UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

Commission file number
001-07283

REGAL BELOIT CORPORATION

(Exact name of registrant as specified in its charter)

Wisconsin		39-0875718
(State of other jurisdiction of incorporation)		(IRS Employer Identification No.)

200 State Street, Beloit, Wisconsin 53511
(Address of principal executive office)

(608) 364-8800
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a “smaller reporting company.” See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ		Accelerated Filer o		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

38,600,282 Shares, Common Stock, $.01 Par Value (as of November 3, 2010)

 

 

REGAL BELOIT CORPORATION

INDEX

				Page
PART I – FINANCIAL INFORMATION
Item 1 -		Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Statements of Earnings			3
		Condensed Consolidated Balance Sheets			4
		Condensed Consolidated Statements of Equity			5
		Condensed Consolidated Statements of Cash Flows			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2 -		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3 -		Quantitative and Qualitative Disclosures about Market Risk			23
Item 4 -		Controls and Procedures			23
PART II – OTHER INFORMATION
Item 1 -		Legal Proceedings			24
Item 1A -		Risk Factors			24
Item 2 -		Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 6 -		Exhibits			24
Signature					25
Index to Exhibits					26
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

CAUTIONARY STATEMENT

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s expectations, beliefs, current assumptions and projections. When used in this press release, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or similar words are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Those factors include, but are not limited to:

	•		economic changes in global markets where we do business, such as reduced demand for the products we sell, weakness in the housing and commercial real estate markets, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
	•		unanticipated fluctuations in commodity prices and raw material costs;
	•		cyclical downturns affecting the global market for capital goods;
	•		unexpected issues and costs arising from the integration of acquired companies and businesses;
	•		marketplace acceptance of new and existing products including the loss of, or a decline in business from, any significant customers;
	•		the impact of capital market transactions that we may effect;
	•		the availability and effectiveness of our information technology systems;
	•		unanticipated costs associated with litigation matters;
	•		actions taken by our competitors, including new product introductions or technological advances, and other events affecting our industry and competitors;
	•		difficulties in staffing and managing foreign operations;
	•		other domestic and international economic and political factors unrelated to our performance, such as the current substantial weakness in economic and business conditions and the stock markets as a whole; and
	•		other risks and uncertainties described from time to time in our reports filed with the U.S. Securities and Exchange Commission, or SEC, which are incorporated by reference.

Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update these statements to reflect subsequent events or circumstances. Additional information regarding these and other risks and factors is included in Item 1A — Risk Factors in our Annual Report on Form 10-K filed with the SEC on March 2, 2010.

PART I — FINANCIAL INFORMATION
REGAL BELOIT CORPORATION

(Dollars in Thousands, Except Dividends Declared and Per Share Data)

ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Three Months Ended								Nine Months Ended
		October 2,				September 26,				October 2,				September 26,
		2010				2009				2010				2009
Net Sales		$	590,801			$	465,192			$	1,682,300			$	1,363,016
Cost of Sales			446,137				351,323				1,263,217				1,063,955
Gross Profit			144,664				113,869				419,083				299,061
Operating Expenses			74,781				65,551				219,636				193,084
Income From Operations			69,883				48,318				199,447				105,977
Interest Expense			4,817				5,360				14,358				17,980
Interest Income			645				359				1,800				869
Income Before Taxes & Noncontrolling Interests			65,711				43,317				186,889				88,866
Provision For Income Taxes			19,831				11,645				58,366				25,697
Net Income			45,880				31,672				128,523				63,169
Less: Net Income Attributable to Noncontrolling Interests, net of tax			1,226				522				4,387				2,780
Net Income Attributable to Regal Beloit Corporation		$	44,654			$	31,150			$	124,136			$	60,389
Earnings Per Share of Common Stock:
Basic		$	1.16			$	0.86			$	3.26			$	1.80
Assuming Dilution		$	1.14			$	0.82			$	3.19			$	1.71
Cash Dividends Declared		$	0.17			$	0.16			$	0.50			$	0.48
Weighted Average Number of Shares Outstanding:
Basic			38,581,166				36,055,784				38,112,515				33,589,782
Assuming Dilution			39,023,135				38,183,014				38,875,978				35,294,400

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

(Dollars in Thousands, Except Shares and Per Share Data)

		(Unaudited)
		October 2,				January 2,
		2010				2010
ASSETS
Current Assets:
Cash and Cash Equivalents		$	134,080			$	262,422
Investments — Trading Securities			194,105				117,553
Trade Receivables, less Allowances of $10,827 in 2010 and $12,666 in 2009			353,212				240,721
Inventories			340,609				268,839
Prepaid Expenses and Other Current Assets			72,667				59,168
Deferred Income Tax Benefits			26,815				30,673
Total Current Assets			1,121,488				979,376
Net Property, Plant and Equipment			361,014				343,071
Goodwill			711,243				663,920
Intangible Assets, Net of Amortization			138,992				116,426
Other Noncurrent Assets			14,864				9,444
Total Assets		$	2,347,601			$	2,112,237
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	230,447			$	161,902
Dividends Payable			6,562				5,981
Accrued Compensation and Employee Benefits			66,129				50,722
Other Accrued Expenses			85,982				82,076
Current Maturities of Debt			7,029				8,385
Total Current Liabilities			396,149				309,066
Long-Term Debt			425,898				468,065
Deferred Income Taxes			73,602				72,418
Hedging Obligations			48,191				31,232
Pension and other Post Retirement Benefits			38,257				39,306
Other Noncurrent Liabilities			17,251				12,082
Equity:
Regal Beloit Corporation Shareholders’ Equity:
Common Stock, $.01 par value, 100,000,000 shares authorized, 38,599,382 shares issued in 2010, and 37,399,353 issued in 2009			386				374
Additional Paid-In Capital			533,782				512,282
Retained Earnings			808,786				703,765
Accumulated Other Comprehensive Loss			(16,799	)			(48,597	)
Total Regal Beloit Corporation Shareholders’ Equity			1,326,155				1,167,824
Noncontrolling Interests			22,098				12,244
Total Equity			1,348,253				1,180,068
Total Liabilities and Equity			2,347,601			$	2,112,237

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

(Dollars in Thousands, Except Share and Per Share Data)

		Regal Beloit Corporation Shareholders’ Equity
																		Accumulated
		Common				Additional												Other
		Stock $.01				Paid-In				Treasury				Retained				Comprehensive				Noncontrolling				Total
		Par Value				Capital				Stock				Earnings				Income (Loss)				Interests				Equity
Balance as of December 27, 2008		$	323			$	356,231			$	(19,419	)		$	631,281			$	(142,429	)		$	11,654			$	837,641
Net Income			—				—				—				60,389				—				2,780			$	63,169
Dividends Declared ($.48 per share)			—				—				—				(16,583	)			—				—			$	(16,583	)
Issuance of 4,312,500 shares of Common Stock			43				150,327				—				—				—				—			$	150,370
Issuance of Treasury Stock for conversion premium on Convertible Debt redemption			—				(11,081	)			11,081				—				—				—			$	—
Reversal of Unrecognized Tax Benefits related to Convertible Debt			—				3,600				—				—				—				—			$	3,600
Stock Options Exercised, including income tax benefit and share cancellations			1				832				—				—				—				—			$	833
Stock-based Compensation			—				3,258				—				—				—				—			$	3,258
Other Comprehensive Income (Loss) by Classification:
Currency Translation adjustments			—				—				—				—				11,607				1,407			$	13,014
Hedging Activities, net of tax			—				—				—				—				69,846				—			$	69,846
Pension and Post Retirement Benefits, net of tax			—				—				—				—				834				—			$	834
Balance as of September 26, 2009		$	367			$	503,167			$	(8,338	)		$	675,087			$	(60,142	)		$	15,841			$	1,125,982

		Regal Beloit Corporation Shareholders’ Equity
														Accumulated
		Common				Additional								Other
		Stock $.01				Paid-In				Retained				Comprehensive				Noncontrolling				Total
		Par Value				Capital				Earnings				Income (Loss)				Interests				Equity
Balance as of January 2, 2010		$	374			$	512,282			$	703,765			$	(48,597	)		$	12,244			$	1,180,068
Net Income			—				—				124,136				—				4,387				128,523
Dividends Declared ($.50 per share)			—				—				(19,115	)			—				—			$	(19,115	)
Issuance of 100,000 shares of Common Stock for Acquisition			1				6,106				—				—				—			$	6,107
Issuance of Common Stock for Conversion premium on Convertible Debt redemption			9				(9	)			—				—				—			$	—
Reversal of Unrecognized Tax Benefits related to Convertible Debt			—				6,554				—				—				—			$	6,554
Noncontrolling Interests of Acquisitions			—				—				—				—				4,591			$	4,591
Stock Options Exercised, including income tax benefit and share cancellations			2				3,881				—				—				—			$	3,883
Stock-based Compensation			—				4,968				—				—				—			$	4,968
Other Comprehensive Income (Loss) by Classification:
Currency Translation adjustments			—				—				—				26,238				876			$	27,114
Hedging Activities, net of tax			—				—				—				4,417				—			$	4,417
Pension and Post Retirement Benefits, net of tax			—				—				—				1,143				—			$	1,143
Balance as of October 2, 2010		$	386			$	533,782			$	808,786			$	(16,799	)		$	22,098			$	1,348,253

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

(Dollars in Thousands)

		Nine Months Ended
		October 2, 2010				September 26, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	128,523			$	63,169
Adjustments to reconcile net income to net cash provided by operating activities (net of acquisitions):
Depreciation and amortization			54,289				50,573
Excess tax benefits from stock-based compensation			(1,581	)			(1,862	)
Loss on disposition of property, net			4,451				243
Stock-based compensation expense			4,968				3,258
Non-cash convertible debt deferred financing costs			—				1,063
Change in assets and liabilities			(42,063	)			119,124
Net cash provided by operating activities			148,587				235,568
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment			(29,989	)			(25,884	)
Purchases of investment securities			(313,169	)			(10,696	)
Sales of investment securities			236,752				—
Business acquisitions, net of cash acquired			(107,258	)			(1,500	)
Sale of property, plant and equipment			108				361
Net cash used in investing activities			(213,556	)			(37,719	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the sale of common stock			—				150,370
Repayments of convertible debt			(39,198	)			(27,609	)
Net repayments of short-term borrowings			(9,139	)			(5,480	)
Payments of long-term debt			(138	)			(152	)
Net repayments under revolving credit facility			(2,863	)			(13,207	)
Dividends paid to shareholders			(18,534	)			(15,794	)
Proceeds from the exercise of stock options			3,545				753
Excess tax benefits from stock-based compensation			1,581				1,862
Net cash (used in) provided by financing activities			(64,746	)			90,743
EFFECT OF EXCHANGE RATES ON CASH			1,373				469
Net (decrease) increase in cash and cash equivalents			(128,342	)			289,061
Cash and cash equivalents at beginning of period			262,422				65,250
Cash and cash equivalents at end of period		$	134,080			$	354,311

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 2010
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying (a) condensed consolidated balance sheet as of January 2, 2010, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of October 2, 2010, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s 2009 Annual Report on Form 10-K filed on March 2, 2010.

Recent accounting guidance changed the consolidation rules as they relate to variable interest entities (“VIE’s”). The guidance changed the model related to consolidating a VIE, and defines the assessment methodology for determining VIE status. The guidance was adopted by the Company as required at the beginning of fiscal 2010, and did not have an effect on the Company’s consolidated financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and nine months ended October 2, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year ending January 1, 2011.

The Company operates on a 52/53 week fiscal year, and fiscal 2009 was a 53 week year with an additional week in the fiscal fourth quarter.

2. OTHER FINANCIAL INFORMATION

Inventories

Cost for approximately 50% of the Company’s inventory is determined using the last-in, first-out (LIFO) inventory valuation method. The approximate percentage distribution between major classes of inventories was as follows:

		October 2, 2010				January 2, 2010
Raw Material and Work in Process			32	%			34	%
Finished Goods and Purchased Parts			68	%			66	%

Property, Plant and Equipment

Property, plant and equipment by major classification was as follows:

		October 2, 2010				January 2, 2010
Land and Improvements			44,612				42,034
Buildings and Improvements			137,723				127,468
Machinery and Equipment			498,362				470,130
Construction in Progress			20,484				14,144
Property, Plant and Equipment			701,181				653,776
Less: Accumulated Depreciation			(340,167	)			(310,705	)
Net Property, Plant and Equipment			361,014				343,071

3. ACQUISITIONS

The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition.

On September 1, 2010, the Company acquired Rotor B.V. (“Rotor”) headquartered in Eibergen, the Netherlands. Rotor sells electric motors to a variety of industries including the marine industry, ship building and offshore oil and gas. In addition to the Netherlands, Rotor also sells throughout Europe, the United Kingdom and Japan. The purchase price was approximately $36.4 million net of cash acquired and assumed liabilities. Rotor is reported as part of the Electrical segment.

On April 6, 2010, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”) headquartered in Melbourne, Australia. CMG manufactures and distributes fractional horsepower industrial motors, blower systems, and industrial metal products with operations in Australia, New Zealand, South Africa, Malaysia, Singapore, the United Kingdom, and the Middle East. The purchase price was $83.5 million, including $74.7 million in cash, approximately $2.7 million in assumed liabilities and 100,000 shares of Company stock with a fair market value of $6.1 million. CMG has operations in both the Mechanical and Electrical segments.

Purchase price allocations for the Rotor and CMG acquisitions included adjustments for intangible assets, property and other working capital adjustments. The excess of purchase price over fair value was assigned to goodwill.

4. INVESTMENTS

Investments are generally short term in duration and are classified as trading securities, which are reported at fair value with gains and losses, which were insignificant for all periods presented, included in earnings. As of October 2, 2010 and January 2, 2010, the Company had $194.1 million and $117.6 million respectively, of trading securities recorded at fair value (Level 2) (see Note 16 of the Condensed Consolidated Financial Statements for description of the fair value hierarchy).

		(Dollars in Thousands)
		October 2, 2010				January 2, 2010
Commercial Paper		$	30,039			$	37,473
U.S. Government Securities			21,307				4,202
Municipal Debt Securities			107,523				48,294
Asset Backed Securities			17,735				5,773
Corporate Debt Securities			17,501				21,811
Total		$	194,105			$	117,553

5. COMPREHENSIVE INCOME

The Company’s consolidated comprehensive income for the three and nine months ended October 2, 2010 and September 26, 2009, respectively, was as follows (in thousands):

		Three Months Ending								Nine Months Ending
		October 2,				September 26,				October 2,				September 26,
		2010				2009				2010				2009
Net income		$	45,880			$	31,672			$	128,523			$	63,169
Other Comprehensive Income (Loss) from:
Currency Translation adjustments			(33,761	)			5,950				(26,238	)			13,014
Changes in fair value on open hedge contracts, net of tax			13,301				(2,035	)			866				23,904
Hedging activities reclassified into earnings from accumulated other comprehensive income (loss) (“AOCI”), net of tax			2,157				10,829				3,551				45,942
Amortization of net prior service costs and actuarial losses			332				60				1,143				834
Comprehensive income		$	27,909			$	46,476			$	107,845			$	146,863

The amount of comprehensive income attributable to noncontrolling interests was $2.1 million and $5.3 million for the three and nine months ended October 2, 2010, respectively. The amount of comprehensive income attributable to noncontrolling interests was $0.5 million and $4.2 million for the three and nine months ended September 26, 2009, respectively.

Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and pension liability adjustments are included in Equity under Accumulated Other Comprehensive Income (Loss). The components of the ending balances of Accumulated Other Comprehensive (Loss) are as follows (in thousands):

		October 2, 2010				January 2, 2010
Translation adjustments		$	21,138			$	(5,100	)
Hedging activities, net of tax			(13,985	)			(18,402	)
Pension and post retirement benefits, net of tax			(23,952	)			(25,095	)
		$	(16,799	)		$	(48,597	)

6. WARRANTY COSTS

The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the three and nine months ended October 2, 2010 and September 26, 2009 (in thousands):

		Three Months Ending								Nine Months Ending
		October 2,				September 26,				October 2,				September 26,
		2010				2009				2010				2009
Beginning balance		$	13,086			$	10,650			$	13,298			$	11,022
Deduct: Payments			(3,293	)			(3,805	)			(10,194	)			(9,124	)
Add: Provision			3,050				4,954				9,687				9,887
Acquisitions			117				—				135				—
Translation Adjustments			42				67				76				81
Ending balance		$	13,002			$	11,866			$	13,002			$	11,866

7. BUSINESS SEGMENTS

The Company has two strategic businesses that are reportable segments, Mechanical and Electrical (in thousands):

		Mechanical Segment								Electrical Segment								Mechanical Segment								Electrical Segment
		Three Months Ending								Three Months Ending								Nine Months Ending								Nine Months Ending
		October 2,				September 26,				October 2,				September 26,				October 2,				September 26,				October 2,				September 26,
		2010				2009				2010				2009				2010				2009				2010				2009
Net Sales		$	63,012			$	43,186			$	527,789			$	422,006			$	174,476			$	142,404			$	1,507,824			$	1,220,612
Income from Operations			7,845				2,522				62,038				45,796				22,232				12,936				177,215				93,041
% of Net Sales			12.4	%			5.8	%			11.8	%			10.9	%			12.7	%			9.1	%			11.8	%			7.6	%
Goodwill at end of period		$	11,261			$	530			$	699,982			$	668,911			$	11,261			$	530			$	699,982			$	668,911

8. GOODWILL AND OTHER INTANGIBLES

Goodwill

As required, we perform an annual impairment test of goodwill during the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of our reporting units below their carrying value.

At October 2, 2010, substantially all of the Company’s goodwill is attributable to the Electrical segment and the Company believes that substantially all of the goodwill is deductible for tax purposes. The following information presents changes to goodwill during the periods indicated (in thousands):

Balance as of January 2, 2010		$	663,920
Acquisitions			39,492
Translation Adjustments			7,831
Balance as of October 2, 2010		$	711,243
Balance as of December 27, 2008		$	672,475
Acquisitions and Valuation Adjustments			(1,917	)
Translation Adjustments			(1,117	)
Balance as of September 26, 2009		$	669,441

Intangible Assets

Intangible assets consisted of the following (in thousands):

		October 2, 2010								September 26, 2009
						Accumulated								Accumulated
		Gross Value				Amortization				Gross Value				Amortization
Customer Relationships		$	130,462			$	(37,681	)		$	98,483			$	(26,512	)
Technology			34,122				(11,962	)			33,063				(7,560	)
Trademarks			25,529				(9,269	)			21,156				(7,287	)
Patents & Engineering Drawings			16,610				(9,586	)			16,610				(7,923	)
Non-Compete Agreements			6,406				(5,639	)			6,348				(4,703	)
		$	213,129			$	(74,137	)		$	175,660			$	(53,985	)
Net Values						$	138,992							$	121,675

Estimated Amortization (in millions)

2011		2012		2013		2014		2015
$19.4		$19.1		$18.9		$18.4		$12.3

Amortization expense recorded for the three and nine months ended October 2, 2010 was $5.2 million and $14.6 million, respectively. Amortization expense for the three and nine months ended September 26, 2009 was $5.2 million and $14.5 million, respectively.

9. DEBT AND BANK CREDIT FACILITIES

The Company’s indebtedness as of October 2, 2010 and January 2, 2010 was as follows (in thousands):

		October 2, 2010				January 2, 2010
Senior notes		$	250,000			$	250,000
Term loan			165,000				165,000
Revolving credit facility			—				2,863
Convertible Notes			—				39,198
Other			17,927				19,389
			432,927				476,450
Less: Current maturities			(7,029	)			(8,385	)
Non-current portion		$	425,898			$	468,065

At October 2, 2010, the Company has $250.0 million of Senior Notes (the “Notes”) outstanding. The Notes were sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among the Company and the purchasers of the Notes. The Notes were issued and sold in two series: $150.0 million in Floating Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017. The Notes bear interest at a margin over the London Inter-Bank Offered Rate (“LIBOR”), which margin varies with the ratio of the Company’s consolidated debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Agreement. These interest rates also vary as LIBOR varies. The Agreement permits the Company to issue and sell additional note series, subject to certain terms and conditions described in the Agreement, up to a total of $600.0 million in combined Notes. At October 2, 2010, the interest rate of 1.0% was based on a margin over LIBOR.

The Company also has a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby the Company borrowed an aggregate principal amount of $165.0 million. The Term Loan matures in June 2013, and borrowings generally bear interest at a variable rate equal to (i) a margin over LIBOR, which margin varies depending on whether certain criteria are satisfied, or (ii) the alternate base rate as defined in the agreement. At October 2, 2010, the interest rate of 1.0% was based on a margin over LIBOR.

The Company’s $500.0 million revolving credit facility (“Facility”) matures in April 2012 and permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of total funded debt to EBITDA, as defined in the Facility. These interest rates also vary as LIBOR varies. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total debt to EBITDA as defined in the Facility.

The Notes, the Term Loan, and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all debt covenants as of October 2, 2010.

The Company has entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 15 of Notes to Condensed Consolidated Financial Statements.)

As of October 2, 2010, the Company has no Convertible Notes that remain outstanding. The Company exercised its right to call the remaining bonds, which resulted in bondholders exercising their conversion right. As a result, bondholders received the principal amount of the notes in cash, with the balance of the conversion obligation satisfied in shares of the Company’s common stock. During the first nine months of 2010, bondholders exercised their conversion right for a total of $39.2 million of Convertible Notes. The par value was paid in cash, and 917,394 shares of common stock were issued for the conversion premium.

At October 2, 2010, other notes payable of approximately $17.9 million were outstanding with a weighted average interest rate of 5.0%.

10. PENSION PLANS

The Company’s net periodic defined benefit pension cost is comprised of the following components (in thousands):

		Three Months Ending								Nine Months Ending
		October 2, 2010				September 26, 2009				October 2, 2010				September 26, 2009
Service cost		$	586			$	578			$	1,758			$	1,734
Interest cost			1,734				1,591				5,203				4,775
Expected return on plan assets			(1,566	)			(1,414	)			(4,697	)			(4,242	)
Amortization of prior service cost			47				49				141				147
Amortization of net actuarial loss			564				188				1,691				564
Net periodic benefit expense		$	1,365			$	992			$	4,096			$	2,978

The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during the 2010 fiscal year is $2.2 million and $0.2 million, respectively.

In the third quarter of 2010 and 2009, the Company contributed $2.9 million and $8.5 million to defined benefit pension plans, respectively. The Company expects to contribute an additional $0.5 million, for total contributions of $4.3 million in 2010. The Company contributed a total of $10.1 million in 2009. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2009 Annual Report on Form 10-K filed on March 2, 2010.

11. SHAREHOLDERS’ EQUITY

The Company recognized approximately $1.9 million and $1.3 million in share-based compensation expense for the three month period ended October 2, 2010 and September 26, 2009, respectively. Share-based compensation expense for the nine month period ending October 2, 2010 and September 26, 2009 was $5.0 million and $3.3 million, respectively. The total excess income tax benefit recognized relating to share-based compensation for the nine months ended October 2, 2010 and September 26, 2009 was approximately $1.6 million and $1.9 million, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of October 2, 2010, total unrecognized compensation cost related to share-based compensation awards was approximately $19.0 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 3.0 years.

The Company was authorized as of October 2, 2010 to deliver up to 5.0 million shares of common stock upon exercise of non-qualified stock options or incentive stock options, or upon grant or in payment of stock appreciation rights, and restricted stock. Approximately 1.7 million shares were available for future grant or payment under the various plans at October 2, 2010.

On May 22, 2009, the Company completed the sale of 4,312,500 shares of common stock at a price of $36.25 per share to the public. Net proceeds of $150.4 million were received by the Company.

Share-based Incentive Awards

The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SARs”). All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire ten years from the grant date. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of grant.

The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. The per share weighted average fair value of share-based incentive awards granted in the May 2010 annual grant was $22.88. The fair market value of the awards is estimated on the date of grant using the Black-Scholes pricing model and the following assumptions: risk-free interest rate of 3.0%; expected dividend yield of 1.1%; expected volatility of 35.4%, and an estimated life of 7.0 years.

A summary of share-based awards (options and SARs) as of October 2, 2010 follows below. Forfeitures of share-based awards were immaterial.

						Wtd. Avg.				Wtd. Avg. Remaining				Aggregate Intrinsic
		Shares				Exercise Price				Contractual Term (years)				Value (in millions)
Number of shares:
Outstanding			1,480,950			$	43.38				7.1			$	23.6
Exercisable			571,150				36.65				5.6				12.9

Restricted Stock

As of October 2, 2010, the Company had 184,150 shares of restricted stock outstanding with a weighted average grant date fair value of $53.12 and a weighted average life of 2.3 years. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of the grant. In the first nine months of 2010 there were 105,950 shares of restricted stock granted, and 29,300 shares of restricted stock vested.

12. INCOME TAXES

The effective tax rate for the three months ended October 2, 2010 was 30.2% versus 26.9% in the prior year period. The effective tax rate for the nine months ended October 2, 2010, was 31.2% versus 28.9% in the prior period. The changes in the effective rates are driven by changes in the global distribution of income.

As of October 2, 2010 and January 2, 2010, the Company had approximately $6.0 million and $6.6 million respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Federal tax returns from 2007 through 2009 and various state tax returns remain subject to income tax examinations by tax authorities.

13. EARNINGS PER SHARE (EPS)

The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in thousands):

		Three Months Ending								Nine Months Ending
		October 2, 2010				September 26, 2009				October 2, 2010				September 26, 2009
Denominator for basic EPS — weighted average			38,581				36,056				38,113				33,590
Effect of dilutive securities			442				2,127				763				1,704
Denominator for diluted EPS			39,023				38,183				38,876				35,294

The “Effect of dilutive securities” represents the dilution impact of equity awards and the Convertible Notes (see Note 9 of Notes to Condensed Consolidated Financial Statements). There was no dilutive effect of the Convertible Notes for the three months ended October 2, 2010. The dilutive effect of the Convertible Notes was approximately 1.8 million shares for the three months ended September 26, 2009. The dilutive effect of the Convertible Notes was approximately 0.3 million shares and 1.4 million shares of the nine month period ending October 2, 2010 and September 26, 2009 respectively.

Options for common shares where the exercise price was above the market price at October 2, 2010, and September 26, 2009 totaling approximately 0.3 million and 0.2 million shares, have been excluded from the calculation of the effect of dilutive securities as the effect of such options is anti-dilutive.

14. CONTINGENCIES

On July 30, 2009, the Company filed a response and counterclaims to an action filed by Nordyne, Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri in which action Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems nor its iQ Drive 23-seer air conditioning systems infringe on our ECM (electronically commutated motor) systems patents (U.S. Patent No. 5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is invalid. In our response and counterclaims against Nordyne we are seeking a judgment that the ‘058 Patent is valid and that Nordyne has, in fact, infringed and continues to infringe the ‘058 Patent by making, using, offering for sale and selling it G7 furnace systems and iQ Drive 23-seer air conditioning systems. We have also requested the U.S. District Court to enjoin Nordyne and all persons working in concert with Nordyne from further infringement of the ‘058 Patent and to award us compensatory and other damages caused by such infringement. We intend to defend our intellectual property vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any other person. We do not currently believe that the litigation will have a material effect on the Company’s financial position or its results of operations.

The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company’s products are used in a variety of industrial, commercial and residential applications that subject us to claims that the use of our products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in defending against such lawsuits in amounts that we believe are adequate, and the Company does not believe that the outcome of any such lawsuit will have a material effect on the Company’s financial position or its results of operations.

15. DERIVATIVE INSTRUMENTS

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk, currency exchange, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.

The Company must recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. Accordingly, the Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of October 2, 2010.

Cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings.

At October 2, 2010, the Company had an additional $1.6 million, net of tax, of derivative gains on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At September 26, 2009, the Company had an additional ($0.7) million, net of tax, of derivative losses on closed hedge instruments in AOCI that was realized in earnings when the hedged items impacted earnings.

As of October 2, 2010, the Company had outstanding the following commodity forward contracts (with maturities extending through June 2012) to hedge forecasted purchases of commodities (in millions):

		Notional Amount
Copper		$	73.6
Aluminum			4.5
Zinc			0.4
Natural Gas			0.7

As of October 2, 2010, the Company had outstanding the following currency forward contracts (with maturities extending through December 2012) to hedge forecasted foreign currency cash flows (in millions):

		Notional Amount
Mexican Peso		$	92.5
Indian Rupee			34.5
Chinese Renminbi			7.0
Australian Dollar			1.8
Thai Baht			1.3

As of October 2, 2010, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $250.0 million (with maturities extending to August 2017).

Fair values of derivative instruments as of October 2, 2010 and January 2, 2010 were (in millions):

		October 2, 2010
		Prepaid				Other Noncurrent				Accrued				Hedging
		Expenses				Assets				Expenses				Obligations
Designated as hedging instruments:
Interest rate swap contracts		$	—			$	—			$	—			$	48.1
Foreign exchange contracts			4.6				2.3				0.4				0.1
Commodity contracts			13.7				3.2				0.2				—
Not designated as hedging instruments:
Foreign exchange contracts			—				—				0.6				—
Commodity contracts			0.2				—				—				—
Total Derivatives:		$	18.5			$	5.5			$	1.2			$	48.2

		January 2, 2010
		Prepaid				Other Noncurrent				Accrued				Hedging
		Expenses				Assets				Expenses				Obligations
Designated as hedging instruments:
Interest rate swap contracts		$	—			$	—			$	—			$	31.2
Foreign exchange contracts			—				1.1				5.5				—
Commodity contracts			3.5				—				—				—
Not designated as hedging instruments:
Foreign exchange contracts			0.2				—				—				—
Commodity contracts			0.9				—				—				—
Total Derivatives:		$	4.6			$	1.1			$	5.5			$	31.2

The effect of derivative instruments on the condensed consolidated statements of equity and earnings for the three and nine months ended October 2, 2010 and September 26, 2009, was (in millions):

Derivatives Designated as Cash Flow Hedging Instruments

		Three Months Ended																Three Months Ended
		October 2, 2010																September 26, 2009
										Interest																Interest
		Commodity				Currency				Rate								Commodity				Currency				Rate
		Forwards				Forwards				Swaps				Total				Forwards				Forwards				Swaps				Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)		$	23.0			$	7.5			$	(9.1	)		$	21.4			$	3.6			$	(1.0	)		$	(6.0	)		$	(3.4	)
Amounts reclassified from other comprehensive income (loss) were:
Gain recognized in Net Sales		$	—			$	0.1			$	—			$	0.1			$	—			$	—			$	—			$	—
Gain (Loss) recognized in Cost of Sales			0.1				(0.5	)			—			$	(0.4	)			(10.9	)			(2.1	)			—			$	(13.0	)
Loss recognized in Operating Expenses			—				—				—			$	—				—				(1.4	)			—			$	(1.4	)
Loss recognized in Interest Expense			—				—				(3.1	)		$	(3.1	)			—				—				(3.1	)		$	(3.1	)

Derivatives Designated as Cash Flow Hedging Instruments

		Nine Months Ended																Nine Months Ended
		October 2, 2010																September 26, 2009
										Interest																Interest
		Commodity				Currency				Rate								Commodity				Currency				Rate
		Forwards				Forwards				Swaps				Total				Forwards				Forwards				Swaps				Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)		$	18.1			$	9.3			$	(26.0	)		$	1.4			$	26.7			$	6.4			$	5.9			$	39.0
Amounts reclassified from other comprehensive income (loss) were:
Gain (Loss) recognized in Cost of Sales			5.6				(2.2	)			—			$	3.4				(52.8	)			(8.5	)			—			$	(61.3	)
Loss recognized in Operating Expenses			—				—				—			$	—				—				(4.8	)			—			$	(4.8	)
Loss recognized in Interest Expense			—				—				(9.1	)		$	(9.1	)			—				—				(8.0	)		$	(8.0	)

The ineffective portion of hedging instruments recognized during the three and nine months ended October 2, 2010 was immaterial.

Derivatives Not Designated as Cash Flow Hedging Instruments

		Three Months Ended												Three Months Ended												Nine Months Ended												Nine Months Ended
		October 2, 2010												September 26, 2009												October 2, 2010												September 26, 2009
		Commodity				Currency								Commodity				Currency								Commodity				Currency								Commodity				Currency
		Forwards				Forwards				Total				Forwards				Forwards				Total				Forwards				Forwards				Total				Forwards				Forwards				Total
Gain (Loss) recognized in Cost of Sales		$	0.1			$	(0.1	)		$	—			$	1.6			$	(0.4	)		$	1.2			$	(0.5	)		$	(0.2	)		$	(0.7	)		$	9.1			$	(1.3	)		$	7.8
Loss recognized in Operating Expenses		$	—			$	—			$	—			$	—			$	(0.5	)		$	(0.5	)		$	—			$	—			$	—			$	—			$	(0.5	)		$	(0.5	)

The net AOCI balance of ($14.0) million loss at October 2, 2010 includes $3.4 million of net current deferred gains expected to be realized in the next twelve months.

16. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or
		Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
		Inputs other than quoted prices that are observable for the asset or liability
Level 3		Unobservable inputs for the asset or liability

The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of October 2, 2010 and January 2, 2010 (in millions):

		October 2, 2010				January 2, 2010
Assets:
Investments — Trading Securities		$	194.1			$	117.6			(Level 2)
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts			4.6				0.2			(Level 2)
Derivative Commodity Contracts			13.9				4.4			(Level 2)
Other Noncurrent Assets:
Derivative Currency Contracts			2.3				1.1			(Level 2)
Derivative Commodity Contracts			3.2				—			(Level 2)
Liabilities:
Other Accrued Expenses:
Derivative Currency Contracts			1.0				5.5			(Level 2)
Derivative Commodity Contracts			0.2				—			(Level 2)
Hedging Obligations:
Interest Rate Swap			48.1				31.2			(Level 2)
Derivative Currency Contracts			0.1				—			(Level 2)

17. SUBSEQUENT EVENT

On November 1, 2010, the Company acquired 55% of Elco Group B.V. (“Elco”). Elco manufactures and sells motors, fans and blowers, and has manufacturing facilities in Italy, China and Brazil.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

The global economy and particularly the U.S. economy continued to show growth in the third quarter 2010. Sales of high efficiency products, particularly for HVAC and commercial refrigeration applications, continued to show strong growth rates, supported by the net economic impact to the end user and, in certain cases, by tax credits and other subsidies. During the third quarter we experienced difficulties meeting some of our demand due to supply chain disruptions. In an effort to mitigate the impact on our customers, we incurred incremental costs, including costs associated with qualifying new vendors, plant labor inefficiencies, and expedited transportation.

Net sales for the third quarter 2010 increased 27.0% to $590.8 million from $465.2 million in the third quarter 2009. Sales for the third quarter 2010 included $33.5 million of incremental sales from the Rotor and CMG businesses acquired in 2010.

Net Income Attributable to Regal Beloit Corporation increased 43.4% to $44.7 million for the third quarter 2010 compared to $31.2 million for the third quarter 2009. Diluted earnings per share increased 39.0% to $1.14 for the third quarter 2010 compared to $0.82 for the third quarter 2009.

RESULTS OF OPERATIONS

NET SALES

		(In millions)
		Three Months Ended								Nine Months Ended
		October 2, 2010				September 26, 2009				October 2, 2010				September 26, 2009
Net Sales		$	590.8			$	465.2			$	1,682.3			$	1,363.0
Sales growth rate			27.0	%			(25.0	%)			23.4	%			(22.7	%)
Net Sales by Segment:
Electrical segment		$	527.8			$	422.0			$	1,507.8			$	1,220.6
Sales growth rate			25.1	%			(24.2	%)			23.5	%			(22.3	%)
Mechanical segment		$	63.0			$	43.2			$	174.5			$	142.4
Sales growth rate			45.9	%			(32.6	%)			22.5	%			(25.8	%)