FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

(Mark One)

x

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedJune 29,2005

o

For the quarterly period ended          March 31, 2005

o

TRANSITIONTRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto
Commission File Number: 001-07283
REGAL-BELOIT CORPORATION
(Exact name of registrant as specified in its charter)

Wisconsin

39-0875718

For the transition period from ___________________ to ___________________

Commission File Number:     001-07283


REGAL-BELOIT CORPORATION

(Exact name of registrant as specified in its charter)


Wisconsin

39-0875718

(State or other jurisdiction of

incorporation or organization)

(IRS Employer
Identification Number)


200 State Street, Beloit, Wisconsin     53511-6254

(Address of principal executive offices)

(608)  364-8800

(Registrant’s telephone number, including area code)

200 State Street, Beloit, Wisconsin   53511-6254
(Address of principal executive offices)
(608) 364-8800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþx NOo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     YES          YES  þx NOo

Indicate the number of shares outstanding of each of the issuers’ classes of common stock as of the latest practicable date.

29,045,022

29,087,432 Shares, Common Stock, $.01 Par Value (as of April 30,July 31, 2005)

REGAL—BELOIT CORPORATION

REGAL-BELOIT CORPORATION
FORM 10-Q
For Quarter Ended March 31,June 29, 2005

INDEX

Page No.

Page No.

PART I -— FINANCIAL INFORMATION

Item 1 -— Financial Statements

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income

4

Condensed Consolidated Statements of Cash Flows

5

Notes to Condensed Consolidated Financial Statements

6 – 10

Item 2 -— Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

11 - 11

14

Item 3 -— Quantitative and Qualitative Disclosures about Market Risk

12

14

Item 4 –— Controls and Procedures

12

14

PART II -— OTHER INFORMATION

Item 1 — Legal Proceedings

15
Item 4 — Submission of Matters to a Vote of Security Holders
16
Item 6 –— Exhibits

13

16

Signature

16

SignatureBylaws of the Registrant

14

Certification of CEO
Certification of CFO
Certification of CEO/CFO

CAUTIONARY STATEMENT
The following is a cautionary statement made under the Private Securities Litigation Reform Act of 1995:With the exception of historical facts, the statements contained in this Quarterly Report on Form 10-Q or incorporated by reference may be forward looking statements. 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,” “should,” “plan,” “expect,” “anticipate,” “estimate,” “believe,” “predict,” “intend,” “potential” or continue” or the negative of these terms or other words of similar import, although some forward-looking statements are expressed differently. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of factors, including:

•

Unexpected issues and costs arising from the integration of acquired companies and businesses, such as our recent acquisitions of the HVAC motors and capacitors businesses and the Commercial AC motors business from General Electric Company (“GE”);

, including any effect the acquired businesses may have on our ability to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002;

•

Marketplace acceptance of our recent acquisitions, including the loss of, or a decline in business from any significant customers;

•

Unanticipated fluctuations in commodity prices and raw material costs and issues affecting our ability to pass increased costs on to our customers;

•

Cyclical downturns affecting the markets for our products;

capital goods;

•

Substantial increases in interest rates that impact the cost of our outstanding debt;

•

The impact of capital market transactions that the company may effect;
•Unanticipated costs associated with litigation matters;

•

The success of our management in increasing sales and maintaining or improving the operating margins of our businesses;

•

Actions taken by our competitors;

•

Difficulties in staffing and managing foreign operations;

•

Our ability to satisfy various covenant requirements under our credit facility; and

•

Other risks and uncertainties described 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 the date of this filing, and we undertake no obligation to update these statements to reflect subsequent events or circumstances.

2


PART I
FINANCIAL INFORMATION
REGAL-BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)

Item I.Financial Statements

 

 

March 31, 2005

 

Dec. 31, 2004

 

 

 

 

 

 

 

(Unaudited)

 

(From Audited
Statements)

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

28,882

 

$

31,275

 

Receivables, less Allowance for Doubtful Accounts of  $2,396 in 2005 and $2,376 in 2004

 

 

201,092

 

 

176,941

 

Income Tax Receivable

 

 

240

 

 

242

 

Future Income Tax Benefits

 

 

6,325

 

 

6,493

 

Inventories

 

 

245,594

 

 

246,816

 

Prepaid Expenses and Other Current Assets

 

 

17,708

 

 

13,152

 

 

 

 

 

Total Current Assets

 

 

499,841

 

 

474,919

 

Property, Plant and Equipment:

 

 

 

 

 

 

 

Land and Improvements

 

 

19,012

 

 

19,026

 

Buildings and Improvements

 

 

104,707

 

 

104,460

 

Machinery and Equipment

 

 

341,398

 

 

335,307

 

 

 

 

 

Property, Plant and Equipment, at Cost

 

 

465,117

 

 

458,793

 

Less - Accumulated Depreciation

 

 

(208,720

)

 

(205,120

)

 

 

 

 

Net Property, Plant and Equipment

 

 

256,397

 

 

253,673

 

Goodwill

 

 

552,972

 

 

544,440

 

Purchased Intangible Assets, net of Amortization

 

 

50,554

 

 

52,058

 

Other Noncurrent Assets

 

 

25,510

 

 

26,962

 

 

 

 

 

Total Assets

 

$

1,385,274

 

$

1,352,052

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ INVESTMENT

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts Payable

 

$

102,339

 

$

106,374

 

Dividends Payable

 

 

3,483

 

 

3,483

 

Accrued Compensation and Employee Benefits

 

 

35,427

 

 

30,256

 

Other Accrued Expenses

 

 

48,279

 

 

44,094

 

Income Taxes Payable

 

 

9,264

 

 

10,731

 

Current Maturities of Long-Term Debt

 

 

271

 

 

271

 

 

 

 

 

Total Current Liabilities

 

 

199,063

 

 

195,209

 

Long-Term Debt

 

 

563,572

 

 

547,350

 

Deferred Income Taxes

 

 

49,470

 

 

48,663

 

Other Noncurrent Liabilities

 

 

20,617

 

 

17,359

 

Minority Interest in Consolidated Subsidiaries

 

 

4,814

 

 

5,292

 

Shareholders’ Investment:

 

 

 

 

 

 

 

Common Stock, $.01 par value, 50,000,000 shares authorized, 29,814,434 issued in 2005 and 29,798,188 issued in 2004

 

 

298

 

 

298

 

Additional Paid-In Capital

 

 

265,010

 

 

263,790

 

Less – Treasury Stock, at cost  774,100 shares in 2005 and 2004

 

 

(15,228

)

 

(15,228

)

Retained Earnings

 

 

297,640

 

 

288,837

 

Unearned Compensation

 

 

(1,033

)

 

(224

)

Accumulated Other Comprehensive Income

 

 

1,051

 

 

706

 

 

 

 

 

Total Shareholders’ Investment

 

 

547,738

 

 

538,179

 

 

 

 

 

Total Liabilities and Shareholders’ Investment

 

$

1,385,274

 

$

1,352,052

 

 

 

 

 

         
      (From Audited
  (Unaudited) Statements)
  June 29, 2005 Dec. 31, 2004
ASSETS
        
 
Current Assets:        
Cash and Cash Equivalents $29,066  $31,275 
Receivables, less Allowance for Doubtful Accounts of $2,742 in 2005 and $2,376 in 2004  200,178   176,941 
Deferred Income Taxes  4,148   6,493 
Inventories  234,642   246,816 
Prepaid Expenses and Other Current Assets  30,549   13,394 
         
Total Current Assets  498,583   474,919 
         
Property, Plant and Equipment:        
Land and Improvements  17,204   19,026 
Buildings and Improvements  102,443   104,460 
Machinery and Equipment  335,004   335,307 
         
Property, Plant and Equipment, at Cost  454,651   458,793 
Less — Accumulated Depreciation  (204,780)  (205,120)
         
Net Property, Plant and Equipment  249,871   253,673 
Goodwill  554,038   544,440 
Purchased Intangible Assets, net of Amortization  48,866   52,058 
Other Noncurrent Assets  23,925   26,962 
         
Total Assets $1,375,283  $1,352,052 
         
         
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
        
Current Liabilities:        
Accounts Payable $82,116  $106,374 
Dividends Payable  3,781   3,483 
Accrued Compensation and Employee Benefits  39,284   30,256 
Other Accrued Expenses  54,477   44,094 
Income Taxes Payable  19,313   10,731 
Current Maturities of Long-Term Debt  476   271 
         
Total Current Liabilities  199,447   195,209 
         
Long-Term Debt  536,895   547,350 
Deferred Income Taxes  48,653   48,663 
Other Noncurrent Liabilities  19,901   17,359 
Minority Interest in Consolidated Subsidiaries  5,115   5,292 
         
Shareholders’ Investment:        
Common Stock, $.01 par value, 50,000,000 shares authorized, 29,860,022 issued in 2005 and 29,798,188 issued in 2004  299   298 
Additional Paid-In Capital  265,826   263,790 
Less – Treasury Stock, at cost 774,100 shares in 2005 and 2004  (15,228)  (15,228)
Retained Earnings  312,302   288,837 
Unearned Compensation  (844)  (224)
Accumulated Other Comprehensive Income  2,917   706 
         
Total Shareholders’ Investment  565,272   538,179 
         
Total Liabilities and Shareholders’ Investment $1,375,283  $1,352,052 
         
See accompanying notes.

3


REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, Except Per Share Data)

 

 

Three Months Ended

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

 

 

(Unaudited)

 

Net Sales

 

$

337,822

 

$

163,084

 

Cost of Sales

 

 

269,378

 

 

124,897

 

 

 

 

 

Gross Profit

 

 

68,444

 

 

38,187

 

Operating Expenses

 

 

42,579

 

 

25,743

 

 

 

 

 

Income From Operations

 

 

25,865

 

 

12,444

 

Interest Expense

 

 

5,454

 

 

1,327

 

Interest Income

 

 

48

 

 

3

 

 

 

 

 

Income Before Taxes & Minority Interest

 

 

20,459

 

 

11,120

 

Provision For Income Taxes

 

 

7,642

 

 

4,003

 

 

 

 

 

Income Before Minority Interest

 

 

12,817

 

 

7,117

 

Minority Interest in Income, Net of Tax

 

 

531

 

 

257

 

 

 

 

 

Net Income

 

$

12,286

 

$

6,860

 

 

 

 

 

Per Share of Common Stock:

 

 

 

 

 

 

 

Earnings Per Share – Basic

 

$

.42

 

$

.27

 

Earnings Per Share – Assuming Dilution

 

$

.41

 

$

.27

 

Cash Dividends Declared

 

$

.12

 

$

.12

 

Average Number of Shares Outstanding - Basic

 

 

29,033,901

 

 

25,041,559

 

Average Number of Shares Outstanding - Assuming Dilution

 

 

30,244,393

 

 

25,278,192

 

                 
  (Unaudited)
  Three Months Ended Six Months Ended
  June 29, June 29, June 29, June 29,
  2005 2004 2005 2004
Net Sales $368,768  $177,652  $706,591  $340,736 
                 
Cost of Sales  288,950   136,811   558,329   261,708 
                 
                 
Gross Profit  79,818   40,841   148,262   79,028 
                 
Operating Expenses  44,007   26,667   86,586   52,322 
                 
                 
Income From Operations  35,811   14,174   61,676   26,706 
                 
Interest Expense  5,894   1,509   11,348   2,836 
                 
Interest Income  28   29   76   32 
                 
                 
Income Before Taxes & Minority Interest  29,945   12,694   50,404   23,902 
              ��  
Provision For Income Taxes  10,996   4,558   18,638   8,594 
                 
                 
Income Before Minority Interest  18,949   8,136   31,766   15,308 
                 
Minority Interest in Income, Net of Tax  504   507   1,035   819 
                 
                 
Net Income $18,445  $7,629  $30,731  $14,489 
                 
                 
Per Share of Common Stock:                
                 
Earnings Per Share – Basic $.63  $.31  $1.06  $.59 
                 
Earnings Per Share – Assuming Dilution $.62  $.31  $1.03  $.58 
                 
Cash Dividends Declared $.13  $.12  $.25  $.24 
                 
Average Number of Shares Outstanding - Basic  29,064,518   24,450,391   29,049,209   24,744,342 
Average Number of Shares Outstanding - Assuming Dilution  29,720,400   24,677,155   29,982,397   24,977,674 
See accompanying notes.

4


REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

 

 

Three Months Ended

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

 

 

(Unaudited)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

12,286

 

$

6,860

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

8,999

 

 

5,226

 

Gain on sale of assets

 

 

(135

)

 

—  

 

Change in assets and liabilities

 

 

(21,989

)

 

(7,421

)

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(839

)

 

4,665

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(7,213

)

 

(3,408

)

Business acquisitions, net of cash acquired

 

 

(6,197

)

 

—  

 

Sale of property, plant and equipment

 

 

501

 

 

11

 

Other, net

 

 

(252

)

 

(673

)

 

 

 

 

Net cash used in investing activities

 

 

(13,161

)

 

(4,070

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Additions to long-term debt

 

 

15,798

 

 

6,966

 

Dividends paid to shareholders

 

 

(3,483

)

 

(3,004

)

Dividends paid to minority partners

 

 

(1,112

)

 

—  

 

Stock issued under option plans

 

 

268

 

 

502

 

 

 

 

 

Net cash provided by financing activities

 

 

11,471

 

 

4,464

 

EFFECT OF EXCHANGE RATE ON CASH

 

 

136

 

 

1

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

 

(2,393

)

 

5,060

 

Cash and cash equivalents at beginning of period

 

 

31,275

 

 

9,100

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

28,882

 

$

14,160

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

7,027

 

$

1,392

 

Income taxes

 

$

4,929

 

$

4,814

 

         
  (Unaudited)
  Six Months Ended
  June 29, June 29,
  2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
        
Net income $30,731  $14,489 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  18,845   11,031 
Gain on sale of assets  (101)  — 
Change in assets and liabilities  (15,718)  (9,209)
         
Net cash provided by operating activities  33,757   16,311 
         
CASH FLOWS FROM INVESTING ACTIVITIES:
        
Additions to property, plant and equipment  (15,549)  (6,699)
Business acquisitions, net of cash acquired  (5,490)  — 
Sale of property, plant and equipment  4,156   1,169 
Other, net  (344)  (2,828)
         
Net cash used in investing activities  (17,227)  (8,358)
         
CASH FLOWS FROM FINANCING ACTIVITIES:
        
Proceeds from (payment of) long-term debt  (11,018)  18,976 
Repurchase of common stock  —   (12,499)
Dividends paid to shareholders  (6,968)  (6,011)
Dividends paid to minority partners  (1,315)  — 
Stock issued under option plans  1,146   553 
Capitalized financing fees  —   (3,801)
         
Net cash used in financing activities  (18,155)  (2,782)
         
EFFECT OF EXCHANGE RATE ON CASH
  (584)  12 
         
         
Net (decrease) increase in cash and cash equivalents  (2,209)  5,159 
Cash and cash equivalents at beginning of period  31,275   9,100 
         
Cash and cash equivalents at end of period $29,066  $14,259 
         
         
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
        
Cash paid for:        
Interest $10,628  $2,234 
Income taxes $5,497  $5,559 
See accompanying notes.

5


REGAL-BELOIT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31,June 29, 2005
(Unaudited)

1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of REGAL-BELOIT Corporation and its wholly owned subsidiaries and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. All adjustments which management believes are necessary for a fair presentation of the results for the interim periods presented have been reflected and are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested theseThese statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004 Annual Report”).

2. INVENTORIES
Cost for approximately 88% 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 is as follows:

 

 

March 31,
2005

 

December 31,
2004

 

 

 

 

 

Raw Material

 

 

13

%

 

13

%

Work-in Process

 

 

25

%

 

25

%

Finished Goods

 

 

62

%

 

62

%

         
  June 29, 2005 December 31, 2004
Raw Material  14%  13%
Work-in Process  25%  25%
Finished Goods  61%  62%
3. COMPREHENSIVE INCOME
The Company’s comprehensive income for the first quarterssecond quarter and six months of 2005 and 2004 is as follows:

 

 

First Quarter Ending

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Net income as reported

 

$

12,286

 

$

6,860

 

Comprehensive income from:

 

 

 

 

 

 

 

Cumulative translation adjustments

 

 

(1,249

)

 

(22

)

Changes in fair value of hedging activities, net of tax

 

 

2,699

 

 

365

 

Hedging activities reclassified into earnings from AOCI

 

 

(1,105

)

 

(216

)

 

 

 

 

 

 

 

345

 

 

127

 

 

 

 

 

Comprehensive income

 

$

12,631

 

$

6,987

 

 

 

 

 

                 
      (In Thousands of Dollars)    
  Second Quarter Ended Six Months Ended
  June 29, June 29, June 29, June 29,
  2005 2004 2005 2004
Net income as reported $18,445  $7,629  $30,731  $14,489 
Comprehensive income (expense) from:                
Cumulative translation adjustments  (729)  (592)  (1,978)  (615)
Changes in fair value of hedging activities, net of tax  2,409   (91)  5,108   190 
Hedging activities reclassified into earnings from accumulated other comprehensive income (“AOCI”), net of tax  (73)  (49)  (1,178)  (180)
                 
   1,607   (732)  1,952   (605)
                 
Comprehensive income $20,052  $6,897  $32,683  $13,884 
                 
4. WARRANTY COSTS
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the first quarterssecond quarter and six months of 2005 and 2004:

 

 

First Quarter Ending

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Beginning balance

 

$

5,007

 

$

2,953

 

Deduct:  Payments

 

 

(1,656

)

 

(1,116

)

Add:  Provision

 

 

1,886

 

 

1,129

 

 

 

 

 

Ending balance

 

$

5,237

 

$

2,966

 

 

 

 

 

                 
  (In Thousands of Dollars)
  Second Quarter Ended Six Months Ended
  June 29, June 29, June 29, June 29,
  2005 2004 2005 2004
Beginning balance $5,237  $2,966  $5,007  $2,953 
Deduct: Payments  (1,149)  (1,104)  (2,805)  (2,220)
Add: Provision  1,527   1,161   3,413   2,290 
                 
Ending balance $5,615  $3,023  $5,615  $3,023 
                 

6


5. BUSINESS SEGMENTS
The Company operates two strategic businesses that are reportable segments: Mechanical and Electrical.

 

 

Mechanical Segment
First Quarter

 

Electrical Segment
First Quarter

 

 

 

 

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Net sales

 

$

48,601

 

$

46,898

 

$

289,222

 

$

116,186

 

Income from operations

 

$

2,738

 

$

2,745

 

$

23,127

 

$

9,699

 

Income from operations as a% of net sales

 

 

5.6

%

 

5.9

%

 

8.0

%

 

8.3

%

Goodwill at end of period

 

$

530

 

$

530

 

$

552,442

 

$

310,686

 

                                 
  (In Thousands of Dollars)
      Mechanical Segment         Electrical Segment    
  Second Quarter Six Months Second Quarter Six Months
  June 29, June 29, June 29, June 29, June 29, June 29, June 29, June 29,
  2005 2004 2005 2004 2005 2004 2005 2004
Net Sales $51,546  $51,142  $100,147  $98,040  $317,222  $126,510  $606,444  $242,696 
Income from Operations $3,139  $3,889  $5,876  $6,634  $32,672  $10,285  $55,800  $20,072 
-% of Net Sales  6.1%  7.6%  5.9%  6.8%  10.3%  8.1%  9.2%  8.3%
Goodwill at end of period $530  $530  $530  $530  $553,508  $310,686  $553,508  $310,686 
6. GOODWILL AND OTHER INTANGIBLES
Changes in the carrying amount of goodwill for the 3six months ended March 31,June 29, 2005 are as follows (in millions):

 

 

Electrical
Segment

 

Mechanical
Segment

 

 Total

 

 

 

 

 

 

Balance as of December 31, 2004

 

$

543.9

 

$

0.5

 

$

544.4

 

GE HVAC acquisition valuation adjustments

 

 

4.3

 

 

—  

 

 

4.3

 

GE HVAC and CAC acquisition costs

 

 

3.3

 

 

—  

 

 

3.3

 

Acquisition of Changzhou Modern Technologies

 

 

.9

 

 

—  

 

 

.9

 

 

 

 

 

 

Balance as of March 31, 2005

 

$

552.4

 

$

0.5

 

$

552.9

 

 

 

 

 

 

             
  Electrical Mechanical  
  Segment Segment Total
Balance as of December 31, 2004 $543.9  $0.5  $544.4 
GE HVAC acquisition adjustments  5.4   —   5.4 
GE HVAC and CAC acquisition costs  3.3   —   3.3 
Acquisition of Changzhou Modern Technologies  .9   —   .9 
             
Balance as of June 29, 2005 $553.5  $0.5  $554.0 
             
Preliminary appraisals by an independent valuation firm have been made of the tangible and intangible assets purchased with the GE HVAC Motors and Capacitors businesses and the GE Commercial AC Motors business in 2004 as well as with the February 2005 acquisition of Changzhou Modern Technologies.2004. The preliminary valuation adjustments result from management’s review and valuation of acquired assets of the businesses. For the period ending March 31,six months ended June 29, 2005, the valuationabove adjustments result primarily from the adjustment of finished goods inventory to fair market value.

Other intangible assets consisted of the following (in millions):
                 
  December 31, 2004
  Weighted – Carrying Accumulated  
  Average Life (yrs) Amount Amortization Net
Amortized intangible assets:                
Non-Compete Agreements  5.0  $2.5  $0.0  $2.5 
Trademarks  4.0   4.9   0.4   4.5 
Patents  10.0   15.4   0.0   15.4 
Engineering Drawings  10.0   1.2   0.0   1.2 
Customer Relationships  10.0   28.6   0.2   28.4 
                 
Total  9.2  $52.6  $0.6  $52.0 
                 
                 
  June 29, 2005
  Weighted – Carrying Accumulated  
  Average Life (yrs) Amount Amortization Net
Amortized intangible assets:                
Non-Compete Agreements  5.0  $2.5  $0.3  $2.2 
Trademarks  4.0   4.9   1.1   3.8 
Patents  10.0   15.4   0.8   14.6 
Engineering Drawings  10.0   1.2   0.1   1.1 
Customer Relationships  10.0   28.6   1.4   27.2 
                 
Total  9.2  $52.6  $3.7  $48.9 
                 

7

 

 

December 31, 2004

 

 

 

 

 

 

Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

Non-Compete Agreements

 

$

2.5

 

$

0.0

 

$

2.5

 

Trademarks

 

 

4.9

 

 

0.4

 

 

4.5

 

Patents

 

 

15.4

 

 

0.0

 

 

15.4

 

Engineering Drawings

 

 

1.2

 

 

0.0

 

 

1.2

 

Customer Relationships

 

 

28.6

 

 

0.2

 

 

28.4

 

 

 

 

 

 

Total

 

$

52.6

 

$

0.6

 

$

52.0

 

 

 

 

 

 


 

 

March 31, 2005

 

 

 

 

 

 

Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

Non-Compete Agreements

 

$

2.5

 

$

0.2

 

$

2.3

 

Trademarks

 

 

4.9

 

 

0.7

 

 

4.2

 

Patents

 

 

15.4

 

 

0.4

 

 

15.0

 

Engineering Drawings

 

 

1.2

 

 

0.0

 

 

1.2

 

Customer Relationships

 

 

28.6

 

 

0.8

 

 

27.8

 

 

 

 

 

 

Total

 

$

52.6

 

$

2.1

 

$

50.5

 

 

 

 

 

 

Amortization expense recorded for the six months ended June 29, 2005 was $3.2 million. Estimated amortization expense is $6.4 million in each of 2005, 2006, and 2007, $5.2 million in 2008 and 2009, and $22.5 million thereafter. We perform an annual evaluation of our goodwill and intangible assets in the fourth quarter of each fiscal year for impairment as required by SFAS 142, “Goodwill and Other Intangible Assets”.

7


7. STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation plans under the intrinsic value method in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 23, “Accounting for Stock Issued to Employees”, and related Interpretations. For stock options, no compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying stock. Had compensation cost for these plans been determined consistent with FASB Statement No. 123 “Accounting for Stock-Based Compensation”, the Company’s net income and earnings per share (“EPS”) would have been reduced to the following pro-forma amounts:

 

 

 

First Quarter Ending

 

 

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

 

 

 

 

(In Thousands of Dollars, Except
Per Share Data)

 

Net Income:

 

 

 

 

 

 

 

As reported

 

$

12,286

 

$

6,860

 

Deduct:

Total stock-based employee compensation expense, net of related tax effects

 

 

(467

)

 

(152

)

Add:

Total stock-based employee compensation included in net income, net of related tax effects

 

 

160

 

 

17

 

 

 

 

 

 

Pro-forma

 

$

11,979

 

$

6,725

 

Earnings per share – basic:

 

 

 

 

 

 

 

As reported

 

$

.42

 

$

.27

 

Pro-forma

 

$

.41

 

$

.27

 

Earnings per share – assuming dilution:

 

 

 

 

 

 

 

As reported

 

$

.41

 

$

.27

 

Pro-forma

 

$

.40

 

$

.27

 

                 
  (In Thousands of Dollars)
  Second Quarter Six Months Ended
  June 29, June 29, June 29, June 29,
  2005 2004 2005 2004
Net Income:                
As reported $18,445  $7,629  $30,731  $14,489 
Deduct: Total stock-based employee compensation expense, net of related tax effects  (415)  (229)  (882)  (368)
Add: Total stock-based employee compensation included in net income, net of related tax effects  102   32   262   49 
                 
Pro-forma $18,132  $7,432  $30,111  $14,170 
Earnings per share – basic:                
As reported $.63  $.31  $1.06  $.59 
Pro-forma $.62  $.30  $1.04  $.57 
Earnings per share – assuming dilution:                
As reported $.62  $.31  $1.03  $.58 
Pro-forma $.61  $.30  $1.01  $.57 
The fair value of each stock option is estimated using the Black-Scholes pricing model. The compensation expense included in net income is primarily for restricted stock.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment”, which requires companies to expense the value of employee stock options and similar awards. This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123R(R) has been revised to become123(R) will be effective beginning January 1, 2006. Management is currently assessing the impact of adopting SFAS No. 123(R).

8. PENSION PLANS
The Company accounts for its defined benefit pension plans under the provisions of SFAS No. 87, “Employers’ Accounting for Pensions”. The Company’s net periodic pension cost is comprised of the following components:
                 
  (In Thousands of Dollars)
  Second Quarter Six Months Ended
  June 29, June 29, June 29, June 29,
  2005 2004 2005 2004
Service cost $651  $366  $1,302  $731 
Interest cost  886   902   1,772   1,804 
Expected return on plan assets  (1,123)  (1,073)  (2,246)  (2,147)
Amortization of prior service cost  32   25   64   50 
Amortization of net loss  244   240   488   480 
                 
Net periodic benefit cost $690  $460  $1,380  $918 
                 

8

 

 

First Quarter Ending

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

 

 

(In Thousands of Dollars)

 

Service cost

 

$

651

 

$

365

 

Interest cost

 

 

886

 

 

902

 

Expected return on plan assets

 

 

(1,123

)

 

(1,074

)

Amortization of prior service cost

 

 

32

 

 

25

 

Amortization of net loss

 

 

244

 

 

240

 

 

 

 

 

Net periodic benefit cost

 

$

690

 

$

458

 

 

 

 

 

In the first quarterssecond quarter and six months of 2005, andthe Company contributed $110,000 to defined benefit pension plans. In the comparable periods of 2004, the Company contributed $110,000$279,000 and $348,000, respectively, to defined benefit pension plans. The Company expects to contribute an additional $220,000 over the balance of 2005, for a total of $330,000 in 2005 contributions. 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 2004 Annual Report.

8


9. EARNINGS PER SHARE (EPS)

The numerator for the calculation of basic and diluted earnings per share is net income. The denominator is computed as follows (in thousands):

 

 

First Quarter Ending

 

 

 

 

 

 

March 31,
2005

 

March 30,
2004

 

 

 

 

 

Denominator for basic EPS – weighted average shares

 

 

29,033,901

 

 

25,041,559

 

Effect of dilutive securities

 

 

1,210,492

 

 

236,633

 

 

 

 

 

Denominator for diluted EPS

 

 

30,244,393

 

 

25,278,192

 

                 
  Second Quarter Ended Six Months Ended
  June 29, June 29, June 29, June 29,
  2005 2004 2005 2004
Denominator for basic EPS – weighted average shares  29,065   24,450   29,049   24,744 
Effect of dilutive securities  655   227   933   234 
                 
Denominator for diluted EPS  29,720   24,677   29,982   24,978 
The increase from March 30,June 29, 2004 of nearly 1 millionin dilutive securities in the quarter ending March 31,and six months ended June 29, 2005, was due primarily to the effect of 677,000 shares attributable to the Company’s convertible senior subordinated debt. Options for common shares where the exercise price was above the market price at March 31June 29, totaling 376,000 and 917,000 shares in 2005 and 2004, respectively, have been excluded from the calculation of the effect of dilutive securities, totaling 9,100 and 746,700 shares in 2005 and 2004, respectively.

the effect of such options being anti-dilutive.

10. CONTINGENCIES
An action was filed on June 4, 2004, and amended in September 2004, against one of the Company’s subsidiaries, Marathon Electric Manufacturing Corporation (“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The action was filed in the United States Bankruptcy Court for the Southern District of New York where each of the Enron Wind entities has consolidated its Chapter 11 bankruptcy petition as part of the Enron Corporation bankruptcy proceedings. In the action against Marathon, Enron Wind has asserted various claims relating to the alleged failures and/or degradations of performance of about 564 generators sold by Marathon to Enron Wind from 1997 to 1999. In January 2001, Enron Wind and Marathon entered into a “Generator Warranty and Settlement Agreement and Release of All Claims” (“Warranty Agreement”). This Warranty Agreement resolved various issues related to past performance of the generators, provided a limited warranty related to the generators going forward, and contained a release by all parties of any claims related to the generators other than those arising out of the obligations contained in the Warranty Agreement.

Enron Wind is seeking to recover the purchase price of the generators and transportation costs totaling about $21 million. In addition, although the Warranty Agreement contains a waiver of consequential, incidental, and punitive damages, Enron Wind claims that this limitation is unenforceable and seeks recovery of consequential, incidental and punitive damages incurred by it and by its customers, totaling an additional $100 million. Enron Wind has asserted claims of breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, and intentional interference with contractual relations. Marathon has filed a motion with the court seeking to have many of Enron Wind’s claims dismissed. Enron Wind recently has filed a motion with the court seeking a declaration that Marathon had an obligation under the Warranty Agreement to repair or replace the generators in the first instance regardless of whether an actual breach of warranty had occurred. The court has held hearings on both motions, but has not yet ruled on this motion.

ruled.

The Company believes that this action is without merit and that it has meritorious defenses to the action. The Company intends to defend vigorously all of the asserted claims. The litigation is in an early discovery phase and it is difficult for the Company to predict the impact the litigation may ultimately have on the Company’s results of operations or financial condition, including the expenses the Company may incur to defend against the action. As of March 31,June 29, 2005, no amounts have beenthe Company had recorded a reserve in the Company’sits financial statements solely related to a portion of the anticipated costs in defending against this contingency.

matter.

The Company is, from time to time, party to other lawsuits arising from its normal business operations. It is believed that the outcome of these lawsuits will have no material effect on the Company’s financial position or its results of operations.

9

11. RELATED PARTY TRANSACTIONS
As part of the consideration paid for the acquisition of the HVAC Motors and Capacitors business on December 31, 2004, the Company issued to GE 4,559,048 shares of common stock (approximately 15% of the Company’s common stock issued). In connection with the GE acquisitions, the Company and GE entered into various supply, transition services, and sales agreements. Included in accounts payable on March 31,June 29, 2005 was $16.6$13.8 million consisting of amounts payable to GE related to trade payables, transition services fees payable, and other payables of the businesses acquired from GE in 2004. The amount paid to GE during the second quarter and first six months of 2005 for these items and other liabilities arising at closing was $54.3 million.$28.4 million and $85.0 million, respectively. The amount expensed in the second quarter and first quarterhalf of 2005 for transition services was $3.7$4.7 million and $8.4 million, respectively, which was recorded underin operating expenses.

12. DERIVATIVE INSTRUMENTS
The Company has entered into certain commodity forward contracts and options in connection with the management of its exposure to fluctuations in certain raw material commodity pricing. These derivative instruments have been designated as cash flow hedges. The Company has also entered into foreign currency forward contracts to reduce the exposure to the risks of changes in the exchange rates of the U.S. dollar, where the Company has operations where the functional currency is the local currency.

These contracts 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 a hedge’s change in fair value, if any, is recorded in earnings in the period of change. The impact of ineffectiveness was immaterial in the second quarter and first quartersix months of 2005.

9


In the firstsecond quarter and six months of 2005, $1.6$2.3 million and $3.9 million, respectively, of net increased hedgefair market value of derivative instruments was recorded in AOCI. At March 31,June 29, 2005, the Company had a balance of $3.4$4.7 million in other current assets and a corresponding net after tax gain of $2.1$2.9 million in AOCI. Of the total other current assets and AOCI $.1related to derivative instruments, $1.7 million and $1.0 million, respectively, were related to currency hedges, with the balance relating to commodity hedges.

The Company estimates that $3.7 million of gains will be reclassified from AOCI to earnings within the next 12 months, based on valuations at June 29, 2005.

13. ACQUISITIONS
On February 7, 2005 the Company acquired 95% ownership of Changzhou Modern Technologies Co., LTD. (“CMT”). CMT is located in Changzhou, P.R. of China and will produce fractional electric motors. The purchase price was $3.23 million which the Company will be paidpay over a three-year period.
14. ANNOUNCEMENT OF STOCK OFFERING
On July 27, 2005, the Company announced a proposed offering of 4,750,000 shares of its common stock that is expected to include 1,330,714 primary shares being offered by the Company and 3,419,286 secondary shares being offered by one selling shareholder, GE. The Company and GE expect to grant the underwriters an option to sell up to an additional 712,500 shares on a pro-rata basis to satisfy over-allotments. The shares are being offered pursuant to an effective shelf registration statement that was previously filed with the U.S. Securities and Exchange Commission.
Based on an assumed offering price of $29.56 per share (the last reported sale price on July 26, 2005), the Company estimates that the net proceeds of the primary shares of the common stock (assuming no exercise of the underwriter’s over-allotment option), after deducting the underwriting discount and estimated offering expenses payable by the Company, will be approximately $37.1 million. The Company expects to also receive approximately $4.8 million from GE’s net proceeds of the shares GE is offering to sell, pursuant to the terms of the shareholder agreement between GE and the Company. The referenced shareholder agreement was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated January 6, 2005. The Company plans to use the net proceeds to reduce the outstanding long-term debt of the Company.

10

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this Item 2 to “we”, “us”, “our” or the “Company” refer collectively to REGAL-BELOIT Corporation and its subsidiaries.

RESULTS OF OPERATIONS

Sales for the second quarter of 2005 were $337.8$368.8 million, which is a 107.1%107.5% increase over $163.1$177.7 million in the firstsecond quarter of 2004. Included in the sales are $155were $177.5 million of sales from the Commercial AC Motors and HVAC Motors and Capacitors businesses we acquired in 2004. We continued to see strong demand throughout the majority ofSales in our markets. Electrical segment increased 150.7% including the sales attributable to the acquired businesses. Approximately 93% of the sales increase is attributable to the sales from the acquired businesses. Sales in our Mechanical segment, which reflect the impact of the sale of the Illinois Gear business in May 2005, increased 148.9%.8%. The sale of the Illinois Gear business reduced segment sales by approximately $1.5 million for the second quarter.
Our sales in the first six months of 2005 were $706.6 million, compared to $340.7 million in comparable 2004, an increase of 107.4%. Included in the $706.6 million were $332.6 million of sales from the businesses we acquired from GE. Electrical segment 2005 six months sales were $606.4 million, including the sales from the acquired businesses. This compared to the 2004 first half sales of $242.7 million for our Electrical segment. For the six months of 2005, Mechanical segment sales increased 3.6%were $100.1 million as strong sales at our Hub City, Mastergear, and Durst divisions were partially offset by soft salescompared to $98.0 million in our Cutting Tools and ElectraGear divisions.

Grosscomparable 2004.

Our gross margin for the second quarter of 2005 was 20.3%21.6%, which was consistent withcompared to the fourth23.0% reported in the second quarter of 2004 and compares to 23.4% in20.3% reported for the first quarter of 2004.2005. Gross margins werecontinued to be impacted by continued raw material cost increases which were, only partiallyhowever, mostly offset by pricingprice increases we instituted and productivity actions.  This difference impacted total margins by approximately 70 basis points for the quarter.improvements we achieved. Additionally, the gross margin of the acquired businesses reduced our margins in total, due primarily to our operations in certain higher cost facilities retained by GE, from which we are transitioning our operations. Our gross margin for the current operating cost structure. 

first half of 2005 was 21.0%, compared to 23.2% in the comparable period of 2004.

Operating expenses for the second quarter of 2005 were 12.6%11.9% of sales versus 15.8%15.0% in the firstsecond quarter of 2004, reflecting the volume leveraging of fixed costs and the impact of the acquired GE businesses, which have lower operating expenses as a percent of sales as compared to the remainder of our businesses. Operating expenses in the first half of 2005 were 12.3% of sales versus 15.4% in the comparable period of 2004.
Income from operations in 2005’s firstsecond quarter was $25.9$35.8 million versus $12.4$14.2 million in the firstsecond quarter of 2004, an increase of 108.9%152.7%. As a percent of sales, income from operations was 7.7%9.7% versus 7.6%8.0% in the firstsecond quarter 2004.

Income from operations for the first half of 2005 was $61.7 million, a 130.9% increase from the $26.7 million reported in the comparable period of 2004. As a percent of sales, income from operations was 8.7% versus 7.8% reported for the first six months of 2004.

Interest expense was $5.5 million versus $1.3$5.9 million in the firstsecond quarter of 2005 versus $1.5 million in comparable 2004. This increase was driven by theour higher level of debt outstanding resulting primarily from the funds borrowed for the cash portion of the 2004 acquisitions. Interest expense in the six months of 2005 was $11.3 million versus $2.8 million for the same period of 2004. Our effective tax rate in the firstsecond quarter of 2005 was 37.3%36.7% as compared to 36.0%35.9% in the firstsecond quarter of 2004.

Net

Our net income for the second quarter of 2005 was $12.3$18.4 million, an increase of 78.3%141.8% versus the $6.9$7.6 million reported in the firstsecond quarter of 2004. Fully diluted earnings per share were $.41$.62 which was an increase of 51.9%100.0% versus $.27$.31 in the firstsecond quarter of 2004. The average number of diluted shares in the firstsecond quarter of 2005 was 30,244,393.29,720,400, versus 24,677,155 shares in comparable 2004. The increase in the average number of shares outstanding versus the firstsecond quarter of 2004 resulted primarily from the shares issued to General ElectricGE as part of the consideration paid for the HVAC businessmotors and capacitors businesses we acquired on December 31, 2004. Net income was $30.7 million in the first half of 2005 versus $14.5 million reported in comparable 2004. Fully diluted earnings per share were $1.03, which was an increase of 77.6% versus $.58 for the same period of 2004. The average number of diluted shares was 29,982,397 for the six months of 2005, versus 24,977,674 shares in comparable 2004.

11

LIQUIDITY AND CAPITAL RESOURCES

Our

At June 29, 2005, our working capital (current assets minus current liabilities) was $300.8$299.1 million, at March 31, 2005, a 7.5% increase from$19.4 million above the $279.7 million at year-endDecember 31, 2004. The increase was due primarily to a $24.2 million increase inHigher accounts receivable resulting from increased salesand reduced accounts payable were the most significant factors in the first quarter of 2005, partly offset by increased accrued liabilities.increase. The ratio of our current assets to our current liabilities (“current ratio”) of 2.5:1 at March 31,June 29, 2005 was slightly higher than our current ratio ofrose from 2.4:1 at December 31,year-end 2004.

Our cash flow from operations was $34.6 million in the second quarter of 2005, a $23.0 million increase from $11.6 million in the comparable quarter of 2004. The combination of a $10.8 million (142%) increase in net useincome and a $4.1 million (72%) increase in depreciation and amortization in the second quarter of 2005 versus the comparable period of 2004 accounted for most of the increase in cash flow. At June 29, 2005, accounts receivable were $23.2 million higher than at December 31, 2004, all of $839,000the increase occurring in the first quarter of 2005. The increase in accounts receivable, due to our improved sales volume, partially offset our higher net income and depreciation and amortization, resulting in first half 2005 downoperating cash flow of $33.8 million, a $17.5 million (107%) increase from an increase of $4.7$16.3 million in the first quartersix months of 2004.  The decrease in operating cash flow was due primarily to a $13.0 million greater increase in accounts receivable in the first quarter of 2005 than in comparable 2004. 
Net cash used in investing activities was $13.2$4.1 million during the second quarter of 2005 and was $17.2 million for the first half of 2005. While capital spending of $8.4 million in the second quarter was higher than the $7.2 million in the first quarter of 2005.  Capital spending was $7.22005, $3.6 million of this total, upcash we received from $3.4 millionthe sale of the Illinois Gear business in May reduced our net capital spending. Our capital spending in the same period last yearfirst six months of 2005 of $15.5 million was a 133% increase from the $6.7 million spent in comparable 2004, due primarily to the impact of the acquisitions we made in August and December of 2004. Business acquisitions of $6.2$5.5 million reflected payments made in the first quarter of 2005 for the CMT acquisition and additional payments relating to the 2004 HVAC Motorsmotors and Capacitorscapacitors acquisition. At March 31, 2005, we had $2.1 million of outstanding commitments for future capital expenditures. 
Our cash flows fromused in financing activities were $11.5$29.6 million during the second quarter of 2005, due primarily to borrowings under our revolving credit agreement. 

10

repayment of long-term debt totaling $26.8 million. For the first six months of 2005, the use of cash in financing activities was $18.2 million, which includes long-term debt repayment of $11.0 million.

Our outstanding long-term debt increased from $547.4decreased to $536.9 million at December 31, 2004 toJune 29, 2005 from $563.6 million at March 31, 2005, due primarily to $32.5 million of cash provided by operating activities in the $24.2second quarter of 2005, of which an $11.0 million increasereduction in inventories was a significant factor. Compared to long-term debt of $547.4 million at December 31, 2004, our accounts receivable.long-term debt at June 29, 2005 was $10.5 million lower. Of our total long-term debt, $444.5$417.5 million was outstanding under our $475 million unsecured revolving credit facility that expires on May 5, 2009 (the “Facility”). The Facility permits the Companyus to borrow at interest rates based upon a margin above the London Inter-Bank Offered Rate (“LIBOR”), which margin varies with the ratio of total funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). These interest rates also vary as LIBOR varies. LIBOR has risen a total of 2.4 percentage points since June 2004. We also pay a commitment fee on the unused amount of the $475 million Facility credit limit, which also varies with the ratio of our total debt to our EBITDA. At March 31,June 29, 2005, the Company’sour margin above LIBOR was 1.5% and our commitment fee rate was .3%. The Facility requires us to maintain specified financial ratios and to satisfy certain financial condition tests. We were in compliance with all of these tests as of March 31,June 29, 2005.

In addition to the Facility, at March 31,June 29, 2005 we also had $115 million of convertible senior subordinated debt outstanding at a fixed interest rate of 2.75%. We also had outstanding an additional $4.3$4.9 million of other senior debt. At March 31,June 29, 2005, our borrowing availability was $19.7$58.8 million based on the Facility’s financial covenants.
On July 27, 2005, the Company announced a proposed offering of 4,750,000 shares of its common stock that is expected to include 1,330,714 primary shares being offered by the Company and 3,419,286 secondary shares being offered by one selling shareholder, GE. The Company and GE expect to grant the underwriters an option to sell up to an additional 712,500 shares on a pro-rata basis to satisfy over-allotments. The shares are being offered pursuant to an effective shelf registration statement that was previously filed with the U.S. Securities and Exchange Commission.

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Based on an assumed offering price of $29.56 per share (the last reported sale price on July 26, 2005), the Company estimates that the net proceeds of the primary shares of the common stock (assuming no exercise of the underwriter’s over-allotment option), after deducting the underwriting discount and estimated offering expenses payable by the Company, will be approximately $37.1 million. The Company expects to also receive approximately $4.8 million from GE’s net proceeds of the shares GE is offering to sell, pursuant to the terms of the shareholder agreement between GE and the Company. The referenced shareholder agreement was filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated January 6, 2005. The Company plans to use the net proceeds to reduce the outstanding long-term debt of the Company.
CRITICAL ACCOUNTING POLICIES

Revenue Recognition
The Company recognizes revenue upon transfer of title, which generally occurs upon shipment of the product to the customer. The pricing of products sold is generally supported by customer purchase orders, and accounts receivable collection is reasonably assured at the time of shipment. Estimated discounts and rebates are recorded as a reduction of sales in the same period revenue is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical experience. Shipping and handling costs are recorded as revenue when billed to the customers.

Goodwill and Other Intangibles
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized; however it is tested for impairment at least annually, with any resulting adjustment charged to the results of operations. Amortization continues to be recorded for other intangible assets with definite lives.

Retirement Plans
Approximately half of our domestic employees are covered by defined benefit pension plans with the remaining domestic employees covered by defined contribution plans. The large majority of our foreign employees are covered by mandated government programs. Our obligations under our domestic defined benefit plans are determined with the assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide us with information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases. Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from assumptions, annual expenses and recorded assets or liabilities of these defined benefit plans may change significantly from year to year. Based on our annual review of actuarial assumptions as well as historical rates of return on plan assets and existing long-term bond rates, we set the long-term rate of return on plan assets at 8.75% and the discount rate at 5.75% for our defined benefit plans as of December 31, 2004. We expect our domestic defined benefit pension expenses in 2005 to increase approximately $1.8 million from 2004, due primarily to the two acquisitions we made from GE in 2004.

Use of Estimates and Assumptions
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which requires companies to expense the value of employee stock options and similar awards. This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. This Statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123R(R) has been revised to become effective beginning January 1, 2006. Management is currently assessing the impact of adopting SFAS No. 123(R).

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In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). This statement changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, where practical to do so. This statement is applicable for fiscal years beginning after December 15, 2005. The Company does not anticipate that this standard will have a material effect on its financial position, results of operations or cash flows.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk relating to the Company’s operations due to changes in interest rates, foreign currency exchange rates and commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating and financing activities and derivative financial instruments such as commodity cash flow hedges and foreign currency forward exchange contracts.

The Company is exposed to interest rate risk on certain of its short-term and long-term debt obligations used to finance our operations and acquisitions. At March 31,June 29, 2005, we had $115.9 million of fixed rate debt and $447.9$421.5 million of variable rate debt, the latter subject to interest rate risk. The variable rate debt is under a credit facility with an interest rate based on a margin above LIBOR. As a result, interest rate changes impact future earnings and cash flow assuming other factors are constant. A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt at March 31,June 29, 2005, would result in a change in after-tax annualized earnings of approximately $795,000.

$1.2 million.

The Company periodically enters into commodity futures and options hedging transactions to reduce the impact of changing copper and aluminum commodity prices. Contract terms of commodity hedge instruments generally mirror those of the hedged item, providing a high degree of risk reduction and correlation.

We are also exposed to foreign currency risks that arise from normal business operations. These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies. Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency contracts to manage our exposure on the transactions denominated in currencies other than the applicable functional currency. Due to our two acquisitions in August and December 2004, we have significantly increased our manufacturing operations outside the United States. In the first quarterhalf of 2005, we began to enter into contracts to hedge certainforeign-currency denominated forecasted foreign operations transactions. Contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries. It is our policy not to enter into derivative financial instruments for speculative purposes.
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. 

immaterial for all periods included in this report.

In the firstsecond quarter and six months of 2005, $1.6$2.3 million and $3.9 million, respectively, of net increased hedge value was recorded in AOCI. At March 31,June 29, 2005, we had a balance of $3.4$4.7 million in other current assets and a corresponding net after tax gain of $2.1$2.9 million in AOCI, representing the fair market value of cash flow commodity and foreign currency hedges. Of the total other current assets and AOCI values, $.1$1.7 and $1.0 million, respectively, related to currency hedges, with the balance relating to commodity hedges.

hedges and translation adjustments.

Item 4.Controls and Procedures

a.     

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 arewere effective in recording, processing,

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summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting. There have not been anywere 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.

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PART II
OTHER INFORMATION
Item 1.Legal Proceedings
An action was filed on June 4, 2004, and amended in September 2004, against one of the Company’s subsidiaries, Marathon Electric Manufacturing Corporation (“Marathon”), by Enron Wind Energy Systems, LLC, Enron Wind Contractors, LLC and Zond Minnesota Construction Company, LLC (collectively, “Enron Wind”). The action was filed in the United States Bankruptcy Court for the Southern District of New York where each of the Enron Wind entities has consolidated its Chapter 11 bankruptcy petition as part of the Enron Corporation bankruptcy proceedings. In the action against Marathon, Enron Wind has asserted various claims relating to the alleged failures and/or degradations of performance of about 564 generators sold by Marathon to Enron Wind from 1997 to 1999. In January 2001, Enron Wind and Marathon entered into a “Generator Warranty and Settlement Agreement and Release of All Claims” (“Warranty Agreement”). This Warranty Agreement resolved various issues related to past performance of the generators, provided a limited warranty related to the generators going forward, and contained a release by all parties of any claims related to the generators other than those arising out of the obligations contained in the Warranty Agreement.
Enron Wind is seeking to recover the purchase price of the generators and transportation costs totaling about $21 million. In addition, although the Warranty Agreement contains a waiver of consequential, incidental, and punitive damages, Enron Wind claims that this limitation is unenforceable and seeks recovery of consequential, incidental and punitive damages incurred by it and by its customers, totaling an additional $100 million. Enron Wind has asserted claims of breach of contract, breach of the implied covenant of good faith and fair dealing, promissory fraud, and intentional interference with contractual relations. Marathon has filed a motion with the court seeking to have many of Enron Wind’s claims dismissed. Enron Wind recently has filed a motion with the court seeking a declaration that Marathon had an obligation under the Warranty Agreement to repair or replace the generators in the first instance regardless of whether an actual breach of warranty had occurred. The court has held hearings on both motions, but has not yet ruled.
The Company believes that this action is without merit and that it has meritorious defenses to the action. The Company intends to defend vigorously all of the asserted claims. The litigation is in an early discovery phase and it is difficult for the Company to predict the impact the litigation may ultimately have on the Company’s results of operations or financial condition, including the expenses the Company may incur to defend against the action. As of June 29, 2005, the Company had recorded a reserve in its financial statements solely related to a portion of the anticipated costs in defending against this matter.
The Company is, from time to time, party to other lawsuits arising from its normal business operations. It is believed that the outcome of these lawsuits will have no material effect on the Company’s financial position or its results of operations.

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Item 4.Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of Shareholders of REGAL-BELOIT Corporation was held on April 22, 2005.
b) The terms of Directors Christopher L. Doerr, G. Frederick Kasten, Henry W. Knueppel, John A. McKay and James L. Packard
    were continued.
c) Matters voted on at the Annual Meeting and the results of each vote were as follows:
     1. Elect three Class C Directors for a term of three years.
         
Name
 For Withheld
J. Reed Coleman  23,629,004   1,214,644 
Stephen N. Graff  23,960,534   883,114 
Thomas J. Fischer  24,033,157   810,491 

Item 6. Exhibits

a)  Exhibits

Exhibit Number

Exhibit Description

3.1

Exhibit Number

Exhibit Description

Bylaws of the Registrant, as amended on April 22, 2005, filed herewith.

3.2

10.1

Second Amendment, dated January 25, 2005,Amendments to the Amended and Restated Credit AgreementBylaws of the Registrant [Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated April 28, 2005 (file #001-07283)].

4.1Letter agreement, dated as of May 5, 2004, among31, 2005, between REGAL-BELOIT Corporation and various financial institutions, filed herein.

General Electric Company [Incorporated by reference to Exhibit 4.1 of REGAL-BELOIT Corporation’s Current Report on Form 8-K dated June 6, 2005 (file #001-07283)].

31.1

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

32

Section of 1350 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

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)

REGAL-BELOIT CORPORATION

                  (Registrant)

/S/ DAVID A. BARTA

/S/ David A. Barta

David A. Barta
Vice President -— Chief Financial Officer

(Principal Accounting and Financial Officer)

DATE:August 8, 2005

DATE:     May 10, 2005

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Index to Exhibits
Exhibit NumberExhibit Description
3.1Bylaws of the Registrant, as amended on April 22, 2005, filed herewith.
3.2Amendments to the Bylaws of the Registrant [Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated April 28, 2005 (file #001-07283)].
4.1Letter agreement, dated as of May 31, 2005, between REGAL-BELOIT Corporation and General Electric Company [Incorporated by reference to Exhibit 4.1 of REGAL-BELOIT Corporation’s Current Report on Form 8-K dated June 6, 2005 (file #001-07283)].
31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.