RBC-2012.6.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2012
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-07283
 
 
REGAL BELOIT CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Wisconsin
 
39-0875718
(State of other jurisdiction of
incorporation)
 
(IRS Employer
Identification No.)
200 State Street, Beloit, Wisconsin 53511
(Address of principal executive office)
(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  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a “smaller reporting company.” See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  ý
As of July 30, 2012 there were 41,674,633 shares of the registrant’s common stock, $.01 par value per share, outstanding.





REGAL BELOIT CORPORATION
INDEX
 
 
Page
 
Item 1 —
 
 
 
 
 
 
 
Item 2 —
Item 3 —
Item 4 —
 
 
 
Item 1 —
Item 1A —
Item 2 —
Item 6 —


2



CAUTIONARY STATEMENT

Certain statements made in this Quarterly Report on Form 10-Q are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on management’s expectations, beliefs, current assumptions, and projections.  When used in this Quarterly Report on Form 10-Q, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or similar words are intended to identify forward-looking statements.  These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond our control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Those factors include, but are not limited to:

actions taken by our competitors and our ability to effectively compete in the increasingly competitive global electric motor, power generation and mechanical motion control industries;
our ability to develop new products based on technological innovation and the marketplace acceptance of new and existing products;
fluctuations in commodity prices and raw material costs;
our dependence on significant customers;
issues and costs arising from the integration of acquired companies and businesses, including the timing and impact of purchase accounting adjustments;
our dependence on key suppliers and the potential effects of supply disruptions;
infringement of our intellectual property by third parties, challenges to our intellectual property, and claims of infringement by us of third party technologies;
increases in our overall debt levels as a result of acquisitions or otherwise and our ability to repay principal and interest on our outstanding debt;
product liability and other litigation, or the failure of our products to perform as anticipated, particularly in high volume applications;
unanticipated costs or expenses that could be incurred relating to product warranty matters;
economic changes in global markets where we do business, such as reduced demand for the products we sell, currency exchange rates, inflation rates, interest rates, recession, foreign government policies and other external factors that we cannot control;
unanticipated liabilities of acquired businesses;
cyclical downturns affecting the global market for capital goods;
difficulties associated with managing foreign operations; and
other risks and uncertainties including but not limited to those described in “Risk Factors” in this Quarterly Report on Form 10-Q and from time to time in our reports filed with Securities and Exchange Commission.

Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report, and we undertake no obligation to update these statements to reflect subsequent events or circumstances.  Additional information regarding these and other risks and factors is included in Item 1A - Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012.


3



PART I—FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Millions, Except Cash Dividends Declared and Per Share Data)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Net Sales
$
863.9

 
$
681.8

 
$
1,671.8

 
$
1,344.4

Cost of Sales
643.8

 
531.1

 
1,254.1

 
1,028.9

Gross Profit
220.1

 
150.7

 
417.7

 
315.5

Operating Expenses
116.8

 
95.9

 
235.3

 
196.6

Income From Operations
103.3

 
54.8

 
182.4

 
118.9

Interest Expense
11.2

 
4.8

 
23.0

 
9.9

Interest Income
0.4

 
0.4

 
0.8

 
0.7

Income Before Taxes
92.5

 
50.4

 
160.2

 
109.7

Provision For Income Taxes
28.2

 
14.4

 
46.0

 
32.9

Net Income
64.3

 
36.0

 
114.2

 
76.8

Less: Net Income Attributable to Noncontrolling Interests
1.6

 
1.7

 
2.8

 
3.6

Net Income Attributable to Regal Beloit Corporation
$
62.7

 
$
34.3

 
$
111.4

 
$
73.2

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.50

 
$
0.89

 
$
2.68

 
$
1.89

Assuming Dilution
$
1.49

 
$
0.88

 
$
2.65

 
$
1.87

Cash Dividends Declared
$
0.19

 
$
0.18

 
$
0.37

 
$
0.35

Weighted Average Number of Shares Outstanding (in millions):
 
 
 
 
 
 
 
Basic
41.7

 
38.7

 
41.6

 
38.6

Assuming Dilution
42.0

 
39.2

 
42.0

 
39.2

See accompanying Notes to Condensed Consolidated Financial Statements

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Net Income
$
64.3

 
$
36.0

 
$
114.2

 
$
76.8

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Change in pension benefits, net of tax effects of $(0.3) million and $0.3 million for the three months ended June 30, 2012 and July 2, 2011, and $(0.9) million and $0.7 million for the six months ended June 30, 2012 and July 2, 2011, respectively
(0.6
)
 
0.4

 
(1.5
)
 
1.1

Foreign currency translation adjustments
(30.4
)
 
7.9

 
(6.7
)
 
18.6

Change in fair value of hedging activities, net of tax effects of $(15.3) million and $(0.5) million for the three months ended June 30, 2012 and July 2, 2011, and $5.6 million and $1.0 million for the six months ended June 30, 2012 and July 2, 2011, respectively
(25.5
)
 
(0.9
)
 
9.1

 
1.7

Hedging activities reclassified into earnings from Other Comprehensive Income (Loss), net of tax effects of $2.1 million and $(3.2) million for the three months ended June 30, 2012 and July 2, 2011, and $5.6 million and $(5.3) million for the six months ended June 30, 2012 and July 2, 2011, respectively.
3.2

 
(5.1
)
 
9.1

 
(8.7
)
Total Other Comprehensive Income (Loss)
(53.3
)
 
2.3

 
10.0

 
12.7

Comprehensive Income
11.0

 
38.3

 
124.2

 
89.5

Less: Comprehensive Income Attributable to Noncontrolling Interests
0.7

 
1.9

 
2.4

 
3.3

Comprehensive Income Attributable to Regal Beloit Corporation
$
10.3

 
$
36.4

 
$
121.8

 
$
86.2

 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
190.9

 
$
142.6

Trade Receivables, less Allowances of $12.3 million in 2012 and $13.6 million in 2011
525.0

 
424.2

Inventories
583.9

 
575.8

Prepaid Expenses and Other Current Assets
86.5

 
99.9

Deferred Income Tax Benefits
51.0

 
48.6

Total Current Assets
1,437.3

 
1,291.1

Net Property, Plant, and Equipment
565.1

 
534.0

Goodwill
1,139.0

 
1,117.6

Intangible Assets, Net of Amortization
312.3

 
316.3

Other Noncurrent Assets
9.8

 
7.5

Total Assets
$
3,463.5

 
$
3,266.5

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
341.7

 
$
249.4

Dividends Payable
7.9

 
7.5

Hedging Obligations
13.5

 
26.1

Accrued Compensation and Employee Benefits
86.7

 
81.7

Other Accrued Expenses
155.9

 
149.8

Current Maturities of Debt
11.1

 
10.0

Total Current Liabilities
616.8

 
524.5

Long-Term Debt
899.8

 
909.2

Deferred Income Taxes
111.2

 
100.1

Hedging Obligations
43.5

 
55.1

Pension and Other Post Retirement Benefits
61.1

 
60.6

Other Noncurrent Liabilities
40.3

 
40.6

Commitments and Contingencies (see Note 13)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $.01 par value, 100.0 million shares authorized, 41.7 million shares and 41.6 million shares issued in 2012 and 2011, respectively
0.4

 
0.4

Additional Paid-In Capital
695.1

 
689.4

Retained Earnings
1,047.2

 
951.3

Accumulated Other Comprehensive Loss
(94.8
)
 
(105.2
)
Total Regal Beloit Corporation Shareholders' Equity
1,647.9

 
1,535.9

Noncontrolling Interests
42.9

 
40.5

Total Equity
1,690.8

 
1,576.4

Total Liabilities and Equity
$
3,463.5

 
$
3,266.5

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance as of January 1, 2011
$
0.4

 
$
535.8

 
$
827.5

 
$
(1.7
)
 
$
35.2

 
$
1,397.2

Net Income

 

 
73.2

 

 
3.6

 
76.8

Other Comprehensive Income (Loss)

 

 

 
13.0

 
(0.3
)
 
12.7

Dividends Declared ($0.35 per share)

 

 
(13.6
)
 

 

 
(13.6
)
Stock Options Exercised, including income tax benefit and share cancellations

 
1.2

 

 

 

 
1.2

Share-based Compensation

 
6.2

 

 

 

 
6.2

Balance as of July 2, 2011
$
0.4

 
$
543.2

 
$
887.1

 
$
11.3

 
$
38.5

 
$
1,480.5

 
 
Common
Stock
$.01 Par
Value
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interests
 
Total
Equity
Balance as of December 31, 2011
$
0.4

 
$
689.4

 
$
951.3

 
$
(105.2
)
 
$
40.5

 
$
1,576.4

Net Income

 

 
111.4

 

 
2.8

 
114.2

Other Comprehensive Income (Loss)

 

 

 
10.4

 
(0.4
)
 
10.0

Dividends Declared ($0.37 per share)

 

 
(15.5
)
 

 

 
(15.5
)
Stock Options Exercised, including income tax benefit and share cancellations

 
1.2

 

 

 

 
1.2

Share-based Compensation

 
4.5

 

 

 

 
4.5

Balance as of June 30, 2012
$
0.4

 
$
695.1

 
$
1,047.2

 
$
(94.8
)
 
$
42.9

 
$
1,690.8

See accompanying Notes to Condensed Consolidated Financial Statements.

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
 
  
Six Months Ended
 
June 30,
2012
 
July 2,
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
114.2

 
$
76.8

Adjustments to reconcile net income and changes in assets and liabilities (net of acquisitions) to net cash provided by operating activities (net of acquisitions):
 
 
 
Depreciation and amortization
63.1

 
43.6

Excess tax benefits from share-based compensation
(0.9
)
 
(1.0
)
(Gain) loss on disposition of assets
(1.4
)
 
0.5

Share-based compensation expense
4.5

 
6.2

Change in assets and liabilities
24.9

 
(16.5
)
Net cash provided by operating activities
204.4

 
109.6

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to property, plant and equipment
(44.8
)
 
(38.5
)
Sales of investment securities

 
56.0

Business acquisitions, net of cash acquired
(95.3
)
 
(22.1
)
Grants received for capital expenditures
2.4

 

Proceeds from sale of assets
2.7

 
0.2

Net cash used in investing activities
(135.0
)
 
(4.4
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings under revolving credit facility
231.0

 

Repayments under revolving credit facility
(240.0
)
 

Proceeds from short-term borrowings
9.2

 
20.5

Repayments of short-term borrowings
(8.4
)
 
(15.4
)
Payments of long-term debt
(0.1
)
 
(0.1
)
Dividends paid to shareholders
(15.0
)
 
(13.1
)
Proceeds from the exercise of stock options
2.1

 
1.8

Excess tax benefits from share-based compensation
0.9

 
1.0

Financing fees paid


(1.9
)
Net cash used in financing activities
(20.3
)
 
(7.2
)
EFFECT OF EXCHANGE RATES ON CASH
(0.8
)
 
2.8

Net increase in cash and cash equivalents
48.3

 
100.8

Cash and cash equivalents at beginning of period
142.6

 
174.5

Cash and cash equivalents at end of period
$
190.9

 
$
275.3

See accompanying Notes to Condensed Consolidated Financial Statements.


4



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of December 31, 2011, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and July 2, 2011, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s 2011 Annual Report on Form 10-K filed on February 29, 2012.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 29, 2012.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
On January 1, 2012, the Company adopted new guidance which changes the presentation of comprehensive income. Under the new guidance, the Company has reported a separate Condensed Consolidated Statement of Comprehensive Income for all periods presented.
On January 1, 2012, the Company adopted new guidance which provides an option to first assess qualitative factors in determining whether is is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The Company will perform its annual goodwill impairment test in the fourth quarter and does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

2. OTHER FINANCIAL INFORMATION
Inventories
Cost for approximately 54% and 45% of the Company’s inventory is determined using the last-in, first-out (LIFO) inventory valuation method as of June 30, 2012 and December 31, 2011, respectively. The approximate percentage distribution between major classes of inventories was as follows:
 
 
June 30,
2012
 
December 31,
2011
Raw Material and Work in Process
41
%
 
38
%
Finished Goods and Purchased Parts
59
%
 
62
%
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (in millions):
 
 
June 30,
2012
 
December 31,
2011
Land and Improvements
$
74.2

 
$
74.1

Buildings and Improvements
193.4

 
189.3

Machinery and Equipment
731.6

 
667.2

Property, Plant and Equipment
999.2

 
930.6

Less: Accumulated Depreciation
(434.1
)
 
(396.6
)
Net Property, Plant and Equipment
$
565.1

 
$
534.0


3.    ACQUISITIONS
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. Acquisition-related expenses, which were recorded in operating expenses, were immaterial for the three and six months ended June 30, 2012. Acquisition-related expenses were $3.5 million and $10.1 million for the three and six months ended July 2, 2011, respectively.
2012 Acquisitions
During the quarter ended June 30, 2012, the Company acquired a Mexico based electrical products company for $1.3 million. It also acquired the assets from a Canadian affiliate of its Elco B.V. joint venture for $1.4 million.
On February 3, 2012, the Company acquired Milwaukee Gear Company (“MGC”), a Wisconsin-based leading manufacturer of highly engineered gearing components for oil and gas applications as well as a wide variety of other commercial and industrial applications. The purchase price of MGC was $80.3 million paid in cash, net of cash acquired. MGC is reported as a part of the Company’s Mechanical segment.
2011 EPC Acquisition
On August 22, 2011, the Company completed its acquisition of the Electrical Products Company (“EPC”) of A.O. Smith Corporation (NYSE: AOS). EPC manufactures and sells a full line of motors for hermetic, pump, distribution, HVAC, and general industrial applications. EPC is based in Tipp City, Ohio and has operations in the United States, Mexico, China, and the United Kingdom. The purchase price included $756.1 million in cash and non-cash consideration of $140.9 million comprised of 2,834,026 shares of Company common stock. EPC is reported as part of the Company’s Electrical segment.
Pro Forma Financial Information
The following pro forma financial information shows the results of continuing operations for the three and six months ended July 2, 2011 as though the acquisition of EPC occurred at the beginning of the 2010 fiscal year. The pro forma financial information includes, where applicable, adjustments for: (i) the amortization of acquired intangible assets, (ii) additional interest expense on acquisition related borrowings and (iii) the income tax effect on the pro forma adjustments. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated above or the results that may be obtained in the future (in millions, except per share amounts):
 
 
Three Months Ended
Six Months Ended
 
July 2,
2011
July 2,
2011
Pro forma net sales
$
904.5

$
1,768.6

Pro forma net income
48.3

105.6

Basic earnings per share as reported
$
0.89

$
1.89

Pro forma basic earnings per share
1.17

2.55

Diluted earnings per share as reported
0.88

1.87

Pro forma diluted earnings per share
1.15

2.51


Other 2011 Acquisitions
On June 1, 2011, the Company acquired Australian Fan and Motor Company (“AFMC”) located in Melbourne, Australia. AFMC manufactures and distributes a wide range of direct drive blowers, fan decks, axial fans and sub fractional motors for sales in Australia and New Zealand. The purchase price of $5.7 million was paid in cash, net of acquired debt and cash. AFMC is reported as part of the Company’s Electrical segment.
On April 5, 2011, the Company acquired Ramu, Inc. (“Ramu”) located in Blacksburg, Virginia. Ramu is a motor and control technology company with a research and development team dedicated to the development of switched reluctance motor technology. The purchase price included $5.3 million paid in cash, net of acquired debt and cash and an additional amount should certain future performance expectations be met. At June 30, 2012, the Company has recorded a liability of $13.7 million for this deferred contingent purchase price. Ramu is reported as part of the Company’s Electrical segment.
On March 7, 2011, the Company acquired Hargil Dynamics Pty. Ltd. (“Hargil”) located in Sydney, Australia. Hargil is a distributor of mechanical power transmission components and solutions. Hargil is reported as part of the Company’s Mechanical segment.

4. COMPREHENSIVE INCOME
As required, the Company adopted new guidance on the presentation of comprehensive income during 2012. Condensed Consolidated Statements of Comprehensive Income are included in the Company’s Condensed Consolidated Financial Statements for all periods presented.
Foreign currency translation adjustments, hedging activities on derivative instruments and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss. The components of the ending balances of Accumulated Other Comprehensive Loss are as follows (in millions):

 
June 30,
2012
 
December 31,
2011
Foreign currency translation adjustments
$
(26.3
)
 
$
(20.0
)
Hedging activities, net of tax
(32.6
)
 
(50.8
)
Pension benefits, net of tax
(35.9
)
 
(34.4
)
 
$
(94.8
)
 
$
(105.2
)

5. WARRANTY COSTS
The Company generally recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience. The following is a reconciliation of the changes in accrued warranty costs for the three and six months ended June 30, 2012 and July 2, 2011 (in millions):

 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Beginning balance
$
25.0

 
$
12.6

 
$
24.2

 
$
12.8

Deduct: Payments
(8.6
)
 
(3.0
)
 
(13.4
)
 
(5.8
)
Add: Provision
9.7

 
31.3

 
15.2

 
33.8

Acquisition

 

 
0.1

 

Translation Adjustments
(0.1
)
 

 
(0.1
)
 
0.1

Ending balance
$
26.0

 
$
40.9

 
$
26.0

 
$
40.9

The accrued warranty costs for three and six months ended July 2, 2011 include $28.0 million in accrued costs due to the previously disclosed warranty expense item.
Accrued warranty costs are included with Other Accrued Expenses on the Condensed Consolidated Balance Sheets.




6. BUSINESS SEGMENTS
The Company has two reportable segments, Mechanical and Electrical (in millions):
 
 
Electrical
 
Mechanical
 
Eliminations
 
Total
Three months ended June 30, 2012
 
 
 
 
 
 
 
External sales
$
783.6

 
$
80.3

 
$

 
$
863.9

Intersegment sales
1.0

 
0.8

 
(1.8
)
 

  Total sales
784.6

 
81.1

 
(1.8
)
 
863.9

Segment income from operations
91.5

 
11.8

 

 
103.3

Identifiable assets
3,251.4

 
212.1

 

 
3,463.5

Depreciation and amortization
29.1

 
3.1

 

 
32.2

Three months ended July 2, 2011
 
 
 
 
 
 
 
External Sales
$
611.3

 
$
70.5

 
$

 
$
681.8

Intersegment sales
2.8

 
0.6

 
(3.4
)
 

  Total sales
614.1

 
71.1

 
(3.4
)
 
681.8

Segment income from operations
44.9

 
9.9

 

 
54.8

Identifiable assets
2,510.4

 
135.9

 

 
2,646.3

Depreciation and amortization
20.1

 
1.9

 

 
22.0

 
Electrical
 
Mechanical
 
Eliminations
 
Total
Six months ended June 30, 2012
 
 
 
 
 
 
 
External sales
$
1,515.0

 
$
156.8

 
$

 
$
1,671.8

Intersegment sales
1.8

 
1.6

 
(3.4
)
 

  Total sales
1,516.8

 
158.4

 
(3.4
)
 
1,671.8

Segment income from operations
160.9

 
21.5

 

 
182.4

Identifiable assets
3,251.4

 
212.1

 

 
3,463.5

Depreciation and amortization
57.5

 
5.6

 

 
63.1

Six months ended July 2, 2011
 
 
 
 
 
 
 
External Sales
$
1,205.6

 
$
138.8

 
$

 
$
1,344.4

Intersegment sales
5.2

 
1.2

 
(6.4
)
 

  Total sales
1,210.8

 
140.0

 
(6.4
)
 
1,344.4

Segment income from operations
100.4

 
18.5

 

 
118.9

Identifiable assets
2,510.4

 
135.9

 

 
2,646.3

Depreciation and amortization
40.6

 
3.0

 

 
43.6


7. GOODWILL AND OTHER INTANGIBLES
Goodwill
As required, the Company performs an annual impairment test of goodwill during the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
At June 30, 2012, most of the Company’s goodwill is attributable to the Electrical segment and the Company believes that substantially all of the goodwill is deductible for tax purposes. The following information presents changes to goodwill during the periods indicated (in millions):


5



 
Total
 
Electrical
Segment
 
Mechanical
Segment
Balance as of December 31, 2011
$
1,117.6

 
$
1,105.0

 
$
12.6

Acquisitions and Valuation Adjustments
21.7

 
0.3

 
21.4

Foreign Currency Translation Adjustments
(0.3
)
 
(0.3
)
 

Balance as of June 30, 2012
$
1,139.0

 
$
1,105.0

 
$
34.0

Intangible Assets
Intangible assets consisted of the following (in millions):
 
 
 
 
June 30, 2012
 
December 31, 2011
 
Useful Life
(years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Customer Relationships
3 -14
 
$
241.7

 
$
(66.8
)
 
$
227.5

 
$
(56.4
)
Technology
3 - 9
 
129.8

 
(33.0
)
 
128.2

 
(24.7
)
Trademarks
3 -20
 
32.3

 
(14.2
)
 
30.9

 
(12.8
)
In-process Research and Development
N/A
 
17.2

 

 
17.2

 

Patent and Engineering Drawings
10
 
16.6

 
(12.5
)
 
16.6

 
(11.7
)
Non-compete Agreements
3 - 5
 
8.1

 
(6.9
)
 
8.1

 
(6.6
)
 
 
 
$
445.7

 
(133.4
)
 
$
428.5

 
(112.2
)
Net Values
 
 
 
 
$
312.3

 
 
 
$
316.3

The estimated expected future annual amortization for intangible assets is as follows (in millions):
 
Year
Estimated
Amortization
2012
$
44.1

2013
43.4

2014
42.2

2015
34.6

2016
30.8


Amortization expense recorded for the three and six months ended June 30, 2012 was $10.9 million and $21.7 million respectively. Amortization expense recorded for the three and six months ended July 2, 2011 was $7.3 million and $14.4 million, respectively.
In-process research and development projects are estimated to be completed by the end of 2013 and amortization will begin upon project completion.

8. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of June 30, 2012 and December 31, 2011 was as follows (in millions):

 
 
June 30,
2012
 
December 31,
2011
Senior notes
$
750.0

 
$
750.0

Term loan
145.0

 
145.0

Revolving credit facility

 
9.0

Other
15.9

 
15.2

 
910.9

 
919.2

Less: Current maturities
(11.1
)
 
(10.0
)
Non-current portion
$
899.8

 
$
909.2


At June 30, 2012, the Company had $750.0 million of senior notes (the “Notes”) outstanding. Details on the senior notes are (in millions):
 
Principal
 
Interest Rate
 
Maturity
Floating Rate Series 2007A
$
150.0

 
Floating (1)
 
August 2014
Floating Rate Series 2007A
100.0

 
Floating (1)
 
August 2017
Fixed Rate Series 2011A
100.0

 
4.1%
 
July 2018
Fixed Rate Series 2011A
230.0

 
4.8 to 5.0%
 
July 2021
Fixed Rate Series 2011A
170.0

 
4.9 to 5.1%
 
July 2023
 
$
750.0

 
 
 
 
 
(1)
Interest rates vary as LIBOR varies. At June 30, 2012, the interest rate was between 1.1% and 1.2%.

In 2008, the Company entered into a Term Loan Agreement (“Term Loan”) with certain financial institutions, whereby it borrowed an aggregate principal amount of $165.0 million. During 2011, the Company repaid $20.0 million of the Term Loan. The Term Loan matures in June 2013, and borrowings generally bear interest at a variable rate equal to a margin over LIBOR. The margin varies with the ratio of the Company’s total funded debt to consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) as defined in the Loan Agreement. These interest rates also vary as LIBOR varies. At June 30, 2012, the interest rate of 1.2% was based on a margin over LIBOR. The Term Loan remains classified as long-term debt at June 30, 2012 as the Company has the current intent and ability to use the availability under its credit facility to refinance the Term Loan.
The Company also has a $500.0 million revolving credit facility (the “Facility”) that matures in June 2016. The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA, net of specified cash, as defined in the Facility. These interest rates also vary as LIBOR varies. At June 30, 2012, there were no borrowings outstanding on the Facility. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total funded debt to EBITDA.
Based on rates for instruments with comparable maturities and terms, which are classified as Level 2 inputs, the approximate fair value of the Company's debt was $946.7 million and $951.0 million as of June 30, 2012 and December 31, 2011, respectively.
The Notes, the Term Loan, and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial debt covenants as of June 30, 2012.
The Company entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 14 of Notes to Condensed Consolidated Financial Statements.)
At June 30, 2012, other notes payable of approximately $15.9 million were outstanding with a weighted average interest rate of 1.8%.

9. PENSION PLANS
The Company’s net periodic defined benefit pension cost is comprised of the following components (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Service cost
$
0.6

 
$
0.6

 
$
1.2

 
$
1.3

Interest cost
1.8

 
2.0

 
3.7

 
4.0

Expected return on plan assets
(1.9
)
 
(1.8
)
 
(3.7
)
 
(3.6
)
Amortization of prior service cost and net actuarial loss
1.0

 
0.9

 
1.9

 
1.8

Net periodic benefit expense
$
1.5

 
$
1.7

 
$
3.1

 
$
3.5


The estimated net actuarial loss and prior service cost for defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost during the 2012 fiscal year is $3.6 million and $0.2 million, respectively.
During the first six months of 2012 and 2011, the Company contributed $3.9 million and $1.2 million, respectively, to defined benefit pension plans. The Company expects to contribute an additional $3.8 million, for total contributions of $7.7 million in 2012. The Company contributed a total of $6.5 million in 2011. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s 2011 Annual Report on Form 10-K filed on February 29, 2012.

10. SHAREHOLDERS’ EQUITY
The Company recognized approximately $2.4 million and $4.4 million in share-based compensation expense for the three month period ended June 30, 2012 and July 2, 2011, respectively. Share-based compensation expense for the six month period ended June 30, 2012 and July 2, 2011 was $4.5 million and $6.2 million, respectively. The total excess income tax benefit recognized relating to share-based compensation for the six months ended June 30, 2012 and July 2, 2011 was approximately $0.9 million and $1.0 million, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of June 30, 2012, total unrecognized compensation cost related to share-based compensation awards was approximately $26.3 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 3.1 years.
The Company was authorized, as of June 30, 2012, to deliver up to 5.0 million shares of common stock upon exercise of non-qualified stock options or incentive stock options, or upon grant or in payment of stock appreciation rights, restricted stock and restricted stock units. Approximately 1.0 million shares were available for future grant or payment under the various plans at June 30, 2012.
Share-based Incentive Awards
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SARs”). All grants are made at prices equal to the fair market value of the stock on the grant dates, and expire ten years from the grant date. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of grant.
The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For the six months ended June 30, 2012 and July 2, 2011, respectively, 255,225 and 333,750 share-based incentive awards were granted. The per share weighted average fair value of share-based incentive awards granted during those respective periods was $22.45 and $26.81.
The assumptions used in our Black-Scholes valuation related to grants were as follows:
 
June 30,
2012
 
July 2,
2011
Risk-free interest rate
1.3
%
 
2.6
%
Expected life (years)
7.0

 
7.0

Expected volatility
37.6
%
 
35.5
%
Expected dividend yield
1.2
%
 
1.0
%

A summary of share-based awards (options and SARs) as of June 30, 2012 follows below. Forfeitures of share-based awards during the six months ended June 30, 2012 totaled 13,640.

 
Number of Shares
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate Intrinsic
Value (in
millions)
Outstanding
1,849,830

 
$
52.26

 
6.5

 
$
21.9

Exercisable
914,065

 
41.92

 
4.4

 
18.6


Restricted Stock and Restricted Stock Units
Changes in restricted stock awards for the six months ended June 30, 2012 were as follows:
 
 
Shares
Weighted Average Value
 
 
Unvested restricted stock awards, December 31, 2011
138,330

$
60.67

 
Granted
92,236

63.56

 
Vested
(32,300
)
43.11

 
Forfeited
(255
)
63.56

 
Unvested restricted stock awards June 30, 2012
198,011

$
64.85

As of June 30, 2012, the Company's restricted stock outstanding had a weighted average grant date fair value of $64.85. The Company values restricted stock awards at the closing market value of its common stock on the date of grant and restrictions generally lapse three years after the date of the grant.

11. INCOME TAXES
The effective tax rate for the three months ended June 30, 2012 was 30.5% versus 28.6% for the three months ended July 2, 2011. The effective tax rate for the six months ended June 30, 2012 was 28.7% versus 30.0% for the six months ended July 2, 2011. The change in the effective rates was driven primarily by the mix of global earnings distribution of income.
As of both June 30, 2012 and December 31, 2011, the Company had approximately $7.1 million of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. U.S. federal tax returns from 2008 through 2011 and various state tax returns remain subject to income tax examinations by tax authorities.

12. EARNINGS PER SHARE (EPS)
The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in millions):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Denominator for basic EPS (weighted average)
41.7

 
38.7

 
41.6

 
38.6

Effect of dilutive securities
0.3

 
0.5

 
0.4

 
0.6

Denominator for diluted EPS
42.0

 
39.2

 
42.0

 
39.2


The “Effect of dilutive securities” represents the dilution impact of equity awards for the three and six months ended June 30, 2012 and July 2, 2011, respectively. As of the three months ended June 30, 2012, the Company had approximately 0.6 million shares where the exercise price was above the market price, and which were excluded from the calculation of the effect dilutive shares as the effect of such options was anti-dilutive. There were no shares where the exercise price was above the market price for the three months ended July 2, 2011. For the six months ended June 30, 2012 and July 2, 2011, there were 0.6 million and 0.4 million, respectively, where the exercise price was above the market price, and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive.

13. CONTINGENCIES
One of the Company’s subsidiaries that it acquired in 2007 is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through 2004 and that were included as components of residential and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material effect on its interim consolidated financial statements as a whole.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company’s products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. The Company accrues for anticipated costs in defending against such lawsuits in amounts that the Company believes are adequate, and the Company does not believe that the outcome of any such lawsuit, individually or in the aggregate, will have a material effect on the Company’s interim consolidated financial statements as a whole.

14. DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk, currency exchange, and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.
The Company must recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of June 30, 2012.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings. All derivative instruments used by the Company impact operating cash flows.
At June 30, 2012, the Company had an additional $(2.2) million, net of tax, of derivative losses on closed hedge instruments in Accumulated Other Comprehensive Income (Loss) (“AOCI”) that will be realized in earnings when the hedged items impact earnings. At December 31, 2011, the Company had an additional $(2.5) million, net of tax, of derivative losses on closed hedge instruments in AOCI that was realized in earnings when the hedged items impacted earnings.
As of June 30, 2012, the Company had outstanding the following commodity forward contracts (with maturities extending through September 2013) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item in millions):

 
Notional
Amount
Copper
$
141.0

Aluminum
8.7


As of June 30, 2012, the Company had outstanding the following currency forward contracts (with maturities extending through December 2014) to hedge forecasted foreign currency cash flows (in millions):

 
Notional
Amount
Mexican Peso
$
216.2

Chinese Renminbi
156.4

Indian Rupee
45.5

Thai Baht
12.3


As of June 30, 2012, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $250.0 million (with maturities extending to August 2017).
Fair values of derivative instruments as of June 30, 2012 and December 31, 2011 were (in millions):

 
June 30, 2012
 
Prepaid
Expenses
 
Other
Noncurrent
Assets
 
Hedging
Obligations
(current)
 
Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$

 
$
39.5

Foreign exchange contracts
3.1

 
2.8

 
8.0

 
3.7

Commodity contracts
2.2

 
0.1

 
4.8

 
0.3

Not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts
0.3

 

 
0.7

 

Total Derivatives
$
5.6

 
$
2.9

 
$
13.5

 
$
43.5

 
 
December 31, 2011
 
Prepaid
Expenses
 
Other
Noncurrent
Assets
 
Hedging
Obligations
(current)
 
Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$

 
$
42.0

Foreign exchange contracts
0.4

 
0.1

 
13.6

 
11.7

Commodity contracts
2.1

 
1.0

 
12.2

 
1.4

Not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange contracts
0.1

 

 

 

Commodity contracts
0.2

 

 
0.3

 

Total Derivatives
$
2.8

 
$
1.1

 
$
26.1

 
$
55.1


The effect of derivative instruments on the Condensed Consolidated Statements of Equity and Comprehensive Income for the three and six months ended June 30, 2012 and July 2, 2011, was (in millions):






Derivatives Designated as Cash Flow Hedging Instruments
 
 
Three Months Ended
 
June 30, 2012
 
July 2, 2011
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)
$
(11.5
)
 
$
(26.3
)
 
$
(3.0
)
 
$
(40.8
)
 
$
1.7

 
$
3.3

 
$
(6.4
)
 
$
(1.4
)
Amounts reclassified from Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) recognized in Net Sales

 
(0.7
)
 

 
(0.7
)
 

 
0.2

 

 
0.2

Gain (Loss) recognized in Cost of Sales
(0.7
)
 
(0.5
)
 

 
(1.2
)
 
8.9

 
2.4

 

 
11.3

Loss recognized in Interest Expense

 

 
(3.4
)
 
(3.4
)
 

 

 
(3.2
)
 
(3.2
)

 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)
$
3.8

 
$
15.1

 
$
(4.2
)
 
$
14.7

 
$
(0.2
)
 
$
8.6

 
$
(5.7
)
 
$
2.7

Amounts reclassified from Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss) recognized in Net Sales

 
(1.0
)
 

 
(1.0
)
 

 
0.4

 

 
0.4

Gain (Loss) recognized in Cost of Sales
(6.5
)
 
(0.4
)
 

 
(6.9
)
 
17.1

 
2.9

 

 
20.0

Loss recognized in Interest Expense

 

 
(6.8
)
 
(6.8
)
 

 

 
(6.4
)
 
(6.4
)

The ineffective portion of hedging instruments recognized during the six months ended June 30, 2012 and July 2, 2011 was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
July 2, 2011
 
June 30, 2012
 
July 2, 2011
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
Gain recognized in Net Sales
$

 
$
0.3

 
$

 
$

 
$

 
$

 
$

 
$

Gain (Loss) recognized in Cost of Sales
(0.3
)
 
0.5

 
(2.0
)
 
(6.0
)
 
(0.3
)
 
0.6

 
(0.2
)
 
(0.9
)

The net AOCI hedging component balance of $(32.6) million loss at June 30, 2012 includes $(14.5) million of net current deferred losses expected to be realized in the next twelve months.

15. FAIR VALUE
The Company uses a three-tier hierarchy to assess the inputs used to measure the fair value of financial assets and liabilities.
 
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or
 
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
 
Inputs other than quoted prices that are observable for the asset or liability
Level 3
Unobservable inputs for the asset or liability

The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair value of the Company's accounts receivable, accounts payable and variable rate debt approximated book value as of June 30, 2012 and December 31, 2011, respectively, due to their short-term nature and the fact that applicable interest rates approximated market rates of interest.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 (in millions):
 
 
June 30,
2012
 
December 31,
2011
 
Classification
Assets:
 
 
 
 
 
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
3.1

 
$
0.5

 
Level 2
Derivative Commodity Contracts
2.5

 
2.6

 
Level 2
Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
2.8

 
0.1

 
Level 2
Derivative Commodity Contracts
0.1

 
1.0

 
Level 2
Liabilities:
 
 
 
 
 
Other Accrued Expenses:
 
 
 
 
 
Deferred Contingent Purchase Price
$
3.1

 
$
2.0

 
Level 3
Hedging Obligations Current:
 
 
 
 
 
Derivative Currency Contracts
8.0

 
13.6

 
Level 2
Derivative Commodity Contracts
5.5

 
12.5

 
Level 2
Hedging Obligations:
 
 
 
 
 
Interest Rate Swap
39.5

 
42.0

 
Level 2
Derivative Currency Contracts
3.7

 
11.7

 
Level 2
Derivative Commodity Contracts
0.3

 
1.4

 
Level 2
Other Noncurrent Liabilities:
 
 
 
 
 
Deferred Contingent Purchase Price
20.1

 
21.5

 
Level 3


The table below sets forth a summary of changes in fair market value of the Company’s Level 3 liabilities for the three and six months ended June 30, 2012 and July 2, 2011 (in millions):

 
Three Months Ended
 
Six Months Ended
 
June 30,
2012
 
July 2,
2011
 
June 30,
2012
 
July 2,
2011
Beginning Balance
$
23.8

 
$
9.2

 
$
23.5

 
$
11.0

Valuation Adjustments
0.3

 

 
0.6

 
(1.8
)
Acquisitions

 
16.7

 

 
16.7

Payments
(0.9
)
 

 
(0.9
)
 

Ending Balance
$
23.2

 
$
25.9

 
$
23.2

 
$
25.9


The Company’s derivative contracts are valued at fair value using the market or income approaches. The Company measures the fair value of foreign exchange contracts using Level 2 inputs based on observable spot and forward rates in active markets. The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions. The Company measures the fair value of interest rate swaps using Level 2 inputs in an income approach for valuation based on expected interest rate yield curves over the remaining duration of the interest rate swaps. During the six months ended June 30, 2012, there were no transfers between classification Levels 1, 2 or 3.
The Level 3 liabilities described above are comprised entirely of the deferred contingent purchase price of two of the Company’s acquisitions and are measured using Level 3 inputs. In connection with the two acquisitions, the Company had a contingent consideration fair value of $23.2 million as of June 30, 2012 which reflects a $0.6 million increase in the liability from December 31, 2011. Payments of $0.9 million were made during the three months ended June 30, 2012. The contingent consideration, payable in cash, is based upon sales or earnings before interest and income taxes for the acquired businesses for the applicable contingency period. The fair value of the contingent consideration is a Level 3 input; the measurement of which is derived using a probability weighted discounted cash flow analysis. The Company has estimated that the maximum contingent amount will be paid under both agreements so the key assumption is the estimated timing of the payments. The discounted cash flow utilized risk-based discount rates ranging from approximately 5.0% to 8.0%.
See Note 8 of Notes to Condensed Consolidated Financial Statements for the disclosure on the Company's fair value of debt at June 30, 2012 and December 31, 2011.

16. RELATED PARTY TRANSACTIONS
As part of the consideration paid for the acquisition of certain assets of Elco S.p.A. on November 1, 2010, the Company assumed $22.3 million payable to an entity that is affiliated with its Elco Group B.V. joint venture partner resulting from a bankruptcy proceeding involving Elco S.p.A.. The amount is payable in semi-annual payments that end in the third quarter of 2012. During the first six months of 2012, $5.3 million was paid by the Company. The Company has included the remaining balance in Other Accrued Expenses.


6



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this Item 2 to “we,” “us,” “our” or the “Company” refer collectively to Regal Beloit Corporation and its subsidiaries.
Overview
Over the past several years, as part of our strategic growth plans, we have typically acquired multiple businesses in any given fiscal year. When we refer to the financial impact of the “recently acquired businesses,” we are referring to the results of operations of acquired businesses prior to the first anniversary of their acquisition.

On an ongoing basis, we focus on a variety of key indicators to monitor business performance. These indicators include organic and total sales growth (including volume and price components), gross profit margin, operating profit, net income and earnings per share, and measures to optimize the management of working capital, capital expenditures, cash flow and Return On Invested Capital (“ROIC”). We monitor these indicators, as well as our corporate governance practices (including our Code of Business Conduct and Ethics), to ensure that we maintain business health and strong internal controls.

To achieve our financial objectives, we are focused on initiatives to drive and fund growth. We seek to capture significant opportunities for growth by identifying and meeting customer product needs within our core product categories, developing new products, and identifying category expansion opportunities. We meet these customer product needs through focused product research and development efforts as well as through a disciplined acquisition strategy. Our acquisition strategy emphasizes acquiring companies that offer market growth potential as a result of geographic base, technology or synergy opportunities. The cash flow needed to fund our growth is developed through continuous, corporate-wide initiatives to lower costs and increase effective asset utilization.

We also prioritize investments that generate higher return on capital. Our management team is compensated based on a modified Economic Value Added (“EVA”) program which reinforces capital allocation disciplines that drive increases in shareholder value. The key metrics in our program include total sales growth, organic sales growth, operating margin percent, operating cash flow as a percent of net income, and ROIC.

Given the current global economic uncertainty, we anticipate that the near-term operating environment will remain challenging. Slower economic growth or recessions in the U.S. and international markets may reduce the demand for our products. In particular, we have seen recent period-to-period declines in sales of our products used in residential HVAC applications, in part due to continued weakness in the U.S. residential housing markets as well as the adverse impact of the R22 dry-ship conversion.
 
Net sales for the second quarter 2012 increased 26.7% to $863.9 million compared to $681.8 million in the second quarter 2011. Net sales for the second quarter 2012 included $225.2 million of incremental net sales from recently acquired businesses.
Net Income Attributable to Regal Beloit Corporation increased 82.8% to $62.7 million for the second quarter 2012 compared to $34.3 million for the second quarter 2011. Diluted earnings per share increased to $1.49 for the second quarter 2012 compared to $.88 for the second quarter 2011.
Net cash provided by operating activities was $204.4 million for the six months ended June 30, 2012, an increase of $94.8 million from the comparable prior year period.

7



Results of Operations
Net Sales


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
July 2,
 
June 30,
 
July 2,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in Millions)
Net Sales
$
863.9

 
$
681.8

 
$
1,671.8

 
$
1,344.4

  Sales growth rate
26.7
%
 
16.7
%
 
24.4
%
 
23.2
%
 
 
 
 
 
 
 
 
Net Sales by Segment:
 
 
 
 
 
 
 
  Electrical segment
$
783.6

 
$
611.3

 
$
1,515

 
$
1,205.6

     Sales growth rate
28.2
%
 
16.9
%
 
25.7
%
 
23
%
  Mechanical segment
$
80.3

 
$
70.5

 
$
156.8

 
$
138.8

     Sales growth rate
13.9
%
 
14.8
%
 
13.0
%
 
24.6
%

Three Months Ended June 30, 2012
Net sales for the second quarter 2012 included $225.1 million of incremental net sales from the acquired businesses. Excluding the acquired businesses, net sales for the second quarter 2012 also reflected (i) price increases of approximately 1.3% to offset increased material costs, (ii) a decrease of approximately 5.5% related to volume and mix changes and (iii) a decrease from foreign currency translation of approximately 2.1%.
In the Electrical segment, net sales for the second quarter 2012 included $212.6 million of incremental net sales from the acquired businesses. North American residential HVAC motor net sales, excluding the acquired businesses, decreased 11.9% in the second quarter 2012 from the second quarter 2011. The decrease was driven primarily by the adverse impact of the R22 dry ship conversion.
North American commercial and industrial motor net sales, adjusted for the divested pool and spa business, increased 1.3% in the second quarter 2012 from the second quarter 2011. Mechanical segment net sales included incremental sales from the acquired business of $12.5 million in the second quarter of 2012. Excluding the acquired and divested businesses, Mechanical segment sales in North America for the second quarter of 2012 increased 9.1% compared to the second quarter 2011, which helped offset weakness in Mechanical sales in Europe and Asia.
Net sales of high efficiency products were 20.2% of total net sales in the second quarter 2012 compared to 19.9% in the second quarter 2011. The impact of foreign currency exchange rates decreased total net sales by approximately 2.1% for the second quarter 2012 compared to a 2.5% positive impact for the second quarter 2011. Net sales to regions outside of the United States increased 9.5% compared to the second quarter 2011 and represented 31.7% of total net sales in the second quarter 2012 compared to 36.6% in the second quarter 2011.
Six Months Ended June 30, 2012
Net sales for the six months ended June 30, 2012 included $428.1 million of incremental net sales from the acquired businesses. Excluding the acquired businesses, net sales for the six months ended June 30, 2012 also reflected (i) price increases of approximately 1.9% to offset increased material costs, (ii) a decrease of approximately 8.1% related to volume and mix changes and (iii) a decrease from foreign currency translation of approximately 1.3%.
In the Electrical segment, net sales for the six months ended June 30, 2012 included $407.1 million of incremental net sales from the acquired businesses. North American residential HVAC motor net sales, excluding the acquired businesses, decreased 21.0% in the six months ended June 30, 2012 from the six months ended July 2, 2011. The decrease was driven primarily by the adverse impact of the R22 dry ship conversion.
North American commercial and industrial motor net sales, adjusted for the divested pool and spa business, increased 2.0% in the six months ended June 30, 2012 from the six months ended July 2, 2011. Mechanical segment net sales included incremental sales from the acquired business of $21.0 million for the six months ended June 30, 2012. Excluding the acquired

8



and divested businesses, Mechanical segment sales in North America for the for the six months ended June 30, 2012 increased 11.9% compared to July 2, 2011.
Net sales of high efficiency products were 19.2% of total net sales in the six months ended June 30, 2012 compared to 17.9% in the six months ended July 2, 2011. The impact of foreign currency exchange rates decreased total net sales by approximately 1.3% for the six months ended June 30, 2012 compared to a 1.8% positive impact for the six months ended July 2, 2011. Net sales to regions outside the United States increased 11.3% for the six months ended June 30, 2012 compared to the six months ended July 2, 2011 and represented 32.9% of total net sales for the six months ended June 30, 2012 compared to 36.7% for the six months ended July 2, 2011.
Gross Profit
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
July 2,
 
June 30,
 
July 2,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in Millions)
Gross Profit
$
220.1

 
$
150.7

 
$
417.7

 
$
315.5

  Gross profit percentage
25.5
%
 
22.1
%
 
25.0
%
 
23.5
%
 
 
 
 
 
 
 
 
Gross Profit by Segment:
 
 
 
 
 
 
 
  Electrical segment
$
197.3

 
$
130.3

 
$
376.1

 
$
275.9

     Gross profit percentage
25.2
%
 
21.3
%
 
24.8
%
 
22.9
%
  Mechanical segment
$
22.8

 
$
20.4

 
$
41.6

 
$
39.6

     Gross profit percentage
28.4
%
 
28.9
%
 
26.5
%
 
28.5
%

Three Months Ended June 30, 2012
Gross profit margin for the second quarter 2012 was 25.5% compared to 22.1% for the second quarter 2011. Electrical segment was 25.2% for the second quarter 2012, compared to 21.3% for the second quarter 2011. Cost of sales for the second quarter 2012 included $0.5 million of restructuring costs in the Electrical segment which negatively impacted gross profit margin. Cost of sales for the second quarter 2011 included $28.0 million from a previously disclosed warranty expense item in the Electrical segment's cost of sales which negatively impacted gross profit margin. Gross profit margin for the
Gross profit margin for the Mechanical segment was 28.4% for the second quarter 2012, relatively consistent with 28.9% in the second quarter 2011.
Six Months Ended June 30, 2012
Gross profit margin for the six months ended June 30, 2012 was 25.0% compared to 23.5% for the six months ended July 2, 2011. Gross profit margin for the Electrical segment was 24.8% for the six months ended June 30, 2012, compared to 22.9% for the six months ended July 2, 2011. Cost of sales for the six months ended June 30, 2012 included $0.5 million of restructuring costs in the Electrical segment which negatively impacted gross profit margin. Cost of sales for the six months ended July 2, 2011 included $28.0 million from a previously disclosed warranty expense item in the Electrical segment's cost of sales which negatively impacted gross profit margin.
Gross profit margin for the Mechanical segment was 26.5% for the six months ended June 30, 2012, compared to 28.5% in the six months ended July 2, 2011. The decrease in the gross margin for the Mechanical segment for the six months ended June 30, 2012 was primarily due to $0.7 million of inventory purchase accounting adjustments related to the acquisition of Milwaukee Gear Company.






9





Operating Expenses
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
July 2,
 
June 30,
 
July 2,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in Millions)
Operating Expenses
$
116.8

 
$
95.9

 
$
235.3

 
$
196.6

  As a percentage of net sales
13.5
%
 
14.1
%
 
14.1
%
 
14.6
%
 
 
 
 
 
 
 
 
Operating Expenses by Segment:
 
 
 
 
 
 
 
  Electrical segment
$
105.8

 
$
85.4

 
$
215.3

 
$
175.5

  As a percentage of net sales
13.5
%
 
14.0
%
 
14.2
%
 
14.6
%
  Mechanical segment
$
11.0

 
$
10.5

 
$
20.0

 
$
21.1

  As a percentage of net sales
13.7
%
 
14.9
%
 
12.8
%
 
15.2
%

Three Months Ended June 30, 2012
Operating expenses for the second quarter 2012 increased $20.9 million and included $23.4 million related to the acquired businesses. Second quarter 2012 included a reduction of $3.5 million of acquisition related expenses as compared to the second quarter of 2011.
Electrical segment operating expenses for the second quarter 2012 included $22.2 million related to the acquired businesses, net of a reduction of $3.5 million of acquisition related expenses.
Mechanical segment operating expenses included an incremental $1.2 million related to the acquired business.
Six Months Ended June 30, 2012
Operating expenses for the six months ended June 30, 2012 included $48.6 million related to the acquired businesses and reflected a reduction of $10.1 million of acquisition related expenses compared to the six months ended July 2, 2011.
Electrical segment operating expenses for the six months ended June 30, 2012 included $46.5 million related to the acquired businesses, and reflected a reduction of $10.1 million of acquisition related expenses.
Mechanical segment operating expenses for the six months ended June 30, 2012 included a gain of sale of assets of $1.3 million.
Income from Operations
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
July 2,
 
June 30,
 
July 2,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in Millions)
Income from Operations
$
103.3

 
$
54.8

 
$
182.4

 
$
118.9

  As a percentage of net sales
12.0
%
 
8.0
%
 
10.9
%
 
8.9
%
 
 
 
 
 
 
 
 
Income from Operations by Segment
 
 
 
 
 
 
 
  Electrical segment
$
91.5

 
$
44.9

 
$
160.9

 
$
100.4

  As a percentage of net sales
11.7
%
 
7.4
%
 
10.6
%
 
8.3
%
  Mechanical segment
$
11.8

 
$
9.9

 
$
21.5

 
$
18.5

  As a percentage of net sales
14.7
%
 
14.0
%
 
13.7
%
 
13.3
%

10




Three Months Ended June 30, 2012
Income from operations was $103.3 million for the second quarter 2012 compared to $54.8 million for the second quarter 2011. As a percentage of sales, income from operations was 12.0% for the second quarter 2012 compared to 8.0% for the second quarter 2011.
Electrical segment income from operations was 11.7% of net sales for the second quarter 2012 compared to 7.4% of net sales for the second quarter 2011. Cost of sales for the second quarter 2012 included $0.5 million of restructuring costs in the Electrical segment which negatively impacted income from operations. Cost of sales for the second quarter 2011 included $28.0 million from a previously disclosed warranty expense item in the Electrical segment's cost of sales which negatively impacted income from operations.
Mechanical segment income from operations was 14.7% of net sales for the second quarter 2012 compared to 14.0% of net sales for the second quarter 2011.
Six Months Ended June 30, 2012
Income from operations was $182.4 million for the six months ended June 30, 2012 compared to $118.9 million for the six months ended July 2, 2011. As a percentage of sales, income from operations was 10.9% for the six months ended June 30, 2012 compared to 8.9% for the six months ended July 2, 2011.
Electrical segment income from operations was 10.6% of net sales for the six months ended June 30, 2012 compared to 8.3% of net sales for the six months ended July 2, 2011. Cost of sales for the six months ended June 30, 2012 included $0.5 million of restructuring costs in the Electrical segment which negatively impacted income from operations. Cost of sales for the six months ended July 2, 2011 included $28.0 million from a previously disclosed warranty expense item in the Electrical segment's cost of sales which negatively impacted income from operations.
Mechanical segment income from operations was 13.7% of net sales for the six months ended June 30, 2012 compared to 13.3% of net sales for the six months ended July 2, 2011.
Interest Expense, Net
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
July 2,
 
June 30,
 
July 2,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in Millions)
Interest Expense, Net
$
10.8

 
$
4.4

 
$
22.2

 
$
9.2


Three Months Ended June 30, 2012
Net interest expense for the second quarter 2012 was $10.8 million compared to $4.4 million for the second quarter 2011. During 2012, the Company's net interest expense increased driven by higher debt outstanding to fund the August 2011 acquisition of the Electrical Products Company of A.O. Smith Corporation.
Six Months Ended June 30, 2012
Net interest expense for the six months ended June 30, 2012 was $22.2 million compared to $9.2 million for the six months ended July 2, 2011. During 2012, the Company's net interest expense increased driven by higher debt outstanding to fund the August 2011 acquisition of the Electrical Products Company of A.O. Smith Corporation.
Provision for Income Taxes
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
July 2,
 
June 30,
 
July 2,
 
2012
 
2011
 
2012
 
2011
 
(Dollars in Millions)
Income Taxes
$
28.2

 
$
14.4

 
$
46.0

 
$
33.0

  Effective Tax Rate
30.5
%
 
28.6
%
 
28.7
%
 
30.0
%


11



Three Months Ended June 30, 2012
The effective tax rate for the second quarter 2012 was 30.5% compared to 28.6% for the second quarter 2011. The change in the effective rates was primarily driven by the global mix of earnings.
Six Months Ended June 30, 2012
The effective tax rate for the six months ended June 30, 2012 was 28.7% compared to 30.0% for the six months ended July 2, 2011. The change in the effective rates was primarily driven by the global mix of earnings.