SELECTED FINANCIAL INFORMATION REGAL-BELOIT CORPORATION
- -------------------------------------------------------------------------------
FIVE YEAR HISTORICAL DATA
(In Thousands, Except Per Share Data)
-------------------------------------------------
Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Net Sales . . . . . . . . . . . . . . . . $ 487,019 $ 281,508 $ 295,891 $ 242,650 $ 219,883
Income from Operations . . . . . . . . . 74,381 51,120 53,607 38,982 25,081
Net Income . . . . . . . . . . . . . . . 38,897 32,276 32,818 23,129 14,246
Total Assets . . . . . . . . . . . . . . 485,625 196,996 175,480 167,665 139,317
Long-term Debt . . . . . . . . . . . . . 192,261 2,168 2,884 16,022 19,612
Shareholders' Investment . . . . . . . . 189,427 160,023 135,873 110,545 92,746
Per Share of Common Stock:
Earnings Per Share . . . . . . . . . . . 1.87 1.57 1.60 1.13 .70
Earnings Per Share - Assuming Dilution . 1.83 1.53 1.57 1.11 .69
Cash Dividends Declared . . . . . . . . .48 .48 .39 .31 .27
Shareholders' Investment . . . . . . . . 9.09 7.75 6.61 5.40 4.55
Average Number of Shares Outstanding 20,806 20,617 20,509 20,438 20,374
<FN>
NOTE: All per share amounts are stated giving retroactive effect of a 2 for 1 stock split in 1994. Net income
per share is based on the weighted average number of shares outstanding (as adjusted) during the respective
periods.
</FN>
COMMON STOCK
1997 1996
--------------------------------- --------------------------------
Price Range Price Range
---------------------- Dividends -------------------- Dividends
High Low Paid High Low Paid
--------- ---------- --------- --------- -------- ---------
1st Quarter . . . . $ 24 1/2 $ 18 $ .12 $ 21 7/8 $ 18 $ .10
2nd Quarter 28 1/2 22 1/2 .12 22 3/8 18 1/4 .12
3rd Quarter 32 1/4 26 1/16 .12 19 3/4 15 1/2 .12
4th Quarter 32 3/4 25 1/16 .12 20 1/4 16 3/8 .12
<FN>
Regal-Beloit has paid 150 consecutive quarterly dividends through January,
1998. The approximate number of holders of common stock as of December 31, 1997
is 1,229.
</FN>
QUARTERLY FINANCIAL INFORMATION
(In Thousands, Except Per Share Data)
------------------------------------------------------------------------------------
1st Qtr 2nd Qtr. 3rd Qtr. 4th Qtr.
------------------ ------------------ ------------------- ------------------
1997 1996 1997 1996 1997 1996 1997 1996
-------- -------- --------- ------- ---------- ------- -------- -------
Net Sales . . . . . . . . $70,570 $75,119 $143,610 $71,817 $138,403 $68,149 $134,436 $66,423
Gross Profit . . . . . . . . 20,371 22,339 41,408 21,853 39,068 19,758 40,161 18,976
Income from Operations . . . 12,062 14,136 21,863 13,771 19,934 11,748 20,522 11,465
Net Income . . . . . . . . . 7,706 8,805 10,807 8,669 9,914 7,412 10,470 7,390
Earnings Per Share . . . . . .37 .43 .52 .42 .48 .36 .50 .36
Earnings Per Share -
Assuming Dilution . . . . . .36 .42 .51 .41 .47 .35 .49 .35
Average Number of
Shares Outstanding . . . 20,774 20,587 20,807 20,614 20,816 20,631 20,826 20,634
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL STATEMENTS
REGAL-BELOIT CORPORATION
- -------------------------------------------------------------------------------
OVERVIEW
The Company achieved record highs in net sales, net income, and earnings per
share in 1997. On March 26, 1997, the Company acquired Marathon Electric
Manufacturing Corporation, nearly doubling the size of the Company in
terms of both sales and employees. (See "Acquisition" following.) The
results of Marathon Electric, which comprises the Company's new Electrical
Group, are included in the Company's financial statements after March 26,
1997.
Net sales in 1997 increased 73.0% to $487,019,000. Of this sales increase,
$201,845,000 was attributable to the Marathon Electric acquisition. Net
income was $38,897,000, or $1.87 per share, 20.5% higher than net income
in 1996 of $32,276,000, or $1.57 per share.
Cash flow from operations increased 46.8% to a record $78,789,000 from
$53,667,000 in 1996. Return on average shareholders' investment was 22.3%,
the fourth consecutive year in excess of 20%. The Company reduced its
outstanding long-term revolving debt to $192,000,000 at year-end 1997,
a $52,000,000 reduction from the peak debt at March 31, 1997, immediately
after the Marathon Electric acquisition.
RESULTS OF OPERATIONS
1997 versus 1996
- ----------------
Net sales of the Company were $487,019,000 in 1997, a 73.0% increase from
$281,508,000 in 1996. Mechanical Group net sales grew to $285,174,000 in
1997, a 1.3% increase from $281,508,000 in 1996. Several of the Mechanical
Group's operating divisions, primarily those serving general industrial
activity, and the agriculture and construction markets, achieved sales
growth in excess of general economic growth in 1997. However, these
gains were partially offset by weakness in the marine, cutting tool, and
heavy equipment markets, which adversely impacted the sales of divisions
serving these markets. Electrical Group 1997 net sales for the nine months
as part of the Company were $201,845,000, 9% higher than for the same nine
months of 1996 under Marathon Electric s former ownership. The Electrical
Group achieved broad-based sales increases in motors, generators, and
other electrical products. New products were introduced, new and emerging
domestic markets were entered and new customers were attracted. Foreign
sales rose by 13.7%, paced by generators.
Gross profit as a percentage of sales for the Company was 29.0% in 1997 as
compared to 29.5% in 1996. The decrease from 1996 was due primarily to a
decline in the overall gross margin in the Mechanical Group resulting
from a more competitive pricing environment in 1997 than experienced in
1996. The impact of the new Electrical Group on gross margin was minimal
as its gross profit as a percentage of sales was comparable to that of
the Mechanical Group.
Company operating expenses increased to $66,627,000 in 1997 from $31,806,000
in 1996 due predominantly to the acquisition of Marathon Electric. As a
percentage of net sales, operating expenses in 1997 were 13.7% as
compared to 11.3% in 1996.
Income from operations of the Company increased to $74,381,000 in 1997 from
$51,120,000 in 1996. The increase was due to the $25,836,000 of income
from operations contributed by the new Electrical Group from April through
December 1997. Income from operations of the Mechanical Group decreased
to $48,545,000 in 1997 from $51,120,000 in 1996, due primarily to the
impact of the previously mentioned weakness in 1997 in several of the
Group's markets.
Interest expense in 1997 was $10,804,000 as compared to $357,000 in 1996.
On March 26, 1997, the Company borrowed $242,000,000 under its Revolving
Credit Facility to finance the purchase of Marathon Electric (See
"Acquisition" following). The average rate of interest paid by the
Company in 1997 was 6.2%. Interest income in 1997 was $810,000, reduced
from $1,052,000 in 1996. The Company's interest income decreased
substantially after the Marathon Electric acquisition, as the Company
utilized $37,000,000 of cash for the acquisition.
The Company's effective tax rate increased to 39.6% of income before taxes
in 1997 from 37.7% in 1996. The rate increase was due primarily to the
nondeductibility of the amortized goodwill associated with the Marathon
Electric acquisition.
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.
1996 versus 1995
- ----------------
Net sales of the Company decreased 4.9% to $281,508,000 in 1996 from
$295,891,000 in 1995. The Company experienced a broad-based slowdown in
most of its markets commencing in the second quarter of 1996 and continuing
for the balance of the year. Sales were impacted by customers working
inventories to lower levels and the end of two long-term contracts at one
of the Company's divisions.
Gross profit as a percentage of sales increased to 29.5% in 1996 from 29.2%
in 1995. Continued improvement in manufacturing efficiencies enabled the
Company to improve margins in 1996 despite the sales decline. Operating
expenses were reduced 3.2% to $31,806,000 in 1996 from $32,854,000 in 1995.
This was accomplished by the continued emphasis on close control of costs
at all levels of the Company's operations.
5
Interest expense in 1996 of $357,000 was below the $776,000 in 1995.
Continued paydown of outstanding debt accounted for the decline. Interest
income, generated by short-term investments of the Company's cash balances,
increased to $1,052,000 in 1996 from $309,000 in 1995. The Company's
effective tax rate decreased one-half point in 1996 to 37.7% of income
before taxes from 38.2% in 1995. The 1996 effective rate decrease was
due primarily to lower effective state income tax rates, net of federal
benefits.
The Company's net income in 1996 of $32,276,000 was 1.7% less than 1995 net
income of $32,818,000. Despite the decline in 1996 sales, net income as a
percentage of net sales increased to 11.5% from 11.1% in 1995. On a per
share basis, 1996 net income was $1.57 per share as compared to $1.60 in 1995.
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 $279,000,000. Marathon Electric, which now
comprises the Company's Electrical Group, is a leading manufacturer of
electric motors and generators.
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 under a
$280,000,000, 5-year, unsecured, revolving credit facility. (See also
"Liquidity and Capital Resources" following).
In connection with the acquisition, 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 value
of goodwill being $153,963,000. While the purchase allocations included
in these statements are believed to approximate the fair market value of the
net assets acquired, the purchase accounting is currently preliminary and
will be finalized during the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $100,627,000 at December 31,
1997, from $92,613,000 a year earlier. The increase reflects the net
additions to the assets and liabilities of the Company associated with the
Marathon Electric acquisition. Working capital increased only modestly
in 1997 because the use of $37,000,000 of Company cash to fund the
acquisition reduced working capital and offset much of the impact of the net
current assets acquired. The Company's current ratio decreased, also as
a result of the acquisition, from 4.1:1 at December 31, 1996 to 2.4:1 at
year-end 1997.
The Company maintains a $225,000,000 unsecured revolving credit facility
which expires March 26, 2002 (the "Facility"). The Facility was originally
for $280,000,000 but was reduced by the Company to the current limit
effective October 1, 1997. The Facility permits the Company to borrow up
to the credit limit at interest rates based upon a margin above LIBOR.
The Company initially borrowed $242,000,000 under the Facility on March 26,
1997, to finance the Marathon Electric acquisition. During the balance of
1997, the Company generated sufficient cash flow to repay $50,000,000 of
the initial debt borrowed, reducing the debt outstanding at December 31,
1997, to $192,000,000. During 1997 the Company paid an average interest
rate of 6.2% for its borrowings. The Company was in compliance with the
covenants of the Facility throughout 1997. At December 31, 1997, the
Company had $33,000,000 of available borrowing capacity under the Facility.
Additionally, the Company maintains a short-term credit line of $10,000,000.
At December 31, 1997, there were no borrowings against the short-term line.
Management believes the credit facilities it has in place provide sufficient
borrowing capacity for the Company to finance its operations for the
foreseeable future. Management also believes that future external growth
from acquisitions can be adequately funded from a combination of the
current credit facilities and the Company s ability to further leverage
its equity with additional long-term indebtedness.
Cash flow from operations continued to grow in 1997, reaching $78,789,000
after $53,667,000 in 1996 and $35,680,000 in 1995. After expending
$16,076,000 for property, plant and equipment in 1997 and paying $9,970,000
in dividends, the Company had sufficient cash available to repay
$52,532,000 of its outstanding debt by the end of 1997. The Company plans
to spend in excess of $20,000,000 for capital items in 1998. The Company
believes its present facilities are sufficient to provide adequate capacity
for its operations in 1998.
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 the
preceding 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 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 other Company documents, such as its Annual Report on Form
10-K and Form 10-Q's, filed with the Securities and Exchange Commission.
6
CONSOLIDATED BALANCE SHEETS REGAL-BELOIT CORPORATION
In Thousands of Dollars
- ------------------------------------------------------------------------------
ASSETS
December 31,
-----------------------------
1997 1996
---------- -----------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,351 $ 38,402
Receivables, less allowance for doubtful accounts of
$2,620 in 1997 and $1,190 in 1996. . . . . . . . . . . . . . . . . . . . . . . . 69,660 32,796
Future income tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,141 4,532
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,527 45,908
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880 393
------------- ------------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,559 122,031
Property, Plant and Equipment:
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,979 6,783
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,167 27,174
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,468 108,783
------------- ------------
Property, Plant and Equipment, at cost . . . . . . . . . . . . . . . . . . . . 233,614 142,740
Less-Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . (82,355) (68,124)
------------- ------------
Net Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . 151,259 74,616
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,358 --
Other Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,449 349
------------- ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 485,625 $ 196,996
============= ============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,590 $ 9,481
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,477
Accrued compensation and employee benefits . . . . . . . . . . . . . . . . . . . . 28,674 12,082
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,434 3,816
Federal and state income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,696 886
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . 38 676
------------- -------------
Total Current Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 71,932 29,418
Long-term Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,261 2,168
Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,726 5,387
Other Noncurrent Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 --
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares authorized, 20,830,226 issued
and outstanding in 1997 and 20,644,843 issued and outstanding in 1996 . . . . . 208 206
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,904 37,695
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,357 121,453
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . (42) 669
------------- -------------
Total Shareholders' Investment . . . . . . . . . . . . . . . . . . . . . . . . 189,427 160,023
------------- -------------
Total Liabilities and Shareholders' Investment . . . . . . . . . . . . . . . . $ 485,625 $ 196,996
============= =============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
7
CONSOLIDATED STATEMENTS OF INCOME REGAL-BELOIT CORPORATION
In Thousands of Dollars, Except Shares Outstanding
- --------------------------------------------------------------------------------------
For The Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------- ------------
Net Sales . . . . . . . . . . . . . . . . $ 487,019 $ 281,508 $ 295,891
Cost of Sales. . . . . . . . . . . . . . . 346,011 198,582 209,430
------------ ------------- ------------
Gross Profit . . . . . . . . . . . . . . . 141,008 82,926 86,461
Operating Expenses . . . . . . . . . . . . 66,627 31,806 32,854
------------ ------------- ------------
Income From Operations . . . . . . . . . 74,381 51,120 53,607
Interest Expense . . . . . . . . . . . . . 10,804 357 776
Interest Income. . . . . . . . . . . . . . 810 1,052 309
------------ ------------- ------------
Income Before Income Taxes . . . . . . . 64,387 51,815 53,140
Provision For Income Taxes . . . . . . . . 25,490 19,539 20,322
------------ ------------- ------------
Net Income . . . . . . . . . . . . . . . $ 38,897 $ 32,276 $ 32,818
============ ============= ============
Earnings Per Share . . . . . . . . . . . . $ 1.87 $ 1.57 $ 1.60
============ ============= ============
Earnings Per Share - Assuming Dilution . . $ 1.83 $ 1.53 $ 1.57
============ ============= ============
Average Number of Shares Outstanding . . . 20,805,844 20,616,825 20,508,890
============ ============= ============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
In Thousands of Dollars, Except Per Share Data
- ----------------------------------------------------------------------------------------
Common
Stock Additional Cumulative
$.01 Paid-In Retained Translation
Par Value Capital Earnings Adjustment Total
------------ ------------ ------------- ------------- ------------
Balance, December 31, 1994 (20,454,952 shares). . $ 205 $ 36,595 $ 74,265 $ (520) $ 110,545
Net Income . . . . . . . . . . . . . . . . . . . -- -- 32,818 -- 32,818
Dividends Declared ($.39 per share). . . . . . . -- -- (8,004) -- (8,004)
Translation Adjustment . . . . . . . . . . . . . -- -- -- (25) (25)
Stock Options Exercised (99,016 shares). . . . . 1 538 -- -- 539
Balance, December 31, 1995 (20,553,968 shares) . . 206 37,133 99,079 (545) 135,873
Net Income -- -- 32,276 -- 32,276
Dividends Declared ($.48 per share) -- -- (9,902) -- (9,902)
Translation Adjustment -- -- -- 1,214 1,214
Stock Options Exercised (90,875 shares) -- 562 -- -- 562
Balance, December 31, 1996 (20,644,843 shares) . . 206 37,695 121,453 669 160,023
Net Income -- -- 38,897 -- 38,897
Dividends Declared ($.48 per share) -- -- (9,993) -- (9,993)
Translation Adjustment -- -- -- (711) (711)
Stock Options Exercised (185,383 shares) 2 1,209 -- -- 1,211
----------- ------------ ------------ ------------ ------------
Balance, December 31, 1997 (20,830,226 shares) . . $ 208 $ 38,904 $ 150,357 $ (42) $ 189,427
=========== ============ ============ ============ ============
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
8
CONSOLIDATED STATEMENTS OF CASH FLOWS REGAL-BELOIT CORPORATION
In Thousands of Dollars
- -----------------------------------------------------------------------------------------------
For The Year Ended December 31,
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,897 $ 32,276 $ 32,818
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 18,874 10,578 10,176
Provision for deferred income taxes . . . . . . . . . . . 13,770 (54) (767)
Change in assets and liabilities, net of acquisitions:
Receivables . . . . . . . . . . . . . . . . . . . . . . . (200) 8,799 (10,559)
Inventories . . . . . . . . . . . . . . . . . . . . . . . 473 3,708 (936)
Current liabilities and other, net . . . . . . . . . . . 6,975 (1,640) 4,948
-------------- -------------- --------------
Net cash provided from operating activities . . . . . . . 78,789 53,667 35,680
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment . . . . . . . . (16,076) (11,112) (13,784)
Business acquisition . . . . . . . . . . . . . . . . . . . (279,260) -- --
Sale of property, plant and equipment . . . . . . . . . . 515 391 3,260
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 356 (525) (281)
-------------- -------------- --------------
Net cash used in investing activities . . . . . . . . . . (294,465) (11,246) (10,805)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt . . . . . . . . . . . . . . . 242,000 -- --
Repayment of long-term debt . . . . . . . . . . . . . . . (52,532) (2,721) (13,242)
Repayment of short-term debt . . . . . . . . . . . . . . . -- -- (10,511)
Stock issued under option and compensation plans . . . . . 1,211 562 539
Dividends to shareholders . . . . . . . . . . . . . . . . (9,970) (9,480) (7,585)
-------------- -------------- --------------
Net cash provided from (used in) financing activities . . 180,709 (11,639) (30,799)
EFFECT OF EXCHANGE RATE ON CASH: . . . . . . . . . . . . . . (84) 162 4
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents . . . (35,051) 30,944 (5,920)
Cash and cash equivalents at beginning of year . . . . . . 38,402 7,458 13,378
-------------- -------------- --------------
Cash and cash equivalents at end of year . . . . . . . . . $ 3,351 $ 38,402 $ 7,458
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,053 $ 413 $ 821
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . $ 9,509 $ 19,728 $ 20,254
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGAL-BELOIT CORPORATION
- -----------------------------------------------------------------------------
For The Three Years Ended December 31, 1997
(1) NATURE OF OPERATIONS
Regal-Beloit Corporation (the Company) is a United States-based multinational
corporation. The Company is organized into two operating groups, the
Mechanical Group with its principal line of business in mechanical products
which control motion and torque, and the Electrical Group with its principal
line of business in electric motors and generators. The principal markets
for the Company's products and technologies are within the United States.
Sales in foreign countries represent a relatively minor but increasing
proportion of total Company sales.
(2) ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The financial statements include the accounts of the Company and its wholly
owned subsidiaries.
Revenue Recognition
- -------------------
Sales and related cost of sales for all products are recognized upon shipment
of the products.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, in certain circumstances, that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue
and expense during the reporting period. Actual results could differ from
those estimates.
Foreign Currency Translation
- ----------------------------
Net assets of non-U.S. subsidiaries, whose functional currencies are other
than the U.S. Dollar, are translated at the rates of exchange in effect as
of year end. Income and expense items are translated at the average
exchange rates in effect during the year. The translation adjustments
relating to net assets are recorded directly into a separate component of
shareholders' investment. Certain other translation adjustments continue to
be reported in net income and were not significant in any of the three
years ended December 31, 1997.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist primarily of highly liquid investments
with insignificant interest rate risk and original maturities of three
months or less at date of acquisition. The carrying value of cash
equivalents closely approximates their fair market value.
Inventories
- -----------
The approximate percentage distribution between major classes of inventory
is as follows:
December 31,
----------------
1997 1996
-------- -------
Raw Material . . . . . . . . . . . . . 13% 17%
Work In Process . . . . . . . . . . . 23% 19%
Finished Goods and Purchased Parts . . 64% 64%
Inventories are stated at cost, which is not in excess of market. Cost for
approximately 82% of the Company's inventory at December 31, 1997 and 67%
at December 31, 1996, was determined using the last-in, first-out (LIFO)
method. If all inventories were valued on the first-in, first-out (FIFO)
method, they would have increased by $8,364,000 and $8,875,000 as of
December 31, 1997 and 1996, respectively. Material, labor and factory
overhead costs are included in the inventories.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment is stated at cost. Maintenance and repairs
are charged to expense as incurred and major renewals and improvements
are capitalized.
The cost of property retired or otherwise disposed of is removed from the
property accounts, the accumulated depreciation is removed from related
reserves, and the net gain or loss is reflected in income.
The provisions for depreciation are based on the estimated useful lives of
plant and equipment from the dates of acquisition and are calculated
primarily using the straight-line method for financial reporting purposes
and accelerated methods for income tax purposes. The estimated useful lives
are:
Description Life
- -------------------------- --------------
Buildings and Improvements 10 to 45 years
Machinery and Equipment 3 to 15 years
(3) LEASES AND RENTAL COMMITMENTS
Rental expenses charged to operations amounted to $3,535,000 in 1997,
$1,158,000 in 1996 and $1,218,000 in 1995. Future minimum rental commitments
for noncancelable operating leases having a remaining term in excess of
one year as of December 31, 1997 are not material.
10
(4) ACQUISITION
On March 26, 1997, the Company acquired 100% of the stock of Marathon
Electric Manufacturing Corporation of Wausau, Wisconsin for approximately
$279,000,000. The acquisition was financed with a combination of
approximately $37,000,000 of existing cash and $242,000,000 of debt.
(See also Note 5 "Long-Term Debt and Bank Credit Facilities".) Marathon
Electric is a leading manufacturer of electric motors and generators.
Marathon Electric sells its products worldwide to a broad range of industries
and customers.
Results of operations for Marathon Electric have been consolidated in the
Company's statements effective March 27, 1997. Unaudited pro-forma results
of operations for Regal-Beloit Corporation for the years ended December 31,
1997 and 1996, as though Marathon Electric had been acquired as of January 1,
1996, are as follows:
(In Thousands, Except Per Share Data)
-------------------------------------
1997 1996
----------------- ------------------
Pro-forma:
Net Sales $ 549,855 $ 526,752
Net Income $ 39,602 $ 35,282
Earnings Per Share $ 1.90 $ 1.71
This acquisition was accounted for as a purchase, and the audited results
shown in these statements relating to the acquisition have been prepared in
accordance with generally accepted accounting principles. While the purchase
allocations included in these statements are believed to approximate the fair
market value of the net assets acquired, the purchase accounting is currently
preliminary and will be finalized during the first quarter of 1998.
(5) LONG-TERM DEBT AND BANK CREDIT FACILITIES
(In Thousands of Dollars)
Long-term debt consists of the following: December 31,
1997 1996
--------- ---------
Revolving Credit Facility . . . . . . . . . . . $ 192,000 $ --
7-3/4% Industrial Revenue Bonds . . . . . . . . -- 1,027
Industrial Development Bonds . . . . . . . . . -- 1,350
Other . . . . . . . . . . . . . . . . . . . . . 299 467
192,299 2,844
Less-Current maturities . . . . . . . . . . . . 38 676
Noncurrent portion . . . . . . . . . . . . . . $ 192,261 $ 2,168
The Company maintains a $225,000,000 unsecured revolving credit facility
which expires March 26, 2002 (the "Facility"). The Facility permits the
Company to borrow at rates based upon a margin above LIBOR. The Facility
also includes financial covenants regarding minimum net worth, maximum
permitted debt and minimum interest coverage. The average interest rate
paid under the Facility in 1997 was 6.2%. The Company had $33,000,000
of available borrowing capacity under the Facility at December 31, 1997.
The Company also maintains a short-term credit line of $10,000,000 at
December 31, 1997. There was no outstanding balance on the short-term credit
line at December 31, 1997.
Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the fair value of long-term
debt is not materially different than the carrying value.
Maturities of long-term debt are as follows:
Year (In Thousands of Dollars)
- ------ --------------------------
1998 $ 38
1999 43
2000 48
2001 54
2002 and thereafter 192,116
---------
Total $ 192,299
=========
6) CONTINGENCIES
The Company is, from time to time, party to lawsuits arising from its normal
business operations. In addition, the Company is party to certain
environmental cleanup proceedings. It is believed that the outcome of these
lawsuits and cleanup proceedings will have no material effect on the
Company's financial position or its results of operations.
<PAGE)11
(7) RETIREMENT PLANS
The Company has a number of retirement plans that cover most of its
employees. The primary plan of the Mechanical Group is a qualified
discretionary profit-sharing plan covering substantially all domestic
employees except those covered by collective bargaining agreements. Total
expense for all profit-sharing and retirement plans of the Mechanical
Group was $4,247,000, $4,041,000 and $4,477,000 in 1997, 1996 and 1995,
respectively.
The Electrical Group has defined benefit pension plans which cover
substantially all employees. Benefits provided under qualified defined
benefit plans are based on employees average earnings in years immediately
preceding retirement and years of credited service. Funding of the plans
is in accordance with federal laws and regulations.
Pension cost for all the defined benefit plans includes the following
components:
(In Thousands of Dollars)
Nine Months Ended
December 31, 1997
-----------------
Service cost $ 822
Interest cost 1,880
Actual return on assets (7,740)
Net amortization and deferral 5,170
------------
Net Pension Expense $ 132
============
The following sets forth the funded status of the Electrical Group's defined
benefit plans and the amounts reflected in the accompanying consolidated
balance sheets.
(In Thousands of Dollars)
Actuarial present value December 31, 1997
-----------------
of benefit obligations:
Vested benefit obligation . . . . . . . . $ 28,148
Accumulated benefit obligation . . . . . $ 29,891
Projected benefit obligation . . . . . . $ 35,316
Plan assets at fair value . . . . . . . . 44,937
Excess of plan assets over projected
benefit obligation . . . . . . . . . . . 9,621
Unrecognized net gain . . . . . . . . . . (3,884)
Unrecognized prior service cost . . . . . 104
Pension asset recognized in the
consolidated balance sheets . . . . . . $5,841
The actuarial valuation assumes that the present values of benefit
obligations are based on a discount rate of 7.5% and annual compensation
increases of 4.5%. The assumed long-term rate of return on plan assets
is 9.0%.
The Electrical Group also has defined contribution plans for substantially
all salaried employees and certain hourly employees. The plans provide for
matching based on participant contributions and Electrical Group profits.
Matching contributions to the plans totaled $1,073,000 for the nine months
ended December 31, 1997.
(8) NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". The standard had no effect on the
basic presentation of Earnings Per Share. Earnings Per Share - Assuming
Dilution is presented for all periods.
The reconciliation of the denominator of the Earnings Per Share and Earnings
Per Share - Assuming Dilution computations per SFAS No. 128 is as follows:
(In Thousands, Except Per Share Data)
-------------------------------------
1997 1996 1995
Net Income for Earnings Per Share . . . . . . . $ 38,897 $ 32,276 $ 32,818
========= ========= =========
Shares for Earnings Per Share . . . . . . . . . 20,806 20,617 20,509
Dilutive Effect of Stock Options . . . . . . . . 469 458 457
--------- -------- ---------
Shares for Earnings Per Share - Assuming Dilution 21,275 21,075 20,966
Earnings Per Share . . . . . . . . . . . . . . . $ 1.87 $ 1.57 $ 1.60
Earnings Per Share - Assuming Dilution . . . . . $ 1.83 $ 1.53 $ 1.57
12
(9) STOCK OPTION PLANS
The Company has four stock option plans available for officers, directors,
and key employees. Under the Company's 1982 and 1987 Stock Option Plans,
qualified incentive stock options for 614,946 and 450,000 shares,
respectively, have been made available for grant and 609,760 and 435,500
shares, respectively, have been granted. Options under these plans were
granted at a price that equaled the market value on the date of grant and an
option's maximum term is 10 years.
In 1991, the shareholders approved a Flexible Stock Incentive Plan. This
plan permits the Company to award options from a single pool of 1,000,000
shares. Non-qualified options for 566,856 shares and qualified incentive
stock options for 124,500 shares have been granted under this plan. These
options were granted at prices that equaled the market value on the date
of grant and an option's maximum term is 10 years.
In 1992, the Outside Directors of the Company were awarded a one time grant
of non-qualified options for an aggregate 140,000 shares. These options
were granted at market value on the date of grant and expired five years
from date of grant.
A summary of the status of the Company's four stock option plans as of
December 31, 1997, 1996 and 1995, and changes during the years then ended is
presented below:
1997 1996 1995
------------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------- ------------------------ -------------------------
Outstanding at beginning of year . . 866,418 $ 8.88 873,086 $ 7.84 955,420 $ 7.25
Granted . . . . . . . . . . . . . . 243,850 24.10 107,700 18.85 33,364 14.75
Exercised . . . . . . . . . . . . . (200,336) 7.54 (96,368) 5.84 (108,448) 4.98
Forfeited . . . . . . . . . . . . . (2,250) 18.81 (18,000) 19.00 (7,250) 13.94
--------- -------- -------- -------- --------- --------
Outstanding at end of year . . . . . 907,682 $ 13.42 866,418 $ 8.88 873,086 $ 7.84
Options exercisable at year-end . . 467,582 616,068 653,736
<FN>
The following table summarizes information about the Company's four stock option plans outstanding at
December 31, 1997:
</FN>
Range of Number Number
Exercise Outstanding at Exercisable at
Prices 12/31/97 12/31/97
- ------------------------------------------------------
$ 5.56 - 8.36 422,994 294,994
8.37 - 12.56 116,612 116,612
12.57 - 18.86 80,776 37,776
18.87 - 27.81 287,300 18,200
------- -------
907,682 467,582
The Company accounts for its stock option plans under APB Opinion No. 25.
Accordingly, no compensation cost has been recognized in the statements of
income. Had compensation cost for these plans been determined consistent
with FASB Statement No. 123 "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
(In Thousands, Except Per Share Data)
1997 1996 1995
---------- ---------- ----------
Net Income:
As Reported . . . . . . . . . . . . $ 38,897 $ 32,276 $ 32,818
Pro Forma . . . . . . . . . . . . . $ 38,100 $ 32,066 $ 32,711
Earnings Per Share
As Reported . . . . . . . . . . . . $ 1.87 $ 1.57 $ 1.60
Pro Forma . . . . . . . . . . . . . $ 1.83 $ 1.56 $ 1.60
Earnings Per Share - Assuming Dilution
As Reported . . . . . . . . . . . . $ 1.83 $ 1.53 $ 1.57
Pro Forma . . . . . . . . . . . . . $ 1.79 $ 1.52 $ 1.57
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995, 1996 and 1997, respectively: risk-free
interest rates of 7.1%, 5.9% and 6.7% for the 1991 Plan options and 6.9%
and 5.5% in 1995 and 1996 for the 1987 Plan options; expected dividend
yield of 2.5% for all years; expected option lives of 7.0 for all years;
expected volatility of 31% in all three years.
13
(10) INCOME TAXES
The provision for income taxes is summarized as follows:
(In Thousands of Dollars)
-----------------------------------
1997 1996 1995
--------- --------- ---------
Current
Federal . . $ 9,748 $ 16,232 $ 17,499
State . . . 861 2,712 3,089
Foreign . . 1,111 649 501
-------- --------- ---------
11,720 19,593 21,089
Deferred . . 13,770 (54) (767)
-------- --------- ---------
$ 25,490 $ 19,539 $ 20,322
======== ======== =========
A reconciliation of the statutory Federal income tax rate and the effective
rate reflected in the statements of income follows:
1997 1996 1995
----- ------ ------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 1.9 3.4 3.8
Nondeductible goodwill
amortization 1.6 -- --
Other, net 1.1 (.7) (.6)
------ ----- -----
Effective tax rate 39.6% 37.7% 38.2%
====== ===== =====
Deferred taxes arise primarily from differences in amounts reported for tax
and financial statement purposes. The Company's net deferred tax liability as
of December 31, 1997 of $18,585,000 is classified on the consolidated balance
sheet as a current income tax benefit of $13,141,000 and a long-term deferred
income tax liability of $31,726,000. The December 31, 1996 net deferred tax
liability was $855,000, consisting of a current income tax benefit of
$4,532,000 and a long-term deferred income tax liability of $5,387,000. The
components of this net deferred tax liability are as follows:
(In Thousands of Dollars)
December 31
-------------------------
1997 1996
----------- -----------
Operating loss carry forward . . . $ 774 $ 1,022
Inventory. . . . . . . . . . . . . 1,999 1,510
Accrued employee benefits. . . . . 4,428 1,724
Bad debt reserve . . . . . . . . . 959 334
Other . . . . . . . . . . . . . . 2,552 1,096
Deferred tax assets . . . . . . 10,712 5,686
Property related . . . . . . . . . (24,277) (6,012)
Inventory valuation reserve . . . (4,734)
Other . . . . . . . . . . . . . . (286) (529)
Deferred tax liabilities . . . (29,297) (6,541)
Net deferred tax liability . . . . $ (18,585) $ (855)
(11) INDUSTRY SEGMENT INFORMATION
Pertinent data for each industry segment in which the Company operated for
the three years ended December 31, 1997 is as follows:
(In Thousands of Dollars)
--------------------------------------------------------------------------
Net Income From Identifiable Capital
Sales Operations Assets Expenditures Depreciation
--------- ----------- ------------ ------------ -------------
1997
Mechanical Group . . . . . . . . . $ 285,174 $ 48,545 $ 158,639 $ 9,482 $ 10,670
Electrical Group (9 months results) 201,845 25,836 326,986(A) 6,594 4,983
--------- --------- ------------ -------- ---------
Total Regal-Beloit Corporation . . $ 487,019 $ 74,381 $ 485,625 $ 16,076 $ 15,653
========= ========= ============ ======== =========
1996 (B)
Total Regal-Beloit Corporation . . $ 281,508 $ 51,120 $ 196,996 $ 11,112 $ 10,553
========= ========= ============ ======== =========
1995 (B)
Total Regal-Beloit Corporation . . $ 295,891 $ 53,607 $ 175,480 $ 13,784 $ 10,149
========= ========= ============ ======== =========
<FN>
(A) Includes $151,358,000 of goodwill relating to the Marathon Electric acquisition.
(B) Prior to 1997, the Company's operations were all part of the Mechanical Group.
</FN>
The Company's products manufactured and sold outside the United States were
4%, 7% and 6% of net sales in 1997, 1996 and 1995, respectively. Export
sales from U.S. operations were approximately 7% of net sales in 1997, 3%
in 1996 and 3% in 1995.
14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Regal-Beloit Corporation:
We have audited the accompanying consolidated balance sheets of
REGAL-BELOIT CORPORATION (a Wisconsin Corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' investment and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Regal-Beloit Corporation and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
-------------------
Milwaukee, Wisconsin, Arthur Andersen LLP
January 28, 1998
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The preceding financial statements of Regal-Beloit Corporation and related
footnotes were prepared by management which is responsible for their
integrity and objectivity. The statements have been prepared in conformity
with generally accepted accounting principles, which have been applied on
a consistent basis.
The system of internal controls of Regal-Beloit Corporation is designed
to assure that the books and records reflect the transactions of the Company
and that its established policies and procedures are carefully followed.
The internal control system is augmented by careful selection and training
of qualified employees, proper division of responsibilities, and the
development and dissemination of written policies and procedures.
Arthur Andersen LLP, whose audit report is shown on this page, is engaged
by the Board of Directors to audit the financial statements of Regal-Beloit
Corporation and issue reports thereon. Their audit is conducted in
accordance with generally accepted auditing standards which require obtaining
an understanding of the Company's systems and procedures and performing
tests and other procedures sufficient to provide reasonable assurance that
the financial statements are neither materially misleading nor contain
material errors.
The Audit Committee of the Board of Directors, which committee consists
entirely of outside directors, meets regularly with the independent public
accountants and management to review the scope and results of audits.
In addition, the Audit Committee meets with Arthur Andersen LLP, without
management representatives present, to discuss the results of their audit
including a discussion of internal accounting controls, financial reporting
and other audit matters.
James L. Packard Kenneth F. Kaplan
---------------- -----------------
James L. Packard Kenneth F. Kaplan
Chairman, President, Vice President, Chief Financial Officer
Chief Executive Officer and Secretary
15
DIVISIONS & SUBSIDIARIES REGAL-BELOIT CORPORATION
- -----------------------------------------------------------------------------
ELECTRICAL GROUP MECHANICAL GROUP------------------------------------------
Domestic Domestic International
- ------- -------- -------------
- -Marathon Electric -Durst -Mastergear U.S.A. -Costruzioni
Wausau, WI Shopiere, WI South Beloit, IL Meccaniche
Legnanesi S.r.L.
- -Marathon Special -Electra-Gear -Ohio Gear/ Legnano, Italy
Products Anaheim, CA Richmond Gear
Bowling Green, OH Liberty, SC -Mastergear (GmbH)
Neu-Anspach,
-Foote-Jones/ -Regal Cutting Tools Germany
International Illinois Gear National Twist Drill
- -Marathon Electric Ltd. Chicago, IL New York Twist Drill -Opperman Mastergear,
Singapore, Republic of South Beloit, IL Ltd.
Singapore -Grove Gear Newbury, England
Union Grove, WI -Velvet Drive
- -Marathon Electric - Transmissions
U.K. -Hub City New Bedford, MA
Leicestershire, England Aberdeen, SD
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
Corporate Headquarters
- ----------------------
Regal-Beloit Corporation
200 State Street, Beloit, WI 53511-6254
Phone: (608) 364-8800 Fax: (608) 364-8818
Transfer Agent, Registrar and Dividend Disbursing Agent
- ------------------------------------------------------
First Class, Registered
& Certified Mail Overnight Courier
- ----------------------- ----------------
BankBoston, NA Boston EquiServe
Boston EquiServe Blue Hills Office Park
P.O. Box 8040 150 Royall Street
Boston, MA 02266-8040 Canton, MA 02021
Phone: (781) 575-3400
Fax: (781) 575-2665
Have you received your cash dividends?
- --------------------------------------
During 1997, four quarterly cash dividends were declared on Regal-Beloit
Corporation common stock. If you have not received all dividends to which
you are entitled, please write or call BankBoston at the address above.
Stock Listing
- -------------
Regal-Beloit stock was first traded publicly in 1969. The Corporation began
trading on the American Stock Exchange in 1976 under the symbol RBC.
Cash Dividends and Stock Splits
- -------------------------------
Regal-Beloit Corporation paid its first cash dividend in January, 1961.
Since that date, Regal-Beloit has paid 150 consecutive quarterly dividends
through January, 1998. The Company has raised cash dividends 33 times in the
37 years these dividends have been paid. The dividend has never been reduced.
The company has also declared and issued 15 stock splits/dividends since
inception.
Stock Purchases
- ---------------
A shareholder should make sure that newly purchased shares are registered
the same way each time they add to their holdings in order to prevent the
creation of duplicate accounts. Such accounts are not only an inconvenience
to the shareholder, but also increase your Company's administrative costs.
Notice of Annual Meeting
- ------------------------
The Annual Meeting of shareholders will be held at 10:30 a.m.,
C.D.T., on Tuesday, April 21, 1998, at the Corporate Offices,
200 State Street, Beloit, Wisconsin.
Form 10-K
- ---------
A copy of the report filed by the Company with the Securities and Exchange
Commission is available to shareholders upon request.
Please direct requests to:
Regal-Beloit Corporation
Attn: Investor Relations
200 State Street, Beloit, WI 53511-6254
Auditors
- --------
Arthur Andersen LLP, Milwaukee, Wisconsin.
Regal-Beloit Corporation is a Wisconsin Corporation listed on the American
Stock Exchange under the symbol RBC.