FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997
--------------------------------------------------------------
Commission File Number 1-7283
---------------------------------------------------------
REGAL-BELOIT CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-0875718
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
200 State Street, Beloit, Wisconsin 53511-6254
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(608) 364-8800
- -------------------------------------------------------------------------------
(Registrant s telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date.
20,821,976 Shares, Common Stock, $.01 Par Value
- -------------------------------------------------------------------------------
<PAGE>1
REGAL-BELOIT CORPORATION
FORM 10-Q
For Quarter Ended September 30, 1997
INDEX
Page No.
---------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheet. . . . . . . . . . . . . . . 3
Statement of Income. . . . . . . . . . . . . . . . . 4
Condensed Statement of Cash Flows. . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . 6
Item 2 - Management s Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 7-9
PART II - OTHER INFORMATION
Item 6 - Reports on Form 8-K. . . . . . . . . . . . . . . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE> 2
PART I
FINANCIAL INFORMATION
1. Financial Statements
REGAL-BELOIT CORPORATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
ASSETS
(In Thousands of Dollars)
<S> <C> <C>
(From Audited
(Unaudited) Statements)
-------------- -------------
Sept. 30, 1997 Dec. 31, 1996
-------------- -------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 3,301 $ 38,402
Receivables, less reserves of $2,570 in 1997
and $1,190 in 1996. . . . . . . . . . . . . . . . . 75,735 32,796
Inventories . . . . . . . . . . . . . . . . . . . . . . 81,333 45,908
Other current assets. . . . . . . . . . . . . . . . . . 10,335 4,925
--------- ---------
Total Current Assets . . . . . . . . . . . . . . . . 170,704 122,031
--------- ---------
Property, Plant and Equipment at Cost . . . . . . . . . . 228,862 142,740
Less - accumulated depreciation . . . . . . . . . . . . (78,499) (68,124)
--------- ---------
Net Property, Plant and Equipment . . . . . . . . . 150,363 74,616
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 152,104 ------
Other Noncurrent Assets. . . . . . . . . . . . . . . . . . 10,534 349
--------- ---------
Total Assets. . . . . . . . . . . . . . . . . . . . . $483,705 $196,996
========= =========
LIABILITIES AND SHAREHOLDERS INVESTMENT
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 22,077 $ 9,481
Federal and state income taxes . . . . . . . . . . . . . 4,374 886
Other current liabilities. . . . . . . . . . . . . . . . 43,079 19,051
--------- ---------
Total Current Liabilities. . . . . . . . . . . . . $ 69,530 $ 29,418
--------- ---------
Long-term Debt . . . . . . . . . . . . . . . . . . . . . . 207,271 2,168
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . 25,443 5,387
Other Noncurrent Liabilities . . . . . . . . . . . . . . . 272 --------
Shareholders Investment:
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,821,976 issued in 1997 and
20,644,843 issued in 1996. . . . . . . . . . . . . 208 206
Additional paid-in capital . . . . . . . . . . . . . . . 38,846 37,695
Retained earnings. . . . . . . . . . . . . . . . . . . . 142,387 121,453
Cumulative Translation Adjustments . . . . . . . . . . . (252) 669
--------- ---------
Total Shareholders Investment. . . . . . . . . . . . 181,189 160,023
--------- ---------
Total Liabilities and Shareholders Investment . . . . $483,705 $196,996
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>3
REGAL-BELOIT CORPORATION
<TABLE>
<CAPTION>
STATEMENT OF INCOME
(In Thousands of Dollars)
(Unaudited)
------------------------------------------------------
Three Months Ended Nine Months Ended
------------------------------------------------------
September 30, September 30,
----------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---------- --------- ---------- -----------
Net Sales . . . . . . . . . . . . . $ 138,403 $ 68,149 $ 352,583 $ 215,085
Cost of Sales . . . . . . . . . . . 99,335 48,391 251,736 151,135
---------- ---------- ----------- -----------
Gross Profit . . . . . . . . . . 39,068 19,758 100,847 63,950
Operating Expenses . . . . . . . . . 19,134 8,010 46,988 24,295
---------- ---------- ----------- -----------
Income from Operations. . . . . . 19,934 11,748 53,859 39,655
Interest Expense . . . . . . . . . . 3,501 109 7,631 300
Interest Income . . . . . . . . . . 117 316 736 628
---------- ---------- ----------- ----------
Income Before Taxes . . . . . . . 16,550 11,955 46,964 39,983
Provision for Income Taxes . . . . . 6,636 4,543 18,537 15,097
---------- ---------- ----------- ----------
Net Income . . . . . . . . . . . $ 9,914 $ 7,412 $ 28,427 $ 24,886
========== ========== =========== ==========
Per Share of Common Stock:
Net Income . . . . . . . . . . . $.48 $.36 $1.37 $1.21
========== ========== =========== ==========
Cash Dividends Declared . . . . . $.12 $.12 $.36 $.36
========== ========== =========== ==========
Weighted Average Number of
Shares Outstanding . . . . . . . 20,816,285 20,631,363 20,799,122 20,610,961
========== ========== ============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>4
REGAL-BELOIT CORPORATION
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
-----------------------------
Nine Months Ended Sept. 30,
-----------------------------
<S> <C> <C>
1997 1996
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,427 $ 24,886
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation, amortization and deferred income taxes. . . . . . 13,626 8,188
Change in assets and liabilities:
Current assets, other than cash . . . . . . . . . . . . . . . 12,826 6,188
Current liabilities, other than notes payable . . . . . . . . 1,394 (1,802)
----------- ------------
Net cash provided from operating activities . . . . . . . 56,273 37,460
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net of retirements . . (10,481) (8,044)
Business acquisition . . . . . . . . . . . . . . . . . . . . . . . (279,260) ------
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 (434)
----------- ------------
Net cash used in investing activities . . . . . . . . . . . . . (289,431) (8,478)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt. . . . . . . . . . . . . . . . . . . . 242,000 ------
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . (37,520) (1,720)
Dividends to shareholders. . . . . . . . . . . . . . . . . . . . . (7,471) (7,004)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,152 458
----------- ------------
Net cash provided from (used in) financing activities . . . . . 198,161 (8,266)
EFFECT OF EXCHANGE RATE ON CASH. . . . . . . . . . . . . . . . . . . (104) 6
---------- ------------
Net (decrease) increase in cash and cash equivalents . . . . . . . (35,101) 20,722
Cash and cash equivalents at beginning of period . . . . . . . . . 38,402 7,458
---------- ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 3,301 $ 28,180
========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,878 $ 236
========== ============
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,700 $ 15,428
========== ============
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>5
REGAL-BELOIT CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. BASIS OF PRESENTATION
The condensed financial statements include the accounts of Regal-Beloit
Corporation and its wholly owned subsidiaries and have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
It is suggested these statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-K.
2. INVENTORIES
Cost for approximately 80% of the Company's inventory is determined using the
last-in, first-out (LIFO) inventory valuation method at September 30, 1997 and
67% at December 31, 1996. The approximate percentage distribution between
major classes of inventories is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
9-30 12-31
1997 1996
---- -----
Raw Material 13% 17%
Work-in Process 23% 19%
Finished Goods 64% 64%
</TABLE>
3. ACQUISITION
The financial statements incorporate, after March 26, 1997, the results of
operations and the assets and liabilities of Marathon Electric Manufacturing
Corporation, which was acquired by the Company on March 26, 1997.
4. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share, which established
new standards for computing and presenting net income per common share and
replaced the standards previously found in Accounting Principles Board Opinion
No. 15, Earnings Per Share. Regal-Beloit Corporation will begin reporting
within the Statement of Income net income per common share and net income per
common share assuming dilution according to this new standard in the fourth
quarter of 1997. For the third quarter and first nine months of 1997 and
1996, net income per common share amounts computed under the new standard are:
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------- -------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------ ------ ------ ------
Basic earnings per share $.48 $.36 $1.37 $1.21
Diluted earnings per share $.47 $.35 $1.35 $1.19
</TABLE>
<PAGE>6
5. DISCLOSURES
In the opinion of Management, all adjustments which were necessary for a fair
statement of the results of the interim periods have been included in the
preceding financial statements. These adjustments were considered to be
recurring in nature and there were no adjustments other than normal recurring
adjustments made to these statements for the periods reported. However, the
results of operations for the quarter are not necessarily indicative of results
to be expected for the year. Certain items, such as income taxes, LIFO
charges, profit sharing expenses and various other accruals, are included in
these statements based on estimates for the entire year.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales for the third quarter of 1997 were $138,403,000, or 103% greater than
net sales of $68,149,000 in 1996's third quarter. The net sales of the
Company's Electrical Group, which was formed when Marathon Electric
Manufacturing Corporation was acquired on March 26, 1997 (see "Acquisition"
following), were $68,965,000, or 50% of total Company sales, in the third
quarter of 1997, accounting for all but $1,289,000 of the Company's sales
increase from 1996. On a pro-forma basis the Electrical Group's net sales were
19.3% higher than the third quarter of 1996. The Company's Mechanical Group
(formerly the power transmission and cutting tool groups) net sales were
$69,438,000 in 1997's third quarter, 2% higher than comparable 1996.
Business conditions in the markets served by the Electrical Group were
generally good during the third quarter of 1997. Most markets the Group serves
did well, and the Group's export sales continued to be strong. Business
conditions in the Mechanical Group were more mixed, with the general industrial
and the agricultural and construction equipment markets continuing strong,
while marine, cutting tool, and custom gearing markets exhibited softness.
Net sales for the nine months ended September 30, 1997, were $352,583,000, a
64% increase from comparable 1996 sales of $215,085,000. The increase was
entirely due to Electrical Group sales as Mechanical Group net sales of
$213,022,000 for the first nine months of 1997 were 1% less than in the first
nine months of 1996.
Net income in the third quarter of 1997 of $9,914,000, or $.48 per share, was
$2,502,000 (34%) higher than the $7,412,000, or $.36 per share, earned in the
third quarter of 1996. The contribution of the Company's new Electrical Group
accounted for the improvement. Nine months 1997 net income of $28,427,000, or
$1.37 per share, was $3,541,000 (14%) improved from the $24,886,000, or $1.21
per share, earned in comparable 1996.
On a pro-forma basis, if Marathon Electric had been acquired on January 1,
1996, nine month 1997 net sales for the Company would have been $415,418,000 as
compared to $398,370,000 for the same nine months of 1996. Net income and
earnings per share of the Company on the same pro-forma basis would have been
<PAGE>7
$29,132,000 and $1.40 per share for the nine months ended September 30, 1997.
1996 nine months net income and earnings per share for the Company would have
been $27,286,000 and $1.32 per share.
The margins of the Company were, as expected, significantly reduced following
the March 26, 1997 acquisition of Marathon Electric, whose margins, though
comparable to their peers, are below those of the Company's Mechanical Group.
The following table compares the third quarter and nine month margins of 1997
to 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(As a percent of Net Sales) September 30, September 30,
------------------ -----------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------- ------- ------ -------
Gross Profit 28.2 29.0 28.6 29.7
Income From Operations 14.4 17.2 15.3 18.4
Pre-tax Income 12.0 17.5 13.3 18.6
Net Income 7.2 10.9 8.1 11.6
======= ======= ====== =======
</TABLE>
Interest expense of $3,501,000 in the third quarter of 1997 was 2.5% of sales
as compared to only $109,000 in comparable 1996. This accounted for the larger
margin decline at the pre-tax income level versus the income from operations
level. The third quarter 1997 interest expense was $576,000 lower than 1997's
second quarter, due primarily to repayment of debt during the third quarter.
ACQUISITION
- -----------
On March 26, 1997, the Company acquired 100% of the stock of Marathon Electric
Manufacturing Corporation, a private company, in a cash merger transaction for
approximately $278,000,000. The acquisition of Marathon Electric had no
material impact on the Company's first quarter 1997 Statement of Income.
Marathon Electric, which now comprises the Company's Electrical Group, is a
leading manufacturer of electric motors and generators and related products.
In 1996 its sales were $245,000,000 and its net income was $17,800,000.
The acquisition was financed with a combination of approximately $37,000,000 of
existing cash and $242,000,000 of debt. The debt was provided by Bank of
America and M&I Marshall & Ilsley Bank under a $280,000,000, 5-year, unsecured,
revolving credit facility. The loan agreement was amended to include seven
other banks on May 30, 1997. The interest rate the Company pays is based on
LIBOR (London Interbank Offered Rate), plus a variable margin based on the
Company's ratio of funded debt to EBITDA. Since March 26, 1997, the Company
has paid an annual interest rate of between 6.1% and 6.2% under the facility.
In the month of June 1997, the assets and liabilities of Marathon Electric were
revalued in accordance with the purchase accounting requirements of generally
accepted accounting principles. The net asset value of Marathon Electric
increased approximately $27,000,000, the final value of goodwill being
$153,963,000.
<PAGE>8
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital as of September 30, 1997 increased to $101,174,000 from
$92,613,000 at December 31, 1996, due primarily to the acquisition of Marathon
Electric partly offset by the use of Company cash in the acquisition. (See
"Acquisition" preceding.) The current ratio of the Company decreased to 2.5:1
from 4.1:1 for the same reason.
At September 30, 1997, the Company had $207,271,000 of long-term debt, a
$36,754,000 (15%) reduction from $244,025,000 outstanding at March 31, 1997 and
$20,594,000 reduced from June 30, 1997. Of the total debt at September 30,
1997, virtually all was borrowed under the Company's $280,000,000 unsecured
revolving credit facility (the "Facility"). Effective October 1, 1997, the
Company, in order to lower the commitment fees paid to its lenders, reduced the
commitment level under the Facility to $225,000,000. Effectively, the Company
had $18,000,000 of available borrowing capacity at September 30, 1997 under the
Facility and an additional $10,000,000 under a supplemental line of credit with
its lead bank. The Company's funded debt to EBITDA ratio at September 30, 1997
was 2.00:1, down from 2.45:1 at March 31, 1997, and its capitalization ratio
was 53.4% as compared to 59.7% at March 31, 1997. The Company paid an annual
interest rate of approximately 6.2% on its outstanding debt at September 30,
1997.
The Company generated $24,465,000 of cash flow from operations in the third
quarter of 1997 and $56,273,000 for the first nine months of the year. Free
cash flow (cash flow from operations less net additions to property, plant and
equipment less dividends) was $17,839,000 and $38,321,000 for 1997's third
quarter and first nine months, respectively. Net capital expenditures during
the third quarter were $4,129,000 and are $10,481,000 year-to-date.
Outstanding commitments for capital items at September 30, 1997 totaled
approximately $2,800,000. The Company believes that the combination of cash
generated by operations and available borrowing capacity is adequate to finance
the Company for the foreseeable future.
CAUTIONARY STATEMENT
- --------------------
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
With the exception of historical facts, the statements contained in Item 2. of
this form 10-Q are forward looking statements. Actual results may differ
materially from those contemplated by the forward looking statements. These
forward looking statements involve risks and uncertainties, including but not
limited to, the following risks: 1) cyclical downturns affecting the markets
for capital goods, 2) substantial increases in interest rates, 3) availability
of or material increases in the costs of select raw materials, and 4) actions
taken by competitors with regard to such matters as product offering, pricing,
and delivery. Investors are directed to the Company's documents, such as its
Annual Report on Form 10-K, Form 10-Q's, and Annual Report, filed with the
Securities and Exchange Commission.
<PAGE>9
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
There were no exhibits or reports on Form 8-K filed during the quarter ended
September 30, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAL-BELOIT CORPORATION
(Registrant)
KENNETH F. KAPLAN
-------------------------------
Kenneth F. Kaplan
Vice President - Chief Financial Officer
and Secretary
(Principal Accounting and Financial Officer)
DATE: November 5, 1997
<PAGE>10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,301,000
<SECURITIES> 0
<RECEIVABLES> 75,735,000
<ALLOWANCES> 2,570,000
<INVENTORY> 81,333,000
<CURRENT-ASSETS> 170,704,000
<PP&E> 228,862,000
<DEPRECIATION> 78,499,000
<TOTAL-ASSETS> 483,705,000
<CURRENT-LIABILITIES> 69,530,000
<BONDS> 207,271,000
0
0
<COMMON> 208,000
<OTHER-SE> 180,189,000
<TOTAL-LIABILITY-AND-EQUITY> 483,705,000
<SALES> 352,583,000
<TOTAL-REVENUES> 352,583,000
<CGS> 251,736,000
<TOTAL-COSTS> 251,736,000
<OTHER-EXPENSES> 46,988,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,631,000
<INCOME-PRETAX> 46,964,000
<INCOME-TAX> 18,537,000
<INCOME-CONTINUING> 28,427,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,427,000
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 0
</TABLE>
