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, 1998
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Commission File Number 1-7283
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REGAL-BELOIT CORPORATION
(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)
(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.
20,906,040 Shares, Common Stock, $.01 Par Value
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REGAL-BELOIT CORPORATION
FORM 10-Q
For Quarter Ended September 30, 1998
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets . . . . . . . . . . . . 3
Statements of Income . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 7
PART II - OTHER INFORMATION
Item 6 - Reports on Form 8-K. . . . . . . . . . . . . . . . 9
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 10
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PART I
FINANCIAL INFORMATION
1. Financial Statements
--------------------
REGAL-BELOIT CORPORATION
CONDENSED BALANCE SHEETS
(In Thousands of Dollars)
(From Audited
ASSETS (Unaudited) Statements)
-------------- -------------
Sept. 30, 1998 Dec. 31, 1997
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<S> <C> <C>
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . $ 2,756 $ 3,351
Receivables, less reserves of $2,826 in
1998 and $2,620 in 1997 . . . . . . . . . . . . 70,395 69,660
Inventories. . . . . . . . . . . . . . . . . . . . 89,884 85,527
Other current assets . . . . . . . . . . . . . . . 15,097 14,021
--------- ---------
Total Current Assets. . . . . . . . . . . . . . 178,132 172,559
--------- ---------
Property, Plant and Equipment at Cost. . . . . . . . . 244,375 233,614
Less - accumulated depreciation. . . . . . . . . . (95,715) (82,355)
--------- ---------
Net Property, Plant and Equipment. . . . . . . . 148,660 151,259
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 148,123 151,358
Other Noncurrent Assets. . . . . . . . . . . . . . . . 10,247 10,449
--------- ---------
Total Assets. . . . . . . . . . . . . . . . . . . $485,162 $485,625
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 19,844 $ 23,590
Federal and state income taxes . . . . . . . . . . 2,166 5,696
Other current liabilities. . . . . . . . . . . . . 35,436 42,646
--------- ---------
Total Current Liabilities. . . . . . . . . . 57,446 71,932
--------- ---------
Long-term Debt . . . . . . . . . . . . . . . . . . . . 178,229 192,261
Deferred Income Taxes. . . . . . . . . . . . . . . . . 32,523 31,726
Other Noncurrent Liabilities . . . . . . . . . . . . . 189 279
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,906,040 issued in 1998 and
20,830,226 issued in 1997. . . . . . . . . . 209 208
Additional paid-in capital . . . . . . . . . . . . 40,797 38,904
Retained earnings. . . . . . . . . . . . . . . . . 175,317 150,357
Cumulative Translation Adjustments . . . . . . . . 452 (42)
--------- ---------
Total Shareholders' Investment. . . . . . . . 216,775 189,427
--------- ---------
Total Liabilities and Shareholders' Investment $485,162 $485,625
========= =========
<FN>
See accompanying notes.
</FN>
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REGAL-BELOIT CORPORATION
STATEMENTS OF INCOME
(In Thousands of Dollars, Except Per Share Data)
(Unaudited)
-----------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
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Net Sales . . . . . . . . . . . . . $ 137,973 $ 138,403 $ 414,772 $ 352,583
Cost of Sales . . . . . . . . . . . 99,066 99,335 294,837 251,736
----------- ----------- ----------- -----------
Gross Profit . . . . . . . . . . 38,907 39,068 119,935 100,847
Operating Expenses. . . . . . . . . 19,059 19,134 58,249 46,988
----------- ----------- ----------- -----------
Income from Operations. . . . . . 19,848 19,934 61,686 53,859
Interest Expense. . . . . . . . . . 2,897 3,501 8,896 7,631
Interest Income . . . . . . . . . . 51 117 247 736
----------- ----------- ----------- -----------
Income Before Taxes . . . . . . . 17,002 16,550 53,037 46,964
----------- ----------- ----------- -----------
Provision for Income Taxes. . . . . 6,612 6,636 20,554 18,537
----------- ----------- ----------- -----------
Net Income. . . . . . . . . . . . $ 10,390 $ 9,914 $ 32,483 $ 28,427
=========== =========== =========== ===========
Per Share of Common Stock:
Earnings Per Share. . . . . . . . $.50 $.48 $1.56 $1.37
=========== =========== =========== ===========
Earnings Per
Share - Assuming Dilution . . . $.49 $.47 $1.53 $1.34
=========== =========== =========== ===========
Cash Dividends Declared . . . . . $.12 $.12 $.36 $.36
=========== =========== =========== ===========
Average Number of
Shares Outstanding. . . . . . . . 20,904,773 20,816,285 20,888,299 20,799,122
=========== =========== =========== ===========
Average Number of
Shares - Assuming Dilution. . . . 21,223,066 21,315,098 21,300,327 21,272,088
=========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
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REGAL-BELOIT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
---------------------------
Nine Months Ended Sept. 30,
---------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,483 $ 28,427
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation, amortization and deferred income taxes. . . . . . . . 17,657 13,626
Change in assets and liabilities:
Current assets, other than cash . . . . . . . . . . . . . . . . . (5,770) 12,826
Current liabilities, other than notes payable . . . . . . . . . . (13,655) 1,394
---------- ----------
Net cash provided from operating activities . . . . . . . . . . 30,715 56,273
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment, net of retirements . . . (11,049) (10,481)
Business acquisition . . . . . . . . . . . . . . . . . . . . . . . . ----- (279,260)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 310
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . (10,683) (289,431)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt. . . . . . . . . . . . . . . . . . . . . ----- 242,000
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . . (14,028) (37,520)
Dividends to shareholders. . . . . . . . . . . . . . . . . . . . . . (7,515) (7,471)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883 1,152
---------- ----------
Net cash (used in) provided from financing activities . . . . . . (20,660) 198,161
EFFECT OF EXCHANGE RATE ON CASH. . . . . . . . . . . . . . . . . . . . . 33 (104)
Net (decrease) increase in cash and cash equivalents . . . . . . . . (595) (35,101)
Cash and cash equivalents at beginning of period . . . . . . . . . . 3,351 38,402
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 2,756 $ 3,301
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 $ 6,878
========== ==========
Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,958 $ 4,700
========== ==========
<FN>
See accompanying notes.
</FN>
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REGAL-BELOIT CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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:
9-30 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 third quarter of 1998
was $377,000 of additional comprehensive income relating to the cumulative
translation adjustment recorded, resulting in net comprehensive income of
$10,767,000 for the quarter. The impact for the first nine months of 1998 was
$494,000 of additional comprehensive income relating to the cumulative
translation adjustment, resulting in net comprehensive income of $32,977,000.
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Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
Net sales for the third quarter of 1998 were $137,973,000, $430,000 (.3%)
lower than net sales of $138,403,000 in 1997's third quarter. Net sales of
the Company's Electrical Group for the third quarter were $68,902,000,
virtually unchanged from $68,965,000 in the comparable quarter of 1997.
Mechanical Group third quarter 1998 net sales of $69,071,000 were $367,000
(.5%) below net sales of $69,438,000 in 1997's third quarter.
Net sales for the nine months ended September 30, 1998, were $414,772,000, a
17.6% increase from net sales of $352,583,000 in comparable 1997. Electrical
Group 1998 nine months net sales of $201,371,000 represented 48.5% of total
Company sales. On a pro-forma basis assuming Marathon Electric had been
acquired January 1, 1997, comparable nine months 1997 Electrical Group sales
would have been $202,397,000. The .5% decrease was due primarily to lower
sales to Asian markets. Mechanical Group nine months 1998 net sales were
$213,401,000, a .2% increase from $213,022,000 in comparable 1997, and
represented 51.5% of total Company sales.
Income from operations in the third quarter of 1998 was $19,848,000, a small
decrease from the prior year. Income from operations as a percent of net
sales of 14.4% in the third quarter of 1998 was unchanged from the prior year.
For the nine months of 1998, income from operations was $61,686,000, 14.5%
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 decreased to 14.9% for the nine months of 1998 from 15.3% in the
comparable period of 1997. The decreased percentage was due primarily to the
lower operating margins of the acquired Marathon Electric as compared to those
of the Mechanical Group.
Interest expense of the Company was $2,897,000 in the third quarter of 1998,
$604,000 (17.3%) lower than in comparable 1997 due primarily to lower
long-term debt outstanding. For the nine months of 1998, interest expense
was $1,265,000 higher than in the comparable period of 1997 due to the
March 26, 1997 Marathon Electric acquisition, which was financed primarily
with long-term debt. Interest income was lower in both 1998's third quarter
and nine months to date versus the comparable periods of 1997, due primarily
to utilizing invested cash in the 1997 acquisition.
Net income in the third quarter of 1998 was $10,390,000, or $.50 per share
($.49 assuming dilution), $476,000 (4.8%) higher than the $9,914,000, or $.48
per share ($.47 assuming dilution) earned a year ago. The improvement was due
to lower interest expense. Net income for the nine months ended September 30,
1998, was $32,483,000, or $1.56 per share ($1.53 assuming dilution),
$4,056,000 (14.3%) greater than the $28,427,000 earned in the comparable
period of 1997. In addition to the improved income before taxes, the Company
benefited from lower effective income tax rates in 1998 as compared to 1997,
38.8% versus 39.5%, respectively.
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YEAR 2000 COMPLIANCE
- --------------------
The Year 2000 issue is related to computer software utilizing two digits for
the year rather than the four required to distinguish 2000 from 1900 or 2001
from 1901 and so on. As a result, any of the Company's computer programs or
any of the Company's suppliers or service providers that have date sensitive
software may incur system failures or generate incorrect data if the dates of
January 1, 2000 or later are not properly recognized. The Company has for
several years been addressing the Year 2000 issue. The Company, through
assigned internal project teams under the guidance of executive Management,
has assessed all computer hardware and all financial, information and
operating systems, whether internally developed or purchased from external
suppliers. The project teams have identified required changes to bring such
hardware and software systems into full Year 2000 readiness, as required.
The necessary changes have, for the most part, already been made and
implemented. Testing of the Company's systems to assure Year 2000 readiness
is in process. The Company plans to have completed sufficient testing by
March 31, 1999 to reasonably conclude that its systems are Year 2000 ready,
though certain tests are likely to continue periodically during the balance
of 1999 as well.
In addition to addressing its operating systems, project teams have been
evaluating and testing all computer operated machinery and equipment and
facilities infrastructure such as telecommunications, security, and HVAC
to determine Year 2000 readiness. The Company's products have been examined
and determined to be Year 2000 ready. The Company is in the process of
surveying key suppliers and customers to evaluate their Year 2000 readiness
efforts. Where key suppliers are not able to verify their readiness by
June 30, 1999, the Company will work to identify backup suppliers. Other than
as relating to its supplier and customer survey efforts, the Company has set
March 31, 1999 as the target date to be Year 2000 ready in all material
respects.
Management believes that the Company is devoting the necessary resources to
identify and resolve significant Year 2000 issues and to minimize the risk of
not being Year 2000 ready. Management further believes the costs it plans
to expend to become Year 2000 ready are not material and will not have an
adverse effect on the Company's financial position, cash flow or results of
operations. However, to the extent that the Company or third parties on
which it relies do not achieve Year 2000 readiness in a timely manner, the
Company's financial position, cash flow or results of operations may be
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital at September 30, 1998 was $120,686,000, 19.9% higher than
$100,672,000 at December 31, 1997. The increase was due primarily to a 5%
increase in inventory coupled with a 20% reduction in current liabilities.
Current ratio increased to 3.1:1 at September 30, 1998 from 2.4:1 at year-end
1997.
Outstanding long-term debt was reduced by $14,000,000 during the third quarter,
to $178,229,000 at September 30, 1998. The year-to-date reduction from
December 31, 1997 was also $14,000,000. The outstanding debt was borrowed
under the Company's $225,000,000 unsecured revolving credit facility (the
"Facility"). On October 1, 1998, the Facility was permanently and voluntarily
reduced by the Company to $190,000,000. The Company had $9,842,000 of
available borrowing capacity under the reduced Facility at October 1, 1998,
and an additional $10,000,000 under a supplemental $10,000,000 line of
<PAGE> 8
credit with its lead bank. The Company's funded debt to EBITDA ratio at
September 30, 1998 was 1.71:1, down from 1.86:1 at year-end 1997, and its
capitalization ratio was 45.1%, down from 50.4% at year-end 1997 and from
53.4% one year ago. The Company paid an annual interest rate of approximately
6.0% on its outstanding debt at September 30, 1998.
The Company's cash flow from operations in the third quarter of 1998 was
$20,236,000, and was $30,715,000 for the nine months of 1998. In the first
half of 1998, primarily one-time reductions in current liabilities resulted
in a $16,437,000 use of cash. With current liabilities increasing $1,951,000
in the third quarter of 1998, and with $15,971,000 of cash flow from net
income, depreciation and amortization, the third quarter 1998 cash flow nearly
doubled that of the first half of 1998. Free cash flow for the nine months of
1998 was $12,151,000 after reducing cash flow from operations for net capital
expenditures and dividends to shareholders. Outstanding commitments for
capital items at September 30, 1998 totaled approximately $2,200,000. 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.
CAUTIONARY STATEMENT
- --------------------
The following is a cautionary statement made under the Private Securities
Litigation Reform Act of 1995:
With the exception of historical facts, the statements contained in Item 2. of
this form 10-Q 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 that
impact the cost of the Company's outstanding debt, 3) the success of
Management in increasing sales and maintaining or improving the operating
margins of its businesses, 4) the availability of or material increases in
the costs of select raw materials or parts, including but not limited to,
steel, copper wire, aluminum, castings, and bearings, and 5) actions taken by
competitors with regard to such matters as product offerings, 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 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, 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGAL-BELOIT CORPORATION
(Registrant)
Kenneth F. Kaplan
--------------------------------
Kenneth F. Kaplan
Vice President - Chief Financial Officer and Secretary
(Principal Accounting and Financial Officer)
DATE: November 12, 1998
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,756,000
<SECURITIES> 0
<RECEIVABLES> 70,395,000
<ALLOWANCES> 2,826,000
<INVENTORY> 89,884,000
<CURRENT-ASSETS> 178,132,000
<PP&E> 244,375,000
<DEPRECIATION> 95,715,000
<TOTAL-ASSETS> 485,162,000
<CURRENT-LIABILITIES> 57,446,000
<BONDS> 178,229,000
0
0
<COMMON> 209,000
<OTHER-SE> 216,566,000
<TOTAL-LIABILITY-AND-EQUITY> 485,162,000
<SALES> 414,772,000
<TOTAL-REVENUES> 414,772,000
<CGS> 294,837,000
<TOTAL-COSTS> 294,837,000
<OTHER-EXPENSES> 58,249,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,896,000
<INCOME-PRETAX> 53,037,000
<INCOME-TAX> 20,554,000
<INCOME-CONTINUING> 32,483,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,483,000
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.53
</TABLE>
