UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| for the quarterly period ended September 27, 2008March 28, 2009
or |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number
001-07283
(Exact name of registrant as specified in its charter)
| (Exact name of registrant as specified in its charter) |
Wisconsin | 39-0875718 |
(State of other jurisdiction of incorporation) | (IRS Employer Identification No.) |
| 200 State Street, Beloit, Wisconsin 53511 |
200 State Street, Beloit, Wisconsin 53511
| (Address of principal executive office) |
(Address of principal executive office)
| Registrant’s telephone number, including area code |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.“smaller reporting company.” See definitionthe definitions of “accelerated filer and large“large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ý Accelerated Filer ¨ Non-accelerated filer ¨ Smaller Reporting Company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO ý
32,276,14531,503,031 Shares, Common Stock, $.01 Par Value (as of October 31, 2008)May 1, 2009)
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CAUTIONARY STATEMENT
This Quarterly Report contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent our management’s judgment regarding future events. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “plan,” “expect,” “anticipate,” “estimate,” “believe,” or “continue” or the negative of these terms or other similar words. Actual results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of factors, including:
· | economic changes in global markets where we do business, such as reduced demand for products we sell, weakness in the housing and commercial real estate markets, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control; |
· | unanticipated fluctuations in commodity prices and raw material costs; |
· | cyclical downturns affecting the global market for capital goods; |
· | unexpected issues and costs arising from the integration of acquired companies and businesses; |
· | marketplace acceptance of new and existing products including the loss of, or a decline in business from, any significant customers; |
· | the impact of capital market transactions that we may effect; |
· | the availability and effectiveness of our information technology systems; |
· | unanticipated costs associated with litigation matters; |
· | actions taken by our competitors, including new product introductions or technological advances, and other events affecting our industry and competitors; |
· | difficulties in staffing and managing foreign operations; and other domestic and international economic and political factors unrelated to our performance, such as the current substantial weakness in economic and business conditions and the stock markets as a whole; and |
· | other risks and uncertainties including but not limited to those described in Item 1A-Risk Factors of the Company’s Annual Report on Form 10-K filed on February 27, 200825, 2009 and from time to time in our reports filed with U.S. Securities and Exchange Commission. |
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. The forward-looking statements included in this Form 10-Q are made only as of their respective dates, and we undertake no obligation to update these statements to reflect subsequent events or circumstances. See also Item 1A - Risk Factors in the Company’s Annual Report on Form 10-K filed on February 27, 2008.25, 2009.
PART I - FINANCIAL INFORMATION REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In Thousands of Dollars, Except Shares Outstanding, Dividends Declared and Per Share Data)
ITEM I. 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
| | | | | | | | | | | | |
Net Sales | | $ | 620,607 | | | $ | 449,374 | | | $ | 1,763,266 | | | $ | 1,327,815 | |
| | | | | | | | | | | | | | | | |
Cost of Sales | | | 487,810 | | | | 342,660 | | | | 1,377,193 | | | | 1,019,998 | |
| | | | | | | | | | | | | | | | |
Gross Profit | | | 132,797 | | | | 106,714 | | | | 386,073 | | | | 307,817 | |
| | | | | | | | | | | | | | | | |
Operating Expenses | | | 67,063 | | | | 53,339 | | | | 195,233 | | | | 147,056 | |
| | | | | | | | | | | | | | | | |
Income From Operations | | | 65,734 | | | | 53,375 | | | | 190,840 | | | | 160,761 | |
| | | | | | | | | | | | | | | | |
Interest Expense | | | 7,103 | | | | 5,116 | | | | 21,449 | | | | 14,607 | |
| | | | | | | | | | | | | | | | |
Interest Income | | | 418 | | | | 365 | | | | 1,333 | | | | 695 | |
| | | | | | | | | | | | | | | | |
Income Before Taxes & Minority Interest | | | 59,049 | | | | 48,624 | | | | 170,724 | | | | 146,849 | |
| | | | | | | | | | | | | | | | |
Provision For Income Taxes | | | 21,261 | | | | 16,638 | | | | 60,826 | | | | 50,301 | |
| | | | | | | | | | | | | | | | |
Income Before Minority Interest | | | 37,788 | | | | 31,986 | | | | 109,898 | | | | 96,548 | |
| | | | | | | | | | | | | | | | |
Minority Interest in Income, Net of Tax | | | 882 | | | | 747 | | | | 2,749 | | | | 2,243 | |
| | | | | | | | | | | | | | | | |
Net Income | | $ | 36,906 | | | $ | 31,239 | | | $ | 107,149 | | | $ | 94,305 | |
| | | | | | | | | | | | | | | | |
Earnings Per Share of Common Stock: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic | | $ | 1.18 | | | $ | 1.00 | | | $ | 3.42 | | | $ | 3.02 | |
| | | | | | | | | | | | | | | | |
Assuming Dilution | | $ | 1.09 | | | $ | 0.92 | | | $ | 3.20 | | | $ | 2.78 | |
| | | | | | | | | | | | | | | | |
Cash Dividends Declared | | $ | 0.16 | | | $ | 0.15 | | | $ | 0.47 | | | $ | 0.44 | |
| | | | | | | | | | | | | | | | |
Weighted Average Number of Shares Outstanding: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic | | | 31,357,433 | | | | 31,320,838 | | | | 31,326,675 | | | | 31,227,373 | |
Assuming Dilution | | | 33,715,881 | | | | 34,104,123 | | | | 33,452,880 | | | | 33,943,057 | |
| | Three Months Ended | |
| | | | | (As Adjusted, | |
| | | | | See Note 2) | |
| | March 28, 2009 | | | March 29, 2008 | |
| | | | | | |
Net Sales | | $ | 443,274 | | | $ | 536,343 | |
| | | | | | | | |
Cost of Sales | | | 352,704 | | | | 414,244 | |
| | | | | | | | |
Gross Profit | | | 90,570 | | | | 122,099 | |
| | | | | | | | |
Operating Expenses | | | 62,378 | | | | 64,487 | |
| | | | | | | | |
Income From Operations | | | 28,192 | | | | 57,612 | |
| | | | | | | | |
Interest Expense | | | 7,119 | | | | 8,413 | |
| | | | | | | | |
Interest Income | | | 133 | | | | 384 | |
| | | | | | | | |
Income Before Taxes & Noncontrolling Interests | | | 21,206 | | | | 49,583 | |
| | | | | | | | |
Provision For Income Taxes | | | 7,230 | | | | 17,558 | |
| | | | | | | | |
Net Income | | | 13,976 | | | | 32,025 | |
| | | | | | | | |
Less: Net Income Attributable to Noncontrolling Interests, net of tax | | | 1,189 | | | | 598 | |
| | | | | | | | |
Net Income Attributable to Regal Beloit Corporation | | $ | 12,787 | | | $ | 31,427 | |
| | | | | | | | |
Earnings Per Share of Common Stock: | | | | | | | | |
| | | | | | | | |
Basic | | $ | 0.41 | | | $ | 1.00 | |
| | | | | | | | |
Assuming Dilution | | $ | 0.39 | | | $ | 0.95 | |
| | | | | | | | |
Cash Dividends Declared | | $ | 0.16 | | | $ | 0.15 | |
| | | | | | | | |
Weighted Average Number of Shares Outstanding: | | | | | | | | |
| | | | | | | | |
Basic | | | 31,457,282 | | | | 31,316,878 | |
Assuming Dilution | | | 32,594,802 | | | | 33,117,034 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
REGALREGAL BELOIT CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Data)
| | | | | (From Audited | | | | | | (As Adjusted, From Audited | |
| | (Unaudited) | | | Statements) | | | (Unaudited) | | | Statements, See Note 2) | |
ASSETS | | September 27, 2008 | | | December 29, 2007 | | | March 28, 2009 | | | December 27, 2008 | |
Current Assets: | | | | | | | | | | | | |
Cash and Cash Equivalents | | $ | 113,722 | | | $ | 42,574 | | | $ | 82,078 | | | $ | 65,250 | |
Receivables, less Allowances for Doubtful Accounts of | | | | | | | | | |
$9,124 in 2008 and $10,734 in 2007 | | | 394,022 | | | | 297,569 | | |
Trade Receivables, less Allowances of $11,593 in 2009, and | | | | | | | | | |
$11,145 in 2008 | | | | 272,661 | | | | 294,326 | |
Inventories | | | 330,346 | | | | 318,200 | | | | 327,324 | | | | 359,918 | |
Prepaid Expenses and Other Current Assets | | | 30,233 | | | | 35,626 | | | | 79,643 | | | | 66,594 | |
Deferred Income Tax Benefits | | | 37,317 | | | | 34,522 | | | | 57,883 | | | | 75,174 | |
Total Current Assets | | | 905,640 | | | | 728,491 | | | | 819,589 | | | | 861,262 | |
| | | | | | | | | | | | | | | | |
Property, Plant and Equipment: | | | | | | | | | | | | | | | | |
Land and Improvements | | | 37,803 | | | | 31,766 | | | | 37,133 | | | | 39,982 | |
Buildings and Improvements | | | 127,540 | | | | 117,707 | | | | 128,456 | | | | 127,018 | |
Machinery and Equipment | | | 470,649 | | | | 435,792 | | | | 468,540 | | | | 457,063 | |
Property, Plant and Equipment, at Cost | | | 635,992 | | | | 585,265 | | | | 634,129 | | | | 624,063 | |
Less - Accumulated Depreciation | | | (264,363 | ) | | | (245,922 | ) | | | (281,444 | ) | | | (265,691 | ) |
Net Property, Plant and Equipment | | | 371,629 | | | | 339,343 | | | | 352,685 | | | | 358,372 | |
| | | | | | | | | | | | | | | | |
Goodwill | | | 648,008 | | | | 654,261 | | | | 667,864 | | | | 672,475 | |
Intangible Assets, Net of Amortization | | | 119,058 | | | | 129,473 | | | | 118,851 | | | | 120,784 | |
Other Noncurrent Assets | | | 8,158 | | | | 10,679 | | | | 10,892 | | | | 10,603 | |
Total Assets | | $ | 2,052,493 | | | $ | 1,862,247 | | | $ | 1,969,881 | | | $ | 2,023,496 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' INVESTMENT | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | | | | |
Accounts Payable | | | 252,782 | | | | 183,215 | | | | 152,991 | | | | 202,456 | |
Dividends Payable | | | 5,023 | | | | 4,700 | | | | 5,039 | | | | 5,024 | |
Accrued Compensation and Employee Benefits | | | 63,552 | | | | 55,315 | | | | 56,692 | | | | 64,207 | |
Other Accrued Expenses | | | 89,664 | | | | 63,358 | | | | 64,936 | | | | 63,457 | |
Hedging Obligations | | | | 46,776 | | | | 80,578 | |
Current Maturities of Debt | | | 17,159 | | | | 5,332 | | | | 7,020 | | | | 15,280 | |
Total Current Liabilities | | | 428,180 | | | | 311,920 | | | | 333,454 | | | | 431,002 | |
| | | | | | | | | | | | | | | | |
Long-Term Debt | | | 554,087 | | | | 558,918 | | | | 580,283 | | | | 560,127 | |
Deferred Income Taxes | | | 82,318 | | | | 75,055 | | | | 71,302 | | | | 72,119 | |
Hedging Obligations | | | | 55,265 | | | | 61,958 | |
Pension and Other Post Retirement Benefits | | | | 44,237 | | | | 43,768 | |
Other Noncurrent Liabilities | | | 33,679 | | | | 27,041 | | | | 12,184 | | | | 16,881 | |
Pension and Other Postretirement Benefits | | | 20,592 | | | | 20,742 | | |
| | | | | | | | | | | | | | | | |
Minority Interest in Consolidated Subsidiaries | | | 14,053 | | | | 10,542 | | |
| | | | | | | | | |
Shareholders' Investment: | | | | | | | | | |
Equity: | | | | | | | | | |
Regal Beloit Corporation Shareholders' Equity: | | | | | | | | | |
Common Stock, $.01 par value, 100,000,000 shares | | | | | | | | | | | | | | | | |
authorized in 2008 and 2007, | | | | | | | | | |
32,276,145 shares issued in 2008 and | | | | | | | | | |
32,105,824 issued in 2007 | | | 322 | | | | 321 | | |
authorized, 32,378,565 issued in 2009, and | | | | | | | | | |
32,276,145 shares issued in 2008 | | | | 324 | | | | 323 | |
Additional Paid-In Capital | | | 341,375 | | | | 335,452 | | | | 357,500 | | | | 356,231 | |
Less - Treasury Stock, at cost, 884,100 shares in 2008, | | | (19,419 | ) | | | (15,228 | ) | |
and 774,100 shares in 2007 | | | | | | | | | |
Less - Treasury Stock, at cost, 884,100 shares in 2009 and 2008 | | | | (19,419 | ) | | | (19,419 | ) |
Retained Earnings | | | 627,727 | | | | 535,304 | | | | 639,029 | | | | 631,281 | |
Accumulated Other Comprehensive Income (Loss) | | | (30,421 | ) | | | 2,180 | | |
Total Shareholders' Investment | | | 919,584 | | | | 858,029 | | |
Total Liabilities and Shareholders' Investment | | $ | 2,052,493 | | | $ | 1,862,247 | | |
Accumulated Other Comprehensive Loss | | | | (118,535 | ) | | | (142,429 | ) |
Total Regal Beloit Corporation Shareholders' Equity | | | | 858,899 | | | | 825,987 | |
Noncontrolling Interests | | | | 14,257 | | | | 11,654 | |
Total Equity | | | | 873,156 | | | | 837,641 | |
Total Liabilities and Equity | | | $ | 1,969,881 | | | $ | 2,023,496 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands of Dollars, Except Per Share Data)
| | Regal Beloit Corporation Shareholders' Equity | | | | | | | |
| | Common Stock $.01 Par Value | | | Additional Paid-In Capital | | | Treasury Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Noncontrolling Interests | | | Total Equity | |
Balance as of December 29, 2007 | | $ | 321 | | | $ | 348,971 | | | $ | (15,228 | ) | | $ | 525,506 | | | $ | 2,180 | | | $ | 10,542 | | | $ | 872,292 | |
(As Adjusted, See Note 2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | $ | - | | | $ | - | | | $ | - | | | $ | 31,427 | | | $ | - | | | $ | 598 | | | $ | 32,025 | |
Dividends Declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($.15 per share) | | | - | | | | - | | | | - | | | | (4,675 | ) | | | - | | | | - | | | | (4,675 | ) |
Purchase of 110,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares of Treasury Stock | | | - | | | | - | | | | (4,191 | ) | | | - | | | | - | | | | - | | | | (4,191 | ) |
Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
tax benefit and share | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
cancellations | | | 1 | | | | 1,375 | | | | - | | | | - | | | | - | | | | - | | | | 1,376 | |
Stock-based Compensation | | | - | | | | 882 | | | | - | | | | - | | | | - | | | | - | | | | 882 | |
Other Comprehensive | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (Loss) by | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Classification: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency Translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adjustments | | | - | | | | - | | | | - | | | | - | | | | 1,323 | | | | 462 | | | | 1,785 | |
Hedging Activities, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of tax | | | - | | | | - | | | | - | | | | - | | | | 10,337 | | | | - | | | | 10,337 | |
Pension and Post | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retirement | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefits net of tax | | | - | | | | - | | | | - | | | | - | | | | 95 | | | | - | | | | 95 | |
Balance as of March 29, 2008 | | $ | 322 | | | $ | 351,228 | | | $ | (19,419 | ) | | $ | 552,258 | | | $ | 13,935 | | | $ | 11,602 | | | $ | 909,926 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Regal Beloit Corporation Shareholders' Equity | | | | | | | | | |
| | Common Stock $.01 Par Value | | | Additional Paid-In Capital | | | Treasury Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Noncontrolling Interests | | | Total Equity | |
Balance as of December 27, 2008 | | $ | 323 | | | $ | 356,231 | | | $ | (19,419 | ) | | $ | 631,281 | | | $ | (142,429 | ) | | $ | 11,654 | | | $ | 837,641 | |
(As Adjusted, See Note 2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Income | | $ | - | | | $ | - | | | $ | - | | | $ | 12,787 | | | $ | - | | | $ | 1,189 | | | $ | 13,976 | |
Dividends Declared | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($.16 per share) | | | - | | | | - | | | | - | | | | (5,039 | ) | | | - | | | | - | | | | (5,039 | ) |
Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
including income | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
tax benefit and share | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
cancellations | | | 1 | | | | 496 | | | | - | | | | - | | | | - | | | | - | | | | 497 | |
Stock-based Compensation | | | - | | | | 773 | | | | - | | | | - | | | | - | | | | - | | | | 773 | |
Other Comprehensive | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (Loss) by | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Classification: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Currency Translation | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adjustments | | | - | | | | - | | | | - | | | | - | | | | (3,970 | ) | | | 1,414 | | | | (2,556 | ) |
Hedging Activities, net | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
of tax | | | - | | | | - | | | | - | | | | - | | | | 27,190 | | | | - | | | | 27,190 | |
Pension and Post | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retirement Benefits, | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of tax | | | - | | | | - | | | | - | | | | - | | | | 674 | | | | - | | | | 674 | |
Balance as of March 28, 2009 | | $ | 324 | | | $ | 357,500 | | | $ | (19,419 | ) | | $ | 639,029 | | | $ | (118,535 | ) | | $ | 14,257 | | | $ | 873,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
| | | | | | |
| | Nine Months Ended | |
| | September 27, 2008 | | | September 29, 2007 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 107,149 | | | $ | 94,305 | |
Adjustments to reconcile net income to net cash provided | | | | | | | | |
by operating activities: | | | | | | | | |
Depreciation and amortization | | | 45,128 | | | | 30,345 | |
Minority interest | | | 2,749 | | | | 2,243 | |
Excess tax benefits from stock-based compensation | | | (2,463 | ) | | | (6,681 | ) |
Loss (gain) on sale of assets, net | | | 124 | | | | (34 | ) |
Stock-based compensation expense | | | 3,356 | | | | 2,802 | |
Change in assets and liabilities, net | | | 2,540 | | | | 45,337 | |
Net cash provided by operating activities | | | 158,583 | | | | 168,317 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Additions to property, plant and equipment | | | (43,947 | ) | | | (23,818 | ) |
Business acquisitions, net of cash acquired | | | (15,805 | ) | | | (253,241 | ) |
Sale of property, plant and equipment | | | 2,158 | | | | 160 | |
Net cash used in investing activities | | | (57,594 | ) | | | (276,899 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Net (repayments) proceeds from short-term borrowing | | | (10,030 | ) | | | 8,200 | |
Payments of long-term debt | | | (293 | ) | | | (333 | ) |
Net repayments under revolving credit facility | | | (169,700 | ) | | | (76,200 | ) |
Net repayments of commercial paper borrowings | | | - | | | | (49,000 | ) |
Net proceeds from long-term borrowings | | | 165,000 | | | | 250,000 | |
Dividends paid to shareholders | | | (14,404 | ) | | | (13,394 | ) |
Purchases of treasury stock | | | (4,191 | ) | | | - | |
Proceeds from the exercise of stock options | | | 2,740 | | | | 1,684 | |
Excess tax benefits from stock-based compensation | | | 2,463 | | | | 6,681 | |
Distributions to minority partners | | | - | | | | (106 | ) |
Financing feeds paid | | | (454 | ) | | | (1,397 | ) |
Net cash (used in) provided by financing activities | | | (28,869 | ) | | | 126,135 | |
| | | | | | | | |
EFFECT OF EXCHANGE RATES ON CASH | | | (972 | ) | | | 1,491 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 71,148 | | | | 19,044 | |
Cash and cash equivalents at beginning of period | | | 42,574 | | | | 36,520 | |
Cash and cash equivalents at end of period | | $ | 113,722 | | | $ | 55,564 | |
| | Three Months Ended | |
| | | | | (As Adjusted, See Note 2) | |
| | March 28, 2009 | | | March 29, 2008 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income | | $ | 13,976 | | | $ | 32,025 | |
Adjustments to reconcile net income to net cash provided | | | | | | | | |
by operating activities: | | | | | | | | |
Depreciation and amortization | | | 15,277 | | | | 14,152 | |
Excess tax benefits from stock-based compensation | | | (1,675 | ) | | | (452 | ) |
(Gain) loss on sale of assets, net | | | (91 | ) | | | 70 | |
Stock-based compensation expense | | | 773 | | | | 882 | |
Non-cash convertible debt deferred financing costs | | | 1,063 | | | | 1,194 | |
Change in assets and liabilities, net of acquisitions | | | (10,725 | ) | | | (13,005 | ) |
Net cash provided by operating activities | | | 18,598 | | | | 34,866 | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Additions to property, plant and equipment | | | (8,143 | ) | | | (13,646 | ) |
Business acquisitions, net of cash acquired | | | (1,500 | ) | | | 374 | |
Sale of property, plant and equipment | | | 306 | | | | 1,149 | |
Net cash used in investing activities | | | (9,337 | ) | | | (12,123 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Net repayments of short-term borrowings | | | (8,265 | ) | | | - | |
Payments of long-term debt | | | (56 | ) | | | (113 | ) |
Net borrowings (repayments) under revolving credit facility | | | 19,150 | | | | (8,200 | ) |
Dividends paid to shareholders | | | (5,024 | ) | | | (4,700 | ) |
Purchases of treasury stock | | | - | | | | (4,191 | ) |
Proceeds from the exercise of stock options | | | 512 | | | | 1,364 | |
Excess tax benefits from stock-based compensation | | | 1,675 | | | | 452 | |
Net cash provided by (used in) financing activities | | | 7,992 | | | | (15,388 | ) |
| | | | | | | | |
EFFECT OF EXCHANGE RATES ON CASH | | | (425 | ) | | | 602 | |
| | | | | | | | |
Net increase in cash and cash equivalents | | | 16,828 | | | | 7,957 | |
Cash and cash equivalents at beginning of period | | | 65,250 | | | | 42,574 | |
Cash and cash equivalents at end of period | | $ | 82,078 | | | $ | 50,531 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2008March 28, 2009
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet as of December 29, 2007,27, 2008, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of September 27, 2008March 28, 2009, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s 2008 Annual Report on Form 10-K filed on February 25, 2009.
As of the beginning of fiscal 2009, the Company adopted the following pronouncements which require us to adjust previously disclosed condensed consolidated financial statements. As such, certain prior period amounts have been adjusted in the unaudited condensed consolidated financial statements to conform to the current period presentation.
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends the accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under SFAS 160, we now report noncontrolling interests in subsidiaries as a separate component of equity in the condensed consolidated financial statements and show both net income attributable to the noncontrolling interest and net income attributable to the controlling interest on the face of the condensed consolidated income statement. SFAS 160 applies prospectively, except for presentation and disclosure requirements, which are applied retrospectively.
The Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). The adoption of FSP APB 14-1 required an adjustment of convertible debt and related cumulative interest expense. (See Note 2 of Notes to Condensed Consolidated Financial Statements.)
Certain non-trade receivables at December 27, 2008.2008 have been reclassified from Receivables to Prepaid Expenses and Other Current Assets to conform to the 2009 presentation. Trade Receivables less Allowances on the Condensed Consolidated Balance Sheets is now comprised of trade receivables net of estimated allowances.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the ninethree months ended September 27, 2008March 28, 2009 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 27, 2008.January 2, 2010.
The Company operates on a 52/53 week fiscal year, and fiscal 2009 will be a 53 week year with an additional week in the fiscal fourth quarter.
2.ADOPTION OF FSP APB 14-1
As of the beginning of fiscal 2009, the Company adopted FSP APB 14-1 which requires an adjustment of convertible debt and related interest expense. The new standard requires that a fair value be assigned to the equity conversion option of the Company’s $115.0 million, 2.75% convertible senior subordinated notes (the “Convertible Notes”) as of April 5, 2004, the date of issuance of the Convertible Notes. This change results in a corresponding decrease in the value assigned to the debt portion of the instrument.
The value assigned to the debt portion of the Convertible Notes was determined based on market interest rates for similar debt instruments without the conversion feature as of April 5, 2004, the issuance date of the Convertible Notes. The difference in this interest rate versus the coupon rate on the Convertible Notes is then amortized into interest expense over the expected term of the Convertible Notes. For purposes of our valuation, we used an expected term of five years, which represents the first anniversary date at which holders of the Convertible Notes may put their Convertible Notes back to the Company.
The five year anniversary occurred in March 2009, and through March 28, 2009, no Convertible Notes were put to the Company and no Convertible Notes were called by the Company. Accordingly, the book value as of March 28, 2009 equals the par value of the Convertible Notes, and interest expense will equal the coupon rate in future periods.
The adjustment affected our balance sheet as follows (in thousands):
| | December 27, 2008 | |
| | As Adjusted | | | As Reported | |
Long-Term Debt | | $ | 560,127 | | | $ | 561,190 | |
Deferred Income Taxes | | | 72,119 | | | | 71,715 | |
Additional Paid-in Capital | | | 356,231 | | | | 342,712 | |
Retained Earnings | | | 631,281 | | | | 644,141 | |
The adjustment of first quarter 2008 interest expense was as follows (in thousands, except per share data):
| | Three Months Ended | |
| | March 29, 2008 | |
| | As Adjusted | | | As Reported | |
Interest Expense | | $ | 8,413 | | | $ | 7,219 | |
Income Before Taxes and | | | | | | | | |
Noncontrolling Interests | | | 49,583 | | | | 50,777 | |
Provision for Income Taxes | | | 17,558 | | | | 18,012 | |
Net Income | | | 32,025 | | | | 32,765 | |
Net Income Attributable to Regal Beloit Corporation | | | 31,427 | | | | 32,167 | |
Earnings per Share of Common Stock | | | | | | | | |
Basic | | $ | 1.00 | | | $ | 1.03 | |
Assuming Dilution | | | 0.95 | | | | 0.97 | |
The full year impact of the adjustment for the fiscal year ended December 27, 2008 reduced diluted earnings per share from $3.87 to $3.77.
3. INVENTORIES
Cost for approximately 66%61% of the Company’s inventory is determined using the last-in, first-out (LIFO) inventory valuation method. The approximate percentage distribution between major classes of inventories was as follows:
| September 27, 2008 | December 29, 2007 |
Raw Material | 22% | 21% |
Work in Process | 15% | 14% |
Finished Goods and Purchased Parts | 63% | 65% |
| March 28, 2009 | December 27, 2008 |
Raw Material and Work in Process | 30% | 29% |
Finished Goods and Purchased Parts | 70% | 71% |
3.4. ACQUISITIONS
The results of operations for acquired businesses are included in the Consolidated Financial Statements from the dates of acquisition. In January, 2009, the Company acquired Custom Power Technology (“CPT”), a custom power electronics business located in Menomonee Falls, Wisconsin. The purchase price and impact in our Condensed Consolidated Financial Statements was not significant. The following acquisitions in 2008 were not considered to be material business combinations.
2008 Acquisitions
On April 25, 2008 the Company acquired Joyce Court Holdings Ltd. and Grand Delight Investments Ltd., sole shareholders of Wuxi Hwada Motor Co. and Wuxi New Hwada Motor Co. (collectively “Hwada”) located in Wuxi, China. Hwada is a leading designer and manufacturer of Integral IEC and NEMA electric motors, which are used in various industrial applications such as compressor, pump, paper and steel processing and power plants. Approximately 50% of Hwada’s product sales are in the China industrial markets. The business is reported as part of the Company’s Electrical Segment. The purchase price was paid in cash ($27.6 million) plus the assumption of approximately $7.5 million in net liabilities. The purchase price allocations for Hwada are preliminary, pending the finalization of working capital adjustments and purchase price adjustments. Additionally, under the terms of the transaction, the Company will paysegment.
Subsequent to quarter end, onOn September 30, 2008, the Company acquired Dutchi Motors B.V. See Note 16 of Notes to Condensed Consolidated Financial Statements.
2007 Acquisitions
On August 31, 2007, the Company completed the acquisition of certain assets comprising the commercial and industrial division of the Fasco Motor business (“Fasco”Dutchi”) from Tecumseh Products, Inc. and certain of its affiliates. On August 31, 2007, the Company also separately acquired the stock of Jakel Incorporated (“Jakel”). Both of the acquired businesses manufacture and market motors and blower systems for a variety of air moving applications including alternative fuel systems, water heaters, heating ventilating and air conditioning (HVAC) systems and other commercial products.
On October 12, 2007, the Company acquired Morrill Motors (“Morrill”).located in Arnhem, The acquired businessNetherlands. Dutchi is a leading designerdistributor of industrial motors in Western and manufacturerEastern Europe, South Africa, Russia and the Middle East. Dutchi is one of fractional horsepower motors and components for the commercial refrigeration and freezer markets. Included inlargest distributors of the Company’s Hwada motor offering are technology based variable speed products.
On October 29, 2007, the Company acquired Alstom motors and fans business (“Alstom”) in India. The Dutchi business is located in Kolkata, India and manufactures and markets a full range of low and medium voltage industrial motors and fans for the industrial and process markets in India. Alstom is noted for high quality process duty motors with a full range from 1 to 3500 hp. The purchase price was paid in cash.
The purchase price allocations for the Morrill and Alstom acquisitions are preliminary, pending the finalization of working capital adjustments and further analysis of contingencies. The combined purchase price, net of cash acquired, was $80.7 million. The excessreported as part of the purchase price over the estimated fair values of the net assets acquired was assigned to goodwill. Adjustments to the estimated fair values may be recorded during the allocation period, not to exceed one year from the date of acquisition.Company’s Electrical segment.
4.5. COMPREHENSIVE INCOME
The Company's comprehensive income (loss) for the three months ended March 28, 2009 and nine months ended September 27,March 29, 2008, and September 29, 2007, respectively werewas as follows (in thousands):
| | Three Months Ending | |
| | | | | (As Adjusted, | |
| | | | | See Note 2) | |
| | March 28, 2009 | | | March 29, 2008 | |
Net income | | $ | 13,976 | | | $ | 32,025 | |
Other Comprehensive Income (Loss) from: | | | | | | | | |
Currency Translation adjustments | | | (3,970 | ) | | | 1,323 | |
Changes in fair value of hedging activities, net of tax | | | 24,367 | | | | 10,777 | |
Hedging activities reclassified into earnings from accumulated | | | | | | | | |
other comprehensive income (loss) ("AOCI"), net of tax | | | 17,608 | | | | (440 | ) |
Deferred losses on closed hedge contracts, net of tax | | | (14,785 | ) | | | - | |
Amortization of net prior service costs and actuarial losses | | | 674 | | | | 95 | |
Comprehensive income | | $ | 37,870 | | | $ | 43,780 | |
| | Three Months Ending | | | Nine Months Ending | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Net income as reported | | $ | 36,906 | | | $ | 31,239 | | | $ | 107,149 | | | $ | 94,305 | |
Comprehensive income (loss) from: | | | | | | | | | | | | | | | | |
Translation adjustments | | | (20,673 | ) | | | 3,510 | | | | (22,301 | ) | | | 10,322 | |
Changes in fair value of hedging activities, net of tax | | | (34,172 | ) | | | 205 | | | | (20,315 | ) | | | (3,285 | ) |
Hedging activities reclassified into | | | | | | | | | | | | | | | | |
earnings from accumulated other | | | | | | | | | | | | | | | | |
comprehensive income (“AOCI”), net of tax | | | 15,050 | | | | (665 | ) | | | 9,942 | | | | 3,436 | |
Amortization of net prior service costs and actuarial losses | | | 177 | | | | 179 | | | | 73 | | | | 535 | |
Comprehensive income (loss) | | $ | (2,712 | ) | | $ | 34,468 | | | $ | 74,548 | | | $ | 105,313 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
The amount of comprehensive income attributable to noncontrolling interests was $2.6 million and $1.1 million for the three months ended March 28, 2009 and March 29, 2008, respectively.
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and pension liability adjustments are included in Shareholder’s InvestmentEquity under Accumulated Other Comprehensive Income (Loss).Loss. The components of the ending balances of Accumulated Other Comprehensive Income (Loss)Loss are as follows:
| | September 27, 2008 | | | December 29, 2007 | |
Translation adjustments | | $ | (1,021 | ) | | $ | 21,280 | |
Hedging activities, net of tax | | | (20,953 | ) | | | (10,580 | ) |
Pension and post retirement benefits, net of tax | | | (8,447 | ) | | | (8,520 | ) |
| | $ | (30,421 | ) | | $ | 2,180 | |
| | March 28, 2009 | | | December 27, 2008 | |
Translation adjustments | | $ | (25,174 | ) | | $ | (21,204 | ) |
Hedging activities, net of tax | | | (71,742 | ) | | | (98,932 | ) |
Pension and post retirement benefits, net of tax | | | (21,619 | ) | | | (22,293 | ) |
| | $ | (118,535 | ) | | $ | (142,429 | ) |
5.6. WARRANTY COSTS
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the three months ended March 28, 2009 and nine months ended September 27,March 29, 2008 and September 29, 2007, respectively (in thousands):
| | Three Months Ending | |
| | March 28, 2009 | | | March 29, 2008 | |
Beginning balance | | $ | 11,022 | | | $ | 9,872 | |
Deduct: Payments | | | (2,747 | ) | | | (1,736 | ) |
Add: Provision | | | 1,754 | | | | 1,839 | |
Translation Adjustments | | | (76 | ) | | | (24 | ) |
Ending balance | | $ | 9,953 | | | $ | 9,951 | |
| | Three Months Ending | | | Nine Months Ending | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Beginning balance | | $ | 10,221 | | | $ | 6,028 | | | $ | 9,872 | | | $ | 6,300 | |
Deduct: Payments | | | (2,343 | ) | | | (2,318 | ) | | | (5,741 | ) | | | (5,772 | ) |
Add: Provision | | | 1,892 | | | | 2,390 | | | | 5,666 | | | | 5,572 | |
Add: Acquisitions | | | - | | | | 2,144 | | | | - | | | | 2,144 | |
Translation Adjustments | | | 19 | | | | - | | | | (8 | ) | | | - | |
Ending balance | | $ | 9,789 | | | $ | 8,244 | | | $ | 9,789 | | | $ | 8,244 | |
7. BUSINESS SEGMENTS
The Company operates two strategic businesses that are reportable segments, Mechanical and Electrical (in thousands):
| | Mechanical Segment | | | Electrical Segment | |
| | Three Months Ending | | | Nine Months Ending | | | Three Months Ending | | | Nine Months Ending | |
| | Sept. 27, 2008 | | | Sept. 29, 2007 | | | Sept. 27, 2008 | | | Sept. 29, 2007 | | | Sept. 27, 2008 | | | Sept. 29, 2007 | | | Sept. 27, 2008 | | | Sept. 29, 2007 | |
Net Sales | | $ | 56,119 | | | $ | 53,300 | | | $ | 168,653 | | | $ | 164,958 | | | $ | 564,488 | | | $ | 396,074 | | | $ | 1,594,613 | | | $ | 1,162,857 | |
Income from Operations | | | 7,368 | | | | 7,911 | | | | 23,414 | | | | 24,585 | | | | 58,366 | | | | 45,464 | | | | 167,426 | | | | 136,176 | |
% of Net Sales | | | 13.1 | % | | | 14.8 | % | | | 13.9 | % | | | 14.9 | % | | | 10.3 | % | | | 11.5 | % | | | 10.5 | % | | | 11.7 | % |
Goodwill at end of period | | $ | 530 | | | $ | 530 | | | $ | 530 | | | $ | 530 | | | $ | 647,478 | | | $ | 635,547 | | | $ | 647,478 | | | $ | 635,547 | |
| | | | | | |
| | Mechanical Segment | | | Electrical Segment | |
| | Three Months Ending | | | Three Months Ending | |
| | March 28, 2009 | | | March 29, 2008 | | | March 28, 2009 | | | March 29, 2008 | |
Net Sales | | $ | 51,912 | | | $ | 62,550 | | | $ | 391,362 | | | $ | 473,793 | |
Income from Operations | | | 6,286 | | | | 10,047 | | | | 21,906 | | | | 47,565 | |
% of Net Sales | | | 12.1 | % | | | 16.1 | % | | | 5.6 | % | | | 10.0 | % |
Goodwill at end of period | | $ | 530 | | | $ | 530 | | | $ | 667,334 | | | $ | 637,796 | |
A reclassificationIn the fourth quarter of $2.7 million and $8.4 million in sales and $0.7 million and $2.1 million of income from operations was made to results for the three and nine months ended September 29, 2007, as previously reported, to reflect the transfer of certain product sales and related operating income from2008, an Electrical Segment unitsegment business was moved to athe Mechanical Segment unitsegment due to a first quarter 2008management reporting change, in management and reportingprior period segment information has been adjusted. The impact of such product sales.the change was not material.
7.8. GOODWILL AND OTHER INTANGIBLES
Goodwill
As described above in Note 34 of Notes to Condensed Consolidated Financial Statements, the Company acquired one business in 20082009 and four separatetwo businesses in 2007.2008. The purchase price allocations for the Morrill, AlstomCPT, Dutchi and Hwada acquisitions are preliminary, pending the finalization of working capital, valuations and further analysis of contingencies. The excess of purchase price over estimated fair value was assigned to goodwill. Adjustments to the estimated fair value of the net assets acquired may be recorded during the allocationmeasurement period, not to exceed one year from the date of acquisition.
A preliminary allocation of $12.4$21.9 million was included in goodwill at September 27, 2008March 28, 2009 related to the MorrillCPT, Dutchi and AlstomHwada acquisitions. During the nine months ended September 27, 2008, the Company completed the fair value analysis of certain property located at the Kolkata, India facility resulting in an increase of the value assigned to property, plant and equipment and a corresponding decrease to goodwill which is included in the table below.
The 2008 acquisition of Hwada resulted in an additional preliminary goodwill allocation of $3.2 million in the nine months ended September 27, 2008.
The Company believes that substantially all of the goodwill is deductible for tax purposes. The following information presents changes to goodwill during the periods indicated (in thousands):
| | Electrical Segment | | | Mechanical Segment | | | Total | |
Balance as of December 27, 2008 | | $ | 671,945 | | | $ | 530 | | | $ | 672,475 | |
Net Acquisitions and Fair Value Adjustments | | | (257 | ) | | | - | | | | (257 | ) |
Translation Adjustments | | | (4,354 | ) | | | - | | | | (4,354 | ) |
Balance as of March 28, 2009 | | $ | 667,334 | | | $ | 530 | | | $ | 667,864 | |
| | Electrical Segment | | | Mechanical Segment | | | Total | |
Balance as of December 29, 2007 | | $ | 653,731 | | | $ | 530 | | | $ | 654,261 | |
Net Acquisitions and Fair Value Adjustments | | | (4,028 | ) | | | - | | | | (4,028 | ) |
Translation Adjustments | | | (2,225 | ) | | | - | | | | (2,225 | ) |
Balance as of September 27, 2008 | | $ | 647,478 | | | $ | 530 | | | $ | 648,008 | |
Intangible Assets
Intangible assets consisted of the following (in thousands):
| | | | | September 27, 2008 | |
Asset Description | | Useful Life (years) | | | Gross Value | | | Accumulated Amortization | | | Net Book Value | |
Non-Compete Agreements | | | 3 -5 | | | $ | 5,766 | | | $ | 3,465 | | | $ | 2,301 | |
Trademarks | | | 3 - 20 | | | | 19,364 | | | | 5,440 | | | | 13,924 | |
Patents | | | 9 - 10.5 | | | | 15,410 | | | | 5,805 | | | | 9,605 | |
Engineering Drawings | | | 10 | | | | 1,200 | | | | 457 | | | | 743 | |
Customer Relationships | | | 10 - 14 | | | | 87,009 | | | | 16,649 | | | | 70,360 | |
Technology | | | 6 - 10 | | | | 25,829 | | | | 3,704 | | | | 22,125 | |
Total | | | | | | $ | 154,578 | | | $ | 35,520 | | | $ | 119,058 | |
| | | | | | | | | | | | | | | | |
| | | | | | December 29, 2007 | |
Asset Description | | Useful Life (years) | | | Gross Value | | | Accumulated Amortization | | | Net Book Value | |
Non-Compete Agreements | | | 3 - 5 | | | $ | 5,588 | | | $ | 2,540 | | | $ | 3,048 | |
Trademarks | | | 3 - 20 | | | | 18,887 | | | | 4,752 | | | | 14,135 | |
Patents | | | 9 - 10.5 | | | | 15,410 | | | | 4,648 | | | | 10,762 | |
Engineering Drawings | | | 10 | | | | 1,200 | | | | 367 | | | | 833 | |
Customer Relationships | | | 10 - 14 | | | | 84,572 | | | | 10,325 | | | | 74,247 | |
Technology | | | 6 - 10 | | | | 27,474 | | | | 1,026 | | | | 26,448 | |
Total | | | | | | $ | 153,131 | | | $ | 23,658 | | | $ | 129,473 | |
Gross Intangibles | |
Asset Description | | Useful Life (years) | | | December 27, 2008 | | | Net Acquisitions and Fair Value Adjustments | | | Translation Adjustments | | | March 28, 2009 | |
Non-Compete Agreements | | | 5 | | | $ | 5,767 | | | $ | 575 | | | $ | 4 | | | $ | 6,346 | |
Trademarks | | | 3 - 21 | | | | 19,490 | | | | - | | | | 19 | | | | 19,509 | |
Patents | | | 10 | | | | 15,410 | | | | - | | | | - | | | | 15,410 | |
Engineering Drawings | | | 10 | | | | 1,200 | | | | - | | | | - | | | | 1,200 | |
Customer Relationships | | | 10 - 15 | | | | 92,633 | | | | 800 | | | | (504 | ) | | | 92,929 | |
Technology | | | 6 - 11 | | | | 25,439 | | | | 1,324 | | | | 21 | | | | 26,784 | |
Total Gross Intangibles | | | | | | $ | 159,939 | | | $ | 2,699 | | | $ | (460 | ) | | $ | 162,178 | |
| | | | | | | | | | | | | | | | | | | | |
Accumulated Amortization | |
Asset Description | | Useful Life (years) | | | December 27, 2008 | | | Amortization | | | Translation Adjustments | | | March 28, 2009 | |
Non-Compete Agreements | | | 5 | | | $ | (3,755 | ) | | $ | (318 | ) | | $ | (2 | ) | | $ | (4,075 | ) |
Trademarks | | | 3 - 21 | | | | (6,026 | ) | | | (298 | ) | | | (2 | ) | | | (6,326 | ) |
Patents | | | 10 | | | | (6,190 | ) | | | (385 | ) | | | - | | | | (6,575 | ) |
Engineering Drawings | | | 10 | | | | (487 | ) | | | (30 | ) | | | - | | | | (517 | ) |
Customer Relationships | | | 10 - 15 | | | | (18,625 | ) | | | (2,388 | ) | | | 69 | | | | (20,944 | ) |
Technology | | | 6 - 11 | | | | (4,072 | ) | | | (811 | ) | | | (7 | ) | | | (4,890 | ) |
Total Accumulated Amortization | | | | | | $ | (39,155 | ) | | $ | (4,230 | ) | | $ | 58 | | | $ | (43,327 | ) |
| | | | | | | | | | | | | | | | | | | | |
Intangible Assets, Net of Amortization | | | $ | 120,784 | | | | | | | | | | | $ | 118,851 | |
During 2008, the Company adjusted certain intangible assets gross values to reflect purchase accounting fair value adjustments and currency translation adjustments.
Estimated Amortization (in millions)
2008 | 2009 | 2010 | 2011 | 2012 |
$14.6 | $14.9 | $14.2 | $ 13.5 | $13.5 |
2009 | 2010 | 2011 | 2012 | 2013 |
$14.8 | $14.1 | $13.5 | $ 13.4 | $13.4 |
Amortization expense recorded for the ninethree months ended September 27,March 28, 2009 and March 29, 2008 and September 29, 2007 was $11.5$4.2 million and $5.7$3.3 million, respectively. The Company performs anhas elected to perform its annual evaluation of goodwill as of the end of the October fiscal month each yeartest for impairment as required by SFAS 142, “Goodwill and Other Intangible Assets”Assets,” during the fourth quarter.
8.9. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of SeptemberMarch 28, 2009 and December 27, 2008 and December 29, 2007 was as follows (in thousands):
| | September 27, 2008 | | | December 29, 2007 | |
Senior notes | | $ | 250,000 | | | $ | 250,000 | |
Term loan | | | 165,000 | | | | - | |
Revolving credit facility | | | 13,000 | | | | 182,700 | |
Convertible senior subordinated debt | | | 115,000 | | | | 115,000 | |
Other | | | 28,246 | | | | 16,550 | |
| | | 571,246 | | | | 564,250 | |
Less: Current maturities | | | (17,159 | ) | | | (5,332 | ) |
Non-current portion | | $ | 554,087 | | | $ | 558,918 | |
| | | | | (As Adjusted, | |
| | | | | See Note 2) | |
| | March 28, 2009 | | | December 27, 2008 | |
Senior notes | | $ | 250,000 | | | $ | 250,000 | |
Term loan | | | 165,000 | | | | 165,000 | |
Revolving credit facility | | | 39,150 | | | | 20,000 | |
Convertible senior subordinated debt | | | 115,000 | | | | 113,937 | |
Other | | | 18,153 | | | | 26,470 | |
| | | 587,303 | | | | 575,407 | |
Less: Current maturities | | | (7,020 | ) | | | (15,280 | ) |
Non-current portion | | $ | 580,283 | | | $ | 560,127 | |
During 2007, in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, the Company issued and sold $250.0 million of senior notes (the “Notes”). The Notes were sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among the Company and the purchasers of the Notes. The Notes were
issued and sold in two series: $150.0 million in Floating Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest at a margin over the London Inter-Bank Offered Rate (“LIBOR”), which margin varies with the ratio of the Company’s consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Agreement. These interest rates also vary as LIBOR varies. The Agreement permits the Company to issue and sell additional note series, subject to certain terms and conditions described in the Agreement, up to a total of $600.0 million in combined Notes.
On June 16,In 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby the Company borrowed an aggregate principal amount of $165.0 million. The Term Loan matures in June 2013, and borrowings generally bear interest at a variable rate equal to (i) a margin over LIBOR, which margin varies depending on whether certain criteria are satisfied, or (ii) the alternate base rate as defined in the agreement. At September 27, 2008,March 28, 2009, the interest rate of 3.7%1.6% was based on a margin over LIBOR. The proceeds from the Term Loan were used to reduce the balance on the Company’s revolving credit facility.
The Company’s $500.0 million revolving credit facility (“Facility”) permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of total funded debt to EBITDA. These interest rates also vary as LIBOR varies. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total debt to EBITDA as defined in the Facility.
The Notes, the Term Loan and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all debt covenants as of September 27, 2008.March 28, 2009.
In August, 2007 the Company entered into an interest rate swap agreement to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 15 of Notes to Condensed Consolidated Financial Statements.)
TheAs of March 28, 2009, the Company’s $115.0 million, 2.75% convertible senior subordinated debt iswas not convertible as the closing price of the Company’s common stock exceededdid not exceed the contingent conversion share price for the specified amount of time. As a result, holders of the notes may surrender the notes for conversion at any time until the maturing of the bonds in March 2024. Holders that exercise their right to convert the notes will receive up to the principal amount of the notes in cash, with the balance of the conversion obligation, if any, to be satisfied in shares of Company common stock or cash, at the Company’s discretion. No notes have been converted into cash or shares of common stock as of September 27, 2008.
As part of the 2008 acquisitionbeginning of Hwada (seefiscal 2009, the Company adopted FSP APB 14-1, “Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion Including Partial Cash Settlement”. The adoption of APB 14-1 required an adjustment of convertible debt and related interest expense. (See also Note 32 of Notes to Condensed Consolidated Financial Statements), the Company assumed $21.6 million of short termStatements.)
At March 28, 2009, additional notes payable to banks. At September 27, 2008, the balance of these notes payable was approximately $17.0$18.2 million and thewere outstanding with a weighted average interest rate was 7.5%of 3.9%.
9.10. PENSION PLANS
The Company’s net periodic pension cost is comprised of the following components (in thousands):
| | Three Months Ending | | | Nine Months Ending | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Service cost | | $ | 1,002 | | | $ | 1,211 | | | $ | 3,008 | | | $ | 3,633 | |
Interest cost | | | 1,478 | | | | 1,266 | | | | 4,434 | | | | 3,800 | |
Expected return on plan assets | | | (1,393 | ) | | | (1,283 | ) | | | (4,179 | ) | | | (3,848 | ) |
Amortization of prior service cost | | | 53 | | | | 32 | | | | 159 | | | | 95 | |
Amortization of net actuarial loss | | | 126 | | | | 239 | | | | 378 | | | | 716 | |
Net periodic benefit expense | | $ | 1,266 | | | $ | 1,465 | | | $ | 3,800 | | | $ | 4,396 | |
| | Three Months Ending | |
| | March 28, 2009 | | | March 29, 2008 | |
Service cost | | $ | 578 | | | $ | 1,003 | |
Interest cost | | | 1,592 | | | | 1,478 | |
Expected return on plan assets | | | (1,414 | ) | | | (1,393 | ) |
Amortization of prior service cost | | | 49 | | | | 53 | |
Amortization of net actuarial loss | | | 188 | | | | 126 | |
Net periodic benefit expense | | $ | 993 | | | $ | 1,267 | |
The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from accumulated other comprehensive incomeloss into net periodic benefit cost during the 20082009 fiscal year is $0.5$0.8 million and $0.2 million, respectively.
In the thirdfirst quarter of 2008each of 2009 and 2007,2008, the Company contributed $3.8$0.3 million and $2.6 million, respectively, to defined benefit pension plans. Contributions to defined benefit plans for the nine months ended September 27, 2008 and September 29, 2007 were $4.4 million and $2.8 million, respectively. The Company expects to contribute an additional $0.2$12.5 million, for total contributions of $4.6$12.8 million in 2008.2009. The Company contributed a total of $3.3$4.8 million in 2007.2008. The assumptions used in the valuation of the Company’s pension plans and in
the target investment allocation have remained the same as those disclosed in the Company’s 2008 Annual Report on Form 10-K filed on February 27, 2008.25, 2009.
10.11. SHAREHOLDERS’ INVESTMENTEQUITY
The Company recognized approximately $1.4$0.8 million and $0.9 million in share-based compensation expense for the three month period ending September 27,ended March 28, 2009 and March 29, 2008, and September 29, 2007, respectively. Share-based compensation expense for the nine months ended September 27, 2008 and September 29, 2007 was $3.4 million and $2.8 million, respectively. The total income tax benefit recognized relating to share-based compensation for the ninethree months ended September 27,March 28, 2009 and March 29, 2008 and September 29, 2007 was approximately $2.5$1.7 million and $6.7$0.5 million, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award recipient. As of September 27, 2008,March 28, 2009, total unrecognized compensation cost related to share-based compensation awards was approximately $12.2$9.7 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.72.8 years.
The Company was authorized as of September 27, 2008March 28, 2009 to deliver up to 5.0 million shares of common stock upon exercise of non-qualified stock options or incentive stock options, or upon grant or in payment of stock appreciation rights, and restricted stock. Approximately 2.4 million shares were available for future grant or payment under the various plans at September 27, 2008.March 28, 2009.
During the ninethree months ended September 27,March 29, 2008, the Company repurchased 110,000 shares at a total cost of $4.2 million. There were no shares repurchased in the comparable period of 2007.2009.
Share-based Incentive Awards
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options and stock appreciation rights (SAR’s)(“SARs”). All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire ten years from the grant date.
The majority of the Company’s annual option and SAR incentive awards are made in the fiscal second quarter. The per share weighted average fair value of share-based incentive awards granted in the May, 2008 annual grant was $14.68. The fair value of the awards is estimated on the date of the grant using the Black-Scholes pricing model and the following assumptions: risk-free interest rate of 3.7%, expected dividend yield of 1.4%, expected volatility of 32.0% and an estimated life of 7 years.
A summary of share-based awards (options and SAR’s) as of September 27, 2008 follows below. Forfeitures of share-based awards were immaterial.
| | Shares | | | Wtd. Avg. Exercise Price | | | Wtd. Avg. Remaining Contractual Term (years) | | | Aggregate Intrinsic Value (in millions) | |
Number of shares: | | | | | | | | | | | | |
Outstanding | | | 1,569,745 | | | $ | 32.96 | | | | 6.9 | | | $ | 17.4 | |
Exercisable | | | 662,542 | | | $ | 27.74 | | | | 5.8 | | | $ | 10.5 | |
Restricted Stock
The Company also granted a total of 31,050 restricted stock awards to certain employees during the nine months ended September 27, 2008. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of grant.
The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter.
A summary of share-based awards (options and SARs) as of March 28, 2009 follows below. Forfeitures of share-based awards were immaterial.
| | Shares | | | Wtd. Avg. Exercise Price | | | Wtd. Avg. Remaining Contractual Term (years) | | | Aggregate Intrinsic Value (in millions) | |
Number of shares: | | | | | | | | | | | | |
Outstanding | | | 1,445,825 | | | $ | 35.83 | | | | 7.0 | | | $ | 3.7 | |
Exercisable | | | 721,592 | | | $ | 29.69 | | | | 5.8 | | | $ | 3.5 | |
Restricted Stock
As of March 28, 2009, the Company had 72,900 shares of restricted stock outstanding with a weighted average price of $44.86 and a weighted average life of 1.7 years. There were no grants of restricted stock in the three months ended March 28, 2009. In the first quarter of 2009, 45,200 shares of restricted stock vested.
11.12. INCOME TAXES
The Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) as of the beginning of fiscal 2007. FIN 48 clarifies the accounting for uncertainty in income taxes by defining criteria that a tax position on an individual matter basis must meet before that position is recognized in the financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, interim period accounting, disclosures and transition.
As of SeptemberMarch 28, 2009 and December 27, 2008, and December 29, 2007, the Company had approximately $6.9$8.6 million of unrecognized tax benefits, $3.2$5.0 million of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Federal tax returns from 2005 through 2007 and various state tax returns from 2002 through 2007 remain subject to income tax examinations by tax authorities. The Company estimates that the unrecognized tax benefits will not change significantly within the next year.
13. EARNINGS PER SHARE (EPS)
The numerator for the calculation of basic and diluted earnings per share is net income.income attributable to Regal Beloit Corporation. The denominator is computed as follows (in thousands):
| | Three Months Ending | | | Nine Months Ending | |
| | September 27, 2008 | | | September 29, 2007 | | | September 27, 2008 | | | September 29, 2007 | |
Denominator for basic EPS - weighted average | | | 31,357 | | | | 31,321 | | | | 31,327 | | | | 31,227 | |
Effect of dilutive securities | | | 2,359 | | | | 2,783 | | | | 2,126 | | | | 2,716 | |
Denominator for diluted EPS | | | 33,716 | | | | 34,104 | | | | 33,453 | | | | 33,943 | |
| | Three Months Ending | |
| | March 28, 2009 | | | March 29, 2008 | |
Denominator for basic EPS - weighted average | | | 31,457 | | | | 31,317 | |
Effect of dilutive securities | | | 1,138 | | | | 1,800 | |
Denominator for diluted EPS | | | 32,595 | | | | 33,117 | |
The “Effect of dilutive securities” represents the dilution impact of equity awards and the convertible senior subordinated debt (see Note 89 of Notes to Condensed Consolidated Financial Statements). The dilutive effect of the convertible senior subordinated debtConvertible Notes was approximately 2.00.9 million shares and 1.71.4 million shares for the three and nine months ended September 27,March 28, 2009 and March 29, 2008, respectively, and 2.0 million shares for both the three and nine months ended September 29, 2007.respectively.
Options for common shares where the exercise price was above the market price at September 27, 2008,March 28, 2009, totaling approximately 183,000955,000 shares, have been excluded from the calculation of the effect of dilutive securities as the effect of such options is anti-dilutive. There were approximately 140,000383,500 anti-dilutive option shares outstanding at SeptemberMarch 29, 2007.2008
On April 26, 2007,December 18, 2008, the Company received notice that theentered into a consent decree with U.S. Environmental Protection Agency (“U.S. EPA”) has filedto resolve the matters alleged by the U.S. EPA in an action filed against the Company in April 2007 in the United States District Court for the Northern District of Illinois seeking reimbursement of the U.S. EPA’s unreimbursed past and future remediation costs incurred in cleaning up an environmental site located near a former manufacturing facility of the Company in Illinois. In 1999, the Company and other parties identified as potentially responsible parties (“PRPs”) reached an agreement with the U.S. EPA to partially fund the costs of certain response actions taken with respect to this site. In 2004, the Company received communications from the U.S. EPA indicating that the Company was identified as one of three PRPs regarding additional remedial actions to be taken by the U.S. EPA at this site. In response, the Company provided to the U.S. EPA its environmental expert’s assessment of the site in 2004. The Company believesdoes not believe that it is not a PRPpotentially responsible party with respect to the site in question and intends to defend vigorously the associated claim. As of September 27, 2008 amounts that have been recordeddid not admit any fault or liability in the Company’s financial statements relatedconsent decree with respect to the allegations made by the U.S. EPA in this contingency are not material.matter. Under the terms of the consent decree, the U.S. EPA withdrew the action filed against the Company and the Company agreed to make a monetary payment, which included contributions from other involved parties. The payment was made by the Company in the first quarter of 2009.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company’s products are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in defending against such lawsuits arising from its normal business operations. It is believedin amounts that we believe are adequate, and the Company does not believe that the outcome of these lawsuitsany such lawsuit will have noa material effect on the Company’s financial position or its results of operations.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience.
14.15. DERIVATIVE INSTRUMENTS
The Company periodically enters intohas adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) in the three months ended March 28, 2009. SFAS 161 amends the required disclosures about the Company’s derivative instruments and hedging activities contained in SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity futuresprice risk, currency exchange, and options hedging transactions to reduce the impact of changing prices forinterest rate risk. Forward contracts on certain commodities suchare entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.
SFAS 133 requires companies to recognize all derivative instruments as copper and aluminum based upon certain firm commitments to purchase such commodities. These transactions are designatedeither assets or liabilities at fair value in the statement of financial position. In accordance with SFAS 133, the Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted
foreign currency cash flows and the contract termsinterest rate swaps as cash flow hedges of commodityforecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of March 28, 2009.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation. Derivative
commodity liabilities of $12.9 million and $0.6 million are recorded in Other Accrued Expenses and Other Noncurrent Liabilities, respectively at September 27, 2008. Derivative commodity liabilities of $6.1 million are recorded in Other Accrued Expenses at December 29, 2007. The unrealized loss on the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.
As of March 28, 2009, the Company had outstanding the following commodity forward contracts (with maturities extending through February 2011) to hedge forecasted purchases of ($8.4) million netcommodities (in millions):
| | Notional | |
| | Amount | |
Copper | | $ | 57.4 | |
Aluminum | | | 3.2 | |
Zinc | | | 1.1 | |
Natural Gas | | | 1.6 | |
Heating Oil | | | 0.3 | |
As of tax and ($3.8) million netMarch 28, 2009, the Company had outstanding the following currency forward contracts (with maturities extending through December 2011) to hedge forecasted foreign currency cash flows (in millions):
| | Notional | |
| | Amount | |
Mexican Peso | | $ | 120.6 | |
Indian Rupee | | | 56.9 | |
Thai Baht | | | 7.0 | |
Australian Dollar | | | 2.5 | |
As of tax,March 28, 2009, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $250.0 million.
Fair values of derivative instruments as of September 27, 2008 and December 29, 2007, respectively,March 28, 2009 were (in millions):
| | Asset Derivatives | | Liability Derivatives | |
| | Fair Value | | Balance Sheet Location | | Fair Value | |
Derivatives designated as hedging instruments | | | | | | | |
Interest rate swap contracts | | $ | - | | Hedging Obligations | | $ | 44.5 | |
Foreign exchange contracts | | | - | | Hedging Obligations | | | 31.6 | |
Commodity contracts | | | - | | Hedging Obligations | | | 22.0 | |
| | | | | | | | | |
Total derivatives designated as hedging instruments | | $ | - | | | | $ | 98.1 | |
| | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | |
Foreign exchange contracts | | | - | | Hedging Obligations | | | 0.5 | |
Commodity contracts | | | - | | Hedging Obligations | | | 3.5 | |
| | | | | | | | | |
Total derivatives not designated as hedging instruments | | $ | - | | | | $ | 4.0 | |
| | | | | | | | | |
Total derivatives | | $ | - | | | | $ | 102.1 | |
The effect of derivative instruments on the Statement of Earnings for the three months ended March 28, 2009 was recorded in Accumulated Other Comprehensive Income (“AOCI”).(in millions):
Derivatives Designated as Cash Flow Hedging Instruments | | | | | | | |
| | Commodity Forwards | | | Currency Forwards | | | Interest Rate Swaps | | | Total | |
Gain (loss) recognized in | | | | | | | | | | | | |
Other Comprehensive Income (Loss) | | $ | 40.4 | | | $ | (1.6 | ) | | $ | 5.1 | | | $ | 43.9 | |
| | | | | | | | | | | | | | | | |
Loss recognized in Cost of Sales | | | (22.1 | ) | | | (2.4 | ) | | | - | | | | (24.5 | ) |
| | | | | | | | | | | | | | | | |
Loss recognized in Operating Expenses | | | - | | | | (1.7 | ) | | | - | | | | (1.7 | ) |
| | | | | | | | | | | | | | | | |
Loss recognized in Interest Expense | | | - | | | | - | | | | (2.2 | ) | | | (2.2 | ) |
The Company uses a cash flow hedging strategy to protect against an increase in the cost of forecasted foreign currency denominated transactions. As of September 27, 2008, derivative currency liabilities of $2.4 million and $0.3 million are recorded in Other Accrued Expenses and Other Noncurrent Liabilities, respectively. As of December 29, 2007, derivative currency assets of $3.4 million and $0.1 million are recorded in Prepaid Expenses and Other Current Assets and Other Noncurrent Liabilities, respectively. The unrealized (loss) gain on the effectiveineffective portion of hedging instruments recognized during the contracts of ($1.3) million net of tax and $2.1 million net of tax, as of September 27, 2008 and December 29, 2007,three months ended March 28, 2009 was recorded in AOCI.immaterial.
The Company has LIBOR-based floating rate borrowings, which expose the Company to variability in interest payments due to changes in interest rates. The Company has entered into pay fixed/receive LIBOR-based floating interest rate swaps to manage fluctuations in cash flows resulting from interest rate risk. These interest rate swaps have been designated as cash flow hedges against forecasted LIBOR-based interest payments. As of September 27, 2008, an interest rate swap liability of $18.1 million was included in Other Noncurrent Liabilities. The unrealized loss on the effective portion of the contracts of ($11.2) million net of tax as of September 27, 2008 was recorded in AOCI. As of December 29, 2007, an interest rate swap liability of $14.4 million was included in Other Noncurrent Liabilities. The unrealized loss on the effective portion of the contracts of ($8.9) million net of tax as of December 29, 2007 was recorded in AOCI.
Derivatives Not Designated as Cash Flow Hedging Instruments | | | | |
| | Commodity Forwards | | | Currency Forwards | | | Total | |
Gain (loss) recognized in Cost of Sales | | $ | 4.5 | | | $ | (0.6 | ) | | $ | 3.9 | |
| | | | | | | | | | | | |
Loss recognized in Operating Expenses | | | - | | | | (0.5 | ) | | | (0.5 | ) |
The net AOCI balance of ($21.0)71.7) million loss at September 27, 2008 is comprised ofMarch 28, 2009 includes ($9.2)46.2) million of net current deferred losses expected to be realized in the next year, and ($11.8) million of net non-current deferred losses. The impact of hedge ineffectiveness was immaterial for all periods presented.
year.
15.16. FAIR VALUE
The implementation of SFAS No. 157 “Fair Value Measurements” for financial assets and financial liabilities, on December 30, 2007, the first day of the 2008 fiscal year,(“SFAS No. 157”) did not have a material impact on our consolidated financial position and results of operations. The Company is currently assessing the impact of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on itscondensed consolidated financial position and results of operations.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS No. 157 classifies the inputs and used to measure fair value into the following hierarchy:
Level 1 | | Unadjusted quoted prices in active markets for identical assets or liabilities |
| | |
Level 2 | | Unadjusted quoted prices in active markets for similar assets or liabilities, or |
| | |
| | Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or |
| | |
| | Inputs other than quoted prices that are observable for the asset or liability |
| | |
Level 3 | | Unobservable inputs for the asset or liability |
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company has determined that ourits financial assets and liabilities are level 2 in the fair value hierarchy. The following table sets forforth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 27, 2008 (inMarch 28, 2009 (n millions):
Liabilities: |
Other Accrued Expenses |
Derivative currency contracts | | $ | 2.4 | | | | | |
Derivative commodity contracts | | | 12.9 | | | | | |
Other Noncurrent Liabilities | | | |
Derivative currency contracts | | $ | 0.3 | | | | | |
Derivative commodity contracts | | | 0.6 | | | | | |
Interest rate swap | | | 18.1 | | | | | |
|
Liabilities: | | | |
Hedging Obligations - Current | | | |
Derivative currency contracts | | $ | 21.3 | |
Derivative commodity contracts | | | 25.5 | |
Hedging Obligations - Long Term | | | | |
Derivative currency contracts | | $ | 10.8 | |
Interest rate swap | | | 44.5 | |
16. SUBSEQUENT EVENT
On September 30, 2008, the Company acquired Dutchi Motors B.V. (“Dutchi”) located in Arnhem, The Netherlands. Dutchi is a leading distributor of industrial motors in Western and Eastern Europe, South Africa, Russia and the Middle East. Dutchi is one of the largest distributors of the Company’s Hwada motor products, which was purchased by the Company in April 2008. The Dutchi business will be reported as part of the Company’s Electrical Segment. The purchase price was approximately $34.0 million in cash and the assumption of approximately $3.2 million in net liabilities.ITEM 22.. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context requires otherwise, references in this Item 2 to “we”, “us”, “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries. All amounts referred to in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect the adjustment of convertible debt and related interest expense discussed in Note 2 of Notes to the Condensed Consolidated Financial Statements.
OVERVIEW
Net sales increased 38.1%decreased 17.4% to $620.6$443.3 million from $449.4$536.3 million in the comparable period of 2007.2008. Sales for the three months ended September 27, 2008March 28, 2009 included $122.6$29.7 million of sales related to the four 2007two 2008 acquired businesses described in Note 34 of Notes to the Condensed Consolidated Financial Statements. An additional $34.2 million ofStatementsand the 2008 sales are attributable to the HwadaCPT acquisition completed on April 25, 2008.
Net income increased 18.1%decreased 59.3% to $36.9$12.8 million for the three months ended September 27, 2008March 28, 2009 as compared to $31.2$31.4 million in the comparable period last year. Diluted earnings per share increased 18.5%decreased 58.9% to $1.09$0.39 for the three months ended September 27, 2008March 28, 2009 as compared to $0.92$0.95 for the comparable period of 2007.2008.
RESULTS OF OPERATIONS
Three Months Ended September 27, 2008March 28, 2009 versus Three Months Ended SeptemberMarch 29, 20072008
Sales for the three months ended September 27, 2008March 28, 2009 were $620.6$443.3 million, a 38.1% increase17.4% decrease over the $449.4$536.3 million reported for the three months ended for SeptemberMarch 29, 2007. Third2008. First quarter 20082009 sales included $122.6$29.7 million of sales related to the four 2007two 2008 acquired businesses described in Note 34 of Notes to the Condensed Consolidated Financial Statements. An additional $34.2 million ofStatements and the third quarter 2008 sales are attributable to the HwadaCPT acquisition completed on April 25, 2008.January 2, 2009.
In the Electrical segment, sales increased 42.5%,decreased 17.4% from the prior year period, including the impact of the acquisitions noted above. Exclusive of the acquired businesses, Electrical segment sales are up 10.8%decreased 23.7%, largely due to global generator sales increasing 25.0%decreasing 12%, commercial and industrial motors sales in North America increasing 9.1%decreasing 23%, and residential HVAC motor sales increased 10.9%decreasing 22%. Sales in our Sinya business in China were down 23.1% for the three months ended September 27, 2008 versus the comparable period of 2007 due to the in-sourcing of motor production by a large customer. Sales in the Mechanical segment increased 5.3%decreased 17.0% from the prior year period. From a geographic perspective, Asia-based sales increased 101.1%decreased 24.2% as compared to the comparable period of 2007.2008. In total, sales to regions outside of the United States were 26.8%26.7% of total sales for the three months ended September 27, 2008March 28, 2009 in comparison to 19.4%25.6% for the comparable period of 2007.2008. The negative impact of foreign currency exchange rate changes decreased total sales by 2.4%.
The gross profit margin for the three months ended September 27, 2008March 28, 2009 was 21.4%20.4% as compared to the 23.7%22.8% reported for the comparable period of 2007. Lower2008. The gross profit margins of 17.3% frommargin for the acquired businesses, and higher material costs had a significant impact onElectrical segment was 19.6% for the three months ended September 27, 2008, partially offset by the contribution from new products, productivity efforts, pricing actions, and product mix. The raw material cost increases resulted primarily from increasesMarch 28, 2009 versus 21.9% in the costcomparable period of copper2008. The Mechanical segment gross profit was 26.9% in the three months ended March 28, 2009 versus 29.1% in the comparable period of 2008. The decrease is driven by higher commodity costs and steel.the absorption impact of lower sales volumes.
Operating expenses were $67.1$62.4 million (10.8%(14.1% of sales) in the three months ended September 27, 2008March 28, 2009 versus $53.3$64.5 million (11.9%(12.0% of sales) in 2007. the comparable period of 2008. Operating expenses included approximately $5.1 million related to the Dutchi and Hwada businesses offset by reductions in variable expenses, such as sales commissions, and the impact of cost reduction activities. Electrical segment operating expenses were 14.0% of net sales for the three months ended March 28, 2009 versus 11.9% in the comparable period of 2008. Mechanical operating expenses for the first quarter of 2009 were 14.8% of sales versus 13.0% in 2008.
Income from operations was $65.7$28.2 million versus $53.4$57.6 million in the comparable period of 2007.2008. As a percent of sales, income from operations was 10.6%6.4% for the three months ended September 27, 2008March 28, 2009 versus 11.9%10.7% in the comparable period of 2007. This decrease reflected lower2008. As a percent of sales, Electrical segment operating profit margins fromwas 5.6% in the acquired businesses, and increased raw material costs partially offset by contributions from new products, pricing actions, and productivity.first quarter of 2009 versus 10.0% in the comparable period of 2008. Mechanical segment operating profit was 12.1% of sales in the first quarter of 2009 versus 16.1% in the comparable period of 2008.
Net interest expense was $6.7$7.0 million versus $4.8$8.0 million in the comparable period of 2007.2008. The increasedecrease is due to higher levels of average debt outstanding driven by lower interest rates in 2009 versus the acquisitions completed since August 2007.comparable period of 2008.
The effective tax rate for the three months ended September 27, 2008March 28, 2009 was 36.0%34.1% versus 34.2%35.4% in the prior year period. The increase in the effective tax rate results from the global distribution of income, increases in certain statutory tax rates in Mexico and China, and the impact of the expiration of the United States Research and Engineering tax credit which had not been extended to 2008 as of September 27, 2008. A dividend repatriation benefit recognized in the three months ended September 27, 2008 was offset by the impact of losses incurred in our Sinya business which is under tax holiday for 2008.
Net income for the three months ended September 27, 2008 was $36.9 million, an increase of 18.1% versus the $31.2 million reported in comparable period of 2007. Fully diluted earnings per share was $1.09 as compared to $0.92 per share reported in the third quarter of 2007. The average number of diluted shares was 33,715,881 during the three months ended September 27, 2008 as compared to 34,104,123 during the comparable period last year.
Nine Months Ended September 27, 2008 versus Nine Months Ended September 29, 2007
Sales for the nine months ended September 27, 2008 were $1.76 billion, which is a 32.8% increase over the $1.33 billion reported for the comparable period of 2007. Sales for the nine months ended September 27, 2008 included $343.0 million of sales related to the four 2007 acquired businesses described in Note 3 of Notes to the Consolidated Financial Statements. An additional $57.5 million of sales in the nine months ended September 27, 2008 relate to the Hwada business acquired on April 25, 2008.
In the Electrical segment, sales increased 37.1%, including the impact of the acquisitions noted above. Exclusive of the acquired businesses, Electrical segment sales are up 53% largely due to global generator sales increasing 25.2%, commercial and industrial motors sales in North America increasing 5.0%, and residential HVAC motor sales increasing 0.9%. Sales in our Sinya business in China were down 14.2% for the nine months ended September 27, 2008 versus the comparable period of 2007 due to the in-sourcing of motor production by a large customer. Sales in the Mechanical segment increased 2.2% from the prior year period. From a geographic perspective, Asia-based sales increased 86.9% as compared to the comparable period of 2007. In total, sales to regions outside of the United States were 26.5% of total sales in comparison to 20.5% for the comparable period of 2007.
Gross margin for the nine months ended September 27, 2008 was 21.9%, which is 1.3 percentage points lower than the comparable period of 2007. Lower operating margins from the acquired businesses, and material costs had a significant impact on the first six months of 2008, partially offset by the contribution from new products, productivity efforts, pricing actions and positive product mix across our entire business. The raw material cost increases resulted primarily from increases in the costs of copper and steel.
Operating expenses for the nine months ended September 27, 2008 were $195.2 million (11.1% of sales) versus $147.1 million (11.1% of sales) in the comparable period of 2007. Income from operations was $190.8 million versus $160.8 million in the comparable period of 2007, an increase of 18.7%. As a percent of sales, income from operations was 10.8% versus 12.1% in the comparable period of 2007.
Net interest expense was $20.1 million versus $13.9 million in the comparable period of 2007. This increase is driven mainly by the higher levels of debt outstanding, from the acquisitions completed since August 2007.
The tax rate for the nine months ended September 27, 2008 was 35.6% versus 34.3% in the prior year comparable period. The increasedecrease in the effective tax rate results primarily from the global distribution of income.
Net income increases in certain statutory tax rates in Mexico and China, and the impact of the expiration of the United States Research and Engineering tax credit which had not been extended to 2008 as of September 27, 2008. A dividend repatriation benefit recognized infor the three months ended September 27, 2008March 28, 2009 was offset by$12.8 million, a decrease of 59.3% versus the impact$31.4 million reported in the comparable period of losses incurred2008. Fully diluted earnings per share was $0.39 as compared to $0.95 per share reported in our Sinya business which is under tax holiday forthe first quarter of 2008. The average number of diluted shares was 32,594,802 during the three months ended March 28, 2009 as compared to 33,117,034 during the comparable period of 2008.
LIQUIDITY AND CAPITAL RESOURCES
Our workingWorking capital was $477.5$486.1 million at September 27, 2008,March 28, 2009, a 14.6%13.0% increase from $416.6$430.3 million at year-end 2007.December 27, 2008. The $60.9$55.8 million increase was primarily driven by a $19.3$49.5 million increasedecrease in net working capital from the Hwada acquisitionaccounts payable and an increasea $33.8 million decrease in current hedging obligations offset by a $21.7 million decrease in accounts receivable driven by higher salesand a $32.6 million decrease in the third quarter of 2008 versus the fourth quarter of 2007.inventory. The ratio of our current assets to our current liabilities (“current ratio”) was 2.1:2.5:1 at September 27, 2008March 28, 2009 and 2.3:2.0:1 at December 29, 2007.27, 2008.
Net cash provided by operating activities was $158.6$21.6 million for the ninethree months ended September 27, 2008March 28, 2009 as compared to $168.3$34.9 million in the comparable period of 2007. Increases in2008. The decrease is driven by lower net income and depreciation and amortization were offset by higher net working capital investment in 20082009 versus 2007.the comparable period of 2008. Net cash used in investing activities was $57.6$9.3 million in the first ninethree months of 20082009 as compared to the $276.9$12.1 million used in the comparable period of the prior year driven by the Fasco and Jakel acquisitions.year. Additions to property, plant and equipment were $43.9$8.1 million in the first ninethree months of 2008,2009, which was $20.1$5.5 million moreless than the comparable period of 2007. The change in capital spending results from increased investments in productivity and new product projects.2008. Our cash used inprovided by financing activities was $28.9$8.0 million for the first ninethree months of 20082009 versus $126.1$15.4 million provided byused in financing activities in the comparable period of 2007.2008. During the ninethree months ended September 27,March 29, 2008, the Company repurchased 110,000 shares at a total cost of $4.2 million. There were no shares repurchased in the equivalent period of 2007.2009.
Our outstanding long-term debt decreasedincreased from $558.9$560.1 million at December 29, 200727, 2008 to $554.1$580.3 million at September 27, 2008.March 28, 2009. At September 27, 2008March 28, 2009, there was $13.0$39.2 million outstanding under our $500.0 million unsecured revolving credit facility that expires on April 30, 2012 (the “Facility”). The Facility permits the Company to borrow at interest rates based upon a margin above the London Inter-Bank Offered Rate (“LIBOR”), which margin varies with the ratio of total funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Facility. These interest rates also vary as LIBOR varies. We pay a commitment fee on the unused amount of the Facility, which also varies with the ratio of our total debt to our EBITDA.
On June 16,In 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby the Company borrowed an aggregate principal amount of $165.0 million. The Term Loan matures in June 2013, and borrowings under the Term Loan generally bear interest at a variable rate equal to (i) a margin over the LIBOR, which margin varies depending on whether certain criteria are satisfied, or (ii) the alternate base rate as defined in the agreement. At September 27, 2008,March 28, 2009, the interest rate of 3.7%1.6% was based on a margin over LIBOR.
At September 27, 2008,March 28, 2009, there was $250.0 million of senior notes (the “Notes”) outstanding. The Notes were issued and sold in two series: $150.0 million in Floating Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest at a margin over LIBOR, which margin varies with the ratio of the Company’s consolidated debt to consolidated EBITDA as defined in the Agreement. These interest rates also vary as LIBOR varies. The note Purchase Agreement (the “Agreement”) permits the Company to issue and sell additional note series, subject to certain terms and conditions described in the Agreement, up to a total of $600.0 million in combined Notes.
The Notes, the Term Loan and the Facility require us to meet specified financial ratios and to satisfy certain financial condition tests. We were in compliance with all debt covenants as of September 27, 2008.March 28, 2009.
In addition to the Facility, the Term Loan and the Notes, at September 27, 2008,March 28, 2009, we also had $115.0 million of convertible senior subordinated debt outstanding at a fixed interest rate of 2.75%, and $28.2$18.2 million of other debt (including approximately $17.0 million assumed in the Hwada purchase, with a weighted average interest rate of 7.5%3.9%.)
CRITICAL ACCOUNTING POLICIES
The Company’s critical accounting policies have not changed materially from those reported in our 20072008 Annual Report on Form 10-K filed on February 27, 2008.25, 2009.
New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)” (“APB 14-1”), which requires that convertible debt securities, that upon conversion may be settled by the issuer fully or partially in cash, be split into a debt and equity component. APB 14-1 is effective for fiscal years (and interim periods) beginning after December 15, 2008 and must be applied retroactively to all past periods presented. The Company will adoptadopted APB 14-1 uponon its effective date, which will have a material impact on the reported valuesdate. (See Note 2 of debt, equity and earnings per share.Notes to Condensed Consolidated Financial Statements.)
In April 2008, the FASB issued FASB Staff Position (FSP) 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 intends to improve the consistency between the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets” and the period of expected cash flows used to measure the fair value of the asset under SFAS 141 (Revised 2007), “Business Combinations”, which is effective for fiscal years (and interim periods) beginning after December 15, 2008. We are evaluating FSP 142-3 to determine the effect on our financial statements and related disclosures.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), which requires expanded disclosures about derivative instruments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with earlier adoption permitted. We are evaluatingThe Company has adopted the new standard to determine its effect onin our financial statements and related disclosures.disclosures beginning in the first quarter of 2009. (See Note 15 of Notes to Condensed Consolidated Financial Statements.)
In December 2007, the FASB issued SFAS 141 (Revised 2007), “Business Combinations” (“SFAS 141R”), effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R establishesestablished principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree, goodwill or gain from a bargain purchase and accounting for transaction costs. Additionally, SFAS 141R determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company will adopthas adopted SFAS 141R upon its effective date as appropriate for any future business combinations.
In December 2007, the FASB also issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 will changechanged the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We have not yet determinedThe Company has adopted the impact, if any,new standard in our financial statements and related disclosures beginning in the first quarter of SFAS 160 on our consolidated financial statements.2009.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items generally on an instrument-by-instrument basis at fair value that are not currently required to be measured at fair value. SFAS 159 is intended to provide entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The implementation of this standard did not have an impact on our consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements”(“ (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February, 2008 the FASB issued FSP FAS 157-2, which delays the effective date of Statement 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. The Company is eligible for the delay as it has not previously adopted SFAS 157. The Company has chosen to partially adoptadopted SFAS 157 (see Note 15 of Notes to Condensed Consolidated Financial Statements).in 2008 for financial assets as permitted.
ITEM 33.. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following information should be read in conjunction with the Company’s 2008 Annual Report on Form 10-K filed on February 25, 2009. Updated information on the Company’s use of derivative financial instruments is contained in Note 15 of Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
We are exposed to market risk relating to the Company’s operations due to changes in interest rates, foreign currency exchange rates and commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges and foreign currency forward exchange contracts.
The Company is exposed to interest rate risk on certain of its short-term and long-term debt obligations used to finance our operations and acquisitions. At September 27, 2008,March 28, 2009, net of interest rate swaps, we had $390.4$380.4 million of fixed rate debt and $180.8$206.9 million of variable rate debt, the latter subject to interest rate risk. As a result, interest rate changes impact future earnings and cash flows assuming other factors are constant. The Company utilizes interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted variable rate interest payments.
Details regarding the instruments, as of September 27, 2008, are as follows:
Instrument
| | Notional
Amount
| | Maturity
| | Rate
Paid
| | Rate Received
| | Fair Value
Gain (Loss)
|
Swap | | $150.0 million | | August 23, 2014 | | 5.3% | | LIBOR (3 month) | | ($9.7) million |
Swap | | $100.0 million | | August 23, 2017 | | 5.4% | | LIBOR (3 month) | | ($8.4) million |
A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt at September 27, 2008,March 28, 2009, would result in a change in after-tax annualized earnings of approximately $0.40.2 million.
The Company periodically enters into commodity futures and options hedging transactions to reduce the impact of changing prices for certain commodities, such as copper and aluminum. Contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation.
We are also exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency contracts to manage our exposure on the transactions denominated in currencies other than the applicable functional currency. Contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. It is our policy not to enter into derivative financial instruments for speculative purposes. We do not hedge our exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars.
All hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair value recorded in accumulated other comprehensive income (“AOCI”) in each accounting period. An ineffective portion of the hedge’s change in fair value, if any, is recorded in earnings in the period of change. The impact due to ineffectiveness was immaterial for all periods included in this report.
The Company periodically enters into commodity futures and options hedging transactions to reduce the impact of changing prices for certain commodities such as copper and aluminum based upon certain firm commitments to purchase such commodities. These transactions are designated as cash flow hedges and the contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation. Derivative commodity liabilities of $12.9 million and $0.6 million are recorded in Other Accrued Expenses and Other Noncurrent Liabilities, respectively at September 27, 2008. Derivative commodity liabilities of $6.1 million are recorded in Other Accrued Expenses at December 29, 2007. The unrealized loss on the effective portion of the contracts of ($8.4) million net of tax and ($3.8) million net of tax, as of September 27, 2008 and December 29, 2007, was recorded in AOCI.
The Company uses a cash hedging strategy to protect against an increase in the cost of forecasted foreign currency denominated transactions. As of September 27, 2008, derivative currency liabilities of $2.4 million and $0.3 million are recorded in Other Accrued Expenses and Other Noncurrent Liabilities, respectively. As of December 29, 2007, derivative currency assets of $3.4 million and $0.1 million (notional value of $213.3 million) are recorded in Prepaid Expenses and Other Current Assets and Other Noncurrent Liabilities, respectively. The unrealized (loss) gain on the effective portion of the contracts of ($1.3) million net of tax and $2.1 million net of tax, as of September 27, 2008 and December 29, 2007, was recorded in AOCI.
The Company has LIBOR-based floating rate borrowings, which expose the Company to variability in interest payments due to changes in interest rates. The Company has entered into pay fixed/receive LIBOR-based floating interest rate swaps to manage fluctuations in cash flows resulting from interest rate risk. These interest rate swaps have been designated as cash flow hedges against forecasted LIBOR-based interest payments. As of September 27, 2008 and December 29, 2007, an interest rate swap liability of $18.1 million and $14.4 million was included in Other Noncurrent Liabilities, respectively. The unrealized loss on the effective portion of the contracts of ($11.2) million and ($8.9) million, net of tax as of September 27, 2008 and December 29, 2007 respectively, was recorded in AOCI.
The net AOCI balance of ($21.0) million gain at September 27, 2008 is comprised of ($9.2) million of net current deferred losses expected to be realized in the next year, and ($11.8) million of net non-current deferred losses. The impact of hedge ineffectiveness was immaterial for all periods presented.
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective to ensure that (a) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Items 3, 4 and 5 are inapplicable and have been omitted.
On April 26, 2007,December 18, 2008, the Company received notice that theentered into a consent decree with U.S. Environmental Protection Agency (“U.S. EPA”) has filedto resolve the matters alleged by the U.S. EPA in an action filed against the Company in April 2007 in the United States District Court for the Northern District of Illinois seeking reimbursement of the U.S. EPA’s unreimbursed past and future remediation costs incurred in cleaning up an environmental site located near a former manufacturing facility of the Company in Illinois. In 1999, the Company and other parties identified as potentially responsible parties (“PRPs”) reached an agreement with the U.S. EPA to partially fund the costs of certain response actions taken with respect to this site. In 2004, the Company received communications from the U.S. EPA indicating that the Company was identified as one of three PRPs regarding additional remedial actions to be taken by the U.S. EPA at this site. In response, the Company provided to the U.S. EPA its environmental expert’s assessment of the site in 2004. The Company believesdoes not believe that it is not a PRPpotentially responsible party with respect to the site in question and intends to defend vigorously the associated claim. As of September 27, 2008 amounts that have been recordeddid not admit any fault or liability in the Company’s financial statements relatedconsent decree with respect to the allegations made by the U.S. EPA in this contingency are not material.
matter. Under the terms of the consent decree, the U.S. EPA withdrew the action filed against the Company and the Company agreed to make a monetary payment, which included contributions from other involved parties. The payment was made by the Company in the first quarter of 2009.The Company is, from time to time, party to litigation that arises in the normal course of our business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company’s products are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in defending against such lawsuits arising from its normal business operations. It is believedin amounts that we believe are adequate, and the Company does not believe that the outcome of these other lawsuitsany such lawsuit will have noa material effect on the Company’s financial position or its results of operations.
The business and financial results of the Company are subject to numerous risks and uncertainties. The risks and uncertainties have not changed materially from those reported in Item 1A in the 20072008 Annual Report on Form 10-K.10-K filed on February 25, 2009.
The following table contains detail related to the repurchase of common stock based on the date of trade during the three months ended September 27, 2008.March 28, 2009.
2008 Fiscal Month | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number of Shares that May Be Purchased Under the Plan or Programs | |
June 29, 2008 to August 2, 2008 | | | - | | | $ | - | | | | - | | | | 2,115,900 | |
| | | | | | | | | | | | | | | | |
August 3, 2008 to August 30, 2008 | | | 69,359 | | | $ | 48.55 | | | | - | | | | 2,115,900 | |
| | | | | | | | | | | | | | | | |
August 31, 2008 to September 27, 2008 | | | - | | | $ | - | | | | - | | | | 2,115,900 | |
| | | | | | | | | | | | | | | | |
Total | | | 69,359 | | | | | | | | - | | | | | |
2009 Fiscal Month | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number of Shares that May Be Purchased Under the Plan or Programs | |
December 28, 2008 to January 31, 2009 | | | - | | | $ | - | | | | - | | | | 2,115,900 | |
| | | | | | | | | | | | | | | | |
February 1, 2009 to February 28, 2009 | | | 56,601 | | | $ | 31.74 | | | | - | | | | 2,115,900 | |
| | | | | | | | | | | | | | | | |
March 1, 2009 to March 28, 2009 | | | - | | | $ | - | | | | - | | | | 2,115,900 | |
| | | | | | | | | | | | | | | | |
Total | | | 56,601 | | | | | | | | - | | | | | |
Under the Company’s equity incentive plans, participants may pay the exercise price or satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares of common stock otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares of common stock, in each case having a value equal to the exercise price or the amount to be withheld. During the three months ended September 27, 2008,March 28, 2009, there were 69,35956,601 shares acquired in connection with equity incentive plans.
The Board of Directors has approved repurchase programs for up to three million shares of the Company’s common stock. Management is authorized to effect purchases from time to time in the open market or through privately negotiated transactions.
Exhibit Number | | Exhibit Description |
| | |
12 | | Computation of Ratio of Earnings to Fixed Charges. |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1 | | Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| REGAL BELOIT CORPORATION (Registrant) /s/ David A. Barta |
| David A. Barta Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) |
Date: May 7, 2009 | |
David A. Barta
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
Date: November 5, 2008
Exhibit Number | | Exhibit Description |
| | |
12 | | Computation of Ratio of Earnings to Fixed Charges. |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1 | | Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |