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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

or

Commission file number 1-7283

REGAL-BELOIT CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (608) 364-8800

Securities registered pursuant to Section 12 (b) of the Act:

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes |X|       No [  ]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 was approximately $466,000,000.

On February 27, 2004, the registrant had outstanding 25,039,506 shares of common stock, $.01 par value, which is registrant’s only class of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for 2003 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to be incorporated by reference into Part III)

REGAL-BELOIT CORPORATION

Index to
Annual Report on Form 10-K

For the Year Ended December 31, 2003

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 this Annual Report on Form 10-K or incorporated by reference 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 the Company’s 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 our competitors, and 6) our ability to satisfy various covenant requirements under our credit facility. Investors are directed to the Company’s documents filed with the Securities and Exchange Commission.

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PART I

     Unless the context requires otherwise, references in this Annual Report to “we,” “us” or “our” refer collectively to REGAL-BELOIT CORPORATION and its subsidiaries.

ITEM 1. Business

Our Company

We are a leading manufacturer and marketer of industrial electric motors, electric power generation components and controls, mechanical motion control products, and cutting tools, serving markets predominantly in the United States as well as throughout the world. Our products are used in a variety of essential industrial applications, and we believe we have one of the most comprehensive product lines in the markets we serve. We sell our products using more than 20 recognized brand names through a multi-channel distribution model, which we believe provides us with a competitive selling advantage and allows us to more fully penetrate our target markets.

Our business is organized into two segments: our Electrical Group, which represented 71% of our 2003 net sales, and our Mechanical Group, which represented 29% of our 2003 net sales. Our Electrical Group manufactures and markets a full line of alternating current (AC) and direct current (DC) industrial electric motors, electric power generation components and controls, and electrical connecting devices. Our Mechanical Group manufactures and markets a broad array of mechanical products, including gears and gearboxes, marine transmissions, high-performance automotive transmissions and ring and pinions, manual valve actuators, and cutting tools. Original equipment manufacturers 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 bundling opportunities between products in our Electrical and Mechanical Groups.

We sell our products directly to original equipment manufacturers and distributors across many markets. Our two business segments are divided into 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. We manufacture the vast majority of the products that we sell and have manufacturing, sales and distribution facilities throughout the United States and Canada as well as in Europe and Asia.

     We believe our competitive strengths include our:

     Our business strategy includes growing revenues organically in excess of market rates, continuously lowering our manufacturing costs and pursuing strategic acquisitions. Our specific revenue growth initiatives include:

Major initiatives in process to lower our manufacturing costs include completing the integration of LEESON Electric Corporation and capitalizing on operating synergies from the acquisition; further improving our operational efficiencies; plant consolidations; and focusing on sourcing and logistics opportunities. We will also seek to broaden our market coverage by acquiring businesses and product lines that provide a strategic fit with our existing businesses.

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Electrical Group

Our Electrical Group manufactures and markets a full line of AC and DC industrial electric motors, electric power generation components and controls, and electrical connecting devices. We entered the industrial electric motor and electric power generation markets in March 1997 with our acquisition of Marathon Electric Manufacturing Corporation. Subsequent acquisitions of the Lincoln Motors business of Lincoln Electric Holdings, Inc. in 1999, Thomson Technology, Inc. in 2000 and LEESON Electric Corporation in 2000 have been integrated with Marathon Electric to form our current Electrical Group. Our expansion into the electric motor and electric power generation markets in 1997 was part of our strategy to leverage our core competencies in industrial manufacturing and to complement our existing mechanical businesses. We estimate that a substantial portion of the mechanical motion control products that we manufacture are powered by an electric motor.

Our Electrical Group manufactures and markets AC and DC industrial electric motors ranging in size from sub-fractional to large integral horsepowers through 800 horsepower in AC and from sub-fractional through small integral horsepowers in DC. We offer over 5,500 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 Group markets a line of AC and DC adjustable speed drives. We sell our Electrical Group products to distributors, original equipment manufacturers and end users across many markets.

Within the Electrical Group, our Motor Technologies Group continues to work to fully leverage potential efficiencies across our electric motor operations. Our Motor Technologies Group manages the manufacturing, purchasing, engineering, accounting, information technology and quality control activities of our Marathon, Lincoln and LEESON electric motor brands. Furthermore, the Motor Technologies Group is specifically fostering the sharing of best practices across our motor and generator businesses and creating focused centers of excellence in each of our motor and generator manufacturing functions.

Our power generation business, which includes electric generators and power generation components and controls, represents a significant portion of our Electrical Group net sales. We expect the market for electric power generation components and controls to grow as a result of a desire on the part of end users to reduce losses due to power disturbances. We intend to continue to seek ways to take advantage of growth in the market for prime and standby power generation in the United States and overseas by expanding our line of generators to meet higher and more sophisticated power generation requirements. With our June 2000 acquisition of Thomson Technology, we specifically targeted the emerging power generation controls market and now offer automatic transfer switches, paralleling switchgear and controls, and systems controls. When these control products are bundled with our Marathon generators, we are able to provide critical components of a system solution to power generation markets throughout the world.

     The following is a description of our major Electrical Group businesses and the primary products that they manufacture and market:

     LEESON Electric. Manufactures AC motors up to 800 horsepower and DC motors up to five horsepower, gear reducers, gearmotors and markets drives primarily for the power transmission, pump, food processing, fitness equipment and industrial machinery markets.

     Lincoln Motors. Manufactures AC motors from ¼ horsepower to 800 horsepower primarily for industrial and commercial pumps, compressors, elevator and 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 Generators. Manufactures AC generators from five kilowatts to four megawatts that primarily serve the standby power, prime power, refrigeration, irrigation and construction markets.

     Marathon Special Products. Manufactures fuse holders, terminal blocks, and power blocks primarily for the HVAC, telecommunications, electric control panel, utilities and transportation markets.

     Thomson Technology. Manufactures automatic transfer switches, paralleling switchgear and controls, and systems controls primarily for the electric power generation market.

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Mechanical Group

Our Mechanical Group manufactures and markets a broad array of mechanical motion control products and cutting tools. Our products include: standard and custom worm gear, bevel gear, helical gear and concentric shaft gearboxes; marine transmissions; high-performance after-market automotive transmissions, ring and pinions and differential locking devices; custom gearing; gearmotors; manual valve actuators and cutting tools. 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. Our high-speed steel and carbide rotary perishable cutting tools are used in metalworking applications. Mechanical Group products are sold to original equipment manufacturers, distributors and end users across many industry segments.

The following is a description of our major Mechanical Group businesses and the primary products they manufacture and market:

     CML (Costruzioni Meccaniche Legnanesi S.r.L.). Manufactures bevel gear valve actuators primarily for the oil, gas, wastewater and water distribution markets.

     Cutting Tools. Manufactures a full line of industrial quality high-speed steel and carbide rotary cutting tools primarily for the aerospace, agriculture, automotive, railroad and general industrial markets. These cutting tools are marketed under three brand names: National Twist Drill, New York Twist Drill and Regal Cutting Tools.

     Durst. Manufactures standard and specialized industrial transmissions and hydraulic pump drives primarily for the construction, agriculture, energy, material handling, forestry, lawn and garden, railroad maintenance and off-road vehicle markets.

     Electra-Gear. Manufactures specialized aluminum gear reducers and gearmotors primarily for the food processing, medical equipment, car wash, boat lift and packaging markets.

     Foote-Jones/Illinois Gear. Manufactures large-scale parallel shaft and right-angle gear drives and custom gears up to 100 inches in diameter primarily for the mining, oil, pulp and paper, forestry, aggregate, construction, steel, power generation and large public works markets.

     Grove Gear. Manufactures standard and custom industrial gear reducers and gearmotors primarily for the material handling, food processing, robotics, healthcare and power transmission markets.

     Hub City. Manufactures gear drives, sub-fractional horsepower gearmotors, mounted bearings and accessories primarily for the packaging, construction, material handling, healthcare and food processing 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. Manufactures ring and pinions and transmissions primarily for the high-performance automotive aftermarket and pleasure boat 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 38 businesses to build a strong multi-product offering. Our senior management has substantial experience in the acquisition and integration of businesses, aggressive cost management, and efficient manufacturing techniques, all of which represent activities that are critical to our long-term growth strategy. Since 1979, our current management team has completed and successfully integrated 23 acquisitions. We have a proven track record of acquiring complementary businesses and product lines, integrating their activities into our organization and aggressively managing their cost structures to reduce waste and unnecessary expenditures. The history of our Electrical and Mechanical Group acquisitions since 1990 is outlined following.

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Sales, Marketing and Distribution

We sell our products directly to original equipment manufacturers and distributors across many markets. Our two business segments are divided into 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.

We believe that our effective use of information technology significantly enhances our ability to provide customer focused quality and further differentiates us from many of our competitors. Our website allows customers easy access to business and product information, and contains the latest product introductions, distributor information, installation manuals, technical bulletins and customer service. For example, through our Electrical Group websites, we have an e-commerce portal that provides our independent manufacturers’ representatives, distributors and employees with constant access to real-time information such as account status, order status, engineering and competitive information, stock product availability, pricing and order entry. In addition, customers are able to search our stock catalogs for motor, gearmotor, drive, part or catalog number.

Markets and Competitors

The worldwide market for electric motors is estimated in excess of $24 billion. The overall domestic market for electric motors is estimated at $9 billion annually, although we believe that we compete primarily in the industrial sector of the domestic electric motor market, estimated to be a $2.3 billion segment of the overall market. We believe approximately 60% of all electricity generated in the U.S. runs through electric motors. With the acquisitions of Marathon Electric in 1997, Lincoln Motors in 1999 and LEESON Electric in 2000, we believe we have become one of the largest producers of industrial electric motors in the United States and hold a market position in this segment close to Baldor Electric Company, the current market leader. 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 the Electrical Group other than Baldor Electric include U.S. Electrical Motors (a division of Emerson Electric Co.), Reliance Electric Company (a division of Rockwell International), 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.

Our Mechanical Group serves various markets and competes with a number of different companies depending on the particular product offering. We believe that we are the leading manufacturer of several products offered by our Mechanical Group 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 Colfax Corporation), Dodge (a division of Rockwell International), 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.

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During the past several years, niche product market opportunities have become more prevalent due to changing market conditions. Our markets have also been impacted by decisions by larger manufacturers not to compete in lower volume or specialized markets. Other manufacturers, which 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 diversity of customers and applications. We believe that we compete primarily on the basis of quality, price, service and our promptness of delivery.

Product Development and Engineering

Each of our business units 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 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, both Mechanical and Electrical. We work closely with our customers to develop new products or enhancements to existing products that improve performance and meet their needs. Examples of our research and development successes in the last two years include our Globetrotter™ IEC Motor line; a full line of premium efficiency motors; three new product lines of high efficiency mechanical speed reducers; a line of induction generators; new co-generation switchgears; a complete array of food solution products including stainless steel and aluminum motors, reducers and electronic devices; and our award winning microMAX™ inverter duty motor line.

Manufacturing and Operations

Our vertically integrated manufacturing operations, including our own cast iron foundry and 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 that consists of approximately 50 semi-tractors and 100 semi-trailers and a network of distribution facilities with the capability to modify stock products to quickly meet specific custom requirements in many instances.

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 still maintain a dual sourcing capability in our existing domestic facilities to ensure a reliable supply source for our customers. Most of our operating units conduct their manufacturing operations independently in one or more facilities. Our Electrical Group manufacturing, other than Marathon Special Products and Thomson Technology, is performed by our Motor Technologies Group, which also has responsibility for all power generation operations, including sales and marketing. 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.

The manufacturing operations of both our Electrical Group and Mechanical Group are highly integrated. Although raw materials and selected parts such as bearings and seals are purchased, this vertical integration permits us to produce most of our required component parts when needed. We believe this results in lower production costs, greater manufacturing flexibility and higher product quality, as well as reducing our reliance on outside suppliers. 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, redesigning plant layout and redesigning products to take full advantage of our more productive equipment and to improve product flow. We believe that our continued product redesign and efficient plant layouts often provide us with a competitive cost advantage in our manufacturing operation. Our goal is to be a low cost producer in our core product areas.

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To continue to be a low cost producer, our strategy in this increasingly global economic environment is to expand our foreign manufacture of select products. We increased our sourcing of both components and finished products from outside the U.S. in the past two years. In January 2003 we acquired a 50% ownership in a current supplier to us of smaller industrial electric motors. This joint venture is our second in China along with our 8-year-old 55%-owned joint venture to manufacture smaller generators. Both support our low cost production efforts.

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 12% of our annual sales, we believe that backlog is not a reliable indicator of our future sales. As of December 31, 2003, our backlog was $73.2 million, as compared to $68.1 million on December 31, 2002. We believe that virtually all of our backlog is shippable in 2004.

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. 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 December 31, 2003, the Company employed approximately 4,850 persons, of which approximately 20% were covered by collective bargaining agreements. We consider our employee relations to be very good.

Environmental Matters

We are subject to Federal, State and local environmental regulations. We are currently involved with environmental proceedings related to certain of our facilities. 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

The names, ages, and positions of the executive officers of the Company as of December 31, 2003, 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.

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Website Disclosure

The Company’s Internet address is www.regal-beloit.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.

The Company has adopted a code of ethics and a code of conduct that apply to our principal executive officer and principal financial officer, as well as to all our directors, officers and employees. These codes are available on our website, along with our current Corporate Governance Guidelines, at www.regal-beloit.com. We intend to disclose through our website any amendments to, or waivers from, the provisions of these codes that apply to our principal executive officer or principal financial officer.

ITEM 2. Properties

We have manufacturing, sales and service facilities throughout the United States and Canada and in Europe and Asia. Our Electrical Group currently operates 38 manufacturing and service and distribution facilities. The Electrical Group’s present operating facilities contain a total of approximately 2,205,510 square feet of space of which approximately 660,000 square feet are leased. Our Mechanical Group currently operates 16 manufacturing and service and distribution facilities. The Mechanical Group’s present operating facilities contain a total of approximately 1,347,000 square feet of space of which approximately 89,000 square feet are leased. Our principal executive offices are located in Beloit, Wisconsin in an owned approximately 24,000 square foot office building. We believe our equipment and facilities are well maintained and adequate for our present needs.

ITEM 3. Legal Proceedings

From time to time, the Company, in the normal course of business, is involved in various claims and legal actions arising out of its operations. The Company does not believe that the ultimate disposition of any currently pending claims or actions would have a material adverse effect on the Company or its financial condition.

ITEM 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2003.

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Part II

ITEM 5. Market for the Registrant’s Common Equity and Related Shareholder Matters

The Company’s Common Stock, $.01 par value (“Common Stock”), is traded on the American Stock Exchange under the symbol “RBC.” The following table sets forth the range of high and low closing sales prices for the Common Stock for the period from January 1, 2002 through December 31, 2003.

The Company has paid 174 consecutive quarterly dividends through January 2004. The number of registered holders of Common Stock as of December 31, 2003 was 841.

Equity Compensation Plan Information

ITEM 6. Selected Financial Data

The selected statement of income data for the years ended December 31, 2003, 2002 and 2001 and the balance sheet data at December 31, 2003 and 2002 are derived from, and are qualified by reference to, the audited financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the years ended December 31, 2000 and 1999 and the balance sheet data at December 31, 2001, 2000 and 1999 are derived from audited financial statements not included herein.

*Amortization of goodwill ceased as of January 1, 2002 (see Note 3 of Notes to Consolidated Financial Statement).

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ITEM 7. Management’s Discussion and Analysis of Financial Statements

Unless the context requires otherwise, references below to “we,” “us,” “our” or the “Company” refer collectively to REGAL-BELOIT CORPORATION and its subsidiaries.

Overview

Our business is cyclical and dependent on industrial and consumer spending and is therefore impacted by the strength of the economy generally, and other factors such as interest rates and commodity prices. The economic slowdown, which began in mid-2000, became an economic recession in 2001, and was characterized by weak industrial markets throughout 2002 and 2003, was the most significant factor in our performance in 2003, as it was in 2002. While our net sales in 2003 increased 2.3% to $619.1 million and net income rose 2.8% to $25.2 million, 2003 was best characterized as lacking a meaningful trend, either up or down, in our markets.

By the end of the third quarter of 2003 we had completed, for the most part, the three plant closings/consolidations we announced in the fourth quarter of 2002. Both in the facilities being closed and in the facilities into which production was moved, our productivity during 2003 was negatively impacted to varying degrees, accounting for a portion of our decreased operating income margin. While these moves took longer than we had expected, we believe they will result in improved productivity and profitability in future quarters.

We again strengthened our balance sheet in 2003 by reducing our outstanding debt by $27.2 million to $195.8 million at December 31, 2003. We increased our investment in our facilities by spending $18.0 million for capital equipment during the year.

We enter 2004 with increased optimism that orders and sales will, for the first time in several years, show a meaningful upward trend. We base this optimism on the macro economic forecasts being published, the comments and attitudes of many of our customers and increased quoting activity in many of our markets. While significant commodity cost pressures exist currently, particularly with copper and steel, two of our largest raw materials, we cannot predict where these costs will be for all of 2004. For the first time since the economic slowdown began in 2000, we have been able to institute price increases with most of our products and many of our customers. The market appears to have accepted our price increases and we believe we can offset the higher current costs of our purchased materials and parts.

Results of Operations

2003 versus 2002

Our net sales were $619.1 million in 2003, a 2.3% increase from $605.3 million in 2002. The higher sales were attributable to our Electrical Group, whose 2003 net sales of $438.4 million were 4.7% improved from 2002’s $418.6 million. This sales increase was due primarily to strength in our power generator and related controls products, including our generator joint venture in China, particularly in the second half of 2003. The increase in the generator and control sales was due primarily to an overall improvement in market demand as 2003 progressed, in part aided by the impact of the Northeast power outage, Hurricane Isabel and Middle East rebuilding projects. Sales of our electric motor products were virtually unchanged in 2003 from 2002. Mechanical Group 2003 net sales of $180.7 million were 3.2% below $186.7 million in 2002 and were basically flat throughout 2003, reflecting broad-based weakness in our markets.

Our gross profit rose 2.6% in 2003 to $146.8 million from $143.1 million the previous year. Gross profit as a percentage of net sales (“gross profit margin”) in 2003 of 23.7% was virtually unchanged from 2002, although increasing to 24.1% in the fourth quarter of 2003 above the 23.6% average margin of the first nine months of 2003. The fourth quarter 2003 gross profit margin increase above the rest of 2003 was due primarily to improved manufacturing productivity and the completion of moving production from three of our factories, which are for the most part now closed, into several of our other facilities.

Our operating expenses in 2003 were $99.5 million, 3.8% above $95.9 million in 2002. Of the $3.6 million increase, approximately $1.2 million, or 33%, was due to the operating expenses of our consolidated Jinling joint venture which began January 1, 2003. Operating expenses as a percentage of sales increased to 16.1% in 2003 from 15.8% in 2002.

Income from operations of $47.2 million was virtually unchanged from 2002. Income from operations as a percentage of sales (“operating income margin”) was 7.6% in 2003 versus 7.8% in 2002. Electrical Group income from operations decreased 4.5% in 2003 to $33.9 million from $35.5 million in 2002, and operating income margin to 7.7% in 2003 from 8.5% in 2002. In addition to the impact of our joint venture discussed above, the impact on 2003 productivity of the plant consolidation programs also discussed above, as well as continued pricing pressures, higher utility and other factory costs and lower overhead absorption in order to reduce inventories were also factors in the reduced Electrical Group operating income margin. Mechanical Group income from operations increased 13.7% to $13.3 million in 2003 from $11.7 million in 2002 and operating income margin to 7.4% from 6.3% for 2003 and 2002, respectively. Excluding the $1.2 million pre-tax fourth quarter 2002 charge relating to a plant closing/consolidation completed in 2003’s first quarter, the Mechanical Group’s 7.4% operating income margin would still be .5% higher in 2003 than in 2002, primarily due to improved productivity and to favorable mix of products sold. (See also Note 11 of Notes to Consolidated Financial Statements.)

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Our interest expense in 2003 decreased 31.2% following a 57.7% decrease in 2002, to $6.5 million from $9.4 million in 2002, due primarily to a combination of lower average interest rates in the United States in 2003 than in 2002 and to our lower average debt outstanding. The average interest rate we paid on outstanding debt in 2003 was 2.7%, following a 3.5% average in 2002. Our effective tax rate on income before taxes increased to 36.2% in 2003 from 34.7% in 2002. This increase was due primarily to the impact of one-time tax refunds we received in 2002.

Our 2003 net income of $25.2 million was 2.8% improved from $24.5 million in 2002. Net income as a percentage of sales of 4.1% in 2003 was virtually unchanged from 2002. Basic earnings per share (“EPS”) was $1.01 in 2003 and 2002, while diluted EPS was $1.00 compared to $1.01 a year earlier.

2002 versus 2001

Our net sales in 2002 decreased 8.8% to $605.3 million from 2001 net sales of $663.6 million. The decrease in net sales was attributable to both of our two segments. Electrical Group net sales decreased 8.4% from $457.0 million in 2001 to $418.6 million in 2002, while Mechanical Group net sales of $186.7 million in 2002 were 9.6% lower than 2001 net sales of $206.6 million. The reduced sales were primarily due to continued weakness in industrial manufacturing markets.

Our gross profit decreased 13.7% to $143.1 million in 2002 from $165.9 million in 2001. Gross profit as a percentage of net sales (“gross profit margin”) was 23.6% in 2002, down from 25.0% in 2001. The reduction in gross profit margin was due primarily to lower overhead absorption resulting from reduced production volumes and to lower average prices to customers. Also contributing to the reduced margin was a $1.2 million pre-tax charge in the fourth quarter of 2002 for plant closings and consolidations in our Mechanical Group.

Operating expenses decreased 12.7% to $95.9 million in 2002 from $109.8 million in 2001. No longer amortizing goodwill in 2002 accounted for $8.4 million of this decrease, while the remaining $5.5 million reduction was due to reduced spending and headcount in selling and administrative expenses. As a percentage of sales, operating expenses declined to 15.8% in 2002 from 16.5% in 2001. Our income from operations of $47.2 million in 2002 was 15.9% below $56.1 million in 2001. This decline occurred in both of our segments, Electrical Group income from operations being down 11.7% to $35.5 million in 2002 (down 27.0% adjusting 2001 for not amortizing goodwill), and the Mechanical Group being down 26.4% to $11.7 million in 2002. (See also Note 11 of Notes to Consolidated Financial Statements.) Income from operations as a percentage of net sales (“operating income margin”) for the Company decreased to 7.8% in 2002 from 8.4% in 2001. This decrease in operating income margin was due primarily to the reduction in gross profit margin, partly offset by the lower operating expenses as a percentage of sales.

Interest expense decreased 57.7% to $9.4 million in 2002 from $22.2 million in 2001, due to a combination of lower debt outstanding, lower interest rates in the United States and a reduced mark-up over LIBOR (London Interbank Offered Rate) we paid to our lenders. The lower debt resulted from repaying $90 million of our loans in March 2002 following our public stock offering and further loan repayments from operating cash flow during the year. The average rate of interest we paid on outstanding debt in 2002 was 3.5%, following a 5.9% average in 2001. Our effective tax rate on income before taxes decreased to 34.7% in 2002 from 42.5% in 2001. The primary factors in the decrease were the impact of non-deductible goodwill amortization in 2001 and one-time tax refunds we received in 2002.

Our net income increased 25.0% to $24.5 million in 2002 from $19.6 million in 2001. As a percentage of net sales, net income increased to 4.1% in 2002 from 3.0% in 2001. Basic and diluted earnings per share (“EPS”) were each $1.01 in 2002, as compared to $.94 basic EPS and $.93 diluted EPS in 2001, increases of 7.4% and 8.6%, respectively. Average number of shares outstanding assuming dilution increased 15.1% in 2002 to 24.3 million from 21.1 million in 2001 as a result of our March 2002 public stock offering. The 2002 net income and EPS numbers are after a fourth quarter after-tax charge of $725,000, or $.03 per share, for plant closings and consolidations in our Mechanical Group. (See also Note 3 of Notes to Consolidated Financial Statements.)

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Liquidity and Capital Resources

Our working capital was $160.1 million at December 31, 2003, an increase of 1.7% from $157.4 million a year previously. The increase was due primarily to a $7.9 million increase in current assets partly offset by a $5.2 million increase in current liabilities. Accounts receivable increased $6.4 million during 2003 due primarily to our increased net sales. Accounts payable increased $4.1 million in 2003 primarily as a result of improved business activity as we entered 2004 from when we entered 2003 a year ago. Other accrued expenses decreased $5.3 million in 2003 due primarily to non-recurring charges against liabilities accrued on December 31, 2002 associated with plant closings/consolidations. Federal and state income tax accruals increased $6.2 million during 2003 as a result of timing changes in estimated tax payments. Our current ratio at December 31, 2003 decreased slightly to 3.1:1 from 3.2:1 at year-end 2002.

Cash flow from operations was $59.0 million in 2003, an 8.5% increase from $54.4 million in 2002. Reduced inventories and higher current liabilities, in part offset by higher receivables, account for the increase. Cash flow used in investing activities totaled $16.6 million versus $11.9 million in 2002. Increased capital spending accounted for the higher investment spending due to an increase in the number of capital projects in 2003, including three facility expansions and a computer system conversion, and to a general increase in spending after unusually low capital spending in 2002. Our commitments for property, plant and equipment as of December 31, 2003 were approximately $2.1 million. We believe that our present facilities, augmented by planned capital expenditures, are sufficient to provide adequate capacity for our operations in 2004.

Cash flow used in financing activities in 2003 was $39.0 million after $43.6 million in 2002. We reduced our outstanding long-term debt $27.1 million in 2003 to $195.7 million at December 31, 2003 from $222.8 million at year-end 2002. We paid $12.0 million in dividends during 2003.

Our primary financing source is our $275 million long-term unsecured revolving credit facility (the “Facility”) that expires on December 31, 2005, which we reduced $25 million in March 2003 from $300 million. The Facility requires us to maintain specified financial ratios and to satisfy certain financial condition tests, with which we were in compliance as of December 31, 2003. At year-end 2003, we had $8.0 million of available borrowing capacity. Although the Facility provides up to $275 million of credit, availability under the Facility may be limited by the funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio covenant, which was the case at December 31, 2003. We believe we will satisfy the financial ratios and tests specified in the Facility for the foreseeable future. We also believe that the combination of our operating cash flow, which has averaged over $60 million per year over the last three years and we believe is indicative of what we might achieve in 2004, and borrowing availability under the Facility will provide sufficient cash flow to finance our existing operations for the foreseeable future. (See also Note 5 of Notes to Consolidated Financial Statements.)

As a result of our capital structure, we are exposed to interest rate risk. Virtually all our debt is under a credit facility with a variable interest rate based on a margin above LIBOR. As a result, interest rate changes impact our future earnings and cash flows assuming other factors are constant. A hypothetical 10% change in our weighted average borrowing rate on our outstanding debt at December 31, 2003, would result in a change in after-tax annual earnings of approximately $155,000. We had no material foreign currency rate risk or material derivative instruments at December 31, 2003.

Off-Balance Sheet Arrangements, Contractual Obligations and Commercial Commitments

The following is a summary of the Company’s contractual obligations and payments due by period as of December 31, 2003 (in thousands):

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We utilize blanket purchase orders (“blankets”) to communicate expected annual requirements to many of our suppliers. Requirements under blankets generally do not become “firm” until a varying number of weeks before our scheduled production. The purchase obligations shown in the above table represent the value we consider “firm”.

At December 31, 2003, the Company had outstanding standby letters of credit totalling $7,005,000, all of which would expire in 2004. We had no other material commercial commitments.

The Company did not have any variable interest entities as of December 31, 2003. Other than disclosed in the table above and the previous paragraph, the Company had no other material off-balance sheet arrangements.

Critical Accounting Policies

The preparation of our consolidated financial statements in 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 and require management’s most difficult, subjective or complex judgments.

Revenue Recognition

Sales and related cost of sales are recognized upon shipment of products as this is when title and risk of ownership transfer to the customer. The pricing of our products is generally supported by customer purchase orders, and accounts receivable collection is reasonably assured at the time of shipment. Any discounts from our standard prices are recognized as a reduction of sales and the related customer receivable at the time of sale. Product returns are estimated and recorded at the time of shipment based upon historical experience. Estimated customer rebates are accrued and recognized as a reduction of sales in a systematic manner throughout the year.

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 of through sale to third parties, scrapping or other means, and the reserves 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, 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

Approximately 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

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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.

The valuation date for our defined benefit plans was changed in 2003 to December 31 from September 30. Based on our annual review of actuarial assumptions as well as historical rates of return on plan assets and existing long-term bond rates, we set the long-term rate of return on plan assets at 8.75% and the discount rate at 6.25% for our defined benefit plans. Primarily as a result of the change in the discount rate, we expect pension expense to increase approximately $1.7 million in 2004 versus 2003. (See also Note 7 of Notes to Consolidated Financial Statements.)

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. SFAS 150 was effective for the Company on July 1, 2003. There was no impact to the Company from adopting SFAS 150.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Adoption of this interpretation on January 1, 2003 did not have a material impact on the consolidated financial statements.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs Associated with Exit or Disposal Activities. The adoption of this statement on January 1, 2003 did not have a material impact on the consolidated financial statements.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Information required by Item 305 of Regulation S-K is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 13 of this report.

ITEM 8. Financial Statements and Supplementary Data

Quarterly Financial Information (Unaudited)

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INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Board of Directors of REGAL-BELOIT CORPORATION:

     We have audited the accompanying consolidated balance sheet of REGAL-BELOIT CORPORATION and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ investment and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 28, 2002.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, such 2003 and 2002 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 3 to the financial statements, as of January 1, 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (Statement No. 142).

     As discussed above, the financial statements of the Company as of December 31, 2001 and for the year then ended were audited by other auditors who have ceased operations. As described in Note 3, these financial statements have been revised to include the transition disclosures required by Statement No. 142. Our audit procedures with respect to the disclosures in Note 3 for 2001 included (i) agreeing previously reported net income to previously issued financial statements; (ii) agreeing the adjustment to reported net income to the Company’s underlying records obtained from management; and (iii) testing the mathematical accuracy of the information included in Note 3. In our opinion, the disclosures for 2001 in Note 3 are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole.

DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 25, 2004

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The following report is a copy of a report previously issued by Arthur Andersen LLP in connection with REGAL-BELOIT CORPORATION’S Form 10-K for the year ended December 31, 2001. This opinion has not been reissued by Arthur Andersen LLP in connection with this Form 10-K.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of REGAL-BELOIT CORPORATION

We have audited the accompanying consolidated balance sheets of REGAL-BELOIT CORPORATION (a Wisconsin Corporation), and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ investment and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of REGAL-BELOIT CORPORATION and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
January 28, 2002

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Assets

See accompanying Notes to Consolidated Financial Statements

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See accompanying Notes to Consolidated Financial Statements.

19

See accompanying Notes to Consolidated Financial Statements.

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See accompanying Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For The Three Years Ended December 31, 2003

(1) Nature of Operations

     REGAL-BELOIT CORPORATION (the Company) is a United States-based multinational corporation. The Company is organized into two operating groups, the Mechanical Group, with its principal line of business in mechanical products which control motion and torque, and the Electrical Group, with its principal line of business in electric motors and power generation products. The principal markets for the Company’s products and technologies are within the United States.

(2) Accounting Policies

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its subsidiaries where the Company owns at least 50% of the subsidiary’s equity. All significant intercompany accounts and transactions are eliminated. The minority interest in the income of majority-owned consolidated subsidiaries was not material in 2001.

Revenue Recognition

     Sales and related cost of sales are recognized upon shipment of products as this is when title and risk of ownership transfer to the customer. The pricing of products sold is generally supported by customer purchase orders, and accounts receivable collection is reasonably assured at the time of shipment. Any discounts from the Company’s standard prices are recognized as a reduction of sales and the related customer receivable at the time of sale. Product returns are estimated and recorded at the time of shipment based upon historical experience. Estimated customer rebates are accrued and recognized as a reduction of sales in a systematic manner throughout the year.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions, in certain circumstances, that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation

     Net assets of non-U.S. subsidiaries, whose functional currencies are other than the U.S. dollar, are translated at the rates of exchange in effect as of year-end. Income and expense items are translated at the average exchange rates in effect during the year. The translation adjustments relating to net assets are recorded directly into a separate component of shareholders’ investment. Transaction adjustments are reported in net income.

Cash and Cash Equivalents

     Cash and cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less at date of acquisition. The carrying value of cash equivalents closely approximates their fair market value.

Life Insurance Policies

     The Company maintains life insurance policies on certain officers and management which name the Company as beneficiary. The total face value of these policies was $11,756,000 at December 31, 2003 and $11,577,000 at December 31, 2002. The cash surrender value, net of policy loans, is $806,000 and $2,284,000 at December 31, 2003 and 2002, respectively, and is included as a component of Other Noncurrent Assets.

Goodwill and Other Intangibles

     Prior to January 1, 2002, the cost of goodwill and other intangibles was amortized on a straight-line basis over the estimated periods benefited ranging from 5 to 40 years.

Effective January 1, 2002, upon the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles (SFAS 142), goodwill and other intangibles with indefinite useful lives are no longer amortized but instead are reviewed annually for impairment and any excess in carrying value over the estimated fair value is charged to the results of operations. Identifiable intangibles with a finite useful life are amortized over their useful lives. (See Note 3 of Notes to Consolidated Financial Statements.)

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Impairment of Long-Lived Assets

     The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The Company assesses these assets for impairment based on estimated future cash flows from these assets.

Inventories

     The approximate percentage distribution between major classes of inventory is as follows:

Inventories are stated at cost, which is not in excess of market. Cost for approximately 82% of the Company’s inventory at December 31, 2003 and 86% in 2002, was determined using the last-in, first-out (LIFO) method. If all inventories were valued on the first-in, first-out (FIFO) method, they would have increased by $3,555,000 and $3,818,000 as of December 31, 2003 and 2002, respectively. Material, labor and factory overhead costs are included in the inventories.

Property, Plant and Equipment

     Property, plant and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred and major renewals and improvements are capitalized.

     The cost of property, plant and equipment retired or otherwise disposed of is removed from the accounts, the accumulated depreciation is removed from related reserves, and the net gain or loss is reflected in income.

     The provisions for depreciation are based on the estimated useful lives of plant and equipment from the dates of acquisition and are calculated primarily using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives are:

Shipping and Handling Revenues and Costs

     Shipping and handling costs are recorded as costs of sales and the related billings are recorded as sales.

Stock-Based Compensation

     The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Stock options are granted at prices equal to the fair market value of the Company’s common stock on the grant dates; therefore, no compensation expense is recognized in connection with stock options granted to employees.

Accumulated Other Comprehensive Income (Loss)

     Other comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly into shareholders’ investment. The components of accumulated other comprehensive income (loss) were as follows at December 31:

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Earnings per Share (EPS)

     The difference between basic and diluted earnings per share is attributable solely to the incremental shares to be issued under the Company’s stock option plans. The following table reconciles the basic and diluted shares used in the per share calculations:

Derivative Instruments

     The Company entered into certain commodity forward contracts in 2003 in connection with the management of its exposure to fluctuations in certain raw material commodity pricing. These financial exposures are managed in accordance with corporate policies and procedures. These derivative instruments have been designated as cash flow hedges. Thus, as changes in the fair value of the derivatives occur, they are recorded as an asset or liability on the consolidated balance sheet and in accumulated other comprehensive income (AOCI). Such amounts are reclassified out of AOCI when the underlying hedged item impacts earnings. As of December 31, 2003, the Company had recorded $160,000, net of tax, in AOCI related to these commodity forward contracts.

Reclassifications

     Certain reclassifications were made to the 2002 financial statements to conform to the 2003 presentation.

(3) Goodwill and Other Intangibles

     On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets. The following table reconciles the reported net income and earnings per share to that which would have resulted for 2001 if SFAS 142 had been adopted effective January 1, 2001 (in thousands of dollars, except per share data):

     During the first quarter of 2002, the Company completed the first step of the transitional goodwill impairment test based on amounts as of January 1, 2002. Based on this review, the Company concluded that there were no impairment losses for goodwill due to the initial application of SFAS 142. The Company has two reporting units which are the same as its reportable segments, the Electrical Group and the Mechanical Group. As permitted by SFAS 142, the Company has elected to perform its annual test for impairment during the fourth quarter. The Company utilizes a discounted cash flow model to estimate the fair value of the reporting units. The Company performed its most recent analysis as of November 30, 2003, and based upon reasonable assumptions of cash flows and cost of capital, concluded that there continues to be no impairment of goodwill. At December 31, 2003 and 2002, none of the Company’s other intangible assets were determined to have indefinite lives and acquired intangibles with definite lives were not material.

     The following information presents changes to goodwill during the periods indicated:

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(4) Leases and Rental Commitments

     Rental expenses charged to operations amounted to $7,097,000 in 2003, $6,928,000 in 2002, and $7,314,000 in 2001. The Company has future minimum rental commitments under operating leases as shown in the following table:

(5) Long-Term Debt and Bank Credit Facilities

Long-term debt consists of the following:

     The Company maintained at December 31, 2003, a $275,000,000 unsecured revolving credit facility which expires December 31, 2005 (the “Facility”). The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). These interest rates also vary with LIBOR. The Company also pays a commitment fee on the unused amount of the $275,000,000 maximum credit limit, which varies with the debt to EBITDA ratio. The Facility includes various financial covenants regarding minimum net worth, permitted debt levels and minimum interest coverage. The Company was in compliance with all financial covenants as of December 31, 2003.

     The average balance outstanding under the Facility in 2003 was $217,236,000 and in 2002 was $253,625,000. The average interest rate paid under the Facility in 2003 was 2.7% and 3.5% in 2002. At December 31, 2003, the interest rate paid on the outstanding balance of the Facility was 2.7%. The Company also paid an unused commitment fee under the facility which was .30% of the unused balance of $83,789,000 at December 31, 2003. The Company had $8,030,000 of available borrowing capacity under the Facility at December 31, 2003, after deducting $211,000 for outstanding Facility-issued standby letters of credit. The available capacity was less than the unused balance of the Facility due to limits established by the debt to EBITDA covenant.

     The Company also has other loans with a total balance outstanding of $4,802,000 at December 31, 2003. The largest is a $2,000,000 industrial development bond issue completed on September 6, 2001.

     Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair market value of long-term debt is not materially different from the carrying value.

     Maturities of long-term debt are as follows:

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(6) Contingencies and Commitments

     The Company is, from time to time, party to lawsuits arising from its normal business operations. It is believed that the outcome of these lawsuits will have no material effect on the Company’s financial position or its results of operations.

     The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for 2003 and 2002:

Provision for virtually all warranties is made in the year of issuance.

(7) Retirement Plans

     The Company has a number of retirement plans that cover most of its employees. The plans include defined contribution plans and defined benefit plans. The defined contribution plans provide for Company contributions based, depending on the plan, upon one or more of participant contributions, service and profits. Company contributions to defined contribution plans totaled $1,941,000, $2,299,000, and $3,329,000 in 2003, 2002 and 2001, respectively.

     Benefits provided under defined benefit plans are based, depending on the plan, on employees’ average earnings and years of credited service, or a benefit multiplier times years of service. Funding of these qualified defined benefit plans is in accordance with federal laws and regulations.

     The Company’s defined benefit pension assets are invested in equity securities and fixed income investments based on the Company’s overall strategic investment direction as follows:

     The Company’s investment strategy for its defined benefit plans is to achieve moderately aggressive growth, earning a long-term rate of return sufficient to at least maintain the plans in a fully funded status. Accordingly, allocation targets have been established to fit this strategy, with a heavier long-term weighting of investments in equity securities. The long-term rate of return assumption considers historic returns adjusted for changes in overall economic conditions that may affect future returns and a weighting of each investment class.

     The defined benefit pension plan assets were invested as follows as of December 31 of each year:

     In 2003, the Company changed for financial reporting purposes the actuarial valuation measurement date for its pension plans from September 30 to December 31. Management believes that a measurement date of December 31 is preferable because it better reflects the actual balances of the plans as of the Company’s balance sheet date. This change did not have a significant effect on 2003 or prior years’ pension expense.

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     The actuarial computations utilized the following assumptions:

     Net periodic pension benefit costs for the defined benefit plans were as follows: