Back to GetFilings.com

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 X NO ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).YES X NO ___

Indicate the number of shares outstanding of each of the issuers’ classes of common stock as of the latest practicable date.

25,031,756 Shares, Common Stock, $.01 Par Value

CAUTIONARY STATEMENT

The following is a cautionary statement made under the Private Securities Litigation Reform Act of 1995: With the exception of historical facts, the statements contained in Item 2. of this Form 10-Q may be forward looking statements. Actual results may differ materially from those contemplated. Forward looking statements involve risks and uncertainties, including but not limited to, the following risks: 1) cyclical downturns affecting the markets for capital goods, 2) substantial increases in interest rates that impact the cost of our outstanding debt, 3) our success in increasing sales and maintaining or improving the operating margins of our businesses, 4) the availability of or material increases in the costs of select raw materials or parts, 5) actions taken by competitors, and 6) our ability to satisfy various covenant requirements under our credit facility. Investors are directed to other documents, such as our Annual Report on Form 10-K and other Form 10-Q's filed with the Securities and Exchange Commission.

PART I

FINANCIAL INFORMATION

REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except Share Data)

Item 1. Financial Statements				(From Audited
ASSETS	(Unaudited)			Statements)
	Sept. 30, 2003			Dec. 31, 2002
Current Assets:
Cash and Cash Equivalents	$ 7,946			$ 5,591
Receivables, less reserves of $1,418 in 2003
and $1,465 in 2002	90,274			79,099
Inventories	128,566			134,037
Other Current Assets	12,317			10,805
Total Current Assets	239,103			229,532
Property, Plant and Equipment at Cost	359,889			346,793
Less - Accumulated Depreciation	(188,342	)		(173,053	)
Net Property, Plant and Equipment	171,547			173,740
Goodwill	313,265			313,265
Other Noncurrent Assets	16,153			17,451
Total Assets	$740,068			$733,988
LIABILITIES AND SHAREHOLDERS’ INVESTMENT
Current Liabilities:
Accounts Payable	$ 32,718		$ 32,038
Federal and State Income Taxes	9,350		1,324
Employee Compensation & Benefits	20,302		18,004
Other Current Liabilities	16,625		20,761
Total Current Liabilities	78,995		72,127
Long-Term Debt	206,706		222,812
Deferred Income Taxes	44,918		44,913
Other Noncurrent Liabilities	10,890		10,661
Minority Interest in Consolidated Subsidiary	4,309		2,052
Shareholders’ Investment:
Common Stock, $.01 par value, 50,000,000 shares
authorized, 25,031,756 issued in 2003 and
25,020,070 issued in 2002	250		250
Additional Paid-In Capital	132,313		132,167
Less – Treasury Stock, at cost, 159,900 Shares in
2003 and 2002	(2,727	)	(2,727			)
Retained Earnings	267,619		257,570
Accumulated Other Comprehensive Loss	(3,205	)	(5,837			)
Total Shareholders’ Investment	394,250		381,423
Total Liabilities and Shareholders’ Investment	$740,068		$733,988

See accompanying notes.

REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, Except Per Share Data)

See accompanying notes.

REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

See accompanying notes.

REGAL-BELOIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

1. BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of REGAL-BELOIT Corporation and subsidiaries (the “Company”) and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. All adjustments which management believes are necessary for a fair statement of the results for the interim periods presented have been reflected and are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested these statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

2. INVENTORIES

Cost for approximately 85% of the Company’s inventory is determined using the last-in, first-out (LIFO) inventory valuation method. The approximate percentage distribution between major classes of inventories is as follows:

	September 30, 2003	December 31, 2002
Raw Material	11%	11%
Work In Process	19%	19%
Finished Goods	70%	70%

3. COMPREHENSIVE INCOME (LOSS)

The Company's comprehensive income (loss) is impacted each quarter by the amount of the cumulative translation adjustments recorded to shareholders' equity (accumulated other comprehensive loss). For the quarter ended September 30, 2003, the impact was $107,000 of income resulting in comprehensive income of $6,617,000 for the quarter. The impact in the third quarter of 2002 was $350,000 of loss resulting in comprehensive income of $6,761,000. In the first nine months of 2003, the impact was $2,632,000 of income resulting in comprehensive income of $21,693,000. For the first nine months of 2002, the impact was $955,000 of income resulting in comprehensive income of $20,891,000.

4. WARRANTY COSTS

The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the three and nine months ended September 30, 2003:

5. BUSINESS SEGMENTS

The Company operates two strategic businesses that are reportable segments: the Mechanical Group and the Electrical Group.

As consistent with December 31, 2002, acquired intangibles with definite lives were not material.

6. STOCK-BASED COMPENSATION COST

The Company accounts for its stock option plans under APB Opinion No. 25. Accordingly, no compensation cost has been recognized in the consolidated statements of income. Had compensation cost for these plans been determined consistent with FASB Statement No. 123 “Accounting for Stock-Based Compensation”, the Company’s net income and earnings per share would have been reduced to the following pro-forma amounts:

The fair value of each option grant is estimated using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in the third quarter of 2003 and 2002, respectively: risk-free interest rates of 3.5% and 4.2%; expected dividend yield of 2.5% and expected option lives of 7.0 years for both years; and expected volatility of 36% and 32%.

7. NEW ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). This Statement prescribes how an issuer classifies and measures certain financial instruments. Financial instruments within the scope of SFAS 150 are required to be classified as liabilities (or assets in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Company July 1, 2003. There was no impact to the Company from adopting SFAS 150.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references in this Item 2 to “we”, “us”, “our” or “the Company” refers collectively to REGAL-BELOIT CORPORATION and its subsidiaries.

OVERVIEW

Our earnings per share (“EPS”) in the third quarter of 2003 were $.26, unchanged from the second quarter of this year. Our third quarter net sales of $159.0 million increased 2.8% sequentially from 2003’s second quarter, due in large part to strength in our power generator products. Our gross profit margin and income from operations as a percent of net sales (“operating margin”) both decreased in the third quarter of 2003, to 22.9% and 7.3%, respectively, from 24.2% and 7.8% in the second quarter of this year. The decreases were due primarily to a combination of a greater mix of lower margin product sales, start-up inefficiencies associated with our plant consolidation programs and overhead underabsorption generated by lower production levels to achieve inventory reductions. During the third quarter, we generated $19.7 million of cash flow from operations, including $6.6 million of inventory reduction, permitting us to lower our debt by $12.5 million to $206.8 million at the end of the third quarter.

RESULTS OF OPERATIONS

Our net sales were $159.0 million in the third quarter of 2003, 3.2% above $154.0 million of net sales in the third quarter of 2002. For the nine months ended September 30, 2003, net sales were $467.0 million, 1.7% higher than comparable 2002. The weakness in demand in the industrial manufacturing sector of the economy that has existed for the past several years has continued as the major factor in our third quarter sales levels this year. The increase in sales in our third quarter was due largely to strength in our generator products due to Middle East rebuilding projects, the Northeast power outage and Hurricane Isabel. Third quarter sales of our electric motors were up modestly from the second quarter of 2003, though Mechanical Group sales were lower due primarily to summer seasonal patterns. (See note 5 to the accompanying condensed consolidated financial statements for our business segment data.)

Gross profit was $36.4 million in 2003’s third quarter and was $110.0 million for nine months year-to-date, only .5% and .8%, respectively, below the gross profit in the comparable periods of 2002. Lower gross profit margins have more than offset the added gross profit from our modestly higher sales discussed above. In the third quarter of 2003, gross profit margin was 22.9% versus 23.8% a year ago; year-to-date it was 23.6% as compared to 24.1% in nine months 2002. Our third quarter gross profit margin decrease resulted primarily from a greater mix of lower margin product sales, start-up inefficiencies associated with our plant consolidation programs, and overhead underabsorption generated by lower production levels in order to achieve inventory reductions. For the nine months of 2003, the lower gross profit margin was due to increased pricing pressures and higher utility and other factory costs in addition to the factors identified for the third quarter of 2003.

Operating expenses of $24.8 million in the third quarter and $75.1 million in the first nine months of 2003 were 3.3% and 3.4% higher, respectively, than in the comparable periods of 2002. The higher costs were due primarily to the consolidation of our new January 1, 2003 China joint venture, unfavorable foreign exchange and increased commissions on our higher net sales.

Our income from operations in the third quarter of 2003 was $11.6 million, 7.2% below $12.5 million a year ago, and $35.0 million for year-to-date 2003, 8.6% lower than $38.3 million in the comparable nine months of 2002. Operating margin in the third quarter this year was 7.3% as compared to 8.1% to last year, and decreased to 7.5% year-to-date from 8.3% in the first nine months of 2002. The decreases in income from operations and operating margin resulted primarily from the reductions in our gross profit margins and increased operating expense, both discussed above.

We reduced our interest expense in the third quarter of 2003 by 15.8% to $1.6 million from $1.9 million a year earlier, due to a combination of our reduced debt and lower interest rates in the economy. We reduced our interest expense by a much larger amount in the first nine months of 2003, by 37.2% to $4.9 million from $7.8 million in comparable 2002. The main reason for the larger reduction was our $90 million March 2002 public stock offering, supported by our cash flow and lower economic interest rates. Our effective tax rate for the third quarter of 2003 was 35.2% and was 36.7% for nine months of 2003, up from 33.7% and 35.0% in the comparable periods of 2002, respectively, due primarily to non-recurring tax refunds in 2002.

Our net income was $6.5 million in the third quarter, an 8.5% reduction from $7.1 million in the third quarter last year, and $19.1 million for the first nine months of 2003, a 4.0% decrease from $19.9 million in comparable 2002. Our EPS was $.26 in the third quarter and $.76 year-to-date, as compared to $.28 and $.83, respectively, in the comparable periods of 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital was $160.1 million at September 30, 2003, 3.8% lower than at June 30, 2003. Our current ratio decreased slightly to 3.0:1 at the end of the third quarter from 3.1:1 the prior quarter. Our cash flow from operations was $19.7 million in the third quarter this year, improved 31.3% from $15.0 million in comparable 2002, due primarily to a combination of earnings, depreciation and inventory reduction. For the first nine months of 2003, operating cash flow was $40.0 million, as compared to $47.5 million in comparable 2002. The difference was due primarily to lower cash generated by working capital changes in 2003. Capital spending was $4.5 million in the third quarter of 2003, and was $14.4 million year-to-date, accounting for the $12.7 million of cash used in investing activities year-to-date. At September 30, 2003, we had $2.1 million of outstanding commitments for future capital expenditures. Cash used in financing activities was $15.5 million in the third quarter this year, with reduced long-term debt of $12.5 million and $3.0 million of dividends comprising the total.

Our $12.5 million of debt reduction in the third quarter lowered our outstanding debt to $206.7 million at September 30, 2003, with $202 million outstanding under our $275 million long-term unsecured revolving credit facility (the “Facility”) that expires December 31, 2005. The Facility requires us to maintain specified financial ratios and to satisfy certain financial condition tests, with which we were in compliance as of September 30, 2003. Our available borrowing capacity at the end of the quarter was $9 million due to the limitation of financial covenants. We believe we will be able to satisfy the financial ratios and tests specified in the Facility for the foreseeable future. We also believe that the combination of borrowing availability under the Facility, our operating cash flow and our ability to access the debt and/or equity markets for additional capital when needed will provide sufficient cash availability to finance our existing operations for the foreseeable future.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our financial statements and the amounts of our revenues and expenses during the periods reported. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are our critical accounting policies which could have the most significant effect on our reported results or require management’s most subjective or complex judgments.

Revenue Recognition

Sales and related cost of sales for all products are recognized upon shipment of the products, as shipments are generally FOB shipping point.

Allowance for Doubtful Accounts

We record allowances for doubtful accounts after customer-specific analysis and general analysis of past due balances, economic conditions and historical experience. Allowance levels change as customer-specific circumstances and the general analysis areas above change.

Excess and Obsolete Inventory Reserves

Our systems track the frequency of usage of inventory by part number and reports are generated monthly. Based on these analyses of historical usage and management’s evaluation of estimated future demand, market conditions and alternative uses for possible excess or obsolete parts, reserves are recorded and changed. Excess and obsolete inventory is periodically disposed through sale to third parties, scrapping or other means, and the reserves are appropriately reduced.

Impairment of Long-Lived Assets

We review long-lived assets, which include property, plant and equipment, and other intangible assets with definitive lives such as patents and trademarks, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset in our accounting records may not be fully recoverable. Additionally, we evaluate the recoverability of goodwill and other intangible assets with indefinite lives at least annually during our fourth quarter, independent of specific events. We assess these assets for impairment based on estimated future cash flows from these assets, which estimates require us to make assumptions about future demand for the Company’s products and services, future market conditions, future growth rates and the discount rate, among others. Changes to these assumptions could result in an impairment charge in future periods.

Product Warranty Reserves

We maintain reserves for product warranty to cover the stated warranty periods for our products. We establish or change such reserves based on our evaluation of historical warranty experience and specific significant warranty matters when they become known and can reasonably be estimated.

Retirement Plans

Slightly over half of our employees are covered by defined benefit pension plans with the remaining employees covered by defined contribution plans. Our obligations under the defined benefit plans are determined with the assistance of actuarial firms. The actuaries make certain assumptions regarding such factors as withdrawal rates and mortality rates. The actuaries also provide us with information and recommendations from which management makes further assumptions on such factors as the long-term expected rate of return on plan assets, the discount rate on benefit obligations and where applicable, the rate of annual compensation increases. Based upon the assumptions made, the investments made by the plans, overall conditions and movement in financial markets, particularly the stock market, and how actual withdrawal rates, life-spans of benefit recipients and other factors differ from assumptions, annual expenses and recorded assets or liabilities of these defined benefit plans may change significantly from year to year.

Self-Insurance Liabilities

Our insurance programs include health care, workers’ compensation and product liability. We self-insure from the first dollar of loss up to various specified retention levels per occurrence. Eligible losses in excess of self-insurance retention levels and up to stated liability limits are covered by policies we purchase from insurance companies, as are eligible losses when and if we purchase aggregate stop-loss policies. We estimate the annual costs and liabilities of our self-insurance programs using our Company’s claims experience and risk exposure levels for the periods being valued. Differences in actual costs of claims from estimated costs will likely result in adjustments to expenses and liabilities.

Litigation and Claims

We record expenses and liabilities when we believe that an obligation of the Company on a specific matter is probable and we have a basis to reasonably estimate the value of the obligation. This methodology is used for environmental matters and legal claims that are filed against the Company from time to time. The uncertainty that is associated with such matters frequently requires adjustments to the liabilities previously recorded.

New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). This Statement prescribes how an issuer classifies and measures certain financial instruments. Financial instruments within the scope of SFAS 150 are required to be classified as liabilities (or assets in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for the Company July 1, 2003. There was no impact to the Company from adopting SFAS 150.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information with respect to the Company’s exposure to interest rate risk and foreign currency risk is contained on Page 15 in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. Management believes that at September 30, 2003, there has been no material change to this information.

Item 4. Controls and Procedures

An evaluation was carried out by the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of September 30, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No changes were made in the Company’s internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control and financial reporting.

PART II

OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

REGAL-BELOIT CORPORATION

(Registrant)

/S/ Kenneth F. Kaplan

Kenneth F. Kaplan

Vice President - Chief Financial Officer and Secretary

(Principal Accounting and Financial Officer)

DATE: November 12, 2003

Exhibit 31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the

Sarbanes-Oxley Act and Rule 13a-14(A) or 15d-14(A)

Under the Securities and Exchange Act of 1934

I, James L. Packard, certify that:

1. I have reviewed this quarterly report on Form 10-Q of REGAL-BELOIT Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

Exhibit 31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the

Sarbanes-Oxley Act and Rule 13a-14(A) or 15d-14(A)

Under the Securities and Exchange Act of 1934

I, Kenneth F. Kaplan, certify that:

1. I have reviewed this quarterly report on Form 10-Q of REGAL-BELOIT Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls.

Exhibit 32.1

Written Statement of the Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of REGAL-BELOIT Corporation (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2003 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/ James L. Packard

James L. Packard

Chairman and Chief Executive Officer

/S/ Kenneth F. Kaplan

Kenneth F. Kaplan

Vice President, Chief Financial Officer and Secretary

Date: November 11, 2003