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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

For the quarterly period ended March 30, 2004

For the transition period from                                          to                                         

Commission File Number: 1-7283

REGAL-BELOIT CORPORATION
(Exact name of registrant as specified in its charter)

200 State Street, Beloit, Wisconsin 53511-6254
(Address of principal executive offices)

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

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.

24,448,820 Shares, Common Stock, $.01 Par Value (as of May 7, 2004)

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REGAL-BELOIT CORPORATION

FORM 10-Q

For Quarter Ended March 30, 2004

INDEX

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.

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PART I

FINANCIAL INFORMATION

REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)

ASSETS

See accompanying notes.

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REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, Except Per Share Data)

See accompanying notes.

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REGAL-BELOIT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

See accompanying notes.

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REGAL-BELOIT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 30, 2004

(Unaudited)

1.    BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of REGAL-BELOIT Corporation and its wholly owned subsidiaries 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.    FISCAL QUARTER END

In 2004, the Company changed to a fiscal monthly calendar based on 21 working days per fiscal month. A working day is defined as a weekday (as opposed to a weekend day) that is not a holiday where the Company’s plants and offices are closed. This fiscal calendar resulted in March 30, 2004 being the last day of the first fiscal quarter. In 2003, fiscal month ends were calendar months. December 31 will continue to be the year end for the Company. The first quarters of both 2004 and 2003 contained 63 work days; thus, this change had an immaterial impact on the financial information reported.

3.    INVENTORIES

Cost for approximately 81% 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:

4.    COMPREHENSIVE INCOME

The Company’s comprehensive income in the first quarter of 2004 was impacted by a $22,000 loss from cumulative translation adjustments and $149,000 of income from hedging activities, which were recorded to shareholders’ investment. For the quarter ended March 30, 2004, the impact was $127,000 resulting in comprehensive income of $7.0 million for the quarter. The impact in the first quarter of 2003 was $657,000 resulting in comprehensive net income of $6.7 million.

5.    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 first quarters of 2004 and 2003:

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6.    BUSINESS SEGMENTS

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

As consistent with December 31, 2003 and 2002, acquired intangibles with finite lives were not material and the Company has no intangibles with indefinite lives.

7.    STOCK-BASED COMPENSATION

The Company accounts for its stock option plans under APB Opinion No. 25. Accordingly, no compensation cost has been recognized in the 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:

8.    PENSION PLANS

The Company accounts for its defined benefit pension plans under the provisions of Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”. The Company’s net periodic pension cost is comprised of the following components:

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During the first quarter of 2004, the Company made contributions to defined benefit pension plans totaling $348,000. The Company expects to contribute another $852,000 over the balance of 2004, for a total of $1.2 million in 2004 contributions. This total has been reduced from the $1.5 million estimated in our 2003 Annual Report on Form 10-K, due to the recently passed Pension Funding Equity Act of 2004.

The assumptions used in the valuation of the Company’s pension plans and to the target investment allocation have remained the same as those disclosed in the Company’s 2003 Annual Report on Form 10-K.

9.    SUBSEQUENT EVENT — CONVERTIBLE SENIOR SUBORDINATED DEBT

On April 5, 2004, the Company closed a convertible subordinated debt offering totaling $115 million. The notes, which are unsecured and due in 2024, bear interest at a fixed rate of 2.75% for five years, and may increase thereafter at ..25% of the average trading price of a Note if certain conditions are met after five years. The Company may not call the Notes for five years, and the Note holders may only put the Notes back to the Company at approximately the 5^th, 10^th and 15^th year anniversaries of the issuance of the Notes.

After deducting fees and expenses of $3.2 million, the net proceeds recorded by the Company totaled $111.8 million. These net proceeds were used to repurchase common stock totaling $12.5 million and to repay $99.3 million of long-term debt, as discussed in Note 10. This convertible senior subordinated debt will be treated, in accordance with generally accepted accounting principles in the United States, as debt in the financial statements of the Company and will not have an impact on earnings per share until certain conditions under which the notes may be converted are satisfied. Taking into account the current higher cost of the convertible subordinated debt in comparison to the variable rate debt from our bank credit facility, and the repurchase of 614,200 shares of the Company’s common stock on March 30, 2004, the impact on earnings per share in 2004 is projected to be neutral.

10.   SUBSEQUENT EVENT — AMENDED AND RESTATED CREDIT FACILITY

On May 5, 2004, the Company and certain of its lending banks amended and restated the existing $275 million Credit Agreement. The amended and restated revolving loan Credit Agreement (the “New Facility”) provides a borrowing limit of $225 million, is unsecured and terminates in May 2009. The New Facility, as did the original Facility, permits the Company to borrow at interest rates based upon a margin above LIBOR, which margin varies with the ratio of total funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). These interest rates also vary as LIBOR varies. The Company also pays a commitment fee on the unused amount of the $225 million credit limit, which varies with the debt to EBITDA ratio. The New Facility includes various covenants regarding minimum net worth, permitted debt levels and minimum interest coverage. The Company was in compliance with all financial covenants as of March 30, 2004.

Under the New Facility and giving pro-forma effect for the $99.3 million debt repayment from the proceeds of the convertible senior subordinated debt offering (See Note 9), the Company would have had $98.7 million of senior debt outstanding at March 30, 2004 and had approximately $40 million of available borrowing capacity.

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

OVERVIEW

In the first quarter of 2004 we achieved a broad-based increase in customer orders. This improvement in demand was seen in both of our operating segments, with total Company first quarter 2004 orders 10% higher than the first quarter a year ago and a 13% sequential improvement from 2003‘s fourth quarter. Our net sales of $163.1 million in 2004‘s first quarter represented a 6% increase from comparable 2003. Net income and earnings per share (“EPS”) increased to $6.9 million and $.27, respectively, both improving 13% from the first quarter of 2003. While our income from operations as a percent of net sales (“operating margin”) increased to 7.7% in the first quarter of 2004, higher prices of commodities important to our production, particularly copper, steel and aluminum, prevented even greater improvement in our operating margin. Costs of these raw materials for the balance of 2004 are uncertain; however, we believe price increases on our products which we either have instituted or plan to institute will offset the higher material costs over the remainder of 2004, assuming the current costs continue throughout 2004.

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RESULTS OF OPERATIONS

Our net sales in the first quarter of 2004 were $163.1 million, 6.4% greater than net sales of $153.3 million in 2003‘s first quarter. Our broad-based increase in orders from our customers in both our Mechanical Group and Electrical Group resulted in our higher net sales. (See Note 6 to the accompanying financial statements for our business segment data.)

Gross profit of $38.2 million in the first quarter was 5.4% higher than $36.2 million in comparable 2003. However, as a percentage of sales gross profit decreased to 23.4% from 23.6% a year previously. The gross profit margin decrease was due primarily to higher raw material costs for copper, steel and aluminum and to costs associated with the consolidation of a significant portion of the production of one Mechanical Group plant into another plant in this Group. These cost factors more than offset the benefits to our gross profit margin of increased sales volume and improved manufacturing productivity.

Operating expenses of $25.7 million in the first quarter of 2004 were 3.7% higher than $24.7 million in comparable 2003. As a percentage of sales, however, operating expenses in the first quarter decreased to 15.7% this year from 16.1% last year. Our income from operations increased 8.9% to $12.5 million in 2004’s first quarter from $11.5 million in comparable 2003. Our increased sales and improvement in operating margin to 7.7% from 7.5% in last year’s first quarter accounted for the higher operating income. Electrical Group operating margin increased from 8.1% in the first quarter of 2003 to 8.4% in 2004’s first quarter, while the Mechanical Group operating margin decreased from 6.1% to 5.9% in the same quarter due to the impact of the production consolidation discussed in the previous paragraph.

Interest expense again decreased year to year, from $1.6 million in last year’s first quarter to $1.3 million this year. Reduction of our outstanding debt and lower interest rates paid by the Company resulted in the decrease. Our effective tax rate in the first quarter of 2004 was 36.0% as compared to 37.5% in the first quarter of 2003 and 36.2% for the full year 2003. Minority interest in income, net of tax, which is the minority partner’s interest in the net income of our two consolidated joint ventures in China, grew 93% in 2004 to $312,000 from $162,000 in 2003’s first quarter. This increased profit portion for the minority owners reflects the increased sales in China and higher profits of these joint ventures.

Our net income was $6.9 million in the first quarter, a 13.1% increase from $6.1 million a year ago. Our EPS was $.27 in 2004’s first quarter, a 12.5% increase above $.24 in comparable 2003.

LIQUIDITY AND CAPITAL RESOURCES

Working capital increased 3.9% to $166.4 million at March 30, 2004 from $160.1 million at year-end 2003, while our current ratio declined to 2.7:1 from 3.1:1 at year-end 2003. This temporary decline in current ratio was due to the $12.5 million payable for the March 30, 2004 treasury stock purchase, which payable was paid on April 5, 2004 using part of the convertible senior subordinated debt proceeds received also on April 5, 2004 (see Note 9). The $6.3 million increase in working capital was due primarily to a $5.1 million increase in cash, an $11.1 million increase in accounts receivable, a $5.8 million inventory increase and a $5.0 million transfer, from fixed assets to other current assets, of the book value of a manufacturing facility closed in 2003 which we expect to be sold in the next 12 months. Partly offsetting the current asset increases were a $9.1 million increase in accounts payable and the $12.5 million payable for the treasury stock purchase. All but the transfer from fixed assets and the treasury stock purchase payable were due primarily to our increased sales and production during our first quarter of 2004.

Our cash flow from operations was $4.7 million in the first quarter, down from $6.4 million in comparable 2003. The decrease was due primarily to the increases in receivables and inventories. Capital spending was $3.4 million during the first quarter, accounting for the majority of the cash used in investing activities. At March 30, 2004, we had $1.9 million of outstanding commitments for future capital expenditures. Cash provided by financing activities was $4.5 million as our long-term debt increased $7.0 million during the first quarter and we paid shareholders $3.0 million in regular quarterly dividends.

Our outstanding debt increased from $195.8 million at December 31, 2003 to $202.8 million at March 30, 2004, with $198 million outstanding at quarter’s end under our $275 million unsecured revolving credit facility (the “Facility”) that expires December 31, 2005. During the first quarter of 2004, our banks agreed to amend the Facility to change the funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization) covenant to 3.75:1 for total debt and to 2.75:1 for senior debt to prepare for our planned issuance of convertible senior subordinated debt. Please see Note 10 to the accompanying financial statements for additional information on the Facility, which was amended and restated on May 5, 2004. Please also see Note 9 to the accompanying financial statements for information on our $115 million convertible senior subordinated debt offering, which closed on April 5, 2004. We believe we will be able to satisfy the financial ratios and tests specified in the amended and restated Facility, as discussed in Note 10, for the foreseeable future. We also believe that the combination of borrowing availability under the amended and restated Facility and our operating cash flow will provide sufficient cash availability to finance our existing operations for the foreseeable future.

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CONTINGENCIES

In March 2004, the Company received notice from the U.S. Environmental Protection Agency that it was identified as one of three potentially responsible parties regarding an environmental site in Illinois. The Company had previously reached a settlement in 1999 with the U.S. Environmental Protection Agency regarding the same site. Management has just commenced assessing this claim and does not expect that a settlement, if any, will be material to the Company’s financial statements. As of March 30, 2004, no amounts have been recorded in the Company’s financial statements related to this contingency.

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 finite 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 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.

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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.

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.

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, 2003. Management believes that at March 30, 2004, there has been no material change to this information.

a. Disclosure Controls and Procedures. The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act.

b. Internal Control Over Financial Reporting. There have not been any changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II
OTHER INFORMATION

ISSUER PURCHASES OF EQUITY SECURITIES

Notes: These shares were repurchased on REGAL-BELOIT’s behalf on the London stock exchange by Bank of America Securities as part of the marketing of the Company’s private $100 million convertible senior subordinated debt offering on March 30, 2004. The repurchases were made under the 2,000,000 share stock repurchase program the Company announced on August 8, 2000. The program does not have an expiration date.

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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.

DATE: May 10 , 2004

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