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EX-31.2 - CERTIFICATE OF CHIEF FINANCIAL OFFICER - REGAL BELOIT CORPcertofcfo.htm
EX-31.1 - CERTIFICATE OF CHIEF EXECUTIVE OFFICER - REGAL BELOIT CORPcertofceo.htm
EX-21 - SUBSIDIARIES OF REGAL BELOIT CORPORATION - REGAL BELOIT CORPrbcsublist.htm
EX-23 - CONSENT OF INDEPENDENT AUDITORS - REGAL BELOIT CORPconsentofauditors.htm
EX-10.14 - TARGET SUPPLEMENTAL RETIREMENT PLAN AS AMENDED AND RESTATED - REGAL BELOIT CORPtargetsuppretplan.htm
EX-12 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - REGAL BELOIT CORPcompofratioofearnings.htm
EX-32 - CERTIFICATIONS OF CEO AND CFO - REGAL BELOIT CORPsec1350certofceoandcfo.htm

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 2, 2010
Commission file number 1-7283

Regal Beloit Corporation
(Exact Name of Registrant as Specified in Its Charter)

Wisconsin
39-0875718
(State of Incorporation)
(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:

 
Name of Each Exchange on
Title of Each Class
Which Registered
Common Stock ($.01 Par Value)
New York Stock Exchange
   
Securities registered pursuant to
Section 12 (g) of the Act
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 T  No £
 
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 £ No  T
 
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 T   No £
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  T
 
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  T             Accelerated filer  £        Non-accelerated filer £        Smaller reporting company  £
                       (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 £  No T
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 27, 2009 was approximately $1.5 billion.
 
On February 22, 2010, the registrant had outstanding 37,467,554 shares of common stock, $.01 par value, which is registrant’s only class of common stock.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Certain information contained in the Proxy Statement for the Annual Meeting of Shareholders to be held on April 26, 2010 is incorporated by reference into Part III, hereof.
 

 
1

 

REGAL BELOIT CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED JANUARY 2, 2010
 
TABLE OF CONTENTS
 
Page
PA RT I
 
Item 1
Business
 3
Item 1A
Risk Factors
 8
Item 1B
Unresolved Staff Comments
 12
Item 2
Properties
 12
Item 3
Legal Proceedings
 13
Item 4
Submission of Matters to a Vote of Security Holders
 14
     
PART II
 
Item 5
 
Market for the Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
 14
Item 6
Selected Financial Data
 16
Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operation
 16
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
 24
Item 8
Financial Statements and Supplementary Data
 25
Item 9
 
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
 51
Item 9A
Controls and Procedures
 51
Item 9B
Other Information
 52
     
PART III
 
Item 10
Director, Executive Officers and Corporate Governance of the Registrant
 52
Item 11
Executive Compensation
 52
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
 52
Item 13
Certain Relationships and Related Transactions and Director Independence
 52
Item 14
Principal Accountant Fees and Services
 52
     
PART IV
 
Item 15
Exhibits, Financial Statement Schedule
 52
     
SIGNATURES
 53

CAUTIONARY STATEMENT
 
This Annual Report contains “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995.  Forward-looking statements represent our management’s judgment regarding future events.  In many cases, you can identify forward-looking statements by terminology such as “may,” “will,”  “plan,” “expect,” “anticipate,” “estimate,” “believe,” or “continue” or the negative of these terms or other similar words.  Actual results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of factors, including:
 
 
·
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
 
·
unanticipated fluctuations in commodity prices and raw material costs;
 
·
cyclical downturns affecting the global market for capital goods;
 
·
unexpected issues and costs arising from the integration of acquired companies and businesses;
 
·
marketplace acceptance of new and existing products including the loss of, or a decline in business from, any significant customers;
 
·
the impact of capital market transactions that we may effect;
 
·
the availability and effectiveness of our information technology systems;
 
·
unanticipated costs associated with litigation matters;
 
·
actions taken by our competitors;
 
·
difficulties in staffing and managing foreign operations; and
 
·
other risks and uncertainties including but not limited to those described in Item 1A-Risk Factors of this
 

 
2

 

 
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 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 Item 1A - Risk Factors.
 
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 of the Company to be held on April 26, 2010 (the “2010 Proxy Statement”) or to information contained in specific sections of the Proxy Statement, incorporate the information into that Item by reference.
 
ITEM 1 -     BUSINESS
 
OUR COMPANY
 
We are one of the largest global manufacturers of commercial, industrial, and heating, ventilation, and air conditioning (HVAC) electric motors, electric generators and controls, and mechanical motion control products.  Many of our products hold leading product positions in a variety of essential commercial, industrial and residential applications, and we believe we have one of the most comprehensive product lines in the markets we serve.  We sell our products to a diverse global customer base using more than 20 recognized brand names through a multi-channel distribution model to leading original equipment manufacturers (“OEMs”), distributors and end users across many markets.  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 target markets.
 
We manufacture and market electrical and mechanical products.  Our electrical products include HVAC motors, a full line of AC and DC commercial and industrial electric motors, electric generators and controls, and capacitors. Our mechanical products include gears and gearboxes, marine transmissions, high-performance automotive transmissions and ring and pinions, manual valve actuators, and electrical connectivity devices.  OEMs and end users in a variety of motion control and other industrial applications increasingly combine the types of electrical and mechanical products we offer.  We seek to take advantage of this trend and to enhance our product penetration by leveraging cross-marketing and product line combination opportunities between our electrical and mechanical products.
 
We market our products through multiple brands, with each typically having its own product offering and sales organization.  These sales organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive manufacturers’ representative organizations. We manufacture the vast majority of the products that we sell, and we have manufacturing, sales, engineering and distribution facilities throughout the United States and Canada as well as in Mexico, India, China, Australia, Thailand and Europe.
 
Our growth strategy includes driving organic growth through innovative new products, new customers, new opportunities at existing customers and participating in fast growth geographic markets.  Additionally, we seek to grow through strategic, value creating acquisitions.  We consider our acquisition process, including identification, due diligence, and integration, to be a core competency of the Company.
 
Our business initiatives include:
 
 
·
Innovation: fueling our growth by delivering new products that address customer needs such as energy efficiency, system cost reduction and improved reliability;
 
·
Globalization: expanding our global presence to participate in high growth markets, “catch” our customers as they expand globally and remain cost competitive;
 
·
Customer Centricity: making continuous improvements in all of the operations that touch our customers so that our customers feel an improved experience;
 
·
Digitization: employing Information Technology (IT) tools to improve the efficiency and productivity of our business and our customers’ businesses; and
 
·
Lean Six Sigma: utilizing Lean Six Sigma to drive continuous improvements in all of our manufacturing and back office operations as well as in the quality of our products.
 
OPERATING SEGMENTS
 
We have two operating segments:  Electrical and Mechanical.  Financial information on our operating segments for the three years ending January 2, 2010 is contained in Note 16 of the Consolidated Financial Statements.
 

3

 
ELECTRICAL SEGMENT
 
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.  Our increasingly efficient motor designs allow current motor products to be significantly more energy efficient than previous models. Our Electrical segment includes a full line of AC and DC commercial and industrial electric motors, HVAC motors, electric generators and controls and capacitors.  Our Electrical segment was developed in the mid 1990’s with a new strategic focus to establish our Company as a significant manufacturer of industrial electric motors, complementing our mechanical products businesses which serve similar markets and whose products were often used in combination with a motor.  Beginning with our acquisition of Marathon Electric Manufacturing Corporation in 1997 our Electrical segment has grown to over $1.6 billion in revenue.
 
During 2008, the Company completed acquisitions of two additional Electrical segment businesses:
 
On April 25, 2008 the Company acquired Joyce Court Holdings Ltd. and Grand Delight Investments Ltd., sole shareholders of Wuxi Hwada Motor Co. and Wuxi New Hwada Motor Co. (collectively “Hwada”) located in Wuxi, China.  Hwada is a leading designer and manufacturer of Integral IEC and NEMA electric motors, which are used in various industrial applications such as compressor, pump, paper and steel processing and power plants.  Approximately 50% of Hwada’s product sales are in the China industrial markets.  The business is reported as part of the Company’s Electrical segment.  The acquisition provides an industrial motor production capability to our China motor businesses.
 
On September 30, 2008, the Company acquired Dutchi Motors B.V.  (“Dutchi”) located in Arnhem, The Netherlands.  Dutchi is a leading distributor of industrial motors in Western and Eastern Europe, South Africa, Russia and the Middle East.  Dutchi is one of the largest distributors of the Company’s Hwada motor products, which was purchased in April, 2008.  The Dutchi business is also reported as part of the Company’s Electrical segment. The acquisition expands our distribution network further into Europe and includes new markets for our product lines.
 
We manufacture and market AC and DC commercial, industrial and HVAC electric motors ranging in size from sub-fractional to small integral horsepowers 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 markets a line of AC and DC adjustable speed drives.  We manufacture capacitors for use in HVAC systems, high intensity lighting and other applications.  We sell our Electrical segment’s products to distributors, original equipment manufacturers and end users across many markets.
 
Our motors 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 and humidifiers. We believe that a majority of our HVAC motors are used in applications that replace existing equipment, with the remainder used in new equipment applications. 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 growing 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, agricultural, marine, military, transportation and other applications.
 
We leverage 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.
 
The following is a description of our major Electrical product brands and the primary products that they manufacture and market:
 
Dutchi Motors.  Distributor of IEC and NEMA electric motors for industrial applications in Western and Eastern Europe, South Africa, Russia and the Middle East.
 
Fasco Motors.  Manufactures motors and blower systems for air moving applications including alternative fuel systems, water heaters and HVAC systems.
 
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 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 HVAC, pumps, power transmissions, fans and blowers, compressors, 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 and components for the commercial refrigeration and freezer markets.
 
Thomson Technology. Manufactures automatic transfer switches, paralleling switchgear and controls, and systems controls primarily for the electric power generation market.
 
4

MECHANICAL SEGMENT
 
Our Mechanical segment includes a broad array of mechanical motion control products including:  standard and custom worm gear, bevel gear, helical gear and concentric shaft gearboxes; marine transmissions; high-performance after-market automotive transmissions and ring and pinions; custom gearing; gearmotors; manual valve actuators, and electrical connecting devices. Our gear and transmission related products primarily control motion by transmitting power from a source, such as a motor or engine, to an end use, such as a conveyor belt, usually reducing speed and increasing torque in the process. Our valve actuators are used primarily in oil and gas, water distribution and treatment and chemical processing applications. 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:
 
CML (Costruzioni Meccaniche Legananesi S.r.L.). Manufactures worm and bevel gear valve actuators primarily for the oil, gas, wastewater and water distribution markets.
 
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, healthcare, 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, healthcare, food processing markets, 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.
 
Opperman Mastergear, Ltd. Manufactures valve actuators and industrial gear drives primarily for the material handling, agriculture, mining and liquid and gas flow control markets.
 
Richmond Gear/Velvet Drive Transmissions. Manufactures ring and pinions and transmissions primarily for the high-performance automotive aftermarket, and marine and industrial transmissions primarily for the pleasure boat, off-road vehicle and forestry markets.
 
THE BUILDING OF OUR BUSINESS
 
Our growth from our founding as a producer of high-speed cutting tools in 1955 to our current size and status has largely been the result of the acquisition and integration of businesses to build a strong multi-product offering. Our senior management has substantial experience in the acquisition and integration of businesses, aggressive cost management, and efficient manufacturing techniques, all of which represent activities that are critical to our long-term growth strategy.  Since 1997 we have acquired and developed our Electrical segment businesses into approximately a $1.6 billion producer of electric motors serving primarily the North America market.  We consider the identification of acquisition candidates and the purchase and integration of targets to be a core competency for the Company. The following table summarizes select Electrical segment acquisitions since 2004.
 
   
Year Acquired
 
Annual Revenues at Acquisition
(in millions)
 
Product Listing at Acquisition
Dutchi Motors
 
2008
 
 $56
 
Distributor of IEC and NEMA electric motors for industrial applications in Western and Eastern Europe, South Africa, Russia and the Middle East
             
Hwada Motors
 
2008
 
 105
 
Integral IEC and NEMA electric motors for industrial applications
             
Fasco Motors
 
2007
 
 299
 
Motor and blower systems for air moving applications
             
Jakel, Inc.
 
2007
 
 86
 
Motor and blower systems for air moving applications
             
Morrill Motors
 
2007
 
 40
 
Fractional horsepower motors for commercial refrigeration and freezer markets
             
Alstom
 
2007
 
 67
 
Full line of low and medium voltage industrial motors for Indian domestic markets
             
Sinya Motors
 
2006
 
 39
 
Fractional and sub-fractional HVAC motors
             
GE Commercial AC Motors
 
2004
 
 144
 
AC motors for pump, compressor, equipment and commercial HVAC
             
GE HVAC Motors and Capacitors
 
2004
 
 442
 
Full line of motors and capacitors for residential and commercial HVAC systems

5

SALES, MARKETING AND DISTRIBUTION
 
We sell our products directly to original equipment manufacturers (“OEMs”), distributors and end-users across many markets.  We have multiple business units, with each unit typically having its own branded product offering and sales organization. These sales organizations consist of varying combinations of our own internal direct sales people as well as exclusive and non-exclusive manufacturers’ representative organizations.
 
MARKETS AND COMPETITORS
 
The 2009 worldwide market for electric motors is estimated to be in excess of $29 billion. The overall domestic market for electric motors is estimated at $10 billion annually, although we estimate the sectors in which we primarily compete, commercial and industrial electric motors and HVAC/refrigeration motors, to be approximately a $3.4 billion segment of the overall domestic market. We believe approximately 40-50% of all electricity generated in the U.S. runs through electric motors.  We believe we are among the largest producers of commercial and industrial motors and HVAC motors.  In addition, we believe that we are the largest electric generator manufacturer in the United States that is not affiliated with a diesel engine manufacturer. Major domestic competitors for our electrical products include Baldor Electric, U.S. Electric Motors (a division of Emerson Electric Co.), A. O. Smith Corporation, General Electric Company and Newage (a division of Cummins, Inc).  Major foreign competitors include Siemens AG, Toshiba Corporation, Weg S.A., Leroy-Somer, Inc. and ABB Ltd.
 
We serve various mechanical product markets 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 competitors in these markets include Boston Gear (a division of Altra Industrial Motion, Inc.), Dodge (a division of Baldor Electric), Emerson Electric Co. and Winsmith (a division of Peerless-Winsmith, Inc.). Major foreign competitors include SEW Eurodrive GmbH & Co., Flender GmbH, Nord, Sumitomo Corporation and Zahnrad Fabrik GmbH Co.
 
During the past several years, niche product market opportunities have become more prevalent due to changing market conditions.  Manufacturers, who historically may have made component products for inclusion in their  finished goods, have chosen to outsource their requirements to specialized manufacturers like us because we can make these products more cost effectively. In addition, we have capitalized on this competitive climate by making acquisitions and increasing our manufacturing efficiencies. Some of these acquisitions have created new opportunities by allowing us to enter new markets in which we had not been involved. In practice, our operating units have sought out specific niche markets concentrating on a wide range of customers and applications. We believe that we compete primarily on the basis of quality, price, service, technology, and our promptness of delivery.  We had one customer that accounted for between 10% and 15% of our consolidated net sales for the years ended January 2, 2010 and December 29, 2007.   We had no customers that accounted for more than 10% of our consolidated sales for the year ended December 27, 2008.
 
PRODUCT DEVELOPMENT AND ENGINEERING
 
Each of our business segments has its own product development and design teams that continuously enhance our existing products and develop new products for our growing base of customers that require custom and standard solutions.  We believe we have the electric motor industry’s most sophisticated product development and testing laboratories. We believe these capabilities provide a significant competitive advantage in the development of high quality motors and electric generators incorporating leading design characteristics such as low vibration, low noise, improved safety, reliability and enhanced energy efficiency.
 
We are continuing to expand our business by developing new, differentiated products in each of our business segments. We work closely with our customers to develop new products or enhancements to existing products that improve performance and meet their needs.
 
As part of our 2004 HVAC motors and capacitors acquisition, we acquired ECM motor technology.  An ECM motor is a brushless DC electric motor with integrated speed control made possible through sophisticated electronic and sensing technology. ECM motors operate at variable speeds with attractive performance characteristics versus competitive variable speed solutions in comfort, energy efficiency, motor life and noise.  GE developed the first generation ECM motors over 15 years ago.  ECM technology is protected by over 125 patents, and we acquired from GE intellectual property and usage rights relating to ECM technology.   ECM motors offer significantly greater temperature and air quality control as well as increased energy efficiency.
 
While we believe that our brands and innovation are important to our continued growth and strong financial results, we do not consider any individual brand or patent, except for the ECM related patents, to be material.
 
MANUFACTURING AND OPERATIONS
 
We have developed and acquired global operations in lower cost locations such as Mexico, India, Thailand, and China that 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 custom requirements in many instances.  This gives us a competitive advantage as we are able to deliver a customer’s unique product when and where they want it.
 
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.  Although we have aggressively pursued 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.  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 in various types and sizes, including bearings and weldments; copper magnet wire; and ferrous and non-ferrous castings.  We purchase our raw materials from many suppliers and, with few exceptions, do not rely on any single supplier for any of our base materials.
 
We have also continued to upgrade our manufacturing equipment and processes, including increasing our use of computer aided manufacturing systems, developing our own testing systems, and the implementation of Lean Six Sigma.  We have trained over 1,100 people in Lean Six Sigma, resulting in significant cost savings since the program began in 2005. Our goal is to be a low cost producer in our core product areas.
 
6

FACILITIES
 
We have manufacturing, sales and service facilities throughout the United States and Canada and in Mexico, India, China, Australia, Thailand and Europe.  Our Electrical segment currently includes 50 manufacturing, service and distribution facilities, of which 32 are principal manufacturing facilities.  The Electrical segment’s present operating facilities contain a total of approximately 6.6 million square feet of space of which approximately 2.3 million square feet are leased.  Our Mechanical segment currently includes 12 manufacturing, service and distribution facilities, of which 6 are principal manufacturing facilities.  The Mechanical segment’s present operating facilities contain a total of approximately 1.1 million square feet of space of which approximately 36,000 square feet 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 2, 2010, our backlog was $264.7 million, as compared to $322.8 million on December 27, 2008.  We believe that virtually all of our backlog will be shipped in 2010.
 
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 2, 2010, the Company employed approximately 15,300 worldwide employees.  We consider our employee relations to be very good.
 
ENVIRONMENTAL MATTERS
 
We are currently involved with environmental proceedings related to certain of our facilities (see also Item 3 – Legal Proceedings).  Based on available information, we believe that the outcome of these proceedings and future known environmental compliance costs will not have a material adverse effect on our financial position or results of operations.
 
EXECUTIVE OFFICERS OF THE COMPANY
 
The names, ages, and positions of the executive officers of the Company as February 15, 2010, are listed below along with their business experience during the past five years.  Officers are elected annually by the Board of Directors at the Meeting of Directors immediately following the Annual Meeting of Shareholders in April.  There are no family relationships among these officers, nor any arrangements of understanding between any officer and any other persons pursuant to which the officer was selected.
 
Name
Age
Position
Business Experience and Principal Occupation
Henry W. Knueppel
61
Chairman and Chief Executive Officer
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.
       
Mark J. Gliebe
49
President and Chief Operating Officer
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.
       
David A. Barta
47
Vice President and Chief Financial Officer
Joined the Company in June 2004 and was elected Vice President, Chief Financial Officer in July 2004.  Prior to joining the Company, Mr. Barta served in several financial management positions for Newell Rubbermaid Inc. from 1995 to June 2004, serving most recently as Chief Financial Officer Levolor/Kirsch Division.  His prior positions during this time included Vice President – Group Controller Corporate Key Accounts, Vice President – Group Controller Rubbermaid Group and Vice President Investor Relations.
       
Paul J. Jones
39
Vice President, General Counsel and Secretary
Joined the Company in September 2006 and was elected Vice President, General Counsel and Secretary in September 2006.  Prior to joining the Company, Mr. Jones was a partner with the law firm of Foley & Lardner LLP where he worked since 1998.
       
Terry R. Colvin
54
Vice President
Corporate Human Resources
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.  From 2003 to 2005, Mr. Colvin was a Plant Operations consultant.

 
7

WEBSITE DISCLOSURE
 
The Company’s 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 operations could be materially and adversely affected and you may lose all or part of your investment.
 
We operate in highly competitive electric motor, power generation and mechanical motion control markets.
 
The electric motor, power generation and mechanical motion control markets are highly competitive.  Some of our competitors are larger and have greater financial and other resources than we do.  There can be no assurance that our products will be able to compete successfully with the products of these other companies.
 
The failure to obtain business with new products or to retain or increase business with redesigned existing or customized products could also adversely affect our business.  It may be difficult in the short-term for us to obtain new sales to replace any unexpected decline in the sale of existing or customized products.  We may incur significant expense in preparing to meet anticipated customer requirements, which may not be recovered.
 
Current worldwide economic conditions may adversely affect our industry, business and results of operations.
 
In 2009, general worldwide economic conditions experienced a downturn due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, increased energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. These conditions make it difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and the economic conditions are causing U.S. and foreign businesses to slow spending on our products, which would delay and lengthen sales cycles. We cannot predict the timing or duration of any economic slowdown or the timing or strength of a subsequent economic recovery, worldwide, or in the specific end markets we serve. If the commercial and industrial, residential HVAC, power generation and mechanical power transmission markets significantly deteriorate due to these economic effects, 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.
 
Changes in global commodity prices, interest rates and currency may adversely impact our financial performance as a result of our commodity, currency and interest rate hedging activities.
 
Although it is impossible to hedge against all currency, commodity or interest risk, 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.  As with all hedging instruments, there are risks associated with the use of such instruments. 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 its 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.
 

 
8

 

We are increasingly reliant on 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. 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 businesses as being dependent upon any single patent or related group of patents. 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.
 
Goodwill comprises a significant portion of our total assets, and if we determine that goodwill has become impaired in the future, net income 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.  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 the current worldwide economic downturn continues, it could result in circumstances, such as a sustained decline in our stock price and market capitalization or a decrease in our forecasted cash flows such that they are insufficient, indicating that the carrying value of our goodwill may be impaired.  If we are required to record a significant change to earnings in our consolidated financial statements because an impairment of goodwill is determined, our results of operations will be adversely affected.
 
Our leverage could adversely affect our financial health and make us vulnerable to adverse economic and industry conditions.
 
We have incurred indebtedness that is substantial relative to our shareholders’ investment.  Our indebtedness has important consequences.  For example, it could:
 
 
·
make it difficult for us to fulfill our obligations under our credit and other debt agreements;
 
·
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;
 
·
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, 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 objectives.  If an event of default under the 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, and a cross default could occur under the terms of our senior subordinated convertible notes allowing the trustee or the holders of the declare the principal amount of the notes, 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 business 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.
 
The Company has several pension plans and future legislation or regulations intended to reform the funding and reporting of pension benefit plans could adversely affect our operating results and cash flows, as could changes in market conditions that impact the assumptions we use to measure our liabilities under these plans.
 
Legislators and agencies of the U.S. government have proposed legislation and regulations to amend, restrict or eliminate various features of, and mandate additional funding of, pension benefit plans. If legislation or new regulations are adopted, we may be required to contribute additional cash to these plans, in excess of our current estimates.
 
 
 
9

 

Market volatility in interest rates, investment returns and other factors could also adversely affect the funded status of our pension plans and require that we contribute additional cash to these plans. Moreover, future changes to the accounting and reporting standards related to pension plans could create significant volatility in our operating results.
 
Cyclicality adversely affects us.
 
Our business is cyclical and dependent on industrial and consumer spending and is therefore impacted by the strength of the economy generally, interest rates and other factors.  Economic factors adversely affecting OEM production and consumer spending could adversely impact us.  During periods of expansion in OEM production, we generally have benefited from increased demand for our products.  Conversely, during recessionary periods, we have been adversely affected by reduced demand for our products.
 
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.
 
Several significant customers of our HVAC motors business represent a significant portion of our revenues.  Our success will depend on our continued ability to develop and manage relationships with these customers.  We expect that significant customer concentration will continue for the foreseeable future in our HVAC motor business.  Our dependence 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 significant 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 business.
 
Our 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.
 
Our dependence on, and the price of, raw materials may adversely affect our profits.
 
The principal raw materials used to produce our products are copper, aluminum and steel.  We source raw materials on a global or regional basis, and the prices of those raw materials are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency exchange rates, price controls, the economic climate and other unforeseen circumstances.  If we are unable to pass on raw material price increases to our customers, our future profitability may be materially adversely affected.
 
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 11,100 of our approximate 15,300 total employees and 18 of our 38 principal manufacturing facilities are located outside the United States.  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 climate 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 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 significantly may be limited.
 

 
10

 

The success of the Company 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.
 
The Company’s 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 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 introducing a global Enterprise Resource Planning (ERP) system that will redesign and deploy a common information system over a period of several years. 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 could subject us to future liabilities, fines or penalties or the suspension of production.  In addition, we are currently involved in some remediation activities at certain sites.  If unexpected obligations at these or other sites or more stringent environmental laws are imposed in the future, we could be adversely affected.
 
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 development costs in foreign operations, to the extent such costs are payable in foreign currency, when translated into U.S. dollars.
 
The operations and success of the Company can be 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.  The Company may also be impacted by actions by foreign governments, including currency devaluation, tariffs and nationalization, where our facilities are located which could disrupt manufacturing and commercial operations.
 
The Company is subject to changes in legislative, regulatory and legal developments involving income taxes.
 
The Company is 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 the Company’s results or operations, financial conditions and liquidity.  Currently, a significant amount of the Company’s revenue is generated from customers located outside of the United States, and a portion of the Company’s 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.
 
Several U.S. legislation proposals have been announced that would substantially reduce (or have the effect of substantially reducing) the Company’s ability to defer U.S. taxes on profit permanently reinvested outside the United States.  Proposals to date could have a negative impact on the Company’s financial position and operating results.  Additionally, they could have a negative impact on the Company’s ability to compete in the global
 

 
11

 

marketplace.  The probability of any of the se proposals being enacted cannot be predicted with any certainty.  The Company continues to monitor legislation to be in position to structure operations in a manner that will reduce the impact of enacted changes.
 
The Company is 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:
 
 
·
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 or labor;
 
·
changes in revenue or earnings estimates or publication of research reports by analysts; and
 
·
domestic and international economic and political factors unrelated to our performance.
 
In addition, the stock markets have experienced extreme volatility that has often been 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 50 manufacturing, service and distribution facilities, of which 32 are principal manufacturing facilities.  The Electrical segment’s present operating facilities contain a total of approximately 6.6 million square feet of space of which approximately 34% are leased.
 
Our Mechanical segment currently includes 12 manufacturing, service and distribution facilities, of which six are principal manufacturing facilities.  The Mechanical segment’s present operating facilities contain a total of approximately 1.1 million square feet of space of which approximately 3% are leased.
 
12

At January 2, 2010, the Mechanical segment had two buildings and the Electrical segment had two 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.
 
ELECTRICAL SEGMENT
     
Location
Sq Footage
Status
Use
Wuxi, China
623,268
Owned
Manufacturing
Kolkata, India
563,298
Owned
Manufacturing
Wausau, WI
498,329
Owned
Manufacturing
Juarez, Mexico (2)
416,631
Owned
Manufacturing
Reynosa, Mexico
346,293
Owned
Manufacturing
Springfield, MO
325,355
Owned
Manufacturing
Shanghai, China (2)
311,000
Leased
Manufacturing
Eldon, MO (2)
276,180
Owned
Manufacturing & Warehouse
Changzhou, China (2)
270,890
Owned & Leased
Manufacturing
Arnhem, The Netherlands (4)
252,144
Leased
Warehouse
Piedras Negras, Mexico (3)
244,048
Leased
Manufacturing & Warehouse
Cassville, MO
238,838
Owned
Manufacturing
Monterrey, Mexico (2)
235,624
Leased
Manufacturing
Indianapolis, IN
220,832
Leased
Warehouse
Faridabad, India
220,000
Leased
Manufacturing
Lebanon, MO (2)
194,400
Owned
Manufacturing
Bangkok, Thailand (2)
169,747
Owned
Manufacturing & Warehouse
West Plains, MO (2)
139,000
Owned
Manufacturing
Pharr, TX
125,000
Leased
Warehouse
Lincoln, MO
120,000
Owned
Manufacturing
Blytheville, AR
107,000
Leased
Manufacturing
Black River Falls, WI
103,000
Owned
Manufacturing
All Other (15)
591,655
(1)
(1)
       
MECHANICAL SEGMENT
     
Location
Sq Footage
Status
Use
Liberty, SC
173,516
Owned
Manufacturing
Aberdeen, SD
164,960
Owned
Manufacturing
Shopiere, WI
132,000
Owned
Manufacturing
Union Grove, WI
122,000
Owned
Manufacturing
All Other (8)
533,176
(2)
(2)

 
 (1)
Less significant manufacturing, service and distribution and engineering facilities located in the United States, Canada, Europe, and Asia: Electrical leased square footage 2,267,186
 
(2)
Mechanical leased square footage 36,492.
 
ITEM 3 -               LEGAL PROCEEDINGS
 
On July 30, 2009, we filed a response and counterclaims to an action filed by Nordyne, Inc. (“Nordyne”) in the U.S. District Court for the Eastern District of Missouri in which action Nordyne is seeking a judgment declaring that neither Nordyne’s G7 furnace systems nor its iQ Drive 23-seer air conditioning systems infringe on our ECM (electronically commutated motor) systems patents (U.S. Patent No. 5,592,058) (“the ‘058 Patent”) and/or that the ‘058 Patent is invalid.  In our response and counterclaims against Nordyne we are seeking a judgment that the ‘058 Patent is valid and that Nordyne has, in fact, infringed and continues to infringe the ‘058 Patent by making, using, offering for sale and selling it’s G7 furnace systems and iQ Drive 23-seer air conditioning systems.  We have also requested the U.S. District Court to enjoin Nordyne and all persons working in concert with Nordyne from further infringement of the ‘058 Patent and to award us compensatory and other damages caused by such infringement.  We intend to defend our intellectual property vigorously against the claims asserted by Nordyne and against any infringement by Nordyne or any other person.  We do not currently believe that the litigation will have a material effect on the Company’s financial position or its results of operations.
 
13

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.
 
ITEM 4 -               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
There were no matters submitted to a vote of security holders during the quarter ended January 2, 2010.
 
PART II
 
ITEM 5 -
      MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
The Company’s Common Stock, $.01 par value (“Common Stock”), 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 the Common Stock for the period from December 29, 2007 through January 2, 2010.  The Company submitted its Section 303A.12(a) CEO Certification to the NYSE on April 29, 2009.
 

 
   
2009
   
2008
 
   
Price Range
   
Price Range
 
   
High
   
Low
   
Dividends
Declared
   
High
   
Low
   
Dividends
 Declared
 
1st Quarter
  $ 38.83     $ 25.81     $ 0.16     $ 44.95     $ 33.94     $ 0.15  
2nd Quarter
    42.65       29.99       0.16       47.54       35.82       0.16  
3rd Quarter
    49.26       38.76       0.16       49.37       39.95       0.16  
4th Quarter
    53.76       43.43       0.16       42.52       26.07       0.16  

 
The Company has paid 198 consecutive quarterly dividends through January 2010.  The number of registered holders of Common Stock as of February 22, 2010 was 576.
 
The following table contains detail related to the repurchase of common stock based on the date of trade during the quarter ended January 2, 2010.
 
2009 Fiscal Month
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May be Purchased Under the Plan or Programs
 
September 27 to  October 31
    -     $ -       -       2,115,900  
                                 
November 1 to  November 28
    362     $ 51.56       -       2,115,900  
                                 
November 29 to  January 2, 2010
    354     $ 51.88       -       2,115,900  
                                 
Total
    716               -          

 
Under the Company’s equity incentive plans, participants may pay the exercise price or satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with plan awards by electing to a) have the Company withhold shares of common stock otherwise issuable under the award, b) tender back shares received in connection with such award or c) deliver previously owned shares of common stock, in each case having a value equal to the exercise price or the amount to be withheld.
 
The Board of Directors has approved repurchase programs of up to three million common shares of Company stock. Management is authorized to effect purchases from time to time in the open market or through privately negotiated transactions. As of December 27, 2008, the Company had repurchased 884,100 shares at an average purchase price of $21.96 per share under this program.  A total of 110,000 of these shares were repurchased in the fiscal year ended December 27, 2008 for a total cost of $4.2 million.  During 2009 the Company issued approximately 1.4 million shares, including all 884,100 treasury shares, in connection with the redemption of certain Convertible notes.  (See Note 8 of the Consolidated Financial Statements.)
 
Item 12 of this Annual Report on Form 10-K contains certain information relating to the Company's equity compensation plans.
 
14

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, except to the extent we specifically incorporate it by reference into such a filing.
 
The following graph compares the hypothetical total shareholder return (including reinvestment of dividends) on an investment in (1) the Common Stock of the Company, (2) the Standard & Poor’s Mid Cap 400 Index, (3) the Standard & Poor’s 400 Electrical Components and Equipment Index, (4) the Standard & Poor’s Small Cap 600 Index, and (5) the Standard & Poor’s 600 Electrical Components and Equipment Index for the period December 31, 2004 through January 2, 2010.  In each case, the graph assumes the investment of $100.00 on December 31, 2004.
 

 
 
2005
 
2006
 
2007
 
2008
 
2009
Regal-Beloit Corporation
125.81
 
188.89
 
163.76
 
125.74
 
195.27
S&P MidCap 400 Index
112.56
 
124.17
 
134.08
 
81.78
 
117.45
S&P 400 Electrical Components & Equipment
110.25
 
123.90
 
155.51
 
94.84
 
130.58
S&P SmallCap 600 Index
107.68
 
123.96
 
123.59
 
81.25
 
106.96
S&P 600 Electrical Components & Equipment
111.10
 
150.37
 
166.47
 
103.97
 
141.48

 
15

ITEM 6 -               SELECTED FINANCIAL DATA
 
The selected statement of income data for the years ended January 2, 2010, December 27, 2008, and December 29, 2007 and the balance sheet data at January 2, 2010, and December 27, 2008 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Annual Report on Form 10-K.  The selected statement of income data for the year ended December 30, 2006 and December 31, 2005 and the balance sheet data at December 29, 2007, December 30, 2006 and December 31, 2005 are derived from audited financial statements not included herein (1).
 
   
(In Thousands, Except Per Share Data)
 
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
 
   
January 2, 2010
   
December 27, 2008 (1)
   
December 29, 2007 (1)
   
December 30, 2006 (1)
   
December 31, 2005 (1)
 
Net Sales
  $ 1,826,277     $ 2,246,249     $ 1,802,497     $ 1,619,545     $ 1,428,707  
Income  from Operations
    159,520       230,431       206,060       194,017       134,572  
Net Income Attributable to Regal Beloit
    95,048       125,525       115,499       107,156       67,091  
Total Assets
    2,112,237       2,023,496       1,862,247       1,437,559       1,342,554  
Long-Term Debt
    468,065       560,127       552,917       313,351       371,463  
Regal Beloit Shareholders' Equity
    1,167,824       825,987       861,750       755,984       657,215  
Earnings Per Share of Common Stock:
                                       
Basic
    2.76       4.00       3.70       3.47       2.26  
Assuming Dilution
    2.63       3.78       3.40       3.20       2.17  
Cash Dividends Declared
    0.64       0.63       0.59       0.55       0.51  
Shareholders' Equity
    33.85       26.35       27.57       24.51       22.15  
Weighted Average Shares Outstanding (in 000's):
                                       
Basic
    34,499       31,343       31,252       30,847       29,675  
Assuming Dilution
    36,132       33,251       33,921       33,504       30,879  

 (1)
Adjusted for the 2009 adoption of new accounting guidance related to Convertible Debt and Noncontrolling Interests (See also Note 2 of the Consolidated Financial Statements).
 
ITEM 7 -               MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
OVERVIEW
 
Regal Beloit Corporation seeks to deliver strong, consistent business results and superior shareholder returns by providing value added products to our customers who serve the commercial, industrial, and residential markets. 
 
To this end, we are focused on two product segments: Electrical and Mechanical. Within these segments, we follow a well defined business strategy to develop and increase market leadership positions in key product categories and improve financial performance.   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), market share, 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 capital. The monitoring of these indicators, as well as our corporate governance practices (including the Company’s Code of Conduct), are used to ensure that business health and strong internal controls are maintained.
 
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 needs within our core product categories and identifying category expansion opportunities. These product needs are met through extensive product research and development efforts as well as through a disciplined acquisition strategy. Growth opportunities are emphasized that offer stronger market growth potential as a result of geographic based expansion, technology or industry expansion. The investments needed to fund our growth are developed through continuous, corporate-wide initiatives to lower costs and increase effective asset utilization. We also prioritize investments toward higher return on capital businesses.  Our management team is compensated based on a modified Economic Value Added (EVA) program which reinforces our capital allocation disciplines which drives capital allocation to increase shareholder value.  Our key metrics include: total sales growth, organic sales growth, operating margin percent, operating cash flow as a percent of net income and return on invested capital (ROIC).
 
Given the global economic slowdown, continued competitive marketplace and highly fluctuating raw material and energy costs, we anticipate that the near-term operating environment will remain challenging. However, we anticipate that our strong balance sheet and liquidity combined with productivity efforts, new products and the impact of our Lean Six Sigma program will provide additional funds for investment in support of key initiatives and new product development.
 
As of the beginning of fiscal 2009, the Company adopted new accounting guidance related to convertible debt and noncontrolling interests (see Note 2 of the Consolidated Financial Statements), which requires us to adjust previously disclosed consolidated financial statements to conform to the current period presentation.
 
16

RESULTS OF OPERATIONS
 

NET SALES
 
(In millions)
 
   
2009
   
2008
   
2007
 
Net Sales
  $ 1,826.3     $ 2,246.2     $ 1,802.5  
  Sales growth rate
    (18.7 %)     24.6 %     11.3 %
                         
Net Sales by Segment:
                       
  Electrical segment
  $ 1,637.7     $ 1,998.6     $ 1,559.0  
    Sales growth rate
    (18.1 %)     28.2 %     11.9 %
  Mechanical segment
  $ 188.6     $ 247.6     $ 243.5  
    Sales growth rate
    (23.8 %)     1.7 %     7.3 %


2009 versus 2008
 

Worldwide sales for year ended January 2, 2010 were $1.826 billion, an 18.7% decrease over the $2.246 billion reported for the year ended for December 27, 2008.  Full year 2009 sales included $57.8 million of incremental sales related to the 2008 acquired businesses and the CPT acquisition completed on January 2, 2009 (see Note 5 of the Consolidated Financial Statements).
 
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 continued to be negatively impacted by the weak housing markets; however, economic stimulus related spending, higher efficiency product mix, and low prior year comparables resulted in a 6.8% decrease during 2009 for the HVAC residential market.
 
Driven by weak end markets, commercial and industrial motor sales in North America for the year ended January 2, 2010 decreased 25.5% over sales for the year ended December 27, 2008.  Global generator sales decreased 42.6% for the year ended January 2, 2010 as compared to the prior year.
 
Sales in the Mechanical segment decreased 23.8% from the prior year period.  Weakness in end markets for all Mechanical segment businesses was experienced in 2009 as a result of weak industrial markets.
 
From a geographic perspective, Asia-based sales decreased 23.5% as compared to 2008.  In total, sales to regions outside of the United States were 26.9% of total sales for the year ended January 2, 2010 as compared to 27.1% in 2008.  The negative impact of foreign currency exchange rates decreased total sales by 0.3% for the year ended January 2, 2010 as compared to the prior year period.
 
2008 versus 2007
 
Worldwide sales for year ended December 27, 2008 were $2.246 billion, a 24.6% increase over the $1.802 billion reported for the year ended for December 29, 2007.  Full year 2008 sales included $404.5 million of incremental sales from the businesses acquired in 2007 and 2008 (see Note 5 of the Consolidated Financial Statements).
 
In the Electrical segment, sales increased 28.2% including the impact of the acquisitions noted above.  Exclusive of the acquired businesses, Electrical segment sales were up 2.2%. Sales for the residential HVAC motor business were negatively impacted by the weak housing markets, including new home construction and sales of existing homes.  Also, we believe that the replacement nature of our HVAC motors was negatively impacted by the lack of credit availability for homeowners who may have elected to repair HVAC systems rather than a full replacement. Sales for the full year 2008 for the HVAC business decreased 1.1%. We saw strength in sales of commercial and industrial motors and our power generation products throughout the majority of 2008, with global weakness in demand developing in the third and fourth quarters.  Sales of commercial and industrial motors increased approximately 2.8% for the full year 2008.  Sales of power generation products increased 21.9% for the same period.
 
Sales in the Mechanical segment increased 1.7% from the prior year period. Individual business results varied significantly depending on the strength of their end markets. Sales in the commercial and industrial product lines remained relatively strong throughout the year.  This strength was largely offset by weak sales in our Richmond Gear operation, which are dependent on consumer spending on discretionary auto and marine products.
 
From a geographic perspective, Asia-based sales increased 62.6% as compared to 2007.  In total, sales to regions outside of the United States were 27.1% of total sales for 2008 in comparison to 21.7% for 2007.

17


GROSS PROFIT
 
(In thousands)
 
   
2009
   
2008
   
2007
 
Gross Profit
  $ 424,224     $ 500,680     $ 413,353  
  Gross profit percentage
    23.2 %     22.3 %     22.9 %
                         
Gross Profit by Segment:
                       
  Electrical segment
  $ 379,017     $ 428,778     $ 343,445  
    Gross profit percentage
    23.1 %     21.5 %     22.0 %
  Mechanical segment
  $ 45,207     $ 71,902     $ 69,908  
    Gross profit percentage
    24.0 %     29.0 %     28.7 %


2009 versus 2008
 
The gross profit margin for the year ended January 2, 2010 was 23.2% as compared to 22.3% reported for 2008.  The gross profit margin for the Electrical segment was 23.1% for the year ended January 2, 2010 versus 21.5% in the prior year.  Electrical segment margins improved due to cost reduction efforts, including the benefit from recent plant consolidations, a mix change toward higher efficiency products in 2009, and short term net material cost savings.  Negative fixed cost absorption in our plants due to lower sales and production levels partially offset these gains.  The Mechanical segment gross margin was 24.0% for the year ended January 2, 2010 versus 29.0% in the prior year.  The Mechanical segment gross margin decreases were driven by negative fixed cost absorption impacts of lower production volumes.  Overall, high efficiency product sales across our business represented 17.2% of net sales in 2009 versus 12.8% for 2008.
 
2008 versus 2007
 
The gross profit margin for the year ended December 27, 2008 was 22.3% as compared to the 22.9% reported for 2007. Higher material costs had a significant impact on 2008 partially offset by the contribution from new products, productivity efforts, pricing actions, and product mix.  The raw material cost increases resulted primarily from increases in the cost of copper and steel.  The gross profit margin for the Electrical segment reflected these impacts and decreased to 21.5% from 22.0% in 2007. Mechanical segment gross profit margin increased to 29.0% in 2008 from 28.7% in the prior year.


OPERATING EXPENSES
 
(In thousands)
 
   
2009
   
2008
   
2007
 
Operating Expenses
  $ 264,704     $ 270,249     $ 207,293  
  As a percentage of net sales
    14.5 %     12.0 %     11.5 %
                         
Operating Expenses by Segment:
                       
  Electrical segment
  $ 234,117     $ 237,246     $ 173,756  
    As a percentage of net sales
    14.3 %     11.9 %     11.1 %
  Mechanical segment
  $ 30,587     $ 33,003     $ 33,537  
    As a percentage of net sales
    16.2 %     13.3 %     13.8 %


2009 versus 2008
 
Operating expenses were $264.7 million (14.5% of net sales) in the year ended January 2, 2010 versus $270.2 million (12.0% of net sales) in 2008.  Operating expenses included an incremental amount of approximately $13.8 million related to the acquired Hwada, Dutchi and CPT businesses.  Significant operating cost reductions were made in 2009 as sales volumes decreased due to the economic slowdown.  Electrical segment operating expenses were 14.3% of net sales for the year ended January 2, 2010 versus 11.9% in the prior year.   Mechanical segment operating expenses were 16.2% of net sales in 2009 and 13.3% in 2008.
 
2008 versus 2007
 
Operating expenses were $270.2 million (12.0% of net sales) in the year ended December 27, 2008 versus $207.3 million (11.5% of sales) in 2007. The $62.9 million increase is driven by the full year impact of 2007 acquisitions and the 2008 acquisitions. Electrical segment operating expenses were 11.9% of sales in 2008 and 11.1% of sales in 2007.  Mechanical operating expenses as a percent of sales decreased to 13.3% from 13.8% in 2007.


INCOME FROM OPERATIONS
 
(In thousands)
 
   
2009
   
2008
   
2007
 
Income from Operations
  $ 159,520     $ 230,431     $ 206,060  
  As a percentage of net sales
    8.7 %     10.3 %     11.4 %
                         
Income from Operations by Segment:
                       
  Electrical segment
  $ 144,901     $ 191,532     $ 169,689  
    As a percentage of net sales
    8.8 %     9.6 %     10.9 %
  Mechanical segment
  $ 14,619     $ 38,899     $ 36,371  
    As a percentage of net sales
    7.8 %     15.7 %     14.9 %


18

2009 versus 2008
 
Income from operations was $159.5 million for the year ended January 2, 2010 and $230.4 million in the prior year.  As a percentage of sales, income from operations was 8.7% in 2009 versus 10.3% in 2008.  Income from operations declined, but was partially offset by cost reduction efforts, including the benefit from recent plant consolidations, a mix toward higher efficiency products in 2009, and short term net material cost savings. Offsetting these factors were negative impacts from lower fixed cost absorption.  Electrical segment income from operations was 8.8% of net sales in 2009 versus 9.6% in 2008.  Driven by negative fixed cost absorption impacts of lower production volumes, the Mechanical segment income from operations was 7.8% of net sales for 2009 versus 15.7% of net sales in 2008.
 
2008 versus 2007
 
Income from operations was $230.4 million versus $206.1 million in the comparable period of 2007.  As a percent of sales, income from operations was 10.3% for the year ended December 27, 2008 versus 11.4% in the comparable period of 2007.  Electrical segment income from operations increased 12.9% to $191.5 million from $169.7 million in 2007 driven by the acquired businesses. As a percent of sales, Electrical segment operating income decreased to 9.6% in 2008 from 10.9% in 2007. This decrease reflected lower operating profit margins from the acquired businesses, and significantly increased raw material costs partially offset by contributions from new products, pricing actions, and productivity. Mechanical segment income from operations increased 7.0% to $38.9 million in 2008 from $36.4 million in 2007. As a percent of sales, Mechanical segment operating income increased to 15.7% in 2008 from 14.9% in 2007. Individual business results varied significantly based on the strength of their end markets.


INTEREST EXPENSE, NET
 
(In thousands)
 
   
2009
   
2008
   
2007
 
Interest Expense, Net
  $ 21,565     $ 31,168     $ 25,717  
   Year End Weighted Average Interest Rate
    3.6 %     4.1 %     4.9 %


2009 versus 2008
 
Net interest expense for the year ended January 2, 2010 was $21.6 million versus $31.2 million for the year ended December 27, 2008.  During 2009, the Company’s interest expense decreased driven by the redemption of $75.8 million of Convertible Notes (see Note 8 of the Consolidated Financial Statements).  Interest income increased in 2009 due to higher cash balances as a result of our strong operating cash flow and the May 2009 secondary stock offering.  (See also Liquidity and Capital Resources discussion following.)
 
2008 versus 2007
 
Net interest expense was $31.2 million versus $25.7 million in the comparable period of 2007.  The increase is driven by higher levels of average debt outstanding driven by the acquisitions completed since August 2007.


PROVISION FOR INCOME TAXES
 
(In thousands)
 
   
2009
   
2008
   
2007
 
Income Taxes
  $ 39,276     $ 70,349     $ 61,937  
   Effective Tax Rate
    28.5 %     35.3 %     34.3 %


2009 versus 2008
 
The effective tax rate for the year ended January 2, 2010 was 28.5% compared to 35.3% in the prior year period.  The decrease in the effective tax rate is driven by changes in the global distribution of income, as well as adjustments to tax reserves due to a statutory expiration.  (See Note 11 of the Consolidated Financial Statements.)
 
2008 versus 2007
 
The effective tax rate for the year ended December 27, 2008 was 35.3% versus 34.3% in the prior year period.  The increase in the effective tax rate results from the global distribution of income and increases in certain statutory tax rates in Mexico and China.


NET INCOME ATTRIBUTABLE TO REGAL BELOIT CORPORATION AND EARNINGS PER SHARE
 
   
(In millions, except per share data)
 
   
2009
   
2008
   
2007
 
Net Income Attributable to Regal Beloit Corporation
  $ 95.0     $ 125.5     $ 115.5  
Fully Diluted Earnings per Share
  $ 2.63     $ 3.78     $ 3.40  
   Average Number of Diluted Shares
    36.1       33.3       33.9  


2009 versus 2008
 
Net Income Attributable to Regal Beloit Corporation for the year ended January 2, 2010 was $95.0 million, a decrease of 24.3% versus the $125.5 million reported in 2008.  Fully diluted earnings per share was $2.63 as compared to $3.78 reported for the year ended December 27, 2008.  The average number of diluted shares was 36,131,607 during the year ended January 2, 2010 as compared to 33,250,689 during the year ended December 27, 2008.
 
19

2008 versus 2007
 
Net Income Attributable to Regal Beloit Corporation for the year ended December 27, 2008 was $125.5 million, an increase of 8.7% versus the $115.5 million reported in the comparable period of 2007.  Fully diluted earnings per share was $3.78 as compared to $3.40 per share reported in 2007.  The average number of diluted shares was 33,250,689 during the year ended December 27, 2008 as compared to 33,920,886 during the comparable period of 2007.
 
LIQUIDITY AND CAPITAL RESOURCES
 
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.
 
Recent distress and volatility in financial markets has created increased levels of uncertainty regarding available debt and equity capital.  We have assessed our liquidity and continue to monitor the impact of the broader volatility on our business including vendors and customers.  We have determined that there has not been a significant impact on our financial position, results of operations, or liquidity during 2009.
 
Our working capital was $670.3 million at January 2, 2010, an increase of 55.8% from $430.3 million at year-end 2008.  At January 2, 2010 our current ratio, the ratio of our current assets to current liabilities, was 3.2:1 versus 2.0:1 at the previous year-end.
 
Cash flow provided by operating activities (“operating cash flow”) was $314.9 million in 2009, a $160.7 million increase from 2008.   The increase was driven by a combined $95.2 million increase in net cash provided from Receivables, Inventory and Accounts Payable. These working capital components provided $96.2 million of operating cash in 2009 versus a combined $1.0 million provided in 2008. The $85.5 million increase in net cash flow used in Current Liabilities and Other is driven by a $52.4 million net change in deferred tax assets related to derivative instruments.
 
Cash flow used in investing activities was $151.6 million in 2009, $51.9 million more than in 2008 driven by the net purchase of investment securities of $117.6 million partially offset by lower acquisitions and lower capital expenditures in 2009. Capital spending decreased to $33.6 million in 2009 from $52.2 million a year earlier.  Our commitments for property, plant and equipment as of January 2, 2010 were approximately $5.2 million.  We believe that our present facilities, augmented by planned capital expenditures, are sufficient to provide adequate capacity for our operations in 2010.
 
Cash flow provided by financing activities was $32.9 million in 2009 compared to cash flow used of $31.4 million in 2008.  On May 22, 2009, the Company completed a public offering of 4,312,500 shares of Common Stock at a price of $36.25 per share, resulting in $150.4 million of net proceeds.  We paid $21.6 million in dividends to shareholders in 2009.
 
At January 2, 2010, the Company had $250.0 million of Senior notes (“the Notes”) outstanding.  The Notes were sold pursuant to a Note Purchase Agreement (the “Agreement”) by and among the Company and the purchasers of the Notes.  The Notes were issued and sold in two series:  $150.0 million in Floating Rate Series 2007A Senior Notes, Tranche A, due August 23, 2014, and $100.0 million in Floating Rate Series 2007A Senior Notes, Tranche B, due August 23, 2017.  The Notes bear interest at a margin over the London Inter-Bank Offered Rate (“LIBOR”), which margin varies with the ratio of the Company’s consolidated debt to consolidated earnings before interest, taxes, deprecation, and amortization (“EBITDA”) as defined in the Agreement.  These interest rates also vary as LIBOR varies. The Agreement permits the Company to issue and sell additional note series, subject to certain terms and conditions described in the Agreement, up to a total of $600.0 million in combined Notes.
 
The Company’s $500.0 million revolving credit facility, (“the Facility”)  permits the Company to borrow at interest rates (0.9% at January 2, 2010)  based upon a margin above LIBOR, which margin varies with the ratio of senior funded debt (total debt excluding convertible 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 senior funded debt to EBITDA.
 
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 under the Term Loan generally bear interest at a variable rate equal to (i) a margin over the LIBOR, which margin varies depending on whether certain criteria are satisfied, or (ii) the alternate base rate as defined in the agreement.  At January 2, 2010, the interest rate of 1.2% 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 2, 2010.
 
20

The Company has interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 14 of the Consolidated Financial Statements.)
 
The Company also had $39.2 million and $113.9 million of convertible senior subordinated notes outstanding at January 2, 2010 and December 27, 2008 respectively.  As of January 2, 2010 the notes are convertible as the closing price of the Company’s common stock exceeded the contingent conversion price for the specified amount of time.  The notes, which are unsecured and due in 2024, bear interest at a fixed rate of 2.75% for five years, and may increase thereafter at .25% of the average trading price of a note if certain conditions are met.  The Company must pay cash for the par value, but retained the option to either pay cash, issue its stock or a combination thereof, for value above par.  During the year ended January 2, 2010, a total of $75.8 million face value of bonds was converted by the holders.  The Company paid cash to redeem the par value of the debt and paid the conversion premium through issuance of approximately 1.4 million shares.  The fair value of these notes at January 2, 2010 was approximately $82.8 million as compared to the fair value at December 27, 2008 of $154.0 million.  The Company has sufficient long-term liquidity in its Facility ($485.0 million at January 2, 2010) to repay any notes converted by their holders.
 
As part of the 2008 acquisition of Hwada (see Note 5 of the Consolidated Financial Statements), the Company assumed $21.6 million of short-term notes payable to banks. As of January 2, 2010, these notes have been paid, at December 27, 2008 the balance of Hwada notes payable was approximately $11.0 million.
 
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%.  As of December 27, 2008, this subsidiary had outstanding borrowings of $4.1 million denominated in local currency with a weighted average interest rate of 3.4%.
 
At January 2, 2010, additional short-term notes payable of approximately $11.2 million were outstanding with a weighted average interest rate of 4.8%.
 

The Company is exposed to interest rate risk on certain of its short-term and long-term debt obligations used to finance our operations and acquisitions.  At January 2, 2010, net of interest rate swaps, we had $305.8 million of fixed rate debt and $170.6 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 2, 2010 would result in a change in net income of approximately $0.2 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 continue to act to reduce our investment in working capital through 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 are in compliance with all of our debt covenants at the end of 2009.  We believe that we will continue to be in compliance with these covenants for the foreseeable future as we believe that we will continue to reduce outstanding debt balances during fiscal year 2010 and maintain an appropriate level of EBITDA.  However, our EBITDA performance is dependent on our financial performance in these uncertain and challenging market conditions which developed in 2008 and have continued through 2009.
 
The primary financial covenants on our senior 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 2, 2010 was approximately 2.1:1.  The minimum interest coverage ratio requires us to be greater than 3.0:1, and our ratio at January 2, 2010 was approximately 9.9:1.
 
We will, from time to time, maintain positive 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 shares.
 
Our projections are based on all information known to the Company, which may change based on global economic events, our financial performance, actions by our customers and competitors and other factors discussed in Item 1A, Risk Factors.
 
21

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
 
The following is a summary of the Company’s contractual obligations and payments due by period as of January 2, 2010 (in millions):
 
Payments due by Period
 
Debt
Including
Estimated*
Interest Payments
   
Operating
Leases
   
Pension
Obligations
   
Purchase
and Other
Obligations
   
Total
Contractual
Obligations
 
Less than 1 Year
  $ 25.4     $ 16.3     $ 1.5     $ 182.3     $ 225.5  
1 - 3 Years
    75.9       21.9       -       -       97.8  
3 - 5 Years
    341.6       9.5       -       -       351.1  
More than 5 Years
    110.8       6.7       -       -       117.5  
Total
  $ 553.7     $ 54.4     $ 1.5     $ 182.3     $ 791.9  

NOTE:
The timing and future spot prices affect the settlement values of the Company’s 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 the Company’s 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 2, 2010.
 
*  Variable rate debt based on January 2, 2010 rates.
 
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 2, 2010, the Company had outstanding standby letters of credit totaling approximately $12.2 million. We had no other material commercial commitments.
 
The Company did not have any material variable interest entities as of January 2, 2010 and December 27, 2008.  Other than disclosed in the table above and the previous paragraph, the Company 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.
 
Impairment of Long-Lived Assets or Goodwill and Other Intangibles
 
We evaluate the recoverability of the carrying amount of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable through future cash flows.  We evaluate the recoverability of goodwill and other intangible assets 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 an impairment is necessary.  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 impairment test as of the end of the October fiscal month each year.
 
The key assumptions used in the discounted cash flow valuation model 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 2009 impairment testing exceed the carrying values of the reporting units.
 
As a result of our 2009 annual impairment review, we recorded a $0.5 million impairment for our Mechanical reporting unit, primarily related to auto and marine products that are dependent on consumer discretionary spending that have not met their performance plans.
 
Derivatives
 
The Company periodically enters 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.  The Company also uses 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 the Company 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 the Consolidated Financial Statements.)
 
22

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 the Consolidated Financial Statements.
 
New Accounting Pronouncements
 

Recent accounting guidance will change the consolidation rules as they relate to variable interest entities (VIE’s).  The guidance changes the model related to consolidating a VIE, and defines the assessment methodology for determining VIE status.  The guidance is effective beginning on the first day of fiscal year 2010.  The adoption of this guidance will not have a material effect on the Company’s consolidated financial statements.
 
Recent accounting guidance requires disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies as well as in annual financial statements.  The guidance amends only the Company’s disclosure requirements.  (See Note 15 of the Consolidated Financial Statements for information regarding the fair value of financial instruments at January 2, 2010.)
 
In the first quarter of 2009, the Company adopted new accounting guidance which requires convertible debt securities that may be settled on conversion by the issuer fully or partially in cash, be split into a debt and equity component.  The guidance is effective for fiscal years (and interim periods) beginning after December 15, 2008 and must be applied retroactively to all past periods presented.  The Company adopted the guidance on its effective date.  (See Note 4 of the Consolidated Financial Statements.)
 
Also in 2009, the Company adopted updated accounting guidance which requires expanded disclosures about derivative instruments and hedging activities.  The guidance is effective for fiscal years and interim periods beginning after November 15, 2008, with earlier adoption permitted.  The Company adopted the new guidance in our financial statements and related disclosures beginning in the first quarter of 2009.  (See Note 14 of the Consolidated Financial Statements.)
 
In 2009, the Company adopted new guidance which establishes general standards and requirements for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The Company has evaluated subsequent events as required under the guidance.  (See also Note 17 of Notes to Consolidated Financial Statements.)
 
In 2009, the Company adopted new guidance which requires disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies as well as in annual financial statements.  The provisions are effective for the Company’s interim period ending on or after June 27, 2009.  The guidance amends only the Company’s disclosure requirements.  (See also Note 15 of Notes to Consolidated Financial Statements)
 
In 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification”) to become the single official source of authoritative, nongovernmental U.S.  Generally Accepted Accounting Principles (“GAAP”), except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants.  The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Codification did not change GAAP but reorganizes the literature using a consistent structure organized by topic, subtopic, section and paragraph, each of which is identified by a numerical designation.  As the Codification was not intended to change or alter existing GAAP, it did not impact the consolidated financial statements.
 
New accounting guidance issued after the effective date of the Codification will be issued in the form of Accounting Standards Updates (“ASUs”).  ASUs will not be considered authoritative in their own right, but instead will serve to update the Codification.
 
Recent accounting guidance has changed the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity.  This new consolidation method significantly changed the accounting for transactions with minority interest holders.  As required, the Company has adopted the new guidance for presentation and disclosure requirements in our financial statements which was applied retroactively to all periods presented.
 
23

There is also new accounting guidance which affects business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The new guidance established principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interest in the acquiree, goodwill or gain from a bargain purchase and accounting for transaction costs.  Additionally, the guidance determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The Company adopted the guidance upon its effective date.
 
Further discussion of the Company’s accounting policies is contained in Note 3 of the Consolidated Financial Statements.
 
ITEM 7A -            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk relating to the Company’s operations due to changes in interest rates, foreign currency exchange rates and commodity prices of purchased raw materials.  We manage the exposure to these risks through a combination of normal operating and financing activities and derivative financial instruments such as interest rate swaps, commodity cash flow hedges and foreign currency forward exchange contracts.
 
The Company is exposed to interest rate risk on certain of its short-term and long-term debt obligations used to finance our operations and acquisitions.  At January 2, 2010, net of interest rate swaps, we had $305.8 million of fixed rate debt and $170.6 million of variable rate debt.  As a result, interest rate changes impact future earnings and cash flow assuming other factors are constant.  The Company utilizes interest rate swaps to manage fluctuations in cash flows resulting from exposure to interest rate risk on forecasted variable rate interest payments.  Details regarding the instruments, as of January 2, 2010, are as follows:
 

Instrument
Notional
Amount
Maturity
Rate
Paid
 
Rate Received
Fair Value
  (Loss)
Swap
$150.0 million
August 23, 2014
5.3 %
LIBOR (3 month)
($17.7) million
Swap
$100.0 million
August 23, 2017
5.4 %
LIBOR (3 month)
($13.5) million

A hypothetical 10% change in our weighted average borrowing rate on outstanding variable rate debt at January 2, 2010, would result in a change in after-tax annualized earnings of approximately $0.2 million.
 

We are also exposed to foreign currency risks that arise from normal business operations.  These risks include the translation of local currency balances of foreign subsidiaries, intercompany loans with foreign subsidiaries and transactions denominated in foreign currencies.  Our objective is to minimize our exposure to these risks through a combination of normal operating activities and the utilization of foreign currency contracts to manage our exposure on the transactions denominated in currencies other than the applicable functional currency.  Contracts are executed with creditworthy banks and are denominated in currencies of major industrial countries.  It is our policy not to enter into derivative financial instruments for speculative purposes.  We do not hedge our exposure to the translation of reported results of foreign subsidiaries from local currency to United States dollars.
 
All hedges are recorded on the balance sheet at fair value and are accounted for as cash flow hedges, with changes in fair value recorded in accumulated other comprehensive income (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.
 
The Company periodically enters 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 of $4.4 million are recorded in Prepaid Expenses at January 2, 2010.  Derivative commodity liabilities of ($62.2) million are recorded in Hedging Obligations at December 27, 2008.   The unrealized gain/(loss) on the effective portion of the contracts of  $2.2 million net of tax and ($32.9) million net of tax, as of January 2, 2010 and December 27, 2008, respectively, was recorded in AOCI.  At January 2, 2010, the Company 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.  At December 27, 2008, the Company had an additional ($13.6) million, net of tax, of derivative commodity losses on closed hedge instruments in AOCI that were realized in earnings when the hedged items impacted earnings.
 
The Company uses a cash hedging strategy to protect against an increase in the cost of forecasted foreign currency denominated transactions.  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. At December 27, 2008 derivative currency liabilities of ($30.8) million were recorded in Hedging Obligations.  The unrealized loss on the effective portion of the contracts of ($2.7) million net of tax, and ($20.1) million net of tax, as of January 2, 2010 and December 27, 2008, was recorded in AOCI. At January 2, 2010, the Company had an additional ($0.6) million, net of tax of derivative currency losses on closed hedge instruments in AOCI that will be realized in earnings when the hedged items impact earnings.  At December 27, 2008, the Company had an additional ($1.6) 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.
 
24

The Company has LIBOR-based floating rate borrowings, which expose the Company to variability in interest payments due to changes in interest rates.  The Company has entered into pay fixed/receive LIBOR-based floating interest rate swaps to manage fluctuations in cash flows resulting from interest rate risk.  These interest rate swaps have been designated as cash flow hedges against forecasted LIBOR-based interest payments.  As of January 2, 2010 and December 27, 2008, an interest rate swap liability of ($31.2) million and ($49.6) million was included in Hedging Obligations, respectively.  The unrealized loss on the effective portion of the contracts of ($19.3) million and ($30.7) million, net of tax as of January 2, 2010 and December 27, 2008 respectively, was recorded in AOCI.
 
The net AOCI balance of ($18.4) million loss at January 2, 2010 includes ($7.2) million of net current deferred losses expected to be realized in the next twelve months.
 
ITEM 8 -               FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Quarterly Financial Information
(Unaudited)
 
   
(In Thousands, Except Per Share Data)
 
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Net Sales
  $ 443,274     $ 536,343     $ 454,550     $ 606,316     $ 465,192     $ 620,607     $ 463,261     $ 482,983  
Gross Profit
    90,570       122,099       94,622       131,177       113,869       132,797       125,163       114,607  
Income from
                                                               
Operations
    28,192       57,612       29,467       67,494       48,318       65,734       53,543       39,591  
Net Income,
   Attributable to
   Regal Beloit Corporation (1)
    12,787       31,427       16,452       37,313       31,150       36,139       34,659       20,646  
Earnings Per Share (1) (2):
                                                               
Basic
    0.41       1.00       0.49       1.19       0.86       1.15       0.94       0.66  
Assuming Dilution
    0.39       0.95       0.47       1.11       0.82       1.07       0.90       0.63  
Weighted Average Number of
                                                               
Shares Outstanding:
                                                               
Basic
    31,457       31,317       33,256       31,306       36,056       31,357       37,031       31,393  
Assuming Dilution
    32,595       33,117       35,105       33,526       38,183       33,716       38,410       32,623  
                                                                 
Net Sales
                                                               
Electrical
  $ 391,362     $ 473,793     $ 407,244     $ 541,055     $ 422,006     $ 556,529     $ 417,056     $ 427,265  
Mechanical
    51,912       62,550       47,306       65,261       43,186       64,078       46,205       55,718  
                                                                 
Income from Operations
                                                               
Electrical
    21,906       47,565       25,339       57,894       45,796       56,597       51,860       29,476  
Mechanical
    6,286       10,047       4,128       9,600       2,522       9,137       1,683       10,115  

(1)
Adjusted for the 2009 adoption of new accounting guidance related to Convertible Debt and Noncontrolling Interests (see also Note 2 of the Consolidated Financial Statement).
 
(2)
Due to the weighting of both the Company’s earnings and the weighted average number of shares outstanding, the sum of the quarterly earnings may not equal the annual earnings per share.
 

 
25

 

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.  Regal Beloit Corporation 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 2, 2010.  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 2, 2010, 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 2, 2010 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
March 1, 2010
 

 

 
26

 

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 2, 2010 and December 27, 2008, 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 2, 2010. 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 2, 2010, 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 2, 2010 and December 27, 2008, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2010, 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 2, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
As discussed in Note 2 to the consolidated financial statements, the Company adopted new accounting guidance in 2009 related to the accounting for convertible debt instruments and noncontrolling interests.

/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 1, 2010

 
27

 
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars, Except Shares Outstanding and Per Share Data)
 
   
For the Year Ended
 
   
January 2,
2010
   
(As adjusted,
see Note 2)
December 27, 2008
   
(As adjusted, see Note 2)
December 29, 2007
 
Net Sales
  $ 1,826,277     $ 2,246,249     $ 1,802,497  
                         
Cost of Sales
    1,402,053       1,745,569       1,389,144  
                         
Gross Profit
    424,224       500,680       413,353  
                         
Operating Expenses
    264,704       270,249       207,293  
                         
Income From Operations
    159,520       230,431       206,060  
                         
Interest Expense
    23,284       32,647       26,650  
                         
Interest Income
    1,719       1,479       933  
                         
Income Before Taxes & Noncontrolling Interests
    137,955       199,263       180,343  
                         
Provision For Income Taxes
    39,276       70,349       61,937  
                         
Net Income
    98,679       128,914       118,406  
                         
Less:  Net Income Attributable to Noncontrolling
       Interests, net of tax
    3,631       3,389       2,907  
                         
Net Income Attributable to Regal Beloit Corporation
  $ 95,048     $ 125,525     $ 115,499  
                         
Earnings Per Share of Common Stock:
                       
                         
Basic
  $ 2.76     $ 4.00     $ 3.70  
                         
Assuming Dilution
  $ 2.63     $ 3.78     $ 3.40  
                         
Weighted Average Number of Shares Outstanding:
                       
                         
 Basic
    34,498,674       31,343,330       31,252,145  
                         
Assuming Dilution
    36,131,607       33,250,689       33,920,886  

See accompanying Notes to the Consolidated Financial Statements.

 

 
28

 

REGAL BELOIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share and Per Share Data)

ASSETS
 
January 2, 2010
   
(As adjusted, see Note 2)
December 27, 2008
 
Current Assets:
           
Cash and Cash Equivalents
  $ 262,422     $ 65,250  
    Investments - Trading Securities
    117,553       -  
    Trade Receivables, less Allowances
      of $12,666 in 2009 and of $11,145 in 2008
    240,721       294,326  
Inventories
    268,839       359,918  
Prepaid Expenses and Other Current Assets
    59,168       66,594  
Deferred Income Tax Benefits
    30,673       75,174  
Total Current Assets
    979,376       861,262  
Property, Plant and Equipment:
               
Land and Improvements
    42,034       39,982  
Buildings and Improvements
    127,468       127,018  
Machinery and Equipment
    484,274       457,063  
Property, Plant and Equipment, at Cost
    653,776       624,063  
Less - Accumulated Depreciation
    (310,705 )     (265,691 )
Net Property, Plant and Equipment
    343,071       358,372  
                 
Goodwill
    663,920       672,475  
Intangible Assets, Net of Amortization
    116,426       120,784  
Other Noncurrent Assets
    9,444       10,603  
Total Assets
  $ 2,112,237     $ 2,023,496  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts Payable
  $ 161,902     $ 202,456  
Dividends Payable
    5,981       5,024  
Accrued Compensation and Employee Benefits
    50,722       64,207  
Other Accrued Expenses
    76,612       63,457  
Hedging Obligations
    5,464       80,578  
Current Maturities of Debt
    8,385       15,280  
Total Current Liabilities
    309,066       431,002  
                 
Long-Term Debt
    468,065       560,127  
Deferred Income Taxes
    72,418       72,119  
Hedging Obligations
    31,232       61,958  
Pension and other Post Retirement Benefits
    39,306       43,768  
Other Noncurrent Liabilities
    12,082       16,881  
                 
Commitments and Contingencies (see Note 12)
               
                 
Equity:
               
Regal Beloit Corporation Shareholders' Equity:
               
Common Stock, $.01 par value, 100,000,000 shares authorized,
       37,399,353 issued in 2009, and 32,282,395 shares issued in 2008
    374       323  
Additional Paid-In Capital
    512,282       356,231  
Less - Treasury Stock, at cost, 884,100 shares in 2008
    -       (19,419 )
Retained Earnings
    703,765       631,281  
Accumulated Other Comprehensive Loss
    (48,597 )     (142,429 )
Total Regal Beloit Corporation Shareholders' Equity
    1,167,824       825,987  
Noncontrolling Interests
    12,244       11,654  
Total Equity
    1,180,068       837,641  
Total Liabilities and Equity
  $ 2,112,237     $ 2,023,496  

See accompanying Notes to the Consolidated Financial Statements.

 
29

 
REGAL BELOIT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(In Thousands of Dollars, Except Per Share Data)
   
Regal Beloit Corporation Shareholders' Equity
         
   
Common Stock $.01 Par Value
 
Additional Paid-In Capital
 
Treasury Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Noncontrolling
Interests
 
Total
Equity
 
Balance as of December 30, 2006
  $ 318   $ 342,661   $ (15,228 ) $ 428,461   $ (228 ) $ 9,634   $ 765,618  
(As Adjusted, See Note 2)
                                           
                                             
Net Income
  $ -   $ -   $ -   $ 115,499   $ -   $ 2,907   $ 118,406  
Dividends Declared ($.59 per share)
    -     -     -     (18,454 )   -     -   $ (18,454 )
Stock Options
   Exercised including income tax benefit and share cancellations
    3     2,469     -     -     -     -   $ 2,472  
Stock-based Compensation
    -     3,841     -     -     -     -   $ 3,841  
Distribution to Noncontrolling
   Interests
    -     -     -     -     -     (2,741 ) $ (2,741 )
Other Comprehensive Income
   (see detail Comprehensive Income Statement)
    -     -     -     -     2,408     742   $ 3,150  
Balance as of December 29, 2007
   (As adjusted, see Note 2)
  $ 321   $ 348,971   $ (15,228 ) $ 525,506   $ 2,180   $ 10,542   $ 872,292  
                                             
                                             
Net Income
  $ -   $ -   $ -