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 June 30, 1998
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Commission File Number 1-7283
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REGAL-BELOIT CORPORATION
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(Exact name of registrant as specified in its charter)
Wisconsin 39-0875718
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
200 State Street, Beloit, Wisconsin 53511-6254
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(Address of principal executive offices)
(608) 364-8800
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(Registrant's telephone number, including area code)
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(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.
20,903,940 Shares, Common Stock, $.01 Par Value
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<PAGE>1
REGAL-BELOIT CORPORATION
FORM 10-Q
For Quarter Ended June 30, 1998
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 4 - Submission of Matters to a Vote of Security Holders. . . 9
Item 6 - Reports on Form 8-K. . . . . . . . . . . . . 10
Signature . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE>2
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
1. Financial Statements
--------------------
REGAL-BELOIT CORPORATION
CONDENSED BALANCE SHEET
(In Thousands of Dollars)
(From Audited
(Unaudited) Statements)
------------- -------------
June 30, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 2,781 $ 3,351
Receivables, less reserves of $2,697 in 1998
and $2,620 in 1997 . . . . . . . . . . . . . . . . . . . 72,164 69,660
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 89,971 85,527
Other current assets . . . . . . . . . . . . . . . . . . . . 15,196 14,021
--------- ---------
Total Current Assets. . . . . . . . . . . . . . . . . . . 180,112 172,559
--------- ---------
Property, Plant and Equipment at Cost. . . . . . . . . . . . . 240,505 233,614
Less - accumulated depreciation. . . . . . . . . . . . . . . (91,247) (82,355)
--------- ---------
Net Property, Plant and Equipment . . . . . . . . . . . . 149,258 151,259
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,084 151,358
Other Noncurrent Assets. . . . . . . . . . . . . . . . . . . . 10,348 10,449
--------- ---------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . $488,802 $485,625
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 20,314 $ 23,590
Federal and state income taxes . . . . . . . . . . . . . . . 1,648 5,696
Other current liabilities. . . . . . . . . . . . . . . . . . 33,533 42,646
--------- ---------
Total Current Liabilities. . . . . . . . . . . . . . . 55,495 71,932
--------- ---------
Long-term Debt . . . . . . . . . . . . . . . . . . . . . . . . 192,240 192,261
Deferred Income Taxes. . . . . . . . . . . . . . . . . . . . . 32,327 31,726
Other Noncurrent Liabilities . . . . . . . . . . . . . . . . . 285 279
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,902,440 issued in 1998 and
20,830,226 issued in 1997. . . . . . . . . . . . . . . 209 208
Additional paid-in capital . . . . . . . . . . . . . . . . . 40,736 38,904
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 167,435 150,357
Cumulative Translation Adjustments . . . . . . . . . . . . . 75 (42)
--------- ---------
Total Shareholders Investment. . . . . . . . . . . . . . 208,455 189,427
--------- ---------
Total Liabilities and Shareholders' Investment. . . . $488,802 $485,625
========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>3
<TABLE>
<CAPTION>
REGAL-BELOIT CORPORATION
STATEMENT OF INCOME
(In Thousands of Dollars, Except Per Share Data)
(Unaudited)
---------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . $ 138,981 $ 143,610 $ 276,799 $ 214,180
Cost of Sales . . . . . . . . . . . . 97,691 102,202 195,771 152,401
---------- ---------- --------- ----------
Gross Profit . . . . . . . . . . . 41,290 41,408 81,028 61,779
Operating Expenses . . . . . . . . . . 19,320 19,545 39,190 27,854
---------- ---------- ---------- ----------
Income from Operations . . . . . . 21,970 21,863 41,838 33,925
Interest Expense . . . . . . . . . . . 3,011 4,077 5,999 4,130
Interest Income . . . . . . . . . . . 66 256 196 619
---------- ---------- ---------- ----------
Income Before Taxes . . . . . . . . 19,025 18,042 36,035 30,414
Provision for Income Taxes . . . . . . 7,346 7,235 13,942 11,901
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . . . $ 11,679 $ 10,807 $ 22,093 $ 18,513
========== ========== ========== ==========
Per Share of Common Stock:
Earnings Per Share . . . . . . . . $ .56 $ .52 $ 1.06 $ .89
========== ========== ========== ==========
Earnings Per
Share-Assuming Dilution. . . . $ .55 $ .51 $ 1.04 $ .87
========== ========== ========== ==========
Cash Dividends Declared . . . . . . $ .12 $ .12 $ .24 $ .24
========== ========== ========== ==========
Average Number of
Shares Outstanding . . . . . . . . 20,898,356 20,807,058 20,879,926 20,790,398
========== ========== ========== ==========
Average Number of
Shares-Assuming Dilution . . . . . 21,348,761 21,252,978 21,338,957 21,250,583
========== ========== ========== ==========
<FN>
See accompanying notes.
</FN>
<PAGE>4
</TABLE>
<TABLE>
<CAPTION>
REGAL-BELOIT CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
-------------------------
Six Months Ended June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,093 $ 18,513
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation, amortization and deferred income taxes. . . . . . 11,886 8,224
Change in assets and liabilities:
Current assets, other than cash . . . . . . . . . . . . . . . (8,056) 10,084
Current liabilities, other than notes payable . . . . . . . . (15,444) (5,013)
--------- ----------
Net cash provided from operating activities . . . . . . . 10,479 31,808
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net of retirements . . (7,217) (6,352)
Business acquisition . . . . . . . . . . . . . . . . . . . . . . . --- (279,224)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 356
--------- ----------
Net cash used in investing activities . . . . . . . . . . . . . (6,850) (285,220)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt. . . . . . . . . . . . . . . . . . . . --- 242,000
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . (18) (16,287)
Dividends to shareholders. . . . . . . . . . . . . . . . . . . . . (5,006) (4,974)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823 1,060
--------- ----------
Net cash provided from (used in) financing activities . . . . . (4,201) 221,799
EFFECT OF EXCHANGE RATE ON CASH. . . . . . . . . . . . . . . . . . . 2 (64)
--------- ----------
Net (decrease) in cash and cash equivalents. . . . . . . . . . . . (570) (31,677)
Cash and cash equivalents at beginning of period . . . . . . . . . 3,351 38,402
--------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 2,781 $ 6,725
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,067 $ 3,329
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,090 $ 3,402
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>5
REGAL-BELOIT CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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 82% of the Company's inventory is determined using the
last-in, first-out (LIFO) inventory valuation method. The approximate
percentage distribution between major classes of inventories is as follows:
6-30 12-31
1998 1997
---- -----
Raw Material 14% 13%
Work-in Process 24% 23%
Finished Goods 62% 64%
3. ACQUISITION
The Statement of Income incorporates, after March 26, 1997, the results of
operations of Marathon Electric Manufacturing Corporation, which was acquired
by the Company on March 26, 1997. Marathon Electric operations did not have
a material impact on the Statement of Income in the first quarter of 1997.
4. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," establishes standards for the reporting and display of comprehensive
income and its components. Adoption of SFAS 130 is required by the Company
as of the December 31, 1998 statements. The impact for the second quarter of
1998 was $10,000 of additional comprehensive income relating to the
cumulative translation adjustment recorded, resulting in net comprehensive
income of $11,689,000 for the quarter. The impact for the first six months
of 1998 was $117,000 of additional comprehensive income relating to the
cumulative translation adjustment, resulting in net comprehensive income of
$22,210,000.
<PAGE>6
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales for the second quarter of 1998 were $138,981,000, 3.2% lower than
net sales of $143,610,000 in 1997's second quarter. Net sales for the second
quarter of the Company's Electrical Group were $67,402,000, 4.5% lower
than in 1997's second quarter. The Electrical Group sales decrease was due
to the inclusion of three days of March 1997 sales, approximately $3,000,000,
in the second quarter of 1997, the three days occurring immediately after
the Company's acquisition of Marathon Electric on March 26, 1997. Excluding
the $3,000,000, 1998 second quarter sales of the Electrical Group were
virtually unchanged from a year earlier. Mechanical Group second quarter
1998 net sales of $71,579,000 were 2.0% below sales of $73,014,000 in
comparable 1997, due primarily to lower sales to the agricultural market,
one of the many markets the Group serves.
Net sales for the six months ended June 30, 1998, were $276,799,000, a 29.2%
increase above net sales of $214,180,000 in the first half of 1997.
Electrical Group 1998 net sales were $132,469,000 for the same period,
representing 48% of total Company sales. On a pro-forma basis assuming
Marathon Electric had been acquired January 1, 1997, comparable six months
1997 Electrical Group sales would have been $133,432,000. The small
decrease was due primarily to lower sales to Asian markets. Mechanical
Group six months 1998 net sales were $144,330,000, a .5% increase from sales
of $143,584,000 in comparable 1997. Mechanical Group net sales comprised
52% of total Company sales.
Income from operations in the second quarter of 1998 was $21,970,000, a small
increase from the prior year. For the first half of 1998 income from
operations was $41,838,000, 23.3% greater than in comparable 1997, due
primarily to the March 26, 1997 acquisition of Marathon Electric. As a
percent of net sales, income from operations was 15.8% and 15.1% for 1998's
second quarter and first six months, respectively, as compared to 15.2% and
15.8% for the comparable second quarter and first six months of 1997,
respectively. The higher second quarter 1998 operating margin was due to
improved Electrical Group gross profit margin, which resulted primarily from
favorable commodity prices on raw materials and a favorable mix of products
sold. The lower first half 1998 operating margin as compared to 1997
resulted primarily from the lower operating margins of the acquired
Marathon Electric as compared to those of the Mechanical Group.
Interest expense of the Company of $3,011,000 in the second quarter of 1998
was $1,066,000 (26.1%) lower than in comparable 1997 due to reduced long-term
debt outstanding. Interest expense for the first six months of 1998 was
$1,869,000 higher than in comparable 1997 due to the March 26, 1997
acquisition of Marathon Electric financed primarily with long-term debt.
Interest income was lower in both the second quarter and first half of 1998
versus the comparable periods of 1997 due primarily to the utilization of
invested cash in the 1997 acquisition.
<PAGE>7
Net income in the second quarter of 1998 of $11,679,000, or $.56 per share
($.55 assuming dilution), was $872,000 (8.1%) higher than the $10,807,000, or
$.52 per share ($.51 assuming dilution), earned a year ago. The improvement
was due to higher margins in the Company's Electrical Group. Net income for
the six months ended June 30, 1998, was $22,093,000, or $1.06 per share
($1.04 assuming dilution), $3,580,000 (19.3%) greater than the $18,513,000,
or $.89 per share ($.87 assuming dilution), earned in comparable 1997. In
addition to the improved income before taxes, the Company benefited from lower
effective income tax rates in 1998 as compared to 1997.
The Company is currently in the process of implementing the required changes
to its computer software programs and operating systems to be Year 2000
compliant and expects to complete these changes in 1998. The Company is
also communicating with its suppliers and customers concerning Year 2000
compliance. Management believes the costs to become Year 2000 compliant will
not be material to the Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at June 30, 1998 was $124,617,000, 23.8% higher than
$100,672,000 at December 31, 1997. The change was due primarily to modest
increases in accounts receivable and inventories coupled with reductions in
current liabilities. The Company's current ratio increased to 3.2:1 at
June 30, 1998 from 2.4:1 at year-end 1997.
At June 30, 1998, the Company's outstanding long-term debt was $192,240,000,
virtually unchanged from December 31, 1997. The outstanding debt was
borrowed under the Company's $225,000,000 unsecured revolving credit facility
(the "Facility"). At June 30, 1998, the Company had $33,000,000 of available
borrowing capacity under the Facility and an additional $10,000,000 under a
supplemental $10,000,000 line of credit with its lead bank. The Company's
funded debt to EBITDA ratio at June 30, 1998 was 1.84:1, down from 1.86:1 at
year-end 1997, and its capitalization ratio was 48.0%, down from 50.4% at
year-end 1997 and 56.8% one year ago. The Company paid an annual interest
rate of approximately 6.0% on its outstanding debt at June 30, 1998.
The Company's cash flow from operations in the second quarter of 1998 was
$7,449,000, and was $10,479,000 for the first six months of the year. During
the first half of 1998, primarily one-time reductions in current liabilities
resulted in a $15,444,000 use of cash. Coupled with increases in accounts
receivable and inventories, the positive cash generated by net income and
depreciation was partly offset. Free cash flow for the first half of 1998
was a negative $1,377,000 after reducing cash flow from operations for net
capital expenditures and dividends to shareholders. Management believes that
free cash flow will increase in the second half of 1998 due to expected
reductions in accounts receivable and inventories, coupled with cash flow
from net income and depreciation. Outstanding commitments for capital items
at June 30, 1998 totaled approximately $1,600,000. The Company believes
that the combination of cash generated by operations and available borrowing
capacity is adequate to finance the Company's operations for the foreseeable
future.
<PAGE>8
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.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of stockholders of Regal-Beloit Corporation was held
on April 21, 1998.
(b) The terms of Directors James L. Packard, Henry W. Knueppel,
William W. Keefer, J. Reed Coleman, Frank E. Bauchiero and
Stephen N. Graff were continued.
(c) Matters voted on at the Annual Meeting and the results of each vote were
as follows:
(1) Elect three Class B Directors for a term of three years.
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
John M. Eldred 18,895,942 180,921
John A. McKay 18,895,562 181,301
G. Frederick Kasten, Jr. 18,897,424 179,439
</TABLE>
(2) Ratify the appointment of Arthur Andersen LLP as independent public
accountants for the Company for the year ending December 31, 1998.
For Against Abstain
---------- ------- -------
19,038,926 25,313 12,624
(3) Approve the Company's 1998 Stock Option Plan.
For Against Abstain
---------- --------- -------
15,515,137 3,470,925 90,801
<PAGE>9
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
There were no exhibits or reports on Form 8-K filed during the quarter ended
June 30, 1998.
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: August 7, 1998
-------------------
<PAGE>10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,781,000
<SECURITIES> 0
<RECEIVABLES> 72,164,000
<ALLOWANCES> 2,697,000
<INVENTORY> 89,971,000
<CURRENT-ASSETS> 180,112,000
<PP&E> 240,505,000
<DEPRECIATION> 91,247,000
<TOTAL-ASSETS> 488,802,000
<CURRENT-LIABILITIES> 55,495,000
<BONDS> 192,240,000
0
0
<COMMON> 209,000
<OTHER-SE> 208,246,000
<TOTAL-LIABILITY-AND-EQUITY> 488,802,000
<SALES> 276,799,000
<TOTAL-REVENUES> 276,799,000
<CGS> 195,771,000
<TOTAL-COSTS> 195,771,000
<OTHER-EXPENSES> 39,190,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,999,000
<INCOME-PRETAX> 36,035,000
<INCOME-TAX> 13,942,000
<INCOME-CONTINUING> 22,093,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,093,000
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.04
</TABLE>
