NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2012
(Unaudited
)
1.
BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of December 31, 2011, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of
September 29, 2012
and for the
three and nine months ended
September 29, 2012
and
October 1, 2011
, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s
2011
Annual Report on Form 10-K filed on
February 29, 2012
.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the
three and nine months ended
September 29, 2012
are not necessarily indicative of the results that may be expected for the entire fiscal year ending
December 29, 2012
.
The Company operates on a
52/53
week fiscal year ending on the Saturday closest to
December 31
.
On
January 1, 2012
, the Company adopted new guidance which changes the presentation of comprehensive income. Under the new guidance, the Company has reported a separate Condensed Consolidated Statement of Comprehensive Income for all periods presented.
On
January 1, 2012
, the Company adopted new guidance which provides an option to first assess qualitative factors in determining whether is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company will perform its annual goodwill impairment test in the fourth quarter and does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.
2.
OTHER FINANCIAL INFORMATION
Inventories
Cost for approximately
41%
and
45%
of the Company’s inventory is determined using the last-in, first-out (LIFO) inventory valuation method as of
September 29, 2012
and
December 31, 2011
, respectively. The approximate percentage distribution between major classes of inventories was as follows:
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Raw Material and Work in Process
|
42
|
%
|
|
38
|
%
|
Finished Goods and Purchased Parts
|
58
|
%
|
|
62
|
%
|
Investments
Investments consist of term deposits of
$3.2 million
with original maturities of greater than three months. Investments with maturities greater than one year may be classified as short term based on their highly liquid nature and their availability to fund future investing activities. Term deposits are included in Prepaid Expenses and Other Current Assets. The fair value of term deposits approximates their carrying value.
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Land and Improvements
|
$
|
76.2
|
|
|
$
|
74.1
|
|
Buildings and Improvements
|
200.0
|
|
|
189.3
|
|
Machinery and Equipment
|
740.5
|
|
|
667.2
|
|
Property, Plant and Equipment
|
1,016.7
|
|
|
930.6
|
|
Less: Accumulated Depreciation
|
(449.9
|
)
|
|
(396.6
|
)
|
Net Property, Plant and Equipment
|
$
|
566.8
|
|
|
$
|
534.0
|
|
3.
ACQUISITIONS
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. Acquisition-related expenses, which were recorded in operating expenses, were immaterial for the
three and nine months ended
September 29, 2012
. Acquisition-related expenses were
$5.6 million
and
$16.0 million
for the
three and nine months ended
October 1, 2011
, respectively.
2012 Acquisitions
During the
nine months ended
September 29, 2012
, the Company acquired a
Mexico based electrical products company
for
$1.6 million
. The Company also acquired assets from a
Canadian affiliate
of its Elco B.V. joint venture for
$1.4 million
. These are reported as a part of the Company's Electrical segment.
On February 3, 2012, the Company acquired Milwaukee Gear Company (“MGC”), a Wisconsin-based leading manufacturer of highly engineered gearing components for oil and gas applications as well as a wide variety of other commercial and industrial applications.
The purchase price of MGC was
$80.3 million
paid in cash, net of cash acquired. MGC is reported as a part of the Company’s Mechanical segment.
2011 EPC Acquisition
On
August 22, 2011
, the Company completed its acquisition of the Electrical Products Company (“EPC”) of A.O. Smith Corporation (NYSE: AOS). EPC manufactures and sells a full line of motors for hermetic, pump, distribution, HVAC, and general industrial applications. EPC is based in Tipp City, Ohio and has operations in the United States, Mexico, China, and the United Kingdom.
The purchase price included
$756.1 million
in cash and non-cash consideration of
$140.9 million
comprised of
2,834,026
shares of Company common stock. EPC is reported as part of the Company’s Electrical segment.
Pro Forma Financial Information
The following pro forma financial information shows the results of continuing operations for the
three and nine months ended
October 1, 2011
as though the acquisition of EPC occurred at the beginning of the
2011
fiscal year. The pro forma financial information includes, where applicable, adjustments for: (i) the amortization of acquired intangible assets, (ii) additional interest expense on acquisition related borrowings and (iii) the income tax effect on the pro forma adjustments. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated above or the results that may be obtained in the future (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
October 1,
2011
|
October 1,
2011
|
Pro forma net sales
|
$
|
847.0
|
|
$
|
2,615.6
|
|
Pro forma net income
|
58.5
|
|
164.9
|
|
|
|
|
Basic earnings per share as reported
|
$
|
1.14
|
|
$
|
3.04
|
|
Pro forma basic earnings per share
|
1.41
|
|
3.97
|
|
Diluted earnings per share as reported
|
1.13
|
|
3.00
|
|
Pro forma diluted earnings per share
|
1.39
|
|
3.92
|
|
Other 2011 Acquisitions
On
June 1, 2011
, the Company acquired Australian Fan and Motor Company (“AFMC”) located in Melbourne, Australia. AFMC manufactures and distributes a wide range of direct drive blowers, fan decks, axial fans and sub fractional motors for sales in Australia and New Zealand.
The purchase price of
$5.7 million
was paid in cash, net of acquired debt and cash. AFMC is reported as part of the Company’s Electrical segment.
On
April 5, 2011
, the Company acquired Ramu, Inc. (“Ramu”) located in Blacksburg, Virginia. Ramu is a motor and control technology company with a research and development team dedicated to the development of switched reluctance motor technology.
The purchase price included
$5.3 million
paid in cash, net of acquired debt and cash and an additional amount should certain future performance expectations be met. At
September 29, 2012
,
the Company has recorded a liability of
$13.7 million
for this deferred contingent purchase price. Ramu is reported as part of the Company’s Electrical segment.
On
March 7, 2011
, the Company acquired Hargil Dynamics Pty. Ltd. (“Hargil”) located in Sydney, Australia. Hargil is a distributor of mechanical power transmission components and solutions. Hargil is reported as part of the Company’s Mechanical segment.
4.
COMPREHENSIVE INCOME
As required, the Company adopted new guidance on the presentation of comprehensive income during 2012. Condensed Consolidated Statements of Comprehensive Income are included in the Company’s Condensed Consolidated Financial Statements for all periods presented.
Foreign currency translation adjustments, hedging activities on derivative instruments and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss. The components of the ending balances of Accumulated Other Comprehensive Loss are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Foreign currency translation adjustments
|
$
|
(7.1
|
)
|
|
$
|
(20.0
|
)
|
Hedging activities, net of tax
|
(17.5
|
)
|
|
(50.8
|
)
|
Pension benefits, net of tax
|
(32.0
|
)
|
|
(34.4
|
)
|
|
$
|
(56.6
|
)
|
|
$
|
(105.2
|
)
|
5.
WARRANTY COSTS
The Company generally recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the
three and nine months ended
September 29, 2012
and
October 1, 2011
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Beginning balance
|
$
|
26.0
|
|
|
$
|
40.9
|
|
|
$
|
24.2
|
|
|
$
|
12.8
|
|
Deduct: Payments
|
(5.9
|
)
|
|
(5.8
|
)
|
|
(19.3
|
)
|
|
(11.7
|
)
|
Add: Provision
|
7.1
|
|
|
2.5
|
|
|
22.3
|
|
|
36.4
|
|
Acquisition
|
—
|
|
|
3.9
|
|
|
0.1
|
|
|
3.9
|
|
Translation Adjustments
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
27.3
|
|
|
$
|
41.4
|
|
|
$
|
27.3
|
|
|
$
|
41.4
|
|
The
warranty provision
for the
nine months ended
October 1, 2011
included
$28.0 million
in accrued costs due to the previously disclosed warranty expense item.
Accrued warranty costs are included with Other Accrued Expenses on the Condensed Consolidated Balance Sheets.
6.
BUSINESS SEGMENTS
The Company has two reportable segments, Mechanical and Electrical (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
|
|
Mechanical
|
|
Eliminations
|
|
Total
|
Three months ended September 29, 2012
|
|
|
|
|
|
|
|
External sales
|
$
|
708.3
|
|
|
$
|
71.2
|
|
|
$
|
—
|
|
|
$
|
779.5
|
|
Intersegment sales
|
0.9
|
|
|
1.3
|
|
|
(2.2
|
)
|
|
—
|
|
Total sales
|
709.2
|
|
|
72.5
|
|
|
(2.2
|
)
|
|
779.5
|
|
Segment income from operations
|
73.2
|
|
|
10.1
|
|
|
—
|
|
|
83.3
|
|
Identifiable assets
|
3,216.1
|
|
|
207.6
|
|
|
—
|
|
|
3,423.7
|
|
Depreciation and amortization
|
32.3
|
|
|
2.1
|
|
|
—
|
|
|
34.4
|
|
Three months ended October 1, 2011
|
|
|
|
|
|
|
|
External Sales
|
$
|
667.5
|
|
|
$
|
69.4
|
|
|
$
|
—
|
|
|
$
|
736.9
|
|
Intersegment sales
|
2.1
|
|
|
0.7
|
|
|
(2.8
|
)
|
|
—
|
|
Total sales
|
669.6
|
|
|
70.1
|
|
|
(2.8
|
)
|
|
736.9
|
|
Segment income from operations
|
69.4
|
|
|
8.7
|
|
|
—
|
|
|
78.1
|
|
Identifiable assets
|
3,259.5
|
|
|
113.1
|
|
|
—
|
|
|
3,372.6
|
|
Depreciation and amortization
|
24.7
|
|
|
1.4
|
|
|
—
|
|
|
26.1
|
|
|
Electrical
|
|
Mechanical
|
|
Eliminations
|
|
Total
|
Nine months ended September 29, 2012
|
|
|
|
|
|
|
|
External sales
|
$
|
2,223.3
|
|
|
$
|
228.0
|
|
|
$
|
—
|
|
|
$
|
2,451.3
|
|
Intersegment sales
|
2.7
|
|
|
2.9
|
|
|
(5.6
|
)
|
|
—
|
|
Total sales
|
2,226.0
|
|
|
230.9
|
|
|
(5.6
|
)
|
|
2,451.3
|
|
Segment income from operations
|
234.1
|
|
|
31.6
|
|
|
—
|
|
|
265.7
|
|
Identifiable assets
|
3,216.1
|
|
|
207.6
|
|
|
—
|
|
|
3,423.7
|
|
Depreciation and amortization
|
87.3
|
|
|
7.7
|
|
|
—
|
|
|
95.0
|
|
Nine months ended October 1, 2011
|
|
|
|
|
|
|
|
External Sales
|
$
|
1,873.1
|
|
|
$
|
208.2
|
|
|
$
|
—
|
|
|
$
|
2,081.3
|
|
Intersegment sales
|
7.2
|
|
|
1.9
|
|
|
(9.1
|
)
|
|
—
|
|
Total sales
|
1,880.3
|
|
|
210.1
|
|
|
(9.1
|
)
|
|
2,081.3
|
|
Segment income from operations
|
169.8
|
|
|
27.3
|
|
|
—
|
|
|
197.1
|
|
Identifiable assets
|
3,259.5
|
|
|
113.1
|
|
|
—
|
|
|
3,372.6
|
|
Depreciation and amortization
|
65.3
|
|
|
4.4
|
|
|
—
|
|
|
69.7
|
|
7.
GOODWILL AND OTHER INTANGIBLES
Goodwill
As required, the Company performs an annual impairment test of goodwill during the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
At
September 29, 2012
, most of the Company’s goodwill is attributable to the Electrical segment and the Company believes that substantially all of the goodwill is deductible for tax purposes. The following information presents changes to goodwill during the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Electrical
Segment
|
|
Mechanical
Segment
|
Balance as of December 31, 2011
|
$
|
1,117.6
|
|
|
$
|
1,105.0
|
|
|
$
|
12.6
|
|
Acquisitions and Valuation Adjustments
|
21.7
|
|
|
0.3
|
|
|
21.4
|
|
Foreign Currency Translation Adjustments
|
5.6
|
|
|
5.6
|
|
|
—
|
|
Balance as of September 29, 2012
|
$
|
1,144.9
|
|
|
$
|
1,110.9
|
|
|
$
|
34.0
|
|
Intangible Assets
Intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2012
|
|
December 31, 2011
|
|
Useful Life
(years)
|
|
Gross Value
|
|
Accumulated
Amortization
|
|
Gross Value
|
|
Accumulated
Amortization
|
Customer Relationships
|
3 - 14
|
|
$
|
243.0
|
|
|
$
|
(72.8
|
)
|
|
$
|
227.5
|
|
|
$
|
(56.4
|
)
|
Technology
|
3 - 9
|
|
130.1
|
|
|
(37.4
|
)
|
|
128.2
|
|
|
(24.7
|
)
|
Trademarks
|
3 - 20
|
|
32.5
|
|
|
(14.9
|
)
|
|
30.9
|
|
|
(12.8
|
)
|
In-process Research and Development
|
N/A
|
|
17.2
|
|
|
—
|
|
|
17.2
|
|
|
—
|
|
Patent and Engineering Drawings
|
10
|
|
16.6
|
|
|
(12.9
|
)
|
|
16.6
|
|
|
(11.7
|
)
|
Non-compete Agreements
|
3 - 5
|
|
8.1
|
|
|
(7.0
|
)
|
|
8.1
|
|
|
(6.6
|
)
|
|
|
|
$
|
447.5
|
|
|
(145.0
|
)
|
|
$
|
428.5
|
|
|
(112.2
|
)
|
Net Values
|
|
|
|
|
$
|
302.5
|
|
|
|
|
$
|
316.3
|
|
The estimated expected future annual amortization for intangible assets is as follows (in millions):
|
|
|
|
|
Year
|
Estimated
Amortization
|
2012
|
$
|
44.4
|
|
2013
|
43.6
|
|
2014
|
42.4
|
|
2015
|
34.7
|
|
2016
|
30.9
|
|
Amortization expense recorded
for the
three and nine
months ended
September 29, 2012
was
$11.1 million
and
$32.8 million
respectively.
Amortization expense recorded
for the
three and nine
months ended
October 1, 2011
was
$8.7 million
and
$23.1 million
, respectively.
In-process research and development projects are estimated to be completed by the end of 2013 and amortization will begin upon project completion.
8.
DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of
September 29, 2012
and
December 31, 2011
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
Senior notes
|
$
|
750.0
|
|
|
$
|
750.0
|
|
Term loan
|
70.0
|
|
|
145.0
|
|
Revolving credit facility
|
27.0
|
|
|
9.0
|
|
Other
|
18.5
|
|
|
15.2
|
|
|
865.5
|
|
|
919.2
|
|
Less: Current maturities
|
(83.8
|
)
|
|
(10.0
|
)
|
Non-current portion
|
$
|
781.7
|
|
|
$
|
909.2
|
|
At
September 29, 2012
, the Company had
$750.0 million
of senior notes
(the “Notes”) outstanding. Details on the senior notes are (in millions):
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity
|
Floating Rate Series 2007A
|
$
|
150.0
|
|
|
Floating
(1)
|
|
August 2014
|
Floating Rate Series 2007A
|
100.0
|
|
|
Floating
(1)
|
|
August 2017
|
Fixed Rate Series 2011A
|
100.0
|
|
|
4.1%
|
|
July 2018
|
Fixed Rate Series 2011A
|
230.0
|
|
|
4.8 to 5.0%
|
|
July 2021
|
Fixed Rate Series 2011A
|
170.0
|
|
|
4.9 to 5.1%
|
|
July 2023
|
|
$
|
750.0
|
|
|
|
|
|
|
|
(1)
|
Interest rates vary as LIBOR varies. At
September 29, 2012
, the
interest rate was between
1.0%
and
1.2%
.
|
In
2008
, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby it borrowed an aggregate
principal amount of
$165.0 million
. During
2011
, the Company
repaid
$20.0 million
of the Term Loan. In the third quarter of 2012, the Company repaid an additional
$75.0 million
of the Term Loan. The Term Loan matures in
June 2013
, and borrowings generally bear interest at a variable rate equal to a margin over LIBOR. The margin varies with the ratio of the Company’s total funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as defined in the Loan Agreement. These interest rates also vary as LIBOR varies. At
September 29, 2012
, the interest rate of
1.2%
was based on a margin over LIBOR.
The Company also has a
$500.0 million
revolving credit facility
(the “Facility”) that matures in
June 2016
. The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA, net of specified cash, as defined in the Facility. These interest rates also vary as LIBOR varies. At
September 29, 2012
, there was
$27.0 million
outstanding on the Facility and the interest rate was
1.7%
. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total funded debt to EBITDA.
Based on rates for instruments with comparable maturities, credit risks, and terms, which are classified as Level 2 inputs, the
approximate fair value
of the Company's debt was
$899.2 million
and
$951.0 million
as of
September 29, 2012
and
December 31, 2011
, respectively.
The Notes, the Term Loan, and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial debt covenants as of
September 29, 2012
.
The Company entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 14 of Notes to Condensed Consolidated Financial Statements.)
At
September 29, 2012
, other notes payable of approximately
$18.5 million
were outstanding with a
weighted average interest rate of
2.5%
.
9.
PENSION PLANS
The Company’s net periodic defined benefit pension cost is comprised of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Service cost
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
1.8
|
|
|
$
|
1.9
|
|
Interest cost
|
1.9
|
|
|
1.7
|
|
|
5.6
|
|
|
5.7
|
|
Expected return on plan assets
|
(1.8
|
)
|
|
(1.6
|
)
|
|
(5.5
|
)
|
|
(5.2
|
)
|
Amortization of prior service cost and net actuarial loss
|
0.9
|
|
|
0.9
|
|
|
2.8
|
|
|
2.7
|
|
Net periodic benefit expense
|
$
|
1.6
|
|
|
$
|
1.6
|
|
|
$
|
4.7
|
|
|
$
|
5.1
|
|
The
estimated net actuarial loss
and
prior service cost
for defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost during the
2012 fiscal year
is
$3.6 million
and
$0.2 million
, respectively.
During the first
nine months
of
2012
and
2011
, the Company contributed
$10.9 million
and
$5.7 million
, respectively, to defined benefit pension plans. The Company expects to make an additional contribution of
$0.5 million
in
2012
. The Company contributed a total of
$6.5 million
in 2011. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s
2011
Annual Report on Form 10-K filed on
February 29, 2012
.
10.
SHAREHOLDERS’ EQUITY
The Company recognized approximately
$2.3 million
and
$4.0 million
in
share-based compensation expense
for the
three month period ended
September 29, 2012
and
October 1, 2011
, respectively.
Share-based compensation expense
for the
nine month period ended
September 29, 2012
and
October 1, 2011
was
$6.7 million
and
$10.2 million
, respectively. The
total excess income tax benefit recognized relating to share-based compensation
for the
nine months ended
September 29, 2012
and
October 1, 2011
was approximately
$1.7 million
and
$1.0 million
, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of
September 29, 2012
,
total unrecognized compensation cost related to share-based compensation awards
was approximately
$24.4 million
, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately
2.9
years.
The Company was authorized, as of
September 29, 2012
, to deliver up to
5.0 million
shares of common stock upon exercise of non-qualified stock options or incentive stock options, or upon grant or in payment of stock appreciation rights, restricted stock and restricted stock units. Approximately
1.0 million
shares were available for future grant or payment under the various plans at
September 29, 2012
.
Share-based Incentive Awards
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SARs”). All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire
ten
years from the grant date.
The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For the
nine months ended
September 29, 2012
and
October 1, 2011
,
255,225
and
289,612
share-based incentive awards were granted, respectively. The per share weighted average fair value of share-based incentive awards granted during those respective periods was $
22.45
and $
26.81
.
The assumptions used in our Black-Scholes valuation related to grants were as follows:
|
|
|
|
|
|
|
|
September 29,
2012
|
|
October 1,
2011
|
Risk-free interest rate
|
1.3
|
%
|
|
2.6
|
%
|
Expected life (years)
|
7.0
|
|
|
7.0
|
|
Expected volatility
|
37.6
|
%
|
|
35.5
|
%
|
Expected dividend yield
|
1.2
|
%
|
|
1.0
|
%
|
A summary of share-based awards (options and SARs) as of
September 29, 2012
follows below. Forfeitures of share-based awards during the
nine months ended
September 29, 2012
totaled
23,640
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(years)
|
|
Aggregate Intrinsic
Value (in
millions)
|
Outstanding
|
1,634,030
|
|
|
$
|
53.35
|
|
|
6.7
|
|
|
$
|
28.2
|
|
Exercisable
|
711,815
|
|
|
41.47
|
|
|
4.7
|
|
|
20.7
|
|
Restricted Stock and Restricted Stock Units
The Company also grants restricted stock awards and values such awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of grant.
Changes in restricted stock awards for the
nine months ended
September 29, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
Weighted Average Value
|
|
|
Unvested restricted stock awards, December 31, 2011
|
138,330
|
|
$
|
60.67
|
|
|
Granted
|
95,916
|
|
63.72
|
|
|
Vested
|
(32,640
|
)
|
43.68
|
|
|
Forfeited
|
(1,345
|
)
|
57.05
|
|
|
Unvested restricted stock awards, September 29, 2012
|
200,261
|
|
$
|
64.92
|
|
11.
INCOME TAXES
The effective tax rate for the
three months ended
September 29, 2012
was
24.5%
versus
30.3%
for the
three months ended
October 1, 2011
. The effective tax rate for the
nine months ended
September 29, 2012
was
27.4%
versus
30.1%
for the
nine months ended
October 1, 2011
. The change in the third quarter effective rates was driven primarily by the qualification in China of a high technology tax incentive for two of our facilities that resulted in a retroactive benefit of $2.3 million.
As of
September 29, 2012
and
December 31, 2011
, the Company had approximately
$5.8 million
and
$7.1 million
, respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. U.S. federal tax returns from
2009
through
2011
and various state tax returns remain subject to income tax examinations by tax authorities.
12.
EARNINGS PER SHARE ("EPS")
The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Denominator for basic EPS (weighted average)
|
41.7
|
|
|
39.9
|
|
|
41.7
|
|
|
39.1
|
|
Effect of dilutive securities
|
0.3
|
|
|
0.5
|
|
|
0.3
|
|
|
0.5
|
|
Denominator for diluted EPS
|
42.0
|
|
|
40.4
|
|
|
42.0
|
|
|
39.6
|
|
The “Effect of dilutive securities” represents the dilution impact of equity awards for the three and nine months ended
September 29, 2012
and
October 1, 2011
, respectively.
For the
nine months ended
September 29, 2012
and
October 1, 2011
,
there were
0.3 million
options and
1.3 million
options, respectively, where the exercise price was above the market price, and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive.
13.
CONTINGENCIES
One of the Company’s subsidiaries that it acquired in
2007
is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through
2004
and that were included as components of residential and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material effect on its interim consolidated financial statements as a whole.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company’s products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in defending against such lawsuits and estimated exposures in amounts that the Company believes are adequate, and the Company does not believe that the outcome of any such lawsuit, individually or in the aggregate, will have a material effect on the Company’s interim consolidated financial statements as a whole.
14.
DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk, currency exchange and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.
The Company must recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of
September 29, 2012
.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings. All derivative instruments used by the Company impact operating cash flows.
At
September 29, 2012
, the Company had an additional
$(0.6) million
, net of tax, of
derivative losses on closed hedge instruments in Accumulated Other Comprehensive Income (Loss) (“AOCI”)
that will be realized in earnings when the hedged items impact earnings. At
December 31, 2011
, the Company had an additional
$(2.5) million
, net of tax, of
derivative losses on closed hedge instruments in AOCI
that was realized in earnings when the hedged items impacted earnings.
As of
September 29, 2012
, the Company had outstanding the following commodity forward contracts (with maturities extending through December 2013) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item in millions):
|
|
|
|
|
|
Notional
Amount
|
Copper
|
$
|
119.0
|
|
Aluminum
|
7.4
|
|
As of
September 29, 2012
, the Company had outstanding the following currency forward contracts (with maturities extending through December 2014) to hedge forecasted foreign currency cash flows (in millions):
|
|
|
|
|
|
Notional
Amount
|
Mexican Peso
|
$
|
184.1
|
|
Chinese Renminbi
|
126.8
|
|
Indian Rupee
|
37.4
|
|
Thai Baht
|
20.3
|
|
Australian Dollar
|
5.7
|
|
As of
September 29, 2012
, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was
$250.0 million
(with maturities extending to
August 2017
).
Fair values of derivative instruments as of
September 29, 2012
and
December 31, 2011
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2012
|
|
Prepaid
Expenses
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38.4
|
|
Foreign exchange contracts
|
5.6
|
|
|
3.8
|
|
|
4.4
|
|
|
1.2
|
|
Commodity contracts
|
7.5
|
|
|
0.4
|
|
|
0.5
|
|
|
—
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Commodity contracts
|
1.2
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
Total Derivatives
|
$
|
14.3
|
|
|
$
|
4.2
|
|
|
$
|
6.1
|
|
|
$
|
39.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Prepaid
Expenses
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42.0
|
|
Foreign exchange contracts
|
0.4
|
|
|
0.1
|
|
|
13.6
|
|
|
11.7
|
|
Commodity contracts
|
2.1
|
|
|
1.0
|
|
|
12.2
|
|
|
1.4
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commodity contracts
|
0.2
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
Total Derivatives
|
$
|
2.8
|
|
|
$
|
1.1
|
|
|
$
|
26.1
|
|
|
$
|
55.1
|
|
The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended
September 29, 2012
and
October 1, 2011
, was (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 29, 2012
|
|
October 1, 2011
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
Gain (Loss) recognized in Other Comprehensive Income (Loss)
|
$
|
9.2
|
|
|
$
|
8.6
|
|
|
$
|
(1.4
|
)
|
|
$
|
16.4
|
|
|
$
|
(42.0
|
)
|
|
$
|
(30.8
|
)
|
|
$
|
(9.7
|
)
|
|
$
|
(82.5
|
)
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in Net Sales
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Gain (Loss) recognized in Cost of Sales
|
(2.6
|
)
|
|
(2.7
|
)
|
|
—
|
|
|
(5.3
|
)
|
|
4.5
|
|
|
2.3
|
|
|
—
|
|
|
6.8
|
|
Loss recognized in Interest Expense
|
—
|
|
|
—
|
|
|
(2.4
|
)
|
|
(2.4
|
)
|
|
—
|
|
|
—
|
|
|
(3.5
|
)
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 29, 2012
|
|
October 1, 2011
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
Gain (Loss) recognized in Other Comprehensive Income (Loss)
|
$
|
13.0
|
|
|
$
|
23.7
|
|
|
$
|
(5.6
|
)
|
|
$
|
31.1
|
|
|
$
|
(42.2
|
)
|
|
$
|
(22.2
|
)
|
|
$
|
(15.4
|
)
|
|
$
|
(79.8
|
)
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) recognized in Net Sales
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
(1.2
|
)
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Gain (Loss) recognized in Cost of Sales
|
(9.1
|
)
|
|
(3.1
|
)
|
|
—
|
|
|
(12.2
|
)
|
|
21.6
|
|
|
5.2
|
|
|
—
|
|
|
26.8
|
|
Loss recognized in Interest Expense
|
—
|
|
|
—
|
|
|
(9.2
|
)
|
|
(9.2
|
)
|
|
—
|
|
|
—
|
|
|
(9.9
|
)
|
|
(9.9
|
)
|
The ineffective portion of hedging instruments recognized during the
three and nine months ended
September 29, 2012
and
October 1, 2011
was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
Gain recognized in Net Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
Gain (Loss) recognized in Cost of Sales
|
0.4
|
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
0.7
|
|
|
0.1
|
|
|
0.1
|
|
|
(0.4
|
)
|
|
(0.2
|
)
|
The
net AOCI hedging component balance of
$(17.5) million
loss at
September 29, 2012
includes
$(2.8) million
of
net current deferred losses expected to be realized in the next twelve months
.
15.
FAIR VALUE
The Company uses a three-tier hierarchy to assess the inputs used to measure the fair value of financial assets and liabilities.
|
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
|
|
Inputs other than quoted prices that are observable for the asset or liability
|
Level 3
|
Unobservable inputs for the asset or liability
|
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair value of the Company's accounts receivable and accounts payable approximated book value as of
September 29, 2012
and
December 31, 2011
, respectively, due to their short-term nature. See Note 8 of Notes to Condensed Consolidated Financial Statements for disclosure of the approximate fair value of the Company's debt at
September 29, 2012
and
December 31, 2011
.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of
September 29, 2012
and
December 31, 2011
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
2012
|
|
December 31,
2011
|
|
Classification
|
Assets:
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
5.6
|
|
|
$
|
0.5
|
|
|
Level 2
|
Derivative Commodity Contracts
|
8.7
|
|
|
2.6
|
|
|
Level 2
|
Investments
|
3.2
|
|
|
—
|
|
|
Level 2
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
3.8
|
|
|
0.1
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.4
|
|
|
1.0
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Other Accrued Expenses:
|
|
|
|
|
|
Deferred Contingent Purchase Price
|
$
|
0.4
|
|
|
$
|
2.0
|
|
|
Level 3
|
Hedging Obligations Current:
|
|
|
|
|
|
Derivative Currency Contracts
|
4.4
|
|
|
13.6
|
|
|
Level 2
|
Derivative Commodity Contracts
|
1.7
|
|
|
12.5
|
|
|
Level 2
|
Hedging Obligations:
|
|
|
|
|
|
Interest Rate Swap
|
38.4
|
|
|
42.0
|
|
|
Level 2
|
Derivative Currency Contracts
|
1.2
|
|
|
11.7
|
|
|
Level 2
|
Derivative Commodity Contracts
|
—
|
|
|
1.4
|
|
|
Level 2
|
Other Noncurrent Liabilities:
|
|
|
|
|
|
Deferred Contingent Purchase Price
|
20.4
|
|
|
21.5
|
|
|
Level 3
|
The Company’s derivative contracts are valued at fair value using the market or income approaches. The Company measures the fair value of foreign exchange contracts using Level 2 inputs based on observable spot and forward rates in active markets. The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions. The Company measures the fair value of interest rate swaps using Level 2 inputs in an income approach for valuation based on expected interest rate yield curves over the remaining duration of the interest rate swaps. During the
nine months ended September 29, 2012
, there were no transfers between classification Levels 1, 2 or 3.
The table below sets forth a summary of changes in fair market value of the Company’s Level 3 liabilities for the
three and nine months ended
September 29, 2012
and
October 1, 2011
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2012
|
|
October 1,
2011
|
|
September 29,
2012
|
|
October 1,
2011
|
Beginning Balance
|
$
|
23.2
|
|
|
$
|
25.9
|
|
|
$
|
23.5
|
|
|
$
|
11.0
|
|
Valuation Adjustments
|
0.3
|
|
|
—
|
|
|
0.9
|
|
|
(1.8
|
)
|
Acquisitions
|
0.4
|
|
|
—
|
|
|
0.4
|
|
|
16.7
|
|
Payments
|
(3.1
|
)
|
|
—
|
|
|
(4.0
|
)
|
|
—
|
|
Ending Balance
|
$
|
20.8
|
|
|
$
|
25.9
|
|
|
$
|
20.8
|
|
|
$
|
25.9
|
|
The Level 3 liabilities described above are comprised entirely of the deferred contingent purchase price of the Company’s acquisitions and are measured using Level 3 inputs. The contingent consideration, payable in cash, is based upon sales or earnings before interest and income taxes for the acquired businesses for the applicable contingency period. The fair value of the contingent consideration is a Level 3 input; the measurement of which is derived using a probability weighted discounted cash flow analysis. The Company has estimated that the maximum contingent amount will be paid under all agreements so the key assumption is the estimated timing of the payments. The discounted cash flow utilized risk-based
discount rates
ranging from approximately
5.0%
to
8.0%
.
See Note 8 of Notes to Condensed Consolidated Financial Statements for the disclosure on the Company's fair value of debt
16.
RELATED PARTY TRANSACTIONS
As part of the consideration paid for the acquisition of certain assets of Elco S.p.A. on
November 1, 2010
, the Company assumed
$22.3 million
payable to an entity
that is affiliated with its Elco Group B.V. joint venture partner resulting from a bankruptcy proceeding involving Elco S.p.A.. During the first
nine
months of 2012, the final two installments totaling
$10.5 million
were paid
.
17.
RESTRUCTURING ACTIVITY
During 2012, the Company began a restructuring effort to consolidate several of its manufacturing facilities in North America and Europe. The Company recorded pre-tax provisions of
$5.2 million
in the third quarter
2012
and
$5.7 million
during the
nine months ended
September 29, 2012
related to these efforts. The Company made payments of
$1.0 million
during the
nine months ended
September 29, 2012
.
18. SUBSEQUENT EVENT
On October 2, 2012, the Company acquired Marlin Coast Motor Rewinding ("MCMR") for an immaterial purchase price. MCMR, based in Cairns, North Queensland, Australia, is a leader in the supply, service and overhaul of electric machines. MCMR is reported as a part of the Company’s Electrical segment.