RBC-2013.9.28-10Q


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 September 28, 2013
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 November 1, 2013 there were 45,068,082 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:

uncertainties regarding our ability to execute our restructuring plans within expected costs and timing;
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;
unexpected issues in implementation or conversion of ERP systems;
fluctuations in commodity prices and raw material costs;
our dependence on significant customers;
issues and costs arising from the integration of recently 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/A filed with the Securities and Exchange Commission on March 26, 2013.


3



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

REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in Millions, Except Per Share Data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net Sales
$
768.2

 
$
779.5

 
$
2,368.4

 
$
2,451.3

Cost of Sales
571.7

 
586.9

 
1,763.2

 
1,841.0

Gross Profit
196.5

 
192.6

 
605.2

 
610.3

Operating Expenses
117.7

 
109.3

 
369.4

 
344.6

Income From Operations
78.8

 
83.3

 
235.8

 
265.7

Interest Expense
10.6

 
10.6

 
31.9

 
33.6

Interest Income
1.3

 
0.4

 
3.1

 
1.2

Income Before Taxes
69.5

 
73.1

 
207.0

 
233.3

Provision For Income Taxes
15.0

 
17.9

 
48.2

 
63.9

Net Income
54.5

 
55.2

 
158.8

 
169.4

Less: Net Income Attributable to Noncontrolling Interests
1.9

 
0.9

 
5.6

 
3.7

Net Income Attributable to Regal Beloit Corporation
$
52.6

 
$
54.3

 
$
153.2

 
$
165.7

Earnings Per Share Attributable to Regal Beloit Corporation:
 
 
 
 
 
 
 
Basic
$
1.17

 
$
1.30

 
$
3.40

 
$
3.98

Assuming Dilution
$
1.16

 
$
1.29

 
$
3.38

 
$
3.94

Cash Dividends Declared
$
0.20

 
$
0.19

 
$
0.59

 
$
0.56

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
45.1

 
41.7

 
45.0

 
41.7

Assuming Dilution
45.4

 
42.0

 
45.3

 
42.0

See accompanying Notes to Condensed Consolidated Financial Statements


4



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in Millions)
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net Income
$
54.5

 
$
55.2

 
$
158.8

 
$
169.4

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments
6.4

 
20.0

 
(22.4
)
 
13.3

Hedging Activities
 
 
 
 
 
 
 
Change in fair value of hedging activities, net of tax effects of $2.6 million and $6.2 million for the three months ended September 28, 2013 and September 29, 2012, and $(3.0) million and $11.8 million for the nine months ended September 28, 2013 and September 29, 2012, respectively
4.4

 
10.2

 
(4.8
)
 
19.3

Reclassification adjustment for losses included in net income, net of tax effects of $2.5 million and $3.0 million for the three months ended September 28, 2013 and September 29, 2012 and $3.4 million and $8.6 million for the nine months ended September 28, 2013 and September 29, 2012, respectively
4.0

 
4.9

 
5.5

 
14.0

Pension Benefit Adjustments
 
 
 
 
 
 
 
Reclassification adjustments for pension benefits included in net income, net of tax effects of $0.4 and $2.4 million for the three months ended September 28, 2013 and September 29, 2012, and $0.7 million and $1.5 million for the nine months ended September 28, 2013 and September 29, 2012, respectively
0.5

 
3.9

 
1.1

 
2.4

Other Comprehensive Income (Loss)
15.3

 
39.0

 
(20.6
)
 
49.0

Comprehensive Income
69.8

 
94.2

 
138.2

 
218.4

Less: Comprehensive Income Attributable to Noncontrolling Interests
2.8

 
1.7

 
5.5

 
4.1

Comprehensive Income Attributable to Regal Beloit Corporation
$
67.0

 
$
92.5

 
$
132.7

 
$
214.3

See accompanying Notes to Condensed Consolidated Financial Statements


5



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions, Except Per Share Data)
 
 
September 28,
2013
 
December 29,
2012
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
462.7

 
$
375.3

Trade Receivables, less Allowances of $11.9 million in 2013 and $10.2 million in 2012
481.9

 
446.0

Inventories
606.1

 
557.0

Prepaid Expenses and Other Current Assets
118.5

 
112.9

Deferred Income Tax Benefits
48.3

 
48.7

Total Current Assets
1,717.5

 
1,539.9

Net Property, Plant, and Equipment
572.6

 
573.1

Goodwill
1,143.9

 
1,151.0

Intangible Assets, net of Amortization
259.6

 
293.2

Other Noncurrent Assets
15.7

 
11.9

Total Assets
$
3,709.3

 
$
3,569.1

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts Payable
$
319.3

 
$
251.8

Dividends Payable
9.0

 
8.5

Hedging Obligations
15.7

 
6.3

Accrued Compensation and Employee Benefits
84.7

 
80.0

Other Accrued Expenses
131.8

 
123.5

Current Maturities of Debt
159.6

 
63.8

Total Current Liabilities
720.1

 
533.9

Long-Term Debt
609.1

 
754.7

Deferred Income Taxes
124.3

 
132.0

Hedging Obligations
19.7

 
35.7

Pension and Other Post Retirement Benefits
67.1

 
69.2

Other Noncurrent Liabilities
52.8

 
47.1

Commitments and Contingencies (see Note 12)

 

Equity:
 
 
 
Regal Beloit Corporation Shareholders' Equity:
 
 
 
Common Stock, $.01 par value, 100.0 million shares authorized, 45.0 million shares and 44.9 million shares issued in 2013 and 2012, respectively
0.5

 
0.4

Additional Paid-In Capital
913.0

 
903.3

Retained Earnings
1,241.6

 
1,115.0

Accumulated Other Comprehensive Loss
(84.7
)
 
(65.3
)
Total Regal Beloit Corporation Shareholders' Equity
2,070.4

 
1,953.4

Noncontrolling Interests
45.8

 
43.1

Total Equity
2,116.2

 
1,996.5

Total Liabilities and Equity
$
3,709.3

 
$
3,569.1

See accompanying Notes to Condensed Consolidated Financial Statements.


6



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 December 31, 2011
$
0.4

 
$
689.4

 
$
951.3

 
$
(105.2
)
 
$
40.5

 
$
1,576.4

Net Income

 

 
165.7

 

 
3.7

 
169.4

Other Comprehensive Income

 

 

 
48.6

 
0.4

 
49.0

Dividends Declared ($0.56 per share)

 

 
(23.3
)
 

 

 
(23.3
)
Stock Options Exercised, including income tax benefit and share cancellations

 
1.5

 

 

 

 
1.5

Share-based Compensation

 
6.7

 

 

 

 
6.7

Dividends Declared to Non-controlling Interests

 

 

 

 
(2.8
)
 
$
(2.8
)
Balance as of September 29, 2012
$
0.4

 
$
697.6

 
$
1,093.7

 
$
(56.6
)
 
$
41.8

 
$
1,776.9

 
 
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 29, 2012
$
0.4

 
$
903.3

 
$
1,115.0

 
$
(65.3
)
 
$
43.1

 
$
1,996.5

Net Income

 

 
153.2

 

 
5.6

 
158.8

Other Comprehensive Loss

 

 

 
(20.5
)
 
(0.1
)
 
(20.6
)
Dividends Declared ($0.59 per share)

 

 
(26.6
)
 

 

 
(26.6
)
Stock Options Exercised, including income tax benefit and share cancellations
0.1

 
1.4

 

 

 

 
1.5

Share-based Compensation

 
8.3

 

 

 

 
8.3

Purchase of Subsidiary Shares from Noncontrolling Interest

 

 

 
1.1

 
(2.8
)
 
(1.7
)
Balance as of September 28, 2013
$
0.5

 
$
913.0

 
$
1,241.6

 
$
(84.7
)
 
$
45.8

 
$
2,116.2

See accompanying Notes to Condensed Consolidated Financial Statements.

7



REGAL BELOIT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
 
  
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
158.8

 
$
169.4

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
95.1

 
95.0

Excess tax benefits from share-based compensation
(0.7
)
 
(1.7
)
Loss (gain) on disposition of assets, net
0.1

 
(1.7
)
Share-based compensation expense
8.3

 
6.7

Change in operating assets and liabilities, net of acquisitions
(23.1
)
 
8.5

Net cash provided by operating activities
238.5

 
276.2

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Additions to property, plant and equipment
(65.4
)
 
(66.1
)
Purchases of investment securities
(24.6
)
 
(4.7
)
Sales of investment securities
24.3

 
1.5

Business acquisitions, net of cash acquired
(6.4
)
 
(103.0
)
Additions of equipment for operating leases
(3.6
)
 

Grants received for capital expenditures
1.6

 
7.1

Proceeds from sale of assets
1.7

 
2.7

Net cash used in investing activities
(72.4
)
 
(162.5
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings under revolving credit facility
20.0

 
281.0

Repayments under revolving credit facility
(20.0
)
 
(263.0
)
Proceeds from short-term borrowings
39.2

 
36.4

Repayments of short-term borrowings
(38.2
)
 
(32.9
)
Repayments of long-term debt
(55.8
)
 
(75.2
)
Dividends paid to shareholders
(26.1
)
 
(22.9
)
Proceeds from the exercise of stock options
2.3

 
3.5

Excess tax benefits from share-based compensation
0.7

 
1.7

Purchase of subsidiary shares from noncontrolling interest
(1.7
)
 

Net cash used in financing activities
(79.6
)
 
(71.4
)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
0.9

 
0.9

Net increase in cash and cash equivalents
87.4

 
43.2

Cash and cash equivalents at beginning of period
375.3

 
142.6

Cash and cash equivalents at end of period
$
462.7

 
$
185.8

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid for:
 
 
 
 Interest
$
37.3

 
$
38.7

 Income taxes
$
35.4

 
$
56.2

See accompanying Notes to Condensed Consolidated Financial Statements.


8



REGAL BELOIT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2013
(Unaudited)

1. BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of December 29, 2012, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of September 28, 2013 and for the three and nine months ended September 28, 2013 and September 29, 2012, 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 consolidated financial statements and the notes thereto included in the Company’s 2012 Annual Report on Form 10-K/A filed on March 26, 2013.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the three and nine months ended September 28, 2013 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 28, 2013.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations, pension assets and liabilities, derivative fair values, goodwill impairment, health care, retirement benefits, litigation claims and contingencies and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a 52/53 week fiscal year ending on the Saturday closest to December 31.
As of the beginning of 2013, the Company adopted new guidance that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This information enables users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements with certain financial instruments and derivative instruments. This new guidance is applicable to the Company's derivative instruments. See Note 13 of Notes to Condensed Consolidated Financial Statements.
As of the beginning of 2013, the Company adopted new guidance that requires footnote disclosures on a prospective basis regarding the changes in accumulated other comprehensive loss by component and the line items affected in the statements of income. See Note 4 of Notes to Condensed Consolidated Financial Statements.
As of the beginning of 2013, the Company changed its inventory valuation method for the finished goods of recently acquired North American businesses to the LIFO method from the FIFO method. The Company believes the change to the LIFO method is preferable because it will improve matching of current costs with revenues when there is volatility in the cost of raw materials, and is consistent with the method used for the majority of the Company’s other North American finished goods inventory. Prior period consolidated financial statements have not been retrospectively adjusted. The cumulative effect of this change was immaterial.

2. OTHER FINANCIAL INFORMATION
Inventories
Inventories are valued at last-in, first-out (LIFO) for approximately 51% and 31% of the Company’s inventory as of September 28, 2013 and December 29, 2012, respectively.





9



The approximate percentage distribution between major classes of inventories was as follows:

 
September 28,
2013
 
December 29,
2012
Raw Material and Work in Process
43
%
 
43
%
Finished Goods and Purchased Parts
57
%
 
57
%
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (in millions):
 
 
September 28,
2013
 
December 29,
2012
Land and Improvements
$
71.8

 
$
76.2

Buildings and Improvements
225.8

 
212.7

Machinery and Equipment
783.6

 
747.5

Property, Plant and Equipment
1,081.2

 
1,036.4

Less: Accumulated Depreciation
(508.6
)
 
(463.3
)
Net Property, Plant and Equipment
$
572.6

 
$
573.1


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 months ended September 28, 2013 and were $3.2 million for the nine months ended September 28, 2013. Acquisition expenses were immaterial for the three and nine months ended September 29, 2012.
2013 Acquisitions
On September 3, 2013, the Company purchased additional shares owned by the noncontrolling interest in its joint venture in a South African distribution business.

On February 8, 2013, the Company acquired the RAM motor business previously owned by Schneider Electric. This business manufactures hermetic motors from 250 hp to 2,500 hp for commercial HVAC applications and is reported in the Electrical segment.

2012 Acquisitions
On April 30, 2012, the Company acquired Tecnojar, a Mexico based electrical products company, for $1.6 million. Tecnojar is reported as a part of the Company's Electrical segment.
On February 3, 2012, the Company acquired Milwaukee Gear Company (“MGC”), a Wisconsin-based leading manufacturer of highly engineered gearing components for oil and gas applications as well as a wide variety of other commercial and industrial applications. The purchase price of MGC was $80.3 million paid in cash, net of cash acquired. MGC is reported as a part of the Company’s Mechanical segment.
4. ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss.

10



The changes in accumulated other comprehensive loss by component, net of tax, for the three and nine months ended September 28, 2013 were as follows (in millions):
 
Three Months Ended
 
September 28, 2013
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(25.1
)
 
$
(41.3
)
 
$
(33.8
)
 
$
(100.2
)
Other comprehensive income before reclassifications
4.4

 

 
5.5

 
9.9

Amounts reclassified from accumulated other comprehensive income
4.0

 
0.5

 

 
4.5

Purchase of subsidiary shares from noncontrolling interest

 

 
1.1

 
1.1

Net current period other comprehensive income
8.4

 
0.5

 
6.6

 
15.5

Ending balance
$
(16.7
)
 
$
(40.8
)
 
$
(27.2
)
 
$
(84.7
)
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 28, 2013
 
Hedging Activities
 
Pension Benefit Adjustments
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
(17.4
)
 
$
(41.9
)
 
$
(6.0
)
 
$
(65.3
)
Other comprehensive income (loss) before reclassifications
(4.8
)
 

 
(22.3
)
 
(27.1
)
Amounts reclassified from accumulated other comprehensive income (loss)
5.5

 
1.1

 

 
6.6

Purchase of subsidiary shares from noncontrolling interest

 

 
1.1

 
1.1

Net current period other comprehensive income (loss)
0.7

 
1.1

 
(21.2
)
 
(19.4
)
Ending balance
$
(16.7
)
 
$
(40.8
)
 
$
(27.2
)
 
$
(84.7
)

The condensed consolidated income statement line item affected by the cash flow hedge amounts reclassified from accumulated other comprehensive loss in the table above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for defined benefit pension items in the table above are included as part of net periodic pension costs; see Note 8 of Notes to Condensed Consolidated Financial Statements.


11



5. BUSINESS SEGMENTS
The Company has two reportable segments: Mechanical and Electrical. Segment detail was (in millions):
 
 
Electrical
 
Mechanical
 
Eliminations
 
Total
Three months ended September 28, 2013
 
 
 
 
 
 
 
External sales
$
707.5

 
$
60.7

 
$

 
$
768.2

Intersegment sales
1.2

 
1.2

 
(2.4
)
 

  Total sales
708.7

 
61.9

 
(2.4
)
 
768.2

Income from operations
71.1

 
7.7

 

 
78.8

Identifiable assets
3,483.1

 
226.2

 

 
3,709.3

Depreciation and amortization
28.5

 
3.2

 

 
31.7

Three months ended September 29, 2012
 
 
 
 
 
 
 
External sales
$
708.3

 
$
71.2

 
$

 
$
779.5

Intersegment sales
0.9

 
1.3

 
(2.2
)
 

  Total sales
709.2

 
72.5

 
(2.2
)
 
779.5

Income from operations
73.2

 
10.1

 

 
83.3

Identifiable assets
3,216.1

 
207.6

 

 
3,423.7

Depreciation and amortization
32.3

 
2.1

 

 
34.4


 
Electrical
 
Mechanical
 
Eliminations
 
Total
Nine months ended September 28, 2013
 
 
 
 
 
 
 
External sales
$
2,171.8

 
$
196.6

 
$

 
$
2,368.4

Intersegment sales
3.2

 
4.0

 
(7.2
)
 

  Total sales
2,175.0

 
200.6

 
(7.2
)
 
2,368.4

Income from operations
211.1

 
24.7

 

 
235.8

Identifiable assets
3,483.1

 
226.2

 

 
3,709.3

Depreciation and amortization
85.6

 
9.5

 

 
95.1

Nine months ended September 29, 2012
 
 
 
 
 
 
 
External Sales
$
2,223.3

 
$
228.0

 
$

 
$
2,451.3

Intersegment sales
2.7

 
2.9

 
(5.6
)
 

  Total sales
2,226.0

 
230.9

 
(5.6
)
 
2,451.3

Income from operations
234.1

 
31.6

 

 
265.7

Identifiable assets
3,216.1

 
207.6

 

 
3,423.7

Depreciation and amortization
87.3

 
7.7

 

 
95.0


6. GOODWILL AND INTANGIBLE ASSETS
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.

12



The following information presents changes to goodwill during the periods indicated (in millions):
 
Total
 
Electrical
Segment
 
Mechanical
Segment
Balance as of December 31, 2011
$
1,117.6

 
$
1,105.0

 
$
12.6

Acquisitions and Valuation Adjustments
25.9

 
2.7

 
23.2

Foreign Currency Translation Adjustments
7.5

 
4.0

 
3.5

Balance as of December 29, 2012
1,151.0

 
1,111.7

 
39.3

Foreign Currency Translation Adjustments
(7.1
)
 
(6.9
)
 
(0.2
)
Balance as of September 28, 2013
$
1,143.9

 
$
1,104.8

 
$
39.1

Intangible Assets
Intangible assets consisted of the following (in millions):
 
 
 
 
September 28, 2013
 
December 29, 2012
 
Useful Life
(years)
 
Gross Value
 
Accumulated
Amortization
 
Gross Value
 
Accumulated
Amortization
Customer Relationships
3 - 14
 
$
244.0

 
$
(95.7
)
 
$
244.9

 
$
(78.7
)
Technology
3 - 9
 
130.3

 
(53.8
)
 
130.3

 
(41.8
)
Trademarks
3 - 20
 
32.3

 
(17.4
)
 
32.7

 
(15.7
)
In-process Research and Development
N/A
 
17.2

 

 
17.2

 

Patent and Engineering Drawings
10
 
16.6

 
(14.6
)
 
16.6

 
(13.3
)
Non-compete Agreements
3 - 5
 
8.3

 
(7.6
)
 
8.2

 
(7.2
)
 
 
 
$
448.7

 
(189.1
)
 
$
449.9

 
(156.7
)
Net Values
 
 
 
 
$
259.6

 
 
 
$
293.2

The estimated expected future annual amortization for intangible assets is as follows (in millions):
 
Year
Estimated
Amortization
2013
$
43.9

2014
42.4

2015
35.0

2016
30.4

2017
24.2


Amortization expense recorded for the three and nine months ended September 28, 2013 was $10.9 million and $33.0 million respectively. Amortization expense for the three and nine months ended September 29, 2012 was $11.1 million and $32.8 million, respectively.
In-process research and development projects are estimated to be completed by the end of 2015 and amortization will begin upon project completion.

13



7. DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of September 28, 2013 and December 29, 2012 was as follows (in millions):
 
September 28,
2013
 
December 29,
2012
Senior notes
$
750.0

 
$
750.0

Term loan

 
55.0

Other
18.7

 
13.5

 
768.7

 
818.5

Less: Current maturities
(159.6
)
 
(63.8
)
Non-current portion
$
609.1

 
$
754.7


At September 28, 2013, the Company had $750.0 million of senior notes (the “Notes”) outstanding. Details on the senior notes are (in millions):
 
Principal
 
Interest Rate
 
Maturity
Floating Rate Series 2007A
$
150.0

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

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

 
4.1%
 
July 2018
Fixed Rate Series 2011A
230.0

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

 
4.9 to 5.1%
 
July 2023
 
$
750.0

 
 
 
 
 
(1)
Interest rates vary as LIBOR varies. At September 28, 2013, the interest rate was 0.9%.

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. Prior to 2013, the Company repaid $110.0 million of the Term Loan. The final $55.0 million payment was made in June 2013 when the loan matured.
The Company 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. 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. At September 28, 2013, the Company had no outstanding balance on the Facility, $23.5 million of standby letters of credit issued under the Facility and $476.5 million of available borrowing capacity.
Based on rates for instruments with comparable maturities, credit risks, and terms, which are classified as Level 2 inputs, the approximate fair value of the Company's debt was $785.5 million and $859.6 million as of September 28, 2013 and December 29, 2012, respectively.
At September 28, 2013, other notes payable of $18.7 million were outstanding with a weighted average interest rate of 2.7%.
The Notes and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial debt covenants as of September 28, 2013.
The Company entered into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. (See also Note 13 of Notes to Condensed Consolidated Financial Statements.)

14



8. PENSION PLANS
The Company’s net periodic defined benefit pension cost is comprised of the following components (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Service cost
$
0.7

 
$
0.6

 
$
2.1

 
$
1.8

Interest cost
1.8

 
1.9

 
5.4

 
5.6

Expected return on plan assets
(2.1
)
 
(1.8
)
 
(6.1
)
 
(5.5
)
Amortization of prior service cost and net actuarial loss
1.1

 
0.9

 
3.2

 
2.8

Net periodic benefit expense
$
1.5

 
$
1.6

 
$
4.6

 
$
4.7


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 2013 fiscal year is $4.0 million and $0.2 million, respectively.
During the first nine months of 2013 and 2012, the Company contributed $4.4 million and $10.9 million, respectively, to defined benefit pension plans. The Company expects to make contributions of $4.9 million in 2013. The Company contributed a total of $11.7 million in 2012. 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 2012 Annual Report on Form 10-K/A filed on March 26, 2013.

9. SHAREHOLDERS’ EQUITY
The Company recognized approximately $2.9 million and $2.3 million in share-based compensation expense for the three months ended September 28, 2013 and September 29, 2012, respectively. Share based compensation expense for the nine months ended September 28, 2013 and September 29, 2012 was $8.3 million and $6.7 million, respectively. The total excess income tax benefit recognized relating to share-based compensation for the nine months ended September 28, 2013 and September 29, 2012 was approximately $0.7 million and $1.7 million, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of September 28, 2013, total unrecognized compensation cost related to share-based compensation awards was approximately $25.9 million, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately 2.6 years.
On April 29, 2013, the Company's shareholders approved the 2013 Equity Incentive Plan ("2013 Plan"). The 2013 Plan authorizes the issuance of 3.5 million shares of common stock for equity-based awards, and terminates any further grants under prior equity plans.
Approximately 3.0 million shares were available for future grant or payment under the 2013 Plan at September 28, 2013.
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 10 years from the grant date.
The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. For the nine month period ended September 28, 2013, and September 29, 2012, respectively, 174,775 and 255,225 share-based incentive awards were granted. The per share weighted average fair value of share-based incentive awards granted during those respective periods was $23.01 and $22.45.

15



The assumptions used in the Black-Scholes valuation related to grants were as follows:
 
 
September 28,
2013
 
September 29,
2012
Risk-free interest rate
 
1.1
%
 
1.3
%
Expected life (years)
 
7.0

 
7.0

Expected volatility
 
38.5
%
 
37.6
%
Expected dividend yield
 
1.2
%
 
1.2
%

A summary of share-based awards (options and SARs) as of September 28, 2013 follows below. Forfeitures of share-based awards during the nine months ended September 28, 2013 were immaterial.
Number of Shares
Shares
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
(years)
 
Aggregate Intrinsic
Value (in
millions)
Outstanding
1,591,490

 
$
55.97

 
6.4
 
$
20.1

Exercisable
796,700

 
48.13

 
4.7
 
16.3


Restricted Stock Awards, Restricted Stock Units and Performance Units
The Company also grants equity-based awards including restricted stock (“RSA”) awards, restricted stock unit (“RSU”) awards and performance unit (“PSU”) awards. Such awards are valued using the closing price of the Company's common stock on the date of grant or, for PSUs, based on a Monte Carlo simulation value. Restrictions generally lapse three years after the date of grant (or one year in the case of certain RSA grants to directors).
Changes in restricted stock awards for the nine months ended September 28, 2013 were as follows:
 
 
Shares
 
Weighted Average Value
 
 
Unvested RSUs, RSAs and PSUs, December 29, 2012
199,941

 
$
64.92

 
Granted
150,482

 
63.05

 
Vested
(36,035
)
 
61.70

 
Forfeited
(7,920
)
 
62.39

 
Unvested RSUs, RSAs and PSUs, September 28, 2013
306,468

 
$
64.45


10. INCOME TAXES
The effective tax rate for the three months ended September 28, 2013 was 21.6% versus 24.5% for the three months ended September 29, 2012. The effective tax rate for the nine months ended September 28, 2013 was 23.3% versus 27.4% for the nine months ended September 29, 2012. The change in the third quarter effective rate was primarily driven by the favorable adjustments related to the finalization of the 2012 U.S. Federal income tax return and the global distribution of earnings, compared to the third quarter 2012. The change in the nine month effective rate was driven by the same factors as the third quarter as well as the by the 2012 research and development retroactive reinstatement which was recorded in the first quarter of 2013. The lower effective rate as compared to the 35.0% statutory Federal income tax rate is driven by lower foreign tax rates.
As of September 28, 2013 and December 29, 2012, the Company had approximately $4.5 million and $5.7 million, respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. U.S. federal tax returns from 2010 through 2012 and various state and foreign tax returns remain subject to income tax examinations by tax authorities.

16



11. EARNINGS PER SHARE ("EPS")
The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in millions):
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Denominator for basic EPS (weighted average)
45.1

 
41.7

 
45.0

 
41.7

Effect of dilutive securities
0.3

 
0.3

 
0.3

 
0.3

Denominator for diluted EPS (weighted average)
45.4

 
42.0

 
45.3

 
42.0


The “Effect of dilutive securities” represents the dilution impact of equity awards. For the three months ended September 28, 2013 and September 29, 2012, respectively, there were 0.7 million and 0.3 million options where the exercise price was above the average market price, and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive. For the nine months ended September 28, 2013 and September 29, 2012, there were 0.7 million and 0.3 million options, respectively, where the exercise price was above the average market price and which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive.

12. 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 exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience.
The following is a reconciliation of the changes in accrued warranty costs for the three and nine months ended September 28, 2013 and September 29, 2012 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Beginning balance
$
21.9

 
$
26.0

 
$
20.9

 
$
24.2

Payments
(5.2
)
 
(5.9
)
 
(13.7
)
 
(19.3
)
Provision
4.8

 
7.1

 
13.2

 
22.3

Acquisition

 

 
1.2

 
0.1

Translation Adjustments

 
0.1

 
(0.1
)
 

Ending balance
$
21.5

 
$
27.3

 
$
21.5

 
$
27.3



17



13. 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, currency exchange and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.
The Company must recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of September 28, 2013.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings. All derivative instruments used by the Company impact operating cash flows.
At September 28, 2013, the Company had $(1.8) 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 29, 2012, the Company had $(0.3) million, net of tax, of derivative losses on closed hedge instruments in AOCI that was realized in earnings when the hedged items impacted earnings.
As of September 28, 2013, the Company had outstanding the following commodity forward contracts (with maturities extending through December 2014) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item in millions):
 
Notional
Amount
Copper
$
130.5

Aluminum
10.0


As of September 28, 2013, the Company had outstanding the following currency forward contracts (with maturities extending through December 2015) to hedge forecasted foreign currency cash flows (in millions):
 
Notional
Amount
Mexican Peso
$
219.3

Chinese Renminbi
132.7

Indian Rupee
38.0

Thai Baht
5.9

Australian Dollar
1.7



18



As of September 28, 2013, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was $250.0 million (with maturities extending to August 2017).
Fair values of derivative instruments as of September 28, 2013 and December 29, 2012 were (in millions):

 
September 28, 2013
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Hedging
Obligations
(current)
 
Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$
7.6

 
$
17.4

Foreign exchange contracts
7.3

 
0.9

 
3.2

 
2.2

Commodity contracts
2.8

 
0.1

 
4.6

 
0.1

Not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts
0.2

 

 
0.3

 

Total Derivatives
$
10.3

 
$
1.0

 
$
15.7

 
$
19.7

 
 
December 29, 2012
 
Prepaid
Expenses and Other Current Assets
 
Other
Noncurrent
Assets
 
Hedging
Obligations
(current)
 
Hedging
Obligations
Designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$

 
$

 
$
35.4

Foreign exchange contracts
6.8

 
2.3

 
4.6

 
0.3

Commodity contracts
3.6

 
0.2

 
1.2

 

Not designated as hedging instruments:
 
 
 
 
 
 
 
Commodity contracts
0.6

 

 
0.5

 

Total Derivatives
$
11.0

 
$
2.5

 
$
6.3

 
$
35.7



19



The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income (pre-tax) for the three and nine months ended September 28, 2013 and September 29, 2012, was (in millions):

Derivatives Designated as Cash Flow Hedging Instruments
 
 
Three Months Ended
 
September 28, 2013
 
September 29, 2012
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (loss) recognized in Other Comprehensive Income (Loss)
$
10.3

 
$
(2.4
)
 
$
(0.9
)
 
$
7.0

 
$
9.2

 
$
8.6

 
$
(1.4
)
 
$
16.4

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

 
(0.1
)
 

 
(0.1
)
 

 
(0.2
)
 

 
(0.2
)
Gain (loss) recognized in Cost of Sales
(4.9
)
 
1.7

 

 
(3.2
)
 
(2.6
)
 
(2.7
)
 

 
(5.3
)
Loss recognized in Interest Expense

 

 
(3.2
)
 
(3.2
)
 

 

 
(2.4
)
 
(2.4
)

 
Nine Months Ended
 
September 28, 2013
 
September 29, 2012
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
 
Commodity
Forwards
 
Currency
Forwards
 
Interest
Rate
Swaps
 
Total
Gain (Loss) recognized in Other Comprehensive Income (Loss)
$
(12.5
)
 
$
3.9

 
$
0.8

 
$
(7.8
)
 
$
13.0

 
$
23.7

 
$
(5.6
)
 
$
31.1

Amounts reclassified from Other Comprehensive Income (Loss):
 
 
 
 
 
 


 
 
 
 
 
 
 
 
Loss recognized in Net Sales

 
(0.6
)
 

 
(0.6
)
 

 
(1.2
)
 

 
(1.2
)
Gain (loss) recognized in Cost of Sales
(4.5
)
 
5.8

 

 
1.3

 
(9.1
)
 
(3.1
)
 

 
(12.2
)
Loss recognized in Interest Expense

 

 
(9.6
)
 
(9.6
)
 

 

 
(9.2
)
 
(9.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The ineffective portion of hedging instruments recognized during the three and nine months ended September 28, 2013 and September 29, 2012 was immaterial.

20



Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
 
Three Months Ended
 
September 28,
2013
 
September 29,
2012
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
Gain (loss) recognized in Cost of Sales
$
0.1

 
$
0.2

 
$
0.4

 
$
(0.5
)
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
Commodity Forwards
 
Currency Forwards
 
Commodity Forwards
 
Currency Forwards
Gain (loss) recognized in Cost of Sales
$
(0.1
)
 
$
0.6

 
$
0.1

 
$
0.1

The net AOCI hedging component balance of $(16.7) million loss at September 28, 2013 includes $(6.6) million of net current deferred losses expected to be realized in the next twelve months.
The Company's commodity and currency derivative contracts are subject to master netting agreements with the respective counterparties which allow the Company to net settle transactions with a single net amount payable by one party to another party. The Company has elected to present the derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis for the periods ended September 28, 2013 and December 29, 2012.

21



The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
 
September 28, 2013
 
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
 
Derivative Contract Amounts Subject to Right of Offset
 
Derivative Contracts as Presented on a Net Basis
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
7.3

 
$
(0.5
)
 
$
6.8

Derivative Commodity Contracts
3.0

 
(3.0
)
 

Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
0.9

 
(0.2
)
 
0.7

Derivative Commodity Contracts
0.1

 
(0.1
)
 

Hedging Obligations Current:
 
 
 
 
 
Derivative Currency Contracts
3.2

 
(0.5
)
 
2.7

Derivative Commodity Contracts
4.9

 
(3.0
)
 
1.9

Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
2.2

 
(0.2
)
 
2.0

Derivative Commodity Contracts
0.1

 
(0.1
)
 

 
December 29, 2012
 
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
 
Derivative Contract Amounts Subject to Right of Offset
 
Derivative Contracts as Presented on a Net Basis
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
6.8

 
$
(1.5
)
 
$
5.3

Derivative Commodity Contracts
4.2

 
(1.3
)
 
2.9

Other Noncurrent Assets:
 
 
 
 
 
Derivative Currency Contracts
2.3

 

 
2.3

Derivative Commodity Contracts
0.2

 

 
0.2

Hedging Obligations Current:
 
 
 
 
 
Derivative Currency Contracts
4.6

 
(1.6
)
 
3.0

Derivative Commodity Contracts
1.7

 
(1.2
)
 
0.5

Hedging Obligations:
 
 
 
 
 
Derivative Currency Contracts
0.3

 

 
0.3


14. 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

22




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 cash equivalents, term deposits, accounts receivable and accounts payable approximated book value as of September 28, 2013 and December 29, 2012, respectively, due to their short-term nature. See Note 7 of Notes to Condensed Consolidated Financial Statements for disclosure of the approximate fair value of the Company's debt at September 28, 2013 and December 29, 2012.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 28, 2013 and December 29, 2012 (in millions):
 
 
September 28,
2013
 
December 29,
2012
 
Classification
Assets:
 
 
 
 
 
Prepaid Expenses and Other Current Assets:
 
 
 
 
 
Derivative Currency Contracts
$
7.3

 
$
6.8

 
Level 2
Derivative Commodity Contracts
3.0

 
4.2

 
Level 2
Investments
8.6

 
8.3

 
Level 2
Other Noncurrent Assets:
 
 
 
 
 
Assets Held in Rabbi Trust
5.1

 
2.6

 
Level 1
Derivative Currency Contracts
0.9

 
2.3

 
Level 2
Derivative Commodity Contracts
0.1

 
0.2

 
Level 2
Liabilities:
 
 
 
 
 
Other Accrued Expenses:
 
 
 
 
 
Deferred Contingent Purchase Price
7.9

 

 
Level 3
Hedging Obligations (current):
 
 
 
 
 
Interest Rate Swap
7.6

 

 
Level 2
Derivative Currency Contracts
3.2

 
4.6

 
Level 2
Derivative Commodity Contracts
4.9

 
1.7

 
Level 2
Hedging Obligations:
 
 
 
 
 
Interest Rate Swap
17.4

 
35.4

 
Level 2
Derivative Currency Contracts
2.2

 
0.3

 
Level 2
Derivative Commodity Contracts
0.1

 

 
Level 2
Other Noncurrent Liabilities:
 
 
 
 
 
Deferred Contingent Purchase Price
13.7

 
21.1

 
Level 3

The Company’s derivative contracts are valued at fair value using the market or income approaches. The Company measures the fair value of foreign currency 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 investments using Level 2 inputs based on quoted market prices for similar instruments in active markets. The Company measures the fair value of interest rate swaps using Level 2 inputs in an income approach for valuation based on expected interest rate yield curves over the remaining duration of the interest rate swaps. During the nine months ended September 28, 2013, there were no transfers between classification Levels 1, 2 or 3.

23



The table below sets forth a summary of changes in fair market value of the Company’s Level 3 liabilities for the three and nine months ended September 28, 2013 and September 29, 2012 (in millions):
 
Three Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Beginning Balance
$
21.6

 
$
23.2

 
$
21.1

 
$
23.5

Valuation Adjustments
0.3

 
0.3

 
0.8

 
0.9

Acquisitions

 
0.4

 

 
0.4

Payments
(0.3
)
 
(3.1
)
 
(0.3
)
 
(4.0
)
Ending Balance
$
21.6

 
$
20.8

 
$
21.6

 
$
20.8


The Level 3 liabilities described above are comprised entirely of the deferred contingent purchase price of the Company’s acquisitions and are measured using Level 3 inputs. The contingent consideration, payable in cash, is based upon sales or earnings before interest and income taxes for the acquired businesses for the applicable contingency period. The fair value of the contingent consideration is a Level 3 input; the measurement of which is derived using a probability weighted discounted cash flow analysis. The Company has estimated that the maximum contingent amount will be paid under all agreements so the key assumption is the estimated timing of the payments and the discount rates. The discounted cash flow utilized risk-based discount rates ranging from approximately 5.0% to 8.0%.
15. SUBSEQUENT EVENT
On October 29, 2013, the Company announced it has reached an agreement to acquire Cemp s.r.l. ("Cemp"), an Italy based electric motor company. Cemp is a leading designer, manufacturer and marketer of flameproof electric motors.


24



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, income from operations, 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 percentage, operating cash flow as a percent of net income, and ROIC.

We believe much of the U.S. economy remains in a period of uncertainty which we expect will continue to make the near-term operating environment challenging. In recent periods we have seen declines in sales of our products used in commercial, industrial and power generation. We expect slow economic growth and continued uncertainty about future economic conditions will continue to pressure our organic sales growth in these markets.

As the U.S. housing market recovers, there is improving demand for residential HVAC products. However, we continue to see increasing competition primarily on the basis of price and we continue to see residential consumer preferences for standard products as opposed to energy-efficient products. In addition, customers periodically change suppliers to achieve cost savings, technology advantages, supplier diversity or for other reasons and the market shares of our customers may change due to product differentiation, pricing, service, quality or consumer preferences. All of these factors impact our sales of residential and commercial HVAC products. As we previously disclosed, we anticipate these factors will combine to negatively impact our residential HVAC revenue by up to $20 million over the next three quarters. However, revenue gains from other customers, new product sales or mix changes may offset some or all of the anticipated declines.




25



Results of Operations
Net Sales
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
 
September 29,
 
September 28,
 
September 29,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in Millions)
Net Sales
$
768.2

 
$
779.5

 
$
2,368.4

 
$
2,451.3

  Sales growth rate
(1.4
)%
 
5.8
%
 
(3.4
)%
 
17.8
%
 
 
 
 
 
 
 
 
Net Sales by Segment:
 
 
 
 
 
 
 
  Electrical segment
$
707.5

 
$
708.3

 
$
2,171.8

 
$
2,223.3

     Sales growth rate
(0.1
)%
 
6.1
%
 
(2.3
)%
 
18.7
%
  Mechanical segment
$
60.7

 
$
71.2

 
$
196.6

 
$
228.0

     Sales growth rate
(14.7
)%
 
2.6
%
 
(13.8
)%
 
9.5
%

Three Months Ended September 28, 2013
Net sales for the third quarter 2013 included $5.6 million of incremental net sales from the recently acquired businesses. Excluding the acquired businesses, net sales for the third quarter 2013 decreased 2.2% and reflected (i) price decreases of approximately 0.9%, (ii) a decrease from volume and mix changes of approximately 0.2% and (iii) a decrease from foreign currency translation of approximately 1.1%.
Electrical segment net sales in the third quarter included $5.6 million from businesses acquired within the last year. North American residential HVAC net sales decreased 3.6% for the third quarter 2013 compared to the third quarter of 2012. North American commercial and industrial motor net sales decreased 2.5%.
Mechanical segment net sales decreased $10.5 million or 14.7% for the third quarter 2013 compared to the third quarter 2012. Excluding the recently acquired business, Mechanical segment sales in North America for the three months ended September 28, 2013 decreased 11.4% compared to the three months ended September 29, 2012 due primarily to weakness in the oil and gas markets.
In the third quarter of 2013, net sales of high efficiency products increased 1.9% compared to the third quarter of 2012 and represented 21.5% of net sales.
Net sales to regions outside of the United States increased 2.7% compared to the third quarter 2012 and represented 33.2% of total net sales in the third quarter 2013 compared to 31.4% in the third quarter 2012. The impact of foreign currency exchange rates decreased net sales to regions outside the United States by 3.4% for the third quarter 2013 compared to the third quarter 2012.
Nine Months Ended September 28, 2013
Net sales for the nine months ended September 28, 2013 included $21.4 million of incremental net sales from the recently acquired businesses. Excluding the recently acquired businesses, net sales for the nine months ended September 28, 2013 decreased 4.3% and reflected (i) price decreases of approximately 0.6%, (ii) a decrease of approximately 2.8% related to volume and mix changes and (iii) a decrease from foreign currency translation of approximately 0.9%.
Electrical segment net sales included $18.0 million of incremental net sales from businesses acquired in the last year. North American residential HVAC motor net sales decreased 2.7% in the nine months ended September 28, 2013 from the nine months ended September 29, 2012. North American commercial and industrial net sales decreased 5.1% in the nine months ended September 28, 2013 from the nine months ended September 29, 2012.
Mechanical segment net sales included incremental sales from the recently acquired business of $3.4 million for the nine months ended September 28, 2013. Excluding the recently acquired business, Mechanical segment sales in North America for the nine months ended September 28, 2013 decreased 10.8% compared to the nine months ended September 29, 2012 due primarily to weakness in the oil and gas markets.
Net sales to regions outside of the United States decreased 2.8% in the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012 and represented 33.0% of total net sales in the nine months ended September 28, 2013 compared to 32.4% in the nine months ended September 28, 2012. The impact of foreign currency exchange rates decreased net

26



sales to regions outside the United States by 2.7% for the nine months ended September 28, 2013 compared to the nine months ended September 29, 2012.
In the nine months ended September 28, 2013, net sales of high efficiency products decreased 1.1% from the nine months ended September 29, 2012, due in part to decreased sales to oil and gas customers, and represented 20.1% of net sales.
Gross Profit
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 28,
 
September 29,
 
September 28,
 
September 29,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in Millions)
Gross Profit
$
196.5

 
$
192.6

 
$
605.2

 
$
610.3

  Gross profit percentage
25.6
%
 
24.7
%
 
25.6
%
 
24.9
%
 
 
 
 
 
 
 
 
Gross Profit by Segment:
 
 
 
 
 
 
 
  Electrical segment
$
180.1

 
$
173.2

 
$
552.9

 
$
549.3

     Gross profit percentage
25.5
%
 
24.5
%
 
25.5
%
 
24.7
%</