SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 1-7283
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REGAL-BELOIT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin 39-0875718
(State of Incorporation) (I.R.S. Employer
Identification No.)
200 State Street
Beloit, Wisconsin 53511-6254
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (608) 364-8800
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Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
----------------
Common Stock ($.01 Par Value) American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act ...........None
(Title of Class)
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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 |X| No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 2002 was approximately $609,000,000.
On March 20, 2002 the registrant had outstanding 25,000,135 shares of common
stock, $.01 par value, which is registrant's only class of common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for 2002 Annual Meeting of Shareholders (to be
filed with the Commission under Regulation 14A within 120 days after the end of
the registrant's fiscal year and, upon such filing, to be incorporated by
reference into Part III)
REGAL-BELOIT CORPORATION
Index to
Annual Report on Form 10-K
For the Year Ended December 31, 2001
Page
PART I
Item 1. Business...................................................... 2
Item 2. Properties.................................................... 10
Item 3. Legal Proceedings............................................. 10
Item 4. Submission of Matters To A Vote of Security Holders........... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters.......................................... 11
Item 6. Selected Financial Data....................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 12
Item 8. Financial Statements and Supplementary Data................... 16
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant............ 30
Item 11. Executive Compensation........................................ 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 31
Item 13. Certain Relationships and Related Transactions................ 31
PART IV
Item 14. Financial Statements, Financial Statement Schedule,
Exhibits and Reports on Form 8-K............................. 31
Signatures 32
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 Annual Report on Form 10-K or incorporated by
reference may be forward looking statements. Actual results may differ
materially from those contemplated. Forward looking statements involve risks and
uncertainties, including but not limited to the following risks: 1) cyclical
downturns affecting the markets for capital goods, 2) our ability to achieve
anticipated synergies in our acquired businesses, 3) substantial increases in
interest rates that impact the cost of the Company's outstanding debt, 4) our
ability to satisfy various covenant requirements under our existing credit
facility, 5) the success of Management in increasing sales and maintaining or
improving the operating margins of its businesses, 6) the availability of or
material increases in the costs of select raw materials or parts, and 7) actions
taken by competitors. Investors are directed to the Company's documents filed
with the Securities and Exchange Commission.
PART I
Unless the context requires otherwise, references in this Annual Report
to "we," "us" or "our" refer collectively to REGAL-BELOIT CORPORATION and its
subsidiaries.
ITEM 1. Business
Our Company
We are a leading manufacturer and marketer of industrial electric motors,
electric power generation components and controls, mechanical motion control
products, and cutting tools, serving markets predominantly in the United States
as well as throughout the world. Our products are used in a variety of essential
industrial applications, and we believe we have one of the most comprehensive
product lines in the markets we serve. We sell our products using more than 20
recognized brand names through a multi-channel distribution model, which we
believe provides us with a competitive selling advantage and allows us to more
fully penetrate our target markets.
Our business is organized in two segments: our electrical group, which
represented 69% of our 2001 net sales, and our mechanical group, which
represented 31% of our 2001 net sales. Our electrical group manufactures and
markets a full line of alternating current (AC) and direct current (DC)
industrial electric motors, electric power generation components and controls,
and electrical connecting devices. Our mechanical group manufactures and markets
a broad array of mechanical products, including gears and gearboxes, marine
transmissions, high-performance automotive transmissions and ring and pinions,
manual valve actuators, and cutting tools. Original equipment manufacturers and
end users in a variety of motion control and other industrial applications
increasingly combine the types of electrical and mechanical products we offer.
We seek to take advantage of this trend and to enhance our market penetration by
leveraging cross-marketing and product line bundling opportunities between
products in our electrical and mechanical groups.
We sell our products directly to original equipment manufacturers and
distributors across many markets. Our two business segments are divided into
multiple business units, with each unit typically having its own branded product
offering and sales organization. These sales organizations consist of varying
combinations of our own internal direct sales people as well as exclusive and
non-exclusive manufacturers' representative organizations. We manufacture the
vast majority of the products that we sell and have manufacturing, sales and
distribution facilities throughout the United States and Canada as well as in
Europe and the Far East.
We believe our competitive strengths include our:
o leadership in our major market segments
o comprehensive product offering and leading brands
o multi-channel and multi-brand distribution model
o rapid response capabilities o product development focus
o broad and diverse customer base
o experienced management team
Our business strategy includes growing revenues organically in excess of
market rates, continuously lowering our manufacturing costs and pursuing
strategic acquisitions. Our specific revenue growth initiatives include:
o leveraging cross-marketing and product line bundling opportunities
o introducing new products
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o capturing custom product sales
o growing our power generation business
Major initiatives in process to lower our manufacturing costs include completing
the integration of Leeson Electric Corporation and capitalizing on operating
synergies from the acquisition; further improving our operational efficiencies;
and focusing on sourcing and logistics opportunities. We will also seek to
broaden our market coverage by acquiring businesses and product lines that
provide a strategic fit with our existing businesses.
Electrical Group
Our electrical group manufactures and markets a full line of AC and DC
industrial electric motors, electric power generation components and controls,
and electrical connecting devices. We entered the industrial electric motor and
electric power generation markets in March 1997 with our acquisition of Marathon
Electric Manufacturing Corporation. Subsequent acquisitions of the Lincoln
Motors business of Lincoln Electric Holdings, Inc. in 1999, Thomson Technology,
Inc. in 2000 and Leeson Electric Corporation in 2000 have been integrated to
form our current electrical group. Our expansion into the electric motor and
electric power generation markets in 1997 was part of our strategy to leverage
our core competencies in industrial manufacturing and to complement our existing
mechanical businesses. We estimate that a substantial portion of the mechanical
motion control products that we manufacture are powered by an electric motor.
Our electrical group manufactures and markets AC and DC industrial electric
motors ranging in size from sub-fractional to large integral horsepowers through
800 horsepower in AC and from sub-fractional through small integral horsepowers
in DC. We offer approximately 5,500 stock models of electric motors in addition
to the motors we produce to specific customer specifications. We also produce
and market precision servo motors, electric generators ranging in size from five
kilowatts through four megawatts, automatic transfer switches and paralleling
switchgear to interconnect and control electric power generation equipment and
electrical connecting devices such as terminal blocks, fuse holders and power
blocks. Additionally, our electrical group markets a line of AC and DC
adjustable speed drives. We sell our electrical group products to distributors,
original equipment manufacturers and end users across many markets.
In 2001, we created, within the electrical group, our motor technologies group
to fully leverage potential efficiencies across our electric motor operations.
This motor technologies group will centralize and manage the manufacturing,
purchasing, engineering, accounting, information technology and quality control
activities of our Marathon, Lincoln and Leeson electric motor businesses.
Furthermore, the motor technologies group is specifically fostering the sharing
of best practices across each of the three motor businesses and creating focused
centers of excellence in each of our motor manufacturing functions.
Our power generation business, which includes electric generators and power
generation components and controls, represents a significant and growing portion
of our electrical group net sales. The market for electric power generation
components and controls is growing as a result of a desire on the part of end
users to reduce losses due to power disturbances. We intend to continue to seek
ways to take advantage of the growing market for prime and standby power
generation in the United States and overseas by expanding our line of generators
to meet higher and more sophisticated power generation requirements. With our
June 2000 acquisition of Thomson Technology, we specifically targeted the
emerging power generation controls market and now offer automatic transfer
switches, paralleling switchgear and controls, and systems controls. When these
control products are bundled with our Marathon generators, we are able to
provide critical components of a system solution to power generation markets
throughout the world.
3
The following is a description of our major electrical group businesses
and the primary products that they manufacture and market:
Leeson Electric. Manufactures AC motors up to 800 horsepower and DC
motors up to five horsepower, gear reducers, gearmotors and drives primarily for
the power transmission, pump, food processing, fitness equipment and industrial
machinery markets.
Lincoln Motors. Manufactures AC motors from 1/4 horsepower to 800
horsepower primarily for industrial and commercial pumps, compressors, elevator
and machine tools, and specialty products.
Marathon Electric. Manufactures AC motors up to 800 horsepower primarily
for HVAC, pumps, power transmissions, fans and blowers, compressors, agriculture
products, processing and industrial manufacturing equipment.
Marathon Generators. Manufactures AC generators from five kilowatts to
four megawatts that primarily serve the standby power, prime power,
refrigeration, irrigation and wind power markets.
Marathon Special Products. Manufactures fuse holders, terminal blocks,
and power blocks primarily for the HVAC, telecommunications, electric control
panel, utilities and transportation markets.
Thomson Technology. Manufactures automatic transfer switches, paralleling
switchgear and controls, and systems controls primarily for the electric power
generation market.
Mechanical Group
Our mechanical group manufactures and markets a broad array of mechanical motion
control products and cutting tools. Our products include: standard and custom
worm gear, bevel gear, helical gear and concentric shaft gearboxes; marine
transmissions; high-performance after-market automotive transmissions and ring
and pinions; custom gearing; gearmotors; manual valve actuators and cutting
tools. Our gear and transmission related products primarily control motion by
transmitting power from a source, such as a motor or engine, to an end use, such
as a conveyor belt, usually reducing speed and increasing torque in the process.
Our valve actuators are used primarily in oil and gas, water distribution and
treatment and chemical processing applications. Our high-speed steel and carbide
rotary perishable cutting tools are used in metalworking applications.
Mechanical group products are sold to original equipment manufacturers,
distributors and end users across many industry segments.
The following is a description of our major mechanical group businesses and the
primary products they manufacture and market:
CML (Costruzioni Meccaniche Legnanesi S.r.L.). Manufactures bevel gear
valve actuators primarily for the oil, gas, wastewater and water distribution
markets.
Durst. Manufactures standard and specialized industrial transmissions and
hydraulic pump drives primarily for the construction, agriculture, energy,
material handling, forestry, lawn and garden and railroad maintenance markets.
Electra-Gear. Manufactures specialized aluminum gear reducers and
gearmotors primarily for the food processing, medical equipment, material
handling and packaging markets.
Foote-Jones/Illinois Gear. Manufactures large-scale parallel shaft and
right-angle gear drives and custom gears up to 100 inches in diameter primarily
for the mining, oil, pulp and paper, forestry, aggregate, construction and steel
markets.
Grove Gear. Manufactures standard and custom industrial gear reducers
primarily for the material handling, food processing, robotics, healthcare and
power transmission markets.
4
Hub City. Manufactures gear drives, sub-fractional horsepower gearmotors,
mounted bearings and accessories primarily for the packaging, construction,
material handling, healthcare and food processing markets.
Mastergear. Manufactures manual valve actuators for liquid and gas flow
control primarily for the petrochemical processing, fire protection and
wastewater markets.
New York Twist Drill. Manufactures a full line of industrial quality
cutting tools in high speed steel and carbide primarily for the aerospace,
automotive, railroad and general manufacturing markets.
Ohio Gear. Manufactures gear reducers and gearmotors primarily for the
material handling, lawn and garden vehicle and food processing markets.
Opperman Mastergear, Ltd. Manufactures valve actuators and industrial
gear drives primarily for the material handling, agriculture, mining and liquid
and gas flow control markets.
Regal Cutting Tools. Manufactures high-speed steel and carbide rotary
cutting tools primarily for the aerospace, agriculture, automotive and general
industrial markets.
Richmond Gear. Manufactures ring and pinions and transmissions primarily
for the high-performance automotive aftermarket.
Velvet Drive Transmissions. Manufactures marine and industrial
transmissions primarily for the pleasure boat, off-road vehicle and forestry
markets.
The Building of Our Business
Our growth from our founding as a producer of high-speed cutting tools in 1955
to our current size and status has largely been the result of the acquisition
and integration of 37 businesses to build a strong multi-product offering. Our
senior management has substantial experience in the acquisition and integration
of businesses, aggressive cost management, and efficient manufacturing
techniques, all of which represent activities that are critical to our long-term
growth strategy. Since 1979, our current management team has completed and
successfully integrated 22 acquisitions. We have a proven track record of
acquiring complementary businesses and product lines, integrating their
activities into our organization and aggressively managing their cost structures
to reduce waste and unnecessary expenditures. The history of our major
electrical and mechanical group acquisitions since 1990 is outlined below.
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Annual Revenues
Year at Acquisition
Business/Product Line Acquired (in millions) Product Listing at Acquisition
--------------------- -------- ------------- ------------------------------
Electrical Group
Leeson Electric Corporation 2000 $175 AC motors (to 350 horsepower) and DC motors
(to 3 horsepower) gear reducers, gearmotors
and drives
Thomson Technology, Inc. 2000 $14 Automatic transfer switches, paralleling
switchgear and controls, and systems controls
Lincoln Motors 1999 $50 AC motors (1/4 to 800 horsepower)
Marathon Electric Manufacturing 1997 $245 AC motors (to 500 horsepower), AC generators
Corporation (5 kilowatt to 2.5 megawatt), fuse holders,
terminal blocks and power blocks
Mechanical Group
Spiral bevel gear product 2001 $4 Spiral bevel gears
line of Philadelphia Gear
Velvet Drive Transmissions 1995 $27 Marine and industrial transmissions
Hub City, Inc. 1992 $44 Gear drives, sub-fractional horsepower
gearmotors, mounted bearings and accessories
Opperman Mastergear, Ltd. 1991 $20 Manual valve actuators for liquid and gas
(U.K., U.S. and Germany) flow control and industrial gear drives
Sales, Marketing and Distribution
We sell our products directly to original equipment manufacturers and
distributors across many markets. Our two business segments are divided into
multiple business units, with each unit typically having its own branded product
offering and sales organization. These sales organizations consist of varying
combinations of our own internal direct sales people as well as exclusive and
non-exclusive manufacturers' representative organizations. On a combined basis,
our individual business units' sales organizations consist of more than 120
direct sales employees and 430 exclusive and non-exclusive manufacturers'
representatives from 170 organizations as of January 2002. In 2001, across all
of our business units, we sold products to more than 6,500 original equipment
manufacturers and 11,000 distributors.
We believe that our effective use of information technology significantly
enhances our ability to provide customer focused quality and further
differentiates us from many of our competitors. Our website allows customers
easy access to business and product information, and contains the latest product
introductions, distributor information, installation manuals, technical
bulletins and customer service. For example, through our electrical group
websites, we have an e-commerce portal that provides our independent
manufacturers' representatives, distributors and employees with constant access
to real-time information such as account status, order status, engineering and
competitive information, stock product availability, pricing and order entry. In
addition, customers are able to search our stock catalogs for motor, gearmotor,
drive, part or catalog number.
Markets and Competitors
The overall market for our electrical products is estimated at $8 billion
annually, although we believe that we compete primarily in the industrial sector
of the domestic electric motor market, a $2.5 billion segment of the overall
market. We believe approximately 60% of all electricity generated in the U.S.
runs through electric motors. With the acquisitions of Marathon Electric in
1997, Lincoln Motors in 1999 and Leeson Electric in 2000, we believe we have
become one of the largest producers of industrial electric motors in the United
States and hold a market position in this segment close to Baldor Electric
Company, the current market leader. In addition, we believe that we are the
largest electric generator manufacturer in the United States that is not
affiliated with a diesel engine manufacturer. Major domestic competitors for the
electrical group other than Baldor Electric include U.S. Electrical Motors (a
division of Emerson
6
Electric Co.), Reliance Electric Company (a division of Rockwell International),
General Electric Company and Newage (a division of Cummins, Inc). Major foreign
competitors include Siemens AG, Toshiba Corporation, Weg S.A., Leroy-Somer, Inc.
and ABB Ltd.
Our mechanical group serves various markets and competes with a number of
different companies depending on the particular product offering. We believe
that we are the leading manufacturer of several products offered by our
mechanical group and that we are the leading manufacturer in the United States
of worm gear drives and bevel gear drives. Our competitors in these markets
include Boston Gear (a division of Colfax Corporation), Reliance Electric
Company (a division of Rockwell International), Emerson Electric Co. and
Winsmith (a division of Peerless-Winsmith, Inc.). Major foreign competitors
include SEW Eurodrive GmbH & Co., Flender GmbH, Sumitomo Corporation and Zahnrad
Fabrik GmbH & Co.
During the past several years, niche product market opportunities have become
more prevalent due to changing market conditions. Our markets have also been
impacted by decisions by larger manufacturers not to compete in lower volume or
specialized markets. Other manufacturers, which historically may have made
component products for inclusion in their finished goods, have chosen to
outsource their requirements to specialized manufacturers like us because we can
make these products more cost effectively. In addition, we have capitalized on
this competitive climate by making acquisitions and increasing our manufacturing
efficiencies. Some of these acquisitions have created new opportunities by
allowing us to enter new markets in which we had not been involved. In practice,
our operating units have sought out specific niche markets concentrating on a
wide diversity of customers and applications. We believe that we compete
primarily on the basis of quality, price, service and our promptness of
delivery.
Product Development and Engineering
Each of our business units has its own product development and design teams that
continuously enhance our existing products and develop new products for our
growing base of customers that require custom solutions. We have one of the
electric motor industry's most sophisticated product development and testing
laboratories. We believe these capabilities provide a significant competitive
advantage in the development of high quality motors and electric generators
incorporating leading design characteristics such as low vibration, low noise,
improved safety, reliability and enhanced energy efficiency. An example of the
success of our research and development efforts is our recently introduced line
of microMAXTM AC inverter duty motors, which won the 2001 "Product of the Year"
award in its category from Plant Engineering magazine.
We are continuing to expand our business by developing new, differentiated
products in each of our business segments. We work closely with our customers to
develop new products or enhancements to existing products that improve
performance and meet their needs. For example, we have redesigned more than 50%
of our electric motor line to meet the new NEMA Premium Compliant Electric Motor
standards. These redesigned motors offer increased efficiency that results in
significant cost savings for customers over previous models. In addition, we
have recently introduced many new product lines, including a line of AC inverter
duty motors, a line of high efficiency, low vibration severe duty electric
motors and large frame 1 1/2 to 4 megawatt electric generators. Furthermore, in
2002, we plan to introduce various new products, including a line of high
efficiency helical worm, helical bevel and parallel shaft drives. This new line
of drives will complement our existing high efficiency helical in-line drives
and will allow us to compete more effectively in this growing segment of the
gear drive market.
Manufacturing and Operations
Our vertically integrated manufacturing operations, including our own cast iron
foundry and aluminum die casting and steel stamping operations, are an important
element of our rapid response capabilities. In addition, we have an extensive
internal logistics operation that consists of 56 semi-tractors and 90
semi-
7
trailers and a network of distribution facilities with the capability to modify
stock products to quickly meet specific custom requirements in many instances.
We manufacture a majority of the products that we sell but also strategically
outsource components and finished goods to an established global network of
suppliers. Although we have aggressively pursued global sourcing to reduce our
overall costs, we still maintain a dual sourcing capability in our existing
domestic facilities to ensure a reliable supply source for our customers. Most
of our operating units conduct their manufacturing operations independently in
one or more facilities. Our electrical group businesses, other than Marathon
Special Products and Thomson Technology, are operated as part of our motor
technologies group, which also has responsibility for all power generation
operations, including sales and marketing. We regularly invest in machinery and
equipment and other improvements to, and maintenance of, our facilities.
Additionally, we have typically obtained significant amounts of quality capital
equipment as part of our acquisitions, often increasing overall capacity and
capability.
The manufacturing operations of both our electrical group and mechanical group
are highly integrated. Although raw materials and selected parts such as
bearings and seals are purchased, this vertical integration permits us to
produce most of our required component parts when needed. We believe this
results in lower production costs, greater manufacturing flexibility and higher
product quality, as well as reducing our reliance on outside suppliers. Base
materials for our products consist primarily of: steel in various types and
sizes, including bearings and weldments; copper magnet wire; and ferrous and
non-ferrous castings. We purchase our raw materials from many suppliers and,
with few exceptions, do not rely on any single supplier for any of our base
materials.
We have also continued to upgrade our manufacturing equipment and processes,
including increasing our use of computer aided manufacturing systems, developing
our own testing systems, redesigning plant layout and redesigning products to
take full advantage of our more productive equipment and to improve product
flow. We believe that our continued product redesign and efficient plant layout
often provide us with a competitive cost advantage in our manufacturing
operation. Our goal is to be a low cost producer in our core product areas.
Backlog
Our business units have historically shipped the majority of their products in
the month the order is received. Since total backlog is less than 15% of our
annual sales, we believe that backlog is not a reliable indicator of our future
sales. As of December 31, 2001, our backlog was $68,152,000 as compared to
$96,000,000 on December 31, 2000. We believe that virtually all of our backlog
is shippable in 2002.
Patents, Trademarks and Licenses
We own a number of United States patents and foreign patents relating to our
businesses. While we believe that our patents provide certain competitive
advantages, we do not consider any one patent or group of patents essential to
our business. We also use various registered and unregistered trademarks, and we
believe these trademarks are significant in the marketing of most of our
products. However, we believe the successful manufacture and sale of our
products generally depends more upon our technological, manufacturing and
marketing skills.
Employees
As of December 31, 2001, the Company employed approximately 5,300 persons, of
which approximately 20% were covered by collective bargaining agreements. We
consider our employee relations to be very good.
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Environmental Matters
We are subject to Federal, State and local environmental regulations. We are
currently involved with environmental proceedings related to certain of our
facilities. Based on available information, we believe that the outcome of these
proceedings and future known environmental compliance costs will not have a
material adverse effect on our financial position or results of operations.
Executive Officers
The names, ages, and positions of the executive officers of the Company as of
December 31, 2001, are listed below along with their business experience during
the past five years. Officers are elected annually by the Board of Directors at
the Meeting of Directors immediately following the Annual Meeting of
Shareholders in April. There are no family relationships among these officers,
nor any arrangements of understanding between any officer and any other persons
pursuant to which the officer was selected.
Name Age Position Business Experience and Principal Occupation
---- --- -------- --------------------------------------------
James L. Packard........ 59 Chairman, President Elected Chairman in 1986; Chief Executive Officer
and Chief Executive since 1984; President since 1980.
Officer
Henry W. Knueppel....... 53 Executive Vice Elected Executive Vice President in 1987; from
President September, 1997 until December, 1999, he also served
as President of Marathon Electric.
Kenneth F. Kaplan....... 56 Vice President, Joined Company in September 1996; elected Vice
Chief Financial President, Chief Financial Officer in October, 1996
Officer and Secretary and Secretary in April, 1997; previously employed by
Gehl Company, West Bend, Wisconsin, as Vice
President - Finance and Treasurer.
David L. Eisenreich..... 58 Vice President and Elected Vice President and named President of Motor
President, Motor Technologies Group in 2001; Senior Vice President of
Technologies Group Operations at Marathon Electric from 1997 until 2001;
former Senior Vice President of Administration, Vice
President of Administration and Vice President of
Corporate Industrial Relations at Marathon Electric.
Gary M. Schuster........ 46 Vice President and Elected Vice President and named President of
President, Mechanical Components Group in 2001; Vice President
Mechanical of Manufacturing at Marathon Electric from 1999 until
Components Group 2001; Vice President and General Manager and Manager
at Lincoln Electric from 1978 until 1999.
Fritz Hollenbach........ 47 Vice President, Named Vice President, Administration and Human
Administration and Resources in 2001; Vice President Human Resources in
Human Resources Mechanical Group from 1994 until 2001; Human Resource
Manager at Foote-Jones/Illinois Gear from 1991 until 1994;
Human Resource Manager at Cutting Tools from 1987 until
1991.
9
ITEM 2. Properties
We have manufacturing, sales and service facilities throughout the United States
and Canada and in Europe and the Far East. Our electrical group currently
operates 38 manufacturing and service and distribution facilities. The
electrical group's present operating facilities contain a total of approximately
2,091,000 square feet of space of which approximately 622,000 square feet are
leased. Our mechanical group currently operates 19 manufacturing and service and
distribution facilities. The mechanical group's present operating facilities
contain a total of approximately 1,530,000 square feet of space of which
approximately 57,000 square feet are leased. Our principal executive offices are
located in Beloit, Wisconsin in an owned approximately 24,000 square foot office
building. We believe our equipment and facilities are well maintained and
adequate for our present needs.
ITEM 3. Legal Proceedings
On or about February 1, 2002, an action was filed in the United States District
Court for the Central District of Illinois against the Company and its Ohio Gear
division ("Ohio Gear"). The plaintiffs in the litigation allege that in 1998 and
1999 Ohio Gear supplied defective differential assemblies that were used in
transaxles manufactured by the plaintiffs. The alleged defect relates to a
component part that Ohio Gear had sourced from a third party supplier. The
plaintiffs allege that they have incurred damages in excess of $3.2 million,
including repair and replacement costs, lost profits, and loss of goodwill. The
plaintiffs seek recovery of $3.2 million plus fees and expenses.
The Company believes it has both the right to recover costs that it incurs in
the litigation from the third party supplier of the defective component part and
defenses to the bulk of the plaintiffs' claims. The Company intends to defend
its position vigorously in the litigation and to pursue recovery from the third
party supplier to the extent that the Company incurs costs in connection with
this matter. Given the preliminary stage of the process, the Company cannot
currently predict the ultimate outcome of the litigation.
From time to time, the Company, in the normal course of business, is also
involved in various other claims and legal actions arising out of its
operations. The Company does not believe that the ultimate disposition of any
currently pending claims or actions would have a material adverse effect on the
Company or its financial condition.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended December 31, 2001.
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PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The Company's Common Stock, $.01 par value ("Common Stock"), is traded on the
American Stock Exchange under the symbol "RBC." The following table sets forth
the range of high and low closing sales prices for the Common Stock for the
period from January 1, 2000 through December 31, 2001:
2001 2000
------------------------------------------- -----------------------------------------
Price Range Price Range
------------------------- Dividends ------------------------- Dividends
High Low Paid High Low Paid
----------- ---------- -------------- ----------- ---------- ------------
1st Quarter......... $22.30 $16.40 $.12 $21.63 $16.50 $.12
2nd Quarter......... 21.35 16.10 .12 19.00 15.63 .12
3rd Quarter......... 22.50 16.90 .12 17.78 15.25 .12
4th Quarter......... 22.90 17.05 .12 19.35 14.60 .12
The Company has paid 166 consecutive quarterly dividends through January 2002.
The number of registered holders of Common Stock as of December 31, 2001 was
923.
ITEM 6. Selected Financial Data
The selected statement of income data for the years ended December 31, 2001,
2000 and 1999 and the balance sheet data at December 31, 2001 and 2000 are
derived from, and are qualified by reference to, the audited financial
statements of the Company included elsewhere in this Annual Report on Form 10-K.
The selected statement of income data for the years ended December 31, 1998 and
1997 and the balance sheet data at December 31, 1999, 1998 and 1997 are derived
from audited financial statements not included herein.
(In Thousands, Except Per Share Data)
---------------------------------------------------------------------------------
Year Ended December 31
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------ ------------- ------------ -------------
Net Sales....................... $663,571 $598,203 $550,661 $550,277 $493,174
Income from Operations.......... 56,060 71,608 72,440 81,113 74,381
Net Income...................... 19,590 33,771 38,067 42,961 38,897
Total Assets.................... 746,599 792,407 508,165 485,070 488,699
Long-term Debt.................. 345,667 393,510 148,166 166,218 192,261
Shareholders' Investment........ 280,150 273,889 252,626 224,497 189,427
Per Share of Common Stock:
Earnings Per Share........... .94 1.61 1.82 2.06 1.87
Earnings Per Share -
Assuming Dilution.......... .93 1.61 1.80 2.02 1.83
Cash Dividends Declared...... .48 .48 .48 .48 .48
Shareholders' Investment..... 13.42 13.10 12.04 10.74 9.09
Average Number of Shares
Outstanding..................... 20,869 20,984 20,959 20,893 20,806
Average Number of Shares -
Assuming Dilution............... 21,124 20,996 21,170 21,278 21,275
11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read together with "Selected
Financial Data" and our consolidated financial statements, including the related
notes, included elsewhere in this report.
Overview
We are a leading manufacturer and marketer of industrial electric motors,
electric power generation components and controls, mechanical motion control
products, and cutting tools, serving markets predominantly in the United States
as well as throughout the world. Our business is organized in two segments. Our
electrical group manufactures and markets a full line of alternating current
(AC) and direct current (DC) industrial electric motors, electric power
generation components and controls, and electrical connecting devices. Our
mechanical group manufactures and markets a broad array of mechanical products,
including gears and gearboxes, marine transmissions, high-performance automotive
transmissions and ring and pinions, manual valve actuators and cutting tools. We
have grown our business during the past several years, in part, through a series
of acquisitions, including the acquisitions of the spiral bevel gear product
line of Philadelphia Gear Company in January 2001, Leeson Electric Corporation
in September 2000, Thomson Technology, Inc. in June 2000 and the Lincoln Motors
business of Lincoln Electric Holdings, Inc. in May 1999. See Note 4 of Notes to
Consolidated Financial Statements.
Our business is cyclical and dependent on industrial and consumer spending and
is therefore impacted by the strength of the economy generally, interest rates
and other factors. The economic slowdown that began in mid-2000 and became an
economic recession in 2001 was the most significant factor in our reduced
performance in 2001. Our net sales, while reaching a record $663,571,000 in
2001, 10.9% greater than in 2000, were down 11.4% when the impact of the two
acquisitions we made in 2000 is excluded. Net income in 2001 was $19,590,000, a
42.0% reduction from the previous year.
We improved our operating cash flow by more than $29,600,000 in 2001, primarily
as a result of reductions in receivables and inventories. Combined with cash
flow from net income, depreciation, and amortization, we generated nearly
$82,000,000 of operating cash flow in 2001. This enabled us, after funding
capital expenditures and paying shareholder dividends, to reduce our outstanding
total debt by nearly $48,000,000 during 2001.
Results of Operations
2001 versus 2000
Net sales in 2001 were $663,571,000, a 10.9% increase from 2000 net sales of
$598,203,000. Excluding those net sales from the 2000 acquisitions of Leeson
Electric and Thomson Technology necessary for comparability purposes, our 2001
net sales were 11.4% below 2000 net sales. This decrease was primarily due to
reduced sales volumes as a result of the economic recession that impacted both
of our operating groups. Electrical group net sales increased 29.1% to
$456,956,000 in 2001 from $353,954,000 in 2000. Excluding the two acquisitions
we made in 2000, electrical group net sales in 2001 were 8.6% below comparable
2000. Mechanical group net sales decreased 15.4% to $206,615,000 in 2001 from
$244,249,000 in 2000.
Our gross profit increased 5.4% to $165,877,000 in 2001 from $157,429,000 in
2000. Gross profit as a percentage of net sales (gross profit margin) declined
to 25.0% in 2001 from 26.3% in 2000 due primarily to lower production volumes
resulting from decreasing sales and planned inventory reductions and to
increased price competition. Income from operations declined 21.7% to
$56,060,000 in 2001, or 8.4% of net sales, from $71,608,000, or 12.0% of net
sales, in 2000. The decrease in income from operations as a percentage of net
sales (operating income margin) was due to a combination of the decrease in
gross profit margin and an increase in operating expenses as a percentage of net
sales to 16.5% in 2001 from
12
14.3% in 2000. The increase in operating expenses as a percentage of net sales
was due primarily to the fact that Leeson Electric selling expenses, as a
percentage of net sales, were greater than those we have historically incurred.
In addition, a large part of our operating expenses are relatively fixed and our
goodwill amortization increased by $3.4 million in 2001. Electrical group
operating income margin decreased to 8.8% in 2001 from 11.5% in 2000 and
mechanical group operating income margin declined to 7.7% in 2001 from 12.6% in
2000. The decrease in electrical group operating income margin was due primarily
to the increase in operating expenses as a percentage of net sales described
above. The decrease in mechanical group operating income margin resulted from a
combination of higher operating expenses as a percentage of net sales and to a
lower 2001 gross profit margin. See Note 10 of Notes to Consolidated Financial
Statements.
Interest expense increased to $22,239,000 in 2001 from $15,332,000 in 2000,
primarily as a result of debt incurred to finance our acquisition of Leeson
Electric at the end of September 2000. Interest expense decreased steadily by
quarter in 2001, due to declining interest rates and as a result of our reducing
total debt by nearly $48,000,000 during 2001. The average rate of interest we
paid on outstanding debt in 2001 was 5.9% as compared to 7.4% in 2000. Because
our income before income taxes decreased in 2001 from 2000, the impact of
non-deductible goodwill amortization resulted in an increase in our effective
tax rate in 2001 to 42.5% of income before income taxes from 40.3% in 2000.
Net income decreased 42.0% to $19,590,000 in 2001 from $33,771,000 in 2000. As a
percentage of net sales, net income decreased to 3.0% in 2001 from 5.6% in 2000.
Basic earnings per share were $.94 and diluted earnings per share were $.93 in
2001, as compared to $1.61 (both basic and diluted) in 2000, representing a
41.6% and 42.2% decrease, respectively.
2000 versus 1999
Our net sales increased 8.6% to $598,203,000 in 2000 from $550,661,000 in 1999.
Electrical group net sales increased 19.7% to $353,954,000 in 2000 from
$295,694,000 in 1999. This increase reflects a full year of sales from Lincoln
Motors, which we acquired in 1999. Excluding the Leeson Electric and Thomson
Technology acquisitions, the increase in 2000 from 1999 was 3.8%. Mechanical
group net sales decreased 4.2% to $244,249,000 in 2000 from $254,967,000 in
1999. This decrease was due primarily to broad-based weakness in the
agriculture, transportation, marine, construction equipment and industrial
machinery markets, particularly in the second half of 2000. We consider the
diversity of markets served by our two operating groups as a key asset; however,
new product introductions and increased market penetration achieved in 2000 did
not offset the broad-based market slowdown.
All net sales, cost of sales and operating expenses have been restated to
reflect the required accounting change, adopted October 1, 2000, for shipping
and handling billings and costs. As a result of this accounting change, 2000 net
sales increased $7,919,000, cost of sales increased $17,930,000, and operating
expenses decreased $10,011,000. Similarly, 1999 net sales increased $6,029,000,
cost of sales increased $13,321,000 and operating expenses decreased $7,292,000.
This change had no impact on net income or income from operations in any period.
All prior periods have been restated to reflect this accounting change.
Gross profit increased 9.2% to $157,429,000 in 2000 from $144,168,000 in 1999.
As a percentage of net sales, gross profit margin of 26.3% in 2000 was slightly
higher than 26.2% in 1999. Income from operations decreased 1.1% to $71,608,000
in 2000, or 12.0% of net sales, from $72,440,000, or 13.2% of net sales, in
1999. The decrease in operating income margin was due to an increase in
operating expenses as a percentage of net sales to 14.3% in 2000 from 13.0% in
1999. The increased percentage resulted primarily from higher selling expenses
during 2000 and to Leeson Electric's selling expenses as a percentage of net
sales being greater than those we have historically incurred. Electrical group
operating income margin decreased to 11.5% in 2000 from 12.4% in 1999, while the
mechanical group operating income margin declined to 12.6% in 2000 from 14.0% in
1999. The operating income margin decrease in the electrical group resulted
primarily from increased selling expenses as a percentage of net sales, which
were partly offset by improvement in gross profit margin from 1999. Favorable
product mix of sales and
13
improved manufacturing productivity enabled the electrical group to more than
offset the impact of higher manufacturing costs in 2000. The mechanical group
decrease was primarily due to a combination of lower sales volume, higher raw
material, fuel and labor costs, reduced production levels and higher selling
expenses as a percentage of net sales.
Interest expense increased 63.0% to $15,332,000 in 2000 from $9,406,000 in 1999,
virtually all as a result of the Leeson Electric acquisition. The higher
interest expense was due to a combination of borrowing approximately
$260,000,000 to finance the Leeson Electric acquisition, an increase in the
interest rate paid on virtually all our debt from 6.9% to 7.9% effective
September 29, 2000 and increases during the first half of 2000 in the London
Interbank Offered Rate, or LIBOR, the rate upon which the interest rate we pay
is based. The average rate of interest we paid on outstanding debt in 2000 was
7.4% as compared to 5.6% in 1999. Our effective tax rate in 2000 increased to
40.3% of income before taxes from 39.8% in 1999. The increase was due primarily
to miscellaneous foreign tax-related items in 2000.
Net income decreased 11.3% to $33,771,000 in 2000 from $38,067,000 in 1999. Net
income as a percentage of net sales decreased to 5.6% in 2000 from 6.9% in 1999.
The reduced percentage was due in part to the impact on the fourth quarter of
the Leeson Electric acquisition, which added net sales but was approximately
neutral to net income as we had expected, and in part to lower earnings in 2000
from our other operations. Basic and diluted earnings per share in 2000 were
$1.61, 11.5% and 10.6% below, respectively, 1999's basic earnings per share of
$1.82 and diluted earnings per share of $1.80.
Liquidity and Capital Resources
Our working capital decreased 13.3% to $161,044,000 at December 31, 2001 from
$185,781,000 at December 31, 2000. The decrease resulted primarily from an
aggregate reduction of more than $33,000,000 in our receivables and inventories
in 2001. The reduction in our receivables was due primarily to the impact of the
U.S. economic recession on our sales volume and operations and occurred
primarily in the fourth quarter of 2001. The decrease in inventories was due in
part to planned reductions in production levels and was made primarily in the
first nine months of 2001. Despite the reduction in our working capital, our
current ratio at December 31, 2001 remained substantially the same as it was at
December 31, 2000.
Cash flow from operations increased 57.0% to $81,769,000 in 2001 from
$52,089,000 in 2000. The major factors contributing to the increased operating
cash flow were $16,673,000 from reduced receivables and $17,014,000 from reduced
inventories. Cash flow used in investing activities was $18,246,000 in 2001 and
$285,020,000 in 2000. The 2000 investing activities included the acquisition of
Leeson Electric. In 2001, capital expenditures were $15,426,000 compared to
$16,994,000 in 2000. The capital expenditure figures in any year do not include
the amounts of property, plant and equipment obtained in connection with our
acquisitions. Such capital additions are included as part of acquisition costs
under the heading "Business acquisitions" in the Consolidated Statements of Cash
Flows. We currently expect capital expenditures for 2002 to be approximately
$20,000,000, although our commitments for property, plant and equipment as of
December 31, 2001 were $431,000. We believe that our present facilities,
augmented by planned capital expenditures, are sufficient to provide adequate
capacity for our operations in 2002. Cash flow used in financing activities in
2001 totaled $59,474,000, of which $48,598,000 on a net basis was used to repay
debt, $10,022,000 was used to pay shareholder dividends and $1,042,000 was used
in January 2001 to repurchase 60,700 shares of our common stock at a weighted
average purchase price of $17.17 per share. We have not repurchased any shares
of our common stock since January 2001.
Our primary financing source is our $350,000,000 long-term revolving credit
facility that expires on December 31, 2005, which we reduced from $375,000,000
when we completed the stock offering described in this paragraph. Our credit
facility requires us to maintain specified financial ratios and to satisfy
certain financial condition tests. We were in compliance with all of the
financial ratios and financial condition tests specified by our amended credit
agreement as of December 31, 2001. In March 2002, we completed a public offering
of 4,109,985 shares of our common stock, including the sale of
14
536,085 shares pursuant to the exercise of the underwriters' over-allotment
option. The net proceeds of the 4,109,985 shares issued were approximately
$90,200,000, which was used to repay our outstanding debt. With the application
of the net proceeds from this offering, we believe we will be able to satisfy
the financial ratios and tests specified in our credit facility for the
foreseeable future, absent unexpected changes in general business and economic
conditions.
At December 31, 2001, we had, after deducting approximately $2,800,000 of
standby letters of credit, $30,200,000 of available borrowing capacity. On a pro
forma basis giving effect to the public offering of our common stock, we would
have had $95,400,000 of available borrowing capacity at December 31, 2001. We
believe that the combination of borrowing availability under our credit facility
and operating cash flow will provide sufficient cash availability to finance our
existing operations for the foreseeable future. Our outstanding total debt of
$345,787,000 at December 31, 2001 reflected a reduction of $47,829,000 from
$393,616,000 at December 31, 2000. The debt reduction was due primarily to the
application of cash generated from operations by the above-mentioned receivables
and inventory reductions. See Note 5 of Notes to Consolidated Financial
Statements.
As a result of our capital structure, we are exposed to interest rate risk.
Virtually all of our debt is under a credit facility with a variable interest
rate based on a margin above LIBOR. As a result, interest rate changes impact
our future earnings and cash flows assuming other factors are constant. A
hypothetical 10% change in our weighted average borrowing rate on the
outstanding debt at December 31, 2001, would result in a change in after-tax
annual earnings of approximately $900,000. We have no material foreign currency
rate risk. In addition, we do not have any material derivative instruments.
Recent Accounting Pronouncements
On June 30, 2001, the Financial Accounting Standards Board finalized Statements
of Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets". Statement No. 141 requires all business
combinations initiated after June 30, 2001 to use the purchase method of
accounting. Under the requirements of Statement No. 142, intangible assets
meeting specific criteria will be separately identified from goodwill acquired
in future acquisitions and amortized over their individual useful lives. Also,
our existing goodwill at June 30, 2001 will no longer be amortized, effective
January 1, 2002. This will eliminate approximately $8,400,000 of annual goodwill
amortization and have a favorable annual impact on net income of approximately
$6,700,000. As of December 31, 2001, we had goodwill on our balance sheet of
$312,735,000, relating to our acquisitions of Leeson Electric, Marathon Electric
and, to a lesser extent, Thomson Technology. The amount of goodwill constituted
approximately 42.0% of our total assets. An assessment of fair value will be
used to test for impairment of goodwill on an annual basis or when circumstances
indicate a possible impairment. We have completed our 2002 annual impairment
test and there has been no impairment of goodwill.
Additionally, Statement No. 143, "Asset Retirement Obligations", and Statement
No. 144, "Impairment or Disposal of Long-Lived Assets", have been issued by the
FASB. Adoption of these Statements on January 1, 2002 will not have a material
adverse effect on our consolidated financial statements.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by Item 305 of Regulation S-K is contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 14-15 of this report.
15
ITEM 8. Financial Statements and Supplementary Data
Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial information for the fiscal years
ended December 31, 2001 and 2000 is as follows (in thousands, except per share
data):
(In Thousands, Except Per Share Data)
----------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------------- ----------------------- ---------------------- -----------------------
2001 2000 2001 2000 2001 2000 2001 2000
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Sales.............. $177,122 $144,185 $171,946 $145,027 $166,719 $138,180 $147,784 $170,811
Gross Profit........... 45,151 38,322 42,829 38,062 40,706 35,922 37,191 45,123
Income from Operations. 17,160 18,087 14,734 18,213 13,344 16,670 10,822 18,638
Net Income............. 5,842 9,414 5,284 9,465 4,703 8,444 3,761 6,448
Earnings Per share..... .28 .45 .25 .45 .23 .40 .18 .31
Earnings Per Share -
Assuming Dilution .28 .45 .25 .45 .22 .40 .18 .31
Average Number of
Shares Outstanding. 20,863 20,986 20,866 20,988 20,871 20,994 20,875 20,970
Average Number of
Shares - Assuming
Dilution........... 21,110 21,033 21,128 20,988 21,129 20,994 21,130 20,970
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of REGAL-BELOIT CORPORATION:
We have audited the accompanying consolidated balance sheets of
REGAL-BELOIT CORPORATION (a Wisconsin Corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of REGAL-BELOIT
CORPORATION and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 29, 2002
16
REGAL-BELOIT CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Shares Outstanding and Per Share Data)
For the Year Ended December 31,
-------------------------------
2001 2000 1999
---- ---- ----
Net Sales ............................................ $ 663,571 $ 598,203 $ 550,661
Cost of Sales.......................................... 497,694 440,774 406,493
----------- ----------- -----------
Gross Profit..................................... 165,877 157,429 144,168
Operating Expenses..................................... 109,817 85,821 71,728
----------- ----------- -----------
Income From Operations........................... 56,060 71,608 72,440
Interest Expense....................................... 22,239 15,332 9,406
Interest Income........................................ 221 274 220
------------- ------------ -------------
Income Before Income Taxes....................... 34,042 56,550 63,254
Provision for Income Taxes............................. 14,452 22,779 25,187
----------- ----------- -----------
Net Income....................................... $ 19,590 $ 33,771 $ 38,067
=========== =========== ===========
Earnings Per Share .................................... $ .94 $ 1.61 $ 1.82
============ ============ ============
Earnings Per Share - Assuming Dilution................. $ .93 $ 1.61 $ 1.80
============ ============ ============
Average Number of Shares Outstanding................... 20,868,896 20,984,423 20,959,182
========== ========== ==========
Average Number of Shares - Assuming Dilution........... 21,124,204 20,996,189 21,169,580
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
17
REGAL-BELOIT CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Information)
ASSETS
December 31,
Current Assets: 2001 2000
---- ----
Cash and cash equivalents..................................... $6,629 $2,612
Receivables, less allowance for doubtful accounts
of $2,233 in 2001 and $2,031 in 2000..................... 80,595 97,032
Income tax receivable......................................... 182 4,069
Future income tax benefits.................................... 8,420 9,475
Inventories................................................... 132,272 148,741
Prepaid expenses.............................................. 3,401 3,709
---------------- ----------------
Total Current Assets..................................... 231,499 265,638
Property, Plant and Equipment:
Land and improvements......................................... 11,867 11,898
Buildings and improvements.................................... 85,170 84,171
Machinery and equipment....................................... 240,444 225,617
---------------- ----------------
Property, Plant and Equipment, at cost................... 337,481 321,686
Less: Accumulated Depreciation............................... (152,608) (132,608)
----------------- -----------------
Net Property, Plant and Equipment........................ 184,873 189,078
Goodwill ........................................................... 312,735 316,295
Other noncurrent assets............................................. 17,492 21,396
---------------- ----------------
Total Assets............................................. $746,599 $792,407
================ ================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable.............................................. $28,429 $32,298
Dividends payable............................................. 2,505 2,509
Accrued compensation and employee benefits.................... 20,250 21,941
Other accrued expenses........................................ 17,303 22,849
Federal and state income taxes................................ 1,848 154
Current maturities of long-term debt.......................... 120 106
---------------- ----------------
Total Current Liabilities................................ 70,455 79,857
Long-term debt...................................................... 345,667 393,510
Deferred income taxes............................................... 43,022 41,063
Other noncurrent liabilities........................................ 5,304 4,088
Minority interest in consolidated subsidiary........................ 2,001 -
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,877,249 issued and outstanding in 2001
and 20,912,192 issued and outstanding in 2000............ 210 210
Additional paid-in capital.................................... 41,967 41,779
Less: Treasury Stock, at cost, 159,900 shares in
2001 and 99,200 shares in 2000........................... (2,727) (1,685)
Retained earnings............................................. 244,564 234,992
Accumulated other comprehensive loss.......................... (3,864) (1,407)
----------------- -----------------
Total Shareholders' Investment........................... 280,150 273,889
---------------- ----------------
Total Liabilities and Shareholders' Investment........... $746,599 $792,407
================ ================
See accompanying Notes to Consolidated Financial Statements.
18
REGAL-BELOIT CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
For the Year Ended December 31,
-------------------------------
2001 2000 1999
---- ---- ----
Cash Flows From Operating Activities:
Net Income $ 19,590 $ 33,771 $ 38,067
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization.................... 31,798 25,549 23,052
Provision for deferred income taxes.............. 3,014 7,678 1,652
Change in assets and liabilities, net of
acquisitions:
Receivables................................. 16,673 8,321 1,093
Inventories................................. 17,014 (5,686) 7,066
Income tax receivable....................... 3,887 (4,069) --
Current liabilities and other, net.......... (10,207) (13,475) (673)
-------- -------- --------
Net cash provided from operating activities...... 81,769 52,089 70,257
Cash Flows From Investing Activities:
Additions to property, plant and equipment....... (15,426) (16,994) (11,422)
Business acquisitions............................ (3,629) (269,232) (32,083)
Sale of property, plant and equipment............ 650 2,725 49
Other, net....................................... 159 (1,519) (1,216)
---------- ----------- -----------
Net cash (used in) investing activities.......... (18,246) (285,020) (44,672)
Cash Flows From Financing Activities:
Additions to long-term debt...................... 2,000 270,000 1,000
Repayment of long-term debt...................... (50,598) (24,598) (19,047)
Repurchase of common stock....................... (1,042) (1,685) --
Stock issued under option plans.................. 188 194 726
Dividends paid to shareholders................... (10,022) (10,075) (10,057)
------------ ---------- ------------
Net cash (used in) provided from financing
activities.................................... (59,474) 233,836 (27,378)
EFFECT OF EXCHANGE RATE ON CASH........................ (32) (22) (26)
------------ ---------- ------------
Net increase (decrease) in cash and cash
equivalents................................... 4,017 883 (1,819)
Cash and cash equivalents at beginning of year... 2,612 1,729 3,548
----------- ----------- -----------
Cash and cash equivalents at end of year......... $ 6,629 $ 2,612 $ 1,729
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................... $ 22,607 $ 14,924 $ 9,520
Income Taxes................................ $ 7,265 $ 18,348 $ 24,886
See accompanying Notes to Consolidated Financial Statements.
19
REGAL-BELOIT CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In Thousands of Dollars, Except Per Share Data)
Common Accumulated
Stock Additional Other
Comprehensive $.01 Par Paid-In Treasury Retained Comprehensive
Income Value Capital Stock Earnings Income (Loss) Total
Balance, December 31, 1998........ $209 $40,860 -- $183,285 $143 $224,497
Net Income........................ $38,067 -- -- -- 38,067 -- 38,067
Dividends Declared ($.48 per share) -- -- -- (10,065) -- (10,065)
Translation Adjustments........... (599) -- -- -- -- (599) (599)
-----
Comprehensive Income.............. $37,468
=======
Stock Options Exercised........... 1 725 -- -- -- 726
- --- -- -- -- ---
Balance, December 31, 1999........ 210 41,585 -- 211,287 (456) 252,626
-
Net Income........................ $33,771 -- -- -- 33,771 -- 33,771
Dividends Declared ($.48 per share) -- -- -- (10,066) -- (10,066)
Translation Adjustments........... (951) -- -- -- -- (951) (951)
-----
Comprehensive Income.............. $32,820
=======
Common Stock Repurchased ......... -- -- (1,685) -- -- (1,685)
Stock Options Exercised........... -- 194 -- -- -- 194
-- --- -- -- -- ---
Balance, December 31, 2000........ 210 41,779 (1,685) 234,992 (1,407) 273,889
Net Income........................ $19,590 -- -- -- 19,590 -- 19,590
Dividends Declared ($.48 per share) -- -- -- (10,018) -- (10,018)
Translation Adjustments........... (928) -- -- -- -- (928) (928)
Additional Pension Liability...... (1,529) -- -- -- -- (1,529) (1,529)
-------
Comprehensive Income.............. $17,133
=======
Common Stock Repurchased ......... -- -- (1,042) -- -- (1,042)
Stock Options Exercised........... -- 188 -- -- -- 188
-- --- -- -- -- ---
Balance, December 31, 2001........ $210 $41,967 $(2,727) $244,564 $(3,864) $280,150
==== ======= ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
20
REGAL-BELOIT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Three Years Ended December 31, 2001
(1) Nature of Operations
REGAL-BELOIT CORPORATION (the Company) is a United States-based
multinational corporation. The Company is organized into two operating groups,
the Mechanical Group with its principal line of business in mechanical products
which control motion and torque, and the Electrical Group, with its principal
line of business in electric motors and power generation products. The principal
markets for the Company's products and technologies are within the United
States.
--------------------------------------------------------------------------------
(2) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. The minority interest in
the earnings of the majority-owned consolidated subsidiary is not material.
Revenue Recognition
Sales and related cost of sales for all products are recognized upon
shipment of the products, as shipments are FOB shipping point.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. ("GAAP") requires management to make
estimates and assumptions, in certain circumstances, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expense during the reporting period. Actual results could differ
from those estimates.
Foreign Currency Translation
Net assets of non-U.S. subsidiaries, whose functional currencies are
other than the U.S. Dollar, are translated at the rates of exchange in effect as
of year-end. Income and expense items are translated at the average exchange
rates in effect during the year. The translation adjustments relating to net
assets are recorded directly into a separate component of shareholders'
investment. Certain other translation adjustments continue to be reported in net
income and were not significant in any of the three years ended December 31,
2001.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments
with insignificant interest rate risk and original maturities of three months or
less at date of acquisition. The carrying value of cash equivalents closely
approximates their fair market value.
Life Insurance Policies
The Company maintains life insurance policies on certain officers and
management which name the Company as beneficiary. The total face value of these
policies was $7,963,000 at both December 31, 2001 and 2000. The cash surrender
value, net of policy loans, is $251,000 and $3,209,000 at December 31, 2001 and
2000, respectively, and is included as a component of Other Noncurrent Assets.
Intangible Assets
The cost of goodwill and other intangible assets is amortized on a
straight-line basis over the estimated periods benefited ranging from 5 to 40
years. Goodwill amortization was $8,401,000,
21
$4,994,000 and $3,845,000 in 2001, 2000 and 1999, respectively. Accumulated
goodwill amortization was $23,965,000 at December 31, 2001 and $15,564,000 at
December 31, 2000.
Effective January 1, 2002, goodwill will no longer be amortized, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Intangible
assets with definitive lives will continue to be amortized. Goodwill and
intangible assets will be evaluated in 2002 for impairment of their carrying
values and at least annually thereafter. Earnings will be charged if the
carrying value of goodwill or an intangible asset exceeds its fair market value.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable. The Company assesses these assets for impairment based on
estimated future cash flows from these assets.
Inventories
The approximate percentage distribution between major classes of
inventory is as follows:
December 31,
----------------------
2001 2000
--------- ---------
Raw Material.................... 11% 11%
Work In Process................. 19% 21%
Finished Goods and
Purchased Parts.............. 70% 68%
Inventories are stated at cost, which is not in excess of market. Cost for
approximately 87% of the Company's inventory at December 31, 2001 and 89% in
2000, was determined using the last-in, first-out (LIFO) method. If all
inventories were valued on the first-in, first-out (FIFO) method, they would
have increased by $4,417,000 and $3,233,000 as of December 31, 2001 and 2000,
respectively. Material, labor and factory overhead costs are included in the
inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Maintenance and repairs
are charged to expense as incurred and major renewals and improvements are
capitalized.
The cost of property, plant and equipment retired or otherwise disposed
of is removed from the accounts, the accumulated depreciation is removed from
related reserves, and the net gain or loss is reflected in income.
The provisions for depreciation are based on the estimated useful lives
of plant and equipment from the dates of acquisition and are calculated
primarily using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful lives are:
Description Life
---------------------------------------- ----------------
Buildings and Improvements.......... 10 to 45 years
Machinery and Equipment............. 3 to 15 years
Shipping and Handling Revenues and Costs
Shipping and handling costs are recorded as costs of sales and the
related billings are recorded as sales.
Reclassifications
Certain reclassifications were made to the 2000 and 1999 financial
statements to conform to the 2001 presentation.
22
Earnings per Share
The difference between basic and diluted earnings per share is
attributable to the incremental shares to be issued under the Company's stock
option plans, which totaled 255,308, 11,766 and 210,398 at December 31, 2001,
2000 and 1999, respectively.
(3) Leases and Rental Commitments
Rental expenses charged to operations amounted to $7,314,000 in 2001,
$4,934,000 in 2000 and $4,189,000 in 1999. The Company has future minimum rental
commitments under operating leases as shown in the following table:
Year (In Thousands of Dollars)
------------------ -----------------------------------
2002 $4,164
2003 3,081
2004 2,926
2005 2,227
2006 1,847
Thereafter 2,037
--------------------------------------------------------------------------------
(4) Acquisitions
On January 16, 2001, the Company acquired, for cash, selected assets of
Philadelphia Gear Company, which now comprise the Company's spiral bevel gear
product line. The purchased assets included inventory and selected machinery,
equipment and tooling. The operating results and assets purchased are not
material to the performance or financial position of the Company.
On September 29, 2000, the Company acquired 100% of the stock of Leeson
Electric Corporation, a private company, for approximately $260,000,000 in cash.
During 2001, the purchase price allocation was finalized and resulted in an
increase to goodwill of approximately $4,000,000. This resulted in approximately
$86,000,000 of the purchase price being allocated to the net assets acquired,
and the remaining $174,000,000 being recorded as goodwill. Leeson is a leading
North American manufacturer and marketer of electric motors and related
products. On June 29, 2000, the Company acquired the assets and liabilities of
Thomson Technology, Inc. ("TTI") for approximately $10,000,000. TTI is a
Vancouver, BC, Canada based manufacturer of power systems controls for the
worldwide power generation market.
On May 28, 1999, the Company purchased the Lincoln Motors business of
Lincoln Electric Holdings, Inc., for a cash purchase price of approximately
$32,100,000. Lincoln Motors manufactures and markets a line of AC electric
motors from 1 horsepower to 800 horsepower.
--------------------------------------------------------------------------------
23
(5) Long-Term Debt and Bank Credit Facilities
(In Thousands of Dollars)
December 31,
------------------------------------------
Long-term debt consists of the following: 2001 2000
-------------------- ------------------
Revolving Credit Facility.......................... $342,000 $392,500
Other.............................................. 3,787 1,116
-------------------- ------------------
345,787 393,616
Less-Current maturities............................ 120 106
-------------------- ------------------
Noncurrent portion................................. $345,667 $393,510
==================== ==================
The Company maintained at December 31, 2001, a $375,000,000 revolving
credit facility which expires December 31, 2005 (the "Facility"). The Facility
permits the Company to borrow at interest rates based upon a margin above LIBOR,
which margin varies with the ratio of debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA"). These interest rates also vary with
LIBOR. The Facility, as amended during 2001, restricts the payment of dividends
to the current $.12 per quarter and also limits acquisitions for cash to $15
million for an individual acquisition and to $30 million in the aggregate. The
Company has pledged in the amended Facility the stock of its major subsidiaries
as security for this agreement. The stock pledge and the dividend and
acquisition restrictions are subject to release if the Company's ratio of funded
debt to EBITDA meets certain requirements. The Facility also includes various
financial covenants regarding minimum net worth, permitted debt levels and
minimum interest coverage. The most restrictive financial covenant included in
the Facility is the ratio of funded debt to EBITDA. This covenant ratio was 4.15
at December 31, 2001, but declines in future quarters throughout 2002 to 3.25 at
December 31, 2002. The Company was in compliance with all financial covenants as
of December 31, 2001.
The average balance outstanding under the Facility in 2001 was
$372,512,000. The average interest rate paid under the Facility in 2001 was 5.9%
and was 4.2% at December 31, 2001. The Company had $30,200,000 of available
borrowing capacity, after deducting approximately $2,800,000 for standby letters
of credit, under the Facility at December 31, 2001. (See Management's Discussion
and Analysis of Financial Statements, "Liquidity and Capital Resources").
The Company also has other loans with a total balance outstanding of
$3,787,000 at December 31, 2001. The largest is a $2,000,000 industrial
development bond issue completed on September 6, 2001.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair market value of
long-term debt is not materially different from the carrying value.
Maturities of long-term debt are as follows:
Year (In Thousands of Dollars)
------------------- ---------------------------------
2002 $120
2003 107
2004 232
2005 342,222
2006 678
Thereafter 2,428
----------
Total $345,787
========
--------------------------------------------------------------------------------
24
(6) Contingencies
The Company is, from time to time, party to lawsuits arising from its
normal business operations. It is believed that the outcome of these lawsuits
will have no material effect on the Company's financial position or its results
of operations.
--------------------------------------------------------------------------------
(7) Retirement Plans
The Company has a number of retirement plans that cover most of its
employees. The plans include defined contribution plans and defined benefit
plans. The defined contribution plans provide for Company contributions based,
depending on the plan, upon one or more of participant contributions, service
and profits. Company contributions to defined contribution plans totaled
$3,329,000, $4,628,000 and $4,820,000 in 2001, 2000 and 1999, respectively.
Benefits provided under defined benefit plans are based, depending on the plan,
on employees' average earnings and years of credited service, or a benefit
multiplier times years of service. Funding of these qualified defined benefit
plans is in accordance with federal laws and regulations.
Net periodic pension benefit costs for the defined benefit plans were as
follows:
(In Thousands of Dollars)
----------------------------------------
2001 2000 1999
----------- --------- ------------
Service cost...................... $1,330 $1,253 $1,375
Interest cost..................... 3,078 2,993 2,809
Expected return on plan assets.... (5,410) (4,858) (4,158)
Net amortization and deferral..... (355) (125) 58
----------- --------- ------------
Net periodic (income) expense..... $(1,357) $(737) $84
=========== ========= ============
25
The following table presents a reconciliation of the funded status of the
defined benefit plans using an assumed discount rate of 7.5% in 2001 and 2000,
annual compensation increases of 3.75% in 2001 and 4.5% in 2000, and an assumed
long-term rate of return on plan assets of 9.0% in 2001 and 2000.
(In Thousands of Dollars)
-----------------------------
2001 2000
------------- ------------
Change in projected benefit obligation:
Obligation at beginning of period......... $41,042 $39,909
Service cost.............................. 1,330 1,253
Interest cost............................. 3,078 2,993
Change in assumptions..................... (882) (1,293)
Plan amendments........................... 403 131
Benefits paid............................. (1,863) (1,951)
------------- ------------
Obligation at end of period............... 43,108 41,042
------------- ------------
Change in fair value of plan assets:
Fair value of plan assets at beginning
of period.............................. 60,844 60,601
Actual (loss) return on plan assets....... (11,582) 1,827
Employer contributions.................... 282 367
Benefits paid............................. (1,863) (1,951)
------------- ------------
Fair value of plan assets at end of
period................................. 47,681 60,844
------------- ------------
Funded status............................. 4,573 19,802
Unrecognized net actuarial loss
(gain).................................. 3,251 (13,289)
Unrecognized prior service costs........... 1,252 924
------------- ------------
Net amount recognized...................... $9,076 $7,437
============= ============
Amounts recognized in balance sheets:
Prepaid benefit cost.................. $11,077 $10,728
Accrued benefit liability............. (3,906) (3,291)
Intangible asset...................... 376 --
Accumulated other
comprehensive loss................. 1,529 --
------------- ------------
Net amount recognized................. $9,076 $7,437
============= ============
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the defined benefit plans with accumulated benefit
obligations in excess of plan assets were $7,740,000, $7,699,000 and $4,094,000,
respectively, as of December 31, 2001, and $3,105,000, $3,054,000 and $0,
respectively, as of December 31, 2000.
--------------------------------------------------------------------------------
(8) Shareholders' Investment
The Company has one stock option plan available for new grants to
officers, directors and key employees, the 1998 Stock Option Plan, as amended.
Additionally, the Company's 1991 Flexible Stock Incentive Plan and 1987 Stock
Option Plan, which have expired as to new grants, have shares previously
26
granted remaining outstanding. Options under all the plans were granted at
prices that equaled the market value on the date of the grant and with a maximum
term of 10 years from the date of grant. Options vest over various periods up to
10 years. A summary of the Company's three stock option plans follows:
At December 31, 2001
--------------------------------------------------------
1987 Plan 1991 Plan 1998 Plan
--------------- ----------------- ----------------
Total Plan shares..................... 450,000 1,000,000 1,000,000
Options granted....................... 449,850 762,882 705,400
Options outstanding................... 38,700 731,324 690,100
Options available for grant........... -- -- 294,600
A summary of the status of the Company's three stock option plans as of
December 31, 2001, 2000 and 1999, and changes during the years then ended is
presented below:
2001 2000 1999
--------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning
of year................. 1,477,718 $18.01 1,430,682 $18.47 839,018 $14.18
Granted.................... 41,850 18.71 134,750 18.14 705,700 22.65
Exercised.................. (26,194) 7.52 (26,018) 6.97 (78,336) 9.33
Forfeited.................. (33,250) 21.28 (61,696) 22.61 (35,700) 23.43
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year. 1,460,124 $18.49 1,477,718 $18.01 1,430,682 $18.47
Options exercisable at
year-end................ 889,824 865,968 656,265
The following table provides information on the three Plans at various
exercise price ranges:
Range of Exercise Prices
-------------------------------------------------------------------------------
$7.18-$10.78 $10.79-$16.18 $16.19-$24.27 $24.28-$32.44 Total
------------- ------------- ------------- ----------- ------------
Options outstanding at 12/31/01 355,510 34,464 963,300 106,850 1,460,124
Options exercisable at 12/31/01 355,510 29,464 401,000 103,850 889,824
The Company accounts for its stock option plans under APB Opinion No. 25.
Accordingly, no compensation cost has been recognized in the statements of
income. Had compensation cost for these plans been determined consistent with
FASB Statement No. 123 "Accounting for Stock-Based Compensation", the Company's
net income and earnings per share ("EPS") would have been reduced to the
following pro-forma amounts:
(In Thousands, Except Per Share Data)
-----------------------------------------------------------------
2001 2000 1999
--------------------- ------------------ ------------------
Net income:
As Reported................................ $19,590 $33,771 $38,067
Pro Forma.................................. $18,886 $33,018 $36,532
Earnings Per Share
As Reported................................ $.94 $1.61 $1.82
Pro Forma.................................. $.91 $1.57 $1.74
Earnings Per Share - Assuming Dilution
As Reported................................ $.93 $1.61 $1.80
Pro Forma.................................. $.89 $1.57 $1.73
27
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: risk-free
interest rates of 5.1%, 6.3% and 5.4%; expected dividend yield of 2.5% for all
years; expected option lives of 7.0 for all years; expected volatility of 33% in
both 2001 and 2000, and 32% in 1999.
On January 28, 2000, the Board of Directors approved a Shareholder Rights
Plan (the "Plan"). Pursuant to this Plan, one common share purchase right is
included with each outstanding share of common stock. In the event the rights
become exercisable, each right will initially entitle its holder to buy one-half
of one share of the Company's common stock at a price of $60 per share
(equivalent to $30 per one-half share), subject to adjustment. The rights will
become exercisable if a person or group acquires, or announces an offer for, 15%
or more of the Company's common stock. In this event, each right will thereafter
entitle the holder to purchase, at the right's then-current exercise price,
common stock of the Company or, depending on the circumstances, common stock of
the acquiring corporation having a market value of twice the full share exercise
price. The rights may be redeemed by the Company at a price of one-tenth of one
cent per right at any time prior to the time a person or group acquires 15% or
more of the Company's common stock. The rights expire on January 28, 2010,
unless otherwise extended.
The Board of Directors approved in 2000 a repurchase program of up to
2,000,000 common shares of Company stock. Management was authorized to effect
purchases from time to time in the open market or through privately negotiated
transactions. Through December 31, 2001, the Company repurchased 159,900 shares
at an average purchase price of $17.06 per share. Management ceased repurchases
in January 2001.
--------------------------------------------------------------------------------
(9) Income Taxes
Earnings before income taxes consisted of the following:
(In Thousands of Dollars)
---------------------------------------------
2001 2000 1999
------------- ----------- -------------
United States................ $30,213 $55,879 $62,143
Foreign...................... 3,829 671 1,111
------------- ----------- -------------
Total........................ $34,042 $56,550 $63,254
============= =========== =============
The provision for income taxes is summarized as follows:
(In Thousands of Dollars)
--------------------------------------------
2001 2000 1999
-------------- ----------- -----------
Current
Federal................. $9,155 $12,858 $20,594
State................... 1,186 1,995 2,321
Foreign................. 1,097 248 620
-------------- ----------- -----------
11,438 15,101 23,535
Deferred..................... 3,014 7,678 1,652
-------------- ----------- -----------
$14,452 $22,779 $25,187
============== =========== ===========
28
A reconciliation of the statutory Federal income tax rate and the
effective tax rate reflected in the statements of income follows:
2001 2000 1999
-------------- ----------- -----------
Federal statutory tax rate........ 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit................ 2.3 2.5 3.0
Nondeductible goodwill
amortization................... 4.0 2.4 2.3
Other, net........................ 1.2 .4 (.5)
-------------- ----------- -----------
Effective tax rate................ 42.5% 40.3% 39.8%
============== =========== ===========
Deferred taxes arise primarily from differences in amounts reported for
tax and financial statement purposes. The Company's net deferred tax liability
as of December 31, 2001 of $34,602,000 is classified on the consolidated balance
sheet as a current income tax benefit of $8,420,000 and a long-term deferred
income tax liability of $43,022,000. The December 31, 2000 net deferred tax
liability was $31,588,000, consisting of a current income tax benefit of
$9,475,000 and a long-term deferred income tax liability of $41,063,000. The
components of this net deferred tax liability are as follows:
(In Thousands of Dollars)
December 31
-----------------------------
2001 2000
------------ ------------
Federal operating loss carry forward... $ 277 $ 401
Accrued employee benefits.............. 1,349 1,495
Bad debt reserve....................... 768 443
Warranty reserve....................... 682 1,067
Other.................................. 215 2,542
------------ ------------
Deferred tax assets............... 3,291 5,948
Property related....................... (29,121) (29,643)
Inventory.............................. (4,935) (3,608)
Other.................................. (3,837) (4,285)
------------ ------------
Deferred tax liabilities.......... (37,893) (37,536)
------------ ------------
Net deferred tax liability............. $(34,602) $(31,588)
============ ============
--------------------------------------------------------------------------------
(10) Industry Segment Information
The Company's reportable segments are strategic businesses that offer
different products and services. The Company has two such reportable segments:
Mechanical Group and Electrical Group. The Mechanical Group produces mechanical
speed reducers and related products for sale to original equipment manufacturers
and distributors. The Electrical Group produces electric motors, power
generation equipment and related products for sale to original equipment
manufacturers and distributors.
The Company evaluates performance based on the segments' income from
operations. Corporate costs have been allocated to each Group based primarily on
the net sales of each Group. The reported net sales of each segment are solely
from external customers. No single customer accounts for 10% or more of the
Company's net sales.
29
The Company's products manufactured and sold outside the United States
were approximately 8%, 4% and 3% of net sales in 2001, 2000 and 1999,
respectively. Export sales from U.S. operations were approximately 6% of net
sales in 2001, 6% in 2000 and 7% in 1999.
Pertinent data for each industry segment in which the Company operated
for the three years ended December 31, 2001 is as follows:
(In Thousands of Dollars)
----------------------------------------------------------------------------------------
Depreciation
Income From Identifiable Capital and
Net Sales Operations Assets Expenditures Amortization
------------- --------------- -------------- -------------- --------------
2001
Mechanical Group........... $206,615 $15,872 $125,201 $5,110 $8,824
Electrical Group........... 456,956 40,188 621,398(A) 10,316 22,974
------------- --------------- -------------- -------------- --------------
Total REGAL-BELOIT......... $663,571 $56,060 $746,599 $15,426 $31,798
============= =============== ============== ============== ==============
2000
Mechanical Group........... $244,249 $30,794 $142,145 $6,515 $9,663
Electrical Group........... 353,954 40,814 650,262(A) 10,479 15,886
------------- --------------- -------------- -------------- --------------
Total REGAL-BELOIT......... $598,203 $71,608 $792,407 $16,994 $25,549
============= =============== ============== ============== ==============
1999
Mechanical Group........... $254,967 $35,732 $145,391 $4,257 $10,910
Electrical Group........... 295,694 36,708 362,774(A) 7,165 12,142
------------- --------------- -------------- -------------- --------------
Total REGAL-BELOIT......... $550,661 $72,440 $508,165 $11,422 $23,052
============= =============== ============== ============== ==============
(A) Includes $312,735 in 2001, $316,295 in 2000 and $143,314 in 1999 of
goodwill relating to Electrical Group acquisitions.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company has had no disagreements with its accountants subject to disclosure
by Item 304 of Regulation S-K nor has it had a change of accountants within the
last two fiscal years.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information required by Item 401 of Regulation S-K is included under the
captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance", of the Company's definitive proxy statement for the
Annual Meeting of Shareholders to be held on April 19, 2002, a copy of which has
been filed within 120 days following the close of the fiscal year, and such
information is incorporated herein by reference. Information with respect to the
executive officers of the Company appears in Part I, page 9 of this Annual
Report on Form 10-K.
ITEM 11. Executive Compensation
Information required by Item 402 of Regulation S-K is included under the
captions "Other Information about the Board" and "Compensation" of the Company's
definitive proxy statement for the Annual Meeting of Shareholders to be held on
April 19, 2002, a copy of which has been filed within 120 days following the
close of the fiscal year, and such information is incorporated herein by
reference; provided, however, that the subsection entitled "Report of
Compensation Committee on Annual Compensation" shall not be deemed to be
incorporated herein by reference.
30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required pursuant to Item 403 of Regulation S-K is included under
the caption "Security Ownership of Certain Beneficial Owners and Management" of
the Company's definitive proxy statement for the Annual Meeting of Shareholders
to be held on April 19, 2002, a copy of which has been filed within 120 days
following the close of the fiscal year, and such information is incorporated
herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information required pursuant to Item 404 of Regulation S-K is included under
the caption "Certain Relationships and Related Transactions" of the Company's
definitive proxy statement for the Annual Meeting of Shareholders to be held on
April 19, 2002, a copy of which has been filed within 120 days following the
close of the fiscal year, and such information is incorporated herein by
reference.
PART IV
ITEM 14. Financial Statements, Financial Statement Schedule, Exhibits and
Reports on Form 8-K
(a) 1. Financial statements - The financial statements listed in the
accompanying index to financial statements and financial statement
schedule are filed as part of this Annual Report on Form 10-K.
2. Financial statement schedules - The financial statement schedules
listed in the accompanying index to financial statements and financial
statement schedule are filed as part of this Annual Report on Form 10-K.
3. Exhibits - The exhibits listed in the accompanying index to exhibits are
filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On February 11, 2002, the Company filed a current report on Form 8-K
pertaining to the action filed against the Company and its Ohio Gear
division in the United States District Court for the Central District of
Illinois. The plaintiffs in the litigation allege that in 1998 and 1999
Ohio Gear supplied defective differential assemblies that were used in
transaxles manufactured by the plaintiffs.
On February 1, 2002, the Company filed a current report on Form 8-K,
attaching as exhibits Management's Discussion and Analysis of Financial
Statements, Selected Financial Information and the audited Consolidated
Financial Statements of the Company relating to the year ended December
31, 2001. Also filed was the form of Second Amendment and Waiver, dated
as of January 31, 2001, among the Company, the financial institutions
listed on the signature pages thereof, Bank of America, N.A., as
Documentation and Syndication Agent, and M&I Marshall & Ilsley Bank, as
Administrative Agent.
On January 29, 2002, the Company filed a current report on 8-K, attaching
as an exhibit a Company press release disclosing, among other things, the
Company's fourth quarter and year-end financial results for the reporting
periods ended December 31, 2001.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REGAL-BELOIT CORPORATION
By: /s/ Kenneth F. Kaplan
-----------------------------------
Kenneth F. Kaplan
Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ James L. Packard Chairman, President, Chief March 27, 2002
--------------------------- Executive Officer and
James L. Packard Director
/s/ Kenneth F. Kaplan Vice President, Chief March 27, 2002
--------------------------- Financial Officer and
Kenneth F. Kaplan Secretary (Principal
Accounting & Financial
Officer)
/s/ Henry W. Knueppel Executive Vice President March 27, 2002
--------------------------- and Director
Henry W. Knueppel
/s/ John A. McKay Director March 27, 2002
---------------------------
John A. McKay
/s/ John M. Eldred Director March 27, 2002
---------------------------
John M. Eldred
/s/ J. Reed Coleman Director March 27, 2002
---------------------------
J. Reed Coleman
/s/ Frank Bauchiero Director March 27, 2002
---------------------------
Frank Bauchiero
32
REGAL-BELOIT CORPORATION
Index to Financial Statements
and Financial Statement Schedule
The following documents are incorporated by reference as part of this report:
Page(s) In
Form 10-K
(1) Financial Statements:
Report of Independent Public Accountants....................... 16
Consolidated Statements of Income for the three years
ended December 31, 2001, 2000 and 1999....................... 17
Consolidated Balance Sheets at December 31, 2001 and 2000...... 18
Consolidated Statements of Cash Flows for the three years
ended December 31, 2001, 2000 and 1999....................... 19
Consolidated Statements of Shareholders' Investment for
the three years ended December 31, 2001, 2000 and 1999....... 20
Notes to Consolidated Financial Statements..................... 21-30
Page(s) In
Form 10-K
(2) Financial Statement Schedule:
Report of Independent Public Accountants on Financial
Statement Schedule........................................... 34
For the three years ended December 31, 2001, Schedule II -
Valuation and Qualifying Accounts............................ 35
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
33
Report of Independent Public Accountants
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of Regal-Beloit Corporation in this Form
10-K, and have issued our report thereon dated January 29, 2002. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
The schedule listed in the index to financial statements is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 29, 2002
34
SCHEDULE II
REGAL-BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts:
(In Thousands of Dollars)
---------------------------------------------------------------------------
Balance Provision Write-offs Additions, Balance
Beginning (Credits) Net of Related to End
of Year For Losses Recoveries Acquisition of Year
------- ---------- ---------- ----------- -------
Year Ended December 31, 2001 $ 2,031 $ 912 $ (710) $ -0- $ 2,233
Year Ended December 31, 2000 $ 1,758 $ 554 $ (809) $ 528 $ 2,031
Year Ended December 31, 1999 $ 1,851 $ (9) $ (84) $ -0- $ 1,758
35
Exhibits Index
Exhibit Number Exhibit Description
2.1 Agreement and Plan of Merger among the Registrant, Regal-Beloit
Acquisition Corp., and Marathon Electric Manufacturing Corporation
dated as of February 26, 1997, as amended and restated March 17,
1997 and March 26, 1997. [Incorporated by reference to Exhibit 2.1
to Regal-Beloit Corporation's Current Report on Form 8-K dated
April 10, 1997]
2.2 Stock Purchase Agreement, dated as of August 7, 2000, as amended
by First Amendment to Stock Purchase Agreement, dated as of
September 29, 2000, among Regal-Beloit Corporation, LEC
Acquisition Corp., Leeson Electric Corporation ("Leeson") and
Leeson's Shareholders. [Incorporated by reference to Exhibit 2 to
Regal-Beloit Corporation's Current Report on Form 8-K dated
October 13, 2000]
3.1 Articles of Incorporation of the Registrant [Incorporated by
reference to Exhibit B to Regal-Beloit Corporation's Definitive
Proxy Statement on Schedule 14A for the 1994 Annual Meeting of
Shareholders]
3.2 Bylaws of the Registrant [Incorporated by reference to Exhibit C
to Regal-Beloit Corporation's Definitive Proxy Statement on
Schedule 14A for the 1994 Annual Meeting of Shareholders]
4.1 Articles of Incorporation and Bylaws of the Registrant
[Incorporated by reference to Exhibits 3.1 and 3.2 hereto]
4.2 Rights Agreement, dated as of January 28, 2000, between
Regal-Beloit Corporation and BankBoston, N.A. [Incorporated by
reference to Exhibit 4.1 to Regal-Beloit Corporation's
Registration Statement on Form 8-A (Registration No. 1-7283) filed
January 31, 2000]
4.3 Credit Agreement, dated as of September 29, 2000, among
Regal-Beloit Corporation, M&I Marshall & Ilsley Bank, as
Administrative Agent, and Swing Line Bank, Bank of America, N.A.,
as Documentation and Syndication Agent, Banc of America Securities
LLC, Lead Arranger and Book Manager and each of the Banks Party to
the Credit Agreement [Incorporated by reference to Exhibit 4 to
Regal-Beloit Corporation's Current Report on Form 8-K dated
October 13, 2000]
4.4 First Amendment, dated as of June 29, 2001, among the Company, the
financial institutions listed on the signature pages thereof, Bank
of America, N.A., as Documentation and Syndication Agent, and M&I
Marshall & Ilsley Bank, as Administrative Agent [Incorporated by
reference to Exhibit 1 to Regal-Beloit Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001]
36
Exhibit Number Exhibit Description
4.5 Second Amendment and Waiver, dated as of January 31, 2002, among
the Company, the financial institutions listed on the signature
pages thereof, Bank of America, N.A., as Documentation and
Syndication Agent, and M&I Marshall & Ilsley Bank, as
Administrative Agent [Incorporated by reference to Exhibit 99.4 to
Regal-Beloit Corporation's Current Report on Form 8-K dated
February 1, 2002]
10.1* Short-Term Incentive Compensation Plan, as amended [Incorporated
by reference to Exhibit 10.1 to Regal-Beloit Corporation's Annual
Report on Form 10-K for the year ended December 31, 1992]
10.3* 1987 Stock Option Plan [Incorporated by reference to Exhibit 10.3
to Regal-Beloit Corporation's Registration Statement on Form S-1
(Registration No. 33-25363) dated November 4, 1988]
10.4* 1991 Flexible Stock Incentive Plan [Incorporated by reference to
Exhibit 10.4 to Regal-Beloit Corporation's Annual Report on Form
10-K for the year ended December 31, 1992]
10.5* Form of Change of Control Agreement between Regal-Beloit
Corporation and each of Henry W. Knueppel and Kenneth F. Kaplan
[Incorporated by reference to Exhibit 10.5 to Regal-Beloit
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997]
10.6* Addendum to Change of Control Agreement effective as of April 21,
1998 [Incorporated by reference to Exhibit 10.5(a) to Regal-Beloit
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998]
10.7* Disability Insurance Agreement between Regal-Beloit Corporation
and Continental Casualty Company [Incorporated by reference to
Exhibit 10.6 to Regal-Beloit Corporation's Annual Report on Form
10-K for the year ended December 31, 1992]
10.8* 1998 Stock Option Plan, as amended [Incorporated by reference to
Regal-Beloit Corporation's Registration Statement on Form S-8
(File No. 333-84779)]
10.9* Key Executive Employment and Severance Agreement, dated as of
June 18, 2001, between James L. Packard and Regal-Beloit
Corporation
21 Subsidiaries of Regal-Beloit Corporation
23 Consent of Independent Public Accountants
99.1 Regal-Beloit Corporation Letter to the Securities and Exchange
Commission regarding representations from Arthur Andersen LLP
37
99.2 Proxy Statement of Regal-Beloit Corporation for the 2002 Annual
Meeting of Shareholders
[The Proxy Statement for the 2002 Annual Meeting of Shareholders
will be filed with the Securities and Exchange Commission under
Regulation 14A within 120 days after the end of the Company's
fiscal year. Except to the extent specifically incorporated by
reference, the Proxy Statement for the 2002 Annual Meeting of
Shareholders shall not be deemed to be filed with the Securities
and Exchange Commission as part of this Annual Report on Form
10-K.]
------------------------
* A management contract or compensatory plan or arrangement.
38