
|
Acquisitions
|
2,398 | — | ||||||
|
|
||||||||
|
|
$ | 41,106 | $ | 39,028 | ||||
|
|
||||||||
The accumulated benefit obligation for all defined benefit pension plans was $110.7 million and
$96.6 million at January 1, 2011 and January 2, 2010, respectively.
Page 53
Table of Contents
The following table presents information for defined benefit pension plans with accumulated benefit
obligations in excess of plan assets (in thousands):
| 2010 | 2009 | |||||||
|
Projected benefit obligation
|
$ | 147,175 | $ | 116,833 | ||||
|
Accumulated benefit obligation
|
$ | 110,683 | $ | 96,625 | ||||
|
Fair value of plan assets
|
$ | 94,484 | $ | 76,460 | ||||
The following weighted-average assumptions were used to determine the projected benefit obligation
at year end:
| 2010 | 2009 | |||
|
Discount rate
|
5.15% to 5.93% | 5.67% to 6.27% | ||
|
Expected long-term rate of return of assets
|
8.25% | 8.25% |
Certain of the Company’s defined benefit pension plan obligations are based on years of service
rather than on projected compensation percentage increases. For those plans that use compensation
increases in the calculation of benefit obligations and net periodic pension cost, the Company used
an assumed rate of compensation increase of 3.0% for the years ended January 1, 2011 and January 2,
2010.
Net periodic pension benefit costs for the defined benefit pension plans were as follows (in
thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Service cost
|
$ | 2,164 | $ | 2,420 | $ | 4,051 | ||||||
|
Interest cost
|
6,899 | 5,778 | 5,831 | |||||||||
|
Expected return on plan assets
|
(6,448 | ) | (5,068 | ) | (5,482 | ) | ||||||
|
Amortization of net actuarial loss
|
2,401 | 759 | 716 | |||||||||
|
Amortization of prior service cost
|
399 | 189 | 199 | |||||||||
|
|
||||||||||||
|
Net periodic benefit cost
|
$ | 5,415 | $ | 4,078 | $ | 5,315 | ||||||
|
|
||||||||||||
For fiscal 2010, the net actuarial loss and prior service cost for the defined benefit pension
plans that was amortized into periodic pension benefit cost was $2.4 million and $0.4 million,
respectively.
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that
will be amortized from AOCI into net periodic benefit cost during the 2011 fiscal year are $3.3
million and $0.2 million, respectively.
As permitted under relevant accounting guidance, the amortization of any prior service cost is
determined using a straight-line amortization of the cost over the average remaining service period
of employees expected to receive benefits under the plans.
The following assumptions were used to determine net periodic pension cost for fiscal years 2010,
2009 and 2008, respectively.
| 2010 | 2009 | 2008 | ||||||
|
Discount rate
|
5.67% to 6.27% | 6.85% to 6.95% | 6.36% to 6.68% | |||||
|
Expected long-term rate of return on assets
|
8.25% | 8.25% | 8.25 | % | ||||
The Company estimates that in 2011, it will make contributions in the amount of $2.2 million
to fund its defined benefit pension plans.
Page 54
Table of Contents
The following pension benefit payments, which reflect expected future service, as appropriate, are
expected to be paid (in millions):
| Year | Expected Payments | |||
|
2011
|
$ | 6.2 | ||
|
2012
|
6.4 | |||
|
2013
|
8.3 | |||
|
2014
|
8.6 | |||
|
2015
|
9.1 | |||
|
2016-2020
|
53.9 | |||
(10) Shareholders’ Equity
The Company recognized approximately $6.7 million, $4.8 million, and $4.6 million in share-based
compensation expense in 2010, 2009 and 2008, respectively. The Company recognizes compensation
expense on grants of share-based compensation awards on a straight-line basis over the vesting
period of each award. As of January 1, 2011, total unrecognized compensation cost related to
share-based compensation awards was approximately $17.6 million, net of estimated forfeitures,
which the Company expects to recognize over a weighted average period of approximately 2.8 years.
The total income tax benefit recognized relating to share-based compensation for the year ended
January 1, 2011 was approximately $1.7 million.
Under the Company’s stock plans, the Company was authorized as of January 1, 2011 to deliver up to
5.0 million shares of common stock upon exercise of non-qualified stock options or incentive stock
options, or upon grant or in payment of stock appreciation rights, and restricted stock.
Approximately 1.8 million shares were available for future grant or payment under the various plans
at January 1, 2011.
On May 22, 2009, the Company completed the sale of 4,312,500 shares of common stock to the public
at a price of $36.25 per share. Net proceeds of $150.4 million were received by the Company.
During fiscal 2010, the Company issued approximately 0.9 million shares to former Convertible Note
holders in settlement of the conversion premium of their redemption. During fiscal 2009, the
Company issued approximately 1.4 million shares, including all 884,100 shares of treasury stock, to
former Convertible Note holders in settlement
of the conversion premium of their redemption. (See Note 8 of the Notes to Consolidated Financial
Statements.)
During fiscal 2008, the Company repurchased 110,000 shares at a total cost of $4.2 million pursuant
to authorization by the Board of Directors. The Company did not repurchase any shares in 2010 or
2009 pursuant to this authorization.
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 (SARs). All grants are made at
prices equal to the fair market value of the stock on the grant dates, and expire ten years from
the grant date.
The per share weighted average fair value of share-based incentive awards granted (options and
SARs) was $22.62 and $15.28 for fiscal 2010 and 2009, respectively. The fair value of the awards
for fiscal 2010 and 2009 were estimated on the date of grant using the Black-Scholes pricing model
and the following weighted average assumptions; expected life of seven years; risk-free interest
rate of 2.8% and 2.6%; expected dividend yield of 1.1% and 1.5%; and expected volatility of 34.8%
and 36.8%, respectively.
The average risk-free interest rate is based on U.S. Treasury security rates in effect as of the
grant date. The expected dividend yield is based on the projected annual dividend as a percentage
of the estimated market value of our common stock as of the grant date. The Company estimated the
expected volatility using a weighted average of daily historical volatility of our stock price over
the expected term of the award. The Company estimated the expected term using historical data
adjusted for the estimated exercise dates of unexercised awards.
Page 55
Table of Contents
Following is a summary of share-based incentive plan grant activity (options and SARs) for fiscal
2010, fiscal 2009 and fiscal 2008:
| Wtd. Avg. | Wtd. Avg. Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic Value | ||||||||||||||
| Shares | Price | Term (years) | (in millions) | |||||||||||||
|
Number of shares under option:
|
||||||||||||||||
|
Outstanding at December 29, 2007
|
1,484,775 | $ | 31.40 | |||||||||||||
|
Granted
|
306,000 | 42.30 | ||||||||||||||
|
Exercised
|
(329,000 | ) | 23.77 | |||||||||||||
|
Forfeited
|
(18,150 | ) | 35.35 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at December 27, 2008
|
1,443,625 | 35.46 | 7.1 | $ | 5.3 | |||||||||||
|
|
||||||||||||||||
|
Exercisable at December 27, 2008
|
660,792 | 27.82 | 5.6 | 4.9 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Outstanding at December 27, 2008
|
1,443,625 | $ | 35.46 | |||||||||||||
|
Granted
|
373,500 | 42.66 | ||||||||||||||
|
Exercised
|
(225,450 | ) | 22.74 | |||||||||||||
|
Forfeited
|
(15,750 | ) | 42.25 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at January 2, 2010
|
1,575,925 | 38.86 | 7.2 | $ | 20.4 | |||||||||||
|
|
||||||||||||||||
|
Exercisable at January 2, 2010
|
585,025 | 33.34 | 5.5 | 10.9 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Outstanding at January 2, 2010
|
1,575,925 | $ | 38.86 | |||||||||||||
|
Granted
|
289,250 | 61.21 | ||||||||||||||
|
Exercised
|
(265,940 | ) | 32.97 | |||||||||||||
|
Forfeited
|
(145,185 | ) | 46.70 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding at January 1, 2011
|
1,454,050 | 43.50 | 6.9 | $ | 33.5 | |||||||||||
|
|
||||||||||||||||
|
Exercisable at January 1, 2011
|
561,150 | 36.93 | 5.3 | 16.7 | ||||||||||||
|
|
||||||||||||||||
The amount of options expected to vest is materially consistent with those outstanding and not
yet exercisable.
The table below presents share-based compensation activity for the three fiscal years ended 2010,
2009 and 2008 (in millions):
| 2010 | 2009 | 2008 | ||||||||||
|
Total intrinsic value of share-based incentive awards exercised
|
$ | 7.4 | $ | 5.7 | $ | 6.3 | ||||||
|
Cash received from stock option exercises
|
3.8 | 5.8 | 2.9 | |||||||||
|
Income tax benefit from the exercise of stock options
|
1.7 | 2.8 | 2.5 | |||||||||
|
Total fair value of share-based incentive awards vested
|
7.0 | 3.5 | 6.5 | |||||||||
Restricted Stock
The Company also granted restricted stock awards to certain employees. The Company restrictions
lapse two to three years after the date of the grant. The Company values restricted stock awards
at the closing market value of its common stock on the date of grant.
A summary of restricted stock activity for fiscal 2010, fiscal 2009 and fiscal 2008:
| Wtd. Avg. | Aggregate | |||||||||||
| Share | Intrinsic Value | |||||||||||
| Shares | Fair Value | (in millions) | ||||||||||
|
Restricted stock balance at December 29,
2007:
|
95,450 | $ | 38.27 | $ | 3.8 | |||||||
|
Granted
|
32,850 | 42.28 | 1.4 | |||||||||
|
Vested
|
(10,200 | ) | 29.75 | (0.3 | ) | |||||||
|
|
||||||||||||
|
Restricted stock balance at December 27,
2008:
|
118,100 | $ | 41.72 | $ | 4.9 | |||||||
|
Granted
|
53,550 | 42.65 | 2.3 | |||||||||
|
Vested
|
(50,700 | ) | 37.55 | (1.9 | ) | |||||||
|
|
||||||||||||
|
Restricted stock balance at January 2, 2010:
|
120,950 | $ | 43.88 | $ | 5.3 | |||||||
|
Granted
|
111,377 | 61.12 | 6.8 | |||||||||
|
Vested
|
(37,100 | ) | 47.06 | (1.7 | ) | |||||||
|
Forfeited
|
(14,050 | ) | 49.07 | (0.7 | ) | |||||||
|
|
||||||||||||
|
Restricted stock balance at January 1, 2011:
|
181,177 | $ | 53.44 | $ | 9.7 | |||||||
|
|
||||||||||||
Page 56
Table of Contents
Treasury Stock
The Board of Directors has approved repurchase programs of up to 3,000,000 common shares of Company
stock. Management is authorized to effect purchases from time to time in the open market or through
privately negotiated transactions. Through December 27, 2008, the Company has repurchased 884,100
shares at an average purchase price of $21.96 per share. During fiscal 2008 the Company
repurchased 110,000 shares for a total cost of $4.2 million. During 2009, approximately 1.4
million shares, including all 884,100 treasury shares, were issued in settlement of the conversion
premium for certain Convertible Notes. (See also Note 8 of the Consolidated Financial Statements.)
(11) Income Taxes
Income Before Taxes and Noncontrolling Interest consisted of the following (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
United States
|
$ | 170,466 | $ | 103,929 | $ | 165,137 | ||||||
|
Foreign
|
50,263 | 34,026 | 34,126 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 220,729 | $ | 137,955 | $ | 199,263 | ||||||
|
|
||||||||||||
The provision for income taxes is summarized as follows (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
|
Current
|
||||||||||||
|
Federal
|
$ | 44,742 | $ | 16,583 | $ | 45,187 | ||||||
|
State
|
6,348 | 2,387 | 7,795 | |||||||||
|
Foreign
|
14,265 | 12,588 | 11,340 | |||||||||
|
|
||||||||||||
|
|
65,355 | 31,558 | 64,322 | |||||||||
|
Deferred
|
690 | 7,718 | 6,027 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 66,045 | $ | 39,276 | $ | 70,349 | ||||||
|
|
||||||||||||
A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in
the consolidated statements of income follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Federal statutory tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State income taxes, net of federal benefit
|
2.2 | 2.3 | 2.6 | |||||||||
|
Domestic production activities deduction
|
(1.0 | ) | (0.7 | ) | (0.9 | ) | ||||||
|
Foreign rate differential
|
(3.9 | ) | (4.2 | ) | 0.3 | |||||||
|
Adjustments to tax accruals and reserves
|
(0.9 | ) | (1.7 | ) | 0.2 | |||||||
|
Other, net
|
(1.5 | ) | (2.2 | ) | (1.9 | ) | ||||||
|
|
||||||||||||
|
Effective tax rate
|
29.9 | % | 28.5 | % | 35.3 | % | ||||||
|
|
||||||||||||
Page 57
Table of Contents
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement
purposes. The Company’s net deferred tax liabilities as of January 1, 2011 of $67.9 million is
classified on the consolidated balance sheet as a net current deferred income tax benefit of $24.9
million and a net non-current deferred income tax liability of $92.8 million. The components of
this net deferred tax asset (liability) are as follows (in thousands):
| January 1, 2011 | January 2, 2010 | |||||||
|
Accrued employee benefits
|
$ | 31,682 | $ | 28,017 | ||||
|
Bad debt reserve
|
2,007 | 3,623 | ||||||
|
Warranty reserve
|
5,836 | 4,446 | ||||||
|
Inventory
|
5,318 | 4,625 | ||||||
|
Accrued liabilities
|
14,225 | 9,655 | ||||||
|
Derivative instruments
|
— | 10,941 | ||||||
|
Other
|
10,514 | 7,705 | ||||||
|
|
||||||||
|
Deferred tax assets
|
69,582 | 69,012 | ||||||
|
|
||||||||
|
Property related
|
(35,432 | ) | (38,498 | ) | ||||
|
Intangible items
|
(100,264 | ) | (66,420 | ) | ||||
|
Derivative instruments
|
(1,821 | ) | — | |||||
|
Convertible debt interest
|
— | (5,839 | ) | |||||
|
|
||||||||
|
Deferred tax liabilities
|
(137,517 | ) | (110,757 | ) | ||||
|
|
||||||||
|
Net deferred tax asset (liability)
|
$ | (67,935 | ) | $ | (41,745 | ) | ||
|
|
||||||||
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in
millions):
| January 1, 2011 | January 2, 2010 | December 27, 2008 | ||||||||||
|
Unrecognized tax benefits — beginning of year
|
$ | 6.6 | $ | 7.1 | $ | 6.8 | ||||||
|
Gross increases — tax positions in prior periods
|
0.8 | 4.1 | — | |||||||||
|
Gross increases — tax positions in the current period
|
0.1 | 0.4 | 0.3 | |||||||||
|
Settlements with taxing authorities
|
— | (0.4 | ) | — | ||||||||
|
Lapse of statute of limitations
|
(2.0 | ) | (4.6 | ) | — | |||||||
|
|
||||||||||||
|
Unrecognized tax benefits end of year
|
$ | 5.5 | $ | 6.6 | $ | 7.1 | ||||||
|
|
||||||||||||
Unrecognized tax benefits as of January 1, 2011 amount to $5.5 million, all of which would impact
the effective income tax rate if recognized.
Potential interest and penalties related to unrecognized tax benefits are recorded in income tax
expense. During fiscal 2010, 2009 and 2008, the Company recognized approximately $0.1 million,
$0.7 million and $0.2 million in net interest expense, respectively. The Company had approximately
$1.0 million, $1.0 million and $1.1 million of accrued interest included in the tax contingency
reserve as of January 1, 2011, January 2, 2010 and December 27, 2008, respectively.
Due to statute expirations, approximately $1.4 million of the unrecognized tax benefits, including
accrued interest, could reasonably change in the coming year.
With few exceptions, the Company is no longer subject to U.S. federal and state/local income tax
examinations by tax authorities for years prior to 2006, and the Company is no longer subject to
non-U.S. income tax examinations by tax authorities for years prior to 2005.
The Company has approximately $5.2 million of net operating losses in various jurisdictions which
expire over a period up to 15 years.
At January 1, 2011 the estimated amount of total unremitted non-U.S. subsidiary earnings was $130.7
million. No U.S. deferred taxes have been provided on the undistributed non-U.S. subsidiary
earnings because they are considered to be permanently invested given our acquisition and growth
initiatives.
(12) Contingencies and Commitments
On July 30, 2009, the Company filed a response and counterclaims to an action filed by Nordyne,
Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri in which action
Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems nor its iQ Drive
23-seer air conditioning systems infringe on the Company’s ECM (electronically commutated motor)
systems patents (U.S. Patent No. 5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is
invalid. In its response and counterclaims against Nordyne the Company is seeking a judgment that
the ‘058 Patent is valid and that Nordyne has, in fact, infringed and continues to infringe the
‘058 Patent by making, using, offering for sale and selling it’s G7 furnace systems and iQ Drive
23-seer air conditioning systems. The Company has also requested the U.S. District Court to enjoin
Nordyne and all persons working in concert with Nordyne from further infringement of the ‘058
Patent and to award us compensatory and
other damages caused by such infringement. The Company intends to defend its intellectual property
vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any
other person. The Company does not currently believe that the litigation will have a material
effect on the Company’s financial position or its results of operations.
Page 58
Table of Contents
One of the Company’s subsidiaries that it acquired in 2007 is subject to numerous claims filed in
various jurisdictions relating to certain sub-fractional motors that were primarily manufactured
through 2004 and that were included as components of residential and commercial ventilation units
marketed by a third party. These claims generally allege that the ventilation units were the cause
of fires. Based on the current facts, the Company does not believe these claims, individually or
in the aggregate, will have a material adverse effect on its results of operations or financial
condition. However, the Company cannot predict the outcome of these claims, the nature or extent
of remedial actions, if any, it may need to undertake with respect to motors that remain in the
field, or the costs it may incur, some of which could be significant.
The Company is, from time to time, party to litigation that arises in the normal course of our
business operations, including product warranty and liability claims, contract disputes and
environmental, asbestos, employment and other litigation matters. The Company’s products are used
in a variety of industrial, commercial and residential applications that subject us to claims that
the use of our products is alleged to have resulted in injury or other damage. The Company accrues
for anticipated costs in defending against such lawsuits in amounts that we believe are adequate,
and the Company does not believe that the outcome of any such lawsuit will have a material effect
on the Company’s financial position or its results of operations.
The Company recognizes the cost associated with its standard warranty on its products at the time
of sale. The amount recognized is based on historical experience. The following is a
reconciliation of the changes in accrued warranty costs for 2010 and 2009 (in thousands):
| 2010 | 2009 | |||||||
|
Balance, beginning of year
|
$ | 13,298 | $ | 11,022 | ||||
|
Payments
|
(14,420 | ) | (12,102 | ) | ||||
|
Provision
|
13,793 | 14,465 | ||||||
|
Translation
|
160 | (87 | ) | |||||
|
|
||||||||
|
Balance, end of year
|
$ | 12,831 | $ | 13,298 | ||||
|
|
||||||||
(13) Leases and Rental Commitments
Rental expenses charged to operations amounted to $24.6 million in 2010, $18.9 million in 2009, and
$16.3 million in 2008. The Company has future minimum rental commitments under operating leases as
shown in the following table (in millions):
| Year | Expected Payments | |||
|
2011
|
$ | 22.4 | ||
|
2012
|
19.0 | |||
|
2013
|
11.9 | |||
|
2014
|
7.6 | |||
|
2015
|
5.8 | |||
|
Thereafter
|
9.4 | |||
(14) Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary
risks managed using derivative instruments are commodity price risk, currency exchange risk, and
interest rate risk. Forward contracts on certain commodities are entered into to manage the price
risk associated with forecasted purchases of materials used in the Company’s manufacturing process.
Forward contracts on certain currencies are entered into to manage forecasted cash flows in
certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk
associated with the Company’s floating rate borrowings.
The Company recognizes all derivative instruments as either assets or liabilities at fair value in
the statement of financial position. Accordingly, the Company designates commodity forward
contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as
cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow
hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits
on derivative financial instruments as of January 1, 2011.
Page 59
Table of Contents
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective
portion of the gain or loss on the derivative is reported as a component of accumulated other
comprehensive income (loss) and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. Gains and losses on the derivative representing
either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are
recognized in current earnings. At January 1, 2011, and January 2, 2010 the Company had an
additional $4.1 million and $1.5 million, net of tax, of derivative gains on closed hedge
instruments in AOCI that will be realized in earnings when the hedged items impact earnings.
As of January 1, 2011, the Company had outstanding the following commodity forward contracts (with
maturities extending through September 2012) to hedge forecasted purchases of commodities (in
millions):
| Notional Amount | ||||
|
Copper
|
$ | 106.3 | ||
|
Aluminum
|
4.2 | |||
|
Natural Gas
|
0.7 | |||
|
Zinc
|
0.2 | |||
As of January 1, 2011, the Company had outstanding the following currency forward contracts (with
maturities extending through December 2012) to hedge forecasted foreign currency cash flows (in
millions):
| Notional Amount | ||||
|
Mexican Peso
|
$ | 86.3 | ||
|
Indian Rupee
|
36.4 | |||
|
Chinese Renminbi
|
8.9 | |||
|
Australian Dollar
|
2.4 | |||
As of January 1, 2011, the total notional amount of the Company’s receive-variable/pay-fixed
interest rate swaps was $250.0 million (with maturities extending to August 2017).
Page 60
Table of Contents
Fair values of derivative instruments were (in millions):
| January 1, 2011 | ||||||||||||||||
| Prepaid | Other Noncurrent | Accrued | Hedging | |||||||||||||
| Expenses | Assets | Expenses | Obligations | |||||||||||||
|
Designated as hedging instruments:
|
||||||||||||||||
|
Interest rate swap contracts
|
$ | — | $ | — | $ | — | $ | 39.1 | ||||||||
|
Foreign exchange contracts
|
7.1 | 1.4 | 0.1 | 0.1 | ||||||||||||
|
Commodity contracts
|
24.7 | 4.2 | 0.1 | — | ||||||||||||
|
|
||||||||||||||||
|
Not designated as hedging instruments:
|
||||||||||||||||
|
Foreign exchange contracts
|
0.2 | — | — | — | ||||||||||||
|
Commodity contracts
|
0.2 | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total Derivatives:
|
$ | 32.2 | $ | 5.6 | $ | 0.2 | $ | 39.2 | ||||||||
|
|
||||||||||||||||
| January 2, 2010 | ||||||||||||||||
| Prepaid | Other Noncurrent | Accrued | Hedging | |||||||||||||
| Expenses | Assets | Expenses | Obligations | |||||||||||||
|
Designated as hedging instruments:
|
||||||||||||||||
|
Interest rate swap contracts
|
$ | — | $ | — | $ | — | $ | 31.2 | ||||||||
|
Foreign exchange contracts
|
— | 1.1 | 5.5 | — | ||||||||||||
|
Commodity contracts
|
3.5 | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Not designated as hedging
instruments:
|
||||||||||||||||
|
Foreign exchange contracts
|
0.2 | — | — | — | ||||||||||||
|
Commodity contracts
|
0.9 | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total Derivatives:
|
$ | 4.6 | $ | 1.1 | $ | 5.5 | $ | 31.2 | ||||||||
|
|
||||||||||||||||
As of January 1, 2011, the Company’s fair value for derivative instruments were classified on the
consolidated balance sheet as a current asset of $32.2 million, a noncurrent asset of $5.6 million,
a current liability of $0.2 million, and a noncurrent liability of $39.2 million.
As of January 2, 2010, the Company’s fair value for derivative instruments is classified on the
consolidated balance sheet as a current asset of $4.6 million, a noncurrent asset of $1.1 million,
a current liability of $5.5 million, and a noncurrent liability of $31.2 million.
The effect of derivative instruments on the consolidated statements of equity and earnings for the
year ended January 1, 2011 and January 2, 2010 was (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
| Year Ended January 1, 2011 | Year Ended January 2, 2010 | |||||||||||||||||||||||||||||||
| Interest | Interest | |||||||||||||||||||||||||||||||
| Commodity | Currency | Rate | Commodity | Currency | Rate | |||||||||||||||||||||||||||
| Forwards | Forwards | Swaps | Total | Forwards | Forwards | Swaps | Total | |||||||||||||||||||||||||
|
Gain (Loss) recognized in Other
Comprehensive Income (Loss)
|
$ | 38.5 | $ | 11.1 | $ | (20.5 | ) | $ | 29.1 | $ | 30.6 | $ | 12.1 | $ | 6.9 | $ | 49.6 | |||||||||||||||
|
Amounts reclassified from other
comprehensive income (loss) were:
|
||||||||||||||||||||||||||||||||
|
Loss recognized in Net Sales
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | (3.3 | ) | $ | — | $ | (3.3 | ) | ||||||||||||||
|
Gain (Loss) recognized in Cost of Sales
|
$ | 10.1 | $ | (2.7 | ) | $ | — | $ | 7.4 | $ | (51.4 | ) | $ | (14.1 | ) | $ | — | $ | (65.5 | ) | ||||||||||||
|
Loss recognized in Interest Expense
|
$ | — | $ | — | $ | (12.7 | ) | $ | (12.7 | ) | $ | — | $ | — | $ | (11.5 | ) | $ | (11.5 | ) | ||||||||||||
The ineffective portion of hedging instruments recognized during the year ended January 1,
2011 was immaterial.
Page 61
Table of Contents
Derivatives Not Designated as Cash Flow Hedging Instruments
| Year Ended January 1, 2011 | Year Ended January 2, 2010 | |||||||||||||||||||||||
| Commodity | Currency | Commodity | Currency | |||||||||||||||||||||
| Forwards | Forwards | Total | Forwards | Forwards | Total | |||||||||||||||||||
|
Gain (loss) recognized in Cost of Sales
|
$ | (0.6 | ) | $ | 0.2 | $ | (0.4 | ) | $ | 9.4 | $ | (1.4 | ) | $ | 8.0 | |||||||||
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
The net AOCI balance related to hedging activities of $2.8 million gains at January 1, 2011
includes $13.0 million of net current deferred gains expected to be realized in the next twelve
months.
(15)
Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date (exit
price). The inputs used to measure fair value are classified into the following hierarchy:
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities | |
|
|
||
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or | |
|
|
||
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or | |
|
|
||
|
|
Inputs other than quoted prices that are observable for the asset or liability | |
|
|
||
|
Level 3
|
Unobservable inputs for the asset or liability |
The Company uses the best available information in measuring fair value. Financial assets and
liabilities are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement. The following table sets forth the Company’s financial assets and
liabilities that were accounted for at fair value on a recurring basis as of January 1, 2011 (in
millions):
| 2010 | 2009 | |||||||||||
|
Assets:
|
||||||||||||
|
Investments
|
$ | 56.3 | 117.6 | (Level 2) | ||||||||
|
Prepaid Expenses and Other Current Assets:
|
||||||||||||
|
Derivative Currency Contracts
|
$ | 7.3 | 0.2 | (Level 2) | ||||||||
|
Derivative Commodity Contracts
|
$ | 24.9 | 4.4 | (Level 2) | ||||||||
|
Other Noncurrent Assets:
|
||||||||||||
|
Derivative Currency Contracts
|
$ | 1.4 | 1.1 | (Level 2) | ||||||||
|
Derivative Commodity Contracts
|
4.2 | — | (Level 2) | |||||||||
|
Liabilities:
|
||||||||||||
|
Other Accrued Expenses:
|
||||||||||||
|
Derivative Currency Contracts
|
$ | 0.1 | 5.5 | (Level 2) | ||||||||
|
Derivative Commodity Contracts
|
0.1 | — | (Level 2) | |||||||||
|
Hedging Obligations — Long Term:
|
||||||||||||
|
Interest Rate Swap
|
$ | 39.1 | 31.2 | (Level 2) | ||||||||
|
Derivative Currency Contracts
|
0.1 | — | (Level 2) | |||||||||
Page 62
Table of Contents
(16) Industry Segment Information
The following sets forth certain financial information attributable to the Company’s reporting
segments for fiscal 2010, fiscal 2009 and fiscal 2008, respectively (in thousands):
| Income From | Identifiable | Capital | Depreciation and | |||||||||||||||||
| Net Sales | Operations | Assets | Expenditures | Amortization | ||||||||||||||||
|
2010
|
||||||||||||||||||||
|
Electrical
|
$ | 2,001,989 | $ | 210,231 | $ | 2,323,164 | $ | 41,065 | $ | 66,746 | ||||||||||
|
Mechanical
|
235,989 | 27,504 | 125,972 | 3,929 | 6,123 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 2,237,978 | $ | 237,735 | $ | 2,449,136 | $ | 44,994 | $ | 72,869 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Electrical
|
$ | 1,637,668 | $ | 144,901 | $ | 1,990,686 | $ | 29,503 | $ | 63,749 | ||||||||||
|
Mechanical
|
188,609 | 14,619 | 121,551 | 4,101 | 5,395 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 1,826,277 | $ | 159,520 | $ | 2,112,237 | $ | 33,604 | $ | 69,144 | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Electrical
|
$ | 1,998,642 | $ | 191,532 | $ | 1,896,959 | $ | 45,186 | $ | 56,337 | ||||||||||
|
Mechanical
|
247,607 | 38,899 | 126,537 | 7,023 | 5,264 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 2,246,249 | $ | 230,431 | $ | 2,023,496 | $ | 52,209 | $ | 61,601 | ||||||||||
|
|
||||||||||||||||||||
The Electrical segment manufactures and markets AC and DC commercial, industrial, commercial
refrigeration, and HVAC electric motors and blowers. These products range in size from
sub-fractional to small integral horsepower motors to larger commercial and industrial motors from
50 through 6500 horsepower. The Company offers thousands of stock models of electric motors in
addition to the motors it produces to specific customer specifications. The
Company also produces and markets precision servo motors, electric generators ranging in size from
five kilowatts through four megawatts, automatic transfer switches and paralleling switchgear to
interconnect and control electric power generation equipment. Additionally, the Electrical segment
manufactures and markets a full line of AC and DC variable speed drives and controllers and other
accessories for most industrial and commercial applications. The Company manufactures capacitors
for use in HVAC systems, high intensity lighting and other applications. It sells its Electrical
segment’s products to original equipment manufacturers, distributors and end users across many
markets.
The Mechanical segment manufactures and markets a broad array of mechanical motion control products
including standard and custom worm gears, bevel gears, helical gears and concentric shaft
gearboxes; marine transmissions; high-performance after-market automotive transmissions and ring
and pinions; custom gearing; gearmotors; manual valve actuators; and electrical connecting devices.
Gear and transmission related products primarily control motion by transmitting power from a
source, such as an electric motor, to an end use, such as a conveyor belt, usually reducing speed
and increasing torque in the process. Valve actuators are used primarily in oil and gas, water
distribution and treatment and chemical processing applications. Mechanical products are sold to
original equipment manufacturers, distributors and end users across many industry segments.
The Company evaluates performance based on the segment’s income from operations. Corporate costs
have been allocated to each segment based primarily on the net sales of each segment. The reported
net sales of each segment are from external customers.
The following sets forth certain financial information attributable to geographic regions in which
the Company operates for fiscal 2010, fiscal 2009 and fiscal 2008, respectively (in thousands):
| Net Sales | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Geographic Information:
|
||||||||||||
|
United States
|
$ | 1,530,866 | $ | 1,335,046 | $ | 1,634,063 | ||||||
|
Asia
|
414,786 | 267,035 | 348,914 | |||||||||
|
Rest of the World
|
292,326 | 224,196 | 263,272 | |||||||||
|
|
||||||||||||
|
|
$ | 2,237,978 | $ | 1,826,277 | $ | 2,246,249 | ||||||
|
|
||||||||||||
Page 63
Table of Contents
| Long-Lived Assets | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Geographic Information:
|
||||||||||||
|
United States
|
$ | 964,267 | $ | 889,180 | $ | 969,722 | ||||||
|
Asia
|
219,230 | 145,346 | 140,059 | |||||||||
|
Rest of the World
|
177,588 | 98,335 | 52,453 | |||||||||
|
|
||||||||||||
|
|
$ | 1,361,085 | $ | 1,132,861 | $ | 1,162,234 | ||||||
|
|
||||||||||||
(17) Related Party Transactions
As part of the consideration paid for the acquisition of Elco on November 1, 2010, the Company
assumed $22.3 million payable to an entity that is affiliated with our Elco Group B.V. joint
venture partner resulting from bankruptcy proceeding involving Elco. A portion will be paid during
2011 with the remaining balance paid during 2012. The Company has included the current amounts in Other
Accrued Expenses and the long-term amount in Other Noncurrent Liabilities.
Page 64
Table of Contents
| ITEM 9 — |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
| ITEM 9A — |
CONTROLS AND PROCEDURES
|
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our
management evaluated, with the participation of our Chief Executive Officer and our Chief Financial
Officer, the effectiveness of the design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the year ended January 1,
2011. Based upon their evaluation of these disclosure controls and procedures, our Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and procedures were
effective as of January 1, 2011 to ensure that (a) information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission, and (b) information required to be disclosed by us in the reports we file or submit
under the Exchange Act is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
.
The report of management required under this Item 9A is contained in Item 8 of Part II of this
Annual Report on Form 10-K under the heading “Management’s Annual Report on Internal Control over
Financial Reporting.”
Report of Independent Registered Public Accounting Firm.
The attestation report required under this Item 9A is contained in Item 8 of Part II of this Annual
Report on Form 10-K under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls.
There were no changes in the Company’s internal control over financial reporting that occurred
during the quarter ended January 1, 2011 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
| ITEM 9B — |
OTHER INFORMATION
|
None.
Page 65
Table of Contents
| ITEM 10 — |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
See the information in the sections titled “Proposal 1: Election of Directors,” “The Board of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for
the 2011 annual meeting of shareholders (the “2011 Proxy Statement”). Information with respect to
our executive officers appears in Part I of this Annual Report on Form 10-K.
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all our
directors, officers and employees. The Code is available on our website, along with our current
Corporate Governance Guidelines, at
www.regalbeloit.com
. The Code and our Corporate
Governance Guidelines are also available in print to any shareholder who requests a copy in writing
from the Secretary of Regal Beloit Corporation. We intend to disclose through our website any
amendments to, or waivers from, the provisions of these codes.
| ITEM 11 — |
EXECUTIVE COMPENSATION
|
See the information in the sections titled “Compensation Discussion and Analysis,” “Executive
Compensation,” “Report of the Compensation and Human Resources Committee,” and “Director
Compensation” in the 2011 Proxy Statement.
| ITEM 12 — |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
See the information in the section titled “Stock Ownership” in the 2011 Proxy Statement.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of January 1, 2011.
| Weighted-average | Number of securities remaining | |||||||||||
| Number of securities to be | exercise price of | available for future issuance | ||||||||||
| issued upon the exercise of | outstanding | under equity compensation | ||||||||||
| outstanding options, | options, warrants | plans (excluding securities | ||||||||||
| Plan category | warrants and rights (1) | and rights | reflected in the first column) (2) | |||||||||
|
Equity
compensation plans
approved by
security holders
|
1,454,050 | $ | 43.50 | 1,802,275 | ||||||||
|
Equity compensation
plans not approved
by security holders
|
||||||||||||
|
|
||||||||||||
|
Total
|
1,454,050 | $ | 43.50 | 1,802,275 | ||||||||
| (1) |
Represents options to purchase our common stock and stock-settled stock appreciation rights
granted under our 1998 Stock Option Plan, 2003 Equity Incentive Plan and 2007 Equity Incentive
Plan.
|
|
| (2) |
Excludes 181,177 shares of restricted common stock previously issued under our 2003 Equity
Incentive Plan and 2007 Equity Incentive Plan for which the restrictions have not lapsed.
|
| ITEM 13 — |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
See the information in the section titled “The Board of Directors” in the 2011 Proxy Statement.
| ITEM 14 — |
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
See the information in the section titled “Proposal 5: Ratification of Deloitte & Touche LLP as
the Company’s Independent Auditors for 2011” in the 2011 Proxy Statement.
Page 66
Table of Contents
| ITEM 15 — |
EXHIBITS, FINANCIAL STATEMENT SCHEDULE
|
| (a) | 1. |
Financial statements — The financial statements listed in the accompanying index to
financial statements and financial statement schedule are filed as part of this Annual Report
on Form 10-K.
|
| 2. |
Financial statement schedule — The financial statement schedule listed in the
accompanying index to financial statements and financial statement schedule are filed as
part of this Annual Report on Form 10-K.
|
| 3. |
Exhibits — The exhibits listed in the accompanying index to exhibits are filed as part
of this Annual Report on Form 10-K.
|
| (b) |
Exhibits — see Exhibit Index.
|
| (c) |
See (a)(2) above
|
Page 67
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 2
nd
day of March, 2011.
|
REGAL BELOIT CORPORATION
|
||||
| By: | /s/ CHARLES A. HINRICHS | |||
| Charles A. Hinrichs | ||||
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
||||
| By: | /s/ PETER J. ROWLEY | |||
| Peter J. Rowley | ||||
|
Vice President and Corporate Controller
(Principal Accounting Officer) |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
|
/s/ HENRY W. KNUEPPEL
|
Chief Executive Officer and Director | March 2, 2011 | ||
|
|
(Principal Executive Officer) | |||
|
|
||||
|
/s/ MARK J. GLIEBE
|
Chief Operating Officer and Director | March 2, 2011 | ||
|
|
(Principal Operating Officer) | |||
|
|
||||
|
/s/ STEPHEN M. BURT
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ CHRISTOPHER L. DOERR
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ THOMAS J. FISCHER
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ DEAN A. FOATE
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ G. FREDERICK KASTEN, JR.
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ RAKESH SACHDEV
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ CAROL N. SKORNICKA
|
Director | March 2, 2011 | ||
|
|
||||
|
|
||||
|
/s/ CURTIS W. STOELTING
|
Director | March 2, 2011 | ||
|
|
Page 68
Table of Contents
REGAL BELOIT CORPORATION
Index to Financial Statements
And Financial Statement Schedule
Index to Financial Statements
And Financial Statement Schedule
| Page(s) In | ||||
| Form 10-K | ||||
|
(1) Financial Statements:
|
||||
|
|
||||
| 38 | ||||
|
|
||||
| 39 | ||||
|
|
||||
| 40 | ||||
|
|
||||
| 41 | ||||
|
|
||||
| 42 | ||||
|
|
||||
| 43 | ||||
|
|
||||
| 44 | ||||
| Page(s) In | ||||
| Form 10-K | ||||
|
(2) Financial Statement Schedule:
|
||||
|
|
||||
| 70 | ||||
All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
Page 69
Table of Contents
SCHEDULE II
REGAL BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
REGAL BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
| (In Thousands of Dollars) | ||||||||||||||||||||
| Balance | Balance | |||||||||||||||||||
| Beginning | Charged to | End | ||||||||||||||||||
| of Year | Expenses | Deductions (a) | Adjustments (b) | of Year | ||||||||||||||||
|
Allowance for receivables:
|
||||||||||||||||||||
|
Year ended January 1, 2011
|
$ | 12,666 | $ | 1,143 | $ | (3,623 | ) | $ | 451 | $ | 10,637 | |||||||||
|
Year ended January 2, 2010
|
$ | 11,145 | $ | 2,487 | $ | (1,875 | ) | $ | 909 | $ | 12,666 | |||||||||
|
Year ended December 27, 2008
|
$ | 10,734 | $ | 4,260 | $ | (3,365 | ) | $ | (484 | ) | $ | 11,145 | ||||||||
|
|
||||||||||||||||||||
|
Allowance for product
warranty reserves:
|
||||||||||||||||||||
|
Year ended January 1, 2011
|
$ | 13,298 | $ | 13,793 | $ | (14,420 | ) | $ | 160 | $ | 12,831 | |||||||||
|
Year ended January 2, 2010
|
$ | 11,022 | $ | 14,465 | $ | (12,102 | ) | $ | (87 | ) | $ | 13,298 | ||||||||
|
Year ended December 27, 2008
|
$ | 9,872 | $ | 8,268 | $ | (7,431 | ) | $ | 313 | $ | 11,022 | |||||||||
| (a) |
Deductions consist of write offs charged against the allowance for doubtful accounts and warranty claim costs.
|
|
| (b) |
Adjustments related to acquisitions and translation.
|
Page 70
Table of Contents
EXHIBIT INDEX
| Exhibit | ||||
| Number | Exhibit Description | |||
| 2.1 |
Purchase Agreement, dated as of August 10, 2004, between Regal Beloit Corporation and General
Electric Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s
Current Report on Form 8-K dated August 30, 2004 (File No. 001-07283)]
|
|||
|
|
||||
| 2.2 |
Amendment to Purchase Agreement, dated as of August 30, 2004, between Regal Beloit Corporation
and General Electric Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit
Corporation’s Current Report on Form 8-K dated August 30, 2004 (File No. 001-07283)]
|
|||
|
|
||||
| 2.3 |
Purchase Agreement, dated as of November 14, 2004, between Regal Beloit Corporation and General
Electric Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s
Current Report on Form 8-K dated December 31, 2004 (File No. 001-07283)]
|
|||
|
|
||||
| 2.4 |
Amendment to Purchase Agreement, dated as of December 31, 2004, between Regal Beloit Corporation
and General Electric Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit
Corporation’s Current Report on Form 8-K dated December 31, 2004 (File No. 001-07283)]
|
|||
|
|
||||
| 2.5 |
Purchase Agreement, dated as of July 3, 2007, by and among Regal Beloit Corporation, Tecumseh
Products Company, Fasco Industries, Inc. and Motores Fasco de Mexico, S. de R.L. de C.V.
[Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form
8-K filed on September 7, 2007]
|
|||
|
|
||||
| 2.6 |
Asset and Stock Purchase Agreement, dated as of December 12, 2010, by and between Regal Beloit
Corporation and A.O. Smith Corporation. [Incorporated by reference to Exhibit 2.1 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on December 15, 2010]
|
|||
|
|
||||
| 3.1 |
Articles of Incorporation of Regal Beloit Corporation, as amended through April 20, 2007.
[Incorporated by reference to Exhibit 3.1 to Regal Beloit Corporation’s Current Report on Form
8-K filed on April 25, 2007 (File No. 001-07283)]
|
|||
|
|
||||
| 3.2 |
Amended and Restated Bylaws of Regal Beloit Corporation. [Incorporated by reference to Exhibit
3.2 to Regal Beloit Corporation’s Current Report on Form 8-K filed on April 25, 2007 (File No.
001-07283)]
|
|||
|
|
||||
| 4.1 |
Articles of Incorporation, as amended, and Amended and Restated Bylaws of Regal Beloit
Corporation [Incorporated by reference to Exhibits 3.1 and 3.2 hereto]
|
|||
|
|
||||
| 4.2 |
Indenture, dated April 5, 2004, between Regal Beloit Corporation and U.S. Bank National
Association, as Trustee. [Incorporated by reference to Exhibit 4.3 to Regal Beloit Corporation’s
Registration Statement on Form S-3 filed on June 21, 2004 (Reg. No. 333-116706)]
|
|||
|
|
||||
| 4.3 |
First Supplemental Indenture, dated December 9, 2004, between Regal Beloit Corporation and U.S.
Bank National Association, as Trustee. [Incorporated by reference to Exhibit 4 to Regal Beloit
Corporation’s Current Report on Form 8-K filed on December 14, 2004 (File No. 001-07283)]
|
|||
|
|
||||
| 4.4 |
Form of 2.75% Convertible Senior Subordinated Note due 2024 (included in Exhibit 4.2).
|
|||
|
|
||||
| 4.5 |
Second Amended and Restated Credit Agreement, dated as of April 30, 2007, among Regal Beloit
Corporation, the financial institutions party thereto and Bank of America, N.A., as
administrative agent. [Incorporated by reference to Exhibit 4.1 to Regal Beloit Corporation’s
Current Report on Form 8-K dated April 30, 2007 (File No. 001-07283)]
|
|||
|
|
||||
| 4.6 |
First Amendment, dated as of August 23, 2007, to the Second Amended and Restated Credit
Agreement, dated as of April 30, 2007, by and among Regal Beloit Corporation, various financial
institutions and Bank of America, N.A., as Administrative Agent. [Incorporated by reference to
Exhibit 4.3 to Regal Beloit Corporation’s Current Report on Form 8-K filed on August 24, 2007
(File No. 001-07283)]
|
|||
|
|
||||
| 4.7 |
Note Purchase Agreement, dated as of August 23, 2007, by and among Regal Beloit Corporation and
Purchasers listed in Schedule A attached thereto. [Incorporated by reference to Exhibit 4.1 to
Regal Beloit Corporation’s Current Report on Form 8-K filed on August 24, 2007 (File No.
001-07283)]
|
|||
|
|
||||
| 4.8 |
Subsidiary Guaranty Agreement, dated as of August 23, 2007, from certain subsidiaries of Regal
Beloit Corporation. [Incorporated by reference to Exhibit 4.2 to Regal Beloit Corporation’s
Current Report on Form 8-K filed on August 24, 2007] (File No. 001-07283)]
|
|||
Page 71
Table of Contents
| Exhibit | ||||
| Number | Exhibit Description | |||
| 4.9 |
Term Loan Agreement, dated as of June 16, 2008, between Regal Beloit Corporation, various
Financial Institutions, US Bank, National Association, Wells Fargo Bank, N.A., Bank of America,
N.A., JP Morgan Chase Bank, N.A., JP Morgan Securities Inc. and Banc of America Securities LLC.
[Incorporated by referenced to Exhibit 4.1 to Regal Beloit’s Corporation’s Current Report on
Form 8-K filed on June 16, 2008 (File No. 001-2783)]
|
|||
|
|
||||
| 10.1 | * |
1991 Flexible Stock Incentive Plan [Incorporated by reference to Exhibit 10.4 to Regal Beloit
Corporation’s Annual Report on Form 10-K for the year ended December 31, 1992 (File No.
001-07283)]
|
||
|
|
||||
| 10.2 | * |
1998 Stock Option Plan, as amended [Incorporated by reference to Exhibit 99 to Regal Beloit
Corporation’s Registration Statement on Form S-8 (Reg. No. 333-84779)]
|
||
|
|
||||
| 10.3 | * |
2003 Equity Incentive Plan [Incorporated by reference to Exhibit B to Regal Beloit Corporation’s
Definitive Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders (File No.
001-07283)]
|
||
|
|
||||
| 10.4 | * |
Regal Beloit Corporation 2007 Equity Incentive Plan (incorporated by reference to Appendix B to
Regal Beloit Corporation’s definitive proxy statement on Schedule 14A for the Regal Beloit
Corporation 2007 annual meeting of shareholders held April 20, 2007 (File No. 1-07283))
|
||
|
|
||||
| 10.5 | * |
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and
each of Henry W. Knueppel and Mark J. Gliebe. [Incorporated by reference to Exhibit 10.6 to
Regal Beloit Corporation’s Annual Report on Form 10-K for the year ended December 29, 2007.
(File No. 001-07283)]
|
||
|
|
||||
| 10.6 | * |
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and
Terry R. Colvin. [Incorporated by reference to Exhibit 10.7 to Regal Beloit Corporation’s Annual
Report on Form 10-K for the year ended December 29, 2007. (File No. 001-07283)]
|
||
|
|
||||
| 10.7 | * |
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and
each of Charles A. Hinrichs, Peter C. Underwood and John M. Avampato. [Incorporated by reference to
Exhibit 10.1 to Regal Beloit Corporation’s Current Report on Form 8-K filed on November 2, 2010
(File No. 001-07283)]
|
||
|
|
||||
| 10.8 | * |
Form of Agreement for Stock Option Grant. [Incorporated by reference to Exhibit 10.9 to Regal
Beloit Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. (File No.
001-07283)]
|
||
|
|
||||
| 10.9 | * |
Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.10 to Regal Beloit
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. (File No.
001-07283)]
|
||
|
|
||||
| 10.10 | * |
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2003 Equity
Incentive Plan. [Incorporated by reference to Exhibit 10.10 to Regal Beloit Corporation’s Annual
Report on Form 10-K for the year ended December 29, 2007. (File No. 001-07283)]
|
||
|
|
||||
| 10.11 | * |
Form of Stock Option Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation’s Current Report on
Form 8-K filed on April 25, 2007 (File No. 001-07283)]
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||
|
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| 10.12 | * |
Form of Restricted Stock Award Agreement under the Regal Beloit Corporation 2007 Equity
Incentive Plan. [Incorporated by reference to Exhibit 10.3 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on April 25, 2007 (File No. 001-07283)]
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|
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| 10.13 | * |
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2007 Equity
Incentive Plan. [Incorporated by reference to Exhibit 10.4 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on April 25, 2007 (File No. 001-07283)]
|
||
|
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||||
| 10.14 | * |
Form of Stock Appreciation Right Award Agreement under the Regal Beloit Corporation 2007 Equity
Incentive Plan. [Incorporated by reference to Exhibit 10.5 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on April 25, 2007 (File No. 001-07283)]
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||
|
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| 10.15 | * |
Target Supplemental Retirement Plan for designated Officers and Key Employees, as amended and
restated. [Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation’s Current
Report on Form 8-K dated November 2, 2010]
|
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Page 72
Table of Contents
| Exhibit | ||||
| Number | Exhibit Description | |||
| 10.16 | * |
Form of Participation Agreement for Target Supplemental Retirement Plan. [Incorporated by
reference to Exhibit 10.12 to Regal Beloit Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2005. (File No. 001-07283)]
|
||
|
|
||||
| 10.17 |
Regal Beloit Corporation Shareholder Value Added (SVA) Executive Officers Incentive Compensation
Plan.
|
|||
|
|
||||
| 12 |
Computation of Ratio of Earnings to Fixed Charges.
|
|||
|
|
||||
| 21 |
Subsidiaries of Regal Beloit Corporation.
|
|||
|
|
||||
| 23 |
Consent of Independent Auditors.
|
|||
|
|
||||
| 31.1 |
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 31.2 |
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 31.3 |
Certification of the Principal Accounting Officer.
|
|||
|
|
||||
| 32 |
Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|||
|
|
||||
| 99.1 |
Proxy Statement of Regal Beloit Corporation for the 2011 Annual Meeting of Shareholders
|
|||
|
|
||||
|
[The Proxy Statement for the 2011 Annual Meeting of Shareholders will be filed with the
Securities and Exchange Commission under Regulation 14A within 120 days after the end of the
Company’s fiscal year. Except to the extent specifically incorporated by reference, the Proxy
Statement for the 2011 Annual Meeting of Shareholders shall not be deemed to be filed with the
Securities and Exchange Commission as part of this Annual Report on Form 10-K.]
|
||||
| * |
A management contract or compensatory plan or arrangement.
|
Page 73
TABLE OF CONTENTS
Part IItem 1 BusinessItem 1A Risk FactorsItem 1B Unresolved Staff CommentsItem 2 PropertiesItem 3 Legal ProceedingsItem 4 Removed and ReservedPart IIItem 5 Market For The Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 12 Of This Annual Report on Form 10-k Contains Certain Information Relating To Our Equity Compensation PlansItem 6 Selected Financial DataItem 7 Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7A Quantitative and Qualitative Disclosures About Market RiskItem 8 Financial Statements and Supplementary DataItem 9 Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A Controls and ProceduresItem 9B Other InformationPart IIIItem 10 Directors, Executive Officers and Corporate GovernanceItem 11 Executive CompensationItem 12 Security Ownership Of Certain Beneficial Owners and ManagementItem 13 Certain Relationships and Related Transactions and Director IndependenceItem 14 Principal Accountant Fees and ServicesPart IVItem 15 Exhibits, Financial Statement Schedule