New York Twist Drill. Manufactures a full line of industrial quality cutting tools in high speed steel and carbide primarily for the aerospace, automotive, railroad and general manufacturing markets.
Ohio Gear. Manufactures gear reducers and gearmotors primarily for the material handling, lawn and garden vehicle and food processing markets.
Opperman Mastergear, Ltd. Manufactures valve actuators and industrial gear drives primarily for the material handling, agriculture, mining and liquid and gas flow control markets.
Regal Cutting Tools. Manufactures high-speed steel and carbide rotary cutting tools primarily for the aerospace, agriculture, automotive and general industrial markets.
Richmond Gear.Gear. Manufactures ring and pinions and transmissions primarily for the high-performance automotive aftermarketaftermarket.
Velvet Drive Transmissions. Manufactures marine and industrial transmissions primarily for the pleasure boat, off-road vehicle and forestry markets.
The Building of Our Business
Our growth from our founding as a producer of high-speed cutting tools in 1955 to our current size and status has largely been the result of the acquisition and integration of 3840 businesses to build a strong multi-product offering. Our senior management has substantial experience in the acquisition and integration of businesses, aggressive cost management, and efficient manufacturing techniques, all of which represent activities that are critical to our long-term growth strategy. Since 1979, our current management team has completed and successfully integrated 2325 acquisitions. We have a proven track record of acquiring complementary businesses and product lines, integrating their activities into our organization and aggressively managing their cost structures to reduce waste and unnecessary expenditures. The history of our Electrical and Mechanical Groupfollowing table summarizes select acquisitions since 1990 is outlined following.1990.
Product Line |
| Year |
| Annual Revenues |
| Product Listing at Acquisition |
| |||
|
|
|
| |||||||
|
|
|
|
| ($ in millions) |
|
|
|
| |
Electrical Products |
|
|
|
|
|
|
|
|
|
|
GE Commercial AC Motors business |
|
| 2004 |
| $ | 144 |
|
| AC motors for pump, compressor, equipment and commercial HVAC |
|
GE HVAC Motors and Capacitors businesses |
|
| 2004 |
|
| 442 |
|
| Full line of motors and capacitors for residential and commercial HVAC systems |
|
LEESON Electric Corporation |
|
| 2000 |
|
| 175 |
|
| AC motors (to 350 horsepower) gear reducers, gearmotors and drives |
|
Thomson Technology, Inc. |
|
| 2000 |
|
| 14 |
|
| Automatic transfer switches, paralleling switchgear and controls and controls systems |
|
Lincoln Motors |
|
| 1999 |
|
| 50 |
|
| AC motors (1/4 to 800 horsepower) |
|
Marathon Electric Manufacturing Corporation |
|
| 1997 |
|
| 245 |
|
| AC motors (to 500 horsepower), AC generators (5 kilowatt to 2.5 megawatt), fuse holders, terminal blocks and power blocks |
|
Mechanical Products |
|
|
|
|
|
|
|
|
|
|
Powertrax assets of Vehicular Technologies |
|
| 2002 |
|
| 3 |
|
| Differential locking devices for high performance automotive applications |
|
Spiral bevel gear product line of Philadelphia Gear |
|
| 2001 |
|
| 4 |
|
| Spiral bevel gears |
|
Velvet Drive Transmissions |
|
| 1995 |
|
| 27 |
|
| Marine and industrial transmissions |
|
Hub City, Inc. |
|
| 1992 |
|
| 44 |
|
| Gear drives, sub-fractional horsepower gearmotors, mounted bearings and accessories |
|
Opperman Mastergear, Ltd. (U.K., U.S. and Germany) |
|
| 1991 |
|
| 20 |
|
| Manual valves actuators and industrial gear drives |
|
57
| Business/Product Line | Year Acquired | Annual Revenues at Acquisition (in millions) | Product Listing at Acquisition |
|---|---|---|---|
| Electrical Group | |||
| LEESON Electric Corporation | 2000 | $175 | AC motors (to 350 horsepower) and DC motors (to 3 horsepower) gear reducers, gearmotors and drives |
| Thomson Technology, Inc. | 2000 | $14 | Automatic transfer switches, paralleling switchgear and controls, and systems controls |
| Lincoln Motors | 1999 | $50 | AC motors (1/4 to 800 horsepower) |
| Marathon Electric Manufacturing Corporation | 1997 | $245 | AC motors (to 500 horsepower), AC generators (5 kilowatt to 2.5 megawatt), fuse holders, terminal blocks and power blocks |
| Mechanical Group | |||
| Powertrax® product line | 2002 | $3 | Differential locking devices for high-performance automotive and 4-wheel drive aftermarket |
| Spiral bevel gear product line of Philadelphia Gear | 2001 | $4 | Spiral bevel gears |
| Velvet Drive Transmissions | 1995 | $27 | Marine and industrial transmissions |
| Hub City, Inc. | 1992 | $44 | Gear drives, sub-fractional horsepower gearmotors, mounted bearings and accessories |
| Opperman Mastergear, Ltd. (U.K., U.S. and Germany) | 1991 | $20 | Manual valve actuators for liquid and gas flow control and industrial gear drives |
Sales, Marketing and Distribution
We sell our products directly to original equipment manufacturers, distributors and distributorsend-users across many markets. Our two business segments are divided intoWe have multiple business units, with each unit typically having its own branded product offering and sales organization. These sales organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive manufacturers’ representative organizations. On a combined basis, our individual business units’ sales organizations consist of more than 125 direct sales employees and 500 exclusive and non-exclusive manufacturers’ representatives from 190 organizations as of January 2005. In 2004, across all of our business units, we sold products to a very broad base of original equipment manufacturers and distributors, each numbering in the thousands.
With our 2004 electric motor acquisitions, we have added leading HVAC OEMs to our customer base. These motors are vital components of an HVAC system and are used to move air into and away from furnaces, heat pumps, air conditioners, ventilators, fan filter boxes and humidifiers. We believe that our effective use of information technology significantly enhances our ability to provide customer focused quality and further differentiates us from manya majority of our competitors. Our website allows customers easy access toHVAC motors are used in applications that replace existing equipment, with the remainder used in new equipment applications. The business enjoys a large installed base of equipment and product information, and contains the latest product introductions, distributor information, installation manuals, technical bulletins and customer service. For example, through our Electrical Group websites, we have an e-commerce portal that provides our independent manufacturers’ representatives, distributors and employeeslong-term relationships with constant access to real-time information such as account status, order status, engineering and competitive information, stock product availability, pricing and order entry. In addition, customers are able to search our stock catalogs for motor, gearmotor, drive, part or catalog number.its major customers.
Markets and Competitors
The worldwide market for electric motors is estimated in excess of $24$25 billion. The overall domestic market for electric motors is estimated at $9 billion annually, although we believe thatestimate the sectors in which we primarily compete, primarily in thecommercial and industrial sector of the domestic electric motor market, estimatedmotors and HVAC/refrigeration motors, to be approximately a $2.3$5.0 billion segment of the overall domestic market. We believe approximately 60% of all electricity generated in the U.S. runs through electric motors. With the acquisitions of Marathon Electric in 1997, Lincoln Motors in 1999 and LEESON Electric in 2000, we believe we have becomebecame one of the largest producers of industrial electric motors in the United StatesStates. With our 2004 acquisitions of GE’s commercial AC and hold a market position in this segment close to Baldor Electric Company,HVAC motors businesses, we believe we are among the current market leader.largest producers of commercial and industrial motors and the largest producer of HVAC motors. In addition, we believe that we are the largest electric generator manufacturer in the United States that is not affiliated with a diesel engine manufacturer. Major domestic competitors for the Electrical Group other thanour electrical products include Baldor Electric, include U.S. ElectricalElectric Motors (a division of Emerson Electric Co.), Reliance Electric Company (a division of Rockwell International), A. O. Smith Corporation, General Electric Company and Newage (a division of Cummins, Inc). Major foreign competitors include Siemens AG, Toshiba Corporation, Weg S.A., Leroy-Somer, Inc. and ABB Ltd.
Our Mechanical Group servesWe serve various mechanical product markets and competescompete with a number of different companies depending on the particular product offering. We believe that we are thea leading manufacturer of several mechanical products offered by our Mechanical Group and that we are the leading manufacturer in the United States of worm gear drives and bevel gear drives. Our competitors in these markets include Boston Gear (a division of Colfax Corporation)Altra Industrial Motion, Inc.), Dodge (a division of Rockwell International), Emerson Electric Co. and Winsmith (a division of Peerless-Winsmith, Inc.). Major foreign competitors include SEW Eurodrive GmbH & Co., Flender GmbH, Nord, Sumitomo Corporation and Zahnrad Fabrik GmbH & Co.
6
During the past several years, niche product market opportunities have become more prevalent due to changing market conditions. Our markets have also been impacted by decisions by larger manufacturers not to compete in lower volume or specialized markets. Other manufacturers, which historically may have made component products for inclusion in their finished goods, have chosen to outsource their requirements to specialized manufacturers like us because we can make these products more cost effectively. In addition, we have capitalized on this competitive climate by making acquisitions and increasing our manufacturing efficiencies. Some of these acquisitions have created new opportunities by allowing us to enter new markets in which we had not been involved. In practice, our operating units have sought out specific niche markets concentrating on a wide diversity of customers and applications. We believe that we compete primarily on the basis of quality, price, service and our promptness of delivery.
Product Development and Engineering
Each of our business units has its own product development and design teams that continuously enhance our existing products and develop new products for our growing base of customers that require custom and standard solutions. We have one of the electric motor industry’s most sophisticated product development and testing laboratories. We believe these capabilities provide a significant competitive advantage in the development of high quality motors and electric generators incorporating leading design characteristics such as low vibration, low noise, improved safety, reliability and enhanced energy efficiency.
8
We are continuing to expand our business by developing new, differentiated products in each of our business segments, both Mechanical and Electrical.segments. We work closely with our customers to develop new products or enhancements to existing products that improve performance and meet their needs. Examples of our research2004 new product introductions include:
Magna-Smart Generator. Our new Magna-Smart generator product line provides customers a variable speed generator, resulting in a lighter, smaller and development successesmore efficient product. We are selling these new products to the recreational vehicle, emergency vehicle, marine and refrigeration markets.
Magna-Lite Generator. Our new, patented Magna-Lite generator allows our customers to eliminate ballasts from their portable light towers. Magna-Lite allows the customer to produce a lighter, smaller and more reliable portable light tower.
Series 2400 Switchgear. We recently introduced our Thomson Technology Series 2400 Switchgear with a PGC 4000 power generation controller. We believe that the integrated process control design provides our customers with the most comprehensive paralleling switchgear system in the last twomarket today. This product also helps our customers lower engineering and production costs, increase output, shorten lead times and improve flexibility for future growth.
Velvet Drive Wakeboard Transmission. In 2004, we introduced the Velvet Drive Wakeboard Transmission to address the niche, growing wakeboard ski boat market. Velvet Drive has been a leader in the marine industry for over 50 years, include our Globetrotter™ IEC Motor line; a full line of premium efficiency motors; threeand this new product linesis the leading product currently manufactured that allows no power loss during tight turns.
As part of highour 2004 GE HVAC motors and capacitors acquisition, we acquired new ECM motor technology. An ECM motor is a brushless electric motor with integrated speed control made possible through sophisticated electronic and sensing technology. ECM motors operate at variable speeds with attractive performance characteristics versus competitive variable speed solutions in comfort, energy efficiency, mechanical speed reducers; a linemotor life and noise. GE developed the first generation ECM motors over 15 years ago. ECM technology is protected by over 125 patents, and we have acquired from GE intellectual property and usage rights relating to ECM technology. ECM motors offer significantly greater temperature and air quality control as well as increased energy efficiency. Because of induction generators; new co-generation switchgears; a complete arraythe energy efficiency of food solution products including stainless steel and aluminum motors, reducers and electronic devices; andthese systems, we believe that ECM enabled continuous air flow systems will be an important element of our award winning microMAX™ inverter duty motor line.customers’ strategies to meet the January 2006 increased energy efficiency standards for residential air conditioners, to 13 SEER from the current standard of 10 SEER.
Manufacturing and Operations
We have developed and acquired global operations in lower cost locations such as Mexico, India, and China that compliment our flexible, rapid response operations in the United States, Canada and Europe. Our vertically integrated manufacturing operations, including our own cast iron foundry and aluminum die casting and steel stamping operations are an important element of our rapid response capabilities. In addition, we have an extensive internal logistics operation that consists of approximately 5048 semi-tractors and 100110 customized semi-trailers and a network of distribution facilities with the capability to modify stock products to quickly meet specific custom requirements in many instances. This gives us a competitive advantage, as we are able to deliver a customer’s product when they want it, where they want it and in the condition they want it.
We manufacture a majority of the products that we sell but also strategically outsource components and finished goods to an established global network of suppliers. Although we have aggressively pursued global sourcing to reduce our overall costs, we still maintain a dual sourcing capability in our existing domestic facilities to ensure a reliable supply source for our customers. Most of our operating units conduct their manufacturing operations independently in one or more facilities. Our Electrical Group manufacturing, other than Marathon Special Products and Thomson Technology, is performed by our Motor Technologies Group, which also has responsibility for all power generation operations, including sales and marketing. 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.
The manufacturing operations of both our Electrical Group and Mechanical Groupbusinesses are highly integrated. Although raw materials and selected parts such as bearings and seals are purchased, this vertical integration permits us to produce most of our required component parts when needed. We believe that this results in lower production costs, greater manufacturing flexibility and higher product quality, as well as reducing our reliance on outside suppliers. Base materials for our products consist primarily of: steel in various types and sizes, including bearings and weldments; copper magnet wire; and ferrous and non-ferrous castings. We purchase our raw materials from many suppliers and, with few exceptions, do not rely on any single supplier for any of our base materials.
We have also continued to upgrade our manufacturing equipment and processes, including increasing our use of computer aided manufacturing systems, developing our own testing systems, redesigning plant layout and redesigning products to take full advantage of our more productive equipment and to improve product flow. We believe that our continued product redesign and efficient plant layoutslayout often provide us with a competitive cost advantage in our manufacturing operation. Our goal is to be a low cost producer in our core product areas.
79
To continue to beFacilities
We have manufacturing, sales and service facilities throughout the United States, Mexico and Canada and in Europe and Asia. Our Electrical segment currently operates 46 manufacturing and service and distribution facilities. The Electrical segment’s present operating facilities contain a low cost producer,total of approximately 3,609,000 square feet of space of which approximately 894,000 square feet are leased. Our Mechanical segment currently operates 19 manufacturing and service and distribution facilities. The Mechanical segment’s present operating facilities contain a total of approximately 1,570,000 square feet of space of which approximately 47,000 square feet are leased. Our principal executive offices are located in Beloit, Wisconsin in an owned approximately 24,000 square foot office building. We believe our strategy in this increasingly global economic environment is to expandequipment and facilities are well maintained and adequate for our foreign manufacture of select products. We increased our sourcing of both components and finished products from outside the U.S. in the past two years. In January 2003 we acquired a 50% ownership in a current supplier to us of smaller industrial electric motors. This joint venture is our second in China along with our 8-year-old 55%-owned joint venture to manufacture smaller generators. Both support our low cost production efforts.present needs.
Backlog
Our business units have historically shipped the majority of their products in the month the order is received. Since total backlog is less than 12%14% of our annual sales, we believe that backlog is not a reliable indicator of our future sales. As of December 31, 2003,2004, our backlog was $73.2$104.4 million, as compared to $68.1$73.2 million on December 31, 2002.2003. We believe that virtually all of our backlog is shippable in 2004.2005.
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. We also use various registered and unregistered trademarks, and we believe these trademarks are significant in the marketing of most of our products. However, we believe the successful manufacture and sale of our products generally depends more upon our technological, manufacturing and marketing skills.
Employees
As of the close of business on December 31, 2003,2004, the Company employed approximately 4,850 persons,5,700 worldwide employees, excluding the employees who are part of whichthe GE HVAC acquisition. As a result of the acquisition of the GE HVAC business at 11:59 pm on December 31, 2004, approximately 20%5,000 employees, including about 1,100 temporary employees in foreign operations, were covered by collective bargaining agreements.added to the Company. We consider our employee relations to be very good.
Environmental Matters
We are subjectIn March 2004, the Company received notice from the U.S. Environmental Protection Agency (“U.S. EPA”) that it was identified as one of three potentially responsible parties regarding an environmental site in Illinois. The Company had previously reached a settlement in 1999 with the U.S. EPA regarding the same site. Management provided its expert’s assessment of this site to Federal, State and local environmental regulations. the U.S. EPA, which has not proceeded with any enforcement action. Based on the facts, the Company believes that there will be no further assessments related to this site. As of December 31, 2004, no amounts have been recorded in the Company’s financial statements related to this contingency.
We are currently involved with environmental proceedings related to certain other of our facilities. Based on available information, we believe that the outcome of these proceedings and future known environmental compliance costs will not have a material adverse effect on our financial position or results of operations.
Executive Officers
The names, ages, and positions of the executive officers of the Company as of December 31, 2003,March 1, 2005, are listed below along with their business experience during the past five years. Officers are elected annually by the Board of Directors at the Meeting of Directors immediately following the Annual Meeting of Shareholders in April. There are no family relationships among these officers, nor any arrangements of understanding between any officer and any other persons pursuant to which the officer was selected.
10
Name |
| Position |
| Business Experience and Principal Occupation | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
James L. Packard | 62 | Chairman and Chief Executive Officer | Elected Chairman in 1986; Chief Executive Officer since 1984; served as President from 1980 to April, 2002; joined the Company in 1979. As previously announced, following our annual meeting of shareholders in April, 2005, Mr. Knueppel will be elected as President and Chief Executive Officer | |||||||
Henry W. Knueppel | 56 | President and Chief Operating Officer | Elected President and Chief Operating Officer in April, | |||||||
David A. Barta | 43 | Vice President and Chief Financial Officer | Joined the Company in | |||||||
Mark Gliebe | 44 | Vice President and President | Joined the Company in January, 2005, 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 and General Manager of GE Industrial Motors from January, 1999 to June, 2000. | |||||||
Kenneth F. Kaplan | 59 | Vice President, Treasurer and Secretary | Joined the Company in September, 1996 and served as Vice President, Chief Financial Officer and Secretary until July, 2004; has served in his current position since July, 2004. | |||||||
David L. Eisenreich | 61 | Vice President and President, Mechanical Components & Power Generation | Elected Vice President and named President of Motor Technologies Group in 2001; Senior Vice President of Operations at Marathon Electric from 1997 until 2001. | |||||||
Fritz Hollenbach | 50 | Vice President, Administration and Human Resources | Elected Vice President, Administration and Human Resources in 2001; Vice President, Human Resources in Mechanical Group from 1994 until 2001. | |||||||
8
Website Disclosure
The Company’s Internet address is www.regal-beloit.com. We make available free of charge (other than an investor’s own Internet access charges) through our Internet website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. We are not including the information contained on or available through our website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
The Company has adopted a code of ethics and a code of conduct that apply to our principal executive officer and principal financial officer, as well as to all our directors, officers and employees. These codes are available on our website, along with our current Corporate Governance Guidelines, atwww.regal-beloit.com. We intend to disclose through our website any amendments to, or waivers from, the provisions of these codes that apply to our principal executive officer or principal financial officer.11
Properties We have manufacturing, sales and service facilities throughout the United States and Canada and in Mexico, Europe, China and The following table provides information regarding our principal facilities. Location(1) Square Footage Status Description of Use Electrical Segment Wausau, WI 498,000 Owned Manufacturing Juarez, Mexico 335,000 Owned Manufacturing Reynosa, Mexico 320,000 Owned Manufacturing Springfield, MO 290,000 Owned Manufacturing Grafton, WI 230,000 Owned Manufacturing Indianapolis, IN 221,000 Leased Warehouse Faridabad, India 220,000 Owned Manufacturing Lebanon, MO 187,000 Owned Manufacturing Lincoln, MO 120,000 Owned Manufacturing Fort Wayne, IN 110,700 Leased Office/Lab Lima, OH 107,000 Owned Manufacturing Blytheville, TX 107,000 Leased Manufacturing West Plains, MO 106,000 Owned Manufacturing Black River Falls, WI 103,000 Owned Manufacturing All Other (32) 654,449 (1) (1) Mechanical Segment Chicago, IL 283,000 Owned Manufacturing Liberty, SC 174,000 Owned Manufacturing Aberdeen, SD 165,000 Owned Manufacturing Shopiere, WI 132,000 Owned Manufacturing Union Grove, WI 122,000 Owned Manufacturing New Bedford, MA 116,000 Owned Manufacturing All Other (13) 578,000 (1) (1) (1) Less significant manufacturing, service and distribution and engineering facilities located in the United States, Canada, Europe, and Asia: Electrical leased square footage 455,139, Mechanical leased 46,692. Legal Proceedings Enron Wind is seeking to recover the purchase price of the generators and transportation costs totaling about $21 million. In addition, although the Warranty Agreement contains a waiver of consequential, incidental, and punitive damages, Enron Wind claims that this limitation is unenforceable and seeks recovery of consequential and incidental damages incurred by it and by its customers, as well as punitive damages, related to the Marathon generators. Enron Wind has asserted claims of breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, and intentional interference with contractual relations. Marathon has filed a motion with the court seeking to have many of Enron Wind’s claims dismissed. The court has not yet ruled on this motion. 12 The Company believes that this action is without merit and that it has meritorious defenses to the action. The Company intends to defend vigorously all of the asserted claims. The litigation is in an early discovery phase and it is difficult for the Company to predict the impact the litigation may ultimately have on the Company’s results of operations or financial condition, including the expenses the Company may incur to defend against the action. As of December 31, 2004, no amounts have been recorded in the Company’s financial statements related to this contingency. In March 2004, the Company received notice from the U.S. Environmental Protection Agency (“U.S. EPA”) that it was identified as one of three potentially responsible parties regarding an environmental site in Illinois. The Company had previously reached a settlement in 1999 with the U.S. EPA regarding the same site. Management provided its expert’s assessment of this site to the U.S. EPA, which has not proceeded with any enforcement action. Based on the facts, the Company believes that there will be no further assessments related to this site. As of December 31, 2004, no amounts have been recorded in the Company’s financial statements related to this contingency. From time to time, the Company, in the normal course of business, is involved in various claims and legal actions arising out of its operations. The Company does not believe that the ultimate disposition of any currently pending claims or actions would have a material adverse effect on the Company or its financial condition. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, Part II ITEM 5. Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. The Company’s Common Stock, $.01 par value (“Common Stock”), is traded on the New York Stock Exchange under the symbol “RBC.” The Company submitted its Section 303A.12(a) CEO Certification to the NYSE on January 10, 2005. Prior to January 21, 2005, the Company’s stock was traded on the American Stock Exchange under the symbol “RBC.” The following table sets forth the range of high and low closing sales prices for the Common Stock for the period from January 1, 2004 2003 Price Range Price Range Dividends Dividends High Low Paid High Low Paid 1st Quarter $ 23.20 $ 19.41 $ .12 $ 21.75 $ 14.96 $ .12 2nd Quarter 22.22 19.14 .12 21.64 15.05 .12 3rd Quarter 24.33 20.40 .12 24.45 18.48 .12 4th Quarter 29.38 23.13 .12 23.07 19.20 .12 The Company has paid As part of the consideration for the acquisition of General Electric Company’s HVAC motors and capacitors businesses, the Company issued 4,559,048 shares of common stock to GE in a transaction exempt from registration inder Section 4(2) of the Securities Act of 1933, as amended. The Company and GE entered into a Shareholder Agreement as part of the transaction. This agreement was filed on Form 8-K on January 6, 2005. Item 12 of this Annual Report on Form 10-K contains certain information relating to the Company’s equity compensation plans Selected Financial Data The selected statement of income data for the years ended December 31, 2004, 2003 (In Thousands, Except Per Share Data) 2004 2003 2002 2001 2000 $ 756,557 $ 619,098 $ 605,292 $ 663,571 $ 598,203 55,162 47,226 47,227 56,060 71,608 30,435 25,206 24,518 19,590 33,771 1,352,052 734,445 733,988 746,599 792,407 547,350 195,677 222,812 345,667 393,510 538,179 398,704 381,423 280,150 273,889 1.24 1.01 1.01 .94 1.61 Earnings Per Share – Assuming Dilution 1.22 1.00 1.01 .93 1.61 .48 .48 .48 .48 .48 21.87 15.93 15.24 13.42 13.10 Basic Average Shares Outstanding 24,603 25,030 24,187 20,869 20,984 Diluted Average Shares Outstanding 24,904 25,246 24,310 21,124 20,996 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation Unless the context requires otherwise, references below to “we,” “us,” “our” or the “Company” refer collectively to REGAL-BELOIT CORPORATION and its subsidiaries. Overview Our business is cyclical and dependent on industrial and consumer spending and is therefore impacted by the strength of the economy generally, and other factors such as interest rates and commodity prices. The economic slowdown, which began in mid-2000, became an economic recession in 2001, and was characterized by weak industrial markets throughout 2002 and Rising material costs, particularly copper, steel and aluminum, presented the most significant We made two significant acquisitions during the year. On August 30, we completed the acquisition of General Electric’s Commercial AC motor business for $72.0 million in cash. The Commercial AC motors business, which is projected to add approximately $140 million in annual sales, manufactures a full line of AC motors for pump, compressor, equipment and commercial HVAC applications. On December 31, 2004, we completed the acquisition of General Electric’s HVAC motors and capacitors businesses (“HVAC business”) for $270 million in cash and 4,559,048 shares of our common stock. The HVAC business is projected to add approximately $500 million in annual sales and manufactures a full line of electric motors for use principally in residential HVAC systems and capacitors for HVAC systems, high intensity lighting and other applications. We enter 2005 encouraged about the prospects for our legacy businesses as well as the newly acquired businesses. The overall market conditions continue to be positive, driven by consumer and business spending. Raw material prices continue to have a negative impact on margins even after the price increases were put into effect in 2004. We plan to continue to address the margin pressures through price increases and productivity improvements in 2005. Results of Operations 2004 versus 2003 Our net sales were $756.6 million in 2004, a 22.2% increase from $619.1 million in 2003. Excluding the sales impact from the acquisition of the CAC business, sales increased 13.5%. The increase in sales was driven by strong demand in the majority of our markets. Sales in the Electrical segment increased 27.1% to $557.0 million. Excluding the sales from the CAC business, sales in the Electrical segment were $503.3 million, an increase of 14.8% over 2003. Sales for the joint ventures that the Company owned for the entire year, which are included in the Electrical segment, increased $10.7 million, or 53% over 2003. Sales in our Our gross profit was $167.1 million, an increase of 13.8% over the $146.8 million reported in 2003. As a percent of sales, gross profit was 22.1% as compared to 23.7% in 2003. The increase in raw material costs drove this decrease, as price increases and our implemented productivity actions only partially offset the increased costs. Our operating expenses in 2004 were $111.9 million, 12.4% above $99.5 million in 2003. The increase was primarily driven by the sales and distribution costs driven by the sales volume increase. Operating expenses as a percentage of sales decreased to 14.8% in 2004 from 16.1% in 2003, reflecting fixed cost leverage and productivity. Income from operations was $55.2 million, an increase of 16.8% over the $47.2 million reported in 2003. Income from operations as 15 Our net interest expense in 2004 was $6.6 million, which was an increase of 3.5% over the $6.4 million in 2003. This increase was due to a slightly increased balance of average debt outstanding. The average interest rate we paid on outstanding debt in 2004 was 2.7% which was unchanged from the 2.7% average in 2003. Our effective tax rate on income Our 2004 net income of 2003 versus 2002 Our net sales were $619.1 million in 2003, a 2.3% increase from $605.3 million in 2002. The higher sales were attributable to our Electrical Our gross profit rose 2.6% in 2003 to $146.8 million from $143.1 million the previous year. Gross profit as a percentage of net sales (“gross profit margin”) in 2003 of 23.7% was virtually unchanged from 2002, although increasing to 24.1% in the fourth quarter of 2003 above the 23.6% average margin of the first nine months of 2003. The fourth quarter 2003 gross profit margin increase above the rest of 2003 was due primarily to improved manufacturing productivity and the completion of moving production from three of our factories, which are for the most part now closed, into several of our other facilities. Our operating expenses in 2003 were $99.5 million, 3.8% above $95.9 million in 2002. Of the $3.6 million increase, approximately $1.2 million, or 33%, was due to the operating expenses of our consolidated Jinling joint venture which began January 1, 2003. Operating expenses as a percentage of sales increased to 16.1% in 2003 from 15.8% in 2002. Income from operations of $47.2 million was virtually unchanged from 2002. Income from operations as a percentage of sales (“operating income margin”) was 7.6% in 2003 versus 7.8% in 2002. Electrical Our interest expense in 2003 decreased 31.2% following a 57.7% decrease in 2002, to $6.5 million from $9.4 million in 2002, due primarily to a combination of lower average interest rates in the United States in 2003 than in 2002 and to our lower average debt outstanding. The average interest rate we paid on outstanding debt in 2003 was 2.7%, following a 3.5% average in 2002. Our effective tax rate on income before taxes increased to 36.2% in 2003 from 34.7% in 2002. This increase was due primarily to the impact of one-time tax refunds we received in 2002. Our 2003 net income of $25.2 million was 2.8% improved from $24.5 million in 2002. Net income as a percentage of sales of 4.1% in 2003 was virtually unchanged from 2002. Basic earnings per share Liquidity and Capital Resources Our working capital was 16 GE and the remainder from the increased Cash flow from operations was $38.2 million in 2004, a 35.3% decrease from $59.0 million in Cash flow Our primary financing source is our As a result of our capital structure, we are exposed to interest rate risk. Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments The following is a summary of the Company’s contractual obligations and payments due by period as of December 31, Payments due by Period Long-Term Debt Operating Leases Purchase Total Contractual Less than 1 Year $ 20,310 $ 3,894 $ 47,631 $ 71,835 1 – 3 Years 41,174 6,280 — 47,454 3 – 5 Years 458,543 2,367 — 460,910 More than 5 Years 121,163 2,070 — 123,233 Total $ 641,190 $ 14,611 $ 47,631 $ 703,432 *Variable rate debt based on December 31, 2004 rates. **Excludes funding of pension or other retirement benefits. We utilize blanket purchase orders (“blankets”) to communicate expected annual requirements to many of our suppliers. Requirements under blankets generally do not become “firm” until a varying number of weeks before our scheduled production. The purchase obligations shown in the above table represent the value we consider “firm”. At December 31, 17 The Company did not have any variable interest entities as of December 31, Critical Accounting Policies Revenue Recognition Goodwill and Retirement Plans made, the investments made by the plans, overall conditions and movement in financial markets, particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from assumptions, annual expenses and recorded assets or liabilities of these defined benefit plans may change significantly from year to year. New Accounting PronouncementsAsia.India. Our Electrical Groupsegment currently operates 38includes 46 manufacturing, and service and distribution facilities, of which 19 are principal manufacturing facilities. The Electrical Group’ssegment’s present operating facilities contain a total of approximately 2,205,5103,609,000 square feet of space of which approximately 660,000894,000 square feet are leased. Our Mechanical Groupsegment currently operates 16includes 19 manufacturing, and service and distribution facilities, of which 13 are principal manufacturing facilities. The Mechanical Group’ssegment’s present operating facilities contain a total of approximately 1,347,0001,570,000 square feet of space of which approximately 89,00047,000 square feet are leased. Our principal executive offices are located in Beloit, Wisconsin in an owned approximately 24,000 square foot office building. We believe our equipment and facilities are well maintained and adequate for our present needs.ITEM 3. Legal ProceedingsAn action was filed on June 4, 2004 and amended in September 2004, against one of the Company’s subsidiaries, Marathon Electric Manufacturing Corporation (“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The action was filed in the United States Bankruptcy Court for the Southern District of New York where each of the Enron Wind entities has consolidated its Chapter 11 bankruptcy petition as part of the Enron Corporation bankruptcy proceedings. In the action against Marathon, Enron Wind has asserted various claims relating to the alleged failures and/or degradations of performance of about 564 generators sold by Marathon to Enron Wind from 1997 to 1999. In January 2001, Enron Wind and Marathon entered into a “Generator Warranty and Settlement Agreement and Release of All Claims” (“Warranty Agreement”). This Warranty Agreement resolved various issues related to past performance of the generators, provided a limited warranty related to the generators going forward, and contained a release by all parties of any claims related to the generators other than those arising out of the obligations contained in the Warranty Agreement.2003.2004.913 Market for the Registrant’s Common Equity and Related Shareholder Matters20022003 through December 31, 2003.2004.2003 2002 Price Range Price Range High Low Dividends
PaidHigh Low Dividends
Paid1st Quarter $21.75 $14.96 $.12 $26.85 $20.60 $.12 2nd Quarter 21.64 15.05 .12 29.31 21.35 .12 3rd Quarter 24.45 18.48 .12 24.21 16.00 .12 4th Quarter 23.07 19.20 .12 21.12 15.75 .12 174178 consecutive quarterly dividends through January 2004.2005. The number of registered holders of Common Stock as of December 31, 20032004 was 841.792.Equity Compensation Plan InformationThe Board of Directors approved, in 2000, a repurchase program of up to 2,000,000 common shares of Company stock. Management was authorized to effect purchases from time to time in the open market or through privately negotiated transactions. In April 2004, in association with the Company’s convertible subordinated debt offering, the Company repurchased 614,200 shares of its stock at a price of $20.35. Through December 31, 2004, the Company has repurchased 774,100 shares at an average purchase price of $19.67 per share under this program.Plan Category Number of securities to be
issued upon exercise of
outstanding options,
warrants and rightsWeighted-average exercise
price of outstanding
options, warrants and
rightsNumber of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))(a) (b) (c) Equity compensation plans approved by security holders 1,282,618 $21.22 1,586,100 Equity compensation plans not approved by security holders — — — Total 1,282,618 $21.22 1,586,100 2002 and 20012002 and the balance sheet data at December 31, 20032004 and 20022003 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the years ended December 31, 20002001 and 19992000 and the balance sheet data at December 31, 2002, 2001 2000 and 19992000 are derived from audited financial statements not included herein.
Year Ended December 31(In Thousands, Except Per Share Data) Year Ended December 31 2003 2002* 2001 2000 1999 Net Sales $619,098 $605,292 $663,571 $598,203 $550,661 Income from Operations 47,226 47,227 56,060 71,608 72,440 Net Income 25,206 24,518 19,590 33,771 38,067 Total Assets 734,445 733,988 746,599 792,407 508,165 Long-term Debt 195,677 222,812 345,667 393,510 148,166 Shareholders’ Investment 398,704 381,423 280,150 273,889 252,626 Per Share of Common Stock: Per Share of Common Stock: Earnings Per Share 1.01 1.01 .94 1.61 1.82 Earnings Per Share - Assuming Dilution 1.00 1.01 .93 1.61 1.80 Cash Dividends Declared .48 .48 Shareholders’ Investment 15.93 15.24 13.42 13.10 12.04 Average Number of Shares Outstanding 25,030 24,187 20,869 20,984 20,959 Average Number of Shares - Assuming Dilution 25,246 24,310 21,124 20,996 21,170 *Amortization of goodwill ceased as of January 1, 2002 (see Note 3 of Notes to Consolidated Financial Statement).1410 Management’s Discussion and Analysis of Financial Statements2003, was2003. The industrial economy began to strengthen in early 2004 in our served markets. Net sales in 2004 increased, including the impact of the GE Commercial AC motor acquisition in August 2004, 22.2% to $756.6 million. Net income rose 20.7% to $30.4 million.factornegative impact to our profitability in 2004. By the fourth quarter, spot prices for steel and copper were approximately double the level from the prior year. We implemented various price increases three times during the year, with the last taking effect in December. The price increases only partially offset the material cost increases.performanceMechanical segment were $199.6 million, which was an increase of 10.4% over 2003. Sales in both segments were positively impacted by improved consumer and business spending and the price increases implemented by the Company during 2004.ita percentage of sales (“operating income margin”) was 7.3% in 2002. While our net sales2004 versus 7.6% in 2003. Electrical segment income from operations increased 16.4% in 2004 to $39.4 million from $33.9 million in 2003, and operating income margin decreased to 7.1% in 2004 from 7.7% in 2003. The impact of the raw material cost increases coupled with an increase in healthcare costs for employees were the primary drivers of this decrease. These factors were partially offset by price increases, favorable volume impacts, and the operating expense fixed cost leveraging and productivity. Mechanical segment income from operations increased 2.3%17.8% to $619.1$15.7 million in 2004 from $13.3 million in 2003. The Mechanical segment operating income margin for 2004 improved to 7.9% from 7.4% in 2003. The results of the Mechanical segment reflect the positive impacts of increased volume, price increases, and the 3rd quarter gain on the sale of property located in the U.K. ($1.5 million pretax), partially offset by raw material cost increases.rose 2.8%before taxes decreased to $25.2 million,31.9% in 2004 from 36.2% in 2003, including tax effects of the minority interest. This decrease was best characterized as lacking a meaningful trend, either up or down,due primarily to the impact of the favorable resolution of several tax matters recorded in our markets.By the endfourth quarter ($1.4 million) and the favorable tax treatment of the third quarter gain on the sale of 2003 we had completed, for the most part, the three plant closings/consolidations we announcedproperty located in the fourth quarterU.K ($.5 million).2002. Both$30.4 million improved 20.7% from the $25.2 million in the facilities being closed and2003. Net income as a percentage of sales was 4.0% versus 4.1% in the facilities into which production2003. Basic earnings per share was moved, our productivity during 2003$1.24 in 2004, a 22.8% increase from $1.01 in 2003. Fully diluted earnings per share was negatively impacted to varying degrees, accounting for$1.22, a portion of our decreased operating income margin. While these moves took longer than we had expected, we believe they will result22.0% increase from $1.00 in improved productivity and profitability in future quarters.2003.We again strengthened our balance sheet in 2003 by reducing our outstanding debt by $27.2 million to $195.8 million at December 31, 2003. We increased our investment in our facilities by spending $18.0 million for capital equipment during the year.We enter 2004 with increased optimism that orders and sales will, for the first time in several years, show a meaningful upward trend. We base this optimism on the macro economic forecasts being published, the comments and attitudes of many of our customers and increased quoting activity in many of our markets. While significant commodity cost pressures exist currently, particularly with copper and steel, two of our largest raw materials, we cannot predict where these costs will be for all of 2004. For the first time since the economic slowdown began in 2000, we have been able to institute price increases with most of our products and many of our customers. The market appears to have accepted our price increases and we believe we can offset the higher current costs of our purchased materials and parts.Results of OperationsGroup,segment, whose 2003 net sales of $438.4 million were 4.7% improved from 2002’s $418.6 million. This sales increase was due primarily to strength in our power generator and related controls products, including our generator joint venture in China, particularly in the second half of 2003. The increase in the generator and control sales was due primarily to an overall improvement in market demand as 2003 progressed, in part aided by the impact of the Northeast power outage, Hurricane Isabel and Middle East rebuilding projects. Sales of our electric motor products were virtually unchanged in 2003 from 2002. Mechanical Groupsegment 2003 net sales of $180.7 million were 3.2% below $186.7 million in 2002 and were basically flat throughout 2003, reflecting broad-based weakness in our markets.Groupsegment income from operations decreased 4.5% in 2003 to $33.9 million from $35.5 million in 2002, and operating income margin to 7.7% in 2003 from 8.5% in 2002. In addition to the impact of our joint venture discussed above, the impact on 2003 productivity of the plant consolidation programs also discussed above, as well as continued pricing pressures, higher utility and other factory costs and lower overhead absorption in order to reduce inventories were also factors in the reduced Electrical Groupsegment operating income margin. Mechanical Groupsegment income from operations increased 13.7% to $13.3 million in 2003 from $11.7 million in 2002 and operating income margin to 7.4% from 6.3% for 2003 and 2002, respectively. Excluding the $1.2 million pre-tax fourth quarter 2002 charge relating to a plant closing/consolidation completed in 2003’s first quarter, the Mechanical Group’ssegment’s 7.4% operating income margin would still be .5% higher in 2003 than in 2002, primarily due to improved productivity and to favorable mix of products sold. (See also Note 11 of Notes to Consolidated Financial Statements.)11(“EPS”) was $1.01 in 2003 and 2002, while diluted EPSearnings per share was $1.00 compared to $1.01 a year earlier.2002 versus 2001Our net sales in 2002 decreased 8.8% to $605.3 million from 2001 net sales of $663.6 million. The decrease in net sales was attributable to both of our two segments. Electrical Group net sales decreased 8.4% from $457.0 million in 2001 to $418.6 million in 2002, while Mechanical Group net sales of $186.7 million in 2002 were 9.6% lower than 2001 net sales of $206.6 million. The reduced sales were primarily due to continued weakness in industrial manufacturing markets.Our gross profit decreased 13.7% to $143.1 million in 2002 from $165.9 million in 2001. Gross profit as a percentage of net sales (“gross profit margin”) was 23.6% in 2002, down from 25.0% in 2001. The reduction in gross profit margin was due primarily to lower overhead absorption resulting from reduced production volumes and to lower average prices to customers. Also contributing to the reduced margin was a $1.2 million pre-tax charge in the fourth quarter of 2002 for plant closings and consolidations in our Mechanical Group.Operating expenses decreased 12.7% to $95.9 million in 2002 from $109.8 million in 2001. No longer amortizing goodwill in 2002 accounted for $8.4 million of this decrease, while the remaining $5.5 million reduction was due to reduced spending and headcount in selling and administrative expenses. As a percentage of sales, operating expenses declined to 15.8% in 2002 from 16.5% in 2001. Our income from operations of $47.2 million in 2002 was 15.9% below $56.1 million in 2001. This decline occurred in both of our segments, Electrical Group income from operations being down 11.7% to $35.5 million in 2002 (down 27.0% adjusting 2001 for not amortizing goodwill), and the Mechanical Group being down 26.4% to $11.7 million in 2002. (See also Note 11 of Notes to Consolidated Financial Statements.) Income from operations as a percentage of net sales (“operating income margin”) for the Company decreased to 7.8% in 2002 from 8.4% in 2001. This decrease in operating income margin was due primarily to the reduction in gross profit margin, partly offset by the lower operating expenses as a percentage of sales.Interest expense decreased 57.7% to $9.4 million in 2002 from $22.2 million in 2001, due to a combination of lower debt outstanding, lower interest rates in the United States and a reduced mark-up over LIBOR (London Interbank Offered Rate) we paid to our lenders. The lower debt resulted from repaying $90 million of our loans in March 2002 following our public stock offering and further loan repayments from operating cash flow during the year. The average rate of interest we paid on outstanding debt in 2002 was 3.5%, following a 5.9% average in 2001. Our effective tax rate on income before taxes decreased to 34.7% in 2002 from 42.5% in 2001. The primary factors in the decrease were the impact of non-deductible goodwill amortization in 2001 and one-time tax refunds we received in 2002.Our net income increased 25.0% to $24.5 million in 2002 from $19.6 million in 2001. As a percentage of net sales, net income increased to 4.1% in 2002 from 3.0% in 2001. Basic and diluted earnings per share (“EPS”) were each $1.01 in 2002, as compared to $.94 basic EPS and $.93 diluted EPS in 2001, increases of 7.4% and 8.6%, respectively. Average number of shares outstanding assuming dilution increased 15.1% in 2002 to 24.3 million from 21.1 million in 2001 as a result of our March 2002 public stock offering. The 2002 net income and EPS numbers are after a fourth quarter after-tax charge of $725,000, or $.03 per share, for plant closings and consolidations in our Mechanical Group. (See also Note 3 of Notes to Consolidated Financial Statements.)12$160.1$279.7 million at December 31, 2003,2004, an increase of 1.7%76.9% from $157.4$158.1 million a year previously.at December 31, 2003. The increase was due primarily to a $7.9$237.5 million increase in current assets partly offset by a $5.2$115.9 million increase in current liabilities. Accounts receivable increased $6.4$91.5 million during 2003 due primarily to our2004, of which $64.1 million resulted from the acquisitions of businesses fromnet sales.sales volume. Accounts payable increased $4.1$70.2 million in 2003 primarily2004, with $59.1 resulting from the acquisitions and a general increase in accounts payable due to improved business activity at the end of 2004 versus at the end of 2003. Other accrued expenses increased $31.8 million in 2004 as a result of improved business activity as we entered 2004 from when we entered 2003 a year ago. Other accrued expenses decreased $5.3 million in 2003 due primarily to non-recurring charges against liabilities accrued on December 31, 2002 associated with plant closings/consolidations. Federal and state income tax accruals increased $6.2 million during 2003 as a result of timing changes in estimated tax payments.the acquisitions due. Our current ratio at December 31, 20032004 decreased slightly to 3.1:2.4:1 from 3.2:3.0:1 at year-end 2002.2003.2003, an 8.5% increase from $54.4 million2003. Increases in 2002. Reduced inventories and higher current liabilities,receivables resulting from the increased sales volumes, in part offset by higher receivables,payables, account for the increase.decrease. Cash flow used in investing activities totaled $338.5 million versus $16.6 million versus $11.9in 2003. Capital spending decreased by $1.7 million in 2002. Increased capital spending accountedto $16.3 million. The net cash paid for the higher investment spending due to an increase inacquisitions of the numberCAC and HVAC businesses totaled $327.9 million. Offsetting these investments were the proceeds from the sale of capital projects in 2003, including three facility expansionsfacilities and a computer system conversion, and to a general increase in spending after unusually low capital spending in 2002.equipment, which totaled $5.9 million. Our commitments for property, plant and equipment as of December 31, 20032004 were approximately $2.1$2.3 million. We believe that our present facilities, augmented by planned capital expenditures, are sufficient to provide adequate capacity for our operations in 2004.2005.used inprovided by financing activities in 2003 was $39.0$322.4 million, after $43.6 million in 2002. We reducedas funds were obtained to finance our outstandingacquisitions. The addition to long-term debt $27.1of $115 million represents the gross proceeds of the convertible senior subordinated debt offering we completed in 2003April 2004. We repurchased $12.5 million of our common stock simultaneously with the closing of the debt offering. The aggregate financing fees of $5.9 million were associated with the debt offering and our amended and restated credit agreement on December 30, 2004. The net borrowings of long-term debt of $236.8 million reflects using the $99.3 million net proceeds of the debt offering to $195.7repay loans under our credit facility, the borrowing of approximately $342 million at December 31, 2003 from $222.8under our credit facility to fund the cash portions of our two acquisitions and $5.9 million at year-end 2002.net repayments of long-term debt provided by our 2004 business operations. We paid $12.0$11.9 million in dividends during 2003.2004.$275$475 million long-term unsecured revolving credit facility (the “Facility”) that expires on December 31, 2005, which we reduced $25May 5, 2009. The Facility was increased by $250 million in March 2003December 2004 from $300the previous $225 million. The Facility requires us to maintain specified financial ratios and to satisfy certain financial condition tests, with which wetests. We were in compliance with all of these ratios and tests as of December 31, 2003.2004. Those tests consist of a minimum interest coverage ratio of 3.75 to 1.0, a maximum funded debt to EBITDA ratio of 4.00 to 1.0, a maximum senior funded debt to EBITDA ratio of 3.00 to 1, and a minimum net worth consisting of the sum of $435.0 million plus 50% of net income for each quarter ending after March 31, 2005 plus 75% of the net proceeds of all issuances of equity securities by the Company. At year-end 2003,2004, we had $8.0$46.8 million of available borrowing capacity. Although the Facility provides up to $275 million of credit, availability under the Facility may be limited by the funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio covenant, which was the case at December 31, 2003. We believe we will satisfy the financial ratios and tests specified in the Facility for the foreseeable future. We also believe that the combination of our operating cash flow, which has averaged over $60$50 million per year over the last three years and we believe is indicative of what we might achieve in 2004,2005, and borrowing availability under the Facility will provide sufficient cash flow to finance our existing operations for the foreseeable future. (See also Note 5 of Notes to Consolidated Financial Statements.)VirtuallyExcept for the $115 million of convertible senior subordinated debt, virtually all our debt is under a credit facilitythe Facility with a variable interest rate based on a margin above LIBOR. As a result, interest rate changes impact our future earnings and cash flows assuming other factors are constant. A hypothetical 10% change in our weighted average borrowingthe LIBOR rate on ourthe Facility debt outstanding debt at December 31, 2003,2004 would result in aan annual after-tax change in after-tax annual earningsnet income of approximately $155,000.$645,000. We had no material foreign currency rate risk or material derivative instruments at December 31, 2003.2004.20032004 (in thousands):Payments due by Period Long-Term Debt Operating Leases Purchase Obligations Total Contractual
ObligationsLess than 1 Year $ 125 $ 4,725 $39,782 $ 44,632 1 – 3 Years 191,424 3,056 — 194,480 3 – 5 Years 731 2,388 — 3,119 More than 5 Years 3,522 6,604 — 10,126 Total $195,802 $16,773 $39,782 $252,357 13
Including Estimated*
Interest Payments
Obligations
Obligations**2003,2004, the Company had outstanding standby letters of credit totalling $7,005,000, alltotaling $5,066,000, $3,000,000 of which would expireexpires in 2004.2007, the balance expires in 2005. We had no other material commercial commitments.2003.2004. Other than disclosed in the table above and the previous paragraph, the Company had no other material off-balance sheet arrangements.The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements and the amounts of our revenues and expenses during the periods reported. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are our critical accounting policies which could have the most significant effect on our reported results and require management’s most difficult, subjective or complex judgments.Sales and related cost
The Company recognizes revenue upon transfer of sales are recognizedtitle, which generally occurs upon shipment of products as this is when title and risk of ownership transferthe product to the customer. The pricing of our products sold is generally supported by customer purchase orders, and accounts receivable collection is reasonably assured at the time of shipment. AnyEstimated discounts from our standard pricesand rebates are recognizedrecorded as a reduction of sales andin the related customer receivable at the time of sale.same period revenue is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical experience. Estimated customer rebates are accruedShipping and recognized as a reduction of sales in a systematic manner throughout the year.Allowance for Doubtful AccountsWe record allowances for doubtful accounts after customer-specific analysis and general analysis of past due balances, economic conditions and historical experience. Allowance levels change as customer-specific circumstances and the general analysis areas above change.Excess and Obsolete Inventory ReservesOur systems track the frequency of usage of inventory by part number and reports are generated monthly. Based on these analyses of historical usage and management’s evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete parts, reserveshandling costs are recorded as revenue when billed to the customers.changed. ExcessOther Intangibles
In accordance with SFAS No. 142, “Goodwill and obsolete inventoryOther Intangible Assets,” goodwill is periodically disposednot amortized; however it is tested for impairment at least annually and with any resulting adjustment charged to the results of through saleoperations. Amortization continues to third parties, scrapping or other means, and the reserves appropriately reduced.Impairment of Long-Lived AssetsWe review long-lived assets, which include property, plant and equipment, andbe recorded for other intangible assets with definitive lives such as patentsdefinite lives. (See Note 3, “Goodwill and trademarks, for impairment whenever events or changes in circumstances indicate that the carrying amountOther Intangibles” of an asset in our accounting records may not be fully recoverable. Additionally, we evaluate the recoverability of goodwill and other intangible assets with indefinite lives at least annually, independent of specific events. We assess these assets for impairment based on estimated future cash flows from these assets, which estimates require usNotes to make assumptions about future demand for the Company’s products and services, future market conditions, future growth rates and the discount rate, among others. Changes to these assumptions could result in an impairment charge in future periods.Product Warranty ReservesConsolidated Financial Statements.)We maintain reserves for product warranty to cover the stated warranty periods for our products. We establish or change such reserves based on our evaluation of historical warranty experience and specific significant warranty matters when they become known and can reasonably be estimated.
Approximately half of our employees are covered by defined benefit pension plans with the remaining employees covered by defined contribution plans. Our obligations under the defined benefit plans are determined with the assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide us with information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases. Based upon the assumptions14The valuation date for our defined benefit plans was changed in 2003 to December 31 from September 30. Based on our annual review of actuarial assumptions as well as historical rates of return on plan assets and existing long-term bond rates, we set the long-term rate of return on plan assets at 8.75% and the discount rate at 6.25%5.75% for our defined benefit plans. Primarilyplans as a result of the change in the discount rate, we expect pension expense to increase approximately $1.7 million in 2004 versus 2003.December 31, 2004. (See also Note 7 of Notes to Consolidated Financial Statements.)Self-Insurance LiabilitiesStatements).Our insurance programs include health care, workers’ compensationFurther discussion of the Company’s accounting policies is contained in Note 2 of Notes to Consolidated Financial Statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and product liability. We self-insure fromassumptions that affect the first dollarreported amounts of loss upassets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on other assumptions that are believed to various specified retention levels per occurrence. Eligible losses in excessbe reasonable under the circumstances, the results of self-insurance retention levels and up to stated liability limits are covered by policies we purchase from insurance companies, as are eligible losses when and if we purchase aggregate stop-loss policies. We estimatewhich form the annual costsbasis for making judgments about the carrying value of assets and liabilities of our self-insurance programs using our Company’s claims experience and risk exposure levels for the periods being valued. Differences in actual costs of claims from estimated costs will likely result in adjustments to expenses and liabilities.Litigation and ClaimsWe record expenses and liabilities when we believe that an obligation of the Company on a specific matter is probable and we have a basis to reasonably estimate the value of the obligation. This methodology is used for environmental matters and legal claims that are filed against the Companynot readily apparent from time to time. The uncertainty that is associated with such matters frequently requires adjustments to the liabilities previously recorded.other sources. Actual results may differ from these estimates under different assumptions or conditions.
In May 2003,December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150,123(R), “Share-Based Payment”, which requires companies to expense the value of employee stock options and similar awards. This Statement is a revision of FASB Statement No. 123, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150)Stock-Based Compensation”. This Statement prescribes how an issuer classifies and measures certain financial instruments.supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 150 wasNo. 123R(R) is effective forbeginning the Company on July 1, 2003. There was noCompany’s third quarter of 2005. Management is currently assessing the impact to the Company fromof adopting SFAS 150.No. 123(R).
In November 2002,2004, the FASB issued InterpretationSFAS No. 45, Guarantor’s Accounting151, “Inventory Costs,” an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and Disclosure Requirements for Guarantees, Including Indirect Guaranteeswasted materials (spoilage) should be recognized as current-period charges and require the allocation of Indebtedness of Others. Adoption of this interpretation on January 1, 2003 did not have a material impactfixed production overheads to inventory based on the consolidated financial statements.
Innormal capacity of the production facilities. The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting15, 2005. Earlier application is permitted for Costs Associated with Exit or Disposal Activities.inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of this pronouncement is not expected to have a significant impact on the Company’s results of operations or financial position.
18
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 using the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted by the Public Company Accounting Oversight Board auditing standards, the acquisitions of the two General Electric businesses acquired by the Company in 2004 (which represented 21% of total assets at December 31, 2004 and 7% of 2004 revenues) were excluded from the scope of management’s assessment of internal control over financial reporting as of December 31, 2004. Based on this assessment, the Company’s management believes that, as of December 31, 2004, the Company’s internal control over financial reporting was effective based on those criteria.
The Company’s auditors, Deloitte & Touche LLP, have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That attestation report follows.
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of REGAL-BELOIT CORPORATION:
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that REGAL-BELOIT CORPORATION and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report Over Financial Reporting, management excluded from their assessment the internal control over financial reporting at the CAC and HVAC businesses which were acquired on August 30, 2004 and December 31, 2004, respectively, and whose financial statements reflect total assets and revenues constituting 21% and 7%, respectively, of the related consolidated financial statement on January 1, 2003amounts as of and for the year ended December 31, 2004. Accordingly, our audit did not include the internal control over financial reporting at the CAC or HVAC businesses. The Company’s management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material impacteffect 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 in a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004 of the Company and our report dated March 8, 2005 expressed an unqualified opinion on those financial statements.
|
DELOITTE & TOUCHE LLP |
Milwaukee, Wisconsin |
March 8, 2005 |
20
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk Information required by Item 305 of Regulation S-K is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page Financial Statements and Supplementary Data Quarterly Financial Information (Unaudited) Quantitative and Qualitative Disclosures About Market Risk1317 of this report.ITEM 8. Financial Statements and Supplementary Data
| (In Thousands, Except Per Share Data) | ||||||||
| 1st Qtr. | 2nd Qtr. | 3rd Qtr. | 4th Qtr. | |||||
| 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |
| Net Sales | $153,324 | $150,380 | $154,645 | $154,907 | $159,031 | $153,997 | $152,098 | $146,008 |
| Gross Profit | 36,233 | 36,326 | 37,384 | 37,984 | 36,432 | 36,577 | 36,706 | 32,256 |
| Income from Operations | 11,505 | 12,639 | 12,342 | 13,323 | 11,996 | 12,663 | 11,383 | 8,602 |
| Net Income | 6,068 | 5,788 | 6,483 | 7,037 | 6,510 | 7,111 | 6,145 | 4,582 |
| Earnings Per Share | .24 | .27 | .26 | .28 | .26 | .28 | .25 | .18 |
| Earnings Per Share – Assuming Dilution | .24 | .27 | .26 | .28 | .26 | .28 | .24 | .18 |
| Average Number of Shares Outstanding | 25,025 | 21,663 | 25,031 | 25,009 | 25,032 | 25,013 | 25,032 | 25,016 |
| Average Number of Shares – Assuming Dilution | 25,204 | 21,759 | 25,227 | 25,245 | 25,285 | 25,121 | 25,268 | 25,116 |
15
|
| (In Thousands, Except Per Share Data) |
| ||||||||||||||||||||||
|
|
| |||||||||||||||||||||||
|
| 1st Qtr. |
| 2nd Qtr. |
| 3rd Qtr. |
| 4th Qtr. |
| ||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||
|
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| 2004 |
| 2003 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net Sales |
| $ | 163,084 |
| $ | 153,324 |
| $ | 177,652 |
| $ | 154,645 |
| $ | 193,888 |
| $ | 159,031 |
| $ | 221,933 |
| $ | 152,098 |
|
Gross Profit |
|
| 38,187 |
|
| 36,233 |
|
| 40,841 |
|
| 37,384 |
|
| 42,944 |
|
| 36,432 |
|
| 45,088 |
|
| 36,706 |
|
Income from Operations |
|
| 12,444 |
|
| 11,505 |
|
| 14,174 |
|
| 12,342 |
|
| 15,591 |
|
| 11,996 |
|
| 12,953 |
|
| 11,383 |
|
Net Income |
|
| 6,860 |
|
| 6,068 |
|
| 7,629 |
|
| 6,483 |
|
| 8,927 |
|
| 6,510 |
|
| 7,019 |
|
| 6,145 |
|
Earnings Per Share |
|
| .27 |
|
| .24 |
|
| .31 |
|
| .26 |
|
| .37 |
|
| .26 |
|
| .29 |
|
| .25 |
|
Earnings Per Share – Assuming Dilution |
|
| .27 |
|
| .24 |
|
| .31 |
|
| .26 |
|
| .36 |
|
| .26 |
|
| .28 |
|
| .24 |
|
Average Number of Shares Outstanding |
|
| 25,042 |
|
| 25,025 |
|
| 24,450 |
|
| 25,031 |
|
| 24,456 |
|
| 25,032 |
|
| 24,463 |
|
| 25,032 |
|
Average Number of Shares – Assuming Dilution |
|
| 25,278 |
|
| 25,204 |
|
| 24,677 |
|
| 25,227 |
|
| 24,725 |
|
| 25,285 |
|
| 24,937 |
|
| 25,268 |
|
REPORT OF INDEPENDENT AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of REGAL-BELOIT CORPORATION:
We have audited the accompanying consolidated balance sheetsheets of REGAL-BELOIT CORPORATION and subsidiaries (the “Company”) as of December 31, 20032004 and 2002, and the related consolidated statements of income, shareholders’ investment and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 28, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 2003, and 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, as of January 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (Statement No. 142).
As discussed above, the financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. As described in Note 3, these financial statements have been revised to include the transition disclosures required by Statement No. 142. Our audit procedures with respect to the disclosures in Note 3 for 2001 included (i) agreeing previously reported net income to previously issued financial statements; (ii) agreeing the adjustment to reported net income to the Company’s underlying records obtained from management; and (iii) testing the mathematical accuracy of the information included in Note 3. In our opinion, the disclosures for 2001 in Note 3 are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.
DELOITTE & TOUCHE LLPMilwaukee, WisconsinFebruary 25, 2004
16
The following report is a copy of a report previously issued by Arthur Andersen LLP in connection with REGAL-BELOIT CORPORATION’S Form 10-K for the year ended December 31, 2001. This opinion has not been reissued by Arthur Andersen LLP in connection with this Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of REGAL-BELOIT CORPORATION
We have audited the accompanying consolidated balance sheets of REGAL-BELOIT CORPORATION (a Wisconsin Corporation), and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ investment and cash flows for each of the three years in the period ended December 31, 2001.2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the financial position of REGAL-BELOIT CORPORATION and subsidiaries as of December 31, 20012004 and 2000,2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001,2004 in conformity with accounting principles generally accepted in the United States.States of America.
ARTHUR ANDERSEN LLPMilwaukee, WisconsinJanuary 28, 2002
| |
DELOITTE & TOUCHE LLP | |
Milwaukee, Wisconsin | |
March 8, 2005 |
21
CONSOLIDATED BALANCE SHEETS | REGAL-BELOIT |
In Thousands of Dollars, Except Share Information |
Assets
| December 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | |||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 9,100 | $ | 5,591 | ||||
| Receivables, less allowance for doubtful accounts of $1,432 in 2003 and $1,465 in 2002 | 85,468 | 79,099 | ||||||
| Income tax receivable | 223 | 184 | ||||||
| Future income tax benefits | 5,104 | 6,208 | ||||||
| Inventories | 131,121 | 134,037 | ||||||
| Prepaid expenses | 6,411 | 4,413 | ||||||
| Total Current Assets | 237,427 | 229,532 | ||||||
| Property, Plant and Equipment: | ||||||||
| Land and improvements | 12,290 | 12,214 | ||||||
| Buildings and improvements | 88,812 | 85,901 | ||||||
| Machinery and equipment | 260,634 | 248,678 | ||||||
| Property, Plant and Equipment, at cost | 361,736 | 346,793 | ||||||
| Less: Accumulated depreciation | (192,638 | ) | (173,053 | ) | ||||
| Net Property, Plant and Equipment | 169,098 | 173,740 | ||||||
| Goodwill | 311,216 | 313,265 | ||||||
| Other Noncurrent Assets | 16,704 | 17,451 | ||||||
| Total Assets | $ | 734,445 | $ | 733,988 | ||||
| Liabilities and Shareholders’ Investment | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 36,179 | $ | 32,038 | ||||
| Dividends payable | 3,004 | 3,002 | ||||||
| Accrued compensation and employee benefits | 18,151 | 18,004 | ||||||
| Other accrued expenses | 12,321 | 17,604 | ||||||
| Federal and state income taxes | 7,546 | 1,324 | ||||||
| Current maturities of long-term debt | 125 | 155 | ||||||
| Total Current Liabilities | 77,326 | 72,127 | ||||||
Long-term Debt | 195,677 | 222,812 | ||||||
| Deferred Income Taxes | 46,186 | 44,913 | ||||||
| Other Noncurrent Liabilities | 11,658 | 10,661 | ||||||
Minority Interest in Consolidated Subsidiaries | 4,894 | 2,052 | ||||||
Shareholders’ Investment: | ||||||||
| Common stock, $.01 par value, 50,000,000 shares authorized, 25,031,756 issued and outstanding in 2003 and 25,020,070 issued and outstanding in 2002 | 250 | 250 | ||||||
| Additional paid-in capital | 132,313 | 132,167 | ||||||
| Less: Treasury Stock, at cost, 159,900 shares in 2003 and 2002 | (2,727 | ) | (2,727 | ) | ||||
| Retained earnings | 270,760 | 257,570 | ||||||
| Accumulated other comprehensive loss | (1,892 | ) | (5,837 | ) | ||||
| Total Shareholders’ Investment | 398,704 | 381,423 | ||||||
| Total Liabilities and Shareholders’ Investment | $ | 734,445 | $ | 733,988 | ||||
|
| December 31 |
| ||||
|
|
| |||||
|
| 2004 |
| 2003 |
| ||
|
|
|
| ||||
Assets |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and Cash Equivalents |
| $ | 31,275 |
| $ | 9,100 |
|
Receivables, Less Allowance for Doubtful Accounts of $2,376 in 2004 and $1,432 in 2003 |
|
| 176,941 |
|
| 85,468 |
|
Income Tax Receivable |
|
| 242 |
|
| 223 |
|
Future Income Tax Benefits |
|
| 6,493 |
|
| 5,104 |
|
Inventories |
|
| 246,816 |
|
| 131,121 |
|
Prepaid Expenses and Other Current Assets |
|
| 13,152 |
|
| 6,411 |
|
|
|
|
| ||||
Total Current Assets |
|
| 474,919 |
|
| 237,427 |
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
Land and Improvements |
|
| 19,026 |
|
| 12,290 |
|
Buildings and Improvements |
|
| 104,460 |
|
| 88,812 |
|
Machinery and Equipment |
|
| 335,307 |
|
| 260,634 |
|
|
|
|
| ||||
Property, Plant and Equipment, at Cost |
|
| 458,793 |
|
| 361,736 |
|
Less: Accumulated Depreciation |
|
| (205,120 | ) |
| (192,638 | ) |
|
|
|
| ||||
Net Property, Plant and Equipment |
|
| 253,673 |
|
| 169,098 |
|
Goodwill |
|
| 544,440 |
|
| 311,216 |
|
Purchased Intangible Assets, net of Amortization |
|
| 52,058 |
|
| — |
|
Other Noncurrent Assets |
|
| 26,962 |
|
| 16,704 |
|
|
|
|
| ||||
Total Assets |
| $ | 1,352,052 |
| $ | 734,445 |
|
|
|
|
| ||||
Liabilities and Shareholders’ Investment |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Accounts Payable |
| $ | 106,374 |
| $ | 36,179 |
|
Dividends Payable |
|
| 3,483 |
|
| 3,004 |
|
Accrued Compensation and Employee Benefits |
|
| 30,256 |
|
| 18,151 |
|
Other Accrued Expenses |
|
| 44,094 |
|
| 12,321 |
|
Income Taxes Payable |
|
| 10,731 |
|
| 9,543 |
|
Current Maturities of Long-Term Debt |
|
| 271 |
|
| 125 |
|
|
|
|
| ||||
Total Current Liabilities |
|
| 195,209 |
|
| 79,323 |
|
Long-Term Debt |
|
| 547,350 |
|
| 195,677 |
|
Deferred Income Taxes |
|
| 48,663 |
|
| 46,186 |
|
Other Noncurrent Liabilities |
|
| 17,359 |
|
| 11,658 |
|
Minority Interest in Consolidated Subsidiaries |
|
| 5,292 |
|
| 2,897 |
|
Shareholders’ Investment: |
|
|
|
|
|
|
|
Common Stock, $.01 Par Value, 50,000,000 Shares Authorized, 29,798,188 Issued in 2004 and 25,191,656 Issued in 2003 |
|
| 298 |
|
| 250 |
|
Additional Paid-in Capital |
|
| 263,790 |
|
| 132,313 |
|
Less: Treasury Stock, at Cost, 774,100 Shares in 2004 and 159,900 Shares in 2003 |
|
| (15,228 | ) |
| (2,727 | ) |
Retained Earnings |
|
| 288,837 |
|
| 270,760 |
|
Unearned Compensation |
|
| (224 | ) |
| — |
|
Accumulated Other Comprehensive Income (Loss) |
|
| 706 |
|
| (1,892 | ) |
|
|
|
| ||||
Total Shareholders’ Investment |
|
| 538,179 |
|
| 398,704 |
|
|
|
|
| ||||
Total Liabilities and Shareholders’ Investment |
| $ | 1,352,052 |
| $ | 734,445 |
|
|
|
|
| ||||
See accompanying Notes to Consolidated Financial Statements
22
CONSOLIDATED STATEMENTS OF INCOME | REGAL-BELOIT |
In Thousands of Dollars, Except Shares Outstanding and Per Share Data |
| For the Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| Net Sales | $ | 619,098 | $ | 605,292 | $ | 663,571 | |||||
| Cost of Sales | 472,343 | 462,149 | 497,694 | ||||||||
| Gross Profit | 146,755 | 143,143 | 165,877 | ||||||||
| Operating Expenses | 99,529 | 95,916 | 109,817 | ||||||||
| Income from Operations | 47,226 | 47,227 | 56,060 | ||||||||
| Interest Expense | 6,462 | 9,399 | 22,239 | ||||||||
| Interest Income | 79 | 149 | 221 | ||||||||
| Income before Income Taxes and Minority Interest | 40,843 | 37,977 | 34,042 | ||||||||
| Provision for Income Taxes | 14,792 | 13,182 | 14,452 | ||||||||
| Income before Minority Interest | 26,051 | 24,795 | 19,590 | ||||||||
| Minority Interest in Income, Net of Tax | 845 | 277 | — | ||||||||
| Net Income | $ | 25,206 | $ | 24,518 | $ | 19,590 | |||||
| Earnings Per Share | $ | 1.01 | $ | 1.01 | $ | .94 | |||||
| Earnings Per Share - Assuming Dilution | $ | 1.00 | $ | 1.01 | $ | .93 | |||||
| Average Number of Shares Outstanding | 25,029,942 | 24,186,839 | 20,868,896 | ||||||||
| Average Number of Shares - Assuming Dilution | 25,246,088 | 24,310,165 | 21,124,204 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
| Compre- hensive Income | Common Stock $.01 Par Value | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2000 | $ | 210 | $ | 41,779 | (1,685 | ) | $ | 234,992 | $ | (1,407 | ) | $ | 273,889 | ||||||||||
| Net Income | $ | 19,590 | — | — | — | $ | 19,590 | — | $ | 19,590 | |||||||||||||
| Dividends Declared ($.48 per share) | — | — | — | (10,018 | ) | — | (10,018 | ) | |||||||||||||||
| Translation Adjustments | (928 | ) | — | — | — | — | (928 | ) | (928 | ) | |||||||||||||
| Additional Pension Liability | (1,529 | ) | — | — | — | — | (1,529 | ) | (1,529 | ) | |||||||||||||
| Comprehensive Income | $ | 17,133 | |||||||||||||||||||||
| Common Stock Repurchased | — | — | (1,042 | ) | — | — | (1,042 | ) | |||||||||||||||
| Stock Options Exercised | — | 188 | — | — | — | 188 | |||||||||||||||||
| Balance, December 31, 2001 | 210 | 41,967 | (2,727 | ) | 244,564 | (3,864 | ) | 280,150 | |||||||||||||||
| Net Income | $ | 24,518 | — | — | — | 24,518 | — | 24,518 | |||||||||||||||
| Dividends Declared ($.48 per share) | — | — | — | (11,512 | ) | — | (11,512 | ) | |||||||||||||||
| Translation Adjustments | 1,607 | — | — | — | — | 1,607 | 1,607 | ||||||||||||||||
| Additional Pension Liability, Net of Tax | (3,580 | ) | — | — | — | — | (3,580 | ) | (3,580 | ) | |||||||||||||
| Comprehensive Income | $ | 22,545 | |||||||||||||||||||||
| Stock Options Exercised | — | 278 | — | — | — | 278 | |||||||||||||||||
| Stock Offering | 40 | 89,922 | — | — | — | 89,962 | |||||||||||||||||
| Balance, December 31, 2002 | 250 | 132,167 | (2,727 | ) | 257,570 | (5,837 | ) | 381,423 | |||||||||||||||
| Net Income | $ | 25,206 | — | — | — | 25,206 | — | 25,206 | |||||||||||||||
| Dividends Declared ($.48 per share) | — | — | — | (12,016 | ) | — | (12,016 | ) | |||||||||||||||
| Translation Adjustments | 4,111 | — | — | — | — | 4,111 | 4,111 | ||||||||||||||||
| Hedging Activities, Net of Tax | 160 | — | — | — | — | 160 | 160 | ||||||||||||||||
| Additional Pension Liability, Net of Tax | (326 | ) | — | — | — | — | (326 | ) | (326 | ) | |||||||||||||
| Comprehensive Income | $ | 29,151 | |||||||||||||||||||||
| Stock Options Exercised | — | 146 | — | — | — | 146 | |||||||||||||||||
| Balance, December 31, 2003 | $ | 250 | $ | 132,313 | $ | (2,727 | ) | $ | 270,760 | $ | (1,892 | ) | $ | 398,704 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
| For the Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| Cash Flows From Operating Activities: | |||||||||||
| Net income | $ | 25,206 | $ | 24,518 | $ | 19,590 | |||||
| Adjustments to reconcile net income to net cash provided from operating activities: | |||||||||||
| Depreciation | 21,014 | 22,134 | 22,294 | ||||||||
| Amortization | 1,058 | 1,040 | 9,504 | ||||||||
| Provision for deferred income taxes | 2,377 | 4,103 | 3,014 | ||||||||
| Change in assets and liabilities, net of acquisitions: | |||||||||||
| Receivables | (4,582 | ) | 1,289 | 16,673 | |||||||
| Inventories | 6,483 | (311 | ) | 17,014 | |||||||
| Income tax receivable | (38 | ) | (3 | ) | 3,887 | ||||||
| Current liabilities and other | 7,447 | 1,639 | (10,207 | ) | |||||||
| Net cash provided from operating activities | 58,965 | 54,409 | 81,769 | ||||||||
Cash Flows From Investing Activities: | |||||||||||
| Additions to property, plant and equipment | (17,965 | ) | (10,754 | ) | (15,426 | ) | |||||
| Business acquisitions, net of cash acquired | (717 | ) | (1,939 | ) | (3,629 | ) | |||||
| Sale of property, plant and equipment | 259 | 205 | 650 | ||||||||
| Other | 1,833 | 539 | 159 | ||||||||
| Net cash used in investing activities | (16,590 | ) | (11,949 | ) | (18,246 | ) | |||||
Cash Flows From Financing Activities: | |||||||||||
| Proceeds from stock offering | — | 89,962 | — | ||||||||
| Additions to long-term debt | — | 1,290 | 2,000 | ||||||||
| Repayment of long-term debt | (27,165 | ) | (124,110 | ) | (50,598 | ) | |||||
| Repurchase of common stock | — | — | (1,042 | ) | |||||||
| Stock issued under option plans | 146 | 278 | 188 | ||||||||
| Dividends paid to shareholders | (12,014 | ) | (11,015 | ) | (10,022 | ) | |||||
| Net cash used in financing activities | (39,033 | ) | (43,595 | ) | (59,474 | ) | |||||
Effect of Exchange Rate on Cash: | 167 | 97 | (32 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | 3,509 | (1,038 | ) | 4,017 | |||||||
| Cash and cash equivalents at beginning of year | 5,591 | 6,629 | 2,612 | ||||||||
| Cash and cash equivalents at end of year | $ | 9,100 | $ | 5,591 | $ | 6,629 | |||||
| Supplemental Disclosures of Cash Flow Information: | |||||||||||
| Cash paid during the year for: | |||||||||||
| Interest | $ | 6,355 | $ | 9,656 | $ | 22,607 | |||||
| Income Taxes | $ | 3,585 | $ | 7,075 | $ | 7,265 | |||||
|
| For the Year Ended December 31, |
| |||||||
|
|
| ||||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
| ||||||
Net Sales |
| $ | 756,557 |
| $ | 619,098 |
| $ | 605,292 |
|
Cost of Sales |
|
| 589,497 |
|
| 472,343 |
|
| 462,149 |
|
|
|
|
|
| ||||||
Gross Profit |
|
| 167,060 |
|
| 146,755 |
|
| 143,143 |
|
Operating Expenses |
|
| 111,898 |
|
| 99,529 |
|
| 95,916 |
|
|
|
|
|
| ||||||
Income from Operations |
|
| 55,162 |
|
| 47,226 |
|
| 47,227 |
|
Interest Expense |
|
| 6,787 |
|
| 6,462 |
|
| 9,399 |
|
Interest Income |
|
| 183 |
|
| 79 |
|
| 149 |
|
|
|
|
|
| ||||||
Income before Income Taxes and Minority Interest |
|
| 48,558 |
|
| 40,843 |
|
| 37,977 |
|
Provision for Income Taxes |
|
| 15,728 |
|
| 14,792 |
|
| 13,182 |
|
|
|
|
|
| ||||||
Income before Minority Interest |
|
| 32,830 |
|
| 26,051 |
|
| 24,795 |
|
Minority Interest in Income, Net of Tax |
|
| 2,395 |
|
| 845 |
|
| 277 |
|
|
|
|
|
| ||||||
Net Income |
| $ | 30,435 |
| $ | 25,206 |
| $ | 24,518 |
|
|
|
|
|
| ||||||
Earnings Per Share |
| $ | 1.24 |
| $ | 1.01 |
| $ | 1.01 |
|
Earnings Per Share - Assuming Dilution |
| $ | 1.22 |
| $ | 1.00 |
| $ | 1.01 |
|
Average Number of Shares Outstanding |
|
| 24,602,868 |
|
| 25,029,942 |
|
| 24,186,839 |
|
Average Number of Shares - Assuming Dilution |
|
| 24,904,287 |
|
| 25,246,088 |
|
| 24,310,165 |
|
See accompanying Notes to Consolidated Financial Statements.
2123
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ INVESTMENT | REGAL-BELOIT |
In Thousands of Dollars, Except Per Share Data |
|
| Compre- |
| Common |
| Additional |
| Treasury |
| Unearned |
| Retained |
| Accumulated |
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance, December 31, 2001 |
|
|
|
| $ | 210 |
| $ | 41,967 |
| $ | (2,727 | ) | $ | — |
| $ | 244,564 |
| $ | (3,864 | ) | $ | 280,150 |
|
Net Income |
| $ | 24,518 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 24,518 |
|
| — |
|
| 24,518 |
|
Dividends Declared ($.48 per share) |
|
|
|
|
| — |
|
| — |
|
| — |
|
|
|
|
| (11,512 | ) |
| — |
|
| (11,512 | ) |
Translation Adjustments |
|
| 1,607 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,607 |
|
| 1,607 |
|
Additional Pension Liability, Net of Tax |
|
| (3,580 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (3,580 | ) |
| (3,580 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Comprehensive Income |
| $ | 22,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Stock Options Exercised |
|
|
|
|
| — |
|
| 278 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 278 |
|
Stock Offering |
|
|
|
|
| 40 |
|
| 89,922 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 89,962 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, December 31, 2002 |
|
|
|
|
| 250 |
|
| 132,167 |
|
| (2,727 | ) |
| — |
|
| 257,570 |
|
| (5,837 | ) |
| 381,423 |
|
Net Income |
| $ | 25,206 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 25,206 |
|
| — |
|
| 25,206 |
|
Dividends Declared ($.48 per share) |
|
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| (12,016 | ) |
| — |
|
| (12,016 | ) |
Translation Adjustments |
|
| 4,111 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,111 |
|
| 4,111 |
|
Change in Fair Value of Hedging Activities, Net of Tax |
|
| 160 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 160 |
|
| 160 |
|
Hedging Activities Reclassified into Earnings from Other Comprehensive Income |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Additional Pension Liability, Net of Tax |
|
| (326 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (326 | ) |
| (326 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Comprehensive Income |
| $ | 29,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Stock Options Exercised |
|
|
|
|
| — |
|
| 146 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 146 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, December 31, 2003 |
|
|
|
|
| 250 |
|
| 132,313 |
|
| (2,727 | ) |
| — |
|
| 270,760 |
|
| (1,892 | ) |
| 398,704 |
|
Net Income |
| $ | 30,435 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 30,435 |
|
| — |
|
| 30,435 |
|
Dividends Declared ($.48 per share) |
|
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| (12,358 | ) |
| — |
|
| (12,358 | ) |
Translation Adjustments |
|
| 2,903 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,903 |
|
| 2,903 |
|
Change in Fair Value of Hedging Activities, Net of Tax |
|
| 864 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 864 |
|
| 864 |
|
Hedging Activities Reclassified into Earnings from Other Comprehensive Income |
|
| (511 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (511 | ) |
| (511 | ) |
Additional Pension Liability, Net of Tax |
|
| (658 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (658 | ) |
| (658 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Comprehensive Income |
| $ | 33,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Unearned Compensation, Net of Amortization |
|
|
|
|
| — |
|
| 288 |
|
| — |
|
| (224 | ) |
| — |
|
| — |
|
| 64 |
|
Stock Issued for Acquisition |
|
|
|
|
| 46 |
|
| 130,343 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 130,389 |
|
Common Stock Repurchased |
|
|
|
|
| — |
|
| — |
|
| (12,501 | ) |
| — |
|
| — |
|
| — |
|
| (12,501 | ) |
Stock Options Exercised |
|
|
|
|
| 2 |
|
| 846 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 848 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Balance, December 31, 2004 |
|
|
|
| $ | 298 |
| $ | 263,790 |
| $ | (15,228 | ) | $ | (224 | ) | $ | 288,837 |
| $ | 706 |
| $ | 538,179 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
24
CONSOLIDATED STATEMENTS OF CASH FLOWS | REGAL-BELOIT |
In Thousands of Dollars |
|
| For the Year Ended December 31 |
| |||||||
|
|
| ||||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
| ||||||
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Net Income |
| $ | 30,435 |
| $ | 25,206 |
| $ | 24,518 |
|
Adjustments to Reconcile Net Income to Net Cash |
|
|
|
|
|
|
|
|
|
|
Provided from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
| 21,061 |
|
| 21,014 |
|
| 22,134 |
|
Amortization |
|
| 552 |
|
| — |
|
| — |
|
Provision for Deferred Income Taxes |
|
| 1,089 |
|
| 2,377 |
|
| 4,103 |
|
Minority Interest in Earnings of Subsidiaries |
|
| 2,395 |
|
| 845 |
|
| 277 |
|
Gain on Sale of Property, Plant, and Equipment |
|
| (2,380 | ) |
| — |
|
| — |
|
Change in Assets and Liabilities, Net of Acquisitions: |
|
|
|
|
|
|
|
|
| |
Receivables |
|
| (28,813 | ) |
| (4,582 | ) |
| 1,289 |
|
Inventories |
|
| (16,481 | ) |
| 6,483 |
|
| (311 | ) |
Accounts Payable |
|
| 14,483 |
|
| 2,915 |
|
| 3,334 |
|
Current Liabilities and Other |
|
| 15,823 |
|
| 4,707 |
|
| (935 | ) |
|
|
|
|
| ||||||
Net Cash Provided from Operating Activities |
|
| 38,164 |
|
| 58,965 |
|
| 54,409 |
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
Additions to Property, Plant and Equipment |
|
| (16,281 | ) |
| (17,965 | ) |
| (10,754 | ) |
Business Acquisitions, Net of Cash Acquired |
|
| (327,851 | ) |
| (717 | ) |
| (1,939 | ) |
Sale of Property, Plant and Equipment |
|
| 5,929 |
|
| 259 |
|
| 205 |
|
Other |
|
| (306 | ) |
| 1,833 |
|
| 539 |
|
|
|
|
|
| ||||||
Net Cash Used in Investing Activities |
|
| (338,509 | ) |
| (16,590 | ) |
| (11,949 | ) |
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from Stock Offering |
|
| — |
|
| — |
|
| 89,962 |
|
Additions to Long-Term Debt |
|
| 115,000 |
|
| — |
|
| 1,290 |
|
Net Borrowings (Repayments) Under Revolving Credit Facility |
|
| 236,819 |
|
| (27,165 | ) |
| (124,110 | ) |
Repurchase of Common Stock |
|
| (12,501 | ) |
| — |
|
| — |
|
Stock Issued Under Option Plans |
|
| 848 |
|
| 146 |
|
| 278 |
|
Financing Fees Paid |
|
| (5,851 | ) |
| — |
|
| — |
|
Dividends Paid to Shareholders |
|
| (11,879 | ) |
| (12,014 | ) |
| (11,015 | ) |
|
|
|
|
| ||||||
Net Cash Provided from (Used in) Financing Activities |
|
| 322,436 |
|
| (39,033 | ) |
| (43,595 | ) |
Effect of Exchange Rate on Cash: |
|
| 84 |
|
| 167 |
|
| 97 |
|
|
|
|
|
| ||||||
Net Increase (Decrease) in Cash and Cash Equivalents |
|
| 22,175 |
|
| 3,509 |
|
| (1,038 | ) |
Cash and Cash Equivalents at Beginning of Year |
|
| 9,100 |
|
| 5,591 |
|
| 6,629 |
|
|
|
|
|
| ||||||
Cash and Cash Equivalents at End of Year |
| $ | 31,275 |
| $ | 9,100 |
| $ | 5,591 |
|
|
|
|
|
| ||||||
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for: |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 5,981 |
| $ | 6,355 |
| $ | 9,656 |
|
Income Taxes |
| $ | 8,847 |
| $ | 3,585 |
| $ | 7,075 |
|
Non-Cash Investing: Issuance of Common Stock in Connection with Acquisition |
| $ | 130,389 |
|
| — |
|
| — |
|
See accompanying Notes to Consolidated Financial Statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three Years Ended December 31, 20032004
(1) Nature of Operations
REGAL-BELOIT CORPORATION (the Company) is a United States-based multinational corporation. The Company is organized intoreports in two operating groups,segments, the Mechanical Group,segment, with its principal line of business in mechanical products which control motion and torque, and the Electrical Group,segment, with its principal line of business in electric motors and power generation products. The principal markets for the Company’s products and technologies are within the United States.
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries where the Company owns at least 50% of the subsidiary’s equity. Those subsidiaries include: Shanghai Marathon GeXin Electric Co. Ltd. of 55%, Shanghai Regal-Beloit & Jinling Co. Ltd of 50% and GE Holmes Industries Far East Ltd. of 50%. All significant intercompany accounts and transactions are eliminated. The minority interest
Use of Estimates
Management’s best estimates of certain amounts are required in preparation of the income of majority-owned consolidated subsidiaries was not materialfinancial statements in 2001.accordance with generally accepted accounting principles, and actual results could differ from those estimates.
Revenue Recognition
Sales and related cost
The Company recognizes revenue upon transfer of sales are recognizedtitle, which generally occurs upon shipment of products as this is when title and risk of ownership transferthe 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. AnyEstimated discounts from the Company’s standard pricesand rebates are recognizedrecorded as a reduction of sales andin the related customer receivable at the time of sale.same period revenue is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical experience. EstimatedShipping and handling costs are recorded as revenue when billed to the customers.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments which are readily convertible to cash, present insignificant risk of changes in value due to interest rate fluctuations and have original or purchased maturities of three months or less.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value. Accounts receivable comprise balances due from customers net of estimated allowances for uncollectible accounts. In determining collectibility, historical trends are evaluated and specific customer rebatesissues are accruedreviewed to arrive at appropriate allowances.
Inventories
The approximate percentage distribution between major classes of inventory is as follows:
|
| December 31, |
| ||||
|
|
| |||||
|
| 2004 |
| 2003 |
| ||
|
|
|
| ||||
Raw Material |
|
| 13 | % |
| 11 | % |
Work In Process |
|
| 25 | % |
| 20 | % |
Finished Goods and Purchased Parts |
|
| 62 | % |
| 69 | % |
Inventories are stated at cost, which is not in excess of market. Cost for approximately 87% of the Company’s inventory at December 31, 2004 and recognized82% in 2003, 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 $13,922,000 and $3,555,000 as a reduction of sales in a systematic manner throughout the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally acceptedDecember 31, 2004 and 2003, respectively. Material, labor and factory overhead costs are included in the U.S.inventories.
26
The Company reviews it inventories for excess and obsolete products or components. Based on an analysis of historical usage and management’s evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete parts, reserves are recorded or changed.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided principally on a straight line basis over the estimated useful lives of 10 to 45 years for buildings and improvements, 3 to 15 years for machinery and equipment. Accelerated methods are used for income tax purposes. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Goodwill and Other Intangibles
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized; however it is tested for impairment at least annually with any resulting adjustment charged to the results of operations. Amortization continues to be recorded for other intangible assets with definite lives.
Stock-Based Compensation
The Company accounts for stock-based compensation plans under the intrinsic value method in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock. Had compensation cost for these plans been determined consistent with FASB Statement No. 123 “Accounting for Stock-Based Compensation”, the Company’s net income and earnings per share (“GAAP”EPS”) requires managementwould have been reduced to make estimates and assumptions, in certain circumstances, that affect the reported amountsfollowing pro-forma amounts:
|
| (In Thousands, Except Per Share Data) |
| ||||||||
|
|
| |||||||||
|
| 2004 |
| 2003 |
| 2002 |
| ||||
|
|
|
|
| |||||||
Net Income: |
|
|
|
|
|
|
|
|
|
| |
| As Reported |
| $ | 30,435 |
| $ | 25,206 |
| $ | 24,518 |
|
| Add: Total stock-based employee compensation expense included in net income, net of related tax effects |
|
| 117 |
|
| 69 |
|
| 52 |
|
| Deduct: Total stock-based employee compensation expense, net of related tax effects |
|
| (839 | ) |
| (497 | ) |
| (578 | ) |
|
|
|
|
|
| ||||||
| Pro Forma |
| $ | 29,713 |
| $ | 24,778 |
| $ | 23,992 |
|
|
|
|
|
|
| ||||||
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
| |
| As Reported |
| $ | 1.24 |
| $ | 1.01 |
| $ | 1.01 |
|
| Pro Forma |
| $ | 1.21 |
| $ | .99 |
| $ | .99 |
|
Earnings Per Share - Assuming Dilution: |
|
|
|
|
|
|
|
|
|
| |
| As Reported |
| $ | 1.22 |
| $ | 1.00 |
| $ | 1.01 |
|
| Pro Forma |
| $ | 1.19 |
| $ | .98 |
| $ | .99 |
|
The fair value of assets and liabilities and disclosure of contingent assets and liabilities ateach option grant is estimated on the date of grant using the financial statementsBlack-Scholes option pricing model with the following weighted-average assumptions used for grants in 2004, 2003 and 2002, respectively: risk-free interest rates of 4.0%, 3.5% and 4.5%; expected dividend yield of 2.25%, 2.5% and 2.5%; expected option lives of 7.0 for all years; expected volatility of 35%, 37% and 32%.
Under the reported amounts2003 Equity Incentive Plan, the Company may issue grants of revenuerestricted stock. The value of the grant is amortized as compensation expense over the vesting period on a straight-line basis. The unamortized balance is reflected as a component of shareholders’ investment.
Earnings per Share (EPS)
Basic and expensediluted earnings per share are computed and disclosed under SFAS No. 128, “Earnings Per Share”. Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average number of common shares outstanding during the reporting period. Actual results could differperiod adjusted for the effect of other dilutive securities.
27
Options for common shares where the exercise price was above the market price at December 31 have been excluded from those estimates.the calculation of effect of dilutive securities shown below. The amount of these shares was 62,850, 714,650 and 749,650 for 2004, 2003 and 2002, respectively. The following table reconciles the basic and diluted shares used in the per share calculations:
|
| December 31 |
| |||||||
|
|
| ||||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
| ||||||
Denominator for basic EPS |
|
| 24,602,868 |
|
| 25,029,942 |
|
| 24,186,839 |
|
Effect of dilutive securities |
|
| 301,419 |
|
| 216,146 |
|
| 123,326 |
|
|
|
|
|
| ||||||
Denominator for diluted EPS |
|
| 24,904,287 |
|
| 25,246,088 |
|
| 24,310,165 |
|
|
|
|
|
| ||||||
Foreign Currency Translation
Net assets of non-U.S. subsidiaries, whose
For those operations using a functional currencies arecurrency 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 the rates ofweighted-average exchange in effect as of year-end. Income and expense items are translated at the average exchange rates in effect during the year.rates. The resulting translation adjustments relating to net assets are recorded directly intoas a separate component of shareholders’ investment. TransactionGains and losses from foreign currency transactions are included in net earnings, which were immaterial in all years.
Impairment of Long-Lived Assets and Amortizable Intangible Assets
Property, plant and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company assesses these assets for impairment based on estimated future cash flows from these assets. Such analyses necessarily involve significant judgment.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its products. Such reserves are established based on an evaluation of historical warranty experience and specific significant warranty matters when they become known and can reasonably be estimated.
Accumulated Other Comprehensive Income (Loss)
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and minimum pension liability adjustments are reportedincluded in shareholder’s investment under accumulated other comprehensive income (loss). The components of the ending balances of accumulated other comprehensive income (loss) are as follows:
|
| 2004 |
| 2003 |
| ||
|
|
|
| ||||
Additional pension liability, net of tax |
| $ | (6,093 | ) | $ | (5,435 | ) |
Translation adjustments |
|
| 6,286 |
|
| 3,383 |
|
Hedging activities, net of tax |
|
| 513 |
|
| 160 |
|
|
|
|
| ||||
Total |
| $ | 706 |
| $ | (1,892 | ) |
|
|
|
| ||||
Derivative Instruments
SFAS No. 133, as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships. Any fair value changes are recorded in net income.
Cash and Cash Equivalentsearnings or accumulated other comprehensive income (loss).
Cash andThe Company has entered into certain commodity forward contracts in connection with the management of its exposure to fluctuations in certain raw material commodity pricing. These derivative instruments have been designated as cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at date of acquisition.flow hedges. The carryingentire value of cash equivalents closely approximates their fair market value.theses hedges at December 31, 2004, which are shown above in “Accumulated Other Comprehensive Income (Loss),” is expected to be realized in 2005.
Legal and Environmental Claims
The Company records expenses and liabilities when the Company believes that an obligation of the Company on a specific matter is probable and there is a basis to reasonably estimate the value of the obligation. This methodology is used for environmental matters and legal claims that are filed against the Company from time to time. The uncertainty that is associated with such matters frequently requires adjustments to the liabilities previously recorded.
Life Insurance Policies
The Company maintains life insurance policies on certain officers and management which name the Company as beneficiary. The total face value of these policies was $11,008,000 at December 31, 2004 and $11,756,000 at December 31, 2003 and $11,577,000 at December 31, 2002.2003. The cash surrender value, net of policy loans, is $806,000$3,315,000 and $2,284,000$806,000 at December 31, 20032004 and 2002,2003, respectively, and is included as a component of Other Noncurrent Assets.
Goodwill and Other Intangibles
Prior to January 1, 2002, the cost of goodwill and other intangibles was amortized on a straight-line basis over the estimated periods benefited ranging from 5 to 40 years.28
Effective January 1, 2002, upon the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles (SFAS 142), goodwill and other intangibles with indefinite useful lives are no longer amortized but instead are reviewed annually for impairment and any excess in carrying value over the estimated fair value is charged to the results of operations. Identifiable intangibles with a finite useful life are amortized over their useful lives. (See Note 3 of Notes to Consolidated Financial Statements.)
22
Impairment of Long-Lived AssetsReclassifications
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses these assets for impairment based on estimated future cash flows from these assets.
Inventories
The approximate percentage distribution between major classes of inventory is as follows:
| December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | ||||||||||
| Raw Material | 11 | % | 11 | % | |||||||
| Work In Process | 20 | % | 19 | % | |||||||
| Finished Goods and Purchased Parts | 69 | % | 70 | % | |||||||
Inventories are stated at cost, which is not in excess of market. Cost for approximately 82% of the Company’s inventory at December 31, 2003 and 86% in 2002, 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 $3,555,000 and $3,818,000 as of December 31, 2003 and 2002, respectively. Material, labor and factory overhead costs are included in the inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and major renewals and improvements are capitalized.
The cost of property, plant and equipment retired or otherwise disposed of is removed from the accounts, the accumulated depreciation is removed from related reserves, and the net gain or loss is reflected in income.
The provisions for depreciation are based on the estimated useful lives of plant and equipment from the dates of acquisition and are calculated primarily using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives are:
Shipping and Handling Revenues and Costs
Shipping and handling costs are recorded as costs of sales and the related billings are recorded as sales.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Stock options are granted at prices equal to the fair market value of the Company’s common stock on the grant dates; therefore, no compensation expense is recognized in connection with stock options granted to employees.
Accumulated Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly into shareholders’ investment. The components of accumulated other comprehensive income (loss) were as follows at December 31:
| 2003 | 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| Additional pension liability, net of tax | $ | (5,435 | ) | $ | (5,109 | ) | ||
| Translation adjustments | 3,383 | (728 | ) | |||||
| Hedging activities, net of tax | 160 | — | ||||||
| Total | $ | (1,892 | ) | $ | (5,837 | ) | ||
23
Earnings per Share (EPS)
The difference between basic and diluted earnings per share is attributable solely to the incremental shares to be issued under the Company’s stock option plans. The following table reconciles the basic and diluted shares used in the per share calculations:
| December 31 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||||||||
| Denominator for basic EPS | 25,029,942 | 24,186,839 | 20,868,896 | ||||||||||||||
| Effect of dilutive stock options | 216,146 | 123,326 | 255,308 | ||||||||||||||
| Denominator for diluted EPS | 25,246,088 | 24,310,165 | 21,124,204 | ||||||||||||||
Derivative Instruments
The Company entered into certain commodity forward contracts in 2003 in connection with the management of its exposure to fluctuations in certain raw material commodity pricing. These financial exposures are managed in accordance with corporate policies and procedures. These derivative instruments have been designated as cash flow hedges. Thus, as changes in the fair value of the derivatives occur, they are recorded as an asset or liability on the consolidated balance sheet and in accumulated other comprehensive income (AOCI). Such amounts are reclassified out of AOCI when the underlying hedged item impacts earnings. As of December 31, 2003, the Company had recorded $160,000, net of tax, in AOCI related to these commodity forward contracts.
Reclassifications
Certain reclassifications were made to the 2003 and 2002 financial statements to conform to the 20032004 presentation.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”, which requires companies to expense the value of employee stock options and similar awards. This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123R(R) is effective beginning the Company’s third quarter of 2005. Management is currently assessing the impact of adopting SFAS No. 123(R).
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” an amendment of ARB No. 43. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The adoption of this pronouncement is not expected to have a significant impact on the Company’s results of operations or financial position.
(3) Goodwill and Other Intangibles
On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.Assets,” This statement addressesestablishes financial accounting and reporting for acquired goodwill and other intangible assets. The following table reconciles the reported net income and earnings per share to that which would have resulted for 2001 if SFAS 142 had been adopted effective January 1, 2001 (in thousands of dollars, except per share data):
| Year Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| Net Income (as reported) | $ | 25,206 | $ | 24,518 | $ | 19,590 | |||||
| Adjustments: | |||||||||||
| Goodwill amortization, net of taxes | — | — | 6,700 | ||||||||
| Pro-forma Net Income | $ | 25,206 | $ | 24,518 | $ | 26,290 | |||||
| Pro-forma earnings per share: | |||||||||||
| Basic | $ | 1.01 | $ | 1.01 | $ | 1.26 | |||||
| Diluted | $ | 1.00 | $ | 1.01 | $ | 1.25 | |||||
During the first quarter of 2002, the Company completed the first step of the transitional goodwill impairment test based on amounts as of January 1, 2002. Based on this review, the Company concluded that there were no impairment losses for goodwill due to the initial application of SFAS 142. The Company hasreports in two reporting units which are the same as its reportable segments, the Electrical Groupsegment and the Mechanical Group. As permitted by SFAS 142, thesegment. The Company has elected to perform its annual test for impairment during the fourth quarter. The Company utilizes a discounted cash flow model to estimate the fair value of the reporting units. The Company performed its most recent analysis as of November 30, 2003,2004, and based upon reasonable assumptions of cash flows and cost of capital, concluded that there continues to be no impairment of goodwill. At December 31, 2003 and 2002, none of the Company’s other intangible assets were determined to have indefinite lives and acquired intangibles with definite lives were not material.
The following information presents changes to goodwill during the periods indicated:
| Electrical Group | Mechanical Group | Total Company |
| Electrical |
| Mechanical |
| Total |
| ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2001 | $ | 312,735 | $ | — | $ | 312,735 | |||||||||||||||
| Powertrax® Acquisition | — | 530 | 530 | ||||||||||||||||||
|
|
|
| ||||||||||||||||||
| Balance, December 31, 2002 | 312,735 | 530 | 313,265 |
| $ | 312,735 |
| $ | 530 |
|
| 313,265 |
| ||||||||
| Adjustments | (2,049 | ) | — | (2,049 | ) |
|
| (2,049 | ) |
| — |
| (2,049 | ) | |||||||
|
|
|
| ||||||||||||||||||
| Balance, December 31, 2003 | $ | 310,686 | $ | 530 | $ | 311,216 |
|
| 310,686 |
| 530 |
| 311,216 |
| |||||||
Acquisitions |
|
| 233,224 |
| — |
| 233,224 |
| |||||||||||||
|
|
|
| ||||||||||||||||||
Balance, December 31, 2004 |
| $ | 543,910 |
| $ | 530 |
| $ | 544,440 |
| |||||||||||
|
|
|
|
| |||||||||||||||||
24Preliminary appraisals have been made of the tangible and intangible assets purchased with the GE HVAC motors and capacitors businesses and the GE Commercial AC motor business in 2004. (See Note 10, “Acquisitions” of Notes to Consolidated Financial Statements.) These preliminary appraisals are reflected in the Company’s balance sheet as of December 31, 2004. These appraisals may be updated when finalized. A preliminary total of $52.6 million of intangible assets with finite lives has been determined, as of the dates of the acquisitions. At December 31, 2004, the value of such intangible assets was $52.0 million, net of the $552,000 amortization recorded in 2004. There were no such assets at December 31, 2003. There are no intangible assets with indefinite lives.
Summary of Intangible Assets with Definite Lives
Asset Description |
| Gross |
| Accumulated |
| Useful Life |
| |||
|
|
|
| |||||||
Non-Compete Agreements |
| $ | 2,500 |
| $ | 33 |
|
| 5 Years |
|
Trademarks |
|
| 4,900 |
|
| 386 |
|
| 3-5 Years |
|
Patents |
|
| 15,400 |
|
| 23 |
|
| 10 Years |
|
Engineering Drawings |
|
| 1,200 |
|
| 7 |
|
| 10 Years |
|
Customer Relationships |
|
| 28,600 |
|
| 103 |
|
| 10 Years |
|
Estimated future amortization
2005 |
| 2006 |
| 2007 |
| 2008 |
| 2009 |
| Thereafter |
| ||||||
|
|
|
|
|
| ||||||||||||
$ | 6,384,000 |
| $ | 6,384,000 |
| $ | 6,380,000 |
| $ | 5,238,000 |
| $ | 5,205,000 |
| $ | 22,467,000 |
|
29
(4) Leases and Rental Commitments
Rental expenses charged to operations amounted to $6,568,000 in 2004, $7,097,000 in 2003, and $6,928,000 in 2002, and $7,314,000 in 2001.2002. The Company has future minimum rental commitments under operating leases as shown in the following table:
| Year | (In Thousands of Dollars) | |||||
|---|---|---|---|---|---|---|
| 2004 | $4,725 | |||||
| 2005 | $3,056 | |||||
| 2006 | $2,388 | |||||
| 2007 | $2,212 | |||||
| 2008 | $1,396 | |||||
| Thereafter | $2,996 | |||||
Year |
| (In Thousands of Dollars) |
| |
|
| |||
2005 |
| $ | 3,894 |
|
2006 |
| $ | 3,350 |
|
2007 |
| $ | 2,930 |
|
2008 |
| $ | 1,439 |
|
2009 |
| $ | 928 |
|
Thereafter |
| $ | 2,070 |
|
(5) Long-Term Debt and Bank Credit Facilities
Long-term debt consists of the following:
|
| (In Thousands of Dollars) |
| |||||||||||||
|
|
| ||||||||||||||
| (In Thousands of Dollars) December 31, |
| 2004 |
| 2003 |
| |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 |
|
|
| ||||||||||||
| Revolving Credit Facility | $ | 191,000 | $ | 218,000 |
| $ | 426,500 |
| $ | 191,000 |
| |||||
Convertible Senior Subordinated Debt |
|
| 115,000 |
| — |
| ||||||||||
| Other | 4,802 | 4,967 |
|
| 6,121 |
| 4,802 |
| ||||||||
|
|
| ||||||||||||||
| 195,802 | 222,967 |
|
| 547,621 |
| 195,802 |
| |||||||||
| Less: Current maturities | 125 | 155 |
|
| 271 |
| 125 |
| ||||||||
|
|
| ||||||||||||||
| Noncurrent portion | $ | 195,677 | $ | 222,812 |
| $ | 547,350 |
| $ | 195,677 |
| |||||
|
|
| ||||||||||||||
On December 30, 2004, the Company and its lenders entered into the First Amendment to the Amended and Restated Credit Agreement dated as of May 5, 2004. The First Amendment increased the facility commitment amount from $225,000,000 to $475,000,000 and changed other terms and conditions to provide to the Company the $270,000,000 cash portion of the purchase price of the Company’s December 31, 2004 acquisition from General Electric Co. (See Note 10, “Acquisitions,” of Notes to Consolidated Financial Statements.)
The Company maintained at December 31, 2003, a $275,000,0002004, this amended $475,000,000 unsecured revolving credit facility which expires December 31, 2005May 5, 2009 (the “Facility”). The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). These interest rates also vary with LIBOR. The Company also pays a commitment fee on the unused amount of the $275,000,000$475,000,000 maximum credit limit, which fee rate also varies with the debt to EBITDA ratio. The Facility includes various financial covenants regarding minimum net worth, permitted debt levels and minimum interest coverage. Those tests consist of a minimum interest coverage ratio of 3.75 to 1.0, a maximum funded debt to EBITDA ratio of 4.00 to 1.0, a maximum senior funded debt to EBITDA ratio of 3.00 to 1, and a minimum net worth of consisting of the sum of $435.0 million plus 50% of net income for each quarter ending after March 31, 2005 plus 75% of the net proceeds of all issuances of equity securities by the Company. The Company was in compliance with all financial covenants as of December 31, 2003.2004.
The average balance outstanding under the Facility in 2004 was $150,596,000 and in 2003 was $217,236,000 and in 2002 was $253,625,000.$217,236,000. The average interest rate paid under the Facility in 2003 was 2.7% in both 2004 and 3.5% in 2002.2003. At December 31, 2003,2004, the interest rate paid on the outstanding balance of the Facility was 2.7%3.9%. The Company also paid an unused commitment fee under the facility which was .30% of the unused balance of $83,789,000$48,500,000 at December 31, 2003.2004. The Company had $8,030,000$46,808,000 of available borrowing capacity under the Facility at December 31, 2003,2004, after deducting $211,000$92,000 for outstanding Facility-issuedFacility - issued standby letters of credit. The available capacity was less than the unused balance of the Facility due to limits established by the debt to EBITDA covenant.credit and $1,600,000 outstanding Swingline.
The Company, also has other loans with a total balance outstanding of $4,802,000 at December 31, 2003.2004, also had $115,000,000 of convertible senior subordinated notes outstanding, which were issued on April 5, 2004. The largestnotes, which are unsecured and due in 2024, bear interest at a fixed rate of 2.75% for five years, and may increase thereafter at .25% of the average trading price of a note if certain conditions are met after five years. The Company may not call the notes for five years, and the note holders may only put the notes back to the Company at approximately the 5th, 10th and 15th year anniversaries of the issuance of the notes. In October 2004, the Company amended the indenture to eliminate its option to issue stock upon a conversion request, and require the Company to pay only cash, up to the $115,000,000 par value of the notes. The Company retained the option to either pay cash, issue its stock or a combination thereof, for value above par, which is a $2,000,000 industrial development bond issue completed on September 6, 2001.above the $25.56 stock conversion price. With the change to the indenture, the Company qualifies for the Treasury Stock method of accounting for this convertible debt in accordance with EITF 04-8.
30
Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities,for convertible senior subordinated debt, the fair market value of the long-term debt is not materially different from the carrying value.
Maturities of long-term debt are as follows:
| Year | (In Thousands of Dollars) |
| (In Thousands of Dollars) |
| |||||
|---|---|---|---|---|---|---|---|---|---|
|
| ||||||||
| 2005 | 191,424 |
| $ | 271 |
| ||||
| 2006 | 731 |
|
| 880 |
| ||||
| 2007 | 368 |
|
| 216 |
| ||||
| 2008 | 154 |
|
| 154 |
| ||||
2009 |
|
| 428,100 |
| |||||
| Thereafter | 3,000 |
|
| 118,000 |
| ||||
|
| ||||||||
| Total | $ | 195,802 |
| $ | 547,621 |
| |||
|
| ||||||||
25
(6) Contingencies and Commitments
An action was filed on June 4, 2004 and amended in September 2004, against one of the Company’s subsidiaries, Marathon Electric Manufacturing Corporation (“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The action was filed in the United States Bankruptcy Court for the Southern District of New York where each of the Enron Wind entities has consolidated its Chapter 11 bankruptcy petition as part of the Enron Corporation bankruptcy proceedings. In the action against Marathon, Enron Wind has asserted various claims relating to the alleged failures and/or degradations of performance of about 564 generators sold by Marathon to Enron Wind from 1997 to 1999. In January 2001, Enron Wind and Marathon entered into a “Generator Warranty and Settlement Agreement and Release of All Claims” (“Warranty Agreement”). This Warranty Agreement resolved various issues related to past performance of the generators, provided a limited warranty related to the generators going forward, and contained a release by all parties of any claims related to the generators other than those arising out of the obligations contained in the Warranty Agreement.
Enron Wind is seeking to recover the purchase price of the generators and transportation costs totaling about $21 million. In addition, although the Warranty Agreement contains a waiver of consequential, incidental, and punitive damages, Enron Wind claims that this limitation is unenforceable and seeks recovery of consequential and incidental damages incurred by it and by its customers, as well as punitive damages, related to the Marathon generators. Enron Wind has asserted claims of breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, and intentional interference with contractual relations. Marathon has filed a motion with the court seeking to have many of Enron Wind’s claims dismissed. The court has not yet ruled on this motion.
The Company believes that this action is without merit and that it has meritorious defenses to the action. The Company intends to defend vigorously all of the asserted claims. The litigation is in an early discovery phase and it is difficult for the Company to predict the impact the litigation may ultimately have on the Company’s results of operations or financial condition, including the expenses the Company may incur to defend against the action. As of December 31, 2004, no amounts have been recorded in the Company’s financial statements related to this contingency.
In March 2004, the Company received notice from the U.S. Environmental Protection Agency (“U.S. EPA”) that it was identified as one of three potentially responsible parties regarding an environmental site in Illinois. The Company had previously reached a settlement in 1999 with the U.S. EPA regarding the same site. Management provided its expert’s assessment of this site to the U.S. EPA, which has not proceeded with any enforcement action. Based on the facts, the Company believes that there will be no further assessments related to this site. As of December 31, 2004, no amounts have been recorded in the Company’s financial statements related to this contingency.
The Company is, from time to time, party to lawsuits arising from its normal business operations. It is believed that the outcome of these lawsuits will have no material effect on the Company’s financial position or its results of operations.
31
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 20032004 and 2002:2003:
|
| (In Thousands of Dollars) |
| ||||||||||||||
|
|
| |||||||||||||||
| (In Thousands of Dollars) |
| 2004 |
| 2003 |
| ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 |
|
|
| |||||||||||||
| Balance, beginning of year | $ | (3,431 | ) | $ | (3,652 | ) |
| $ | (2,953 | ) | $ | (3,431 | ) | ||||
| Payments | 5,915 | 6,605 |
|
| 5,325 |
| 5,915 |
| |||||||||
| Provision | (5,437 | ) | (6,384 | ) |
|
| (5,545 | ) |
| (5,437 | ) | ||||||
Additions from acquisitions |
|
| (1,834 | ) |
| — |
| ||||||||||
|
|
| |||||||||||||||
| Balance, end of year | $ | (2,953 | ) | $ | (3,431 | ) |
| $ | (5,007 | ) | $ | (2,953 | ) | ||||
|
|
| |||||||||||||||
Provision for virtually all warranties is made in the year of issuance.
(7) Retirement Plans
The Company has a number of retirement plans that cover most of its employees. The plans include defined contribution plans and defined benefit plans. The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant contributions, service and profits. Company contributions to defined contribution plans totaled $1,941,000,$4,455,000, $2,283,000, and $2,299,000 in 2004, 2003 and $3,329,000 in 2003, 2002, and 2001, respectively.
Benefits provided under defined benefit plans are based, depending on the plan, on employees’ average earnings and years of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit plans is in accordance with federal laws and regulations.
The Company’s defined benefit pension assets are invested in equity securities and fixed income investments based on the Company’s overall strategic investment direction as follows:
|
| Target |
| ||||||||||||||
|
|
| |||||||||||||||
| Target |
| Allocation |
| Return |
| ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allocation | Return |
|
|
| |||||||||||||
| Equity investments | 70% | 9-10% |
|
| 70 | % |
| 9-10 | % | ||||||||
| Fixed income | 30% | 6-7% |
|
| 30 | % |
| 6-7 | % | ||||||||
|
|
| |||||||||||||||
| Total | 100% | 8.75% |
|
| 100 | % |
| 8.75 | % | ||||||||
|
|
| |||||||||||||||
The Company’s investment strategy for its defined benefit plans is to achieve moderately aggressive growth, earning a long-term rate of return sufficient to at least maintain the plans in a fully funded status. Accordingly, allocation targets have been established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return assumption considers historic returns adjusted for changes in overall economic conditions that may affect future returns and a weighting of each investment class.
The defined benefit pension plan assets were invested as follows as of December 31 of each year:
|
| 2004 |
| 2003 |
| ||||||||||
| 2003 | 2002 |
|
|
| |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity investments | 74% | 61% |
|
| 73 | % |
| 74 | % | ||||||
| Fixed income | 26% | 39% |
|
| 27 | % |
| 26 | % | ||||||
|
|
| |||||||||||||
| Total | 100% | 100% |
|
| 100 | % |
| 100 | % | ||||||
|
|
| |||||||||||||
In 2003, the Company changed for financial reporting purposes the actuarial valuation measurement date for its pension plans from September 30 to December 31. Management believes that a measurement date of December 31 is preferable because it better reflects the actual balances of the plans as of the Company’s balance sheet date. This change did not have a significant effect on 2003 or prior years’ pension expense.
2632
The actuarial computations utilized the following assumptions:
Benefit Obligation |
| 2004 |
| 2003 |
|
|
| |||
|
|
|
| |||||||
Discount rate |
|
| 5.75 | % |
| 6.25 | % |
|
|
|
Rates of increase in compensation level |
|
| 0-2.75 | % |
| 0-2.5 | % |
|
|
|
Net Periodic Pension Cost |
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
| |||||||
Discount rate |
|
| 6.25 | % |
| 7.0 | % |
| 7.5 | % |
Expected long-term rate of return on assets |
|
| 8.75 | % |
| 8.75 | % |
| 9.0 | % |
Rates of increase in compensation levels |
|
| 0-2.5 | % |
| 0-3.0 | % |
| 0-3.75 | % |
| Net Periodic Pension Cost | 2003 | 2002 | 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Discount rate | 7.0% | 7.5% | 7.5% | |||||||||
| Expected long-term rate of return on assets | 8.75% | 9.0% | 9.0% | |||||||||
| Rates of increase in compensation levels | 0-3.0% | 0-3.75% | 0-4.5% | |||||||||
Net periodic pension benefit costs for the defined benefit plans were as follows:
|
| (In Thousands of Dollars) |
| |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
| (In Thousands of Dollars) |
| 2004 |
| 2003 |
| 2002 |
| |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 |
|
|
|
| ||||||||||||||||||
| Service cost | $ | 1,389 | $ | 1,336 | $ | 1,330 |
| $ | 1,462 |
| $ | 1,389 |
| $ | 1,336 |
| ||||||||
| Interest cost | 3,346 | 3,233 | 3,078 |
|
| 3,609 |
| 3,346 |
| 3,233 |
| |||||||||||||
| Expected return on plan assets | (4,717 | ) | (5,438 | ) | (5,410 | ) |
|
| (4,295 | ) |
| (4,717 | ) |
| (5,438 | ) | ||||||||
| Net amortization and deferral | 172 | (157 | ) | (355 | ) |
|
| 1,063 |
| 172 |
| (157 | ) | |||||||||||
|
|
|
| |||||||||||||||||||||
| Net periodic expense (income) | $ | 190 | $ | (1,026 | ) | $ | (1,357 | ) |
| $ | 1,839 |
| $ | 190 |
| $ | (1,026 | ) | ||||||
|
|
|
| |||||||||||||||||||||
The following table presents a reconciliation of the funded status of the defined benefit plans:
|
| (In Thousands of Dollars) |
| ||||||||||||
|
|
| |||||||||||||
| (In Thousands of Dollars) |
| 2004 |
| 2003 |
| ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 |
|
|
| |||||||||||
| Change in projected benefit obligation: |
|
|
|
|
|
| |||||||||
| Obligation at beginning of period | $ | 48,184 | $ | 43,108 |
| $ | 57,751 |
| $ | 48,184 |
| ||||
| Service cost | 1,389 | 1,336 |
|
| 1,462 |
| 1,389 |
| |||||||
| Interest cost | 3,346 | 3,233 |
|
| 3,609 |
| 3,346 |
| |||||||
| Change in assumptions | 7,245 | 2,600 | |||||||||||||
Actuarial loss |
|
| 628 |
| 7,245 |
| |||||||||
| Plan amendments | — | 26 |
|
| 310 |
| — |
| |||||||
| Benefits paid | (2,413 | ) | (2,119 | ) |
|
| (2,089 | ) |
| (2,413 | ) | ||||
|
|
| |||||||||||||
| Obligation at end of period | 57,751 | 48,184 |
| $ | 61,671 |
| 57,751 |
| |||||||
|
|
| |||||||||||||
| Change in fair value of plan assets: |
|
|
|
|
|
| |||||||||
| Fair value of plan assets at beginning of period | 40,958 | 47,681 |
|
| 49,616 |
| 40,958 |
| |||||||
| Actual gain (loss) on plan assets | 10,688 | (4,900 | ) | ||||||||||||
Actual return on plan assets |
|
| 4,799 |
| 10,688 |
| |||||||||
| Employer contributions | 383 | 296 |
|
| 1,317 |
| 383 |
| |||||||
| Benefits paid | (2,413 | ) | (2,119 | ) |
|
| (2,089 | ) |
| (2,413 | ) | ||||
|
|
| |||||||||||||
| Fair value of plan assets at end of period | 49,616 | 40,958 |
|
| 53,643 |
| 49,616 |
| |||||||
|
|
| |||||||||||||
| Funded status | (8,135 | ) | (7,226 | ) |
|
| (8,028 | ) |
| (8,135 | ) | ||||
Unrecognized net actuarial loss | 17,657 | 16,450 |
|
| 16,728 |
| 17,657 |
| |||||||
| Unrecognized prior service costs | 1,069 | 1,174 |
|
| 1,278 |
| 1,069 |
| |||||||
|
|
| |||||||||||||
| Net amount recognized | $ | 10,591 | $ | 10,398 |
| $ | 9,978 |
| $ | 10,591 |
| ||||
|
|
| |||||||||||||
| Amounts recognized in balance sheets |
|
|
|
|
|
| |||||||||
| Prepaid benefit cost | $ | 9,012 | $ | 8,703 |
| $ | 8,399 |
| $ | 9,012 |
| ||||
| Accrued benefit liability | (8,060 | ) | (7,509 | ) |
|
| (9,312 | ) |
| (8,060 | ) | ||||
| Intangible asset | 1,005 | 1,096 |
|
| 1,221 |
| 1,005 |
| |||||||
| Accumulated other comprehensive loss | 8,634 | 8,108 |
|
| 9,670 |
| 8,634 |
| |||||||
|
|
| |||||||||||||
| Net amount recognized | $ | 10,591 | $ | 10,398 |
| $ | 9,978 |
| $ | 10,591 |
| ||||
|
|
| |||||||||||||
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit plans with accumulated benefit obligations in excess of plan assets were $28,366,000, $28,287,000 and $18,975,000 respectively, as of December 31, 2004, and $25,317,000, $25,301,000 and $17,241,000, respectively, as of December 31, 2003, and $22,070,000, $22,051,000 and $14,542,000, respectively, as of December 31, 2002.2003. Total accumulated benefit obligations for all defined benefit plans totaled $55,320,000$57,819,000, and $44,690,000
33
$55,320,000 at December 31, 20032004 and 2002,2003, respectively. The Company estimates that, based on current legislation, in 20042005, it will make contributions in the amount of $1,472,000$628,000 to fund its defined benefit plans. This estimate does not include contributions yet to be calculated, if any, that may be made in 2005 relating to new participants in the Company’s defined benefit pension plans as a result of the Company’s acquisitions from General Electric Co. in 2004. (See Note 10, “Acquisitions,” of Notes to Consolidated Financial Statements.)
27
(8) Shareholders’ Investment
The Company has two stock option plans available for new grants to officers, directors and key employees, the 2003 Equity Incentive Plan and the 1998 Stock Option Plan, as amended. Additionally, the Company’s 1991 Flexible Stock Incentive Plan and the 1987 Stock Option Plan, which have expired as to new grants, have shares previously granted remaining outstanding. Options under all the plans were granted at prices that equalledequaled the market value on the date of the grant and with a maximum term of 10 years from the date of grant. Options vest over various periods up to 10 years.
Grants of restricted stock, which vest three years from the grant date given continuous employment over the three years is attained, have been awarded to certain officers under the 2003 Equity Incentive Plan. There were 14,175 shares of restricted stock outstanding at December 31, 2004. Unamortized deferred compensation expense with respect to the restricted stock grants amounted to $224,000 at December 31, 2004 and is being amortized over a three year vesting period. Deferred compensation expense aggregated $64,000 in 2004.
A summary of restricted stock granted during 2004 is as follows:
Shares Granted |
|
| 14,175 |
|
Weighted-Average Fair Value of Restricted Shares granted during year |
| $ | 20.30 |
|
A summary of the Company’s stock option plans follows:
|
| At December 31, 2004 |
| ||||||||||
|
|
| |||||||||||
|
| 1987 Plan |
| 1991 Plan |
| 1998 Plan |
| 2003 Plan |
| ||||
|
|
|
|
|
| ||||||||
Total Plan shares |
|
| 450,000 |
|
| 1,000,000 |
|
| 1,000,000 |
|
| 1,500,000 |
|
Options granted |
|
| 449,850 |
|
| 762,882 |
|
| 946,900 |
|
| 290,750 |
|
Restricted stock granted |
|
|
|
|
|
|
|
|
|
|
| 14,175 |
|
Options outstanding |
|
| 4,550 |
|
| 324,184 |
|
| 936,100 |
|
| 290,750 |
|
Restricted stock outstanding |
|
|
|
|
|
|
|
|
|
|
| 14,175 |
|
Options available for grant |
|
| — |
|
| — |
|
| 53,100 |
|
| 1,195,075 |
|
A summary of the status of the Company’s three stock option plans as of December 31, 2004, 2003 2002 and 2001,2002, and changes during the years then ended is presented below:
|
| 2004 |
| 2003 |
| 2002 |
| ||||||||||||||||||||||||||||||||
|
|
|
|
| |||||||||||||||||||||||||||||||||||
| 2003 | 2002 | 2001 |
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares |
| Weighted |
| ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price |
|
|
|
|
|
|
| |||||||||||||||||||||||||||
| Outstanding at beginning of year | 1,125,754 | $ | 21.98 | 1,460,124 | $ | 18.49 | 1,477,718 | $ | 18.01 |
|
| 1,282,618 |
| $ | 21.22 |
| 1,125,754 |
| $ | 21.98 |
| 1,460,124 |
| $ | 18.49 |
| |||||||||||||
| Granted | 233,750 | 17.70 | 38,250 | 19.97 | 41,850 | 18.71 |
|
| 382,500 |
| 20.77 |
| 233,750 |
| 17.70 |
| 38,250 |
| 19.97 |
| |||||||||||||||||||
| Exercised | (11,586 | ) | 12.59 | (357,370 | 7.77 | (26,194 | ) | 7.52 |
|
| (51,034 | ) |
| 16.56 |
| (11,586 | ) |
| 12.59 |
| (357,370 | ) |
| 7.77 |
| ||||||||||||||
| Forfeited | (65,300 | ) | 19.58 | (15,250 | 21.43 | (33,250 | ) | 21.28 |
|
| (58,500 | ) |
| 20.03 |
| (65,300 | ) |
| 19.58 |
| (15,250 | ) |
| 21.43 |
| ||||||||||||||
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
| Outstanding at end of year | 1,282,618 | $ | 21.22 | 1,125,754 | $ | 21.98 | 1,460,124 | $ | 18.49 |
|
| 1,555,584 |
| $ | 21.53 |
| 1,282,618 |
| $ | 21.22 |
| 1,125,754 |
| $ | 21.98 |
| |||||||||||||
Options exercisable at year-end | 823,168 | 710,904 | 889,824 |
|
| 919,534 |
|
|
| 823,168 |
|
|
| 710,904 |
|
|
| ||||||||||||||||||||||
Weighted-average fair value of options granted during the year | $5.55 | $6.52 | $6.19 |
| $ | 6.96 |
|
|
| $ | 5.55 |
|
|
| $ | 6.52 |
|
|
| ||||||||||||||||||||
34
The following table provides information on the three Plans at various exercise price ranges:
|
| Range of Exercise Prices |
| ||||||||||
|
|
| |||||||||||
|
| $12.50-$18.75 |
| $18.76-$28.14 |
| $28.15-$32.44 |
| Total |
| ||||
|
|
|
|
|
| ||||||||
Options outstanding at 12/31/04 |
|
| 266,684 |
|
| 1,226,050 |
|
| 62,850 |
|
| 1,555,584 |
|
Options exercisable at 12/31/04 |
|
| 162,634 |
|
| 694,050 |
|
| 62,850 |
|
| 919,534 |
|
The Company accounts for its stock option plans under APB Opinion No. 25. Accordingly, no compensation cost for option plans has been recognized in the statements of income. Had compensation cost for these plans been determined consistent with FASB Statement No. 123 “Accounting for Stock-Based Compensation”, the Company’s net income and earnings per share (“EPS”) would have been reduced to the following pro-forma amounts:
| (In Thousands, Except Per Share Data) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| Net Income: | |||||||||||
| As Reported | $ | 25,206 | $ | 24,518 | $ | 19,590 | |||||
| Deduct: Compensation Adjustment | $ | (428 | ) | $ | (526 | ) | $ | (704 | ) | ||
| Pro Forma | $ | 24,778 | $ | 23,992 | $ | 18,886 | |||||
| Earnings Per Share: | |||||||||||
| As Reported | $ | 1.01 | $ | 1.01 | $ | .94 | |||||
| Pro Forma | $ | .99 | $ | .99 | $ | .91 | |||||
| Earnings Per Share - Assuming Dilution: | |||||||||||
| As Reported | $ | 1.00 | $ | 1.01 | $ | .93 | |||||
| Pro Forma | $ | .98 | $ | .99 | $ | .89 | |||||
28
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively: risk-free interest rates of 3.5%, 4.5% and 5.1%; expected dividend yield of 2.5% for all years; expected option lives of 7.0 for all years; expected volatility of 37% in 2003, 32% in 2002 and 33% in 2001.
On January 28, 2000, the Board of Directors approved a Shareholder Rights Plan (the “Plan”). Pursuant to this Plan, one common share purchase right is included with each outstanding share of common stock. In the event the rights become exercisable, each right will initially entitle its holder to buy one-half of one share of the Company’s common stock at a price of $60 per share (equivalent to $30 per one-half share), subject to adjustment. The rights will become exercisable if a person or group acquires, or announces an offer for, 15% or more of the Company’s common stock. The Company amended its Shareholder Rights Plan in December 2004 to raise to 20% the limit for General Electric Co., to whom the Company issued 4,559,048 shares on December 31, 2004 as part of the purchase price of acquiring GE’s HVAC motors and capacitors business. The 4,559,048 shares owed by GE at December 31, 2004 represented 15.7% of the Company’s outstanding shares. In thisthe event the 15% limitation is exceeded, or 20% if by GE, each right will thereafter entitle the holder to purchase, at the right’s then-current exercise price, common stock of the Company or, depending on the circumstances, common stock of the acquiring corporation having a market value of twice the full share exercise price. The rights may be redeemed by the Company at a price of one-tenth of one cent per right at any time prior to the time a person or group acquires 15% or more, or 20% or more if by GE, of the Company’s common stock. The rights expire on January 28, 2010, unless otherwise extended.
The Board of Directors approved in 2000 a repurchase program of up to 2,000,000 common shares of Company stock. Management was authorized to effect purchases from time to time in the open market or through privately negotiated transactions. In April 2004, in association with the Company’s convertible subordinated debt offering, the Company repurchased 614,200 shares of its stock at a price of $20.35. Through December 31, 2003,2004, the Company has repurchased 159,900774,100 shares at an average purchase price of $17.06$19.67 per share.
(9) Income Taxes
| (In Thousands of Dollars) Year Ended December 31 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2001 | |||||||||
| United States | $ | 36,076 | $ | 35,354 | $ | 30,213 | |||||
| Foreign | 4,767 | 2,623 | 3,829 | ||||||||
| Total | $ | 40,843 | $ | 37,977 | $ | 34,042 | |||||
Income before income taxes and minority interest consisted of the following:
|
| (In Thousands of Dollars ) |
| |||||||
|
|
| ||||||||
|
| 2004 |
| 2003 |
| 2002 |
| |||
|
|
|
|
| ||||||
United States |
| $ | 36,689 |
| $ | 36,076 |
| $ | 35,354 |
|
Foreign |
|
| 11,869 |
|
| 4,767 |
|
| 2,623 |
|
|
|
|
|
| ||||||
Total |
| $ | 48,558 |
| $ | 40,843 |
| $ | 37,977 |
|
|
|
|
|
| ||||||
The provision for income taxes is summarized as follows:
|
| (In Thousands of Dollars) |
| ||||||||||||||||||
|
|
| |||||||||||||||||||
|
| 2004 |
| 2003 |
| 2002 |
| ||||||||||||||
| (In Thousands of Dollars) |
|
|
|
| |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Current | 2003 | 2002 | 2001 |
|
|
|
|
|
|
|
| ||||||||||
| Federal | $ | 9,990 | $ | 7,321 | $ | 9,155 |
| $ | 9,565 |
| $ | 9,990 |
| $ | 7,321 |
| |||||
| State | 1,009 | 1,017 | 1,186 |
| 1,181 |
| 1,009 |
| 1,017 |
| |||||||||||
| Foreign | 1,416 | 741 | 1,097 |
| 3,893 |
| 1,416 |
| 741 |
| |||||||||||
|
|
|
| ||||||||||||||||||
| 12,415 | 9,079 | 11,438 |
|
| 14,639 |
| 12,415 |
| 9,079 |
| |||||||||||
| Deferred | 2,377 | 4,103 | 3,014 |
|
| 1,089 |
| 2,377 |
| 4,103 |
| ||||||||||
|
|
|
| ||||||||||||||||||
| Total | $ | 14,792 | $ | 13,182 | $ | 14,452 |
| $ | 15,728 |
| $ | 14,792 |
| $ | 13,182 |
| |||||
|
|
|
| ||||||||||||||||||
35
A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in the statements of income follows:
|
| 2004 |
| 2003 |
| 2002 |
| ||||||||||||||
| 2003 | 2002 | 2001 |
|
|
|
| |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % |
|
| 35.0 | % |
| 35.0 | % |
| 35.0 | % | |||||
| State income taxes, net of federal benefit | 1.6 | 1.7 | 2.3 |
|
| 1.6 |
| 1.6 |
| 1.7 |
| ||||||||||
| Nondeductible goodwill amortization | — | — | 4.0 | ||||||||||||||||||
Resolution of tax matters |
|
| (4.7 | ) |
| — |
| — |
| ||||||||||||
| Prior period tax refund | — | (1.3 | ) | — |
|
| — |
| — |
| (1.3 | ) | |||||||||
Impact of UK Property Sale |
|
| (1.0 | ) |
| — |
| — |
| ||||||||||||
| Other, net | (0.4 | ) | (0.7 | ) | 1.2 |
|
| 1.0 |
| (0.4 | ) |
| (0.7 | ) | |||||||
|
|
|
| ||||||||||||||||||
| Effective tax rate | 36.2 | % | 34.7 | % | 42.5 | % |
|
| 31.9 | % |
| 36.2 | % |
| 34.7 | % | |||||
|
|
|
| ||||||||||||||||||
29The favorable impact from the resolution of tax matters resulted from the 4th quarter 2004 resolution of a state tax nexus issue and the completion of several federal and state tax audits.
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company’s net deferred tax liability as of December 31, 20032004 of $41,082,000$42,170,000 is classified on the consolidated balance sheet as a current income tax benefit of $6,493,000 and a long-term deferred income tax liability of $48,663,000. The December 31, 2003 net deferred tax liability was $41,082,000, consisting of a current income tax benefit of $5,104,000 and a long-term deferred income tax liability of $46,186,000. The December 31, 2002 net deferred tax liability was $38,705,000, consisting of a current income tax benefit of $6,208,000 and a long-term deferred income tax liability of $44,913,000. The components of this net deferred tax liability are as follows:
|
| (In Thousands of Dollars) |
| ||||||||||||
|
|
| |||||||||||||
| (In Thousands of Dollars) December 31 |
| 2004 |
| 2003 |
| ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 |
|
|
| |||||||||||
| Federal operating loss carry forward | $ | 28 | $ | 152 |
| $ | — |
| $ | 28 |
| ||||
| Accrued employee benefits | 3,243 | 3,642 |
|
| 6,850 |
| 3,243 |
| |||||||
| Bad debt reserve | 463 | 532 |
|
| 380 |
| 463 |
| |||||||
| Warranty reserve | 809 | 964 |
|
| 810 |
| 809 |
| |||||||
| Other | 67 | 360 |
|
| 629 |
| 1503 |
| |||||||
|
|
| |||||||||||||
| Deferred tax assets | 4,610 | 5,650 |
|
| 8,669 |
| 6,046 |
| |||||||
Property related | (26,031 | ) | (29,407 | ) |
|
| (26,464 | ) |
| (26,031 | ) | ||||
Intangible items |
|
| (19,655 | ) |
| (15,616 | ) | ||||||||
| Inventory | (5,481 | ) | (5,755 | ) |
|
| (4,720 | ) |
| (5,481 | ) | ||||
| Other | (14,180 | ) | (9,193 | ) | |||||||||||
|
|
| |||||||||||||
| Deferred tax liabilities | (45,692 | ) | (44,355 | ) |
|
| (50,839 | ) |
| (47,128 | ) | ||||
|
|
| |||||||||||||
| Net deferred tax liability | $ | (41,082 | ) | $ | (38,705 | ) |
| $ | (42,170 | ) | $ | (41,082 | ) | ||
|
|
| |||||||||||||
No valuation allowances are recorded at December 31, 20032004 and 2002.2003.
(10) Acquisitions
On August 30, 2004, the Company acquired the Commercial AC motors (“CAC”) business from the General Electric Company. The business combination expands the Company’s product offering through extensions of existing product lines and new product applications into existing and new market segments. The customer base also expands the Company’s OEM and distributor relationships. In addition to the acquisition of the CAC assets, the Company also assumed certain liabilities, including but not limited to accounts payable, certain accrued compensation and benefits and certain other accrued expenses. The purchase price paid for CAC was approximately $72.0 million in cash, subject to a working capital adjustment upon final completion of the closing balance sheet. The final working capital adjustment may impact the dollar amount of tangible assets, liabilities, or goodwill. On a preliminary basis, approximately $45.5 million of the purchase price was allocated to the net assets acquired, $8.3 million was allocated to intangible assets with definite lives and the remaining $18.2 million was recorded as goodwill. The value assigned to intangible assets is based on a preliminary valuation and the potential exists for revisions as the valuation is finalized.
36
CAC is a leading manufacturer and marketer of a full line of fractional and subfractional AC electric motors for pump, compressor, equipment and commercial HVAC applications, with expected annual sales on a normalized basis of approximately $130 million. Included in the acquisition were motor manufacturing facilities in Juarez, Mexico and technology resources in Hyderbad, India. CAC financial results for four months ending December 31, 2004 are included in the Company’s 2004 financial statements in the Electrical segment.
At 11:59 p.m. on December 31, 2004, the Company acquired the HVAC motors and capacitors businesses from General Electric Company. The business combination provides the Company a leading market position for electric motors used in central heating and air conditioning and expansion of the Company’s customer base to include major HVAC original equipment manufacturers. In addition, the acquisition expands the Company’s global manufacturing and technology capabilities, including the patented ECM technology. In addition to the HVAC assets, the Company also assumed certain liabilities, including but not limited to accounts payable, certain accrued compensation and benefits and certain other accrued expenses. The purchase price paid for HVAC was approximately $400.0 million, subject to a working capital adjustment upon final completion of the closing balance sheet. The final working capital adjustment may impact the dollar amount of tangible assets, liabilities, or goodwill. The purchase price consisted of approximately $270.0 million in cash and 4,559,048 shares of common stock of the Company which was valued at approximately $130.0 million. On a preliminary basis, approximately $140.8 million of the purchase price was allocated to the net assets acquired, $44.3 million was allocated to intangible assets with definite lives and the remaining $215.0 million was recorded as goodwill. The value assigned to intangible assets is based on a preliminary valuation and the potential exists for revisions as the valuation is finalized.
The HVAC motor business, which represents approximately 90% of the revenues of the acquired businesses, produces a full line of electric motors for use in residential and commercial HVAC systems. The capacitors business represents the balance of the revenues and produces a line of capacitors used in HVAC applications, high intensity lighting and other applications. In total, the business had sales of $442.0 million in 2004. Results for the HVAC business will be included in the Electrical segment. Included in the acquisition were motor manufacturing facilities in Faridabad, India; Reynosa, Mexico; and Springfield, Missouri; and a capacitor manufacturing facility in Juarez, Mexico. The acquired businesses also maintain technology development, administrative and sales support teams in Fort Wayne, Indiana and electric motor engineering resources located in Hyderbad, India.
GE entered into a shareholder agreement with Regal-Beloit related to the Company’s common stock issued to GE in the transaction. The shareholder agreement, among other things, includes provisions, subject to limitations and a sharing formula, for sharing of gains or losses resulting from GE’s liquidation of the Company’s stock. Any such gains or losses will be recorded directly to shareholders’ investment consistent with EITF 97-15 “Accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination.” In addition, the Company and GE have entered into several transition service agreements. These agreements are related to transition support in areas such as warehousing, computer systems, and accounting services. The duration of the various agreements ranges from six months to three years, depending on the specific agreement. The amount paid to GE under these agreements in 2004 was $1.0 million.
Proforma results for 2004 and 2003, assuming these acquisitions were completed on January 1, 2003 (excluding any synergies, cost reductions, additional sales opportunities, or future tax benefits) and a summary of the assets acquired and liabilities assumed, including the detail of intangible assets acquired, are as follows:
REGAL-BELOIT Proforma Including HVAC and CAC (unaudited)
|
| 2004 |
| 2003 |
| ||
|
|
|
| ||||
Sales |
| $ | 1,295,228 |
| $ | 1,145,872 |
|
Cost of Sales |
|
| 1,007,404 |
|
| 888,129 |
|
|
|
|
| ||||
Gross Profit |
|
| 287,824 |
|
| 263,743 |
|
Operating Expenses |
|
| 167,872 |
|
| 159,624 |
|
|
|
|
| ||||
Income from Operations |
|
| 119,952 |
|
| 104,119 |
|
Interest Expense |
|
| 16,467 |
|
| 16,360 |
|
Interest Income |
|
| 347 |
|
| 79 |
|
|
|
|
| ||||
Income Before Taxes and Minority Interest |
|
| 103,832 |
|
| 87,838 |
|
Provision for Income Taxes |
|
| 36,455 |
|
| 30,722 |
|
|
|
|
| ||||
Income Before Minority Interest |
|
| 67,377 |
|
| 57,116 |
|
Minority Interest in Income, Net of Tax |
|
| 3,055 |
|
| 1,564 | |
|
|
| |||||
Net Income |
| $ | 64,322 |
| $ | 55,252 |
|
|
|
|
| ||||
Earnings per Share |
| $ | 2.21 |
| $ | 1.87 |
|
Earnings per Share - Assuming Dilution |
| $ | 2.18 |
| $ | 1.85 |
|
37
Opening Balance Sheet Summary (Preliminary)
($ thousands)
|
| At |
| At |
| ||
|
|
|
| ||||
Cash |
| $ | — |
| $ | 13,689 |
|
Accounts Receivable |
|
| 16,199 |
|
| 45,517 |
|
Inventory |
|
| 25,100 |
|
| 73,150 |
|
Prepaid Expenses |
|
| 1,254 |
|
| 278 |
|
|
|
|
| ||||
Total Current Assets |
|
| 42,553 |
|
| 132,634 |
|
Net Property, Plant, & Equipment |
|
| 22,975 |
|
| 74,592 |
|
Goodwill (100% of which is expected to be deductible for tax purposes) |
|
| 18,204 |
|
| 215,020 |
|
Purchased Intangible Assets |
|
| 8,300 |
|
| 44,310 |
|
Other Non-Current Assets |
|
| — |
|
| 4,100 |
|
Total Assets |
| $ | 92,032 |
| $ | 470,656 |
|
|
|
|
| ||||
Accounts Payable |
| $ | 10,228 |
| $ | 45,211 |
|
Other Liabilities |
|
| 10,018 |
|
| 25,302 |
|
Shareholders Equity |
|
| 71,786 |
|
| 400,143 |
|
|
|
|
| ||||
Total Liabilities & Equity |
| $ | 92,032 |
| $ | 470,656 |
|
|
|
|
| ||||
Preliminary Summary of Intangible Assets with Definite Lives
($ millions)
Asset Description |
|
| CAC |
|
| HVAC |
|
| Total |
|
| Useful Life |
|
|
|
|
|
| |||||||||
Non-Compete Agreements |
| $ | 0.5 |
| $ | 2.0 |
| $ | 2.5 |
|
| 5 Years |
|
Trademarks |
|
| 3.8 |
|
| 1.1 |
|
| 4.9 |
|
| 3-5 Years |
|
Patents |
|
| 0.7 |
|
| 14.7 |
|
| 15.4 |
|
| 10 Years |
|
Engineering Drawings |
|
| 0.2 |
|
| 1.0 |
|
| 1.2 |
|
| 10 Years |
|
Customer Relationships |
|
| 3.1 |
|
| 25.5 |
|
| 28.6 |
|
| 10 Years |
|
|
|
|
|
|
|
|
| ||||||
Total |
| $ | 8.3 |
| $ | 44.3 |
| $ | 52.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Included in accounts payable on December 31, 2004 was $38.4 million consisting of amounts payable to GE related to trade payables, transition services fees payable, and other payables of the acquired businesses.
On September 16, 2002, the Company purchased, for cash, select assets of the Powertrax® product line of Vehicular Technologies. The purchased assets included inventory and certain intangible assets. The operating results and purchased assets are not material to the performance or financial position of the Company. In November 2002, the Company entered into an agreement to form a joint venture effective January 1, 2003, with Shanghai Jinling Co., Ltd. The Company acquired, for a combination of cash and investment of machinery and technology, a 50% ownership in Shanghai Micro Motor, Shanghai Jinling’s sub-fractional and fractional motor company, which was already a supplier to the Company. The purchased assets are not material to the financial position of the Company.
On January 16, 2001, the Company acquired, for cash, selected assets of Philadelphia Gear Company, which now comprise the Company’s spiral bevel gear product line. The purchased assets included inventory and selected machinery, equipment and tooling. The operating results and assets purchased are not material to the performance or financial position of the Company.
(11) Industry Segment Information
The Company’s reportable segments are strategic businesses that offer different products and services. The Company has two such reportable segments: Mechanical Group and Electrical Group.Electrical. The Mechanical Groupsegment principally produces mechanical speed reducersproducts that control motion and related productstorque for sale to original equipment manufacturers and distributors. The Electrical Groupsegment principally produces electric motors and power generation equipment and related products for sale to original equipment manufacturers and distributors.
The Company evaluates performance based on the segments’segment’s income from operations. Corporate costs have been allocated to each Groupsegment based primarily on the net sales of each Group.segment. The reported net sales of each segment are solely from external customers. No single customer accounts for 10% or more of the Company’s net sales. The Company’s products manufactured and sold outside the United States were approximately 12%14%, 9%12% and 8%9% of net sales in 2004, 2003 2002 and 2001,2002, respectively. Export sales from U.S. operations were approximately 5%7%, 5% and 6%5% in 2004, 2003 2002 and 2001,2002, respectively.
3038
Pertinent data for each industryreportable segment in which the Company operated for the three years ended December 31, 20032004 is as follows:
| (In Thousands of Dollars) | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Sales | Income From Operations | Identifiable Assets | Capital Expenditures | Depreciation and Amortization | |||||||||||||
| 2003 Mechanical Group | $ | 180,741 | $ | 13,349 | $ | 121,976 | $ | 6,229 | $ | 7,373 | |||||||
| Electrical Group | 438,357 | 33,877 | 612,469 | 11,736 | 14,699 | ||||||||||||
| Total REGAL-BELOIT | $ | 619,098 | $ | 47,226 | $ | 734,445 | $ | 17,965 | $ | 22,072 | |||||||
| 2002 Mechanical Group | $ | 186,716 | $ | 11,678 | $ | 124,053 | $ | 3,522 | $ | 8,410 | |||||||
| Electrical Group | 418,576 | 35,549 | 609,935 | 7,232 | 14,764 | ||||||||||||
| Total REGAL-BELOIT | $ | 605,292 | $ | 47,227 | $ | 733,988 | $ | 10,754 | $ | 23,174 | |||||||
| 2001 Mechanical Group | $ | 206,615 | $ | 15,872 | $ | 125,201 | $ | 5,110 | $ | 8,824 | |||||||
| Electrical Group | 456,956 | 40,188 | 621,398 | 10,316 | 22,974 | ||||||||||||
| Total REGAL-BELOIT | $ | 663,571 | $ | 56,060 | $ | 746,599 | $ | 15,426 | $ | 31,798 | |||||||
|
| (In Thousands of Dollars) |
| |||||||||||||
|
|
| ||||||||||||||
|
| Net |
| Income From |
| Identifiable |
| Capital |
| Depreciation |
| |||||
|
|
|
|
|
|
| ||||||||||
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mechanical |
| $ | 199,590 |
| $ | 15,720 |
| $ | 140,163 |
| $ | 7,408 |
| $ | 7,790 |
|
Electrical |
|
| 556,967 |
|
| 39,442 |
|
| 1,211,889 |
|
| 8,873 |
|
| 15,490 |
|
|
|
|
|
|
|
| ||||||||||
Total REGAL-BELOIT |
| $ | 756,557 |
| $ | 55,162 |
| $ | 1,352,052 |
| $ | 16,281 |
| $ | 23,280 |
|
|
|
|
|
|
|
| ||||||||||
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mechanical |
| $ | 180,741 |
| $ | 13,349 |
| $ | 121,976 |
| $ | 6,229 |
| $ | 7,373 |
|
Electrical |
|
| 438,357 |
|
| 33,877 |
|
| 612,469 |
|
| 11,736 |
|
| 14,699 |
|
|
|
|
|
|
|
| ||||||||||
Total REGAL-BELOIT |
| $ | 619,098 |
| $ | 47,226 |
| $ | 734,445 |
| $ | 17,965 |
| $ | 22,072 |
|
|
|
|
|
|
|
| ||||||||||
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mechanical |
| $ | 186,716 |
| $ | 11,678 |
| $ | 124,053 |
| $ | 3,522 |
| $ | 8,410 |
|
Electrical |
|
| 418,576 |
|
| 35,549 |
|
| 609,935 |
|
| 7,232 |
|
| 14,764 |
|
|
|
|
|
|
|
| ||||||||||
Total REGAL-BELOIT |
| $ | 605,292 |
| $ | 47,227 |
| $ | 733,988 |
| $ | 10,754 |
| $ | 23,174 |
|
|
|
|
|
|
|
| ||||||||||
None
Controls and Procedures Disclosure Controls and Procedures
Procedures.An evaluation was carried out by the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2003.2004. Based upon thaton this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of theseCompany’s disclosure controls and procedures were effective. No
Management’s Report on Internal Control over Financial Reporting. The report of management required under this Item 9A is contained in Item 7 of Part II of this Annual Report on Form 10-K under the heading “Management’s Annual Report on Internal Control over Financial Reporting.”
Attestation Report of Independent Registered Public Accounting Firm. The attestation report required under this Item 9A is contained in Item 7 of Part II of this Annual Report on Form 10-K under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls. There were no changes were made in the Company’s internal controlscontrol over financial reporting that occurred during the yearquarter ended December 31, 20032004 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control andover financial reporting.
Other Information |
None.
39
PART III
Directors and Executive Officers of the Registrant Information required by Item 401 of Regulation S-K is included under the captions “Election of Directors,” The Company has adopted a code of ethics and a code of conduct that apply to all our directors, officers and employees. These codes are available on our website, along with our current Corporate Governance Guidelines, at www .regal-beloit.com. We intend to disclose through our website any amendments to, or waivers from, the provisions of these codes. Executive Compensation Information required by Item 402 of Regulation S-K is included ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information required pursuant to Plan Category Number of securities to be Weighted-average exercise Number of securities Equity compensation plans approved by security holders 1,555,584 $ 21.53 1,262,350 Equity compensation plans not approved by security holders — — — Total 1,555,584 $ 21.53 1,262,350 Certain Relationships and Related Transactions Information required pursuant to Item 404 of Regulation S-K is included under the caption “Other Information About the Board Principal Accounting Fees and Services The information required by this item is hereby incorporated by reference from the caption “Audit Committee Report” 40 PART IV Exhibits, Financial Statement Schedules (a) 1. Financial statements 2. Financial statement schedule 3. Exhibits (b) Exhibits- see the Index to Exhibits on Pages 46-48 (c) See (a) 2. above 41 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. REGAL-BELOIT CORPORATION By: David A. Barta 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/ Chairman, Chief Executive Officer March and Director James L. Packard /s/ Vice President, Chief Financial March Officer David A. Barta (Principal Accounting & Financial Officer) /s/ President, Chief Operating Officer March and Director Henry W. Knueppel /s/ J. Director March J. Reed Coleman /s/ Director March Thomas J. Fischer /s/ STEPHEN N. GRAFF Director March 11, 2005 Stephen N. Graff REGAL-BELOIT CORPORATION Index to Financial Statements Page(s) In (1) Financial Statements: Reports of Independent Registered Public 20-21 Consolidated Balance Sheets at December 31, 22 Consolidated Statements of Income for the three years ended 23 24 Consolidated Statements of Cash Flows for the three years ended 25 Notes to Consolidated Financial Statements 26-39 Page(s) In (2) Financial Statement Schedule: Report of Independent 44 For the three years ended December 31, 45 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 43 REPORT OF INDEPENDENT To the Board of Directors and Shareholders of We have audited the consolidated financial statements of REGAL-BELOIT CORPORATION and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and DELOITTE & TOUCHE LLP SCHEDULE II REGAL-BELOIT CORPORATION VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts: (In Thousands of Dollars) Balance Provision Write-offs, Additions, Balance Year Ended December 31, 2004 $ 1,432 $ 428 $ (641 ) $ 1,157 $ 2,376 $ 1,465 $ 608 $ (641 ) $ -0- $ 1,432 $ 2,233 $ 590 $ (1,358 ) $ -0- $ 1,465 Exhibits Index Exhibit Exhibit Description 2.1 Agreement and Plan of Merger among the Registrant, Regal-Beloit Acquisition Corp., and Marathon Electric Manufacturing Corporation dated as of February 26, 1997, as amended and restated March 17, 1997 and March 26, 1997. [Incorporated by reference to Exhibit 2.1 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated April 10, 2.2 Stock Purchase Agreement, dated as of August 7, 2000, as amended by First Amendment to Stock Purchase Agreement, dated as of September 29, 2000, among REGAL-BELOIT CORPORATION, LEC Acquisition Corp., 2.3 Purchase Agreement, dated as of August 10, 2004, between REGAL-BELOIT Corporation and General Electric Company. [Incorporated by reference to Exhibit 2.1 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated August 30, 2004 (File No. 001-07283)] 2.4 Amendment to Purchase Agreement, dated as of August 30, 2004, between REGAL-BELOIT Corporation and General Electric Company. [Incorporated by reference to Exhibit 2.1 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated August 30, 2004 (File No. 001-07283)] 2.5 Purchase Agreement, dated as of November 14, 2004, between REGAL-BELOIT Corporation and General Electric Company. [Incorporated by reference to Exhibit 2.1 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated December 31, 2004 (File No. 001-07283)] 2.6 Amendment to Purchase Agreement, dated as of August 30, 2004, between REGAL-BELOIT Corporation and General Electric Company. [Incorporated by reference to Exhibit 2.1 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated December 31, 2004 (File No. 001-07283)] 3.1 Articles of Incorporation of the Registrant [Incorporated by reference to Exhibit B to REGAL-BELOIT CORPORATION’S Definitive Proxy Statement on Schedule 14A for the 1994 Annual Meeting of 3.2 Bylaws of the Registrant [Incorporated by reference to Exhibit C to REGAL-BELOIT CORPORATION’S Definitive Proxy Statement on Schedule 14A for the 1994 Annual Meeting of 4.1 Articles of Incorporation and Bylaws of the Registrant [Incorporated by reference to Exhibits 3.1 and 3.2 hereto] 4.2 Indenture, dated April 5, 2004, between REGAL-BELOIT Corporation and U.S. Bank National Association, as Trustee. [Incorporated by reference to Exhibit 4.3 to REGAL-BELOIT Corporation’s Registration Statement on Form S-3 filed on June 21, 2004 (File No. 333-116706)] 4.3 First Supplemental Indenture, dated December 9, 2004, between REGAL-BELOIT Corporation and U.S. Bank National Association, as Trustee. [Incorporated by reference to Exhibit 4 to REGAL-BELOIT Corporation’s Current Report on Form 8-K filed on December 14, 2004 (File No. 001-07283)] 4.4 Form of 2.75% Convertible Senior Subordinated Note due 2024 (included in Exhibit 4.2). 46 Exhibit Exhibit Description 4.5 Registration Rights Agreement, dated April 5, 2004, among REGAL-BELOIT Corporation, Banc of America Securities LLC, Deutsche Bank Securities Inc., Wachovia Capital Markets, LLC and Robert W. Baird & Co. Incorporated. [Incorporated by reference to Exhibit 4.5 to REGAL-BELOIT Corporation’s Registration Statement on Form S-3 filed on June 21, 2004 (File No. 333-116706)] 4.6 Rights Agreement, dated as of January 28, 2000, between REGAL-BELOIT CORPORATION and BankBoston, N.A. [Incorporated by reference to Exhibit 4.1 to REGAL-BELOIT CORPORATION’S Registration Statement on Form 8-A (Registration No. 1-7283) filed January 31, 2000] 4.7 Amendment effective as of June 11, 2002, to the Rights Agreement, dated as of January 28, 2000, between REGAL-BELOIT 4.8 Second Amendment to Rights Agreement, dated as of November 12, 2004, between REGAL-BELOIT Corporation and EquiServe Trust Company, N.A. [Incorporated by reference to Exhibit 4.3 to REGAL-BELOIT Corporation’s Report on Form 8-A/A filed on November 18, 2004 (File No. 001-07283)] 4.9 Third Amendment to Rights Agreement, dated as of 4.10 Shareholder Agreement, dated as of December 31, 2004, between REGAL-BELOIT Corporation and General Electric Company. [Incorporated by reference to Exhibit 4 to REGAL-BELOIT Corporation’s Current Report on Form 8-K filed on January 6, 2005 (File No. 001-07283)] 4.11 Amended and Restated Credit Agreement, dated as of May 5, 2004, among 4.12 First Amendment, dated December 10.1* REGAL-BELOIT CORPORATION Stock Option Deferral Policies and Procedures 10.2* 1987 Stock Option Plan [Incorporated by reference to Exhibit 10.3 to REGAL-BELOIT CORPORATION’S Registration Statement on Form S-1 (Registration No. 33-25363) dated November 4, 10.3* 1991 Flexible Stock Incentive Plan [Incorporated by reference to Exhibit 10.4 to REGAL-BELOIT CORPORATION’S Annual Report on Form 10-K for the year ended December 31, 47 Exhibit Exhibit Description 10.4* 1998 Stock Option Plan, as amended [Incorporated by reference to REGAL-BELOIT CORPORATION’S Registration Statement on Form S-8 (File No. 333-84779)] 10.5* REGAL-BELOIT CORPORATION Retirement Plans specifically incorporating: LEESON Electric 401(k) Plan [Incorporated by reference to REGAL-BELOIT CORPORATION’S Registration Statement on Form S-8 (File No. 333-108092)]. 10.6* 2003 Equity Incentive Plan [Incorporated by reference to REGAL-BELOIT CORPORATION’S Registration Statement on Form S-8 (File No. 333-110061)]. 10.7* Key Executive Employment and Severance Agreement, dated as of June 18, 2001, between James L. Packard and REGAL-BELOIT CORPORATION [Incorporated by reference to Exhibit 10.9 to REGAL-BELOIT CORPORATION’S Annual Report on Form 10-K for the year ended December 31, 10.8* Form of Key Executive Employment and Severance Agreement between REGAL-BELOIT CORPORATION and each of Henry W. Knueppel and Kenneth F. Kaplan. [Incorporated by reference to Exhibit 10.5 to REGAL-BELOIT CORPORATION’S Annual Report on Form 10-K for the year ended December 31, 21 Subsidiaries of REGAL-BELOIT CORPORATION, filed herein. 23 Consent of Independent Auditors, filed herein. 31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herein. 31.2 Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herein. 32 Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herein. 99.2 Proxy Statement of REGAL-BELOIT CORPORATION for the [The Proxy Statement for the * A management contract or compensatory plan or arrangement.“2003“2004 Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance”, of the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2004,2005, a copy of which has beenwill be filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference. Information with respect to the executive officers of the Company appears in Part I pages 8 and 9 of this Annual Report on Form 10-K.ITEM 11. Executive Compensationon pages 7 and 10-13 ofin the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2004,2005, a copy of which has beenwill be filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference;provided,,however,, that the subsection entitled “Report of Compensation and Human Resources Committee on Annual Compensation” shall not be deemed to be incorporated herein by reference. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder MattersItemsItem 403 and 201(d) of Regulation S-K is included under the captionscaption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information”, respectively, of the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2004,2005, a copy of which has beenwill be filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.31Equity Compensation Plan Information
issued upon exercise of
outstanding options,
warrants and rights
(a)
price of outstanding
options, warrants and
rights
(b)
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)—- Certain Relationships and Related Transactions” of the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2004,2005, a copy of which has beenwill be filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.set forth inof the Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held on April 22, 2004.2005, a copy of which will be filed within 120 days following the close of the fiscal year, and such information is incorporated herein by reference.ITEM 15. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K(a)—- 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.—- 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.—- The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form10-K.(b)Reports on Form 8-K On October 22, 2003, the Company filed a current report on Form 8-K containing the Company’s third quarter 2003 earnings news release.REGAL-BELOIT CORPORATIONBy: /s/ Kenneth F. KaplanKenneth F. Kaplan/s/ DAVID A. BARTA
Vice President, Chief Financial Officer and SecretaryJamesJAMES L. PackardPACKARD12, 200411, 2005and DirectorKenneth F. KaplanDAVID A. BARTA12, 200411, 2005Kenneth F. Kaplan and SecretaryHenryHENRY W. KnueppelKNUEPPEL12, 200411, 2005and DirectorReed ColemanREED COLEMANDirector12, 200411, 2005Frank E. BauchieroTHOMAS J. FISCHERDirector12, 200411, 2005Frank E. BauchieroDirectorMarch 12, 2004Stephen N. Graff3242
And Financial Statement Schedule
Form 10-K(1)Financial Statements:ReportAccountantsAccounting Firm16-1720032004 and 2002200318
December 31, 2004, 2003 and 2002 December 31, 2003, 2002 and 200119Consolidated Statements of Shareholders’ Investment for the three
years ended December 31, 2004, 2003 2002 and 2001200220
December 31, 2004, 2003 and 2002 December 31, 2003, 2002 and 20012122-31
Form 10-KReportsAuditors/IndependentRegistered Public AccountantsAccounting Firm
on Financial Statement Schedule342003,2004, Schedule II -– Valuation
And Qualifying Accounts35All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.33AUDITORS’ REPORTREGISTERED PUBLIC ACCOUNTING FIRM
REGAL-BELOIT CORPORATION and SubsidiariesCORPORATION:2002,for each of the three years in the period ended December 31, 2004, management’s assessment of the effectivenss of the Company’s internal control over financial reporting as of December 31, 2004, and for the years then endedeffectiveness of the Company’s internal control over financial reporting as of December 31, 2004, and have issued our reportreports thereon dated February 25, 2004 (which report expresses an unqualified opinion and includes explanatory paragraphs relating to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and related disclosures); such report is included elsewhere in this Form 10-K.March 8, 2005. Our audits also included the consolidated financial statement schedule of the Company forlisted in the years ended December 31, 2003 and 2002.accompanying index at item 15. This consolidated financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, the 2003 and 2002such consolidated financial statement schedule, when considered in relation to 2003 and 2002the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. The financial statement schedule for year ended December 31, 2001 was audited by other auditors who have ceased operations. Those auditors expressed an opinion, in their report dated January 28, 2002, that such financial statement schedule, when considered in relation to the 2001 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein.
Milwaukee, WisconsinFebruary 25, 2004March 8, 2005The report set forth below is a copy of a previously issued audit report by Arthur Andersen LLP. This report has not been reissued by Arthur Andersen LLP in connection with its inclusion in this Form 10-K.44We will not be able to obtain the written consent of Arthur Andersen LLP as required by Section 7 of the Securities Act of 1933 for our registration statements on Form S-8. Accordingly, investors will not be able to sue Arthur Andersen LLP pursuant to Section 11(a)(4) of the Securities Act with respect to any such registration statements, and therefore ultimate recovery on a successful claim may be limited. The ability of investors to recover from Arthur Andersen LLP may also be limited as a result of Arthur Andersen LLP’s financial condition or other matters resulting from the various civil and criminal lawsuits against that firm.REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSWe have audited, in accordance with auditing standards generally accepted in the United States, the financial statements of Regal-Beloit Corporation in this Form 10-K, and have issued our report thereon dated January 28, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index to financial statements is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.ARTHUR ANDERSEN LLPMilwaukee, WisconsinJanuary 28, 200234(In Thousands of Dollars) Balance
Beginning
of YearProvision
For LossesWrite-offs,
Net of
RecoveriesAdditions,
Related to
AcquisitionBalance
End
of Year
Beginning
of Year
For Losses
Net of
Recoveries
Related to
Acquisitions
End
of YearYear Ended December 31, 2003 $ 1,465 $ 608 $ (641 ) $ -0- $ 1,432 Year Ended December 31, 2002 $ 2,233 $ 590 $ (1,358 ) $ -0- $ 1,465 Year Ended December 31, 2001 $ 2,031 $ 912 $ (710 ) $ -0- $ 2,233 3545ExhibitNumberExhibit Description2.1
Number1997]1997 (File No. 001-07283)]]2.2LeesonLEESON Electric Corporation (“Leeson”LEESON”) and Leeson’sLEESON’s Shareholders. [Incorporated by reference to Exhibit 2 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated October 13, 2000]2000 (File No. 001-07283)]3.1Shareholders]Shareholders (File No. 001-07283)]3.2Shareholders]Shareholders (File No. 001-07283)]4.14.2
Number4.3Credit Agreement, dated as of September 29, 2000, among REGAL-BELOIT CORPORATION, M&I Marshall & Ilsley Bank, as Administrative Agent, and Swing Line Bank, Bank of America, N.A., as Documentation and Syndication Agent, Banc of America Securities LLC, Lead Arranger and Book Manager and each of the Banks Party to the Credit Agreement [Incorporated by reference to Exhibit 4 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated October 13, 2000]4.4First Amendment, dated as of June 29, 2001, among the Company, the financial institutions listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank, as Administrative Agent [Incorporated by reference to Exhibit 1 to REGAL-BELOIT CORPORATION’S Quarterly Report on Form 10-Q for the quarter ended June 30, 2001].4.5Second Amendment and Waiver, dated as of January 31, 2002, among the Company, the financial institutions listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank, as Administrative Agent [Incorporated by reference to Exhibit 99.4 to REGAL-BELOIT CORPORATION’S Current Report on Form 8-K dated February 1, 2002]4.6CORPORATIONCorporation and BankBoston, N.A. originally filed as Exhibit 4.1 and incorporated on REGAL-BELOIT CORPORATION’SCorporation’s Registration Statement on Form 8-A (file no. 1-7283)(File No. 001-07283) and on REGAL-BELOIT CORPORATION’SCorporation’s current report on Form 8-K dated January 31, 2000. [Incorporated by reference to Exhibit 4.6 to REGAL-BELOIT CORPORATION’SCorporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.2002]36Exhibits IndexExhibitNumberExhibit Description4.7October 7, 2002,December 31, 2004, between REGAL-BELOIT Corporation and EquiServe Trust Company, N.A. [Incorporated by reference to Exhibit 4.4 to REGAL-BELOIT Corporation’s Report on Form 8-A/A filed on January 6, 2005 (File No. 001-07283)]the Company, theREGAL-BELOIT Corporation, various financial institutions, listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank as Administrative Agent and Swing Line Bank, and Bank of America, N.A. as Syndication Agent. [Incorporated by reference to Exhibit 4.710.1 to REGAL-BELOIT CORPORATION’S AnnualCorporation’s Quarterly Report on Form 10-K10-Q for the year-endedquarter ended June 29, 2004 (File No. 001-07283)]31, 2002.4.8Fourth Amendment,30, 2004, to the Amended and Restated Credit Agreement, dated as of March 4, 2003,May 5, 2004, among the Company, theREGAL-BELOIT Corporation, various financial institutions, listed on the signature pages thereof, Bank of America, N.A., as Documentation and Syndication Agent, and M&I Marshall &and Ilsley Bank, as Administrative Agent. [Incorporated by reference to Exhibit 10.1 to REGAL-BELOIT CORPORATION’S QuarterlyCorporation’s Current Report on Form 10-Q for the quarter ended March 31, 2003.8-K filed on January 5, 2005 (File No. 001-07283)]10.1*1988]1988 (File No. 001-07283)]10.2*1992]1992 (File No. 001-07283)]10.3*
Number10.4*10.5*10.6*2001.2001 (File No. 001-07283)].10.7*2002.2002 (File No. 001-07283)].18Letter regarding change in accounting principle, filed herein.2331.131.237Exhibits IndexExhibitNumberExhibit Description3299.1REGAL-BELOIT CORPORATION Letter to the Securities and Exchange Commission regarding representations from Arthur Andersen LLP [Incorporated by reference to Exhibit 99.1 to REGAL-BELOIT CORPORATION’S Annual Report on Form 10-K for the year ended December 31, 2002].20042005 Annual Meeting of Shareholders [The20042005 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 20042005 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.4838