Building
Building
Momentum
Momentum
Regal-Beloit Corporation
World Headquarters
200 State Street
Beloit, Wisconsin 53511-6254
www.regalbeloit.com
2010 Annual Report
Table of Contents
Part I
About the company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1
Building momentum through innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3
Expanding our global reach through acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . 4-5
Financial highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Letter to shareholders and associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8
Retirement message from Chief Executive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Envisioning the future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-13
Leadership team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14-15
Shareholder information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Part II
10-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 1-64
About the Company
Regal Beloit Corporation (NYSE: RBC) is a leading global manufacturer of air flow,
motion control and power generation solutions used in commercial, industrial and
residential applications. From electric motors and generators to mechanical gear
drives and electronic controls, Regal Beloit’s products and systems convert power
into motion and motion into power to help the world run more efficiently.
One of the company’s unique features is its market diversity. The company
promotes over 30 distinguished brands and serves an expansive array of
industries including heating, ventilating and air conditioning (HVAC), commercial
refrigeration, food processing, pharmaceutical, chemical processing, material
handling, medical, oil and gas production, construction, manufacturing, power
generation, agriculture and mining, to name a few.
With headquarters in Beloit, Wisconsin, Regal Beloit has manufacturing and
distribution facilities throughout North America and in South America, Europe,
Asia, South Africa, Singapore, Thailand and Australia.
Regal Beloit is a Wisconsin corporation listed on the New York Stock Exchange
under the symbol RBC.
1
Building Momentum Through Innovation
Energy Efficiency Technology
“The increasing momentum of our company is powered by the
innovation of products and technologies that are needed and that
deliver tangible value to our customers.”
- Henry W. Knueppel
Our business model is built on providing necessary, innovative products and systems
addressing ever-evolving customer needs. By their very nature, our products are necessary–
not optional–to the function of much of the equipment that keeps the world in motion. Our
key products include electric motors and generators, electronic drives and controls, and
mechanical gear reducers that either power or transfer power to equipment, allowing it to
perform optimally and efficiently.
We live in an era of an escalating demand for energy worldwide. The International Energy
Agency (IEA) expects the world’s power demand to rise 45% by 2030, and there is an
increasing concern for the impact on our climate due to emissions from power plants.
This increasing energy consumption and concern is causing governments, businesses and
industries around the world to institute new mandates for energy efficiency, making our
energy efficient products and technology more important to our customers.
Next Generation ECM Technology Emerges
Our engineers have been involved in the effort to develop new energy efficient
technology for decades. In 2010, our Genteq brand released the new Eon™ motor that
represents our seventh generation of Electronically Commutated Motor (ECM) technology
for HVAC furnaces and air handlers. Eon™ is a lighter, more compact, and more efficient
variable speed motor that is also compatible with existing ECM units.
We also released the ARkTIC™ SSC motor, the most advanced ECM unit available for
commercial refrigeration applications. The ARkTIC™ SSC, marketed by Morrill Motors, is
used in the evaporator on commercial refrigeration units. With efficiencies three times higher
than shaded pole motors and 45% higher than Permanent Split Capacitor (PSC) models,
the ARkTIC™ SSC is now the premium energy savings solution on the market.
Eon™
HVAC Motor
imPower™
Pump Motor
SyMAX™ Permanent
Magnet Motor
High Efficiency Right
Angle Gear Reducer
2
Building Momentum Through Innovation
Custom Integrated Solutions
Revolutionary Permanent Magnet Motors Arrive
Our Fasco and Marathon brands recently developed the world’s first axial flux brushless motor technology for
commercial and domestic pumping applications. The product line of patented imPower™ motors, released in
2010, incorporates powerful, rare earth permanent magnets combined with the latest in electronic controls to
provide higher efficiencies, lower operating costs, lighter weight and less noise. These motors are designed for
use in a variety of water pumping applications.
In addition, our commercial and industrial motor businesses are launching a permanent magnet synchronous
motor line in 2011 that meets the world’s highest efficiency levels in both NEMA 180-280 (North American) and
IEC 112-180 (International) frame sizes. This leading edge product line incorporates an interior permanent
magnet rotor that produces high flux within the motor resulting in improved energy savings over existing models.
The line is being offered by Marathon as the SyMAX™ motor and by Leeson as the Platinum E™ model for a wide
variety of industrial and commercial applications.
High Efficiency Right Angle Gearing
Another way we help to improve efficiency is by controlling the transfer of power and torque using right angle
worm gear speed reducers. In 2010, our Grove Gear and Hub City mechanical businesses introduced a new 90%
efficient gear reducer as compared to efficiencies of 68% for traditional models. When paired with our energy
efficient electric motors and drives, these gear products offer even greater efficiencies than traditional systems
while allowing for an increase in torque of up to 60%.
Marathon Electric
NEMA C-Face Motor
Unico 1200 Series
Electronic Drive
Hub City Helical
Bevel Gearbox
Integrated System Solution to Customer
Custom Integrated Solutions
With the 2010 Unico acquisition came the ability to supply the combination of an electronic drive control with
the mechanical and electrical components for a wide variety of industrial and commercial applications. Unico
has developed proprietary technology for oil and gas recovery, commercial HVAC and a number of other
applications.
Unico’s model S1200 variable speed drive controller incorporates the latest in insulated gate bi-polar
transistors, pulse-width modulation and digital signal processing for optimal motor performance and complete
programmability, while maintaining simplicity of operation. The S1200 can be configured for constant torque,
variable torque, or extended torque applications and can drive a standard or inverter-duty AC induction or
synchronous motor for retrofitting on existing equipment or upgrading on new systems.
3
Expanding Our Global Reach
Our growth strategy includes driving organic growth through innovation and also
through globalization. We want to attract new customers in fast growing markets and
to expand geographically into rapidly developing regions of the world. Our growth is
often accomplished through business acquisitions that have enabled us to expand our
product portfolio, improve our technological leadership and increase our sales outside
of the United States to 32% percent of total sales in 2010.
We have acquired and successfully integrated 14 new businesses during the past six
years, and we continue to identify and evaluate strategic, value-adding acquisitions
on an ongoing basis. By expanding our global operations and leveraging our
manufacturing capabilities, we have improved our ability to provide products and
services where our customers need them. In addition, our operations worldwide share
best practices, business disciplines, expertise and resources to continuously improve
our performance and the value we provide to our customers.
Facilities: 7
Employees: 216
Facilities: 11
Employees: 428
Facilities: 9
Employees: 3616
Facilities: 3
Employees: 2174
Facilities: 1
Employees: 19
Facilities: 28
Employees: 4644
Facilities: 10
Employees: 5936
Facilities: 1
Employees: 42
Facilities: 1
Employees: 777
Facilities: 3
Employees: 84
Facilities: 1
Employees: 47
Facilities: 1
Employees: 128
Facilities: 2
Employees: 25
Facilities: 3
Employees: 69
Facilities: 11
Employees: 316
4
2010 Acquisitions
April 6, 2010 – We acquired CMG, located in Melbourne, Australia with operations in
Australia, New Zealand, South Africa, Malaysia, Singapore, the United kingdom, and the
Middle East. CMG makes fractional horsepower industrial motors, blower systems and
industrial metal products and distributes a wide variety of complementary products.
May 4, 2010 – We acquired Air-Con Technology, located in Mississauga, Ontario,
Canada. Air-Con is a distributor of heating, ventilating and air conditioning electric
motors and motors for refrigeration.
September 1, 2010 – We acquired Rotor B.V., located in Eibergen, the Netherlands, with
presence in Europe, the United kingdom and Japan. Rotor sells standard and special
electric motors to a variety of industries including the marine industry, ship building and
offshore oil and gas.
November 1, 2010 – We acquired 55% of Elco Group B.V. located in Milan, Italy with
manufacturing facilities in Italy, China and Brazil. Elco manufactures and markets
motors, fans and blowers.
December 13, 2010 – We announced the acquisition of A.O. Smith’s Electrical Products
Company (EPC). EPC is headquartered in Tipp City, Ohio and manufactures electric
motors in the US, Mexico, China and the United kingdom for a wide variety of applica-
tions including commercial and residential HVAC, commercial and residential pump,
and general commercial and industrial equipment applications.
December 23, 2010 – We acquired Unico, Inc., located in Franksville, Wisconsin, U.S.A.
Unico manufactures a full range of AC and DC drives, motor controllers and accessories
for a wide range of industrial and commercial applications in nine different countries.
Global Growth
2005
14%
86%
2010
32%
68%
Inside United States
Outside United States
5
Financial Results
(In Thousands, Except Per Share Data)
Net Sales
Net Sales
Net Sales
Net Sales Growth
2006
$ 1,619,545
13.4%
$ 1,802,497
2007
Net Income
11.3%
$ 2,246,249
Net Income
24.6%
2008
2009
2010
$ 1,826,277
$ 2,237,978
-18.7%
$95,048
22.5%
$149,379
Net Income
$107,156
$115,499
$125,525
Net Income as a Percentage
of Net Sales
6.6%
6.4%
5.6%
5.2%
6.7%
$2.2
$2.2
$2.2
$2.2
$1.8
$1.6
$1.6
Earnings Per Share:
$1.8
$1.8
Basic
Assuming Dilution
$1.8
$3.47
3.20
$3.70
3.40
$107.2
$115.5
$107.2
$4.00
$125.5
3.78
$115.5
$149.4
$149.4
$125.5
$2.76
2.63
$3.91
3.84
Net Sales
Net Sales
Net Income
$95.0
Net Income
$95.0
2006
2007
2006
Net Sales
2009
2008
(in billions)
2007
2008
2010
2009
2010
Net Income
2006
(in millions)
2007
2006
2008
2007
2009
2008
2010
2009
2010
$2.2
$2.2
$2.2
$2.2
$149.4
$149.4
$1.8
$1.8
$1.8
$1.8
$1.6
$1.6
$125.5
$125.5
$115.5
$107.2
$115.5
$107.2
$95.0
$95.0
2006
2007
2008
2006
2009
2007
2010
2008
2009
2010
2006
2007
2008
2006
2009
2007
2010
2008
2009
2010
Dividends Declared
Dividends Declared
Cumulative Total Shareholder Return
Cumulative Total Shareholder Return
Dividends Declared
(cents per share)
Cumulative Total Shareholder Return
.59¢
.55¢
.55¢
.63¢
.59¢
.64¢
.63¢
.67¢
.64¢
.67¢
Dividends Declared
Dividends Declared
$201.7
$201.7
$150.1
$150.1
$130.1
$155.2
$130.1
$155.2
$100.0
$100.0
Cumulative Total Shareholder Return
Cumulative Total Shareholder Return
$99.9
$99.9
2006
2006
2007
.59¢
.55¢
2007
2008
.63¢
.55¢
2008
2009
.64¢
.59¢
6
2009
2010
.67¢
.63¢
2010
.64¢
.67¢
2005
2006
2005
2007
2006
2008
2007
2009
2008
2009
2010
$201.7
2010
$201.7
$150.1
$155.2
$150.1
$155.2
$130.1
$130.1
$100.0
$100.0
$99.9
$99.9
2006
2007
2006
2008
2007
2009
2008
2010
2009
2010
2005
2006
2007
2005
2008
2006
2009
2007
2010
2008
2009
2010
Shareholder Letter
The year 2010 will be remembered as an exceptional
year in Regal Beloit’s history. We achieved significant
sales growth and record earnings, expanded our global
presence, enhanced our product offerings through
the completion of six acquisitions, and announced the
largest acquisition in our history. We also introduced a
record number of new products primarily targeted at
providing our customers with energy efficient solutions,
and we welcomed a number of new members to our
leadership team. In short, we continued to build our
momentum and to position your company for an even
brighter future. For all these accomplishments, we wish
to express our appreciation, admiration and gratitude
to our more than 18,000 employees all over the world
who contributed to our success in 2010. It is because
of your skill, dedication and tireless efforts that we
were able to achieve these outstanding results.
(standing) John Avampato (VP/CIO), Pete Underwood (VP/Gen. Counsel/
Secretary), Terry Colvin (VP/Corp. HR); (seated) Chuck Hinrichs (VP/CFO),
(Henry knueppel (Chairman/CEO), Mark Gliebe (President/COO)
Over the last six years, we have taken significant steps to balance our end markets and to geographically diversify our
markets served. The strength and execution of that strategy can be seen in our 2010 results. Sales for 2010 reached
$2.2 billion, a 22% increase over 2009. We saw double-digit growth in our U.S. residential HVAC business as consumers
continued to see value in installing energy efficient systems. Sales in our commercial and industrial business grew by
17%, primarily due to improving industrial demand and continued growth in our Asia based business. Our power
generation and mechanical businesses also achieved double-digit growth based on improving later cycle end
markets. Our sales growth came from both organic growth and the addition of sales from the companies we acquired
in 2010. Our strategy of driving organic growth through innovative new energy efficient products and expanding our
presence in faster growing international markets produced positive results for us in 2010. Our sales of energy efficient
products in 2010 increased 22% from the prior year and now represent nearly 18% of our sales. Additionally, sales in
regions outside the United States grew 44% and now represent 32% of our total sales.
Although we are pleased with our sales growth, commodity cost inflation had a significant negative impact on our
profitability. Despite two price increases in 2010 and outstanding productivity improvements across the company, our
margins narrowed. Given our sales growth, we were not pleased with our lack of progress on margins; however, we
could not be happier with the efforts of our people at every level to offset these historic commodity cost increases.
Cash flow from operations remained strong despite the need to carry additional receivables and to build inventory
as a result of improving sales. Strong cash flow allowed us to fund investments in innovation, complete strategic
acquisitions, increase dividend payments to our shareholders and fund capital expenditure requirements.
During 2010, as part of our strategy to grow our business through acquisitions, we completed six acquisitions and
announced a seventh. Let us share with you a brief summary of four of these acquisitions. The CMG acquisition
expands our geographic reach and provides us better access to end markets in Australia, New Zealand and South
Africa. The Rotor and Elco acquisitions provide us excellent management teams, greater access to the European
markets and a stronger product offering for marine, oil and gas, and commercial refrigeration applications in Europe.
The Unico acquisition provides unique electronic control solutions to a wide variety of applications including oil and gas
production, commercial HVAC and test stand automation. Our agreement to acquire the Electrical Products Company
(EPC) motor business from A.O. Smith was announced in December 2010. The combination of EPC with Regal Beloit
will provide a more complete product offering and additional channels for delivering energy efficient technologies to
support our customers. It will be the largest acquisition in Regal Beloit history, adding $700 million in annual revenues
and 7,800 new employees to the Regal Beloit team. Combined, these seven acquisitions will increase revenues by over
one billion dollars and significantly expand our global manufacturing and distribution footprint.
7
We are proud to report thirty-two new product introductions in 2010 that are in line with our strategic objective of
providing new energy efficient solutions to our customers. While we are excited about all of these new products, let us
highlight two of them. The first is the imPower™ pool motor that provides an energy efficient ECM solution to pool pump
applications allowing the homeowner to significantly reduce the utility costs of operating a pool pump. The payback
to the consumer is approximately one year. The second is our high efficiency blower (HEB). This product is the
combination of a high efficiency HVAC motor with a specially designed blower housing that provides a more efficient
air moving solution for the customer. Again, payback for the end user is approximately one year. While both products
are in the early stages of commercialization, we are receiving very positive feedback on their performance, and we
have high expectations for their adoption.
The year 2010 was also a year of transition for our leadership team. During the year, we welcomed Mr. Stephen M. Burt
to our Board of Directors. Steve is the managing director in the Chicago office of independent financial advisory and
investment banking firm Duff & Phelps. He will be a great asset to our board bringing global business and corporate
development experience. Unfortunately, G. Frederick kasten Jr. will be retiring from our Board after serving since 1995.
During his 15 years of service, Fred provided leadership and oversaw the significant transformation of our company.
Fred has been an outstanding Board member. His informed and independent opinions have added real value, and he
will be missed.
Additionally in 2010, we were happy to welcome Chuck Hinrichs as our new Chief Financial Officer and Peter
Underwood as our new General Counsel. Chuck joins us with over seven years of experience as the CFO of Smurfit-
Stone, and Peter was a partner with Foley & Lardner. We welcome both and look forward to many years of leadership
and contributions. Finally, we would like to acknowledge the promotion of John Avampato to an executive officer.
John joined the company in 2006 and has been our Chief Information Officer since 2008, providing great leadership in
developing and executing our IT strategy. This promotion is a reflection of our commitment to the successful execution
of our IT strategy and its importance as Regal Beloit continues to grow.
We would like to again acknowledge the efforts of our employees whose hard work and dedication made 2010
such a remarkable year. Coming out of the 2009 recession, our staff levels were lean, and we incurred significant
challenges in commodity cost inflation and raw material availability. Our people faced these challenges head on and
executed plans to make 2010 a record year in earnings while maintaining a focus on our customers and developing
new products. We thank them for their efforts and determination.
As we look at 2011, we see a few concerning headwinds, but also a number of positive tailwinds and strong overall
momentum. The key headwind for 2011 will be copper and steel material inflation. Copper prices have increased by
12% in the first quarter of 2011 compared to the fourth quarter of 2010, and steel prices are up 36% in the same time
frame. We will continue to work to offset material cost inflation with a combination of price increases and productivity;
however, it will be difficult to offset all of the anticipated increases in raw material prices. The tailwinds we anticipate
include the growth of the 2010 acquisitions, the sales growth from 2010 and 2011 new product introductions, double-
digit sales growth in Asia, export growth resulting from a weak U.S. dollar, an improving energy efficient product mix,
and synergies from acquisitions. More important than these tailwinds are the 18,000 people who are Regal Beloit. They
are the creators of the positive momentum we are experiencing, and they are the primary reason for our optimism
about the future. We thank you for your continuing support of our activities.
Sincerely,
Henry W. knueppel
Chairman
Chief Executive Officer
8
Mark Gliebe
President
Chief Operating Officer
Message to Shareholders, Employees and Business Associates
After 32 years with Regal Beloit, I recently announced my upcoming retirement.
Making the decision to retire was easy, saying goodbye to close associates is much
more difficult.
I have had the incredible luck to have joined Regal Beloit at the time of the first
generational change of leadership in the company’s history. After the company’s
early years, our former Chairman and CEO, Jim Packard, and I were handed the
reigns by the original founders. We had the pleasure of knowing the three founders,
kenyon Taylor, Henry O’Dell and Bill Oliver personally. We learned from the founders
how to foster an entrepreneurial spirit and how to nurture the vitality that comes from
the birth of an idea and the creation of an organization. We were charged with
carrying the torch of growth and value creation in a changing market place. From
that time until Jim retired, we changed the company’s complexion considerably from
a cutting tool company to a power transmission company, to a power transmission,
electric motor and generator company.
Henry knueppel
Chairman and CEO
In the six years since Jim’s retirement, I have had the pleasure of working shoulder to shoulder with Mark Gliebe. Mark
is a person with great values that guide his personal and professional decisions. His energy, vision and depth along
with his values make him the perfect leader for Regal Beloit. It has also been a pleasure to work with our incredibly
talented leadership team to continue to adapt and change the company to compete and thrive in an ever
changing global economy. Through it all, the constants have been the opportunity to work with talented, energetic
and dedicated people and the accelerating rate of change.
It is impossible to properly thank everyone who deserves to be thanked for their help in making Regal Beloit a
successful company and for having helped me personally in my career. Certainly, I want to thank Jim Packard for
his mentorship, leadership and friendship. I want to thank all of our Board members over the years. We have been
blessed with great Boards filled with people of wisdom and integrity that set a noble “tone at the top” and who
inspired leadership. In my six years as CEO I could not have asked for a better, more engaged or more independent
thinking Board. It has been a Board that added real value in every way. I want to thank Mark Gliebe, our leadership
team and our employees. Your energy and talent are incomparable. You are an inspiration and the source of the
success of Regal Beloit. I want to thank our shareholders for supporting our activities. Thanks to your support, we have
achieved consistent growth and value creation. Finally, and very personally, I want to thank my wife Susan and our
family. My career was built on the foundation of your support.
As I look to the future and officially pass the baton, I can confidently say that the best days for Regal Beloit lay in the
future. It is impossible for me to overstate the talent, energy and dedication of the employees who are Regal Beloit.
To our shareholders, your corporation is in the hands of the most talented group of people in its history, and there is
no limit to what they can and will achieve in the years ahead.
To all of you, it has been an honor and the privilege of my career to have served as your CEO for the last six years.
Thank you.
Thank you.
Henry W. knueppel
Chairman
Chief Executive Officer
9
Envisioning Our Future
A Message From Our New CEO
It is both an honor and a privilege to serve as the fourth chief executive officer of
the Regal Beloit Corporation. The responsibility of leading your Company is one
that I take with the utmost respect, loyalty and tenacity of spirit. The record of
accomplishments by my predecessors has been astonishing, and my goal will
be to build on the current momentum and to continue their trajectory of growth
and success.
Over the last year, your leadership team worked together to develop a refreshed
strategy. We began the process by looking at the Company through the eyes
of our key stakeholders including our customers, our employees, our board of
directors and our investors. We interviewed 120 stakeholders and asked them to tell
us what they thought of our Company, our direction, our management team and
our products. From that feedback, we envisioned what we wanted the Company
to look like five years from now. That exercise was the foundation for us to refresh
our corporate purpose, values, initiatives and strategic objectives – in essence, our
vision for the future.
Going forward, our goal will be to equally serve the interests of our key stakeholders
including our customers, our employees and our investors. We would like our stake-
holders to see us as the technology company that we have become: one that
develops intelligent system solutions by integrating electronic controls, application
software and electric motors, electric generators and mechanical drives. We will
focus our innovation efforts primarily on energy efficiency – both the efficient
consumption of energy and the efficient production of energy. Innovative new
products that add exceptional value to our customers will be our calling card.
Our globalization initiative will continue to drive a shift in our customer base, so
that at least 50% of our future revenues come from business outside of the United
States. In addition, our global customers will be able to communicate with a single
integrating representative from Regal Beloit instead of representatives from multiple
businesses. We will continue to be a consistent acquirer, and we will broaden our
horizon to include platforms that are adjacent to or complimentary to our electric
motor, electric generator and mechanical drive product lines.
You will see us drive simplification throughout the Company to eliminate
complexities, squeeze out costs and make it easier to do business with us. Our
customers will continue to know us by our many global product brands; however,
we will strengthen our corporate identity so that we become one company for
both our customers and our employees. We recognize that using the business
disciplines of Lean Six Sigma and our Compass Operating System is critical for our
long-term continuous improvement and sustainability. Our stakeholders expect us to
continuously improve on all fronts, and we will drive improvements throughout the
organization, so that we are all speaking a common business language and using
one set of tools.
Mark Gliebe
CEO
10
Envisioning Our Future
As part of our refreshed vision for the future, we announced that “sustainability” will be added as one of
our five key initiatives. We recognize that a sustainable strategy includes that we not only achieve our
growth and profitability objectives, but also that we take responsibility for the impact that we have on our
planet and people. This means that we will be mindful of our manufacturing operations and products as
well as the fair and just treatment of our employees.
With our renewed purpose, values, initiatives and objectives, we have laid the foundation to grow
your Company into a profitable five billion dollar enterprise. It is an ambitious pursuit, but you should
feel assured by the fact that we have a talented and dedicated leadership team that was fully
engaged in developing this vision. Together we will make it happen and we are already on course
and building momentum.
Finally, on behalf of all of the stakeholders of the Regal Beloit Corporation, I would like to extend my
sincere gratitude and appreciation to Henry W. knueppel for his 32 years of dedication and service.
Since Henry joined the Company in 1979, he has been a key leader and architect behind the Company’s
growth and success. When he joined the company, Regal Beloit had revenues of $38 million and
employed about 900 people, all in the United States. By the end of 2011, the Company’s revenues will be
approaching $3 billion and we will employ nearly 25,000 people all over the world. During Henry’s six years
as CEO, the Company nearly tripled in size both in terms of revenues and number of employees. Since
the end of 2005, Regal Beloit either completed or announced 15 acquisitions representing over $2 billion
in revenues. As equally important, total shareholder returns during Henry’s time as CEO increased by
over 100%.
When Henry took the reigns as CEO in 2005, he had a vision for the Company and he knew the
Company had to change in order to support the future growth. He implemented and embraced changes
that are now part of our core culture. From our Lean Six Sigma continuous improvement discipline to
our Compass Operating System to our Packard Learning Center (named after Henry’s predecessor,
James L. Packard), Henry has been the architect of change that is now the foundation of our future. With
the seven acquisitions that we announced in 2010, Henry leaves the Company with a strong momentum
that we can build on for even better days ahead.
Anyone who meets Henry is impressed by his sincerity and genuine personality. He is honest, fair, hard
working and incredibly competitive–all traits of a great leader! Henry has been an outstanding CEO, an
excellent mentor for me and a personal friend. Please join me in congratulating Henry on an incredible
career and wish that he and his wife Susan have a wonderful retirement!
11
“Anyone who meets Henry is impressed by his sincerity and genuine personality. He is honest, fair, hard working and incredibly competitive – all traits of a great leader!”– Mark Gliebe “We convert power into motion to help the
world run more efficiently.”
Our Core Values
Integrity
We are a company that is honest, trustworthy, candid, transparent and fair.
High Energy
Our culture promotes a strong work ethic with high energy teams fostering a culture of inclusion
and respect for all.
GLOBALIZATION
CUSTOMER CARE
Performance
INNOVATION
SUSTAINABILITY
SIMPLIFICATION
Everyone is expected to perform, and our stakeholders count on us to execute, meet commit-
ments and continuously improve.
GLOBALIZATION
GLOBALIZATION
CUSTOMER CARE
INNOVATION
GLOBALIZATION
CUSTOMER CARE
INNOVATION
SUSTAINABILITY
Our Company Initiatives
CUSTOMER CARE
Customer Care
INNOVATION
eopl e
Our future depends on the success of our customers. We will establish closer
SUSTAINABILITY
Pl
e
t
P
a
n
SIMPLIFICATION
relationships with our customers, actively listen to their feedback and respond
Prof i
t
with a sense of urgency.
Globalization
We want to be global for three reasons. First, we want to participate in high
e
t
P
growth markets around the world. Second, many of our customers are global,
t
Prof i
SUSTAINABILITY
SIMPLIFICATION
and we want to serve customers where they do business. Finally, we want to
utilize our global capabilities to seek out the best talent and to remain globally
competitive.
eopl e
Pl
a
n
Innovation
Pl
SIMPLIFICATION
a
eopl e
P
e
t
We will build the future of the Company on products that are new and needed.
n
GLOBALIZATION
CUSTOMER CARE
INNOVATION
SUSTAINABILITY
While we accept that with an innovation mindset comes a certain degree of risk,
Prof i
t
we are committed to investing in new products, technologies and processes that
deliver real value to our customers.
Sustainability
The long-term sustainability of our Company requires not only continuous growth
SIMPLIFICATION
eopl e
Pl
a
n
P
e
t
Prof i
t
and profitability, but also that we take personal responsibility for the impact we
have on our planet, and for the fair and just treatment of the people we employ.
Simplification
Complexity is a serious disadvantage in business. We aim to simplify every aspect
of our operations to eliminate complexities in order to increase our speed,
improve our flexibility and reduce our costs.
eopl e
P
Pl
a
n
e
t
Prof i
t
12
– Business Purpose
Our Strategic Objectives
1. Deliver world-class performance to our customers through innovation, quality, delivery,
responsiveness and cost.
Innovation – We will provide creative, leading edge ideas and solutions that enable customers to
differentiate their product offerings.
Quality – We will be viewed as one of our customers’ highest quality suppliers.
Delivery – We will be viewed as one of our customers’ most dependable suppliers.
Responsiveness – We will have a positive attitude and a sense of urgency with our customers
while offering them proactive solutions and e-tools for an optimal experience with us.
Cost – When assessing their total operating and system costs, customers will view us as
competitive, fair and an overall good value.
2. Develop, attract and retain the best people by providing an engaging work environment while
helping them achieve their career goals.
Respectful Work Environment – We will promote an environment in which we treat each other with
dignity and respect.
Engaging Work Environment – We will promote an environment built on teamwork and a common
goal to continuously improve all that we do.
Achievement of Personal Career Goals – We will promote an atmosphere where personal career
growth is a dual responsibility of leaders and individuals.
3. Sustain top quartile performance in the diversified industrial sector with respect to revenue
growth, profitability and cash flow.
Increase revenue 15% annually – We will achieve our revenue goals with both organic growth and
with strategic acquisitions.
Improve our profitability – We will improve our margins by selling more energy efficient products,
reducing complexities in our organization, and fully deploying our Compass Operating System.
Optimize capital deployment – We will utilize our capital intelligently and deploy resources to
ahieve our growth objectives and initiatives.
13
Business Leaders
Paul Goldman
Vice President
HVACR
Eric McGinnis
Vice President
Business Development
Mike Wickiser
Sr. Vice President
C&I Motors and Generators
John kunze
Vice President
Air Moving
Jon Schlemmer
Sr. Vice President
RBC Asia
Duke Sims
Vice President
Mechanical Products
14
Functional Leaders
Pete Rowley
Vice President
Corporate Controller
Vivek Bhargava
Vice President
Critical Business Processes
Dennis Mikulecky
Vice President
Human Resources
John Perino
Vice President
Investor Relations
Scott Brown
Sr. Vice President
Manufacturing
Linda Shaw
Vice President
Global Sourcing & Logistics
John Thomas
Vice President
of Technology
Dave Hanson
Vice President
Finance Operations
15
Shareholder Information
Transfer Agent, Registrar and Dividend
Public Information and Reports
Disbursing Agent
First Class, Registered & Certified Mail:
Computershare Investor Services
P.O. Box 43078
Providence, RI 02940-3078
Overnight Courier
Computershare Investor Services
250 Royall Street
Canton, MA 02021
Investor Relations Number: 781-575-2879
Internet Address: www.computershare.com
Cash Dividends and Stock Splits
Shareholders can view Company documents
on the internet on the Company’s website at
www.regalbeloit.com that also includes a link to
the Security and Exchange Commission’s EDGAR
website. From the website, shareholders may also
request copies of news releases or Forms 10-k and
10-Q as filed by the Company with the Securities and
Exchange Commission.
Please direct information requests to:
Regal-Beloit Corporation
ATTN: Investor Relations
200 State Street
Beloit, WI 53511-6254
During 2010, four quarterly cash dividends
Email: finance@regalbeloit.com
were declared on Regal-Beloit Corporation
www.regalbeloit.com
common stock. If you have not received all
dividends to which you are entitled, please write
Auditors
or call Computershare at the address above.
Deloitte & Touche LLP, Milwaukee, Wisconsin
Regal Beloit paid its first cash dividend in January,
Notice of Annual Meeting
1961. Since that date, Regal Beloit has paid 203
The Annual Meeting of Shareholders will be held
consecutive quarterly dividends through January,
at 9:00 a.m., C.D.T., on Monday, May 2, 2011,
2011. The Company has raised cash dividends 38
at the Regal Beloit Corporate Headquarters,
times in the 50 years these dividends have been
Packard Learning Center, 200 State Street,
paid. The dividend has never been reduced. The
Beloit, WI 53511-6254.
Company has also declared and issued 15 stock
splits/dividends since inception.
Regal-Beloit Corporation is a Wisconsin Corporation listed on the NYSE under the symbol RBC.
16
Regal Beloit Corporation
200 State Street
Beloit, WI 53511
(608) 364-8800
2010 Annual Report
on Form 10-K
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2011
Commission File number 1-7283
Regal Beloit Corporation
(Exact Name of Registrant as Specified in Its Charter)
Wisconsin
(State of Incorporation)
39-0875718
(IRS Employer Identification No.)
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive offices)
(608) 364-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class
Common Stock ($.01 Par Value)
Securities registered pursuant to
Section 12 (g) of the Act
Name of Each Exchange on
Which Registered
New York Stock Exchange
None
(Title of Class)
Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:55) No (cid:133)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:55)
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 (cid:55) No (cid:133)
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 (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes (cid:55) No (cid:133)
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. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer (cid:55) Accelerated filer (cid:133) Non-accelerated filer (cid:133) Smaller reporting company (cid:133)
(Do not check if a smaller reporting company)
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:55)
The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 3, 2010 was approximately $2.1 billion.
On February 22, 2011, the registrant had outstanding 38,627,709 shares of common stock, $.01 par value, which is registrant’s only class of
common stock.
Certain information contained in the Proxy Statement for the Annual Meeting of Shareholders to be held on May 2, 2011 is incorporated by
reference into Part III, hereof.
DOCUMENTS INCORPORATED BY REFERENCE
3
REGAL BELOIT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 1, 2011
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Removed and Reserved
Market for the Registrant’s Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results
of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
Director, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedule
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
SIGNATURES
Page
6
12
18
18
19
19
20
21
21
29
31
55
55
55
56
56
56
56
56
57
58
4
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains “forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements represent our management’s judgment regarding future events. In many
cases, you can identify forward-looking statements by terminology such as “may,” “will,” “plan,” “expect,” “anticipate,”
“estimate,” “believe,” or “continue” or the negative of these terms or other similar words. Actual results and events could differ
materially and adversely from those contained in the forward-looking statements due to a number of factors, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric
motor, power generation and mechanical motion control industries;
our ability to develop new products based on technological innovation and the marketplace acceptance of new and
existing products;
fluctuations in commodity prices and raw material costs;
our dependence on significant customers;
issues and costs arising from the integration of acquired companies and businesses, including the timing and impact of
purchase accounting adjustments;
our dependence on key suppliers and the potential effects of supply disruptions;
infringement of our intellectual property by third parties, challenges to our intellectual property, and claims of
infringement by us of third party technologies;
increases in our overall debt levels as a result of acquisitions or otherwise and our ability to repay principal and interest
on our outstanding debt;
product liability and other litigation, or the failure of our products to perform as anticipated, particularly in high volume
applications;
difficulties consummating the pending acquisition of the Electrical Products Company of A.O. Smith Corporation that
may have a negative impact on our results of operations;
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency
exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we
cannot control;
unanticipated liabilities of acquired businesses;
cyclical downturns affecting the global market for capital goods;
difficulties associated with managing foreign operations; and
other risks and uncertainties including but not limited to those described in “Risk Factors” in this Annual Report on
Form 10-K and from time to time in our reports filed with U.S. Securities and Exchange Commission.
All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly
qualified in their entirety by the applicable cautionary statements. The forward-looking statements included in this Annual
Report on Form 10-K are made only as of their respective dates, and we undertake no obligation to update these statements to
reflect subsequent events or circumstances. See also “Risk Factors.”
5
PART I
Unless the context requires otherwise, references in this Annual Report to “we,” “us,” “our” or the “Company” refer
collectively to Regal Beloit Corporation and its subsidiaries.
References in an Item of this Annual Report on Form 10-K to information contained in our Proxy Statement for the Annual
Meeting of Shareholders to be held on May 2, 2011 (the “2011 Proxy Statement”) or to information contained in specific sections
of the Proxy Statement, incorporate the information into that Item by reference.
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended
January 1, 2011 as “fiscal 2010,” the fiscal year ended January 2, 2010 as “fiscal 2009,” and the fiscal year ended December
27, 2008 as “fiscal 2008.”
ITEM 1 - BUSINESS
Our Company
We are a global manufacturer of electric motors and controls, electric generators and controls, and mechanical motion control
products. Many of our products feature energy efficiency technology and electronics. Our energy efficiency product portfolio
offers lower operating costs to our customers and a significant marketing benefit to our original equipment manufacturer
(“OEM”) customers. Our electrical products primarily include AC and DC commercial and industrial electric motors and
controls, motors used in heating, ventilation, and air conditioning (“HVAC”) and commercial refrigeration applications, electric
generators and controls, and capacitors. Our mechanical products include primarily gears and gearboxes, marine transmissions,
high-performance automotive transmissions, manual valve actuators, and electrical connectivity devices.
We believe we have one of the most comprehensive product lines in the industries we serve. We market our products using over
30 recognized brand names, with most brands having their own product offerings and sales organizations. These sales
organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive
manufacturers’ representative organizations. Through this multi-channel distribution model, we sell our products to a diverse
global customer base consisting primarily of leading OEMs, distributors and end users. We believe this strategy, coupled with a
high level of customer service, provides us with a competitive selling advantage and allows us to more fully serve our customers.
We manufacture the vast majority of the products that we sell, and we have manufacturing, sales, engineering, and distribution
facilities primarily in the United States, Mexico, China, India and Australia, as well as a number of other locations throughout the
world.
OEMs and end users in a variety of motion control and other industrial applications typically combine the types of electrical and
mechanical products we offer. We seek to take advantage of this practice and to enhance our product penetration by leveraging
cross-marketing and product line combination opportunities between our electrical and mechanical products. Our growth strategy
also includes (i) driving organic growth through the introduction of innovative new products, (ii) establishing and maintaining
new customers, as well as developing new opportunities with existing customers, (iii) participating in higher growth geographic
markets, and (iv) identifying and consummating strategic, value creating acquisitions. We consider our acquisition process,
including identification, due diligence, and integration, to be one of our core competencies.
Our business initiatives include:
• Customer Care: Our future depends on the success of our customers. We will maintain close relationships with our
customers, actively listen to their feedback and respond with a sense of urgency.
• Globalization: We want to be global for three reasons. First, we want to participate in high growth markets around the
world. Second, many of our customers are global and we want to serve customers where they do business. Finally, we
want to utilize our global capabilities to seek out the best talent and to remain globally competitive.
•
Innovation: We will build our future on products that are new and needed. While we accept that with an innovation
focus comes a certain degree of risk, we are committed to investing in new products, technologies and processes that
deliver value to our customers.
• Sustainability: The long term sustainability of our Company requires not only continuous growth and profitability, but
also that we take personal responsibility for the impact we have on our planet, and for the fair and just treatment of the
people we employ.
• Simplification: Complexity is a serious disadvantage in business. We aim to simplify every aspect of our operations to
eliminate complexities in order to increase our speed, improve our flexibility and reduce our costs.
Reporting Segments
We have two reporting segments: Electrical and Mechanical. Financial information on our reporting segments for fiscal 2010,
fiscal 2009, and fiscal 2008 is contained in Note 16 of the Notes to Consolidated Financial Statements.
Electrical Segment
Our Electrical segment includes AC and DC commercial and industrial electric motors and controls, HVAC and commercial
refrigeration motors, electric generators and controls, and capacitors. We believe our motor products are uniquely positioned to
help our customers and end consumers achieve greater energy efficiency, resulting in significant cost savings for the consumer and
preservation of natural resources and our environment. We estimate that approximately 40-50% of all electricity generated in the
U.S. is consumed by electric motors.
6
Our Electrical segment has continued to grow over time, primarily due to strategic acquisitions. For example, during 2010, we
completed six acquisitions. These acquisitions (each of which is reported as part of the Electrical segment, except for CMG
Engineering Group Pty, Ltd. (“CMG”), which is reported as part of both the Electrical and Mechanical segments) included:
• On December 23, 2010, we acquired Unico, Inc. (“Unico”), located in Franksville, Wisconsin. Unico manufactures a
full range of AC and DC drives, motor controllers and other accessories for most industrial and commercial applications.
Unico has developed proprietary technology in the fields of oil and gas recovery technology, commercial HVAC
technology, test stand automation and other applications.
• On December 1, 2010, we acquired South Pacific Rewinders (“SPR”), located in Auckland, New Zealand. SPR operates
as a motor rewinder and distributor in the Pacific region.
• On November 1, 2010, we acquired 55% of Elco Group B.V. (“Elco”), located in Milan, Italy. Elco manufactures and
sells motors, fans and blowers and has manufacturing facilities in Italy, China and Brazil.
• On September 1, 2010, we acquired Rotor B.V. (“Rotor”), located in Eibergen, the Netherlands. Rotor sells standard
and special 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.
• On May 4, 2010, we acquired Air-Con Technology (“Air-Con”), located in Mississauga, Ontario, Canada. Air-Con is a
distributor of HVACR electric motors.
• On April 6, 2010, we acquired CMG, located in Melbourne, Australia. CMG manufactures and sells 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. CMG also distributes integral horsepower
industrial motors, mechanical power transmission products, material handling equipment, electrical insulation materials,
magnet wire and specialty conductors in Australia and New Zealand.
Our Electrical segment manufactures and markets AC and DC commercial, industrial, commercial refrigeration, and HVAC
electric motors and blowers. These products range in size from sub-fractional to small integral horsepower motors to larger
commercial and industrial motors from 50 through 6500 horsepower. We offer thousands of 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. Additionally, our Electrical segment manufactures and markets a
line of AC and DC variable speed drives and controllers and other accessories for most industrial and commercial applications.
We manufacture capacitors for use in HVAC systems, high intensity lighting and other applications. We sell our Electrical
segment’s products to original equipment manufacturers, distributors and end users across many markets.
Our HVAC electric motors and blowers are vital components of an HVAC system and are used to move air into and away from
furnaces, heat pumps, air conditioners, ventilators, fan filter boxes, water heaters, and humidifiers. We believe that a majority of
our HVAC motors replace existing motors or are part of a new HVAC system that replaces an existing HVAC system. The
remainder of sales are used in a HVAC system for new home construction. The business enjoys a large installed base of equipment
and long-term relationships with its major customers.
Our power generation business, which includes electric generators and power generation components and controls, represents a
portion of our Electrical segment’s net sales. The market for electric power generation components and controls has grown in
recent years as a result of a desire on the part of end users to reduce losses due to power disturbances and the increased need for
prime power in certain applications. Our generators are used in industrial, commercial, agricultural, marine, military,
transportation, construction, and other applications.
We leverage material and manufacturing efficiencies across our motor and power generation operations. We centralize the
manufacturing, purchasing, engineering, accounting, information technology and quality control activities of our Electrical
segment. Furthermore, we specifically foster the sharing of best practices across each of the Electrical segment businesses and
create focused centers of excellence in each of our manufacturing functions. We focus on cost reduction and value added
engineering opportunities for our customers.
The following is a description of our major Electrical product brands and the primary products that they manufacture and market:
• CMG. Manufactures fractional horsepower industrial motors and blower systems and distributes integral horsepower
motors, mechanical power transmission products, material handling equipment, electrical insulation materials, magnet
wire, and specialty conductors under the brands CMG, OBA, Transmission Australia, and Torin.
• Dutchi Motors. Distributor of International Electrotechnical Commission (“IEC”) and National Electric Manufacturers
Association (“NEMA”) electric motors for industrial applications in Western and Eastern Europe, Russia and the Middle
East.
• Elco. Manufactures fractional horsepower motors and blower systems for the commercial refrigeration markets.
• Fasco Motors. Manufactures motors and blower systems for air moving applications including alternative fuel systems,
water heaters, appliances, pumps, and HVAC systems.
• Genteq. Manufactures fractional AC, high efficiency brushless DC and ECM motors for application in the HVAC
market, mainly to OEMs.
7
• Hwada Motors. Manufactures Integrated IEC and NEMA motors for various industrial applications such as compressor,
pump, paper and steel processing and power plants.
• LEESON Electric. Manufactures and distributes 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, elevators, machine tools, and specialty products.
• Marathon Electric. Manufactures AC motors up to 800 horsepower primarily for pumps, power transmissions, fans and
blowers, compressors, HVAC, agriculture products, processing and industrial manufacturing equipment.
• Marathon Electric Motors (India) Ltd. Manufactures a full range (from 1 to 3500 horsepower) of low and medium
voltage industrial motors and fans for the industrial and process markets in India.
• Marathon Generators. Manufactures AC generators from five kilowatts to four megawatts that primarily serve the
standby power, prime power, refrigeration, industrial and irrigation markets.
• Morrill Motors. Manufactures fractional horsepower motors, blowers and components for the commercial refrigeration
and freezer markets.
• Rotor. Distributes standard and special electric motors to a variety of industries including marine, ship building and
offshore oil and gas.
• Thomson Technology. Manufactures automatic transfer switches, paralleling switchgear and controls, and systems
controls primarily for the electric power generation market.
• Unico. Manufactures a full range of AC and DC drives, motor controllers and other accessories for most industrial and
commercial applications. Unico has developed proprietary technology in the field of oil and gas recovery, commercial
HVAC and test stand automation.
Mechanical Segment
Our Mechanical segment manufactures and markets a broad array of mechanical motion control products including standard and
custom worm gears, bevel gears, helical gears and concentric shaft gearboxes; marine transmissions; high-performance after-
market automotive transmissions and ring and pinions; custom gearing; gearmotors; manual valve actuators; and electrical
connecting devices. Our gear and transmission related products primarily control motion by transmitting power from a source,
such as an electric motor, 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.
Mechanical products are sold to original equipment manufacturers, distributors and end users across many industry segments.
The following is a description of our major Mechanical segment brands and the primary products they manufacture and market:
• Durst. Manufactures standard and specialized industrial transmissions, hydraulic pump drives and gears for turbines
used in power generation primarily for the construction, agriculture, energy, material handling, forestry, lawn and garden
and railroad maintenance markets.
• Grove Gear/Electra-Gear. Manufactures standard and custom industrial gear reducers and specialized aluminum gear
reducers and gearmotors primarily for the material handling, food processing, robotics, power transmission, medical
equipment and packaging markets.
• Hub City/Foote-Jones. Manufactures gear drives, sub-fractional horsepower gearmotors, mounted bearings, large-scale
parallel shaft and right-angle gear drives and accessories primarily for the packaging, construction, material handling,
food processing mining, oil, pulp and paper, forestry, aggregate, construction and steel markets.
• Marathon Special Products. Manufactures fuse holders, terminal blocks, and power blocks primarily for the HVAC,
telecommunications, electric control panel, utilities and transportation markets.
• Mastergear. Manufactures manual valve actuators for liquid and gas flow control primarily for the petrochemical
processing, fire protection and wastewater markets. Mastergear has locations in the United States and Europe.
• Richmond Gear. Manufactures ring and pinions and transmissions primarily for the high-performance automotive
aftermarket.
•
Sankey. Manufactures electrical steel components, general metal product stampings, products for building including
expanded metal mesh products, and aluminum and zinc die-cast products.
• Velvet Drive Transmissions. Manufactures marine transmissions primarily for the pleasure boat and yacht markets.
The Building of Our Business
Our growth from our founding in 1955 to our current size has largely been the result of the acquisition and integration of
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. Our organic and acquisition growth has rapidly moved the Company into other
regions of the world where market and growth fundamentals are more favorable and aligned with our business strategy. We
8
consider the identification of acquisition candidates and the purchase and integration of businesses to be one of our core
competencies. The following table summarizes acquisitions from 2008 to 2010:
Year
Acquired
2010
Annual Revenues
at Acquisition
(in millions)
$ 62
Unico
South Pacific Rewinders
Elco
Rotor
Air-Con
CMG
2010
2010
2010
2010
2010
Custom Power Technology
2009
Dutchi Motors
2008
Primary Products at Acquisition
Manufactures AC and DC drives, motor controllers used in oil and
gas recovery, commercial HVAC technology, and test stand
automation and development
Rewinder and distributor of electric motors
Manufactures motors, fans and blowers used in HVAC and
commercial refrigeration applications for markets in Europe, South
America and Asia
Distributes standard and special electric motors used in general
industrial and marine applications in the Netherlands, Europe,
United Kingdom and Japan
Distributor of HVAC electric motors in Canada
Manufactures and distributes fractional horsepower industrial
motors and blower systems in Australia, New Zealand, South
Africa, Malaysia, Singapore, United Kingdom and the Middle
East.
Manufactures customer power electronics in the U.S.
Distributor of IEC and NEMA electric motors for industrial
applications in Western and Eastern Europe, Russia and the
Middle East
1
80
32
1
120
2
56
Hwada Motors
2008
105
Integral IEC and NEMA electric motors for industrial applications
Sales, Marketing and Distribution
We sell our products directly to OEMs, distributors and end-users. We have multiple business units, and each unit typically has 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 maintain a large distribution facility in Indianapolis, Indiana which serves as a hub for our North American distribution and
logistics operations. Products are shipped from this facility to our customers utilizing our fleet of trucks and trailers as well as
common carriers. We maintain numerous warehouse and distribution facilities in our global markets to service the needs of our
customers. In addition, we have many manufacturer representatives’ warehouses located in specific geographic areas to serve
local customers.
We had no customers that accounted for more than 10% of our consolidated net sales in fiscal 2010, fiscal 2009 or fiscal 2008.
Competition
General
During the past several years, certain product opportunities have become more prevalent due to changing customer requirements.
Our customers, which historically may have made component products for inclusion in their finished goods, are increasingly
choosing to outsource their requirements to specialized manufacturers like us because we can make these products more cost
effectively. In order to better position us for growth in this competitive climate, we have focused on making strategic acquisitions
and improving our manufacturing efficiencies. Some of these acquisitions have created new opportunities by allowing us to
provide new and broader product offerings and serve customers in a wider variety of applications.
We believe that we compete primarily on the basis of quality, price, service, technology, our promptness of delivery, and the
overall value of our products.
Electrical Segment
Electric motor manufacturing is a highly competitive global industry in which there is greater emphasis on reducing costs,
boosting efficiency and promoting energy savings. We compete with a growing number of domestic and international competitors
due in part to the nature of the products we manufacture and the wide variety of applications and customers we serve. Many
manufacturers of electric motors operate production facilities in many different countries, producing products for both the
domestic and export markets. Electric motor manufacturers from abroad, particularly those located in China, India and elsewhere
in Asia, provide increased competition as they expand their market penetration around the world, especially in North America.
Additionally, there is a recent trend toward global industry consolidation. In 2010, Nidec Corporation (Kyoto, Japan) (“Nidec’)
acquired a portion of the motors and controls business of Emerson Electric Company, a leading manufacturer of electric motors
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and process controls based in St. Louis, Missouri. In 2011, ABB Ltd. (Zurich, Switzerland) (“ABB”) acquired Baldor Electric
Company, a leading manufacturer of electric motors and drives based in Fort Smith, Arkansas.
Our major foreign competitors for electrical products include Broad-Ocean Motor Co., Welling Holding Limited, Kirloskar
Brothers Limited, ebm-papst, Crompton Greaves, Johnson Electric, Siemens AG, Toshiba Corporation, Panasonic Corporation,
Leroy-Somer (a subsidiary of Emerson Electric Company), Weg S.A., Nidec, TECO and ABB. Our major domestic competitors
for electrical products include Baldor Electric (a subsidiary of ABB), U.S. Electric (a subsidiary of Nidec), Emerson Electric
Company, A. O. Smith Corporation, General Electric Company, Bluffton Motor Works, McMillan Electric Company and Newage
(a division of Cummins, Inc). On balance, the demarcation between domestic U.S. and foreign manufacturers is blurring as
competition becomes more and more global.
Mechanical Segment
We provide various mechanical product applications and compete with a number of different companies depending on the
particular product offering. We believe that we are a leading manufacturer of several mechanical products and that we are the
leading manufacturer in the United States of worm gear drives and bevel gear drives. Our major domestic competitors include
Boston Gear (a division of Altra Industrial Motion, Inc.), Dodge (a subsidiary of ABB), Emerson Electric Company and Winsmith
(a division of Peerless-Winsmith, Inc.). Our major foreign competitors include SEW Eurodrive GmbH & Co., Flender GmbH,
Nord, Sumitomo Corporation and Zahnrad Fabrik GmbH Co.
Product Development and Engineering
We believe that innovation is critical to our future growth and success. We are committed to investing in new products,
technologies and processes that deliver real value to our customers. We believe the key driver of our innovation strategy is the
development of products that include energy efficiency, embedded intelligence, and variable speed technology solutions.
Each of our business units has its own product development and design team that continuously work to enhance our existing
products and develop new products for our growing base of customers that require custom and standard solutions. We believe we
have state of the art 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.
We are continuing to expand our business by developing new, differentiated products in each of our business units. We work
closely with our customers to develop new products or enhancements to existing products that improve performance and meet
their needs.
Manufacturing and Operations
We have developed and acquired global operations in lower cost locations such as Mexico, India, Thailand, and China to
participate in regions with higher economic growth, to follow our multinational customers, and to complement our flexible, rapid
response operations in the United States, Canada and Europe. Our vertically integrated manufacturing operations, including our
own 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 and a network of distribution facilities with the capability to modify stock
products to quickly meet specific customer requirements in many instances. This gives us a competitive advantage as we are able
to efficiently and promptly deliver a customer’s unique product to the desired location.
We manufacture a majority of the products that we sell, but also strategically outsource components and finished goods from an
established global network of suppliers. We aggressively pursue global sourcing to reduce our overall costs. We generally
maintain a dual sourcing capability in our existing domestic facilities to ensure a reliable supply source for our customers,
although we do depend on a limited number of key suppliers for certain materials and components. 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. Base
materials for our products consist primarily of steel, copper and aluminum. Additionally, significant components consist of
bearings, electronics, ferrous and non-ferrous castings, and weldments.
We continually upgrade our manufacturing equipment and processes, including increasing our use of computer aided
manufacturing systems and developing our own testing systems. To drive the continuous improvement process, we have deployed
Lean Six Sigma across our facilities worldwide in order to develop our people and deploy our processes. The initiative has
generated significant cost saving by eliminating waste, improving safety, quality, delivery, and reducing cycle times. We have
trained over 1,700 people since the program began in 2005. Our goal is to be a low cost and high quality producer in our core
product areas.
Facilities
We have manufacturing, sales and service facilities primarily in the United States, Mexico, China, India and Australia, as well as
a number of other locations throughout the world. Our Electrical segment currently includes 108 manufacturing, service and
distribution facilities, of which 45 are principal manufacturing facilities. The Electrical segment’s present operating facilities
contain a total of approximately 8.1 million square feet of space of which approximately 44.0% are leased. Our Mechanical
segment currently includes 11 manufacturing, service and distribution facilities, of which 6 are principal manufacturing facilities.
The Mechanical segment’s present operating facilities contain a total of approximately 0.8 million square feet of space of which
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approximately 5.0% are leased. Our principal executive offices are located in Beloit, Wisconsin in an owned approximately
54,000 square foot office building. We believe our equipment and facilities are well maintained and adequate for our present
needs.
Backlog
Our business units have historically shipped the majority of their products in the month the order is received. As of January 1,
2011, our backlog was $340.2 million, as compared to $264.7 million on January 2, 2010. We believe that virtually all of our
backlog will be shipped in 2011.
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 other than
our ECM patents which relate to a material portion of our sales. We also use various registered and unregistered trademarks, and
we believe these trademarks are significant in the marketing of most of our products. However, we believe the successful
manufacture and sale of our products generally depends more upon our technological, manufacturing and marketing skills.
Employees
As of the close of business on January 1, 2011, we employed approximately 18,500 employees worldwide. We consider our
employee relations to be very good.
Executive Officers
The names, ages, and positions of our executive officers as February 15, 2011, 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. 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
Henry W. Knueppel
Age Position
62 Chairman and Chief
Executive Officer
Mark J. Gliebe
50 President and Chief
Operating Officer
Charles A. Hinrichs
57 Vice President and Chief
Financial Officer
Business Experience and Principal Occupation
Elected Chairman in April 2006; elected Chief Executive Officer
April 2005; served as President from April 2002 to December 2005
and Chief Operating Officer from April 2002 to April 2005; joined
the Company in 1979. In December 2010, Mr. Knueppel announced
his plan to retire as CEO, effective in May 2011. Mr. Knueppel will
remain as Chairman of the Board through the end of 2011.
Elected President and Chief Operating Officer in December 2005.
Joined the Company in January 2005 as Vice President and President
– Electric Motors Group, following our acquisition of the HVAC
motors and capacitors businesses from GE; previously employed by
GE as the General Manager of GE Motors & Controls in the GE
Consumer & Industrial business unit from June 2000 to December
2004. In December 2010, the Board of Directors named Mr. Gliebe
as CEO, effective upon Mr. Knueppel’s retirement in May 2011.
Joined the Company and was elected Vice President, Chief Financial
Officer in September 2010. Prior to joining the Company, Mr.
Hinrichs was Senior Vice President and Chief Financial Officer at
Smurfit-Stone Container Corporation, where he worked from 1995 to
2009.
2009, Smurfit-Stone Container
Corporation and its primary operating subsidiaries filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court in Wilmington,
Delaware, and emerged from bankruptcy in July 2010.
January 26,
On
Peter C. Underwood
41 Vice President, General
Counsel and Secretary
Terry R. Colvin
55 Vice President
Corporate Human
Resources
Joined the Company and was elected Vice President, General
Counsel and Secretary in September 2010. Prior to joining the
Company, Mr. Underwood was a partner with the law firm of Foley
& Lardner LLP from 2005 to 2010 and an associate from 1996 to
2005.
Joined the Company in September 2006 and was elected Vice
President Corporate Human Resources in January 2007. Prior to
joining the Company, Mr. Colvin was Vice President of Human
Resources for Stereotaxis Corporation from 2005 to 2006.
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Name
John M. Avampato
Age Position
49 Vice President
Information Technology
Business Experience and Principal Occupation
Joined the Company in April 2006 and was elected Vice President
Information Technology in April 2010. Prior to joining the
Company, Mr. Avampato was with Newell Rubbermaid from 1984
to 2006 where he was Vice President, Chief Information Officer
from 1999 to 2006.
Pending Acquisition of Electrical Products Company of A.O. Smith Corporation
On December 12, 2010, we entered into an agreement with A.O. Smith Corporation (the “EPC Purchase Agreement”) pursuant to
which we will acquire 100% of the stock and assets of the Electrical Products Company (“EPC”) of A.O. Smith Corporation (the
“EPC Acquisition”). The total consideration for the transaction is $875 million, including $700 million of cash and $175 million
in shares of our common stock.
EPC is based in Tipp City, Ohio and has operations in the United States, Mexico, China and the United Kingdom. The
transaction will expand our global manufacturing capabilities and allow us to offer a more complete array of products and
technologies to our customers. Targeted synergies from the transaction are $30 to $40 million achieved over three to four years.
The closing of the transaction is subject to all customary regulatory approvals, which are still pending as of the date of this filing.
On February 4, 2011, we received a request for additional information and documentary material, commonly referred to as a
“second request,” from the United States Department of Justice regarding the EPC Acquisition. The request is part of the
regulatory process under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and will
extend the waiting period under the HSR Act until 30 days after both companies have substantially complied with the
requests. We are in the process of gathering information to respond to the request and are working cooperatively with the United
States Department of Justice as it reviews the proposed transaction. See “Risk Factors.”
Website Disclosure
Our Internet address is www.regalbeloit.com. We make available free of charge (other than an investor’s own Internet access
charges) through our Internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange Commission. We are not including the information contained on or
available through our website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
ITEM 1A – RISK FACTORS
You should carefully consider each of the risks described below, together with all of the other information contained in this
Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks
develop into actual events, our business, financial condition or results of operations could be materially and adversely affected
and you may lose all or part of your investment.
We operate in the highly competitive global electric motor, power generation and mechanical motion control industries.
The global electric motor, power generation and mechanical motion control industries are highly competitive. We encounter a
wide variety of domestic and international competitors due in part to the nature of the products we manufacture and the wide
variety of applications and customers we serve. In order to compete effectively, we must retain relationships with major
customers and establish relationships with new customers, including those in developing countries. Moreover, in certain
applications, customers exercise significant power over business terms. It may be difficult in the short-term for us to obtain new
sales to replace any decline in the sale of existing products that may be lost to competitors. Our failure to compete effectively
may reduce our revenues, profitability and cash flow, and pricing pressures resulting from competition may adversely impact our
profitability.
In addition, some of our competitors are larger and have greater financial and other resources than we do. For example, ABB and
Nidec recently established or increased their presence in the electric motor, power generation and mechanical motion control
industries in North America through acquisitions, and certain other global competitors have recently established facilities in the
United States. There can be no assurance that our products will be able to compete successfully with the products of these other
companies.
Our ability to establish, grow and maintain customer relationships depends in part on our ability to develop new products
and product enhancements based on technological innovation.
The electric motor industry in recent years has seen significant evolution and innovation, particularly with respect to increasing
energy efficiency and control enhancements related to motor products. Our ability to effectively compete in the electric motor
industry depends in part on our ability to continue to develop new technologies and innovative products and product
enhancements. If we are unable to meet the needs of our customers for innovative products, or if our products become
technologically obsolete over time due to the development by our competitors of technological breakthroughs or otherwise, our
revenues and results of operations may be adversely affected. In addition, we may incur significant costs and devote significant
resources to the development of products that ultimately are not accepted in the marketplace, do not provide anticipated
enhancements, or do not lead to significant revenue, which may adversely impact our results of operations.
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Our dependence on, and the price of, raw materials may adversely affect our gross margins.
Many of the products we produce contain key materials such as steel, copper, aluminum and rare earth metals. Market prices for
those materials can be volatile due to changes in supply and demand, manufacturing and other costs, regulations and tariffs,
economic conditions and other circumstances, and those prices generally increased significantly in 2010. We may not be able to
offset the increase in commodity costs through pricing actions, productivity enhancements or other means, and increasing
commodity costs may have an adverse impact on our gross margins, which could adversely affect our results of operations and
financial condition.
In our HVAC motor business, we depend on revenues from several significant customers, and any loss, cancellation or
reduction of, or delay in, purchases by these customers may have a material adverse effect on our business.
We derive a significant portion of the revenues of our HVAC motor business from several key OEM customers. Our success will
depend on our continued ability to develop and manage relationships with these customers. We expect this significant customer
concentration will continue for the foreseeable future in our HVAC motor business. Our reliance in the HVAC motor business on
sales from a relatively small number of customers makes our relationship with each of these customers important to our business.
We cannot assure you that we will be able to retain these key customers. Some of our customers may in the future shift some or
all of their purchases of products from us to our competitors or to other sources. The loss of one or more of our largest customers,
any reduction or delay in sales to these customers, our inability to develop relationships successfully with additional customers, or
future price concessions that we may make could have a material adverse effect on our results of operations and financial
condition.
We may encounter difficulties in integrating the operations of acquired businesses that may have a material adverse
impact on our future growth and operating performance.
Full realization of the expected benefits and synergies of acquisitions, such as the pending EPC Acquisition, will require
integration over time of certain aspects of the manufacturing, engineering, administrative, sales and marketing and distribution
functions of the acquired businesses, as well as some integration of information systems platforms and processes. Complete and
successful integration of acquired businesses, and realization of expected synergies, can be a long and difficult process and may
require substantial attention from our management team and involve substantial expenditures and include additional operational
expenses. Even if we are able to successfully integrate the operations of acquired businesses, we may not be able to realize the
expected benefits and synergies of the acquisition, either in the amount of time or within the expected time frame, or at all, and
the costs of achieving these benefits may be higher than, and the timing may differ from, what we initially expect. Our ability to
realize anticipated benefits and synergies from the acquisitions may be affected by a number of factors, including:
• The use of more cash or other financial resources, and additional management time, attention and distraction, on
integration and implementation activities than we expect, including restructuring and other exit costs;
•
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increases in other expenses related to an acquisition, which may offset any potential cost savings and other synergies
from the acquisition;
our ability to realize anticipated levels of sales in emerging markets like China and India;
our ability to avoid labor disruptions or disputes in connection with any integration; and
the timing and impact of purchase accounting adjustments.
Any potential cost-saving opportunities may take at least several quarters following an acquisition to implement, and any results
of these actions may not be realized for at least several quarters following implementation. We cannot assure you that we will be
able to successfully integrate the operations of our acquired businesses, that we will be able to realize any anticipated benefits and
synergies from acquisitions or that we will be able to operate acquired businesses as profitably as anticipated.
We may encounter delays or difficulties consummating the pending EPC Acquisition.
On December 12, 2010, we entered into the EPC Purchase Agreement. The closing of the EPC Acquisition is subject to various
conditions, including customary regulatory approvals, which are still pending.
On February 4, 2011, we received a request for additional information and documentary material, commonly referred to as a
“second request,” from the United States Department of Justice regarding the EPC Acquisition. The request is part of the
regulatory process under the HSR Act. We are in the process of gathering information to respond to the request and are working
cooperatively with the United States Department of Justice as it reviews the proposed transaction.
There can be no assurance that we will consummate the EPC Acquisition in a timely manner, or at all. Various events, regulatory
factors or other circumstances related to the EPC Acquisition could delay or prevent the acquisition, or have a negative impact on
our results of operations, including:
• The inability to close the acquisition in a timely manner;
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•
•
the inability or the failure to satisfy conditions to complete the acquisition, including required regulatory approvals such
as that required under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended;
disruption of our current business plans and operations;
diversion of management’s attention from ongoing business concerns;
the effect of the announcement of the acquisition on our business relationships, operating results and business generally;
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actions taken or conditions imposed by governmental or regulatory authorities pursuant to a required regulatory approval
or otherwise, including any requirement to divest of any operations or assets of EPC;
the possibility that the acquisition may be more expensive to complete than anticipated, including as a result of
unexpected factors or events;
the occurrence of any event, change or other circumstance that could give rise to the termination of the purchase
agreement; or
the failure of the acquisition to close for any other reason.
We depend on certain key suppliers, and any loss of those suppliers or their failure to meet commitments may adversely
affect our business and results of operations.
We are dependent on a single or limited number of suppliers for some materials or components required in the manufacture of our
products. If any of those suppliers fail to meet their commitments to us in terms of delivery or quality, we may experience supply
shortages that could result in our inability to meet our customers’ requirements, or could otherwise experience an interruption in
our operations that could negatively impact our business and results of operations.
Infringement of our intellectual property by third parties may harm our competitive position, and we may incur
significant costs associated with the protection and preservation of our intellectual property.
We own or otherwise have rights in a number of patents and trademarks relating to the products we manufacture, which have
been obtained over a period of years, and we continue to actively pursue patents in connection with new product development and
to acquire additional patents and trademarks through the acquisitions of other businesses. These patents and trademarks have been
of value in the growth of our business and may continue to be of value in the future. With the exception of the ECM patents, we
do not regard any of our patents essential to our businesses. However, an inability to protect this intellectual property generally, or
the illegal breach of some or a large group of our intellectual property rights, would have an adverse effect on our business. In
addition, there can be no assurance that our intellectual property will not be challenged, invalidated, circumvented or designed-
around, particularly in countries where intellectual property rights are not highly developed or protected. We have incurred in the
past and may incur in the future significant costs associated with defending challenges to our intellectual property or enforcing
our intellectual property rights, which could adversely impact our cash flow and results of operations.
Third parties may claim that we are infringing their intellectual property rights and we could incur significant costs and
expenses or be prevented from selling certain products.
We may be subject to claims from third parties that our products or technologies infringe on their intellectual property rights or
that we have misappropriated intellectual property rights. If we are involved in a dispute or litigation relating to infringement of
third party intellectual property rights, we could incur significant costs in defending against those claims. Our intellectual
property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or
misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to
technology that are important to our business, or be required to pay damages or license fees with respect to the infringed rights or
be required to redesign our products at substantial cost, any of which could adversely impact our cash flows and results of
operations.
As a result of the anticipated increase in our debt levels and debt service obligations in connection with the pending EPC
Acquisition, we may have less cash flow available for our business operations, we could become increasingly vulnerable to
general adverse economic and industry conditions and interest rate trends, and our ability to obtain future financing may
be limited.
As of January 1, 2011, we had $230.9 million in cash and investments and approximately $454.2 million in available borrowings
under our current revolving credit facility. We will incur substantially higher debt levels in order to fund a portion of the
purchase price for the EPC Acquisition. Our ability to make required payments of principal and interest on our increased debt
levels will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive
and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from
operations or that future borrowings will be available under our current credit facilities in an amount sufficient to enable us to
service our indebtedness or to fund our other liquidity needs. In addition, our credit facilities contain financial and restrictive
covenants that could limit our ability to, among other things, borrow additional funds or take advantage of business opportunities.
Our failure to comply with such covenants could result in an event of default that, if not cured or waived, could result in the
acceleration of all our indebtedness or otherwise have a material adverse effect on our business, financial condition, results of
operations and debt service capability. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.” Our anticipated increased indebtedness may have important consequences. For
example, it could:
• Make it more challenging for us to obtain additional financing to fund our business strategy and acquisitions, debt
service requirements, capital expenditures and working capital;
•
increase our vulnerability to interest rate changes and general adverse economic and industry conditions;
14
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•
require us to dedicate a substantial portion of our cash flow from operations to service our indebtedness, thereby
reducing the availability of our cash flow to finance acquisitions and to fund working capital, capital expenditures,
manufacturing capacity expansion, business integration, research and development efforts and other general corporate
activities;
limit our flexibility in planning for, or reacting to, changes in our business and our markets; and
place us at a competitive disadvantage relative to our competitors that have less debt.
In addition, our credit facility and senior notes require us to maintain specified financial ratios and satisfy certain financial
condition tests, which may require that we take action to reduce our debt or to act in a manner contrary to our business strategies.
If an event of default under our credit facility or senior notes, the lenders could elect to declare all amounts outstanding under the
applicable agreement, together with accrued interest, to be immediately due and payable.
We are subject to litigation, including product liability and warranty claims that may adversely affect our financial
condition and results of operations.
We are, from time to time, a party to litigation that arises in the normal course of our business operations, including product
warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. We face an
inherent business risk of exposure to product liability and warranty claims in the event that the use of our products is alleged to
have resulted in injury or other damage. While we currently maintain general liability and product liability insurance coverage in
amounts that we believe are adequate, we cannot assure you that we will be able to maintain this insurance on acceptable terms or
that this insurance will provide sufficient coverage against potential liabilities that may arise. Any claims brought against us, with
or without merit, may have an adverse effect on our business and results of operations as a result of potential adverse outcomes,
the expenses associated with defending such claims, the diversion of our management’s resources and time and the potential
adverse effect to our business reputation.
We sell certain products for high volume applications, and any failure of those products to perform as anticipated could
result in significant liability that may adversely affect our business and results of operations.
We manufacture and sell a number of products for high volume applications, including motors used in pools and spas, residential
and commercial heating, ventilation, air conditioning and refrigeration equipment. Any failure of those products to perform as
anticipated could result in significant product liability, product recall or rework, or other costs. The costs of product recalls and
reworks are not generally covered by insurance. If we were to experience a product recall or rework in connection with products
of high volume applications, our financial condition or results of operations could be materially adversely affected.
Commodity, currency and interest rate hedging activities may adversely impact our financial performance as a result of
changes in global commodity prices, interest rates and currency rates.
We use derivative financial instruments in order to reduce the substantial effects of currency and commodity fluctuations and
interest rate exposure on our cash flow and financial condition. These instruments may include foreign currency and commodity
forward contracts, currency swap agreements and currency option contracts, as well as interest rate swap agreements. We have
entered into, and expect to continue to enter into, such hedging arrangements. While limiting to some degree our risk fluctuations
in currency exchange, commodity price and interest rates by utilizing such hedging instruments, we potentially forgo benefits that
might result from other fluctuations in currency exchange, commodity and interest rates. We also are exposed to the risk that
counterparties to hedging contracts will default on their obligations. We manage exposure to counterparty credit risk by limiting
the counterparties to major international banks and financial institutions meeting established credit guidelines. However, any
default by such counterparties might have an adverse effect on us.
Worldwide economic conditions may adversely affect our industry, business and results of operations.
General economic conditions and conditions in the global financial markets can affect our results of operations. Deterioration in
the global economy could lead to higher unemployment, lower consumer spending and reduced investment by businesses, and
could lead our customers to slow spending on our products or make it difficult for our customers, our vendors and us to accurately
forecast and plan future business activities. Worsening economic conditions could also affect the financial viability of our
suppliers, some of which we may consider key suppliers. If the commercial and industrial, residential HVAC, power generation
and mechanical power transmission markets significantly deteriorate, our business, financial condition and results of operations
will likely be materially and adversely affected. Additionally, our stock price could decrease if investors have concerns that our
business, financial condition and results of operations will be negatively impacted by a worldwide economic downturn.
Goodwill comprises a significant portion of our total assets, and if we determine that goodwill has become impaired in the
future, our results of operations and financial condition in such years may be materially and adversely affected.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. We review
goodwill and other intangibles at least annually for impairment and any excess in carrying value over the estimated fair value is
charged to the results of operations. The Company’s estimates of fair value are based on assumptions about the future operating
cash flows, growth rates, discount rates applied to these cash flows and current market estimates of value. A reduction in net
income resulting from the write down or impairment of goodwill would affect financial results and could have a material and
adverse impact upon the market price of our common stock. If we are required to record a significant charge to earnings in our
consolidated financial statements because an impairment of goodwill is determined, our results of operations and financial
condition could be materially and adversely affected.
15
Businesses that we have acquired or may acquire may have liabilities which are not known to us.
If we consummate the EPC Acquisition, pursuant to the terms of the EPC Purchase Agreement we will assume the majority of
EPC’s liabilities and risks after the closing, subject to certain representations and warranties of, and indemnification rights against
A.O. Smith Corporation. Similarly, we have assumed liabilities of other acquired businesses, and may assume liabilities of
businesses that we acquire in the future. There may be liabilities or risks that we fail, or are unable, to discover, or that we
underestimate, in the course of performing our due diligence investigations of EPC and other acquired businesses. Additionally,
businesses that we have acquired or may acquire in the future may have made previous acquisitions, and we will be subject to
certain liabilities and risks relating to these prior acquisitions as well. We cannot assure you that our rights to indemnification
contained in definitive acquisition agreements that we have entered or may enter into will be sufficient in amount, scope or
duration to fully offset the possible liabilities associated with the business or property acquired. Any such liabilities, individually
or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations. As we begin
to operate acquired businesses, we may learn additional information about them that adversely affects us, such as unknown or
contingent liabilities, issues relating to compliance with applicable laws or issues related to ongoing customer relationships or
order demand.
We may incur costs or suffer reputational damage due to improper conduct of our employees, agents or business partners.
We are subject to a variety of domestic and foreign laws, rules and regulations relating to improper payments to government
officials, bribery, anti-kickback and false claims rules, competition, export and import compliance, money laundering and data
privacy. If our employees, agents or business partners engage in activities in violation of these laws, rules or regulations, we may
be subject to civil or criminal fines or penalties or other sanctions, may incur costs associated with government investigations, or
may suffer damage to our reputation.
Sales of products incorporated into HVAC systems are seasonal and affected by the weather; mild or cooler weather could
have an adverse effect on our operating performance.
Many of our motors are incorporated into HVAC systems that OEMs sell to end users. The number of installations of new and
replacement HVAC systems or components is higher during the spring and summer seasons due to the increased use of air
conditioning during warmer months. Mild or cooler weather conditions during the spring and summer season often result in end
users deferring the purchase of new or replacement HVAC systems or components. As a result, prolonged periods of mild or
cooler weather conditions in the spring or summer season in broad geographical areas could have a negative impact on the
demand for our HVAC motors and, therefore, could have an adverse effect on our operating performance. In addition, due to
variations in weather conditions from year to year, our operating performance in any single year may not be indicative of our
performance in any future year.
We increasingly manufacture our products outside the United States, which may present additional risks to our business.
As a result of our recent acquisitions, a significant portion of our net sales are attributable to products manufactured outside of the
United States, principally in Mexico, India, Thailand and China. Approximately 13,900 of our approximate 18,500 total
employees and 30 of our 51 principal manufacturing facilities are located outside the United States. In addition, if we
consummate the EPC Acquisition, the number of facilities located in foreign jurisdictions will increase, particularly in China and
Mexico, which will increase our exposure to risks specific to those jurisdictions. International operations generally are subject to
various risks, including political, societal and economic instability, local labor market conditions, the imposition of foreign tariffs
and other trade restrictions, the impact of foreign government regulations, and the effects of income and withholding taxes,
governmental expropriation and differences in business practices. We may incur increased costs and experience delays or
disruptions in product deliveries and payments in connection with international manufacturing and sales that could cause loss of
revenue. Unfavorable changes in the political, regulatory, and business climates in countries where we have operations could
have a material adverse effect on our financial condition, results of operations and cash flows.
We may be adversely impacted by an inability to identify and complete acquisitions.
A substantial portion of our growth has come through acquisitions, and an important part of our growth strategy is based upon our
ability to execute future acquisitions. We may not be able to identify and successfully negotiate suitable acquisitions, obtain
financing for future acquisitions on satisfactory terms or otherwise complete acquisitions in the future. If we are unable to
successfully complete acquisitions, our ability to grow our company may be limited.
Our success is highly dependent on qualified and sufficient staffing. Our failure to attract or retain qualified personnel
could lead to a loss of revenue or profitability.
Our success depends, in part, on the efforts and abilities of our senior management team and key employees. Their skills,
experience and industry contacts significantly benefit our operations and administration. The failure to attract or retain members
of our senior management team and key employees could have a negative effect on our operating results.
Our operations are highly dependent on information technology infrastructure and failures could significantly affect our
business.
We depend heavily on our information technology infrastructure in order to achieve our business objectives. If we experience a
problem that impairs this infrastructure, such as a computer virus, a problem with the functioning of an important IT application,
or an intentional disruption of our IT systems by a third party, the resulting disruptions could impede our ability to record or
process orders, manufacture and ship in a timely manner, or otherwise carry on our business in the ordinary course. Any such
16
events could cause us to lose customers or revenue and could require us to incur significant expense to eliminate these problems
and address related security concerns.
We are in the process of implementing a global Enterprise Resource Planning (ERP) system that will redesign and deploy a
common information system over a period of several years. The process of implementation can be costly and can divert the
attention of management from the day-to-day operations of the business. As we implement the ERP system, the new system may
not perform as expected. This could have an adverse effect on our business.
We may be adversely affected by environmental, health and safety laws and regulations.
We are subject to various laws and regulations relating to the protection of the environment and human health and safety and have
incurred and will continue to incur capital and other expenditures to comply with these regulations. Failure to comply with any
environmental regulations, including more stringent environmental laws that may be imposed in the future, could subject us to
future liabilities, fines or penalties or the suspension of production.
We may suffer losses as a result of foreign currency fluctuations.
The net assets, net earnings and cash flows from our foreign subsidiaries are based on the U.S. dollar equivalent of such amounts
measured in the applicable functional currency. These foreign operations have the potential to impact our financial position due
to fluctuations in the local currency arising from the process of re-measuring the local functional currency in the U.S. dollar. Any
increase in the value of the U.S. dollar in relation to the value of the local currency will adversely affect our revenues from our
foreign operations when translated into U.S. dollars. Similarly, any decrease in the value of the U.S. dollar in relation to the value
of the local currency will increase our operating costs in foreign operations, to the extent such costs are payable in foreign
currency, when translated into U.S. dollars.
Our operations can be negatively impacted by natural disasters, terrorism, acts of war, international conflict, political and
governmental actions which could harm our business.
Natural disasters, acts or threats of war or terrorism, international conflicts, and the actions taken by the United States and other
governments in response to such events could cause damage or disrupt our business operations, our suppliers, or our customers,
and could create political or economic instability, any of which could have an adverse effect on our business. Although it is not
possible to predict such events or their consequences, these events could decrease demand for our products, could make it
difficult or impossible for us to deliver products, or could disrupt our supply chain. We may also be negatively impacted by
actions by foreign governments, including currency devaluation, tariffs and nationalization, where our facilities are located which
could disrupt manufacturing and commercial operations.
We are subject to changes in legislative, regulatory and legal developments involving income taxes.
We are subject to U.S. federal, state, and international income, payroll, property, sales and use, fuel, and other types of taxes.
Changes in tax rates, enactment of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could
result in substantially higher taxes and, therefore, could have a significant adverse effect on our results or operations, financial
conditions and liquidity. Currently, a significant amount of our revenue is generated from customers located outside of the
United States, and an increasingly greater portion of our assets and employees are located outside of the United States. U.S.
income tax and foreign withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries,
because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries.
Future legislation may substantially reduce (or have the effect of substantially reducing) our ability to defer U.S. taxes on profit
permanently reinvested outside the United States. Additionally, they could have a negative impact on our ability to compete in
the global marketplace.
We are subject to tax laws and regulations in many jurisdictions and the inability to successfully defend claims from
taxing authorities related to our current and/or acquired businesses could adversely affect our operating results and
financial position.
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing
jurisdictions. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations,
our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to
these differences could have an adverse impact on our operating results and financial position.
Our stock may be subject to significant fluctuations and volatility.
The market price of shares of our common stock may be volatile. Among the factors that could affect our common stock price
are those discussed above under “Risks Factors” as well as:
•
•
•
•
•
•
domestic and international economic and political factors unrelated to our performance;
quarterly fluctuation in our operating income and earnings per share results;
decline in demand for our products;
significant strategic actions by our competitors, including new product introductions or technological advances;
fluctuations in interest rates;
cost increases in energy, raw materials, intermediate components or materials, or labor; and
17
•
changes in revenue or earnings estimates or publication of research reports by analysts.
In addition, stock markets may experience extreme volatility that may be unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the trading price of our common stock.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
We have manufacturing, sales and service facilities throughout the United States and in Canada, Mexico, India, China, Australia,
Thailand and Europe.
Our Electrical segment currently includes 108 manufacturing, service and distribution facilities, of which 45 are principal
manufacturing facilities. The Electrical segment’s present operating facilities contain a total of approximately 8.1 million square
feet of space of which approximately 44% are leased.
Our Mechanical segment currently includes 11 manufacturing, service and distribution facilities, of which six are principal
manufacturing facilities. The Mechanical segment’s present operating facilities contain a total of approximately 0.8 million
square feet of space of which approximately 5% are leased.
At January 1, 2011, the Mechanical segment had one building and the Electrical segment had four buildings totaling
approximately 0.5 million square feet that were available for sale due to consolidation of manufacturing in other locations.
Our principal executive offices are located in Beloit, Wisconsin in an owned approximately 54,000 square foot office building.
We believe our equipment and facilities are well maintained and adequate for our present needs.
Sq Footage
623,268
498,329
472,708
412,000
321,472
320,000
292,757
290,000
276,000
244,091
238,838
235,755
235,624
220,832
220,000
210,155
186,900
169,660
168,552
162,693
146,874
130,630
120,857
120,000
120,000
116,288
114,937
107,000
106,000
103,000
1,116,314
Status
Owned
Owned
Owned
Owned & Leased
Owned & Leased
Owned
Leased
Owned
Owned
Leased
Owned & Leased
Owned
Leased
Leased
Leased
Leased
Owned
Owned
Leased
Leased
Owned
Owned
Leased
Leased
Owned
Owned
Leased
Leased
Owned
Owned
(1)
Use
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Warehouse
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Warehouse
Manufacturing
Manufacturing
Manufacturing
Manufacturing & Warehouse
Manufacturing & Warehouse
Manufacturing & Warehouse
Warehouse
Manufacturing
Warehouse
Warehouse
Manufacturing
Manufacturing
Warehouse
Manufacturing
Manufacturing
Manufacturing
(1)
Electrical Segment
Location
Wuxi, China
Wausau, WI
Kolkata, India
Juarez, Mexico - 2
Shanghai, China – 3
Reynosa, Mexico
Hengli, China
Springfield, MO
Eldon, MO - 2
Milan, Italy
Cassville, MO
Changzhou, China
Monterrey, Mexico – 2
Indianapolis, IN
Faridabad, India
Piedras, Mexico – 2
Lebanon, MO
Bangkok, Thailand – 2
Rowville, Australia – 3
Dandenong, South Australia – 4
Eibergen, Netherlands
Erwin, TN – 4
Auckland, New Zealand – 3
Pharr, TX
Lincoln, MO
McAllen, TX
Tomago, Australia
Blytheville, AR
West Plains, MO
Black River Falls, WI
All Other – 61
18
Mechanical Segment
Location
Liberty, SC
Aberdeen, SD
Shopiere, WI
Union Grove, WI
All Other - 7
Sq Footage
173,516
164,960
132,000
122,000
255,180
Status
Owned
Owned
Owned
Owned
(2)
Use
Manufacturing
Manufacturing
Manufacturing
Manufacturing
(2)
(1) Less significant manufacturing, service and distribution and engineering facilities located in North America, Europe, Asia, Australia, South America, and
Africa: Electrical leased square footage 3,534,491.
(2) Mechanical leased square footage 45,680.
ITEM 3 - Legal Proceedings
In July 2009, we filed a response and counterclaims in an action initiated by Nordyne, Inc. (“Nordyne”) on February 4, 2009, in
the U.S. District Court for the Eastern District of Missouri. In the 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 patent 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 deny that Nordyne is entitled to relief and we seek a judgment 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 also have 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. On February 2, 2011, the Court issued a claim construction order in which it held that some of the claims in
the ‘058 Patent contain limitations that are indefinite and thus invalid. However, other claims of the ‘058 Patent were not affected
by this ruling and remain to be litigated in the action. 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.
One of our subsidiaries that we acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain
sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and
commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of
fires. Based on the current facts, we do not believe these claims, individually or in the aggregate, will have a material adverse
effect on our results of operations or financial condition. However, we cannot predict the outcome of these claims, the nature or
extent of remedial actions, if any, we may need to undertake with respect to motors that remain in the field, or the costs we may
incur, some of which could be significant.
We are, from time to time, party to other litigation that arises in the normal course of our business operations, including product
warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. Our
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. We accrue for anticipated costs in defending against such lawsuits
in amounts that we believe are adequate, and we do not believe that the outcome of any such lawsuit will have a material effect on
our results of operations or financial position.
ITEM 4 - REMOVED AND RESERVED
19
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
General
Our common stock, $.01 par value per share, is traded on the New York Stock Exchange under the symbol “RBC.” The
following table sets forth the range of high and low closing sales prices for our common stock for the period from December 28,
2008 through January 1, 2011.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
High
$60.78
65.63
65.07
69.54
Low
$47.40
55.48
55.09
55.27
2010
Price Range
Dividends Declared High
2009
Price Range
Low
Dividends Declared
$0.16 $38.83 $25.81
29.99
42.65
0.17
0.17 49.26 38.76
43.43
53.76
0.17
$0.16
0.16
0.16
0.16
We have paid 202 consecutive quarterly dividends through January 2011. The number of record holders of common stock as of
February 22, 2011 was 547.
The following table contains detail related to the repurchase of our common stock based on the date of trade during the quarter
ended January 1, 2011.
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of Shares Purchased as
Part of Publicly Announced Plans or
Programs
Maximum Number of Shares that
May be Purchased Under the Plan
or Programs
2010 Fiscal Month
October 3 to
November 6
November 7 to
December 4
December 5 to
January 1, 2011
1,728
$55.27
-
-
Total
1,728
-
-
-
-
2,115,900
2,115,900
2,115,900
Under our equity incentive plans, participants may pay the exercise price or satisfy all or a portion of the federal, state and local
withholding tax obligations arising in connection with plan awards by electing to a) have us withhold shares of common stock
otherwise issuable under the award, b) tender back shares received in connection with such award or c) deliver previously owned
shares of common stock, in each case having a value equal to the exercise price or the amount to be withheld. The shares listed
under “Total Number of Shares Purchased” relate to our repurchases under these equity incentive plans.
Our Board of Directors has approved repurchase programs of up to 3,000,000 shares of common stock. Management is authorized
to effect purchases from time to time in the open market or through privately negotiated transactions. Through January 1, 2011,
we repurchased 884,100 shares at an average purchase price of $21.96 per share under this program. (See Note 10 of Notes to the
Consolidated Financial Statements.)
Item 12 of this Annual Report on Form 10-K contains certain information relating to our equity compensation plans.
Stock Performance
The following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (the “Exchange Act”) or to
the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Exchange Act.
The following graph compares the hypothetical total shareholder return (including reinvestment of dividends) on an investment in
(1) our common stock, (2) the Standard & Poor’s Mid Cap 400 Index, and (3) the Standard & Poor’s 400 Electrical Components
and Equipment Index, for the period December 31, 2005 through January 1, 2011. In each case, the graph assumes the
investment of $100.00 on December 31, 2005.
20
$250
$200
$150
$100
$50
$0
2005
Comparison of Cumulative Five Year Total Return
2006
2007
2008
2009
2010
Regal Beloit Corporation
S&P MidCap 400 Index
S&P 400 Electrical Components & Equipment
Regal Beloit Corporation
S&P MidCap 400 Index
S&P 400 Electrical Components & Equipment
2007
2006
150.14 130.17
110.32 119.12
112.38 141.06
2009
2008
2010
99.95 155.21 201.74
72.66 104.35 132.15
86.03 118.45 171.31
ITEM 6 - SELECTED FINANCIAL DATA
The selected statement of income data for fiscal 2010, 2009, and 2008, and the selected balance sheet data at January 1, 2011 and
January 2, 2010 are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this
Annual Report on Form 10-K. The selected statement of income data for fiscal 2007 and 2006 and the selected balance sheet data
at December 27, 2008, December 29, 2007 and December 30, 2006 are derived from audited financial statements not included
herein.
Net Sales
Income from Operations
Net Income Attributable to Regal Beloit
Total Assets
Long-Term Debt
Regal Beloit Shareholders' Equity
Per Share Data:
Earnings - Basic
Earnings - Assuming Dilution
Cash Dividends Declared
Shareholders' Equity
Weighted Average Shares Outstanding (in 000's):
Basic
Assuming Dilution
(In Thousands, Except Per Share Data)
Fiscal Year 2010 Fiscal Year 2009 Fiscal Year 2008 Fiscal Year 2007 Fiscal Year 2006
$1,619,545
194,017
107,156
1,437,559
313,351
755,984
$1,802,497
206,060
115,499
1,862,247
552,917
861,750
$2,237,978
237,735
149,379
2,449,136
428,256
1,361,960
$2,246,249
230,431
125,525
2,023,496
560,127
825,987
$1,826,277
159,520
95,048
2,112,237
468,065
1,167,824
3.91
3.84
0.67
35.27
38,236
38,922
2.76
2.63
0.64
33.85
34,499
36,132
4.00
3.78
0.63
26.35
31,343
33,251
3.70
3.40
0.59
27.57
31,252
33,921
3.47
3.20
0.55
24.51
30,847
33,504
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
We operate on a 52/53 week fiscal year ending on the Saturday closest to December 31. We refer to the fiscal year ended
January 1, 2011 as “fiscal 2010,” the fiscal year ended January 2, 2010 as “fiscal 2009,” and the fiscal year ended December
27, 2008 as “fiscal 2008.” Fiscal 2010 had 52 weeks, fiscal 2009 had 53 weeks, and fiscal 2008 had 52 weeks.
Overview
We are a global manufacturer of electric motors and controls, electric generators and controls, and mechanical motion control
products. Many of our products feature energy efficient technology, and electronics. Our energy efficiency products can offer
lower operating costs to our customers and promote sustainability. Our products are used in a variety of essential commercial,
21
industrial, commercial refrigeration and heating, ventilation, and air conditioning (“HVAC”), applications, and we believe we have
one of the most comprehensive product lines in the industries we serve. We sell our products to a diverse global customer base
using more than 30 recognized brand names through a multi-channel distribution model to leading original equipment
manufacturers (“OEMs”), distributors and end users for a wide variety of applications. We believe this strategy, coupled with a
high level of customer service, provides us with a competitive selling advantage and allows us to more fully serve our customers.
We have two reporting segments: Electrical and Mechanical. Our electrical products primarily include HVAC motors, a full line
of AC and DC commercial and industrial electric motors, electric generators and controls, high-performance drives and controls,
and capacitors. Our mechanical products primarily include gears and gearboxes, marine transmissions, high-performance
automotive transmissions and ring and pinions, manual valve actuators, and electrical connectivity devices.
On an ongoing basis, we focus on a variety of key indicators to monitor business performance. These indicators include organic
and total sales growth (including volume and price components), gross profit margin, operating profit, net income and earnings
per share, and measures to optimize the management of working capital, capital expenditures, cash flow and Return On Invested
Capital (ROIC). We monitor these indicators, as well as our corporate governance practices (including the Company’s Code of
Business Conduct and Ethics), to ensure that we maintain business health and strong internal controls.
To achieve our financial objectives, we are focused on initiatives to drive and fund growth. We seek to capture significant
opportunities for growth by identifying and meeting customer product needs within our core product categories, developing new
products, and identifying category expansion opportunities. We meet these customer product needs through focused product
research and development efforts as well as through a disciplined acquisition strategy. Our acquisition strategy emphasizes
acquiring companies that offer market growth potential as a result of geographic base, technology or industry expansion. The cash
flow needed to fund our growth is developed through continuous, corporate-wide initiatives to lower costs and increase effective
asset utilization.
We also prioritize investments that generate higher return on capital businesses. Our management team is compensated based on
a modified Economic Value Added (EVA) program which reinforces capital allocation disciplines that drive increases in
shareholder value. The key metrics in our program include total sales growth, organic sales growth, operating margin percent,
operating cash flow as a percent of net income and ROIC.
Given the global economic uncertainty, we anticipate that the near-term operating environment will remain challenging.
Specifically, we are experiencing continued increases in the costs for commodity inputs, including copper, steel and aluminum,
which are the primary materials used in manufacturing our products. We are unable to predict the future costs of these
commodities, and continued increases in these costs may adversely affect our operating margins if we are unable to offset cost
increases through price, productivity or other means.
Results of Operations
Net Sales
Net Sales
Sales growth rate
Net Sales by Segment:
Electrical segment
Sales growth rate
Mechanical segment
Sales growth rate
Fiscal 2010
(In millions)
Fiscal 2009
Fiscal 2008
$2,238.0
22.5%
$1,826.3
(18.7%)
$2,246.2
24.6%
$2,002.0
22.3%
$236.0
25.1%
$1,637.7
(18.1%)
$188.6
(23.8%)
$1,998.6
28.2%
$247.6
1.7%
Fiscal 2010 Compared to Fiscal 2009
Net sales for fiscal 2010 were $2.2 billion, a 22.5% increase over fiscal 2009 net sales of $1.8 billion. Net sales for fiscal 2010
included $119.5 million of incremental net sales related to the acquisitions of CMG Engineering Group Pty, Ltd., Air-Con
Technology, Rotor B.V., Elco Group B.V., South Pacific Rewinders, and Unico, Inc. that occurred in fiscal 2010 (we refer to
these businesses as the “2010 acquired businesses”; see Note 5 of Notes to the Consolidated Financial Statements).
In the Electrical segment, net sales for fiscal 2010 were $2.0 billion, a 22.3% increase over fiscal 2009 net sales of $1.6 billion.
Fiscal 2010 net sales for the Electrical segment included $92.6 million of incremental net sales related to the 2010 acquired
businesses. The increase in net sales in the Electrical segment was primarily due to volume increases, the effects of product price
increases we implemented in an effort to offset increasing raw material costs, and new product introductions, resulting in (i) an
11.8% increase from fiscal 2009 in U.S. sales of residential HVAC products for the replacement market benefitting from the
effects of the economic stimulus providing a tax credit to consumers for the purchase of certain energy-efficient products, (ii) a
16.8% increase from fiscal 2009 in sales of commercial and industrial motors driven by improving industrial demand in the U.S.,
and (iii) 14.1% increase from fiscal 2009 in generator sales due primarily to generally improving economic conditions.
In the Mechanical segment, net sales for fiscal 2010 were $236.0 million, a 25.1% increase over fiscal 2009 net sales of $188.6
million. The increase in net sales in the Mechanical segment was primarily due to improved business conditions in the industrial
22
markets. Fiscal 2010 net sales for the Mechanical segment included $26.9 million of incremental net sales related to the 2010
acquired businesses.
High efficiency product sales across our business represented 17.9% of net sales for fiscal 2010, a $73.5 million increase from
fiscal 2009. High efficiency product sales also represented 17.9% of net sales for fiscal 2009.
From a geographic perspective, Asia-based net sales increased 55.3% for fiscal 2010 compared to fiscal 2009. In total, net sales
to regions outside of the United States were 31.6% of total net sales for fiscal 2010 compared to 26.9% of total net sales for fiscal
2009. The positive impact of foreign currency exchange rates increased total net sales by 0.4% for fiscal 2010 compared to fiscal
2009.
Fiscal 2009 Compared to Fiscal 2008
Net sales for fiscal 2009 were $1.8 billion, an 18.7% decrease over fiscal 2008 net sales of $2.2 billion. Net sales for fiscal 2009
included $57.8 million of incremental net sales related to the 2008 acquired businesses and the CPT acquisition completed on
January 2, 2009.
In the Electrical segment, sales decreased 18.1% including the impact of the acquisitions noted above. Exclusive of the acquired
businesses, Electrical segment sales decreased 21.0%. Sales for the residential HVAC motor business were negatively impacted
by weak housing markets; however, economic stimulus related spending, higher efficiency product mix, and low prior year
comparables resulted in a 6.8% decrease during fiscal 2009 for the HVAC residential market.
Driven by weak end markets, commercial and industrial motor sales in North America for fiscal 2009 decreased 25.5% over sales
for fiscal 2008. Global generator sales decreased 42.6% for fiscal 2009 compared to fiscal 2008.
Sales in the Mechanical segment decreased 23.8% from fiscal 2008. Weakness in end markets for all Mechanical segment
businesses was experienced in fiscal 2009 as a result of weak industrial markets.
High efficiency product sales represented 17.9% of net sales for fiscal 2009 compared to 12.8% for fiscal 2008.
From a geographic perspective, Asia-based net sales decreased 23.5% for fiscal 2009 compared to fiscal 2008. In total, net sales
to regions outside of the United States were 26.9% of total net sales for fiscal 2009 compared to 27.3% of total net sales for fiscal
2008. The negative impact of foreign currency exchange rates decreased total net sales by 0.3% for fiscal 2009 compared to
fiscal 2008.
Gross Profit
Gross Profit
Gross profit percentage
Gross Profit by Segment:
Electrical segment
Gross profit percentage
Mechanical segment
Gross profit percentage
Fiscal 2010
(In thousands)
Fiscal 2009
Fiscal 2008
$549,350
24.5%
$424,224
23.2%
$500,680
22.3%
$486,117
24.3%
$63,233
26.8%
$379,017
23.1%
$45,207
24.0%
$428,778
21.5%
$71,902
29.0%
Fiscal 2010 Compared to Fiscal 2009
The gross profit margin for fiscal 2010 was 24.5% compared to 23.2% for fiscal 2009.
The gross profit margin for the Electrical segment was 24.3% for fiscal 2010 compared to 23.1% for fiscal 2009. The increase in
Electrical segment gross margins was primarily due to (i) volume increases, (ii) the effects of product price increases
implemented in an effort to offset increasing raw material costs, (iii) cost reduction efforts, including the benefit from plant
consolidations, and (iv) a mix change toward higher efficiency products. The increase in Electrical segment gross margins was
partially offset by (i) higher costs for raw materials such as copper, aluminum, energy, and other material inputs (in particular, the
accelerating prices for copper in 2010, which is a key commodity input in the production of electrical motors and generators), (ii)
incremental costs incurred in an effort to mitigate the impact to customers of supply chain disruptions experienced in the second
and third quarters, including incremental costs associated with expedited transportation expenses, plant labor inefficiencies and
costs to qualify new vendors, and (iii) the impact of purchase accounting adjustments related to the 2010 acquired businesses.
The gross profit margin for the Mechanical segment was 26.8% for fiscal 2010 compared to 24.0% for fiscal 2009. The increase
in Mechanical segment gross margins was primarily due to positive fixed cost absorption impacts of higher production volumes.
Fiscal 2009 Compared to Fiscal 2008
The gross profit margin for fiscal 2009 was 23.2% compared to 22.3% for fiscal 2008.
The gross profit margin for the Electrical segment was 23.1% for fiscal 2009 compared to 21.5% for fiscal 2008. The increase in
Electrical segment gross margins was primarily due to (i) cost reduction efforts, including the benefit from plant consolidations,
(ii) a mix change toward higher efficiency products, and (iii) short term net material cost savings. The increase in Electrical
segment gross margins was partially offset by negative fixed cost absorption due to lower sales and production levels.
23
The gross profit margin for the Mechanical segment was 24.0% for fiscal 2009 compared to 29.0% for fiscal 2008. The decrease
in Mechanical segment gross margins was primarily due to negative fixed cost absorption impacts of lower production volumes.
Operating Expenses
Operating Expenses
As a percentage of net sales
Operating Expenses by Segment:
Electrical segment
As a percentage of Electrical segment net sales
Mechanical segment
As a percentage of Mechanical segment net sales
Fiscal 2010 Compared to Fiscal 2009
(In thousands)
Fiscal 2010 Fiscal 2009 Fiscal 2008
$270,249
12.0%
$264,704
14.5%
$311,615
13.9%
$275,886
13.8%
$35,729
15.1%
$234,117
14.3%
$30,587
16.2%
$237,246
11.9%
$33,003
13.3%
Operating expenses were $311.6 million, or 13.9% of net sales, for fiscal 2010 compared to $264.7 million, or 14.5% of net sales,
for fiscal 2009. Operating expenses for the Electrical segment were $275.9 million, or 13.8% of Electrical segment net sales, for
fiscal 2010 compared to $234.1 million, or 14.3% of Electrical segment net sales, for fiscal 2009. Operating expenses for the
Mechanical segment were $35.7 million, or 15.1% of Mechanical segment net sales, for fiscal 2010 compared to $30.6 million, or
16.2% of Mechanical segment net sales, for fiscal 2009.
The increases in operating expenses for fiscal 2010 in both the Electrical segment and the Mechanical segment were primarily
due to higher variable compensation and other expenses related to higher sales volume. Operating expenses for fiscal 2010 also
included (i) an incremental $28.4 million related to the 2010 acquired businesses, and (ii) $6.6 million of acquisition and
diligence related expenses compared to $0.3 million for fiscal 2009.
Fiscal 2009 Compared to Fiscal 2008
Operating expenses were $264.7 million, or 14.5% of net sales, for fiscal 2009 compared to $270.2 million, or 12.0% of net sales,
for fiscal 2008. Operating expenses for the Electrical segment were $234.1 million, or 14.3% of Electrical segment net sales, for
fiscal 2009 compared to $237.2 million, or 11.9% of Electrical segment net sales, for fiscal 2008. Operating expenses for the
Mechanical segment were $30.6 million, or 16.2% of Mechanical segment net sales, for fiscal 2009 compared to $33.0 million, or
13.3% of Mechanical segment net sales, for fiscal 2008.
The decreases in operating expenses for fiscal 2009 in both the Electrical segment and the Mechanical segment were primarily
due to significant operating cost reductions as sales volumes decreased due to the economic slowdown.
Income from Operations
Income from Operations
As a percentage of net sales
Income from Operations by Segment:
Electrical segment
As a percentage of net sales
Mechanical segment
As a percentage of net sales
Fiscal 2010 Compared to Fiscal 2009
2010
$237,735
10.6%
(In thousands)
2009
$159,520
8.7%
2008
$230,431
10.3%
$210,231
10.5%
$27,504
11.7%
$144,901
8.8%
$14,619
7.8%
$191,532
9.6%
$38,899
15.7%
Income from operations was $237.7 million, or 10.6% of net sales, for fiscal 2010 compared to $159.5 million, or 8.7% of net
sales, for fiscal 2009. Income from operations for the Electrical segment was $210.2 million, or 10.5% of Electrical segment net
sales, for fiscal 2010 compared to $144.9 million, or 8.8% of Electrical segment net sales, for fiscal 2009. Income from
operations for the Mechanical segment was $27.5 million, or 11.7% of Mechanical segment net sales, for fiscal 2010 compared to
$14.6 million, or 7.8% of Mechanical segment net sales for fiscal 2009.
The increases in income from operations for fiscal 2010 in both the Electrical segment and the Mechanical segment were
primarily due to volume and price increases, partially offset by higher commodity input costs and higher operating expenses from
the 2010 acquired businesses.
Fiscal 2009 Compared to Fiscal 2008
Income from operations was $159.5 million, or 8.7% of net sales, for fiscal 2009 compared to $230.4 million, or 10.3% of net
sales, for fiscal 2008. Income from operations for the Electrical segment was $144.9 million, or 8.8% of Electrical segment net
sales, for fiscal 2009 compared to $191.5 million, or 9.6% of Electrical segment net sales, for fiscal 2009. Income from
operations for the Mechanical segment was $14.6 million, or 7.8% of Mechanical segment net sales, for fiscal 2009 compared to
$38.9 million, or 15.7% of Mechanical segment net sales, for fiscal 2008.
24
Income from operations declined, but was partially offset by cost reduction efforts, including the benefit from plant
consolidations, a mix toward higher efficiency products in fiscal 2009, and short term net material cost savings. Offsetting these
factors were negative impacts from lower fixed cost absorption.
Interest Expense, Net
Fiscal 2010
(In thousands)
Fiscal 2009
Fiscal 2008
Interest Expense, Net
Year End Weighted Average Interest Rate
$17,006
4.1%
$21,565
3.6%
$31,168
4.1%
Fiscal 2010 Compared to Fiscal 2009
Net interest expense for fiscal 2010 was $17.0 million compared to $21.6 million for fiscal 2009 due to lower debt levels in fiscal
2010. Interest income increased for fiscal 2010 due to higher cash balances as a result of our operating cash flow (see “-
Liquidity and Capital Resources”).
Fiscal 2009 Compared to Fiscal 2008
Net interest expense for fiscal 2009 was $21.6 million compared to $31.2 million for fiscal 2008. During fiscal 2009, interest
expense decreased driven by the redemption of $75.8 million of convertible notes (see Note 8 of Notes to the Consolidated
Financial Statements). Interest income increased in fiscal 2009 due to higher cash balances as a result of operating cash flow and
the proceeds from the public offering of common stock in May 2009 (see “- Liquidity and Capital Resources”).
Effective Tax Rate
Income Taxes
Effective Tax Rate
Fiscal 2010 Compared to Fiscal 2009
Fiscal 2010
(In thousands)
Fiscal 2009
Fiscal 2008
$66,045
29.9%
$39,276
28.5%
$70,349
35.3%
The effective tax rate for fiscal 2010 was 29.9% compared to 28.5% for fiscal 2009. The increase in the effective tax rate was
primarily due to changes in the global distribution of income (see Note 11 of Notes to the Consolidated Financial Statements).
Fiscal 2009 Compared to Fiscal 2008
The effective tax rate for fiscal 2009 was 28.5% compared to 35.3% for fiscal 2008. The decrease in the effective tax rate was
primarily due to changes in the global distribution of income, as well as adjustments to tax reserves due to a statutory expiration
(see Note 11 of Notes to the Consolidated Financial Statements).
Net Income Attributable to Regal Beloit Corporation
Net Income Attributable to Regal Beloit Corporation
Fully Diluted Earnings per Share
Average Number of Diluted Shares
(In millions, except per share data)
Fiscal 2010 Fiscal 2009 Fiscal 2008
$125.5
$3.78
33.3
$149.4
$3.84
38.9
$95.0
$2.63
36.1
Fiscal 2010 Compared to Fiscal 2009
Net Income Attributable to Regal Beloit Corporation for fiscal 2010 was $149.4 million, an increase of 57.2% compared to $95.0
million for fiscal 2009. Fully diluted earnings per share were $3.84 for fiscal 2010 compared to $2.63 for fiscal 2009. The
average number of diluted shares was 38,921,699 during fiscal 2010 compared to 36,131,607 during fiscal 2009.
Fiscal 2009 Compared to Fiscal 2008
Net Income Attributable to Regal Beloit Corporation for fiscal 2009 was $95.0 million, a decrease of 24.3% compared to $125.5
million for fiscal 2008. Fully diluted earnings per share were $2.63 for fiscal 2009 compared to $3.78 for fiscal 2008. The
average number of diluted shares was 36,131,607 during fiscal 2009 compared to 33,250,689 during fiscal 2008.
Liquidity and Capital Resources
General
Our principal source of liquidity is operating cash flow which we target to equal or exceed our net income. In addition to
operating income, other significant factors affecting our liquidity management include working capital levels, capital
expenditures, dividends, acquisitions, availability of debt financing and the ability to attract long term capital at acceptable terms.
Our working capital was $688.7 million at January 1, 2011, an increase of 2.7% from $670.3 million at year-end 2009. At
January 1, 2011, our current ratio (which is the ratio of our current assets to current liabilities) was 2.7:1 compared to 3.2:1 at
January 2, 2010.
Cash flow provided by operating activities (“operating cash flow”) was $175.4 million for fiscal 2010, a $139.5 million decrease
from fiscal 2009. The decrease was driven by a combined $158.5 increase in the level of accounts receivable, inventory and
25
accounts payable as a result of the increased level of sales. These working capital components used $62.3 million of operating
cash in fiscal 2010 compared to providing $96.2 million in fiscal 2009.
Cash flow used in investing activities was $194.7 million for fiscal 2010, $43.1 million more than in fiscal 2009, driven by
$211.9 of acquisition costs and partially offset by the net sales of investment securities of $60.7 million. In addition, capital
spending increased to $45.0 million for fiscal 2010 from $33.6 million for fiscal 2009. Our commitments for property, plant and
equipment as of January 1, 2011 were approximately $5.5 million. In fiscal 2011, we anticipate capital spending will increase to
approximately $90.0 million, as we fund (i) the purchase of our factory in Faridabad, India, which is currently leased, and (ii) the
construction and relocation of two of our factories in China as required by the Chinese government. We believe that our present
manufacturing facilities, augmented by these planned capital expenditures in fiscal 2011, will be sufficient to provide adequate
capacity for our operations in 2011.
Cash flow used in financing activities was $70.3 million for fiscal 2010, compared to cash flow provided of $32.9 million for
fiscal 2009. On May 22, 2009, we completed a public offering of 4,312,500 shares of our common stock at a price of $36.25 per
share, resulting in $150.4 million of net proceeds. We paid $25.1 million in dividends to shareholders in fiscal 2010.
At January 1, 2011, we have $250.0 million of senior notes (the “Notes”) outstanding. The Notes were sold pursuant to a Note
Purchase Agreement (the “Agreement”) by and among us 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”). These interest rates vary as LIBOR varies. The Agreement permits us 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 January 1, 2011 the interest rate of 0.9% was based on a margin over LIBOR.
Our $500.0 million revolving credit facility (the “Facility”) permits us to borrow at interest rates based upon a margin above
LIBOR, which margin varies with the ratio of senior funded debt to EBITDA as defined in the Facility. These interest rates also
vary as LIBOR varies. We pay a commitment fee on the unused amount of the Facility, which also varies with the ratio of our
senior funded debt to our EBITDA. As of January 1, 2011, we had approximately $45.8 million in standby letters of credit issued
under the Facility and $454.2 million in available borrowings under the Facility. The average balance outstanding in direct
borrowings under the Facility in fiscal 2010 was $1.4 million. The Facility matures in April 2012.
On June 16, 2008, we entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, pursuant to which
we 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 a margin over LIBOR which varies with the ratio of our 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. At January 1, 2011, the interest rate of 1.0% was based on a margin over LIBOR. The Notes, the Term
Loan and the Facility require us to meet specified financial ratios and to satisfy certain financial condition tests. We were in
compliance with all debt covenants as of January 1, 2011.
We have interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 14 to
Notes to the Consolidated Financial Statements).
As of January 1, 2011, we have no convertible notes that remain outstanding. During fiscal 2010, the final $39.2 million face
value bonds were converted. We paid the par value in cash and issued approximately 0.9 million shares for the conversion
premium. During fiscal 2009, several bondholders exercised their conversion right for a total of $75.8 million of convertible
notes. The par value of the convertible notes was paid in cash and the conversion premium was paid through issuance of
approximately 1.4 million shares of stock.
As part of the acquisitions made during fiscal 2010 (see note 5 of Notes to the Consolidated Financial Statements), we assumed
$11.1 million of short-term and long-term debt. At January 1, 2011, $1.5 million of the short-term acquired debt remains
outstanding and $2.4 million of the long-term acquired debt remains outstanding.
At January 1, 2011, one of our foreign subsidiaries had outstanding short-term borrowings of $7.0 million denominated in local
currency with a fixed interest rate of 5.6%. At January 2, 2010 one of our foreign subsidiaries had outstanding short-term
borrowings of $8.2 million, denominated in local currency with a weighted average interest rate of 1.9%.
At January 1, 2011, additional notes payable of approximately $14.9 million were outstanding with a weighted average interest
rate of 4.7 %.
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and
acquisitions. At January 1, 2011, net of interest rate swaps, we had $266.4 million of fixed rate debt and $170.5 million of
variable rate debt. The variable rate debt is primarily under our Term Loan with an interest rate based on a margin above LIBOR.
As a result, interest rate changes impact future earnings and cash flow assuming other factors are constant. A hypothetical 10%
change in our weighted average borrowing rate on outstanding variable rate debt at January 1, 2011 would result in a change in
net income of approximately $0.1 million.
Predominately, all of our expenses are paid in cash, often with payment term provisions that include early payment discounts and
time elements. We believe that our ability to generate positive cash flow, coupled with our available revolver balance will be
sufficient to fund our operations for the foreseeable future. We focus on optimizing our investment in working capital through
26
improved and enforced payment terms and operational efficiencies. Additionally, we believe that our capital expenditures for
maintenance of equipment and facilities will be consistent with prior levels and not present a funding challenge.
We were in compliance with all of our financial covenants at the end of fiscal 2010. We believe that we will continue to be in
compliance with these covenants for the foreseeable future.
The primary financial covenants on our Notes, Term Loan, and the Facility include ratios of debt to EBITDA (as defined in each
agreement) and minimum interest coverage ratios of EBITDA to interest expense. The debt to EBITDA covenant ratio requires
us to be less than 3.75:1, and our ratio at January 1, 2011 was approximately 1.4:1. The minimum interest coverage ratio requires
us to be greater than 3.0:1, and our ratio at January 1, 2011 was approximately 16.3:1.
We will, from time to time, maintain excess cash balances which may be used to fund operations, repay outstanding debt and will
be available for other investments which may include acquisitions of businesses or product lines, dividends, investments in new
product development programs and the repurchase of our commons stock.
Our projections are based on all information known to us, which may change based on global economic events, our financial
performance, actions by our customers and competitors and other factors discussed in “Risk Factors.”
EPC Acquisition
We plan to fund the $700 million cash consideration in the EPC Acquisition with a combination of existing cash, borrowings
under the Facility and additional debt.
Litigation
In July 2009, we filed a response and counterclaims in an action initiated by Nordyne, Inc. (“Nordyne”) on February 4, 2009, in
the U.S. District Court for the Eastern District of Missouri. In the 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 patent 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 deny that Nordyne is entitled to relief and we seek a judgment 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 also have 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. On February 2, 2011, the Court issued a claim construction order in which it held that some of the claims in
the ‘058 Patent contain limitations that are indefinite and thus invalid. However, other claims of the ‘058 Patent were not affected
by this ruling and remain to be litigated in the action. 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.
One of our subsidiaries that we acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain
sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and
commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of
fires. Based on the current facts, we do not believe these claims, individually or in the aggregate, will have a material adverse
effect on our results of operations or financial condition. However, we cannot predict the outcome of these claims, the nature or
extent of remedial actions, if any, we may need to undertake with respect to motors that remain in the field, or the costs we many
incur, some of which could be significant.
We are, from time to time, party to other litigation that arises in the normal course of our business operations, including product
warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. Our
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. We accrue for anticipated costs in defending against such lawsuits
in amounts that we believe are adequate, and we do not believe that the outcome of any such lawsuit will have a material effect on
our results of operations or financial position.
Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments
The following is a summary of our contractual obligations and payments due by period as of January 1, 2011 (in millions):
Payments due by Period (1)
Less than 1 Year
1 - 3 Years
3 - 5 Years
More than 5 Years
Total
Debt Including Estimated
Interest Payments (2)
Operating
Leases
Pension
Obligations
$24.7
197.0
168.6
116.5
$506.8
$22.4
30.9 -
13.4 -
9.4 -
$76.1
Purchase and
Other Obligations
$273.0
$2.2
-
-
-
$2.2
$273.0
Total Contractual
Obligations
$322.3
227.9
182.0
125.9
$858.1
(1) The timing and future spot prices affect the settlement values of our hedge obligations related to commodities, currency and interest rate swap agreements.
Accordingly, these obligations are not included above in the table of contractual obligations. The timing of settlement of our tax contingent liabilities cannot
be reasonably determined and they are not included above in the table of contractual obligations. Future pension obligation payments after 2010 are subject to
revaluation based on changes in the benefit population and/or changes in the value of pension assets based on market conditions that are not determinable as of
January 1, 2011.
(2) Variable rate debt based on January 1, 2011 rates.
27
We utilize blanket purchase orders (“blankets”) to communicate expected annual requirements to many of our suppliers.
Requirements under blankets generally do not become “firm” until a varying number of weeks before our scheduled production.
The purchase obligations shown in the above table represent the value we consider “firm.”
At January 1, 2011, we had outstanding standby letters of credit totaling approximately $45.8 million. We had no other material
commercial commitments.
We did not have any material variable interest entities as of January 1, 2011 and January 2, 2010. Other than disclosed in the
table above and the previous paragraph, we had no other material off-balance sheet arrangements.
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the
United States requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of
the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from
those estimates. We believe the following critical accounting policies could have the most significant effect on our reported
results.
Goodwill
We evaluate the carrying amount of goodwill annually or more frequently if events or circumstances indicate that an asset might
be impaired. When applying the accounting guidance, we use estimates to determine when it might be necessary to take an
impairment charge. Factors that could trigger an impairment review include significant underperformance relative to historical or
forecasted operating results, a significant decrease in the market value of an asset or significant negative industry or economic
trends. We perform our required annual goodwill impairment test as of the end of the October fiscal month each year.
The key assumptions used in the discounted cash flow valuation model used to estimate fair value include discount rates, growth
rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive
and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted
average cost of capital (“WACC”). The WACC considers market and industry data as well as company-specific risk factors for
each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is
indicative of the return an investor would expect to receive for investing in such a business. Terminal value rate determination
follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period
assuming a constant WACC and long term growth rates. The calculated fair values for our 2010 impairment testing exceed the
carrying values of the reporting units. The two reporting units that compromise approximately 82% of the total consolidated
carrying value at January 1, 2011 had a combined excess of approximately 90% estimated fair value over carrying value. We had
two reporting units with a total of $27.3 million of goodwill at January 1, 2011 that had an estimated fair value that was less than
15% over carrying value.
Intangible Assets
We evaluate the recoverability of the carrying amount of intangible assets whenever events or changes in circumstance indicate
that the carrying amount of an asset may not be fully recoverable through future cash flows. When applying the accounting
guidance we use estimates to determine when an impairment is necessary. Factors that could trigger an impairment review
include a significant decrease in the market value of an asset or significant negative or economic trends. (See also Note 7 of Notes
to the Consolidated Financial Statements).
Derivatives
We periodically enter into commodity hedging transactions to reduce the impact of changing prices for certain commodities such
as copper and aluminum based upon forecasted purchases of such commodities. We also use a cash hedging strategy to protect
against an increase in the cost of forecasted foreign currency denominated transactions. Finally, we also have certain LIBOR-
based floating rate borrowings that expose us to variability in interest rates that have been swapped into a pay fixed/receive
LIBOR based interest rate swap agreement.
The fair value of derivatives is recorded on the consolidated balance sheet and the value is determined based on level 2 inputs.
(See Note 14 of Notes to the Consolidated Financial Statements.)
Retirement Plans
Approximately half of our domestic employees are covered by defined benefit pension plans with the remaining employees
covered by defined contribution plans. The defined benefit pension plans covering a majority of our domestic employees were
frozen to new employees as of January 1, 2009. Most of our foreign employees are covered by government sponsored plans in
the countries in which they are employed. Our obligations under our defined benefit pension plans are determined with the
assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as withdrawal rates and mortality
rates. The actuaries also provide information and recommendations from which management makes further assumptions on such
factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the
rate of annual compensation increases.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets,
particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from
assumptions, annual expenses and recorded assets or liabilities of these defined benefit pension plans may change significantly
from year to year. Based on the annual review of actuarial assumptions as well as historical rates of return on plan assets and
28
existing long-term bond rates, we set the long-term rate of return on plan assets at 8.25% and used a discount rate ranging from
5.2% to 5.9% for its defined benefit pension plans as of January 1, 2011. (See also Note 9 of the Consolidated Financial
Statements).
Income Taxes
We operate in numerous taxing jurisdictions and are subject to regular examinations by various U.S. Federal, state and foreign
jurisdictions for various tax periods. Our income tax positions are based on research and interpretations of the income tax laws
and rulings in each of the jurisdictions in which we do business. Due to the subjectivity of interpretations of laws and rulings in
each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent uncertainty in
estimating the final resolution of complex tax audit matters, our estimates of income tax liabilities may differ from actual
payments or assessments.
Additional information regarding income taxes is contained in Note 11 of Notes to the Consolidated Financial Statements.
Further discussion of our accounting policies is contained in Note 3 of Notes to the Consolidated Financial Statements.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk relating to our operations due to changes in interest rates, foreign currency exchange rates and
commodity prices of purchased raw materials. We manage the exposure to these risks through a combination of normal operating
and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges and foreign
currency forward exchange contracts. All hedging transactions are authorized and executed pursuant to clearly defined polices
and procedures, which strictly prohibit the use of financial instruments for speculative purposes.
All hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair
value recorded in accumulated other comprehensive income (loss) (“AOCI”) in each accounting period. An ineffective
portion of the hedges change in fair value, if any, is recorded in earnings in the period of change.
Interest Rate Risk
We are exposed to interest rate risk on certain of our short-term and long-term debt obligations used to finance our operations and
acquisitions. At January 1, 2011, net of interest rate swaps, we had $266.4 million of fixed rate debt and $170.5 million of
variable rate debt. As a result, interest rate changes impact future earnings and cash flow assuming other factors are constant.
We utilize interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted
variable rate interest payments. We have LIBOR-based floating rate borrowings, which expose us to variability in interest
payments due to changes in interest rates. A hypothetical 10% change in our weighted average borrowing rate on outstanding
variable rate debt at January 1, 2011, would result in a change in after-tax annualized earnings of approximately $0.1 million. We
have entered into pay fixed/receive LIBOR-based floating interest rate swaps to manage fluctuations in cash flows resulting
from interest rate risk. These interest rate swaps have been designated as cash flow hedges against forecasted LIBOR-
based interest payments. Details regarding the instruments, as of January 1, 2011, are as follows:
Instrument
Swap
Swap
Notional Amount
$150.0 million
$100.0 million
Maturity
Rate Paid
August 23, 2014
August 23, 2017
5.3%
5.4%
Rate Received
LIBOR (3 month)
LIBOR (3 month)
Fair Value (Loss)
($21.1) million
($18.0) million
As of January 1, 2011 and January 2, 2010, the interest rate swap liability of ($39.1) million and ($31.2) million was
included in Hedging Obligations, respectively. The unrealized loss on the effective portion of the contracts of ($24.2)
million and ($19.3) million, net of tax as of January 1, 2011 and January 2, 2010, respectively, was recorded in AOCI.
Foreign Currency Risk
We are also exposed to foreign currency risks that arise from normal business operations. These risks include the
translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions
denominated in foreign currencies. Our objective is to minimize our exposure to these risks through a combination of
normal operating activities and the utilization of foreign currency exchange contracts to manage our exposure on the
transactions denominated in currencies other than the applicable functional currency. Contracts are executed with
creditworthy banks and are denominated in currencies of major industrial countries. We do not hedge our exposure to the
translation of reported results of foreign subsidiaries from local currency to United States dollars.
As of January 1, 2011, derivative currency assets (liabilities) of $7.3 million, $1.4 million, ($0.1) million, and ($0.1)
million are recorded in Prepaid Expenses, Other Noncurrent Assets, Accrued Expenses, and Hedging Obligations,
respectively. As of January 2, 2010, derivative currency assets (liabilities) of $0.2 million, $1.1 million, and ($5.5) million
are recorded in Prepaid Expenses, Other Noncurrent Assets, and Hedging Obligations, respectively. The unrealized gain
(loss) on the effective portion of the contracts of $5.1 million net of tax, and ($2.7) million net of tax, as of January 1, 2011
and January 2, 2010, was recorded in AOCI. At January 1, 2011, we had an additional immaterial amount of currency gains
on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At January
2, 2010, we had an additional ($0.6) million, net of tax, of derivative currency losses on closed hedge instruments in AOCI
that were realized in earnings when the hedged items impacted earnings.
29
The following table quantifies the outstanding foreign exchange contracts intended to hedge non-U.S. dollar denominated
receivables and payables and the corresponding impact on the value of these instruments assuming a hypothetical 10%
appreciation/depreciation of their counter currency on January 1, 2011 (dollars in millions):
Currency
Mexican Peso
Australian Dollar
Indian Rupee
Chinese Renminbi
Notional
Amount
86.3 $
$
2.4
36.4
8.9
Foreign Exchange Gain/(Loss) From:
Fair
Value
7.9
(0.1)
0.5
0.2
$
10% Appreciation of
Counter Currency
8.6
0.2
3.6
0.9
$
10% Depreciation of
Counter Currency
(8.6)
(0.2)
(3.6)
(0.9)
It is important to note that gains and losses indicated in the sensitivity analysis would be offset by gains and losses on the
underlying receivables and payables.
Commodity Price Risk
We periodically enter into commodity hedging transactions to reduce the impact of changing prices for certain commodities
such as copper and aluminum based upon forecasted purchases of such commodities. These transactions are designated as
cash flow hedges and the contract terms of commodity hedge instruments generally mirror those of the hedged item,
providing a high degree of risk reduction and correlation.
Derivative commodity assets (liabilities) of $24.9 million, $4.2 million, and ($0.1) are recorded in Prepaid Expenses, Other
Noncurrent Assets, and Accrued Expenses, respectively, at January 1, 2011. Derivative commodity assets of $4.4 million
are recorded in Prepaid Expenses at January 2, 2010. The unrealized gain on the effective portion of the contracts of $17.8
million net of tax and $2.2 million net of tax, as of January 1, 2011 and January 2, 2010, respectively, was recorded in
AOCI. At January 1, 2011, we had an additional $4.1 million, net of tax, of derivative commodity gains on closed hedge
instruments in AOCI that will be realized in earnings when the hedged items impact earnings. At January 2, 2010, we had
an additional $2.1 million, net of tax, of derivative commodity gains on closed hedge instruments in AOCI that were
realized in earnings when the hedged items impacted earnings.
The following table quantifies the outstanding commodity contracts intended to hedge raw material commodity prices and
the corresponding impact on the value of these instruments assuming a hypothetical 10% appreciation/depreciation of their
prices on January 1, 2011 (dollars in millions):
Commodity
Copper
Aluminum
Zinc
Natural Gas
Notional
Amount
$
106.3 $
4.2
0.2
0.7
Fair
Value
28.5
0.6
-
(0.1)
Commodity Purchase Price Gain/(Loss) From:
10% Increase of
Commodity Prices
10% Decrease of
Commodity Prices
$ 10.6
0.4
-
-
$ (10.6)
(0.4)
-
-
It is important to note that gains and losses indicated in the sensitivity analysis would be offset by the actual prices of the
commodities.
The net AOCI balance of $2.8 million gain at January 1, 2011 includes $13.0 million of net current deferred gains expected
to be realized in the next twelve months.
30
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Financial Information
(Unaudited)
Net Sales
Gross Profit
Income from
Operations
Net Income
Attributable to
Regal Beloit Corporation
Earnings Per Share (1) :
Basic
Assuming Dilution
Weighted Average Number
of Shares Outstanding
Basic
Assuming Dilution
Net Sales
Electrical
Mechanical
Income from Operations
Electrical
Mechanical
1st Quarter
(In Thousands, Except Per Share Data)
3rd Quarter
2nd Quarter
4th Quarter
2010
$507,318
130,915
2009
$443,274
90,570
2010
$584,181
143,504
2009
$454,550
94,622
2010
$590,801
144,664
2009
$465,192
113,869
2010
$555,678
130,267
2009
$463,261
125,163
62,765
28,192
66,799
29,467
69,883
48,318
38,288
53,543
37,762
12,787
41,720
16,452
44,654
31,150
25,243
34,659
1.10
0.98
0.41
0.39
1.09
1.07
0.49
0.47
1.16
1.14
0.86
0.82
0.65
0.65
0.94
0.90
37,446
38,622
31,457
32,595
38,310
38,954
33,256
35,105
38,581
39,023
36,056
38,183
38,607
39,052
37,031
38,410
$457,245
50,073
$391,362
51,912
$522,790
61,391
$407,244
47,306
$527,789
63,012
$422,006
43,186
$494,165
61,513
$417,056
46,205
56,340
6,425
21,906
6,286
58,835
7,964
25,339
4,128
62,038
7,845
45,796
2,522
33,016
5,272
51,860
1,683
(1) Due to the weighting of both earnings and the weighted average number of shares outstanding, the sum of the quarterly earnings per share
may not equal the annual earnings per share.
31
Management’s Annual Report on Internal Control Over Financial Reporting
The management of Regal Beloit Corporation (the “Company”) is responsible for the accuracy and internal consistency of the
preparation of the consolidated financial statements and footnotes contained in this annual report.
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial
reporting. The Company operates under a system of internal accounting controls designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of published financial statements in accordance with generally
accepted accounting principles. The internal accounting control system is evaluated for effectiveness by management and is
tested, monitored and revised as necessary. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of January
1, 2011. In making its assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on the results of its
evaluation, the Company’s management concluded that, as of January 1, 2011, the Company’s internal control over financial
reporting is effective at the reasonable assurance level based on those criteria.
Our internal control over financial reporting as of January 1, 2011 has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
March 2, 2011
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Regal Beloit Corporation
Beloit, Wisconsin
We have audited the accompanying consolidated balance sheets of Regal Beloit Corporation and subsidiaries (the “Company”) as
of January 1, 2011 and January 2, 2010, and the related consolidated statements of income, equity, comprehensive income (loss),
and cash flows for each of the three years in the period ended January 1, 2011. Our audits also included the consolidated financial
statement schedule listed in the Index as Item 15. We also have audited the Company’s internal control over financial reporting as
of January 1, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and
financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s
principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board
of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of January 1, 2011 and January 2, 2010, and the results of their operations and their cash flows for each of the
three years in the period ended January 1, 2011, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also,
in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January
1, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/S/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 2, 2011
33
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Data)
Net Sales
Cost of Sales
Gross Profit
Operating Expenses
Income From Operations
Interest Expense
Interest Income
January 1, 2011
$2,237,978
For the Year Ended
January 2, 2010 December 27, 2008
$2,246,249
$1,826,277
1,688,628
1,402,053
1,745,569
549,350
424,224
311,615
264,704
237,735
159,520
19,576
23,284
2,570
1,719
500,680
270,249
230,431
32,647
1,479
Income Before Taxes & Noncontrolling Interests
220,729
137,955
199,263
Provision For Income Taxes
66,045
39,276
70,349
Net Income
154,684
98,679
128,914
Less: Net Income Attributable to Noncontrolling
Interests, net of tax
5,305
3,631
3,389
Net Income Attributable to Regal Beloit Corporation
$149,379
$95,048
$125,525
Earnings Per Share of Common Stock:
Basic
Assuming Dilution
Weighted Average Number of Shares Outstanding:
$3.91
$3.84
$2.76
$2.63
$4.00
$3.78
Basic
Assuming Dilution
38,236,168
34,498,674
31,343,330
38,921,699
36,131,607
33,250,689
See accompanying Notes to the Consolidated Financial Statements.
34
REGAL BELOIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
ASSETS
Current Assets:
Cash and Cash Equivalents
Investments - Trading Securities
Trade Receivables, less Allowances
of $10,637 in 2010 and of $12,666 in 2009
Inventories
Prepaid Expenses and Other Current Assets
Deferred Income Tax Benefits
Total Current Assets
Net Property, Plant and Equipment:
Land and Improvements
Buildings and Improvements
Machinery and Equipment
Property, Plant and Equipment, at Cost
Less - Accumulated Depreciation
Net Property, Plant and Equipment
Goodwill
Intangible Assets, Net of Amortization
Other Noncurrent Assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable
Dividends Payable
Accrued Compensation and Employee Benefits
Other Accrued Expenses
Current Maturities of Debt
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Hedging Obligations
Pension and other Post Retirement Benefits
Other Noncurrent Liabilities
Commitments and Contingencies (see Note 12)
January 1, 2011
January 2, 2010
$174,531
56,327
331,017
390,587
110,665
24,924
1,088,051
45,909
141,128
550,816
737,853
(341,477)
396,376
775,371
175,490
13,848
$2,449,136
$231,705
6,562
63,842
88,596
8,637
399,342
428,256
92,858
39,174
51,127
41,217
$262,422
117,553
240,721
268,839
59,168
30,673
979,376
42,034
127,468
484,274
653,776
(310,705)
343,071
663,920
116,426
9,444
$2,112,237
$161,902
5,981
50,722
82,076
8,385
309,066
468,065
72,418
31,232
39,306
12,082
Equity:
Regal Beloit Corporation Shareholders' Equity:
Common Stock, $.01 par value, 100,000,000 shares authorized,
38,615,547 issued in 2010, and 37,399,353 shares issued in 2009
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Regal Beloit Corporation Shareholders' Equity
Noncontrolling Interests
Total Equity
Total Liabilities and Equity
386
535,807
827,467
(1,700)
1,361,960
35,202
1,397,162
$2,449,136
374
512,282
703,765
(48,597)
1,167,824
12,244
1,180,068
$2,112,237
See accompanying Notes to the Consolidated Financial Statements.
35
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in Thousands, Except Per Share Data)
Regal Beloit Corporation Shareholders' Equity
Common
Stock $.01
Par Value
$321
Additional
Treasury
Paid-In
Stock
Capital
$348,971 $(15,228)
Retained
Earnings
$525,506
Accumulated
Other
Comprehensive
Income (Loss)
$2,180
Noncontrolling
Interests
$10,542
Total
Equity
$872,292
$ -
-
$ - $ -
-
-
$125,525
(19,750)
$ -
-
$3,389
-
$128,914
$(19,750)
-
2
-
-
-
(4,191)
2,680
4,580
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$(4,191)
$2,682
$4,580
(3,044)
$(3,044)
-
$323
-
-
$356,231 $(19,419)
-
$631,281
$ -
-
$ - $ -
-
-
$95,048
(22,564)
(144,609)
$(142,429)
$ -
-
767 $(143,842)
$837,641
$11,654
$3,631
-
$98,679
$(22,564)
43
150,327
3
-
5
-
-
-
5,817
4,752
-
-
(19,424)
3,600
19,419
-
10,979
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$150,370
-
-
-
-
$5,820
$4,752
$-
$3,600
-
(4,468)
$10,979
$(4,468)
-
$374
-
$512,282
-
$ -
-
$703,765
$ -
-
$ -
-
$ -
-
$149,379
(25,677)
93,832
$(48,597)
$ -
-
1,427
$95,259
$12,244 $1,180,068
$5,305
-
$154,684
$(25,677)
1
2
-
9
-
-
6,106
4,127
6,747
(9)
6,554
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$6,107
$4,129
$6,747
$-
$6,554
16,560
$16,560
-
$386
-
$535,807
-
$ -
-
$827,467
46,897
$(1,700)
1,093
$47,990
$35,202 $1,397,162
Balance as of December 29, 2007
Net Income
Dividends Declared ($.63 per share)
Purchase of 110,000
shares of Treasury Stock
Stock Options
Exercised including income tax
benefit and share cancellations
Stock-based Compensation
Distribution of Noncontrolling
Interests
Other Comprehensive Income (Loss)
(see detail Comprehensive Income
Statement)
Balance as of December 27, 2008
Net Income
Dividends Declared ($.64 per share)
Issuance of 4,312,500 shares of
Common Stock
Stock Options
Exercised including income tax
benefit and share cancellations
Stock-based Compensation
Issuance of Treasury and Common
Stock for conversion premium
on Convertible Debt redemption
Reversal of unrecognized tax benefits
Reversal of tax benefits related to
Convertible Debt
Distribution to Noncontrolling Interests
Other Comprehensive Income (Loss)
(see detail Comprehensive Income
Statement)
Balance as of January 2, 2010
Net Income
Dividends Declared ($.67 per share)
Issuance of 100,000 shares of
Common Stock for acquisition
Stock Options
Exercised including income tax
benefit and share cancellations
Stock-based Compensation
Issuance of Common Stock for
conversion premium on
Convertible Debt redemption
Reversal of tax benefits related to
Convertible Debt
Additions to Noncontrolling
Interests from acquisitions
Other Comprehensive Income (Loss)
(see detail Comprehensive Income
Statement)
Balance as of January 1, 2011
See accompanying Notes to the Consolidated Financial Statements.
36
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
Net Income
Other Comprehensive Income (Loss) net of tax:
Pension and Post Retirement benefits
Currency translation adjustments
Change in fair value of hedging activities
Hedging Activities Reclassified into Earnings from
Other Comprehensive Income
Total Other Comprehensive Income (Loss)
Comprehensive Income (Loss)
Less: Comprehensive Income Attributable to
Noncontrolling Interests
Comprehensive Income (Loss)Attributable to
Regal Beloit Corporation
January 1, 2011
For the Year Ended
January 2, 2010 December 27, 2008
$154,684
$98,679
$128,914
(2,637)
29,383
18,022
3,222
47,990
202,674
(2,802)
17,531
30,738
49,792
95,259
193,938
(13,773)
(41,717)
(89,547)
1,195
(143,842)
(14,928)
6,398
5,058
4,156
$196,276
$188,880
$(19,084)
See accompanying Notes to the Consolidated Financial Statements.
37
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to Reconcile Net Income to Net Cash
Provided from Operating Activities:
Depreciation
Amortization
Stock-based Compensation
Provision for Deferred Income Taxes
Excess Tax Benefits from Stock-based Compensation
Losses on Property, Plant and Equipment
Non-Cash Convertible Debt Deferred Financing Costs
Changes in Assets and Liabilities, Net of Acquisitions:
Receivables
Inventories
Accounts Payable
Current Liabilities and Other
Net Cash Provided from Operating Activities
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment
Purchases of Investment Securities
Sales of Investment Securities
Business Acquisitions, Net of Cash Acquired
Sale of Property, Plant and Equipment
Net Cash Used in Investing Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-Term Debt Proceeds
Net Proceeds from the Sale of Common Stock
Net Repayments of Short-Term Borrowings
Payments of Long-Term Debt
Net Repayments Under Revolving Credit Facility
Proceeds from the Exercise of Stock Options
Repayments of Convertible Debt
Excess Tax Benefits from Stock-based Compensation
Financing Fees Paid
Distribution to Noncontrolling Interests
Purchases of Treasury Stock
Dividends Paid to Shareholders
Net Cash (Used in) Provided from Financing Activities
January 1, 2011
For the Year Ended
January 2, 2010
December 27, 2008
$154,684
$98,679
$128,914
52,918
19,951
6,747
690
(1,735)
4,659
-
(30,398)
(56,369)
24,457
(216)
175,388
(44,994)
(416,797)
477,514
(211,916)
1,496
(194,697)
-
-
(8,448)
(184)
(2,863)
3,759
(39,198)
1,735
-
-
-
(25,096)
(70,295)
49,730
19,414
4,752
7,718
(2,808)
5,172
1,063
48,905
86,593
(39,327)
35,028
314,919
(33,604)
(117,553)
-
(1,500)
1,033
(151,624)
-
150,370
(6,866)
(215)
(17,066)
5,767
(75,802)
2,808
-
(4,468)
-
(21,607)
32,921
45,963
15,638
4,580
6,027
(2,463)
124
4,938
32,420
(8,882)
(22,553)
(50,507)
154,199
(52,209)
-
-
(49,702)
2,238
(99,673)
165,200
-
(11,820)
(324)
(162,700)
2,880
-
2,463
(454)
(3,044)
(4,191)
(19,426)
(31,416)
EFFECT OF EXCHANGE RATES ON CASH:
1,713
956
(434)
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
(87,891)
262,422
$174,531
197,172
65,250
$262,422
22,676
42,574
$65,250
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest
Income Taxes
38
See accompanying Notes to the Consolidated Financial Statements.
$20,075
74,533
$24,105
22,153
$26,877
68,653
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For The Three Years Ended January 1, 2011
(1) Nature of Operations
Regal Beloit Corporation (the “Company”) is a United States-based multinational corporation. The Company reports in two
segments; the Electrical segment, with its principal line of business in electric motors and power generation products, and the
Mechanical segment, with its principal line of business in mechanical products which control motion and torque. The principal
markets for the Company’s products and technologies are within the United States.
(2) Basis of Presentation
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31. The fiscal year ended
January 1, 2011 was 52 weeks as compared to the fiscal year ended January 2, 2010 which was 53 weeks.
(3) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned
subsidiaries. In addition, the Company has a 50/50 joint venture in China that is consolidated as over half of the joint venture
sales are to Regal Beloit Corporation owned entities. All intercompany accounts and transactions are eliminated.
Use of Estimates
Management’s best estimates of certain amounts are required in preparation of the consolidated financial statements in
accordance with generally accepted accounting principles, and actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue upon transfer of title, which generally occurs upon shipment of the product to the customer.
The pricing of products sold is generally supported by customer purchase orders, and accounts receivable collection is reasonably
assured at the time of shipment. Estimated discounts and rebates are recorded as a reduction of sales in the same period revenue
is recognized. Product returns and credits are estimated and recorded at the time of shipment based upon historical experience.
Shipping and handling costs are recorded as revenue when billed to the customers. The costs incurred from shipping and
handling are recorded in Cost of Sales.
Research and Development
The Company performs research and development activities relating to new product development and the improvement of current
products. Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments which are readily convertible to cash, present insignificant risk of changes
in value due to interest rate fluctuations and have original or purchased maturities of three months or less. The Company had a
material amount of cash held on deposit at two financial institutions as of January 1, 2011. While this constitutes a concentration
of credit risk, the Company believes these institutions to be financially stable.
Investments
Investments consist of marketable debt and equity securities with original maturities of greater than three months and remaining
maturities of less than one year. Investments with maturities greater than one year may be classified as short term based on their
highly liquid nature and their availability to fund future investing activities.
Trade Receivables
Trade receivables are stated at estimated net realizable value. Trade receivables are comprised of balances due from customers,
net of estimated allowances. In determining collectability, historical trends are evaluated and specific customer issues are
reviewed to arrive at appropriate allowances.
Inventories
The approximate percentage distribution between major classes of inventory at year end is as follows:
Raw Material and Work in Process
Finished Goods and Purchased Parts
2010
36%
64%
2009
34%
66%
Inventories are stated at cost, which is not in excess of market. Cost for approximately 46% of the Company's inventory at
January 1, 2011 and 56% at January 2, 2010 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 $58.3 million and $35.8 million as of January 1,
2011 and January 2, 2010, respectively. Material, labor and factory overhead costs are included in the inventories.
The Company reviews inventories for excess and obsolete products or components. Based on an analysis of historical usage and
management’s evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete
parts, the Company records inventories at net realizable value.
39
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost. Depreciation of plant and equipment is provided principally on a straight-line
basis over the estimated useful lives (3 to 40 years) of the depreciable assets. Accelerated methods are used for income tax
purposes.
Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures which extend the useful lives of
existing equipment are capitalized and depreciated.
Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset.
Commitments for property, plant, and equipment purchases were $5.5 million at January 1, 2011.
Goodwill and Intangible Assets
Goodwill and Intangibles Assets result from the acquisition of existing businesses by the Company. Goodwill is not amortized;
however; it is tested for impairment annually at the fiscal October month end with any resulting adjustment charged to the results
of operations. Amortization of Intangible Assets with definite lives is recorded over the estimated life of the asset.
Earnings per Share (EPS)
Diluted earnings per share is computed based upon earnings applicable to common shares divided by the weighted-average
number of common shares outstanding during the period adjusted for the effect of other dilutive securities. Options for common
shares where the exercise price was above the market price have been excluded from the calculation of effect of dilutive securities
shown below; the amount of these shares were 0.3 million in 2010, zero in 2009, and 0.9 million for 2008. The following table
reconciles the basic and diluted shares used in the per share calculations for the three years ended January 1, 2011 (in millions):
Denominator for basic EPS
Effect of dilutive securities
Denominator for diluted EPS
2010
2009
2008
38.2
0.7
38.9
34.5
1.6
36.1
31.3
1.9
33.2
The “Effect of dilutive securities” represents the dilution impact of equity awards and the convertible notes (see Note 10 of the
Consolidated Financial Statements). The dilutive effect of conversion of certain of the Company’s convertible notes into shares
of common stock was approximately, 0.3 million shares, 1.3 million shares, 1.5 million shares for fiscal years 2010, 2009 and
2008, respectively.
Retirement Plans
Approximately half of the Company’s domestic employees are covered by defined benefit pension plans with the remaining
employees covered by defined contribution plans. The defined benefit pension plans covering a majority of the Company’s
domestic employees were frozen to new employees as of January 1, 2009. Most of the Company’s foreign employees are
covered by government sponsored plans in the countries in which they are employed. The Company’s obligations under its
defined benefit pension plans are determined with the assistance of actuarial firms. The actuaries make certain assumptions
regarding such factors as withdrawal rates and mortality rates. The actuaries also provide information and recommendations from
which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the
discount rate on benefit obligations and where applicable, the rate of annual compensation increases.
Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets,
particularly the stock market and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from
assumptions, annual expenses and recorded assets or liabilities of these defined benefit pension plans may change significantly
from year to year. Based on the annual review of actuarial assumptions as well as historical rates of return on plan assets and
existing long-term bond rates, the Company sets the long-term rate of return on plan assets at 8.25% and used a discount rate
ranging from 5.2% to 5.9% for its defined benefit pension plans as of January 1, 2011. (See also Note 9 of the Consolidated
Financial Statements).
Income Taxes
The Company operates in numerous taxing jurisdictions and is subject to regular examinations by various U.S. Federal, state and
foreign jurisdictions for various tax periods. Its income tax positions are based on research and interpretations of the income tax
laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and
rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions as well as the inherent
uncertainty in estimating the final resolution of complex tax audit matters, estimates of income tax liabilities may differ from
actual payments or assessments.
Foreign Currency Translation
For those operations using a functional currency other than the U.S. dollar, assets and liabilities are translated into U.S. dollars at
year-end exchange rates, and revenues and expenses are translated at weighted-average exchange rates. The resulting translation
adjustments are recorded as a separate component of shareholders’ equity.
40
Impairment of Long-Lived Assets and Amortizable Intangible Assets
Property, Plant and Equipment and Intangible Assets Net of Amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. The Company assesses these assets for
impairment when the undiscounted expected future cash flows derived from an asset are less than its carrying value. If the
Company determines that an asset is impaired, then it measures the impairment as the amount by which the carrying value
exceeds fair value. Such analyses necessarily involve significant estimates.
Product Warranty Reserves
The Company maintains reserves for product warranty to cover the stated warranty periods for its products. Such reserves are
established based on an evaluation of historical warranty experience and specific significant warranty matters when they become
known and can reasonably be estimated.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments, unrealized gains and losses on derivative instruments and pension liability adjustments
are included in shareholders’ equity under accumulated other comprehensive loss. The components of the ending balances of
Accumulated Other Comprehensive Loss are as follows (in thousands):
Translation adjustments
Hedging activities, net of tax
Pension and post retirement benefits, net of tax
Total
Derivative Instruments
2010
$23,190
2,842
(27,732)
$(1,700)
2009
$(5,100)
(18,402)
(25,095)
$(48,597)
Derivative instruments are recorded on the consolidated balance sheet at fair value as determined under accounting guidance that
establishes criteria for designation and effectiveness of the hedging relationships. Any fair value changes are recorded in net
earnings or Accumulated Other Comprehensive Income (Loss).
The Company uses derivative instruments to manage its exposure to fluctuations in certain raw material commodity pricing,
fluctuations in the cost of forecasted foreign currency transactions, and variability in interest rate exposure on floating rate
borrowings. These derivative instruments have been designated as cash flow hedges. (See Note 14 to the Consolidated Financial
Statements.)
Legal Claims
The Company records expenses and liabilities when the Company believes that an obligation of the Company on a specific matter
is probable and there is a basis to reasonably estimate the value of the obligation. This methodology is used for legal claims that
are filed against the Company from time to time. The uncertainty that is associated with such matters frequently requires
adjustments to the liabilities previously recorded.
Fair Values
The fair values of cash equivalents, receivables, inventories, prepaid expenses, accounts payable, and accrued expenses
approximate the carrying values due to the short period of time to maturity. The fair value of long-term debt is estimated using
discounted cash flows based on the Company’s current incremental borrowing rates, except for the convertible senior
subordinated debt discussed in Note 8, and the fair value of investments, pension assets, and derivative instruments is determined
based on inputs as defined in Note 15 of the Consolidated Financial Statements.
(4) Convertible Debt
As of the beginning of fiscal 2009, the Company adopted accounting guidance, which requires an adjustment of convertible debt,
equity, and interest expense. The guidance requires that a fair value be assigned to the equity conversion option of the
Company’s $115.0 million original par value and then outstanding, 2.75% convertible senior subordinated notes (the
“Convertible Notes”) as of April 5, 2004, the date of issuance of the Convertible Notes. This change results in a corresponding
decrease in the value assigned to the debt portion of the instrument.
The value assigned to the debt portion of the Convertible Notes was determined based on market interest rates for similar debt
instruments without the conversion feature as of April 5, 2004, the issuance date of the Convertible Notes. The difference in this
interest rate versus the coupon rate on the Convertible Notes is then amortized into interest expense over the expected term of the
Convertible Notes. For purposes of the valuation, the Company used an expected term of five years, which represents the first
anniversary date at which holders of the Convertible Notes may put their Convertible Notes back to the Company.
In 2009, bondholders exercised their conversion right for a total of $75.8 million face value of bonds. The remaining $39.2
million face value of bonds were redeemed in fiscal 2010. The Company paid cash to redeem the par value and the conversion
premium was paid through issuance of approximately 2.3 million shares of stock for the total redemption of $115.0 million. (See
Note 8 of the Consolidated Financial Statements.)
(5) Acquisitions
The results of operations for acquired businesses are included in the Consolidated Financial Statements from the dates of
acquisition.
41
On December 23, 2010, the Company acquired Unico, Inc. (“Unico”), located in Franksville, Wisconsin. Unico manufactures a
full range of AC and DC drives, motor controllers and other accessories for most industrial and commercial applications. Unico
has developed proprietary technology in the fields of oil and gas recovery technology, commercial HVAC technology, test stand
automation and other applications. The preliminary purchase price of $105.1 million was paid in cash, net of acquired debt and
cash. In addition to the cash paid, the Company agreed to pay an additional amount should certain performance thresholds be
met. At January 1, 2011, the Company has recorded a liability of $11.0 million for this consideration. Unico is reported as part
of the Company’s Electrical segment.
On December 1, 2010, the Company acquired South Pacific Rewinders (“SPR”), located in Auckland, New Zealand. SPR
operates as a motor rewinder and distributor in the Pacific region.
On November 1, 2010, the Company acquired 55% of Elco Group B.V. (“Elco”), located in Milan, Italy. Elco manufactures and
sells motors, fans and blowers and has manufacturing facilities in Italy, China and Brazil. The purchase price was $26.9 million,
net of acquired debt and cash. The purchase price includes $4.6 million in cash, net of acquired debt and cash, paid at closing and
$22.3 million which will be paid in four semi-annual payments. Elco is reported as part of the Company’s Electrical segment.
On September 1, 2010, the Company acquired Rotor B.V. (“Rotor”), located in Eibergen, the Netherlands. Rotor sells standard
and special 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 of $36.4
million was paid in cash, net of acquired debt and cash. Rotor is reported as part of the Company’s Electrical segment.
On May 4, 2010, the Company acquired Air-Con Technology (“Air-Con”), located in Mississauga, Ontario, Canada. Air-Con is
a distributor of HVACR electric motors.
On April 6, 2010, the Company acquired CMG Engineering Group Pty, Ltd. (“CMG”), located in Melbourne, Australia. CMG
manufactures and sells 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 business also
distributes integral horsepower industrial motors, mechanical power transmission products, material handling equipment,
electrical insulation materials, magnet wire and specialty conductors in Australia and New Zealand. The purchase price was
$82.6 million, net of acquired debt and cash. The purchase price was paid $76.5 million in cash and $6.1 million in shares of
Company common stock. CMG is reported as part of our Electrical and Mechanical segments.
In January 2009, the Company acquired Custom Power Technologies (“CPT”), a custom power electronics business located in
Menomonee Falls, Wisconsin.
Pending Acquisition
On December 12, 2010, Regal Beloit Corporation and A.O. Smith Corporation (NYSE: AOS) entered into an agreement where
Regal Beloit Corporation will acquire 100% of the stock and assets of the Electrical Products Company (“EPC”) of A.O. Smith
Corporation. The total consideration for the transaction is $875 million, including $700 million of cash and $175 million in
shares of Regal Beloit common stock. Closing on the transaction is subject to all customary regulatory approvals, which are still
pending as of the date of this filing.
(6) Investments
The Company has cash invested in trading securities as of January 1, 2011 and January 2, 2010. These securities are generally
short term in duration and are reported at fair value with gains and losses, which were insignificant in 2010 and 2009, included in
earnings. As of January 1, 2011 and January 2, 2010, the Company had $56.3 and $117.6 million of trading securities recorded at
fair value (see Note 15 of the Consolidated Financial Statements for description of the fair value hierarchy).
January 1, 2011
Municipal Debt Securities
Asset Backed Securities
Other Securities
Total
January 2, 2010
Commercial Paper
U.S. Government Securities
Municipal Debt Securities
Asset Backed Securities
Corporate Debt Securities
Total
Total
$29,844
20,464
6,019
Level 1
$ -
-
-
$56,327
$ -
Total
$37,473
4,202
48,294
5,773
21,811
Level 1
$ -
-
-
-
-
Level 2
Level 3
$29,844 $ -
-
20,464
-
$ -
$56,327
6,019
Level 2
$37,473
4,202
48,294
5,773
21,811
Level 3
$-
-
-
-
-
$ -
$117,553
$ -
$117,553
(7) Goodwill and Intangible Assets
Goodwill
As required, the Company performs 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 its reporting units below their carrying value.
42
As a result of its 2009 annual goodwill impairment review process, the Company recorded a $0.5 million impairment for its
Mechanical reporting unit, primarily related to auto and marine products that are dependent on consumer discretionary spending
that did not meet their performance plans.
As described in Note 5 of the Consolidated Financial Statements, the Company acquired six businesses in 2010 and one business
in 2009. The excess of purchase price over estimated fair value was assigned to goodwill.
The Company believes that substantially all of the goodwill is deductible for tax purposes. The following information presents
changes to goodwill during the periods indicated (in thousands):
Electrical Segment Mechanical Segment Total Company
Balance, December 27, 2008
Net Acquisitions and Fair Value Adjustments
Impairment
Translation Adjustments
Balance, January 2, 2010
Acquisitions
Translation Adjustments
Balance, January 1, 2011
Intangible Assets
Intangible assets consists of the following (in thousands):
$671,945
$(7,243)
-
(782)
$663,920
90,875
8,340
$763,135
$530
$672,475
$ -
(530)
-
$-
11,040
1,196
$12,236
$(7,243)
(530)
(782)
$663,920
101,915
9,536
$775,371
Asset Description
Non-Compete Agreements
Trademarks
Patents
Engineering Drawings
Customer Relationships
Technology
Total Gross Intangibles
Useful Life
(years)
3 - 5
3 - 20
10
10
3 - 17
3 - 9
Gross Intangibles
January 2, 2010
Acquisitions
$6,348
21,200
15,410
1,200
98,064
33,183
$175,405
$1,100
9,213
-
-
39,385
26,542
$76,240
Accumulated Amortization
Asset Description
Non-Compete Agreements
Trademarks
Patents
Engineering Drawings
Customer Relationships
Technology
Total Accumulated Amortization
Intangible Assets, Net of Amortization
Useful Life
(years)
3 - 5
3 - 20
10
10
3 - 17
3 - 9
January 2, 2010
Amortization
$(4,997)
(7,658)
(7,732)
(607)
(29,325)
(8,660)
$(58,979)
$116,426
$(789)
(1,980)
(1,542)
(120)
(11,349)
(4,171)
$(19,951)
Translation
Adjustments January 1, 2011
$7,550
30,979
15,410
1,200
139,348
60,600
$255,087
$102
566
-
-
1,899
875
$3,442
Translation
Adjustments January 1, 2011
$(5,879)
(9,759)
(9,274)
(727)
(40,841)
(13,117)
$(79,597)
$175,490
$(93)
(121)
-
-
(167)
(286)
$(667)
Amortization expense was $20.0 million in fiscal 2010, $19.4 million in fiscal 2009, and $15.6 million in fiscal 2008.
Estimated Amortization (in millions)
2011
$26.8
2012
$26.4
2013
$26.1
2014
$25.0
2015
$17.6
43
(8) Debt and Bank Credit Facilities
The Company’s indebtedness as of January 1, 2011 and January 2, 2010 was as follows (in thousands):
Senior notes
Term Loan
Revolving credit facility
Convertible senior subordinated debt
Other
Less: Current maturities
Non-current portion
January 1, 2011
January 2, 2010
$250,000
165,000
-
-
21,893
436,893
(8,637)
$428,256
$250,000
165,000
2,863
39,198
19,389
476,450
(8,385)
$468,065
At January 1, 2011, 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”). These interest rates 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 January 1, 2011 the interest rate of 0.9% was based on a margin over LIBOR.
On June 16, 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby
the Company borrowed an aggregate principal amount of $165.0 million. The Term Loan matures in June 2013, and borrowings
generally bear interest at a variable rate equal to a margin over LIBOR, this 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. At January 1, 2011, the interest rate of 1.0% was based on a margin
over LIBOR.
The Company’s $500.0 million revolving credit facility (the “Facility”) permits the Company to borrow at interest rates based
upon a margin above LIBOR, which margin varies with the ratio of senior 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 senior funded debt to EBITDA. The Facility matures in April 2012. The average balance
outstanding under the Facility in 2010 was $1.4 million and in 2009 was $11.4 million. The average interest rate paid under the
Facility was 1.2% in 2010 and 1.3% in 2009. The Company had $454.2 million of available borrowing capacity under the
Facility at January 1, 2011.
The Notes, the Term Loan and the Facility require us to meet specified financial ratios and to satisfy certain financial condition
tests. The Company was in compliance with all financial covenants as of January 1, 2011.
The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also
Note 14 to the Consolidated Financial Statements).
As of January 1, 2011, the Company has no Convertible Notes that remain outstanding. During the year ended January 1, 2011,
the final $39.2 million face value bonds were converted. The Company paid the par value in cash and issued approximately 0.9
million shares for the conversion premium. During 2009, bondholders exercised their conversion right for a total of $75.8
million of Convertible Notes. The par value of those Convertible Notes were paid in cash and the conversion premium was paid
through issuance of approximately 1.4 million shares of stock.
The Company had $39.2 million of convertible senior subordinated notes outstanding at January 2, 2010. The fair value of these
notes at January 2, 2010 was approximately $82.8 million.
At January 1, 2011, a foreign subsidiary of the Company had outstanding short-term borrowings of $7.0 million, denominated in
local currency with a fixed interest rate of 5.6%. At January 2, 2010, a foreign subsidiary of the Company had outstanding short-
term borrowings of $8.2 million, denominated in local currency with a weighted average interest rate of 1.9%.
At January 1, 2011, additional notes payable of approximately $14.9 million were outstanding with a weighted average interest
rate of 4.7%.
Maturities of long-term debt are as follows (in thousands):
Year
2011
2012
2013
2014
2015
Thereafter
44
$8,637
508
165,524
150,514
539
111,171
Total $436,893
(9) Retirement Plans
The Company has a number of retirement plans that cover most of its domestic employees. The defined benefit pension plans
covering a majority of the Company’s domestic employees were frozen to new employees as of January 1, 2009. Most foreign
employees are covered by government sponsored plans in the countries in which they are employed. The domestic employee
plans include defined contribution plans and defined benefit pension 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 $4.3 million, $4.9 million, and $4.8 million in 2010, 2009, and 2008,
respectively.
Benefits provided under defined benefit pension 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 pension plans is
in accordance with federal laws and regulations. The actuarial valuation measurement date for pension plans is as of fiscal year
end for all periods.
The Company’s defined benefit pension assets are invested in equity securities and fixed income investments based on the
Company’s overall strategic investment direction as follows:
Equity investments
Fixed income
Total
Target
Allocation
Return
75%
25%
100%
9-10%
5.5-6.5%
8.25%
The Company’s investment strategy for its defined benefit pension plans is to achieve moderately aggressive growth, earning a
long-term rate of return sufficient to allow the plans to reach fully funded status. Accordingly, allocation targets have been
established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return
assumptions consider historic returns and volatilities adjusted for changes in overall economic conditions that may affect future
returns and a weighting of each investment class.
The following table presents a reconciliation of the funded status of the defined benefit pension plans (in thousands):
Change in projected benefit obligation:
Obligation at beginning of period
Service cost
Interest cost
Actuarial loss
Plan amendments
Benefits paid
Foreign currency translation
Acquisitions/other
Obligation at end of period
Change in fair value of plan assets:
Fair value of plan assets at beginning of period
Actual return on plan assets
Employer contributions
Benefits paid
Foreign currency translation
Acquisitions/other
Fair value of plan assets at end of period
Funded status
2010
2009
$116,833
2,164
6,899
8,527
1,120
(4,862)
(38)
16,532
$147,175
$103,039
2,262
6,956
9,938
-
(4,788)
973
(1,547)
$116,833
$76,460
9,227
4,052
(4,862)
(368)
9,975
$94,484
$(52,691)
$58,063
14,001
10,110
(4,788)
549
(1,475)
$76,460
$(40,373)
45
The fair value of plan assets is based on inputs used to measure fair value as described in Note 15 of the Consolidated Financial
Statements (in thousands):
January 1, 2011
Cash
Money Market Funds
U.S. Government Obligations
Common Stocks
Domestic Equities
International Equities
Common Collective Trust Funds
Fixed Income Funds
U.S. Equity Funds
International Equity Funds
Mutual Funds
Fixed Income Funds
U.S. Equity Funds
International Equity Funds
Total
January 2, 2010
Cash
Money Market Funds
Common Stocks
Domestic Equities
International Equities
Common Collective Trust Funds
Fixed Income Funds
U.S. Equity Funds
International Equity Funds
Mutual Funds
International Equity Funds
Total
Total
Level 1
$1,431
3,881
1,794
15,146
6,622
18,563
27,084
7,494
$1,431
3,881
-
15,146
-
-
-
-
Level 3
Level 2
$ - $ -
-
-
-
1,794
-
6,622
18,563
27,084
7,494
-
-
-
-
659
2,072
9,738
$94,484
-
2,072
9,738
$32,268
659
-
-
$62,216
-
-
-
$ -
Total
Level 1
$1,169
1,220
21,883
5,915
17,777
13,127
7,377
$1,169
1,220
21,883
3,403
-
-
-
Level 2
$ -
-
Level 3
$ -
-
-
2,512
17,777
13,127
7,377
-
-
-
-
-
7,992
$76,460
-
$27,675
7,992
$48,785
-
$ -
The Company recognized the funded status of its defined benefit pension plans on the balance sheet as follows (in thousands):
Other Accrued Expenses
Pension and Other Post Retirement Benefits
2010
$(1,564)
(51,127)
$(52,691)
2009
$(1,067)
(39,306)
$(40,373)
Amounts Recognized in Accumulated Other Comprehensive Income
Net actuarial loss
Prior service cost
Acquisitions
$36,600
2,108
2,398
$41,106
$37,497
1,531
-
$39,028
The accumulated benefit obligation for all defined benefit pension plans was $110.7 million and $96.6 million at January 1, 2011
and January 2, 2010, respectively.
The following table presents information for defined benefit pension plans with accumulated benefit obligations in excess of plan
assets (in thousands):
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2010
$147,175
$110,683
$94,484
2009
$116,833
$96,625
$76,460
The following weighted-average assumptions were used to determine the projected benefit obligation at year end:
Discount rate
Expected long-term rate of return of assets
5.15%
to 5.93%
8.25%
5.67%
to 6.27%
8.25%
2010
2009
Certain of the Company’s defined benefit pension plan obligations are based on years of service rather than on projected
compensation percentage increases. For those plans that use compensation increases in the calculation of benefit obligations and
46
net periodic pension cost, the Company used an assumed rate of compensation increase of 3.0% for the years ended January 1,
2011 and January 2, 2010.
Net periodic pension benefit costs for the defined benefit pension plans were as follows (in thousands):
Service cost
Interest cost
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service cost
Net periodic benefit cost
2010
$2,164
6,899
(6,448)
2,401
399
$5,415
2009
$2,420
5,778
(5,068)
759
189
$4,078
2008
$4,051
5,831
(5,482)
716
199
$5,315
For fiscal 2010, the net actuarial loss and prior service cost for the defined benefit pension plans that was amortized into periodic
pension benefit cost was $2.4 million and $0.4 million, respectively.
The estimated net actuarial loss and prior service cost for the defined benefit pension plans that will be amortized from AOCI into
net periodic benefit cost during the 2011 fiscal year are $3.3 million and $0.2 million, respectively.
As permitted under relevant accounting guidance, the amortization of any prior service cost is determined using a straight-line
amortization of the cost over the average remaining service period of employees expected to receive benefits under the plans.
The following assumptions were used to determine net periodic pension cost for fiscal years 2010, 2009 and 2008, respectively.
Discount rate
Expected long-term rate of return on assets
2010
to
5.67%
2009
2008
6.27%
8.25%
6.85% to 6.95%
8.25%
6.36% to 6.68%
8.25%
The Company estimates that in 2011, it will make contributions in the amount of $2.2 million to fund its defined benefit pension
plans.
The following pension benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in
millions):
Year
2011
2012
2013
2014
2015
2016-2020
Expected Payments
$6.2
6.4
8.3
8.6
9.1
53.9
(10) Shareholders’ Equity
The Company recognized approximately $6.7 million, $4.8 million, and $4.6 million in share-based compensation expense in
2010, 2009 and 2008, 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 January 1, 2011, total unrecognized compensation
cost related to share-based compensation awards was approximately $17.6 million, net of estimated forfeitures, which the
Company expects to recognize over a weighted average period of approximately 2.8 years. The total income tax benefit
recognized relating to share-based compensation for the year ended January 1, 2011 was approximately $1.7 million.
Under the Company’s stock plans, the Company was authorized as of January 1, 2011 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 1.8 million shares were available for future grant or payment under the
various plans at January 1, 2011.
On May 22, 2009, the Company completed the sale of 4,312,500 shares of common stock to the public at a price of $36.25 per
share. Net proceeds of $150.4 million were received by the Company.
During fiscal 2010, the Company issued approximately 0.9 million shares to former Convertible Note holders in settlement of the
conversion premium of their redemption. During fiscal 2009, the Company issued approximately 1.4 million shares, including all
884,100 shares of treasury stock, to former Convertible Note holders in settlement of the conversion premium of their
redemption. (See Note 8 of the Notes to Consolidated Financial Statements.)
During fiscal 2008, the Company repurchased 110,000 shares at a total cost of $4.2 million pursuant to authorization by the Board
of Directors. The Company did not repurchase any shares in 2010 or 2009 pursuant to this authorization.
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.
47
The per share weighted average fair value of share-based incentive awards granted (options and SARs) was $22.62 and $15.28 for
fiscal 2010 and 2009, respectively. The fair value of the awards for fiscal 2010 and 2009 were estimated on the date of grant
using the Black-Scholes pricing model and the following weighted average assumptions; expected life of seven years; risk-free
interest rate of 2.8% and 2.6%; expected dividend yield of 1.1% and 1.5%; and expected volatility of 34.8% and 36.8%,
respectively.
The average risk-free interest rate is based on U.S. Treasury security rates in effect as of the grant date. The expected dividend
yield is based on the projected annual dividend as a percentage of the estimated market value of our common stock as of the grant
date. The Company estimated the expected volatility using a weighted average of daily historical volatility of our stock price
over the expected term of the award. The Company estimated the expected term using historical data adjusted for the estimated
exercise dates of unexercised awards.
Following is a summary of share-based incentive plan grant activity (options and SARs) for fiscal 2010, fiscal 2009 and fiscal
2008:
Shares
Wtd. Avg.
Exercise Price
Wtd. Avg. Remaining
Contractual Term (years)
Aggregate Intrinsic Value
(in millions)
Number of shares under option:
Outstanding at December 29, 2007 1,484,775
306,000
Granted
(329,000)
Exercised
Forfeited
(18,150)
Outstanding at December 27, 2008 1,443,625
660,792
Exercisable at December 27, 2008
Outstanding at December 27, 2008 1,443,625
373,500
Granted
(225,450)
Exercised
(15,750)
Forfeited
1,575,925
Outstanding at January 2, 2010
585,025
Exercisable at January 2, 2010
Outstanding at January 2, 2010
Granted
Exercised
Forfeited
Outstanding at January 1, 2011
Exercisable at January 1, 2011
1,575,925
289,250
(265,940)
(145,185)
1,454,050
561,150
$31.40
42.30
23.77
35.35
35.46
27.82
$35.46
42.66
22.74
42.25
38.86
33.34
$38.86
61.21
32.97
46.70
43.50
36.93
7.1
5.6
7.2
5.5
6.9
5.3
$5.3
4.9
$20.4
10.9
$33.5
16.7
The amount of options expected to vest is materially consistent with those outstanding and not yet exercisable.
The table below presents share-based compensation activity for the three fiscal years ended 2010, 2009 and 2008 (in millions):
Total intrinsic value of share-based incentive awards exercised
Cash received from stock option exercises
Income tax benefit from the exercise of stock options
Total fair value of share-based incentive awards vested
Restricted Stock
2010
2009
2008
$7.4
3.8
1.7
7.0
$5.7
5.8
2.8
3.5
$6.3
2.9
2.5
6.5
The Company also granted restricted stock awards to certain employees. The Company restrictions lapse two to three years after
the date of the grant. The Company values restricted stock awards at the closing market value of its common stock on the date of
grant.
48
A summary of restricted stock activity for fiscal 2010, fiscal 2009 and fiscal 2008:
Restricted stock balance at December 29, 2007:
Granted
Vested
Restricted stock balance at December 27, 2008:
Granted
Vested
Restricted stock balance at January 2, 2010:
Granted
Vested
Forfeited
Restricted stock balance at January 1, 2011:
Treasury Stock
Shares
95,450
32,850
(10,200)
118,100
53,550
(50,700)
120,950
111,377
(37,100)
(14,050)
181,177
Wtd. Avg. Share
Fair Value
Aggregate Intrinsic Value
(in millions)
$38.27
42.28
29.75
$41.72
42.65
37.55
$43.88
61.12
47.06
49.07
$53.44
$3.8
1.4
(0.3)
$4.9
2.3
(1.9)
$5.3
6.8
(1.7)
(0.7)
$9.7
The Board of Directors has approved repurchase programs of up to 3,000,000 common shares of Company stock. Management is
authorized to effect purchases from time to time in the open market or through privately negotiated transactions. Through
December 27, 2008, the Company has repurchased 884,100 shares at an average purchase price of $21.96 per share. During
fiscal 2008 the Company repurchased 110,000 shares for a total cost of $4.2 million. During 2009, approximately 1.4 million
shares, including all 884,100 treasury shares, were issued in settlement of the conversion premium for certain Convertible Notes.
(See also Note 8 of the Consolidated Financial Statements.)
(11) Income Taxes
Income before Taxes and Noncontrolling Interest consisted of the following (in thousands):
United States
Foreign
Total
2010
$170,466
50,263
$220,729
2009
$103,929
34,026
$137,955
2008
$165,137
34,126
$199,263
The provision for income taxes is summarized as follows (in thousands):
Current
Federal
State
Foreign
Deferred
Total
2010
2009
2008
$44,742
6,348
14,265
65,355
690
$66,045
$16,583
2,387
12,588
31,558
7,718
$39,276
$45,187
7,795
11,340
64,322
6,027
$70,349
A reconciliation of the statutory Federal income tax rate and the effective tax rate reflected in the consolidated statements of
income follows:
Federal statutory tax rate
State income taxes, net of federal benefit
Domestic production activities deduction
Foreign rate differential
Adjustments to tax accruals and reserves
Other, net
Effective tax rate
2010
2009
2008
35.0 %
2.2
(1.0)
(3.9)
(0.9)
(1.5)
29.9 %
35.0 %
2.3
(0.7)
(4.2)
(1.7)
(2.2)
28.5 %
35.0 %
2.6
(0.9)
0.3
0.2
(1.9)
35.3 %
Deferred taxes arise primarily from differences in amounts reported for tax and financial statement purposes. The Company’s net
deferred tax liabilities as of January 1, 2011 of $67.9 million is classified on the consolidated balance sheet as a net current
deferred income tax benefit of $24.9 million and a net non-current deferred income tax liability of $92.8 million. The
components of this net deferred tax asset (liability) are as follows (in thousands):
49
Accrued employee benefits
Bad debt reserve
Warranty reserve
Inventory
Accrued liabilities
Derivative instruments
Other
Deferred tax assets
Property related
Intangible items
Derivative instruments
Convertible debt interest
Deferred tax liabilities
Net deferred tax asset (liability)
January 1, 2011
January 2, 2010
$31,682
2,007
5,836
5,318
14,225
-
10,514
69,582
(35,432)
(100,264)
(1,821)
-
(137,517)
$(67,935)
$28,017
3,623
4,446
4,625
9,655
10,941
7,705
69,012
(38,498)
(66,420)
-
(5,839)
(110,757)
$(41,745)
Following is a reconciliation of the beginning and ending amount of unrecognized tax benefits (in millions):
Unrecognized tax benefits - beginning of year
Gross increases - tax positions in prior periods
Gross increases - tax positions in the current period
Settlements with taxing authorities
Lapse of statute of limitations
Unrecognized tax benefits end of year
January 1, 2011
$6.6
0.8
0.1
-
(2.0)
$5.5
$7.1
4.1
0.4
January 2, 2010 December 27, 2008
$6.8
-
0.3
-
-
$7.1
(0.4)
(4.6)
$6.6
Unrecognized tax benefits as of January 1, 2011 amount to $5.5 million, all of which would impact the effective income tax rate
if recognized.
Potential interest and penalties related to unrecognized tax benefits are recorded in income tax expense. During fiscal 2010, 2009
and 2008, the Company recognized approximately $0.1 million, $0.7 million and $0.2 million in net interest expense,
respectively. The Company had approximately $1.0 million, $1.0 million and $1.1 million of accrued interest included in the tax
contingency reserve as of January 1, 2011, January 2, 2010 and December 27, 2008, respectively.
Due to statute expirations, approximately $1.4 million of the unrecognized tax benefits, including accrued interest, could
reasonably change in the coming year.
With few exceptions, the Company is no longer subject to U.S. federal and state/local income tax examinations by tax authorities
for years prior to 2006, and the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years
prior to 2005.
The Company has approximately $5.2 million of net operating losses in various jurisdictions which expire over a period up to 15
years.
At January 1, 2011 the estimated amount of total unremitted non-U.S. subsidiary earnings was $130.7 million. No U.S. deferred
taxes have been provided on the undistributed non-U.S. subsidiary earnings because they are considered to be permanently
invested given our acquisition and growth initiatives.
(12) Contingencies and Commitments
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 the Company’s 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 its
response and counterclaims against Nordyne the Company is 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’s G7 furnace
systems and iQ Drive 23-seer air conditioning systems. The Company has 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. The Company intends to defend its intellectual property
vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any other person. The Company
does not currently believe that the litigation will have a material effect on the Company’s financial position or its results of
operations.
One of the Company’s subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to
certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential
and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the
50
cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have
a material adverse effect on its results of operations or financial condition. However, the Company cannot predict the outcome of
these claims, the nature or extent of remedial actions, if any, it may need to undertake with respect to motors that remain in the
field, or the costs it may incur, some of which could be significant.
The Company is, from time to time, party to litigation that arises in the normal course of our business operations, including
product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters.
The Company’s products are used in a variety of industrial, commercial and residential applications that subject us to claims that
the use of our products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in
defending against such lawsuits 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.
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 2010
and 2009 (in thousands):
Balance, beginning of year
Payments
Provision
Translation
Balance, end of year
(13) Leases and Rental Commitments
2010
2009
$13,298
(14,420)
13,793
160
$12,831
$11,022
(12,102)
14,465
(87)
$13,298
Rental expenses charged to operations amounted to $24.6 million in 2010, $18.9 million in 2009, and $16.3 million in 2008. The
Company has future minimum rental commitments under operating leases as shown in the following table (in millions):
Year
2011
2012
2013
2014
2015
Thereafter
Expected Payments
$22.4
19.0
11.9
7.6
5.8
9.4
(14) Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed using derivative
instruments are commodity price risk, currency exchange risk, 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 recognizes 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 January 1, 2011.
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 accumulated other comprehensive income (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 January 1, 2011, and January 2, 2010 the Company had an additional $4.1 million and $1.5 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.
As of January 1, 2011, the Company had outstanding the following commodity forward contracts (with maturities extending
through September 2012) to hedge forecasted purchases of commodities (in millions):
Copper
Aluminum
Natural Gas
Zinc
Notional Amount
$106.3
4.2
0.7
0.2
51
As of January 1, 2011, the Company had outstanding the following currency forward contracts (with maturities extending through
December 2012) to hedge forecasted foreign currency cash flows (in millions):
Mexican Peso
Indian Rupee
Chinese Renminbi
Australian Dollar
Notional Amount
$86.3
36.4
8.9
2.4
As of January 1, 2011, 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 were (in millions):
January 1, 2011
Prepaid
Expenses
Other Noncurrent
Assets
Accrued
Expenses
Hedging
Obligations
Designated as hedging instruments:
Interest rate swap contracts
Foreign exchange contracts
Commodity contracts
$ -
7.1
24.7
Not designated as hedging instruments:
Foreign exchange contracts
Commodity contracts
Total Derivatives:
0.2
0.2
$32.2
$ -
$ -
1.4
4.2
-
-
$5.6
0.1
0.1
-
-
$0.2
$39.1
0.1
-
-
-
$39.2
January 2, 2010
Prepaid
Expenses
Other Noncurrent
Assets
Accrued
Expenses
Hedging
Obligations
Designated as hedging instruments:
Interest rate swap contracts
Foreign exchange contracts
Commodity contracts
$ -
-
3.5
Not designated as hedging instruments:
Foreign exchange contracts
Commodity contracts
Total Derivatives:
0.2
0.9
$4.6
$ -
$ -
1.1
-
-
-
$1.1
5.5
-
-
-
$5.5
$31.2
-
-
-
-
$31.2
As of January 1, 2011, the Company’s fair value for derivative instruments were classified on the consolidated balance sheet as a
current asset of $32.2 million, a noncurrent asset of $5.6 million, a current liability of $0.2 million, and a noncurrent liability of
$39.2 million.
As of January 2, 2010, the Company’s fair value for derivative instruments is classified on the consolidated balance sheet as a
current asset of $4.6 million, a noncurrent asset of $1.1 million, a current liability of $5.5 million, and a noncurrent liability of
$31.2 million.
The effect of derivative instruments on the consolidated statements of equity and earnings for the year ended January 1, 2011 and
January 2, 2010 was (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
Gain (Loss) recognized in
Other Comprehensive Income (Loss)
Amounts reclassified from other
comprehensive income (loss) were:
Loss recognized in Net Sales
Gain (Loss) recognized in Cost of Sales
Loss recognized in Interest Expense
Year Ended January 1, 2011
Year Ended January 2, 2010
Commodity
Forwards
Currency
Forwards
Interest
Rate
Swaps
Total
Commodity
Forwards
Currency
Forwards
Interest
Rate
Swaps
Total
$38.5
$11.1
$(20.5)
$29.1
$30.6
$12.1
$6.9
$49.6
-
10.1
-
-
(2.7)
-
-
-
(12.7)
-
7.4
(12.7)
-
(51.4)
(3.3)
(14.1)
-
-
-
-
(11.5)
(3.3)
(65.5)
(11.5)
The ineffective portion of hedging instruments recognized during the year ended January 1, 2011 was immaterial.
52
Derivatives Not Designated as Cash Flow Hedging Instruments
Year Ended January 1, 2011
Commodity
Forwards
Currency
Forwards
Total
Year Ended January 2, 2010
Currency
Forwards
Commodity
Forwards
Total
Gain (loss) recognized in
Cost of Sales
$(0.6)
$0.2
$(0.4)
$9.4
$(1.4)
$8.0
The ineffective portion of hedging instruments recognized was immaterial for all periods presented.
The net AOCI balance related to hedging activities of $2.8 million gains at January 1, 2011 includes $13.0 million of net current
deferred gains expected to be realized in the next twelve months.
(15) 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 January 1, 2011 (in
millions):
Assets:
Investments
Prepaid Expenses and Other Current Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Other Noncurrent Assets:
Derivative Currency Contracts
Derivative Commodity Contracts
Liabilities:
Other Accrued Expenses:
Derivative Currency Contracts
Derivative Commodity Contracts
Hedging Obligations – Long Term:
Interest Rate Swap
Derivative Currency Contracts
2010
2009
$
56.3
117.6 (Level 2)
7.3
24.9
1.4
4.2
0.1
0.1
39.1
0.1
0.2 (Level 2)
(Level 2)
4.4
1.1
-
(Level 2)
(Level 2)
5.5
-
(Level 2)
(Level 2)
31.2 (Level 2)
(Level 2)
-
53
(16) Industry Segment Information
The following sets forth certain financial information attributable to the Company’s reporting segments for fiscal 2010, fiscal
2009 and fiscal 2008, respectively (in thousands):
2010
Electrical
Mechanical
Total
2009
Electrical
Mechanical
Total
2008
Electrical
Mechanical
Total
Net Sales
$2,001,989
235,989
$2,237,978
$1,637,668
188,609
$1,826,277
$1,998,642
247,607
$2,246,249
Income From
Operations
Identifiable
Assets
Capital
Expenditures
Depreciation and
Amortization
$210,231
27,504
$237,735
$144,901
14,619
$159,520
$191,532
38,899
$230,431
$2,323,164
125,972
$2,449,136
$1,990,686
121,551
$2,112,237
$1,896,959
126,537
$2,023,496
$41,065
3,929
$44,994
$29,503
4,101
$33,604
$45,186
7,023
$52,209
$66,746
6,123
$72,869
$63,749
5,395
$69,144
$56,337
5,264
$61,601
The Electrical segment manufactures and markets AC and DC commercial, industrial, commercial refrigeration, and HVAC
electric motors and blowers. These products range in size from sub-fractional to small integral horsepower motors to larger
commercial and industrial motors from 50 through 6500 horsepower. The Company offers thousands of stock models of electric
motors in addition to the motors it produces to specific customer specifications. The Company also produces and markets
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. Additionally, the Electrical segment
manufactures and markets a full line of AC and DC variable speed drives and controllers and other accessories for most industrial
and commercial applications. The Company manufactures capacitors for use in HVAC systems, high intensity lighting and other
applications. It sells its Electrical segment’s products to original equipment manufacturers, distributors and end users across many
markets.
The Mechanical segment manufactures and markets a broad array of mechanical motion control products including standard and
custom worm gears, bevel gears, helical gears and concentric shaft gearboxes; marine transmissions; high-performance after-
market automotive transmissions and ring and pinions; custom gearing; gearmotors; manual valve actuators; and electrical
connecting devices. Gear and transmission related products primarily control motion by transmitting power from a source, such as
an electric motor, to an end use, such as a conveyor belt, usually reducing speed and increasing torque in the process. Valve
actuators are used primarily in oil and gas, water distribution and treatment and chemical processing applications. Mechanical
products are sold to original equipment manufacturers, distributors and end users across many industry segments.
The Company evaluates performance based on the segment’s income from operations. Corporate costs have been allocated to
each segment based primarily on the net sales of each segment. The reported net sales of each segment are from external
customers.
The following sets forth certain financial information attributable to geographic regions in which the Company operates for fiscal
2010, fiscal 2009 and fiscal 2008, respectively (in thousands):
Geographic Information:
United States
Asia
Rest of the World
Geographic Information:
United States
Asia
Rest of the World
2010
Net Sales
2009
$1,530,866
414,786
292,326
$2,237,978
$1,335,046
267,035
224,196
$1,826,277
2008
$1,634,063
348,914
263,272
$2,246,249
2010
Long-Lived Assets
2009
2008
$964,267
219,230
177,588
$1,361,085
$889,180
145,346
98,335
$1,132,861
$969,722
140,059
52,453
$1,162,234
54
(17) Related Party Transactions
As part of the consideration paid for the acquisition of Elco on November 1, 2010, the Company assumed $22.3 million payable
to an entity that is affiliated with our Elco Group B.V. joint venture partner resulting from bankruptcy proceeding involving Elco.
A portion will be paid during 2011 with the remaining balance paid during 2012. The Company has included the current amounts
in Other Accrued Expenses and the long-term amount in Other Noncurrent Liabilities.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management evaluated,
with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
year ended January 1, 2011. Based upon their evaluation of these disclosure controls and procedures, our Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of January 1, 2011 to ensure
that (a) information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission,
and (b) information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting.
The report of management required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K
under the heading “Management’s Annual Report on Internal Control over Financial Reporting.”
Report of Independent Registered Public Accounting Firm.
The attestation report required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under the
heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Controls.
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended January
1, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B – OTHER INFORMATION
None.
55
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
See the information in the sections titled “Proposal 1: Election of Directors,” “The Board of Directors” and “Section 16(a)
Beneficial Ownership Reporting Compliance” in our proxy statement for the 2011 annual meeting of shareholders (the “2011
Proxy Statement”). Information with respect to our executive officers appears in Part I of this Annual Report on Form 10-K.
We have adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all our directors, officers and employees.
The Code is available on our website, along with our current Corporate Governance Guidelines, at www.regalbeloit.com. The
Code and our Corporate Governance Guidelines are also available in print to any shareholder who requests a copy in writing from
the Secretary of Regal Beloit Corporation. We intend to disclose through our website any amendments to, or waivers from, the
provisions of these codes.
ITEM 11 – EXECUTIVE COMPENSATION
See the information in the sections titled “Compensation Discussion and Analysis,” “Executive Compensation,” “Report of the
Compensation and Human Resources Committee,” and “Director Compensation” in the 2011 Proxy Statement.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information in the section titled “Stock Ownership” in the 2011 Proxy Statement.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of January 1, 2011.
Plan category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to be
issued upon the exercise of
outstanding options,
warrants and rights (1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining available
for future issuance under equity
compensation plans (excluding securities
reflected in the first column) (2)
1,454,050
1,454,050
$43.50
$43.50
1,802,275
1,802,275
(1) Represents options to purchase our common stock and stock-settled stock appreciation rights granted under our 1998 Stock Option Plan, 2003 Equity
Incentive Plan and 2007 Equity Incentive Plan.
(2) Excludes 181,177 shares of restricted common stock previously issued under our 2003 Equity Incentive Plan and 2007 Equity Incentive Plan for which the
restrictions have not lapsed.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
See the information in the section titled “The Board of Directors” in the 2011 Proxy Statement.
ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES
See the information in the section titled “Proposal 5: Ratification of Deloitte & Touche LLP as the Company’s Independent
Auditors for 2011” in the 2011 Proxy Statement.
56
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULE
PART IV
(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 schedule - The financial statement schedule listed in the accompanying index to financial statements
and financial statement schedule are filed as part of this Annual Report on Form 10-K.
3. Exhibits - The exhibits listed in the accompanying index to exhibits are filed as part of this Annual Report on Form 10-K.
(b) Exhibits- see Exhibit Index.
(c) See (a)(2) above
57
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, on this 2nd day of March, 2011.
SIGNATURES
REGAL BELOIT CORPORATION
By:
By:
/s/ CHARLES A. HINRICHS
Charles A. Hinrichs
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ PETER J. ROWLEY
Peter J. Rowley
Vice President and Corporate Controller
(Principal Accounting Officer)
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/ HENRY W. KNUEPPEL
Henry W. Knueppel
Chief Executive Officer and Director
(Principal Executive Officer)
March 2, 2011
/s/ MARK J. GLIEBE
Mark J. Gliebe
Chief Operating Officer and Director
(Principal Operating Officer)
/s/ STEPHEN M. BURT
Stephen M. Burt
Director
/s/ CHRISTOPHER L. DOERR
Christopher L. Doerr
Director
/s/ THOMAS J. FISCHER
Thomas J. Fischer
Director
/s/ DEAN A. FOATE
Dean A. Foate
Director
/s/ G. FREDERICK KASTEN, JR. Director
G. Frederick Kasten, Jr.
/s/ RAKESH SACHDEV
Rakesh Sachdev
Director
/s/ CAROL N. SKORNICKA
Carol N. Skornicka
Director
/s/ CURTIS W. STOELTING
Curtis W. Stoelting
Director
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
March 2, 2011
58
REGAL BELOIT CORPORATION
Index to Financial Statements
And Financial Statement Schedule
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the fiscal years ended
January 1, 2011, January 2, 2010 and December 27, 2008
Consolidated Balance Sheets at January 1, 2011 and January 2, 2010
Consolidated Statements of Equity for the fiscal years ended
January 1, 2011, January 2, 2010 and December 27, 2008
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended
January 1, 2011, January 2, 2010 and December 27, 2008
Consolidated Statements of Cash Flows for the fiscal years ended
January 1, 2011, January 2, 2010 and December 27, 2008
Notes to the Consolidated Financial Statements
Page(s) In
Form 10-K
33
34
35
36
37
38
39
(2) Financial Statement Schedule:
For the fiscal years ended January 1, 2011, January 2, 2010 and December 27, 2008
Schedule II –Valuation and Qualifying Accounts
60
Page(s) In
Form 10-K
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or
notes thereto.
59
SCHEDULE II
REGAL BELOIT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Allowance for receivables:
Year ended January 1, 2011
Year ended January 2, 2010
Year ended December 27, 2008
(In Thousands of Dollars)
Balance
Beginning
of Year
Charged to
Expenses
Deductions(a)
Adjustments(b)
Balance
End
of Year
$12,666
$11,145
$10,734
$1,143
$2,487
$4,260
$(3,623)
$(1,875)
$(3,365)
$451
$909
$(484)
$10,637
$12,666
$11,145
Allowance for product warranty reserves:
Year ended January 1, 2011
Year ended January 2, 2010
Year ended December 27, 2008
$13,298
$11,022
$9,872
$13,793
$14,465
$8,268
$(14,420)
$(12,102)
$(7,431)
$160
$(87)
$313
$12,831
$13,298
$11,022
________________________________
(a) Deductions consist of write offs charged against the allowance for doubtful accounts and warranty claim costs.
(b) Adjustments related to acquisitions and translation.
60
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
2.6
3.1
EXHIBIT INDEX
Exhibit Description
Purchase Agreement, dated as of August 10, 2004, between Regal Beloit Corporation and General Electric
Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K
dated August 30, 2004 (File No. 001-07283)]
Amendment to Purchase Agreement, dated as of August 30, 2004, between Regal Beloit Corporation and
General Electric Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s Current
Report on Form 8-K dated August 30, 2004 (File No. 001-07283)]
Purchase Agreement, dated as of November 14, 2004, between Regal Beloit Corporation and General Electric
Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K
dated December 31, 2004 (File No. 001-07283)]
Amendment to Purchase Agreement, dated as of December 31, 2004, between Regal Beloit Corporation and
General Electric Company. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s Current
Report on Form 8-K dated December 31, 2004 (File No. 001-07283)]
Purchase Agreement, dated as of July 3, 2007, by and among Regal Beloit Corporation, Tecumseh Products
Company, Fasco Industries, Inc. and Motores Fasco de Mexico, S. de R.L. de C.V. [Incorporated by reference to
Exhibit 2.1 to Regal Beloit Corporation’s Current Report on Form 8-K filed on September 7, 2007]
Asset and Stock Purchase Agreement, dated as of December 12, 2010, by and between Regal Beloit Corporation
and A.O. Smith Corporation. [Incorporated by reference to Exhibit 2.1 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on December 15, 2010]
Articles of Incorporation of Regal Beloit Corporation, as amended through April 20, 2007. [Incorporated by
reference to Exhibit 3.1 to Regal Beloit Corporation’s Current Report on Form 8-K filed on April 25, 2007 (File
No. 001-07283)]
3.2
Amended and Restated Bylaws of Regal Beloit Corporation. [Incorporated by reference to Exhibit 3.2 to Regal
Beloit Corporation’s Current Report on Form 8-K filed on April 25, 2007 (File No. 001-07283)]
4.1
Articles of Incorporation, as amended, and Amended and Restated Bylaws of Regal Beloit Corporation
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.1*
10.2*
[Incorporated by reference to Exhibits 3.1 and 3.2 hereto]
Indenture, dated April 5, 2004, between Regal Beloit Corporation and U.S. Bank National Association, as
Trustee. [Incorporated by reference to Exhibit 4.3 to Regal Beloit Corporation’s Registration Statement on Form
S-3 filed on June 21, 2004 (Reg. No. 333-116706)]
First Supplemental Indenture, dated December 9, 2004, between Regal Beloit Corporation and U.S. Bank
National Association, as Trustee. [Incorporated by reference to Exhibit 4 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on December 14, 2004 (File No. 001-07283)]
Form of 2.75% Convertible Senior Subordinated Note due 2024 (included in Exhibit 4.2).
Second Amended and Restated Credit Agreement, dated as of April 30, 2007, among Regal Beloit Corporation,
the financial institutions party thereto and Bank of America, N.A., as administrative agent. [Incorporated by
reference to Exhibit 4.1 to Regal Beloit Corporation's Current Report on Form 8-K dated April 30, 2007 (File
No. 001-07283)]
First Amendment, dated as of August 23, 2007, to the Second Amended and Restated Credit Agreement, dated as
of April 30, 2007, by and among Regal Beloit Corporation, various financial institutions and Bank of America,
N.A., as Administrative Agent. [Incorporated by reference to Exhibit 4.3 to Regal Beloit Corporation’s Current
Report on Form 8-K filed on August 24, 2007 (File No. 001-07283)]
Note Purchase Agreement, dated as of August 23, 2007, by and among Regal Beloit Corporation and Purchasers
listed in Schedule A attached thereto. [Incorporated by reference to Exhibit 4.1 to Regal Beloit Corporation’s
Current Report on Form 8-K filed on August 24, 2007 (File No. 001-07283)]
Subsidiary Guaranty Agreement, dated as of August 23, 2007, from certain subsidiaries of Regal Beloit
Corporation. [Incorporated by reference to Exhibit 4.2 to Regal Beloit Corporation’s Current Report on Form 8-
K filed on August 24, 2007] (File No. 001-07283)]
Term Loan Agreement, dated as of June 16, 2008, between Regal Beloit Corporation, various Financial
Institutions, US Bank, National Association, Wells Fargo Bank, N.A., Bank of America, N.A., JP Morgan Chase
Bank, N.A., JP Morgan Securities Inc. and Banc of America Securities LLC. [Incorporated by referenced to
Exhibit 4.1 to Regal Beloit’s Corporation’s Current Report on Form 8-K filed on June 16, 2008 (File No. 001-
2783)]
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 (File No. 001-07283)]
1998 Stock Option Plan, as amended [Incorporated by reference to Exhibit 99 to Regal Beloit Corporation’s
Registration Statement on Form S-8 (Reg. No. 333-84779)]
61
Exhibit
Number
10.3*
Exhibit Description
2003 Equity Incentive Plan [Incorporated by reference to Exhibit B to Regal Beloit Corporation’s Definitive
Proxy Statement on Schedule 14A for the 2003 Annual Meeting of Shareholders (File No. 001-07283)]
10.4*
10.5*
10.6*
10.7*
Regal Beloit Corporation 2007 Equity Incentive Plan (incorporated by reference to Appendix B to Regal Beloit
Corporation's definitive proxy statement on Schedule 14A for the Regal Beloit Corporation 2007 annual meeting
of shareholders held April 20, 2007 (File No. 1-07283))
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and each of
Henry W. Knueppel and Mark J. Gliebe. [Incorporated by reference to Exhibit 10.6 to Regal Beloit
Corporation’s Annual Report on Form 10-K for the year ended December 29, 2007. (File No. 001-07283)]
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and Terry R.
Colvin. [Incorporated by reference to Exhibit 10.7 to Regal Beloit Corporation’s Annual Report on Form 10-K
for the year ended December 29, 2007. (File No. 001-07283)]
Form of Key Executive Employment and Severance Agreement between Regal Beloit Corporation and each of
Charles A Hinrichs, Peter C. Underwood and John M. Avampato. [Incorporated by reference to Exhibit 10.1 to
Regal Beloit Corporation’s Current Report on Form 8-K filed on November 2, 2010 (File No. 001-07283)]
10.8*
10.9*
Form of Agreement for Stock Option Grant. [Incorporated by reference to Exhibit 10.9 to Regal Beloit
Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. (File No. 001-07283)]
Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.10 to Regal Beloit Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2005. (File No. 001-07283)]
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2003 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.10 to Regal Beloit Corporation’s Annual Report on Form 10-K for
the year ended December 29, 2007. (File No. 001-07283)]
Form of Stock Option Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive Plan.
[Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation’s Current Report on Form 8-K filed on
April 25, 2007 (File No. 001-07283)]
Form of Restricted Stock Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive Plan.
[Incorporated by reference to Exhibit 10.3 to Regal Beloit Corporation’s Current Report on Form 8-K filed on
April 25, 2007 (File No. 001-07283)]
Form of Restricted Stock Unit Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.4 to Regal Beloit Corporation’s Current Report on Form 8-K filed
on April 25, 2007 (File No. 001-07283)]
Form of Stock Appreciation Right Award Agreement under the Regal Beloit Corporation 2007 Equity Incentive
Plan. [Incorporated by reference to Exhibit 10.5 to Regal Beloit Corporation’s Current Report on Form 8-K filed
on April 25, 2007 (File No. 001-07283)]
Target Supplemental Retirement Plan for designated Officers and Key Employees, as amended and restated.
[Incorporated by reference to Exhibit 10.2 to Regal Beloit Corporation's Current Report on Form 8-K dated
November 2, 2010]
Form of Participation Agreement for Target Supplemental Retirement Plan. [Incorporated by reference to
Exhibit 10.12 to Regal Beloit Corporation’s Annual Report on Form 10-K for the year ended December 31,
2005. (File No. 001-07283)]
10.17
12
21
23
31.1
31.2
32
Regal Beloit Corporation Shareholder Value Added (SVA) Executive Officers Incentive Compensation Plan.
Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of Regal Beloit Corporation.
Consent of Independent Auditors.
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.1
Proxy Statement of Regal Beloit Corporation for the 2011 Annual Meeting of Shareholders
[The Proxy Statement for the 2011 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 2011 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.
62
EXHIBIT 12
REGAL BELOIT CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Earnings available for
fixed charges:
Income before taxes and
Noncontrolling interests
Interest expense
Estimated interest component
of rental expense
Total earnings available for
fixed charges
Fixed charges:
Interest expense
Estimated interest component
of rental expense
Total fixed charges
Ratio of earnings to
fixed charges
Fiscal 2010
Fiscal 2009
Fiscal 2008
Fiscal 2007 Fiscal 2006
$220,729
19,576
$137,955
23,284
$199,263
32,647
$180,343
26,650
$170,568
24,160
6,594
6,297
5,318
4,433
2,500
$246,899
$167,536
$237,228
$211,426
$197,228
$19,576
$23,284
$32,647
$26,650
$24,160
6,594
$26,170
6,297
$29,581
5,318
$37,965
4,433
$31,083
2,500
$26,660
9.4
5.7
6.3
6.8
7.4
63
BOARD OF DIRECTORS
HENRY W. KNUEPPEL
G. FREDERICK KASTEN, JR. (4)
Chairman and Chief Executive Officer
Regal Beloit Corporation
Director since 1987
Former Chairman and Director
Robert W. Baird & Co., Inc.
Director since 1995
MARK J. GLIEBE
RAKESH SACHDEV (1)(3)
President and Chief Operating Officer
Regal Beloit Corporation
Director since 2007
Sr. Vice President and President of Asia Pacific
ArvinMeritor, Inc.
Director since 2007
CHRISTOPHER L. DOERR (3)
Formerly Co-Chairman,
Co-Chief Executive Officer
LEESON Electric Corporation
Director since 2003
CURTIS W. STOELTING (1*)
Chief Executive Officer
RC2 Corporation
Director since 2005
THOMAS J. FISCHER (1)(2)
CAROL N. SKORNICKA (3*)
Former Managing Partner,
Milwaukee Office
Arthur Andersen LLP
Director since 2004
Retired Sr. Vice President-Corporate Affairs,
Secretary and General Counsel
Midwest Air Group
Director since 2006
DEAN A. FOATE (2*)
STEPHEN M. BURT (1)(3)
President and Chief Executive Officer
Plexus Corporation
Director since 2005
Managing Director
Duff & Phelps
Director since 2010
COMMITTEE ASSIGNMENTS AS OF JANUARY 2009
(1) Member of Audit Committee
(2) Member of Compensation and Human Resources Committee
(3) Member of Corporate Governance and Director Affairs Committee
(4) Presiding Director
* Committee Chairman
We have filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended December 27, 2008 the certifications of
our Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act. We submitted to the
New York Stock Exchange during fiscal 2008 the Annual CEO Certification required by Section 303A.12(a) of the New York
Stock Exchange Listed Company Manual.
64
Building
Building
Momentum
Momentum
Regal-Beloit Corporation
World Headquarters
200 State Street
Beloit, Wisconsin 53511-6254
www.regalbeloit.com
2010 Annual Report