ITEM
1 -
BUSINESS
OUR
COMPANY
We are
one of the largest global manufacturers of commercial, industrial, and HVAC
electric motors, electric generators and controls, and mechanical motion control
products. Many of our products hold leading market 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 penetrate 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, capacitors and
electrical connecting devices. Our mechanical products include gears and
gearboxes, marine transmissions, high-performance automotive transmissions and
ring and pinions and manual valve actuators. 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 market penetration by leveraging
cross-marketing and product line combination opportunities between our
electrical and mechanical products.
We market
our products through multiple business units, with each typically having its own
branded product offering and sales organization. These sales
organizations consist of varying combinations of our own internal direct sales
people as well as exclusive and non-exclusive manufacturers’ representative
organizations. We manufacture the vast majority of the products that we sell,
and 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;
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·
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Customer
Centricity: making continuous improvements in all of the operations that
touch our customers so that our customers feel an improved
experience;
|
·
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Digitization:
employing IT tools to improve the efficiency and productivity of our
business and our customers’ businesses;
and
|
·
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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 December 29, 2007 is contained in Note 12 of Notes to the
Consolidated Financial Statements.
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 estimated that approximately 60% 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, capacitors and electrical connecting
devices. Our Electrical segment 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 acquisitions of Marathon Electric
Manufacturing Corporation in 1997, the Lincoln Motors business of Lincoln
Electric Holdings, Inc. in 1999 and LEESON Electric Corporation in 2000, we
believe we became one of the largest producers of industrial electric motors
serving the North American market. In 2004, we separately acquired
two electric motor businesses from General Electric Company (“GE”) which were
natural extensions to our core electric motor product lines. We
acquired GE’s commercial AC motors business, which manufactures a full line of
alternating current motors for pump, compressor and commercial heating,
ventilating and air conditioning (“HVAC”) applications, as well as GE’s HVAC
motors and capacitors businesses, which produce a full line of electric motors
for use principally in residential HVAC systems, as well as capacitors for HVAC
systems, high intensity lighting and other applications.
During
2007, the Company completed acquisitions of four additional Electrical segment
businesses.
On August
31, 2007, the Company completed the acquisition of certain assets comprising the
commercial and industrial division of the Fasco Motor business (“Fasco”) from
Tecumseh Products, Inc. and certain of its affiliates. On August 31,
2007, the Company also separately acquired the stock of Jakel Incorporated
(“Jakel”). Both of the acquired businesses manufacture and market
motors and blower systems for a variety of air moving applications including
alternative fuel systems, water heaters, HVAC systems and other commercial
products. In January 2008, the Company announced that it is
consolidating the Fasco and Jakel businesses under the Fasco brand
name. The acquisition provides expanded system solutions for our
customers, and expands our geographic manufacturing and commercial footprints
into Thailand and Australia.
On
October 12, 2007, the Company acquired Morrill Motors. The acquired
business is a leading designer and manufacturer of fractional horsepower motors
and components for the commercial refrigeration and freezer
markets. Included in the motor offering are technology based variable
speed products. The acquisition expands our standard and high
efficiency system solution for the commercial refrigerator and freezer end
markets.
On
October 29, 2007, the Company acquired the Alstom motors and fans business in
India. The business is located in Kolkata, India and manufactures and
markets a full range of low and medium voltage industrial motors and fans for
the industrial and process markets in India. Alstom is noted for high
quality process duty motors with a full range from 1 to 3500 hp. The
acquisition expands our commercial and manufacturing presence in India, making
us one of the largest motor manufacturers in India. The acquired
Alstom business has been re-branded as Marathon Electric Motors (India)
Ltd.
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 3500 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 and electrical
connecting devices such as terminal blocks, fuse holders and power blocks.
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.
SEGMENT
BUSINESSES
The
following is a description of our major Electrical product businesses and the
primary products that they manufacture and market:
Fasco
Motors.
Manufactures motors and blower systems for air moving
applications including alternative fuel systems, water heaters and HVAC
systems. The acquired Jakel, Inc. business was consolidated with
Fasco in January 2008 under the Fasco brand name.
GE Commercial Motors by REGAL
BELOIT
. Manufactures a full line of motors for pump, compressor,
commercial and residential HVAC applications. Also, manufactures
capacitors for use in HVAC systems, high intensity lighting and other
applications.
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. (Alstom acquired business).
The acquired Alstom business
has been re-branded as 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.
Marathon Special Products
.
Manufactures fuse holders, terminal blocks, and power blocks primarily for the
HVAC, telecommunications, electric control panel, utilities and transportation
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.
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; and manual valve actuators. 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.
SEGMENT
BUSINESSES
The
following is a description of our major Mechanical segment businesses 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.
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. In the preceeding ten years we have acquired and developed
our Electrical segment businesses into one of the largest producers of electric
motors serving the North America market. We consider the
identification of acquisition candidates, the purchase and integration of
targets to be a core competency for the Company. The following table summarizes
select Electrical segment acquisitions since 1997.
Product
Line
|
Year
Acquired
|
Annual
Revenues
at
Acquisition
(in
millions)
|
Product Listing at
Acquisition
|
Electrical
Products
|
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
|
|
|
|
|
|
|
LEESON
Electric Corporation
|
2000
|
|
175
|
|
AC
motors (to 350 horsepower) gear reducers, gearmotors and
drives
|
|
|
|
|
|
|
Thomson
Technology, Inc.
|
2000
|
|
14
|
|
Automatic
transfer switches, paralleling switchgear and controls and controls
systems
|
|
|
|
|
|
|
Lincoln
Motors
|
1999
|
|
50
|
|
AC
motors (1/4 to 800 horsepower)
|
|
|
|
|
|
|
Marathon
Electric Manufacturing Corporation
|
1997
|
|
245
|
|
AC
motors (to 500 horsepower), AC generators (5 kilowatt to 2.5 megawatt),
fuse holders, terminal blocks and power
blocks
|
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
worldwide market for electric motors is estimated in excess of $25 billion. The
overall domestic market for electric motors is estimated at $9 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
$5 billion segment of the overall domestic market. We believe approximately 60%
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 and
our promptness of delivery. We had one customer that accounted for
more than 10% of our consolidated net sales in each of the three fiscal years
ending December 29, 2007.
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 have one of the electric motor industry’s most
sophisticated product development and testing laboratories. We believe these
capabilities provide a significant competitive advantage in the development of
high quality motors and electric generators incorporating leading design
characteristics such as low vibration, low noise, improved safety, reliability
and enhanced energy efficiency.
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 to 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 700 people in Six Sigma in the last two years. Every
facility has been introduced to Lean Six Sigma, resulting in approximately $20
million in cost savings since the program began in 2005. Our goal is to be a low
cost producer in our core product areas.
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 68 manufacturing,
service and distribution facilities, of which 32 are principal manufacturing
facilities. The Electrical segment’s present operating facilities
contain a total of approximately 6.0 million square feet of space of which
approximately 2.1 million square feet are leased. Our Mechanical
segment currently includes 13 manufacturing, service and distribution
facilities, of which 5 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 4% is
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. Since total backlog is less than 10% of
our annual sales, we believe that backlog is not a reliable indicator of our
future sales. As of December 29, 2007, our backlog was $255.7
million, as compared to $174.6 million on December 30, 2006. We
believe that virtually all of our backlog is shippable in 2008.
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 December 29, 2007, the Company employed approximately
17,900 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, 2008, 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
|
59
|
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; served as Executive Vice President from
1987 to April 2002; joined the Company in 1979.
|
|
|
|
|
Mark
J. Gliebe
|
47
|
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
|
45
|
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
|
37
|
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
|
52
|
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. In 2003 and prior, Mr.
Colvin served in several human resources positions for Sigma-Aldrich
Corporation, serving most recently as Vice President of Human Resources
from 1995 to 2003.
|
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.
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.
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 11,500 of our
over 17,900 total employees and 17 of our 37 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 will be
limited.
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.
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:
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make
it difficult for us to fulfill our obligations under our credit and other
debt agreements;
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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;
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increase
our vulnerability to interest rate changes and general adverse economic
and industry conditions;
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require
us to dedicate a substantial portion of our cash flow from operations to
service our indebtedness, thereby reducing the availability of our cash
flow to finance acquisitions and to fund working capital, capital
expenditures, research and development efforts and other general corporate
activities;
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limit
our flexibility in planning for, or reacting to, changes in our business
and our markets; and
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place
us at a competitive disadvantage relative to our competitors that have
less debt.
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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 notes to declare the principal amount of the notes, together with accrued
interest, to be immediately due and payable.
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
are subject to litigation 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, among other things, contract disputes, product
warranty and liability claims, and environmental, asbestos, employment and other
litigation matters. Litigation may have an adverse effect on us
because of potential adverse outcomes, the costs associated with defending
lawsuits, the diversion of our management’s resources and other
factors.
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 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.
The
Company has numerous 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. Market volatility in interest rates, investment
returns and other factors could also adversely affect the funded status of our
pension plans. Moreover, future changes to the accounting and reporting
standards related to pension plans could create significant volatility in our
operating results.
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:
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quarterly
fluctuation in our operating income and earnings per share
results;
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decline
in demand for our products;
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significant
strategic actions by our competitors, including new product introductions
or technological advances;
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fluctuations
in interest rates;
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cost
increases in energy, raw materials or
labor;
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changes
in revenue or earnings estimates or publication of research reports by
analysts; and
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domestic
and international economic and political factors unrelated to our
performance.
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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.